Credit deflation and the reflation cycle to come.

[sancho panza]

20 minutes ago, Harley said:

Sounds reasonable.  As said before, I want to add to my income portfolio, although I already hold BP and Shell but am not fully allocated due to the price run and no major pull back.  Income may suffer on some US ones if cable strengthens but so be it.  I value some currency diversification.

As mentioned, I'm waiting for a rainy day (literally!) to look at the FTSE 250 and even below, using the parameters I previously outlined.  I have a list of those with yields over 5%, although it's a bit old now.  Stockpedia are keen for me to take a sub for UK and US data for about £23 per month which might help but I'll probably use some free resources.  Happy to share what I find.

I'm not fretting about a 10-15% run up in cable,will hopefully be more..Some of these share movments over the next two years will dwarf that on both up n down side imo.I've taken teh decision to ignore forex on purchases

 

Shell hasn't presented many opportunities and we've genreally loaded up on BP instead which always seemed the more undervalued cousin.Exxon touching 5 year low by the way

13 minutes ago, Castlevania said:

The problem with banks is that no one knows what crap they have sat on their balance sheet and they’re hugely cyclical. I note that most of the banks reported an increase in bad debts in their half year earnings reports last week.

Thanks for the heads up CV,didn't know that

[DurhamBorn]

3 minutes ago, Castlevania said:

The problem with banks is that no one knows what crap they have sat on their balance sheet and they’re hugely cyclical. I note that most of the banks reported an increase in bad debts in their half year earnings reports last week.

^ This.If i had to buy a UK bank id probably pick Lloyds,but i wouldnt buy a bank.There is one side that they might see profits explode if rates start to move,but this is a debt deflation and we cant know how much bad debt they will end up with,and could be facing the good risks de-leveraging and the bad risks defaulting.I see the next cycle as favouring companies with high fixed assets,and/or companies that can consolidate their sector,or outlast the competition so gain from inflation later.

What i do know though is we might see a lot of companies go under,and there will be some real shocks.Its likely everyone might get caught out with a few in their portfolio.That is why its crucial to have a broad spread.This is already a very deep and cruel bear among UK stocks and it will likely carry on.There is a risk we could see PEs down in the 5s-8s area even after profits have been sliced and that means perhaps 80% down in many,if not most areas.There are huge risks out there,not just economic,but political,and even environmental.

Once we step (and nobody will ring the bell) from this cycle to the next though the invisible hand of inflation could do even more damage to cash and bonds.As Ray says in the article from last week people might be having to cash principal when retired etc and that will mean money running out.That distribution cycle will have all kinds of victims.The next cycle of people retiring will have a lot more concerns than the present.

[Harley]

1 minute ago, sancho panza said:

Exxon touching 5 year low by the way

Yep, in my sights!

[sancho panza]

2 minutes ago, Harley said:

Yep, in my sights!

Been working through XLE/big oils ,worth looking at Gazprom/Lukoil/Occidental/Statoil/Total/Repsol/ENI.All of which score the requisite rate to get through my initla sift.Even Chevron,which is about as near peak as you can get still gets through as it scores so well on balance sheet, income and FCF.

Feel like the PM miners are being put to bed for now given the the face ripper we've seen.Starting to focus my efforts on the wider dollar plays.Oil will follow gold soon enough.

[sancho panza]

11 minutes ago, Cattle Prod said:

Thanks @DurhamBorn for your update. Reassuring, as I had sold a % of GDXJ over the last weeks to buy inflation stocks and had to watch todays action with green eyes. You're right, emotion begone!

Right on cue, John Hussman comes out with an excellent piece on inflation, and what drives it. Check out the attached chart showing the real GDP/deficit spending gap opening up wide. You can clearly see how the next 8 to 10 years are going to fill out that yellow area, jist like the 60s and 70s. Double digit inflation? Easily.

We may not be at that inflection point yet, but we are close. Govts are gearing up for infrastructure deficit spending already. Sure, we probably have a recession/crash to get through first, but that will only cause govts to open the spigots and blow that hole wide open. Goodbye fixed mortgage, hello silver and oil :-)

https://www.hussmanfunds.com/comment/mc190805/

ref bit in bold,if they actually included some of the real costs of living eg buying a hosue/buying a pound of earnings in a pension,then inflation has been running hard for the last decade.At some point,it will even cross over into their mediocre attempts at measuring cost of living increases.I suspect when it does it will run hard led by increasing velocity as people's incomes dwindle by the week.

 

Thanks for the Hussman post,always a good read.

[Errol]

I'm not a trading person, so continue to hold and add to any and all gold/silver positions. The aim when I started buying on 2000 was to get to $10,000 a ounce minimum. I will still be buying at least up to $5000. Timing isn't important and it may well take another decade to get there. Or not. You just never know. I just continue buying through any price falls, as I've done since 2000.

The issue once $10,000 or thereabouts is reached will be what to do with the proceeds of any sale, or indeed which country to sell it in. I wouldn't trust any paper currency at that point as the world will doubtless be a highly unpleasant place by that stage.

We are due massive resets. The dollar, in particular, will not survive in the current form. The world monetary system will not survive in the current form. We will be very lucky to escape serious global warfare the way things are shaping up.

[sancho panza]

Market leaders of late getting battered.

[DurhamBorn]

29 minutes ago, sancho panza said:

Been working through XLE/big oils ,worth looking at Gazprom/Lukoil/Occidental/Statoil/Total/Repsol/ENI.All of which score the requisite rate to get through my initla sift.Even Chevron,which is about as near peak as you can get still gets through as it scores so well on balance sheet, income and FCF.

Feel like the PM miners are being put to bed for now given the the face ripper we've seen.Starting to focus my efforts on the wider dollar plays.Oil will follow gold soon enough.

Buffet put $10billion into Occidenal i think for their recent deal.Thanks for putting them up,added to the list.

[DurhamBorn]

20 minutes ago, Cattle Prod said:

Check that deal closely, DB. It was a very good, hard nosed, low risk deal for Buffet, and therefore not so good for Oxy. Too heavy on shale for me. Anadarko has excellent international assets, which Oxy is going to dump by all accounts. 

Thanks for the info,i did notice they were big in the Permian so thought they might be heavily exposed to shale.

[BearyBear]

 

[sancho panza]

36 minutes ago, Cattle Prod said:

Check that deal closely, DB. It was a very good, hard nosed, low risk deal for Buffet, and therefore not so good for Oxy. Too heavy on shale for me. Anadarko has excellent international assets, which Oxy is going to dump by all accounts. 

Just had a quick look and they're carrying debt to equity that you'd expect with a utility,poor historical profitability too,but I the chart looks very unusual in terms of volatility.

Thanks for the heads up ref Oxy and shale.

[sancho panza]

1 hour ago, Cattle Prod said:

That's a much better way of putting it. I guess one way to apply Hussmans work, knowing inflation has been running hard as you say is "It'll become so bleedin' obvious that psychology will change, the herd will shift (for which you need a cattle prod, of course ;-)), and inflation will feed on itself as people reject government spending, statistics, and general lies. Velocity, innit?"

I'm a staunch believer in a debt deflation being inbound but as I've said before,there's no reason that a credit deflation can't run alongside price inflation(using their measures),particualrly when monetary policy is being used to depress currency valuations

 

We had a good discussion in the early pages ref behavioural economics led by @Harley who has more formal education in economics than most of us.The neo classicals that predominate at the world CB's just really struggle to model consumer responses adequately.The discussion arose because I was making the point I made earlier ref QE/Zirp trying to drive consumption being underpinned by a couple of things 

1) velocity was a constant

2) it can be applied equally across socio demograhics

They printed to get savers spending more but in actual fact they drove consumption down in substantial chunks of those cohorts.My mum being a prime example-lives within her means,interest income drops,cuts spending.Others who were already borrowed to the hilt went ahead and got a car on PCP.

I never used to believe price inflation would run alongside credit deflation.They struck me as mutually exclusive.But then the last ten years happened and I reflected at length that I'd been wrong.

I think there could well come a time in the not too distant when people buy food early in the month if you know what I mean.And that pshychological shift will be the beginning of a new era.

CB's think they've banished inflation.They haven't ,they just haven't been measuring it properly.

[sancho panza]

1 hour ago, Errol said:

I'm not a trading person, so continue to hold and add to any and all gold/silver positions. The aim when I started buying on 2000 was to get to $10,000 a ounce minimum. I will still be buying at least up to $5000. Timing isn't important and it may well take another decade to get there. Or not. You just never know. I just continue buying through any price falls, as I've done since 2000.

The issue once $10,000 or thereabouts is reached will be what to do with the proceeds of any sale, or indeed which country to sell it in. I wouldn't trust any paper currency at that point as the world will doubtless be a highly unpleasant place by that stage.

We are due massive resets. The dollar, in particular, will not survive in the current form. The world monetary system will not survive in the current form. We will be very lucky to escape serious global warfare the way things are shaping up.

Good post Errol.It's going to be fascinating to watch this unfold and to see what sort of monetary system follows the great unwinding of the debt bubble

[DurhamBorn]

@sancho panza i think thats exactly right.CBs do think inflation has been banished.They simply cant see that low rates and QE have simply taken margins down to levels that only need a small trigger.Im actually shocked at the price increases going on out there yet not picked up in the numbers yet.People on fixed incomes are being destroyed and seeing their spending power slashed.£1600 council tax on a fixed income of £12k is getting into the crazy zone.As always those who worked and saved but are just above benefit levels suffer the most.

[sancho panza]

@Cattle Prod you called it

https://wolfstreet.com/2019/08/05/oil-price-correction-triggers-shale-meltdown/

Oil Price Correction Triggers Shale Meltdown

by Wolf Richter • Aug 5, 2019 • 8 Comments • Email to a friend

Second oil bust in five years – or phase 2 of the same oil bust – exacts its pound of flesh.

Shale-oil driller Halcon Resources today announced in a filing with the SECthat it would file for pre-packaged Chapter 11 bankruptcy in Houston on or before August 7, after about 67.3% of the holders of its unsecured notes agreed to take a haircut of $750 million. This was Halcon’s second bankruptcy filing in three years.

The original shareholders got wiped out ahead and during the first bankruptcy filing in 2016, felled by negative cash flows, high debts, and the oil bust. In the process, $1.8 billion of Halcon’s debt was eliminated. In return, these stiffed debt holders were given 96% of the newly restructured company’s shares. Now, in the second bankruptcy, those new shareholders will also be wiped out, and the current debt holders will become the shareholders in the newly restructured company.

A month ago, it was oilfield services giant Weatherford International that filed for pre-packaged Chapter 11 bankruptcy in Houston, after it had entered into a restructuring support agreement with holders of 62% of its unsecured notes. Back in 2014, before the oil bust hit, the company had 67,000 employees, now down to about 26,000.

The reorganization plan allows Weatherford to shed $5.8 billion of its $7.6 billion in long-term debt. Existing shareholders had already gotten wiped out due to the collapse of the share price. Now the stiffed debt holders will get 99% of the newly restructured company’s shares. And the company will get new credit and loans of $1.75 billion to be able to operate.

The amounts of money that have been drilled into the ground in the US oil patch are huge, but as long as new investors kept coming in to bail out old investors in these permanently cash-flow negative but capital-intensive operations, the equation worked. But it is getting increasingly difficult to find these new investors.

Last week was particularly ugly for investors in the US shale patch as the shares of a number of shale oil companies plunged, following terrible earnings and cash-flow reports. Here is Nick Cunningham on the shale meltdown:

By Nick Cunningham of Oilprice.com:

It was a rough week for the U.S. shale industry. A series of earnings reports came out in recent days, and while some drillers beat expectations, there were some huge misses as well.

Concho Resources, for instance, saw its share price tumble 22 percent when it disclosed several problems at once. Profits fell by 25 percent despite production increases. Concho conceded that it would slash spending and slow the pace of drilling in the second half of the year.

It also said that one of its projects where it tried to densely pack wells together, which it called “Dominator,” the results were not as good as they had hoped. The project had 23 wells, but production disappointed. The “30 and 60 day production rates were consistent with our other projects in that area, but the performance has declined,” Leach said. . the company will abandon the densely packed well strategy and move forward with wider spacing.

In the second quarter the company had 26 rigs in operation, but that has since fallen to 18. At the start of the year, the company had 33 active rigs.

“We made the decision to adjust our drilling and completion schedule in the second half of the year to slow down and not chase incremental production at the expense of capital discipline,” Concho’s CEO Tim Leach told analysts on an earnings call. He said the company’s aiming for “a free cash flow inflection in 2020.”

The company reported a net loss of $792 million for the first six months of 2019. As Liam Denning put it in Bloomberg Opinion: “It’s sobering to think that Concho, valued at more than $23 billion in the spring of 2018 and having since absorbed the $7.6 billion purchase of RSP Permian Inc., now sports a market cap of less than $16 billion.”

The reason these results are important is because they may not be one-off problems for individual companies, but are more likely indicative of the problems plaguing the whole sector. “There is little doubt this is a big event for the sector and a brake of this nature will create lasting impact,” Evercore analyst Stephen Richardson wrote in a note, referring to Concho’s poor results.

“How companies still, after all these years we have wailed and gnashed our teeth, manage to over-promise and under-deliver, remains an infuriating mystery,” Paul Sankey wrote in a note for Mizuho Securities USA LLC.

Whiting Petroleum had an even worse week. Its stock melted down on Thursday, falling by 38 percent after reporting a surprise quarterly loss that badly missed estimates. The company announced that it would cut its workforce by a third.

According to the Wall Street Journal and Wood Mackenzie, a basket of 7 shale drillers posted a combined $1.58 billion in negative cash flow in the first quarter, four times worse than the same period a year earlier.

While the results, in many cases, were bad, the declines in share prices were hugely amplified by the announcement of new tariffs on China, which caused a broad selloff not just in the energy sector, but for equities of all types. Here is a sampling of how the share prices of some oil companies fared on Thursday:

• Whiting Petroleum -38 percent
• Concho Resources -22 percent
• Pioneer Natural Resources -7.5 percent
• EOG Resources -5.5 percent
• Devon Energy -6.8 percent
• Continental Resources -7.8 percent
• Royal Dutch Shell -6.1 percent
• Chevron -2 percent
• SM Energy -9.0 percent

But the poor quarterly performances were true before President Trump took to twitter. Even with oil down and stocks perhaps looking cheap, “it’s hard to call it a contrarian opportunity right now,” Matt Maley, chief market strategist at Miller Tabak, told CNBC. “This group has really been dead money most of this year.”

Investors are clearly souring on the sector. As Bloomberg notes, speculative positioning from traders fell to the lowest level since March 2013, a sign of “investor apathy” towards crude oil and energy stocks.

While shale E&Ps languish, the oil majors are not slowing down. Exxon said that its oil production rose by 7 percent, driven by the Permian. In fact, its production from the Permian rose 90 percent in the second quarter from a year earlier. Earnings dropped by 21 percent, however, and the company cited lower prices and poor downstream margins.

But the majors aggressive bet on U.S. shale is a sign of the times. Small and medium drillers are getting hammered and seeing their access to capital close off, which is forcing budget cutbacks and otherwise leading to steep selloffs in their share prices.

The majors, on the other hand, are only in the early stages of a multi-year bet on shale. They can stomach losses on individual shale projects for years, scaling up while they earn profits elsewhere. . despite the widespread financial losses for the shale sector, it’s not clear that production is set to grind to a halt. By Nick Cunningham of Oilprice.com

Over 170 shale companies have declared bankruptcy since 2015, affecting $100 billion in debt, including 8 bankruptcies already this year. Read… A ‘’Gusher Of Red Ink’’ for US Shale

[sancho panza]

16 minutes ago, DurhamBorn said:

@sancho panza i think thats exactly right.CBs do think inflation has been banished.They simply cant see that low rates and QE have simply taken margins down to levels that only need a small trigger.Im actually shocked at the price increases going on out there yet not picked up in the numbers yet.People on fixed incomes are being destroyed and seeing their spending power slashed.£1600 council tax on a fixed income of £12k is getting into the crazy zone.As always those who worked and saved but are just above benefit levels suffer the most.

There's not a day goes by I'm not grateful for having a bit of leeway between me + Mrs P and the bread line.I've been lucky in life but some of my mates from school are working at Asda/driving,watching as their rents rack up and their wages decline in real terms.

People are surviving by either borrowing or jsut not buying certain things any more.

perchance,I happened upon an old council tax bill for a hosue I've piad for in Leicester for 20 years.I remember it being something like £300 in the 90's.Back then a call centre wage was circa £12k,maybe more.Not much more today tbh.

As you say ,the trigger will be small but once pulled,it'll take some rate hikes to nip it.

[Harley]

36 minutes ago, sancho panza said:

I never used to believe price inflation would run alongside credit deflation.They struck me as mutually exclusive.But then the last ten years happened and I reflected at length that I'd been wrong.

That's one of those laser comments that jumps out at you.  Succinct but deeper than most would appreciate.  Makes me sad the morass of those who should know better are so out if it.  Things have just run away from them so far.  They sold their souls and are now lost.  Those who have any mojo left waste it trying to terraform the mess they have created into a compliant version of their make believe world.  "Unconventional" and "new normal" will haunt them.

[Ginn]

Where will physical gold prices go from here? Do the sages on here have a guide for me please.?

[Bobthebuilder]

I have just spent the last half hour reading through the last few pages of this thread. I do feel its the most important thing ive read in the last 10 years.

Everything rings true.

My grammer is awful and i cant put it into words very well, but what im seeing among people around me (friends, family etc) ticks every box you lot are talking about.

1. Those in debt are running ever faster into the black hole.

2. A few of the more clued up are starting to notice food and utilities bills increasing.

3. Many small builders i know are having jobs cut back (customers just cant get the credit to do all the works they wished for).

I am lucky, i have no debt and i have a good cushion (for now).

I wish i could put it better, i feel something has change recently. Interesting times ahead.

[MrXxxx]

Q for the Oldies..reading book that says that banks showed interest in offering mortgages in 1980s, these originally being the preserve of the building societies...is this so?I have always assumed that banks have always offered them.

[DurhamBorn]

7 minutes ago, Bobthebuilder said:

I have just spent the last half hour reading through the last few pages of this thread. I do feel its the most important thing ive read in the last 10 years.

Everything rings true.

My grammer is awful and i cant put it into words very well, but what im seeing among people around me (friends, family etc) ticks every box you lot are talking about.

1. Those in debt are running ever faster into the black hole.

2. A few of the more clued up are starting to notice food and utilities bills increasing.

3. Many small builders i know are having jobs cut back (customers just cant get the credit to do all the works they wished for).

I am lucky, i have no debt and i have a good cushion (for now).

I wish i could put it better, i feel something has change recently. Interesting times ahead.

The Fed started to tighten Bob 18 months ago,thats what happened.The size of the debt being serviced by the amount of liquidity in the economy decides how much is left for other things.Susan doesnt understand why she has less money,but she knows it.The key question now is what do governments do?.Do they tax and spend or do they print and spend,or both?.All roads point to a debt deflation in the private sector (not just the struggling defaulters,but strong companies de-leveraging after industry consolidation) and government having to take up the slack.

In simple terms the backbone of the economy cant afford the commitments made by governments and debtors.So its inflate or collapse,the middle ground roads have almost slipped out of view.

As we have always said on this thread,little or no debt and cash flow will be crucial,for individuals and companies.

[ashestoashes]

9 hours ago, DurhamBorn said:

@sancho panza i think thats exactly right.CBs do think inflation has been banished.They simply cant see that low rates and QE have simply taken margins down to levels that only need a small trigger.Im actually shocked at the price increases going on out there yet not picked up in the numbers yet.People on fixed incomes are being destroyed and seeing their spending power slashed.£1600 council tax on a fixed income of £12k is getting into the crazy zone.As always those who worked and saved but are just above benefit levels suffer the most.

I think inflation will blow the system up so that's why they're talking about digital currency and negative rates

[Gin]

Where do physical Gold prices go from here, Sages.?

[Democorruptcy]

15 hours ago, DurhamBorn said:

Ok ,we hit the range my road map said on gold today $1460-$1528.Its been an incredible ride really.We nailed it to the mast and got the time bang on late May,after a few false dawns.

I dont want to put anyone off the sector,and i fully understand anyone staying fully invested.However,i follow my road maps,and the PMs are only part of the road ahead.I wasnt sure how to deal with things (3 years old) hitting first target and how to proceed because too much sentiment and emotion has started to creep in to my thoughts.I see the news,Trump,the noise etc,but i have to stick to what my road map said and says.So iv decided to sell over half my PM stocks today after selling some the last couple of weeks.Iv sold the likes of Eldorado 80%.That brute hit me for 50% red at one point but ended up a fantastic green.Iv sold most of the others ranging from 50% sold to 80% sold.A few others that are in CAD will be sold tomorrow.

My indicators are saying the top end of my road map is likely,and that we could be in a new secular bull BUT a pull back from the top of the range (circa $1528) is still very possible.Iv decided not to sell the holdings iv kept.Those will be kept now through the full cycle (2027ish),and if we do get a pullback i would re-deploy more capital to the sector.That has removed the emotion from things now.

I really hope you have all made some money on the PMs.I know some didnt ladder and got in a bit early,but hopefully nice greens now.Most of the rubber band stocks have done very very well.

From a macro point the UK is looking much stronger than the Euro area,and even maybe the US.My $/£ cross market work is flashing to buy sterling.I use a few indicators i magnify for contrarian reasons and its these that are showing strength.They often call a bit early,but that never bothers me,always destination.

I have a feeling select mid range domestic stocks might start to turn soon if the sterling buy signal is correct.I have removed the ladders on several and bought into weakness today,and have put a ladder another 7% below on a lot of them.In affect iv re-deployed some of the PM gains into UK mid cap cyclicals/reflation.

As ever,its not a science,but Trump is forcing Chinas hand and all nations will soon start to reflate.Where the UK is in that cycle due to where sterling was the last 18 months should see us outperform.

Your late May call was superb timing.

Re Sterling surely once Brexit is decided one way or another, it's got to go back up?

Which mid range domestic stocks are you looking at?

[dgul]

2 hours ago, MrXxxx said:

Q for the Oldies..reading book that says that banks showed interest in offering mortgages in 1980s, these originally being the preserve of the building societies...is this so?I have always assumed that banks have always offered them.

Pre the 80's banks didn't really offer mortgages.  Pre '71 this was to do with the way money worked (Bretton Woods, etc), Pre '80 this was to do with 'the corset'.  Essentially, both limited the banks ability to lend to households (by different methods).  Things changed properly in 1987 with a new banking act (and on the other side in 1986 with the Building Societies Act, which allowed them to perform like banks).

Pre mid-80's mortgages were hard to come by -- you had to show an ongoing relationship with money, which actually meant 'good job, earning and saving'.  You couldn't get a mortgage with a bank because they were limited in offering credit to households.  Building societies were different, as they were 'full reserve' (ie, only lent money that they had on their books).  Once you had a mortgage with a BS, that was it -- you couldn't really move from them without a jolly good reason. 

When I was about 10 my parents opened up a building society account (local BS, of course) specifically so that when I came of age I'd have 10+ years of history as a customer with them, which would help in getting a mortgage.  This wasn't them being silly or overcautious -- it really was a good idea that would have been important in my life if it wasn't for deregulation of banking later in my childhood.

The deregulation of banking is an important part of why house prices have got out of control (but not the only part).