Deflationary collapse and the Reflation Cycle to Come.

[chronyx]

Definitely sounds plausible.

[Talking Monkey]

56 minutes ago, Fence said:

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.

Would a lot of other countries go the same way too, most of Europe has dodgy finances, Japan, China and India too

[Thorn]

1 hour ago, Fence said:

 Think state/charity food bank partnerships, price controls, a war on cash, trickle down corruption, any and every other form of control.

I agree and I think it's already well under way. It also sounds like the USSR. 

All empires collapse though. 

[Gribble]

On 6/29/2017 at 8:20 AM, Gribble said:

Arguing by insulting people just shows how very bitter you are. PS I have made £100K shorting £ against the Euro. Enjoy to$$er!

 

On 6/28/2017 at 6:03 PM, TheCountOfNowhere said:

You probably don't  understand what is going on do you? Wishful think that rates will stay low forever based on your stupidity or desperation won't make it so.

£ down to 1.085 Euro. Happy days :-)

[durhamborn]

10 hours ago, Fence said:

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.

Great to have your input Fence,hope you stick around and keep adding your thoughts.I look at things from a macro side and where we are in a cycle.I then invest for the long term.Nothing fancy in investing terms,but aimed at areas i think the cycle will help.Im getting on now and if i say myself iv got a very good record (thanks to someone who started me off decades ago).What worries me most is the scale of the disaster my charts and work tell me is ahead.Im starting to doubt them myself at times because to be honest they are pointing to extreme falls.They are telling me we are going to see the biggest deflationary crash since WW2 and with it wealth destruction on a scale its hard to imagine.Im seeing extreme balance sheet risk across consumers and business.Leverage that will sink whole sectors once earnings fall.

My charts are also telling me interest rates will play no role in the collapse in its early stages apart from the fact the Fed has already shrunk the monetary base in the US.

If i strip away the leverage to normal levels i see a recession.Pretty normal one.When i add in the leverage and earnings fall points where involuntary debt liquidation starts i see huge falls.S and P down 78%,Oil to $10 etc.Those arent targets of course and im not saying we are going there.Just what i see in the numbers.Im also very worried about how this bear plays out.I think there is a very good chance we see 15/20% falls and people buy,only for the main event to then hit.

In wealth terms this looks like an extinction event to me.The economy has too many rentiers and they will be cleared out on a scale few can imagine.

For the UK,after the horrors ahead im quite bullish for people in the right sectors.The FTSE holds a lot of stocks that will do very well in a reflation.The reflation will also repair a lot of the damage this disinflation cycle has done.There will be cheap houses,lots of them.Money wont be going on welfare and consumption,it will be building.

Could this be wrong?,Of course,but i still think people should cover themselves in some form.If its wrong you lose a bit of growth/buying power.If its only half right you save your financial future.For peoples sake lets hope we simply get a recession and the CBs act quickly and we return to growth.Thats not what im seeing though.

[Sancho Panza]

16 hours ago, durhamborn said:

1) on a pure value basis the miners look very cheap

2) Iv pretty much sold my equity portfolio i built up since the early 90s and many of those are already well down.

3) Capital preservation is my number 1 aim at the moment

4) Im now considering if i should hold some of them through what i thinks coming or not though.

5)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

6) 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.

Such a thought provoking thread.I've split your post up for ease of replying.

1) Some of them eg Barrick/Newmont are where they were in the early 90's.I realise there are a host factors financial/geo political and otherwise that have changed in the interim,but still,what would I rather hand my kids...a chunk of Barrick shares or a 3 bed semi in Leicester that's in the middle of a lot of angry people finding their money isn't going as far at the shops as it once did.

Sorry if I sound apocalyptic but I completely agree on point 6) in your reply.

6) I've been investing for the family for 20 years or so now and have seen two major bear markets where a lot of people lost their shirt and their pension pot or both.The late 90's tech bubble was one.I'd been in the techies a while and sold well before the top.I couldn't believe the random friends who were tipping scoot.com at the peak.Shoeshine boys warning.

The second was the 2008 RBS/Lehman collapse.A lot of retail investors had major exposure to the banks.We lost a few quid when Northern Rock went down.It forced me to get to grips with how fractional reserve lending/bank balance sheets/credit creation work.The blood letting in the UK (and many Western countries') housing market should have come then.The politicians took the easy option then and created a once in 80 year credit event that appears to be inbound.

Just like in 1999/2000 when people were tipping scoot.com,now everyone is tipping BTL.

If you're running with the herd you won't see the lions until it's too late,I'll take my chances on my own.

2) We're in cash now(mainly),utilities,goldies and some short term trades eg M&S (don't laugh),big oils that are hedged with a some out of the money puts on high beta FTSE 100 stocks.

3) There was a good quote from the Great Depression-It's about the return of the money not the return on it.

4) We're currently about 8% goldies.There's a couple more I'd like to add eg Kinross,Newmont but I'm waiting for a price I'm happy with.If the Goldies crash,I'll be moving that weighting up considerably.I think there's a raft of FTSE stocks that are bloated beyond belief and who'll be vulnerable to the sucking sound eg Whitbread(Costa Coffee),Next etc......just my views,DYOR.

5) I think UST's are a sensible call in the circumstances.Had to laugh the other week when Greenspan warned on the Bond market bubble.Swiss ten years have been negative since 2015.Whenever you're ready Alan.

Edited August 23, 2017 by Sancho Panza

[Sancho Panza]

15 hours 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.

Japanese house prices are still below 1990

[Sancho Panza]

13 hours ago, Fence said:

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!

Worth noting how many Brokers no longer offer Personal Crest Accounts.Many people don't realise that the small print of Nominee ownership(the Nominees are the legal owners,the retail buyer the beneficial owner) allows for the asset to be used by the Nominees as their asset in the instance of a bail in.

Massive risk imo with ETF's not delivering the asset exposure promised especially if the market is choppy.

The velocity of money is the key reason QE failed/is failing.All these academic economists in their ivory towers clearly viewed it as a constant,thought they'd cut rates and stimulate spending....................all QE achieved besides reducing IR's and blowing asset bubbles,was the constant reduction of velocity.Until they start addressing the cause of that reduction,we will be in the mire.

Edited August 23, 2017 by Sancho Panza

[Sancho Panza]

12 hours ago, Fence said:

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.

I think the big issue as highlighted by Providents drop is that if people stop paying their bills for whatever reason,we'll get defaults.

The trigger for the enxt banking bust will be BTLers posting the keys back because the tenants have stopped paying,or they cant get any,or the repair bill is too large etc etc.

Good point on Argentina.

Edited August 23, 2017 by Sancho Panza

[Sancho Panza]

2 hours ago, durhamborn said:

Great to have your input Fence,hope you stick around and keep adding your thoughts.I look at things from a macro side and where we are in a cycle.I then invest for the long term.Nothing fancy in investing terms,but aimed at areas i think the cycle will help.Im getting on now and if i say myself iv got a very good record (thanks to someone who started me off decades ago).What worries me most is the scale of the disaster my charts and work tell me is ahead.Im starting to doubt them myself at times because to be honest they are pointing to extreme falls.They are telling me we are going to see the biggest deflationary crash since WW2 and with it wealth destruction on a scale its hard to imagine.Im seeing extreme balance sheet risk across consumers and business.Leverage that will sink whole sectors once earnings fall.

My charts are also telling me interest rates will play no role in the collapse in its early stages apart from the fact the Fed has already shrunk the monetary base in the US.

If i strip away the leverage to normal levels i see a recession.Pretty normal one.When i add in the leverage and earnings fall points where involuntary debt liquidation starts i see huge falls.S and P down 78%,Oil to $10 etc.Those arent targets of course and im not saying we are going there.Just what i see in the numbers.Im also very worried about how this bear plays out.I think there is a very good chance we see 15/20% falls and people buy,only for the main event to then hit.

In wealth terms this looks like an extinction event to me.The economy has too many rentiers and they will be cleared out on a scale few can imagine.

For the UK,after the horrors ahead im quite bullish for people in the right sectors.The FTSE holds a lot of stocks that will do very well in a reflation.The reflation will also repair a lot of the damage this disinflation cycle has done.There will be cheap houses,lots of them.Money wont be going on welfare and consumption,it will be building.

Could this be wrong?,Of course,but i still think people should cover themselves in some form.If its wrong you lose a bit of growth/buying power.If its only half right you save your financial future.For peoples sake lets hope we simply get a recession and the CBs act quickly and we return to growth.Thats not what im seeing though.

From what I can see there are two types of recessions

1) Inventory recessions,We build too many bikes and they get sold cheap

2) Credit recessions-a rarer beast that is based on a contraction of the money supply due to debt default.

I think we're headed for two.

On the latter point highlighted above,there's a host of empty shops in Leicester city centre,probably all sat on abanks or a Landlords balance sheet marked at par.But a shop with no tenant is worth nothing.Actually it's worse than that because there's a cost of carry.I'd rather buy Swiss ten years.

 

Sadly,I have to go out.....

[Errol]

Excellent thread this. One of the best.

It will be interesting to follow its progress and the contributions as time goes by.

[TheCountOfNowhere]

1 hour ago, Errol said:

Excellent thread this. One of the best.

It will be interesting to follow its progress and the contributions as time goes by.

Scary as ####.

 

What's the general consensus of opinion to maintain wealth/cash?

Edited August 23, 2017 by TheCountOfNowhere

[Noallegiance]

Just turned on Bloomberg for the first time in months and within 15 minutes I've heard:

"We'll find out if Central Banks are emperors with no clothes"

"Are Central Banks no longer Masters of the Universe"

"The UK economy may not be as good as it looks"

A review of this:

http://www.independent.co.uk/news/business/news/wpp-shares-latest-updates-news-crash-12-per-cent-advertising-company-giant-warning-unilever-a7907766.html

I thought I'd switched on HPC TV.

[TheCountOfNowhere]

48 minutes ago, Noallegiance said:

Just turned on Bloomberg for the first time in months and within 15 minutes I've heard:

"We'll find out if Central Banks are emperors with no clothes"

"Are Central Banks no longer Masters of the Universe"

"The UK economy may not be as good as it looks"

A review of this:

http://www.independent.co.uk/news/business/news/wpp-shares-latest-updates-news-crash-12-per-cent-advertising-company-giant-warning-unilever-a7907766.html

I thought I'd switched on HPC TV.

The whole MSM seem to be getting their news/opinions from here right now.

[durhamborn]

2 hours ago, Sancho Panza said:

From what I can see there are two types of recessions

1) Inventory recessions,We build too many bikes and they get sold cheap

2) Credit recessions-a rarer beast that is based on a contraction of the money supply due to debt default.

I think we're headed for two.

On the latter point highlighted above,there's a host of empty shops in Leicester city centre,probably all sat on abanks or a Landlords balance sheet marked at par.But a shop with no tenant is worth nothing.Actually it's worse than that because there's a cost of carry.I'd rather buy Swiss ten years.

 

Sadly,I have to go out.....

Agreed this is number 2.My mentor and myself call it a balance sheet recession,but thats just the way we term a credit recession.Debt default caused or brought on by earnings falls.What few fail to see is the fact the Fed has cut the monetary base in the US over the last three years.They have cut with inflation below 2%.From a macro point without decent velocity that is suicide to a world economy with the leverage we have now.

WPP warning today and the dollar index heading down again.I still think 88 is where its going.

You mentioned Whitbread,i bought it a long time ago for a fiver (same time as BAT at around £6 if i remember right),i sold all of them over the last 6 months,some 1000% up.

This cycle is passing by the side of the car and will soon be in the rear view mirror.For the UK,with half the population living on very high levels of welfare income its not going to be pretty.

Edited August 23, 2017 by durhamborn

[Leviathan]

Db and all

 

If DXY does head to 88 it doesn't appear to be taking sterling with it for the ride.

Any views on where next with Sterling vs the dollar? I was hoping we would get a bit of a rally into the Autumn for sterling maybe as far as 1.38 to 1.40 on dollar weakness before it turned round but that seems less and less likely by the day. I can see a smaller chance we may get to the top of the channel at c 1.35 now but I'm struggling to see any more upside here and the downside risks (economy slowing, domestic credit risks increasing, trade deficit worsening etc) are creating a lot of negative sentiment for traders and speculators to take advantage of (see Euro sterling).  

Lev

 

[durhamborn]

2 hours ago, Sancho Panza said:

Worth noting how many Brokers no longer offer Personal Crest Accounts.Many people don't realise that the small print of Nominee ownership(the Nominees are the legal owners,the retail buyer the beneficial owner) allows for the asset to be used by the Nominees as their asset in the instance of a bail in.

Massive risk imo with ETF's not delivering the asset exposure promised especially if the market is choppy.

The velocity of money is the key reason QE failed/is failing.All these academic economists in their ivory towers clearly viewed it as a constant,thought they'd cut rates and stimulate spending....................all QE achieved besides reducing IR's and blowing asset bubbles,was the constant reduction of velocity.Until they start addressing the cause of that reduction,we will be in the mire.

I think whats interesting is when QE was used,and thats why its a disaster.If you look at the disinflation cycle as starting around 1982 then all the following higher lows,higher highs,and the interest rates lower lows,lower highs the full cycle was ending in 07.Everything had reached the end of the risk curve and investment was collapsing as margins and returns werent worth investing for.The clean out would of been large and a lot of pain would of seen a new inflation cycle.Nothing to worry about and quite healing.To QE at that point was probably the worst point in any cycle to do it.To pump money into an economy that didnt want to invest because there were no returns was insane.It did what we all know.It sat on bank balance sheets and was used to pump an asset bubble while due to that and the lack of return on investment velocity collapsed.It also funded the massive handouts of welfare money that simply fund imported consumption and make people work as little as possible.

The CBs are slapping each others backs because they stopped a business cycle ending,when all they have done is ensure this disinflation cycle ends with massive financial dislocation and wealth destruction.They will of course then print massive amounts and we will see a full on reflation cycle.During that cycle i fully expect the miners to show the returns the techs did in the late 90s.

 

[durhamborn]

5 minutes ago, Leviathan said:

Db and all

 

If DXY does head to 88 it doesn't appear to be taking sterling with it for the ride.

Any views on where next with Sterling vs the dollar? I was hoping we would get a bit of a rally into the Autumn for sterling maybe as far as 1.38 to 1.40 on dollar weakness before it turned round but that seems less and less likely by the day. I can see a smaller chance we may get to the top of the channel at c 1.35 now but I'm struggling to see any more upside here and the downside risks (economy slowing, domestic credit risks increasing, trade deficit worsening etc) are creating a lot of negative sentiment for traders and speculators to take advantage of (see Euro sterling).  

Lev

 

When i first thought the DXY had topped at 102 and was going to fall to 88 i thought sterling might hit $1.40.Now i still think the DXY will hit 88,but sterling might not get to $1.40.Iv already started buying some US treasuries,but nowhere near the amount i want to end up with.Im hedged with gold miners though so if sterling doesnt reach $1.40,but the dollar still falls that will be good enough hopefully.Capital preservation is key,and at todays sterling price,not after any bust.

[Leviathan]

Thanks Db - Likewise I've made some small TLT purchases but have the majority still to buy. I think like you I will continue to drip in probably without hedging first as I have a reasonable USD position in the meantime. I don't think the stock markets are quite ready to roll over yet causing the flight to UST but the sterling risk to capital feels pretty close by. Like you I don't want to get caught the wrong side of any local currency depreciation.

[Talking Monkey]

1 hour ago, durhamborn said:

Agreed this is number 2.My mentor and myself call it a balance sheet recession,but thats just the way we term a credit recession.Debt default caused or brought on by earnings falls.What few fail to see is the fact the Fed has cut the monetary base in the US over the last three years.They have cut with inflation below 2%.From a macro point without decent velocity that is suicide to a world economy with the leverage we have now.

WPP warning today and the dollar index heading down again.I still think 88 is where its going.

You mentioned Whitbread,i bought it a long time ago for a fiver (same time as BAT at around £6 if i remember right),i sold all of them over the last 6 months,some 1000% up.

This cycle is passing by the side of the car and will soon be in the rear view mirror.For the UK,with half the population living on very high levels of welfare income its not going to be pretty.

DB what about shorting the major indicies via a CFD account or something, get some of that stockmarket downside

[Talking Monkey]

1 hour ago, durhamborn said:

I think whats interesting is when QE was used,and thats why its a disaster.If you look at the disinflation cycle as starting around 1982 then all the following higher lows,higher highs,and the interest rates lower lows,lower highs the full cycle was ending in 07.Everything had reached the end of the risk curve and investment was collapsing as margins and returns werent worth investing for.The clean out would of been large and a lot of pain would of seen a new inflation cycle.Nothing to worry about and quite healing.To QE at that point was probably the worst point in any cycle to do it.To pump money into an economy that didnt want to invest because there were no returns was insane.It did what we all know.It sat on bank balance sheets and was used to pump an asset bubble while due to that and the lack of return on investment velocity collapsed.It also funded the massive handouts of welfare money that simply fund imported consumption and make people work as little as possible.

The CBs are slapping each others backs because they stopped a business cycle ending,when all they have done is ensure this disinflation cycle ends with massive financial dislocation and wealth destruction.They will of course then print massive amounts and we will see a full on reflation cycle.During that cycle i fully expect the miners to show the returns the techs did in the late 90s.

 

On the return you expect to see on the miners are we talking in the 1000% territory, what timeframe

[durhamborn]

1 minute ago, Talking Monkey said:

DB what about shorting the major indicies via a CFD account or something, get some of that stockmarket downside

Im not really a trader and im poor at it and never use leverage so avoid shorting mostly although i do have a small Amazon short running thats making 7% at the moment.Iv put a stop in on that at 2% profit just in case though.

If things do play out there will be some massive upside in the next cycle in certain areas and im more bothered about re-building a quality portfolio for that.Difficult times and i think the key thing is for everyone to be very careful at the moment.In a way your shorting the market by being liquid or in treasuries anyway.Not seeing your capital go up in smoke is the most important thing at the moment.Shocking that people who have worked and saved are in this situation,but in it we are.

[durhamborn]

7 minutes ago, Talking Monkey said:

On the return you expect to see on the miners are we talking in the 1000% territory, what timeframe

Probably yes,metals will likely be the big winners.I think the reflation cycle will take 7 years from the first printing to panic station inflation levels,if its on a scale i expect.The size of the collapse and then the size of the CBs response is crucial.If its weak and only stops the collapse we might see stagflation.If its large,and also passed to government then the reflation is on.We will get plenty of time to act if this crash happens i think.I doubt people will be buying reflation stocks for a good while and there will be a decent lag.This is all educated guess work at the moment though of course,but its good to debate,even if people dont agree,and/or things dont pan out as far as expected.

[Majorpain]

5 hours ago, Sancho Panza said:

Worth noting how many Brokers no longer offer Personal Crest Accounts.Many people don't realise that the small print of Nominee ownership(the Nominees are the legal owners,the retail buyer the beneficial owner) allows for the asset to be used by the Nominees as their asset in the instance of a bail in.

Massive risk imo with ETF's not delivering the asset exposure promised especially if the market is choppy.

Its a grey area, however my nominee broker spreads client cash over around 12 UK banks so you are theoretically covered by the govt to a maximum of just over £1 million.  I would not like to put that theory to the test!  Even if they had any claim on cash held in the accounts, you would still be covered by the government guarantee so would get your money back IMO.

Equally the nominee accounts are in trust in a legally seperate company which the main broker has no claim over, so whilst the shares may legally have their name on it, if they were liquidated you would get the shares.  Brokers using client money illegally did happen in the US, so i wouldnt say its not going to happen, but its very very unlikely IMO.

The above is my understanding of reading my brokers website (very carefully!), i am fairly happy that bar the financial system completely imploding and going back to rocks as barter i will at least get my cash/shares back.

[Errol]

Getting your cash back won't be much use if you need a wheelbarrow full of it to buy a loaf of bread.