What caught my eye this week.
A big week for news. A Spring Budget that shifted the retirement savings goalposts like a giant tossing cabers, alongside a banking crisis still threatening to drag down US – and possibly European – banks, like giants gasping for air.
On pensions, do read the cracking comments to our article on Wednesday. We’re lucky to have informed readers who mostly take the time to flesh out their thinking when they post. You’ll learn as much from that thread as from any media article. Especially when many financial journalists seem confused as to how the Lifetime Allowance really works.
There’s no doubt this ceaseless pension meddling is a pain though – from how the Lifetime Allowance has been reduced over the years to Hunt going back on a pledge made just last autumn to freeze it until 2026 (making this week’s reversal potentially bitter and costly to anyone who had acted accordingly) to Labour’s response that they’ll – you guessed it – reverse the reversal.
I believe the Lifetime Allowance is bad regulation. But changing the pension rules every few years is even worse. Pensions require people to plan for several decades away. Yet we can’t be confident the rules will even outlast an election.
Those who can should probably take advantage of this latest pivot. But do your research carefully – and don’t dawdle!
Here today, gone tomorrow
As for the banking crisis, that story is changing daily. I just deleted a huge bunch of relevant links I collected over the week. Most of them – while admirable takes – have been overtaken by events.
The most interesting of these discussed how the failure of Silicon Valley bank is a sign of a wider shift in the venture capital ecosystem. But that’s pretty esoteric stuff from a mainstream perspective when a European bank like Credit Suisse is listing.
Now money can be moved in seconds online, bank runs seem to be just a Twitter panic away.
Perhaps my main takeaway therefore is US regulators seem to be deciding they can’t risk any deposit losses – because that risk even existing can drive deposit flight – and so they will in time legislate towards either full insurance of deposits or at least limits in the several millions.
Existing insurance schemes work by protecting enough small deposits to satisfy most of a bank’s customers that their money is safe. This gives the larger deposits a sort of free ride.
The theory is that protecting the little guys means a bank run won’t happen. But Silicon Valley Bank’s failure showed that model has limits.
Banks are still not boring enough
If we do see all cash deposits protected that would surely change the business of banking, both in the US and abroad (if only due to regulatory arbitrage).
Banks would become quasi-national utilities if the Government explicitly stood behind their balance sheets. And they’d be regulated as such.
On the other hand smaller banks (of which the US still has thousands, some of whom fail ever year) might get a leg-up. Larger banks wouldn’t benefit from Too Big To Fail status if, thanks to universal insurance and regulatory scrutiny, no bank could fail.
For what it’s worth I still think the drama is containable – not least because it has to be. The authorities can do what it takes, albeit we might be cleaning up the consequences for years to come.
As the Motley Fool said this week in a tongue-in-cheek letter to lawmakers:
[Imagine] how well your sensitive, musical instrument-playing children would fare in post-capitalist Mad Max wasteland.
Then add a zero to every number in your rescue package.
Have a great weekend!
Our updated guide to finding the best online broker – Monevator
Lifetime Allowance for Pensions abolished and annual allowance raised – Monevator
From the archive-ator: Gagadom and the Grim Reaper: suppose they come early? – Monevator
Note: Some links are Google search results – in PC/desktop view click through to read the article. Try privacy/incognito mode to avoid cookies. Consider subscribing to sites you visit a lot.
Spring Budget: key points at-a-glance – BBC
Spring Budget: changes to pensions, childcare, and energy support – Which
Spring Budget: how will your income change? [Calculator] – Guardian
Labour pledges to reverse abolishing of Lifetime Allowance – Pension Age
Jeremy Hunt’s R&D shake-up divides UK small businesses [Search result] – FT
UK house prices to fall 10% from peak, says OBR – Yahoo Finance
Barclays could save £200m by pausing payments to staff pension scheme – Guardian
Oil price falls to lowest level since Russia invaded Ukraine – Axios
Scottish Mortgage removes non-executive director after boardroom clash [Search result] – FT
Argentinian inflation soars over the 100% mark – BBC
Seems like the Covid ‘She-cession’ was a ‘He-cession’ after all… – Axios
…but there’s still plenty to debate in the latest UK gender pay gap figures – ONS
Why the UK economy has grown so slowly [Search result] – FT
Frozen thresholds impact mini-special
The impact of frozen or reduced tax thresholds on personal incomes – OBR
Frozen tax thresholds to cost higher-rate households £1,000 a year, says IFS – This Is Money
Products and services
How the government energy cap U-turn will affect your bills – Which
Open an account with InvestEngine via our link and get £25 when you invest at least £100 – and an additional £100 if you invest at least £10,000 into an ISA before 2 May (T&Cs apply. Capital at risk) – InvestEngine
£4.5bn is lying in lost accounts. Could some of it belong to you? – Which
Eight energy-saving fixes from a hands-on energy-saving expert – This Is Money
Halifax is offering a time-limited £175 bank switching bonus – This Is Money
Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor
Homes for sale in former pubs, in pictures – Guardian
Comment and opinion
Why the higher paid should work longer than the rest [Search result] – FT
Gradually, then suddenly – Fortunes & Frictions
Investor behaviour during market shocks – Behavioural Investment
No, it wasn’t pension funds that killed the UK stock market – Real Returns
The rules of the money game [Podcast] – Morgan Housel via Apple Podcasts
Stabilizing – Retirement Investing Today
Staying invested – Spilled Coffee
Market expectations for US interest rate hikes are yo-yoing – The Irrelevant Investor
Don’t waste your emotional capital investing out of spite – Abnormal Returns
Will ChatGPT improve financial literacy? – Morningstar
Market timing mini-special
Don’t chase the past – Bilello
Why you always sell stocks at the bottom – Darius Foroux
Naughty corner: Active antics
A tracker and a slug of cash replicates the average multi-factor hedge fund – Finominal
Statistically speaking, you are the patsy – Neckar Substack
Crisis alpha versus panic alpha – Random Roger
Can the value spread expand forever? – Alpha Architect
Kindle book bargains
Banking On It: How I Disrupted an Industry by Anne Boden – £0.99 on Kindle
Bank of Dave by Dave Fishwick – £0.99 on Kindle
Never Go Broke by Lee Boyce and Jesse McClure – £0.99 on Kindle
Green Living Made Easy: Hacks to Save Time and Money by Nancy Birtwhistle – £0.99 on Kindle
Germany gives green light to €49 a month public transport ticket – Guardian
How the fossil fuel industry plays dirty in the “fight for its life” – Semafor
Banking on the seaweed rush – Hakai
Joe Biden just broke a big climate promise in Alaska – Vox
Off our beat
Michael Heseltine: “The adults are back in charge” [Search result] – FT
Is Facebook’s Metaverse turning into a ghost town? – The Honest Broker
Six useful prompts to make better use of ChatGPT – via Twitter
Our reality may be the sum of all possible realities – Nautilus
Meta productivity – Dror Poleg
How Ted Lasso became a multi-million dollar business – Huddle Up
An interview with futurist Kevin Kelly – Noahpinion
“No doubt all commodities have politics. But money and credit and the structure of finance piled on them are constituted by political power, social convention, and law in a way that sneakers, smartphones, and barrels of oil are not.”
– Adam Tooze, Crashed: How a Decade of Financial Crises Changed the World
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Thanks as always for the roundup TI. If anyone is interested in longer reads on the banking situation, I can recommend Matt Stoller and Patrick McKenzie’s recent takes – some useful extra context in those.
Banks should be more like utilities, the general saving bits, providing a service and the Fed was correct to change the deposit guarantee.
Shouldn’t they also ring fence them from their more exciting investment and other non utility activities?
Seems like an unfinished debate from 2008/09
Think you mean ‘banking’ rather than ‘baking’ on the seaweed rush? Which reminded of this article I came across of a chap doing the opposite and attempting to re-wild the south-coast kelp forests from his garage -> https://www.theguardian.com/environment/2023/mar/13/steve-allnutt-rewilding-kelp-forests-west-sussex-from-his-garage
Things do look rather wild at the moment, in particular the dramatic swings in US Treasury yields. Things might get wilder until say the last quarter of this year. I felt the repeated rallies in the US market over the first months of this year, based on hopes that the Fed was about to pivot, were hot air and stayed away – heaven knows how much client money got burned in those regularly disappointed rallies. I am reasonably sure the Fed will do more until the inflation beast has expired. I did actively get hold of 10 yearish US Treasuries (gbp-hedged) and gilts when yields were higher than today, in the case of gilts adding to some I had got during the brief reign of Mad Queen Liz. Time alone will tell if these yields were a decent long-term buy for the new era. I don’t think anyone knows what comes next and so will likely now remain fairly inactive unless there is a huge crash.
@The Rhino — C’mon, who doesn’t like a seaweed muffin? (Thanks for the spot… 🙂 )
@Ballard — Cheers for leads, you’re welcome re: the links.
@Prometheus — For me it’s unfinished 2008/2009, and also the unintended consequences of shutting down the economy in 2020/2021 continuing to play out (via shocks, then inflation, then rates) which I (and plenty of others of various persuasions) warned at the time would break things. Only to be met be a some commentators on this blog saying things like “Well there we have it, The Investor only cares about money and no matter how many people die”.
Obviously not what I was saying. I wasn’t even saying there wasn’t a good case for the first lockdowns! I was saying (a) there was a total sum to be thought about here and (b) the global economy wasn’t a financial model / spreadsheet you could put on pause, which some seemed to think it was especially financial types — and hence there would be a price to pay later. And it did look more like they were more right… until late 2021 / 2022, and now these bank failures.
In my stock picking antics I have seen companies derailed by a warehouse fire, when they have insurance! In comparison shutting down, say, China, was bound to screw things up. I continue to think my ‘cranky machine juddering back to life in fits and spurts and smoke’ is the best analogy for this aftermath.
We’ve wondered before on this blog (me and comments) why more things haven’t broken given the rate rises last year. The Mini Budget / LDI crisis was the first taste, as I wrote last week. This is the second. I daresay there’s more to come, though I’m not a doomster about it. 🙂
“Pensions require people to plan for several decades away. Yet we can’t be confident the rules will even outlast an election.”
Hear hear. Pensions are problematic in so many ways. From what I understand, there are many other ticking time-bombs with overly-generous pensions made to public-service workers in the US especially. They are a gift for politicians – promise jam tomorrow, letting their successors work out how they can afford it.
Quite, perhaps there should be some committee that decides/suggests policy so removing the immediate short term politicking from such an important but trivially(?) treated area.
Thanks for the link to the Nautilus’s popular article on Feynman path integrals in quantum gravity. It’s interesting that they seem to be hinting at progress in applying path integrals to quantum gravity possibly offering Mathematicians some fresh insight into how to fit them in a more formal mathematical framework.
The problem for Mathematicians is that they struggle to rigorously prove convergence with the highly oscillatory complex measure in quantum mechanical Feynman path integrals. When time becomes imaginary, the path integral becomes a Wiener integral used in stochastic calculus and quantitative finance with which Mathematicians are very familiar with and understand with complete rigor. Imaginary time transforms Schrödinger’s equation into the heat equation!
It is becoming more evident now that rather than being a fundamental theory of nature, general relativity will probably turn out to be an emergent effective theory just like Thermodynamics emerges from statistical physics. Spacetime might not be a fundamental building block of reality but something that is made out of quantum mechanical entanglement.
Errr OK, but the LTA is even more complicated!
@Al Cam (#9) – Path integrals and quantum gravity are very simple and straightforward compared to the government’s Pension rules, specially when you consider the tapering 😉
By about paragraph 5 of the Nautilus article my head was in a complete spin! @ Tom-Baker Dr Who, glad someone has a grasp of this mind boggling subject! Think I’ll stick with lifetime allowance protections, protected tax free cash, and tapering!
I have a degree in Maths, and I don’t understand it 😀
*pensions, of course*
A good friend of mine is COO of a kelp farming business. The logistics are fascinating, as he has to essentially work with tides, climate and the difficulty of harvesting open water crops. The equipment is also quite intensive and costs need to drop before being scalable. I often call his business Clarkson’s Underwater Farm, but it’ll be revolutionary if some of the challenges can be overcome.
I liked RIT’s update! I think I found his blog when at M/Lynch. His posts during his slog days were so helpful, a guilty pleasure, while I pretended to live my perfect lie (life).
I’m glad he loves Australia. Lots to learn from his transition phase …
Ref: the market volatillity, the silver lining of this current bout for me so far is that it’s rewarding diversified investors. Last year was the “everything” falls, but now at least bonds are acting in the opposite direction and gold is doing well too. Good to see.
Excellent point. After years of drought, it has been a relief to have the opportunity to load up on (supposedly) high quality sovereign debt, at what at least looked like decent medium-term yields, and then see them doing their bit when panic breaks out.
@Tom-Baker Dr Who, “It is becoming more evident now that rather than being a fundamental theory of nature, general relativity will probably turn out to be an emergent effective theory”
It is interesting that you say that, as when I studied General Relativity (a long time ago), a commonly held view back then was that gravity was not a force, in the Standard Model sense of the term and was all about matter warping spacetime. I remember the maths professor who gave the course, which was 90+% a course on tensors with little physics, holding that view. He gave a simple parallel – consider 2 people walking North. They gradually get closer together, but there is no force (particle exchange) between them making this happen.
I thought this view had gone out of fashion, especially since the eventual measurement of gravitational waves.
How does String Theory fit into all of this these days?
i was wondering how long it was before the QE junkies started clamouring for NZIR and QE again. https://www.theguardian.com/business/2023/mar/19/slash-interest-rates-and-stop-bond-sales-ex-policymaker-david-blanchflower-tells-bank-of-england
Jeez, if capitalism is so brilliant then just let capitalism run its course for once. Stop trying to prop up markets with money borrowed from the future.
This quote had me laughing (and not in a good way) out loud “Murphy said QE had been “benign and saved the country from many of the worst impacts of the austerity pursued by successive governments since 2010 without creating the current inflation we are suffering.”
In my long time on this planet is that number lessons learned from any lessons learned exercise is that no lessons are EVER learned.
@Rae. I think Gravity is seen now as a something that should be able to be defined in quantum terms, rather than just a consequence of relativity. however, noone has yet detected a graviton or really defined one.
I think the jury is still out on whether gravitational waves have actually been observed. There are some serious methodological concerns with the LIGO experiments that sound rather like the tail wagging the dog. They have been unable to correlate the putative observations of gravitational waves with the observation of the events that should be causing them eg. black holes colliding, and also seem unable to account for the “false” readings that they are throwing out.
I am only a lay person, not a Physics graduate, but all this stuff really fascinates me
@Bloodonthestreets, I can’t see any logic in keeping interest rates high. General inflation wasn’t caused by easy money due to QE (though house price inflation probably was), it was caused by first the aftermath of Covid (supply chain issues) and then Russia attacking Ukraine. Prices aren’t going to come back down but inflation measured over the last 12 months is bound to since it is now a year since the massive fuel price rise. It won’t come down fast, there will be a longish tail, but even the government (OBR and BoE) think it will be around 2-3% by the end of the year. And that will happen regardless of what interest rates have done and will do.
But it is high interest rates that are causing banks to fail, and are beginning to hit the business side of the economy. Given that changes in interest rates take a while to have an effect, the BoE needs to start now with the reversal. At least no more rises – the bigger risk is the economy going into reverse and the government having to take panic action.
(To be fair, the interaction of currencies means that the BoE couldn’t ignore the lead of the Federal Reserve on interest rates. And QE is a lot more complicated – but certainly didn’t cause the vast majority of retail inflation).
@Naeclue (#17) – Yes, when I first learnt General Relativity, I experienced the same as you. The geometric picture was dominant. The most popular and respected textbook, Wheeler, Kip Thorne, and Misner ‘Gravitation,’ emphasises the geometrical picture from the very start. Only Weinberg’s textbook deviated from this trend.
String Theory is surprising because gravity just emerges from it naturally without us having to add it by hand as in other quantum theories of gravity.
Indeed what I was referring to originates from String Theory. More specifically from Maldacena’s conjecture about the equivalence of string theory on Anti-de Sitter (AdS) space, and a conformal field theory defined on the boundary of the AdS space (also called the holographic principle). Recently, Leonard Susskind and Maldacena used AdS/CFT correspondence to show that the general relativity solution for two Black Holes arbitrarily distant from each other yet connected by an Einstein Podolski bridge implies that they are entangled. They also showed that if you could create two Black Holes from entangled particle pairs, these Black Holes would be connected by an Einstein Podolski bridge!
This is amazing because the bridge connects two remote parts of space making them closer to each other than without the bridge. So it seems that this result is suggesting that entanglement can build spacetime!
I come to read a financial blog and Find Dr Who and others discussing imaginary Time, And Relativistic Dimensions In Space.
Mind blown. One of the many things I like about this blog is the wide range of the links, especially the Off Our Beat section. Thanks
@EcoMiser, when you read about attempts to reconcile quantum theory and general relativity it always sounds more like science fiction!
@Tom-Baker Dr Who, I had not realised you were talking about string theory. I thought it was something else. Are you saying then that string theory can provide a way to have gravity “emerge” without having to quantize spacetime? Or is there still a quantum theory of gravity in there? It would be very funny if string theory could explain gravity without a quantum theory for spacetime as that would imply large numbers of physicists had been barking up the wrong tree for a generation!
I am very in the dark on this stuff. I covered general relativity and quantum theory of course, but none of the various speculative attempts to reconcile the two theories, other than popular science things I have read since.
Can help but the feel the objective of the budget changes – pension, childcare were largely designed to obscure the fact that the economy is flatlining at best, taxes are going to be higher than ever before and living standards are dramatically falling. Panorama this evening is quite amusing in this regard. It’s all solvable if the British decide to suck up ten years of pain, reform and realise perceived British exceptionalism is negative and not something to be proud of.
@Naeclue (#23) – Yes, one of the most surprising things about String Theory is that it doesn’t set out to quantise gravity from the start yet a quantum theory of gravity just emerges from it when strings are closed on themselves forming a loop. As it’s impossible to eliminate closed strings from any formulation of String Theory, gravity is always there!
We can’t tell yet whether it’s going to be String Theory’s revolutionary approach or the traditional approaches, where you attempt to quantise spacetime directly, that are going to be vindicated in the end. In fact, it’s possible that one of the more traditional approaches, Quantum Loop gravity (which I think is what the Nautilus article was referring to), might turn out to be just another way to recast String Theory in this particular context.
Yes, it always sounds a bit like science fiction because in most of the natural phenomena we are familiar with having a quantum theory of gravity is absolutely irrelevant. Any effect is such a small correction that you would never detect it. As you probably know, quantum gravity only becomes important at the Planck scale. The Planck length, for example is awfully short: sqrt(hbar G / c^3) ~1.6 x 10^-35 metres. This is what you would face inside a Black Hole as you approach the singularity or at the Big Bang. So Black Holes and the early Universe are where we can obviously look for evidence of quantum gravity’s effects.
One of the most amazing developments of recent decades is that Cosmology has become a much higher precision science than it used to be in the past and we can now measure with previously undreamt of accuracy things like the Hubble constant, the Cosmological constant, and even anisotropies in the Cosmic Microwave background left by the Big Bang.
One great challenge for theorists would be to come up with an effect that can be calculated and then detected in experiments that can actually be carried out with current technology. A bit like Einstein’s prediction of our Sun’s gravity bending light that Eddington validated in his famous eclipse experiment. Or the general relativity corrections without which GPS becomes so inaccurate that our Satnavs would be useless.
Sorry, I meant Loop Quantum Gravity rather than Quantum Loop Gravity above (#25).
@EcoMiser — Very much appreciate the note, glad to have to you reading!
@All — Thanks as always for the comments everyone.