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Credit deflation and the reflation cycle to come.


DurhamBorn

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1 hour ago, Yellow_Reduced_Sticker said:

"Forget Great Depression, the Greatest Ever is Coming Says: Gerald Celente...

Well worth a watch:

 

Fair enjoyed that. A right character and he is on the ball.hes right it is geopolitical.

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1 hour ago, TheCountOfNowhere said:

At the end of the day.... Who knows. Not I.  I'd opt for 4/5 rental inspections over the next 2 years to find out tho. 

I might have done as well, but it wasn't just my call, and when you find an affordable place you like in spite of the price it gets more difficult to argue with the other half to not just get on with it.

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1 hour ago, TheCountOfNowhere said:

Bailed out banks x2

Interested to hear which of the bailed out banks you seeing being the least risky investment in this context? If a deflation does happen, won't they be getting hammered again?

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3 hours ago, TheCountOfNowhere said:

As I said. Makes no sense in that context. 

 

I'm already seeing houses in Kent and Sussex and to a lesser extend Surrey with asking prices that make Milton keynes/Northants look embarrassing so top end prices defo have come down0. 

 

It's not a bad move tho if you don't see a collapse in prices and you are hedging your bets, might turn out to be the right option. 

 

At the end of the day.... Who knows. Not I.  I'd opt for 4/5 rental inspections over the next 2 years to find out tho. 

Great piece on Wolf Street about China imposing capital controls to stop people buying foreign real estate - I wonder how much of the London/SE Price drop is down to this?

https://wolfstreet.com/2019/08/30/china-imposes-new-capital-controls-targets-foreign-real-estate-purchases-as-yuan-falls-to-11-year-low/

The idea appears to be to allow Chinese citizens to go overseas and do normal things, such as working or studying, but not invest in foreign real estate.

“Wiring money overseas is not allowed for the purposes of purchasing real estate or insurance products,” a representative at a second-tier Chinese bank told the Nikkei.


Fingers crossed this is the tip of the spear and it spreads - I'd love to see other peoples thoughts on how property prices are going to move in the future. It feels to me like the first few dominos in the chain have been knocked over, but I have no idea how long the chain is

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The attributes of a "reflation stock"?

Many thanks to those who already replied to this key question.

Summarising feedback so far (mostly that pdf):

1. Sector (subject to the specific company factors below):
  . Banks
  . Supermarkets
  . Defence
  . Utilities
  . Consumer durables and apparel
  . Consumer services
  . Food and staples retailing
  . Food, beverages and tobacco
  . Household and personal care
  . Life insurance
  . Healthcare equipment
  . Capital goods
  . Semiconductors and semi equipment
  . Software and services
  . Technology hardware and equipment
  . Materials

2. Input and/or output pricing power:
  . Provides a needed product or service (as opposed to a wanted one)
  . Limited market competition and/or high supplier competition
  . Strong brands (still valid?)
  . Power over suppliers (e.g. monopoly, oligopoly, long term contracts)
  . Undergoing limited sectoral structural change
  . Flexible cost base such as low fixed costs (to react to cost push inflation)
  . Room for productivity growth (via regulation changes, technology, etc)
  . Strong proprietary technologies, licences, etc
  . Non-regulated industry (e.g. no price caps)
  . Beneficiary of regulation and subsidies (e.g. renewables, electric vehicles)
  . Low sensitivity to rising wages (e.g. high automation)
  . Ability to relocate to cheaper (tax, labour, proximity, etc) geographical areas
  . Any other Buffet "moat" ideas!

3. Beneficiaries of government reflation policies (e.g. infrastructure spending)

4. Protected against higher interest rates:
  . Long leases
  . Long debt maturity rates at low interest rates

5. Beneficiaries of higher interest rates

6. Beneficiaries of rising bond yields (e.g. life insurance companies)

7. Depreciating up to date fixed asset base requiring limited further additions

Example companies (DYOR) - with my guesses:
  . BT (1=H, 2=H, 3=H, 4=?, 5=L, 6=L, 7=?)
  . Vodafone (1=M, 2=M, 3=M, 4=H, 5=L, 6=L, 7=H)
  . Centrica (1=H, 2=M, 3=H, 4=?, 5=L, 6=L, 7=?)
  . Royal Mail (1=H, 2=M, 3=?, 4=?, 5=L, 7=?)
  . BAE (1=H, 2=H, 3=H, 4=?, 5=L, 6=L, 7=?)

Comments, additions, deletions?

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5 hours ago, Cattle Prod said:

Where'd you get a 15 yr fix?! I have fix envy!

Welcome 

What are the overpayment penalty’s on that monster of a fix

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3 hours ago, Yellow_Reduced_Sticker said:

"Forget Great Depression, the Greatest Ever is Coming Says: Gerald Celente...

Well worth a watch:

 

Yes, for China.

No, for the West.

Due to demographics, income from employment in the west is going to shoot up and houses will become cheaper.

 

 

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18 minutes ago, stokiescum said:

What are the overpayment penalty’s on that monster of a fix

You can pay 10% of the balance in over-payments in any given year without penalty.

Early repayment charges (i.e. for paying in full) are ludicrous. 6% to 5 years, 5% to 9 years, 4% to 11 years, 3% to 13 years, 2.5% to 14 years and 1.5% to 15 years. We have simply factored swallowing the maximum early repayment charge into our plans, should we have to move. But if we thought we might have to move we'd have gone for a shorter fix (or probably not bought at all). They claim to allow you to port the mortgage, but if prices dive I am not sure quite how that would work...?! The terms wouldn't work for everybody I guess.

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29 minutes ago, Durabo said:

Great piece on Wolf Street about China imposing capital controls to stop people buying foreign real estate - I wonder how much of the London/SE Price drop is down to this?

https://wolfstreet.com/2019/08/30/china-imposes-new-capital-controls-targets-foreign-real-estate-purchases-as-yuan-falls-to-11-year-low/

The idea appears to be to allow Chinese citizens to go overseas and do normal things, such as working or studying, but not invest in foreign real estate.

“Wiring money overseas is not allowed for the purposes of purchasing real estate or insurance products,” a representative at a second-tier Chinese bank told the Nikkei.


Fingers crossed this is the tip of the spear and it spreads - I'd love to see other peoples thoughts on how property prices are going to move in the future. It feels to me like the first few dominos in the chain have been knocked over, but I have no idea how long the chain is

China's always restricted Chiense taking vah out.

Last 2 yeqrs has seen them really crack down and make it a crime against China.

 

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Interesting read on "reflation" in that several types are listed and we probably need to focus on the one more likely/prevalent this time around (which according to this forum the main one would be capital projects).  That is, no two "reflations" are the same!

https://www.investopedia.com/terms/r/reflation.asp

Plenty more postings on the web about this now (although many refer only to the QE type reflation we've had).  But this seemed an interesting view on industrial commodities:

https://seekingalpha.com/article/4247757-commodities-reflation-supply-speculation

 

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reformed nice guy
5 hours ago, TheCountOfNowhere said:

Ill have a go. 

 

Reflation stocks.... Companies who's products people really need even in a massive down turn + actual commodities, gold etc.  Id probably add defense stocks too. 

 

I. E.  Gold, gas, water, oil, BAE, electricity. 

Stuff that's going to do badly....pizza makers. 

Ps. My share position is... Based on several companies who look like they've already crashed and are hopefully fair value. 

 

Bt/vodafone

Gold x 2

Centrica 

Bailed out banks x2

Royal mail

Supermarkets x 2

Will add more as companies share prices tumble. 

Here is what is on my watchlist, with a basic explanation of my thinking, if it is of interest:

Tyson Foods Inc - food producer, USA

Nutrien Ltd - potash, Canada

Gazprom - oil, low PE

Ferguson plc - plumbing supplies, assuming reflation = more infrastructure spending

Mosaic Co - potash USA

Evraz - steel will be needed to make all the stuff, low P/E

Walmart

Costco

Nestle

BAE

Medtronic plc - largest medical device company. older population = more demand regardless of economy

Linde plc - chemicals

Telefonica - thanks DB

Vodafone

Royal Mail

SSE

Centrica

Union Pacific Corp - US freight trains

Siemens  - infrastructure 

Fanuc Corp - industrial robotics

Siemens Healthineers - medical machines (MRI, CT scanners etc), same logic as medtronic

 

I already have holdings of certain blue chips (BP, Shell, Rio Tinto...) that I would have had on the list if I didnt have them already

 

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55 minutes ago, Harley said:

The attributes of a "reflation stock"?

Many thanks to those who already replied to this key question.

Summarising feedback so far (mostly that pdf):

1. Sector (subject to the specific company factors below):
  . Banks
  . Supermarkets
  . Defence
  . Utilities
  . Consumer durables and apparel
  . Consumer services
  . Food and staples retailing
  . Food, beverages and tobacco
  . Household and personal care
  . Life insurance
  . Healthcare equipment
  . Capital goods
  . Semiconductors and semi equipment
  . Software and services
  . Technology hardware and equipment
  . Materials

2. Input and/or output pricing power:
  . Provides a needed product or service (as opposed to a wanted one)
  . Limited market competition and/or high supplier competition
  . Strong brands (still valid?)
  . Power over suppliers (e.g. monopoly, oligopoly, long term contracts)
  . Undergoing limited sectoral structural change
  . Flexible cost base such as low fixed costs (to react to cost push inflation)
  . Room for productivity growth (via regulation changes, technology, etc)
  . Strong proprietary technologies, licences, etc
  . Non-regulated industry (e.g. no price caps)
  . Beneficiary of regulation and subsidies (e.g. renewables, electric vehicles)
  . Low sensitivity to rising wages (e.g. high automation)
  . Ability to relocate to cheaper (tax, labour, proximity, etc) geographical areas
  . Any other Buffet "moat" ideas!

3. Beneficiaries of government policies (e.g. infrastructure spending)

4. Protected against higher interest rates:
  . Long leases
  . Long debt maturity rates at low interest rates

5. Beneficiaries of higher interest rates

6. Beneficiaries of rising bond yields (e.g. life insurance companies)

7. Depreciating up to date fixed asset base requiring limited further additions

Example companies (DYOR) - with my guesses:
  . BT (1=H, 2=H, 3=H, 4=?, 5=L, 6=L, 7=?)
  . Vodafone (1=M, 2=M, 3=M, 4=H, 5=L, 6=L, 7=H)
  . Centrica (1=H, 2=M, 3=H, 4=?, 5=L, 6=L, 7=?)
  . Royal Mail (1=H, 2=M, 3=?, 4=?, 5=L, 7=?)
  . BAE (1=H, 2=H, 3=H, 4=?, 5=L, 6=L, 7=?)

Comments, additions, deletions?

Great post Harley. I think you've covered an awful lot there. But in terms of pricing power, personally not sure how important 'brands' will be in a reflation economy, brands may be 'pushed back' into becoming luxury items like they once were - however anything labelled 'low carbon' will be a winner, i.e. natural materials for construction and insulation will be big, wooden houses and straw roofs for the many not the few (as JC might say)!.

Might be useful to highlight that the debt cycle is being replaced by a distribution cycle - so a change toward less consumption and the consumer becoming a smaller part of the economy with industrial side expanding.

However in terms of actual stock picking I believe your sections 4 and 7 are crucial. Unfortunately I find those two technical metrics difficult to judge because stock analysis sites (eg. investing.com) don't provide this type of information (perhaps the paid for sites provide more info.?) - instead they aggregate the debt figures - which could be 'hiding' 10-20 year low interest corporate bond debt, which effectively could be mostly ignored after factoring in inflation.

 

 

Sancho your scs scores are excellent, I find them very helpful, but I don't think they include for factors like long-term-low-interest-debt 'protection' or 'valuable' fixed assets do they? ...how granular to go I guess might be your answer? ...but the reason I ask is because identifying companies with these positive factors (along with good cashflow which I know you do account for) would help find financially sound companies, ones that are better positioned to survive next 10 years.     

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36 minutes ago, reformed nice guy said:

...... if it is of interest....

Oh yes, very indeed thanks!!!!  I can see some "smarts" on display there!

We do seem to be at an exciting time to dust down our strategies and start "tooling up"!  Certainly feels like an inflexion point with prices yet to adjust.

I'm at last doing what SP and I discussed some time ago (and SP has been doing) - starting with suitable global sector ETFs to identify suitable stocks and hold a few per sector.

I hope to meet a few of your stocks and compare my list with SP's results as a productive sanity check.

I'm looking after two FTSE income portfolios but am now drawing blanks here (Micro Focus yesterday being a bit of a canary). 

I may have to max out at 20 stocks (not 25), and increase their allocations to 5% each (or buy smaller caps in the same industries with the extra 1% allocation).

I'll keep looking, as prices fall, for further good yielders but best I open a new (more productive) front.

I need to double check the tax implications but may open a multi-currency portfolio outside of a tax wrapper for mostly foreign shares.  May focus on high yielders if this is possible (the shares/potential is there), else value.

I'm thinking about complementing the regional ETFs/funds in some pensions with certain (reflation) sector ETFs/funds to tilt at the "reflation" windmill.

I'm also thinking about getting back into options trading, after a ten year break, if I have more time!

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10 minutes ago, JMD said:

......personally not sure how important 'brands' will be in a reflation economy, brands may be 'pushed back' into becoming luxury items like they once were......

Ha, exactly what I was thinking (hence the question mark).  I've been an Aldi type well before it was fashionable or "necessary" so have had my doubts for a long time.  And, spookily, I also thought about the luxury nuance at the time of writing.  What does that mean for the branded companies though?  What would be interesting is to know who actually makes what - do the brand companies (in which case do they offer contract manufacturing and are they set up to do this successfully?),  do they retreat and/or buy up such companies, or what?  I once worked at a contract manufacturer supplying some products to all the supermarkets but these were the main supermarkets and I don't know how widespread this is.  Then again, I hold Unilever and that just keeps rising in defiance of these thoughts!    

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13 minutes ago, JMD said:

Unfortunately I find those two technical metrics difficult to judge because stock analysis sites (eg. investing.com) don't provide this type of information (perhaps the paid for sites provide more info.?) - instead they aggregate the debt figures - which could be 'hiding' 10-20 year low interest corporate bond debt, which effectively could be mostly ignored after factoring in inflation.

My problem too.  The best free site I found was Morningstar that at least splits current borrowings into time buckets.  I need to check individual company financial statements to see if there is more detail but if there is then this may be more optional than mandatory and consistent (last time I recall only a time split was mandatory).

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Can I just say that I think there have been many insightful and really useful posts recently. Always has been of course, but I think over recent weeks there have been so many of these ….anyway I am very grateful for the knowledge and time you guys take to make your posts so informative for 'learners' (lurkers?) like me.        And of course a big shout out to DurhamBorn for starting the whole adventure.  

 

 

I also have a question that I don't believe i've seen discussed much here:

Has anyone thoughts on how to get investment exposure to good automation/robotics companies, and also to the semiconductor manufacturer sector in general (perhaps etf's)? I'm thinking in terms of those companies that will help increase productivity for the industrial/manufacturing/building sectors. 

 

 

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1 hour ago, reformed nice guy said:

Here is what is on my watchlist, with a basic explanation of my thinking, if it is of interest:

Tyson Foods Inc - food producer, USA

Nutrien Ltd - potash, Canada

Gazprom - oil, low PE

Ferguson plc - plumbing supplies, assuming reflation = more infrastructure spending

Mosaic Co - potash USA

Evraz - steel will be needed to make all the stuff, low P/E

Walmart

Costco

Nestle

BAE

Medtronic plc - largest medical device company. older population = more demand regardless of economy

Linde plc - chemicals

Telefonica - thanks DB

Vodafone

Royal Mail

SSE

Centrica

Union Pacific Corp - US freight trains

Siemens  - infrastructure 

Fanuc Corp - industrial robotics

Siemens Healthineers - medical machines (MRI, CT scanners etc), same logic as medtronic

 

I already have holdings of certain blue chips (BP, Shell, Rio Tinto...) that I would have had on the list if I didnt have them already

 

Can I ask why Tyson Foods?

Only I don't know the company but noticed it represented a comparatively large holding (4% holding out of 300 stocks) in the Van Eck Natural Resources Index ETF (HAP).

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17 hours ago, Harley said:

We talk about reflation stocks, even mention the odd one, but don't define the term.  What are the attributes, such as sector/industry?  Illustrative examples?

Iv put above in the thread a lot iv started buying and are a very good indication of the sort of company.

I view them as this.

A company that can run with or outpace inflation and/or a company that has expensive assets depreciating at a fixed rate where the product coming from those assets will increase in price,even just with inflation as that feeds fast free cash increases.(telcos prime examples and potash miners etc)

Another side im seeing as reflation are sectors that gain from inflation in other ways,an example are public transport companies.High motoring costs will force more people to use their services (they also have the advantage of the depreciation).High energy costs will force investment in green/cheaper energy.Iv bought SSAB for instance as they are turning their blast furnaces to hydrogen and that could see much bigger margins at the end of the next cycle.I road map them at 130 SEK a share in around 2027 as long as they survive a deflation event of course.

Other companies that gain from all Fiat being de-valued.That is resource,food etc.

Companies that gain from defence spending .

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3 hours ago, spygirl said:

Yes, for China.

No, for the West.

Due to demographics, income from employment in the west is going to shoot up and houses will become cheaper.

 

 

West gets inflation instead as you say,and lots of it.Where everyone is wrong is expecting long term deflation.The deflation event is steep but short term.Bonds will be destroyed in the next cycle.We are at a key inflection point now.QE forced over capacity and margins falling to zero.The new round wont.It wont be moved through the banks,it will divert through national governments.Cutting out the banks will lead to the thing missing.Velocity.In very very simple terms,the likes of Vodafone built their network on borrowed money at 1.5%.In a few years anyone wanting to compete will have to pay 7%.For new competition to be able to make a profit VODs free cash flow would need to reach around £16 billion and the shares around £6.50.

Low rates increase house prices and destroy productive asset values.Rising rates destroy house prices and increase productive assets.The UK public are almost all in the wrong camp as the cycle unfolds.

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29 minutes ago, spunko said:

@DurhamBorn if it's okay, I would like to start a 'part 2' of this thread as it's got quite long. Or if you want to create it please go ahead.

Sure that would be fine,and in a way we are at part 2 now.(or close).

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