Bonds and especially gilts have taken a hellavua beating recently. Rising bond yields have inflicted losses shocking enough to put some people off for life. And that’s a shame because bonds and equities share an important characteristic: they’re likely to be more profitable in the future after a sharp price fall than after a gain. To explain why, let’s investigate what happens to bonds when interest rates rise. 

When interest rates rise, two things typically happen to older bonds1:

• The yield on the bonds rise 

• The price of the bonds fall

This means that as interest rates rise, your bond portfolio or fund will probably suffer a capital loss.

And lower prices for bonds mean your fund is worth less, right? 

Right. But counterintuitively, interest rate rises also create the conditions for stronger bond returns in the future. 

That’s because rising bond yields equate to higher future income payments.

Eventually those improved cashflows can reverse your capital losses and then put you further ahead than if the interest rate rise had never happened. 

Rising bond yields: are they good or bad?

Rising bond yields are bad news at first because they trigger capital losses. But the good news is your expected bond returns are actually greater after a rate rise.

This example shows three alternate destinies for the same intermediate bond fund – depending on the future path of interest rates: 

Source: Author’s calculations and Portfolio Charts

This is a necessarily simplified example that doesn’t include daily fluctuations in yield, nor investment costs. We have assumed an upward sloping yield curve that shifts in parallel, and that all interest is reinvested. The underlying bond fund calculations are handled by Portfolio Charts’ excellent bond index calculator.

• The blue timeline shows what unfolds when interest rates hike 2% and then remain stable. Despite an initial double-digit capital loss the fund earns a 4.5% annualised return over 15 years.  

• The green timeline tracks the bond fund’s fate if interest rates stay flat. It earns a 3.8% annualised return in this scenario. 

• Finally, the red timeline charts a cork-popping 22% initial gain triggered by a 2% interest rate drop. But rates then go flat like cheap fizz. The fund limps home with a 3.1% annualised return.

Hence the surprising result is that the rising yield scenario is the most profitable one over the long term. 

It’s like a bond fund morality tale. Good things come to those who wait.

Who said bonds were boring?

Long-term investors reeling from recent reverses in their bond funds could imagine it as a hero’s journey:

• First, the setback as the interest rate rise inflicts calamitous losses. 

• Then the transformation as stronger cashflows bend the arc of fortune upwards.  

• Atonement as the blue bond fund overtakes its lazier selves enjoying the easy life. 

• Finally the triumphant return: 4.5% annualised in this case. 

You’ll notice it takes the rising yield scenario fund more than three years to recover its capital loss. And it’s ten years until it’s more profitable than if yields hadn’t risen.

But it’s returned 22% more than its falling yield ‘alternative reality’ self after 15 years. 

If you owned a shorter-term bond fund it would recover more quickly. The trade-off is its annualised returns would be lower. 

Conversely a longer bond fund takes more time to repair the damage but annualised returns would be higher still. 

Either way the pattern is the same. 

Yet if you asked most people, I’d wager that they’re cursing rising bond yields right now. 

It’s like an adult version of the marshmallow test. Do you want a quick sugary hit or can you wait for a bigger payoff?

What happens to bonds when interest rates rise?

In a nutshell, rising interest rates in 2022 have caused our existing bonds to be marked down in price. Hence the capital losses. 

But our existing bonds get replaced by higher-yielding versions as they reach maturity. And the new bonds pay more income. 

Over time, the replacements produce a stronger stream of cashflows. This erases the earlier losses. 

It’s like a heavy snowfall that covers a pothole. After a while the snow piles up until you’re left with a big mound. The tear in the road is long since forgotten. 

But to properly understand the underlying mechanism we need to clear something up.

The interest rates that directly affect bond prices are not the Bank Of England’s interest rates. Or any other central bank’s rate. 

No, bonds respond like a puppet on a string to market interest rates. 

Market interest rates are the sum of supply and demand for any given bond. 

Which means each bond has its own interest rate. And that rate yo-yos in tune with bond traders’ views on:

• The bond’s specific properties, such as its credit rating and maturity date.

• Broader forces – inflation, the state of the economy, currency moves, animal spirits and, yes, the influence of central bank interest rates. 

Ultimately, the market interest rate is the return that investor’s demand for bearing the risk of holding a particular bond.  

Why do bond prices fall when interest rates rise?

The reason that bond prices fall when interest rates rise is so that older, lower income bonds remain competitive against newer equivalents that pay better rates. 

Why does this happen?

Well, it’s because most newly-issued bonds pay a steady stream of income that match the prevailing interest rate for their type.  

For example, if the market interest rate for a ten-year gilt is 4%, then a freshly printed 10-year gilt must pony up a 4% annual income stream to be competitive. 

If it didn’t then nobody would buy it. (And then the government wouldn’t be able to finance all those national nice-to-haves like roads, schools, hospitals, the army and such like.)

That fixed rate of bond interest is formally called a coupon rate. 

For example, a bond with a 4% coupon pays £4 per year on its principal of £100.2

The £100 principal is the amount loaned to the government in the first place, when the bond is issued. When the bond matures, whoever owns it at that point will get that £100 back.

But what if interest rates for ten-year gilts afterwards rise to 5%? Then now our old 4% job looks like an Austin Allegro in a car park full of Teslas.

You’re worried about being laughed off the bond trader’s floor with your weeny debt instrument. 

You want to get shot of the 4% gilt. But why would anyone buy it when they can get a shiny, new version of the same thing paying 5%?

There can only be one answer: you sell it at a discount. A lower price that recognises that 4% bonds aren’t all that when 5% behemoths roam the bond market. 

The discount price needed to sell this bond is: £92.21

Bazinga! At that new price your 4% ten-year gilt offers exactly the same return as a 5% ten-year gilt worth £100. 

This market reality explains why bond prices fall when interest rates rise.

Brief sci-fi side trip to an alternative universe

If prices didn’t drop, then nobody would be able to offload their less competitive bonds when a factor like inflation spurs everyone to demand higher rates of interest. 

And if prices didn’t adjust like that, then the bond market wouldn’t function properly.

Instead it’d be like a vast hodgepodge of fixed-rate and fixed-term savings accounts. All sporting different interest rates, depending on when they were initiated.

There would be no liquidity. The fixed term would lock you into your ‘savings account’ with a particular tranche of government debt until it matured.

Government financing would be far more expensive. The risk of being locked into lower interest rates would make everyone demand much higher coupons in the first place.

Basically, if today’s government bond market didn’t exist then somebody would have to invent it.

Rates up, price down, rates down, price up

Back in the real world, the same phenomenon of a bond’s price and yield adjusting to prevailing rates works in reverse. 

If market interest rates fell from 4% to 3%, say, then your old gilt with its 4% coupon would look good by comparison. 

Some quick sums reveal you’d be able to sell it for £108.58. (In practice a small investor wouldn’t need to do any maths. The market constantly adjusts pricing across all bonds as rates move).

At the higher price, your 4% ten-year gilt offers exactly the same return as a 3% ten-year gilt priced at £100. 

From this market-clearing mechanism we can derive the iron law of bonds:

• When interest rates rise, the price of a bond falls.

• When interest rates fall, the price of a bond rises.

You can check out the price changes yourself using a bond price calculator.

Rising bond yields: which yield are they talking about? 

Yield-to-maturity (YTM) is the metric that really counts. 

YTM (minus costs) is a bond’s expected annualised return if you hold it to maturity. This yield takes into account the bond’s current price, and assumes all remaining coupon payments are reinvested at the same interest rate.

Yield-to-maturity is the critical metric enabling you to compare the expected return of bonds of a similar type, even though they vary by price, maturity, and coupon.

Whenever we talk about bond yields in this post we’re referring to the yield-to-maturity.

With this metric in play, we can finally get to the heart of why bond prices fall when interest rates rise. 

In the example above, our poor old gilt – saddled with its now-underwhelming 4% coupon – was outgunned by new-fangled gilts spraying about 5% per year. 

Our 4% gilt’s price falls to £92.21, which pushes up its YTM to 5%. Now it offers a 5% annualised return to new buyers and is every bit as appealing as its newer rival. 

Extra yield juice, reinvested, is on top of the £7.79 capital gain a buyer will make if they hold the 4% gilt to maturity. On that date the bondholder receives the £100 principal payment, booking a £7.79 gain over the price they bought it for.  

Hence it’s the discounted price that enables an old bond with an under-powered coupon to trade on equal terms with new entrants on the market.   

Again, the process plays out in reverse when interest rates fall. Which brings us to the second iron law of bonds:

• Yields rise when the price of a bond falls.

• Yields fall when the price of a bond rises.

Higher market interest rates means investors are demanding a higher yield (i.e. a greater return) on their money. 

And as we saw in our sci-fi aside earlier, this price-adjustment mechanism is what prevents the bond market seizing up due to it saddling investors with uncompetitive bonds they need to sell. 

Not so smooth operators

In reality bond investors constantly reevaluate their assumptions just as equity investors do.

Thus market interest rates oscillate like a thrash metal guitar string. Which causes bond yields to rise and fall like empires on fast-forward, and prices to seesaw like frenzied toddlers.  

Thus, while my chart above models the effect of rising bond yields in principle, the real world is far messier. Interest rates are never going to hike on day one then stay flat for the next 15 years.

So how can we apply the rules above to our own investments?

Rising bond yield takeaways

Let’s boil down all this bond banter to some basic principals you can take to the bank.

Rising bond yields are positive for long-term investors who can ride out the capital losses and eventually take advantage of fatter income payments. 

Much of the doom and gloom after the Financial Crisis concerned the fact that low yields meant miserly long-term bond returns. It dragged down the equity risk premium as well.

Now, rising rates and a return to the old normal is leaving that particular threat in the rear-view mirror. 

Higher coupons should lower bond volatility. They plump up your safety cushion against equity losses, too. 

But let’s be clear-eyed about the risks.

Sharply rising bond yields can rain pain upon us for years. This happened to UK government bonds in the 1970s. 

Eventually those vertiginous yields became the source of stellar bond returns in the 1980s and 1990s when high inflation and interest rates fell away. 

But a rising rate environment is no picnic if you’re short on time. You’ll lock in real capital losses if you’re a forced seller, before your bond allocation can take advantage of higher yields. 

If you need to sell to pay the bills then some of your allocation should be in cash and short duration bonds. These refuges are less vulnerable to inflation and less sensitive to interest rate moves. 

The standard advice is to match your bond fund’s duration to your time horizon. 

But this is tricky to do in practice and is no magic bullet anyway. We’ll talk it through in a follow-up post. 

The other important point is that not all interest rate rises are as calamitous as the surges that heaped historic havoc on the UK recently. 

Steep and rapid hikes at the long end of the yield curve can ravage bonds with lengthy lifespans.

Gentle climbs over years are much easier to cope with. 

What you should do about bonds

That brings us finally to the psychological element.

You may be a long-term investor who can afford to wait for rising bond yields to work their charm. 

But if staring at a long bond fund in the red for years on end is going to gnaw at your psyche then the waiting game may not be for you. 

We know that high inflation which escapes its Central Bank gatekeepers is bad for bonds. 

So it’s not hard to imagine a world where bond yields could keep rising from here.

If that higher-than-expected inflation scenario unfolds then we’ll spend much longer eating capital losses before finally enjoying the fruits of growing yields. 

To me, that has suggested trimming bond allocations, looking at diversification options, and reassessing your exposure to long bonds. I argued for that in a reappraisal of the 60/40 portfolio.

But I believe it’s short-sighted to ditch bonds entirely.  

We do not know that interest rates will keep rising. 

In a deep recession they typically fall – buffering your portfolio with bond capital gains even as equities crash like a drunk’s Jenga tower. 

In that scenario, your bond funds are likely to be the best comfort you’ve got. 

When do you think the next recession will be? Never? Soon? Anytime now?

Such uncertainty means there’s still a place for bonds.

Take it steady,

The Accumulator

P.S. I can’t find a better place to put this bit, but because bond funds sell their bonds before they mature, yield-to-maturity is a fuzzier measure with funds than with individual bonds. It is still a useful bond fund comparator and your best guide to future expected returns, but with a fund YTM is not a guarantee of any particular return.

P.P.S. Take a look at our best bond fund ideas for help with your research.

1. By ‘older bonds’ we mean previously issued bonds that trade on the secondary market. We don’t mean newly issued bonds. [↩]
2. A bond’s principal is also called par value, nominal value, or face value. Essentially it’s the original value of the loan made to the bond issuer. [↩]

What caught my eye this week.

I honestly don’t want to keep returning to the UK’s fiscal and political kerfuffle, week after week.

But like a newspaper’s travel correspondent who finds herself the only reporter in town during an air raid, the battle keeps thundering in.

This week was one of truth and reconciliation – in as much as the truth hit home and it had to be reconciled with a hostile political reality.

Most notably, with senior Conservative MPs openly stating that they wouldn’t support it, PM Liz Truss caved on scrapping the 45% tax band.

Instead it was her proposed tax cut that was scrapped. A twitch of fiscal sanity, sure, but from her party not her chancellor. And as it only saves a couple of billion pounds, the bond vigilantes’ Excel spreadsheets won’t have budged much anyway.

Indeed the Office for Budget Responsibility would likely confirm a black hole in the nation’s finances, were it to release its independent forecast today.

Bean counters

The Guardian quotes Sir Charlie Bean, an ex-member of the independent watchdog and a former Bank of England deputy governor:

“It will be in the order of £60bn to £70bn relative to its previous forecasts,” he said, adding that Kwarteng would face three options: further U-turns on his tax-cutting plans, deep cuts to public spending, or risking the ire of already rattled financial markets by substantially adding to the national debt.

“What he’ll be confronted with, and I don’t think to be honest most observers and MPs have really woken up to this yet, is the extent to which the public finances has deteriorated since the spring,” Bean said.

“It will be interesting to see what the chancellor comes up with, what rabbits he can pull out of the hat. They could U-turn on the tax cuts they announced a fortnight ago, but that of course I’d say would be politically terminal for the Truss government.”

I’m starting to suspect it was no accident that big concrete spending cuts – as well as the promised supply side reforms – were put off until November, even though this is what roiled the markets.

The tax cuts were perhaps meant to prepare the ground for future pain by obviously straining the country’s finances – in the same way that a patient is less inclined to complain about an imminent amputation if gangrene has already set in.

Create a frightening shortfall, then you’re swinging the axe not as a mad man but as a surgeon.

But if that was the idea, it looks a long shot now.

With her party in open revolt and many Tory MPs fearing for their jobs, the politically difficult decisions that Truss said she sought – some of which in isolation may be well-judged – seem as hard a sell to Parliament as to the country.

Bad medicine

Many Monevator readers might be sympathetic to those who suffered a real terms benefits freeze, but fewer would be directly affected. (State services such as a flailing NHS are another matter).

No, we’ll mostly feel the ongoing pinch at the tax rather than spend end of the equation.

And on that score it’s still widely under-appreciated just how static tax allowances – combined with raging inflation – amplify the tax take.

According to the Institute for Fiscal Studies, taxpayers are set lose twice as much from frozen allowances next year as they will gain under the promised tax cuts, writing:

Freezes to personal tax parameters alone will reduce households’ income by £1,250 on average by 2025–26.

Adding in freezes to benefits and gradual policy roll-outs brings that figure to £1,450, or 3.3% of income, and means a £41 billion boost to the exchequer.

That is double the £20 billion gain in household income (and loss to the exchequer) from the high-profile personal tax giveaways – the reduction in National Insurance contributions and 1p cut to the basic rate of income tax.

In other words, on average for every £1 households gain from high-profile cuts to rates of income tax and National Insurance, they lose £2 from the freezes and policy roll-outs.

My co-blogger The Accumulator has been banging this drum for months. He even made a rare foray off the fence in our comment thread on the Mini Budget to say:

It’s a joke. The tax thresholds are still frozen until April 2026 with inflation rampant. Most will pay more tax not less.

This is a conjuring trick.

T.A. has had a draft article knocking about since early summer that tried to unpick very precisely how much not raising the various allowances would cost a person, versus a counterfactual world where allowances rose with inflation.

However I felt it was too confusing for readers. It also teetered on a vast and fairly unfathomable spreadsheet that underlined how difficult it is to do these sums for yourself.

My bad for not publishing it anyway, in retrospect, though like my warnings about imminent contact with sequence of returns risk and my urging readers to stress test their mortgages, it might have been a little early to truly hit home.

Here’s how the IFS sees the upfront damage in terms of where the various bands would be if they’d risen with inflation:

Source: IFS

Reading this table doesn’t really reveal how it all adds up for you, however. And you can try to do the sums like The Accumulator did, but it’s mind-bending stuff.

Which is why of course politicians prefer this conjuring trick to hiking tax rates directly.

First, do no harm

Sympathizers might ask who can blame them?

We have a perma-sluggish economy afflicted with poor productivity growth that – borrowing aside – must fund ever-growing commitments and a relentless string of one-off spending splurges, most recently the energy support measures.

Tax as a share of national income income is already getting on to its highest level since the aftermath of World War II.

The tax cuts may well been chosen for their political bite. But at least they take the edge off.

Look, Liz Truss and Kwasi Kwarteng have clearly bungled the delivery of their chosen hardcore medicine. And it certainly appears to be more from the chemotherapy end of the spectrum than a holistic retreat to the Alps to take in the air.

It’s not the treatment course I’d prescribe. The ordering has been back to front. You’d hope for more competent doctors.

But as I said in my ambivalent response to the Mini Budget, I don’t quibble as much as some do with the diagnosis.

Post-mortem

As has been the way of Tory politicians for half-a-dozen years though, they soon exhaust my short store of sympathy with their lofty disregard for the facts.

This time saw Truss and her followers claim the drama of the Bank of England having to intervene to shore up reeling pension funds was all down to global matters.

Ukraine was even mentioned a few times.

Luckily the Bank of England remains independent enough to shoot that down.

The Bank’s Deputy Governor Jon Cunliffe told MPs that some pooled investments in the now-notorious liability-driven pension investment funds would have been worth zero if it hadn’t acted by stepping in to buy gilts.

His letter to Parliament also directly linked the crisis to the Mini Budget (or fiscal event, as it was formally called), not Russia’s war or even the US Federal Reserve.

See if you can spot the correlation that Truss and Kwarteng strain to notice:

Source: Bank of England / UK Gov

As I say, I’d love to talk about something else next week. But we can’t duck how this all impacts our finances in the here and now, let alone the never-never of future government borrowing costs.

There are links below to the ongoing stress in mortgages, for example, and to reports of a sudden nosedive in the housing market.

The big danger now is this administration doesn’t have any political capital left to push through the controversial cuts and reforms that are required even by its own lights.

That could leave our economy in an 18-month limbo, until the next General Election.

Better wrap up warm this winter.

Have a great weekend everyone.

[continue reading…]

I watched the new three-part Netflix documentary Eat The Rich this week. And I got nostalgic for an experience I took almost no part in.

The documentary centers on GameStop’s brief life as a meme stock, culminating in the short squeeze in January 2021 that sent its price parabolic.

Fortunes were made and lost in a day. At least on a mobile screen.

Eat The Rich presents a comprehensive Big Short-flavoured overview of the whole saga. The run-up, the peak, and the party-pooping aftermath.

We see the perspective of all the key players, too, although only a couple of Wall Street pros took part.

“I like the stock”

I knew the pandemic lockdown trading boom was big at the time. But only really because I saw its impact on several listed companies I follow, like Hargreaves Lansdown.

I’d also laughed along with the memes and the lingo. Stonks, diamond hands, HODL, and all the rest. But again, only when it bled on to Twitter or the blogs.

I imagine 20 years ago I would have been in the thick of it. Time flies, and investing bulletin board posters become old bloggers.

Maybe that’s why even though my sole, tiny contribution to the drama was to urge GameStop traders to dump their shares if they still owned them – just before the peak as it happens – I was a bit sad to have missed the craziness.

Perhaps not what you’d expect from a website about sensible investing?

True, I’m the naughty active one in these parts.

Yet by its end the meme stock frenzy had almost nothing to do with the ‘proper’ investing principles that relics like me employ. Not for 99% of the participants, anyway.

It probably had more in common with a riot.

There was a similar energy and even a (fickle) camaraderie that was intoxicating.

Chasing meme stocks and bragging about your blowups on Wall Street Bets is about as far from passive investing via index funds as you could imagine.

It’s very bad for your wealth. It also appears to have been a hoot.

Down and out in London and Wall Street

I don’t want to imply that my tracker-philic co-blogger The Accumulator doesn’t know how to have a good time.

You’d better hope you’re not nearby when he discovers an ETF with a 0.04% lower ongoing charge figure. Something is liable to get broken in the celebrations.

But let’s face it, passive investing is mostly boring and it even feels wrong. We do it because it’s the best way to secure long-term wealth. It will never inspire a movie.

In contrast even when they’re losing money, the Reddit traders make a show of it.

Here’s a typical post from this week:

Source: Wall Street Bets

Piloting a $280,000 portfolio to an 80% loss in less than 18 months takes some doing. You might even be tempted to snicker.

Yet – albeit in their scabrous and hilarious way – the comments that followed on Reddit are overwhelmingly supportive.

The community understands the desire to gamble all on escaping from corporate life. Not the slow and steady way we do it, but ultra-speedily.

And for a few brief months in the midst of the lockdowns and at the height of a speculative bubble, it was possible. For a lucky few, anyway. All from making highly-levered bets on a free share trading app.

Many people did achieve life-changing wealth – at least for a while. A minority may even have got out before the implosion.

But as a counterpoint, the best comment for Monevator purposes is buried deep in that thread above:

Source: Wall Street Bets

‘Impressive’ in a Wall Street Bets context hails the seeming immolation of yet more of this trader’s money.

However in this case, his retirement funds were tucked safely away in trackers.

And there the bear market that we boring sensible investors have bewailed has been – relatively-speaking – a life-saver for the down-and-out Reddit day trader.

There’s a lesson in that. But the Monevator audience is not really the one that needs to hear it.

So long and thanks for all the memes

While Wall Street Bets lives on, meme stock mania for now is in the 2021 history books. (Along with a lot of other weird stuff from that year.)

Nearly all the runners and riders long ago saw their share prices crash back to reality.

And you’d at least that hope the extremely over-sized yet complacently held professional short positions that made GameStop’s price gains so explosive – and blew up at least one hedge fund – are in the dustbin of posterity, too.

But even so, it won’t be the last time a collective trading mania takes over the markets.

We’re all still getting more connected, not less. And the greed, desperation, or economic injustices that motivated so many into recklessness have hardly gone away.

The same forces of social media and virality have also driven changes at the business end of investing.

For example, a plethora of baby venture capital start-ups were founded during the boom on the back of podcasts and newsletters. It’s yet another way of using the distribution superpower of the Internet to pool capital.

You even see viral mobs at work with reviews for Eat The Rich on Rotten Tomatoes.

Critics love the series. However the audience says it’s diabolical. Presumably the Reddit faithful disapprove of the filmmaker’s even-handed approach and so they have voted it down en masse.

Similar ‘review bombing’ was seen a few weeks ago with Amazon’s Rings of Power spin-off. It undermines the legitimacy of what we once called user-generated content – which was meant to be a special forte of the Internet era.

One by one our vanities are blowing up.

The people in this country have had enough of discounted cash flows

The very low audience rating for Eat The Rich seems unfair to me.

But perhaps trying to tell the whole story fairly only guaranteed it would equally piss off everyone.

We live in an age where you must be either for or against something. Even-handedness is a weakness. There are no shades of grey.

Indeed the same wicked social media dynamics that made meme stock trading so potent we also see in everything from domestic politics to the culture wars to calls for a nuclear confrontation with Russia.

Experts are, famously, out. Reducing complicated positions to a mouse click – a like or a cancellation – is the order of the day.

That’s how the Conservative Party ends up voting against the guy who tried to admit to the fragile economic situation we’re in – and instead for the woman who just said she’ll fix it, the way you used to bang on a TV to get the picture working again.

Fewer people seem prepared to take the difficult path. Whether it be analyzing a company’s accounts or a politician’s pitch.

One week a deeply troubled computer game retailer’s valuation rockets from $2bn to $24bn then straight back down again.

Another week the gilt market blows up.

It’s almost like the experts were on to something.

Divided by dividends

Being old-fashioned though, I thought the documentary did a good job of covering the GameStop story from different perspectives.

In Eat The Rich we see hedge fund managers as over-paid and self-regarding economic vandals. But we’re also reminded that they’re stewards of the capital of pension funds and university endowments.

The Reddit day traders are portrayed as self-reliant iconoclasts but also, at points, as clueless dummies.

Lawmakers and regulators are simultaneously asleep at the wheel, in cahoots with Big Finance, and sympathetic to claims the capital markets have been ‘rigged’ against the little guy.

Oh and they’re also clueless dummies. (Everyone gets that treatment.)

Sensible observers know all these things can be true at different times.

Yet it’s also indicative of yet another facet of modern life. Our implicit trust in the structures surrounding us really does seem to be breaking down.

Very few celebrate bankers as The Masters of the Universe these days. Not many more would raise a glass even for captains of industry.

Like everyone involved in investing – apparently – they’re all said to be out only for themselves, one way or another.

Even you sensible investors who find a spiritual home at Monevator should get used to being called names.

Sometimes we’re the strivers, responsibly taking control of our financial futures. Giving up hedonistic pleasure today to ensure we’re not a burden in our old age.

Other times though, we’re layabout rentiers making money off the labour of others. Which makes us fair game for windfall taxes on our firms and higher rates on our dividends and other profits.

Which is it? Are investors part of the solution, or does society believe we’re actually a problem?

Eat the rich, the poor can have cake

If a pundit or politician wants to make the case for nationalizing the utilities or the railroads, then the dividends legitimately paid out to shareholders or pension funds are a green light to confiscate their gains.

On another day, when it’s time to encourage people to invest in start-ups or to make more capital available to growing companies, then the government courts investors with warm words and even special vehicles like ISAs or VCTs.

It used to be that different parties might hold these different views.

Now it’s as likely to be the same politician on a different day.

It’s hard not to get cynical. But there’s an even bigger problem.

As I suggested last weekend, it all reveals a society that is deeply uncomfortable with the capitalism that has facilitated much of the societal richness we see around us. From infrastructure to state pensions.

Perhaps we feel we can afford to be cavalier about capitalism, snug in the bounty it has provided. There’s surely some truth in that.

But I believe people are also distrustful because they believe that capitalism betrayed them. Most clearly with the financial crisis of 2007 and 2008 that animated the meme stock traders. But also with the steady rise of inequality at the high-end, and the winner-takes-most dynamics of the Internet era.

It is a dangerous direction of travel. As I wrote back in 2012:

I believe it’s a responsibility of all of us who support free markets – let alone those of us who hope to profit from them via investing – to stand up and be counted, and to be sure we can justify any aspect of the system that we defend, rather than indulging in fantasy politics of any persuasion.

I hope we do not come to regret not doing more to defend capitalism – including from itself.

I guess even fewer people were reading Monevator ten years ago than I’d realized…

Because while the tools of investing – from cheap tracker funds to free share trading to abundant information – have only gotten better, the image of investing in most people’s eyes has not.

That’s how you end up with a public that can call for windfall taxes without wondering how and where their pensions are invested.

And it’s how smart young people who two decades ago might have been reading Warren Buffett and preaching capitalism as a force for good end up believing that by rallying together via a trading app they were going to smash the system.