Deflationary collapse and the Reflation Cycle to Come.

[PerfectCircle]

1 hour ago, Funn3r said:

Can't see employment going up in a recession, maybe you meant unemployment? I am not an economist and I approach this whole thing from a completely different angle; that of walking around seeing exhausted consumers and desperate businesses all who are just-about-managing on credit. All it would take is a symbolic interest rate rise, or perhaps not even that, and boom. Even the more solid businesses are seeing their margins shrinking and what can they do? Certainly not put up prices to customers who already cannot afford them. I agree that if there is a precise trigger for all this we do not know for sure what it is. It's like a very shakey jenga tower though, you can see it's about to go and what does it matter which brick finally pulls it down.

Indeed, I meant unemployment. I am not denying the recession part of the prediction and its endogenous causes, but cannot understand the inflationary mechanism behind the cycle theory.   

[Sancho Panza]

On 10/15/2017 at 11:10 PM, Sancho Panza said:

Here's a viable link for the Sornette paper

https://arxiv.org/pdf/cond-mat/0301543.pdf

 

https://en.wikipedia.org/wiki/Didier_Sornette

Didier Sornette (born June 25, 1957 in Paris) is Professor on the Chair of Entrepreneurial Risks at the Swiss Federal Institute of Technology Zurich (ETH Zurich) since March 2006. He is also a professor of the Swiss Finance Institute, and a professor associated with both the department of Physics and the department of Earth Sciences at ETH Zurich. He was previously jointly a Professor of Geophysics at UCLA, Los Angeles California (1996–2006) and a Research Professor at the French National Centre for Scientific Research (1981–2006), working on the theory and prediction of complex systems.^[1] Pioneer in econophysics, in 1994, he co-founded with Jean-Philippe Bouchaud the company Science et Finance, which later merged with Capital Fund Management (CFM)

https://www.kcl.ac.uk/artshums/depts/history/people/staff/Academic/goldgara/index.aspx

' Anne Goldgar is a Professor in Early Modern European History, and has taught in the Department since 1993. Prior to this she was a Research Fellow at Clare Hall Cambridge, an assistant professor of history and Art and Sciences Faculty Fellow at New York University and was a Teaching Fellow at Harvard. Anne is a graduate of Princeton and completed both her A.M. and PhD at Harvard. '

3 hours ago, Eddie_George said:

https://www.smithsonianmag.com/history/there-never-was-real-tulip-fever-180964915/

Thanks for that Eddie.Interesting to read another perspective from a respected scholar.

Sornette digs into a few other bubbles besides the Tulip one to illustrate his wider point.

I suppose the problem with a lot of these historical analogies is that the data isn't as widely available as one would like.

 

My view on the current property bubble is that it has the potential to have a much broader impact than any that have preceded it for the following reasons

1) the banking system and the way it creates credit has become interwoven with the health of the property market

2) it has penetrated much deeper than previous bubbles eg UK housing market now worth more than the UK stock market.

3) It will be exacerbated by demographic problems in Western societies where increasing life expectancy has been underwritten by wealth creation that isn't really wealth creation.

 

If you have any more inks to other good articles on bubbles I'd be grateful etc

[Sancho Panza]

1 hour ago, Funn3r said:

Can't see employment going up in a recession, maybe you meant unemployment? I am not an economist and I approach this whole thing from a completely different angle; that of walking around seeing exhausted consumers and desperate businesses all who are just-about-managing on credit. All it would take is a symbolic interest rate rise, or perhaps not even that, and boom. Even the more solid businesses are seeing their margins shrinking and what can they do? Certainly not put up prices to customers who already cannot afford them. I agree that if there is a precise trigger for all this we do not know for sure what it is. It's like a very shakey jenga tower though, you can see it's about to go and what does it matter which brick finally pulls it down.

Who needs IR rises when inflation is doing the damage?

[durhamborn]

16 minutes ago, PerfectCircle said:

Indeed, I meant unemployment. I am not denying the recession part of the prediction and its endogenous causes, but cannot understand the inflationary mechanism behind the cycle theory.   

Inflation will come from government pumping money direct into the economy.The deflationary vortex dead ahead will prove such a shock,and so damaging that governments will panic.Im not talking a few quid or dollars.Im talking governments facing the very real prospect of western society and with it democracy falling apart.The Fed will print $8 trillion.The UK probably £600/800 billion.This wont go to banks,or on welfare,it will go direct into industrial production.Military,roads,rail,clean energy,telecoms etc.

The inflation cycle will start slowly,as it will be filling a 35 year disinflation cycle.Three years after the printing infation might be 6%.I fully expect to see it go over double figures though by 2025,perhaps even up to 20%.Rates will be close behind.Wages will be increasing fast,unemployment will have no affect on things.

Look around at the news.Look at the politics.People arent able to join the dots yet,but what they are seeing are forces coming together.Forces that will unleash a full on reflation cycle as soon as they get the excuse.The excuse will be a massive debt deflation that sees wealth destruction on a scale not seen since WW2.

Consumer facing stocks will continue to see profits slide.The market will continue to knock 20% of each one as they warn on profits,until people wake up to the fact record leverage,and record derivatives are turning a normal downturn into something much worse.

[Sancho Panza]

1 hour ago, PerfectCircle said:

Fascinating thread. I have read a big chunk of the many pages but still struggle to understand what will trigger the hyperinflation cycle (given that the entire theory is built on the back of the 30 years deflation/inflation cycle turning soon, that is a big hole).

 

Economy enters into recession due to chain reaction of defaults in a low margin hyper leveraged environment, employment rockets up. Governments panic and start a massive infrastructure investment programme on a back of supportive central bankers who created as much liquidity as needed. So essentially, privately funded activity gets substituted by public (state) intervention, here governments are only pick up the slacks on a typical Keynesian way, employment is unlikely to be lower than currently, job will be of low added value, so little upward pressure on wages. When we draw a parallel with today’s situation, it is clear that the classic Phillips curve does not apply any longer, so much so that every central banks admit not understanding anymore the drivers of inflation. Theories of various sorts like commodity prices, globalisation, new tech and demography are pushed forward, and god knows which one is determinant. In that context, I struggle to understand how Durham can be so certain about the inflation direction over the next 5-7 years while it seems the concept of inflation itself is questionable in the 21^st century. If anyone can shed some light...?

You're not the only one who isn't sold on the hyperflation(I'm not sure DB is calling for a hyperinflationary cycle,rather a reflationary one).I'm a confirmed debt deflationist but DB/Errol and some others have the cahunas to make some timing calls that I wouldn't even try to.That's markets.

I generally agree that the govt will try and step in to prop up aggregate demand,I'm just not sure how effective they will be with velocity carrying on southwards.

My issues are

1) it very much depends how deep the deflation goes.Reflation from a 50% pull back isn't necessarily inflation in my eyes.

2) History shows us that hyperinflations only come generally with political/social breakdown.

 

 

For me personally,I'll be just grateful to get my family through the deflationary bust that's coming and then I'll worry about the inflation that follows.

As ever,time for the US deflation/inflation chart

[durhamborn]

8 minutes ago, Sancho Panza said:

Who needs IR rises when inflation is doing the damage?

Im glad you mentioned that.I think the currency related inflation in the UK means we are tightening about the same as the Fed.(our inflation is because of increasing import prices so every penny is lost to the UK economy).

Expect the Yen to move much higher soon.The BOJ want 110 i expect,but they might get dollar parity soon.

[Sancho Panza]

4 minutes ago, durhamborn said:

Inflation will come from government pumping money direct into the economy.The deflationary vortex dead ahead will prove such a shock,and so damaging that governments will panic.Im not talking a few quid or dollars.Im talking governments facing the very real prospect of western society and with it democracy falling apart.The Fed will print $8 trillion.The UK probably £600/800 billion.This wont go to banks,or on welfare,it will go direct into industrial production.Military,roads,rail,clean energy,telecoms etc.

The inflation cycle will start slowly,as it will be filling a 35 year disinflation cycle.Three years after the printing infation might be 6%.I fully expect to see it go over double figures though by 2025,perhaps even up to 20%.Rates will be close behind.Wages will be increasing fast,unemployment will have no affect on things.

Look around at the news.Look at the politics.People arent able to join the dots yet,but what they are seeing are forces coming together.Forces that will unleash a full on reflation cycle as soon as they get the excuse.The excuse will be a massive debt deflation that sees wealth destruction on a scale not seen since WW2.

Consumer facing stocks will continue to see profits slide.The market will continue to knock 20% of each one as they warn on profits,until people wake up to the fact record leverage,and record derivatives are turning a normal downturn into something much worse.

Wish I'd waited for you to reply.Thanks for clarifying.

Fair play to you for calling pricing points so far ahead.

[Sancho Panza]

1 minute ago, durhamborn said:

Im glad you mentioned that.I think the currency related inflation in the UK means we are tightening about the same as the Fed.(our inflation is because of increasing import prices so every penny is lost to the UK economy).

Expect the Yen to move much higher soon.The BOJ want 110 i expect,but they might get dollar parity soon.

Shaun Richards makes a similar point quite often,I jsut wish I was capable of the maths behind it.

[durhamborn]

@Sancho Panza i dont expect a hyper-inflation,or anything near one,i do think inflation between 10% and 20% is pretty much certain though by 2025.I agree its about velocity (hence why we are on a cliff now),but the printing in a reflation cycle will go direct into the economy.Forge builds rails gets work,pays workers,pays suppliers etc.This wont be working itself through the banking system.This will be 0.1% coupon printed gilts direct to government,same in the US.They will be fighting the first deflationary collapse since before WW2 and a very real chance of society falling apart.They will take a while to understand the scale (hence the collapse) and wont right size the printing for a while,but they will get there and go way past IMO.

[durhamborn]

5 minutes ago, Sancho Panza said:

Wish I'd waited for you to reply.Thanks for clarifying.

Fair play to you for calling pricing points so far ahead.

Its just what i see SP.I could be way off of course,but thats what my charts project to when i do cross market plots/likely scale of printing etc .To be honest from a purely selfish investing side i dont care if those numbers are right,i only care about the general direction of travel.If we do see a reflation cycle,even if im way out of the scale,i should still outperform the market.My families financial protection is my only real concern.Whats clear to me is this disinflation cycle is ending.It goes out with a bang as i expect,or it turns without a crash.I see no other outcome.I know several on this thread see us going direct to inflation and i value their thoughts and opinions on that.However i suspect the illiquidity and one side market we are going to see once selling starts ,combined with the derivative affects could make this bear a very severe fast unwind so that most of the damage in done in 6 months.Thats the set up i see.Time will tell.

[Democorruptcy]

16 minutes ago, durhamborn said:

Inflation will come from government pumping money direct into the economy.The deflationary vortex dead ahead will prove such a shock,and so damaging that governments will panic.Im not talking a few quid or dollars.Im talking governments facing the very real prospect of western society and with it democracy falling apart.The Fed will print $8 trillion.The UK probably £600/800 billion.This wont go to banks,or on welfare,it will go direct into industrial production.Military,roads,rail,clean energy,telecoms etc.

The inflation cycle will start slowly,as it will be filling a 35 year disinflation cycle.Three years after the printing infation might be 6%.I fully expect to see it go over double figures though by 2025,perhaps even up to 20%.Rates will be close behind.Wages will be increasing fast,unemployment will have no affect on things.

Look around at the news.Look at the politics.People arent able to join the dots yet,but what they are seeing are forces coming together.Forces that will unleash a full on reflation cycle as soon as they get the excuse.The excuse will be a massive debt deflation that sees wealth destruction on a scale not seen since WW2.

Consumer facing stocks will continue to see profits slide.The market will continue to knock 20% of each one as they warn on profits,until people wake up to the fact record leverage,and record derivatives are turning a normal downturn into something much worse.

I'm struggling to see how they would separate that out.

There's been a lot of press about printing money helping the wealthier get wealthier. How can printing even larger amounts not have some also go to welfare? Without it democracy might fall apart because there would be rioting in the streets as benefits would be plunging in real terms. There has to be helicopter money to the masses to keep them appeased.

 

[durhamborn]

1 minute ago, Democorruptcy said:

I'm struggling to see how they would separate that out.

There's been a lot of press about printing money helping the wealthier get wealthier. How can printing even larger amounts not have some also go to welfare? Without it democracy might fall apart because there would be rioting in the streets as benefits would be plunging in real terms. There has to be helicopter money to the masses to keep them appeased.

 

When i say it wont go to welfare i mean they wont simply pass it all to consumption through the benefits system.They will feed some through as inflation increases to benefits as you rightly say as they wont be able to hold back a cost of living collapse.Most of the printed money though will go direct into schemes/projects.

One area will be housing.They will unleash councils to build on a massive scale.Another will be clean energy.Expect huge investment in places like Teesside on battery storage plants etc.It wont just be us of course,the US will be doing the same,as will Europe.The Chinese are the ones who need to worry.The consumer wont drive the next cycle in the West.

There will be other ways it plays out we cant see of course ,but this wont push up most asset prices.Only inflation assets,and those arent well understood,and most portfolios or funds wont hold very many until its too late.Lets see how much longer we limp along.

[iamnumerate]

2 minutes ago, durhamborn said:

 

One area will be housing.They will unleash councils to build on a massive scale.

 

Do you think that it is possible in Greater London?  There are a lot NIMBIES here and few obvious places.  Obviously London councils could build somewhere and only provide people without jobs housing somewhere else, but I don't think that would fly.

[durhamborn]

1 minute ago, iamnumerate said:

Do you think that it is possible in Greater London?  There are a lot NIMBIES here and few obvious places.  Obviously London councils could build somewhere and only provide people without jobs housing somewhere else, but I don't think that would fly.

NIMBIES will only be a name in history books soon.The power of the state tends to show itself in crisis times and sweeps away such things.When the elite face kissing goodbye to their grouse estates and country piles to pitchfork carrying mobs,i doubt a few SAGA members in a leafy suburb will count for much.

[iamnumerate]

Just now, durhamborn said:

NIMBIES will only be a name in history books soon.The power of the state tends to show itself in crisis times and sweeps away such things.When the elite face kissing goodbye to their grouse estates and country piles to pitchfork carrying mobs,i doubt a few SAGA members in a leafy suburb will count for much.

The NIMBIES are not just the old - they seem to be most ages, to be fair to them we have do have problems with lack of space which more development (like a block of 30 flats with 6 parking spaces) make worse.

[PerfectCircle]

1 hour ago, durhamborn said:

Inflation will come from government pumping money direct into the economy.The deflationary vortex dead ahead will prove such a shock,and so damaging that governments will panic.Im not talking a few quid or dollars.Im talking governments facing the very real prospect of western society and with it democracy falling apart.The Fed will print $8 trillion.The UK probably £600/800 billion.This wont go to banks,or on welfare,it will go direct into industrial production.Military,roads,rail,clean energy,telecoms etc.

The inflation cycle will start slowly,as it will be filling a 35 year disinflation cycle.Three years after the printing infation might be 6%.I fully expect to see it go over double figures though by 2025,perhaps even up to 20%.Rates will be close behind.Wages will be increasing fast,unemployment will have no affect on things.

Look around at the news.Look at the politics.People arent able to join the dots yet,but what they are seeing are forces coming together.Forces that will unleash a full on reflation cycle as soon as they get the excuse.The excuse will be a massive debt deflation that sees wealth destruction on a scale not seen since WW2.

Consumer facing stocks will continue to see profits slide.The market will continue to knock 20% of each one as they warn on profits,until people wake up to the fact record leverage,and record derivatives are turning a normal downturn into something much worse.

First of all, I give you credit for depicting such a controversial prediction with so much detail. It is also quite captivating to read.

I think we all agree here something is brewing since the sorcerer's apprentices cheated the last economic cycle in 2008. Casualization of employment, liberalisation of the economy, privatisation, explosion of public and private debt and general high leverage in the economy, there isn’t much left the govs’ haven’t done to prop up the economy any further, and you may be right to think that we are on the verge of witnessing the greatest investment programme ever conceived. Saying all that, the industry of the future are robotics, medical, AI, big data, green energy, telecom, and socially responsible tertiary company to name a few, where the heck are they going to find millions of trained engineers and tough low skilled workers to put the rail down or install fibre optic up the highlands.  History doesn’t repeat itself, and there is something deeply unintuitive in expecting the next recovery cycle to be based on traditional, old fashioned industries (but my intuition might be completely wrong!).

Inflation wise, if we have a large unemployed workforce, and an ever greater overcapacity in most commodity markets after decades of cheap money (china is piling up vast amount of unused steel and other raw materials), the inflationary pressure will be initially low, although I guess enough money printing will eventually trigger some. On the other hand, I do agree that infrastructure are in a severe need of investment (US alone needs $15 TRILLION just to renovate the existing ones, let alone building more) so some dots undeniably align here.

[durhamborn]

22 minutes ago, PerfectCircle said:

First of all, I give you credit for depicting such a controversial prediction with so much detail. It is also quite captivating to read.

I think we all agree here something is brewing since the sorcerer's apprentices cheated the last economic cycle in 2008. Casualization of employment, liberalisation of the economy, privatisation, explosion of public and private debt and general high leverage in the economy, there isn’t much left the govs’ haven’t done to prop up the economy any further, and you may be right to think that we are on the verge of witnessing the greatest investment programme ever conceived. Saying all that, the industry of the future are robotics, medical, AI, big data, green energy, telecom, and socially responsible tertiary company to name a few, where the heck are they going to find millions of trained engineers and tough low skilled workers to put the rail down or install fibre optic up the highlands.  History doesn’t repeat itself, and there is something deeply unintuitive in expecting the next recovery cycle to be based on traditional, old fashioned industries (but my intuition might be completely wrong!).

Inflation wise, if we have a large unemployed workforce, and an ever greater overcapacity in most commodity markets after decades of cheap money (china is piling up vast amount of unused steel and other raw materials), the inflationary pressure will be initially low, although I guess enough money printing will eventually trigger some. On the other hand, I do agree that infrastructure are in a severe need of investment (US alone needs $15 TRILLION just to renovate the existing ones, let alone building more) so some dots undeniably align here.

I agree we cant know exactly how it will play out,or the exact winners.However its not about that.Its about where will assets gain from the inflation.Remember with prices increasing some companies can increase prices quickly,some cant.Companies with huge,expensive assets gain because prices increase quicker than they need to depreciate those assets.Earnings increase very fast.If your a customer facing business costs increase faster than you can pass on.Earnings fall.Im only interested in making/protecting capital and protecting my family.

AI might be the future and the top AI stock is Nvidia (NVDA),i predict that by 2024 silver miners (SIL) will of outperformed Nvidia by 500%.Copper miners too,and gold,and energy.Some of the oldest industries in the world.I wouldnt be at all surprised if silver and gold miners outperformed Nvidia by 150% over the next 12 months.

[assetpricing]

the key thing to trigger the next inflation process is the money by the next massive print going to the industries and workers rather than the banking system.

[bricor mortis]

I have been wondering...about the mass print and infrastructure spending hypothesis DB has conjured...Could a fly in the ointment be that it takes sooo long for planning, then designing, then constructing, for instance look at Hinckley, HS2, any other public works scheme, ok they might over ride planning consent as DB suggests above, but even so, it does take time to design and plan, so by the time it all goes pear shaped, an infrastructure related binge maybe is going to come along a bit late in the game. So I would not be surprised if they do helicopter the public until infrastructure projects get in gear. Just my musings, opinions welcome.

 

[Toast]

3 hours ago, PerfectCircle said:

Saying all that, the industry of the future are robotics, medical, AI, big data, green energy, telecom, and socially responsible tertiary company to name a few, where the heck are they going to find millions of trained engineers and tough low skilled workers to put the rail down or install fibre optic up the highlands.

This may well be true, but in the sense that that's where the biggest growth is. However, a modern economy is largely a traditional economy, but with new bits bolted on. We still need the physical infrastructure and the boring parts we don't think too much about, in order for the new shiny stuff to exist at all - and doubly so if we have neglected to maintain the former. I seem to remember reading that the war which used the most horses was the second world war.

[bricor mortis]

On 17/10/2017 at 10:31 AM, durhamborn said:

http://www.cityam.com/274005/shares-merlin-entertainment-slump-terrorist-attacks-and-bad

Its almost every day a consumer facing stock warns on profits.Always an excuse of course.Terrorists,rain,no big sports event,sun,whatever.

The market slice the shares 20% and move on thinking thats it.However its not it.These companies are starting to see the start of a tapped out consumer and how inflation in certain sectors leads to deflation.Merlin above are pulling in capital investment.Last week Marstons said they were slowing down their build out of new pubs etc.Thats just the start.All investment will be stopped as consumer facing companies see margins evaporate and bank covenants come under pressure.

This bear market will of destroyed a lot of equity long before the mainstream even pick up we are in a bear market.

Merlin entertainment...... I took a friend to Warwick Castle two years ago thinking it would be a National Trust property and it would cost about £6 or £ 7 to get in. 

On arrival it was £ 6 ....for the carpark! .... I parked in a street 200 yards away for free and went back. It then became clear this piece of National heritage has been quietly acquired by Merlin. When I asked at the gate for admission prices I was advised that well I could get tickets for £ 28 each, but these would not entitle me to see the whole site, for that I would need premium  £34 pound tickets. Needless to say I refused to pay, and went to a local museum for free instead. 

Sorry if this is a bit off topic

Edited October 18, 2017 by bricor mortis
apologies for slightly off topic rant

[Funn3r]

If inflation does go to 10-20% then pensioners will be screwed. Mine (not drawing it yet) goes up with inflation but capped at a few percent and I assume they are all the same. 

I sometimes wonder whether we will get the deflationary crash but then just stay there. I went to see Blade Runner 2049 last night and unless you are an elite replicant designer you basically live in a slum eating noodles forever in persistent drizzle, snow, and neon lights.

[Inoperational Bumblebee]

23 minutes ago, Funn3r said:

...you basically live in a slum eating noodles forever in persistent drizzle, snow, and neon lights.

Sounds like Wales.

[Mooping]

7 minutes ago, Inoperational Bumblebee said:

Sounds like Wales.

I read somewhere that the original Blade Runner city scene was inspired by the view of the enormous Port Talbot Steel Works.

[zugzwang]

5 hours ago, durhamborn said:

There will be other ways it plays out we cant see of course ,but this wont push up most asset prices.Only inflation assets,and those arent well understood,and most portfolios or funds wont hold very many until its too late.Lets see how much longer we limp along.

The economy can be re-balanced in two ways. Either asset prices fall, or current prices (and incomes rise). Or both.

My argument against a hyperinflation is the cost of energy. Energy spikes are inherently disinflationary, and keeping inflation out of the energy complex is going to be hugely problematic when >£600bn is being dropped on infrastructure. Oil contracts have most of the attributes of money (durable, fungible, convenient, traded worldwide etc.). Historically they've been employed as both a liquidity substitute and a store of value.

Hard times ahead for everybody, yes. But an asymmetric recovery, fundamentally, with the bulk of the readjustment being borne by asset holders.

 

 

Edited October 18, 2017 by zugzwang