Credit deflation and the reflation cycle to come.

[DurhamBorn]

3 hours ago, sancho panza said:

Many thanks.That phrase has been banging round my head since.Sometimes,a small off the cuff comment contains truths that are more universal than appears at first. I always loved Gordon Ramsey-'The last thing genius learns is simplicity'.

 

The reason I'm up,unable to sleep at 0400 (unusual for me) is that we've had a family bust up and it's caused me to take a deep hard look at me and Mrs P's allocations due to some family issues.As luck would have it,I'll be purchasing some PM miners this week at lower levels than previously.

 

Fascinated by that COT report.Are there any blogs that cover that stuff you'd reccomend?

https://www.ireallytrade.com/cotreport.html

Larry Williams,his book should be owned by anyone in the gold space.

https://www.amazon.co.uk/Trade-Stocks-Commodities-Insiders-Secrets/dp/0471741256/ref=asap_bc?ie=UTF8

Commercials being long is incredible and its never happened before,least short has always been the trigger for a turn.

[DurhamBorn]

1 hour ago, Barnsey said:

Another factor to consider - Gold linked ETFs. Inevitably creates selling pressure on the underlying. Have to tread carefully, especially if we see a considerable Yuan devaluation ahead.

Gold seems to be tracking the Yuan doesnt it,looks like China is involved in forcing down price (for now) from their offshore accounts.Its almost like they are testing a gold standard.

[dgul]

2 hours ago, Democorruptcy said:

OK, what do you think about this one? Wind and solar.

https://www.hl.co.uk/shares/shares-search-results/t/the-renewables-infrastructure-group-ord-npv

 

 

Hmm -- as far as I can tell there's not much debt and they do actually generate a positive return.  

My take would be that the previous one at least has the possibility of generating a better return, but is more likely to get into trouble (go to zero) in a serous downturn*.  These guys seem to be a bit more boring but (assuming that everyone keeps up with their obligations going forwards) more likely to just hang around paying their dividends. 

But I've only glimpsed at the financials, and it is all guesswork anyway without knowing the nature of the economy going forwards.

[* Of course, for the last 20 years (+) this has been a fantastic way to create a return -- everyone, from BTL to hedge-funds, have used this approach (gearing) to get richer quicker.  And it may well continue to be a fantastic way to create a return.  I'd guess, however, that if the @DurhamBorn future comes to pass, then it'll be a millstone, not rocket (feel free to comment, DB)]

[Democorruptcy]

2 hours ago, dgul said:

 

Hmm -- as far as I can tell there's not much debt and they do actually generate a positive return.  

My take would be that the previous one at least has the possibility of generating a better return, but is more likely to get into trouble (go to zero) in a serous downturn*.  These guys seem to be a bit more boring but (assuming that everyone keeps up with their obligations going forwards) more likely to just hang around paying their dividends. 

But I've only glimpsed at the financials, and it is all guesswork anyway without knowing the nature of the economy going forwards.

[* Of course, for the last 20 years (+) this has been a fantastic way to create a return -- everyone, from BTL to hedge-funds, have used this approach (gearing) to get richer quicker.  And it may well continue to be a fantastic way to create a return.  I'd guess, however, that if the @DurhamBorn future comes to pass, then it'll be a millstone, not rocket (feel free to comment, DB)]

In a serious downturn don't the utilities perform better than other shares? I'm assuming these would be in classed in that bracket. I don't own them now and just have them on a watchlist for if a downturn makes the price/NAV more reasonable. I've forgotten where I noticed them but I think it was on here or ToS.

[Gordie Lastchance]

On 14/06/2018 at 21:22, The Second Mouse said:

TRIG sounds interesting, the thing I can't quite work out is whether the dividend that lands in the bank is 5.78%, or 

5.78%- Annual management charge (1%) - ongoing charge (0.08%)..so 4.7% ?

It was mentioned here back in June, Demo. There was a question mark over TRIG's dividend at the time. Would you happen to know the answer?

[Mere mortal]

15 hours ago, sancho panza said:

There's just too many people stacking on one side of the trade.Virtually every person I know thinks property is a one way ticket.It's worse now than in 2007. I have vivid memories still of the tech bubble and the way so many people unfamiliar with the risk of stock trading, pushed themselves in front of the oncoming truck and got mullered in the smack.When this housing bubble unwinds-and it will-the losses will be ruinous for many of the IO BTLers,severely damaging for late entrants (both resi and LL) and pretty painful for anyone leveraged over 50%.

 

I think we're going to be in a period where aside from FTB's, building successful chains of transactions will be hard.The amount of people under 45 with the salaries to take out £500k houses will be significantly reduced  given worsening pension provisions, rising rates, deleveraging banking system, rising fuel prices,rising food prices.

Wolf St has a cracking post on rental drops in the USA as some cities depopulate eg Chicago.What will happen in the UK if a large chunk of EU migrants head home?

Longer term,the outlook for sterling is awful and I suspect as it drops,we will see the perfect storm for UK HPI as the UK depopulates and rates rise to defend the BoE pension pot which is held in sterling.

Spot on  I reckon... I think this is why the traditional next step up houses in the area I'm in are left languishing right now (the ones in the 220 to 280 bracket).... heck of alot of the 400K plus ones selling though ...

[ashestoashes]

vodafone just at 166.66 - a sign ?

[dgul]

1 hour ago, Democorruptcy said:

In a serious downturn don't the utilities perform better than other shares? I'm assuming these would be in classed in that bracket. I don't own them now and just have them on a watchlist for if a downturn makes the price/NAV more reasonable. I've forgotten where I noticed them but I think it was on here or ToS.

But they don't look like utilities -- they look more like hedge-funds.

[Barnsey]

What a day, the kids go back to school and all hell breaks loose!

Italy PMI falls to 2 year low (second largest industrial sector in Europe after Germany), Eurozone manufacturing at 21 month low, UK manufacturing at 25 month low (new export orders fell for first time in over 2 years despite weak £), South African PMI has collapsed from 51.5 in July to just 43.4 (50.0 expected), Turkey PMI collapsed from 51.0 to 46.3, China Caixin PMI hits 14 month low, South Korea's factory sector shrank for a sixth consecutive month...

Methinks the S.S. Earth be sinking captain! 

[azzuri82]

On 31/08/2018 at 08:52, BearyBear said:

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

This is the sort of stuff going up in Edinburgh at the moment, surely a 3-bed new build flat (...albeit in the grounds of the old Donaldson's school!) is peak / bubble territory?:

https://www.rightmove.co.uk/property-for-sale/property-75296360.html

£1.7m for a 3-bed new build, crazy.

 

[Democorruptcy]

1 hour ago, Gordie Lastchance said:

It was mentioned here back in June, Demo. There was a question mark over TRIG's dividend at the time. Would you happen to know the answer?

Sorry I don't.

[Band]

20 minutes ago, azzuri82 said:

This is the sort of stuff going up in Edinburgh at the moment, surely a 3-bed new build flat (...albeit in the grounds of the old Donaldson's school!) is peak / bubble territory?:

https://www.rightmove.co.uk/property-for-sale/property-75296360.html

£1.7m for a 3-bed new build, crazy.

 

Nice flat, all flats build should be to a similar standard. Take one of the zero's off the end and its probably a fair price given its location.

[azzuri82]

6 minutes ago, Banned said:

Nice flat, all flats build should be of a similar standard. Take on of the zero's off the end and its probably a fair price given its location.

Crazy to think that around £300k of that is VAT.

[DurhamBorn]

1 hour ago, Barnsey said:

What a day, the kids go back to school and all hell breaks loose!

Italy PMI falls to 2 year low (second largest industrial sector in Europe after Germany), Eurozone manufacturing at 21 month low, UK manufacturing at 25 month low (new export orders fell for first time in over 2 years despite weak £), South African PMI has collapsed from 51.5 in July to just 43.4 (50.0 expected), Turkey PMI collapsed from 51.0 to 46.3, China Caixin PMI hits 14 month low, South Korea's factory sector shrank for a sixth consecutive month...

Methinks the S.S. Earth be sinking captain! 

Fed tightening starting to come through now,still its not like everyone is leveraged to the hilt is it).Luckily in the UK its mostly BTL and over leveraged homeowners who will take most of the hit.Those FTB smiles as they tell their friends about their shiny new HTB house will soon turn to decades of grind.South African love those numbers though,it means the Rand keeps going down and their margins keep going up.

[DurhamBorn]

1 hour ago, dgul said:

But they don't look like utilities -- they look more like hedge-funds.

Yes a lot of them have a massive amount of leverage.The water companies being the worst examples.Its one of the reasons i like Centrica,if they can get shot of their 20% nuclear stake they should be down to about £1.3 billion of debt,thats a pretty strong position given their cash flow profile compared to most in the sector.Telcos have a lot of leverage as well,but they are mostly coming out of investment cycles and depreciation should move in the right direction going forward.They just need inflation to lead rates,negative rates are hugely bullish for them.

[Option5]

I have a new job coming up in Norway, chose to get paid in NOK (other options were Euro and GBP)

Right choice?

[BurntBread]

20 hours ago, sancho panza said:

Longer term,the outlook for sterling is awful and I suspect as it drops,we will see the perfect storm for UK HPI as the UK depopulates and rates rise to defend the BoE pension pot which is held in sterling.

Thank you SP. That's a particularly interesting throw-away remark. I'm sure almost everyone here is informed on this subject anyway, but for the few like me, here (if I have the right link) is the unremarkable strategy of the BoE pension fund:

"To acquire low risk, government-guaranteed assets or high quality supra-national assets that will on an on-going basis provide as close a hedge to the cash flows of the Fund's accrued liabilities as is practicable, having regard to transaction costs. To limit the risk of assets failing to meet the liabilities over the long term."

Here are their allocations:

 

It looks like they have a small incentive not to burn the pound, and a somewhat larger incentive for the index-linking to actually reflect inflation; both of which are hard to do in an inflationary environment (I would guess).

So, it seems like they are not completely insulated from the consequences of their policies. Oddly, they seem to be moving slightly towards UK fixed-interest.

[Option5]

1 hour ago, Cattle Prod said:

Option, Ive worked in Norway and I'd say it depends on how much you're making. If you are going to spend most of it on living costs, why introduce a currecy risk, stay in NOK. If you're day rating and planning to repatriate most of your cash, then maybe your home currency. Overall Ihink youve made the right choice in NOK, oil prices should keep it solid.

Enjoy Norway!

Thanks, I've lived and worked in Norway before, ten years in Oslo and one in Stavanger (that felt like ten).

I won't be living there this time, just my old employer will allow me to consult from here with the odd trip to Oslo.

I have a NOK account anyway and all the chat about the pound makes me think the NOK is a safer bet.

[A_P]

ignore, it's all in the full report you linked. Some interesting reading in the Risk Management section

[Band]

5 hours ago, Option5 said:

I have a new job coming up in Norway, chose to get paid in NOK (other options were Euro and GBP)

Right choice?

Get an A1 form so you dont have to pay Norwegian NI would be my recommendation if its only temporary work.

[sancho panza]

7 hours ago, ashestoashes said:

vodafone just at 166.66 - a sign ?

Yes that it's even better value now than at 175.I still haven't bought my first tranche  yet but it's a compelling currency hedge and  relatively solid cash flows.

5 hours ago, Option5 said:

I have a new job coming up in Norway, chose to get paid in NOK (other options were Euro and GBP)

Right choice?

Nok,every day at the minute.

3 hours ago, BurntBread said:

Thank you SP. That's a particularly interesting throw-away remark. I'm sure almost everyone here is informed on this subject anyway, but for the few like me, here (if I have the right link) is the unremarkable strategy of the BoE pension fund:

"To acquire low risk, government-guaranteed assets or high quality supra-national assets that will on an on-going basis provide as close a hedge to the cash flows of the Fund's accrued liabilities as is practicable, having regard to transaction costs. To limit the risk of assets failing to meet the liabilities over the long term."

Here are their allocations:

 

It looks like they have a small incentive not to burn the pound, and a somewhat larger incentive for the index-linking to actually reflect inflation; both of which are hard to do in an inflationary environment (I would guess).

So, it seems like they are not completely insulated from the consequences of their policies. Oddly, they seem to be moving slightly towards UK fixed-interest.

Worth noting the index linking is to RPI which includes house prices rather than the -normally lower-CPIH on which most normal people's pay awards are made.

Just sayin'.........

https://www.ons.gov.uk/economy/inflationandpriceindices/articles/shortcomingsoftheretailpricesindexasameasureofinflation/2018-03-08

Ongoing work by the ONS and others has strengthened the case against the RPI, and the evidence suggests it is likely to overstate inflation. It is not possible to be precise about the extent of any upward bias as there is no single perfect measure to benchmark it against. When we compare it to other measures, however, we find the RPI inflation rate is currently around 1 percentage point higher than the CPIH and the experimental Household Costs Indices.

the treatment of housing costs for home-owners, technically known as owner occupiers’ housing costs (OOH); the RPI uses a combination of mortgage interest payments and also house prices as a proxy for housing depreciation, this means that the RPI is heavily influenced by house prices and interest rates, as shown in Figure 1

[UnconventionalWisdom]

13 hours ago, DurhamBorn said:

Gold seems to be tracking the Yuan doesnt it,looks like China is involved in forcing down price (for now) from their offshore accounts.Its almost like they are testing a gold standard.

It looks like there is definitely something going on to keep it somewhat pegged. 

All a bit tin foil hat but with Russia dumping US treasuries for gold, there could be an attempt to shift from the dollar as the world's reserve currency. 

[sancho panza]

5 hours ago, Cattle Prod said:

The New York Times has published a good piece on the fracking ponzi:

Edit: It's by Bethany Mc Lean, who exposed the Enron scandal

https://www.nytimes.com/2018/09/01/opinion/the-next-financial-crisis-lurks-underground.html

 

Excerpt:

"The 60 biggest exploration and production firms are not generating enough cash from their operations to cover their operating and capital expenses. In aggregate, from mid-2012 to mid-2017, they had negative free cash flow of $9 billion per quarter.

These companies have survived because, despite the skeptics, plenty of people on Wall Street are willing to keep feeding them capital and taking their fees"

Far more articulate than my rant

 

As we're talking the NYT and I've just been talking inflation,I'd love to mention a wonderful article they wrote four years ago on the origins of the 2% inflation target back in New Zealand in the early 90's.Long story short,bunch of politicians want to get home for Christmas so stop arguing and set on a compromise of 2%.

That 2% becomes the basis of an economic orthodioxy that will create the biggest debt deflation since the Great Depression............amazing how many super educated economists it took to do it.

https://www.nytimes.com/2014/12/21/upshot/of-kiwis-and-currencies-how-a-2-inflation-target-became-global-economic-gospel.html

' Yet even as the idea of a 2 percent target has become the orthodoxy, a worrying possibility is becoming clear: What if it’s wrong? What if it is one of the reasons that the global economy has been locked in five years of slow growth?

To understand that thinking, it’s worth understanding how New Zealand’s 2 percent target became so entrenched in the world economic order to begin with .

Once the law was enacted, though, there was the difficult question of what the inflation target should be. Zero percent? Two percent? Five percent?

Mr. Brash and Mr. Caygill got a head start on an answer from an offhand comment made during a television interview in 1988. Roger Douglas, Mr. Caygill’s predecessor as finance minister, had been seeking to dissuade New Zealanders from thinking that the central bank would be content with high inflation, and so he said in an interview that he was aiming for inflation of around zero to 1 percent.

“It was almost a chance remark,” Mr. Brash said in a recent interview. “The figure was plucked out of the air to influence the public’s expectations.”

With Mr. Douglas’s figures as a starting point, Mr. Brash and Mr. Caygill agreed that it would be best to expand the range to give them more room to maneuver, but only a bit. New Zealand would aim for inflation between zero and 2 percent.

Not surprisingly, the passage of a law to reform the central bank governance of an archipelago of 3.4 million people received no coverage in the major American papers. But across the close-knit world of global central bankers, people started to notice the Kiwis’ monetary policy experiment.

One view was that zero inflation should be the goal — that a dollar today should have the same buying power as a dollar in a decade, or two or three. That was the view embraced by, among others, Paul A. Volcker, the former Fed chairman. Alan Greenspan, Mr. Volcker’s successor at the Fed, argued that inflation needed to be low enough that it didn’t have to be factored into business decisions.

Ms. Yellen, who now runs the institution, worried that announcing an inflation target would make the Fed focus only on inflation and neglect its responsibilities to bolster growth and jobs. She worried that zero inflation could paralyze the economy, particularly during slumps, and felt that some inflation was necessary.

In that 1996 debate, another argument that Ms. Yellen raised against a zero percent target was particularly prescient. The higher the level of inflation, the more that central banks can stimulate the economy during a downturn.

Imagine that there is a severe recession and the Fed cuts interest rates to zero, so that when you put money in the bank you get no return. If there is no inflation, your money will retain its purchasing power and be worth the same when you withdraw it. But if there is inflation, the value of your money sitting in the bank becomes steadily less valuable, meaning that you have more incentive to spend or invest it.

“A little inflation permits real interest rates to become negative on the rare occasions when required to counter a recession,” Ms. Yellen said in 1996. “This could be important.”

Starting in the late 1990s, Japan found itself stuck in a pattern of falling prices, or deflation, even after it cut interest rates all the way to zero. The United States suffered a mild recession in 2001, and the Fed cut interest rates to 1 percent to help spur a recovery. Then came the global financial crisis of 2007 to 2009, spurring a steep downturn across the planet and causing central banks to slash interest rates.

All of this has quite a few smart economists wondering whether the central bankers got the target number wrong. If they had set it a bit higher, perhaps at 3 or 4 percent, they might have been better able to combat the Great Recession because they could cut inflation-adjusted interest rates by more. '

[Barnsey]

Great listen which ties into many of the ongoing topics we discuss, an hour long but flew past for me, will probably revisit

 

[Onsamui]

Foreign investors have been withdrawing on a large scale from British government bonds

https://www.armstrongeconomics.com/markets-by-sector/foreign-exchange/pound/foreigner-selling-uk-debt-as-hard-bexit-appears/