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Deflationary collapse and the Reflation Cycle to Come.


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9 hours ago, Sancho Panza said:

Thanks for putting this up Errol.I've read him before when you've posted his stuff.

Interesting that he says

' The homebuilders are already in a bear market, like the one that started in mid-2005 in the same stocks about 18 months before the stock market started heading south in 2007. My Short Seller’s Journal subscribers and I are raking in a small fortune shorting and buying puts on homebuilder stocks. As an example, I recommended shorting Hovnanian (HOV) at $2.88 in early January. It’s trading at $1.78 as I write this – a 38.2% ROR in 4 months. Anyone get that with AMZN in the last 4 months? You can learn more about the SSJ here: Short Seller’s Journal. '

 

Very much coincides with my view on Uk building stocks

I think house prices are now in their bear market.I track house builders average price (that shows when the top priced houses on developments are sticking) and they are turning down.The only way builders can increase profits from here is increase supply.HTB is the fly in ointment though,young people are jumping in with it and hanging themselves.

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Rather than put my thoughts in other threads about how i see the end of this cycle playing out i thought a thread dedicated to this would be a much better idea.Many other posters here have some great

How convenient.

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27 minutes ago, durhamborn said:

I think house prices are now in their bear market.I track house builders average price (that shows when the top priced houses on developments are sticking) and they are turning down.The only way builders can increase profits from here is increase supply.HTB is the fly in ointment though,young people are jumping in with it and hanging themselves.

From Wed:
 

Quote

 

Crest Nicholson has warned that its margins will be squeezed by flat house prices and rising business costs, prompting investors to send the housebuilder’s shares down 13pc.

The company said that, while it had enjoyed “strong growth in revenues and housing unit numbers in the first six months of 2018... generally flat pricing against a backdrop of continuing build cost inflation at 3-4pc will mean that operating margins for the full year are expected to be around 18pc”. That is at the bottom end of Crest Nicholson’s 18pc to 20pc guided range.

Average selling prices rose 5pc at £439,000 in the first half of the year and the housebuilder expects revenue growth of more than 15pc this year, with year-to-date completions already 11pc ahead of the same period last year.

The company said that sales at higher price points had proven “difficult to achieve”, which it said “reflects the greater interdependency of higher-value sales with transactions in the second-hand market, where activity has been more subdued and property chains have been taking longer to complete”.

The housebuilder expects that trend to continue, which it said would suppress prices and cause its margins to be flat.

https://www.telegraph.co.uk/business/2018/05/16/crest-nicholson-shares-slip-warns-margins/

 

 

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10 hours ago, Sancho Panza said:

 

Very much coincides with my view on Uk building stocks

Why are they building like crazy at the moment? Everywhere I go I see new builds going up. Do they already know bad times are coming and want to get rid of their land banks quickly? 

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1 hour ago, durhamborn said:

I think house prices are now in their bear market.I track house builders average price (that shows when the top priced houses on developments are sticking) and they are turning down.The only way builders can increase profits from here is increase supply.HTB is the fly in ointment though,young people are jumping in with it and hanging themselves.

Indeed, and the not-so-young. especially in the SE. It's easy for us to critique on here but most of them feel as though they have no other choice.

1 hour ago, Funn3r said:

Why are they building like crazy at the moment? Everywhere I go I see new builds going up. Do they already know bad times are coming and want to get rid of their land banks quickly? 

I imagine these things are planned so far in advance due to our insanely restrictive planning procedures that, despite economic forecasts, homebuilders (just like their HTB customers) are guilty of getting a little caught up in the good times. For those painfully holding off long term and continuing to fund landlord early retirement lifestyles (like me), this extra stock is most welcome.

 

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Yet another article along the same lines as @durhamborn , looming liquidity crisis:

http://www.mauldineconomics.com/editorial/a-liquidity-crisis-of-biblical-proportions-is-upon-us/#

Quote

You see, it’s not just borrowers who’ve become accustomed to easy credit. Many lenders assume they can exit at a moment’s notice. One reason for the Great Recession was so many borrowers had sold short-term commercial paper to buy long-term assets.

Things got worse when they couldn’t roll over the debt and some are now doing exactly the same thing again, except in much riskier high-yield debt. We have two related problems here.

  • Corporate debt and especially high-yield debt issuance has exploded since 2009.
  • Tighter regulations discouraged banks from making markets in corporate and HY debt.

Both are problems but the second is worse. Experts tell me that Dodd-Frank requirements have reduced major bank market-making abilities by around 90%. For now, bond market liquidity is fine because hedge funds and other non-bank lenders have filled the gap.

The problem is they are not true market makers. Nothing requires them to hold inventory or buy when you want to sell. That means all the bids can “magically” disappear just when you need them most.

These “shadow banks” are not in the business of protecting your assets. They are worried about their own profits and those of their clients.

Gavekal’s Louis Gave wrote a fascinating article on this last week titled, “The Illusion of Liquidity and Its Consequences.” He pulled the numbers on corporate bond ETFs and compared them to the inventory trading desks were holding—a rough measure of liquidity.

Louis found dealer inventory is not remotely enough to accommodate the selling he expects as higher rates bite more.

We now have a corporate bond market that has roughly doubled in size while the willingness and ability of bond dealers to provide liquidity into a stressed market has fallen by more than -80%. At the same time, this market has a brand-new class of investors, who are likely to expect daily liquidity if and when market behavior turns sour. At the very least, it is clear that this is a very different corporate bond market and history-based financial models will most likely be found wanting.

Quote

Leverage, Leverage, Leverage

To make matters worse, many of these lenders are far more leveraged this time. They bought their corporate bonds with borrowed money, confident that low interest rates and defaults would keep risks manageable.

In fact, according to S&P Global Market Watch, 77% of corporate bonds that are leveraged are what’s known as “covenant-lite.” That means the borrower doesn’t have to repay by conventional means.

Somehow, lenders thought it was a good idea to buy those bonds. Maybe that made sense in good times. In bad times? It can precipitate a crisis. As the economy enters recession, many companies will lose their ability to service debt, especially now that the Fed is making it more expensive to roll over—as multiple trillions of dollars will need to do in the next few years.

Normally this would be the borrowers’ problem, but covenant-lite lenders took it on themselves.

The macroeconomic effects will spread even more widely. Companies that can’t service their debt have little choice but to shrink. They will do it via layoffs, reducing inventory and investment, or selling assets.

All those reduce growth and, if widespread enough, lead to recession.

Let’s look at this data and troubling chart from Bloomberg:

Companies will need to refinance an estimated $4 trillion of bonds over the next five years, about two-thirds of all their outstanding debt, according to Wells Fargo Securities. This has investors concerned because rising rates means it will cost more to pay for unprecedented amounts of borrowing, which could push balance sheets toward a tipping point. And on top of that, many see the economy slowing down at the same time the rollovers are peaking.

“If more of your cash flow is spent into servicing your debt and not trying to grow your company, that could, over time—if enough companies are doing that—lead to economic contraction,” said Zachary Chavis, a portfolio manager at Sage Advisory Services Ltd. in Austin, Texas. “A lot of people are worried that could happen in the next two years.”

 

Edited by Barnsey
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12 hours ago, DoINeedOne said:

Whats peoples view on Vodafone over the last few days its been down dropped below £2 "Vodafone chief bows out after ‘remarkable transformation"

 

I know DYOR and have bought some over the past day or so 

Ex div date looming. I bought these a couple of months back for 191. In fact my very first shares purchase! I topped up today aswell. At this price it's gone into my HL Shares ISA for the long term.

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On 18/05/2018 at 07:41, Talking Monkey said:

Anyone know who bought those treasuries. A fascinating post

https://wolfstreet.com/2018/05/16/but-who-the-heck-bought-the-1-2-trillion-in-new-us-debt-over-the-past-12-months/

'Here are the top holders of Treasuries, after China and Japan – many of them tax havens and alleged money laundering centers, and tiny countries or jurisdictions with inexplicably huge balances. For example, Ireland, which is in overall third position behind China and Japan, holds $318 billion of Treasuries, higher than its GDP ($304 billion in 2016).

  • Ireland: $318 billion
  • Brazil: $286 billion
  • United Kingdom (“City of London!”): $264 billion
  • Switzerland: $245 billion
  • Cayman Islands: $243 billion
  • Luxembourg: $222 billion
  • Hong Kong: $196 billion
  • Taiwan: $170 billion
  • India: $157 billion
  • Saudi Arabia: $151 billion
  • Belgium: $125 billion

Note that Germany, a country with a massive trade surplus with the US and the rest of the world, and the fourth largest economy in the world, only holds $76 billion in Treasuries.

In total, foreign holdings edged up by $2.3 billion In March, to $6.294 trillion. Over the past 12 months, these holdings gained $220 billion.

Over the same 12-month period through March 31, 2018, the US gross national debt surged by mind-boggling $1.24 trillion with a T to an even more mind-boggling $21.1 trillion. This is split in two ways:

  1. Debt held internally by US government entities has risen by $185 billion to $5.66 trillion
  2. Debt that is publicly traded has soared by $1.06 trillion to $15.4 trillion.

This publicly traded debt of $15.4 trillion is held by these entities:

  • 15.6% or $2.4 trillion by the Fed as part of its QE
  • 41.0% or $6.3 trillion by foreign official entities (see above).
  • 49.4% or $6.7 trillion by, well, mostly Americans, directly or indirectly.

It’s mostly Americans directly and indirectly, via bond funds pension funds, and other ways, along with some “unofficial” investors from other countries. For them, Treasuries have become more attractive as yields have now risen sharply – though they remain relatively low. These “risk free” Treasury yields from three month and up now even exceed the S&P 500 dividend yield, and they practically blow away the yields in the twisted NIRP regions of Europe and Japan. So that’s a deal. '

Edited by Sancho Panza
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On 18/05/2018 at 09:37, durhamborn said:

I think house prices are now in their bear market.I track house builders average price (that shows when the top priced houses on developments are sticking) and they are turning down.The only way builders can increase profits from here is increase supply.HTB is the fly in ointment though,young people are jumping in with it and hanging themselves.

I'm doing the bulk of my chart work at the minute on the UK housebuilders.

I think a good few are in the topping out process.And a good few have had an exponential rise over the last two years.Chart work is a highly individual thing and there are no set rules that guarantee successful trades in my expereince.That being said,they have incredible value and some combinations work incredibly well for some sectors.Some rules are timeless eg ' the more a resistance is tested the more likely it is to break'.

Building land moves at 3 times the rate of change to house prices,given prices appear to be on the verge of dropping,a lot of assets may not be worth what was paid in a year or two.

As I've stated previously,the builders dropped hard before Northern Rock in 2007,with Lehman,Bear,RBS,A&L,B&B going in 2008....

Intersting times will start if the builders break south imho.

 

Edit to add-LCP/LSL Acadata come out over the next two weeks,and the LCP data does include new builds which is where the action lies at the moment

 

Edited by Sancho Panza
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On 18/05/2018 at 11:34, Barnsey said:

Yet another article along the same lines as @durhamborn , looming liquidity crisis:

http://www.mauldineconomics.com/editorial/a-liquidity-crisis-of-biblical-proportions-is-upon-us/#

 

The increasingly excellnet Wolf St-I'm virtually spamming it at the minute-has another good piece on movement at the margins in US credit card markets.Worth reading the whole thing.

https://wolfstreet.com/2018/05/18/credit-card-delinquencies-spike-past-financial-crisis-peak-at-smaller-us-banks/

'Credit Card Delinquencies Spike Past Financial-Crisis Peak at the 4,788 Smaller US Banks

by Wolf Richter • May 18, 2018 • 66 Comments

Subprime is calling.

In the first quarter, the delinquency rate on credit-card loan balances at commercial banks other than the largest 100 – so at the 4,788 smaller banks in the US – spiked in to 5.9%. This exceeds the peak during the Financial Crisis. The credit-card charge-off rate at these banks spiked to 8%. This is approaching the peak during the Financial Crisis.

A sobering set of numbers the Federal Reserve Board of Governors released this afternoon.

But the surge in charge-offs at these banks points at something fundamental: Credit problems at the margin. The consumer spending binge in recent years has been funded not by surging incomes at the lower 60% of the wage scale, where real wage stagnation has reigned, but by borrowing – particularly via credit cards and auto loans. Both of them have turned sour at the margins. And these are still the best of times.

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26 minutes ago, Sancho Panza said:

The increasingly excellnet Wolf St-I'm virtually spamming it at the minute-has another good piece on movement at the margins in US credit card markets.Worth reading the whole thing.

https://wolfstreet.com/2018/05/18/credit-card-delinquencies-spike-past-financial-crisis-peak-at-smaller-us-banks/

'Credit Card Delinquencies Spike Past Financial-Crisis Peak at the 4,788 Smaller US Banks

by Wolf Richter • May 18, 2018 • 66 Comments

Subprime is calling.

In the first quarter, the delinquency rate on credit-card loan balances at commercial banks other than the largest 100 – so at the 4,788 smaller banks in the US – spiked in to 5.9%. This exceeds the peak during the Financial Crisis. The credit-card charge-off rate at these banks spiked to 8%. This is approaching the peak during the Financial Crisis.

A sobering set of numbers the Federal Reserve Board of Governors released this afternoon.

But the surge in charge-offs at these banks points at something fundamental: Credit problems at the margin. The consumer spending binge in recent years has been funded not by surging incomes at the lower 60% of the wage scale, where real wage stagnation has reigned, but by borrowing – particularly via credit cards and auto loans. Both of them have turned sour at the margins. And these are still the best of times.

Sancho Panza-  watching the same site these days- agree that it’s increasingly juicy. Do you think bitcoin was a vehicle for Chinese money to exit their country and do you think international capital flows will flood to dollar assets when it all hits?

Edited by Thorn
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3 hours ago, Thorn said:

Sancho Panza-  watching the same site these days- agree that it’s increasingly juicy. Do you think bitcoin was a vehicle for Chinese money to exit their country and do you think international capital flows will flood to dollar assets when it all hits?

I have little understanding of Bticoin and the like.Hence I'd never trade it.

From what I understand,it's a decent mechanism to dodge capital controls etc.

I'm a $ bull for sure when it comes to the longer term.

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8 hours ago, Thorn said:

Sancho Panza-  watching the same site these days- agree that it’s increasingly juicy. Do you think bitcoin was a vehicle for Chinese money to exit their country and do you think international capital flows will flood to dollar assets when it all hits?

The simple answer is to hedge your bets and diversify. I have bitcoin (as well as other Crypto), yes it’s all mostly speculation. But Bitcoin and Monero are the two main currencies used on the dark web, so as these have a real world use (albeit mostly an immoral one), they have value. 

My gut feeling is when the time comes and countries are fleeing their currencies, Bitcoin will go stratospheric. I do believe that banks have bought enough now however to be able to manipulate the price of crypto, just like gold in a way.

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On 18/05/2018 at 09:15, DoINeedOne said:

Whats peoples view on Vodafone over the last few days its been down dropped below £2 "Vodafone chief bows out after ‘remarkable transformation"

 

I know DYOR and have bought some over the past day or so 

Telcos are out of favour,and have been for a good while now.They have all invested heavily in their networks and some (BT) still will be for several years.This means debt has gone up and/or free cash flow has been swallowed up.As free cash is used for investment debts remain high/dividends look at risk.However once this investment falls and depreciation costs also fall free cash can explode higher.The debt has been borrowed at around 3%,Vodaphone even have some around 1.5%.In affect bond holders have financed the networks that in an inflation cycle will reward the equity while the bonds/debt is inflated away.A lot depends on if the telecos can push through inflation increases through the next cycle.If they can they are probably very very cheap.Of course the market worries that higher interest rates mean much higher re-finance costs,and that is true,however it is nothing compared to the increase in free cash from falling investment and increasing prices.

I bought Vod a while ago at £1.91 and i added a few BT last week,that was more a punt for the long term because i rate the Chairman very highly,even though they have a big problem with the pension scheme.DYOR and just my opinions etc.

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6 minutes ago, DoINeedOne said:

Eldorado Gold had a good day up 16.8%

 

The main aim is to reach an agreement in the coming weeks within the spirit of the arbitration ruling – Stathakis as quoted by the Greek energy ministry. 

It did. Lots of the miners are crawling up- First Majestic, Sibanye too. And Cameco is a bit of an odd one but interesting to see what will happen.

DB’s picks have been on the money. DYOR etc. but thanks again DB.

I want to figure out how to protect the gains from a crash. Not sure how to put rolling stops on HL SIPP.

I am now reading a really good book called The Long and The Short of It. John Kay. Really recommend it- puts a lot of concepts together for a novice.

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8 hours ago, Thorn said:

 

I want to figure out how to protect the gains from a crash. Not sure how to put rolling stops on HL SIPP.

 

Best way to win is to cash out.

Stop losses wont work if a collapse comes, read the small print, the game is rigged.

If no one is buying, you cant sell.

Cash out, keep the cash or buy something physical is the only way to win if you are a little person

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19 minutes ago, TheCountOfNowhere said:

Best way to win is to cash out.

Stop losses wont work if a collapse comes, read the small print, the game is rigged.

If no one is buying, you cant sell.

Cash out, keep the cash or buy something physical is the only way to win if you are a little person

I agree with that Count.I never use a stop loss.Im not interested in the price the market puts on something,only the price i put on it.I quite often top slice holdings and i have done that to several the last few weeks (DRAX,Royal Mail,Go Ahead).

Noticed Hammond on about telco investment.All part of whats coming in a reflation.Interesting the way he says they will create the conditions.Through tax,less regulation,lifting price caps no doubt.

https://www.theguardian.com/business/2018/may/22/uk-needs-big-digital-upgrade-to-thrive-after-brexit-says-hammond

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2 hours ago, whome_yesyou said:

Wouldn’t gold miners go up in a crash event though? 

They might,they might not.there are no guaranteed moves when there's market wide sell off.

Only risk what you can afford to lose and spread your risk etc.We are mainly cash with a few genuine longs in the goldies,telecoms,oilies,utilities.If the goldies get smacked in a crash,we'll move our weighting up.

The bulk of the cash will likely be heading back into the bigger divi payers.That's my plan anyway.

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8 hours ago, durhamborn said:

I agree with that Count.I never use a stop loss.Im not interested in the price the market puts on something,only the price i put on it.I quite often top slice holdings and i have done that to several the last few weeks (DRAX,Royal Mail,Go Ahead).

Noticed Hammond on about telco investment.All part of whats coming in a reflation.Interesting the way he says they will create the conditions.Through tax,less regulation,lifting price caps no doubt.

https://www.theguardian.com/business/2018/may/22/uk-needs-big-digital-upgrade-to-thrive-after-brexit-says-hammond

Drax, since I bought in Feb has gone up 25%. Sold the lot yesterday and put it into IBTL. Hope I made the right choice. We'll see I guess.

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