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Credit deflation and the reflation cycle to come.


DurhamBorn

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sancho panza


if you can't beat em,sell.

https://www.bbc.co.uk/news/business-48851270

Deep discounting has failed to stem the slide in sales for Sainsbury's.

The supermarket giant says it has cut prices on more than 1,000 everyday food and grocery products since February.

Yet in its latest quarterly trading statement, it reports a fall of 1.2% in its total sales, excluding fuel.

The results cover the 16 weeks to 29 June. Like-for-like sales, which ignore the boost that a retailer gets from opening new stores, were even worse, falling by 1.6%.

https://www.reuters.com/article/us-walmart-asda-ipo/asda-boss-sees-possible-stock-market-listing-in-two-to-three-years-idUSKCN1TY24N?feedType=RSS&feedName=businessNews&utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+reuters%2FbusinessNews+(Business+News)

LONDON (Reuters) - The timescale for a possible stock market listing of British supermarket group Asda, by its U.S. parent Walmart (WMT.N), is two to three years, Asda’s boss said on Wednesday.

 

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sancho panza

Deutsche are  struggling for direction.QE and NIRP will finish them off.

I particularly enjoy the gentile way they describe setting up a 'bad bank' as if they're doing German taxpayers a favour.

Credit deflation cometh.

https://www.bloomberg.com//news/articles/2019-07-03/deutsche-bank-s-overhaul-and-the-questions-investors-are-asking?srnd=markets-vp

Job cuts

The headline number for job cuts is expected to be about 20,000, according to people with knowledge of the matter. That’s more than a fifth of the workforce and would represent the biggest reductions in a decade. The bank is already slashing positions at the retail and commercial clients division. What we still don’t know -- amid reports of a large retrenchment in U.S. equities -- is just how many roles will be cut from the investment bank, how quickly the axe is going to fall and where the cuts will be felt the most. The division had 18,200 front-office staff and 40,800 total employees at the end of the first quarter.

Financial Targets

The restructuring, with the severance packages, may cost as much as 5 billion euros $5.6 billion), people familiar with the matter said. The bank will probably slip to a net loss this year because of those costs, the Financial Times reported on Wednesday.

The question is what new goals the CEO might set and by when. Deutsche Bank says it wants to make the cost-to-income ratio its principal target rather than the adjusted costs measure it uses now. The bank is also in talks with regulators about potentially lowering its capital cushion, putting a question mark over where its common equity tier 1 ratio will end up.

Investment Bank

The CEO wants to shift the bank away from its focus on institutional clients toward meeting the trade finance and cash management needs of large companies. He’s looking at drastic cuts to equities and interest rates trading and may shutter those businesses in several countries outside Europe, people familiar with the matter have said.

But its not all about retreat. Sewing says he wants to invest in the transaction bank, headed by Stefan Hoops, as well as the private wealth management unit under Fabrizio Campelli.

The scale of those cuts and investments aren’t yet fully known, but Sewing is considering eliminating half of the bank’s global equities trading workforce while he plans to hire 300 wealth managers, people familiar have said.

Paying the Bill

All the options for paying for the massive restructuring bill come with their own headaches. Sewing is said to be against a capital increase because it will dilute the holdings of the bank’s long-suffering shareholders. He’s considering tapping into the bank’s capital cushion, but such a move risks provoking the ire of regulators.

The bank could also sell the shares of its asset manager, DWS, though there’s no indication yet that the option is being considered. Deutsche Bank owns more than three quarters of DWS’s shares and its stake could go as low as 40% without losing control thanks to a unique legal structure. Reducing the capital buffers would free up cash.

 

Non-Core Unit

Exiting businesses could leave Deutsche Bank with billions of euros of assets it no longer wants. It’s planning to create a dedicated unit to help sell or wind down those holdings, including the ones from the trading units it’s seeking to cut or close.

The ultimate size and shape of the non-core unit is unknown, though people say it will end up holding 30 billion to 50 billion euros out of the 374 billion euros of risk-weighted assets the bank had at the end of the first quarter. People familiar with the matter have said it will include long-dated interest rate derivatives, equities, non-performing loans and performing loans.

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Regarding tobacco I bought small holding of Imperial brands recently.  Trying to turn my portfolio into the most unethical out there now, just need to add in a bit of BAE 🙂.  But seriously really interesting stuff regarding the possible move into cannabis if (when?) the bubble bursts and they can use there war chest to buy out.  Really like that play.

A cleaner at work was saying a few months ago -I kid you not (and the cleaner I think saw the irony too)-  that a guy in his local pub was saying buy into cannabis as it's only going up at the moment.  Obviously bubble talk but I said sure one could ride the wave just don't know when it crashes.

Also read quite recently the book about rjr Reynolds, barbarians at the gates.  Was about IIRC leveraged buy outs of the 80s with I think an apex on the RJR drama.  Get a consortium of outside buyers and preferably the board of the company together and without hostility take private.  

The thing with RJR that stuck out and the reason was so attractive as an aqusition for a LBO was that the cash generation of the tobacco company was phenomenal.  It just wasn't recognised by the public/ market.  Again there had been threats always present back then with regulation and law against tobacco.  Kind of a taboo subject if you will.  But that cash flow was the king.

(In the end I think the buy out was a fight against different buyers bidding up so was as lot more than expected and far greater than stock price ultimately - maybe never went as well as the buyer hoped but the book was good eye opener in how tobacco companies can have massive cash generation like dB has described)

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Heard something last week about the Chinese now having access to the LSE.  Good for UK shares?  Increase allocation now?  Worked for property!

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sancho panza
6 hours ago, Sideysid said:

https://finance.yahoo.com/news/30-treasury-bonds-flash-economic-180737839.html

 

30 year yield has now turned. This may have been the reason for the gold spike yesterday.

Thanks for psoting from the link.

'The bond market flashed yet another warning signal for investors on Wednesday that a downturn for the economy may be coming. Despite the S&P 500 hitting new all-time highs, the yield on 30-year U.S. Treasury bonds briefly dipped below the overnight fed funds rate, a signal that has preceded the past five U.S. recessions.

image.png.a1cd71eb3724c4a6af840e04794cf643.png

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sancho panza

With hattip to @Sideysid

Took a look at the Twitter feed of the guy the yahoo article Sidey quoted.Has a video on.Well worth 15 minutes fo your time

https://www.realvision.com/tv/videos/the-macro-view-on-gold

Tavi talks about Global debt imbal;ances ie Global debt to GDP is now 270%,higher than all previous crises.

Also points out  very high ratio of non financial companies in the West have negative free cash flow eg 82% in Canada

Gold could do well whilst Dollar rises.

AT 6 mins 30 their macro model graph is worth looking at.

8-01 chart looking at 5age of yield curve inversions across the full curve

at 10-15 interesting analysis of the 2 year yield over 30 odd years.-fed rate cut not bullish for stocks

11-20 5yr real yields inverted  has stong correlation with Gold price

12 mins discusses Chinese credit bubble being biggest in History $40 trillion on balance sheet,£45trn off balance sheet.Chinese currency issues loom as it's only has strengthened since 08,ergo Yuan devaluation looms,ergo Chinese stock market will drop but so will local currency ergo Gold well postioned.

 

Russell 3000 to silver ratio cahrt at 15-30

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44 minutes ago, sancho panza said:

Thanks for psoting from the link.

'The bond market flashed yet another warning signal for investors on Wednesday that a downturn for the economy may be coming. Despite the S&P 500 hitting new all-time highs, the yield on 30-year U.S. Treasury bonds briefly dipped below the overnight fed funds rate, a signal that has preceded the past five U.S. recessions.

image.png.a1cd71eb3724c4a6af840e04794cf643.png

You beat me to it @sancho panza xD

He's a fantastic follow and fellow!

Rewinding the clock way back to when this thread started and the discussion of reflationary strategy after the next recession/depression, Steen Jakobsen of Saxo Bank has released his Q3 report, some very interesting views in there, and I consider him one of the best out there (for some reason the financial analyst Scandinavians including those at Nordea Markets are really on point!)

https://www.home.saxo/-/media/documents/quarterly-outlook/q3-full-report-2019.pdf

Quote

The lower policy rates will not help, as we have pointed out several times using our Four Horsemen theme. The price of money is only a derivative of the quantity of money. And currently, the change in the quantity of money, explained via the credit impulse, remains sluggish, which means that the current central bank effort to change the price of money will only create a short-term sugar high. The analogy we use is that the size of the credit cake is unchanged to smaller, while a piece of cake will now get a bit cheaper. This, of course, leaves only a marginal transmission to the real economy. And once the central banks burn through the last bits of available policy headroom, policymakers will look for further policy initiatives as the rate cutting and restarting of quantitative easing will not be enough. We believe the next logical step will be a massive increase in fiscal spending as national budget talks get under way in October-November. This fiscal expansion will be aimed at infrastructure, environment and inequality.

Quote

A global push to expand fiscal spending and run larger budget deficits, while global interest rates are set at zero or below, while the globalisation benefit on inflation is structurally disappearing due to trade tensions and general globalisation fatigue, sets up a scenario reminiscent of the 1970s: Big government, trade troubles (back then the US vs. Japan), supply constraints (the Opec crisis), changing market models (the shift away from the gold standard), inflation, the opening of the USChina relationship, and — who knows? — maybe even bad hair. This may seem an outrageous prediction, but the structural forces keeping inflation low have disappeared.

 

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The one thing I found not as impressive with Imperial was their lack of exposure to any of the developing country markets, like Africa. Or Asia like @Castlevania noted with bat possibly dominating local in Cambodia.

Just quickly googling now it looks like Imperial made a small investment last year but I can't see any mention of Bat in the space.  Not to say they can't hoover up later.  The owner of Philip Morris, Altria made a far far bigger play in acquiring a significant stake in one of the big cannabis company cronos for over a billion.  So obviously much higher valuation etc but guessing a billion isn't really a lot for these cash generating beasts.  (Need to look into more as it seems bit confusing with Philip Morris owner being different company to Philip Morris international - who I assume use the same brands but outside North America) 

Sensible thing maybe to buy them all or something but I'm not really wanting or can afford that large slice in tobacco.

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DurhamBorn
5 hours ago, Barnsey said:

You beat me to it @sancho panza xD

He's a fantastic follow and fellow!

Rewinding the clock way back to when this thread started and the discussion of reflationary strategy after the next recession/depression, Steen Jakobsen of Saxo Bank has released his Q3 report, some very interesting views in there, and I consider him one of the best out there (for some reason the financial analyst Scandinavians including those at Nordea Markets are really on point!)

https://www.home.saxo/-/media/documents/quarterly-outlook/q3-full-report-2019.pdf

 

Inflation is coming and people are slowly waking up to it.They dont understand that a debt deflation is simply part of the road map to higher prices in goods and services.Once rates start to crank higher it will be much harder to invest in capital assets and the owners of those will crank prices higher.Its really key though that companies have their debt structured right.You want to be able to pay it off mostly as it comes due,not re-issue into much higher rates.It will be the final theft of cash assets in the early stages (and the removal of housing equity during the process).

Where im working are a superb leading indicator of recession,and while everyone i work with has a fancy lease car and high spending lifestyle it seems they are in for a very nasty shock pretty soon i think.Instead of working on the line i would of been far more useful to the company giving them a road map of whats about to hit them.They will do very well in the next cycle but will have a very difficult 18 month/24 month period as the cycles turn.

I havent done much work lately,but looking at liquidity profiles and leads and lags on currency i use i think money might flow into the UK soon.China looks like it might be ground zero.

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20 hours ago, DurhamBorn said:

Fully expect the above,and bond proxies and reflation stocks should end up the big winners.The only difference is that i see governments diverting a lot of the printed money direct into the economy.

I see Boris, our next visionary(?) leader is mooting an extra 20,000 police, tangential spending into the economy perhaps... but also very handy insurance, helping to keep the police on government side for if/when things go bit chaotic in future.   

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DurhamBorn
7 hours ago, DoINeedOne said:

Its a 2 month old article but in theme to what @DurhamBorn is saying

Imperial to sell premium cigar business in shift to vaping

https://www.reuters.com/article/us-imperial-brands-divestiture/imperial-to-sell-premium-cigar-business-in-shift-to-vaping-idUSKCN1S61OK

Simon Langelier was also employed to the Imperial board in 17 and he is Chairman of the cannabis oil company PharmaCielo.They are medicinal Cannabis oil mostly,but its pretty obvious Imperial are exploring the space.I would expect a vape product might be they way they move,perhaps at low density they will sell as relaxing rather than stoned.

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19 hours ago, sancho panza said:

I'm a long term bull on BATS and Imp but not buying long term yet.

SP, interesting that you say that, do you think these stocks will go low(er) again, later in year perhaps? Not asking for a crystal ball, but I assume you have a technical reason why you think this may be the case, or is it just part of the general FTSE market blow-off expected to happen at some point?

I ask because I wanted to buy into these along with buying further into basket of other reflation stocks but unfortunately I haven't the funds at the moment. Hopefully I haven't completely missed the latest lows for these?   

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Abu Hashim

Hello DurhamBorn and others

Many thanks for the regular updates which are slowly manifesting.

You mentioned about money flowing in to the UK soon, would it be possible to share why that might be the case.  Would it not be that with brexit and deflation people would be investing in gold and silver, basically avoiding sterling?

Also much further along are we on your road map?  I know you don't like talking about dates but rather direction of travel, but the S and P is close to the 3000 mark and is predicted to hit 4000 before deflation sets in (according to one analyst).

I am based in the South East in Bucks in a major town not too far from Heathrow.  There has definitely been a slowdown here and cooling off on prices, but some properties are still shifting at a rapid pace, anything half decent under 400k is going quick.

Likewise there are a few houses in the 500-600 and above range which are also being snapped up. 

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DurhamBorn
34 minutes ago, Abu Hashim said:

Hello DurhamBorn and others

Many thanks for the regular updates which are slowly manifesting.

You mentioned about money flowing in to the UK soon, would it be possible to share why that might be the case.  Would it not be that with brexit and deflation people would be investing in gold and silver, basically avoiding sterling?

Also much further along are we on your road map?  I know you don't like talking about dates but rather direction of travel, but the S and P is close to the 3000 mark and is predicted to hit 4000 before deflation sets in (according to one analyst).

I am based in the South East in Bucks in a major town not too far from Heathrow.  There has definitely been a slowdown here and cooling off on prices, but some properties are still shifting at a rapid pace, anything half decent under 400k is going quick.

Likewise there are a few houses in the 500-600 and above range which are also being snapped up. 

I have a data set based on currency falls over time and its affect on the real economy.The one for the UK has now crossed an inflection point where i would expect investors to start to move back into sterling assets.I never take any notice of noise,Brexit or anything else.House prices are already turning down and that will continue for probably 8 years.I would expect those £400k houses to go down by 50%+ inflation adjusted by 2028.I dont really do any work on house prices though as i have no interest in them.Im mortgage free,il never move etc.Those buying now or the last few years will regret it though i expect as rates increase into the next cycle.

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34 minutes ago, DurhamBorn said:

I have a data set based on currency falls over time and its affect on the real economy.The one for the UK has now crossed an inflection point where i would expect investors to start to move back into sterling assets.I never take any notice of noise,Brexit or anything else.House prices are already turning down and that will continue for probably 8 years.I would expect those £400k houses to go down by 50%+ inflation adjusted by 2028.I dont really do any work on house prices though as i have no interest in them.Im mortgage free,il never move etc.Those buying now or the last few years will regret it though i expect as rates increase into the next cycle.

How about buying now with a 10y fix..? The inflation should eat a big chunk of the principal left at the end of the fixed term, correct?

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TheCountOfNowhere
51 minutes ago, DurhamBorn said:

I have a data set based on currency falls over time and its affect on the real economy.The one for the UK has now crossed an inflection point where i would expect investors to start to move back into sterling assets.I never take any notice of noise,Brexit or anything else.House prices are already turning down and that will continue for probably 8 years.I would expect those £400k houses to go down by 50%+ inflation adjusted by 2028.I dont really do any work on house prices though as i have no interest in them.Im mortgage free,il never move etc.Those buying now or the last few years will regret it though i expect as rates increase into the next cycle.

Hi dB. 

 

Im still following what you say and can't really argue against what your saying. 

 

Biggest commitment for most people is a house... People, believe it or not, accept it or not, follow what you say and want some guidance. 

 

Your message is not clear.. Inflation/deflation... Its a thread about deflation yet your preparing for inflation. 

 

Its impossible to set time scales but can you elucidate on how you see things playing out. 

 

For example, is it a stock market crash followed by inflation, is it a property crash + inflation. 

 

Is it just inflation and nominal House prices stay flat. 

 

Please give us a clearer idea of how you see the next couple of years panning out. 

 

I'd think many on here would agree with my comments. 

 

Its still the best thread on the Internet btw

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Bobthebuilder
1 hour ago, BearyBear said:

How about buying now with a 10y fix..? The inflation should eat a big chunk of the principal left at the end of the fixed term, correct?

If i had to buy a house now, that would be my plan.

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Actually had an offer rejected on a house last week. Went to best and final and came second. First time I’ve ever offered. Big ish deposit and a ten year fix was the plan. If it were just me then I’d wait (and I’m secretly hoping nothing else comes up for a while) but our lass can’t wait and to be honest I’d don’t want to wait any longer either. I figure sometimes you just gotta do what you gotta do and hope that forewarned is forearmed. Inflation eating away at the debt whilst inflation investments work to pay it off at or soon after the first fix ends.

🤷🏻‍♂️

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DurhamBorn
1 hour ago, TheCountOfNowhere said:

Hi dB. 

 

Im still following what you say and can't really argue against what your saying. 

 

Biggest commitment for most people is a house... People, believe it or not, accept it or not, follow what you say and want some guidance. 

 

Your message is not clear.. Inflation/deflation... Its a thread about deflation yet your preparing for inflation. 

 

Its impossible to set time scales but can you elucidate on how you see things playing out. 

 

For example, is it a stock market crash followed by inflation, is it a property crash + inflation. 

 

Is it just inflation and nominal House prices stay flat. 

+

Please give us a clearer idea of how you see the next couple of years panning out. 

 

I'd think many on here would agree with my comments. 

 

Its still the best thread on the Internet btw

We are going to get a debt deflation followed by price inflation.I have no idea when prices will go down or up.I dont do any work on house prices.100% of my work the last 6 months has been on the PM sector as thats where my own personal money has been invested and anyone following that advice on timing should be up between 30% and 50% from the buy late May call.I already have ladders set up in the stocks i want for the next cycle.Iv got around 60% invested already.I invest over a cycle.If i invest £500k my aim is to return around 9% a year compounding,or 3% above inflation.My road map says much higher inflation and so much higher interest rates by around 2028.That road map would say in that environment houses will fall around 50%,or maybe more inflation adjusted by 2028.

My cycle work says reflation stocks will hugely outperform "growth" sectors between now and 2028.How people allocate their capital is up to them.I dont do timing work on sectors i want outside of the PMs,i use ladder buys and start buying when i think we are close to the end of the cycle as i think we are now.Trying to time is a waste of time mostly,and over a cycle makes very little difference.Buying Imperial at £3.50 or £4.50 in 2000 made no difference by 2016 for instance.

If i was buying a house i would buy one where i live tomorrow and enjoy life.If i was down south i wouldnt touch one until at least 2022/3.

 

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Yellow_Reduced_Sticker
@DurhamBornThanks for posting the above.
 
Here's my layman's understanding to help other dosbods folks who may get confused along the way...i certainly did!xD
 
1) from now to anytime within the next few months to up to 2021 -> we get a stock market high then... COLLAPSE!
 
this is the time when us good folks of dosbods start our bottom buying/feeding frenzy and hoover up them CHEAP stocks!:D
 
during this time CB's make IR's go to zero in the panic -> ( Deflation period)
the above will last around 2 years...
 
2) then we move to Inflation -> IR's start to go up AND in to double figures by 2025/28
 
its during this period that DB expects house to drop by the biggest falls (i would agree with this - how many of today's house buyers can even get their head around 17% mortgage rates? well i REMEMBER them very well...i can remember 1990 to 93 like it was yesterday!)
 
@DurhamBorn Correct me if i'm wrong.
 
BTW, just came back from tesco's and BLANKED!:o
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