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durhamborn

Deflationary collapse and the Reflation Cycle to Come.

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So the news today is that the UK ecomony is doing great.

Completely at odds with the sentiment of this thread.

I guess time will tell, but for now the can appears to have been kicked all the way to the end of the street.

 

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1 hour ago, Pitchfork said:

So the news today is that the UK ecomony is doing great.

Completely at odds with the sentiment of this thread.

I guess time will tell, but for now the can appears to have been kicked all the way to the end of the street.

 

its at total odds with what people are writing not only on this thread but on other threads on the site too,

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1 hour ago, Pitchfork said:

So the news today is that the UK ecomony is doing great.

Completely at odds with the sentiment of this thread.

I guess time will tell, but for now the can appears to have been kicked all the way to the end of the street.

 

The most optimistic Treasury forecast is 1% growth p.a. for the foreseeable future? Pitiful. Even 'Hockeysticks' Chote couldn't summon up any enthusiasm.

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1 hour ago, Pitchfork said:

So the news today is that the UK ecomony is doing great.

Completely at odds with the sentiment of this thread.

I guess time will tell, but for now the can appears to have been kicked all the way to the end of the street.

 

Philip Hammond tried hard to disguise Britain's gloomy economic outlook

https://www.bloomberg.com/amp/news/articles/2018-03-13/u-k-raises-2018-economic-growth-forecast-to-1-5-vs-1-4-jepndn8h?

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not to worry, i reckon the guardians days are numbered, what they need to do it stop printing the paper and put up a paywall on the website, its like reading through mud, im never any better off after ive read something there, I always assumed the lack/removal/slowdown of comments was either a way to save money on discus licensing fees or a method of ensuring puff pieces got no criticism.

Hopefully the BBC will be forced at some point to go commercial, then watch it die a thousand deaths. Ive seen them decimated (the msm) in my own lifetime, i reckon that could accelerate and i may see them go to the wall before i kick the bucket, that would be something worth staying alive for.

Maybe Jonathan ross will get beaten  up as well at some point.

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12 minutes ago, leonardratso said:

not to worry, i reckon the guardians days are numbered, what they need to do it stop printing the paper and put up a paywall on the website, its like reading through mud, im never any better off after ive read something there, I always assumed the lack/removal/slowdown of comments was either a way to save money on discus licensing fees or a method of ensuring puff pieces got no criticism.

Hopefully the BBC will be forced at some point to go commercial, then watch it die a thousand deaths. Ive seen them decimated (the msm) in my own lifetime, i reckon that could accelerate and i may see them go to the wall before i kick the bucket, that would be something worth staying alive for.

Maybe Jonathan ross will get beaten  up as well at some point.

Nothing against Jonathan Woss as such but otherwise thanks for cheering me up

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3 minutes ago, Funn3r said:

Nothing against Jonathan Woss as such but otherwise thanks for cheering me up

Absolutely, they're all twats!

Nice post leonardratso.

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Crikey, the FTSE dividend stocks (BATS, VOD, GSKL, etc) had quite a poor day today!  And the index approaching it's third retest of the 2015 high.  At least GBP holding up.

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Interesting about VOD for sure. 

Thinking about active picks v passive strategy constantly here and I’ve been wondering how much of the stock market is active versus passive investment.

https://www.reuters.com/article/us-funds-blackrock-passive/less-than-18-percent-of-global-stocks-owned-by-index-investors-blackrock-idUSKCN1C82TE

This article suggests that for every $1 in trackers there are $22 being actively invested out there.

 

Edited by Thorn

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6 minutes ago, Thorn said:

Interesting about VOD for sure. 

Thinking about active picks v passive strategy constantly here and I’ve been wondering how much of the stock market is active versus passive investment.

https://www.reuters.com/article/us-funds-blackrock-passive/less-than-18-percent-of-global-stocks-owned-by-index-investors-blackrock-idUSKCN1C82TE

This article suggests that for every $1 in trackers there are $22 being actively invested out there.

 

And interestingly for readers of this thread...

Oaktree Capital Management LP Co-Chairman Howard Marks told clients this summer that active managers’ underperformance could be temporary and that ETFs’ “promise of liquidity has yet to be tested in a major bear market.”

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8 hours ago, Thorn said:

And interestingly for readers of this thread...

Oaktree Capital Management LP Co-Chairman Howard Marks told clients this summer that active managers’ underperformance could be temporary and that ETFs’ “promise of liquidity has yet to be tested in a major bear market.”

This was summed up well for me by a poster 100's of pages ago who pointed out that when TSHTF then fund holders will all be trying to leave through a very narrow door. Not where you want to be in a major financial crash!

Dumped my LS100 last week. Christ, I'd be selling my house if didn't think my wife would leave me :rolleyes:

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8 hours ago, Thorn said:

And interestingly for readers of this thread...

Oaktree Capital Management LP Co-Chairman Howard Marks told clients this summer that active managers’ underperformance could be temporary and that ETFs’ “promise of liquidity has yet to be tested in a major bear market.”

The next cycle will favour good active managers i think,of course charges need to be watched.I actually sold the tobacco stocks at the top (within 5%) id had them since 2000.Im actually tempted to pick a few of Imperial back up as its down 40% since then.They are bond proxies of course in a deflation due to cash generation and dividends and go over valued,but once the divis hit 8% they are probably a good reflation stock as well,their input costs are low.The problem is the debt profile.There is about £12 billion and £7 billion spread in £ $ and Euro that needs to be re-financed from 2022 onwards to 2026.If rates are much higher then it will take a lot of earnings,they were having to issue at 8% and 9% during the financial crisis.If i was them i would change the 10% dividend increase to inflation+2% and start cracking down the debt more.

VOD i like a lot and already own some.I would like to add a lot more,but am waiting on that for now.Buying would be a lot easier without all these big debts,though cash flow will be king soon.

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the moneysavingexpert news letter had an offer from nutmeg offering £200 if you invested £1900 over the course of a year.

 

While I'm tempted to do the bear minimum required to get that £200 I took one look at the description of nutmeg and thought I don't want a computer picking stocks at this moment.

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32 minutes ago, Houdini said:

the moneysavingexpert news letter had an offer from nutmeg offering £200 if you invested £1900 over the course of a year.

 

While I'm tempted to do the bear minimum required to get that £200 I took one look at the description of nutmeg and thought I don't want a computer picking stocks at this moment.

"robo funds" - are people mad? The offer doesnt seem as good as I initially thought either. You have to leave the £1900 in for 2 years min and there is an annual 1% management charge.

Assuming it makes no gain (or no loss)

£200-£19-£19= £162

£81 per year for a £1900 investment - 4.2%. Not too shabby but beaten by a safe and sound Nationwide flex direct account and most bank switch offers for much lower risk

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12 hours ago, Thorn said:

And interestingly for readers of this thread...

Oaktree Capital Management LP Co-Chairman Howard Marks told clients this summer that active managers’ underperformance could be temporary and that ETFs’ “promise of liquidity has yet to be tested in a major bear market.”

For me there are several potential problems with ETF's

1) some don't hold the underlying and use derivatives to mirror the price action.

2) the ones that hold the un derlying are effectively buying a lot of the dross alongside the good stuff

3) ETF's ability to offload the dross in a major correction commensurate with the dross' compostion of the index has never realy been tested.

4) If a lot of people start selling ETF's they're costs as a %age could rise.

5) If they are unable to offload falling shares quickly enough then their ability to mirror an index might suffer.

Having said that,I'm not sure about the liquidity requirements for ETF's but I figure you must be pretty safe with the larger ones eg Tresury ETF's,GDX etc

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4 hours ago, durhamborn said:

 

VOD i like a lot and already own some.I would like to add a lot more,but am waiting on that for now.Buying would be a lot easier without all these big debts,though cash flow will be king soon.

In this environment there are few shares that aren't carrying debt.Given how cheap it's been to borrow,you have to see it from their position.

Have to say that I'm starting to run my slide rule over a few water companies at the moment.Lot of politcal risk but some eg United utilities are 30% off peak and in a strong downtrend.Could be more to come.

Edited by Sancho Panza

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19 minutes ago, Sancho Panza said:

In this environment there are few shares that aren't carrying debt.Given how cheap it's been to borrow,you have to see it from their position.

Have to say that I'm starting to run my slide rule over a few water companies at the moment.Lot of politcal risk but some eg United utilities are 30% off peak and in a strong downtrend.Could be more to come.

Yes,i think a lot depends on the length of the debt and the interest etc (and if it was used for valuable fixed assets).As long as free cash flow remains high a reflation can see debt being inflated away.Bond holders take a bath at the expense of equity.They fund the profit yet lose from inflation.The market is selling off what they consider bond proxies,but some of them also gain from any reflation.Some are getting to prices id much rather own than cash if people lose faith in government etc.

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3 minutes ago, durhamborn said:

Yes,i think a lot depends on the length of the debt and the interest etc (and if it was used for valuable fixed assets).As long as free cash flow remains high a reflation can see debt being inflated away.Bond holders take a bath at the expense of equity.They fund the profit yet lose from inflation.The market is selling off what they consider bond proxies,but some of them also gain from any reflation.Some are getting to prices id much rather own than cash if people lose faith in government etc.

My concern with water companies is that they are regulated as to how much prices can be raised and have in the past been used as a political football. 

That's not to say that they may not be good investments (assuming they have kept their network maintained and there isn't nasty surprises down the line) but its a riskier investment than a few other options.

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1 minute ago, Houdini said:

My concern with water companies is that they are regulated as to how much prices can be raised and have in the past been used as a political football. 

That's not to say that they may not be good investments (assuming they have kept their network maintained and there isn't nasty surprises down the line) but its a riskier investment than a few other options.

I agree,and in a rising rate cycle they will struggle to increase earnings their debt loads are so huge.They also dont have the option to flog off bits.I miss the days when i owned Thames and Yorkshire though,hated it when they were bought out,i wanted the divi streams.

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1 hour ago, Sancho Panza said:

For me there are several potential problems with ETF's

1) some don't hold the underlying and use derivatives to mirror the price action.

2) the ones that hold the un derlying are effectively buying a lot of the dross alongside the good stuff

3) ETF's ability to offload the dross in a major correction commensurate with the dross' compostion of the index has never realy been tested.

4) If a lot of people start selling ETF's they're costs as a %age could rise.

5) If they are unable to offload falling shares quickly enough then their ability to mirror an index might suffer.

Having said that,I'm not sure about the liquidity requirements for ETF's but I figure you must be pretty safe with the larger ones eg Tresury ETF's,GDX etc

ETFS All Commodities ETF had a serious fall during the GFC with the collapse of AIG.  I have still not made up my losses.

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As ever,hattip @zugzwang for putting me onto this guy.

Talking about how NIRP doesn't work and why?

Also discussing the outlook for IR's..

https://suremoneyinvestor.com/2018/03/heres-how-europes-housing-bubble-could-kill-your-portfolio/

'Since 2013 the population of the European Union has grown by about 2%. That’s a growth rate of roughly 0.4% per year. Over that span, consumer prices in Europe have inflated by a total of 3.4%, an average of less than 0.7% per year. Meanwhile, European home prices have risen by 16%. When house prices inflate 8 times faster than population growth and nearly 5 times faster than consumer price inflation, in my book that’s a bubble.

 

1-SMI-graph.jpg


And we know what drives it – central bank policy that keeps mortgage rates at abnormally low levels, along with a policy that penalizes depositors for holding deposits – negative interest rates. These policies have succeeded in stimulating housing bubbles, but have failed to trigger broad economic growth.

 

The ECB has jumped through hoops promulgating the twin insanities of QE and negative interest rates. QE is printed money used to buy European bonds, thereby pushing down European long term interest rates, including mortgage rates. Buyers get abnormal subsidies from super low interest rates, and sellers get inflated prices.

But then the ECB uses negative interest rates to penalize the holding of deposits. Negative interest rates hit big institutions who hold massive deposits. Thus they have an incentive to extinguish deposits by using them to pay off debt. They get rid of loans faster than they take them out.

The result is that the ECB’s objective of stimulating credit growth and thereby economic growth can never be met, because banks and other large entities pay down loans to get rid of the cost of holding deposits. There’s just not enough profit opportunity in the real economy for them to take out more loans on balance.  Consequently, business credit growth in Europe has been stagnant, absolutely dead, since the ECB instituted the negative interest rate policy (NIRP) and QE in September 2014.

 

2-SMI-graph.jpg


Meanwhile household debt in Europe has soared since the start of QENIRP.

 

Household debt to banks had been growing at an accelerating rate with the rise becoming parabolic in 2017. It downticked in January, but only slightly.  Household loans are now growing at a 3.4% annual rate. That’s down a tick from 3.5% in December but still up from 2.0% a year ago. The fact that consumers are adding to debt while the business is getting rid of it, maybe isn’t a good sign.

 

3-SMI-graph.jpg

In fact, it could be a reflection of that housing bubble. Mortgage lending rose €170 billion (4.2%) in the past 12 months, despite the first slight downtick in a year in January.  That annual increase accounted for 90% of the rise in consumer loans. The increase in mortgages was also 68% higher than the annual increase in January 2017. Mortgage borrowing has been accelerating along with European home prices in the last year.

 

 

4-SMI-graph.jpg

While households are increasing their mortgage debt, their revolving credit is in a downtrend. It is now down 6.4% year to year and down 17.4% since NIRP started in September 2014. Other than causing a mortgage bubble, ECB policies have had no positive impact on household borrowing.

 

 

5-SMI-graph.jpg

The mortgage bubble has once again created a situation of immense fragility at the worst possible time.  Housing prices are inflated and borrowers are stretched.

 

Now the ECB is cutting back QE. In January it reduced its purchase rate from €60 billion per month to €30 billion.

But issuers, particularly European governments, not to mention the US government, certainly aren’t cutting back issuance. They’re adding to the supply of securities that dealers, banks, and investors must absorb. And European banks are big buyers not only of their local sovereign debt, they are also big buyers of US Treasuries. They now have less money available to absorb the flow of new supply.

The supply of sovereign debt is ballooning and the money to purchase it is shrinking. Not only is the ECB buying less, but the Fed is actually pulling money out of the world financial system and markets. It has set a schedule of draining funds from the system that will increase from $20 billon per month now to $50 billion per month in October.

These forces are set in stone by central bankers determined to stick with them until, in Janet Yellen’s words, “a material adverse event.” Nobody knows what that is, but my guess is that it won’t just be a 20% decline in stock prices. I think that it will take a real financial crisis to get them to reverse course.

Meanwhile the ECB keeps floating the BS that the European recovery is strong. It’s cover for the eventually ending their QE program, possibly this fall, based on trial balloons floated by ECB proxies in the European pundit class.

In any event, the first step in course reversal won’t be to print money to buy bonds. It will be to lower nominal interest rates, which will be a “really useless and futile gesture” (apologies to Animal House) for stopping asset deflation. Money printing caused the inflation of the asset bubble, and now stopping money printing will cause its deflation.

Given these forces, such a crisis is inevitable. Only the timing is at issue.

And we have a very good idea about that…

Here’s When This Bubble Is Poised to Burst (And Soak Your Portfolio)

As ECB policy and the European housing bubble promote ever greater financial fragility, another disaster looms as a direct result of ECB policy.

The ECB has been promoting a program called the TLTRO that started in 2016. TLTRO means Targeted Long Term Lending Operations. The essence of the program is that the ECB will pay an interest bonus to banks who take these loans from the ECB and then make business loans above a certain benchmark.

This is free money for the banks. The ECB is telling the banks we’ll pay you to take this money if you lend it out. The problem is, as illustrated above, is that there is NO business loan demand.

But as we all know, bankers are clever little scoundrels. They figured out that they can earn that bonus by simply lending the money to each other. So in 2016 and 2017 they took down about half a trillion in TLTRO money, and simply lent it back and forth to each other. I believe that the January spike is another instance of that. There’s no other explanation for it.

 

6-SMI-graph.jpg

So interbank lending exploded higher to a new high in January. It broke out above the 2008 peak. Need I remind you what happened in 2008?

 

The annual growth rate of interbank loans is now a scalding 15.6%. Without these interbank games, total loan growth in the European banking system would have been negative over the past year. Interbank loans rose by–excuse me while I rub my eyes in disbelief — €921 billion in the 12 months ended January. Other types of loans barely grew at all or declined.

In March, European banks will be permitted to start paying off their TLTRO borrowings. Let’s listen for a giant sucking sound as banks rush to do that. They will use deposits created when they took the funds to repay the loans. This money, aka “liquidity,” will thereby disappear.

When that money was created, Europe’s banks used some of it to purchase US Treasuries. As deposits grew US Treasury prices rose, causing yields to fall.

 

7-SMI-graph.jpg

Some of that liquidity flowing into the US was then directed toward purchasing stocks.

 

 

8-SMI-graph.jpg

European banks will almost certainly liquidate those positions in US Treasuries to pay down the TLTROs.

 

That’s what they did when they were able to start paying down the ECB’s original LTRO programs in 2012 and 2013. European banks had used the LTROs issued in 2011 to buy Treasuries, driving US yields to their lows in in July 2012. As soon as the banks were permitted to start paying down those loans, they did. To do so, they sold their US Treasury holdings.

That selling helped drive the yield on the 10 year Treasury from 1.5% to 3% from mid 2012 through the end of 2013. I have felt, and I believe that we’ll soon know for certain, that that was the end of the secular bull market in bonds.

Now, as the European banks get ready to pay off their TLTRO loans, the 10 year US Treasury yield stands at roughly 2.85%. We’re likely to see that yield move much higher as European banks sell their US Treasury holding to pay off loans from the ECB – loans that they don’t want and don’t need.

Keep in mind that these sales will come in an environment of very heavy new supply being issued by the US Treasury. It will not be pretty.

That giant sucking sound you’ll hear will be a result of three forces. The European banks will be liquidating Treasuries and extinguishing money. At the same time as the US Treasury and other governments will be sucking up all available liquidity from a pool that is simultaneously being drained by the Fed. And chances are that the Europeans won’t be the only ones selling.

As bond prices go down that drain and yields soar, US stock prices will be pulled down in the vortex. The process of money destruction will be self reinforcing, causing liquidation of all inflated assets. The liquidation of stocks and bonds to pay off margin debt will in turn destroy money.

At some point the central banks will be forced to print a lot of money in an attempt to reverse that vicious cycle. But that point is a long way off.  Before the central banks respond, there must first be significant pain, that “material adverse event” that Yellen talked about.

I therefore continue to see all rallies in the US stock market as opportunities to sell and raise cash toward the goal of reaching 60-70% cash (more or less depending on your circumstances) if you haven’t done so already. I’d modify the old adage just a bit to “Sell by May and go away.”  If you have cash, you’ll be able to take advantage of buying opportunities down the road.'

 

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More protectionism.

 

https://wolfstreet.com/2018/03/13/leaked-trumps-next-shoe-to-drop-on-us-china-trade/

'This is the big one. It makes steel and aluminum tariffs look like a game.

 

To punish China for its intellectual property theft, including IP infringements such as counterfeiting, and to retaliate against Chinese investment rules that require technology transfers to Chinese partners in order to set up shop in China, the Trump administration is considering a proposal by the Office of the US Trade Representative (USTR) that would impose:

  • Tariffs on a large variety of Chinese products, including tech products and consumer goods like clothing.
  • Restrictions on investment by Chinese companies in the US, the first impact of which we have already seen by Trump’s order yesterday blocking all Chinese takeovers of large US tech companies.
  • And limits on visas for certain Chinese nationals.

 

Trump had pledged to crack down on the causes of the huge US trade deficit. In terms of the magnitude of the trade deficit, no country comes even close to China (chart shows China and Hong Kong combined due the transshipments via Hong Kong): '

 

 

 

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15 minutes ago, Sancho Panza said:

This is free money for the banks. The ECB is telling the banks we’ll pay you to take this money if you lend it out. The problem is, as illustrated above, is that there is NO business loan demand.

But as we all know, bankers are clever little scoundrels. They figured out that they can earn that bonus by simply lending the money to each other. So in 2016 and 2017 they took down about half a trillion in TLTRO money, and simply lent it back and forth to each other. I believe that the January spike is another instance of that. There’s no other explanation for it.

Sounds similar to the BoE's FLS.

Edited by Eddie_George

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