Credit deflation and the reflation cycle to come.

[Harley]

Here we go, to those looking to infrastructure spending (from the Budget thread).

Not that a government forecast has at anytime been worth a tin of beans!

1 hour ago, Wheeler said:

From the red book published after the budget yesterday.

Are there any maths whizzes who can explain how much the population will increase by next year if the GDP can increase by 1.6% but GDP per capita only increases by 1.0%?

God I love this thread and all who post in her!

[MvR]

53 minutes ago, Majorpain said:

@Wheeler@sancho panza

Im not surprised the banks have got cold feet on risky lending, their margin for error has reduced and its easier for them to get badly burnt in a recession.  Perhaps that's the aim?

This doesn't cause a direct problem for BTL, but if I was a bank and this change came in, it would be on my mind that there is nothing to stop the government reverting to pre-2002 rules next budget and HMRC being near the top of the pile for everything.  When loans run to 10 years + that would be a problem.

It would also motivate banks to take an active interest in a borrower's tax affairs, presumably asking or evidence things are in order before they lend.  In effect this will offload some of the tax enforcement burden from HMR&C to the banks. They may, for example, require due tax to be held in a kind of escrow at the bank. 

[Majorpain]

43 minutes ago, sancho panza said:

Is this linking the dots MP ref the article below? Banks front running guidance on the Budget?

The big banks may have had some advance warning of budget changes.When you lookat how marginal the profit was on soemthing like Carillioin,then any small change in bankruptcy arrangements could make a massive difference to lending policies.

They will probably have been "consulted" on the effects!

Whilst I am no expert in Corporate financing, it looks like if a business owes a lot of money to someone else (in any form) then they will be affected by this change in bankruptcy, so yes lending policies can expect to be tightened up considerably in the very near future if they have not done so already.

 

[Barnsey]

5 hours ago, Harley said:

Or are they just tightening now so they can loosen later?

This and only this, no need to overthink. Which is why Eurozone is fecked.

[sancho panza]

Paul Hodges does Minsky.

Personal highlights

'In total, the Fed has added $3.8tn to its balance sheet since 2009, whilst China, the European Central Bank and the Bank of Japan added nearly $30tn of their own stimulus.  Effectively, they ensured that credit was freely available to anyone with a pulse, and that the cost of borrowing was very close to zero.'

and 

'Sadly, it therefore seems only a matter of “when”, not “if”, a new financial crisis will occur.'

 

 

 

https://www.icis.com/blogs/chemicals-and-the-economy/2018/10/budgeting-for-the-end-of-business-as-usual/

'Budgeting for the end of “Business as Usual”

By Paul Hodges on 28 October, 2018 in Economic growth

Companies and investors are starting to finalise their plans for the coming year.  Many are assuming that the global economy will grow by 3% – 3.5%, and are setting targets on the basis of “business as usual”.  This has been a reasonable assumption for the past 25 years, as the chart confirms for the US economy:

• US GDP has been recorded since 1929, and the pink shading shows periods of recession
• Until the early 1980’s, recessions used to occur about once every 4 – 5 years
• But then the BabyBoomer-led economic SuperCycle began in 1983, as the average Western Boomer moved into the Wealth Creator 25 – 54 age group that drives economic growth
• Between 1983 – 2000, there was one, very short, recession of 8 months.  And that was only due to the first Gulf War, when Iraq invaded Kuwait

Since then, the central banks have taken over from the Boomers as the engine of growth.  They cut interest rates after the 2001 recession, deliberately pumping up the housing and auto markets to stimulate growth.  And since the 2008 financial crisis, they have focused on supporting stock markets, believing this will return the economy to stable growth:

• The above chart of the S&P 500 highlights the extraordinary nature of its post-2008 rally
• Every time it has looked like falling, the Federal Reserve has rushed to its support
• First there was co-ordinated G20 support in the form of low interest rates and easy credit
• This initial Quantitative Easing (QE) was followed by QE2 and Operation Twist
• Then there was QE3, otherwise known as QE Infinity, followed by President Trump’s tax cuts

In total, the Fed has added $3.8tn to its balance sheet since 2009, whilst China, the European Central Bank and the Bank of Japan added nearly $30tn of their own stimulus.  Effectively, they ensured that credit was freely available to anyone with a pulse, and that the cost of borrowing was very close to zero.  As a result, debt has soared and credit quality collapsed.  One statistic tells the story:

“83% of U.S. companies going public in the first nine months of this year lost money in the 12 months leading up to the IPO, according to data compiled by University of Florida finance professor Jay Ritter. Ritter, whose data goes back to 1980, said this is the highest proportion on record.  The previous highest rate of money-losing companies going public had been 81% in 2000, at the height of the dot-com bubble.”

And more than 10% of all US/EU companies are “zombies” according to the Bank of International Settlements (the central banks’ bank), as they:

“Rely on rolling over loans as their interest bill exceeds their EBIT (Earnings before Interest and Taxes). They are most likely to fail as liquidity starts to dry up”.

2019 – 2021 BUDGETS NEED TO FOCUS ON KEY RISKS TO THE BUSINESS
For the past 25 years, the Budget process has tended to assume that the external environment will be stable.  2008 was a shock at the time, of course, but time has blunted memories of the near-collapse that occurred.  The issue, however, as I noted here in September 2008 is that:

“A long period of stability, such as that experienced over the past decade, eventually leads to major instability.

“This is because investors forget that higher reward equals higher risk. Instead, they believe that a new paradigm has developed, where high leverage and ‘balance sheet efficiency’ should be the norm. They therefore take on high levels of debt, in order to finance ever more speculative investments.”

This is the great Hyman Minsky’s explanation for financial crises and panics. Essentially, it describes how confidence eventually leads to complacency in the face of mounting risks.  And it is clear that today, most of the lessons from 2008 have been forgotten.  Sadly, it therefore seems only a matter of “when”, not “if”, a new financial crisis will occur.

So prudent companies will prepare for it now, whilst there is still time.  You will not be able to avoid all the risks, but at least you won’t suddenly wake up one morning to find panic all around you.

The chart gives my version of the key risks – you may well have your own list:

• Global auto and housing markets already seem to be in decline; world trade rose just 0.2% in August
• Global liquidity is clearly declining, and Western political debate is ever-more polarised
• Uncertainty means that the US$ is rising, and geopolitical risks are becoming more obvious
• Stock markets have seen sudden and “unexpected” falls, causing investors to worry about “return of capital”
• The risks of a major recession are therefore rising, along with the potential for a rise in bankruptcies

Of course, wise and far-sighted leaders may decide to implement policies that will mitigate these risks, and steer the global economy into calmer waters.  Then again, maybe our leaders will decide they are “fake news” and ignore them.

Either way, prudent companies and investors may want to face up to these potential risks ahead of time.  That is why I have titled this year’s Outlook, ‘Budgeting for the end of “Business as Usual“.  As always, please contact me at [email protected] if you would like to discuss these issues in more depth.'

[sancho panza]

Italy heading up poop creek sans paddle.

https://wolfstreet.com/2018/10/30/france-worried-about-italy-showdown-with-eu-brussels/

'France was just served with a stark reminder of an inconvenient truth: €277 billion of Italian government debt — the equivalent of 14% of French GDP — is owed to French banks. 

France isn’t the only Eurozone nation with unhealthy levels of exposure to Italian debt, although it is far and away the most exposed. According to the Bank of International Settlements, German lenders have €79 billion worth of exposure to Italian debt and Spanish lenders, €69 billion. In other words, taken together, the financial sectors of the largest, second largest and fourth largest economies in the Eurozone — Germany, France and Spain — hold over €415 billion of Italian debt on their balance sheets.

 

Lorenzo Bini-Smaghi, a former member of the ECB board, disagrees. He believes that events are following a similar script to the onset of the Eurozone debt crisis in 2011, when surging bond yields caused a massive contraction in credit.

“Italy is going straight into a wall,” he says. “The economy risks tipping into recession in the fourth quarter. The banks have already cut loans over the summer, as soon as the spreads (between german bond yields and italian bond yields) began to rise. The Italian government has not understood this. You can’t see the wall yet, but the crash is going to be violent.”'

[Harley]

1 hour ago, sancho panza said:

France isn’t the only Eurozone nation with unhealthy levels of exposure to Italian debt, although it is far and away the most exposed. According to the Bank of International Settlements, German lenders have €79 billion worth of exposure to Italian debt and Spanish lenders, €69 billion. In other words, taken together, the financial sectors of the largest, second largest and fourth largest economies in the Eurozone — Germany, France and Spain — hold over €415 billion of Italian debt on their balance sheets.

Per the saying, doesn't look like it's Italy's problem any more!

[spygirl]

22 hours 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.

70+ IO - non amortising!!

And thus is the problem for ukgov and BoE. Slash IRs and no debt has been paid back. Fat fergus cunt still owes just as much as he did 10 years.

All IO should have had IR frozen and the debt paid off.

Interesting anedote from a late io btl entrant i know. She gushes all the info out cos she thinks shes a genius -

Bought io btl @ 200k 5 years ago. 90% ltv. Rent 1k, mortgage about 1200.

Tried to buy 2 others but failed for a few reasons.

Remortaged after 2 years. Next remortagage - last year -  she could not meet any lenders in btl lon requirement. 2/3 year intro was going from 3% to 6%, switching 200 monthly  'profit' to 600 cash sink. 

She remortgaged OOO and put 80k in it to get under 60% req to get cheap remortgage.

Shes now bought another recently  for 150k. Withdrew another 60k from OO to get the io btl mortgage.

Shes fucked on so many outcomes -

IR raise. Bang. Cannot afford btl or OO mortgage.

Io banned - which i see happening, being moved to non bank, specialist finance at amuch higher rate.

House price fall 20%. Repo time.

 

 

[spygirl]

10 hours ago, Majorpain said:

This is probably a big part of it, a recession cant be put off forever, however the political winds are also changing and in a years time the landscape may be completely different.  Far left and Far right are gaining strength is all countries, and its the hardest hit like Italy where they are strongest, with inequality from QE only getting worse its only going one way IMO.

If they don't act now whilst the politicians are on board, they may not get another chance without strings being attached.

On another note:

http://www.constructionenquirer.com/2018/10/30/opinion-we-cant-build-anything-without-finance/

Banks are running a mile from both property development and construction.

Because ptopdev are not paying their loans.

Once a sector starts defaulting, banks slash future loans.

[sancho panza]

1 hour ago, spygirl said:

Remortaged after 2 years. Next remortagage - last year -  she could not meet any lenders in btl lon requirement. 2/3 year intro was going from 3% to 6%, switching 200 monthly  'profit' to 600 cash sink. ................................................

House price fall 20%. Repo time.

 

 

I'm not sure shell need a 20% hpc to get repoed Spy.

[Inoperational Bumblebee]

15 hours ago, Majorpain said:

They did change the rules some years ago, probably to help the banks taking a bath when companies went under.  Obviously, now the government is not awash with printed cash, they have to grab everything they can, so its back to HMRC having first dibs on the company assets!

I'm getting more and more sure that they have detected something they really don't like, CB's all tightening even though its obvious it will crash the everything bubble, the chancellor in interviews warning about the economic fallout from brexit or "other events", something is in the pipeline and I would quite like to know what it is!

 

15 hours ago, Talking Monkey said:

Any thoughts from the Dosbodders on what it could be, what do they see down the road for them to tighten even though it is certain to crash the bubble

Debt levels with lack of actual growth or inflation to reduce it - student loan debt in the US or residential mortgages in the UK would be high on my list.

[Band]

2 hours ago, sancho panza said:

I'm not sure shell need a 20% hpc to get repoed Spy.

Im not so sure there will get a 20% HPC after 2 decades of HPI and 1 decade after a so called financial crash there is nothing i can see other than the fact prices are insanethat is likely to trigger such a fall.

[spygirl]

11 hours ago, sancho panza said:

I'm not sure shell need a 20% hpc to get repoed Spy.

Its insnae.

I tried tlaking to her with the first one. No luck.

Shes now got S24 which is goign to tax both rental incomes at 30%, takign them both below the IO mortgage payments.

She thinks shes going retire and live off the retnal inome. How FFS? All the rent is goign to pay just the mortgage interest, the debt is not being repayed.

Ive suggested ot eh rthan her payments are goign to go up - I can see IO BTL costing more than 8% shortly.

I can also see her being forcedinto repayment, in whicvhcase she'll need ~1k of cash to keep that postion.

She keeps saying ' Im asset rich but cash poor.

I keep saying - You dont oew the asset.

 

8 hours ago, Banned said:

Im not so sure there will get a 20% HPC after 2 decades of HPI and 1 decade after a so called financial crash there is nothing i can see other than the fact prices are insanethat is likely to trigger such a fall.

Markets have two things, both connected: prices and transacions.

Transaction nubmers have crashed.

These will lead to prcies crashing.

Add in the the US has decided to pusue a more nmral IR stragey - 4/5%.

Does BoE avoid centures of competing with FED for funds by having bo rates ~1% higher. Or dod they stay low. BoE are going higher.

 

[One percent]

15 minutes ago, spygirl said:

Its insnae.

I tried tlaking to her with the first one. No luck.

Shes now got S24 which is goign to tax both rental incomes at 30%, takign them both below the IO mortgage payments.

She thinks shes going retire and live off the retnal inome. How FFS? All the rent is goign to pay just the mortgage interest, the debt is not being repayed.

Ive suggested ot eh rthan her payments are goign to go up - I can see IO BTL costing more than 8% shortly.

I can also see her being forcedinto repayment, in whicvhcase she'll need ~1k of cash to keep that postion.

She keeps saying ' Im asset rich but cash poor.

I keep saying - You dont oew the asset.

 

 

 

Im betting too that she thinks you’re jealous of her because she is the landlord and you were too stupid and missed the boat. 

[spygirl]

8 minutes ago, One percent said:

Im betting too that she thinks you’re jealous of her because she is the landlord and you were too stupid and missed the boat. 

I dont know what she thinks. I doubt she thinks.

Ive pointed out she has took a postion on ~350K of housing and had to put in ~170K of equity from her OOO.

Her expsorure to housing is i nthe region of ~800k.

Her debt is ~400k.

Its insane.

[One percent]

1 minute ago, spygirl said:

I dont know what she thinks. I doubt she thinks.

Ive pointed out she has took a postion on ~350K of housing and had to put in ~170K of equity from her OOO.

Her expsorure to housing is i nthe region of ~800k.

Her debt is ~400k.

Its insane.

Oh well, she can afford a 400 k hit. 

I realised the game was up when a very thick mate of mine told me she was into btl in scabby. It’s my pension innit. 

Mind, they are still keeping those plates spinning. 

[DoINeedOne]

Didn't see this update posted about centrica

https://www.centrica.com/news/centrica-and-lo3-energy-deploy-blockchain-technology-part-local-energy-market-trial-cornwall

• Project to explore how blockchain could unlock savings for 200 homes and businesses

• Further trial in North America to deliver world’s first micro-hedging market for industrial and commercial customers

Centrica plc has today announced a new trial to explore how blockchain technology could revolutionise the way consumers buy and sell energy.

Blockchain technology provides a secure platform for consumers to buy and sell from each other, giving them greater control. Blockchain groups buy and sell transactions together into blocks that are securely linked so that the trade history is permanent and unalterable.

Delivered in partnership with energy blockchain pioneers LO3 Energy (LO3), the project will see the roll out of the technology in Centrica’s £19m Local Energy Market (LEM) programme in an effort to explore how new approaches could disrupt the traditional energy model. The LEM has been established by Centrica Business Solutions to test the role of distributed generation and storage in supporting local grid flexibility in the south west of England.

The blockchain trial will take this a step further, testing a range of energy transactions including multi-party peer to peer trading across 200 business and residential participants using LO3’s new Exergy platform.

Centrica is also working with LO3 on a trial in North America to deliver the world’s first micro-hedging market for business customers. Run by the company’s North America Business unit, Direct Energy Business, the trial aims to cut costs and improve efficiency for commercial businesses in Texas through an innovative new business-to-business energy network.

Unlike the traditional model where businesses manage their electricity procurement through fixed price contracts, or power purchase agreements, Direct Energy Business will use LO3’s platform to offer large commercial and industrial companies the opportunity to place their own orders for customised power hedges that are then matched with the best offer in a competitive system.

Mark Hanafin, Chief Executive of Centrica Business said: “The proliferation of digital technologies is having a significant impact on the energy industry, allowing us to find new and better ways of delivering energy and services to our customers.

“This is an exciting opportunity for us to test blockchain technology beyond the theoretical and put it into practice, developing innovative new solutions that will empower consumers in the UK, North America and beyond to take control of how they engage with energy.”

Last year, Centrica Innovations invested into LO3 Energy as part of a £100m programme to identify, incubate and accelerate new technologies with the potential to transform the way we live, work and move.

Lawrence Orsini, CEO of LO3 Energy, said: “Exergy is designed to empower new prosumers while enabling traditional industry players to shift business models and find their place in the energy market of the future. Our partnership with Centrica and Direct Energy will trigger adoption for Exergy at a scale that will bring trustworthy disruption to the industry.”

 

More info from centrica website

https://www.centrica.com/innovation/cornwall-local-energy-market

A £19m programme to explore flexible, smart energy solutions for the UK

Centrica's Distributed Energy and Power business is working on a pioneering trial in Cornwall that will test the use of flexible demand, generation and storage across both the domestic and business sectors.

 

We are developing a virtual marketplace that will provide participants with a platform to buy and sell energy and flexibility both to the grid and the wholesale energy market.

[macca]

Real thought provoking article.. pathological consumption.. for all us frugal folks.. 

https://www.monbiot.com/2012/12/10/the-gift-of-death/

[Democorruptcy]

On 30/10/2018 at 07:28, Talking Monkey said:

Any thoughts from the Dosbodders on what it could be, what do they see down the road for them to tighten even though it is certain to crash the bubble

Italy is going to blow the Euro apart?

When it goes pop, the CBs will need to reduce rates and splurge liquidity all over the place.

[Band]

16 minutes ago, Democorruptcy said:

Italy is going to blow the Euro apart?

When it goes pop, the CBs will need to reduce rates and splurge liquidity all over the place.

Thing is we keep hearing all these different things that are going to blow the Euro, $, £, EU, Chinese, UK, developing nations economies apart .... and it keeps getting kicked into the future.

 

[TNS]

I'm all but convinced the can will be kicked forever. We've had Greece, Italy, Ireland and yet the show goes on. I see a long drawn out process of wage increases although i could be totally wrong.

[Democorruptcy]

We may well have had Ireland and Greece but I don't think we have had Italy yet. Italy has helped bail Ireland and Greece but they are too big to be bailed.

Top 4 contributors are Germany, France, UK and Italy.

EU contributions and spending by country

I know there are other potential black swans but Italy would be my five star choice at the moment.

[Band]

31 minutes ago, Democorruptcy said:

We may well have had Ireland and Greece but I don't think we have had Italy yet. Italy has helped bail Ireland and Greece but they are too big to be bailed.

Top 4 contributors are Germany, France, UK and Italy.

EU contributions and spending by country

I know there are other potential black swans but Italy would be my five star choice at the moment.

Wait and see my betting is they back down and do as the EU tell them .. itll all fall apart i just think its got a while to run... same with the housing bubble i see no signs whatsoever of a minor correction let alone a crash. High end London and Home Counties are the exception. Best im seeing is insane kite flying prices being lowered anything vaguely value ie 50% high than 2013 is selling.

 

[sancho panza]

6 hours ago, spygirl said:

 

Markets have two things, both connected: prices and transacions.

Transaction nubmers have crashed.

These will lead to prcies crashing.

Add in the the US has decided to pusue a more nmral IR stragey - 4/5%.

Does BoE avoid centures of competing with FED for funds by having bo rates ~1% higher. Or dod they stay low. BoE are going higher.

 

Wolf calling the top of the turn in the hot money areas in the USA.

 

As you say,transaction declines tend to forewarn of pricing changes either upwards or downwards.

https://wolfstreet.com/2018/10/30/declines-in-the-most-splendid-house-price-bubbles-in-america/

15 hours ago, Banned said:

Im not so sure there will get a 20% HPC after 2 decades of HPI and 1 decade after a so called financial crash there is nothing i can see other than the fact prices are insanethat is likely to trigger such a fall.

History says 'non'

1 hour ago, TheNickos said:

I'm all but convinced the can will be kicked forever. 

History says no again.

3 hours ago, DoINeedOne said:

Didn't see this update posted about centrica

https://www.centrica.com/news/centrica-and-lo3-energy-deploy-blockchain-technology-part-local-energy-market-trial-cornwall

• Project to explore how blockchain could unlock savings for 200 homes and businesses

• Further trial in North America to deliver world’s first micro-hedging market for industrial and commercial customers

Centrica plc has today announced a new trial to explore how blockchain technology could revolutionise the way consumers buy and sell energ

Thanks for that.Very interesting.I've been logn CNA for a while,the more I see the more I like it.I'll be holding v.long term.

[Band]

15 minutes ago, sancho panza said:

Wolf calling the top of the turn in the hot money areas in the USA.

 

As you say,transaction declines tend to forewarn of pricing changes either upwards or downwards.

https://wolfstreet.com/2018/10/30/declines-in-the-most-splendid-house-price-bubbles-in-america/

History says 'non'

History says no again.

Thanks for that.Very interesting.I've been logn CNA for a while,the more I see the more I like it.I'll be holding v.long term.

Its over what timescale, my kids 8 now and still no crash in sight.

Like the article how it states insane bubble no.1 is the benchmark!

Almost like the globalists and their MSM propaganda machine are all singing off the identical hymn sheet