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Deflationary collapse and the Reflation Cycle to Come.


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DB have I got you wrong or were you thinking that IRs would go down initially then increase in a reflation cycle into double digits?

I think that scenario might be accelerated by the de-dollarisation of the world economy. 

Once the dollar loses it's position as the go-to world reserve currency, nations are going to dump significant proportions of their reserves  - partly through being strongarmed by China and Russia, and dollar inflation is going to rise - with a knock on effect on interest rates.

I think the next step Trump will take will be to re-value treasury gold in Fort Knox at market rates; this will give him a year's worth of wiggle room in the budget without raising debt levels but it will give stocks a kick and act as an inflationary pressure.

Next significant Fed meeting is in December - I don't see them raising or cutting rates but they will continue with "off balance" Quantative Tightening which is going to make the resulting crunch even more massive.

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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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23 minutes ago, ThePrufeshanul said:

DB have I got you wrong or were you thinking that IRs would go down initially then increase in a reflation cycle into double digits?

I think that scenario might be accelerated by the de-dollarisation of the world economy. 

Once the dollar loses it's position as the go-to world reserve currency, nations are going to dump significant proportions of their reserves  - partly through being strongarmed by China and Russia, and dollar inflation is going to rise - with a knock on effect on interest rates.

I think the next step Trump will take will be to re-value treasury gold in Fort Knox at market rates; this will give him a year's worth of wiggle room in the budget without raising debt levels but it will give stocks a kick and act as an inflationary pressure.

Next significant Fed meeting is in December - I don't see them raising or cutting rates but they will continue with "off balance" Quantative Tightening which is going to make the resulting crunch even more massive.

I think rates will go down in the deflation by a lot (im talking US treasury rates) and then start a long slow rise through the reflation cycle speeding upwards towards the end.My gold targets are $1450 then down below $900 then up to perhaps $10,000 at the end of the reflation.The hardest call is gold pulling back in the deflation,im not sure on that call and we could be in a new bull market as many on this thread think.I do fully expect silver and then gold to provide fantastic returns in the next cycle whatever the path.Miners could be to the next cycle what tech stocks where to the last (present) one.

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5 hours ago, Thorn said:

Interesting article many thanks- but it seems there are lots of warning signals being observed out there and even MSM stories now regarding the world economy, but nobody able to see what actual event might trigger a collapse.

Maybe an actual Big Event won't be needed because all of a sudden some debts won't be serviced and there's a snowball effect. 

That's my thought.

I think it will actually start quite gently and everyone will believe at first it's just another normal recession.

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3 hours ago, oldsport said:

That's my thought.

I think it will actually start quite gently and everyone will believe at first it's just another normal recession.

This. I reckon Steve Keen nailed it and it feels like a Bust is coming...its just a game of watching and waiting right now.

Tick, Tock.

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Oil prices near a 3yr high as OPEC production cuts begin to bite.

Quote

Oil prices jumped to their highest for more than two years on Monday after major producers said output cuts were squeezing supplies.

Brent crude leapt by 2.7% to $58.39 (£43.35) a barrel as analysts said prices could rise to levels not seen since 2014, in a move that would put further upward pressure on inflation in the UK. The oil price squeeze has been orchestrated by the Opec oil producers’ group but could be exacerbated if Turkey follows through on threats to block supplies from Kurdistan.

Improving global growth, especially in emerging economies and the eurozone, is also pushing up oil prices by increasing demand for energy, while the damage to US shale output in the wake of Tropical Storm Harvey could also lift Brent.

“It’s all driven by the idea is that the production cut is starting to work and the rebalance is under way,” said Gene McGillian at US-based consultancy Tradition Energy.

The market shift represents a short-term boost for North Sea oil producers after three years of low prices that have triggered steep cuts in employment in the industry’s main centres around Aberdeen and forced many firms out of business.

But Britain’s economy is expected to suffer more generally should prices continue to rise towards $60 a barrel. The balance of payments deficit, already the largest in the G7, is expected to widen after years of declining North Sea production turned the UK into a net importer of oil.

The higher price of oil is also expected to translate into higher prices at petrol pumps, which could push inflation above 3%.

https://www.theguardian.com/business/2017/sep/25/oil-prices-output-cuts-uk-inflation

RR7_economicoaster_final_rev_colors-01.j

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11 hours ago, pmgdawau said:

A big impact on people will be when their pensions go pop, any ideas of what timescales that will play out on ?

I think it depends on what type of pension and where its invested.Final salary will be fine i think.Rates will rocket in the reflation cycle and pension increases are mostly locked at max 5% for deferred pensions etc.The liability will be inflated away mostly.Money purchase will depend where its invested.Most will be in trackers,and trackers will be terrible investments in a reflation.Very few people remember or have any idea of how to invest in a reflation.The key point is PE ratios keep falling because rates keep rising.A stock that starts on a PE of 10 that is reflation leaning should do nicely.A stock that starts on 20 that is deflation leaning will lose 90% over the cycle inflation adjusted.I count some of the most popular stocks in the world that might fall 70%+.Thats why im shorting some of them (including Amazon).

 

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Hi Durhamborn, thanks for sharing your ideas. As you mentioned, a severe deflation looks inevitable, which will help to rebalance the market. But I am also thinking how bad the US market will be hit this time, and the timing of the correction. When the Federal started to increase base rate, I thought the US might have a chance to escape the damage even they missed a tightening chance in the last cycle. I guess the Federal know the risk of tightening into a recession since the beginning of monetary base shrink. But they believe tightening can also solve problem, even tightening into booming. They knew the real economy was not good as the data revealed, after the massive QE into the banking industry with the most still sitting in the excess reserve.  However, they know the US $ is the world currency and they started gambling with it. I think they always have incentives to use that advantage solve domestic problem. They started the interest rate rising cycle to attract overseas dollars back into the US market. They expect with more and more money flowing into the US market, the US economy will be inflated as well, that is why they stick to the 2% inflation rate.  If everything as planned, the capital inflow and the rising rate will become a mutual positive feedback. The Wall Street knows that as well and collude with the Fed. That is why the stock market has been push to a very high position as they expect there will be continuous overseas money back to buy.  The mistake the Fed made is they may over estimate the repayment ability of the US household and Corporates, or they didn't expect the systemic leverage soaring so quickly, which lead to the income less enough to cover interest payment. The other reason may be the Russia +China and other oil countries are trying hard to debase the US dollar as the reserve currency, the Fed has to fight for US dollar.  No matter which motivation dominates the rate rising and tapering, the action of the FED is the same that we see the tightening moves quicker than expected until very bad things happen. I personally think the extreme high leverage in the economy is not the plan of the Federal, but just a side product of its policy.I agreed that you said we now  very close to the massive default point.  I have kept an eye on the net capital inflow into the US. The recent date has deteriorated quickly, so I expect the turn point is very soon.  The only hope now in the stock market is the Trump Tax plan. But this won't slow down the household and personal default.

 

 

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On 9/21/2017 at 8:14 PM, durhamborn said:

In the UK spy yes,but remember nearly all the inflation here is from sterling falling.That means it has simply been sent to China mostly.Inflation here has cut the spending power of consumers for no gain to business.Until wages go up faster than inflation then its deflationary.

Worth noting you're talking about US CPI which excludes housing costs.US inflation is way over 2% for the man on the street.

Fed is raising whilst it can, so it can at least appear to be trying come recession time.If you call doing what failed last time as 'trying'.

http://www.usinflationcalculator.com/inflation/current-inflation-rates/

Great intro piece here on the accuracy of US inflation data.

https://www.forbes.com/sites/perianneboring/2014/02/03/if-you-want-to-know-the-real-rate-of-inflation-dont-bother-with-the-cpi/#3a661c67200b

' Common sense tells us the Consumer Price Index is not an adequate measure of inflation. For the second year in a row the Consumer Price Index for All Urban Consumers (CPI-U) remained under 2 percent.  On average, consumer prices increased 1.5 percent, according to the government. However, the government has incentives to keep this statistic as low as possible. In fact, the CPI doesn’t even measure inflation, rather a range of consumer spending behaviors. The CPI is perhaps one of the most important government statistics because it affects a number of public programs and is used as a benchmark to set public policy.

The CPI is tied to the incomes of about 80 million Americans, specifically: Social Security beneficiaries, food stamp recipients, military and federal Civil Service retirees and survivors, and children on school lunch programs.

As I outlined above, the CPI is not a measurement of rising prices, rather it tracks consumer spending patterns that change as prices change. The CPI doesn’t even touch the falling value of money. If it did the CPI would look much different.

Another example where the BLS doesn’t meet other agency’s inflation measurements is the U.S. Department of Agriculture. According to the BLS the average price of beef and veal increased 20 percent over the past five years. However, according to the USDA, beef prices have increased 26 percent over the past five years. '

On 9/25/2017 at 1:41 PM, ThePrufeshanul said:

Yes Steve Keen has said that Debt reaching a threshold can trigger a collapse in itself. 

Nevertheless there are a number of external triggers anyway - from the growing car finance problem to North Korea.

I think there is a good chance that it will be a run on Sterling though. The Tories are in chaos with Brexit negotiations and this will get worse as they tear themselves apart. There is likely to be a further devaluation against the Euro if things dont improve and this means the BoE will have to increase interest rates to prop things up. Raised IRs will mean debts will become unserviceabe for a lot of companies. 

Any economy which cannot handle rate increase or rises of a few percent either way (let along a quarter of one percent) is extremely brittle.

This is akin to 1929 when the stock market crashed for no particular reason.Galbraith theorised that 'people just stopped wanting to play any more'.

There's precedents throughout history of recessions sans rising IR's.

 

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Ref earlier discussion re yield inversion and the Fed having tinkered so much at the short end of the curve that unusual things are happening.

 

https://mishtalk.com/2017/09/21/yield-curve-flattens-dramatically-looking-quite-recessionary/

'Curve Watchers Anonymous has been watching the yield curve flatten for months on end.

The flattening is taking shape in an unusual manner, with yields at the long end of the curve generally declining and yields at the short end of the curve rising.

Treasury Yields 2000-2017

yield-curve-2017-09-21a2.png?w=529&h=307

That chart is as of the end-of-day on September 20 following the interest rate and balance sheet reduction announcement by the FOMC.

The curve flattened again today. The above pattern is quite unusual. In most prior recessions, the curve flattened with short-end yields rising faster than long-end yields, not with the long end declining substantially for months.

I can find one similar pattern heading into the 2001 recession. It’s difficult to spot in the above chart because the curve in 2000 is inverted.

Treasury Yields 2000-2001

yield-curve-2017-09-21b.png?w=529&h=309

The flattening of the curve looks quite recessionary.'

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https://mishtalk.com/2017/09/19/record-65-think-stocks-will-rise-over-course-of-one-year-did-the-bell-just-ring/

'Record 65% Think Stocks Will Rise Over Course of One Year: Did the Bell Just Ring?

19 Tuesday Sep 2017

Posted by Mish | September 19, 2017 2:32:36 | Economics

59 Comments

 

Hooray! The latest University of Michigan sentiment survey shows US Stock Market Bullishness Hit an All-Time High.

record-bulliishness.png?w=529&h=287

Poll: Did the Bell Just Ring?

Record 65% Think Stocks Will Rise Over Course of One Year: Did the Bell Just Ring?https://t.co/gzlwtE53iG

— Mike Mish Shedlock (@MishGEA) September 19, 2017

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On 9/26/2017 at 11:49 AM, Grab_Some_Popcorn said:

XIfwbsV.png

I reckon october will see yoy falls. woop woop.

 

Worth taking these from the RM index thread.The impact of house price falls on credit creation going forwards-in a fractional reserve system-is inherently deflationary.Losses restrict future lending as they reduce a banks capital base.

No wish to insult anyone's intelligence here but for those who aren't overly familiar with FRB,wiki is a great place to have a flick through the basics.

https://en.wikipedia.org/wiki/Fractional-reserve_banking

Great thread on HPC for those looking to dig deeper into Basel changes

On 9/26/2017 at 11:00 AM, crazypabs said:

YourMove/ReedRains (aka LSL Property Services) Property Index show MoM declines for the past 5months. Annual gains still positive though, however negative YoY territory not far away.

https://lsl-assets.s3.amazonaws.com/lslps/uploads/media_file/LSL-Acadata-EW-HPI-News-Release-August-17.pdf

FYI I only just came across this today, never seen this index previously.

 

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well i dont see much of a deflationary bust going on, i have hedged both ways although ive reduced my exposure to mutual funds significantly of late, the deflationationary stuff i bought is falling away but saved by the upside in equity funds, might turn, dunno. Looks like bitcoin et al is the new gold to be honest, the volatility is chronic though, it must be illiquid at the top and the spreads get large when it troughs. I dont know, i darent touch it so it will probably go to infinity and beyond knowing my luck.

Still best get on, these shotguns wont clean themselves.

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57 minutes ago, Sancho Panza said:

What does it have?

I'm here to learn.

The wiki page you referenced links to the following BoE document:

http://www.bankofengland.co.uk/publications/documents/quarterlybulletin/2014/qb14q1prereleasemoneycreation.pdf

which explains the manner in which commercial banks create money at the point of granting a loan, including the statement:

Quote

Another common misconception is that the central bank determines the quantity of loans and deposits in the economy by controlling the quantity of central bank money — the so-called ‘money multiplier’ approach. In that view, central banks implement monetary policy by choosing a quantity of reserves. And, because there is assumed to be a constant ratio of broad money to base money, these reserves are then ‘multiplied up’ to a much greater change in bank loans and deposits. For the theory to hold, the amount of reserves must be a binding constraint on lending, and the central bank must directly determine the amount of reserves. While the money multiplier theory can be a useful way of introducing money and banking in economic textbooks, it is not an accurate description of how money is created in reality. Rather than controlling the quantity of reserves, central banks today typically implement monetary policy by setting the price of reserves — that is, interest rates. 

 

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  • 444 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
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      • up 5%



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