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Credit deflation and the reflation cycle to come.


DurhamBorn

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Hi all, not contributed to this thread for yet but did contribute a couple of times on TOS.

I'm trying to figure out how much I need to retire. 

From doing a bit of reading I can see that the average stock market annual return (after inflation) over the last 90 years has been pretty close to 10%.

What do people think is a reasonable amount to build into projections for the next 30 years or so? I'm thinking of going with 3% (after inflation).

Seems to me much of the West was built over the last 100 years with massive growth much of the time. Is that likely to continue for the next 30 years?

Difficult questions, particularly when Governments have resorted to money printing but you've got to go with something which is why I'm thinking a pretty conservative 3%.

Be interested in other people's views, DB? SP? Harley etc?

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1 hour ago, Starsend said:

Hi all, not contributed to this thread for yet but did contribute a couple of times on TOS.

I'm trying to figure out how much I need to retire. 

From doing a bit of reading I can see that the average stock market annual return (after inflation) over the last 90 years has been pretty close to 10%.

What do people think is a reasonable amount to build into projections for the next 30 years or so? I'm thinking of going with 3% (after inflation).

Seems to me much of the West was built over the last 100 years with massive growth much of the time. Is that likely to continue for the next 30 years?

Difficult questions, particularly when Governments have resorted to money printing but you've got to go with something which is why I'm thinking a pretty conservative 3%.

Be interested in other people's views, DB? SP? Harley etc?

**I'm just making this up I stand by nothing**

From what I can see 10% average total returns on the FTSE works over most time periods, unless you're really unlucky and go all-in right on the edge of a recession.

Average dividends are about 4.4%, so personally I'm aiming for at least 100k each by the time we reach escape velocity. 

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13 minutes ago, Calcutta said:

**I'm just making this up I stand by nothing**

From what I can see 10% average total returns on the FTSE works over most time periods, unless you're really unlucky and go all-in right on the edge of a recession.

Average dividends are about 4.4%, so personally I'm aiming for at least 100k each by the time we reach escape velocity. 

Thanks Calcutta

The FTSE100 has barely moved in 20 years so if it weren't for dividends you'd be sitting on a whacking great loss in real terms. The dividends most likely cover inflation (assuming that you go by Gov figures which are most likely understated significantly) but not much real growth. Guess that shows the importance of diversification.

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45 minutes ago, Starsend said:

Thanks Calcutta

The FTSE100 has barely moved in 20 years so if it weren't for dividends you'd be sitting on a whacking great loss in real terms. The dividends most likely cover inflation (assuming that you go by Gov figures which are most likely understated significantly) but not much real growth. Guess that shows the importance of diversification.

From IG

https://www.ig.com/uk/trading-strategies/what-are-the-average-returns-of-the-ftse-100--190318#information-banner-dismiss

"Because of the distortive impact of high inflation, it makes most sense to look at inflation-adjusted ('real') returns over longer time periods. Over the last 119 years UK equities have made annualised returns of +4.9% over and above inflation.1 Therefore, if you think inflation will be 2.5% on an ongoing basis, you might expect your long-term returns to be around 7.5%."

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4 hours ago, Starsend said:

Hi all, not contributed to this thread for yet but did contribute a couple of times on TOS.

I'm trying to figure out how much I need to retire. 

From doing a bit of reading I can see that the average stock market annual return (after inflation) over the last 90 years has been pretty close to 10%.

What do people think is a reasonable amount to build into projections for the next 30 years or so? I'm thinking of going with 3% (after inflation).

Seems to me much of the West was built over the last 100 years with massive growth much of the time. Is that likely to continue for the next 30 years?

Difficult questions, particularly when Governments have resorted to money printing but you've got to go with something which is why I'm thinking a pretty conservative 3%.

Be interested in other people's views, DB? SP? Harley etc?

OK, here's is my shot after reading a number of FIRE sites.

Realistic drawdown rate after costs is 2.5-3%, this will mean you are unlikely to run out of money in a 30-40 year retirement...check out Pau who is the academic guru on this...also RIT/WICAO webpage.

This then means a £100k pot should give you £2.5-3 k per year.

Then decide how expensive your tastes are...Rowntree Foundation states £14k pyr minimum for a single person.

As always DYOR (do your own research).

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Agent ZigZag

£500,000 pension pot to give £15000PA or £288 per week. Not much is it for saving hard. My father in law always looked at his investments to return £320pw to allow for fluctuations in the mkt.

Today my running costs to include Council tax, electricity, Gas,water and home insurance is approx £105pw.

That leaves £184pw or £26 a day to spend on food and leisure. Makes you think is saving into a pension worth it. Should have bought an HMO and sat back on my arse

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21 hours ago, sancho panza said:

Wolf warns on Eurobanks

 

NPLs remain dangerously to catastrophically high in Italy, Greece, Portugal, and Cyprus

https://wolfstreet.com/2019/06/17/bad-loans-still-too-high-at-eurozone-banks-ecb-warns/

'

 

Inspired by Deutsche Bank Death Spiral, European Banks Sink to Dec 24, 2018 Level – First Seen in 1995

https://wolfstreet.com/2019/06/15/led-by-deutsche-bank-death-spiral-european-banks-sink-to-dec-24-level/

Italys banks and their loan books are fucked.

The economy is shrinking. Has been since late 80s. Down to demographics and fucked government.

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sancho panza
1 hour ago, spygirl said:

Italys banks and their loan books are fucked.

The economy is shrinking. Has been since late 80s. Down to demographics and fucked government.

Italy's birth rate was a record low last year.

Here's a top ten of demogrpahic timebombs,besides the obvious China/Italy,also a few East European countries emptying out.Goota love the EU and high house prices.

https://www.businessinsider.com/10-countries-at-risk-of-becoming-demographic-time-bombs-2018-8?r=US&IR=T#two-years-ago-china-began-allowing-families-to-have-two-children-instead-of-one-but-the-policy-change-has-not-done-enough-to-reverse-a-decreasing-fertility-rate-10

15 hours ago, Sugarlips said:

https://www.zerohedge.com/news/2019-06-17/china-roll-out-new-rare-earth-policy

I know, it’s ZH but interested to hear how this might play out, US relies on China for 80% of its precious metals, if they are blocked in the next stage of the trade war, where are the next supplies going to be sourced and which firms will benefit? Western Australia has a lot of untapped lithium for example.The USA and Can

The USA and Canada have some but aren't mining them.

Mountain pass is the most well known resource.

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sancho panza
12 hours ago, DurhamBorn said:

Its all due to the long deflation/dis-inflation cycle.Massive amounts of capacity came onto the world economy and that kept prices down.Money creation went above trend,but capacity was growing stronger,or in line.You can extend and shorten the road map to when this sort of thing ends,and this time it actually went pretty much as far as these things can.People could borrow for nothing,or very very little.Then other things come into play.This whole thread and the last one are about the very process.If you go out into the world among the population pretty much nobody understands cycles.In the city and the press there are hardly any people who even know its a cycle.The end of this cycle is happening all around us and its exactly as predicted.The politics tends to be first,it picks up on the changes even though people dont understand why they feel that way,why things happen.The kind of investments that hate deflation cycles have capitulated now (or are in the process) because the market thinks they are basket cases.They are making the mistake of looking backwards as always.Some areas that gain from inflation are starting to stir though.Gold moved exactly in the window expected,late May.Others like utilities and telcos are still suffering while others like some transports (Go Ahead for instance) have bounced almost 50% from bottom ladders.

Woodfords case might prove a focus to look back on in the future.He bought a lot of stocks that should do well in the future,but miss-timed,but also bought stocks with massive debts right at the end of the cycle.The irony is the people selling the funds down 20%+ are likely putting the money into funds that have gained most from deflation (FANGS/"growth" etc) and will likely see another big smack down.

Cash flow and debt repayment timing are critical as this cycle turns.Interest rates are going to creep higher after the deflation ends and many companies will see cash flow go negative in that window.The survivors will see rising prices for their goods at the same time as less competition.Inflation crushing margins or rate increases do the same job at the end of a disinflation.It doesnt matter the one that delivers the pain.

We just need the miners to keep running and GDX get to around $28 so we can then funnel those big capital gains into reflation stocks (and several other beaten down areas) and it will be job done until around 2025/26 when we might have to get busy again.

 

 

A couple of very interesting observations that made me think.Both correct.I've discussed before how the inflation figures grotesquely misrepresent the reality of price inflation for many who spend disproportionate amounts of their income on fuel/food/shelter.It's jsut like you say,people can't really put their finger on it but they know things are getting worse.

Also,on the second piint we need look no further than the amount of smaller energy retailers going under.............

 

Onto a separate matter.I was doing some research and noticed that a number of Goldies started dropping heavily well before Oct 2008.To save me reprinting a raft of them,using GDX as a proxy

GDX dropped from 1/2/08 at 53 to 21 1/10/8 and went up there after tieing it in with the gold price action peaking at 972 in Feb 08,bottomed at 716 10/08 .

However,DXY appears to have started a bottoming process around March 08.Surged from August 08

Question:Does recent gold strength indicate we're heading into dollar weakness phase of the bear?

Anyone with an opinion on any indicators that have been relaible in the past?

image.png.723199162fb7f4c1a33eeadabcee1877.png

Was it the bottoming of the dollar March 08 and then lifting off Aug 08 but then dollar was still rising as GDX was rocketing back

image.png.91102525da85b056e6278473b5e1b1bb.png

https://uk.investing.com/commodities/gold

 

image.png.97e23a28959e776f47d028f88b9982bc.png

 

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sancho panza
8 hours ago, kibuc said:

SPX up.

Dollar up.

Gold up.

Treasuries up.

I hope you guys understand any of it 'cause I'm lost at sea, I need an adult.

Yeah,me too.I'm sat here trying to work it out.See my previous Q kibuc.

Having said that some key sectors are rolling over.Headline averages hiding all manner of sins.

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sancho panza
8 hours ago, Starsend said:

Hi all, not contributed to this thread for yet but did contribute a couple of times on TOS.

I'm trying to figure out how much I need to retire. 

From doing a bit of reading I can see that the average stock market annual return (after inflation) over the last 90 years has been pretty close to 10%.

What do people think is a reasonable amount to build into projections for the next 30 years or so? I'm thinking of going with 3% (after inflation).

Seems to me much of the West was built over the last 100 years with massive growth much of the time. Is that likely to continue for the next 30 years?

Difficult questions, particularly when Governments have resorted to money printing but you've got to go with something which is why I'm thinking a pretty conservative 3%.

Be interested in other people's views, DB? SP? Harley etc?

I'm not so sure the metircs of the previous 100 will stay true over the next 30.Hige expansion of narrow money since the 1960's and mismeasurement of inflation.

What I aim to do is to match the costs of my life to the equiites I invest in.Eg match my utility bills with some utility investments-prices go up and it won't affect me,same with oil etc.Food harder to hedge but there are some agri businesses that could eg Soil ETF and tractor producers.

Good question.Something else to worry about

6 hours ago, Starsend said:

Thanks Calcutta

The FTSE100 has barely moved in 20 years so if it weren't for dividends you'd be sitting on a whacking great loss in real terms. The dividends most likely cover inflation (assuming that you go by Gov figures which are most likely understated significantly) but not much real growth. Guess that shows the importance of diversification.

The loss would be even worse if you'd actually bought the underlying stocks and not an ETF.i know some people still waiting for marconi to make a comeback

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Castlevania
59 minutes ago, sancho panza said:

The loss would be even worse if you'd actually bought the underlying stocks and not an ETF.i know some people still waiting for marconi to make a comeback

Surely a FTSE 100 ETF would give the same result as buying all the individual stocks at their respective index weighting?

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8 hours ago, Castlevania said:

Surely a FTSE 100 ETF would give the same result as buying all the individual stocks at their respective index weighting?

Yes if it tracks it but you have trading costs and it depends also on any success/failures the manager may have I.e. swaps defaulting etc

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12 hours ago, Cattle Prod said:

Problem with the FIRE sites, (and Mr Money Moustache is excellent) is that they invariably base the investment strategy and drawdowns from on a Vanguard/Boglehead/passive point of view. And that's not going to work gpimg forward.

My strategy is to buy large cash rich dividend paying compaines cheaply instead, and I expect to do better than 4%. The "lifetime" opportunity for that strategy (as in the 'cheaply' bit is in the early innngs already, per this thread.

Why?...not saying you are wrong, just trying to understand it myself...can understand your return as an active being better IF you pick the winners, but the whole rationale of a passive approach is a safer `middle ground` where you take a long-term approach on small yields/returns, drawing down to zero, and adjusting your DDs in the fallow periods.

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Getting a sense that things are starting to get very interesting again out there in the global macro environment, just some recent noteworthy points:

- Today is June FOMC meeting day, will Powell stand his ground in defiance of Trump's threats for lower rates? And will markets tank as a result? Will he indicate easing at next month's meeting to compensate? What happens today through to July's meeting will probably decide whether the SPX goes into full melt up mode or not. Remember the Fed cuts in 50bp drops. US economists obviously getting a bit twitchy about NIRP.

- Yesterday, Draghi planted the QE/easing stimulus seed. BOE still suggesting a hike may be needed due to weak £, but I think they're just sitting on their hands and waiting to see what everyone else does, trying to prop it up best they can for now.

- Global negative yielding debt spiked to a new record of $12.5 trillion yesterday after Draghi's comments.

- Lot's of low/negative yield bond records being set, Denmark just 1bp away from ALL govt bonds negative, Australia 10 yr record low, Switzerland/Germany/Netherlands/Austria/Finland & Sweden 10 yr bonds all negative!

- I'm not a gold bug like many of you, but just worth mentioning that it seems some kind of temporary pull back is possible as it approaches high end of 10 year DSI

- US trucking tonnage rolling over (no pun intended), trucking industry now experiencing a significant downturn (remember, this sector was on fire until a few months ago) https://www.businessinsider.com/truckers-warn-bloodbath-companies-bankrupt-lower-expectations-2019-6

- Another UK economy success story, Premier Inn, has just posted 4.6% drop in sales for first 3 months of 2019, stating "weak trading conditions". https://www.bbc.co.uk/news/business-48687824

 

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19 minutes ago, MrXxx said:

Why?...not saying you are wrong, just trying to understand it myself...can understand your return as an active being better IF you pick the winners, but the whole rationale of a passive approach is a safer `middle ground` where you take a long-term approach on small yields/returns, drawing down to zero, and adjusting your DDs in the fallow periods.

I think it lies with the belief that what's to come isn't going to look anything like the previous 40 years of ever lower interest rates.

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1 hour ago, Barnsey said:

I think it lies with the belief that what's to come isn't going to look anything like the previous 40 years of ever lower interest rates.

Thats right and how i see things.Dividend paying stocks are still the best way to retire (flexible,can stop start etc) but its going to be a different set that can manage to do that and other companies will be in a distribution cycle.Its crucial companies can at least track inflation higher without destroying sales.Those include companies that are leaders in their sector as others go under.Debt repayment timing is critical as well,the more debt that can be retired as it comes off the better (for a debt deflation watch the likes of Imperial change its capital policy soon,instead of 10% divi increases i expect 4% or RPI+2% and debts repayments instead).Vodafone has already done this.Its ironic but the companies with the best ability to pay coupons are the ones rolling off their debts.The debt deflation is coming from two sides,none payers defaulting and strong companies paying off.

On GDX if the Fed doesnt cut tonight it might pull back to the $21.70-$22 area and i think this will be the last chance to get on board.Gold is in the start of a sustained move up.It has tested its 6 year old consolidation already and once it gets through that the move should start to speed up.

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18 minutes ago, DurhamBorn said:

Thats right and how i see things.Dividend paying stocks are still the best way to retire (flexible,can stop start etc) but its going to be a different set that can manage to do that and other companies will be in a distribution cycle.Its crucial companies can at least track inflation higher without destroying sales.Those include companies that are leaders in their sector as others go under.Debt repayment timing is critical as well,the more debt that can be retired as it comes off the better (for a debt deflation watch the likes of Imperial change its capital policy soon,instead of 10% divi increases i expect 4% or RPI+2% and debts repayments instead).Vodafone has already done this.Its ironic but the companies with the best ability to pay coupons are the ones rolling off their debts.The debt deflation is coming from two sides,none payers defaulting and strong companies paying off.

On GDX if the Fed doesnt cut tonight it might pull back to the $21.70-$22 area and i think this will be the last chance to get on board.Gold is in the start of a sustained move up.It has tested its 6 year old consolidation already and once it gets through that the move should start to speed up.

Ok, just doing some reading about this so let me check with you folks that I have it correct.

1. We are now in the slowdown stage (after the expansion stage where small/med caps ttraditionally do better), and the large caps are reducing divis to deleverage for the foreseen recession stage.

2. Gold is increasing as a flight to safety.

What I dont understand is why inflation is low; in expansion it should be high (or is this due to indice I.e CPI not including correct factors such as housing) AND why interest rates are so low; at this stage govts should be increasing to control expansion and allow a position to reduce from in a recession stage (to stimulate economy)....are we actually at the edge of slowdown stage and about to drop off the edge?

Finally, how does terms mentioned here (disinflaton/reinflation) relate to this financial cycle?

Thanks for any help.

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3 hours ago, Barnsey said:

- Global negative yielding debt spiked to a new record of $12.5 trillion yesterday after Draghi's comments.

- Lot's of low/negative yield bond records being set, Denmark just 1bp away from ALL govt bonds negative, Australia 10 yr record low, Switzerland/Germany/Netherlands/Austria/Finland & Sweden 10 yr bonds all negative!

Looks even better as a picture

 

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1 hour ago, MrXxx said:

Ok, just doing some reading about this so let me check with you folks that I have it correct.

1. We are now in the slowdown stage (after the expansion stage where small/med caps ttraditionally do better), and the large caps are reducing divis to deleverage for the foreseen recession stage.

2. Gold is increasing as a flight to safety.

What I dont understand is why inflation is low; in expansion it should be high (or is this due to indice I.e CPI not including correct factors such as housing) AND why interest rates are so low; at this stage govts should be increasing to control expansion and allow a position to reduce from in a recession stage (to stimulate economy)....are we actually at the edge of slowdown stage and about to drop off the edge?

Finally, how does terms mentioned here (disinflaton/reinflation) relate to this financial cycle?

Thanks for any help.

Massive capacity was added to the global economy by China and also very fast technology change.Inflation was very high if you accept money creation as inflation,its just capacity managed to suck up the demand.If you look at food prices now for example inflation is very high.Iv just had a pay rise at work 2.49%.Council tax up 5%.

Disinflation is where prices slowly fall over a long cycle and interest rates do the same.That makes assets like houses go up in price (and "growth" shares as they discount future growth against low rates).Re-inflation is where governments decide they dont like lamposts and ropes so change policy from allowing money creation from credit,to that plus direct investment into the economy and CBs monetize the debts (50 year gilts at 0.5% coupons,90% of the profits from the bond handed back to government).This causes longer term rates to start to increase,it means investment in fixed assets becomes more expensive (most are funded by debt depreciated over say 10 years) and so companies that already hold expensive fixed assets can suddenly increase prices but their depreciation stays the same for several years.That usually sees free cash flow explode higher around year 4 into a reflation as increases move through but depreciation is still low.

If you take Amazon,it gains from deflation.It charges £40 for a widget,but the price falls.The price falls faster than they cut the selling prices.The reverse happens in a reflation.The factory puts prices up faster than Amazon can increase selling prices.

A telco like Vodafone has paid for its network (or bondholders have) and they depreciate those assets over say 10 years.£1 billion of assets say generating £2 billion of sales.Prices go up 5% so £200 million extra added onto turnover,but depreciating those assets remains the same,that £100 million mostly flows to free cash flow.

The very companies that look terrible investments at the end of a disinflation are the very ones primed to do well in a reflation.The key of course is surviving through the bottleneck of a debt deflation that comes at the end of disinflation cycles.

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1 minute ago, DoINeedOne said:

Looks even better as a picture

 

Amazing isnt it.Trump will dump tariffs on Europe to make up for it if the Fed dont cut tonight.Or even if they do.Companies need to use this window to re-finance their debts.

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4 minutes ago, DurhamBorn said:

Massive capacity was added to the global economy by China and also very fast technology change.Inflation was very high if you accept money creation as inflation,its just capacity managed to suck up the demand.If you look at food prices now for example inflation is very high.Iv just had a pay rise at work 2.49%.Council tax up 5%.

Disinflation is where prices slowly fall over a long cycle and interest rates do the same.That makes assets like houses go up in price (and "growth" shares as they discount future growth against low rates).Re-inflation is where governments decide they dont like lamposts and ropes so change policy from allowing money creation from credit,to that plus direct investment into the economy and CBs monetize the debts (50 year gilts at 0.5% coupons,90% of the profits from the bond handed back to government).This causes longer term rates to start to increase,it means investment in fixed assets becomes more expensive (most are funded by debt depreciated over say 10 years) and so companies that already hold expensive fixed assets can suddenly increase prices but their depreciation stays the same for several years.That usually sees free cash flow explode higher around year 4 into a reflation as increases move through but depreciation is still low.

If you take Amazon,it gains from deflation.It charges £40 for a widget,but the price falls.The price falls faster than they cut the selling prices.The reverse happens in a reflation.The factory puts prices up faster than Amazon can increase selling prices.

A telco like Vodafone has paid for its network (or bondholders have) and they depreciate those assets over say 10 years.£1 billion of assets say generating £2 billion of sales.Prices go up 5% so £200 million extra added onto turnover,but depreciating those assets remains the same,that £200 million mostly flows to free cash flow.

The very companies that look terrible investments at the end of a disinflation are the very ones primed to do well in a reflation.The key of course is surviving through the bottleneck of a debt deflation that comes at the end of disinflation cycles.

Crucial Point 

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