Credit deflation and the reflation cycle to come.

[MrXxx]

SB, agree with the `predictive` powers of these experts, although I did find the video s useful in explaining some basics I.e. fractional reserve lending.

OK, moving this discussion on a little, what do people think of the following given a inflation/hyperinflation scenario:

`it's best to put your savings in a world currency that has the highest gold reserve/FIAT ratio`

working on the premise that although the currency may not have a gold standard attached, general confidence in the currency may be higher as a) they may be less likely to QE, and b) if things get tough for their FIAT they may support it with a partial/full gold standard.

I know this is more theoretical rather than practical finance so if you folks find it of little relevance to this theme just ignore :-)

[Bobthebuilder]

16 minutes ago, MrXxx said:

SB, agree with the `predictive` powers of these experts, although I did find the video s useful in explaining some basics I.e. fractional reserve lending.

OK, moving this discussion on a little, what do people think of the following given a inflation/hyperinflation scenario:

`it's best to put your savings in a world currency that has the highest gold reserve/FIAT ratio`

working on the premise that although the currency may not have a gold standard attached, general confidence in the currency may be higher as a) they may be less likely to QE, and b) if things get tough for their FIAT they may support it with a partial/full gold standard.

I know this is more theoretical rather than practical finance so if you folks find it of little relevance to this theme just ignore :-)

i would say that all posters on this thread have zero trust in any fiat of any kind going forward ten years, maybe $ more so, be interesting to hear.

 

[Agent ZigZag]

39 minutes ago, SillyBilly said:

the Bank of England (complete with emblem on the leather). I paid £400 for it.

And that desk will be still be around from were we are today to the next cycle some 300 years later

[Bricks & Mortar]

53 minutes ago, MrXxx said:

working on the premise that although the currency may not have a gold standard attached, general confidence in the currency may be higher as a) they may be less likely to QE, and b) if things get tough for their FIAT they may support it with a partial/full gold standard.

Very interesting question.  Personally, I've been with Gordon Brown, thinking the days of gold reserves supporting FIAT went over the hill with Nixon, and I'm probably still there as far as this thread looks.  Thread does invite one to consider what happens after a reflation though...

(three dots at the end, because I have no idea and think it so far away that almost anythings possible)

[wherebee]

5 minutes ago, Bricks & Mortar said:

Very interesting question.  Personally, I've been with Gordon Brown, thinking the days of gold reserves supporting FIAT went over the hill with Nixon, and I'm probably still there as far as this thread looks.  Thread does invite one to consider what happens after a reflation though...

Yes, I think you are right.....until you are not.  Here is a list of over 500 failed fiat currencies.

https://trader2trader.co/tag/historic-graphs/page/3/

Fiat currencies must, mathematically, fail in a non-infinite resource world.  By fail I mean lose value rapidly at some point so that the population values them the same as the paper they are made from.  Whilst depreciation in western currencies has been massive over that period, if you look at the short term reactions of the populace, they have not given up on the value of fiat...yet.

 

[DurhamBorn]

4 hours ago, MrXxx said:

OK, so now I am really lost/confused on how to secure my future/pension/investments...having watched a number of Sperando and Maloney videos posted on here (and the hidden truths series) the message is that we are in for financial Armageddon, and not just locally/Nationally but worldwide, and we are `talking` months/years rather than years/decades...

OK, I appreciate that some of these are sales pitches (Maloney especially), but they all seem to agree that rare commods (G & S) are the only way to preserve your money...

FIAT=forget it, bonds=worthless promises, equities=assets inflated by QE currency that will disappear as quickly as it appeared, miners=an increase but only in worthless FIAT...

...so the only way to go is pm, and then only if you have them `in hand` and can make sure they aren't confiscated...

...or am I missing an opportunity and just being hysterical?!

Fiat wont by worthless just worth less.The end of the reflation is when Fiat goes pop.This next cycle is inflationary and Fiat will lose around 70% of its value over the cycle,but PMs should out run that easily,and the miners will x3 minimum the PM increase.It wont be a wipe out,just a deflation that wipes down asset values followed by inflation that does the rest of the damage.People will panic and sell risk assets when underwater by a large amount and go into cash,inflation will then take the rest of the spending power.20% weighting in PMs (leaning to silver) will protect most peoples wealth in my opinion.

Nothing to fear about whats coming,its just a reflation cycle,and we will all do just fine in it.More than fine.Lots of companies can do well in a reflation.Companies with expensive assets already built and depreciating over 10 year who can increase prices with inflation will see free cash explode.The telecom sector is one (and dirt cheap at the end of a disinflation).Transport is another (more people give up/forced to give up cars).Oil and gas,both will see big runs in the next cycle.The cycle will suck income to certain areas,and in doing so take it away from others.The losers will be the likes of houses,cars,holidays etc etc.

[DurhamBorn]

1 hour ago, SillyBilly said:

I'm very much with this. I picked up a twin pedestal antique desk whose home was once upon a time the Bank of England (complete with emblem on the leather). I paid £400 for it. When I look at what £400 buys you for a large desk these days it is nothing really. I got a (relatively) matching leather cushioned chair for it for £40 from Gumtree. Had to drive 60 miles there and back for it but well worth it. Nothing particularly special about the chair but has a lovely worn look, is of great workmanship and quality and has aged beautifully. What would £40 get me at Ikea? Just looking and I am not impressed. I'd say my taste is quality, price is actually less of a concern but just so happens you can find quality for a better price than you can buying new these days...largely overpriced Chinese tat.

Almost everything in my house is 2nd hand.Lots of really nice solid wood furniture in the front room,bookcase,table,big box thing we use as coffee table etc.Even my chair was £50 from gumtree.I have an old van i paid £800 for (3 years ago) and its brilliant for picking up things from Gumtree etc.Its incredible how cheap you can get everything these days 2nd hand.Most people chuck money away.That will start to dry up soon though i expect as credit becomes hard to get.Best to take advantage now.

[Noallegiance]

3 minutes ago, DurhamBorn said:

Fiat wont by worthless just worth less.The end of the reflation is when Fiat goes pop.This next cycle is inflationary and Fiat will lose around 70% of its value over the cycle,but PMs should out run that easily,and the miners will x3 minimum the PM increase.It wont be a wipe out,just a deflation that wipes down asset values followed by inflation that does the rest of the damage.People will panic and sell risk assets when underwater by a large amount and go into cash,inflation will then take the rest of the spending power.20% weighting in PMs (leaning to silver) will protect most peoples wealth in my opinion.

Nothing to fear about whats coming,its just a reflation cycle,and we will all do just fine in it.More than fine.Lots of companies can do well in a reflation.Companies with expensive assets already built and depreciating over 10 year who can increase prices with inflation will see free cash explode.The telecom sector is one (and dirt cheap at the end of a disinflation).Transport is another (more people give up/forced to give up cars).Oil and gas,both will see big runs in the next cycle.The cycle will suck income to certain areas,and in doing so take it away from others.The losers will be the likes of houses,cars,holidays etc etc.

I find comfort in these posts and the similarity to people like Maloney and Schiff. 

DB hasn't asked for a penny, isn't selling a service of any kind, and is the definition of consistent. Whoever he is.

I'd never hold you to anything DB, but you give me hope in a crazy world. And I'm nowhere near clever enough to even begin to do 90% of what you instinctively know.

[MrXxx]

9 hours ago, SillyBilly said:

I'm very much with this. I picked up a twin pedestal antique desk whose home was once upon a time the Bank of England (complete with emblem on the leather). I paid £400 for it. When I look at what £400 buys you for a large desk these days it is nothing really. I got a (relatively) matching leather cushioned chair for it for £40 from Gumtree. Had to drive 60 miles there and back for it but well worth it. Nothing particularly special about the chair but has a lovely worn look, is of great workmanship and quality and has aged beautifully. What would £40 get me at Ikea? Just looking and I am not impressed. I'd say my taste is quality, price is actually less of a concern but just so happens you can find quality for a better price than you can buying new these days...largely overpriced Chinese tat.

You can always buy quality but in relation to the market place it's expensive; basically furniture has got cheaper over the years due to advances in materials/production methods.

If you want to pick up solid, old (not antique) furniture look at charity/house clearance shops, Gumtree ads, and Freecycle. 

As for the BoE desk, can't imagine it has much wear...unlike the chair as they sit on their arses all day ....unless it was Carney`s because as we all know, he only `sits on the fence`!

[MrXxx]

8 hours ago, DurhamBorn said:

People will panic and sell risk assets when underwater by a large amount and go into cash,inflation will then take the rest of the spending power.

This...as has been mentioned on this thread a number of times, a) Don't follow the `herd` as this is where maximum damage occurs, b) Find the `unloved` based on the sound principles in your second paragraph, c) Get out of FIAT and into assets as the supply/velocity of the former increases and so does inflation...couple of years ago I was completely clueless about how this all worked, now its all beginning to make sense...until it doesn't! :-)

[StrugglingMillennial]

What sort of assets?

[A_P]

2 hours ago, StrugglingMillennial said:

What sort of assets?

Equities, property/REITs, bonds/gilts, PM's, collectibles etc etc

[sancho panza]

15 hours ago, Bobthebuilder said:

i would say that all posters on this thread have zero trust in any fiat of any kind going forward ten years, maybe $ more so, be interesting to hear.

 

I wouldn't say zero.As long as it's still used as a medium of exchange then it'll be fine.A lot of serial doomsdayers eg Dent have been wrong time and again.Wheat will still be grown,jsut waht you buy it with and how much you buy it for may change.

I think a lot of western currencies will weaken,I'm not so sure on the rouble and yuan.

15 hours ago, wherebee said:

Yes, I think you are right.....until you are not.  Here is a list of over 500 failed fiat currencies.

https://trader2trader.co/tag/historic-graphs/page/3/

Fiat currencies must, mathematically, fail in a non-infinite resource world.  By fail I mean lose value rapidly at some point so that the population values them the same as the paper they are made from.  Whilst depreciation in western currencies has been massive over that period, if you look at the short term reactions of the populace, they have not given up on the value of fiat...yet.

 

I was explaining to a South African the otehr day how houses in SA have made little in dollar terms over 15 years.They were surprised,but you can't argue with the maths.For many years, the dollar's purcahsing power wa steady,inlfation and the 2% inflation target are relatively recent inventions to move away from boom n bust.

 

As a few have said,what's old becomes new and bust is about to have a comeback before boom starts agin

[Wheeler]

4 minutes ago, sancho panza said:

I wouldn't say zero.As long as it's still used as a medium of exchange then it'll be fine.A lot of serial doomsdayers eg Dent have been wrong time and again.Wheat will still be grown,jsut waht you buy it with and how much you buy it for may change.

I think a lot of western currencies will weaken,I'm not so sure on the rouble and yuan.

 

There is a lot of talk about hyperinflation but I see that as very unlikely, at least in terms of US or global hyperinflation. The two key things that lead to hyperinflation IMHO are:

1. Loss of confidence in a government/bank so people don't want to hold that currency
2. An alternative form of currency that can be used instead

So if you look at Venuzuela as an example, no one wants to hold bolívar and are transacting in US dollars instead. The doomsdayers (nice word BTW) see the US printing dollars like mad and people swapping to use specie instead. I just don't see that.

It's more likely that there will be a longer period of higher than normal inflation and people will adjust to it. Gold and silver will do well still.
 

[sancho panza]

16 minutes ago, Wheeler said:

There is a lot of talk about hyperinflation but I see that as very unlikely, at least in terms of US or global hyperinflation. The two key things that lead to hyperinflation IMHO are:

1. Loss of confidence in a government/bank so people don't want to hold that currency
2. An alternative form of currency that can be used instead

So if you look at Venuzuela as an example, no one wants to hold bolívar and are transacting in US dollars instead. The doomsdayers (nice word BTW) see the US printing dollars like mad and people swapping to use specie instead. I just don't see that.

It's more likely that there will be a longer period of higher than normal inflation and people will adjust to it. Gold and silver will do well still.
 

 

People forget that ractional reserve lending started with Roman goldsmiths issuing more promissory notes than they had gold.In other words they issued specie.Even if we had a gold standard the banks would game it.It was ever thus.

Also gold isnt a great inflation hedge especially over last 50 years.For me its a graet way to hedge a loss of faith in CBs.....which i think many of us see coming

True hyperinflation needs a political collapse which i dont think well get 0

 

 

[kibuc]

Boy was I wrong on Sibanye or what. It's been absolutely killing it since Christmas.

 

[DurhamBorn]

 

1 hour ago, Wheeler said:

There is a lot of talk about hyperinflation but I see that as very unlikely, at least in terms of US or global hyperinflation. The two key things that lead to hyperinflation IMHO are:

1. Loss of confidence in a government/bank so people don't want to hold that currency
2. An alternative form of currency that can be used instead

So if you look at Venuzuela as an example, no one wants to hold bolívar and are transacting in US dollars instead. The doomsdayers (nice word BTW) see the US printing dollars like mad and people swapping to use specie instead. I just don't see that.

It's more likely that there will be a longer period of higher than normal inflation and people will adjust to it. Gold and silver will do well still.
 

Agree,no hyper inflation,just very high inflation,maybe even as high as 20% for a short period.Of course promises (pensions) and spending power in cash and also house equity will be cut by about 70%.Im really worried about the end of the reflation though.My friend thinks there is a very real risk of currency and everything else collapse then.We have a cycle before that though and a lot depends on how the macro picture builds and how much fuel goes on the fire.Our velocity indicators are starting to move and my friend has got capital ready to deploy in TIPs (treasury inflation protected securities).He thinks late April will be the time to go long in them as he is seeing inflation showing up strong into May and they should turn up strongly with gold and form a very strong trending wave up along with the PM miners.

If we get 60% of the liquidity we expect then silver should see $200 in the next cycle.If we get 100% $300 and if we see more $600+ as an outlier.

The key number for me is silver at $24.I see $26 as a point it might turn lower as a debt deflation takes hold.My friend maintains from there sub $10 silver could hit for a very short period.So IF silver hits $24 il have to decide what to do then.My silver miner portfolio is doing very well already,Great Panther is up 26% and Alexco resources 21%,others 11%+ but im not putting stops under them.If we get pull backs into late April il be buying more in what i have,and a few new ones including Mag Silver Corp.

[Frog]

Hi DB, thanks for sharing your insights, fascinating thread.

Several times you've mentioned house prices would be hit hard during a reflation, I'm unclear as to why this would be the case.  Surely property would be a good inflation hedge and prices would rise (at least in nominal terms) as they did in the 1970's?

[UnconventionalWisdom]

17 minutes ago, Frog said:

Hi DB, thanks for sharing your insights, fascinating thread.

Several times you've mentioned house prices would be hit hard during a reflation, I'm unclear as to why this would be the case.  Surely property would be a good inflation hedge and prices would rise (at least in nominal terms) as they did in the 1970's?

Correct me if I'm wrong DB but my understanding is that the main reason is a credit deflation makes its more difficult for banks to lend money. With less money available, the banks are more cautious to who they lend to and the debt cost will be higher.
Due to low liquidity, the deflation will cause the central banks to panic and hence print directly into the economy. With the extra money injection, interest rates will have to rise. This will result in higher rates for loans and hence the over-leveraged will be hit hard. So anyone with a BTL will have to sell as they can't service their debt. Higher interest rates will also impact people who bought at the peak as well as limiting the money available for mortgages. 

Great to see this thread pick up the past few days... Truly fascinating stuff to read. 

[Frog]

Hi UW, my own view is that the period of deflation will be very short, and will provide the excuse for more QE, NIRP, heli money, etc.  This will result in inflation and whilst this remains at manageable levels, interest rates will in effect remain negative.  The result will be that real assets will increase in price (including houses).

It will only be at the end of the reflation period when house prices will be hurt because then the CB's will be trying to defeat runaway inflation with very high interest rates. 

Essentially once the printing presses really gets going I expect a repeat of the 1970's (high inflation - houses more than doubled in nominal terms), followed by a Volcker shock (1980's recession, very high interest rates) when the CB's crush inflation.

 

 

[UnconventionalWisdom]

6 minutes ago, Frog said:

This will result in inflation and whilst this remains at manageable levels, interest rates will in effect remain negative.  The result will be that real assets will increase in price (including houses)

This is my fear. I live in the SE and despite being on an alright salary, I don't want to tie myself down to a small flat that costs 7 x local average salary. I'm already thinking I need to leave as I'm not sure I can be happy here.

There is an argument that HPs could increase further if everything goes bad. 

It will depend if they print directly into the economy or whether they continue performing QE that benefits bank lending. I'm hopeful that they won't go down that route but am weary that they might. If they do, I don't know what I'll do- HPs are already at stupid levels, if they get a lot higher I can see people giving up on the system or holding angry demos. 

[sancho panza]

6 hours ago, kibuc said:

Boy was I wrong on Sibanye or what. It's been absolutely killing it since Christmas.

 

Wow, jsut checked it.Palladium is soaring I beleive which may explain it.

I was checking XAU/GDX/GDXJ and whilst I bought some Freeport/IAM/WRN they all look overbought medium term.I don't have DB's contacts and I for one am in for the longish term and will be using pull backs to add some.

This recent run caught me by surprise as GDX etc rallied with the S&P...maybe one of the brighter ones could explain why.Maybe something to do with the dollar?

3 hours ago, Frog said:

Hi DB, thanks for sharing your insights, fascinating thread.

Several times you've mentioned house prices would be hit hard during a reflation, I'm unclear as to why this would be the case.  Surely property would be a good inflation hedge and prices would rise (at least in nominal terms) as they did in the 1970's?

I don't know whether you're familair with the emchanics of Fractional reserve lending.Currently under Basel rules,hmortgages sit as an asset on banks balance sheets vs liabilities.If houses start selling at lossses to laon value,banks need to rein in credit which will naturally push hosue prices down leading to more loan losses.This is why 2008 frightened the neo classicals so much

https://en.wikipedia.org/wiki/Fractional-reserve_banking

 

Also if I may.Might be worth reading this article on the 2% inflation target and wherre it came from.Incredible that we're using it.

 

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

ometimes, decisions that shape the world’s economic future are made with great pomp and gain widespread attention. Other times, they are made through a quick, unanimous vote by members of the New Zealand Parliament who were eager to get home for Christmas.

That is what happened 25 years ago this Sunday, when New Zealand became the first country to set a formal target for how much prices should rise each year — zero to 2 percent in its initial action. The practice was so successful in making the high inflation of the 1970s and ’80s a thing of the past that all of the world’s most advanced nations have emulated it in one form or another. A 2 percent inflation target is now the norm across much of the world, having become virtually an economic religion.

2 hours ago, Frog said:

Hi UW, my own view is that the period of deflation will be very short, and will provide the excuse for more QE, NIRP, heli money, etc.  This will result in inflation and whilst this remains at manageable levels, interest rates will in effect remain negative.  The result will be that real assets will increase in price (including houses).

It will only be at the end of the reflation period when house prices will be hurt because then the CB's will be trying to defeat runaway inflation with very high interest rates. 

Essentially once the printing presses really gets going I expect a repeat of the 1970's (high inflation - houses more than doubled in nominal terms), followed by a Volcker shock (1980's recession, very high interest rates) when the CB's crush inflation.

 

 

Tell that to the japanses 20 years and some.JCB currently has a balance sheet bigger than Japanese GDP.....................The Japs have tried to everything to stimulate inflation which they mistake for growth.

 

All they've done from what I can see is kill money velocity.Just my view.

[sancho panza]

@kibuc Wesdome is already a ten bagger from 2013.I'm hoping for a pull back so I can get in but can't bring myself to buy into such momentum...

[sancho panza]

Great Hodges psot

https://www.icis.com/chemicals-and-the-economy/2019/02/feds-magic-money-tree-hopes-to-overcome-smartphone-sales-downturn-and-global-recession-risk/

by Paul Hodges on 3rd February 2019 in Consumer demand

SHARE THIS STORY

 

Last November, I wrote one of my “most-read posts”, titled Global smartphone recession confirms consumer downturn. The only strange thing was that most people read it several weeks later on 3 January, after Apple announced its China sales had fallen due to the economic downturn.

Why did Apple and financial markets only then discover that smartphone sales were in a downturn led by China?  Our November pH Report “Smartphone sales recession highlights economic slowdown‘, had already given detailed insight into the key issues, noting that:

“It also confirms the early warning over weakening end-user demand given by developments in the global chemical industry since the start of the year. Capacity Utilisation was down again in September as end-user demand slowed. And this pattern has continued into early November, as shown by our own Volume Proxy.”

The same phenomenon had occurred before the 2008 Crisis, of course, as described in The Crystal Blog.  I wrote regularly here, in the Financial Times and elsewhere about the near-certainty that we were heading for a major financial crisis. Yet very few people took any notice.

And even after the crash, the consensus chose to ignore the demographic explanation for it that John Richardson and I put forward in ‘Boom, Gloom and the New Normal: How the Western BabyBoomers are Changing Demand Patterns, Again’.

Nothing seems to change.  So here we are again, with the chart showing full-year 2018 smartphone sales, and it is clear that the consumer downturn is continuing:

• 2018 sales at 1.43bn were down 5% versus 2017, with Q4 volume down 6% versus Q4 2017
• Strikingly, low-cost Huawei’s volume was equal to high-priced Apple’s at 206m
• Since 2015, its volume has almost doubled whilst Apple’s has fallen 11%

And this time the financial outlook is potentially worse than in 2008.  The tide of global debt built up since 2008 means that the “World faces wave of epic debt defaults” according to the only central banker to forecast the Crisis.

“WALL STREET, WE HAVE A PROBLEM”

So why did Apple shares suddenly crash 10% on 3 January, as the chart shows? Everything that Apple reported was already known.  My November post, after all, used published data from Strategy Analytics which was available to anyone on their website.

The answer, unfortunately, is that markets have lost their key role of price discovery. Central banks have deliberately destroyed it with their stimulus programmes, in the belief that a strong stock market will lead to a strong economy. And this has been going on for a long time, as newly released Federal Reserve minutes confirmed last week:

• Back in January 2013, then Fed Governor Jay Powell warned that policies “risked driving securities above fundamental values“
• He went on to warn that the result would be “there is every reason to expect a sharp and painful correction“
• Yet 6 years later, and now Fed Chairman, Powell again rushed to support the stock market last week
• He took the prospect of interest rate rises off the table, despite US unemployment dropping for a record 100 straight months

The result is that few investors now bother to analyse what is happening in the real world.

They believe  they don’t need to, as the Fed will always be there, watching their backs. So “Bad News is Good News”, because it means the Fed and other Western central banks will immediately print more money to support stock markets.

And there is even a new concept, ‘Modern Monetary Theory’ (MMT), to justify what they are doing.

THE MAGIC MONEY TREE PROVIDES ALL THE MONEY WE NEED

There are 3 key points that are relevant to the Modern Monetary Theory:

• The Federal government can print its own money, and does this all the time
• The Federal government can always roll over the debt that this money-printing creates
• The Federal government can’t ever go bankrupt, because of the above 2 points

The scholars only differ on one point.  One set believes that pumping up the stock market is therefore a legitimate role for the central bank. As then Fed Chairman Ben Bernanke argued in November 2010:

“Higher stock prices will boost consumer wealth and help increase confidence, which can also spur spending. Increased spending will lead to higher incomes and profits that, in a virtuous circle, will further support economic expansion.”

The other set believes instead that government can and should spend as much as they like on social and other programmes:

“MMT logically argues as a consequence that there is no such thing as tax and spend when considering the activity of the government in the economy; there can only be spend and tax.”

The result is that almost nobody talks about debt any more, and the need to repay it.  Whenever I talk about this, I am told – as in 2006-8, that “I don’t understand”.  This may be true. But it may instead be true that, as I noted last month:

“Whilst Apple won’t go bankrupt any time soon, weaker companies in its supply chain certainly face this risk – as do other companies dependent on sales in China. And as their sales volumes and profits start to fall, investors similarly risk finding that large numbers of companies with “Triple B” ratings have suddenly been re-rated as “Junk”:

• Bianco Research suggest that 14% of companies in the S&P 1500 are zombies, with their earnings unable to cover interest expenses
• The Bank of International Settlements has already warned that Western central banks stimulus lending means that >10% of US/EU firms currently “rely on rolling over loans as their interest bill exceeds their EBIT. They are most likely to fail as liquidity starts to dry up”.

I fear  the coming global recession will expose the wishful thinking behind the magic of the central banks’ money trees.

[sancho panza]

 

 @DurhamBorn do you know of any ETF's that cover TIPS?

I'm looking to try and buy TLT before the US recession bnecomes apparent.Might be worth buying some TIPs inc ase I'm wrong about the inflation