Credit deflation and the reflation cycle to come.

[Majorpain]

14 hours ago, Talking Monkey said:

Interesting stuff Major have you any more on this

It was only a 5 minute talk so there wasn't any particular detail, and i'm afraid i'm not important enough to be told such things anyway!

[sancho panza]

Don't know if it's been mentioned here but new high in CAD for the yellow stuff

[sancho panza]

Silver???

[sancho panza]

Sahun Richards with an interesting piece on 2% inflation targetting.Worth noting he highlights that due to differences in methodolgy 2% in the US(which includes a measure for imputed rents) isn';t the same as 2% in the EU

His analysis on GDP/inflation stats is some of the best on the web imho and puts the MSM to shame.

https://notayesmanseconomics.wordpress.com/2019/07/26/the-times-they-are-a-changing-for-inflation-targeting/

The Times They Are A-Changing For Inflation Targeting

Posted on July 26, 2019

The concept of inflation targeting had its roots in the abandonment of the gold standard in 1971. The world of fiat money requires some sort of anchor and we have seen various ways of providing this such as fixed exchange-rates and controlling the money supply. None of those were entirely satisfactory and some were complete failures so in the 1990’s we saw the concept of inflation targeting begin and a combination of Canada and New Zealand saw us end up with one of 2 per cent per annum. It is important to note that 2% per annum was chosen because it seemed right not that there was any particular logical thought process. Also it is important to note that the definition of inflation varies much more than you might think and in some cases quite widely. So for example 2% per annum in the United States is very different to 2% per annum in the Euro area as the former has owner-occupied housing costs ( albeit via the Imputed Rent route) and the latter does not.

Price Stability

Central bankers have tried to push the line that 2% per annum is price stability. For example Mario Draghi of the ECB told us this only yesterday at the ECB press conference.

Our mandate is price stability

This is quite an Orwellian style abuse of language and let me illustrate this with Mario’s own words.

On the inflation side, we basically saw inflation which is below our aim and we see projected inflation that says that convergence is further out in time, though as I’ve said on another occasion, the informational content of market-based inflation expectations has to be assessed, taking into account certain technical conditions of these markets. However also in the SPF, the Survey of Professional Forecasters, inflation expectations have gone down so that’s what led the Governing Council to these proposals, to the various proposals.

As you can see “inflation which is below our aim” would give Euro area workers and consumers more price stability but Mario and the ECB do not want it. This is why he was hinting so strongly at policy action in September although there is a catch in that. After all he only stopped QE in December and we still have negative interest-rates in the Euro area yet inflation is doing this.

Euro area annual HICP inflation increased to 1.3% in June 2019, from 1.2 % in May…….Looking through the recent volatility due to temporary factors, measures of underlying inflation remain generally muted. Indicators of inflation expectations have declined.

So here are a couple of thoughts for you. We are being told price stability is the objective when they are doing the opposite and they are using methods which in spite of extraordinary sums ( 2.6 trillion Euros of QE) have not had much impact. Care is needed with the latter conclusion because we know so many asset prices have surged but the Euro area in particular has gone to a lot of effort to keep them out of the consumer inflation numbers. They spent the last 2/3 years promising to put house prices in the numbers and then in December did a handbrake turn, which was so transparent as being what they planned all along. Or if you prefer another version of kicking that poor battered can into the future.

As an aside I have regularly warned about these over time and am pleased that the ECB is finally admitting this.

the informational content of market-based inflation expectations has to be assessed,

It is somewhere between slim and none which is very different to the impression the ECB has previously created.

The Times They Are A-Changing

The ECB interest-rate announcement told us this and the emphasis is mine.

Accordingly, if the medium-term inflation outlook continues to fall short of its aim, the Governing Council is determined to act, in line with its commitment to symmetry in the inflation aim.

That was brand new off the blocks so to speak and as you can imagine led to speculation about what the ECB planned next. For example, as it has been below its 2% per annum target for some time would it plan some “catch-up” in the manner suggested in the past by some members of the US Federal Reserve? So a type of average inflation targeting.

Yet a bit more than 45 minutes later ( Mario was late) there has been some ch-ch-changes.

the continued sustained convergence of inflation to levels that are below, but close to, 2% over the medium term.

As one cannot be symmetrically below there is a problem here. Unusually for Mario Draghi he got into quite a mess explaining this.

On the other point: no, there isn’t any change really.

Yet he then confessed there was one.

In fact, it’s true it’s not there in the first page; it’s in the fourth page, it’s just what it is.

The idea that the change just appeared there is laughable and we then found out more about the state of play.

But we had a discussion about symmetry and there is a sense in the Governing Council that there should be a reflection on the objective: namely is it is close to but below 2%, or, should we move to another objective?

There you have it as they had for a while created the impression they had changed it. For clarity the ECB target is unusual in that it sets it for itself. The more common procedure is that the relevant government sets it for the central bank in the way that the Chancellor of the Exchequer does for the Bank of England. The present ECB target has been in place since 2003 and perhaps the advent of Christine Lagarde has Mario wanting to restrict how much damage she can do. After all it was apparent that the gushing praise she received, somehow in an inexplicable oversight omitted her competence for the role,

Whatever the rationale Mario was somewhat discombobulated.

 In the meantime, however, the main thing in this introductory statement is that the Governing Council – I think I have said this many times, but now it’s in the introductory statement – reaffirmed its commitment to symmetry around the inflation aim, which in a sense is 1.9 – it’s close to, but below, 2%.

So he was trying somewhat unconvincingly to sing along with Maxine Nightingale.

Ooh, and it’s alright and it’s coming along
We gotta get right back to where we started from

 

Comment

So we see that the ECB is joining an increasingly global trend to change its inflation target and typically for Ivory Tower thinkers they are missing the main point. After all the advent of the credit crunch which is still causing economic after-effects posed serious questions for the whole concept. Yet the main driver we are seeing is heading towards even easier monetary policy as opposed to a revision of the concepts involved. The same monetary policy that has failed to create much consumer inflation at all and may even have weakened it, although this comes with the caveat that much of this comes from the way inflation is measured.

The establishment remains determined to ram this home. Let me hand you over to the Wall Street Journal.

A higher Federal Reserve inflation target ahead of the 2007-09 recession likely would have given the central bank more room to lower interest rates and resulted in a “substantially” faster economic recovery, a group of economists has found.

If the Fed had set its inflation target above its current 2% level, that would have led to higher inflation over time, which would have caused interest rates to climb higher than they did before the recession, according to a paper by economists Janice Eberly, James Stock and Jonathan Wright.

Missing is anybody pointing out that the higher inflation would have made us all poorer. No doubt in the Ivory Tower scenario the wages fairy would have rescued us but we know in the real world that he or she is always hard and sometimes impossible to find these days.

That is before we get to the point I started with which never quite seems to be received in the thin air at the top of the Ivory Towers that the inflation measures used are at best an approximation and at worst simply wrong.

[Clueless Imbecile]

Some thoughts I'm wrestling with at the moment...

1) If we get the deflationary bust, then I guess that means that stockmarkets would crash quite severely (e.g. as a pure guess, maybe 50 to 60 percent?). However, I think someone said that the markets would take decades to recover (as opposed to the usual, say, 4 years). What is the rationale behind that idea that the stockmarkets would take far longer to recover this time?

2) I'm thinking that I should have some government bonds in my portfolio, for the sake of diversification, but they just seem poor value at the moment. If interest rates are likely to fall (much talk of negative yields recently) then am I better off holding cash and waiting until yields rise? One thing I did think is that I am safer buying gov bonds direct (e.g. UK gilts & US treasuries or TIPS) rather than investing in a bond fund (because a fund could be forced to sell bonds when the price is unfavourable if a lot of unit holders decided they wanted out of the fund, whereas with individual bonds I could hold until they mature if necessary and therefore not be forced to sell at less than the maturity value).

3) Do we have a list of what DurhamBorn calls "reflation stocks"? I tend to think I should have between 10 and 20 different stocks for the sake of diversification and not putting to much of my pot into any one company. Currently I have the following stocks:

BT
Vodafone
Centrica
SSE
Stagecoach
Royal Mail

I think DurhamBorn mentioned Imperial Brands. I'm currently thinking of buying some of those shares but not sure whether to wait in the hope of the share price falling or dip my toe in now. Ideally I would find some good reflation stocks that are in different industry sectors to the ones I've mentioned above. How about:

Pharmaceuticals

Are there any more reflation stocks?

As I understand it, the criteria that defines what is a reflaton stock is one that meets all of the following:

a) Well established company with a track record of paying good dividends (e.g. yield of 5 percent or higher).
b) Industry sector where there is a large capital investment needed in order to set up in business (e.g. in infrastructure, machinery) thus making it expensive for competitors to start up.
c) The company's debt must either be quite low (such that they could easily pay it off) or be fixed at a low interest rate so that they are not at the mercy of rising rates in the next cycle.
d) Price to earnings is low (e.g. less than 15).

Is there anything I've missed?

Thanks to spunko for this fantastic forum, thanks to DurhamBorn for this amazing thread, and thanks to all who've posted on here. This thread is usually the first thing I look at when I surf the web each day.

Good luck guys, and DYOR!

Cheers,
Clueless Imbecile

Disclaimer: I am not an expert. Anything I post here is just my opinions, which may not be factually correct. My posts are intended purely for the purpose of debate and are not to be taken as advice. If you act on any of the above then you do so entirely at your own risk. I do not accept any liability.

 

[harp]

1 hour ago, Clueless Imbecile said:

Some thoughts I'm wrestling with at the moment...

1) If we get the deflationary bust, then I guess that means that stockmarkets would crash quite severely (e.g. as a pure guess, maybe 50 to 60 percent?). However, I think someone said that the markets would take decades to recover (as opposed to the usual, say, 4 years). What is the rationale behind that idea that the stockmarkets would take far longer to recover this time?

2) I'm thinking that I should have some government bonds in my portfolio, for the sake of diversification, but they just seem poor value at the moment. If interest rates are likely to fall (much talk of negative yields recently) then am I better off holding cash and waiting until yields rise? One thing I did think is that I am safer buying gov bonds direct (e.g. UK gilts & US treasuries or TIPS) rather than investing in a bond fund (because a fund could be forced to sell bonds when the price is unfavourable if a lot of unit holders decided they wanted out of the fund, whereas with individual bonds I could hold until they mature if necessary and therefore not be forced to sell at less than the maturity value).

3) Do we have a list of what DurhamBorn calls "reflation stocks"? I tend to think I should have between 10 and 20 different stocks for the sake of diversification and not putting to much of my pot into any one company. Currently I have the following stocks:

BT
Vodafone
Centrica
SSE
Stagecoach
Royal Mail

I think DurhamBorn mentioned Imperial Brands. I'm currently thinking of buying some of those shares but not sure whether to wait in the hope of the share price falling or dip my toe in now. Ideally I would find some good reflation stocks that are in different industry sectors to the ones I've mentioned above. How about:

Pharmaceuticals

Are there any more reflation stocks?

As I understand it, the criteria that defines what is a reflaton stock is one that meets all of the following:

a) Well established company with a track record of paying good dividends (e.g. yield of 5 percent or higher).
b) Industry sector where there is a large capital investment needed in order to set up in business (e.g. in infrastructure, machinery) thus making it expensive for competitors to start up.
c) The company's debt must either be quite low (such that they could easily pay it off) or be fixed at a low interest rate so that they are not at the mercy of rising rates in the next cycle.
d) Price to earnings is low (e.g. less than 15).

Is there anything I've missed?

Thanks to spunko for this fantastic forum, thanks to DurhamBorn for this amazing thread, and thanks to all who've posted on here. This thread is usually the first thing I look at when I surf the web each day.

Good luck guys, and DYOR!

Cheers,
Clueless Imbecile

Disclaimer: I am not an expert. Anything I post here is just my opinions, which may not be factually correct. My posts are intended purely for the purpose of debate and are not to be taken as advice. If you act on any of the above then you do so entirely at your own risk. I do not accept any liability.

 

 

Here's the list of reflation stocks (and weighting) DB posted up a while ago, although Imperial Brands and British American Tobacco are not reflation stocks just cheap at current prices. Bearing in mind some are up a fair bit already(Go Ahead), so who knows how far these ones will drop in a crash. They seem to have been hamered down a fair bit over the years (VOD, CNA etc). But as DB says just ladder in as they fall and you might stab the bottom somewhere.

I have all these on the list, although as a newbie I've bought and sold some of them 3 times in the last 18months, not always has it gone right, BUT on occasion it has so overall I'm break even on those stocks, even as many have dropped a fair bit since. The saving grace has been miners which I seemed to have timed very well (all luck) so all in so far I'm up. Maybe in for a correction this week in PM's which might be just consolidation? Depends on the FED in a few days. Could also be a buying opportuntiy if we get a dip?

Boris Johnson's speech on Saturday in Manchester about the Northern Powerhouse trainlines and local transport (bus) in Manchester is a good sign for Stagecoach/Go-Ahead so might pick up some more on Monday.
 

1	IMPERIAL BRANDS	10.6%
2	VODAFONE GROUP	9.9%
3	BRITISH AMERICAN TOBACCO	7.9%
4	CENTRICA	7.4%
5	CARD FACTORY	7.2%
6	NEWRIVER REIT	7.0%
7	ROYAL MAIL	6.7%
8	STANDARD LIFE ABERDEEN	6.6%
9	GO-AHEAD GROUP	6.5%
10	STAGECOACH GROUP	5.6%
11	BT GROUP	5.6%
12	PLAYTECH	5.1%
13	SSE	4.7%
14	TUI AG	4.3%
15	Cash	3.7%
16	WILLIAM HILL	1.3%

 

 

 

[Castlevania]

The gambling companies aren’t reflation stocks. They just generate a load of cash and people will always gamble. In addition I’ve never seen a poor bookmaker.

That list with the weighting’s is what DB put together for his Dad as an income portfolio (who I assume is in his 60’s or 70’s) so will be weighted towards someone of that age (and has no PM exposure).

[Ellandback]

Regarding British American Tobacco, I use Snus and noticed that tobacconists have just started to stock the BAT offering called 'Lyft', it's been impossible to buy Snus over the counter in the UK since the old days of the Skoal Bandit (then came the senseless EU ban). The Snus market is growing rapidly and would be another canny manoeuvre along with their Vape and Cannabis investments. 

As an aside, I found this presentation by Jeff Clark regarding PMs informative to me as a newbie, I've no idea of his credentials - apologies if already posted.

Cheers

 

[DurhamBorn]

18 minutes ago, Castlevania said:

The gambling companies aren’t reflation stocks. They just generate a load of cash and people will always gamble. In addition I’ve never seen a poor bookmaker.

That list with the weighting’s is what DB put together for his Dad as an income portfolio (who I assume is in his 60’s or 70’s) so will be weighted towards someone of that age (and has no PM exposure).

Yes thats a portfolio i put together (he is 78),its actually doing really well as a whole so far.The gambling companies interest me because i see it as a sector that will do what tobacco did.Consolidate down to a few players who produce buckets of free cash for shareholders.The tobacco companies were added simply on valuation and the fact i think they will control the cannabis market at some point.His remit is to provide an income above inflation and capital values to hold over the medium term.I also sold Tui out of it for a 13% gain,my dad said he didnt want it as they were German.

Interesting Vod shooting up last week on the news they were going to float the towers business.Shows the sort of value hidden away in these high infrastructure cost companies.

[Castlevania]

49 minutes ago, DurhamBorn said:

Yes thats a portfolio i put together (he is 78),its actually doing really well as a whole so far.The gambling companies interest me because i see it as a sector that will do what tobacco did.Consolidate down to a few players who produce buckets of free cash for shareholders.The tobacco companies were added simply on valuation and the fact i think they will control the cannabis market at some point.His remit is to provide an income above inflation and capital values to hold over the medium term.I also sold Tui out of it for a 13% gain,my dad said he didnt want it as they were German.

Interesting Vod shooting up last week on the news they were going to float the towers business.Shows the sort of value hidden away in these high infrastructure cost companies.

I did find Tui an odd choice. I’m glad your Dad agrees with me

[Lightscribe]

1 hour ago, Castlevania said:

I did find Tui an odd choice. I’m glad your Dad agrees with me

Yup, not an area I have any interest to invest in, as well as card factory, but I’m sure there’s value to be found. Obviously it’s a more shorter term, so is more at odds than the rest of us looking towards a lifetime portfolio.

I’m sure DB’s dad is happy with his returns, I’ve tried to sort my dad’s finances but he’s a stick in the mud (74 with a brain tumour so forgets a lot) and only wants to stay with his 0.1% savings account with HSBC he’s had for 40 years.

[Dogtania]

Just tried to set up some regular investing with my HL sipp into some shares but even though a fair bit of my total portfolio in there is in cash I can only do regular (ie low dealing cost) through funding the account externally from direct debit.

On the other hand aj bell in my Lisa I was able to take advantage of the regular investment with accured cash. 

I've given my feedback to HL regarding this.  I don't have a lot of experience with aj bell but the two times I've contacted them they have been able to answer my query straight away (unlike HL who tend to have to transfer you etc). The mobile aj bell seems to be very well thought out too.

Anyway just having this mini rant here as I know the general consensus is HL are better for hand holding beginners etc.  A friend recently was looking into a sipp and was aware of both companies as options but had heard the same from other people too.  Albeit very limited experience but so far I prefer a j bell.  Very annoying about the cash balance not being able to be used for regular investing.

[Majorpain]

http://www.constructionenquirer.com/2019/07/28/insurance-crisis-spreads-across-construction/

Fascinating collapse in slo mo, the insurers have detected something they really don't like and are exiting the PI market very quickly.

[DurhamBorn]

9 hours ago, Castlevania said:

I did find Tui an odd choice. I’m glad your Dad agrees with me

I bought them for a bounce when Thomas Cook took the whack,main competitor under such pressure,in those situations they all go down and then the market thinks hang on main competitor under pressure.Worked perfect for a nice bounce.I do actually like  sector in some ways,Tui owns a lot of assets and thats the key.However its probably too early in the cycle to buy them.They are the sort of cycle play that will 200%+ ,but you really need to get them when its carnage.

https://www.bbc.co.uk/news/newsbeat-49073222

BAT and Imperial licking their lips.I reckon cannabis will be delivered through vapes and only big tobacco will be able to fund the needed regulation/science etc.Id expect Imperial to make a move in Canada,even if very small scale.

The reason Card Factory is in there is free cash generation.Pretty much nobody else has a chance of getting near them.A few have tried and all closed.Iv also got a good friend who works for Aldi high up,and he told me where they had a trial with Card Factory cards,footfall went up in the Aldi store and they were going to roll it out.They also have a massive market to go at when they roll out click and collect this year.All my daughters chav mates get balloons etc from there for the kids birthdays etc and click and collect should ensure a bigger basket size.Always a risk the other discounters up their game but at the moment their ranges are shit.

As always small part of a portfolio,

[Harley]

In the middle of my (late!) weekly review and this just popped up:

It's the CRB (commodity Index) monthly chart.

Such a strong move in the MACD but a relatively limited follow through in price.  Not quite a divergence (signalling an eventual resolution one way or the other) but close enough to watch.  The chart has achieved a higher high and may be about to do it again, which may signal a change in the downtrend.

One to watch, or more specifically its constituents. 

[Loki]

1 hour ago, Majorpain said:

http://www.constructionenquirer.com/2019/07/28/insurance-crisis-spreads-across-construction/

Fascinating collapse in slo mo, the insurers have detected something they really don't like and are exiting the PI market very quickly.

Good find Major, another issue for firms trying to secure contracts

[Castlevania]

Bit of a coincidence. Two articles on how the next cycle could be inflationary within two days of each other. Something’s up.

https://moneyweek.com/511575/three-investments-to-own-in-our-debt-soaked-world/?utm_campaign=money-morning-newsletter&utm_medium=email&utm_source=newsletter

https://www.telegraph.co.uk/business/2019/07/29/inflationhits-canbe-fast-anddevastating/

[Loki]

GBPUSD Getting a kicking

[Noallegiance]

Well whaddayaknow:

...chief global strategist at Morgan Stanley Investment Management, who writes on op-ed column in the New York Times today.

Interest rates have been low since 2008 he says, meaning the US markets are awash with "easy money".

Cutting rates would just drive up the prices of stocks, bonds and property and encourage risky borrowing, he argues.

More easy money could set the stage for a collapse in the financial markets. And that could be followed by an economic downturn and falling prices — much as in Japan in the 1990s. The more expensive these financial assets become, the more precarious the situation, and the more difficult it will be to defuse without setting off a downturn," 

 

On't Beeb, no less.

[leonardratso]

7 minutes ago, Noallegiance said:

Well whaddayaknow:

...chief global strategist at Morgan Stanley Investment Management, who writes on op-ed column in the New York Times today.

Interest rates have been low since 2008 he says, meaning the US markets are awash with "easy money".

Cutting rates would just drive up the prices of stocks, bonds and property and encourage risky borrowing, he argues.

More easy money could set the stage for a collapse in the financial markets. And that could be followed by an economic downturn and falling prices — much as in Japan in the 1990s. The more expensive these financial assets become, the more precarious the situation, and the more difficult it will be to defuse without setting off a downturn," 

 

On't Beeb, no less.

this is obviously rubbish. There is no empirical evidence whatsoever that this has been the case for the last decade.

I theorize that the morgan stanely chief global strategist is a complete arsehole and not an astute economic mastermind like what drahgi and the rest of the ecb not to mention those great financial wizards at the jcb are.

oops forgot to mention gordon brown (or brun as DB and XYY would say it) - the bloke that single handedly saved the world but was then driven to obscurity by a bigotted woman (and a totally pissed off electorate).

 

[CVG]

21 minutes ago, Loki said:

GBPUSD Getting a kicking

Apparently due to No Deal preparations being escalated. It's given the FTSE 100 a 2% boost today.

[Harley]

11 minutes ago, leonardratso said:

.......this is obviously rubbish. There is no empirical evidence whatsoever that this has been the case for the last decade......

 

Who would have thought if you increase the supply of something then its value relative to other things goes down.  A Nobel prize there waiting for a think-out-the-box economist ready to posit a theory.  Oh, I don't know, something like "The Law of Supply and Demand"?  Has to be a law to win the Nobel. 

[harp]

4 hours ago, CVG said:

Apparently due to No Deal preparations being escalated. It's given the FTSE 100 a 2% boost today.

Ah! So is this why my PM's in BullionVault are going crazy! Platinum has been great as of end of June (thanks DB).

[CVG]

3 minutes ago, harp said:

Ah! So is this why my PM's in BullionVault are going crazy! Platinum has been great as of end of June (thanks DB).

Yep, all due to exchange rates today. Prices in GBP through the roof, but flat in terms of USD.

[sancho panza]

via soberlook