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Credit deflation and the reflation cycle to come.


DurhamBorn

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1 minute ago, Democorruptcy said:

I'm not suggesting markets aren't overvalued, it's just that I've become very untrusting. When I see a chart now I see what THEY want me to think, so I start looking for other reasons behind it. The first step is usually to look at the axis.

I don't blame you. I'm the same way. I just dug out the 10k's after following the trail and low and behold, can't trust a damn thing.

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Democorruptcy
1 hour ago, Majorpain said:

Thats a plausible theory, although there are also higher borrowing costs stopping debt fueled stock buybacks, to explain why US markets are "turbulent" at the moment.

Gravity is going to be a bitch one day for the FANG's.  (especially Apple and Amazon!).

That reminds of another chart of doom and gloom I have a problem with. Maybe I'm looking at it the wrong way? A lot's been posted about margin debt being at all time highs etc. Why not and why couldn't it go higher? In 2007 the Fed rate was over 5%, when it was 0.5% fairly recently doesn't that mean debt is much cheaper, so margin debt should be off the top of the scale? 0.5% is 1/10 of 5% so debt should soar? Even now the cost of money is a lot cheaper than historically.

In my mind reality has been completely suspended, there doesn't seem to be any accountability anymore. Bringing it back home, it's summed up by Hammond's Mansion House speech. Up to £5bn leveraged by the BoE up to £750bn without sign off by the Treasury. Just a 0.7% fall in the assets borrowed against and they are in the red. I emailed the Treasury Select Committee and asked if they were going to be disbanded now that they had been made redundant (no reply yet) xD

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42 minutes ago, Democorruptcy said:

That reminds of another chart of doom and gloom I have a problem with. Maybe I'm looking at it the wrong way? A lot's been posted about margin debt being at all time highs etc. Why not and why couldn't it go higher? In 2007 the Fed rate was over 5%, when it was 0.5% fairly recently doesn't that mean debt is much cheaper, so margin debt should be off the top of the scale? 0.5% is 1/10 of 5% so debt should soar? Even now the cost of money is a lot cheaper than historically. 

In my mind reality has been completely suspended, there doesn't seem to be any accountability anymore. 

 

Thats not investors using leverage to buy shares, thats companies taking out debt to buy shares back from the market.  It inflates EPS and makes the board look better.  The process looks like:

1.  Company takes out debt and uses it to buy back shares increasing share price.

2. Company need to renew debt, Fed rate increasing so instead of 1% its 2% for example.

3.  Company cant issue more debt as its struggling to pay interest on its current loans and so cant buy shares back.

4. Company renews debt but its gone from 2% to 3%. (or more if market suspects company is "in distress")

5. Company collapses under debt burden.

We are currently at stage 2.

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2 hours ago, Barnsey said:

Very wise @Majorpain, thing is this is now fuelled by temporary tax cuts (to offset significant QT) and ironically strong $, neither of which can probably continue beyond next summer. US stocks very much last (wo)man standing scenario at the moment. I'm nowhere near arrogant or "smart" enough to make trading calls, just absorbing a significant range of opinions day in day out (unhealthily so TBH).

I'm not that smart myself but will have a punt if I think the odds are on my side.

Ref that earlier chart,check the similarities with this long term Doug Short series of articales on NYSE margin debt

https://www.advisorperspectives.com/dshort/updates/2018/09/26/margin-debt-and-the-market

381a434e1309f44511c0f2a39411a242.png

Edit:sorry wont cut and paste.

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2 hours ago, Admiral Pepe said:

Nice work Pepe.Thanks.

1 hour ago, MrXxx said:

Agree, to not get some of the benefits now puts you at a disadvantage, and people don't respect you for it, they consider you a fool.

As SP stated above, eventually it will `break`, and it will only be at this stage that people will value/respect it, the way they did when it was ` born` :(

Mrs P was born in South Africa with virtually no welfare state.She can't beleive how ungrateful some are for what's available.

1 hour ago, Democorruptcy said:

I'm not suggesting markets aren't overvalued, it's just that I've become very untrusting. When I see a chart now I see what THEY want me to think, so I start looking for other reasons behind it. The first step is usually to look at the axis.

That's one of the reasons I do my own chart work and/or follow series like Doug Shorts that you can follow for years.

58 minutes ago, Democorruptcy said:

That reminds of another chart of doom and gloom I have a problem with. Maybe I'm looking at it the wrong way? A lot's been posted about margin debt being at all time highs etc. Why not and why couldn't it go higher? In 2007 the Fed rate was over 5%, when it was 0.5% fairly recently doesn't that mean debt is much cheaper, so margin debt should be off the top of the scale? 0.5% is 1/10 of 5% so debt should soar? Even now the cost of money is a lot cheaper than historically.

 

Margin debt trades form a small portion of daily demand on the NYSE,I think it's under 1%,so they're a symptom rather than a cause.

Borrowing costs form a really minor part of the maths if you're buying on margin.People who borrow to speculate in stocks are hardly going to worry about the IR until it's north of 12%.

 

Ref @Majorpain unsure of how many companies using borrowed money would show up in these Doug Shrot figures.From my link

'The New York Stock Exchange previously published end-of-month data for margin debt on the NYX data website, including historical data going back to 1959. Because of NYSE's suspension of publication, we have turned to FINRA to continue our analysis. The figures differ in their inclusion of firms. For data through January 2010, debit balances were derived by adding NYSE debit balances in margin accounts to FINRA debit balances in customers' cash and margin accounts and credit balances were derived by adding NYSE free credit balances in cash and margin accounts to FINRA free and other credit balances in customers' securities accounts. For data after January 2010, "As of February 2010, data are collected pursuant to FINRA Rule 4521 and are aggregated across all member firms, regardless of whether the firm was designated to NASD or the New York Stock Exchange (NYSE) before the consolidation of NASD and the member firm regulation operations of NYSE Regulation in July 2007 that created FINRA," (FINRA statistics definition, FINRA website). As a result of this change, the debt data is higher than the NYSE data.'

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3 minutes ago, sancho panza said:

Ref @Majorpain unsure of how many companies using borrowed money would show up in these Doug Shrot figures.From my link

'The New York Stock Exchange previously published end-of-month data for margin debt on the NYX data website, including historical data going back to 1959. Because of NYSE's suspension of publication, we have turned to FINRA to continue our analysis. The figures differ in their inclusion of firms. For data through January 2010, debit balances were derived by adding NYSE debit balances in margin accounts to FINRA debit balances in customers' cash and margin accounts and credit balances were derived by adding NYSE free credit balances in cash and margin accounts to FINRA free and other credit balances in customers' securities accounts. For data after January 2010, "As of February 2010, data are collected pursuant to FINRA Rule 4521 and are aggregated across all member firms, regardless of whether the firm was designated to NASD or the New York Stock Exchange (NYSE) before the consolidation of NASD and the member firm regulation operations of NYSE Regulation in July 2007 that created FINRA," (FINRA statistics definition, FINRA website). As a result of this change, the debt data is higher than the NYSE data.'

They wouldnt, im guessing a lot of the money is QE money borrowed from the major banks, It will be sitting in plain view on company balance sheets.  Mcdonalds on the link is an example of company which has taken full advantage of the cheap debt on offer.

https://www.investopedia.com/terms/l/leveraged_buyback.asp

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9 minutes ago, Majorpain said:

They wouldnt, im guessing a lot of the money is QE money borrowed from the major banks, It will be sitting in plain view on company balance sheets.  Mcdonalds on the link is an example of company which has taken full advantage of the cheap debt on offer.

https://www.investopedia.com/terms/l/leveraged_buyback.asp

Aaah....I see your point.One of the reasons I'm a little wary of calling the big kahuna here is the amount of buy backs.As a company,if you can access money at 1% and lift earnings by 5%,why wouldn't you?

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Just now, sancho panza said:

Aaah....I see your point.One of the reasons I'm a little wary of calling the big kahuna here is the amount of buy backs.As a company,if you can access money at 1% and lift earnings by 5%,why wouldn't you? 

You would, and they did.  I seem to remember that someone on here (Barnsey?) mentioned that this week or last week was the start of pre-earnings when companies would be blocked from buying back their shares.  Give it a few weeks and we will find out if its the Feb crash again or armageddon!

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Again another anecdotal, speaking with a defence/prosecution network expert today earning six figures. He overheard my talking of averaging in on Vodafone in this current period as I'm currently working alongside him in the field myself. He had no idea in regards to pensions/investments as I explained the basics of dividends etc, even though he has taken stock options as part of his role and his pension was in an index tracker etc. It's scary to think how much money is in passive investment funds blindly ploughing in. When this sucker turns it will be carnage.

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Democorruptcy
1 hour ago, Majorpain said:

 

Thats not investors using leverage to buy shares, thats companies taking out debt to buy shares back from the market.  It inflates EPS and makes the board look better.  The process looks like:

1.  Company takes out debt and uses it to buy back shares increasing share price.

2. Company need to renew debt, Fed rate increasing so instead of 1% its 2% for example.

3.  Company cant issue more debt as its struggling to pay interest on its current loans and so cant buy shares back.

4. Company renews debt but its gone from 2% to 3%. (or more if market suspects company is "in distress")

5. Company collapses under debt burden.

We are currently at stage 2.

I agree with all that. The only thing you have missed is that in effect they are using the borrowed money to pay dividends, to try to encourage more suckers investors to buy their shares.

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17 minutes ago, Cattle Prod said:

And as we speak, the S&P is down 3% on the day. I look forward to the caterwauling and gnashing of teeth tomorrow. 

Treasuries (and the dollar) sold off too...again...where will the safe haven bid go?

Edit: it just bounced off the 38.2 Fibb - crisis over! That was quick, I didnt expect it to get there for weeks. There are much fewer buyers left in the market, it really is just retail momo muppets and algos bouncing off fibbs.

The miners had a very nice day today as did UK defensive's.Card Factory put on 2.5%.Maybe they are stocking a new card? "sorry to hear about the loss of your leveraged BTL and Fang portfolio,thinking of you at this difficult time".

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Article about how ETFs might perform when everyone heads for the exits...

https://www.zerohedge.com/news/2018-09-11/not-grounded-reality-blackrock-responds-alarm-over-etf-market-fragility

Quote

One week ago, SocGen analyst Sebastien Lemaire stress-tested the fragility of 16,000 stocks, and concluded that small caps, dividend shares and gold miners are all especially vulnerable in market drop as a result of outsized ownership among passive/ETF investors. In turn, those positions could prove more difficult, and certainly costly, to exit.

 

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52 minutes ago, Majorpain said:

You would, and they did.  I seem to remember that someone on here (Barnsey?) mentioned that this week or last week was the start of pre-earnings when companies would be blocked from buying back their shares.  Give it a few weeks and we will find out if its the Feb crash again or armageddon!

It was barnsey.

I think in the UK at least we're on the cusp.Some of the internal activity within the FTSE over the last week has been a sight to behold. stocks that have had steady multi year long run ups like Ashtead/Ferguson/Intertek/Bunzl/hargreaves/Experian/IHG have been getting walloped.

As for the US,mid terms are in November,I don't see anything happening much before then.I'm still going for 2019 for the Big Kahuna.

33 minutes ago, Cattle Prod said:

Is anyone else reading about de-dollarisation? There are big macro structural shifts going on right now, and I'm trying to make sense of it all. I'm reading Luke Gromen, Mark Yusko and others. In trying to understand the Yen/Gold correlation, I got to the argument that its linked to the Chinese oil futures exchange. In that if oil exporters dont want Yuan for their oil, they'll take gold ir gold equivalent for it. The Chinese want the dollar out of the commodities trade, and the geopolitics the last 8 months or so fits this narrative. There is no doubt that China and Russia have been buying physical gold while dumping (Russia) or not buying (China) Treasuries. 

Its compelling, and the oil exchange is doing well by all accounts. The US has effectively been on an oil standard since 1971, that's been challenged now. And China can't be invaded or bullied. Interesting times.

https://www.macrotrends.net/1380/gold-to-oil-ratio-historical-chart

Gold has been rising in oil terms gradually over time. Even when oil was very cheap, it was in this trend. Its very cheap in oil terms now, much more so than in early 2016.

Attached - where gold is moving to. Why? It has to do with wanting to break with the dollar. In using the dollar as a weapon the US might have seriously shot itself in the foot.

 

 

Screenshot_20181010-203807_Twitter.jpg

Great chart CP.I don't know whether you read it on here or ToS but we had a great debate about why the Fed was raising before Powell was put in and the general conclusion after an excellent debate was that they were defending the dollar.What you've pointed out with a relevant chart is that we were about right on their motivations.

I'd raise rates to raise velocity but they're clearly not worreid about the things we mortals are.

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5 minutes ago, DurhamBorn said:

The miners had a very nice day today as did UK defensive's.Card Factory put on 2.5%.Maybe they are stocking a new card? "sorry to hear about the loss of your leveraged BTL and Fang portfolio,thinking of you at this difficult time".

:ph34r::D

as I've said previously,not sure this is the beginning of a major sell off in stocks at all,but anyone watching the transactionless housing market and wondering when to shift their stock should get a move on.

 

 

4 minutes ago, Stuffed said:

Article about how ETFs might perform when everyone heads for the exits...

https://www.zerohedge.com/news/2018-09-11/not-grounded-reality-blackrock-responds-alarm-over-etf-market-fragility

small caps, dividend shares and gold miners

 

Fascintaing piece,Thank you.

I wouldn't mind if the latter two sold off heavily in a sell off......

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13 hours ago, DurhamBorn said:

IMF report today shows the UK has terrible public finances and the 2nd worst of any industrial country for government assets because they sold most of them in the 80s and 90s.Its incredible to think that instead of building and owning assets like houses themselves that they fund through housing benefit later they are pumping money to chief execs of house builders with HTB.Of course the real reason is to trap young people into being tax payers forever.

Wont be long before they clamp down on pensions,its the only real way someone earning £50-£100k a year can avoid being fleeced in income tax.Yearly allowance cut to £30k then £20k in the budget?

I saw the IMF article in the FT today and the real irony is that Kenya, Uganda and Gambia are above us in the table yet we give them $100`s mil in foreign aid!...how does that `work` economically then?!

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@sancho panza yes that "why are they increasing rates" debate was superb and looks like we were 100% correct in the end.It started out me saying the macro picture pointed to a collapse and that the Fed were creating a disaster.I saw it as a policy error 1930s style.However once everyone else considered where the road map pointed on the tightening and it could be that they knew very well what they were doing,but were prepared to take any pain to protect the dollar.I new where the macro picture pointed,but considered it a policy error,where as after that debate the fog cleared and it was like oh of course.That shows how important friendly debate from all the great people who add their thoughts here is.Of course that level of thought process is well lacking from the media including the financial press who are like rabbits in headlights.

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1 hour ago, Majorpain said:

You would, and they did.  I seem to remember that someone on here (Barnsey?) mentioned that this week or last week was the start of pre-earnings when companies would be blocked from buying back their shares.  Give it a few weeks and we will find out if its the Feb crash again or armageddon!

Agreed re: Feb crash or Armageddon. I think this is mibbe it but I hope not, was hoping the plates might keep spinning for another 6-9 months so I could get some more of my personal affairs in order.

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Been a brutal day, futures also 3 or 4% down. I'm not sure this is the big one either, but we've still got another 3 or 4 weeks of buyback blackouts to get through. Lots of breaking through 100/200 DMAs.

IMG_20181010_223425.thumb.jpg.d76be3a462b784947f42851e82d57b76.jpg

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34 minutes ago, Barnsey said:

Been a brutal day, futures also 3 or 4% down. I'm not sure this is the big one either, but we've still got another 3 or 4 weeks of buyback blackouts to get through. Lots of breaking through 100/200 DMAs.

IMG_20181010_223425.thumb.jpg.d76be3a462b784947f42851e82d57b76.jpg

Dow -3.15%

Ndx -4.4%

Dow Tran -4.0%

Rut is down 10% in 10days

Its a bloodbath and its not even friday.

 

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Just now, Green Devil said:

Anyone wonder why the pound is up?

Perhaps its because the markets see the UK as the only place with 0% chance of any rate hikes only cuts.

People selling Amazon are buying our defensive's?.The commercials were net long by a very large margin last week on Sterling.They are very net short the dollar.

 

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1 hour ago, DurhamBorn said:

@sancho panza yes that "why are they increasing rates" debate was superb and looks like we were 100% correct in the end.It started out me saying the macro picture pointed to a collapse and that the Fed were creating a disaster.I saw it as a policy error 1930s style.However once everyone else considered where the road map pointed on the tightening and it could be that they knew very well what they were doing,but were prepared to take any pain to protect the dollar.I new where the macro picture pointed,but considered it a policy error,where as after that debate the fog cleared and it was like oh of course.That shows how important friendly debate from all the great people who add their thoughts here is.Of course that level of thought process is well lacking from the media including the financial press who are like rabbits in headlights.

It was an excellent debate and it changed my thinking on the issue,I was struggling to understand their motives and whilst I had a few ideas,defending the $ wasn't in my top three.By the end it made perfect sense.

It really was this thread at it's best.

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