As FT Alphaville noted yesterday:
In case you were wondering, the Strait of Hormuz is still closed. The US economy is propped up by an AI buzz that is increasingly fuelled by vast off-balance-sheet exposures. The Fed is possibly going to raise interest rates. China's economy is still slowing. Yields everywhere are climbing, and Japan is suffering a bond crisis. Private credit is stressed. Virtually every measure of leverage is engorged. Asian geopolitics is messy and getting messier. Europe is Europe, and the UK is being particularly British.
And as they want to show, US investment funds appear to have record-low cash levels at present, record-high levels of exposure to the US equity markets, and without apparent exception, everyone is betting that the euphoric rise in those markets will continue.
The belief is that this time everything is different.
And as the article points out, that's nuts.
This cannot continue. A system put into this state will break. That is not speculation. It is a statement of fact. That only question is when. And as even FT Alphaville thinks, soon has to be the answer to that.
My sense that we are living through the equivalent of the summer of 1939 at this moment, waiting for the storm to break, grows by the day.
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And when the storm does break, we all have to be ready with our arguments for what the recovery looks like, as you are.
Here’s my modest contribution: other people’s ideas which I’ve drawn together.
https://criticaltakes.org/the-corporation/ten-proposals-for-curbing-corporate-power/
I’d be interested to know what you think of it, Richard.
My question would be, how? You do not say.
You’re right, it’s not a plan of action. That’s by design: I think the plan of action has to come out of discussion and consensus-building among many different people and organisations and as an individual I don’t have the means to make that happen. But it’s useful to have a core of general ideas, as a basis for consensus and ultimately for action, and I do have the means to do that.
Slightly tangentially, I note that the UK 10 year gilt yield is slightly above 5% (total annualized return taking into account both the 4.75% coupon payments and the capital gain when the bond matures). Surely this is a great buying opportunity for the UK government!
Were the treasury to buy those gilts then, presumably, it could save a lot of money. Yes, the money it paid would end up in Bank of England reserve accounts. And, if the government, via the Bank, insists, on its insane practice of paying base rate on reserves, then it would have to pay 3.75% on those reserves. But it would still save quite a bit of money. It would have to “borrow” the money to buy the gilts for its own Bank of England – but fortunately it has an unlimited, interest free, overdraft with it’s bank, so that’s OK.
Given the media scribblers have worked themselves into an apoplectic frenzy over the size of UK government “debt”, then surely this is a prime opportunity to assuage their fevered anxiety? Why is the government not doing this?
This is only of value if the vase rate is kept low, I make clear.
Since the media is currently obsessed by the interest paid on government “debt” I was wondering if there were ways to reduce this. You, quite rightly, pointed out that buying back gilts only saves money if the base rate stays low (because the government has to pay interest on reserves).
I’ve been thinking about this. First, it has been questioned why we pay interest on reserves at all. The Bank of England wants to do so to preserve it’s control of interest rates. But this only requires tiered interest, i.e. the bank only needs to pay interest on the top part of reserves. The ECB, Japan, and Switzerland have all used tiered interest rates, so it’s entirely possible. So why does the government not do this?
With tiered interest on reserves the banks have a zero return asset that they can’t, in aggregate, get rid of. If they were offered low coupon gilts they would have little choice but to buy them; at least they would be getting some return (and the tiering threshold could then be reduced accordingly). This is, I believe, what happened before QE, prior to 2008. This could potentially release the £100’s of billions in reserves with the government paying only a fraction of the interest it currently pays .
In turn the government could use this money to buy back high coupon gilts to further reduce it’s interest bill. This would then create more reserves, but they could again be swapped for low coupon gilts.
Overall this process would swap high coupon gilts AND reserves for low coupon gilts, thereby significantly reducing government interest payments. The group who would pay are the banks, who would no longer be receiving an unjustified government subsidy in the form of interest on reserves.
I mentioned two ways to do this in the interview with Matthew Wright. I will be doing a video on it.
Great.
From Barnett Waddingham
2.4m People flexibly accessed Pension Income before Age 65. The Treasury is the Big Winner
£75.5bn, apparently.
That’s a decent earner…
Given the state of the markets, I no longer believe in the law of gravity.
“everyone is betting that the euphoric rise in those markets will continue” -)-)-)
Who are these people betting against I wonder.
Michael Burry of ‘The Big Short’ fame for one
FT Alphaville is the best financial journalism out there, at present. I think Stein and Keynes have said it all….
If something cannot go on forever, it will stop.
Markets can remain irrational longer than you can remain solvent.
Sun Tzu wrote “Speak quietly whilst wielding a big stick”. The problem in 1939 was that Neville Chamberlain spoke quietly whilst wielding an umbrella.
The kind of big stick that would have been effective in deterring Hitler isn’t appropriate in this theatre and I have no idea what could be effective as a substitute. Richard, the other bloggers and YouTubers who espouse similar thinking and those of us who follow them and agree with their principles have no real, effective power to wield in the short term. That isn’t an insult to anybody, it’s a regrettable statement of fact.
So, as in 1939, the coming disaster cannot be averted. We must each examine how seriously we are exposed to it’s likely consequences and what, if anything, we can do to minimise the impact. I have no control over where my pension fund is invested but will be planting potatoes when it stops raining in my corner of Tasmania and possibly increasing the number of chickens we keep.
Planning to grow more veg had already been part of my thinking, but the hot dry weather this year has ruined much of my effort, and it’s likely to get a lot worse for many years. That too can be attributed to the short-sighted idiocy of financiers and politicians.
As if on cue, I just read this. Directly comparing the situation with 2008, and highlighting “Sooner or later the party will finish”
https://splash247.com/global-ship-orderbook-growth-hits-fastest-pace-since-pre-lehman-boom/
It will…..
On Sunday I had a call from an old friend I’d not heard from in literally years.
He’s very clever and is earning a fortune doing a job he doesn’t particularly enjoy and made a point of telling me of all the people he knows who are making a fortune from AI stocks (mainly Nvidia).
I said that I’m in the camp that we’re watching the wheels falling off the bus in real time.
He didn’t want to know – and I think that’s part of the problem – people are so caught up in their day to day, they’re oblivious as to what’s really going on.
Agreed
The point is that this time everything is different from the last four ‘market corrections’. Why don’t you Jeremiahs understand that? The banks and private credit fund managers understand that so why can’t you?
I am hoping you are being ironic.
I was involved with financial institutions during the 1986 correction, the Japanese property bubble, the tech boom and bust and the 2007/8 fiasco. Before each of them I heard the same explanation, ‘it’s not like last time and if you don’t realise that you’re an idiot’. I’ve always been an idiot, why change the habits of a lifetime?