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Deflationary collapse and the Reflation Cycle to Come.


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2 hours ago, Sancho Panza said:

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

This year a record amount has gone into US equities by retail investors and there has been big selling by insiders/execs.The only area that has seen big selling  is the energy sector.The US market magazines and press have all been saying why this sector is finished.The execs and insiders have been buying heavily.Iv bought FCG.

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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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13 hours ago, cognitive dissonance said:

Probably the UK doesn't need any sort of reserve nowadays, it creates money ex nihilo 'out of nothing' :lol:

Good read here, quote 'Janet Yellen has declared low inflation to be a mystery' :blink:

https://northmantrader.com/2017/09/26/waving-white-flags/

They are pretty much creating credit out of the promise of mortgagors to pay back their loans.That's pretty much my definition of nothing.

The big banks have never actually made it through a proper downturn in assets post Basel .2008 wasn't allowed to happen.

Balance sheets that were full of overblown asset values were kept solvent by taxpayers and extend and pretend continued.It says a lot that the BoE stress tests focus on inflation and rising IR's not a debt deflation.

The deflationary potential out there in terms of a credit downturn are huge and massively underpriced.

 

 

Interesting link-absolutel;y bang on.

' Fed speaker after Fed speaker is starting to acknowledge the underlying structural issues that foil their stated policy objectives which means that their policies have been focused on fighting the symptoms but not the root causes. Indeed, their policies exacerbated them. Central banks have blown asset prices sky high in the hopes of organic growth coming. It never did. Instead now everything is loaded up with debt, wealth inequality is higher than ever & now they can’t raise rates. Again. '

image.jpeg.9de4baa45c406c0bfed899bc76c6b0d3.jpeg

image.jpeg.69c96c62860cc2cd1af816ec210e0fcc.jpeg

 

image.jpeg.6027c5cb448a0e5872dda2300c989310.jpeg

Congratulations. You got everyone loaded up on debt and margin.

That the technology cycle has been deflationary and that pensions & benefits are hopeless underfunded and overstated in the wake of demographic realities. Central banks threw easy money at the problem, and with low rates enabled vast debt accumulation exacerbating wealth inequality in the process, all the while permitting the world to pretend that the barbarians were not at the gate.

 

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12 hours ago, stoobs said:

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:

 

You don't by any chance know the year when the UK abandoned cash reserve lending do you?

Was it 90's? Basel 1 implementation was 1992

Edited by Sancho Panza
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1 hour ago, cognitive dissonance said:

The barbarians are coming and I for one cannot wait :lol:

(just posting to subscribe to thread again, have unwittingly unsubscribed.....)

From that link of yours.The idea that this will play out without some seismic societal shift occuring is both naieve and going against the weight of historical evidence.

' But wealth inequality bred discontentment and resentment toward the establishment and finger pointing. That’s why America got Trump, the UK got Brexit and Germany got the AfD as the largest party. It’s all related on some level. But guess what? NONE of the structural issues are being addressed. The entire public debate is drowned out with political theater and drama. '

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On 9/26/2017 at 3:43 PM, assetpricing said:

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.

 

 

I agree.I think an historic bear market is close.Im pretty convinced we will get a reflation cycle next.Nothing is ever certain and nobody cant know the future,but for myself i am happy to follow what i see.Iv sold all my dis-inflation cycle assets that i bought over the last 30 years and i am now slowly starting to build a reflation portfolio.Im also long gold miners and starting to build a US treasury investment.The miners and treasuries i will be selling though at some point.

If im wrong and the markets carry on up over the next three years then i wont lose sleep.I had a very good return on my dis-inflation assets through the cycle.I buy and hold for full cycles and have no interest in short term moves or getting in a bit early or a bit late.The stocks im starting to buy (and funds) il be holding for probably 8 to 10 years (reflation cycles are much quicker).

Like you say a lot depends on defaults because this looks like a balance sheet event.Earnings falling where debts cant be serviced even at century low rates.

Lets see how things work out.

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Sancho, how do you see Gold and Cryptocurrency faring in a deflationary crunch?

To some extent it depends on whether you see them as assets (which get cashed in to pay off debt) or money (either of which could be seen as safe haven in either deflation or inflation if the system completely collapses) but I would be interested in your thoughts (DB has already set out his position).

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Peak Housing Bubble: The Big Short Is Back

Wash, rinse, repeat. The American public never gets tired of the destructive abuse it suffers from Wall St. The deep sub-prime mortgage market is roaring back and, with it, the nuclear bomb-laden derivatives that triggered round one of The Big Short de facto financial system collapse: It’s an astonishing comeback for the roughly $70 billion market for synthetic CDOs, which rose to infamy during the crisis and then faded into obscurity after nearly destroying the financial system. But perhaps the most surprising twist is Citigroup itself. Less than a decade ago, the bank was forced into a taxpayer bailout after suffering huge losses on similar types of securities tied to mortgages.

http://investmentresearchdynamics.com/peak-housing-bubble-the-big-short-is-back/

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2 hours ago, Democorruptcy said:

It's that word!

 

The markets think we go from where we are now to a nice easy reflation.I think they are very very wrong on that.There will be a severe deflation event first to get through.I still think the dollar goes to or close to Yen parity and the dollar index goes to 88.Time will tell.

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2 hours ago, pmgdawau said:

I thought that because the CBs create money at interest then there will never be enough to pay them back so the system has collapse built into it.

This is the whole problem with fractional reserve lending,particualrly once you leave something finite ie cash ratios behind,and move on to something that floats eg capital ratios where assets values can shift underneath the house that's built upon it.

2 hours ago, durhamborn said:

I agree.I think an historic bear market is close.Im pretty convinced we will get a reflation cycle next.Nothing is ever certain and nobody cant know the future,but for myself i am happy to follow what i see.Iv sold all my dis-inflation cycle assets that i bought over the last 30 years and i am now slowly starting to build a reflation portfolio.Im also long gold miners and starting to build a US treasury investment.The miners and treasuries i will be selling though at some point.

If im wrong and the markets carry on up over the next three years then i wont lose sleep.I had a very good return on my dis-inflation assets through the cycle.I buy and hold for full cycles and have no interest in short term moves or getting in a bit early or a bit late.The stocks im starting to buy (and funds) il be holding for probably 8 to 10 years (reflation cycles are much quicker).

Like you say a lot depends on defaults because this looks like a balance sheet event.Earnings falling where debts cant be serviced even at century low rates.

Lets see how things work out.

The problem I have with the whole reflation cycle is that you need a viable banking sector to do the heavy lifting.I'm looking at the state of the UK and the world's banks and trying to fathom how deep the losses will be and how far into the future it will be before it has real legs.

The BCBS thread has helped me understand that a little more but bank balance sheets are opaque at best.

2 hours ago, ThePrufeshanul said:

Sancho, how do you see Gold and Cryptocurrency faring in a deflationary crunch?

To some extent it depends on whether you see them as assets (which get cashed in to pay off debt) or money (either of which could be seen as safe haven in either deflation or inflation if the system completely collapses) but I would be interested in your thoughts (DB has already set out his position).

My view on crypto's is based upon the fact that the yellow stuff is tangible and was the original cryptos'.The rise of some of the crypto's reminds me of the tech bubble and it won't take much regulation or fraud to shatter confidence in them,

My Mum is telling me we need to invest in crypto's as well, which is all the market timing advice I need.

DB has bigger cahunas than me and offers some price/data points down the line.In a debt deflation of any significance it's about the return of the money not the return on it.If the goldies drop from here,I'll buy more and that's about as definitve as I can be.

PS please remember I'm long M&S at this point...DYOR.

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16 minutes ago, Sancho Panza said:

DB has bigger cahunas than me and offers some price/data points down the line.In a debt deflation of any significance it's about the return of the money not the return on it.If the goldies drop from here,I'll buy more and that's about as definitve as I can be.

PS please remember I'm long M&S at this point...DYOR.

Agree 100% SP that at the moment the return of your capital,or as much as possible is what matters.I put my targets on because thats what i see in my work.I started the thread and think its right i put on exactly what i see.I fully expect to be wrong on some,as ever,and its good to have points people cant debate around.I see gold going $1450+,down below $1000 then up to $7000 plus in the next cycle.I know others dont agree with the deflation bit in the middle and of all my forward looking charts its the one i keep going back and back too.I see no problem at all in your approach to simply buy more gold assets if they do fall.Im tempted myself to follow that line.Im no gold bug and didnt own it for a long time,but i do see the metals (silver even more so) being huge winners in the next cycle.

The markets are already doing what i expected underneath.Deflation stocks are falling as profits come under pressure.If this bear does kick in though i fear there will be many traps along the way.Im starting to add reflation stocks,but only very small amounts (i bought some FCG,a fund of gas companies and Centrica).Whatever,i think the crucial point is to avoid companies with high debts who will see free cash flow go down the plug in a downturn.That doesnt leave much.

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17 hours ago, stoobs said:

The U.K. doesn't have a Fractional Reserve Banking system.

 

16 hours ago, stoobs said:

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

Interesting link, thanks.

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38 minutes ago, durhamborn said:

I know others dont agree with the deflation bit in the middle and of all my forward looking charts its the one i keep going back and back too.I see no problem at all in your approach to simply buy more gold assets if they do fall.Im tempted myself to follow that line.Im no gold bug and didnt own it for a long time,but i do see the metals (silver even more so) being huge winners in the next cycle.

The markets are already doing what i expected underneath.Deflation stocks are falling as profits come under pressure.If this bear does kick in though i fear there will be many traps along the way.Im starting to add reflation stocks,but only very small amounts (i bought some FCG,a fund of gas companies and Centrica).Whatever,i think the crucial point is to avoid companies with high debts who will see free cash flow go down the plug in a downturn.That doesnt leave much.

How anyone can argue with a deflation call I don't know.See chart below.

I never used to be a gold bug either but as I've understood more about the miscalculation of inflation,money supply,CB incompetence,I've changed.My current view is to take profits from elsewhere and funnel them into the goldies.The last twenty years has been a good run,even if you only enjoyed some of it.Some goldies are down 75% off peak and more.If they drop 50%,I'll add.

On that last sentence in bold,I've felt for while that in a balance sheet recession you need to be focusing on stocks with strong balance sheets.There aren't many as you say.

 

Edit to add-I'm only buying the $1bn + market cap goldies

1 hour ago, ThePrufeshanul said:

Thanks Sancho (and earlier, DB) that's very informative! Do you have a particular set of  resources that you recommend reading? (Books, analysts, blogs etc)?

I'm quite new to economics and finance and am still trying to get my head around things.

I've been reading here for years and have found numerous worthwhile resources.The BCBS thread/fractional reserve lending are issues to really get your head around as understanding how banks will be forced to deleverage their balance sheets due to losses in asset values is -to my uneducated mind- the key issue going into a debt deflation.

Personally,I found it easier to understand the basics of cash reserve lending and then get to grips with Basel-capital ratios/leverage ratios etc.The key thing for me is that as soon as the banks start taking losses,they're inherently forced to rein in credit creation which has a much wider economic impact. In 2008 they basically got to offload all their dross onto tax payers worldwide and then carry on as before.

 

 

Inflation chart USA 1871-now.png

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19 hours ago, leonardratso said:

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.

Self defence when it all goes tits up or suicide?

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4 hours ago, ThePrufeshanul said:

Thanks SP

No worries.

I meant to add a couple of my go to reads.

Mish Shedlock does some cracking analysis of broad economic themes and has a pretty good track record.

Shaun Richards really goes into how statistics are compiled eg GDP, inflation measures and the difference between them etc.He has a really sceptical take on things and has opened my eyes no end.Also,he replies if you have any specific queries and it's a bit like this place in that there's no such thing as a dumb question.

Paul Hodges writes some illuminating stuff.particularly on the impact of demographics,but also from the perspective of what chemical markets are telling him

Steve Keen here & here blew my mind when I first read the Roving Cavaliers of Credit in 2009 where he laid out the historical evidence that loans were being created ahead of deposits (contrary to the money multiplier being taught in schools).That's now the official position and is a broadly accepted truth which it wasn't 10 years ago.

PS if you come across some good informative links like Cognitive Dissonance -Northman trader one-then feel free to post and share.That's the great thing with these threads.

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9 hours ago, durhamborn said:

The markets think we go from where we are now to a nice easy reflation.I think they are very very wrong on that.There will be a severe deflation event first to get through.I still think the dollar goes to or close to Yen parity and the dollar index goes to 88.Time will tell.

Agree! it is not easy to enter a easy reflation. The excess capacity from last cycle are still existing there.  Real incomes are stagnant. Demand are only maintain by easy credits. The whole system looks very fragile though the economic size appears huge. The GDP number doesn't mean much, just a number to manipulate market expectation. The UK looks even worse than the US. Just look at the recent crime rate across the country, quite worrisome.

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2 hours ago, Sancho Panza said:

No worries.

I meant to add a couple of my go to reads.

Mish Shedlock does some cracking analysis of broad economic themes and has a pretty good track record.

Shaun Richards really goes into how statistics are compiled eg GDP, inflation measures and the difference between them etc.He has a really sceptical take on things and has opened my eyes no end.Also,he replies if you have any specific queries and it's a bit like this place in that there's no such thing as a dumb question.

Paul Hodges writes some illuminating stuff.particularly on the impact of demographics,but also from the perspective of what chemical markets are telling him

Steve Keen here & here blew my mind when I first read the Roving Cavaliers of Credit in 2009 where he laid out the historical evidence that loans were being created ahead of deposits (contrary to the money multiplier being taught in schools).That's now the official position and is a broadly accepted truth which it wasn't 10 years ago.

PS if you come across some good informative links like Cognitive Dissonance -Northman trader one-then feel free to post and share.That's the great thing with these threads.

Il add here a guy iv followed for years.He is a Contrarian investor with a lot of experience of cycles.

http://truecontrarian-sjk.blogspot.co.uk/

He does a lot of work around fund flows from retail investors compared to insiders.He doesnt try to time,but is prepared to wait for things to revert back to the mean.He has opened my eyes to many undervalued sectors over the years (and overvalued ones).Worth reading.

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4 hours ago, Sancho Panza said:

No worries.

I meant to add a couple of my go to reads.

Mish Shedlock does some cracking analysis of broad economic themes and has a pretty good track record.

Shaun Richards really goes into how statistics are compiled eg GDP, inflation measures and the difference between them etc.He has a really sceptical take on things and has opened my eyes no end.Also,he replies if you have any specific queries and it's a bit like this place in that there's no such thing as a dumb question.

Paul Hodges writes some illuminating stuff.particularly on the impact of demographics,but also from the perspective of what chemical markets are telling him

Steve Keen here & here blew my mind when I first read the Roving Cavaliers of Credit in 2009 where he laid out the historical evidence that loans were being created ahead of deposits (contrary to the money multiplier being taught in schools).That's now the official position and is a broadly accepted truth which it wasn't 10 years ago.

PS if you come across some good informative links like Cognitive Dissonance -Northman trader one-then feel free to post and share.That's the great thing with these threads.

Double thanks - look forward to getting stuck into them :D

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1 hour ago, durhamborn said:

Il add here a guy iv followed for years.He is a Contrarian investor with a lot of experience of cycles.

http://truecontrarian-sjk.blogspot.co.uk/

He does a lot of work around fund flows from retail investors compared to insiders.He doesnt try to time,but is prepared to wait for things to revert back to the mean.He has opened my eyes to many undervalued sectors over the years (and overvalued ones).Worth reading.

Also thanks!

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  • 441 Brexit, House prices and Summer 2020

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