Credit deflation and the reflation cycle to come.

[leonardratso]

for tax purposes, or rather so you dont get taxed twice on any cap gains, by the US and the UK. Look it up, theres more to it than im puting here, but thats  the gist is it not guys?

[DoINeedOne]

Like others have said no issues with a W8BEN I actually have to fill these out with my work even as sometimes I work with American companies it's basically to just say you have nothing in the USA and are not a resident so are not subject to there taxes

 

[leonardratso]

SA miners;

https://uk.reuters.com/article/uk-safrica-mining/south-africa-proposes-30-percent-black-ownership-for-mining-firms-within-five-years-idUKKBN1JB2LY

 

[Castlevania]

4 minutes ago, leonardratso said:

SA miners;

https://uk.reuters.com/article/uk-safrica-mining/south-africa-proposes-30-percent-black-ownership-for-mining-firms-within-five-years-idUKKBN1JB2LY

 

Yep. And it’s one of the few EM currencies that’s been doing well. Unfortunately most precious metal mines are in crap parts of the world. Political risk is a big issue. Diversify.

[sancho panza]

Wolf Richter,possibly stating one of the most obvious things that many -including me,don't appreciate

The subject is Canadian sub prime but the theme is universal in a debt deflation

https://wolfstreet.com/2018/06/15/canada-has-a-subprime-real-estate-problem-you-just-dont-know-it/

'Subprime loans are any loans that are below prime, as in the typical lending criteria isn’t met. The part that’s poorly understood is a borrower, a loan, or any combination of those can be subprime. A borrower with excellent credit, might want a subprime loan. This happens more often than you think, and is usually because a bank won’t lend as much money as needed. No one thinks of a family in a nice neighborhood with a private loan to buy their fourth or fifth condo as subprime, but they are.

Don’t worry, it’s not just average people that don’t understand this. There’s still a lot of confusion about the issue in the finance community around the US subprime crisis. Most people knew subprime lenders blew up, and naturally blamed poor people and immigrants with low credit scores, as is the way. However, new research shows that the sudden rise in foreclosures during this period were due almost exclusively to investors with good credit. Good credit, but using subprime lenders.

Subprime borrowers defaulted at the same rate they always did. Investors using subprime lenders jumped by a “factor of 10.” When prime borrowers couldn’t get the loans they wanted, they went to the lenders that would. So yes, it was a subprime lending problem – but not due to poor people. These were mostly middle class investors. Whole textbooks will be written on the topic, but what you need to remember today is not all subprime loans are to people with bad credit. However, all have insufficient credit for the size of loan they’re looking to borrow.

'

[sancho panza]

More evidence if it were needed that Powell is something of a wildcard and that by implication Trump is-economically speaking.

https://wolfstreet.com/2018/06/13/this-fed-grows-relentlessly-more-hawkish/

'By unanimous vote, the FOMC raised its target for the federal funds rate by a quarter percentage point to a range between 1.75% and 2.0%. This was expected; what’s intriguing is the unanimous vote, unlike prior rate hikes.

Four rate hikes in 2018 (two more this year) are now gradually being baked in, according to the median expectation of the 15 members of the FOMC, per the infamous “dot plot” with which the Fed tries to communicate potential rate moves: One member expects 5 rate hikes in 2018; seven members expect 4 hikes; five members expect 3 hikes, and two members expect no more hikes. At the March meeting, four rate hikes had appeared in the dot plot as a real but more distant possibility.

Two more hikes this year would bring the top end of the target range to 2.5% by year-end. This shows the 2018 section of the dot plot:

Rates are expected to continue to rise, three times in 2019 and once in 2020, nudging the federal funds rate to nearly 3.5%.

A presser after every meeting – oh boy. During the press conference, Powell said that, starting next January, there will be a press conference after every FOMC meeting. This idea has been mentioned a couple of times recently to prepare markets for it. Now it’s official. As in every Fed announcement, it’s no biggie, really, trust us. The move is designed to “explain our actions and answer your questions,” Powell said. It was “only about improving communications.” It didn’t mean at all that the Fed would be speeding up its rate hikes, he said.

Here’s the thing: The Fed has fallen into a habit in this cycle of only hiking rates at a meeting that is followed by a press conference. There have been four meetings with press conferences scheduled in the year, along with four meetings without press conferences. By this logic, the maximum number of rate hikes the market expects is four per year. By adding press conferences to all meetings, and thus doing away with this four-rate-hike-per-year limitation, the market will have to start expecting the unexpected – that seems to be the message.

“Gradual” but relentless. “We’ve been very, very careful not to tighten too quickly,” Powell said. “I think we’ve been patient. I think that patience has borne fruit, and I think it continues to. We had a lot of encouragement to go much faster, and I’m really glad we didn’t, but at this time, continuing on that gradual pace continues to seem like the right thing.”

Interest paid to the banks on excess reserves gets a makeover. Banks have about $1.89 trillion in “excess reserves” on deposit at the Fed:

The Fed has been paying banks interest on these excess reserves at a rate that was equal to the top of the Fed’s target range – so 1.75% since the last rate hike, which amounts to an annual rate of $33 billion of easy profits for the banks. In theory with today’s rate hike, the FOMC would also have increased the rate it pays on excess reserves to 2.0%.

But this didn’t happen. The Fed hiked this rate to only 1.95%. This move is “intended to foster trading in the federal funds market at rates well within the FOMC’s target range.”

It’s supposed to solve a problem: The Fed has trouble keeping the federal funds rate in the middle of its target range. For example, yesterday the effective federal funds rate was 1.70%, when the Fed’s target range was 1.50% to 1.75%. The federal funds rate should have been in the middle, so around 1.625%. This has been a problem for months. The Fed is worried the federal funds rate might go over the top of its target range. So it hopes that by lowering what it pays on excess reserves in relationship to its target range, it can nudge the federal funds rate back to the middle of the target range.

Some dovish language disappears from the statement, including:

• Gone is the line: “Market-based measures of inflation compensation remain low.”
• Also gone is the line that the federal funds rate is “likely to remain, for some time, below levels that are expected to prevail in the longer run.”

Step by systematic step, the Fed is “gradually” getting more hawkish. Its stated purpose is to tighten “financial conditions.” This means pushing up yields and widening spreads, and thereby pushing down bond prices, especially at the riskier end of the spectrum; making raising money, including in the stock market, more expensive; and inciting investors to be more risk averse, thereby tamping down on asset prices of all kinds.

This rate-hike cycle is different. It has now been going on for two-and-a-half years, during which the Fed hiked rates by 1.75 percentage points. The last rate-hike cycle lasted only two years, but the Fed pushed up rates by 4.25 percentage points to 5.25% by July 2006. The fact that this rate-hike cycle is so gradual allows the economy and markets, asset prices, and yields to adjust gradually – that’s what Powell pointed out when he said this “patience has borne fruit.” And it allows the Fed to keep going relentlessly.'

[Talking Monkey]

6 hours ago, sancho panza said:

More evidence if it were needed that Powell is something of a wildcard and that by implication Trump is-economically speaking.

https://wolfstreet.com/2018/06/13/this-fed-grows-relentlessly-more-hawkish/

'By unanimous vote, the FOMC raised its target for the federal funds rate by a quarter percentage point to a range between 1.75% and 2.0%. This was expected; what’s intriguing is the unanimous vote, unlike prior rate hikes.

Four rate hikes in 2018 (two more this year) are now gradually being baked in, according to the median expectation of the 15 members of the FOMC, per the infamous “dot plot” with which the Fed tries to communicate potential rate moves: One member expects 5 rate hikes in 2018; seven members expect 4 hikes; five members expect 3 hikes, and two members expect no more hikes. At the March meeting, four rate hikes had appeared in the dot plot as a real but more distant possibility.

Two more hikes this year would bring the top end of the target range to 2.5% by year-end. This shows the 2018 section of the dot plot:

Rates are expected to continue to rise, three times in 2019 and once in 2020, nudging the federal funds rate to nearly 3.5%.

A presser after every meeting – oh boy. During the press conference, Powell said that, starting next January, there will be a press conference after every FOMC meeting. This idea has been mentioned a couple of times recently to prepare markets for it. Now it’s official. As in every Fed announcement, it’s no biggie, really, trust us. The move is designed to “explain our actions and answer your questions,” Powell said. It was “only about improving communications.” It didn’t mean at all that the Fed would be speeding up its rate hikes, he said.

Here’s the thing: The Fed has fallen into a habit in this cycle of only hiking rates at a meeting that is followed by a press conference. There have been four meetings with press conferences scheduled in the year, along with four meetings without press conferences. By this logic, the maximum number of rate hikes the market expects is four per year. By adding press conferences to all meetings, and thus doing away with this four-rate-hike-per-year limitation, the market will have to start expecting the unexpected – that seems to be the message.

“Gradual” but relentless. “We’ve been very, very careful not to tighten too quickly,” Powell said. “I think we’ve been patient. I think that patience has borne fruit, and I think it continues to. We had a lot of encouragement to go much faster, and I’m really glad we didn’t, but at this time, continuing on that gradual pace continues to seem like the right thing.”

Interest paid to the banks on excess reserves gets a makeover. Banks have about $1.89 trillion in “excess reserves” on deposit at the Fed:

The Fed has been paying banks interest on these excess reserves at a rate that was equal to the top of the Fed’s target range – so 1.75% since the last rate hike, which amounts to an annual rate of $33 billion of easy profits for the banks. In theory with today’s rate hike, the FOMC would also have increased the rate it pays on excess reserves to 2.0%.

But this didn’t happen. The Fed hiked this rate to only 1.95%. This move is “intended to foster trading in the federal funds market at rates well within the FOMC’s target range.”

It’s supposed to solve a problem: The Fed has trouble keeping the federal funds rate in the middle of its target range. For example, yesterday the effective federal funds rate was 1.70%, when the Fed’s target range was 1.50% to 1.75%. The federal funds rate should have been in the middle, so around 1.625%. This has been a problem for months. The Fed is worried the federal funds rate might go over the top of its target range. So it hopes that by lowering what it pays on excess reserves in relationship to its target range, it can nudge the federal funds rate back to the middle of the target range.

Some dovish language disappears from the statement, including:

• Gone is the line: “Market-based measures of inflation compensation remain low.”
• Also gone is the line that the federal funds rate is “likely to remain, for some time, below levels that are expected to prevail in the longer run.”

Step by systematic step, the Fed is “gradually” getting more hawkish. Its stated purpose is to tighten “financial conditions.” This means pushing up yields and widening spreads, and thereby pushing down bond prices, especially at the riskier end of the spectrum; making raising money, including in the stock market, more expensive; and inciting investors to be more risk averse, thereby tamping down on asset prices of all kinds.

This rate-hike cycle is different. It has now been going on for two-and-a-half years, during which the Fed hiked rates by 1.75 percentage points. The last rate-hike cycle lasted only two years, but the Fed pushed up rates by 4.25 percentage points to 5.25% by July 2006. The fact that this rate-hike cycle is so gradual allows the economy and markets, asset prices, and yields to adjust gradually – that’s what Powell pointed out when he said this “patience has borne fruit.” And it allows the Fed to keep going relentlessly.'

On top of this there is QT which by Q4 will be running at 50billion a month, anybody think Powell will accelerate that even further in 2019

[DurhamBorn]

1 hour ago, Talking Monkey said:

On top of this there is QT which by Q4 will be running at 50billion a month, anybody think Powell will accelerate that even further in 2019

No,i think he will reverse it as a global deflationary bust hits.The speed depends on when the liquidity squeeze kicks in a recession.

 

[Talking Monkey]

9 minutes ago, DurhamBorn said:

No,i think he will reverse it as a global deflationary bust hits.The speed depends on when the liquidity squeeze kicks in a recession.

 

Absolutely agree that when the deflationary bust hits that it will reverse, but was thinking on what Powell might do up until the point that it becomes clear a deflationary bust is imminent or upon us, as I get the impression he is very hawkish, so with a fairly slow pace of rate rises he may want another avenue and increase QT.

[DurhamBorn]

11 hours ago, leonardratso said:

SA miners;

https://uk.reuters.com/article/uk-safrica-mining/south-africa-proposes-30-percent-black-ownership-for-mining-firms-within-five-years-idUKKBN1JB2LY

 

I actually think this is going in the right direction.South Africa does its mining different in that the mine rights are simply a lease from the people to mine for a certain length of time in an area.The last government nearly killed mining,but this new president understands how important it is for the country and for black workers.They want to attract investment and know they need to get this right.The likes of Harmony Gold already have the quota met as their biggest shareholder is African Rainbow Minerals.Deep level mining in SA is expensive,but the grades are the best in the world.When the days come (as they will) when gold is going up in the $50 a day range the leverage will show itself.

There is also a lot of Greenstone belt in SA (and next door in Zimbabwe) and this hasnt really been explored mostly hidden under sand,but from drill results from Harmony it looks like there is big potential for open pit mining,much lower cost mines than the 2000m deep level mines.

This is the very recent drill result.

https://www.harmony.co.za/invest/presentations/2018/send/131-2018/3486-kalgold-greenstone-exploration

 

SA miners really need a weak rand due to their high costs,but over time if they can add a lot of cheaper open pit production to lower their average AISC,they should be able to expand margins.

There is big risk in most gold mining areas,and a spread is needed,but im very happy to risk having a couple of SA miners due to their leverage to the gold price.

 

 

[DurhamBorn]

11 minutes ago, Talking Monkey said:

Absolutely agree that when the deflationary bust hits that it will reverse, but was thinking on what Powell might do up until the point that it becomes clear a deflationary bust is imminent or upon us, as I get the impression he is very hawkish, so with a fairly slow pace of rate rises he may want another avenue and increase QT.

Yes he seems to want fiscal policy to do the work.Thats exactly how we see the next cycle,fiscal spending  taking over.The question is a recession hitting first and then the size of the leverage making it a very severe one.I think he will tighten until it happens.They might even be trying to bring on a liquidity problem so that the $ remains king.

[Talking Monkey]

1 minute ago, DurhamBorn said:

Yes he seems to want fiscal policy to do the work.Thats exactly how we see the next cycle,fiscal spending  taking over.The question is a recession hitting first and then the size of the leverage making it a very severe one.I think he will tighten until it happens.They might even be trying to bring on a liquidity problem so that the $ remains king.

That last bit did cross my mind, there are multiple benefits to be had. Tightening will finally clear out the zombie companies, but it also would give a clear signal that $ is still king and extend that for another decade or so. Eventually the Chinese currency will replace the dollar that is an inevitability I think, but a well timed crises might delay it by a decade

[DurhamBorn]

3 minutes ago, Talking Monkey said:

That last bit did cross my mind, there are multiple benefits to be had. Tightening will finally clear out the zombie companies, but it also would give a clear signal that $ is still king and extend that for another decade or so. Eventually the Chinese currency will replace the dollar that is an inevitability I think, but a well timed crises might delay it by a decade

Yes i think there is a lot to that.It will be interesting to see who cracks first.It might be Europe yet.

[darkmarket]

14 minutes ago, Talking Monkey said:

Eventually the Chinese currency will replace the dollar that is an inevitability I think, but a well timed crises might delay it by a decade

That might not be a foregone conclusion. Since the vehicle for interrupting dollar hegemony is the One Belt One Road initiative, a reasonable way to monitor the Yuan's progress is through developments related to that, as well as offshore yuan trading centres and the international currency basket.

OBOR's success depends on enough governments believing that there are viable projects requiring vast funding justifying the risks of the debt incurred, which Sri Lanka and others show to be critical, and then actually making repayments. These economic opportunities must have either recently emerged, been detected or were previously ignored by global capital.

The U.S. position on China's membership of the WTO has evolved this year to considering it a mercantilist, state-led economy acting in ways the WTO was not established to manage, requiring measures outside the WTO mechanisms to counteract. This isn't far from a call for China's removal from the WTO, which would in turn have implications for the Yuan's membership of any international currency basket.

There's a lot that could go wrong on the way to the Yuan, or even a currency basket, ending dollar hegemony. For the short-term risks of uncontrolled deflation or inflation, the Yuan dwarves the Dollar.

[Democorruptcy]

26 minutes ago, DurhamBorn said:

Yes he seems to want fiscal policy to do the work.Thats exactly how we see the next cycle,fiscal spending  taking over.The question is a recession hitting first and then the size of the leverage making it a very severe one.I think he will tighten until it happens.They might even be trying to bring on a liquidity problem so that the $ remains king.

Which means that wealthy Americans and/or banks can buy assets around the world more cheaply.

Germany obviously has a big say in what goes on in Euroland. However if Germany exited the Euro the other currencies would devalue and the Germans could buy the rest of Europe on the cheap instead of paying for an army to invade it. Years ago when Greece was tipped to be the first country to leave the Euro, I backed Cyprus at 50/1, the bet is still running but their bail-in stuffed it for me. I suppose Italy might be favourites now but I'd be tempted at a big price to go for Germany. 

[Talking Monkey]

14 minutes ago, darkmarket said:

That might not be a foregone conclusion. Since the vehicle for interrupting dollar hegemony is the One Belt One Road initiative, a reasonable way to monitor the Yuan's progress is through developments related to that, as well as offshore yuan trading centres and the international currency basket.

OBOR's success depends on enough governments believing that there are viable projects requiring vast funding justifying the risks of the debt incurred, which Sri Lanka and others show to be critical, and then actually making repayments. These economic opportunities must have either recently emerged, been detected or were previously ignored by global capital.

The U.S. position on China's membership of the WTO has evolved this year to considering it a mercantilist, state-led economy acting in ways the WTO was not established to manage, requiring measures outside the WTO mechanisms to counteract. This isn't far from a call for China's removal from the WTO, which would in turn have implications for the Yuan's membership of any international currency basket.

There's a lot that could go wrong on the way to the Yuan, or even a currency basket, ending dollar hegemony. For the short-term risks of uncontrolled deflation or inflation, the Yuan dwarves the Dollar.

I've only read small bits on the OBOR policy, the impression I got was some of those governments were risking crippling themselves by the debt required for those infrastructure projects, real crushing debts in developing countries where servicing those debts would really hamper social welfare development etc.

That last bit in bold I didn't quite understand could you elaborate a little please

 

[darkmarket]

1 hour ago, Talking Monkey said:

I've only read small bits on the OBOR policy, the impression I got was some of those governments were risking crippling themselves by the debt required for those infrastructure projects, real crushing debts in developing countries where servicing those debts would really hamper social welfare development etc.

You get more coverage in Caixin Global than western financial media, but for a more critical view my experience has been better reading geopolitics sources.

For the last part, I was really just summarising that the obstacles mentioned above mean it's a bumpy road ahead at least. In terms of short-term risks, on the one hand deflation of the credit bubble is underway especially with regard to shadow banking, but on the other hand the announcement of a bailout for HNA is in line with a previous promise to prop up any companies deemed to be in the national interest.

[NogintheNog]

On 15/06/2018 at 11:50, ThoughtCriminal said:

I'm primarily thinking of

 

Gazprom

Lukoil

Novatek

Rosneft

Norilsk Nickel

Rostelecom

Rushydro

 

I think the perception of Russia as high risk is primarily due to the media noise. The economic fundamentals of their economy are superb, especially compared to western basket cases.

 

 

 

Take a look here on Russia;

https://srsroccoreport.com/areas-of-the-world-more-vulnerable-to-collapse/

Quote

You will notice that Saudi Arabia is the sixth largest oil consumer in the world followed by Russia.  Both Saudi Arabia and Russia export a much higher percentage of oil than they consume.  However, Russia will likely survive a much longer than Saudi Arabia because Russia can provide a great deal more than just oil.  Russia and the Commonwealth Independent States can produce a lot of food, goods, commodities, and metals domestically, whereas Saudi Arabia must import most of these items.

Quote

If the oil price shoots up to $100 or higher and stays there (which I highly doubt), then costs will start to surge once again for the shale oil industry.  As costs increase, we can kiss goodbye the notion of higher shale oil profits.  But as I mentioned in the brackets (), I don’t see the oil price jumping to $100 and staying there.  Yes, we could see an oil price spike, but not a long-term sustained price as the current economic cycle is getting ready to roll over.  And with it, we are going to experience one hell of a deflationary collapse.  This will take the oil price closer to $30 than $100.

 

[Barnsey]

Hi everyone!

My understanding is that China needs the US more than the US needs China, so I expect things to continue to escalate. Combine this with the Chinese economy now visibly slowing down in Q2 2018, backed up by their failure to follow the Fed raising rates, things could get interesting.

Have noticed rhetoric regarding US recession predictions remain at 2020, but now generally saying "at the latest".

[Talking Monkey]

1 hour ago, Barnsey said:

Hi everyone!

My understanding is that China needs the US more than the US needs China, so I expect things to continue to escalate. Combine this with the Chinese economy now visibly slowing down in Q2 2018, backed up by their failure to follow the Fed raising rates, things could get interesting.

Have noticed rhetoric regarding US recession predictions remain at 2020, but now generally saying "at the latest".

What do others on here think about US recession predictions, I know they are saying at the latest 2020, but the rate rises and QT will start biting before then I would have thought

[Orpington_Madness]

Hi

Long-term lurker from the other site.

Love this thread and have learned loads.  

Timing could be quite important with this - particularly if you are looking to buy a house (I'm thinking a good time would be towards the end of any deflation event - with as a reasonable amount of deposit and as long a fixed term mortgage than can be obtained)

It's all crystal ball stuff but it a deflation event isn't evident in the period Q4, 2018 - Q1, 2019, I would be concerned that we might go straight to reflation.

I was talking to my FD the other day and asked him if there was any macroeconomic contingency contained within the companies strategic planning. He asked me what I mean't and I floated a scenario where interest rates and inflation were to be getting on for double figures at which point he looked at me as if I had just landed from outer space. I am amazed at how unprepared the world is going to be for this, particular those professionals who should be prepared (just like 2008, i suppose though).

 

 

 

 

 

[Thorn]

+1.

My gut feeling is same re the timing. The thing to do would be -same as after the GFC in Ireland at least -expect house prices to drop for a certain length of time- 2 years?

2012 was the bottom I think.

I also agree with you about sounding like an oddball out there with civilians ie everybody who doesn’t read this thread and it’s older sister on TOS. If I ever try to discuss What Will Happen Everybody When The World Says No More Tick? I just get silence.

...its like nobody any more can conceive of another crash and they think it will all just go on like normal. 

I’ve now got about 25% miners-silver/gold, 25% utilities and hopefully their steady dividends, 25%TLT/IBTL, and 25% in trackers and Scottish Mortgage Investment Trust with stop-loss sell triggers at 14% under the trackers and SMT.

I am also thinking of putting a new layer on the tinfoil helmet and over the next month I will be turning all my sensors up to the next level.

It is called Jumpy.

 

[Game_of_Homes]

On 11/06/2018 at 21:03, azzuri82 said:

This is a great tip and was something I'd completely overlooked - thanks!

NS&I also do a Junior ISA paying 2.5% at the moment.

[Game_of_Homes]

@DurhamBorn, I probably asked you this already on the ToS thread (apologies if so, I have a terrible memory!) but I want to understand your reasoning for thinking that the precious metals (and especially silver) are going to go up? What industries will they be used in, in the future that you see their value not just being about their intrinsic worth but also as a utility? Do you see more of a focus on PM in new technologies such as battery power increasing as new technologies are developed? Also, what do you think about palladium? I put some money into that a few years ago and it has done very well, increased by about 50% (wish I'd put more in). Do you see it rising more along with the other PMs?

[leonardratso]

13 minutes ago, Game_of_Homes said:

NS&I also do a Junior ISA paying 2.5% at the moment.

im getting 3.25% @ nationwide JISA, its cash though not S&S, its full so im still pumping up premium bonds for the spoilt brats.