Credit deflation and the reflation cycle to come.

[azzuri82]

27 minutes ago, Cattle Prod said:

Not rigourosly enough! That is one book I need to read a second time. My interp is that it's all about risk. Most humans and the financial industry underestimate it. The barbell strategy is essentially about not going bust in the event of a black swan - if there is a risk I lose everything on goldies (yes there is) I must have something to counterbalance that on the other side. I think he mentions cash/treasuries but I'm including companies I can't see disappearing off the face of the earth, like Vod. The split needs to be unbalanced, eg risk 10% of your capital to be exposed to a positive black swan (e.g. gdxj 5 bags because china/russia reset with gold backed currency). Worst case scenario, you only lose 10% capital. My barbell is a wee bit tilted!

Yeah his theories on risk are sound. I believe he was the first to pen the phrase "picking up pennies in the path of a steamroller" when describing the risks financial institutions took in the lead up to the financial crisis of 2008. Most people believe these 'marginal gains' to be a sensible and reliable route to wealth creation, but often as you said, underestimate the fat tail risks "that no one seen coming" .

In relation to your expertise in the energy sector, a gent whose judgement I trust greatly is in general agreement with your predictions in the energy market and oil has suggested that a sustainable replacement to oil we extract @ 200-250 dollars a barrel would be using coal / coal oil (which is closely related to kerosine). With enough coal in the ground for at least 200 years of our energy requirements (taking the obvious environmental effects out of the equation), do you see any future in this? I believe this is how the Nazis managed to produce oil during WWII when cut off from the general global supply.

[Hardhat]

@Cattle Prod

 

Fascinating stuff, thanks for sharing. 

[Lightscribe]

5 hours ago, Cattle Prod said:

No. I think that price is enough to stimulate huge investment and hopefully innovation elsewhere. The problem is time, QE has already robbed us of ten valuable years. What you suggest is technically feasible, under duress, but I hope it doesn't come to that. If it does, we'll have bigger problems elsewhere.

The problem with renewable energy is base load. At the moment its coal, gas, nuclear, hydro. Hydro sites are already exploited, nuclear will probably have to resurge, coal has to go and there is lots of gas in the world. Its gas, until a major battery/fusion/thorium breakthrough.

Transport fuels are what you mention though, and barring a major battery tech breakthrough, electric won't replace most transport (I think cars are 20-30%).

Again lpg gas is a simpler solution than distilling coal, but there is no liquid transportable substance on earth with the energy density of oil. Imagine the effort it would take you to pull a car from London to Southampton with a rope? How about at 70mph? I can do it with a milk carton of this liquid. Its a total one off, a practically free hit of energy for the human race. Its imperative the last (economic, lots left) batch of the stuff is used to find something better.

Also, the '200' years of coal needs to be viewed with the same lens as Permian oil: it's mostly poor quality lignite and expensive/sub economic 

I sold my Royal Dutch Shell shares in 2014 at what I believed to be the peak of oil. QE has warped the market since however, and Royal Dutch Shell has seen higher highs, but I’m a great believer in watching those with skin in the game that has infinity more capital than me to worry about.

https://www.bbc.co.uk/news/world-us-canada-29310475

Interesting you mention fusion and Thorium. Without going too tin foil hatted, do you think that  progress in these areas are somewhat ‘restricted’? I say that as in regards to thorium, as India has by far the largest reserves, which would obviously put them in a strong economic position going forward. I have a very small holding in LightBridge (for shits and giggles) but  larger regular investment in Cameco (Uranium obviously but their mines have access to concentrations of Thorium).

[azzuri82]

27 minutes ago, Sideysid said:

I sold my Royal Dutch Shell shares in 2014 at what I believed to be the peak of oil. QE has warped the market since however, and Royal Dutch Shell has seen higher highs, but I’m a great believer in watching those with skin in the game that has infinity more capital than me to worry about.

https://www.bbc.co.uk/news/world-us-canada-29310475

Interesting you mention fusion and Thorium. Without going too tin foil hatted, do you think that  progress in these areas are somewhat ‘restricted’? I say that as in regards to thorium, as India has by far the largest reserves, which would obviously put them in a strong economic position going forward. I have a very small holding in LightBridge (for shits and giggles) but  larger regular investment in Cameco (Uranium obviously but their mines have access to concentrations of Thorium).

Thorium is an interesting one, it's said there's 13 times the amount of energy in coal in the form of thorium than just burning the coal itself.

The USA trialled thorium electrical power in the 60s, it's safer, cheaper and more reliable than other forms of nuclear power, but it was ignored with uranium and plutonium chosen instead going forward as they could both be used for nuclear weapons, whereas thorium  cannot.

Thorium is intrinsically much safer, since there's no core involved to go into meltdown a La Fukushima, it doesn't operate under high pressure, and in the event power is lost, the working liquid simply cools and turns to a solid. Theoretically, you could quite literally turn such a power plant "off" and and leave it unmanned.

The technology exists, is proven but there's currently no political will for it to happen.

[azzuri82]

6 hours ago, Cattle Prod said:

No. I think that price is enough to stimulate huge investment and hopefully innovation elsewhere. The problem is time, QE has already robbed us of ten valuable years. What you suggest is technically feasible, under duress, but I hope it doesn't come to that. If it does, we'll have bigger problems elsewhere.

The problem with renewable energy is base load. At the moment its coal, gas, nuclear, hydro. Hydro sites are already exploited, nuclear will probably have to resurge, coal has to go and there is lots of gas in the world. Its gas, until a major battery/fusion/thorium breakthrough.

Transport fuels are what you mention though, and barring a major battery tech breakthrough, electric won't replace most transport (I think cars are 20-30%).

Again lpg gas is a simpler solution than distilling coal, but there is no liquid transportable substance on earth with the energy density of oil. Imagine the effort it would take you to pull a car from London to Southampton with a rope? How about at 70mph? I can do it with a milk carton of this liquid. Its a total one off, a practically free hit of energy for the human race. Its imperative the last (economic, lots left) batch of the stuff is used to find something better.

Also, the '200' years of coal needs to be viewed with the same lens as Permian oil: it's mostly poor quality lignite and expensive/sub economic 

In the US alone, there's said to be 469 billion short tons of recoverable coal:

https://www.eia.gov/energyexplained/index.php?page=coal_reserves

Converted to oil, that's about 400 years worth of fuel at current usage levels. Even accounting for population growth and increased levels of use, you'd still get 150-200 years out of it.

You're absolutely right about liquid hydrocarbons, we've had a free ride over the last 100-150 years because of them but that can't continue.

What's left in terms of natural gas, and how much more quickly will these reserves deplete once it's being used in vehicles?

[azzuri82]

For anyone that's interested, Sasol in South Africa have perfected the process:

"Coal-to-liquid (CTL) technology makes economic sense only in a world of high oil prices: synthetic fuels become economically viable when oil prices reach $50 a barrel. As a result, Sasol has come of age. Until 2003, oil prices averaged $25 a barrel, making $45-a-barrel liquid coal economically prohibitive, but today oil prices hover at $70-a barrel, so the demand for CTL technology is booming.

The CTL technology dates back to the 1920s, when two German chemists, Franz Fischer and Hans Tropsch, developed a process to convert coal into a gas and then used it to make synthetic fuels. During the Nazi reign, the "Fischer-Tropsch method" was employed in the war effort, as Germany lacked access to sufficient crude oil. International oil companies also experimented with the process, but put it aside because oil was cheaper.

Sasol - prompted by South Africa's apartheid-era isolation, as well as the poor quality of its coal- perfected this technology at its first plant in Sasolburg back in 1955. When oil prices soared in the 1970s, Sasol built two more plants in Secunda with a $6-billion government loan. The company was privatised and was listed on the Johannesburg Stock Exchange in 1979, but the government maintains a 23.5% stake.

This heavy subsidisation pattern continues, with this expensive technology requiring similar incentives and loan guarantees elsewhere - resulting in engineers shunning CTL for a long time. But with the world approaching energy peak, CTL technology is gaining favour."

Read more: http://www.mediaclubsouthafrica.com/tech/38-tech/innovation-bg/123-liquid-fuel-from-coal#ixzz5Piu5Cv36

[Barnsey]

Probably nothing but another false flag, but I'm seeing a lot of opinions/comments/predictions about today being a particularly turbulent one in the US stock market. There have been plenty of these silly rumours before so definitely NOT trading advice, but I thought I'd just mention it as many of these opinions are reasonably sound technical analysis and not sentiment based.

[Solzhenitsyn]

Nice little chart here showing $\Gold ratio. A breakdown at resistance due to weakening $ would be very bullish PM’s and would fit nicely with your thesis that dollar peak is in and we’re Heading down to 84/86 dxy.....

 

[Option5]

4 minutes ago, Cattle Prod said:

There are about 25 gas fields being shut down this year in the UK with gas still in them, because they dont make money. And rightly so!

Part of the issue for offshore UK is the cost of maintaining/repairing/replacing infrastructure that had a 25 year design life when it was installed 50 years ago.

[Barnsey]

Apologies interrupting the genuinely insightful discussion on energy, just wanted to quickly highlight that UK house prices have just experienced their biggest monthly fall since July 2012

https://www.nationwide.co.uk/about/house-price-index/headlines

[Majorpain]

42 minutes ago, Cattle Prod said:

The EIA might tell you there are 20bn bbl oil in the Permian. This is technically recoverable. But it is not economically recoverable. If you look at SEC filings, perhaps only EOG is actually generating net cash, and only a small amount. The rest are just burning money. Those 20bn barrels of oil are not economically recoverable, and if it wasnt for QE they would stay in the ground until price was much higher. 

Coal mines in the US are shutting down because they are not making money, no matter how much Trump wants to blame China etc. You need to go deeper, more expensive, for poorer quality. Its a natural distribution, and you see it in all commodities. 

200 years? Think of what I said about the long term slope of commodity bottoms inflating about 6% a year. How much of that coal will be recovered when a coal miner is paid say 500k a year in the year 2027? At what price? I maintain that that price will stimulate alternatives and the coal will be left in the ground. And are not, therefore, economic reserves, even at current prices.

The problem with all of this is that it involves the West having a much lower standard of living than we are enjoying now.  Voters are not going to like that!  The other problem is that with energy prices that high the debt that has been built up is going to come crashing down as people prioritise heating/eating over the fancy car or retail therapy.  Love a bit of malinvestment, and with super cheap debt floating around its currently in abundance.

As to wage growth, on the supply and demand front there are more people than ever before and world population is increasing at a rapid rate.  I don't think its too far fetched that lucky people in the future may be the ones who actually have a job regardless of the salary.  How many people in the UK are currently milking tax credits after all, after 10 years of "growth"?  If that safety net ever got taken away....

[Option5]

14 minutes ago, Cattle Prod said:

wouldn't it be a great idea if the govt bought/underwrote/invested in that infrastructure?

You mean like Norway did/do?

15 minutes ago, Cattle Prod said:

Apprenticeships anyone? 

Despite good 'A' level results my lad's an apprentice welder.................

[azzuri82]

32 minutes ago, Cattle Prod said:

Sorry if its diverted the thread! I hope my purchase contributed to that number. I think the housing market turned 6-8 months ago. Thats about the same lag time I saw in Ireland between the first negotiations downward, and wider reporting of it. The peak never feels like a peak at the time, its in your rear view mirror

...unless you happen to live in the permabubble that is Edinburgh. 

[Solzhenitsyn]

Interesting comment on the Twitters re credit availability/lending to House builders in the US...

 

[Solzhenitsyn]

1 hour ago, Cattle Prod said:

Thanks Azzuri.

When I spoke about 'published bullshit', one of the most abused metrics is recoverable reserves. My expertise is oil, but I see your numbers for coal are from the EIA. As I said, their.....

Yep, second only to Yet-to-Find numbers. I also work in O&G, subsurface (exploration).

currently working the North Sea. U.K. 

The OGA regularly release estimates of billions of barrels YTF potential for the North Sea, what they don’t consider is that much of it is in tiny accumulations.

same for the undeveloped discoveries...who on earth is going to develop a 12mmboe HPHT condensate discovery ?!? 

Still money to be made in the North Sea for small focussed explorers, but I just don’t see the growth potential for the majors. 

$200 oil might help recover some of the small stuff I suppose, assuming finding costs & capex/opex don’t similarly inflate!

 

rig rates still nice and low however, we currently have a semi-sub on contract for $100k per day. That’s less than 1/3 of the cost compared to just a few years ago  

[BearyBear]

27 minutes ago, azzuri82 said:

...unless you happen to live in the permabubble that is Edinburgh. 

Supply is up, I have never seen so many For Sale signs on my street.

[invalid]

10 hours ago, Cattle Prod said:

No. I think that price is enough to stimulate huge investment and hopefully innovation elsewhere. The problem is time, QE has already robbed us of ten valuable years. What you suggest is technically feasible, under duress, but I hope it doesn't come to that. If it does, we'll have bigger problems elsewhere.

The problem with renewable energy is base load. At the moment its coal, gas, nuclear, hydro. Hydro sites are already exploited, nuclear will probably have to resurge, coal has to go and there is lots of gas in the world. Its gas, until a major battery/fusion/thorium breakthrough.

Transport fuels are what you mention though, and barring a major battery tech breakthrough, electric won't replace most transport (I think cars are 20-30%).

Again lpg gas is a simpler solution than distilling coal, but there is no liquid transportable substance on earth with the energy density of oil. Imagine the effort it would take you to pull a car from London to Southampton with a rope? How about at 70mph? I can do it with a milk carton of this liquid. Its a total one off, a practically free hit of energy for the human race. Its imperative the last (economic, lots left) batch of the stuff is used to find something better.

Also, the '200' years of coal needs to be viewed with the same lens as Permian oil: it's mostly poor quality lignite and expensive/sub economic 

Really appreciate your input, great to have someone from the industry sharing their knowledge.

I'm probably a bit more optomistic on EVs and battery storage. Lots of political pressue for EVs for clean air.

I'm starting to view gas prices as being as important as oil, with so much more electricity generation from gas and the direct use for heating. I think of gas and oil prices as being an early indicator for inflation levels.

So many factors to influence the oil price and they often balance each other out and you seem to get a cycle of prices as the price determines investment and production levels which in turn determine the price. I know there is a lot more to it but forgive me, I'm here to learn.

One factor for oil prices not really touched on is the political aspect. I recall around 2012? the North Sea output dropping faster than Norway and lots of lobbying to the government for some tax breaks. Once those tak breaks were given the production increased. I can't help but suspect there was some deliberate slowing of production to put political pressure on. What are your thoughts on this?

[Solzhenitsyn]

1 hour ago, Cattle Prod said:

Funny you say that. You're exactly right, (and the majors are tarriffing the hell out of smaller operators like rack rent landlords), wouldn't it be a great idea if the govt bought/underwrote/invested in that infrastructure?! Fits right into DBs cycle. You could recover alot more north sea gas and oil if you werent getting shafted on tarriffs. I think they'll call it a 'national strategic resource' that needs public investment for 'security and continuity of supply'. The standards of metal fab for offshore installations in the UK has been left decline far behind the likes of Singapore. That'll change too. Apprenticeships anyone? 

Interesting you should suggest this. A colleague and myself were discussing this about 3 years ago. We’re pretty much convinced that’s what will happen. Every year closer to a field being shut down, the operator has to hold a larger % of the abandonment costs in Escrow. This means eventually the operator just wants rod and will shut the field down. This often removes a big chunk of local infrastructure meaning smaller satellite fields cannot be developed.

i think UKGOV will eventually underwrite all abandonment costs and take ownership of the infrastructure. They’ll then likely outsource the management of the infrastructure to a private company / public-private partnership that manages the facilities in return for a modest (but guaranteed) level of income.

[DurhamBorn]

11 hours ago, Cattle Prod said:

No. I think that price is enough to stimulate huge investment and hopefully innovation elsewhere. The problem is time, QE has already robbed us of ten valuable years. What you suggest is technically feasible, under duress, but I hope it doesn't come to that. If it does, we'll have bigger problems elsewhere.

The problem with renewable energy is base load. At the moment its coal, gas, nuclear, hydro. Hydro sites are already exploited, nuclear will probably have to resurge, coal has to go and there is lots of gas in the world. Its gas, until a major battery/fusion/thorium breakthrough.

Transport fuels are what you mention though, and barring a major battery tech breakthrough, electric won't replace most transport (I think cars are 20-30%).

Again lpg gas is a simpler solution than distilling coal, but there is no liquid transportable substance on earth with the energy density of oil. Imagine the effort it would take you to pull a car from London to Southampton with a rope? How about at 70mph? I can do it with a milk carton of this liquid. Its a total one off, a practically free hit of energy for the human race. Its imperative the last (economic, lots left) batch of the stuff is used to find something better.

Also, the '200' years of coal needs to be viewed with the same lens as Permian oil: it's mostly poor quality lignite and expensive/sub economic 

Great to have you here Cattle Prod and thankyou for your thoughts in the posts above.This thread moved here from the old place because i fully intended the thread to be open to everyone from the most experienced to the least and where people could lay out their thoughts without worry of the usual trolls who shoot down anyone who makes a bad call.Bad calls are part of investing and are often timing issues.

Thankyou for noticing our currency calls.I would say that work on the dollar over the last few years has been the best in the market,and by that i mean including every institution.Nobody has called the dollar better and thats mostly because of the 50 year experience and macro work of my friend.His cross market work on flows etc provides almost pin point road maps.The only thing those cant track is black swans of course.

I hear you on gold and the miners.Im starting to lean more towards a straight up into 2020 though i still see a risk of an up down up.There is plenty of time to work on that later.The road map point to a massive bull market in PMs and the miners though and iv never seen my indicators all in a line.Only the ALGO indicator that tracks momentum is in sell mode,but id expect that to turn last when the other indicators are flashing such huge buy signals as they are all contrarian based and are designed to move along the line depending on the scale of the bearish sentiment etc.

I agree on gas as well.Gas will be a huge winner in the next cycle.People never ever smell a reflation cycle because they are rare beasts.They come about when a long disinflation has seen consumers take too much of the pie while the backbone of the economy doesnt get the investment it needs.They also tend to begin with a debt deflation shock.High capital asset companies who have already paid for most of it,or have fixed low interest rates for a decade will clean up.People will be shocked how quickly free cash flow shoots up for these companies and the best part is they are mostly hated right now.

 

[Solzhenitsyn]

16 minutes ago, DurhamBorn said:

Great to have you here Cattle Prod and thankyou for your thoughts in the posts above.This thread moved here from the old place because i fully intended the thread to be open to everyone from the most experienced to the least and where people could lay out their thoughts without worry of the usual trolls who shoot down anyone who makes a bad call.Bad calls are part of investing and are often timing issues.

Thankyou for noticing our currency calls.I would say that work on the dollar over the last few years has been the best in the market,and by that i mean including every institution.Nobody has called the dollar better and thats mostly because of the 50 year experience and macro work of my friend.His cross market work on flows etc provides almost pin point road maps.The only thing those cant track is black swans of course.

I hear you on gold and the miners.Im starting to lean more towards a straight up into 2020 though i still see a risk of an up down up.There is plenty of time to work on that later.The road map point to a massive bull market in PMs and the miners though and iv never seen my indicators all in a line.Only the ALGO indicator that tracks momentum is in sell mode,but id expect that to turn last when the other indicators are flashing such huge buy signals as they are all contrarian based and are designed to move along the line depending on the scale of the bearish sentiment etc.

I agree on gas as well.Gas will be a huge winner in the next cycle.People never ever smell a reflation cycle because they are rare beasts.They come about when a long disinflation has seen consumers take too much of the pie while the backbone of the economy doesnt get the investment it needs.They also tend to begin with a debt deflation shock.High capital asset companies who have already paid for most of it,or have fixed low interest rates for a decade will clean up.People will be shocked how quickly free cash flow shoots up for these companies and the best part is they are mostly hated right now.

 

Hi DB,

im really interested in the indicators you use. I’d like to learn more about this in general. I totally get that these are your indicators given to you by a friend and you don’t want to share the exact recipe, but if you could point me in the general direction of where I could start researching into these I would be really great full. 

Even just general how many indicators you use and what they generally approximate/track would be useful. What types of data feed into them and how much data is publicalky available vs how much would need to be purchased.

id really like to explore the macro picture and it’s usefulness as an accompaniment to my price charting.

cheers

[invalid]

2 year chart for Uk natural gas futures:

 

[invalid]

With oil prices I like to take a 12 month rolling average, as of May 2018 (latest figures I have) crude was at $59 on a 12 month average which is is a 20% YOY increase. Its been running at that YOY increase level for at least 9 months now, as an input cost that must be starting to feed out the other end by now in the form of increased prices and inflation.

Many of the big energy co's have raised prices twice year. Wholesale prices are high and with the spike in gas prices will go higher if the prices remain at that level.

With low output from wind this summer driving up prices, a long cold winter will lock those price increase in. A mild winter may see a drop in prices. Would be intrested in any thoughts on the production side of things.

It's starting to look like we could be on the edge of some interesting times. However, attempting to predict the future is I think an almost pointless exercise, the best that we can do is to get an indication of the probability of different outcomes.

[A_P]

3 hours ago, Barnsey said:

Apologies interrupting the genuinely insightful discussion on energy, just wanted to quickly highlight that UK house prices have just experienced their biggest monthly fall since July 2012

https://www.nationwide.co.uk/about/house-price-index/headlines

Bit of detail about HTB in the release:

How much is Help to Buy impacting activity in England?

“There were around 48,000 Help to Buy (HTB) Equity Loan completions in England in the 12 months to March 2018, up 21% on the same period last year. The scheme accounted for c8% of total house purchase mortgages in England in the period, though it continues to account for a higher share of activity in the North (10%) and the East Midlands (9%).

“The vast majority (c80%) of HTB loans were to first time buyers and while its share of FTB activity has continued to trend upwards, it remains relatively modest at 13% of transactions.

“It is unclear how much HTB activity represents additional demand and how much has simply replaced activity that would already have taken place. The scheme has, however, been a key source of demand for newly built homes in recent years. Indeed, HTB has accounted for more than a third (37% in the last 12 months) of new build completions in England. This is even higher in some regions, such as the North West, where HTB accounted for nearly half of new build purchases (see chart below).

“It is unclear whether or not the scheme will be extended (or amended) beyond April 2021, when it is due to expire. However, given the long lead time on many housing developments and the political consensus on the need to increase housing supply, it suggests that the scheme will not come to an abrupt end.”

Isn't NW one of the mortgage providers that are locking in HTB'ers on high rates after their intial fixed term ends? So circa 40% of their new build mortgage book will be on some nasty rates going forward. Ouch.

[Barnsey]

11 minutes ago, Admiral Pepe said:

Isn't NW one of the mortgage providers that are locking in HTB'ers on high rates after their intial fixed term ends? So circa 40% of their new build mortgage book will be on some nasty rates going forward. Ouch.

Very interesting geographical spread there, Midlands and North going to get hit hard, as @DurhamBorn points out in the Darlington area, lots of these crudely put together shoeboxes springing up for vastly more than local prices, big ponzi scheme they'll be trapped in for a decade or more, especially if there's significant push back from builders on leasehold changes, wouldn't want to get on the wrong side of them now would we?

[Band]

3 hours ago, Option5 said:

You mean like Norway did/do?

Despite good 'A' level results my lad's an apprentice welder.................

Tell him to get nito pipeline welding pretty much all the current lot are 60 plus, he'll be on £600-700 a day in the coming years.Probably close to £500 now.