What caught my eye this week.
Last week we debated the Mini Budget on Monevator in a couple of excellent threads of reader comments.
By Wednesday morning all that was out the window.
Any potential benefits to the new administration signalling a growth agenda or to its seemingly ill-timed tax cuts were moot. The gamble had already backfired.
The UK government bond (gilt) market was in meltdown.
Most of the headlines had focused on the weakness of the pound following Kwasi Kwarteng’s bolt from very blue.
But the impact on the gilt market was soon apparent.
Indeed as the week began I was tinkering with my ‘low volatility’ sub-portfolio I’d set up specifically to feel safer in what looked like being a choppy 2022.
Longer duration bonds – and a few proxies such as REITs – were sliding.
Time to nip and tuck?
But by Wednesday morning, my now ironically-named low-volatility basket was shedding value like sheets of snow slewing off a roof in the warming sun.
This was not supposed to happen – at this pace – with government bonds:
https://twitter.com/Monevator/status/1575034713869553664
It looked to me like forced selling and I doubted it could stand for long.
Was it, then, a chance to load up?
I was on the scent – pension funds were in difficulties. But my learning curve – and the slope the descent – was too steep for me to get confident about a wholesale switch into these supposedly super-safe assets. How bad would it get?
Then – even as I was giving myself a crash course in the ‘liability driven investment’ (LDI) hedging strategies behind the plunge – I saw the same index-linked gilt ETF was climbing.
Was I missing the boat? Had big investors stepped in?
Now it was motoring! The sheer pace made it clear I’d missed a ‘red headline’ on a Bloomberg.
So there I was just before lunchtime on Wednesday, when the Bank of England stepped in to save the pensions sector from imploding.
Where were you?
The doom loop
Like always with these events – from the Global Financial Crisis to September 11 to Pearl Harbour – there’s a paper trail you can follow with hindsight, after the worst has happened.
It turns out insiders had warned about the potential risk of a spiraling LDI crisis months ago.
For example, from the Financial Times in July:
LDI is big business, having more than tripled in size over the past decade, and the reason is simple — it helps funds manage the risks in meeting their pension promises for members, partly through derivatives.
But now funds are facing calls from counterparties to put up collateral to fund those trades. The sums are potentially huge and asset sales to meet the calls could have a knock-on effect to markets such as equities.
Of course nobody paid much attention.
UK politics has been quietly mullering the economy for years, but it hadn’t yet crystalized in a drama that stood apart from the fug of lockdown. The damage was real, but diffuse enough to dismiss pre-Brexit concerns as scaremongering. Yields were rising, but that was a global thing.
But this time was different. What Rishi Sunak had warned would happen in his debates with Liz Truss had started before Kwasi Kwarteng had barely stopped talking.
Confidence was shot, and investors started to mark down British assets.
And through the hedging strategies of pension funds, there was a mechanism for shit to get real, quickly.
You’ve probably had your fill of explainers over the past few days. This was one of those weeks where our little corner of the Internet becomes front page news. (Honestly, it never happens if Egyptology is your hobby.)
But in short: in less febrile times pension funds hedged away the risk of prices moving against them – and impacting their ability to fund their liabilities – with derivatives. These hedges were backed with collateral, including but not limited to gilts. As gilt prices fell they triggered margin calls, which to some currently unknown extent prompted more gilt selling. That drove gilt prices lower. Causing more margin calls. You get the picture.
I haven’t seen anyone else make the comparison yet, but what this most reminds me of is the 1987 stock market crash.
That year’s short, sharp plunge was blamed on portfolio insurance strategies. Again they were meant to protect against declines that they were afterwards blamed for accelerating.
Of course the 1987 crash was in equities – where we’re all ready to shrug our shoulders and say it happens.
Not in the ‘safe’ gilt market, which is meant to be the bedrock of the financial system.
We’re all in it together
Yet for all the drama of a highly-rated government bond market in meltdown, even a crash of this magnitude is not truly surprising to me.
As long-term readers know – and have suffered – like others I’ve been warning about the political direction of travel in the UK for years. That it’s finally culminated in something like this is arguably a feature not a bug of the narrative’s fairy tale thinking, to borrow Sunak’s phrase.
Even for markets generally, it’s almost surprising it took so long for something to really break given the regime change of 2020.
As I wrote in April when high inflation had started to cause ructions in student loans:
I’m surprised we haven’t heard about massive financial blow-ups yet, given the pace of developments.
Another one ticked off the To Do list.
I also warned about quantitative tightening back in February, of the likely hit to retirement plans, and urged readers to stress test their mortgages even as others celebrated a return to double-digit house price inflation.
I’d argue Monevator was ahead of the curve on all that. Yet a fat lot of good it’s done me personally, so fast have things gone off the rails.
Hitherto you could kind of wave away the cost-of-living crisis if you had sufficient funds to put the heating on without a care and to do your weekly shop at Waitrose.
It was awful, of course, to imagine families on the breadline without the money to heat their homes.
But you wouldn’t be personally much at risk.
Now though the realities of 2022 are becoming manifest for all of us.
Keep calm and carry on cutting
How will this all resolve itself in the weeks and months ahead?
Your guess is as good as mine.
But for starters, I suspect the pound ended the week strengthening not because the markets are suddenly smitten with Trussonomics – as the reliably-ludicrous John Redwood claimed on Twitter.
Rather, traders surely sense that – with Labour more than 30 points ahead in the polls and Tory backbenchers up in arms – we’ll see a personnel change and/or a row-back of policy.
Or, more frighteningly, an enormous axe taken to already-straitened State provisions.
As I said last week, I’ve nothing against lower taxes or even an aspiration to shrink the State, in principle. A long time ago I even voted Conservative once or twice.
I also agree Britain has a long-term productivity problem – plus now the self-inflicted wounds of leaving the EU. (Trade frictions, staff issues, higher inflation, and so on).
But even with a sympathetic read, the Mini Budget seemed to have its priorities mostly wrong. Especially with the relatively cheap but politically toxic scrapping of the 45% rate of tax.
One day, sure. But why now?
Meanwhile talk of supposedly game-changing supply-side reforms are just talk until November.
Add to the Budget surprises the government’s high-handed treatment of everyone from the civil service to the OBR to the Bank of England to the media, it’s not surprising investors took flight.
Something must be done to calm things a longer-term basis. Otherwise borrowing costs will go haywire, provoking a truly deep recession and making the UK’s debt burden a noose.
Just keep in mind that to reassure the gilt market, Truss and crew only need to show they understand Britain’s particular economic problems – especially its big trade deficits – and that Britain will pay its bills in a vaguely inflation-sensitive fashion.
The market doesn’t really need to care whether Truss and Kwarteng have a palatable project in mind.
Gilts trade in a financial market. They are not tallied up on a morality-weighing machine.
Which means a calming resolution here might be as ugly as the cause, for many people.
There’s talk, for instance, Truss could cut benefits in real terms to help balance the nation’s books.
More pain, more gain
Perhaps hard-right Tories would see bringing fire and brimstone to the welfare state as making the best of a crisis.
Time will tell.
However in the same vein of looking for a bright side in a car crash, I want to conclude by stressing there’s a silver lining to this bond market roiling.
I’ve been surprised recently how often people here and elsewhere are asking whether they should now dump their bonds.
I’d say that boat has sailed. On the contrary, from here on bonds may regain their place as a useful portfolio diversifier.
Because while bond prices have fallen further and faster than almost anyone anticipated – at least until the Bank of England stepped in – that has in turn driven up yields for new purchasers.
Clearly it’s easier for me to say this as a naughty active investor who came into 2022 with zero in gilts or Treasuries. (I have had swingeing losses on what I bought this year though, so do share some pain!)
But in the long-term, higher returns than they otherwise could have expected – at least compared to what were at worst nailed-on negative yields – will hold be for passive investors, too.
Lower bond prices are – eventually – beneficial to bond fund returns. Bonds will rollover and the money is reinvested into higher-yielding issues. These deliver more income bang for your buck in future years.
Again, this sea-change has been fast and dramatic.
The 30-year index linked gilt yield-to-maturity (YTM), for example, was negative 2% in December 2020. You were paying the government to inflation-protect your capital.
But the sell-off sent its yield above 2%. You could lock in a 2% real return if you wanted.
That seems attractive right now. Will it amount to much in the years ahead? As ever we cannot know. But it’s certain that positively growing wealth is a lot better for your portfolio than an asset priced to eat it.
It’s a similarly remarkable story with the 10-year vanilla gilt yield:
We are back to pre-2010 levels here.
Again, 4.1% doesn’t seem amazingly attractive with inflation running near-10%, but that shouldn’t last. Moreover there’s now some yield firepower to buffer a portfolio again, should equities fall.
And the 10-year gilt yield was as high as 4.5% before the Bank of England intervention.
It ain’t over until it’s over
Incidentally, some people say the Bank is back to QE in trying to manage down longer-term yields.
I believe that’s wide of the mark.
The Bank of England has said its gilt buying is a temporary measure designed to restore market functioning. It’s even put a date on stopping the purchases.
To me the Bank clearly aspires to get pension funds enough time to fix their positions and then to let gilt yields go where they may.
And when that happens, prices could resume their fall, and yields climb again. Which would price fixed rate mortgages even higher, among other things.
Of course the Bank may be overtaken by events again. But the point is the same push-me pull-you dynamic that I cited last week (and that The Sunday Times paid, um, homage to) is still in place.
The Bank of England wants to raise rates to curb inflation. Meanwhile the government (so far) has only announced extra borrowing and tax cuts.
The first tightens money. The second is loose. Something has already given. There’ll surely be more drama to come.
A few follow-up reads:
- Seven days that shook the UK [Search result] – FT
- Who exactly has the BoE bailed out? [Search result] – FT
- “I’d never seen anything like it”: market turmoil sparked a pension sell-off – Guardian
- The liquidity haves and have nots – Bond Vigilantes
Oh and while this week’s acute crisis was of the government’s own making, it’s true that the sell-off in bonds in 2022 has been historic globally:
That’s a lot of pain to go around.
It’s all go
Lastly, a housekeeping note.
Readers who peruse Monevator via mobile may have found they couldn’t read our new passive investing guide on their phones this week.
The special mobile theme that we were using didn’t render the page properly.
That theme delivered a lovely browsing experience on mobile and I know some of you loved it. But it has been causing problems for years now.
So we’ve decided to turn it off. Instead, the standard responsive Monevator theme will now load across all devices.
Sorry if you regret the change. But please do check out the passive investing guide – and forward it to your family and friends! It’s really comprehensive.
Have a great weekend everyone.
From Monevator
Our new guide to passive investing in the UK – Monevator
Don’t currency hedge your portfolio – Monevator
From the archive-ator: How Andy Warhol’s loft living sowed the seeds of risky buy-to-let investment – Monevator
News
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
UK not in recession, but economic output still below pre-pandemic levels – BBC
House prices are stagnant for the first time since mid-2021, says Nationwide – Yahoo Finance
What will the end of IR35 reforms mean for contractors? [Search result] – FT
Banks still failing fraud victims in three-quarters of cases – Which
Porsche roars onto the market with a £70bn float – ThisIsMoney
The Tories have become unmoored from the British people [Search result] – FT
Products and services
Liz Truss wrong to claim no family will pay more than £2,500 on their energy bills – Full Fact
The best savings accounts you can open with just £1 – Which
Open a SIPP with Interactive Investor and pay no SIPP fee for six months. Terms apply – Interactive Investor
What the falling pound means for your holidays, mortgage, pensions, and more – Which
Open an account with InvestEngine via our affiliate link and get £25 when you invest at least £100 (new customers only, T&Cs apply) – InvestEngine
First-time buyer homes under the new stamp duty bands, in pictures – Guardian
House price and mortgage pain mini-ish special
Mortgages withdrawn in record numbers over rate rise fears – BBC
UK house prices may fall 20% amid ‘mortgage carnage’, warn experts – Guardian
What are the best mortgages still left on the market? – Which
Mortgage lenders buoyed by Bank of England intervention [Search result] – FT
Buy-to-let landlords facing financial cliff edge after the Mini Budget – Guardian
What are your options if you can’t pay your mortgage? – ThisIsMoney
“We will likely lose our dream house because of Kwarteng’s actions” – Guardian
Comment and opinion
How your financial stories can get in a plot twist – Humble Dollar
After the harvest – The Belle Curve
Save the savers – Humble Dollar
Why you shouldn’t optimise your life – Of Dollars and Data
The thrill of the trade – Morningstar
Something has to hurt – Behavioural Investment
Mistakes – Indeedably
Reaping the whirlwind: a September 2022 inflation update – Musings on Markets
Income and happiness mini-special
Tim Harford: How much money will actually make you happy? [Search result] – FT
Too soon? Retiring on just $650,000 at age 29 – Financial Mechanic
Beyond a certain pay level, respect at work is the main driver of job satisfaction – KoI
Crypt o’ crypto
Disney is hiring ahead of an ‘aggressive’ push into NFTs and DeFi – The Block
Naughty corner: Active antics
Have US stocks become cheap? Definitely maybe – Morningstar
Stanley Druckenmiller: the #1 investor in the world [Podcast] – Apple
Why 40-year-old hedge fund managers feel old… – eFinancial Careers
…though at least the A.I.s aren’t rivals yet – The Evidence-based Investor
The UK investment trusts trading at unusually wide discounts – Trustnet
Kindle book bargains
Winners: And How They Succeed by Alistair Campbell – £0.99 on Kindle
The 5 AM Club: Own Your Morning. Elevate Your Life. by Robin Sharma – £0.99 on Kindle
How To Own The World by Andrew Craig – £0.99 on Kindle
Quit Like A Millionaire: No Gimmicks, Luck, or Trust Fund Required by Kristy Shen – £0.99 on Kindle
Environmental factors
Bluefield Solar Income Fund: full-year results – DIY Investor
Urban greening can reduce the impact of global heating in cities, study finds – Guardian
Britain’s energy mess [Podcast] – A Long Time In Finance
Off our beat
Engaging with history – Morgan Housel
A Ponzi scheme by any other name: the bursting of China’s property bubble – Guardian
Does Arthur Brooks have the secret to happiness? – GQ
Days since the incident [Data] – Neal.Fun
Annie Duke: quitting is underrated – MSN
How Guatam Adani became the world’s second-richest person – SatPost
Cats give the laws of physics a big stretch – The Atlantic
And finally…
“Investors who play the earnings expectations game are likely to lose because short-term earnings do not reflect how the market prices stocks.”
– Michael Mauboussin, Expectations Investing
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The Monevator Team have been excellent the past week or so- several informative and extremely topical posts.
Keep up the good work,
Lee.
Ditto – as ever, great posts. But in a pedantic mood: ‘weeks’ not ‘week’s’, and ‘straitened’ not ‘straightened’ ….. (strait = narrow / straight = not curving. As I’m sure TI knows but perhaps some readers don’t).
@Tyro — Indeed. Yes, I had to rush my proof reading this week as my ‘quick 500 word intro’ grew and grew. Sadly unlike my co-contributors I only have readers to point out the typos. 🙁 (Thanks for doing so.)
@Lee — Cheers!
I’m fortunate enough to have a DB pension that should cover half of our retirement income meaning I don’t hold bonds in my portfolios – so I was spared the worst if the Kwarnage from last week.
On the flip side, my mortgage is up at the end of the year and the best rate offered by my provider is now 5.14% up from 3.69% last week and 1.79% that I have at the moment.
We are least have options but for millions who are house rich, asset poor and mortgaged to the hilt – it’s a looming disaster.
“Let them eat cake” might be the government response
Good explanation. IMO, LDI per-se is not the issue but rather the hedging and leverage. I discussed this briefly with ERN a year ago, see comments to part 48 of his SWR series!
“Or, more frighteningly, an enormous axe taken to already-straightened State provisions.”
Judging from the very recent headlines I have been reading, it looks like this government is already going along this austerity path.
After all this turmoil, I was preparing myself for large paper losses this week as I checked my total portfolio valuation. I was surprised to find that for the first time in a while it went up by a tiny bit in USD: 0.75% compared to last week. In sterling, on the other hand, it’s down 1.41% compared to last week.
what a week. It confirmed my thoughts that an asset allocation for UK = 8% (everything, overall) is sensible. the advice to diversify globally has great merit. I’d like to think market capitulation is approaching sooner rather than later. This too shall pass. but wtf?
A good summary of a crazy week.
My portfolio holds some life insurers, so will be “interesting” to see how the LDI crisis affected them.
Unlike most around here, I only invest in individual FTSE All-Share stocks, so my UK exposure is relatively high at 60%. That isn’t necessarily a bad thing (UK dividend yields very high, after all) but given current circumstances, 60% feels a tad high. I think a 50% ceiling may aid my beauty sleep.
Self-confessed amateur in many things investing so I don’t understand the implications of bond market movements over the last week.
I’ve been investing monthly in Vanguard’s 60/40 and 80/20 Lifestrategy funds up till now. Is it wise to continue doing so or is that a question no one knows the answer to?
PS. The Belle Curve writes the best articles. My response to ‘the harvest’ – “But you knew there would always be the spring, as you knew the river would flow again after it was frozen. When the cold rains kept on and killed the spring, it was as though a young person had died for no reason.”
“So there I was just before lunchtime on Wednesday, when the Bank of England stepped in to save the pensions sector from imploding.”
Some say pensions wasn’t the reason for the BoE stepping in e.g. https://www.coppolacomment.com/2022/09/what-was-real-reason-for-bank-of.html
I am relieved I took lower returns the last two years and offset the entire mortgage. Financially worse off, mentally much better off with the way rates are rising.
@codemonkey — I don’t think that article is really saying anything different more than it’s just playing the consequences of market dysfunction forward a few more stops. It’s a good piece but be kind of throws away the comment that at one point there was no pricing for long gilts! This in itself is total market failure and more than sufficient reason for the BoE to intervene, regardless of who’d be the ultimate bag holder.
As I say in the piece LDI appears to have been the mechanism for doom loop. If it had been left to run its course who knows how far the damage would have run, but providing a buyer of last resort to enable LDI to get resolved without meltdown seems more than plausible cause to me.
@Ali
Who knows where bonds will go from here, but my guess is that prices will go lower bearing in mind 1) the stated aim of just about all central banks is to increase interest rates 2) that’s also the stated wish of Truss & Co and 3) the Bank of England’s market intervention to reduce the 30 yr gilt is only temporary. I don’t see anything telling us it’ll go the other way.
Perhaps that’s a buy signal though
Smel.
@TI: The link to GQ / Arthur Brooks points to Finumus’ currency hedging article (at least for me on mobile).
@mr_jetlag — Darn, thank you. Fixed now.
I suspect our financial woes will not truly come to an end until the “Conservative Party” is removed from power. There is something wrong, a dangerously populist/never mind the rules attitude, with this set of Conservatives. (Perhaps they are not actually Conservatives as we understood the term but took over the politically useful label as part of Brexit). Anyway, I would rather have the allegedly boring Starmer in place. I could definitely live with five years of boredom right now. And yes we have a productivity problem but no that budget was, I believe, absolutely not the answer. Try building decent rail links between Oxford and Cambridge and between our large Northern cities.
It is quite possible, as you suggest, that there is more gilt turmoil ahead. Although I also suspect the BofE will find “technical” reasons to, in effect, intervene to somewhat mitigate that.
The yield spike was certainly “exciting”. I texted my friend travelling in Uzbekistan to congratulate him on living in a more developed country than me. Some weeks ago now, I started dripping money into the gilt market and accidentally bagged an extraordinary yield (30 year at 5%?). Yippee. I started that pretty much daily drip feed because I had no gilts (have been doing the same for longer with US government ten year bonds). I think these may be helpful for protection in volatility some time in the future.
It’s far right to want to raise benefits in line with earnings ? At a time there are more vacancies than Job seekers ?
Is it genuinely kind to people to keep them in benefits dependency ? I guess on a fire website there will be a lot of people who hate their jobs, but most people are either ambivalent or secretly enjoy and get purpose from work, so would be good all round.
That guardian article on housing features a couple who live in an extremely expensive house being unable to upsize to an even more extremely expansive house because interest rates aren’t 2.5pc. I guess in making houses affordable against earnings there have to be winners and losers – funny how the guardian backs the asset rich over poor aspiring homeowners – I suppose, linking back to the above, they believe it’s kinder to pay the aspiring homeowners benefits then give them a chance at owning a home…. Champagne socialism indeed
@Hospitaller — Agreed. Like all of us these days, but to an extent that is especially reality-distorting, the right-wing Brexit Tories live in a bubble of self-reinforced cherry-picking. So for instance @BBlimp appears to have skipped over the week’s literally potentially economy-imploding travails — and indeed ignores the voter graphic from that notoriously lefty rag, the FT, which shows that yes indeed the current Tory party is very right wing, in the context of British politics (I didn’t say “far right”. I said hard-right of the Tories) — to instead highlight a Guardian article where he disagrees with a couple of people’s life choices, which they made like all of us under the assumption of vaguely stable government policy.
There isn’t a lot of self-reflection going on. Have a read of Twitter today. The Brexit-y Tory ideologues (which number still contains a dismaying cohort of late middle-aged UK investors) are blaming everything that happened this week mostly on the Bank of England, who in reality saved their (/our) bacon (or in the case of an apparently celebrated loon, blame it as the cost of sidestepping Jeremy Corbyn) as opposed to their own policy choices or even just the timing and delivery of said policies (and the sacking of at least one person who could have guided them better).
According to these guys, by raising rates far higher and earlier the Bank of England could have single-handedly defeated global commodity and energy price inflation around the world!
Well, no, of course they don’t say that, but it’s the implication of their silly narrative. Go read it. It’s hilarious.
It’s never their fault, it’s always somebody else.
Vague things “might have happened” if we we’d stayed in Europe. As opposed to what did happen while we were in Europe. (Chiefly faster growth than France, Germany, or the US, on a per capita basis, since joining in 1973, as a reminder).
In November we’ll get a big relaxation in immigration to attempt to undo that particular quantum of damage, which I’m sure will be touted as a benefit of Brexit. (“British immigration!”) You can’t make it up.
Sadly when the crowd gets sane again one by one, to quote Galbraith, and finally ejects them from power, the hardcore will be left to create a ‘stabbed in the back’ narrative, especially if/when we go back into Europe (on crappier terms). Just as Brexit was finally about to deliver, of course, they will say.
Meanwhile the rest of us will have to get on with an economy set back by 10-20% in output for no good reason, economically speaking, and only really scanty romantic (at best) or odious (at worst) non-economic ones. In the face of Asian economic ascendancy and all the rest of it.
@(BB)Limp
You raise a good point that I’ve observed a bit over the last few days
Those additional rate tax payers who have a putative 5% income tax rate cut they might get – they are mainly the people with one (or more) jumbo mortgages
What they might win on an income tax cut, they lose on higher mortgage payments. (Not evening mentioning the lower value of their properties)
Makes you wonder who exactly this massive act of policy vandalism has helped
PS. Your prediction earlier this week that “The Tories will walk the next election” is looking as healthy as Monty Python’s apocryphal parrot
https://yougov.co.uk/topics/politics/articles-reports/2022/09/30/voting-intention-con-21-lab-54-28-29-sep-2022
First of all, I’d like to echo what others have say and congratulate the Monevator team on the quality of this and recent articles. Well done.
Can I take issue with the link “Retiring on just $650,000 at age 29”. Regardless of whether that’s sensible…the author is peddling the usual snake oil words that you get to 25x your expenditure and your done. Er no. As most people know (and I write again for newer readers) – that’s based on 30 years. At which point the author of that blog will be 59. what’s he going to do? Blow his brains out? Quelle Surprise his blog also has a handful of affiliate links too.
The 4% rule is in deep trouble anyway. The 1999 cohort was pulling out >10% as of 2022. With the S&P 500 down 25% , inflation at 10% that’s looking to be a 15% drawdown next year, which means absent an asset price increase, the person will run out of funds in year 29. And the S&P 500 isn’t exactly cheap. I’ve always thought the 1999 cohort has the best chance of busting the 4% rule and it’s looking that way at the moment.
But hey, tell someone the truth to someone who wants to be lied to and you’ll go broke. Lie to someone who wants to be lied to and you’ll make a fortune.
Rather like the UK electorate – Electorates broadly get govts they deserve. People want to be lied to or at least not told the honest truth. The UK is on the economic road to nowhere and Brexit, Covid and now UKR / Russia has probably sped the journey up a couple of decades.
I’ve got a sneaking support for the govt, which is a minority view. Not the shambolic execution – not the mini budget and not because I think trickle down economics will work. Think education, targeted infrastructure, highly targeted immigration of high earnings, close economic links to as many geographically close countries as possible, business breaks, a bit of honesty to the electorate about the position we’re in. Nor should poor people be dumped on from a height. Someone’s gotta serve fast food and clean the loos. But because for the first time in a couple of decades they are actually being a bit honest and articulating there is a major problem with our income to expenditure. No wants to acknowledge the problem though so one would assume a change in 2024. I feel increasingly confident we’re going to have much closer links to the EU g/f – the economics will demand it.
Yes bonds are looking much better value – I loaded up on a load of UK ST bonds (4% +). But the FTSE 250 is on a CAPE of 16 – 17x. That’s pretty good. FTSE 100 CAPE of 15x even cheaper. Although the FTSE 100 has delivered a total nominal price growth of ……zero in 23 years. That’s a long time to keep the faith.
Can I recommend the following link to anyone who wants to read upon inflation linked bonds . It’s $TIPS but has application to UK ILG as well..
https://portfoliocharts.com/2022/09/27/all-about-tips-real-returns-and-inflated-expectations/
Just a heads-up that a new documentary has dropped on Netflix called: ‘Eat the rich!’ The GameStop Saga.
It is about, of course, the GameStop saga, and dining on wealthy folks.
I have only just clicked it on to watch while I do some chores, so can’t vouch for its quality yet. (The rating on IMDB is very low but I assume that’s because it’s been review bombed by various partisan degenerates).
Here’s our take from the time:
https://monevator.com/stonking-gains-hedge-fund-pains/
January 2021! What a very different market we inhabited back then.
Neverland that’s the point surely – taxes were cut so they are better able to cope with rising interest rates. Even the most economically illiterate should recognise rising interest rates are a world phenomenon? Do you suppose interest rates wouldn’t have risen if Rishi was PM ? Amazing.
And… I’ll remind you all there’s only one poll that matters 😉
And we’ve certainly seen a lot of panic amongst certain types who went on to lose elections they were sure to win these past six years.
Ps – I’m not sure if that was sarcasm but the FT is a well known lefty rag. Lots of contributors have spoken about that before in these very comments. The people that think it isn’t spend too much time reading bbc and guardian.
I guess the rot started some time ago and we have got used to it by now, but I do still find it amazing that with such a calamitous cock-up, requiring the intervention in the gilt market by the Bank of England, the Chancellor feels no responsibility or any reason to resign. How incompetent does a member of this Government have to be before they accept any responsibility for their actions?
It strikes me that the regulation and risk management of pension funds needs looking into. The freezing of the gilts market is unusual though, so it is possible that the solution to the problem (Bank of England buying gilts) is the optimal solution for such an event, Government cock-up or otherwise.
Gilts do seem to be investable again and I may buy some gilts next week (up to 3 year maturity) as a lot of dividends turn up this time of year and I have a fixed rate deposit maturing Wednesday. I will compare with term deposit rates towards the end of next week first though. Bought some short dated gilts, just over one year to maturity, before the mini-budget, which turned out not to be the most brilliant timing!
@(BB)limp
“taxes were cut so they are better able to cope with rising interest rates”
Odd then that in his speech on 23 September (the day gilt rates jumps and the pound crashed) Kami Kwasi didn’t mention interest rates once.
Transcript: https://www.gov.uk/government/speeches/the-growth-plan-2022-speech
This is exactly what he said “Take the additional rate of income tax. […] But I’m not going to cut the additional rate of tax today, Mr Speaker. I’m going to abolish it altogether. From April 2023, we will have a single higher rate of income tax of 40 per cent. This will simplify the tax system and make Britain more competitive. It will reward enterprise and work. It will incentivise growth. It will benefit the whole economy and whole country. And, Mr Speaker, after all, this only returns us to the same top rate we had for 20 years.”
Almost as if …. he didn’t know what the result of what he was saying might be …
@Naeclue
“the Chancellor feels no responsibility or any reason to resign. How incompetent does a member of this Government have to be before they accept any responsibility for their actions?”
The chancellor, like two of the last three prime ministers, went to eton
At eton shamelessness is a feature not a bug
Thank you Neverland, for confirming what I thought – you think the U.K. is the only country in which interest rates are rising, and you don’t recognise that interest rates need to rise, which will create losers (focused on by the guardian) and winners ( the companies that attract capital and talent once the zombies have gone, the people able to buy homes once prices come down etc etc).
I’m more than happy being in the minority when the majority think inflation and interest rates are a U.K. phenomenon. Btw – September eurozone inflation… double figures… almost as if something has to be done about it
@(BB)limp
You write “the companies that attract capital and talent once the zombies have gone, the people able to buy homes once prices come down etc etc” as if you want a recession
And yet the mini-budget speech mentioned “growth” no less than twenty five times
Indeed here is your glorious leader justifying the measures by saying that a recession must be avoided at all costs.
Link: https://www.bbc.co.uk/news/live/business-63069137?ns_mchannel=social&ns_source=twitter&ns_campaign=bbc_live&ns_linkname=633556c0194f716822a36fbe%26LISTEN%3A%20It%27s%20not%20fair%20to%20have%20a%20recession%20-%20Truss%262022-09-29T08%3A36%3A53.266Z&ns_fee=0&pinned_post_locator=urn:asset:15a4ce43-e430-488d-9453-7f021a074556&pinned_post_asset_id=633556c0194f716822a36fbe&pinned_post_type=share
You make no sense
Saw the monevator tweet on Weds morning with the gilts graph, almost straight away shifted 5% of my pension into gilts (previously 100% equities), but as my pension provider doesn’t do live dealing switch didn’t happen until 2 days after BoE action!
Also enjoyed reading the Finumus post about sterling vs other currencies, maybe my next 5% shift will be into International bonds?!
@Neverland — Please stop it with the (BB)limp jibe. I’m not quite sure why I’m not deleting your comments automatically as I did for a while, but you’re on a negative leash.
Please stick to constructive discussion of the facts, which you’re actually more than capable of delivering when you want to.
It’s a rare moment that I come away from a Housel article disagreeing with it. I do think we have cognitive bugs, but also believe it’s possible to overcome at least some of them (in part through raising awareness of them). There are lots of things that persisted as “human nature” for very long time which we no longer believe to be true eg men are superior to women, slavery is a normal state of affairs, divine right of leaders etc. Perhaps more features of human nature will be exposed in the future as we cannot assume we have reached an end point. Perhaps a better challenge would be, if humans are behaving the same as the ancients did – maybe we should double down on asking ourselves why?
Interesting, that Housel referenced McGonigal too – as she frequently asks her students to set her a challenge of what is something that is true now, but might not be in 10 years time. As a futurist, she is rarely stumped apparently.
On the FIREing 29 year old, it’s hard to imagine that a previously productive and highly focussed individual will not be involved in some other money generating activity at some point in the next 50 or so years of their life so I think they will be just fine. When I look back over my paid work career, an awful lot of it seems to have been the result of hobbies or voluntary work that somehow became paid along the way. I wouldn’t claim that it was a universal rule, but I have been lucky that way.
@Seeking Fire
It’s actually a ‘she’ and not a ‘he’ by the way.
I think the RE part needs to be retired. I think her mindset is more she can pick up regular (non-career) focused gigs to make an additional side income. She’s a hugely talented software developer who can attract jobs around the world so by ‘retiring’ from a salaried job at 29 I do think she’ll be absolutely fine.
I think it should be framed a little differently now and that these people who do step away from their careers early should frame it as such. It doesn’t make as an impactful headline I guess?
If you take the time to read her blog though you’ll understand what type of person she is and I think she’ll always have some type of income. I do agree that the RE part can be misleading.
@Ryan
Good constructive points, FIRE is just a buzzword, I became financially independent aged 49 some 15 years ago. Having been very busy/motivated running a business you do switch off , for a while, six months in my case and then you do different things, because you can and want to.
Covid caused me to stop my side gigs because of the vulnerability of a family member, one day in August I accepted a ‘job’ for no particular reason and have three bookings this weekend…. It’s because you can say yes or no but at heart the people who can become FIRE at a younger age are unlikely to never do anything again.
I planned to become financially independent a few years before I did, the buzzword then was ‘Downshifting’ the odd article in the The Times or Telegraph’s Saturday editions, somehow that morphed into FIRE but I always felt Downshifting was a better much descriptive term for my way of life.
Blimey inflations rampent, all the .99 kindle linked books are showing as 2.99 for me
@miner2039er — Alas! They flip over at some point at the end of the month, so I guess we’re onto a new batch now. Come back next week! 🙂
Excellent article and discussion. For the first time in my life I’m interested in buying some bonds. Ideally a 5 and/or 10 year index linked bond. Briefly: I have some chunky future expenses that are likely to rise with inflation, and I’d like to match that liability with an appropriate investment. Historically I have invested 100% in shares. Could someone point me to a website where prices of such assets are listed? I’ll take it from there.
I’ve come across this article that summarise in numbers some of the great points TI made this weekend:
https://www.bnnbloomberg.ca/the-nightmare-numbers-behind-britain-s-week-of-market-panic-1.1826532
I usually try to avoid mentioning politics, but as Mr Spock would say this current populist government “is not the Torry party as we know, Jim!” I think this became apparent to many people and to business around 2016. Fortunately, it seems that their days might finally be numbered as they have gone from sabotaging the country to shooting themselves in the foot again:
https://www.bnnbloomberg.ca/liz-truss-s-tax-cut-gaffe-hits-tories-in-the-pocket-five-charts-1.1826630
I think ZXSpectrum48k has stopped commenting here because he’s made money like a bandit with the bond market ruckus… I hope the guy will come back with stories.
@ The Investor
@ Tom-Baker Dr Who
I have come to the conclusion that the only long-term way out of the political morass we find ourselves in is to adopt proportional representation. PR forces a degree of consensus government. It will need a different breed of politician, one who works hard daily at compromise, not conflict/playing to extreme views.
PS The fact that the Chancellor (according to the PM) did not even get the higher rate tax cut passed through Cabinet is truly extraordinary behaviour.
I suppose it depends what flavour of PR would be chosen.
This short article from the Electoral Reform Society shows how the 109 result might have looked under PR:
https://www.electoral-reform.org.uk/how-the-2019-election-results-could-have-looked-with-proportional-representation/
@Ryan 31.
Thanks for your comment. Firstly my bad for assuming a he not a she, so apologies to the author. I’m normally better as using they when I don’t know the gender.
I’ve no issues with an individual retiring at 29 or whatever age works for them. Everyone is on their own journey and finding their own way. You’ll note I made no comment on that.
I’ve equally no issue with a blogger generating income through affiliate links. Everyone is blogging for a reason and the majority are doing so to generate traffic often for economic reasons. More power to them.
I’ve also got no issue and think it’s a good idea for someone to become FI and then generate additional income through work or otherwise which has a host of benefits monetary or otherwise. Again up to them and whatever works.
The issue I have and I double down on what I say is the mistruths being pedalled by so many bloggers, and to be honest having now had a bit more of read through, this website Financial Mechanic, which is that all you need to do is to get to 25x and you are done. I quote directly from the website in question.
“It is possible to retire early. Extremely early. If you want to know your early retirement number, a rule of thumb is to multiply your anticipated yearly spending in retirement by 25”
and
“I learned that if you save 50% of your salary you can retire in @17 years, no matter how old you are”.
That is untrue. There is no evidence to support that. The evidence is based on a thirty year study worst case scenario. Not a 60 year study.
There is also zero attempt to qualify absolute statements by saying, this was based on past performance, it includes annual rebalancing, no fees or taxes and anyone following that study would have had to have a strong mental stomach given the market gyrations.
Rather like we are seeing today where the 2021 cohort now has a w/r of 6% after one year.
But hey, that doesn’t tell a good story does it. I’d have much more respect for a blogger that frames all of those risks and limitations of the study and then says you know what, I’m going for it anyway and I’ll limit my risk through work etc etc. Rather like the Accumulator on Monevator.
Bloggers – it seems mostly to be US ones who say otherwise are doing people a disservice. Mind you there was one very well UK blogger who took a lot of abuse when he went off piste with his articles who once wrote a blog article saying the 25x study showed you were guaranteed to have in real terms at the end of the 30 years your principal protected. Until Ermine questioned it. And then the page was removed. Amusing the person now offers financial coaching, which is a total laugh.
To follow up (again) with apologies for dominating the comments and for cr*pping on the FIRE 4% shibboleth the following study is worth a read that’s recently been released.
https://deliverypdf.ssrn.com/delivery.php?ID=011106009067112124099005119117108024038039000065003034103087108087095111085122067078010118005034010099113069106022006086122121039035093009046113065125085024083116071066071121114069065083115105010025122092010086006003091120091067025100087104077025096&EXT=pdf&INDEX=TRUE
“The 4% rule originates from Bengen (1994), who finds that a retirement strategy with 50% in stocks, 50% in government bonds, and a 4%
inflation-adjusted withdrawal rate survives each 30-year period in the US historical record from 1926 to 1991.”
hmmm not sure how that fits into very early retirement lol…
Anyway, the depressing conclusion from this analysis is that were US returns to be closer to global returns and mapping across life expectancy to a couple a 65 year old would need to draw closer to 2.26% to avoid financial ruin.
Note 65. Not 50, 45 or 29.
I won’t bother setting out the arguments for and against. You can see them well enough in the following reddit link.
https://www.reddit.com/r/financialindependence/comments/xt8k18/swr_academic_study_the_safe_withdrawal_rate/
Now where’s my personal capital link…..:)
Accumulator – given you’ve actually pulled the pin & for anyone else, I’d be super interested in their thoughts on this.
@Seeking fire
I’ve always been working on a 2.5% SWR assumption so to see one academic study than that says a 2.3% SWR carries a 5% risk of failure doesn’t surprise me one bit
Three things:
– you can always opt to spend less than planned
– state pension kicks in from the late 60s offering £18,000 a year for a couple
– downsizing and equity release are options
It’s basic economics, if you cut taxes that will increase inflation. In normal times when inflation is low a sensible incremental program of tax cuts could work okay, but when the BofE is already increasing interest rates to try to bring down very high inflation it is reckless to bring in a big package of sudden unfunded tax cuts (to say the least). Now the BofE will have to increase interest rates even more, as Huw Pill indicated. So loans and mortgages will be even more expensive then they otherwise would have been, causing even more chaos in the economy. What was hopefully a temporary period of high inflation may now become endemic as workers demand higher wages, businesses put up prices to pay for said wages, inflation continues and sterling declines in value so imports become more expensive, workers demand even higher wages, and round and round in a vicious circle. Combine that with the ‘efficiencies’ the government is now talking about making and the increased cost of borrowing, and we’re looking at a long and painful recession, much worse than other countries will see, and definitely not the growth that Truss and Kamikwaze seem to think they’ll create. The only good thing to come out of this mess is that the contradictory alliance of anti-immigration protectionist brexiters and free-marketeer libertarian brexiteers has finally been broken, as recent polls are showing. Just a shame the rest of us will have to suffer until the adults get elected at the next election.
This letter to the FT editor from some former Conservative minister even manages to get electoral reform in at the end: https://twitter.com/hugh_pemberton/status/1576202764090499072
I have no idea what would make one of the two parties back it seriously though. It’s excruciating.
https://www.theguardian.com/politics/2022/sep/24/keir-starmer-defies-call-for-changes-to-first-past-the-post-voting-system
[Drat, hit save too soon.] I wonder what this latest adventure means for the MMT “movement”; I hope we see some interviews with folks who were campaigning for those policies.
@Seeking Fire
Absolutely no need to apologise. I just wanted to let you know.I’ve followed her blog for a while and she’s (largely) a good writer.
I completely agree with your feedback. Although the 4% rule is a good ‘base’ to get someone interested in saving more I do think like you said it makes it sound so easy. I couldn’t agree more with everything you have said. I think some of the more credible bloggers are changing their narrative a little to focus more on FI and what they describe as more ‘fun work’. I am in a similar boat myself. Having some my micro educational business I am technically FI but I still work 4 or so hours a day. It means every month I neutralise my outgoings so none of my capital is touched. I am 37 so plenty of time to draw down.
I agree that if people were a little more honest and said ‘Look I have enough to retire from a traditional full time role but will taking on part time gigs to make sure my lifestyle stays great’ it would be far more credible. But like you said that’s not as clickbaity and perhaps a little wordy!
I think I know who you mean when you mentioned the UK blogger. I believe he was heavily pushing crypto at it’s peak which has also slowed down a little too.
@Hariseldon
Thanks for the kind words. I completely agree with everything you have said and I am in a similar boat to yourself. Congratulations on making life work the way you wanted it to do so. Seems like you’ve got a great blend of fun work and free time. Downshifting is a good way to describe things. I think flexibility is the key, on what you work on and how you approach life.
Similar to yourself I was lucky to be able to sell my small educational business when things peaked for online learning mid covid. I am probably FI but i’ve taken the route you mentioned and downshifted. I still have a little bit of equity in a business and I work to grow that specific business as well as the odd freelance engagement. Different to before though I can take extended periods of time off, finish at a reasonable hour and wake up and decide what I want to work on. It’s a nice feeling and perhaps more bloggers should own it and describe FIRE in this way.
Thanks again for the comment 🙂
@Alex P (#37):
Re ZX, take a look at comments to ermines latest post on Britannia Unchained!
Nice to see @ZXSpectrum48K is still doing well, even if it’s elsewhere. 🙂
As for @ermine, from my selfish perspective as I’ve said before I wish he’d post his rants by first thing Friday morning latest.
He often posts late on Friday afternoon onwards, by which time they’ve often missed my reading. And I’m loathe to post week-old stuff, especially when it’s topical.
This one would have fitted right in this week’s edition though:
https://simplelivingsomerset.wordpress.com/2022/09/30/britannia-unchained-welcome-to-your-future/
Reminds me of Finimus’ casual 1m+ profit on a crypto trade.
Slightly sad it didn’t spark even the smallest amount of joy.
Does beg the question why keep going?
Is there not something more enjoyable out there?
Possibly not?
I would have thought even his very high level of future liabilities must be squared away by now?
Money’s a funny old thing..
@Seeking Fire (#41):
The SSRN paper provides a new twist on the international SWR results published previously by Pfau. However, the message remains the same: the so-called SWR rate is unknown and unknowble in advance.
IMO, floor and upside is a better approach; albeit that it is not risk free either. The recent/current debacle in the UK bonds market may unintentionally give such an LDI approach an undeserved bad reputation though!
Ryan Gibson
Neverland
Al Cam
Agree with your comments. Thanks.
I’m always interested to hear the journey for those people who’ve cut the engines of accumulation and are bouncing around on the updrafts and downdrafts of financial returns. This year being a serious downdraft.
@Seeking Fire:
OOI, are you familiar with Ed Thorps suggestions for a perpetual portfolio, which stated simply are at least 80% equities and a withdrawal rate of no more than 2%?
Economy in tatters, infighting at the top, a string of weak imbecile leaders, the masses screaming panem et circenses, authoritarian populism becoming … eh …very popular, war on the periphery, new global powers rising from what we used to think of (and treat like) flea-bitten barbarians. Welcome to the 21st century Europe. I used to think this was like France in 1799, but it’s beginning to look a lot like Rome in 476, or a few years (decades?) prior to that. Hopefully decades. All I need is for everything to hold together for another 50-60 years.