mini budget

[Max B Gold]

Given Truss flagged the run on the pound in advance I hedged against it and switched my three pension pots to Dollars months ago. I'm quids in. I can't believe youse didn't get in on it!

That's not a hedge, that's a punt. A hedge would have been taking out an fx forward or something similar to nullify the effect.

A Punt? Not really. Lizzie and the IEA flagged it well in advance. I'm quids rich and I don't even care about the losers on the other side of this transaction.

[Dunners]

13 years of QE has come to an end. But, if the tax cuts are to be funded through bonds, and the bond market won't lend to you, what happens then?

[Still's Carenae]

To put this into perspective over the last few weeks the pound has dropped 17% against the $, but only 4% against the Euro.

Today's falls are just noise in thin markets, lots of players have pushed in the first 20 minutes, which is normal in markets, when they are hunting in packs.

[The Mindsweep]

Who is selling sterling? The EU, immigrants, lefties, single mothers, MSM, muslims?

Who do we blame?

[Long slender neck]

HODL

Seriously. How low can it go before 'something' happens?

[Dunners]

The pound seems to be stabilising a bit now. But the gilt yields are something else.

[The Mindsweep]

Is there a sub-prime lender the government can use to fund all their nonsense?

The next play now will be for them to blame everyone and everything and say they are putting everything on hold. Unfortunately the markets will see this as even further weakness.

The bring back Boris brigade will be getting ready, but sadly we are f***** no matter what happens.

[The Mindsweep]

[Dunners]

[Long slender neck]

What the hell does that mean?

[Give it to Jabo]

I does not look good, in any event.....

[StillSpike]

For all I know that might be great news.

Can you / anyone explain in plain-non-city-boy language what that all means?

[Dunners]

What the hell does that mean?

The mini budget was based on the assumption that tax cuts would be funded by borrowing. I'm no economist, but it looks like the bond market doesn't fancy our prospects, and the market is now predicting BoE interest rate rises in the region of 5.75% before the end of the FY.

[Dunners]

Can you / anyone explain in plain-non-city-boy language what that all means?

For some it could be good news - as you may be about to see the return of being rewarded for saving as opposed to borrowing. But for an economy that has evolved to function on cheap money, and for those with mortgages either on variable rates or coming to an end of their fixed term, this could be very bad news.

First, lets look at the trends:

• At the start of the year, the BoE was predicting that rates could peak at 1.5%

• By August they increased their prediction to 2.75%

• As of last week, and before the mini budget, they had increased their prediction to 4.75%

If you were to plot these changing predictions on a graph, you'd be looking at an upward curve similar to what we saw when Covid cases were on the increase. This is not something that is under control, and the markets know that.

The latest data however is predicting that rates could peak above 5.75%, and some even saying that they could be above 6%.

At this point in the discussion you'll usually get some old b*stard come along and go on about rates being 15% once upon a time. The implication being that this is no big deal and we should stop whinging and cut back on our avocados. However, while double-digit interest rates were a thing back in the past, it's a false equivalence as you must make adjustments for affordability.

This means factoring in other debt burdens, relative household income levels, mortgage terms and mortgage rates. When you do this things look very different. For comparison, a base rate of 14.2% in 1980 (when people had relative higher incomes and lower indebtedness) will feel equivalent to a 3% base rate today.



A consequence of QE, while it is argued by some to have saved the banks and us all from societal collapse, is that we're now more vulnerable to even the slightest increases in base rates. And if this sh*tstorm wasn't enough, just when these massive rate hikes could hit is exactly when there is a huge number of fixed-rate mortgage deals due to come up for renewal.

[StillSpike]

So the talk about bonds, gilts and yields means what? Is it people selling something, the price of which indicates that the city boys reckon that interest rates will go up to 5.75%+ ?

[Max Fowler]

London property prices went up 2% last month, so it's not all doom and gloom.

Also, why do boomers hate avocados so much?

[Give it to Jabo]

As in all things, especially with this Government, the the poor get screwed over to a greater extent. Looks like Rishi Sunak's economic forecasts about fiscal recklessness are coming home to roost....

[BoniO]

Kwarteng is hopeless and always was, and will be, just a yes man for his masters. He adds nothing to his new job.

In his previous role he gave the go-ahead for Sizewell C, despite huge opposition, and more tellingly, despite the fact that there is not a good enough supply of fresh water to feed the new reactor. Again, he was just toeing the party line.

[Max B Gold]

London property prices went up 2% last month, so it's not all doom and gloom.

Also, why do boomers hate avocados so much?

It's even better than rising house prices. I've got no mortgage and plenty of savings. It's win, win, win all the way to this year's Carribean Cruise. That's Capitalism baby.

[Dunners]

So the talk about bonds, gilts and yields means what? Is it people selling something, the price of which indicates that the city boys reckon that interest rates will go up to 5.75%+ ?

It represents what it will cost the government to borrow money to fund its budget plans. The increase in yields is the market saying to the UK government that they don't think we're a good bet so they want a better returns on their investment. This means that the cost of government borrowing will be much higher than initially predicted.

The markets are also betting that the BoE will raise interest rates to make the pound more attractive. This is in response to the drop in the pound and to the increase in bond yields.

If the BoE does this (and it may), it will result in about 100,000 households per month - every month - entering into severe financial stress. That will have an impact on their levels of economic activity (if not repossession of their homes) that will compound the negative economic effects being felt already.

[Dunners]

Oh, and, there is no other way.

[Max Fowler]

Oh, and, there is no other way.

All that you can do is watch them play.

[Dunners]

Hmmm. A few (very unconfirmed) rumours that there may be a statement from the BoE and the Treasury later today. I think this guy has summarised the BoE options and predicament quick neatly:

[BoniO]

The lying, incompetent, Tories will blame the BoE for the inflation rate whatever they do.

[The Mindsweep]

I was working in the markets on Black Wednesday in September 92 when the government took on the markets. The BOE weren't independent then but the interest rate started the day at 10%, when up to 12% in the late morning and 15% in the afternoon. Just before 4pm came the announcement that the UK would leave the Exchange Rate Mechanism immediately and the markets took stock. Rates returned to 10% and steadly decreased to around 7% by the end of the year and have remained lower since then.

The markets won then and will again. Sterling still has a long way to fall, even if they put rates up.