Raven Prop P Discussion Threads

[kenny] 20/7/2020 01:26

"Treasury's austerity hawks risk pushing the UK into a Japanese-style deflation trap"


Very interesting article, a couple of days' ago, from The Telegraph about the UK heading for deflation. Here is an extract:

"The other Japanification winner is corporate credit. Bank of America says yields will keep dropping as investors try to escape the “no-go zone” of sub-zero rates.

The European Central Bank has signalled that it will buy many more industrial and commercial bonds (though not bank bonds), making the trade almost irresistible for fixed income funds. Some €160bn of European company debt is trading at negative yields. “We think it will go to €500bn soon,” said Mr Martin."
==========================================================================
I wait to see whether RAVP attracts more long term investors - over the next two years or so. Not that I am planning on selling in a couple of years, for the simple reason that the rate of return will, in effect, be even more attractive then; as Mr. Market realises that interest rates may stay low for decades.

[rayg5] 16/7/2020 17:18

Very well spotted, Gary.

[gary1966] 16/7/2020 15:11

Currently you can buy for 122.5p and sell for 122.6p. I managed to sell at 122.73p and buy at 122.5p a short while ago. Strange times. Cleared £22.60 after dealing costs for 1 minute of my time.

[kenny] 09/7/2020 13:06

News about the purchase of Ordinary Shares, Preference Shares and Convertible Preference Shares from Invesco is due by the end of this month.

My view is that it will not proceed – in the RNS of 23 April 2020, the company stated that they will “reassess the purchases as conditions settle”. In these times, it would be imprudent to lay out £100m on a buyout, let alone a buyout of a single shareholder. I believe the “reassessment” will come to that conclusion and it is the reason the conversion was subsequently proposed.

The only transaction likely to proceed is the conversion of the Convertible Preference because that does not involve the company in any cash outlay. In the same RNS of 23 April, the company stated that they had the agreement of roughly 71% of each of the Ordinary and Convertible Preference holders, whereas they need 75% or more to pass the conversion.

Let’s hope that in the interim they have been working on convincing at least 4% of the other holders to agree to the conversion. They have some clout; in the sense that the buy in of Invesco does not benefit remaining holders e.g. the prices of that buy in are no longer at a discount to market prices, due to Covid19.

[gary1966] 08/7/2020 18:44

This is getting very close to moving above the 200DMA which has got to be bullish.

[cfro] 08/7/2020 14:26

Those articles are a load of tosh.

Look, the FED and Central banks have a mandate to stop deflation at all costs. Deflation in any shape or form would spell the end of the economic system as we know it. They cannot afford to have prices in general go down (apart from food), assets prices like stocks and houses allowed to fall say 50% let alone 20 or 10%...because simply put it would destroy the banks.

What they want is inflation but by stealth, so nobody really notices what is going on. We have had it for decades and that isnt going to change over night!

[kenny] 08/7/2020 01:31

More recent comment about deflation:

"Time to act now before deflation destroys the economic recovery" This article also comments on why fixed income yields are so low.


"The Covid-19 crisis: inflationary or deflationary?"


"Are we heading for hyper-inflation or deflation?"


"Deflation Fears at ECB Signal Stimulus Battles for Lagarde"

[cc2014] 07/7/2020 17:59

When inflation went to 5% the interest rate was 5% though and the rates banks/building socieities were offering on 5 year bonds were around 7%. I still have a copy of my investment certficate from RBS paying 7.3% for 5 years.

This topic is a difficult one. Looking at bond yields and savings interest rates the market certainly believes Gary is right about QE to infinity having no impact on interest rates.

I don't agree with Mr. Market. I think the question that needs raising is "how much debt can a goverment take on before the market doesn't want to lend any more". I'm of the view the bond market is priced wrong along with all prefs.

If the yield on a 1.25% Treasury Gilt 2041 is 0.625%, which is 0.525% above base rate, if base rate moves to say 0.5% and a new bond would therefore have a return of 1.025%, then that bond that is currently priced at 112.5p today will be instead trading at... Well I can't even be bothered to work it out exactly but somewhere around 60-70p in the secondary market.

Which is fine if you intend to run the 2041 bond to maturity but if instead you are playing pass the parcel and want to offload it then capital losses don't look too great.


Perhaps even more interstingly people aren't buying long dated debt with any gusto.
0.625% 2050 gilt only had 1.68 cover in the latest gilt auction...

Mr. Market may not agree with me but they aren't entirely stupid. Happy to lend lots of short dated debt at 0%, but that then begs the question what rate it gets refinanced at in 3-10 years time.

[kenny] 07/7/2020 17:22

Lots of discussion of whether or not inflation will appear. However, do not rule out the prospect of deflation.

I cite three recent articles in support:

"The Fed Actually Needs Price Deflation"


"A Warning That the Economic Recovery is Threatened by Deflation"
- scroll down on the linked page to find the above article.

"Deflation Is More Than Just "Lower Prices""


Do not rule out deflation as a possibility, especially as we are probably entering a period of high unemployment, worldwide - unemployment that is going to be a lot higher than pre-Covid19.

My view is that deflation is certainly possible, and a study of this topic is worthwhile for investors.

Consider, for example, why Japan has been fighting it for over 30 years without success, despite massive state intervention. Is the US following Japan, for example, by buying corporate bonds? How long before the US needs to follow Japan in also buying shares? Japan's printing of money on a massive scale has not been successful in producing inflation or getting out of deflation.

[pogue] 07/7/2020 15:33

Gary
its a little different this time, inflation is caused by rising prices which forces governments to raise interest rates so for the latter you need the former, that was not evident last time as many businesses did not close and the mantra then was to create zombie companies and keep the economy going this time many have/will collapse and those that survive will also be badly mauled and will need to raise prices to survive, with less competition, it is happening already in Witherspoons, airlines, holiday accommodation etc therefore inflation is more likely. Add in the amount of money the chancellor is going to throw at everyone and this money will feed into the system bidding up prices for scarcer goods, services and assets.

[gary1966] 07/7/2020 15:16

When inflation went to 5% in the financial crisis much to my disgust nothing happened with interest rates and the BOE's only remit regarding interest rates was completely ignored. Every excuse under the sun was made as to why raising interest rates would have no effect on inflation. All it was about was protecting house prices and surprise surprise it is happening again. Talk of upping stamp duty thresholds, extending help to buy for all, mortgage holidays etc. There is no way on earth any amount of inflation will cause a rise in interest rates if it puts the housing market in danger as keeping house prices moving upwards is the only government policy that all parties agree on. Due to levels of indebtedness even if they did move up then 0.5% would probably do it.

Rant over

[pogue] 07/7/2020 12:38

I am betting that past performance is no guarantee of future results. Just because flooding the system for years has not produced inflation does not mean more flooding will not.
Place your bets.

[cc2014] 07/7/2020 12:21

When QE was launched in the 2008 financial crisis inflation went to 5%.



It is my view no new type of economics has been created and we will see inflation again. The market highs are telling us too much money is sloshing around.

I note Wetherspoons have put their prices up. What choice do they have? Less business, same overheads, extra costs for Covid safety.

Inflation will lead to rising interst rates whether we like it or not as no governor of the BOE is going to let inflation run away.

(I am happy to concede inflation may stay very low for the next 6 months as business destock unwanted items but after that it takes off)

[igbertsponk] 07/7/2020 12:13

Ah, an analyst... so bound to be right then....

[montyhedge] 07/7/2020 12:06

What an analyst said today.

[gary1966] 07/7/2020 12:05

pogue, We have had QE for the last 12 years and very accommodative policy in addition to this, but it still hasn't led to inflation and has been predicted to do so for this time. Old models don't work anymore as globally there is so much debt any uptick is easily suppressed. These yield nearly 10% and so it would have to be a serious increase in inflation before the return here is compromised and I just don't see that coming although I agree old modelling would suggest it should.

[igbertsponk] 07/7/2020 12:05

9.... that's somewhat exact!

[montyhedge] 07/7/2020 12:01

Interest rates will be virtually negative for 9 years.

[igbertsponk] 07/7/2020 12:01

Shares are crazy high as too many on furlough on 100% of pay. Nothing to spend it on, no Starbucks, Pret, pubs, holidays, clothes. So they've all started investing in Tesla.
Will all crash when some normality returns and the spending spree starts.

[igbertsponk] 07/7/2020 10:52

Interesting thought, but forecast suggest we'll be stuck at 2% inflation for years.

[pogue] 07/7/2020 10:18

Personally I am looking to get out of fixed income due what I perceive to be a large threat of high inflation due to the flooding of markets with liquidity due to QE and low interest rates. Will wait a while longer here but have cut others last couple of months.

[gary1966] 07/7/2020 09:55

Not in the luxury position to be able to re-invest dividends but bid 119.55p this morning and so moved up another 2p this week.

[igbertsponk] 07/7/2020 09:48

Has been doing very well recently. Reinvested divis for most of us I suspect.