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14 weeks and 12 numbers that have changed the investing history books forever

14 weeks and 12 numbers that have changed the investing history books forever post image

The middle of February 2020, and the global stock market is riding high. There are concerns – the unpredictable US president, Britain’s disentanglement from the EU, and how quickly China can recover from a new virus that has turned a key city into something from a dystopian novel – but also optimism. The US/China trade spat is easing. US election years tend to be good for markets. There’s also the Olympics to look forward to.

Fast-forward fourteen weeks and… wow.

We’ve been living through a real-life disaster movie. The build-up was tense and then the action exploded at an unimaginable pace. Heroes and villains filled our TV screens, augmented by scenes of human misery and suffering. Millions sickened – hundreds of thousands died. Billions ‘sheltered in place’ as the US lingo puts it, many terrified of leaving their homes. We’re only just beginning to realize the cost in terms of jobs, economic dislocation, and the ginormous IOUs written by governments worldwide.

Investors have had a front row seat. The stock market’s reaction may seem exaggerated – like an excitable child in the row behind us, screaming and gasping as events unfold. But it’s also uncannily predictive. By late February it saw things taking a turn for the dramatic, and began to swoon. Portfolios reeled.

For the rest of our lifetimes we’ll see data points from 2020 popping up in any backwards-look at the records. The textbooks blogs won’t need to be rewritten – event-driven crashes are nothing new – but such was this one’s ferocity that the data will need to be revised.

Here are some numbers for the ages.

1. The S&P 500 fell 30% in 22 days

US markets saw the 30% fastest decline ever. Other markets plunged even more steeply, but the US S&P 500 is the big beast of the jungle. Its companies make up more than half of the global equity portfolio.

2. The spread on the riskiest debt jumped by 9.8%

A frantic dash for cash and into the safe havens of government bonds saw riskier bonds dumped overboard like orders for Tokyo 2020 t-shirts. Widening credit spreads are normal in risk-off environments, but again the speed here was dramatic. According to Morningstar, spreads for BBB, high-yield, and CCC and lower-rated credits jumped 3.57%, 7.30%, and 9.78%, respectively, during the peak-to-trough period. This was the largest widening within a month-long period since the 2008 financial crisis.

3. The Vanguard Total Bond Market ETF traded at a discount of 6.2% to net assets

The money markets looked in danger of breaking down. On 12 March the Vanguard Total Bond Market ETF traded at an unprecedented 6.2% discount to its net asset value (NAV). Oversimplifying hugely, this implied investors could buy the ETF, sell its underlying holdings, and make an instant profit. But of course they couldn’t, because liquidity was evaporating, and also the apparent discounts on many bond ETFs anticipated declines in market prices in advance of them being discovered with real-life trades. On Sunday 15 March the US Federal Reserve rode to the rescue and the disruption was contained.

4. The UK government announced a £350 billion economic defence package

We’ve never seen anything like this government intervention outside of wartime – and not even then so baldly declared. On 17 March the newly-installed UK chancellor Rishi Sunak told the country he was ready to deploy £330bn in loans and £20bn in other aid.

5. US oil prices went below $0

Here’s something else you don’t see every day. Or indeed, ever. On 20 April the price of oil in the US – as indicated by futures contracts – turned negative. In theory this meant an oil producer would pay you to take oil off their hands. Oil demand had collapsed with the global lockdown, and storage capacity looked close to full. “This is off-the-charts wacky,” Stewart Glickman, an energy equity analyst at CFRA Research, told the BBC. “The demand shock was so massive that it’s overwhelmed anything that people could have expected.”

6. Some 20.5 million US workers lost their jobs in April

This cover from The New York Times is a legendary effort that will define the period. Breathtaking and defying almost everyone’s worst-case scenarios back in late February – whatever they now say they believed back then.

7. The Bank of England told us to get ready for the worst recession in 300 years

On 6 May the central bank warned the British economy looked set to shrink by 14% in 2020. This would be the biggest annual contraction since a decline of 15% in 1706, based on the bank’s best estimate of historical data.

8. The largest British firms slash dividends by £24bn in the face of crisis

Looking to hoard cash, prevented from paying dividends due to receiving state support – or simply dodging a PR disaster – UK firms have scrapped their dividends. By early May the UK’s 100 largest companies had cut their payouts by £24 billion, according to the investment bank Gleacher Shacklock. Link Asset Services’ worst-case scenario envisages total dividends down by 51% in 2020 – although its central expectation is for a more bearable 32-39% decline. Either way, the age-old truism that dividends are far less volatile than prices looks like it will be upended by Covid-19.

9. The UK government pays the wages of an extra eight million workers

Britain has so far been spared the enormous job losses seen in the US, largely due to Rishi Sunak’s very generous support package. By 19 May some eight million UK workers had been furloughed onto the UK government’s coronavirus job retention scheme, which sees the state pay 80% of an employee’s wages. The scheme has won plaudits, but it’s expensive. It had already cost the Treasury £11 billion by late May, and it has now been extended to the end of October, albeit with employers asked to chip in from 1 August.

10. The UK government sold gilts with a negative yield of 0.003%

With investors still smarting from the crash and fears of a depression looming, the UK government sold £3.8 billion worth of three-year gilts on 20 May at a negative yield of 0.003%. This is the first time conventional gilts have been sold with a negative yield – it meant investors were willing to give their money to the UK government with the certainty of getting back less in the future. Why would they do this? Perhaps some had no choice but to take the going rate – for example pension funds – but others may anticipate deflation (falling prices) which could increase the real value of cash, even eroded by negative interest. Or maybe they see gilt yields going lower still, allowing them to sell their bonds for a profit – the so-called ‘greater fool’ theory.

11. The UK budget deficit skyrocketed to £62.1bn in April

Whatever the reason, it’s a good thing the UK government can borrow so cheaply, because it has to. Bloomberg reported that April’s £62.1 billion deficit – the most since modern records began in 1993 – was almost three times the previous peak, and almost as much as in the whole of the previous fiscal year. Even during the financial crisis, monthly borrowing was never more than £22 billion.

12. The S&P 500 leaps 33% from its March low

What goes down doesn’t always bounce back – certainly not within short two months – but that’s what has happened with equities in the US. To return to where we started, the US market is up 33% since the trough of despair on 23 March. I’d noted the day before that investor panic seemed to have reached doomsday levels, and I was adding to my shares accordingly. But I was doing so with a long-term horizon – I didn’t expect a face-ripping bull market over the next two months!

Has the market correctly discerned that economies will recover quickly as lockdowns are lifted? Were the worst fears of the virus overblown? Or is the situation still truly dire – but even after all those job losses and dividend cuts, equities are the most attractive asset class compared to the negative yields on government bonds and barely-there interest on cash?

After the rollercoaster we’ve been on in 2020, I wouldn’t rule anything out.

{ 54 comments… add one }
  • 1 Christian May 27, 2020, 2:31 pm

    Anyone know what was going on at the beginning of the 1700s? There seems to be massive upturns one year and then massive downturns the next and this repeats. Is the data just poor? A quick Google search doesn’t bring up obvious reasons for such volatility in economic activity.

  • 2 xeny May 27, 2020, 3:07 pm

    At least one factor was variable weather – there was a “Great Frost of 1709”, and the Maunder Minimum ran from 1645 to 1715, so I’d suspect quite a few failed harvests, when agriculture was most of GDP.

  • 3 Shermo May 27, 2020, 4:11 pm

    Thankfully my job wasn’t affected much so I am just stuck working from home.

    Financially pretending nothing had happened and kept putting money in my ISA and pension as I was before, buying in cheaper due to the crash. Will come out the other side and in 6 to 12 months forget about this momentary blip in the market (hopefully).

    If anything I’ve actually saved money as I haven’t been commuting, I’ve saved on food as I’ve not been eating out at lunch times as I hadn’t had time to make something to take to the office. Saved money on going out for drinks with friends and colleagues too, although I’d rather have a bit less money and see them!

  • 4 Chiny May 27, 2020, 4:46 pm

    There was endless European war, notably the War of the Spanish Succession which went nowhere slowly, despite the vast cost. Not conducive to steady economic progress.

  • 5 ZXSpectrum48k May 27, 2020, 4:51 pm

    @christian. Be careful ascribing too much to the data in that period – the ONS didn’t exist then!

    To be fair it was a volatile period. As @xeny mentions the 1690s marked the low of the Little Ice Age. Colder, wetter weather reduced crop yields across Europe. The Great Famine of 1695–1697 caused population falls of up to 25% in various parts of northern Europe. Scotland was badly hit.

    This was followed by the War of Spanish Succession (1701-1714). The size of armed forces during that period increased massively. The cost was pretty much unsustainable for what were essentially agricultural economies. Against that, however, the UK was the main beneficiary of the conflict in economic terms. The Treaty of Utrecht marked its rise to primacy as a European mercantile power

    I’d also add this period included the Act of Union (1707, Scotland economically was in bad shape) and South Sea Bubble.

  • 6 Christian May 27, 2020, 4:59 pm

    @ZXSpectrum48k @xeny. Thanks for the insight. It’s so easy to forget just how much of the economy was agriculture and how affected this could be by the weather!

  • 7 wolmars May 27, 2020, 5:00 pm

    You may add the unprecedented use of the word unprecedented. I spotted you sneaking it there into point 3!

  • 8 driftglass May 27, 2020, 5:13 pm

    “upended by Covid” etc etc

    None of this was caused by a coronavirus. This economic euthanasia is all inflicted by a panicked, adolescent government.

  • 9 ermine May 27, 2020, 8:57 pm

    > This economic euthanasia is all inflicted by a panicked, adolescent government.

    If you’re going to take that line then it’s governments. After all if the ships of all the other states were serenely cruising through the water then we would stick out for more reasons than that Cummings fellow. The madness of crowds you assert seems pretty widespread…

  • 10 Matthew May 27, 2020, 10:00 pm

    Well we don’t seem to be hearing mass complaints about huge job losses on the horizon or too many people going bust or large scale mortgage defaults, if anything this has been an increase in national debt and an outlook of future austerity but maybe also QE to get inflation back up. I think covid probably finished off the brexit vulnerable companies early (hastened the restructuring of the economy) and therefore has lessened what we’ll see from a hard brexit, and freedom of movement would be more suspicious. – have’t heard much more recently about those EU covid bonds, will have to look into that

    I think I was right that we wouldn’t see a breakdown of society – we queued patiently, we did build temp hospitals as needed, if we had to we knew how to bail out banks/ go further, we coped, despite any shortcummings.

  • 11 Garry Taylor May 28, 2020, 7:29 am

    I thought you said you would be laying off the Covid related stuff in the coming weeks. Reminding me of what has just cheered me up, thanks for that. Now how about some nice new positive news to keep us passively invested, please.

  • 12 Amit May 28, 2020, 9:14 am

    It’s somewhat strange. On the one hand we have this notion that markets almost certainly rise over the long term (indicating organisations representing the market will advance with time); on the other hand, in the face of events, markets react like a child as if there is no tomorrow. And the behaviours demonstrated by investors in a crash are reminiscent of it has always been. I hope there are other sane reasons for long term market growth; because sane investor behaviour doesn’t appear to be one.

  • 13 The Investor May 28, 2020, 9:57 am

    @Amit — Markets will (probably) always fluctuate with investors’ emotions and indeed we should be glad of that. If they just clocked in at (say) an 8% a year gain every year then that long-term expected return would soon be whittled down to 5,4,3% or lower, because there would be no risk. It’s the volatility (and the fact that many want to avoid it) that sees investors demand a higher return, to the good of our portfolios over time.

    Irrespective of investor antics, over the long-term markets should rise (all else equal) in well-functioning capitalist democracies, as they reflect economic growth and inflation.

    See this article: https://monevator.com/is-investing-a-zero-sum-game/

  • 14 Mark Meldon May 28, 2020, 10:00 am

    An excellent piece; thanks for writing it.

  • 15 xxd09 May 28, 2020, 10:02 am

    Markets always come back unless it’s Armageddon in which case it does not matter
    The question then is how long will it take?
    It might be longer than you as an investor can hold out
    There was plenty of warning-the market was at an all time high plus plenty of excess national debt
    Moral/Lesson- always keep a couple of years of living expenses in cash and have an asset allocation that can stand a serious downturns-your age in quality bonds is a guide
    At least that’s an ideal scenario to aim for!

  • 16 Fremantle May 28, 2020, 10:35 am


    2 years emergency fund seems a bit extreme, what is your rational for recommending that? For someone midstream in accumulation, 2 years expenses might mean having a significantly greater than 10% of their liquid wealth in cash. Why not 3-6 months?

  • 17 ZXSpectrum48k May 28, 2020, 11:05 am

    The last few months has been another textbook example of the bifurcation of volatility observed in the last decade. We used to have normal vs. heightened periods of volatility, and the ratio between the two was a few multiples. Now, we’ve suppressed background levels of volatility for long periods, perhaps at 50% of prior normal volatility, combined with short, brutal periods of volatility that can be described as almost “digital” in their character.

    The reasons seem fairly obvious. We have massive financial represssion by central banks. They act to suppress both volatility and asset price falls. This in turn drives ever more risk taking, leading to ever larger volatility events downstream. We have regulations on the bank sell-side which mean they cannot warehouse risk; they are just agency brokers, rather than principals. Add to that the dominance of momentum investing on the buy-side. This results in the market trending for long period in one direction, with ever falling volatility, but ever bigger positions. The problem is when they want to get out, there is nobody of their size on the other side. Hence we see huge air pockets.

    It was no accident that prior to this move, the Sharpe ratio (return to volatility ratio) of the S&P500 went above 9 in 4Q19. It’s been above 1 for the last decade but long-term it’s closer to 0.5. No surprise then that that the months of January and February 2020 saw the highest ever inflows from retail investors into risky assets like equities and HY corporate bonds.

    It was that momentum-based investing (and yes that includes you passive types) and their tendency to “buy the f**kin dip”, that ensured that we hit a new peak in the SPX as late as Feb 19th. A new equity peak, despite clear risks from a Chinese supply shock and risks of a global demand shock as COVID19 spread. Risks abounded and they were not priced at all. Hence the 35% collapse in the SPX in a month – no one to take the other side – then taking two thirds of that move back in the next 2 months. It’s incredibly hard to attribute all those moves to changes just to changes in economic consensus or even risk skew. Liquidity is a major problem, in both directions.

  • 18 The Investor May 28, 2020, 11:42 am

    Liquidity is a major problem, in both directions.

    The illiquidity was a dream for me in March/April. Big gaps up and down all over the place in individual stocks. I’d love to have more such periods! 🙂

    I guess this must have been what it was like to be a (competent) active investor in the 1920s/1950s, before most of the inefficiencies were arbitraged away.

  • 19 Amit May 28, 2020, 12:56 pm

    Thanks @TI. On a related note, Vanguard have upped their 10 year estimates from global equities to a range of 6.6% – 8.6%.


  • 20 Naeclue May 28, 2020, 3:06 pm

    An excellent summary of an extraordinary period. I note that the pound value of the Vanguard World Tracker ETF is within 3% of its 2019 close. That’s One hell of a market shrug.

    Anecdotally I think lockdown is breaking down. Lots of people now using their boats and holiday homes. I was on our boat on Tuesday and noted a popular anchorage in Chichester Harbour was heaving, as was the nearby popular beach at West Wittering, despite the Car park being closed. I understand it has got much busier since (car park opened Wesnesday). Part of the drift was already happening, but I suspect that Cummins demonstration of the flexibility of the rules has accelerated the trend. Roads in London much more busy and people are clearly meeting up on the commons, parks, front gardens, etc.

  • 21 Learner May 28, 2020, 3:40 pm

    @Fremantle 2 years and 3 months are both extremes. Somewhere in the middle is probably about right. If you lose your job now, there may not be another comparable one for quite some time. Am finding this out the hard way right now but fortunately have 12 months runway before becoming a forced seller.

  • 22 ZXSpectrum48k May 28, 2020, 7:12 pm

    @TI. Don’t get me wrong. I adore this type of volatility. Professionally, it’s my best year since 2008/09/13 and I only worked 3 months of it. Even my personal portfolio is up almost 20% in US$ terms this year. For you equity types that’s small beer but when you consider my mean return since 2000 is about 12%, the median 8-9% and the vol 5-6%, this is a good year by those standards. Obviously this is all more than counterbalanced by the small fact I may die of COVID!

    The problem with this level of volatility is that it does leave permanent damage. We think of liquidity in terms of transaction costs but the more important metrics of liquidity are market depth and resilience. By both those measures, liquidity has deteriorated badly. When you get to a point, as we did in March, when you can’t get a price in an off-the-run UST, never mind a corporate bond, it’s a problem. For those trying to turn around financial supertankers it’s a huge problem. And these days there are a lot more supertankers.

    I must admit I find there is a stream of inefficiencies in EM rate derivative markets even in normal times. In recent years, if anything, those inefficiencies have been growing larger again. The problem is while higher vol magnifies opportunities, it also lowers the liquidity, meaning you can’t scale those positions. It’s the quid pro quo.

    By contrast, I’ve always felt that equities is probably the hardest market to make active returns. Data seems to support that view. It has the highest proportion of risk-neutral type investors, the smallest number of non-economic agents, and the least amount of risk-transfer. Not a good mix for active types. Nonetheless, my impression is that niches like small-caps are still inefficient, albeit scaling is probably the big constraint there also.

  • 23 MrOptimistic May 28, 2020, 7:26 pm

    I think someone ought to mention China. There’s an awful lot of politics left this year and the global economy could become a battleground.

  • 24 The Rhino May 28, 2020, 8:10 pm

    @Naeclue – I was thinking the same thing about VWRL, I purchased at 6967 on 18/11, and today its 6878 – now only 1.3% down.
    I went windsurfing down at Hayling last Fri not a million miles from Chichester harbour. Place was absolutely rammed and the Inn on the Beach was open for takeout. What lockdown?

  • 25 Ruby May 28, 2020, 8:16 pm

    @ Naeclue – I agree and think the lock down is fraying fast and can’t see anyone taking much notice of BJ’s rather feeble concessions today. I suspect people just aren’t listening to him anymore for reasons substantially of his own making. My own index for how people are feeling about themselves is a little niche, and relates to the amount of abuse I get from motorists while cycling around London. Lots = happy and content – Little = introverted and depressed. I’m happy to report volume and quantity have been increasing nicely over the last couple of weeks and I’d suggest it’s almost at pre lock down levels now after a quiet few weeks. Yet to hear anything original though.

  • 26 Naeclue May 28, 2020, 10:44 pm

    @rhino, windsurfing must have been exciting. We came back the day before due to 30+ knot winds predicted for Friday and Saturday.

    The government were behind the curve on the way into lockdown and now seem to be catching up with what many people are already doing on the way out. The Cummings episode has blown a lot of their credibility. I suspect it is too late to sack him now, the damage is already done.

  • 27 Vanguardfan May 29, 2020, 7:25 am

    @fremantle/learner, xxd09 is speaking about decumulation, which requires an altogether different mindset and financial set up. When you are no longer earning and your investments must sustain you over decades, several years in cash or low risk assets is not at all unreasonable. You need enough not to need to sell when markets are down.

  • 28 TahiPanas2 May 29, 2020, 7:54 am

    xxdo9, Fremantle and Learner,

    It is surely difficult to be prescriptive about the size of an emergency fund as peoples’ needs, resources and ability to save, etc., are hugely different. Indeed, you could argue that the people with the greatest need, who have low-income precarious jobs, are the least likely to have savings of any kind. Conversely, anyone who can afford a 6 years cash standby, as quoted elsewhere, is arguably preparing for possible economic Armageddon and this may say as much about their personality as statistical probability. However, you can’t say that 6 years is too much.
    Apart from the practical ability of each of us to save, having pensions, etc., it seems that the 3 months/ 2 years target is, for many of us , as much a necessary psychological crutch as a practical data driven calculation. From this viewpoint there is no right or wrong figure and no way to measure how much would really be needed when brown stuff hits the fan.
    Personally, I have about 2 years normal expenditure in cash but that figure is mostly accidental. I would be comfortable with half that amount but have no real data to back up that calculation.

  • 29 xxd09 May 29, 2020, 9:57 am

    I was speaking about an ideal situation which as one poster said is certainly more relevant to a retired person and probably not achievable for those in Accumulation phase
    However an cash emergency fund is a basic requirement of anybody’s portfolio
    The size of that fund and when it morphs into 2 years living expenses is a personal choice by the investor
    The amount required on a number of variables-security of employment,family commitments etc
    The current crisis sadly highlights the relevance of this very necessary part of your portfolio especially for the self employed and will become more self evident as furlough money is reduced and stopped

  • 30 BBlimp May 29, 2020, 10:05 am

    @xxd09 I was struck last weekend by some ( slightly) younger friends agreeing with each other that the corona situation made them realise they needed more savings. The slightly older amongst us were aghast and we’re worried about the moral hazard of the govt intervention… the difference… this has been the first recession for people under 35, first time they’ve realised that when you lose your job you might not be able to get another one ! I can’t speak as to the 90s or the dramas you went through before but anyone who was working at the time of the GFC would surely have some money set aside…

    On the plus side, Nissan did chose Sunderland over the the single market in the end, looks like things aren’t going to be as bad as Grieve / Hammond predicted. A ‘bug out’ fund on top of the emergency fund seems rather silly now

  • 31 Naeclue May 29, 2020, 10:19 am

    I make a distinction between emergency cash and strategic cash. Emergency cash is to cover short term needs when something expensive crops up or for a period of temporary unemployment. It really needs to be available on instant access.

    Strategic cash is money held to cover extended periods during decumulation when investments are down. This is entirely different to emergency situations and could run for many years. Strategic cash can be held on longer term deposits. I have cash deposits of up to 3 years, so not much use in an emergency.

  • 32 The Investor May 29, 2020, 10:43 am

    On the plus side, Nissan did chose Sunderland over the the single market in the end, looks like things aren’t going to be as bad as Grieve / Hammond predicted. A ‘bug out’ fund on top of the emergency fund seems rather silly now

    Okay, I’ll bite as it’s a Friday morning. 😉

    The case for a modest ‘bug out’ fund in response to Brexit (or Trump, or Orban if you’re Hungarian, or whatnot) isn’t predicated on whether Nissan chooses Sunderland for its car plant. It’s not based on the decision to Brexit at all, really.

    It’s based on the politics / psychology / populism that most would agree drove the decision, rightly or wrongly.

    You, very much in a minority, see Brexit as a rational decision even in terms of economics, let alone the other factors that drove the Leave vote. (Self-determination, immigration, whatnot). So I’m not surprised to hear you think the idea of having money/resources set aside for a Plan B is an unwise move.

    If, on the other hand, you see nationalism/populism not witnessed in Europe and the US for several generations, attacks on the judiciary as the ‘enemies of the people’, polarization into extremes of them and us (both sides do this, certainly) and whatnot as palpable threats, allied to a leadership that has repeatedly downright lied in order to salve its base / get its way, then extrapolating this further quickly makes a ‘bug out’ fund seem very rational.

    I repeat (as I said at the time and have repeated often but I don’t expect you to cite the nuance and ruin your rhetorical position) that I think a UK bug-out-prepper is very unlikely to need to use their fund. At the time I think I put the chances as c.5%. It’s perhaps gone up a notch since then with the pandemic, the ‘brilliance’ we’ve again seen on display from our captains, etc, but only to 6-7%, as a purely gut feel (i.e. More than 1/20, less than 1/10). You could re-run history and your life many many times before you needed it.

    But the thing about emergency exit plans is when you need them you’re very grateful. If the cost rounds down to a small % of net worth, why not?

    This is all in sharp contrast to say 1995-2005, when I’d say the need for a UK investor to have a bug-out fund was roughly 0.1 to 1%.

    [Edit: Oops, “an unwise move”. Pesky double negatives!]

  • 33 tom_grlla May 29, 2020, 11:07 am

    While we don’t know what the rest of the year holds, at this point, the Accumulator’s post here:
    looks like the best post of the year.
    It seems like another world already, so it’s easy to forget just how hairy it was, and tempting to throw in the towel.
    Swearing AND Capitals!

    Thanks as always, TA and TI!

  • 34 BBlimp May 29, 2020, 11:14 am

    @TI, indeed, we’re on such different outlooks! I believe we are about to enter a golden age, free of EU barriers to trade, the CAP and able to take immigrants from every corner of the globe according to our needs valuing each fairly rather than based on their place of birth.
    As you say, sadly I interpret every even to support that proposition whilst you interpret the same information in the other direction. I’ve noticed more and more guardian refs and less from my end of the street in the weekly roundup… I’m in no position to lecture you on polarisation but it’d be lovely if the U.K, or GB, were able to depolarise a little.

    I don’t think Emily Maitless helped… framed as a competition between Cummins and the BBC I expect that shored the base up and will actually work out as a distinct moment when polarisation was cemented in British politics.

  • 35 ZXSpectrum48k May 29, 2020, 11:43 am

    I’m not a fan of Gilts here. I think there are better bond markets to be long of. Nonetheless, I think parts of the media are borderline hysterical in terms of their fear of some form of debt crisis (point 11), whilst ignoring the fact Gilt yields are at all time lows (point 10).

    To put this into context, take the example of UK private sector defined benefit pension plans. The buy-out value of their liabilities at the start of 2020 was around £2.1 trillion, with a duration of around 20. These liabilities are priced off the Gilt curve, so the perfect replicating hedge would be a 100% portfolio of Gilts with a duration of 20. Now, the fixed-rate Sterling bond market (Gilts + IG corporate bonds) has a duration of about 10. So in duration-weighted terms, UK private sector defined benefit pension liabilities are equivalent to about £4.2 trillion of 10-year bonds.

    Now the total size of the fixed-rate Sterling bond market is about £1.8 trillion of 10-year equivalents. I’m excluding the £500bn the BoE owns since we all know they ain’t ever coming back to the market. The total size of the linker market in 10-year terms is £700bn. So £2.5trillion in total. Do you see the problem? There simply aren’t enough Gilts and corporate bonds to hedge those liabilities.

    Now in reality, these pension plans hedge synthetically by lending long-dated swaps (equivalent to being long a bond), but that just creates a duration shortage somewhere else (being a zero net sum derivative). Moreover, these plans are only about 70% hedged. The other 30% is in other assets such as commercial property (ouch!) or the FTSE (ouch!). Even worse, because they are not perfectly hedged with Gilts, they run a short convexity position. As Gilts yields fall, their underweight Gilt position gets ever bigger. How much bigger? Well a back of the envelope calc implies they might need to buy around £200bn in Gilts just to get back to the underweight they had. That’s in itself would absorb most the additional Gilt issuance the Treasury might need.

    And this is just defined benefit pension plans. They is also massive life assurance demand (another short convexity position), demand from DC retail investor pension plans that keeps increasing as the boomers age, demand from banks (since Gilts are 0% RWA), demand from global reserve managers, SWFs, global bond index funds …

    It’s easy to scare people when you talk about the national debt being almost £2 trillion and debt to GDP at 100% (though it’s really 75% when you accept those Gilts are the BoE aren’t really coming back). What people totally seem to forget is the demand side is also much bigger than it was 30-40 years ago and that demand isn’t getting smaller, it’s getting bigger.

  • 36 xxd09 May 29, 2020, 12:09 pm

    Unfortunately or fortunately politics does trump economics
    I have been to Cuba and seen how everybody is equal but equally poor(totalitarian police state etc etc)and it’s been for a long long time -whatever the rights and wrongs of the case may be
    So rational behaviour by governments economic wise is not to be counted on especially the more left leaning they are
    The left seems to have a cavalier attitude to money and debt -for good reasons no doubt
    The right gets accused of prioritising money over people
    The populace seems to be split right down the middle-and but make rational decisions because they-unlike politicians-have to balance their household budgets or starve/lose the house
    As an investor in the middle -a floating voter-I would keep you cash fund as large as is possible -till those politicians sort things out which may well not be for a long time yet

  • 37 The Investor May 29, 2020, 12:22 pm

    @BBlimp: You write:

    I’ve noticed more and more Guardian refs and less from my end of the street in the weekly roundup…

    This is true, but it’s not entirely my fault — it’s a growing paywall issue. I’d happily include more Telegraph links, for example, but they’re deeply pay-walled. The Times went years ago. I do try to include a bunch of ThisIsMoney links, not only on their own merits but also because they lean right (or at least US-style economically) liberal and Brexit tolerant.

  • 38 xeny May 29, 2020, 1:45 pm


    >able to take immigrants from every corner of the globe according to our needs

    Because of course they’ll be desperate to come here.

  • 39 BBlimp May 29, 2020, 3:20 pm

    @ xeny … I’ll hold you to that when they continue to do so 😉

  • 40 SpreadKindness May 29, 2020, 3:22 pm

    Emily Maitlis is my heroine. She cares deeply about the very real problems facing this country. Her rallying call to the barricades means more to me than any outdated BBC charter or stupid laws about impartiality.

  • 41 BBlimp May 29, 2020, 4:15 pm

    @spread kindness – I agree ! Quicker we get rid or trim down the bbc the quicker she can get a job not propped up by the taxpayer elsewhere

  • 42 The Investor May 29, 2020, 6:19 pm

    Guys, this isn’t the forum for one line back and forths. Will delete both sides from here. Thanks!

  • 43 ermine May 29, 2020, 7:54 pm

    > I’d happily include more Telegraph links, for example, but they’re deeply pay-walled.

    Pressreader, with your public library account. Obvs you are indirectly feeding the Beast, but you know what they say about keeping your enemies closer 😉

    Doesn’t help you with the Times, though, but OK for the torygraph

  • 44 xxd09 May 29, 2020, 8:23 pm

    More conservative press seems to be paywalled than its leftist counterpart
    Conservatives are a commercial bunch but might cost them the media battle
    I note that Guido Fawkes,Spiked and Unherd are free-good sources of conservative opinion
    It would be good to have both sections of the populace represented and debating with each other
    Right and left seem to have 50% of the population each therefore to get out of the current impasse both sides need to speak and deal with each other
    Until that happens and it requires manners,polite behaviour and common sense-the mess we are in will continue
    Situation being reproduced in the US
    Standing shouting at each other will get us no where
    No sign of any changes yet
    I live in hope!

  • 45 The Investor May 29, 2020, 8:26 pm

    @ermine — Thanks, but AIUI that wouldn’t solve the Weekend Reading linking issue?

  • 46 Matthew May 29, 2020, 8:42 pm

    A lot of Express articles seem to be free…

  • 47 ermine May 30, 2020, 10:21 am

    @TI you can link to specific articles on pressreader, like this one on Sunak’s self-employed extension – I would guess people have to log in with their library card actually get to read it.

    It is odd, the sudden tightening up of the press over the last year or so. I guess the Scott Trust lets the Grauniad be less closed than the right-wing press, though I would have though the press barons would sponsor their mouthpieces, after all it is the influence on policy they are buying, not the income stream 😉

  • 48 The Investor May 30, 2020, 10:40 am

    @ermine — Alas I don’t have a library card, and I don’t know anyone who does either! 🙁

  • 49 ermine May 30, 2020, 11:17 am

    > I don’t have a library card, and I don’t know anyone who does either!

    OMG I feel old!

  • 50 The Rhino May 30, 2020, 8:32 pm

    @ermine don’t feel old. I have three and I’m younger than TI. I absolutely love libraries. You’d have to prise my cards out of my could, dead hands.

    Borrow box which seems to be the ebook part of the library has been a godsend during lockdown. Kept me and the kids sane.

    Have also bought a few of TIs Kindle recommends as well.

  • 51 Hare May 30, 2020, 8:32 pm


    I have 3 library cards and I’m in my early 40s. My OH in his 60s has 11 library cards.

  • 52 ermine May 31, 2020, 3:28 pm

    I’m now starting to get library card envy. I’ve only got two 😉

    rbdigital/zinio also score for magazines, which are also usually available from the library e-services

  • 53 weenie June 1, 2020, 10:55 pm

    I only have 2 library cards too – only recently discovered the joys of Borrowbox; only used to really read e-books when I was travelling as I still prefer ‘real’ books but since I can only borrow in this format, they’ve kind of grown on me.

    Think the service is really popular in my area as I have to reserve all the books I want to read.

  • 54 The Rhino June 1, 2020, 11:42 pm

    @weenie yep borrow box on my phone has been better than I thought it would be. Managed to get through the whole of Coot Club on it. I love a bit of old school Ransome. Now if anyone knows how I could link up borrow box to a Kindle I would be eternally grateful!

    Have pigeon post next in dead tree format. A 1946 edition. It looks (and smells) fantastic.

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