As the FT notes this morning:
Private share ownership has also declined substantially since the 1980s, and remains much lower than in the US.
As the FT also notes in another article:
Hargreaves Lansdown, the UK's largest investment platform, said its conventional gilt sales had risen more than six fold over the past 12 months, compared with a 72 per cent rise for index-linked gilts.
There are three obvious conclusions.
First, people do not quote reasonably trust saving in shares because they can see that most of what quoted companies does is unsustainable, making their shares wholly unsuitable as a long-term store of value.
Second, nothing Jeremy Hunt or Rachel Reeves can do - despite their desperate pleas and attempts- will change that. If stock markets reflect failing consumer markets their appeal cannot be revived.
Third, people want to save with the government. It really is time for the government to let them do so, as much as they want.
I have been saying this for a long time It has to be part of a new narrative on economics.
Thanks for reading this post.
You can share this post on social media of your choice by clicking these icons:
You can subscribe to this blog's daily email here.
And if you would like to support this blog you can, here:
Gilts certainly seem a much better investment these days than shares given everything that is happening with quoted companies
A great opportunity for green bonds like the old war bonds, to invest in a just and green infrastructure that will serve future generations and give a safe few percent in dividend. Of course Tories would give the contracts to their buddies so the whole thing needs strong social watchdog.
The rise in gilt ownership is purely down to valuation as rising interest rates have forced prices down making now a much more attractive entry point. Short dated gilts currently yield 5% and if you buy low coupon gilts the bulk of the return will be as capital gain and this is especially attractive for private investors as capital gains on gilts are tax free.
When gilt yields were sub 1% they represented very poor value and were mainly owned by pension fund managers who were forced to own them for regulatory purposes. Buying gilts around that time, even as recent as 2020 would have been a poor investment.
So the rise in interest rates has led to gilt prices falling sharply hence making them more attractive to buy now. The ending of QE and emergence of QT has led to price falls across all maturities where long dated yields touched 5% and again they were attractive for private investors to buy.
So guilts are much more attractive now than they have been compared to equities. As interest rates fall and gilt prices rise this will become less so as gilts can only offer you a finite amount of return.
You so totally miss the point. It’s quite scary really.
“You so totally miss the point. It’s quite scary really.”
What point do i miss? Do you think people want to invest in gilts irrespective of value? Do you think those who bought a few years ago are happy sitting on 20-59% losses? But that loss is tempered by the fact they made losses on govt gilts? of course not… it’s about value.
You still miss the point
If yoy really think people are as rational as you imply then youy do not understand why they save as they do
“If yoy really think people are as rational as you imply then youy do not understand why they save as they do”
Yes i agree many high street savers through inertia do not behave entirely rationally. But the increased buying of gilts through the platforms like HL and AJ Bell is rationally motivated by he value offered by gilts post the fall in prices after the rise in interest rates and the end of QE /start of QT. It will reverse when the value has been extracted.
You still don’t get it
I suggest you go and play elsewhere where your ‘talents’ might be appreciated
Those that think all actors are rational and that free markets will deliver fair pricing and efficiency need to get out more. I would also add that “rationality” is in the eye of the beholder – we must be careful.
The theory was that QE would produce lower gilt yields (policy rates were already zero) and release a flood of money into equities that would then deliver investment to revive the economy. The practice was quite different as
(a) various actors continued to buy gilts at absurdly low yields for various reasons – some rational, some not. We know that because we heard the howls of pain when rates went up.
(b) companies refused to invest how ever low rates got as the economic outlook was so grim. We know that – just look at investment data.
(c) others used low rates to bid up the price of existing assets. We know that – house prices rose, but not new building.
In short, QE (adding a fixed quantity of demand by the BoE – the “Q” in QE) did not deliver what was hoped. It was fiscal policy via furlough that prevented the slump.
The correct policy would have been to intervene in the gilt market to keep rates at reasonable levels that did not restrain activity (say 2 or 3% for long gilts)…. and let fiscal policy do the heavy lifting.
Now, wind forward to today and we are in the mirror image. Rates have been hiked and gilts are being sold (QT). The rise in gilt yields has attracted investors but is this at a level that is consistent with the best level for the real economy? No – with inflation expected to fall to below 2% we have 3% real yields which, I suggest, is too high.
The point here is that people just want a fair rate for safe saving…. and QE/QT and BoE rates policy is not delivering that.
Agreed
“QE (adding a fixed quantity of demand by the BoE – the “Q” in QE) did not deliver what was hoped. It was fiscal policy via furlough that prevented the slump”.
I think that is a very well made point. There was a very long debated (and frazzling!) thread here discussing money as bank deposits, and money as notes and coin. This comment of yours helps to bring out the issue that was lurking unstated in the earlier thread. The BoE, as the Central bank does not possess direct relationships with the public through bank deposits, but generally acts through the specially privileged relationship with commercial banks to execute monetary policy, and with the public typically by indirect means; like the issue of banknotes. QE failed to deliver the fruits of increased demand; but the direct action taken to help the public by the furlough process did work.
The current banking system does not work sufficiently effectively to fix the economy (rather than just propping up the commercial banks in their interest) in a crisis; in a financial crisis (2007-8); or in a real world crisis, like a pandemic (or a war), or something else we do not expect; because crisis is inevitable in the real world, and disorder is the order of the world (second law of thermodynamics); equilibrium is thus a fiction made up by economists and bankers, a fairy tale.
Agreed
Yes, for many people safe saving at a fair rate is what they want…. and the government should accommodate this with the right products through NS&I plus NEST.
But how do we mobilise these savings to deliver the things we need?
Listening to the news this morning (Radio 3 – I get too angry with Radio 4) I learned that Nissan was investing £1bn in electric car manufacturing…. and it was billed as unqualified good news. But if it is a profitable exercise those profits will accrue to the (mainly) Japanese owners – why depend on Foreign Direct Investment? Our aging population has plenty of savings but the transmission from those with capital to those that need it is broken. We need Government to intermediate this process which, at it’s heart is the fact that savers want Fixed Income risk whereas Equity capital is required for investment.
Agreed
Well yes, and here the Harrington Declaration is pertinent (ironically Government sponsored!), easily applicable mutatis mutandis to Domestic direct Investment; through the vehicle of Government Bonds. I believe that could be transformative with the public; because it offers them a route to hypothecated investment in economically constructive and socially worthwhile outcomes; which I believe would be powerful, since the investor can be protected from risk; through a guaranteed interest rate, and a fixed maturity price for the Bond.
People look for a secure, risk free home for their money in a very, very naughty world. The public has learned that you cannot often enough, or with sufficient confidence, trust the private sector with your money, unless you have a guarantee from something you can rely on. The closest to that (nothing is perfect) is the sovereign issuer of the currency you rely on; the currency, not the bank deposits (because they are secure in so far as guaranteed by the sovereign issuer).
The Government can provide the secure investment with a range of bonds invested in frastructure and green projects; offering better transport, housing and secure, cheap energy supply; and that is just illustrative.
We are on a wave length
What ‘Savers’ want is a range of products from things like teens wanting to save for next years holidays or University to people approaching pension age who might like to buy some extra pension.
We need National Savings products aimed at these and all points between.
Agreed
The infrastructure is there with NS&I – although they should expand to offer a gilt dealing service.
NEST also offers a place for pension saving. If they also offered a “forward starting real annuity” as a savings vehicle (and perhaps even made this the default option) then we would have something quite decent.
Indeed
A forward starting real annuity?
Have you any idea what this would cost (and hence why almost no-one would be prepared to pay for it, assuming it was rationally priced)?
I think Clive does…
“Have you any idea what this would cost”
Surely it would cost the government nothing. Money goes out, but it is not a cost.
The only question I see is, what do people with no savings get?
Baz, you are correct. You can’t buy this in the market because the cost of constructing the hedge would be prohibitive.
But there is one market participant that is already taking a very similar risk – the Government. It issues index linked gilts and it would not be a huge step or risk to offer forward starting annuities. The Bank of England website gives daily market yield curves (20 year real yields on Index Linked Gilts are close to 2%, forward inflation trades at about 3%). Just use those (real) discount rates to put a Present Value on the forward starting real annuity and hey presto you have a product that might be of interest to some folk.
Issuing index linked liabilities is not a huge risk for government as revenues are largely index linked so this product would just replace Index Linked gilt issuance.
(Indeed, in the early 1990s RBNZ did some interesting, if now slightly dated, work on what a country’s debt portfolio should look like foreign v domestic debt, inflation linked v conventional debt and what duration etc. If I recall, long duration index linked issuance has a significant place in an optimal portfolio.)
Neat….
The thing that people seem to forget is that bonds (whether sovereign or corporate) provide contractual returns. With equities, the bulk of your return in the sort or medium term depends on the behaviour of the market. If Mr. Market’s in a good mood, as Ben Graham put it, your return will benefit, and vice versa. With credit instruments, on the other hand, your return comes overwhelmingly from the contract between you and the borrowers. You give a borrower money up front; they pay you interest every six months; and they give you your money back at the end. And, to greatly oversimplify, if the borrower doesn’t pay you as promised, you and the other creditors get ownership of the company via the bankruptcy process, a possibility that gives the borrower a lot of incentive to honor the contract. The credit investor isn’t dependent on the market for for returns; if the market shuts down or becomes illiquid, the return for the long-term holder is unaffected. The difference between the sources of return on equities and bonds is profound, something many investors may understand intellectually, but not fully appreciate. (Source: Howard Marks of Oaktree Capital).
People want their savings to (a) maintain their value (b) be secure.
The government should offer a savings account that pays the Bank of England base rate plus, say, 2%.
Of course that means that people won’t put some of this money into riskier stocks and shares, or other risky ventures, but why should most people feel obliged to do so?
The people who could invest in riskier ventures will have more than enough surplus cash to do so.
Why on earth should the government choose to pay above market returns to savers?
Who said base rate was market rate?
Have you ever been into the real world?
And why not?
“Why on earth should the government choose to pay above market returns to savers? ”
☑️ Because it is less than bank loan interest rates
☑️ It “costs” the government nothing
☑️ People with lower wealth will benefit
☑️ It is more cost effective than having to support people with no retirement provisions
☑️ It makes people feel ̶g̶o̶o̶d̶ ̶ better
🙂
Is there anyone seriously saying that base rate + 2% is below market rate. If so, what good evidence do they have?
Base + 3 is often charged to SMEs
So why not pay base + 2?
Don’t say markets don’t like it
Please say why not
Not sure this makes sense.
My starting point is that NS&I should pay base rate on savings. If the BoE is paying banks Base Rate on CBRAs then the least it could do is pay Base Rate to ordinary people.
Even this may create problems and paying even more increases this risk. Banks will have to pay more to raise deposits and just pass it on to borrowers. (If government pays Base plus 2% then “Base plus2%” becomes the “New Base” and SMEs will pay (old) Base plus 5%.)
Now, it IS possible that an above market rate should be paid in certain circumstances. Eg. Singapore paid substantially above market rates on peoples CPF (pension and medisave) accounts but this was in a period of ultra low rates and for policy reasons. However, this should not be the norm.
In the UK this might be paying higher rates on pension savings… although this should come with obligations and should mean taking a look at the tax advantages pension savings currently enjoy.
Finally, what do we mean by “market rate”. Base rate which drives all other rates is set by the MPC not the market; the BoE acts in the market to stop the market trading at levels too distant from the policy rate. Indeed, they also operate in longer dated gilts too…. so it is unclear what we mean by “market rate”.
Richard
Anton N offered what seemed to me to be some searching but constructive criticism. He was not trolling you. Yet you responded – dismissively and defensively – by saying: “You still don’t get it. I suggest you go and play elsewhere where your ‘talents’ might be appreciated.” Why be so rude? You have repeatedly said you welcome constructive criticism; so why not patiently re-explain your position to AN? You will not win converts by dismissing and then censoring all criticism, but magnanimity will…
He utterly failed to understand that saving, and where to save, is usually an emotive act, not a rational one.
The response was wholly appropriate in that context. His response was that of a neoliberal troll.
Richard can be a little brusk on occasion. We are all grown ups and it is “his blog, his rules”.
AN’s point was that if rates are higher people will switch their savings into deposits or bonds (and out of bonds if rates are very low). This is obviously true and not, I think, Richard’s point.
I did elaborate in my comment that I hope helped ANs (and others) understanding. If ANs questions were genuine then he/she got a response; if he/she was trolling then Richards response was appropriate.
Thanks