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Credit deflation and the reflation cycle to come.


DurhamBorn

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31 minutes ago, sancho panza said:

 

 @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

https://www.ishares.com/uk/individual/en/products/251714/ishares-tips-ucits-etf?switchLocale=y&siteEntryPassthrough=true

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1 hour ago, sancho panza said:

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

Quote

Hi SP, thanks for your reply.  With regard to the above, I agree, but won't this only be the case during the short deflation window.  Once the reflation kicks in hard assets will benefit.

 

1 hour ago, sancho panza said:

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. 

Maybe we do go the way of the Japanese and Ian McCafferty is right “It is too much to say never, that we won’t ever go back. But there is a 20-year horizon under which there will be factors keeping it low,” [reference to IRs] in which case DB will have to change the title of his thread.

Anyway, just my ideas, if I really knew all the answers I'd be a billionaire by now.

 

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SP, I wasn't aware of banks using mortgages as part of fractional reserve lending.....so not only have our politicians gifted them low interest cash with FLS, but with HTB they have provided a double whammy I.e reduced their risk AND through bubble inflating increase the FR loan pot size...basically wealth transfer on a grand scale... why are people in the UK not demonstrating en mass  to their local MP (or even worse)?..with the recent spate of incidents at MPs surgeries involving mentally unstable individuals in the last 5 years, I wouldn't like to be an MP in the next 5~10 years!

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UnconventionalWisdom
6 minutes ago, MrXxx said:

, I wouldn't like to be an MP in the next 5~10 years!

Yep, there are still a lot of people who have seen their first house go up stupidly and have over extended for the next place as they think the same will happen again. 

Next 5-10 years is when the proportion of working people with no house grows significantly and that's when things will turn. That or everyone just down tools and stops working as they can't be bothered with all the effort when it's their landlord that benefits. 

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43 minutes ago, MrXxx said:

SP, I wasn't aware of banks using mortgages as part of fractional reserve lending.....so not only have our politicians gifted them low interest cash with FLS, but with HTB they have provided a double whammy I.e reduced their risk AND through bubble inflating increase the FR loan pot size...basically wealth transfer on a grand scale... why are people in the UK not demonstrating en mass  to their local MP (or even worse)?..with the recent spate of incidents at MPs surgeries involving mentally unstable individuals in the last 5 years, I wouldn't like to be an MP in the next 5~10 years!

Because people are "educated" to be part of the system, not question it

and how can your average person understand this?

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Democorruptcy

I was thinking how Fed policy might favour large firms and enable them to have the cash to buy up more small firms and also stifle small firms starting up. They can price them out with economies of scale. Ultimately it leads to power in the hands of a few and lots of people on basic income handouts. However they talk about more employment and firms starting up, so just checked some US figures. A lot of it is people who cannot afford to live, doing bits on the side
 

Quote

 

Only a third of these reported ‘businesses’ have actual employees – the rest just report extra income on their tax returns

Many of them are “side hustlers”. It’s the neighbor who sells $1,000 worth of crafts on Etsy or the friend who sometimes drives an Uber. It’s a college kid who babysits or a school teacher who occasionally rents out a room on Airbnb. They probably have a full-time job with health insurance. They are not entrepreneurs. They’re just earning a few extra bucks and reporting the income on a schedule C – the supplemental income tax form.

 

I suppose in the UK we have 16 hour nail shops and tax credits.

 

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10 hours ago, sancho panza said:

@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...

I had similar reservations about Alexco but decided to pull the trigger two days ago instead of waiting for a dip. People smarter than me say "if you want to own a stock, buy it". Then again, I'm in it for a long haul and I leave day-trading to professionals, so my perspective on 10% dips might be different than yours. If WDO goes down big time, I'll simply re-balance the portfolio (which I only keep because my wife demanded it - up until recently Wesdome WAS my portfolio :) ).

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1 hour ago, MrXxx said:

SP, I wasn't aware of banks using mortgages as part of fractional reserve lending.....so not only have our politicians gifted them low interest cash with FLS, but with HTB they have provided a double whammy I.e reduced their risk AND through bubble inflating increase the FR loan pot size...basically wealth transfer on a grand scale... why are people in the UK not demonstrating en mass  to their local MP (or even worse)?..with the recent spate of incidents at MPs surgeries involving mentally unstable individuals in the last 5 years, I wouldn't like to be an MP in the next 5~10 years!

Which is why FLS,HTB1+2,QE,Zirp etc were all back door bail outs in a way.Sustaining asset prices so as to preserve credit creation.Sadly they killed money velocity at the same time,effectively destroying any positive benefits that may have been gained from some sort of stimulus and trying to solve a debt problem with an even bigger debt problem.

The only problem for the politicians is that leverage is your firend on the way up-swing constituancies like Worcester did well from rising house prices-but your enemy on the way down.

Hence my disappointment with our CB/political elite thinking they can fight gravity and ultimately to lose at a potentially great cost to future generations.

I have only one word for our elites-Australia.This is going to be an epic bust.

 

 

I remember learning about FRB in 2007-you'd jsut never needed to know it before then-and it helped me sell some sizeable (for us) bank holdings ahead of them crashing.

 

Re Hodges earlier.I share those feelings he had from 06 when he was sneered and laughed at for saying a crash as coming.

 

As I said-Australia.

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27 minutes ago, kibuc said:

I had similar reservations about Alexco but decided to pull the trigger two days ago instead of waiting for a dip. People smarter than me say "if you want to own a stock, buy it". Then again, I'm in it for a long haul and I leave day-trading to professionals, so my perspective on 10% dips might be different than yours. If WDO goes down big time, I'll simply re-balance the portfolio (which I only keep because my wife demanded it - up until recently Wesdome WAS my portfolio :) ).

In terms of the goldies/silvies, I think you're right.I timed tranche 1 in 2017 badly,got tranche 2 in Dec in a good moment incl Alexco.My only issue was that the two Brokers I use couldn't get the odd stock eg Amarillo/Atico.And Bizzarrely HSBC were unable to buy Alamos...

The rally since Dec has been disconcerting in a way as I was hoping to add a few more-tranche 2.2 if you will-on weakness,but there hasn't really been any despite Wall St soaring.

Ergo,I'm with you,I think you';ve got to dip in and jsut buy some.What I'm doing now and I'm unsure whether this is a good idea-but where a stocks chart looks overbought-I'm downsizing a little and maybe looking to add a little extra risk with a respected minnow or two.Having said all that I can't bring myself to buy any Wesdome with that perfect looking chart.Just too perfect.Sometimes you have to accept you've missed the boat.

 

Must say though,that much as I trade IG actively ,our pension pot longs are held for a very long time.I'd have to have a very good reason to sell these.This market has the feel of the tech stocks before the tech bubble.I was lucky enough to own some tech stocks and to be buying in the mid to late 90's as computers and mobile phones were clearly going to see demand grow.The reason I think PM's will blossom is that people will be looking for solid mediums of exchange as it becomes apparent that our CB overlords have got it badly wrong.Could happen this year or in ten,but I think it will happen.

 

Sorry for going on.

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10 hours ago, A_P said:

many thanks AP

1 hour ago, A_P said:

Because people are "educated" to be part of the system, not question it

and how can your average person understand this?

That was superb,I've never seen Werner before but I love the way these intellectual types can explain complicated theroretical notions into laymans terms.

 

Interesting to David Buik-long favourite of daytime business shows agreeing........lol

1 hour ago, Democorruptcy said:

I was thinking how Fed policy might favour large firms and enable them to have the cash to buy up more small firms and also stifle small firms starting up. They can price them out with economies of scale. Ultimately it leads to power in the hands of a few and lots of people on basic income handouts. However they talk about more employment and firms starting up, so just checked some US figures. A lot of it is people who cannot afford to live, doing bits on the side
 

I suppose in the UK we have 16 hour nail shops and tax credits.

 

Fed policy already favours large companies due to the nature of the collateral it's willing to tkae re QE.

As credit shrinks,this will surely give the large an advantage over the small.

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1 hour ago, A_P said:

Because people are "educated" to be part of the system, not question it

and how can your average person understand this?

Excellent description.

Note this shows again that we do not have fractional reserve banking in this country. The concept is a fallacy.

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3 minutes ago, stoobs said:

Excellent description.

Note this shows again that we do not have fractional reserve banking in this country. The concept is a fallacy.

What would you call it? Genuine question

Would you agree that banks have balance sheets composed of assets versus liabilities and can create cradit out of thin air?

 

 

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6 minutes ago, sancho panza said:

What would you call it? Genuine question

Would you agree that banks have balance sheets composed of assets versus liabilities and can create cradit out of thin air?

 

 

They have to balance their books on a daily basis. 

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Just now, sancho panza said:

What would you call it? Genuine question

Would you agree that banks have balance sheets composed of assets versus liabilities and can create cradit out of thin air?

Yes, I completely agree with you. Unfortunately I don't know what the correct vocabulary is to describe it.

In fractional reserve banking, a financial institution is only allowed to lend up to a maximum multiplier of its deposits and certain other balance sheet items.

In reality, in our country and most other large economies, a bank can lend without any technical limit because they create money at the point of granting a loan.

I go to Barclays and ask for a £100 quadrillion loan. They grant that and create £100 quadrillion of money in a Barclays account. At that point the net effect on Barclays' balance sheet is zero. They don't go bust.

On day two I use that £100 quadrillion to buy an overpriced bedsit in Islington and transfer the money to the seller's account with NatWest. Everything is fine until that evening when all transfers between banks are summed and any net changes have to be accounted for. At this point Barclays are found to owe NatWest £100 quadrillion and need to borrow that amount from other banks or deposit equivalent assets with the BoE. They can't so they are screwed.

Therefore Barclays shouldn't have created the money as they knew they wouldn't be able to balance the books once it was used. However, it doesn't stop them creating that money in the first place.

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39 minutes ago, sancho panza said:

Which is why FLS,HTB1+2,QE,Zirp etc were all back door bail outs in a way.Sustaining asset prices so as to preserve credit creation.Sadly they killed money velocity at the same time,effectively destroying any positive benefits that may have been gained from some sort of stimulus and trying to solve a debt problem with an even bigger debt problem.

All of which have fuelled populism around the developed world, the central bank madness kept the show on the road for another decade but the long term damage is looking to be severe.

Asset prices are (of course) currently directly linked to both the willingness & ability of buyers to get credit, but what the central banks are missing (because they have no impact on inflation or GDP) is that reserves of both companies and consumers are being completely hollowed out.  Everything is being sacrificed on the alter of current consumption and sod tomorrow!  So the pyramid is being inverted, as time goes by the debt at the top is being supported by a narrower and narrower base.

I think it was something like 50% of Americans couldn't deal with an unexpected $500 bill?  And that's the richest country on earth?

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1 minute ago, Majorpain said:

All of which have fuelled populism around the developed world, the central bank madness kept the show on the road for another decade but the long term damage is looking to be severe.

Asset prices are (of course) currently directly linked to both the willingness & ability of buyers to get credit, but what the central banks are missing (because they have no impact on inflation or GDP) is that reserves of both companies and consumers are being completely hollowed out.  Everything is being sacrificed on the alter of current consumption and sod tomorrow!  So the pyramid is being inverted, as time goes by the debt at the top is being supported by a narrower and narrower base.

I think it was something like 50% of Americans couldn't deal with an unexpected $500 bill?  And that's the richest country on earth?

58% of Americans have less than $1,000 in savings.

20% of Americans have no access to affordable healthcare.

2.2 million Americans are incarcerated, while a further 4.5 million are on probation or parole.

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3 minutes ago, Majorpain said:

https://tradingeconomics.com/united-kingdom/personal-savings

Savings rate fell below 5% for the first time since the 50's after brexit, I suspect that's whats currently keeping things moving GDP wise.

It is not sustainable or desirable in the long run, and the longer it continues the worse the damage will eventually be.

There's a whisper in the Telegraph this morning about the deficit targets being missed (again).

Here's the link but you'll need access.

https://www.telegraph.co.uk/business/2019/02/06/hammond-set-abandon-deficit-rule-spending-plans-student-loans/

spend.jpg

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This was shared in the main forum. Almost half of adults don't have enough savings to cover an unexpected £300 bill. Just under half of adults have a numeracy attainment age of 11 or below.

When you speak to most individuals their times horizons are very small. Usually not looking much further than what's for dinner or when the next holiday is. Additionally I've been doing a lot of house viewings recently and I'm gobsmacked at the amount of gadgets and tech in I see in peoples homes. Spend spend spend.

infographic-shakespeare-martineau.jpg

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48 minutes ago, stoobs said:

Yes, I completely agree with you. Unfortunately I don't know what the correct vocabulary is to describe it.

In fractional reserve banking, a financial institution is only allowed to lend up to a maximum multiplier of its deposits and certain other balance sheet items.

In reality, in our country and most other large economies, a bank can lend without any technical limit because they create money at the point of granting a loan.

I go to Barclays and ask for a £100 quadrillion loan. They grant that and create £100 quadrillion of money in a Barclays account. At that point the net effect on Barclays' balance sheet is zero. They don't go bust.

On day two I use that £100 quadrillion to buy an overpriced bedsit in Islington and transfer the money to the seller's account with NatWest. Everything is fine until that evening when all transfers between banks are summed and any net changes have to be accounted for. At this point Barclays are found to owe NatWest £100 quadrillion and need to borrow that amount from other banks or deposit equivalent assets with the BoE. They can't so they are screwed.

Therefore Barclays shouldn't have created the money as they knew they wouldn't be able to balance the books once it was used. However, it doesn't stop them creating that money in the first place.

I'm a bit more liberal in my use of the term FRB.I agree it's not cash reserve lending which iirc was abandoned with the first Basel accord(happy to be corrected) however,when you look at the balance sheets post Basel,they are effectively quite similar to the way they wer pre basel.It's the methodology of credit creation that's changed.

It's amazing though,how little has changed since roman times when you pull it back to the brass tacks.

 

This Steve keen piece shows that even under cash reserve lending banks were clearly creating credit ahead of taking a deposit. Maybe explains why basel/repeal of glass steagall/2008 happened.

52 minutes ago, Castlevania said:

They have to balance their books on a daily basis. 

Technically.In reality they can jsut adjust risk weightings/move some loans around and hey presto,solvent until someone wants their cash out.

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41 minutes ago, Majorpain said:

All of which have fuelled populism around the developed world, the central bank madness kept the show on the road for another decade but the long term damage is looking to be severe.

Asset prices are (of course) currently directly linked to both the willingness & ability of buyers to get credit, but what the central banks are missing (because they have no impact on inflation or GDP) is that reserves of both companies and consumers are being completely hollowed out.  Everything is being sacrificed on the alter of current consumption and sod tomorrow!  So the pyramid is being inverted, as time goes by the debt at the top is being supported by a narrower and narrower base.

I think it was something like 50% of Americans couldn't deal with an unexpected $500 bill?  And that's the richest country on earth?

Boom!! Nicely pu MP

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35 minutes ago, zugzwang said:

58% of Americans have less than $1,000 in savings.

20% of Americans have no access to affordable healthcare.

2.2 million Americans are incarcerated, while a further 4.5 million are on probation or parole.

Makes you wonder why he's building the wall-too keep the poor people in or the poor people out?

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26 minutes ago, A_P said:

This was shared in the main forum. Almost half of adults don't have enough savings to cover an unexpected £300 bill. Just under half of adults have a numeracy attainment age of 11 or below.

When you speak to most individuals their times horizons are very small. Usually not looking much further than what's for dinner or when the next holiday is. Additionally I've been doing a lot of house viewings recently and I'm gobsmacked at the amount of gadgets and tech in I see in peoples homes. Spend spend spend.

infographic-shakespeare-martineau.jpg

I'd haggle on the 16% of all working age adults having a disability.Might well be that 16% get disability benefit.

 

The savings figure is stunning.

 

As for the demographics,the FCA clearly read Paul hodges.

 

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17 hours ago, sancho panza said:

 

 @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

ISHARES II PLC USD TIPS 0-5 UCITS USD (TIP5)

 

https://www.fundslibrary.co.uk/FundsLibrary.DataRetrieval/Documents.aspx/?type=packet_fund_class_doc_factsheet_private&id=ce74b550-0499-4654-81ca-977df05b4a30&user=s0gWbZnDHerVAjJ5Kw8rVivBzhMHCFPlsw7SU7eeglU%3d&r=1

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