My first trade - Shell / BP

[Stacktastic]

11 minutes ago, KDave said:

If you can get the timing right then fair play I have not worked out how to trade the short term movements myself and stick to buying with longer term targets in mind. 

Sentiment is very low despite a higher average oil price over the last quarter and results coming soon, I don't know what people are thinking but you can almost taste the fear at these prices.

Yesterday I finally bought shell at 973, a triumph of sorts as I have been holding that money for months. I missed the lowest it got yesterday as I was not paying enough attention (at work). I also bought more BP at 237 and added Total (FP) to the oilies to go along with Repsol and prior to ex-dividend, decent yield on Total now. That is the last I will put in to oil this year (maybe) as I have been neglecting telecoms which are also still very cheap, hopefully they stay low for a bit longer and allow me to get in.

Those four appear to be attempting to set up and take as much share of the non existent hydrogen market as possible while they continue to produce oil and gas. All of these renewable electricity buys are being done in order to use it themselves, BP has gone heavy into it PR wise, though oil and gas will still be needed and at a much higher prices for hydrogen to be viable in regard to cost. Between them all they must know something. 

Well done with Shell, I should have done that, but it was my first trade and I am not in that bad position. 

I shall just put a sell order on it I think at the price it hits a positive. i will leave 50% in each account as i will kick myself if it never goes down again. same with a couple of my mining stocks I will sell it all though and reinvest in only a few mining stocks on a dip (like Barrat). I can then reinvest if or when it goes down again in a similar fashion as you have. I am learning patience as well as good timing, as i got a very nice position in the WTI a couple of weeks back. 

Im looking at  a short play on paper silver I think if it keeps plummeting. £16 an ounce is a good target I think as it will certainly go up again. 

[KDave]

1 hour ago, Stacktastic said:

Well done with Shell, I should have done that, but it was my first trade and I am not in that bad position. 

I shall just put a sell order on it I think at the price it hits a positive. i will leave 50% in each account as i will kick myself if it never goes down again. same with a couple of my mining stocks I will sell it all though and reinvest in only a few mining stocks on a dip (like Barrat). I can then reinvest if or when it goes down again in a similar fashion as you have. I am learning patience as well as good timing, as i got a very nice position in the WTI a couple of weeks back. 

Im looking at  a short play on paper silver I think if it keeps plummeting. £16 an ounce is a good target I think as it will certainly go up again. 

I have not sold to buy back lower, I have just been buying all year since March, cost averaging in and keeping some aside for bigger buys at low points if they came. The target for the money set aside was for £9 shell initially but I used most of that early to get the average below £11. I have no money for £8 shell should we see it, maybe we do who knows. Patience is good, key, I don't have enough of it so use systems where possible to take some of the strain off the human side and let the system work out what to do. I have also learned in the past that my timing is more luck than judgement which is why I average in and also keep some cash on the side for those opportunities (luck). I set targets to the downside at which to buy and if I don't get them then so be it, the averaging process will fill out my target eventually.

I am not sure about selling half to buy later idea, I used to do that on the way up, to take some cash off the table but its a sign you don't know something or something is missing from the plan. Is half your long term position and half for trading? Fair enough if so but just selling at breakeven would be a sentimental/emotional red flag if I started thinking about it (not rational or target driven). If you do sell at breakeven without a target then you must deal with one of two scenarios 1: you sell and it drops - now what do you do, wait for it to drop more? How long do you wait, how far do you let it drop. What if it starts going back up do you buy then, or do you wait for it to drop again? Scenario 2: you sell and goes up - now what do you do, wait for it to drop so you can buy back in? What if it keeps going up..... you get the picture. If you have targets you have worked out in advance then fair enough, otherwise you will just allow yourself to be led by the nose by the market and likely do the wrong thing. Emotions are part of the process but should not be the driving factor, if I had listened to this myself I would have a lot more £9 shell and less £10 shell but there you go. 

October is when I am looking to start accumulating metals again, maybe we get a few months to do so with a bit of luck. 

[Kman]

On 19/08/2020 at 13:39, Kman said:

I have a sliding support line drawn in for RDSB that I think is right minus bad news or a slump in oil itself

~10.50 currently sliding down to ~10 in October

It lost that lower support

9.96 was the first price it clawed back upto after the March low, it lost that too

It came up to test it today, If it gets rejected  it will be interesting just how low it can go

How would you even work out the fair value of a company like shell atm? because it might say they have x amount of assets but if they tried to sell assets in the current market would they not get only a fraction of their worth. Not that they need to sell anything, just out of interest

Edited September 22, 2020 by Kman

[KDave]

Fair value of a company is a judgement on many factors, assets and share price sure, but in this case that judgement heavily depends on where you think the oil price is going in the future. You know my opinion on inflation and what I think will happen to the oil price. For the companies I looked backwards based on last years financial reports on $64 oil, comparing annual reports and comparing metrics in order to rank them, Exxon came out top Shell second, Shell had the highest revenue of all the majors in 2019, largest company by assets, best return on capital employed, best return on assets, decent quick debt ratio, highest income before tax, but it has more debt than Exxon, less per share income, almost 4 times as much long term debt, etc. I am not too concerned about long term debt due to inflation expectations. BP is the worst of them based on last years performance, has the worst balance sheet regarding debt, etc, but has half the short term debt that Exxon had. I am not concerned about its debt, especially after the FED told us inflation is coming. That is looking backwards, looking forwards take that $64 oil and double it in 3 years, triple it in 5 years, etc. Q3 will be interesting to see how they are getting on, I expect they did quite well all things considered, as oil has averaged around $40 for most of the quarter. A lot has happened this quarter in regards to the noise around renewable electricity and hydrogen. Shell buying oil developments in Africa, these will not be producing oil for 5-7 years, this tells me they know they will still be an oil producer beyond that time frame despite all the noise. Shell and Microsoft partnering up. It won't be long until the market starts to see value, whether it is fair or not is a judgement call. 

Everyone thinks oil is dead. I have read several articles around this theme recently far in excess of the calls from 2015, even the oil companies themselves are at it (BP). Instead people have been investing in Tesla and equivalent thinking everyone is going to need electric vehicles and no oil. Sure people will need them, but they are not going to be lining up around the world to spend $60k on an electric car next year, maybe in 10 years when there might be a significant amount of electric vehicles on the road, but until then what are people going to need? Have we found a replacement for plastics? How high does the price of natural gas need to be for hydrogen to be viable? Who is positioning themselves now to provide that hydrogen and given the prices of conventional energy to support said hydrogen, what do they know? 

The market is still looking backwards thinking more of the same is coming in regards to the monetary conditions (wrong), then it is looking forwards 10 years in to the future and seeing it happening next year (wrong). We will see in time. At the moment I am not seeing many people calling to invest in oil, though I have had a couple of tentative emails from various subscriptions calling attention to a few of the companies. Won't be long.  

[HerculeHolmes]

On 22/09/2020 at 20:49, KDave said:

 

I'm not a believer in electric cars, I think Governments will still get their fuel revenue by hook or by crook, I think ordinary ICE cars - especially secondhand - are often more economical in the short and long term,  I think distance range is a major issue on the "cheapest" electric cars and that they will become unusable for many people when the battery ages and range drops below the necessary commuting distance, I think they have relatively short life-spans - the value of the car being almost entirely in the battery, I think they are not green - I think it's just "green theatre", I think households will have no way to charge more than one vehicle at a time, I think that an all-electric fleet of cars will put huge pressure on power stations, and most of all I think they are simply far too expensive for 90%+ of people to buy.

But, if we are forced to buy them by our governments, then they WILL take over, and the value of petrol and diesel will crash through the floor. I don't know what is going to happen, but it seems to me that a lot of governments are very, very keen to push EV's on us whether we like them or not and whether we can afford them or not.

Edited September 25, 2020 by HerculeHolmes

[KDave]

Its not going to happen smoothly in the timeframes that government wants, it will take drastic measures to implement and have far reaching consequences to our standard of living and the competitiveness of the UK economy. The initial target was 2050 all electric, reasonable, if unlikely, now they have said they will stop people buying conventional vehicles from 2030! All electric by 2030 is insane, 9 years from now there will be no conventional vehicles on the roads only electric? The only way to achieve that is with huge subsidies for electric along with tyrannical measures, including the stick of financial penalties for using conventional, though some of the later is coming anyway in the form of higher oil prices. The economic cost will be enormous and we will price ourselves out of competition against non EV nations. Anything we do or produce will have the huge overhead of expensive transport/commute tagged on to the price, while other nations carry on with oil and undercut and enjoy a higher standard of living. Nothing about it is good for the UK or its people. Likely that is the reason they are doing it.  

The result of achieving this will be to take two thirds of the cars off the road, as you say, too expensive for 90% of people to buy - this will force most people to use mass transport or walk/bike everywhere. A huge drop in standard of living. Most people will not be buying and maintaining electric cars at the prices they will command when demand is 95% higher. The state will make driving something for the elite and well off (that's how they like it). This would solve the issue of congested roads and it would have far reaching economic repercussions; the covid economy is perhaps a good glimpse as to what it would look like. People working from home with the rest on a form of UBI (furlough), perhaps that is what covid has been about all along, getting people used to working from home, quiet roads and UBI. The artificial trigger needed for the test run reform of the economy. Regardless, unless they keep covid going for the next 9 years the 2030 goal is not happening, once things return to 'normal', people will not play ball until they are given incentive to do so and no one is going to deliberate hamstring themselves by increasing transport costs either personally or in business. How many white van men are going to hand over the LGV for an expensive electric equivalent? How many businesses are going to sell the fleet of cheap cars for the enormous capital and ongoing cost of an electric equivalent? How many people are willing to give up convivence of a diesel or petrol car for the privilege of monthly battery rental whether they drive it or not. 

This is just the UK. EV sales are only currently 2% of global car market. Oil is going no where soon from the big picture, it doesn't matter what action they take here. Also consider that China is the largest EV market in terms of take up in the world now, they also have the cheapest electricity costs in the world because they burn coal to produce it. They understand economics and that energy is everything, they also could care less about the climate nonsense as there is nothing 'green' about any of this EV stuff. As soon as you start digging you work it out pretty quickly and are left wondering why we are pushing this nonsense so hard to our detriment.

[HerculeHolmes]

Returning to normal is taking a lot longer that I'd hoped. 3 weeks they said... Now we're into a second wave (or so they claim, personally I am very suspicious about the numbers) and can't help but feel a conspiracy theory atmosphere in the air like it's all to do with stopping Brexit and replacing Donald Trump and desensitizing us into living in a less free world. This is not the same world we were living in 1 year ago.

But I am hopeful (if that's the right word) that oil is still going to be the big thing for decades to come. I've started putting some cash into Shell and BP on Trading 212 (about £700). Maybe I should be using a different platform.. I don't really know much but Trading 212 is the only one I've used so far. Gotta start somewhere though.

[Stacktastic]

On 22/09/2020 at 20:49, KDave said:

Fair value of a company is a judgement on many factors, assets and share price sure, but in this case that judgement heavily depends on where you think the oil price is going in the future. You know my opinion on inflation and what I think will happen to the oil price. For the companies I looked backwards based on last years financial reports on $64 oil, comparing annual reports and comparing metrics in order to rank them, Exxon came out top Shell second, Shell had the highest revenue of all the majors in 2019, largest company by assets, best return on capital employed, best return on assets, decent quick debt ratio, highest income before tax, but it has more debt than Exxon, less per share income, almost 4 times as much long term debt, etc. I am not too concerned about long term debt due to inflation expectations. BP is the worst of them based on last years performance, has the worst balance sheet regarding debt, etc, but has half the short term debt that Exxon had. I am not concerned about its debt, especially after the FED told us inflation is coming. That is looking backwards, looking forwards take that $64 oil and double it in 3 years, triple it in 5 years, etc. Q3 will be interesting to see how they are getting on, I expect they did quite well all things considered, as oil has averaged around $40 for most of the quarter. A lot has happened this quarter in regards to the noise around renewable electricity and hydrogen. Shell buying oil developments in Africa, these will not be producing oil for 5-7 years, this tells me they know they will still be an oil producer beyond that time frame despite all the noise. Shell and Microsoft partnering up. It won't be long until the market starts to see value, whether it is fair or not is a judgement call. 

Everyone thinks oil is dead. I have read several articles around this theme recently far in excess of the calls from 2015, even the oil companies themselves are at it (BP). Instead people have been investing in Tesla and equivalent thinking everyone is going to need electric vehicles and no oil. Sure people will need them, but they are not going to be lining up around the world to spend $60k on an electric car next year, maybe in 10 years when there might be a significant amount of electric vehicles on the road, but until then what are people going to need? Have we found a replacement for plastics? How high does the price of natural gas need to be for hydrogen to be viable? Who is positioning themselves now to provide that hydrogen and given the prices of conventional energy to support said hydrogen, what do they know? 

The market is still looking backwards thinking more of the same is coming in regards to the monetary conditions (wrong), then it is looking forwards 10 years in to the future and seeing it happening next year (wrong). We will see in time. At the moment I am not seeing many people calling to invest in oil, though I have had a couple of tentative emails from various subscriptions calling attention to a few of the companies. Won't be long.  

I agree with this 100% - my thoughts exactly. 

19 hours ago, HerculeHolmes said:

I'm not a believer in electric cars, they are simply far too expensive for 90%+ of people to buy. But, if we are forced to buy them by our governments, 

 

15 hours ago, KDave said:

All electric by 2030 is insane, 9 years from now there will be no conventionl vehicles on the roads only electric? The result of achieving this will be to take two thirds of the cars off the road

 

1 hour ago, HerculeHolmes said:

I am very suspicious about the numbers and can't help but feel a conspiracy theory atmosphere in the air

You are not wrong there & I can't understand why people are not questioning what is happening and the idiot rules that are being made (like wearing masks weeks after lockdown & all the stupid stories that have come out 'a scientist said this so it must be true', not to mention the complete s**** computer models of the spread of this (same people that modelled another ice age about now LOL). With regards to the numbers, you only have to put things into perspective and look at official world death figures to see that its largely just people that would have died normally.

40k people is very little (out of 75,000,000 in the UK), when you consider 450,000 die A DAY on average in the world! I never realised how few people do not rely upon the media & use common sense / critical thinking - its very scary actually. my father is an educated middle class man, he was calling chinese people, yellow slant eyed bastards yesterday (the bat story). Sorry if thats offensive to anyone, but it made me feel sick, so just demonstrating the above! He seems to think that as he watches Aldgezera that its the truth. If he thinks like that i hate to think how easy it is to control the mindset of other people less privileged than him  

I don't have any answers & I don't actually think the government knows 50% of whats going on (its much higher up than that), but I recon they are continuing the fear factor and padding themselves out for the next flu season i think, although they might have another mini lockdown soon. I just wish they gave all the sheep the vaccine and I can carry on with my life (assuming they all don't die from it that is as that's what killed most the people in the Spanish flu!).

With regards to electric vehicles & based on the above comment from myself, we are now apparently in the 4th industrial revolution, which include plans for humans being upgraded using tech not to mention the digital tattoo thing. These are a few observations of whats happened this year in my area, where as far as I am aware no one has died (40k people or so). To shut down the whole economy is highly suspicious on its own!

- getting people used to being at home
- giving people free 'money' and relying on the goverment
- killing off local small businesses, especially food & beverages & the events/entertainment industry. 
- making people abide by the rules and enforcing it with threats
- Fear of an unknown entity, a bit like religious fear mongering (oh you could be carrying it, maybe not)
- splitting up social gatherings & creating social distrust of others. 
- Antisemitism & a common enemy (bats & chinese people - come on!). 
- Making people fearful of touching anyone else, with distancing - we are social animals after all. 
- movement from physical money to a digital currency of some sort by encouraging more contactless
- constantly changing the rules & adding/chancing things to the story (it reads like a book to me)

And so on. 

If this is actually manufactured (I don't know either way) & I was in control of this, I would see great benefit with electric self driving cars as you can tell where everyone is at any time, you could stop & control the car remotely (ie from a police car), you could shut down all cars in any specific area (ie Birmingham) & even monitor peoples private conversations or body vitals. If this is a thing and we are very quickly moving into a robotic mechanised world, then I dont think its a far cry to suggest that governments may gift each house hold with a grant of some sort, including bringing back solar technology? After all money is just a concept & they can always get it back in road tax or taxing the electric companies, possibly doing even better than they do with fuel tax?

On the flip side, if everyone is at home, car use (and more importantly fuel consumption) might halve in the space of a few years. Just playing devils advocate here as BP in particular is the deal of the century this week.

 

Edited September 26, 2020 by Stacktastic

[KDave]

1 hour ago, HerculeHolmes said:

Returning to normal is taking a lot longer that I'd hoped. 3 weeks they said... Now we're into a second wave (or so they claim, personally I am very suspicious about the numbers) and can't help but feel a conspiracy theory atmosphere in the air like it's all to do with stopping Brexit and replacing Donald Trump and desensitizing us into living in a less free world. This is not the same world we were living in 1 year ago.

But I am hopeful (if that's the right word) that oil is still going to be the big thing for decades to come. I've started putting some cash into Shell and BP on Trading 212 (about £700). Maybe I should be using a different platform.. I don't really know much but Trading 212 is the only one I've used so far. Gotta start somewhere though.

Buying BP at 25 year lows what is not to like. The downside is possible, risk of further downside vs reward of potential upside, you make the call, you know what I think. Always a chance they go bust of course, tentative is definitely appropriate with share picking in a contrarian/hated sector. If it was easy all the monkeys would be doing it. 

Returning to normal will not happen for a while yet, logically the 'Conservatives' (Stalinists with a 9 year plan) will want to see out winter first, with flu season on its way and a population with weak immunity due to being separated from each other all year. It will likely be the worst flu season we have seen for a long time, plus corona virus on top. After that, maybe the Stanlists in charge will let us back out of our prison cells, I don't think people will put up with it for another year. Account also for all the horror stories coming out from hospitals regarding euthanasia, critical race theory reintroduced into society by BLM, all the job losses that are coming, inflation, higher energy bills, etc - unrest will start to bubble over. They can't keep us locked down forever or we will see another poll tax riots equivalent and likely worse. 

For oil supply is as much a part of the picture as demand, supply has cratered and inventories are being burned through a lot faster than expected. However ideally I would want to see oil fall below $40 again for a while to reap the best long term gains, flush out the rest of the fracking companies and the smaller players, then the majors can cherry pick the best assets and after that cut capex as no new entrants will be coming into the market for years. They will have huge cashflow in a couple of years time which they will use to pay down debt, spin off dividends and share buy backs. BP should return roughly 20% compounding per year between dividends and share buy backs (6% yield + 15% of cash into buybacks as announced).

[Stacktastic]

28 minutes ago, KDave said:

It will likely be the worst flu season we have seen for a long time, plus corona virus on top.

Your not wrong there and a lot of cases I think might be created as people are fearful, stressed as they cant afford to live & not as active, which is a recipe for bad immunity & health in general. One things for sure I I think there will be a lot of PTS disorder patients in the next few years, not to mention as you say, civil unrest. I dont think its unfeasible to say that America might have a civil war or some thing like that. Not sure it would be that bad here, but certainly for some nations that have a had a real distrust for its leaders for many generations & have seen the same scenarios playing out (Moonlandings, pearl harbour, Hiroshima, 911/invasion of the middle east, swine/bird flu, secret space programs, wreckless printing of money,god the list goes on and on (although a few on that list are a little bit conspiracy theory). Just the Genocide of Hiroshima & 911/controlled explosion is enough proof to me that our world leaders don't have the general publics interests at heart & there is a bigger play being acted out & this is just one of the concluding scenes. 

Its a bit out there for this forum but I am starting to think this is definitely a simulation of some sort, it just could not be made up! Plus as im starting to catch it out at times, especially after a few drinks. People reactions also this year have been interesting as they cant seem to use logical thinking, almost as it they are being controlled somehow? Im sure my homemade gin is the antidote - I should be called Mr Looney LOL. .  

Yes there is a very good chance that the share prices can go down a lot more. If I zoom out on the graphs, im actually very happy with my position. Assuming they recover and dont fall, it only has one way to go after all of this BS. Im continuing to invest on the WTI dips as thats the only stock i have that not in a minus after last week (ignoring Greatland Gold & Barrick). I learnt a valuable lesson with Shell & BP with WTI and that is to sit and wait. I can see it hitting the lower line with the bell if there is a 'second wave'. 

Looking at this graph it only needs to go up £20 a barrel to make a decent return. With inflation it might even hit £80 a barrel, maybe more within 3 years. 

Edited September 26, 2020 by Stacktastic

[KDave]

This is how I think about it (not advice); See an opportunity long term. Establish how much exposure you want in this long term opportunity. Offset the risk associated with short term timing by using cost averaging and setting aside cash for targets to the downside. Now most of the negative emotion has been removed from process and watching prices fall becomes something to celebrate, sitting on a paper loss becomes easy. Sure you can think "if only I waited I would have more shares" but if it went up you would be thinking the opposite, the process is a timing risk/reward trade off. Any movements to the downside are no longer something to worry about. With dividend payers its even easier - you are paid to wait for the expected outcome and increase cashflow throughout the process. 

Of course I could be wrong and everyone else right on oil. That is why the first thing to do is establish how much exposure you want and work from there, I have hit my 2020 targets now. If we see further downside I will consider buying some of next years allocation early, otherwise I aim to be back on the metals next week, especially silver.  

The more articles come out hammering oil, the stronger the thesis 

[Kman]

8 hours ago, KDave said:

This is how I think about it (not advice); See an opportunity long term. Establish how much exposure you want in this long term opportunity. Offset the risk associated with short term timing by using cost averaging and setting aside cash for targets to the downside. Now most of the negative emotion has been removed from process and watching prices fall becomes something to celebrate, sitting on a paper loss becomes easy. Sure you can think "if only I waited I would have more shares" but if it went up you would be thinking the opposite, the process is a timing risk/reward trade off. Any movements to the downside are no longer something to worry about. With dividend payers its even easier - you are paid to wait for the expected outcome and increase cashflow throughout the process. 

If your short term outlook was negative would you ever take a sell position rather than averaging in going down?

Taking a sell instead of a buy, if it went down 10%  and you exit your position to buy then you would be getting 20% more stock with the original monetary amount right?

If the stock goes up then the money you already have in would counter the loss of the sell position on paper; It would be aggressive but an interesting way to go

On 22/09/2020 at 20:49, KDave said:

 especially after the FED told us inflation is coming. 

They said they would let inflation go over 2% but I think that was hot air

Edited September 26, 2020 by Kman

[KDave]

14 hours ago, Kman said:

If your short term outlook was negative would you ever take a sell position rather than averaging in going down?

Taking a sell instead of a buy, if it went down 10%  and you exit your position to buy then you would be getting 20% more stock with the original monetary amount right?

If the stock goes up then the money you already have in would counter the loss of the sell position on paper; It would be aggressive but an interesting way to go

They said they would let inflation go over 2% but I think that was hot air

Yes you could do that if you are confident there are lots of ways to do it, you could combine a number of approaches. One commentator I follow treats 40% of his Shell holding as short term trading and keeps the other 60% as the long term hold and tries to increase that holding by trading, but it doesn't always go his way and requires a lot more work. It needs to be systematic to be worth doing I think, as the system is there to manage the human side of what we are doing; trying to time the market like that based on a short term outlook requires energy and work, causes stress, adds emotions to the equation, leaves more room for mistakes thanks to the human factor. But its another way to do it, sure, aggressive as you say (emotional), more risk more reward. I have a lot of respect for people that manage to combine technical analysis with a long term thesis, Christopher Arron is someone who does this with metals and has made some great calls in the past on silver for example, trading short term uptrends and downtrends to make money to add to his long term long position. However it doesn't always work and recently he got the short term picture very wrong, this will have cost him and his followers, but if he is right more often than not then its just part of the net positive equation.

On the FED better to look at what they and other central bank arms are doing not only what they are saying. QE to keep interest rates low (long bond yield) while adding enormous amounts of liquidity directly into the economy through various mechanism, directly to businesses, governments and the man in the street, so this is not the QE of 2009 to provide liquidity to the banks, this is for the whole economy. More will be coming, most of it directly to government as it is the only way out other than deflation and reset. 

The BoE pension fund is 90% index-linked bonds and corporate bonds (linked to RPI no less). What does this signal. They are telling you in every way they can what they are doing, they are positioned for it and they are working toward it because it is necessary. They are talking about it and telling everyone what to expect. If we don't see inflation its because they messed up by failing to print enough and cause a deflationary collapse. It is possible. 

[Kman]

4 hours ago, KDave said:

On the FED better to look at what they and other central bank arms are doing not only what they are saying. QE to keep interest rates low (long bond yield) while adding enormous amounts of liquidity directly into the economy through various mechanism, directly to businesses, governments and the man in the street, so this is not the QE of 2009 to provide liquidity to the banks, this is for the whole economy. More will be coming, most of it directly to government as it is the only way out other than deflation and reset. 

The BoE pension fund is 90% index-linked bonds and corporate bonds (linked to RPI no less)

We've had a decent amount of QE, stimulus, you could apply for loans deferrals etc 

Why is RPI going down?

[KDave]

58 minutes ago, Kman said:

We've had a decent amount of QE, stimulus, you could apply for loans deferrals etc 

Why is RPI going down?

Deflationary pressure is winning out. It was spotted by the FED late 2019. September onwards they tried to introduce liquidity using the old fashioned QE, it was not enough despite what the season uptick says (Jan/Dec). In March Covid came along to exacerbate the problem and provide the opportunity to test injecting liquidity directly into the economy. This was done to stave off the deflationary effects of the government response to Covid only; the stimulus replaced what was lost (furlough, wages, etc). Replace what was lost and the problem you had before is still there, here we are. 

Deflation won't last if it occurs, because one of two things will happen; either we live through systemic collapse, or central banks conjure up more liquidity and get government to put it where it is needed.

I have listened to arguments that QE itself is deflationary and causes deflationary conditions. Its an interesting argument but for the reality that tightening does not cause inflation, so it can't be correct. For example - the FED stopped QE Jan 2015, RPI started a little bull run in the years after, does that mean the deflationary effects of QE stopped between 2015 - 2017 as the argument claims? That stopping QE started inflation? Does it not more likely tell us the inflationary effects took time to enter the system? Given the nature of the previous QE programs (and austerity). 2017 as another example - the FED started tightening mid 2017 - logically by the QE causes deflation argument, RPI should have rocketed up. All of that deflationary pressure being reversed by removing QE from the balance sheets, where were the calls for impending hyperinflation? But deflationary conditions came back, notice not straight away. So there is a lag in the effect of tightening (which is deflationary) and there is a lag in the effect of QE (which is inflationary). It takes time for liquidity to move through the system and that gives the leads and lags. Late 2019 the FED spotted the deflationary problem they had caused, and started increasing its balance sheets again in an attempt to increase liquidity the old fashioned way (2008 QE style). Fortunate that covid hit in march and they could test out the next generation QE, we will see a lot more of that. 

The calls for hyperinflation following the March 2020 version of QE - this was never the risk. Deflation was always the risk over the last 12 months, September 2019 onwards they started to respond. We will see inflation when the FED and central banks size their response properly yes, but not hyperinflation, in these conditions post covid it is impossible. The RPI chart tells you that more QE is coming (or a reset) and going from past performance that they will likely over do it as they did on the other end into late 2019 tightening for too long.

The RPI chart says there are leads and lags, and liquidity takes time to enter/show up in the system. 2016 - 2017 was 2015 FED's inflationary lag, 2018 - 2019 was 2017 FED's deflationary lag. Direct into the economy is the only option now to avoid as much lag as possible, so we will see a lot more of that imo. Government will be spending it, central banks will be facilitating it. 

[Kman]

@KDave QE + banks tightening loan standards would be deflationary, that's what we have atm

QE removes dollars from the system and if banks aren't lending where are the new dollars coming from? mortgages and loans were deferred past few months so dollars that should have been destroyed repaying debt stayed in the system, that helped

If you have QE+ banks lending enough then there's no deflationary pressure. During 2009-2014 banks started lending again so there was no great deflationary pressure released 

RPI in 2014-16 was very low, ok it started creeping up but it was still lower than 2011 and lower even than 2007 before there was any QE

2016-19ish also had a very strong economy, everything on a macro level looked good, unemployed was down to the lowest it had been since 2007 and the velocity of money started to stabilise after falling for 9 years

It's reasonable there was a little inflation then and it was down to strong economy not just a delayed reaction to QE 

It's a debt based monetary system you need people working and taking out new debt to pay back the old debt+ some, just giving people money wont work for long

Edited September 28, 2020 by Kman

[KDave]

A new dollar is created and given to a bank. All things being equal, there is inflationary potential in the new dollar. If the banks sits on the dollar its not the dollars fault. 

In our case currency (dollars) are being destroyed and hoarded by repayment of debt and saving, and the banks are not lending new dollars. This is in part due to government response to a flu virus killing off everyone's job prospects and destroying the economy. The BoE sees the deflationary conditions developing and steps in to lower interest rates and create new currency, this time it gives some to the banks to encourage them to lend, and it gives some to the government. The government does not sit on those dollars it gives them out and makes it rain. Rishi Sunak gives Gordon Brown a run his money. The balance between dollars being destroyed vs dollars being given out by government (and banks) is enough to counter some of the deflationary pressure. However, the activity that was being performed previously with those dollars is no longer possible because the economy is shut down and the psychology/attitude remains that everyone is still hoarding in anticipation of job losses. So is QE deflationary? Or are the conditions coinciding with the need for QE deflationary. 

QE was in response to deflationary conditions in the money supply. It does not remove dollars from the system it adds them. Dollars are being removed from the system but not by QE. 

The government will lead the economy out of the mess it has caused and will be facilitated by the central banks (more QE).  Historically government have done this by spending on public works and infrastructure and something similar will happen this time around, hopefully anyway because I am positioning for it. We will have to wait and see. 

[Kman]

3 hours ago, KDave said:

QE was in response to deflationary conditions in the money supply. It does not remove dollars from the system it adds them

1. The Bank has $1 that already existed
2. Gov: can I borrow that $1 and I will give you back $1.01 in a year? here's an iou 
3. The bank now has an iou for $1.01 and the government can spend the $1
4. The Fed: I will take that iou please for $1.011 but I'm going to exchange it for dollars in an account you can't withdraw from
5. result: There's still only $1 in circulation and when its repaid $1.01 we will be -$0.01 from where things started

That's deflationary by itself

If the Government can use that dollar to create jobs and financial security resulting in economic prosperity then there will be more consumer spending, more loans being taken out so more currency to feed the old debt + an abundant amount in circulation 

QE on it's own is deflationary, what it's trying to stimulate is economic prosperity that leads to inflation (at least in the short term) as you said with 

"The government will lead the economy out of the mess it has caused and will be facilitated by the central banks (more QE).  Historically government have done this by spending on public works and infrastructure and something similar will happen this time around, hopefully anyway because I am positioning for it. We will have to wait and see. "

The question is what type of inflation will we get? they will do well to stimulate the economy back to 2018 ish levels within the next 6 or 7 years and even then the RPI was below 2007

 

Quote

A new dollar is created and given to a bank. All things being equal, there is inflationary potential in the new dollar. If the banks sits on the dollar its not the dollars fault. 

A new dollar created through debt goes to the debtor not the bank, or directly to whatever they're taking the loan out for or paid for on their credit card 

It may increase what they can lend but if they aren't lending as you say it doesn't make much difference, but in the meantime debts will be getting repaid bringing the dollars in circulation down

Edited September 28, 2020 by Kman

[KDave]

3 hours ago, Kman said:

1. The Bank has $1 that already existed
2. Gov: can I borrow that $1 and I will give you back $1.01 in a year? here's an iou 
3. The bank now has an iou for $1.01 and the government can spend the $1
4. The Fed: I will take that iou please for $1.011 but I'm going to exchange it for dollars in an account you can't withdraw from
5. result: There's still only $1 in circulation and when its repaid $1.01 we will be -$0.01 from where things started

Out of interest where does the FED say banks can't use the dollars it creates, I will take your word for it. If the FED does say that, does QE not still increase balance sheet reserves from which to lend against anyway (making the restriction irrelevant). The government will be right back after step 4 to borrow some more, followed by the FED, etc - liquidity is increasing all the time, along with inflationary potential of all those additional dollars. 

Lets say QE is itself deflationary because of the destruction of dollars at the end of the process, by the example a 0.01% deflationary effect from QE, but after how long? Until the dollars are repaid we see no deflationary effect? How big is the deflationary effect, are we talking 0.01% as per the example or is it more than that, because it would have to be more and to be over a short time frame to be a factor in the equation, rather than after 30 years we see a 0.01% deflationary effect from repayment of a long bond. In other words if QE is deflationary, is it anything more than academic vs the inflationary potential of the increased money supply?  

[Kman]

1 hour ago, KDave said:

Out of interest where does the FED say banks can't use the dollars it creates, I will take your word for it. If the FED does say that, does QE not still increase balance sheet reserves from which to lend against anyway (making the restriction irrelevant). The government will be right back after step 4 to borrow some more, followed by the FED, etc - liquidity is increasing all the time, along with inflationary potential of all those additional dollars. 

 

I know it's in the federal reserve act 1913 somewhere but not sure on the exact quote - https://fraser.stlouisfed.org/files/docs/publications/books/fract_iden_1914.pdf

Quote

Lets say QE is itself deflationary because of the destruction of dollars at the end of the process, by the example a 0.01% deflationary effect from QE, but after how long? Until the dollars are repaid we see no deflationary effect? How big is the deflationary effect, are we talking 0.01% as per the example or is it more than that, because it would have to be more and to be over a short time frame to be a factor in the equation, rather than after 30 years we see a 0.01% deflationary effect from repayment of a long bond. In other words if QE is deflationary, is it anything more than academic vs the inflationary potential of the increased money supply? 

Good question and something I had to think about to highlight where I went wrong

When the iou is due the government have to pay who is holding the bond, the Fed, so it's not removing 0.01% it's removing the whole $1.01 from circulation - It's turning one good liquid dollar into $1.01 of debt that had to be repaid

^ That is assuming the government do pay the bond at maturity and the fed aren't going to put the dollars back into circulation; maybe they treat it as making good the currency equivalent they gave the bank in the collateral account

I guess you could argue if this is correct the dollar equivalent at the bank wasn't doing much anyway but I think they need liquid dollars for stuff like the repo market, reserves and general bank operations like paying the board dividends

[KDave]

OK I will have a look and for now I take your word for it, though part of me has doubts that it may be a interpretive reading of recent events where the FED stopped banks using QE funds for buy backs and bonuses? 

I can't quite 100% agree academically that QE is deflationary in itself but it is an academic argument as in reality it does allow those conditions to develop. But it is the act of government/corporate/household borrowing followed by repayment and servicing of borrowing that takes dollars out of the system, it is government bonds at maturity, and the servicing of debt that is deflationary. QE is enabling more government and corporate bond sales, so I guess from that perspective QE can be said to encourage deflationary conditions, but I think I would struggle to find the correlation on a chart, mainly because deflationary conditions are the cause of QE. At least that is how I look at it, without the deflationary conditions what need would there be for QE? 

The idea of QE is to facilitate borrowing, which I agree borrowing has an ongoing deflationary effect in its servicing (interest rates) and is deflationary at the end on repayment. But what happens to the dollars in the meantime is potentially inflationary, or the additional dollars have inflationary potential. If its being held on bank reserve as in previous QE, then the inflationary effect is not realised until that money is mobilised. Banks sat on most of that QE money for a long time last time around, until around 2015 when reserves started to fall (inflationary);

On 28/09/2020 at 01:43, Kman said:

If the lending occurs immediately and borrowing is spent on things, then the effect is immediately inflationary and long term deflationary, though the balance depends on what that money is spent on (whether we get a return on the borrowing, or a return on investment - for example on infrastructure spending). 

That is where I think we are heading personally. I believe the government will basically direct the market by spending in certain areas which will then spread out. Infrastructure being the main one I am expecting, around which industry will grow. This will be funded by borrowing at low rates (enabled/facilitated by QE), the window will last for as long as QE lasts. The issue then is, longer term, when government can no longer borrow and the artificial market demand disappears, leaving a new sector developed in a borrowing bubble to find new customers or go bust, while the deflationary effect of borrowing also comes home to roost and exacerbates (rising interest rates to combat the inflation). Then it is reset time, I reckon end of the decade. 

[Kman]

10 minutes ago, KDave said:

OK I will have a look and for now I take your word for it, though part of me has doubts that it may be a interpretive reading of recent events where the FED stopped banks using QE funds for buy backs and bonuses?  

I thought that was because they made banks undergo 'stress tests' and they didn't like what they saw and wanted them to have larger reserves

This is an article how it works with the fed - https://www.thebalance.com/is-the-federal-reserve-printing-money-3305842

"Between December 2008 and October 2014, the Fed launched quantitative easing That was a massive expansion of open market operations. The nation's central bank added $4 trillion to the money supply. It did this by buying Treasurys from its member banks. It paid them by adding the same amount to their credit on their books. It had the same impact on the economy as printing 40 billion $100 bills and mailing them to banks to lend."

Quote

Banks sat on most of that QE money for a long time last time around, until around 2015 when reserves started to fall (inflationary);

Higher bank reserves and lower loaning standards would be inflationary as long as the demand for loans is there

The higher a banks reserves the more it can lend, they don't lose any reserves from giving out loans that currency is created out of thin air through fractional reserve lending

Quote

That is where I think we are heading personally. I believe the government will basically direct the market by spending in certain areas which will then spread out. Infrastructure being the main one I am expecting, around which industry will grow. This will be funded by borrowing at low rates (enabled/facilitated by QE), the window will last for as long as QE lasts. The issue then is, longer term, when government can no longer borrow and the artificial market demand disappears, leaving a new sector developed in a borrowing bubble to find new customers or go bust, while the deflationary effect of borrowing also comes home to roost and exacerbates (rising interest rates to combat the inflation). Then it is reset time, I reckon end of the decade. 

I think the problem is, look at how much money has been spent already that hasn't expanded anything economically, merely kept heads above water

I think by the time you get the economy to back where it was with unemployment levels, consumer spending, loans etc that will probably take 5-7 years. In that 7 years you've got all this new debt to be paid back and things are only where they were at the start of 2020

Growth up from a bottom but only getting back to previous levels 5-7 years ago + massive new debt doesn't seem inflationary

 

[KDave]

3 hours ago, Kman said:

Higher bank reserves and lower loaning standards would be inflationary as long as the demand for loans is there

The higher a banks reserves the more it can lend, they don't lose any reserves from giving out loans that currency is created out of thin air through fractional reserve lending

Sure and excess reserves fell from 2015. Looks to me as if the banks were lending against excess reserves, RPI confirms inflationary pressures entered in 2015, banks were lending/consumers were borrowing. Currency was being created out of thin air against reserves that were created in the years before via QE. 

3 hours ago, Kman said:

I think the problem is, look at how much money has been spent already that hasn't expanded anything economically, merely kept heads above water

I think by the time you get the economy to back where it was with unemployment levels, consumer spending, loans etc that will probably take 5-7 years. In that 7 years you've got all this new debt to be paid back and things are only where they were at the start of 2020

Growth up from a bottom but only getting back to previous levels 5-7 years ago + massive new debt doesn't seem inflationary

You are not wrong on what has happened, it is exactly that, replacement of what was lost only. What happens next I think a lot more QE and spending directly, it won't be the banks only QE combined with government austerity this time imo, but we will see. 

[KDave]

A Russian penny has dropped;

https://seekingalpha.com/news/3617863-rosneft-calls-bp-and-shells-shift-to-renewables-existential-crisis

Attacking their shift towards renewables, Russia's Rosneft (OTCPK:RNFTF) lashed out at BP (NYSE:BP) and Royal Dutch Shell (RDS.A, RDS.B) for creating an "existential crisis" for oil supplies.

"I think that to go away from your core business, which is what they are doing, somebody will need to step in... somebody will need to take that responsibility," Rosneft's Didier Casimiro told the Financial Times Commodities Global Summit. "It is an existential threat for supply. It is an existential threat for price volatility... we will have a [supply] crunch, price volatility, and yes higher prices."

[HGr]

Today I bought some BP and Shell, I thought I wouldn't see anything as low as March again. Will double down if they go much lower. Had some Shell around 13.50 a few months ago, but I got a bad feeling and sold it at 13ish to buy gold instead, happy I did that. 

Rolls Royce also sucks right now! So I bought some ☺️