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DurhamBorn

Credit deflation and the reflation cycle to come.

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9 minutes ago, DurhamBorn said:

I have just moved over onto here and hoped to carry on the conversation about what i think is ahead.A credit deflation followed by a full on reflation cycle.Leveraged assets will be hit very very hard,in the UK that means houses (BTL will see huge pain).

My thoughts on this playing out are,and remain these,

The great deflation cycle that started around 35 years ago is about to end with a deflationary collapse.During those 35 years interest rates have fallen to lower lows and made investing in equity/property very easy (they have always gone to higher highs).However that has also caused people to go way way along the risk curve for yield.The leverage on the system is beyond extreme.The Fed (and other central banks) missed out an entire tightening cycle,and in doing so have already made sure the recession dead ahead will see massive un-voluntary debt liquidation,a financial system in free fall and wealth destruction on a scale few can even imagine.Leverage is going to destroy business and individuals on a scale not seen since the late 1920s.Once this does hit the central banks will be slow to react with the right response as they themselves will be shocked at the speed and scale.They will panic and print direct into the economy by passing money/debt to governments at 0.1% or zero coupons.This is what will kick in the first reflation cycle since the 70s.Inflation will appear,rising slowly at first but increasing for perhaps a decade until it reaches double figures.Interest rates will follow,but being behind the curve perhaps through the whole cycle.The leveraged who survived the deflationary collapse will then suffer increasing interest rates for a decade.

I look forward to anyones thoughts on this,for,against,anything,and its great to of been directed to the forum,thankyou.

Welcome. Glad you made it over, I really enjoyed your posts on tos. :)

re your post, makes a lot of sense but I’ve not a clue as to where this is heading 

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8 minutes ago, One percent said:

Welcome. Glad you made it over, I really enjoyed your posts on tos. :)

re your post, makes a lot of sense but I’ve not a clue as to where this is heading 

Thankyou One percent appreciate it.There is no doubt a lot is in flux,but things are starting to turn in directions i would expect given the macro situation we have seen develop.Things are probably very close to getting interesting.The Fed meeting might see another rate increase mid June and id expect after that gold to start to run as people wake up to the fact the Fed is pulling liquidity while at the same time the worry of being behind the curve.The UK has the highest tax rate we have had and thats before we see a downturn (and the people who pay most of that tax are the ones who will see the biggest losses in wealth).

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I'm going for this year being a 1976 moment, a cracking summer with no rain, with water shortages, drought orders and a follow up of economic diarrhoea.

Enjoy the weather while you can for next year we will be fooked.

 

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Posted (edited)

I'll start with these two Wolf St posts

 

The margins are moving

https://wolfstreet.com/2018/06/04/toronto-house-price-bubble-deflates/

Average price of single-family house plunges 13%, or by C$160,000 from peak. Sales of homes priced over C$1.5 million collapse by 63%. Condos still hanging on.

It was particularly unpleasant at the higher end: Sales of homes costing C$1.5 million or more plummeted by 46% year-over-year to 508 homes in May 2018, according to TREB data. Compared to the April 2017 peak of 1,362 sales in that price range, sales in May collapsed by 63%.

But it’s not just at the high end. At the low end too. In May, sales of homes below C$500,000 – about 68% of them were condos – fell by 36% year-over-year to 5,253 homes.

 

https://wolfstreet.com/2018/06/03/housing-bubbles-in-sydney-melbourne-deflate/

'In Sydney, home prices had jumped over 80% from the end of 2009 through the peak in September last year, after having dipped only 4.6% during the Global Financial Crisis, turning the city into one of the hottest housing bubbles in the world.

But the price boom has run its course. According to CoreLogic Daily Home Value Index, home prices fell 4.2% by the end of May compared to a year ago, with house prices down 5.9%, and prices of condos (“units” as they’re called) down 0.4%. In the eight months since the peak in September, the index has fallen 4.7%:

Melbourne is a few months behind Sydney. Home prices peaked in December 2017 and have since declined 1.7%, but are still remain up 2.2% from a year ago, with house prices up 1.5% condo prices flat (-0.1%). '

Edited by sancho panza

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1 hour ago, DurhamBorn said:

I have just moved over onto here and hoped to carry on the conversation about what i think is ahead.A credit deflation followed by a full on reflation cycle.Leveraged assets will be hit very very hard,in the UK that means houses (BTL will see huge pain).

My thoughts on this playing out are,and remain these,

The great deflation cycle that started around 35 years ago is about to end with a deflationary collapse.During those 35 years interest rates have fallen to lower lows and made investing in equity/property very easy (they have always gone to higher highs).However that has also caused people to go way way along the risk curve for yield.The leverage on the system is beyond extreme.The Fed (and other central banks) missed out an entire tightening cycle,and in doing so have already made sure the recession dead ahead will see massive un-voluntary debt liquidation,a financial system in free fall and wealth destruction on a scale few can even imagine.Leverage is going to destroy business and individuals on a scale not seen since the late 1920s.Once this does hit the central banks will be slow to react with the right response as they themselves will be shocked at the speed and scale.They will panic and print direct into the economy by passing money/debt to governments at 0.1% or zero coupons.This is what will kick in the first reflation cycle since the 70s.Inflation will appear,rising slowly at first but increasing for perhaps a decade until it reaches double figures.Interest rates will follow,but being behind the curve perhaps through the whole cycle.The leveraged who survived the deflationary collapse will then suffer increasing interest rates for a decade.

I look forward to anyones thoughts on this,for,against,anything,and its great to of been directed to the forum,thankyou.

Who grassed us up :D 

Welcome it`s like the other place was once but you can say fuck cunt and cockwomble 

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Just now, Long time lurking said:

Who grassed us up :D 

Welcome it`s like the other place was once but you can say fuck cunt and cockwomble 

Only people who i respect highly so its all good)

Looks like the government are starting to play ball as well.The next cycle will be industrial and the fuel for the fire will be governments fiscal spending borrowing at very low coupons thanks to massive QE.

https://www.bbc.co.uk/news/business-44363366

"The sheer cost of building new nuclear power stations means it makes sense for the government to help finance projects like this," he said.

"Governments can borrow much more cheaply that private companies and that lower cost of borrowing can drastically reduce the ultimate cost. Hinkley Point C would have been roughly half the cost if the government had been borrowing the money to build it at 2%, rather than EDF's cost of capital, which was 9%."

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Db, greetings.

So are you expecting anything to change? What is the wealth destruction you are talking about?

I can see things continuing as they are for the foreseeable future at least our lifetimes. Low IR endless QE rising asset prices the wealth gap widening.

It wont change by economics. Too many vested interests in politics and banking. It will take a war to change. Rise of the machines etc.

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Posted (edited)
8 hours ago, Green Devil said:

Db, greetings.

So are you expecting anything to change? What is the wealth destruction you are talking about?

I can see things continuing as they are for the foreseeable future at least our lifetimes. Low IR endless QE rising asset prices the wealth gap widening.

It wont change by economics. Too many vested interests in politics and banking. It will take a war to change. Rise of the machines etc.

Im expecting massive change.At least it will be massive to the population who now think a deflation cycle lasts forever.Interest rates will be near or above 10% by 2025,or at the very least heading that way.The consumer is now starting to be less of the economy and that will continue.Not dead,just falling.Government will take up the slack,but not by funding chinese made trampolines in every social housing garden paid for by tax credits.They will be funding massive projects in clean energy,telecoms,transport etc.The end of deflation cycles are where the productive part of the economy cant make a profit so declines past the stage where it can fund the needs of the population.We are at that point now.

Things like this are just the start.

https://www.theguardian.com/environment/2018/jun/04/uk-takes-5bn-stake-in-welsh-nuclear-power-station-in-policy-u-turn

"The UK will take a £5bn-plus stake in a new nuclear power station in Wales in a striking reversal of decades-long government policy ruling out direct investment in nuclear projects."

Governments will be borrowing at coupons of 0.5% or less as QE flows direct into fiscal investment spending.

A reflation is dead ahead,and it will have its sleeping partner with it,high inflation.Leveraged deflation assets like BTL are about to be creamed.Massive wealth destruction ahead.

Edited by DurhamBorn

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Posted (edited)
14 minutes ago, Cosmic Apple said:

@DurhamBorn is this now THE thread or are you carrying on the conversation on 2 fronts?

Mostly here i hope,though if i get chance i will answer people once/if im able to.Hopefully people will find their way here.Iv noticed a lot of names i really respect already.

Edited by DurhamBorn

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2 minutes ago, DurhamBorn said:

Mostly here i hope,though if i get chance i will answer people once/if im able to.Hopefully people will find there way here.Iv noticed a lot of names i really respect already.

Hopefully your arrival will wake up this section :)

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52 minutes ago, DurhamBorn said:

Mostly here i hope,though if i get chance i will answer people once/if im able to.Hopefully people will find their way here.Iv noticed a lot of names i really respect already.

Bugger off. I spend far too much time reading here as it is!

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Posted (edited)
32 minutes ago, Cosmic Apple said:

Have your posting 'privileges' been revoked over on ToS then?

Moderated,and i feel its rude that people would think im ignoring them.With whats ahead i think its important that people can share thoughts and experience.Looking at our work we are pretty convinced we are at a cycle inflection point.We are moving into a reflation/inflationary cycle.The only questions are around how we get there.Is there a huge debt deflation first (we think there will be),or do we go straight to the wealth creation period (in the right assets).

At the moment we havent been doing any work on currency because all our currency work hit 100% correct.Our dollar index and £/$ calls were the best in the market.Nobody got close.I do think the 95 area should be a top for the dollar though and it should then turn down again (for now).

We have been doing a lot more work on the PM area,as we think that might be where we get the hints and although we got the direction right we were only 40% along the range we expected.Gold has outperformed the $ since late 2015 and remains in an uptrend.It seems to be giving a repeat of the 1999-2001 action.This points to the $1620 area.Other work points to the $1400 area or more likely the $1540 area perhaps by late this year.There could be some more small downside in the miners into the FOMC meeting,but then the road is open.

Platinum also looks like it might be getting ready to move out of the FOMC meeting.Retail (dumb money) is very bearish and commercial very bullish and have those positions.SBGL seems to be trying to buy up most of the platinum/palladium production outside of the likes of Anglo American.They have taken a big risk to do so taking on a lot of debt,debt that could prove a big problem if the rand stays strong.However,maybe they see what we see ahead and are playing the longer term.?

We are no gold bugs,but we do think the picture could be pointing to a situation where people start to view PMs as the no1 protection against financial dislocation and loss.The June FOMC meeting and the action after that could start clearing the fog.

Edited by DurhamBorn

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12 hours ago, DurhamBorn said:

I have just moved over onto here and hoped to carry on the conversation about what i think is ahead.A credit deflation followed by a full on reflation cycle.Leveraged assets will be hit very very hard,in the UK that means houses (BTL will see huge pain).

My thoughts on this playing out are,and remain these,

The great deflation cycle that started around 35 years ago is about to end with a deflationary collapse.During those 35 years interest rates have fallen to lower lows and made investing in equity/property very easy (they have always gone to higher highs).However that has also caused people to go way way along the risk curve for yield.The leverage on the system is beyond extreme.The Fed (and other central banks) missed out an entire tightening cycle,and in doing so have already made sure the recession dead ahead will see massive un-voluntary debt liquidation,a financial system in free fall and wealth destruction on a scale few can even imagine.Leverage is going to destroy business and individuals on a scale not seen since the late 1920s.Once this does hit the central banks will be slow to react with the right response as they themselves will be shocked at the speed and scale.They will panic and print direct into the economy by passing money/debt to governments at 0.1% or zero coupons.This is what will kick in the first reflation cycle since the 70s.Inflation will appear,rising slowly at first but increasing for perhaps a decade until it reaches double figures.Interest rates will follow,but being behind the curve perhaps through the whole cycle.The leveraged who survived the deflationary collapse will then suffer increasing interest rates for a decade.

I look forward to anyones thoughts on this,for,against,anything,and its great to of been directed to the forum,thankyou.

Hey DB.

 

How did you find us ?

 

We're all having a party.

 

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Just now, TheCountOfNowhere said:

Who is this "we" you talk of ?

A friend Count who is probably one of,or the best macro guys in the US,i met him when i worked for Glaxosmithkline when they hired him for a few months for the pension scheme to consult on some big changes in the 90s..He is retired now (70s) and only works for a few select institutions and a couple of charity accounts close to his heart.The work he did and evolved in the 70s saw him call the deflation cycle in the early 80s and he positioned the pension funds he ran into bonds and consumer staples.His pension funds were top  1 percentile over the full term he ran them.We became friends when i offered him to join our table and then a day out to the horse racing of all things.(he always was sat on his own in the staff canteen).He knew i came from a very working class town and left school at 16,but saw i had the 3rd highest maths score among Glaxo employees who had taken the tests (around 4000 people) and gave me some figures ,graphs etc and asked me to tell him what i saw.We have been close ever since.

Most trading houses dont even use macro work now like his.They used to forward to the trading teams and they would stock pick on how he saw the cycle working out.Now they pretty much just momentum trade.He sees massive dangers ahead.

 

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5 minutes ago, DurhamBorn said:

A friend Count who is probably one of,or the best macro guys in the US,i met him when i worked for Glaxosmithkline when they hired him for a few months for the pension scheme to consult on some big changes in the 90s..He is retired now (70s) and only works for a few select institutions and a couple of charity accounts close to his heart.The work he did and evolved in the 70s saw him call the deflation cycle in the early 80s and he positioned the pension funds he ran into bonds and consumer staples.His pension funds were top  1 percentile over the full term he ran them.We became friends when i offered him to join our table and then a day out to the horse racing of all things.(he always was sat on his own in the staff canteen).He knew i came from a very working class town and left school at 16,but saw i had the 3rd highest maths score among Glaxo employees who had taken the tests (around 4000 people) and gave me some figures ,graphs etc and asked me to tell him what i saw.We have been close ever since.

Most trading houses dont even use macro work now like his.They used to forward to the trading teams and they would stock pick on how he saw the cycle working out.Now they pretty much just momentum trade.He sees massive dangers ahead.

 

Cheers DB, that's good to know.

I was just wondering if you were inventing friends like the rest of us :)

This thread and the one of ToS is pretty much asks the most important question of our time.

Are we going to see a massive inflation event that will wipe out productive work/savings/support the rich men's asset prices ( not values ) or will we see a massive asset price deflation ( stocks, shares, guitars, classic cars, etc ) followed by more money printing/inflation.

1st one is probably best for the rich and the 2nd one for the poor, so I know which one I expect !!!

The interesting thing for me was the US starting to raise rates, this was surely not a unilateral decision and the ECB/BoE will have a plan in place to come into line, Term Funding ending was more a signal of this than anything.  Even a small raise by the BoE would send house prices tumbling further.  Then there's the pretend BrExit the establishment is trying to get away with and the rise of the far right British parties who will stop the immigration ( most likely by concentrating them in small holding camps whole they work out where to send them ).

God knows what's coming down the line, but either way it's not good.

All I wanted was a decent family home at a fair price...what I've got is Armageddon.

P.S How did you find us ?  Did someone give you a tip of, or did you wonder where everyone had gone ?

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12 hours ago, DurhamBorn said:

I have just moved over onto here and hoped to carry on the conversation about what i think is ahead.A credit deflation followed by a full on reflation cycle.Leveraged assets will be hit very very hard,in the UK that means houses (BTL will see huge pain).

My thoughts on this playing out are,and remain these,

The great deflation cycle that started around 35 years ago is about to end with a deflationary collapse.During those 35 years interest rates have fallen to lower lows and made investing in equity/property very easy (they have always gone to higher highs).However that has also caused people to go way way along the risk curve for yield.The leverage on the system is beyond extreme.The Fed (and other central banks) missed out an entire tightening cycle,and in doing so have already made sure the recession dead ahead will see massive un-voluntary debt liquidation,a financial system in free fall and wealth destruction on a scale few can even imagine.Leverage is going to destroy business and individuals on a scale not seen since the late 1920s.Once this does hit the central banks will be slow to react with the right response as they themselves will be shocked at the speed and scale.They will panic and print direct into the economy by passing money/debt to governments at 0.1% or zero coupons.This is what will kick in the first reflation cycle since the 70s.Inflation will appear,rising slowly at first but increasing for perhaps a decade until it reaches double figures.Interest rates will follow,but being behind the curve perhaps through the whole cycle.The leveraged who survived the deflationary collapse will then suffer increasing interest rates for a decade.

I look forward to anyones thoughts on this,for,against,anything,and its great to of been directed to the forum,thankyou.

I agree with the long term but why do you think that there will necessarily be this massive debt liquidation event?

Yes the Fed is into uncharted ground with both interest rate rises and unwinding QE and could get it wrong but we have seen ten years of countries' racing to devalue their currencies.  Central banks, sorry ha ha independent central banks, are always loooking for any excuse to cut rates and print money and at the first danger signs they'll do this and let the inlfation this causes erode the big debt bubbles whilst continuing to boost asset values in nominal terms.

Morally I like the idea of the feckless borrower getting their fingers burnt but will it happen on a grand scale?  I can't see it being allowed; governments will bend and break the rules again.

The one big weapon they have is that they can let money slowly devalue so that everyone feels richer and old debts become easier to service.  I don't see why they wouldn't do this.

However I am merely disagreeing without positing my own view to be shot down which is that the current round of interest rate rises will be shortlived and even through it real interest rates - Base Rate - RPI - will still be mostly negative.  As soon as problems arise from this toghtening there will be gross over-reaction from the banks and inflation will be deliberately stoked to lessen the personal / corporate debt burden.

So my primary requirement from any investment remains that it will increase in value with inflation rather than being eroded by it.  So equities, index linked, and yes gold if you must.

I don't see houses having that quality as they have already risen so far in advance of inflation that I think they have considerbaly overshot and they are due a long period of nominal stagnation or minor falls and real terms major falls.

 

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Posted (edited)
55 minutes ago, Frank Hovis said:

I agree with the long term but why do you think that there will necessarily be this massive debt liquidation event?

Yes the Fed is into uncharted ground with both interest rate rises and unwinding QE and could get it wrong but we have seen ten years of countries' racing to devalue their currencies.  Central banks, sorry ha ha independent central banks, are always loooking for any excuse to cut rates and print money and at the first danger signs they'll do this and let the inlfation this causes erode the big debt bubbles whilst continuing to boost asset values in nominal terms.

Morally I like the idea of the feckless borrower getting their fingers burnt but will it happen on a grand scale?  I can't see it being allowed; governments will bend and break the rules again.

The one big weapon they have is that they can let money slowly devalue so that everyone feels richer and old debts become easier to service.  I don't see why they wouldn't do this.

However I am merely disagreeing without positing my own view to be shot down which is that the current round of interest rate rises will be shortlived and even through it real interest rates - Base Rate - RPI - will still be mostly negative.  As soon as problems arise from this toghtening there will be gross over-reaction from the banks and inflation will be deliberately stoked to lessen the personal / corporate debt burden.

So my primary requirement from any investment remains that it will increase in value with inflation rather than being eroded by it.  So equities, index linked, and yes gold if you must.

I don't see houses having that quality as they have already risen so far in advance of inflation that I think they have considerbaly overshot and they are due a long period of nominal stagnation or minor falls and real terms major falls.

 

Show me a bubble in history that has never collapsed ?

Only wage inflation erodes debt...for the masses we're not seeing much of that are we and as prices become more  and more extreme, the bubble ( pyramid ) becomes more and more unstable, it wont take much for it to collapse.  When the BoE are forced to raise rates to 1% it's a goner.

Inflation with no wager inflation makes it harder to service your debts.

The current debt bubble is so large it will cause revolution or war, take your pick, these massive once in 4 life times unregulated banker debt bubble rarely end well.

House prices are the least of our worries.

I'm probably wrong tho.

Edited by TheCountOfNowhere

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I'm thinking a new normal for homes with the current 40+ generation being the last to expect to own their homes, and for then the vast persistence of low interest rates means that a lot now have no mortgage so are immune from rate rises and (if not in their own minds) from house price falls.

The gig job / zero hours / minimum wage people have been thoroughly priced out and lottery wins aside will be renting forever; falls are unlikely to be big enough to bring them to affordable levels.

Then you get the smaller number if under forties, it say under thirty fives, that can just about afford to buy.  They are the ones who will be hammered by rate rises and price falls but they are now a minority even within their own generation.

Their houses will be the ones coming onto the market and it won't be many as not many have been able to buy; enough to depress prices but not crash them as there are a lot if the older generation who have done so well from all this just looking for a buying opportunity to add a BTL to their investment portfolio.

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3 hours ago, Frank Hovis said:

I'm thinking a new normal for homes with the current 40+ generation being the last to expect to own their homes, and for then the vast persistence of low interest rates means that a lot now have no mortgage so are immune from rate rises and (if not in their own minds) from house price falls.

The gig job / zero hours / minimum wage people have been thoroughly priced out and lottery wins aside will be renting forever; falls are unlikely to be big enough to bring them to affordable levels.

Then you get the smaller number if under forties, it say under thirty fives, that can just about afford to buy.  They are the ones who will be hammered by rate rises and price falls but they are now a minority even within their own generation.

Their houses will be the ones coming onto the market and it won't be many as not many have been able to buy; enough to depress prices but not crash them as there are a lot if the older generation who have done so well from all this just looking for a buying opportunity to add a BTL to their investment portfolio.

Nope.

The private reantal sector is small, even with the soon to be bust IO BTL idiots.

As the UK housign stands at the mo, about 10 years of supply are to be dumped onto the market.

There has been large structureal shifts in employment and wages paid, this will reduce the mortgage someone can sduport.

Changes like MMR are massive, huge.

Nope. The UK Housing market will go like Scarborohghs - large number of probates with no one to buy. Local prices are everywhere - there's limited price diferntial between small and large houses.

Raise IRs just a bit - say 3%, and with the current mortgage spread on mortgages - 3% - thats 6%.

 

 

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