A BiS point here

I’ve come to this site after seeing a post with Richard’s comments in other media, to see if he was misquoted. For full disclosure I work at a UK based real money/long only asset manager.

It seems that he wasn’t and after reading the above I feel that some truths and general debunking need to be said.

1. The Musk co-ordinated attack theory.

This is simply nonsense. Just a conspiracy theory – one which betrays a complete lack of understanding of finance.

Gilt markets are huge. To move them as much as they have would need a lot of co-ordination from a significant number of people at different houses. Considering that over 7000 different institutions traded Gilts on just one of the various electronic trading platforms in the last month, this would be an achievement in itself.

However, in reality co-ordination simply doesn’t happen. All our communications are recorded and checked in real time. We aren’t allowed personal devices on the trading floor. Etc. To actively collude with other market participants is illegal and would cost that person a job, a massive fine, their license, career and probably jail time. It’s simply not worth it, given how easy it is to get caught.

It’s incredibly unlikely that hundreds of people at a similar number of firms would band together in this manner, so what Richard is saying is just the pure conjecture of a ill-informed conspiracy theory.

Besides, why would people need to co-ordinate when this trade has been so obvious for quite a while now. They’ve been underperforming since the budget basically. Investors have been selling their Gilts well before Musk got involved.

Which leads nicely on to….

2. So why are Gilts selling off so aggressively, more than peers?

I know a lot of people will say things like “Trump” and “everything else is selling off as well” so let’s deal with that first. There is some truth in that. But that does NOT explain why Gilts are some of the worst performing bonds in the world at the moment.

The real reason is the fiscal. It’s a complete disaster thanks to Labour and the Budget, as well as various other Labour policies.

The budget borrows an extra £142bn over this parliament – and still ends up with a smaller economy and lower real living standards than would have been the case under Rishi Sunak. They’ve front loaded spending now for a fairly small potential boost to GDP growth but deferred any fiscal consolidation. It takes real incompetence to borrow/spend more and still manage to generate weaker outcomes even by their own forecasts – which at ~2% GDP growth look incredibly optimistic. They’ve also given themselves basically no room to maneuver in terms of fiscal space before they have to either cut spending (which will fall on investment spending inevitably, not current) or once again raise taxes.

This is before you consider the inflationary aspects as well. This budget is inflationary in ways other than simply through the direct effect of increased government spending. And as we all know, higher inflation means higher yields.

~ A lot of extra spend has gone directly public sector wages. Without reform to the underlying at all. Hardly likely to be good for productivity and likely to be only the starting point.
~ Business taxes (NI) are going to slow growth and kill jobs. Businesses are already putting up prices to compensate.
~ Changes to other taxes (Cap gains, Inheritance, Non-doms) have all chased money and investment away. This has a direct effect on GDP but also confidence and the balance of payments (which is also a massive problem – more later).
~ Forthcoming employment laws seem to be aimed squarely at making the cost of employing people higher and making it more difficult to remove people when necessary. Again this has a direct effect on investment, growth and confidence.

Already you’ve got a lot of reasons to wonder why on earth anyone would buy Gilts – especially when the market is already overweight.

But then you can add in some more ideology driven policies. Someone above mentioned energy policy. It’s a disaster. The UK already has the highest prices in the world at about $400 per MW/h. Four times greater than most of Europe or the US. It makes any large scale manufacturing and a lot of energy intensive services near unviable in the UK.

Then they’ve self destructed even more by banning new North Sea oil (again destroying jobs, investment and tax revenue) and betting everything on wind and solar. Now in the long term, wind and solar will be viable (indeed, our firm is heavily invested in both) but not by 2030. Simply put, there aren’t enough ships that can handle offshore installation at the pace required in the world to do it. That’s before you consider the ~£300bn investment you would need into the grid just to get the energy to where it’s actually needed.

Based on these policies, we roughly expect UK energy prices to increase by about 25% over the next 5 years in the face of roughly flat global prices. Again affecting inflation and growth.

So you have a situation where the new government has delivered a budget which somehow manages to reduce growth (and thats before you account for their fantasy projections), increase inflation and make any potential return on investment lower through much higher taxation. Outside that the policy mix is fairly shambolic, with little to nothing that might improve growth either long term or short term.

Investing is a relative value game, so why buy Gilts when the outlook is poor and there are so many other things you can invest in instead?

3. The twin deficits

Not only does the UK run a large budget deficit, it also runs a large current account deficit. The twin deficits are the third worst in the world.

This means in practice that the UK needs to attract foreign investment flows constantly. But thanks to the fiscal situation, the incompetent people running government and a few other factors, it’s harder to attract those flows.

Government doesn’t really have any direct control over this necessity. It’s a hostage to global financial markets here. The government can’t print dollars. This means that bond yields will keep creeping higher until they are attractive enough that investors think that the risk of holding them is once again met. Doesn’t look like that is going to happen for a while given both the global and local situation.

4. Some other points.

There is a lot of talk from Richard and others about Gilts being safe. Depends what you mean by that, and I think that what he is saying (that you can never lose money owning them) is utterly false except in the most basic nominal terms.

I would hope we can all agree that inflation affect the value of money through it’s purchasing power. £100 today is worth a lot more than in 10 years time even with quite marginal rates of inflation.

So sure, if you buy a Gilt for £100 now you might get that £100 back, as well as some coupons along the way, but unless that bond offers a real rate of return you will actually have lost money in real (inflation adjusted) terms. That is before you consider the mark to market losses as yields go higher.

The UK does not offer particularly high real yields (though they are at least positive now) compared to peers. So again, why invest here when you can get better elsewhere?

I also see Richard says interest rates should be cut.

This would probably decrease short term rates but at the cost of a weaker currency and higher inflation. So long term yields (where the DMO actually issues) would likely rise, not fall, as the effect of currency and the view that the BoE is not serious about containing inflation, balance of payments and the above real rates issue all take effect.

He also says that the government can simply print money. This is quite honestly nuts. Base money supply would explode, confidence in sound economic management would disappear, the currency would collapse and bond holders would head for the hills sending bond yields sky-rocketing. That’s before the inevitable inflationary spike.

I also see Richard says investors should be forced to buy Gilts. For their own good basically. Apart from the massively authoritarian nature of this, you can’t force people to buy things. Foreigners own 35% of the Gilt market at the moment and try telling them they can’t sell. They’ll simply never buy again. I think this is really code for forcing people into poor investment choices to give the government even more of their money.

I could go on but I think I’ve covered enough. This has got nothing to do with Musk and everything to do with sensible people making informed investment decisions based on the information available – which is almost uniformally bad thanks to the actions of this government. I’m by no means saying things were perfect before but somehow they’ve made the Tories look competent by comparison.

Yes, let’s shall we?

Let’s remember that you are the one claiming that there is a Musk led conspiracy across the markets to bring down the Labour government. And that Labour is doing everything so well that none of this is their fault.

It’s laughable.

Gilts are described as the risk free curve. RELATIVE to other instruments. That does NOT mean they are risk free. You can still lose money owning Gilts. Even if they don’t default which I agree in nominal terms is near impossible. In implicit terms though you can easily have your money inflated away by government and lose a lot. All it takes is some negative real rates.

Given (looking through your older posts) you seem to have thought Gilts were a fantastic investment when they yielded 1%, I guess you have lost a large amount.

Inflation might not be heading to the post pandemic highs again, but it is heading up well above 3%. Possibly higher depending on other factors. That affects your real returns. You seem to think it’s not from domestic sources. So where is it coming from then? If you look at headline vs core….it’s all coming from core. I.e. domestic price pressure. Mostly it’s coming from services. But had you actually looked at the data you’d know that.

As I explained in my original post, it is the actions of this Labour government that have led to a loss in economic confidence and their policy mix and the budget have locked that view in. The general public don’t think they are competent – why would those in the financial markets think vastly differently. It’s just we actually have huge amounts more data and research to help form that view. To claim that the budget has been a success when it literally drove growth off a cliff is simply crazy.

I’m not going to get deep into the energy market debate, but the cost of Miliband’s energy program is well north of £300bn. Even if that was a good use of capital (which is questionable at best) there simply isn’t the capacity to install those offshore wind farms, solar panels and most importantly the grid infrastructure in 5 years. You can’t magic up deep sea piling boats out of thin air for example. So it will not happen even if the financing was available. QED domestic energy prices are going to rise a lot.

If Gilts don’t fund government, other than taxes what does? By your comment about withdrawing funds from the market I am going to guess you mean some form of money printing MMT style nonsense. Gilts are called “cash” for a reason. They are interchangeable in banking terms. Nor does printing money solve the balance of payments issue. Like I said, the government can’t print dollars. Not that printing pounds would be a good idea either.

QT is a discussion topic. Stopping it might slow down the sell off in Gilts but it fundamentally doesn’t much change the situation. The twin deficits are enormous and will have to be funded by large Gilt sales. Or more tax rises. The government might save a couple of £bn by doing so but at the cost of higher inflation. it would also be a massive sign of weakness to the market that things are out of control. I’d guess that if they stopped QT early you would see short rates go higher (as more cash needs to be placed which would prevent the BoE cutting. You would also probably see the back end rally (yields lower) in the short term but then the poor fiscal dynamics would take over again and rates would head higher. But in your simplistic, uneducated world, relying on literally no experience of financial markets at all, you think that ending QT, cutting rates and printing money would be a panacea.

“I am no lover of Reeves, but thank you for conforming there is a conspiarcy after all – because that is exactly what you have done.”

Honestly, what are you talking about? I said that the markets have been selling Gilts for months now, since the budget. Well before Musk ever said anything. The majority of people share the view that Labour have taken a poor but improving situation and driven it off the aforementioned cliff. They’ve done this not because they dislike Labour but because of the evidence of what the economy is doing and is likely to do thanks to Labour’s decisions. Mostly they’ve made huge mistakes, often on a purely ideological basis. We have a fiduciary duty to our investors (mostly pensioners) and that means making sounds investment decisions. Not playground type stuff because we don’t like the political party in charge.

That’s not a conspiracy theory. That’s just logical. But as I say, I’m pretty confident that you are the one peddling conspiracy theories.

As Clive says I haven’t posted my full name because of work. Plus frankly I don’t trust someone like you with it. I get the feeling you and GDPR haven’t been acquainted properly.