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Weekend reading: How long, doc?

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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.


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.

From Monevator

The Slow & Steady Passive Portfolio Update: Q3 2022 – Monevator

Eat The Rich or die trying (a review, of sorts) – Monevator

From the archive-ator: Mortgage risk checklist – Monevator


Note: Some links are Google search results – in PC/desktop view you can click to read the piece without being a paid subscriber. Try privacy/incognito mode to avoid cookies. Consider subscribing if you read them a lot!1

Public won’t be told to curb energy use after No. 10 reportedly objects – BBC

Panmure Gordon: lower gas prices cuts 40% from cost of price cap [Graph] – via Twitter

Fitch cuts UK’s credit rating outlook to negative, citing fiscal risk – Business Standard

“Uninvestable” UK market loses £300bn in Liz Truss’s first month – Bloomberg via Yahoo

Property sales collapsing at the fastest rate since the pandemic – Yahoo Finance

“Kicking myself I didn’t move faster”: fear and panic grips the house market – Guardian

Products and services

UK mortgage rates are soaring. What can you do? – Guardian

Time to give annuities another look as rates rise 50% – ThisIsMoney

Aldi was the cheapest supermarket in September – Which

Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor

In the US, an Inverse Cramer ETF will enable you to bet against the pundit – ETF Stream

Do higher rates mean it’s time to switch to fixed-rate savings accounts? – ThisIsMoney

11 ways to save on heating bills this winter – Which

Pretty mews homes for sale, in pictures – Guardian

Comment and opinion

Time for investors to learn a new game [Search result]FT

Brighter prospects for bonds ahead – Vanguard

What the money is for – Of Dollars and Data

Terry Smith: who is to blame for the latest pensions debacle? [Search result]FT

Spending for happiness starts at home – Humble Dollar

Timing the stock market versus timing the bond market – A Wealth of Common Sense

All about TIPS: real returns and inflated expectations – Portfolio Charts

Avoiding failure versus achieving success – Banker on FIRE

The intersection of financial and longevity planning – Humble Dollar

The future of indexing, governance, and financial technology [Podcast]Morningstar

Equities: a wolf in sheep’s clothing [Nerdy]Elm Wealth

Building a better CAPE ratio [Deep, nerdy]Early Retirement Now

Invest now mini-special

The Investor Opportunity index hits a two-year high – The Reformed Broker

Rethinking risk – Jack Raines

Why fear is good – Compound Advisors

Was that the bottom? – The Irrelevant Investor

Hedge fund managers are feeling confident, especially in the UK – Institutional Investor

Naughty corner: Active antics

Global venture capital pullback is dramatic in Q3 2022 [As expected]Crunchbase

Thinking about the next Warren Buffett – Neckar’s Minds and Markets

Growth investing ain’t about the rates [Free registration required]GMO

What are UK public market metrics signalling about our economic prospects? [Thread] – via Twitter

Fed ripping off the inflation band-aid – Investing Caffeine

Covid corner

More than one million in the UK report Long Covid a year after infection – Guardian

Who can get a booster jab this autumn? – BBC

Kindle book bargains

Mastering The Market Cycle by Howard Marks – £0.99 on Kindle

Go Big: How To Fix Our World by Ed Miliband – £0.99 on Kindle

Talking To My Daughter: A Brief History Of Capitalism by Yanis Varoufakis – £0.99 on Kindle

My Life, Our Times by Gordon Brown – £0.99 on Kindle

[Amazon is behind the progressive tilt this month, not me. Maybe it’s seen interest spike with the political travails?]

Environmental factors

UK defies climate warnings with new oil and gas licences – BBC

Want to save the oceans? Stop recycling plastic – i News

A moonshot for coral breeding was successful, but there’s a snag – Hakai

Off our beat

Five short stories about expectations – Morgan Housel

How Russia’s war in Ukraine might end… – The New Yorker

…and how it is continuing – BBC

Can longtermism save us all? – Slate

Lunch with Elon Musk: “Aren’t you entertained?” [Search result]FT

The 2022 crash has taken its toll on financial influencers, but spam has replaced them – M.I.

Why do you like the music you like? Science weighs in – The Washington Post

And finally…

“For all that has recently been said about ‘the wisdom of crowds’, the authors prefer to fly with airlines which rely on the services of skilled and experienced pilots, rather than those who entrust the controls to the average opinion of the passengers.”
– John Kay, Radical Uncertainty

Like these links? Subscribe to get them every Friday! Note this article includes affiliate links, such as from Amazon and Interactive Investor. We may be compensated if you pursue these offers, but that will not affect the price you pay.

  1. Note some articles can only be accessed through the search results if you’re using PC/desktop view (from mobile/tablet view they bring up the firewall/subscription page). To circumvent, switch your mobile browser to use the desktop view. On Chrome for Android: press the menu button followed by “Request Desktop Site”. []
{ 46 comments… add one }
  • 1 Factor October 8, 2022, 11:03 am

    Truss – a surgical appliance worn to support a hernia!

  • 2 Hariseldon October 8, 2022, 12:05 pm

    Lots of bad news, the financial mood is quite poor but in itself that sets the stage for recovery.

    The gloom is what effectively rate rises aim to achieve in an aim to reduce inflation expectations… Although a lot of this is accidental caused by the governments ‘communication missteps’

  • 3 Al Cam October 8, 2022, 12:39 pm

    IMO, Terry Smith article is a good read.

  • 4 cttw October 8, 2022, 2:04 pm

    @Hariseldon – ‘Sets the stage for recovery’ – Yeah, but it would help if we didn’t keep unnecessarily shooting ourselves in the foot – it’s not incumbent on the Govt to make things worse than they need to be.

    Is it too much to ask to have a Govt with the wherewithal to maintain some macro stability and get the nuts and bolts of the economy working well?

  • 5 xxd09 October 8, 2022, 2:19 pm

    Obviously the current politicians in charge (Conservatives)are getting in the neck as they should
    However the shambolic opposition thankfully now led by a semi credible leader hardly inspires much confidence
    Then try living in Scotland!
    What to do ?
    Pungent continual scrutiny is the only way ahead and eventually politicians of some ability will appear otherwise much trouble ahead especially if the situation continues in this sad mode for many years

  • 6 Brod October 8, 2022, 2:56 pm

    Well, just glad we’ve paid our mortgage off.

    No fancy-Dan investing to pay-off to the mortgage and live high on the excess returns here thank you!

    Now, long duration bonds at 6%? (Of course, when they reach 6%, I’ll probably want to wait for 7… or maybe 8???) But not Gilts, I think.

  • 7 Matt October 8, 2022, 4:17 pm

    Extremely shameful to see Monevator posting pro-Russian comments on twitter. Have unsubscribed.

  • 8 The Investor October 8, 2022, 6:06 pm

    @Matt — Are you prepared to see London destroyed in a nuclear war so that Ukraine can try to keep its territorial integrity? (And in fact regain Crimea, which is its current settlement aim?)

    If not, then you accept that as in 1945, 1962, 1973, and at many other times in history we will have to make squeamish compromises to de-escalate.

    Anyone who knows history knows this is extremely normal. Why do you think the Soviet Union ended up with half of Europe? To give just one of innumerable examples.

    I’ve supported full sanctions and military support for Ukraine since the start. I continue to do so.

    And I haven’t owned Russian assets for a decade (not even passively) because I was actually alert to what Russia was before it was fashionable to change your icons on social media:


    But my position on the danger of nuclear conflict has also been pretty consistent since February:


    This danger is escalating. Listen to Biden if you don’t believe me. Do you think he and his advisers shout down anyone who says we need to find a non-Armageddon way out of this mess? Let’s pray not.

    As for being tough on Russia, I’ve been urging it for years privately and occasionally in public forums, for example lambasting Germany for shutting down both its nuclear power stations and its coal industry many years before 99% of people gave a crap.

    You win these geopolitical battles over decades, not on social media.

    If anyone else is wondering whether they should unsubscribe because I have a different point of view to them on nuclear war, here’s the single offending Tweet — a reply in a comment thread — where for the record I say (of course) that I condemn the Russian invasion:

    Intransigent positions on the culture wars or where rates should be are one thing.

    Quite another not to understand shades of grey when confronting an enemy with 6,000 nukes.

    Of course I condemn the Russian invasion. We should have got tough a decade ago.


    Everyone is entitled to their opinions. Including me.

  • 9 Andrew October 8, 2022, 7:08 pm

    I’ve just been stress testing my mortgage, which ends in mid 2027:

    My stressed scenario:
    – By mid 2027 our house is worth 20% less than today.
    – I’m remortgaging in 2027 at 8%
    – I earn no bonuses between now and then, and only achieve a 2%/year base pay rise.
    – I am able to save and invest £X/month now without compromising pension savings.

    In this scenario, if I take every penny of the £X/month saved over the next four and a half years, and every penny of any increased income, and put it toward paying down the mortgage, I could still maintain a 85% LTV at a mortgage rate of 8%

    This is my “FIRE is dead” scenario, where the £X/month I’m saving goes to zero.

  • 10 Wephway October 8, 2022, 11:12 pm

    @Hari Seldon, I wouldn’t be so sure, it seems we’re going through the first major economic aftershock of the pandemic, ie high inflation. However unemployment has been mercifully low, so far. I work in the risk function of a major bank and we haven’t seen increasing numbers of customers going into collections/forbearance this year and it seems the main reason is that people are scraping by, if they lose one job they’re able to get another relatively quickly. That will likely change soon though, while we’re all focused on the effect of interest rate rises on mortgages, the effect on loans to businesses could be much more damaging to the economy. As businesses delay or halt investing that will have a knock on impact on jobs. Increasing unemployment will have a much bigger impact on the economy, house prices and so on than inflation has had (though it’s all linked really). It doesn’t help when an incompetent government starts exacerbating inflation with tax giveaways to the rich, causing chaos and confusion and forcing the BofE to raise interest rates further. But basically I think there are further aftershocks to come and stagflation is a very real possibility. I do believe the next big house price crash won’t come next year, but in 2-3 years time. Of course economic forecasting is a fool’s game, so I could be wrong! I would just be hesitant about declaring a recovery any time soon.

  • 11 EarlyRetirementNow October 9, 2022, 12:40 am

    Thanks for the mention. I take the “Deep, nerdy” moniker as a badge of honor. Also happy to see that Haghani’s “Equities: a wolf in sheep’s clothing” made your list. I get that newsletter, too. That’s always worth reading!

  • 12 Boltt October 9, 2022, 7:55 am


    I must have missed the comment saying you’d bought – congrats, enjoy the highs and lows of ownership

    With all the turmoil and uncertainty I’ve applied for a FTC after being “out” (no not that one) for nearly 7 years – I like money and being around bright people (BBlimp talked me into it, and the £500k IO mortgage)

    My daughter bought last year 1.6% fixed for 5 years – looking at her repayments v interest at the end of the 5th year she will have repaid around 17% of the mortgage (£180 to £150k outstanding) – the repayment schedule assumed a higher interest rate for the final 20 years. This will help many people on 5 year fixes but isn’t often noticed. Hope you’re 5 year fix was an sub 2%


  • 13 far_wide October 9, 2022, 8:17 am

    @TI I’m with you.
    I would feel much more assured seeing unpopular headlines about negotations with the Kremlin in the press than I am about seeing triumphant blow-by-blow battles and exploding bridges.
    Similarly when I read about sanctions biting in Russia and there being a very poor medium term future for the country, that doesn’t give me any great pleasure as it makes me wonder what they will choose to do instead when they feel there’s no good alternative.
    The really concerning thing at the moment is that it doesn’t seem like anyone is remotely in the mood for compromise, and Putin is losing the plot. Perhaps that’s all a very necessary (for him) show of supposed strength, but if he is still rational then it seems a strange choice to attempt to annex regions which he could shortly lose.

  • 14 mr_jetlag October 9, 2022, 8:33 am

    @Andrew v prudent modelling and probably more conservative than even your lenders would be undertaking. Best of luck with the 5 year plan.

    My own take on this is that relative to the broader population most on here would absorb 5-8% mortgages more easily, in the same way that we forget that a quarter of British households have no savings at all. I think the straw that breaks the economic camel’s back will be a combination of energy, house price crashes and continued £ weakness. This surely can’t go on…

  • 15 Andrew October 9, 2022, 11:11 am


    2.7%, but it’s not a done-deal yet, which is exactly why I’m running the numbers.

    The chain I was in previously was going cold with our mortgage offer expiry date looming. Another house we previously looked at, but couldn’t afford, came back to market. The people who won it (with a ridiculous bid) couldn’t afford post-fiscal-event interest rates. We’ve now started the process of moving our existing mortgage offer (secured in June) over. Fingers crossed, but I’m trying to remain emotionally detached… the pessimist in me says the bank will down-value deliberately to shake us off.

  • 16 Andrew October 9, 2022, 11:21 am


    It’s amazing how much comfort a spreadsheet can bring! I will have 5 annual reviews at work between now and the end of the mortgage deal, so plenty of time to make career adjustments if things aren’t shaping up.

    The nuclear option is to turn off workplace pension contributions entirely. This would put us well in to safe territory (with no monthly savings) of up to around 10%

    Unfortunately, even with a good 6 figure income, we can’t afford for my partner to stop working… so having kids in the next 5 years is going to be another hurdle.

  • 17 The Investor October 9, 2022, 1:54 pm

    @ERN — You’re welcome, and you’ve definitely taken that in the right spirit! 🙂 Monevator has quite a wide audience due to our eclectic mix of Keep It Simple passive investing basics, index fund esoterica, and my own adventures in active investing. Hence in these links I tend to put the deeper stuff in ‘Comment and Opinion’ further down the list and usually flag. I don’t want newcomers to think they need to dive into these deeper topics; they can get 80-90% to optimal without it. But I know our loyalist (nerdiest!) readers love that sort of stuff, including your work. Have a great Sunday!

    @Brod — Yes, as things standing paying off the mortgage is definitely getting much more attractive (or rather paying it off a year ago would certainly have been in hindsight). We’ll see where we are in another five years but at the moment it looks like that particular sequence of returns has gone against me. 🙂

    @Andrew — My fixed rate mortgage comes up for renewal in six weeks or so. As much discussed here over the past 18 months, I would have bitten the arm of anyone who let me lock in 1-2% for 5-10 years (assuming portable) and was amazed at people going onto two year fixes in case mortgage rates fell from 1.75% to 1.5% or whatnot. Sadly, however, the unusual circumstances around my mortgage mean I was loathe to upset the hornet’s nest with an early renewal application. I can imagine actually sitting on my banks SVR for six months or so as things stand, then reassessing. Anyway, on your point about reassuring modeling, I was stress testing at 6% and feeling jittery then realized I’d have see really dire returns or maybe live until well over 100 for me to really get into trouble. (Your 10% might be a different matter!) As discussed several times I’ve also created a ‘low volatility’ portfolio following my QT posts in Spring that admittedly hasn’t been exactly that the way long gilts have behaved, but still makes me rest easy versus the heavy lifting of repaying the capital (and reducing my interest only payments accordingly) if push came to shove. It’s important to appreciate as the landscape changes for sure, but also important to model things going right as well as wrong. 🙂

    @Wephway — Interesting thoughts. I’m very confident that if 5-10 year yields don’t come down soon and sustainably so then house prices are going to drop. The question is how much? The first cut will just see the recent froth come off. I agree we’d need to see unemployment as well as higher rates to cause deep damage. Basically enough to create forced sellers while simultaneously making buy-to-let even more unattractive. Interesting times, yet again. 😐

    @far_wide — This blog needs to open up a new front in the political wars of our time like a hole in the head 🙂 So I’ll just point to this thread, which does a good job of articulating my perspective:


    Thanks @all for reading and the comments!

  • 18 Hospitaller October 9, 2022, 2:26 pm

    I am wondering whether the US equities market will capitulate. It is making huge moves up (and then back down) as some investors assume the Fed will not stay the course on rate hikes (and then take on board at least for a while that they will). One can surely only do that so often before quitting the market. My best guess is that capitulation (and therefore some decent buying opportunities) will now happen by 2022 year end. Any views?

  • 19 Grouty October 9, 2022, 2:44 pm

    Long time reader, first time commenting. Thanks for all your articles, I think between this website, meaningful money and Lars Krojier you might have saved my sanity by showing that there is a way to get out of the rat race other than feet first, thanks.

    I liked the FT article by Terry Smith a lot. Sums up the issues with pension fund excessive risk (volatility) aversion being offset by complex financial engineering rather than placing confidence in the innovation of mankind very well

  • 20 The Investor October 9, 2022, 2:50 pm

    @Hospitaller — My best guess is it’s more or less happened. I expected US inflation to begin to properly rollover ‘soon’ (within the next three months if it hasn’t already). So many factors that drove the spike have come off now. Thanks to the bond drawdown the destruction of [edit: listed, i.e. not including property] global wealth is about twice 2008/2009 (though that’s not inflation-adjusted).

    That said US equities are still not exactly cheap. I think you can construct a case for fair value.

    Note that is my best *guess*. 🙂 Off the top of my head I’d say it’s about a 40-60% confidence guesstimate, with say 20-30% meaningful downside to come and 10-20% significant speedy upside, all over a short (1-6 months) timeframe. For significant upside we’d need inflation to rollover very fast and an unlikely speedy Fed pivot that is quick enough to keep the upcoming recession short and very shallow.

    As you know these things are unknowable though, it’s a guess, definitely not personal financial advice, and I reserve the right to think something different tomorrow. 🙂

    Certainly bearishness has been pretty high for months, though we’ve not seen a full-on loathing of equities (outside of disruption/growth, which is where I’m overweight so that may be a bias too).

    But I’ve never really seen full-on equity loathing in my lifetime as an investor. Maybe for a few weeks in late 2008.

  • 21 Learner October 9, 2022, 4:43 pm

    @TI, also bemused at Brits’ suspicion of long fixes. Here in the US every single homeowner I know has locked in 20-30 years at under 3%. Obviously that’s uncommon elsewhere but I can’t understand not fixing for as long as possible in the UK market. Is refinancing not possible, or some other barrier to change that makes it too committing?

    Somewhat related, I suspect these unprecedented loan terms are going to distort the US property market for decades. Who on earth would give up a 2% loan to switch to a 6% loan on their next home? Golden handcuffs loans will cause low turnover and low inventory.

  • 22 platformer October 9, 2022, 7:31 pm

    @Learner – The US mortgage is a very strange product. A 30y fixed rate US mortgage can be refinanced after 3 years at no cost. This is mandated by law through the Dodd-Frank act. That is the same as saying a US mortgage includes an embedded option (which is particularly valuable when rates are volatile).

    The US govt also subsidises rates given that Fannie Mae/Freddie Mac by law must acquire all mortgages originated by lenders that meet its broad criteria. They then securitise these mortgages and sell the resulting MBS into the capital markets while also guaranteeing the interest and principal (for a fee). As they are US govt sponsored, this is an implicit US govt guarantee on mortgages.

    Note US borrowers are still paying for their prepayment option as MBS investors demand higher rates (a spread to Treasury) as a result of the option existing. Not least because when rates decline, mortgages get prepaid and their duration declines precisely when their liabilities have also increased.

  • 23 BBlimp October 9, 2022, 7:33 pm

    @Learner – I was just in the US (poor timing on my part), and a bottle of generic shower gel was seven bucks and there were help wanted signs at every restaurant offering 18-22 bucks an hour !

    Lot of the commentators here believe high interest rates and inflation are a U.K. phenomenon.

    @Boltt – what a name check – enjoy ! Im in a management position now but used to supervise returners, and they absolutely ‘secretly’ loved it. Often on reduced and/or compressed hours and often at (in some cases much) less demanding roles than they left at but there is definitely value to be had in work. It makes little sense, when you think about it, to cap universal credit hours the way we do, when work is fulfilling and rewarding.

  • 24 Mousecatcher007 October 9, 2022, 8:31 pm

    Thanks to the obvious I’m fretting about bonds. The conventional wisdom hitherto is that your high quality bond exposure should be in or hedged to the currency that matches your liabilities. So GBP for most of us. I am now sorely tempted to make a strategic change and unhedge 50% of my bonds. But am I listening to noise rather than signal? Quandry!

  • 25 Learner October 9, 2022, 8:32 pm

    @platformer, thanks I didn’t know that the refinancing policy was built into it as well. That’s a pretty key part.

  • 26 The Investor October 10, 2022, 9:13 am

    @Mousecatcher007 — We have a big bond article coming tomorrow. However that’s about yields not hedging

    Presume you saw Finumus’ article a couple of weeks ago? The comments are worth a read too:


  • 27 Wephway October 10, 2022, 9:48 am

    @TI, if the 18 year property cycle is correct (a big if, though there is 300 years of data to back it up), then we’re in for mad house price gains that don’t make sense over the next few years, peaking in 2025, followed by a big house price crash from 2026-2030. Which seems unlikely at the moment but then no one thought house prices would rocket up when the pandemic hit and that’s exactly what they did.

    Never underestimate a government’s temptation to meddle in the housing market, I could see the next chancellor (I can’t see Kamikwasi lasting long) bringing in measures next year that will inflate house prices, in time for the next election. In the past the only times the 18 year property cycle has been disrupted is when there has been a very major shock, eg WWII. It remains to be seen whether Brexit/Covid/Putin can have that sort of effect on our bonkers housing market.

    One other exception, during the last big recession (ie 2008 onwards) house prices in London kept going up due to it being seen as a safe haven for foreign investors. House prices did drop in the rest of the country though.

    I bought my first house in 2013 in Northampton for £162.5k, the previous owner bought it in 2007 for £172.5k. I worked out if the house had kept track with general inflation from 2007 it should have been worth £208k in 2013, so they made a £35k+ loss when they sold it to me. It’s now worth over £300k, possibly £325k looking at other similar houses being sold nearby. Not trying to boast or anything, I was very lucky with my timing. If the house had kept track with inflation since I bought it, it would only be worth about £205k now.

  • 28 Mousecatcher007 October 10, 2022, 1:48 pm


    Thanks for the reminder about the Finumus link

  • 29 SemiPassive October 10, 2022, 6:38 pm

    Wephway, I think 6%-7% mortgage rates are such an extreme move they will bring any property cycle forward, so 2022 will have been the peak.
    I can’t see any way we don’t get a 20% house price crash/correction over the next 2 years as people roll off fixed rate deals and first time buyers will be hit straight away. Lender valuations will already start to be marked down from this month which will accelerate as banks aim to limit their exposure.
    The housing market will turn much quicker than the typical oil tanker pace of previous downturns, given the magnitude of all the headwinds.

    Looking forward to the forthcoming bond article. I bet there will be a few last minute edits given today’s movements. Longer Gilt yields exploding again, 2/10 yr has un-inverted, and mnay GBP income-producing asset classes seem to be being re-rated accordingly (corp bonds, infrastructure, REITs etc).
    And it isn’t even the end of the week yet. It seems the market isn’t even going to wait for the BoE to stop making gilt purchases on the 14th Oct. Which begs the question will the 10 yr, 20 and 30 yr all top 5% this time next week if they are this high already.

    If so the BoE will almost certainly have to extend the gilt buying or some other massive liquidity injection using gilts as collateral to stop the LDI based pension schemes from blowing up.

  • 30 BBlimp October 10, 2022, 6:44 pm

    Wephway – completely wrong. I bought in Sep 2007 in London so would know.

    Sep 2007 £298,414
    Oct 2007 £298,559
    Nov 2007 £297,648
    Dec 2007 £297,994
    Jan 2008 £298,596
    Feb 2008 £295,700
    Mar 2008 £293,605
    Apr 2008 £294,346
    May 2008 £295,163
    Jun 2008 £290,100
    Jul 2008 £290,261
    Aug 2008 £281,721
    Sep 2008 £276,487
    Oct 2008 £266,999
    Nov 2008 £258,647
    Dec 2008 £253,881
    Jan 2009 £253,093
    Feb 2009 £249,847
    Mar 2009 £247,264
    Apr 2009 £245,351
    May 2009 £249,991
    Jun 2009 £253,596
    Jul 2009 £259,793
    Aug 2009 £262,076
    Sep 2009 £267,501
    Oct 2009 £268,780
    Nov 2009 £266,837
    Dec 2009 £270,118
    Jan 2010 £279,724
    Feb 2010 £278,753
    Mar 2010 £280,472
    Apr 2010 £281,981
    May 2010 £281,762
    Jun 2010 £284,541
    Jul 2010 £292,772
    Aug 2010 £290,641


  • 31 The Investor October 10, 2022, 7:20 pm

    @SemiPassive — As I noted on Twitter today, I think it is because the BoE has effectively signaled it is NOT doing QE-New despite what the market was hoping. The new mechanisms seem designed to stop market instability rather than higher yields post-Friday. Link to BoE details via my Tweet here:


    @Wephway — As SemiPassive says, I think if rates stay up 6-7% there will definitely be some kind of correction whatever a cycle suggests. Buying power via a mortgage will have been severely curtailed; only a third of a UK households run a mortgage, but I imagine its well over 90% of new buyers who are mostly setting prices at the margin (which are then rippled up the chain). I am sympathetic to the idea that an interaction of the credit cycle and human emotions (/generations) can drive some sort of very general long-run cycles, but you have to take any prediction of where we’d be in any specific 2-3 years position in such a cycle a massive grain of salt if it was made, say, a dozen years ago… (as an 18-year cycle would suggest…)

    With all that said I doubt rates will stay at 6-7%. My best guess is inflation will roll over, slower globally in the UK due to ‘reasons’ but even here, and that sustained higher rates of even 5-6% will probably start doing more of the heavy lifting for the bank on any domestic demand drivers.

    With that said inflation has been much more persistent than I expected, so my whole read will be off. But then that brings us back into property correction territory, which is a sort of self-fulfilling (/correcting) prophecy.

    Interesting times.

  • 32 Jonathan B October 10, 2022, 8:51 pm

    @TI, “inflation has been much more persistent than I expected”. I suspect you are impatient.

    Since inflation is measured on an annualised basis, it would take 12 months for a step change in prices to no longer contribute to headline inflation. In practice there isn’t usually a single inflationary event but something of a continuum.

    Even so my guess is that the supply chain issues following Covid began to relax in late autumn 2021, so one component will start to drop off a direct effect. The energy cost effects of Putin’s invasion will have had their highest effect in the first couple of months, so that direct effect will reduce some time next Spring. But both have created secondary inflation with a delay, and that component will decline rather more slowly.

    My frustration is the Bank of England assuming increased interest rates will control inflation – how on earth are they going to affect those historical supply chain issues, or Putin’s ego? The only thing they might rein in is house price inflation where cheap loans have surely been a factor, but there is a risk of destabilisation if interest rates rise too far too fast.

    But having said that, I can see why many economists would prefer interest rates to be roughly the same as inflation and if the current problems get us back to that there may be more effective monetary levers for the future.

  • 33 Wephway October 10, 2022, 9:13 pm

    @BBlimp, not ‘completely wrong’ actually, though thanks for your constructive tone. Yes okay there may have been a short dip in house prices in London but they were back up to where they were fairly quickly unlike the rest of the country which saw a much deeper and longer crash. The 18 year property cycle would suggest house prices shouldn’t have started to recover until 2012 (and then only slowly) which is correct for the rest of the country, as my example showed. But in London they carried on going up (short dip aside), almost as though the Credit Crunch hadn’t happened.

    @Semi Passive and TI, agreed, the sudden changes in interest rates may bring about a crash sooner than predicted, though I do think it is only one side of the coin, ie the demand side. In terms of supply I expect people will just stop putting their houses on the market if they don’t think they’ll get the price they expect, the market will slow to a crawl, and then it’s only where people are forced to sell that will push prices down. At which point I go back to my earlier observation that unemployment is still very low and I don’t see a sudden rise in people needing to sell up. And I don’t think interest rates of 6-7% will necessarily force people to sell, as I say I work in a bank and speaking to people who work on mortgages they’re pretty confident their customers have the affordability headroom to manage increased costs (though maybe that’s just my bank). I suspect as well the government will do something to prop up prices.

    Anyway, I don’t disagree there will be a correction, but 20% next year? Seems unlikely to me.

  • 34 Seeking Fire October 10, 2022, 9:17 pm

    I cannot recall ever seeing this YTD performance in a UK Gilt. Admittedly one of the index linked variety and extremely long dated. But the price decline is quite something to behold.


  • 35 BBlimp October 10, 2022, 10:16 pm


    Peak to trough fall c.Sep 2007 to c.March 2009;
    London 16pc,
    West of England 19pc,
    East of England 19.7pc.

    I wouldn’t characterise that as a ‘much deeper’ crash.

    Same source as before.

  • 36 Wephway October 10, 2022, 11:04 pm

    @BBlimp, sure but look at those graphs, the East of England is flat for several years, only starting to recover around 2013/4, whilst London has a short dip before continuing it’s upward trajectory. And as I say, the longer the flatline, the further house prices fall relative to general inflation.

  • 37 The Investor October 11, 2022, 8:21 am

    @Seeking Fire — There’s no liquidity in INXG or IGLT this morning, which is pretty remarkable for £1bn passive ETFs tracking a c. £2 trillion market.

  • 38 The Investor October 11, 2022, 8:27 am

    @Jonathan B — You may be right. 🙂 I always try to remind myself when I look back at historical periods that a couple of years *feels* longer to live through than on a graph. (We surely learned that lesson through the worst of the pandemic…) Perhaps part of my seeming impatience though is I’ve been tracking inflation for far longer than most people / media.

    Hard to remember now but this post discussing inflation was published at a time when inflation wasn’t on everyone’s lips…


    …though that didn’t last long (mid-March)…


    My read on inflation came through company reports. Firms had been battling supply chain issues and supplier price volatility for at least twelve months.

    Especially at the raw end (commodities) much of that has passed now and indeed if it weren’t for Russia/Ukraine I think we’d be dealing with maybe just 3-5% already. 😐

  • 39 The Investor October 11, 2022, 8:42 am

    p.s. Remarkable to see the prospect of a ‘fire sale’ raised in a Bank of England release this morning:


  • 40 xxd09 October 11, 2022, 9:30 am

    Appeasement is such an interesting political policy
    One of the last times we saw this was before the Second World War where Hitler wasn’t stopped in his tracks
    Eventually his bluff was called but too late to stop a world war happening
    With the Cold War-the first time the Russians played the nuclear card their bluff was immediately called by a generation whose parents had been through a war and had an arguably stiffer backbone than today’s population
    (I was there as a student and lived with 3 minutes warning but backed the bluff calling policy-if I noticed it much-callow youth!)
    Politicians who act like Boris ie arm Ukrainians immediately are not popular and indeed he was duly thrown to the wolves over relatively minor peccadilloes
    However not facing down bullies has a price as indeed does facing them down
    The lessons of history seem however to have been learned by our current European leaders and backing Ukraine now will save us all from having to doing the job later more expensively down the line

  • 41 The Investor October 11, 2022, 9:42 am

    @xxd09 — Boris Johnson wasn’t thrown out for arming the Ukranians. In fact that policy had wide-ranging support, including cross-party in parliament.

    He was thrown out for several years of continual untruth (not least over Brexit though this wasn’t his political undoing) culminating in weeks where he was changing his stories literally daily (parties etc) only as photos came out that forced him to change them.

    Even the vast majority of MPs in his own party in Parliament (a cohort already purged of more liberal elements) could see by the end that he was unfit to govern the country.

  • 42 xxd09 October 11, 2022, 10:59 am

    My only point was that a “leader” is often initially very unpopular-decision making has that downside
    We would all wish for a saintly leader pure in mind and body to take us through crises but saints are often considered figments of the imagination by many people so for better or worse we are stuck with the rather fallible politicians available
    The current fevered climate of “goodness” relentlessly patrolled by social media etc will continue to discombobulate us all till reality takes over in its own brutal way (with the poor suffering the most as usual )
    We humans are a funny lot!

  • 43 The Investor October 11, 2022, 1:55 pm

    My only point was that a “leader” is often initially very unpopular-decision making has that downside

    I disagree. You linked the discussion of Russia and unpopularity with Boris Johnson, and your post implied the reason ‘he had to go’ was because he made a tough and unpopular decision.

    Whereas in reality as I say Parliament supported his Ukraine-related decisions, and in fact he would often make more statements about Ukraine to deflect from domestic issues at home. (The timing was uncanny).

    And those ‘issues’ were not typically unpopular decisions, either. They were the consequences of his latest mendacity.

  • 44 xxd09 October 11, 2022, 3:05 pm

    I think we must agree to respectfully disagree!
    That’s what debate is all about
    Then leave it to the voters!
    Thanks for the opportunity to punt different views and ideas about-that way “truth” emerges kicking and screaming into the day light-hopefully!

  • 45 Always Late October 12, 2022, 12:37 pm

    Thank you for posting the tax table from @TA regarding threshold freezes. Interesting when we mentioned this in the mini(major) budget thread many were/are expecting the government to increase these thresholds without, as far as I could tell, any evidence at all. Any sign of that happening yet, people? I guess we have to wait for that more comprehensive Kwasi address. I for one would like to see @TA’s article and calcs, especially when those thresholds might be frozen for quite some time with, say, 10% inflation.

  • 46 The Investor October 12, 2022, 1:24 pm

    @Always Late — Well I would say I suspected he would raise them (I haven’t gone back and seen my exact language) in Spring. This was shortly after the Mini Budget, when the direction of intent had been signaled by the government but the reaction from the markets hadn’t yet been fully revealed / unwound. This suspicion was amplified when the Chancellor spoke on Sunday on Laura K on the BBC and said “there’s more to come”. I literally turned to my mother who I was staying with at the time and said: “pages will be written about that little phrase he just slipped in there”.

    However after the past fortnight I’d say all bets are off. Unless they come swinging for spending in an unprecedented way, it’s very hard to see how they could get away with it without roiling the market further and sending long-term rates higher still, which is obviously at odds with their stated pro-growth agenda.

    Note I’m not saying they’ve displayed an particular acumen at avoiding the roiling the markets so far (so who knows what they’ll do) and I’m not saying they should cut £100s of billions from spending. But ethics/morals aside, it would contribute to a ‘plan’ from the gilt market perspective.

    In short: everything is even more up in the air than usual. A time we should all hedge our bets and avoid anything super heroic IMHO. 🙂

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