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Credit deflation and the reflation cycle to come.


DurhamBorn

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6 hours ago, Barnsey said:

Current train of thought:

- If markets seems to turn around for a final top into end of year, go heavy into IBTL over next few weeks, hold until summer 2019 through first downward wave of market decline (USD/TLT safe havens during global deflationary bust?)

- Fed reverses tightening policy summer 2019, go heavy miners & Gold/Silver (PMs safe haven during $ collapse?), stocks to see a smaller bounce but then resume downward trend

- Focus heavily on buying value reflation stocks/commodities mid 2019 - late 2020 as global recession takes hold, focus on FTSE 350 companies linked to energy/EV/transport/essential consumer staples/health and low fee trackers in Industrial nations once they hit their (multi) decade lows (Dow, MSCI China/Emerging Markets, Nikkei, Dax)

- Inflation starts to show its ugly face 2020 onwards, end game target of 2025 remains but could shift a couple years later based on timing/length of recession, at that point sell everything?

I agree inflation might top a bit later.I saw 2025,but 2027 is looking more likely now.I still see 97.5 as likely top for the dollar and i actually see a 74 level as a target,though the road map stops at 85.Thats very rough at the moment though.If/when the market gets a hint the Fed is starting to wobble gold should move up hard.This dollar call is the most likely to go wrong due to the debt deflation being upon us.

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Great article from Ben Hunt at Epsilon Theory (been a reader for few years now)

https://www.epsilontheory.com/things-fall-apart-part-3-markets/

Each of the Three Horsemen of the Investing Semi-Apocalypse will create a severe deflationary shock.

That’s why you don’t have to change your investment playbook for a Fed-created recession, a China-created credit freeze, or an Italy-created Euro crisis. You already know the deflationary playbook. It’s what you’ve been doing (or should have been doing) for the past ten years. Just keep doing THAT.

But if we enter an inflationary world, something that very few investors alive today have EVER experienced … well, everything you’ve been doing for the past ten years will be a mess. Your prayers to the great god of diversification, at least as that god is manifested today as the Holy Long Bond, will go unanswered. Your embrace of the cult of Vanguard, at least as that cult is expressed today as the worship of passive index funds, will give you pain rather than comfort. The very languagethat you use today to speak with other investors about core abstractions like Value and Growth will turn into gobbledygook.

Today’s common knowledge rejects this Fourth Horseman of inflationary regime change. But, but … demographics!, you hear. Don’t you understand that Demographics is Destiny™, that we are getting older and having fewer children, dooming us to the long gray slog? But, but … technology!, you hear. Don’t you understand that robots and AI are going to replace all us mere humans, creating a world where our bread and circuses just get cheaper and cheaper? Yeah, I understand. I hear these narratives and memes, too.

But that’s my point. We believe that we are in a deflationary world because we are TOLD that we are in a deflationary world. That’s the common knowledge. Everyone knows that everyone knows that inflation is dead and gone, that it’s a long gray slog going forward, forever and ever amen.

It’s hard to imagine when you’re immersed in it, but common knowledge can change.

That includes common knowledge of the fundamental inflationary/deflationary nature of our world.

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On 26/10/2018 at 12:36, Thorn said:

Seems MA is guiding towards DOW stocks as the quality thing to hold in the coming drop in confidence his model predicts shortly.

Do you think that’s his idea of the Trade of the Century? the Dow 30 is The Flight To Quality? 

from his private blog:
"Tomorrow, we will be adding our Crash Model Model commentary to the online report. These are technical dynamic numbers which are produced each day. When the market often penetrates them intraday you get the crash. If you open below them, this too can spark a quick rapid decline. 

The Crash Mode indicator for today, Monday 29th, lies at 2427363. This is the number to watch intraday. The critical intraday support lies at 24075 and the first Minor Monthly Bearish lies at 23995, followed by 23340."

 
For at least the final 18 months going into the high on September 3rd, 1929, the general consensus turned bullish. ...As long as the major remain bearish calling for every top to be the last one, you know we are nowhere near the high yet.
 
 
This is the order the cards will fall: Emerging Markets, then Europe, then Japan and last the USA
" We have been warning that the first to crack would be emerging markets and Turkey was the focal point. We are also beginning to witness the debt crisis in China due to loans in dollars as well. Many of these companies simply lacked the sophistication to understand currency risk or hedging strategies. The second in line would be Europe and the Euro is really in danger of bringing the entire world economy down. The third in line will be Japan, and then finally the crisis will hit the USA."
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Nice to see someone spotting that inflation might be coming Barnsey.My roadmap points to double digit inflation,double digit rates (maybe) and a cycle thats shocks almost everyone.The dis-inflation is over as the west looks to invest to counter China etc.

Iv been trying to work out the affect of a huge bond bear on the insurance companies given they are taking on lots of final salary pension schemes.Will it mean windfall profits or massive losses etc?.

 

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32 minutes ago, DurhamBorn said:

Iv been trying to work out the affect of a huge bond bear on the insurance companies given they are taking on lots of final salary pension schemes.Will it mean windfall profits or massive losses etc?.

Indeed, but I wonder what the small print of these deals includes e.g. some kind of risk share?

Also, would they not hold bonds to maturity so be able to set the transfer prices and returns with certainty?

Disclosure:. I own L&G and may buy more, or not!

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2 hours ago, Harley said:

Indeed, but I wonder what the small print of these deals includes e.g. some kind of risk share?

Also, would they not hold bonds to maturity so be able to set the transfer prices and returns with certainty?

Disclosure:. I own L&G and may buy more, or not!

Thats what im trying to figure out.Aviva and L+G could be fantastic buys,or terrible given the structure of them going forward.

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Sometimes, especially at times like this, it pays to look at the big picture:

Capture9.thumb.PNG.ab563ceae169baf5af747495cd3fa8db.PNG

The FTSE100 has been a dog since 2009.  But is it a bit of a safe haven in 2018+?

Not sure they look much different after allowing for currency movements against GBP.

Should we cry for UK investors as well as workers, both whom have seen little relative increase in income/wealth?

 

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What's everyone make of the budget then?

Stamp duty relief life support for reckless shared ownership, last ditch desperation.

Lots of infrastructure spending to come. 

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28 minutes ago, Harley said:

Sometimes, especially at times like this, it pays to look at the big picture:

The FTSE100 has been a dog since 2009.  But is it a bit of a safe haven in 2018+?

Not sure they look much different after allowing for currency movements against GBP.

Should we cry for UK investors as well as workers, both whom have seen little relative increase in income/wealth?

 

It seems like it was only yesterday that Amazon was nearly a $1T company, I look again a week later and its loss of value has been rapid ($770bn now).

The UK has missed out on the breakneck rise, and will probably fall with rest IMO, but falling from a lower height hurts a lot less!

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1 hour ago, Harley said:

Sometimes, especially at times like this, it pays to look at the big picture:

Capture9.thumb.PNG.ab563ceae169baf5af747495cd3fa8db.PNG

The FTSE100 has been a dog since 2009.  But is it a bit of a safe haven in 2018+?

Not sure they look much different after allowing for currency movements against GBP.

Should we cry for UK investors as well as workers, both whom have seen little relative increase in income/wealth?

 

What software are you using Harley for your charting? Can you add on the FTSE250 and FTSE All Share?

 

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Yellow_Reduced_Sticker
3 hours ago, Cattle Prod said:

Thank you all for the great conversation, I've been following some great posts with interest. What a week!

I have been in Perth Australia the last week with work, so I have not had time to reflect. But I can add an anecdotal. 

I took advantage of my business trip to head to the Perth Mint. I was tempted to go and see the 1 ton gold coin, but as the tour was 16 dollars, I passed, and went to the bullion room instead, which I'm sure you frugal gits appreciate!

I've never bought direct before, how interesting. Business was brisk. I was trying not to be nosy, but I was impressed with the very ordinary couple in the booth beside me. They were splitting their purchase on two cards, so maxing out. They'll do all right.

Airport security was fun, for those who have asked about this before. Ive carried bullion through airports before, so wasnt fazed. I knew my bag would be pulled. I said the standard line "do you mind if we check it in a private room" ..."no problem sir".... they didnt even bother. One chap discreetly whispered "do you have silver or gold coins in there?" "Yes" "Ok no worries" just weighed the package in his hand, didnt even check my invoice and as I tried to repack chit chatted about my visit and profession. Shook hands as I left!

Taking off, more in a bit 

LOVE it, YES i'll put my name as number 1 for the FRUGAL git candidate!xD

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Yellow_Reduced_Sticker
1 hour ago, Admiral Pepe said:

What software are you using Harley for your charting? Can you add on the FTSE250 and FTSE All Share?

 

While ya waiting for Harley  to reply...

Heres a GOOD tip in regards to charting software.

I use prorealtime's FREE  'End-of-Day version'

https://www.prorealtime.com/en/

Its EXCELLENT ! However WARNING! WARNING! WARNING!
 
Do NOT get the Real-Time version ...WHY because is costs moola AND we don't want to be shelling out any as we are all a... bunch frugal gits! xD
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7 hours ago, DurhamBorn said:

Nice to see someone spotting that inflation might be coming Barnsey.My roadmap points to double digit inflation,double digit rates (maybe) and a cycle thats shocks almost everyone.The dis-inflation is over as the west looks to invest to counter China etc.

Iv been trying to work out the affect of a huge bond bear on the insurance companies given they are taking on lots of final salary pension schemes.Will it mean windfall profits or massive losses etc?.

 

I have tried looking in L&G accounts but can't find that much information, so I have an indirect answer: large DB insurer which isn't listed but lots of detail in the accounts.  Could be useful if they all have a similar asset mix but could also be completely useless.

https://www.pensioncorporation.com/media/100113/annual-report-and-accounts-2017-1.pdf

To summarise:

page 34: assets ~40% gilts / ~60% corporate bonds (grade BBB and above)

BBB is ~40% of total bonds.

UK/US/Other split of corporates is 45/35/20

page 32: asset cashflows broadly match liability cashflows

Bond bear: guess there could be issues if BBB start defaulting.  No idea what the probability of that is.

However, if there is a simultaneous equity bull, funding positions of some DB schemes could improve, and they may become easier to insure - therefore resulting in new business for insurers.

 

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watching my L&G work pension ebb and flow over the years, it hasnt been spectacular and thats in one of the better performing lifestyle equity funds. And this is in an equity bull market.

I cant honestly believe that they make the grade when it comes to liabilities versus assets and gains on those assets. In a bear market i expect it to die hard, but thats from a very narrow perspective (ie only what funds i can see and are available to me). Ive never been overly impressed by the growth of the pension i have with them and can see it being wiped out in a prolonged down market. I had a small amount in their property portfolio a year or so back and made it by 1 day to get it out before they seized redemptions due to the lack of price discovery and liquidity. It was mainly in commercial property and leant heavily on shopping centers. The redemptions did return a month or so later, but the price was much lower.

In short, if i wasnt forced by work to pay into L&G, i wouldnt touch it with a barge pole using my own money.

Just anecdotal, DYOR etc etc etc.

 

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On 28/10/2018 at 08:41, Admiral Pepe said:

So in conclusion, when DB says the most will get hurt, in this country is it the biggest percentgage going to be shareholders either directly or indirectly (pensions etc) or is it our property market where the most pain will be met? Because it seems to me the consensus is the FTSE won't do too bad in a run or reflation. So a few old duffers nearign retirement might lose a bit off the top, however, when we consider the low volume in pensions, it's the middle classes that have loaded up in property. So they've avoided the stock market in fear of another crash and gone and put their eggs all in the property basket. I'm sure we could plot a graph nicely over the ownership of stock graph.

I think there are many shares that are overvalued but I suspect the bulk of the pain wil be felt by BTLers and BTL lenders.There are a number of shares that have been elevsted way above where there revenue/profit growth would normnally take them,but I'm struggling to see BP and the like take a 50% bath from here.

The real leverage in the UK-imho-is the BTLers sat on 70%+ LTV loans spread across their portfolio.The mechanics of the vicious circle in FRB,equity exposure to their own home/salary etc etc will come into ply but these people in my expereince have one asset class to fall back on and they are unaware of how leveraged theyr are to it.

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8 hours ago, Barnsey said:

@sancho panza you short IBM? You might want to be now after their purchase of Red Hat xD Definitely a sure sign we're at the top of the tech bubble!

I'll check it out.I shut a load today for the simple reason that I think we're oversold as I've said previously.I was surprised by todays sell off in the US,but am still not convinced this is anything more than a short term correction.

I shut FB,Visa,Netflix and a couple of UK EA's today.Need some downtime.Although each time I say that I end up opening some more the follwoiing day.

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4 hours ago, Admiral Pepe said:

What software are you using Harley for your charting? Can you add on the FTSE250 and FTSE All Share?

 

Tradingview.com service but alas they don't have the two indicies you requested.  I could use ETFs or funds if you have the tickers.

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22 minutes ago, sancho panza said:

I think there are many shares that are overvalued but I suspect the bulk of the pain wil be felt by BTLers and BTL lenders.There are a number of shares that have been elevsted way above where there revenue/profit growth would normnally take them,but I'm struggling to see BP and the like take a 50% bath from here.

The real leverage in the UK-imho-is the BTLers sat on 70%+ LTV loans spread across their portfolio.The mechanics of the vicious circle in FRB,equity exposure to their own home/salary etc etc will come into ply but these people in my expereince have one asset class to fall back on and they are unaware of how leveraged theyr are to it.

Agree pretty much 100% SP.The pain in the UK will be over leveraged home owners and even more so leveraged BTL.There is also a side people dont consider.A divi payer can go down 40% and youl get your money back in 8 years if you hold on just in divis (even with a few cuts).In a leveraged BTL once interest rates go up and your rents dont/voids etc you can lose it,your house and everything else.

There was a part in the budget documents today where the government said in the small print they want to issue less inflation linked gilts and more standard ones.Of course they do.

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1 minute ago, DurhamBorn said:

Agree pretty much 100% SP.The pain in the UK will be over leveraged home owners and even more so leveraged BTL.There is also a side people dont consider.A divi payer can go down 40% and youl get your money back in 8 years if you hold on just in divis (even with a few cuts).In a leveraged BTL once interest rates go up and your rents dont/voids etc you can lose it,your house and everything else.

There was a part in the budget documents today where the government said in the small print they want to issue less inflation linked bonds and more standard ones.Of course they do.

They need to issue enough to keep thier pension fund full.

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3 minutes ago, DurhamBorn said:

There was a part in the budget documents today where the government said in the small print they want to issue less inflation linked bonds and more standard ones.Of course they do.

Plus NS&I moving to CPI from RPI for it's £20bn index linked bonds next May

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20 minutes ago, sancho panza said:

I think there are many shares that are overvalued but I suspect the bulk of the pain wil be felt by BTLers and BTL lenders.There are a number of shares that have been elevsted way above where there revenue/profit growth would normnally take them,but I'm struggling to see BP and the like take a 50% bath from here.

The real leverage in the UK-imho-is the BTLers sat on 70%+ LTV loans spread across their portfolio.The mechanics of the vicious circle in FRB,equity exposure to their own home/salary etc etc will come into ply but these people in my expereince have one asset class to fall back on and they are unaware of how leveraged theyr are to it. 

The budget today included making HRMC perferred creditor.  We were all scratching our heads as we thought they already were.  And then someone says, maybe not (behind the charge holder) for property!  As they say, watch the hands!

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Inoperational Bumblebee
On 28/10/2018 at 00:36, Harley said:

Thanks for the effort.  Nice, chuckle, chuckle. 

I started a much-in-need-of-update thread on such topics in the "Investing and Money" section.  

The heading is "Financial Risk Management".  Really boring and buried deep in the DOSBODS basement.  No-one goes there.

But I see it as a case of "build it and they will come", only too late.  Keeps me focussed though.

I feel like the risk management guy in the canteen of the investment house no-one wants to sit with for lunch, until they, belatedly, need to!

This thread's a bit in the basement too.  Ever worried what we're going to say when the Off Topic guys come calling on us financial nerds looking for a simple answer?  

Although I notice there's now a "Dow Down 3%" thread in Off Topic and some of us have been freelancing so maybe we'll be left alone!

As always, best to keep heads down.

There's some of us from Off Topic who spend a lot of time on this thread. :ph34r:

Will pop over to the other thread.

 

 

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