Deflationary collapse and the Reflation Cycle to Come.

[Errol]

4 hours ago, Option5 said:

What happens then of course is it reopens at a vastly reduced level 

The opposite will happen with gold.

[Will!]

On 14/08/2017 at 7:07 AM, stuckmojo said:

good discussion there. Sideways question: I was using Interactive Investor in the past, now I'm back to the UK I'm looking at another share dealing account. Thoughts?

Halifax.

[Will!]

On 17/08/2017 at 9:34 PM, Majorpain said:

One country to keep an eye on China, everyone thinks they are the next superpower but in reality their wealth is all one grand facade of ponzi malinvestment.  When the next crash hits its going to interesting watching the CCP trying to keep everything going when people stop buying cheap rubbish and the cash stops flowing in. 

War would be one way of doing that.

[2rocketman]

The Share Centre

[Democorruptcy]

On 8/18/2017 at 10:55 AM, durhamborn said:

The miners need gold through that $1300 level.The COMEX will probably be manipulated as much as possible to keep it down.Interesting few months ahead.

Recession....

http://charleshughsmith.blogspot.co.uk/2017/08/are-we-already-in-recession.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed:+google/RzFQ+(oftwominds)

[mathschoc]

Co-op group stake in co-op bank now at 1% after rescue package was approved

https://www.bbc.co.uk/news/amp/business-41006673

Zombie banks alive and well

[durhamborn]

1 hour ago, mathschoc said:

Co-op group stake in co-op bank now at 1% after rescue package was approved

https://www.bbc.co.uk/news/amp/business-41006673

Zombie banks alive and well

Dollar down again,gold and the miners up,some of them are really starting to motor,Sibanye is up 30%,Yamana 20%,nice return in a couple of months.Iv added in some rolling stops to lock profit in now,but hopefully they will run still with shallow pull backs as the markets turn down.The first deflationary collapse in 80+ years is coming.Here in the UK we get government borrowing tomorrow.If they borrowed more this July than last its another sign the tax take has topped out before they even got close to getting the deficit down.Thats a horrible position to be in.If the BOE print now they see inflation creep up and wages fall,if they dont the economy rolls over.The Fed will focus everyone's minds though once it starts to dawn that they have tightened the US into a recession.All coming along nice now.I think houses have topped in the UK as well.They might take a while to show up in the figures,but the secular top is probably in and will stand for a couple of decades inflation adjusted.Anyone who bought earlier this year and had a first child,that child will be off to uni before they break even again.A long distribution cycle lies ahead for houses,bonds and "growth" shares.

This great disinflation cycle is ending.I remember when it started,1982,

 

[leonardratso]

provident : nice big fall there, peter crook has resigned, hahahaha peter crook, you couldnt make it up.

[Sancho Panza]

10 hours ago, durhamborn said:

Dollar down again,gold and the miners up,some of them are really starting to motor,Sibanye is up 30%,Yamana 20%,nice return in a couple of months.Iv added in some rolling stops to lock profit in now,but hopefully they will run still with shallow pull backs as the markets turn down.The first deflationary collapse in 80+ years is coming.Here in the UK we get government borrowing tomorrow.If they borrowed more this July than last its another sign the tax take has topped out before they even got close to getting the deficit down.Thats a horrible position to be in.If the BOE print now they see inflation creep up and wages fall,if they dont the economy rolls over.The Fed will focus everyone's minds though once it starts to dawn that they have tightened the US into a recession.All coming along nice now.I think houses have topped in the UK as well.They might take a while to show up in the figures,but the secular top is probably in and will stand for a couple of decades inflation adjusted.Anyone who bought earlier this year and had a first child,that child will be off to uni before they break even again.A long distribution cycle lies ahead for houses,bonds and "growth" shares.

 

 

Some of the gold miners have had a different experience depending when you bought.Also very volatile.I've been buying through this year,so speaking from experience

Goldcorp down 10%

Barrick up 5%

Yamana down 10%

Gold Fields up 40%

Anglogold Ashanti down 10%

Novagold level,

New Gold up 7%

Eldorado down 20%

Looking back to 2008,they plummeted into collapse but came out first.

Good piece here from Mish on why it's worth getting some exposure.

https://mishtalk.com/2017/07/20/secular-disinflationary-trend-hits-new-highs-deflation-on-deck-whats-that-mean-for-gold/

'

What’s That Mean for Gold?

Contrary to popular belief, gold is not an inflation hedge. We had inflation every step of the way from 1980 to 2000 with gold falling from $850 to $250 along the way.

To be more precise, we had disinflation, a falling, but positive rate of inflation as measured by the CPI. Those are conditions in which gold tends to perform miserably.

Gold tends to do well in deflation, stagflation, and times of credit stress. More importantly, gold does well when confidence in central banks is on the wane.

On June 24, I gave a presentation to the Venture Alliance group. Here are a few slides on gold from my presentation.

Faith in Central Banks 

The second to last slide above is worth a detailed inspection. Here is the timeline.

• August 15, 1971: Nixon closed the gold redemption window. Gold was $43.15 per ounce.
• January 21, 1980: Gold closed at $850 an ounce. That was the market top for decades.
• March 1980: US inflation peaked at 14.8%. The Federal Reserve Board led by Paul Volcker raised the federal funds’ rate to a peak of 20% in June 1981. It was not the rate of hikes that directly led to the plunge in gold. Rather, the rate hikes convinced the public and the markets that the Fed had everything under control.
• August 11, 1987: Greenspan took over as Fed chair. The “Great Moderation” started. Disinflation and slowing falling interest rates were the norms. Greenspan was labeled the “Maestro”. Faith in central banks peaked under Greenspan.
• May 7, 1999: The Bank of England announced plans to dump gold for other assets. The price of gold was $282 per ounce. The advance notice of the sale drove the price down by 10% by the time of the first auction on July 6, 1999. With many traders shorting, gold reached a low of $252.80 on July 20. This is frequently called “Brown’s Bottom” after Gordon Brown, the UK Chancellor of the Exchequer.
• 2000-2007: The DotCom bubble burst and Greenspan slashed interest rates to a then record low. This was followed by a housing bubble, a housing bubble bust, and Greenspan leaving the Fed. Ben Bernanke took over. Bernanke slashed interest rates to nearly zero and kicked off three rounds of QE. Faith in central banks was again in question for most of this timeline.
• August 23, 2011: Gold peaked at $1923.70 with a European debt crisis underway, worries about Greece, and with the Fed involved in a series of QE actions.
• July 26, 2012: Mario Draghi gave his famous “Whatever it Takes” speech. “Within our mandate, the ECB is ready to do whatever it takes to preserve the euro. And believe me, it will be enough.” Faith in central banks was temporarily restored.
• November 22, 2015: Gold touched $1056. In the chart, I gave a December date. That timeframe is when faith in central banks hit a rebound peak.
• Present: A debate is on whether or not the Fed is behind or a head of the curve. Dissent at the Fed as to whether it should be hiking or cutting is widespread. Many economists advocate a higher range of inflation even though the Fed cannot get to 2% inflation. Asset bubbles are numerous and obvious to many observers, but not the Fed.

The price of gold closely follows faith in central banks. If you think faith in central banks will again come into widespread question, then add to your gold stash.

Deflation on Deck?

Is deflation on deck? Yes, asset deflation, a very destructive kind of deflation.

CPI deflation is not to be feared. More precisely, CPI deflation is a benefit. Falling prices increase purchasing power by definition and thus raise standards of living.

Yet, central banks (especially the Fed, ECB, Bank of Japan, and the People’s Bank of China) foolishly poured trillions of dollars into the economy an attempt to boost CPI inflation.

Instead of boosting the CPI, central banks created numerous asset bubbles. When asset bubbles burst, and they always do, bank loans based on inflated asset values come into question.

This is precisely what happened in the housing bubble, and it will happen again, perhaps not as severely globally, but it may be crippling in the EU.

Economic Challenge to Keynesians

Of all the widely believed but patently false economic beliefs is the absurd notion that falling consumer prices are bad for the economy and something must be done about them.

I have commented on this many times and have been vindicated not only by sound economic theory but also by actual historical examples.

1. My article Deflation Bonanza! (And the Fool’s Mission to Stop It) has a good synopsis.
2. My Challenge to Keynesians “Prove Rising Prices Provide an Overall Economic Benefit” has gone unanswered.

There is no answer because history and logic both show that concerns over consumer price deflation are seriously misplaced.

BIS Deflation Study

The BIS did a historical study and found routine deflation was not any problem at all.

“Deflation may actually boost output. Lower prices increase real incomes and wealth. And they may also make export goods more competitive,” stated the study.

It’s asset bubble deflation that is damaging. When asset bubbles burst, debt deflation results.

Central banks’ seriously misguided attempts to defeat routine consumer price deflation is what fuels the destructive asset bubbles that eventually collapse.

For a discussion of the BIS study, please see Historical Perspective on CPI Deflations: How Damaging are They?

Meanwhile, economically illiterate writers bemoan deflation, as do most economists and central banks. The final irony in this ridiculous mix is central bank policies stimulate massive wealth inequality fueled by soaring stock prices.

Full Presentation

Click here to view my entire Venture Alliance Presentation, 38 slides in all.

Mike “Mish” Shedlock'

[durhamborn]

Yes very volatile Sancho.Iv placed rolling stops in mine now.I think they will rally hard in the first stages of the equity sell off then collapse with everything else.Im tempted to hold a couple just in case through everything though as even if they do get hit hard i see them as huge winners in the next cycle.

What is your thinking on them?.Are you buying for a long term hold and the inflation thats coming hard in the next cycle?.

[Sancho Panza]

4 hours ago, durhamborn said:

 

1) I think they will rally hard in the first stages of the equity sell off then collapse with everything else.

 

2) What is your thinking on them?.Are you buying for a long term hold and the inflation thats coming hard in the next cycle?.

 

1) I think you might well be right.

2) I think we're entering a phase where the CB's quite simply won't have the control they think they have.As I've said many times,particularly of late,IR's won't kill the property ponzi,but a lack of demand will.When the banks start taking hits on their balance sheets,there will be a considerable impact on economic activity through reduced credit creation and I just can't see how the CB's will be able to get companies like RBS doing anything productive at all while they hold such a stock of illiquid historical bad debts.Could be bad for the metal,could be good for it.

At the minute my main aim is trying to preserve the gains of the last twenty five years- by that I mean the security it gives my family.Pursuant to that my waking concern-after porridge-is sterling risk.Then I worry about yield, look at the QE bloated stock markets and see little of value.

So Goldies=

a. hedges sterling risk-not inconsiderable when you look at the borrowing figures and how many people are relying on govt help.Politically,it's going to be hard to unwind.

b. the stocks are relatively cheap on an historical basis and I think the yellow metal will come to be viewed as the original bitcoin.

c. hedges geo political risk

Personally,when buying either the metal or the Goldies as a hedge versus inflation,I think it's important to make a distinction.If you're hedging cost push inflation eg falling currency,then it's a viable trade.If you're hedging demand pull,I think there are better asset classes.

Sorry for the long answer,much as I'm answering you,I'm clarifying my own thoughts.

In short,we'll be holding the current tranches and then looking to add more if the prices drop significantly from here.

The days of using Big Pharma and Big Oil for hedging sterling are looking tired trades.

 

 

 

Edited August 22, 2017 by Sancho Panza

[spyguy]

Gold, beans, shotguns.. dont know. Predicting the future will make you look an idiot - see Pols and CBs.

Have you played the MMR and local income game?

A typical local income is 25k + 12k. Once you take out utils, ctax, car transport, holiday, credit cards, youre left wiih about 15k. Now multiply that by 4.5. Thats the max average local mortgage.

[Sancho Panza]

30 minutes ago, spyguy said:

Gold, beans, shotguns.. dont know. Predicting the future will make you look an idiot - see Pols and CBs.

Have you played the MMR and local income game?

A typical local income is 25k + 12k. Once you take out utils, ctax, car transport, holiday, credit cards, youre left wiih about 15k. Now multiply that by 4.5. Thats the max average local mortgage.

Played it many years ago.There's a reason I've been renting ever since.

You can only do your best with regard to the future.

[TheCountOfNowhere]

6 minutes ago, Sancho Panza said:

Played it many years ago.There's a reason I've been renting ever since.

You can only do your best with regard to the future.

+1

Life is what it is.

You dont "get on with your life" by buying a house, you effectively sign up to the end phase of your life.

House prices are in mania territory with the potential, like all investment manias, to ruin no end of people.

20 years from now people will be shaking their heads thinking, why did we do that, how could we be so stupid.

 

 

Edited August 22, 2017 by TheCountOfNowhere

[locky82]

I have rented for many years and I have been a mortgage slave for about 2 years. My life hasn't really changed, same car, holidays, job. The only thing I will say is I never knew how satisfying reducing a mortgage balance would be. 12 grand down, only 220 to go 

[Sancho Panza]

1 hour ago, locky82 said:

I have rented for many years and I have been a mortgage slave for about 2 years. My life hasn't really changed, same car, holidays, job. The only thing I will say is I never knew how satisfying reducing a mortgage balance would be. 12 grand down, only 220 to go 

Don't try too hard to sell the dream will you?

[locky82]

 I don't need too! 

To clarify I meant its satisfying instead of paying rent, which is ball hang. 

[durhamborn]

2 hours ago, Sancho Panza said:

 

1) I think you might well be right.

2) I think we're entering a phase where the CB's quite simply won't have the control they think they have.As I've said many times,particularly of late,IR's won't kill the property ponzi,but a lack of demand will.When the banks start taking hits on their balance sheets,there will be a considerable impact on economic activity through reduced credit creation and I just can't see how the CB's will be able to get companies like RBS doing anything productive at all while they hold such a stock of illiquid historical bad debts.Could be bad for the metal,could be good for it.

At the minute my main aim is trying to preserve the gains of the last twenty five years- by that I mean the security it gives my family.Pursuant to that my waking concern-after porridge-is sterling risk.Then I worry about yield, look at the QE bloated stock markets and see little of value.

So Goldies=

a. hedges sterling risk-not inconsiderable when you look at the borrowing figures and how many people are relying on govt help.Politically,it's going to be hard to unwind.

b. the stocks are relatively cheap on an historical basis and I think the yellow metal will come to be viewed as the original bitcoin.

c. hedges geo political risk

Personally,when buying either the metal or the Goldies as a hedge versus inflation,I think it's important to make a distinction.If you're hedging cost push inflation eg falling currency,then it's a viable trade.If you're hedging demand pull,I think there are better asset classes.

Sorry for the long answer,much as I'm answering you,I'm clarifying my own thoughts.

In short,we'll be holding the current tranches and then looking to add more if the prices drop significantly from here.

The days of using Big Pharma and Big Oil for hedging sterling are looking tired trades.

 

 

 

Thankyou.Yes on a pure value basis the miners look very cheap.Iv pretty much sold my equity portfolio i built up since the early 90s and many of those are already well down.Capital preservation is my number 1 aim at the moment.I had bought the miners as they usually top around a year after the Russell 2000 and if the markets roll over around 20% in the first stage of a bear they should perform very well (after that they could plunge).Im now considering if i should hold some of them through what i thinks coming or not though.I will probably use US treasuries for a decent part,but i am worried about sterling.I see it going up a bit more yet,but 90c could be on the cards during a bust.Asset allocation is very difficult at the moment.Like you say big Pharma (i worked for Glaxosmithkline) used to be a perfect sterling hedge,but they look very exposed themselves given their balance sheets.

The UK will do ok in a reflation cycle i think,but the wealth destruction and shock getting there is the worry.The economy is in a terrible position to deal with the involuntary debt liquidation ahead.The demand destruction looks like generational in size.

[durhamborn]

2 hours ago, TheCountOfNowhere said:

+1

Life is what it is.

You dont "get on with your life" by buying a house, you effectively sign up to the end phase of your life.

House prices are in mania territory with the potential, like all investment manias, to ruin no end of people.

20 years from now people will be shaking their heads thinking, why did we do that, how could we be so stupid.

 

 

I think thats very true.I actually think house prices have reached their secular top and the prices wont be seen again inflation adjusted for at least 20 years.People will see their deposits gone,be trapped in negative equity for decades and if they go under have a smashed credit record and wont be able to buy again.There are lots of people who think the equity in their homes will fund their pension.They are going to be shocked to their core.

[Majorpain]

7 hours ago, durhamborn said:

Yes very volatile Sancho.Iv placed rolling stops in mine now.I think they will rally hard in the first stages of the equity sell off then collapse with everything else.Im tempted to hold a couple just in case through everything though as even if they do get hit hard i see them as huge winners in the next cycle.

What is your thinking on them?.Are you buying for a long term hold and the inflation thats coming hard in the next cycle?.

I sold all my gold miners at a profit recently for a couple of reasons, one of which was a youtube analyst (igold) who was  pointing out various scenarios where the gold price and miner price diverged.  The basic gist was that 3/4 times in the past this "negative divergence" had occured it signalled a top to the gold price, basically the miners were looking to the future lower prices and not the current gold price.  If you couple that with the deflationary crash theory on here which i do think will play out, its a good bet to me that sitting mainly in cash now ill be able to pick up some bargains later (i hope!).

It is a risk having cash in a broker account which is in a bank somewhere, if there are limits on withdrawls i dont know how that will affect brokerage accounts, and there is no point in having a load of cash to invest at crash prices if you cant actually access the funds.  But then that may equally be safer than having a share of a blue chip company whose bottom line is crashing.  I think i have talked myself into a little bit of diversification...

[durhamborn]

1 minute ago, Majorpain said:

I sold all my gold miners at a profit recently for a couple of reasons, one of which was a youtube analyst (igold) who was  pointing out various scenarios where the gold price and miner price diverged.  The basic gist was that 3/4 times in the past this "negative divergence" had occured it signalled a top to the gold price, basically the miners were looking to the future lower prices and not the current gold price.  If you couple that with the deflationary crash theory on here which i do think will play out, its a good bet to me that sitting mainly in cash now ill be able to pick up some bargains later (i hope!).

It is a risk having cash in a broker account which is in a bank somewhere, if there are limits on withdrawls i dont know how that will affect brokerage accounts, and there is no point in having a load of cash to invest at crash prices if you cant actually access the funds.  But then that may equally be safer than having a share of a blue chip company whose bottom line is crashing.  I think i have talked myself into a little bit of diversification...

Yes selling at a profit  ready for falls is a good position.I fully intend to be back in shares 90% at some point.I think US treasuries should be part of a sterling investors portfolio going forward.The US wont default in a deflation and they will likely go up quite strongly against sterling.I think the BOE will print to cover deposits up to the protected amounts,but the currency risk is huge.Interesting times.

[Talking Monkey]

1 hour ago, durhamborn said:

I think thats very true.I actually think house prices have reached their secular top and the prices wont be seen again inflation adjusted for at least 20 years.People will see their deposits gone,be trapped in negative equity for decades and if they go under have a smashed credit record and wont be able to buy again.There are lots of people who think the equity in their homes will fund their pension.They are going to be shocked to their core.

DB on your point of negative equity for decades I take that your opinion is that once they crash they will not reach their pre crash nominal price for decades, have I got that right, or are you taking an inflation adjusted view. If it is the former then in the context of the high inflation environment you expect post 2020/21 house prices are really going to lag behind everything

[durhamborn]

1 minute ago, Talking Monkey said:

DB on your point of negative equity for decades I take that your opinion is that once they crash they will not reach their pre crash nominal price for decades, have I got that right, or are you taking an inflation adjusted view. If it is the former then in the context of the high inflation environment you expect post 2020/21 house prices are really going to lag behind everything

Inflation adjusted.I think they go down hard,then go up much slower than inflation in the recovery cycle.They are priced at the extreme end of the risk curve.The only question is the scale of the falls for me.I think rates might hit 8%+ in 7 years reversing most of the disinflation cycle  30 year + falls.Most wont agree with that however.

[Fence]

Great stuff durhamborn, sancho, et al.  Got me to wake up and log back in (metaphorically and physically!).  Please keep up what is a very high quality thread.  Thanks.

Chuckled at the mention of GSK.  Was my last project (nail) before taking time out to build a more sustainable base in the country, investing my trashing cash in a new type of asset class.

Unfortunately that's taken my eye of the investing ball.  High cash balances but smart enough not to try playing catch-up.  It's all about risk mitigation and asset protection now.

Concerned about institutional risk (EFTs, funds, banks, brokers (esp. those with changed ownership), etc). Bail ins, fund freezes. etc have all been tested and are ready to go.

Still worried about the low velocity of money.  The nature of QE (a loan to the banks and thence asset inflation) has put a lid on it so far.  May that continue.

Edit:  Gold has been a good hedge against GBP!

Edited August 22, 2017 by Fence

[Fence]

On 17/08/2017 at 10:05 PM, nothernsoul said:

Ive found this thread very informative. I agree with the analysis that in such a crisis central banks will print and pump money into the economy eventually causing inflation. However, apologies if this may sound naive, but isnt it possible the bank of england will keep rates ultra low, seeing inflation as the evil with the lesser political consequences than raising them and causing the biggest house price crash this country has ever seen.

Yes, well articulated and extremely relevant and important isn't it.

Alas (as a former economist) the normal economic rules no longer apply since the establishment went unconventional rather than do the right things.  I started as an economist, became a political economist, and gave up when I needed to become a political, political, economist!  Probably too late to go back to relying on interest mechanisms and the like.  High rates may cause defaults but inflation for more people than we realise will make just living extremely difficult.  The security service rule of thumb is that societies are three meals away from breakdown.

We are now many standard deviations away from normal.  The unconventional partially got us here and so it will be used to attempt to get us out (although what the end steady state will look like scares me) .  Think state/charity food bank partnerships, price controls, a war on cash, trickle down corruption, any and every other form of control.  A form of client state that some have been promoting.  Maybe even with low interest rates and more money for those businesses in real control who will need them as they see their real balance sheets evaporate.  

We're going the way of Argentina - it also used to be one of the richest countries in the world.

Edited August 22, 2017 by Fence