Credit deflation and the reflation cycle to come.

[sancho panza]

33 minutes ago, Errol said:

Open question -  if you were looking for one commodity stock to buy, bearing in mind commodities are at near historic lows, what would it be?

My best buy would be Kinross over 3-5 years at current $4-30 level.Tempted by Harmony but geo political risk puts that out of play.

Smaller plays eg Wesdome probably offer better returns but I'm including an element of risk/reward mitigation.

Over 10 years,I'd go for Fresnillo.Might be one of the biggest stocks in the FTSE by then from todays price.

[sancho panza]

37 minutes ago, Tdog said:

Sorry for not answering your question, surely if there is a deflationary bust the following recession will mean people will buy less thus the prices of these commodities will fall further.

Doesn't necessairly follow as certain things that are necessary for life eg food/fuel,may well go up in price even during a credit(debt) deflation

Credit deflation and price inflation aren't mutually exclusive

[DurhamBorn]

https://www.directorstalkinterviews.com/cobham-plc-recommended-cash-acquisition-of-cobham/412788555

One of the defence companies i was going to buy.I was just about to start buying them,one that got away there.Along with Inmarsat more and more UK companies going for a song.

[Thorn]

You’re sounding analytical, cool, calm and collected there as usual DB. You sound like that fits your expectations overall... and you don’t sound that surprised...Not like this lad did at a previous Turn...

 

[CVG]

34 minutes ago, DurhamBorn said:

https://www.directorstalkinterviews.com/cobham-plc-recommended-cash-acquisition-of-cobham/412788555

One of the defence companies i was going to buy.I was just about to start buying them,one that got away there.Along with Inmarsat more and more UK companies going for a song.

I only got my first ladder into Immarsat before it was subject to a takeover bid and doubled overnight! C'est la vie. There are some great companies out there. Halma has done really well for me. I bought it after reading how many years it had consistently been paying out increasing (but low) dividends.

[janch]

Following on from Woodford et al and lack of liquidity in funds:

https://www.zerohedge.com/news/2019-07-24/16-trillion-fund-spots-new-ticking-time-bomb-market

[Majorpain]

https://www.bloomberg.com/news/articles/2019-07-25/ecb-signals-rate-cut-qe-ahead-as-global-stimulus-push-picks-up?srnd=markets-vp

QE to infinity and beyond!

What DB and the rest of the screwed EU banking sector really needs is more negative rates....

[kibuc]

On 23/07/2019 at 21:48, Tdog said:

Anyone still holding Infrastrata? Im going for the shit or bust approach, bust seems to be looking more likely!

I sold my entire holding around 0.7p to take advantage of the run in miners, but I believe risk/return ratio to be very favourable here. It currently suffers a bit due to the CEO all but saying that exciting news should start flowing in September/October, quite a departure from previous timelines, but I'll certainly start buildg my position early September. A lot of workstreams being operated by a rather small crew so there are considerable risks, but the potential is huge there IMHO. 

[leonardratso]

8 hours ago, DurhamBorn said:

https://www.directorstalkinterviews.com/cobham-plc-recommended-cash-acquisition-of-cobham/412788555

One of the defence companies i was going to buy.I was just about to start buying them,one that got away there.Along with Inmarsat more and more UK companies going for a song.

tchoh, unlucky.

[DurhamBorn]

8 hours ago, CVG said:

I only got my first ladder into Immarsat before it was subject to a takeover bid and doubled overnight! C'est la vie. There are some great companies out there. Halma has done really well for me. I bought it after reading how many years it had consistently been paying out increasing (but low) dividends.

Notice PMs speach today in parliament,more telcos,more public transport,free ports etc etc.Reflation policies all of them.Whole world is going to do the same.The inflation that comes out of the back end will be huge.My road map is saying 12%+ inflation is likely end point,though 10% is where the much of the time is spent.2028 maybe.The PMs are delivering us very nice capital gains,but the longer term cycle remains intact and thats where im interested now.I know others are holding PMs for the long term,and i fully support that,but mine (although im still holding half) have already delivered the capital gains i hoped for (around 50%).

I am a bit miffed about missing the jump in Cobham,but the way it goes.

[No One]

Jaguar Land Rover slumps to £395MILLION loss - but the boss is convinced the car maker will return to profit by the end of the year

[Majorpain]

4 hours ago, DurhamBorn said:

The inflation that comes out of the back end will be huge.My road map is saying 12%+ inflation is likely end point,though 10% is where the much of the time is spent.

Ill put you down as a maybe for some negative yielding 30 Yr Swiss bonds then?

[sancho panza]

Thats Swiss 30 year yield is surreal.You are Paul Hodges and I claim my fiver

On another matter,I can't remember if his has been posted before.An indictment of the academic economic establishment and the policy errors they've made

Jut reread it.Super analysis

https://www.icis.com/chemicals-and-the-economy/2019/06/perennials-set-to-defeat-the-feds-attempt-to-maintain-the-stock-market-rally/

By Paul Hodges on 23rd June 2019 in Economic growth

SHARE THIS STORY

 

Never let reality get in the way of a good theory. That’s been the policy of western central banks since the end of the BabyBoomer-led SuperCycle in 2000, when the oldest Boomer moved out of the Wealth Creator 25-54 age group and into the Perennial 55+ cohort.

Inevitably this led to a slowdown in growth, as the Perennials already own most of what they need, and their incomes decline as they enter retirement.  40% of Americans aged 65+ would have incomes below the poverty line, if Social Security didn’t exist.

The well-meaning folk at the US Federal Reserve chose to ignore this development, and instead launched their subprime experiment   But demographics are destiny, and their first attempt to effectively “print babies” ended in 2008’s near-disaster for the global economy.

Their problem, as John Maynard Keynes noted in his conclusion to his 1936 General Theory, was that:

“The ideas of economists and political philosophers, both when they are right and when they are wrong, are more powerful than is commonly understood. Indeed the world is ruled by little else. Practical men, who believe themselves to be quite exempt from any intellectual influences, are usually the slaves of some defunct economist.”

And in the case of today’s central bankers, they are enslaved to the theories of 2 defunct economists:

• One is Franco Modigliani, who won the 1955 Nobel Prize with his “life-cycle hypothesis”, which suggested individuals plan out their  lifetime income and spending in advance, so as to even out their consumption over their entire lifetime
• The other is Milton Friedman, who won the 1975 Prize for his argument that “inflation is always and everywhere a monetary phenomenon”, ignoring the importance of supply and demand balances

Modigliani and Friedman were working before anyone realised a BabyBoom had taken place.  When John Richardson and I were researching our book ‘Boom, Gloom and the New Normal: How the Western BabyBoomers are Changing Demand Patterns, Again’ in 2010, the authoritative Oxford English Dictionary gave the earliest use of the word as being in 1979.

So they might have some excuse for not being aware of the demand pressures caused by the fact that the number of US babies rose by 52% in 1946-64, compared to the previous 18 years.   But today’s central bankers have no such excuse.  Common sense, or a quick glance at the charts above would immediately confirm:

• Increasing life expectancy and falling fertility rates mean that an entirely new generation, the Perennials 55+, is alive today for the first time in history
• And the data shows very clearly that their spending falls off away once they turn 55, and is down 43% by the time they reach the age of 75

Similarly, common sense suggests that inflation is not a monetary phenomenon, but a function of supply and demand balances. The post-War BabyBoom  was inevitably going to create a lot of demand and hence inflation, particularly as factories had first to be converted back from military production.

Similarly, when all these babies moved into the workforce, it was almost inevitable that:

• We would see more or less constant demand, as the Boomers reached their Wealth Creator years
• This demand would be turbo-charged as women went back into the workforce after starting a family, creating the two-income family for the first time in history

Fertility rates fell below replacement levels of 2.1 babies/woman as long ago as 1970. Inevitably, therefore, the number of Wealth Creators has plateaued – just as increasing life expectancy means that the number of Perennials is growing rapidly.

Since 2008, the Fed has completely failed to recognise this critical development for supply/demand balances.

Instead it has “doubled down” on the subprime policy, via record levels of stimulus.  If you ask them why, they will tell you their core economic model – the Dynamic Stochastic General Equilibrium model – doesn’t need to include demographic detail, as it is based on  Modigliani and Friedman’s theories.

We are therefore now almost certainly approaching a new crisis. As the chart on the left from Charlie Bilello confirms :

• The total of government bonds with negative interest rates has now reached $13tn
• The stock market is ignoring this evidence of slowing demand, and is still powering ahead

One or the other is soon going to be proved wrong.

THE END-GAME FOR THE STIMULUS POLICIES WILL LIKELY BE MAJOR DEFLATION
The central banks have spent the past 10 years following Friedman’s theory, believing they could create inflation via stimulus policies.  Instead, their low interest rates encouraged companies to boost supply, at a time when the rise of the Perennials meant demand growth was already slowing.

Unsurprisingly, therefore, interest rates are going negative, as the Fed’s policies have effectively proved deflationary.  Very worryingly, around 14% of US companies are already unable to service their debt, because their earnings are not enough to pay their interest bills.

Had the Fed focused on demographics, it would have been obvious that the best way to create demand was to increase the spending power of the Perennials, who typically rely on savings for extra income.  But instead of allowing markets to set higher interest rates, the Fed chose to lower them, making deflation almost inevitable.

History suggests their next round of stimulus policy, if/when the S&P 500 weakens again, will be to introduce Friedman’s idea of “helicopter money” – and electronically transfer perhaps $500 to every American’s bank account.  This will be the ultimate test for Friedman’s theory, as if it doesn’t magically create inflation, the Fed will have nothing more to do.

Maybe, this final burst of stimulus will work.  But probably most Perennials, and many Wealth Creators, will instead save the money – alarmed by the Fed’s sense of desperation.  In turn, this will turbocharge the deflationary cycle – forcing interest rates even lower and risking major economic turmoil.

[VeryMeanReversion]

9 hours ago, sancho panza said:

On another matter,I can't remember if his has been posted before.An indictment of the academic economic establishment and the policy errors they've made

Jut reread it.Super analysis

https://www.icis.com/chemicals-and-the-economy/2019/06/perennials-set-to-defeat-the-feds-attempt-to-maintain-the-stock-market-rally/

 

Very informative, thanks for posting it.

Some thoughts:

1. When the economic models don't match reality, they keep pressing the wrong button (stimulate, stimulate).

2. "We're not getting older, we're getting better" is just delusion. The era of the most productive age groups (30-45 year old) has long passed. Encouraging immigration of younger but 'net-drains' is beyond stupid.

3. They can only print, not make real assets. That's why I aim for maximum capital but minimum £'s and minimum debt.

4. In an aging population, no one with any ability to pay back will want to borrow. My mortgage company says I can borrow £275K but I just want to clear the balance and reduce my working hours. Less than five years for me to do that then I don't want any debt at even 0%.  I'm already on a 4-day week as the 5th day is taxed so heavily, it's not worth it.

 

 

 

 

[CVG]

10 minutes ago, VeryMeanReversion said:

 I'm already on a 4-day week as the 5th day is taxed so heavily, it's not worth it.

 

You sound like you have your head screwed on. I have to ask only because it might help someone else. Is that 5th day not even worth working to stuff into your pension tax free or have you already maximised that?

[Majorpain]

10 hours ago, sancho panza said:

Thats Swiss 30 year yield is surreal.You are Paul Hodges and I claim my fiver

 

The 50 year is near enough zero, that means i could pretty much give the Swiss govt free money for the rest of my life with nothing in return.

QE is going to have one hell of a reckoning one day when it unravels, hopefully we wont be sitting in deckchairs on the titanic to watch!

[leonardratso]

hey nice +7% on vod, was it rerated i believe to a buy. Every little helps

 

[CVG]

14 minutes ago, leonardratso said:

hey nice +7% on vod, was it rerated i believe to a buy. Every little helps

 

July 26 (Reuters) - London's FTSE 100 recovered on Friday as
Vodafone jumped on plans to create a separate European tower
company and education firm Pearson gained after an upbeat
trading update.

[Harley]

11 hours ago, sancho panza said:

....Jut reread it.Super analysis... 

An absolute cracker of a post thanks.  Divergent policies (the reasons for which being a fascinating study in itself) in the face of demographics is like picking up coins in front of a bulldozer!  Short of an external catastrophe (war, natural disaster, etc), it can only end one way.  To say "opportunity lost" would be an understatement!

[Harley]

12 hours ago, sancho panza said:

....And in the case of today’s central bankers, they are enslaved to the theories of 2 defunct economists:.....

Modigliani's theory only works if you make the age old economist's assumption of the rational economic actor.  Laughable more now than ever, especially when those pulling the levers are themselves being irrational as they have sold their economic souls to the politicians and their clients.

Friedman, well I have some support for him and his cohort having first studied in the 1980's when crony Keynsianism was seen to be failing and a balance was being sort (Keynes' monetarist views had/have been conveniently ignored).  A derivative of monetary theory is still relevant but the source of that money (government) and some other assumed long standing aspects of it no longer are.

None of this is hard if you're an "honest" economist and care for the subject.

[VeryMeanReversion]

1 hour ago, CVG said:

You sound like you have your head screwed on. I have to ask only because it might help someone else. Is that 5th day not even worth working to stuff into your pension tax free or have you already maximised that?

I put in £30K and the SIPP currently generates £20K in divis per year. With that, I'll have enough by age 55 (now 50) to clear the mortgage and have the same disposable income I have now without having to work.

Putting the £40K max into SIPP would mean I could finish a bit earlier but I can't get to the money before 55. IF some options pay off, I could use them to get to the 40K max and also backfill the last three years without doing any more work.

For now, I think I would rather have the day off and walk the dog rather than have a 5% bigger pension pot which I don't need.

P.S.  A little tip I learnt from a friend was that when you are full-time in this industry, you are expected to work say 45 hours a week.  If you cut down to say a 30 hour contract, you only have to do exactly 30 hours as a part-timer. So you save 15 hours of which you were only being paid 7.5 which were then taxed at ~60% so really only getting paid for 3.

[Harley]

And while I'm at it, if you temporarily accept Economics is somewhat a science (at least in approach), then is it not the case that most scientific explanations, theories, observations, etc break down if you venture far enough standard deviations from the norm?  For example, and very relevent, do not the normal laws of physics break down as you approach a cosmic black hole?  If so in most of the sciences, then so in Economics and current policy is now many deviations (in the full sense of the word!) from the norm!  And they are a long way from perfecting the normal theories before venturing into the extreme and unconventional tail ends of the subject.  More like they are trying to terraform the economic landscape to fit their want than understand the existing one!

[Castlevania]

Economics is an art not a science. Most problems arise from treating it as a science, which just doesn’t work. People are irrational.

[Bricks & Mortar]

14 hours ago, sancho panza said:

https://www.icis.com/chemicals-and-the-economy/2019/06/perennials-set-to-defeat-the-feds-attempt-to-maintain-the-stock-market-rally/

Loved this very much.  I'm coming round to the idea that helicopter money might actually be likely as a first response. 

[Ma2]

20 hours ago, DurhamBorn said:

The PMs are delivering us very nice capital gains,but the longer term cycle remains intact and thats where im interested now.I know others are holding PMs for the long term,and i fully support that,but mine (although im still holding half) have already delivered the capital gains i hoped for (around 50%).

@DurhamBorn

Hi DB, could you just clarify if you mean PM, PM miners or both in your post above?

Personally I intend to sell off gains and potentially some capital in the miners to buy potential reflation stocks but hold the metals themselves as a hedge against whatever the hell is coming. 

Many thanks.