Credit deflation and the reflation cycle to come.

[man o' the year]

25 minutes ago, Inoperational Bumblebee said:

I do wonder how sustainable income from these purpose-built student apartments will be if Brexit decimates the number of EU students who choose to study in the UK. It's not a gamble I'd be taking right now.

The motivation to build student accommodation is not some far sighted ideal to correct the housing situation. On the contrary it is a make money quick scheme. I am not talking about letting to students at inflated rent values although this is the case. I know that this means in fact many students in the areas that I know are taking advantage of the fact that renting in houses is cheaper than the rates offered in specialist accommodation especially when ancillary costs are considered. Here in Bath the student accommodation providers have obtained from the council a "Letters of Comfort" legal document in relation to their student accommodation which means that they can let out to non students for example tourists. This means that they have a more lucrative revenue stream and unlike my hotel, for example, do not have to pay the associated business rates nor obtain the planning permission to build what amounts to hotel accommodation.

[Wheeler]

I was playing around on the FRED (St Louis Fed) website trying to understand how GDP, money supply and velocity, and interest rates interacted when I noticed the following:

1. If you look at the difference between 10 year and 2 year treasury bond yields then the 10 year ones drop below the 2 year just before the start of a recession. I think this is what is referred to as a yield inversion,  a term I'd heard before but not really understood what it meant.

2. In the other recessions since 1980 the velocity of money increased prior to the recession and fell during and after. The falls aren't apparent in the 1970 and 1974 ones though.

3. The velocity of money has been decreasing since the 2008 recession but hasn't bottomed out yet and the 10 year yield hasn't dropped below the 2 year one yet. 

My guess (and it is just that) is that we have another 9-12 months before the recession hits the USA.

I'd welcome any comments or corrections as I don't really understand this and I might be completely off track.

 

 

[Wheeler]

5 minutes ago, man o' the year said:

The motivation to build student accommodation is not some far sighted ideal to correct the housing situation. On the contrary it is a make money quick scheme. I am not talking about letting to students at inflated rent values although this is the case. I know that this means in fact many students in the areas that I know are taking advantage of the fact that renting in houses is cheaper than the rates offered in specialist accommodation especially when ancillary costs are considered. Here in Bath the student accommodation providers have obtained from the council a "Letters of Comfort" legal document in relation to their student accommodation which means that they can let out to non students for example tourists. This means that they have a more lucrative revenue stream and unlike my hotel, for example, do not have to pay the associated business rates nor obtain the planning permission to build what amounts to hotel accommodation.

Are they abusing that to let out to visitors during term time do you know? I know university halls of residence were available in the past during the holidays for conferences, sports club summer schools etc. I guess it would be worse if they let to individual tourists.

[Solzhenitsyn]

1 hour ago, Wheeler said:

I was playing around on the FRED (St Louis Fed) website trying to understand how GDP, money supply and velocity, and interest rates interacted when I noticed the following:

1. If you look at the difference between 10 year and 2 year treasury bond yields then the 10 year ones drop below the 2 year just before the start of a recession. I think this is what is referred to as a yield inversion,  a term I'd heard before but not really understood what it meant.

2. In the other recessions since 1980 the velocity of money increased prior to the recession and fell during and after. The falls aren't apparent in the 1970 and 1974 ones though.

3. The velocity of money has been decreasing since the 2008 recession but hasn't bottomed out yet and the 10 year yield hasn't dropped below the 2 year one yet. 

My guess (and it is just that) is that we have another 9-12 months before the recession hits the USA.

I'd welcome any comments or corrections as I don't really understand this and I might be completely off track.

 

 

Nice chart. On the face of it, assuming M1 velocity follows previous trends, this would suggest the recovery has not even started yet. That would be very bullish for markets I think.

another insightful chart is long term history of us markets on a log scale. See how we go through decade long periods of boom/crash before breaking out and going on a massive decade plus long bull run? Kind of looks like we just escaped one of those difficult phases and are about to go on a major long term bull run, it also seems perfectly time with you M1 velocity trend.

i guess the question is do we have one more crash before the real bull gets underway? Your M1 velocity chart and those market charts don’t suggest we do....

[DurhamBorn]

Money supply growth has been slowing, the yield curve is not far from inverting, the Fed is tightening, loan growth is slowing, consumer credit defaults are rising and credit spreads, though still historically very low have turned upwards.These are all late cycle signals and that a recession will follow. With the leverage in the system (including derivatives), the economic and market reversal are both likely to come very fast when they finally arrive. In other words, we can go from optimism to pessimism and from a consensus scenario of steady as she goes to gloom in a hurry. We might yet see the biggest bear market since the war.

After that i think a wealth creation cycle will begin.The right assets will make people big profits.There is a chance though we go straight to reflation.I see it as unlikely,but possible.Its why im long PMs and their miners now.

[man o' the year]

2 hours ago, Wheeler said:

Are they abusing that to let out to visitors during term time do you know? I know university halls of residence were available in the past during the holidays for conferences, sports club summer schools etc. I guess it would be worse if they let to individual tourists.

Not just during vacation time. The accommodation is advertised on booking agencies on a regular basis. It is clearly a conscious effort to diversify on the part of the universities accommodation providers. The reason is that the student accommodation lets for £250 per week compared to letting a room which is on average £390 per month*. The let room has other financial advantages too.

My figures are from research done on behalf of the guest house association for an objection to the council against the building of large new hotel in Bath.

"Student Castle got permission to  run part of the property as holiday flats without getting planning permission but through the issue of a “ letter of comfort” so no one could challenge it."

Also 

"they are trading for more than 140 days per year ".

[RedCoat]

Great to see this thread move here and continue to flourish, I have been lurking (with the occasional post) on the other site for a few years now but agree that a topic like this requires people to be able to speak freely and reply at will. Many thanks to everyone who has contributed so brilliantly.

@DurhamBorn @sancho panza (and anyone else with an opinion!), I recall reading on the older thread, Sancho, your goal portfolio for a few years into the reflation cycle, and I found this very informative and useful. Similarly I was interested to see, DB, you stating you were ~16% in PM miners with no plans to increase this. I understand that you are very much concerned with wealth preservation as well as profit, but I am wondering what either of you would suggest in terms of a portfolio weighting for those at the very start of both their working and investing life? Go balls deep in PMs, their miners and then also heavy on big oil/telecoms when the time is right? I guess I'm asking what you would do if you were 20 again or advising any of your kids that age!

[spygirl]

5 hours ago, man o' the year said:

The motivation to build student accommodation is not some far sighted ideal to correct the housing situation. On the contrary it is a make money quick scheme. I am not talking about letting to students at inflated rent values although this is the case. I know that this means in fact many students in the areas that I know are taking advantage of the fact that renting in houses is cheaper than the rates offered in specialist accommodation especially when ancillary costs are considered. Here in Bath the student accommodation providers have obtained from the council a "Letters of Comfort" legal document in relation to their student accommodation which means that they can let out to non students for example tourists. This means that they have a more lucrative revenue stream and unlike my hotel, for example, do not have to pay the associated business rates nor obtain the planning permission to build what amounts to hotel accommodation.

Ive had short contracts where ive hired a halls room for 1-2 months Jul-Aug.

Much cheaper and better than a hotel.

Sadly just me. No 22yo busty student.

6 hours ago, Inoperational Bumblebee said:

I do wonder how sustainable income from these purpose-built student apartments will be if Brexit decimates the number of EU students who choose to study in the UK. It's not a gamble I'd be taking right now.

Its a good bet.

Uni gets first dibs.

Students get somewhere nearby and maintained.

[spygirl]

16 hours ago, macca said:

CONservatives top 3 donors:

 

1) financial institutions 

2) property millionaires 

3) arms dealers.. 

 

Who is stupid enough to vote for these tax dodgers? 

Whos stupid enough to donate to a party who receives most of its donations from public sector unions?

[spygirl]

On 09/06/2018 at 09:09, Frank Hovis said:

IME (meaning seeing property shows on the telly!) people getting into debt to buy BTLs are happy to take yields, and particularly gross yields (ignore voids and maintenance), that an experienced investor would see as unacceptable.  When any have the temerity to suggest this the professional adviser confidently opines "Well you're really in it for the capital gains".

I think that so much easy money has been made in property that for many people the receipt of a windfall such as in inheritance is the cue, if they already own their own homes, to get into BTL.  Just check the regular "What would you do with £100k?" threads on Mumsnet.

With property people will buy into a falling market - quick, don't miss the boat! - because the property = riches mantra is so fundamentally ingrained it will take another massive crash to rid people of those thoughts and get it back to the days when I recall somebody telling me that they viewed their house in Islington as "a liability".

In the long term I entirely agree with you, stupidly invested money dwindles and the queue of numpties wanting to get into BTL will fall with the attrition of money lost on previous BTLs.

But there is serious momentum behind this in people's minds that will keep it running when any sensible investor would throw their hands up in horror.  And governments know that despite commonsense there are votes in maintaining the appearance (i.e. nominal if not real rises) of rising house prices.

So this long term could be very long indeed before either a correction or real terms losses re-establishing the link with salaries.  Five years, ten, twenty?

I decided long ago that whilst a crash was inevitable there was such huge pressure for it not to happen that it would be delayed and delayed so it would be foolish to put my life on hold awaiting it and bought.

I would still be delighted with a crash both for wider social and for personal reasons (I'd buy something really nice) but I have made myself unreliant upon it.

Nope. Wont work like that.

Theres a huge die off coming with the baby boomers. Simple mortality stat - 50% of the over 65 will be dead within 10 years.

Income from property investment is taxed - no option for older people to leverage up and out compete OOOs.

Housing i one big expensive lump where you cant sell 10% for instant cash or tax planning.

The only attraction of io btl was allowing loons to leverage up on grossly mispriced debt.

 

[spygirl]

On 09/06/2018 at 09:37, DurhamBorn said:

All markets end up by hurting the most amount of people possible. BTL (and housing in general) is at that stage now.

From what i see BTL will prove a disaster of an investment from here in for most.Anyone buying now will be looking at a 50%/70% real terms loss by 2025 and interest rates up 300%+ on a SVR.The government will be throwing money into social housing during the next cycle as well.The people buying with cash will be simply making a bad investment.The people with leverage will see a good chunk of them kissing the family home goodbye as well.

1000 oz of silver might buy an average house by 2025.

 

 

No need to guess the future.

Idiot io btler i know - mortgage 1100, rent 1000 - and that rents too high, liable to go.

3 year fixed term ended, moved to SVR. Mortgage now 1500.

[spygirl]

On 09/06/2018 at 14:40, Frank Hovis said:

I agree with all of that @Solzhenitsyn except fresh props being unlikely.

I think they're highly likely.

Remember MIRAS?  And ehat about bringing back by- borrower MIRAS to support "hard working families" and we don't want to "trash their dreams of home ownership".

The words of David Cameron when bringing in a previous prop; Help to Buy probably.

There will be no props for non OOO.

[DurhamBorn]

6 minutes ago, RedCoat said:

Great to see this thread move here and continue to flourish, I have been lurking (with the occasional post) on the other site for a few years now but agree that a topic like this requires people to be able to speak freely and reply at will. Many thanks to everyone who has contributed so brilliantly.

@DurhamBorn @sancho panza (and anyone else with an opinion!), I recall reading on the older thread, Sancho, your goal portfolio for a few years into the reflation cycle, and I found this very informative and useful. Similarly I was interested to see, DB, you stating you were ~16% in PM miners with no plans to increase this. I understand that you are very much concerned with wealth preservation as well as profit, but I am wondering what either of you would suggest in terms of a portfolio weighting for those at the very start of both their working and investing life? Go balls deep in PMs, their miners and then also heavy on big oil/telecoms when the time is right? I guess I'm asking what you would do if you were 20 again or advising any of your kids that age!

If i was 20 again my main concern would be building up cash so i could take advantage of house price falls.The quicker you get a home paid for and live rent/mortgage free the better.I would start building a portfolio though as well,maybe 30% of savings,and with that id be looking to buy the most likely to gain from the cycle (and the most under valued at the end of this one).Id be going PM miners,telcos,certain energy stocks etc.Id still want a balanced portfolio,but balance across inflation sectors.

My personal investing i try to aim for 9% compounding minimum.Its amazing the returns you can get from that.If Vod increase their divi at 2% going forward they should return that.Centrica would have to increase theirs by 0.7% a year on average,so if no increases for 5 years year six going up 4% would do it.Iv always seen the return as dividend + dividend growth and considered the full cycle.5 years minimum,but more likely 8+.Of course dividend cuts change things.

Once im fully invested i usually hold between 20 and 25 stocks.

If i had to throw a small portfolio together with not much cash monday understanding risk but leaning to a hope to outperform during the next cycle id probably go like this,

BT ,Centrica,Vod,Harmony Gold Mining,Sibanye Gold,Mirasol Resources,Anglogold Ashanti,Yamana Gold,Barrick Gold.

After that id add some physical PMs,silver first then gold.

As ever thats not investment advice,everything depends on people, risk profile,age,goal,income,savings etc and all DYOR etc.

 

[DurhamBorn]

13 minutes ago, spygirl said:

No need to guess the future.

Idiot io btler i know - mortgage 1100, rent 1000 - and that rents too high, liable to go.

3 year fixed term ended, moved to SVR. Mortgage now 1500.

Are they Ltd company?.If not do they have a family home with equity?.If so they look stuffed,unless they can sell the BTL quickly and clear the debt (best option).£1500 mortgage,what do they own for that sort of mortgage?

[Wheeler]

3 hours ago, Solzhenitsyn said:

i guess the question is do we have one more crash before the real bull gets underway? Your M1 velocity chart and those market charts don’t suggest we do....

 

@Solzhenitsyn Thanks for those graphs. It's interesting that they don't show any long term declines in the market; the bear periods look like oscillations in a trading range. I really can't see how we can go to a new bull market though as we must surely be at the top of a credit expansion cycle by now.

 

2 hours ago, DurhamBorn said:

Money supply growth has been slowing, the yield curve is not far from inverting, the Fed is tightening, loan growth is slowing, consumer credit defaults are rising and credit spreads, though still historically very low have turned upwards.These are all late cycle signals and that a recession will follow. With the leverage in the system (including derivatives), the economic and market reversal are both likely to come very fast when they finally arrive. In other words, we can go from optimism to pessimism and from a consensus scenario of steady as she goes to gloom in a hurry. We might yet see the biggest bear market since the war.

After that i think a wealth creation cycle will begin.The right assets will make people big profits.There is a chance though we go straight to reflation.I see it as unlikely,but possible.Its why im long PMs and their miners now.

Thanks DB. I've been brushing up on business cycles over the past few months trying to understand the various macro indicators and work out whether we will get a deflationary or inflationary bust. I'm still not certain but tightening by the Fed, stopping QE by the BoE and now by ECB all point to deflation.

[spygirl]

3 minutes ago, DurhamBorn said:

Are they Ltd company?.If not do they have a family home with equity?.If so they look stuffed,unless they can sell the BTL quickly and clear the debt (best option).£1500 mortgage,what do they own for that sort of mortgage?

Nope.

Itll drag them down.

Idiot cant see it - just looking on zoopla and counting chickens.

Looking to remortgage to throw 30% in from OO to reduce the io btl mortgage.

[Wheeler]

2 hours ago, man o' the year said:

Not just during vacation time. The accommodation is advertised on booking agencies on a regular basis. It is clearly a conscious effort to diversify on the part of the universities accommodation providers. The reason is that the student accommodation lets for £250 per week compared to letting a room which is on average £390 per month*. The let room has other financial advantages too.

My figures are from research done on behalf of the guest house association for an objection to the council against the building of large new hotel in Bath.

"Student Castle got permission to  run part of the property as holiday flats without getting planning permission but through the issue of a “ letter of comfort” so no one could challenge it."

Also 

"they are trading for more than 140 days per year ".

So in tourist areas with universities they could build more student accommodation than is needed with the aim of letting the rest out to tourists. Unless the planning committees are vigilant!

[DurhamBorn]

3 minutes ago, spygirl said:

Nope.

Itll drag them down.

Idiot cant see it - just looking on zoopla and counting chickens.

Looking to remortgage to throw 30% in from OO to reduce the io btl mortgage.

Yep,lower rate,,but the same amount of debt,no doubt thinks the BTL will double and they can cash out.I take it SVR is about 4% so rent must be 3% before repairs,voids etc.If they are 40% taxpayers even worse with new rules.Crazy.They will end up with higher rates,massive negative equity etc,so trapped.

[Funn3r]

32 minutes ago, DurhamBorn said:

If i was 20 again my main concern would be building up cash so i could take advantage of house price falls.The quicker you get a home paid for and live rent/mortgage free the better.I would start building a portfolio though as well,maybe 30% of savings,and with that id be looking to buy the most likely to gain from the cycle (and the most under valued at the end of this one).Id be going PM miners,telcos,certain energy stocks etc.Id still want a balanced portfolio,but balance across inflation sectors.

My personal investing i try to aim for 9% compounding minimum.Its amazing the returns you can get from that.If Vod increase their divi at 2% going forward they should return that.Centrica would have to increase theirs by 0.7% a year on average,so if no increases for 5 years year six going up 4% would do it.Iv always seen the return as dividend + dividend growth and considered the full cycle.5 years minimum,but more likely 8+.Of course dividend cuts change things.

Once im fully invested i usually hold between 20 and 25 stocks.

If i had to throw a small portfolio together with not much cash monday understanding risk but leaning to a hope to outperform during the next cycle id probably go like this,

BT ,Centrica,Vod,Harmony Gold Mining,Sibanye Gold,Mirasol Resources,Anglogold Ashanti,Yamana Gold,Barrick Gold.

After that id add some physical PMs,silver first then gold.

As ever thats not investment advice,everything depends on people, risk profile,age,goal,income,savings etc and all DYOR etc.

 

What do you think of BT CEO resigning? Thought I understood you in the past to say you were not impressed so much with BT itself but you really trusted the CEO. 

[leonardratso]

17 minutes ago, DurhamBorn said:

Yep,lower rate,,but the same amount of debt,no doubt thinks the BTL will double and they can cash out.I take it SVR is about 4% so rent must be 3% before repairs,voids etc.If they are 40% taxpayers even worse with new rules.Crazy.They will end up with higher rates,massive negative equity etc,so trapped.

its ok, no need to raise the rents, merely split the house/shed and get more tenants in - quantity, not quality is where its at. This is a well known silver bullet solution that always works. Stack em high and wide and cheap, same in retail, take a look at pound world, they are doing great with this philosophy.

hahahah, nicer dumber people this could not happen to.

 

[man o' the year]

34 minutes ago, Wheeler said:

So in tourist areas with universities they could build more student accommodation than is needed with the aim of letting the rest out to tourists. Unless the planning committees are vigilant!

"Vigilant planning committees" - I think you are being naive. These are big boys with deep pockets. When I applied for planning permission no chance - but money speaks and is transforming Bath into a globalised clone of every other city as developers build large hotels and then sell them to the hotel chains. Housing built for the elderly has gone the same way. In the meantime independent traders disappear. Restaurants for example are going fast in Bath even Jamie Oliver's and Prezzo have closed recently let alone better independent but less high profile ones

[UnconventionalWisdom]

9 hours ago, BadAlchemy said:

What triggered the last reflation cycle ...in the 70's I think DB said it was? - sorry I was in nappies at that time 

I think the end of last Reflation period was the end of the 70s. My interpretation is that it began after the war and the Deflation/Reflation periods each last 30-40 years

[UnconventionalWisdom]

On 07/06/2018 at 12:41, spygirl said:

The *HUGE* biggy is China.

It was China exporting deflation that pished Western IR low as they swamped the Western market with cheap stuff.

Wester ncentral banks fucked up by not seeing this, lowering IRs, causing Western assets to boom, digging a bigger hole.

Now China is swinging from a current account surplus to deficit.

https://tradingeconomics.com/china/current-account

And China is a long way from cheap.

This is where the fun starts.

Anyone who is dependent on Chinese export is going to get royally fucked over.

And now the Chinese will start pushing prices up the in the West.

This is interesting. If China is reducing its reliance on exports, do you think it'll start offloading its US debt holdings/ reduce its purchases? Seems they could now do with a stronger Yuan. 

[Wheeler]

9 minutes ago, man o' the year said:

"Vigilant planning committees" - I think you are being naive. These are big boys with deep pockets. When I applied for planning permission no chance - but money speaks and is transforming Bath into a globalised clone of every other city as developers build large hotels and then sell them to the hotel chains. Housing built for the elderly has gone the same way. In the meantime independent traders disappear. Restaurants for example are going fast in Bath even Jamie Oliver's and Prezzo have closed recently let alone better independent but less high profile ones

Actually I was being a bit sarcastic. I assumed the developers would be using section 106 "bribes" to get their developments through.

[UnconventionalWisdom]

53 minutes ago, spygirl said:

Nope.

Itll drag them down.

Idiot cant see it - just looking on zoopla and counting chickens.

Looking to remortgage to throw 30% in from OO to reduce the io btl mortgage.

And the idiots that leveraged up won't even have the remortgage option.