1 00:00:10,039 --> 00:00:13,440 Speaker 1: Hello, and welcome to another episode of the Odd Blots podcast. 2 00:00:13,480 --> 00:00:16,520 Speaker 1: I'm Tracy Alloway and I'm Joe. Wasn't all Joe? We 3 00:00:16,560 --> 00:00:19,439 Speaker 1: need to talk about the UK? Yeah, we definitely do. 4 00:00:19,560 --> 00:00:21,599 Speaker 1: You know. The last couple of weeks, of course, have 5 00:00:21,680 --> 00:00:25,520 Speaker 1: been consumed by the volatility and the pound and the 6 00:00:25,560 --> 00:00:28,479 Speaker 1: guilt market. And I think it's actually good that we 7 00:00:28,520 --> 00:00:30,520 Speaker 1: waited a few days. Maybe it'd a been fun to 8 00:00:30,680 --> 00:00:33,199 Speaker 1: do one right away, but there's so much confusion that 9 00:00:33,280 --> 00:00:35,400 Speaker 1: I actually think for learning something, it kind of helps 10 00:00:35,400 --> 00:00:38,080 Speaker 1: to avoid it a feed. That's my excuse. I'm going 11 00:00:38,159 --> 00:00:40,839 Speaker 1: to start this conversation with a massive caveat, which is 12 00:00:41,000 --> 00:00:44,839 Speaker 1: we are recording on October three. Things can change in 13 00:00:44,880 --> 00:00:46,960 Speaker 1: the couple of days that it takes us to get 14 00:00:47,000 --> 00:00:49,479 Speaker 1: this out, and already things have changed quite a bit. 15 00:00:49,600 --> 00:00:52,199 Speaker 1: So you know, the week before we recorded this, we 16 00:00:52,280 --> 00:00:55,560 Speaker 1: saw massive movements in the UK market. So we saw 17 00:00:55,760 --> 00:00:59,360 Speaker 1: five year guilts at like four point seven percent, which 18 00:00:59,360 --> 00:01:01,280 Speaker 1: was the highest, and two thousand and eight we saw 19 00:01:01,320 --> 00:01:04,360 Speaker 1: an even bigger move in longer dated guilts. I think 20 00:01:04,400 --> 00:01:07,840 Speaker 1: the twenty year was almost five percent. It's now back 21 00:01:07,880 --> 00:01:11,120 Speaker 1: below four percent. The pound reached a record low against 22 00:01:11,120 --> 00:01:14,679 Speaker 1: the dollar. All of this was after the UK unveiled 23 00:01:14,800 --> 00:01:17,440 Speaker 1: a mini budget that featured a bunch of tax cuts 24 00:01:17,440 --> 00:01:20,520 Speaker 1: that were expected to balloon the public deficit at a 25 00:01:20,600 --> 00:01:23,800 Speaker 1: time of inflationary pressure in the UK. Joe, I'm just 26 00:01:23,800 --> 00:01:26,440 Speaker 1: going to make that point. But even then, you know, 27 00:01:26,760 --> 00:01:29,160 Speaker 1: in the one week since all of that happened, we 28 00:01:29,280 --> 00:01:32,720 Speaker 1: now have the UK Prime Minister was trust coming out 29 00:01:32,800 --> 00:01:35,720 Speaker 1: and basically doing a U turn on one big component 30 00:01:35,760 --> 00:01:38,440 Speaker 1: of the mini budget, which was the tax cuts, And 31 00:01:38,480 --> 00:01:41,400 Speaker 1: so we're seeing some relief in the market, but there's 32 00:01:41,400 --> 00:01:45,959 Speaker 1: still this big question over what exactly just happened, right, 33 00:01:46,040 --> 00:01:48,160 Speaker 1: and so it really I mean, the story kind of 34 00:01:48,200 --> 00:01:51,440 Speaker 1: started on September twenty three when those tax cuts were announced. 35 00:01:51,680 --> 00:01:54,560 Speaker 1: It really started accelerating in the middle of the following 36 00:01:54,600 --> 00:01:58,120 Speaker 1: week the Bank of England was forced to essentially enter 37 00:01:58,200 --> 00:02:01,360 Speaker 1: the market. And when you have these big in government 38 00:02:01,360 --> 00:02:04,280 Speaker 1: bond there's always this debate, and you've written about it 39 00:02:04,360 --> 00:02:07,040 Speaker 1: for years. Another context, it's like how much is quote 40 00:02:07,040 --> 00:02:09,720 Speaker 1: fundamental and how much is technical? How much does it 41 00:02:09,800 --> 00:02:12,600 Speaker 1: have to do with market structure verse some sort of 42 00:02:12,639 --> 00:02:16,440 Speaker 1: like meaningful signal about the path of expected inflation or 43 00:02:16,480 --> 00:02:19,919 Speaker 1: the Bank of England policy rates and at times there 44 00:02:20,000 --> 00:02:22,839 Speaker 1: is a deviation, and it seemed at least at one 45 00:02:22,880 --> 00:02:26,359 Speaker 1: point last week that there was a pretty big deviation 46 00:02:26,440 --> 00:02:30,000 Speaker 1: between something like fundamental versus this sort of like technical 47 00:02:30,120 --> 00:02:33,320 Speaker 1: driven market that may have been causing a run of 48 00:02:33,400 --> 00:02:35,799 Speaker 1: sorts in at least one quarter of the market. Right, 49 00:02:35,880 --> 00:02:38,239 Speaker 1: So we are going to be getting into this technicals 50 00:02:38,320 --> 00:02:42,560 Speaker 1: versus fundamentals question with really the perfect the perfect guest. 51 00:02:42,919 --> 00:02:45,840 Speaker 1: We're going to be speaking to Toby Nangel. He is 52 00:02:45,840 --> 00:02:49,239 Speaker 1: an economic and markets commentator who worked in asset management 53 00:02:49,240 --> 00:02:52,400 Speaker 1: for twenty five years, formerly the head of global asset 54 00:02:52,440 --> 00:02:56,520 Speaker 1: Allocation for Columbia thread Needle, also a previous All Thoughts guest, 55 00:02:56,680 --> 00:03:00,760 Speaker 1: and someone who is quite philosophical at times over money 56 00:03:00,880 --> 00:03:03,239 Speaker 1: and what mark, but also apparently can get technical to 57 00:03:04,040 --> 00:03:07,640 Speaker 1: combine the philosophy with the technical, which is a rare combination. 58 00:03:07,880 --> 00:03:11,040 Speaker 1: So I'm looking forward to this conversation. Toby, Thank you 59 00:03:11,080 --> 00:03:13,480 Speaker 1: so much for coming on our bots, Thanks for having me. 60 00:03:14,040 --> 00:03:16,560 Speaker 1: So maybe a basic question to start off with, but 61 00:03:16,720 --> 00:03:20,880 Speaker 1: how remarkable were the events of the previous week or 62 00:03:20,960 --> 00:03:24,359 Speaker 1: so in your mind? Oh my goodness, yeah, I mean 63 00:03:24,400 --> 00:03:26,760 Speaker 1: for the guilt market, There's nothing like that in my career, 64 00:03:26,840 --> 00:03:29,360 Speaker 1: and I was looking back using Bank of England data 65 00:03:29,400 --> 00:03:31,640 Speaker 1: and you can't really find something like it. For the 66 00:03:31,639 --> 00:03:35,160 Speaker 1: part well since the daily data that they have there 67 00:03:35,200 --> 00:03:39,000 Speaker 1: to have the short guilt market completely repriced the Bank 68 00:03:39,000 --> 00:03:41,400 Speaker 1: of England rate path in the way it did. And 69 00:03:41,400 --> 00:03:44,200 Speaker 1: then also the long end kind of go from this 70 00:03:44,280 --> 00:03:47,840 Speaker 1: big bear flattening into this huge bear steepening as you 71 00:03:47,920 --> 00:03:51,200 Speaker 1: had liquidation trades and a and a run dynamic unfold 72 00:03:51,360 --> 00:03:54,120 Speaker 1: with the Bank of England than having to intervene to 73 00:03:54,240 --> 00:03:56,480 Speaker 1: start buying bonds when it's trying to do QT. I 74 00:03:56,480 --> 00:03:59,560 Speaker 1: mean it, there's nothing like it. It's really an extraordinary episode. 75 00:04:00,040 --> 00:04:03,120 Speaker 1: We need to uh talk to Richard Silla, who you 76 00:04:03,160 --> 00:04:05,880 Speaker 1: know history of interest rates going back to two thousand. 77 00:04:06,120 --> 00:04:09,680 Speaker 1: That was one of our first episodes to find something comparable. 78 00:04:09,760 --> 00:04:12,240 Speaker 1: It sounds like it really was wild. And all someone 79 00:04:12,280 --> 00:04:14,520 Speaker 1: has to do is look up a chart of like 80 00:04:14,800 --> 00:04:17,520 Speaker 1: tenure guilt or anything and you just see these multi 81 00:04:17,600 --> 00:04:20,720 Speaker 1: standard deviation moves that are supposed to happen like one 82 00:04:20,760 --> 00:04:24,040 Speaker 1: every hundred thousand years happening a few days. But before 83 00:04:24,040 --> 00:04:27,080 Speaker 1: we even get to like what was really driving last week, 84 00:04:27,400 --> 00:04:30,479 Speaker 1: I'm curious, like in the weeks Prior to this, it 85 00:04:30,520 --> 00:04:35,560 Speaker 1: appears we've been seeing this deterioration of market liquidity, pretty 86 00:04:35,560 --> 00:04:38,280 Speaker 1: big sell off in government bond markets around the world, 87 00:04:38,640 --> 00:04:42,080 Speaker 1: strains starting to emerge with so much tightening from central banks, 88 00:04:42,120 --> 00:04:45,359 Speaker 1: Like going prior to September twenty three, the day of 89 00:04:45,400 --> 00:04:48,279 Speaker 1: the mini budget, what we're conditions like, what was trading 90 00:04:48,320 --> 00:04:52,000 Speaker 1: like in your view in government bonds? So, I mean, 91 00:04:52,040 --> 00:04:54,640 Speaker 1: you quite right. It's in an environment of rising bone 92 00:04:54,720 --> 00:04:57,000 Speaker 1: yields around the world, driven really by by the FED, 93 00:04:57,080 --> 00:04:58,719 Speaker 1: but also what's going on the e CP and what's 94 00:04:58,760 --> 00:05:01,800 Speaker 1: anticipated to happen in the UK. From what I understand, 95 00:05:01,839 --> 00:05:04,920 Speaker 1: I mean, liquidity hasn't been amazingly good, but there was 96 00:05:05,080 --> 00:05:08,400 Speaker 1: nothing that I heard that was pointing to a complete 97 00:05:08,400 --> 00:05:11,160 Speaker 1: collapse or anything like that. I can see Joe is 98 00:05:11,200 --> 00:05:15,160 Speaker 1: setting up his his argument for later. It turned out 99 00:05:15,160 --> 00:05:18,440 Speaker 1: everything was fine. I have no argument anymore. Okay, okay. 100 00:05:18,480 --> 00:05:22,440 Speaker 1: So the Bank of England stepped in, which provoked a 101 00:05:22,480 --> 00:05:26,920 Speaker 1: whole bunch of commentary about things like fiscal dominance, and 102 00:05:26,920 --> 00:05:30,960 Speaker 1: the accepted explanation or narrative for why they stepped in 103 00:05:31,040 --> 00:05:34,719 Speaker 1: now is because something was going on with pensions and 104 00:05:34,800 --> 00:05:37,440 Speaker 1: basically we were getting this sort of like self fulfilling 105 00:05:37,560 --> 00:05:41,960 Speaker 1: cycle of yields going up, pensions having to sell stuff 106 00:05:42,040 --> 00:05:44,760 Speaker 1: off and then yields go up more. Can you walk 107 00:05:44,839 --> 00:05:47,600 Speaker 1: us through exactly what the issue was there? Yeah? Sure. 108 00:05:47,760 --> 00:05:50,039 Speaker 1: So in the UK market as the management market, the 109 00:05:50,040 --> 00:05:53,440 Speaker 1: biggest segment by by far, something's called liability driven investment 110 00:05:53,520 --> 00:05:55,760 Speaker 1: or l d I. And to understand that you have 111 00:05:55,839 --> 00:05:58,159 Speaker 1: you need to kind of rewind. Probably about twenty five 112 00:05:58,200 --> 00:06:00,440 Speaker 1: years there were these moves in the way of this 113 00:06:00,480 --> 00:06:03,159 Speaker 1: guy called Robert Maxwell, who's probably best known today in 114 00:06:03,320 --> 00:06:07,799 Speaker 1: the North American audience for being Jolne Maxwell's father. He yeah, 115 00:06:08,200 --> 00:06:12,840 Speaker 1: so he ran a media empire, the Mirror Group, and 116 00:06:13,080 --> 00:06:16,400 Speaker 1: before he fell off his yacht and drowned near the 117 00:06:16,400 --> 00:06:20,880 Speaker 1: Canary Islands, he'd fraudently taken hundreds of millions of pounds 118 00:06:20,920 --> 00:06:24,040 Speaker 1: from the Mirror Group pension scheme, leaving those pensioners basically, 119 00:06:24,120 --> 00:06:27,080 Speaker 1: you know, without a pension. So it's a huge scandal 120 00:06:27,160 --> 00:06:29,800 Speaker 1: caused of bankruptcy of that media empire and a big 121 00:06:29,839 --> 00:06:33,040 Speaker 1: bailout of the Mirror pension scheme. So then you kind 122 00:06:33,040 --> 00:06:36,160 Speaker 1: of bring in this minimum funding requirement for UK pensions. 123 00:06:36,560 --> 00:06:39,200 Speaker 1: At the same time, accountancy standards are changing. You have 124 00:06:39,240 --> 00:06:41,599 Speaker 1: this thing called FRS seventeen, which goes to f RS 125 00:06:41,640 --> 00:06:44,080 Speaker 1: one or two in the in the UK, or International 126 00:06:44,120 --> 00:06:47,840 Speaker 1: Accounting Standard i S nineteen for global, which kind of says, 127 00:06:48,080 --> 00:06:50,359 Speaker 1: do you know what a pension is? Sort of like 128 00:06:50,400 --> 00:06:53,760 Speaker 1: a deferred piece of payment for an employee. It's like 129 00:06:53,800 --> 00:06:56,120 Speaker 1: a it's like a long series of zeros, right a lot. 130 00:06:56,160 --> 00:06:58,400 Speaker 1: I mean, as in a long zero coupon bonds, So 131 00:06:58,480 --> 00:07:01,320 Speaker 1: we should probably value them like long zero. So we 132 00:07:01,440 --> 00:07:03,200 Speaker 1: get a bunch of actories to work these things out 133 00:07:03,240 --> 00:07:06,279 Speaker 1: and then discount them back using bondials. So suddenly, you know, 134 00:07:06,440 --> 00:07:09,360 Speaker 1: you had financial statements that were full of fluctuating pension 135 00:07:09,400 --> 00:07:12,840 Speaker 1: fund mismatches of assets and liabilities, and at the same 136 00:07:12,880 --> 00:07:15,160 Speaker 1: time you had this regulatory pressure to say, you know, 137 00:07:15,360 --> 00:07:18,120 Speaker 1: you probably don't want to have your pension fund hugely underfunded. 138 00:07:18,280 --> 00:07:21,000 Speaker 1: You can invest in anything you want, but if you've 139 00:07:21,000 --> 00:07:23,200 Speaker 1: got a big funding deficit, then you've got to present 140 00:07:23,240 --> 00:07:25,960 Speaker 1: a recovery plan, which might mean over that period you 141 00:07:25,960 --> 00:07:27,920 Speaker 1: can pay no dividends, you can't do em any m 142 00:07:27,960 --> 00:07:30,520 Speaker 1: and a we might say you can't change people on 143 00:07:30,560 --> 00:07:32,720 Speaker 1: your board. All these kind of things that firms don't 144 00:07:32,720 --> 00:07:35,560 Speaker 1: want to do, and so firms go, well, how do 145 00:07:35,600 --> 00:07:37,920 Speaker 1: we deal with this? And number one, they kind of 146 00:07:37,920 --> 00:07:40,880 Speaker 1: shut down their pension schemes for new entrance, and number 147 00:07:40,920 --> 00:07:44,320 Speaker 1: two they look to better match their assets and the liabilities, 148 00:07:44,640 --> 00:07:48,040 Speaker 1: their liabilities looking bond like. So this is kind of 149 00:07:48,080 --> 00:07:51,240 Speaker 1: like the deep history of it. Now, what's has got 150 00:07:51,280 --> 00:07:56,000 Speaker 1: to do with derivatives? And last week, well pretty much 151 00:07:56,200 --> 00:07:59,680 Speaker 1: almost every pension fund couldn't quite afford to match their 152 00:07:59,680 --> 00:08:02,760 Speaker 1: assets and the liabilities. So what they do instead is 153 00:08:02,800 --> 00:08:05,600 Speaker 1: they they have a growth portfolio which is kind of 154 00:08:05,600 --> 00:08:08,600 Speaker 1: low volatility that they should beat cash over time, and 155 00:08:08,600 --> 00:08:10,640 Speaker 1: then they've got a matching portfolio and that might be 156 00:08:10,680 --> 00:08:14,040 Speaker 1: long data guilts. Now the liabilities look a lot like 157 00:08:14,120 --> 00:08:16,720 Speaker 1: long dated guilts in so far as a long dated 158 00:08:16,760 --> 00:08:20,640 Speaker 1: about twenty five year duration instruments, right, but they might 159 00:08:20,680 --> 00:08:24,680 Speaker 1: only have like in the matching assets and in low 160 00:08:25,120 --> 00:08:27,920 Speaker 1: volatility growth assets. So what they do is they put 161 00:08:27,920 --> 00:08:31,000 Speaker 1: an overlay over the rest of it, using swaps or 162 00:08:31,160 --> 00:08:33,880 Speaker 1: doing kind of repo on that on that matching portfolio 163 00:08:33,960 --> 00:08:37,480 Speaker 1: to to to generate leverage. And the leverage varies a lot, 164 00:08:38,160 --> 00:08:39,559 Speaker 1: like you know, it would be up to like of 165 00:08:39,600 --> 00:08:58,800 Speaker 1: a four four times for the larger schemes. What gets 166 00:08:58,840 --> 00:09:03,280 Speaker 1: through the mechanics? Actually, yeah, what happened, Setting aside the 167 00:09:03,360 --> 00:09:07,560 Speaker 1: craziness of last week, what happens mathematically for the pensions 168 00:09:07,640 --> 00:09:10,720 Speaker 1: when rates go up as they have been this year. Okay, okay, yeah, 169 00:09:11,120 --> 00:09:13,400 Speaker 1: So if you have a pension fund, it's called assets, 170 00:09:13,440 --> 00:09:15,600 Speaker 1: which will be financial securities and other stuff, and then 171 00:09:15,720 --> 00:09:18,000 Speaker 1: we have liabilities. So let's say at the beginning of 172 00:09:18,000 --> 00:09:22,040 Speaker 1: the year, your pension fund and your assets are one hundred, 173 00:09:22,320 --> 00:09:26,880 Speaker 1: and your liabilities are hundred long dated bond yields rise up, 174 00:09:26,960 --> 00:09:28,839 Speaker 1: you know, a lot. Let's say there rise a hundred 175 00:09:28,840 --> 00:09:31,679 Speaker 1: basis points in your and your and your liability to 176 00:09:31,720 --> 00:09:34,920 Speaker 1: got duration. So now your liabilities are only seventy five 177 00:09:34,960 --> 00:09:38,920 Speaker 1: in present value terms. Now your assets they would have 178 00:09:39,000 --> 00:09:41,840 Speaker 1: maybe fallen a bit because great hasn't been fantastic, but 179 00:09:41,960 --> 00:09:45,040 Speaker 1: also on the on the liability side, those guilts have 180 00:09:45,080 --> 00:09:48,000 Speaker 1: been worth less, and then the swap overlay is worth less. 181 00:09:48,040 --> 00:09:51,160 Speaker 1: So what mathematically will have been happening during the year 182 00:09:51,559 --> 00:09:54,360 Speaker 1: is it pretty much every month they'll probably be rebalancing 183 00:09:54,840 --> 00:09:57,280 Speaker 1: so that they get back to being fully hedged and 184 00:09:57,400 --> 00:09:59,520 Speaker 1: they don't have any kind of crazy stuff going on. 185 00:09:59,760 --> 00:10:03,280 Speaker 1: So Just to be clear, the value of the assets 186 00:10:03,679 --> 00:10:06,320 Speaker 1: has in a rising rate period, the value of the 187 00:10:06,360 --> 00:10:11,080 Speaker 1: assets has fallen, but if it's orderly, it's okay because 188 00:10:11,280 --> 00:10:15,280 Speaker 1: by the accounting standards, the total value of the obligations 189 00:10:15,320 --> 00:10:18,120 Speaker 1: has fallen as well. Absolutely. I mean, we think of 190 00:10:18,160 --> 00:10:21,440 Speaker 1: pensions as investors, but what they're really trying to do 191 00:10:21,480 --> 00:10:23,560 Speaker 1: is they're trying to solve their problem. And their problem 192 00:10:23,800 --> 00:10:26,600 Speaker 1: is that they don't want to leave their beneficiaries with 193 00:10:26,679 --> 00:10:30,840 Speaker 1: an unsecure outcome, right, So that means that they don't 194 00:10:30,840 --> 00:10:32,520 Speaker 1: go around going, oh, how do I duce a little 195 00:10:32,520 --> 00:10:35,000 Speaker 1: bit more out of this? Or that they're thinking how 196 00:10:35,040 --> 00:10:37,920 Speaker 1: can I get my funding ratio into a better place, 197 00:10:38,280 --> 00:10:40,480 Speaker 1: And if they've got their funding ratio in a great place, 198 00:10:40,520 --> 00:10:43,320 Speaker 1: then they don't really care what yield are doing. So 199 00:10:43,440 --> 00:10:45,480 Speaker 1: this is like, you know, it's fine ld I works 200 00:10:45,480 --> 00:10:47,280 Speaker 1: fine in low yield environment, it works fine, and high 201 00:10:47,320 --> 00:10:50,880 Speaker 1: yeld environment it doesn't work fine if you move from 202 00:10:50,920 --> 00:10:54,360 Speaker 1: a low yielding environment to high yelding environment super super quickly, 203 00:10:54,679 --> 00:10:56,240 Speaker 1: And maybe we should have a look at them account 204 00:10:56,320 --> 00:10:57,960 Speaker 1: to that. Well, So this was going to be my 205 00:10:58,040 --> 00:11:02,000 Speaker 1: next question, what exactly how happens in that scenario when 206 00:11:02,040 --> 00:11:05,079 Speaker 1: you get a sharp move or yields move very quickly. 207 00:11:05,640 --> 00:11:08,280 Speaker 1: And when you have that type of volatility, is it 208 00:11:08,400 --> 00:11:13,320 Speaker 1: a problem because of the optics related to the pension fund? 209 00:11:13,360 --> 00:11:15,920 Speaker 1: You know, no one wants to say that they're underfunded 210 00:11:15,960 --> 00:11:17,960 Speaker 1: and then have a bunch of press written about that, 211 00:11:18,080 --> 00:11:20,440 Speaker 1: or be restricted in what they can do going forward, 212 00:11:21,080 --> 00:11:24,199 Speaker 1: or is it a problem in terms of technical stuff 213 00:11:24,240 --> 00:11:27,040 Speaker 1: that they have to do, like stump up more collateral 214 00:11:27,120 --> 00:11:30,360 Speaker 1: to cover some of those swaps that you just described. Okay, 215 00:11:30,520 --> 00:11:33,760 Speaker 1: it's it's the second one. But also importantly, in a 216 00:11:33,800 --> 00:11:35,960 Speaker 1: thing which hapn't said yeah far, it's quite important, is 217 00:11:36,000 --> 00:11:40,640 Speaker 1: that they tend to actually be underhedged. So rising yields 218 00:11:40,720 --> 00:11:44,440 Speaker 1: actually helped their funding ratios, so that that kind of 219 00:11:44,520 --> 00:11:46,240 Speaker 1: hypothetical scheme in the beginning of year, which had a 220 00:11:46,280 --> 00:11:50,520 Speaker 1: hundred assets and hundred liabilities now has seventy five liabilities. 221 00:11:50,720 --> 00:11:55,000 Speaker 1: It might actually have eight assets rather than and so 222 00:11:55,080 --> 00:11:57,800 Speaker 1: it's actually in a much much better funding ratio than 223 00:11:57,840 --> 00:12:01,400 Speaker 1: it was before. There's this being windfull gain that's come 224 00:12:01,440 --> 00:12:04,080 Speaker 1: through even though the assets are fallen. Right, it's winning 225 00:12:04,160 --> 00:12:07,040 Speaker 1: if you like. So from the optics, the optics are good, 226 00:12:07,440 --> 00:12:11,000 Speaker 1: but then there can be the mechanics and like really annoyingly, 227 00:12:11,120 --> 00:12:15,160 Speaker 1: there are kind of three different ways at least which 228 00:12:15,160 --> 00:12:17,720 Speaker 1: they kind of implement, but let's just focus on Let's 229 00:12:17,720 --> 00:12:21,079 Speaker 1: focus on like two max. Ok So, one of which 230 00:12:21,160 --> 00:12:24,120 Speaker 1: is that they they implement directly, so they have that 231 00:12:24,240 --> 00:12:27,079 Speaker 1: matching pool of assets like guilts and then the growth 232 00:12:27,120 --> 00:12:30,120 Speaker 1: pool with like a swap overlay or repo on on 233 00:12:30,160 --> 00:12:34,600 Speaker 1: the matching assets. Now they've effectively got gearedlong data guilts, 234 00:12:34,760 --> 00:12:37,720 Speaker 1: and when guilt prices fall a lot very quickly, that's 235 00:12:37,720 --> 00:12:40,440 Speaker 1: gonna make the collateral worthless. Also, the P and L 236 00:12:40,640 --> 00:12:43,840 Speaker 1: on the derivative overlay will be sharply into negative, so 237 00:12:43,840 --> 00:12:45,920 Speaker 1: you're going to have to put up more collateral and 238 00:12:45,920 --> 00:12:49,320 Speaker 1: the collatteral is worthless um and and so that's gonna 239 00:12:49,320 --> 00:12:52,000 Speaker 1: be a problem that there's going to be liquidity situation there. 240 00:12:52,760 --> 00:12:56,200 Speaker 1: It's not a funding solvency or funding ratio issue, but 241 00:12:56,240 --> 00:12:59,439 Speaker 1: there's a liquidity problem there. So that's that's one route. 242 00:12:59,520 --> 00:13:01,719 Speaker 1: The second route is something which I think a lot 243 00:13:01,760 --> 00:13:04,160 Speaker 1: more schemes have had problems with, which is a they're 244 00:13:04,160 --> 00:13:06,360 Speaker 1: not big enough to have is doas in place with 245 00:13:06,440 --> 00:13:09,480 Speaker 1: the counterparties and then having like swaps going place. So 246 00:13:09,520 --> 00:13:11,520 Speaker 1: what they do is they go to a an asset 247 00:13:11,520 --> 00:13:14,559 Speaker 1: manager that has a solutions are and and the asset 248 00:13:14,600 --> 00:13:16,959 Speaker 1: manasion says, you know, I'll tell you what. We'll take 249 00:13:17,000 --> 00:13:19,200 Speaker 1: a hundred pounds and we'll put seventy five pounds in 250 00:13:19,200 --> 00:13:21,760 Speaker 1: this growth portfolio, and we'll put twenty five pounds in 251 00:13:21,760 --> 00:13:26,080 Speaker 1: this pooled leverage matching fund which has all the leverage 252 00:13:26,160 --> 00:13:29,000 Speaker 1: within it and there's nothing outside that along with like 253 00:13:29,360 --> 00:13:34,199 Speaker 1: a hundred other pension schemes. Now, if you as a 254 00:13:34,240 --> 00:13:36,880 Speaker 1: pension scheme with your hundred pounds, you've got liquidity to 255 00:13:36,960 --> 00:13:38,800 Speaker 1: make sure that you can put in more collateral if 256 00:13:38,840 --> 00:13:41,480 Speaker 1: you need to, because you know your your funding ratio 257 00:13:41,520 --> 00:13:44,120 Speaker 1: is improving. This is great, and so you all set 258 00:13:44,160 --> 00:13:47,439 Speaker 1: up fantastically. But maybe some of those other schemes they 259 00:13:47,440 --> 00:13:50,880 Speaker 1: don't have liquidity. Maybe they're invested in private credit or 260 00:13:50,960 --> 00:13:54,400 Speaker 1: infrastructure or other long term types of things which don't 261 00:13:54,400 --> 00:13:57,760 Speaker 1: have great liquidity. Now, if the asset manager says, okay, 262 00:13:57,800 --> 00:14:00,600 Speaker 1: you know, we've we've got we've got to recapitalize nation events, 263 00:14:00,760 --> 00:14:03,560 Speaker 1: so you need to transfer more funds in, then they're 264 00:14:03,600 --> 00:14:06,480 Speaker 1: unable to do anything about it. And so they heads 265 00:14:06,520 --> 00:14:09,120 Speaker 1: just starts to fall away, even if the whole structure 266 00:14:09,160 --> 00:14:12,520 Speaker 1: within those pool funds is maintained. But the asset manager 267 00:14:12,800 --> 00:14:15,040 Speaker 1: sometimes might even kind of go, do you know what, Like, 268 00:14:15,120 --> 00:14:17,400 Speaker 1: you know, we're not going to get recapitalization for most 269 00:14:17,440 --> 00:14:20,240 Speaker 1: of these, we might just decide to deliver them ourselves. 270 00:14:20,760 --> 00:14:23,200 Speaker 1: And that's what you saw, I think one of the 271 00:14:23,200 --> 00:14:25,760 Speaker 1: announcements over we can come out from a large asset manager. 272 00:14:26,520 --> 00:14:28,840 Speaker 1: I just have a million questions, but I'll start and 273 00:14:29,120 --> 00:14:30,840 Speaker 1: just to sort of recap what you're saying. You know, 274 00:14:31,000 --> 00:14:34,560 Speaker 1: sometimes in market, sometimes I'm skeptical of it, but sometimes 275 00:14:34,600 --> 00:14:38,840 Speaker 1: in market people make a distinction between a liquidity crisis 276 00:14:39,280 --> 00:14:41,920 Speaker 1: and a solvency crisis. And so just to be clear, 277 00:14:42,720 --> 00:14:46,600 Speaker 1: what you described is it seems like a fairly clear 278 00:14:46,680 --> 00:14:50,680 Speaker 1: example of what should be categorized as a liquidity crisis, 279 00:14:50,720 --> 00:14:54,600 Speaker 1: because in some cases maybe the move and rates improved 280 00:14:54,600 --> 00:14:58,720 Speaker 1: the overall solvency and created a gap between the value 281 00:14:58,720 --> 00:15:01,440 Speaker 1: of the assets today and the applic asians, but the 282 00:15:01,480 --> 00:15:03,640 Speaker 1: mechanics of it, and you just you know, there were 283 00:15:03,680 --> 00:15:07,720 Speaker 1: several different avenues. This really sounds like liquidity was the 284 00:15:07,800 --> 00:15:13,160 Speaker 1: key issue here. That's absolutely right, Joe. And moreover, the 285 00:15:13,280 --> 00:15:17,240 Speaker 1: only route for liquidity for some of these was actually 286 00:15:17,320 --> 00:15:21,840 Speaker 1: selling long dated guilts or unwinding long dated swaps, which 287 00:15:21,960 --> 00:15:24,360 Speaker 1: which kind of then then boils down to like you 288 00:15:24,400 --> 00:15:27,080 Speaker 1: know this the Bank of England when they intervened, they 289 00:15:27,080 --> 00:15:30,480 Speaker 1: weren't doing it to bail out pension schemes. It might actually, 290 00:15:30,520 --> 00:15:34,080 Speaker 1: I think, I think, actually genuinely it will have disadvantaged 291 00:15:34,400 --> 00:15:39,600 Speaker 1: large numbers of pension schemes materially by their actions. It tracy, 292 00:15:39,680 --> 00:15:41,880 Speaker 1: you know, I'm thinking it feels like this is actually 293 00:15:41,880 --> 00:15:44,360 Speaker 1: a common theme this year, and I'm thinking, like some 294 00:15:44,480 --> 00:15:48,320 Speaker 1: of the commodity volatility that earlier in the year, where 295 00:15:48,360 --> 00:15:52,960 Speaker 1: you have these commodity producers they were actually benefiting from 296 00:15:53,000 --> 00:15:56,119 Speaker 1: a sort of solidcy basis by the fact that commodities 297 00:15:56,120 --> 00:15:59,320 Speaker 1: were surging, but due to the funding cost of their hedges, 298 00:15:59,680 --> 00:16:03,240 Speaker 1: were risk of going bankrupt despite favorable commodity right, and 299 00:16:03,280 --> 00:16:06,440 Speaker 1: also just the pro cyclicality of margin calls, which is 300 00:16:06,480 --> 00:16:09,280 Speaker 1: something we also saw in the commodities market. Okay, So 301 00:16:09,800 --> 00:16:13,320 Speaker 1: on that note, Toby, you just mentioned the BOE coming in. 302 00:16:13,760 --> 00:16:17,840 Speaker 1: What exactly did they do first off, and is it 303 00:16:17,960 --> 00:16:22,040 Speaker 1: quie or not and why does it matter? And then secondly, 304 00:16:22,400 --> 00:16:24,760 Speaker 1: what impact has that had on the pension fund. So 305 00:16:24,800 --> 00:16:28,320 Speaker 1: you mentioned that it might actually have been negative for 306 00:16:28,360 --> 00:16:31,080 Speaker 1: them in terms of a funding perspective, but it would 307 00:16:31,080 --> 00:16:34,160 Speaker 1: have broken the liquidity margin called doom loop that you 308 00:16:34,240 --> 00:16:37,600 Speaker 1: just described. Yeah, that's that's right. So the Bank of 309 00:16:37,600 --> 00:16:40,640 Speaker 1: England they saw that this doom look was in place 310 00:16:40,800 --> 00:16:43,120 Speaker 1: and that you don't know where that's going to lead, right, 311 00:16:43,160 --> 00:16:46,400 Speaker 1: that could that could undermine the entire financial system. So 312 00:16:46,600 --> 00:16:49,800 Speaker 1: they intervened with an announcement that they would do daily 313 00:16:49,840 --> 00:16:53,280 Speaker 1: auctions of up to five billion pounds each in long 314 00:16:53,360 --> 00:16:56,120 Speaker 1: dated securities, and they did their first auction and I 315 00:16:56,120 --> 00:16:58,120 Speaker 1: think it was like just over a been was was 316 00:16:58,120 --> 00:17:01,800 Speaker 1: was offered, but the announcement just collapsed long yields by 317 00:17:01,960 --> 00:17:04,520 Speaker 1: a hundred basis points, I mean a huge move. I mean, 318 00:17:04,560 --> 00:17:06,520 Speaker 1: if you've got twenty five year duration in this stuff, 319 00:17:06,560 --> 00:17:11,240 Speaker 1: that's a percent price jump just on the announcement, which 320 00:17:11,320 --> 00:17:13,920 Speaker 1: is just phenomenal. So so that's what they're technically doing. 321 00:17:14,000 --> 00:17:17,200 Speaker 1: Is that quee um. I think that technically you could 322 00:17:17,200 --> 00:17:19,440 Speaker 1: talk about it as balance sheet enlargement, but I think 323 00:17:19,480 --> 00:17:23,199 Speaker 1: it's it can only be understood as a lender of 324 00:17:23,240 --> 00:17:26,320 Speaker 1: last resort, or rather market maker of last resort function 325 00:17:26,400 --> 00:17:29,040 Speaker 1: that it's stepping in to do. It's protecting the financial system. 326 00:17:29,080 --> 00:17:32,240 Speaker 1: It's not trying to reverse QT in it anyway. And 327 00:17:32,359 --> 00:17:35,280 Speaker 1: you know, I think actually it was. They executed it 328 00:17:35,320 --> 00:17:38,399 Speaker 1: and the results are probably way beyond their expectations. And 329 00:17:38,440 --> 00:17:40,480 Speaker 1: then the second question was about like what was the 330 00:17:40,480 --> 00:17:44,480 Speaker 1: impact on pension funds. Well, some some of these these 331 00:17:44,520 --> 00:17:47,480 Speaker 1: pension funds will being cleared out of their hedges, whether 332 00:17:48,560 --> 00:17:51,920 Speaker 1: through their choice or through their managers choices, up when 333 00:17:52,119 --> 00:17:56,160 Speaker 1: long dated yields were above five percent. And so if 334 00:17:56,200 --> 00:17:57,840 Speaker 1: you think of that, you know that fund that's feeling 335 00:17:57,880 --> 00:18:01,440 Speaker 1: really great because it's it's assets are fallen by year 336 00:18:01,440 --> 00:18:04,479 Speaker 1: to day, but it's liabilities are down twenty five year 337 00:18:04,520 --> 00:18:07,720 Speaker 1: to date, and you have like the assets and liabilities 338 00:18:07,720 --> 00:18:10,400 Speaker 1: going up and down in this roller coaster together. Well, 339 00:18:10,400 --> 00:18:13,480 Speaker 1: the assets just fell out when the game unbledged and 340 00:18:13,520 --> 00:18:16,879 Speaker 1: the liabilities rose back up hugely after the Bank of 341 00:18:16,920 --> 00:18:21,600 Speaker 1: England intervention. And so that windfall gain which might have 342 00:18:21,680 --> 00:18:25,000 Speaker 1: come from rising yields, because that's a little bit under hedge. 343 00:18:25,200 --> 00:18:28,200 Speaker 1: I don't know the impact like system systemically, and I 344 00:18:28,240 --> 00:18:31,480 Speaker 1: don't think anyone knows the impact systemically yet as see 345 00:18:31,480 --> 00:18:33,919 Speaker 1: what the hits being for them. Hopefully it's small. I 346 00:18:33,920 --> 00:18:35,920 Speaker 1: think in the macreconic terms it will be small, but 347 00:18:36,000 --> 00:18:39,840 Speaker 1: it will be hugely painful for for a number of schemes. 348 00:18:39,880 --> 00:18:42,920 Speaker 1: So I'm thinking back to in the US in UH 349 00:18:42,920 --> 00:18:45,280 Speaker 1: and I guess elsewhere, but in the US and spring 350 00:18:46,440 --> 00:18:49,560 Speaker 1: on set of the pandemic, and it was a similar 351 00:18:49,600 --> 00:18:55,399 Speaker 1: situation with leverage hedge funds that are cash treasuries versus futures, 352 00:18:56,040 --> 00:18:58,760 Speaker 1: and the FED head to step in and restore calm 353 00:18:58,800 --> 00:19:00,879 Speaker 1: to the market. And then you know that people have 354 00:19:00,920 --> 00:19:03,400 Speaker 1: talked about the idea of like a standing repo facility 355 00:19:03,560 --> 00:19:05,920 Speaker 1: such that at any given time you can just get 356 00:19:05,960 --> 00:19:09,000 Speaker 1: liquidity for what, within any given systems should be the 357 00:19:09,119 --> 00:19:13,199 Speaker 1: safest most liquid asset. Would something like that in the 358 00:19:13,320 --> 00:19:16,720 Speaker 1: UK had it? Is there anything equivalent to that in place? 359 00:19:17,320 --> 00:19:21,399 Speaker 1: Or would something like that be useful such that the 360 00:19:21,520 --> 00:19:24,240 Speaker 1: central bank doesn't have to make ad hoc decisions about 361 00:19:24,240 --> 00:19:27,000 Speaker 1: when to step in, but allow players to at any 362 00:19:27,040 --> 00:19:31,320 Speaker 1: time get central bank liquidity for their guilt. So I 363 00:19:31,359 --> 00:19:33,640 Speaker 1: don't think that there was I mean, I could be wrong, 364 00:19:33,680 --> 00:19:36,639 Speaker 1: so I'm gonna caveat that, but I don't think that 365 00:19:36,680 --> 00:19:39,040 Speaker 1: there was a problem about getting liquidity feel guilt. I 366 00:19:39,040 --> 00:19:41,199 Speaker 1: don't think that people were wondering, you know, how do I, 367 00:19:41,240 --> 00:19:43,600 Speaker 1: how do I get finance for this. It's more that 368 00:19:43,880 --> 00:19:47,000 Speaker 1: owing to the structure of the leverage, the value of 369 00:19:47,000 --> 00:19:49,640 Speaker 1: the guilts had had reduced such that, you know, they 370 00:19:49,680 --> 00:19:52,639 Speaker 1: just didn't have enough collateral. I mean, consultants will we 371 00:19:52,640 --> 00:19:54,159 Speaker 1: talked about you know, I was speaking to a c 372 00:19:54,280 --> 00:19:56,840 Speaker 1: i OVA of an investment consultant for a piece I 373 00:19:56,880 --> 00:20:00,520 Speaker 1: read in in July setting up this whole yeah, concern 374 00:20:00,600 --> 00:20:03,280 Speaker 1: about l d I. And he told me, listen, one 375 00:20:03,320 --> 00:20:07,359 Speaker 1: of my clients had one point five billion pounds of 376 00:20:07,480 --> 00:20:10,879 Speaker 1: excess collateral when guilt yields were down at the lows 377 00:20:11,000 --> 00:20:14,320 Speaker 1: during the pandemic. They've now got zero and they need 378 00:20:14,359 --> 00:20:16,840 Speaker 1: to get another billion pounds collateral call to come through, 379 00:20:16,920 --> 00:20:19,720 Speaker 1: so they're selling things that was in June, right, that 380 00:20:19,800 --> 00:20:22,080 Speaker 1: was the effect of what had happened through then. So 381 00:20:22,119 --> 00:20:24,920 Speaker 1: you had let's say that twenty five which was guilts, 382 00:20:24,960 --> 00:20:27,080 Speaker 1: you might have only needed ten to put in that 383 00:20:27,119 --> 00:20:29,719 Speaker 1: pot for collateral, and that then fifteen could have been 384 00:20:29,800 --> 00:20:32,600 Speaker 1: excess collateral. Then you know, as as yields rise, so 385 00:20:32,640 --> 00:20:35,520 Speaker 1: your excess collateral shrinks down and then you need to 386 00:20:35,600 --> 00:20:38,399 Speaker 1: replenish it, you need to rebalance. And these things can happen, 387 00:20:38,560 --> 00:20:40,359 Speaker 1: you know, they can. It can cause a little bit 388 00:20:40,400 --> 00:20:43,800 Speaker 1: of strains on the system. But they can happen over months, 389 00:20:43,840 --> 00:20:47,520 Speaker 1: but they can't happen over forty eight hours. So speaking 390 00:20:47,520 --> 00:20:52,160 Speaker 1: of collateral calls, which is basically a synonym for forced deleveraging, 391 00:20:52,320 --> 00:20:54,560 Speaker 1: I know, we we talked about the sort of doom 392 00:20:54,600 --> 00:20:57,800 Speaker 1: loop of you know, yields going up and so pension 393 00:20:57,800 --> 00:21:01,080 Speaker 1: funds have to sell more guilt and then that forces 394 00:21:01,160 --> 00:21:03,679 Speaker 1: yields to go up more, particularly at the long end. 395 00:21:04,040 --> 00:21:07,480 Speaker 1: But we've also seen some chatter about other assets being 396 00:21:07,520 --> 00:21:11,800 Speaker 1: sold to satisfy these margin requirements. What have you seen there? 397 00:21:11,800 --> 00:21:14,679 Speaker 1: I've seen talk of credit, you know, specifically some e 398 00:21:14,760 --> 00:21:18,200 Speaker 1: t F given that they're more liquid than underlying cash bonds. 399 00:21:18,280 --> 00:21:21,160 Speaker 1: But also I've seen people talk about the impact going 400 00:21:21,240 --> 00:21:25,760 Speaker 1: as far as the Australian mortgage market. Last week, Yeah, yeah, 401 00:21:25,760 --> 00:21:29,600 Speaker 1: I saw Australian rnbs that go on bid in project credit. Yeah, absolutely, 402 00:21:30,160 --> 00:21:33,159 Speaker 1: that's far an offer. I'd say that the vast majority 403 00:21:33,359 --> 00:21:37,040 Speaker 1: of large pension schemes which are in the UK market, 404 00:21:37,119 --> 00:21:40,520 Speaker 1: large I mean l D I liability driven investment comes around. 405 00:21:40,600 --> 00:21:42,320 Speaker 1: I mean covered at the last count, which will be 406 00:21:42,359 --> 00:21:44,760 Speaker 1: smaller now about one and a half trillion pounds, but 407 00:21:44,840 --> 00:21:47,600 Speaker 1: that would be like out of close to two trillion 408 00:21:47,640 --> 00:21:50,840 Speaker 1: pounds worth of defined benefit pensions. So these are the 409 00:21:50,920 --> 00:21:54,320 Speaker 1: kind of magnitudes and now the vast majority of them 410 00:21:54,680 --> 00:21:58,920 Speaker 1: will have come through this and feel, wow, our strategy survived. 411 00:21:59,000 --> 00:22:00,840 Speaker 1: You know, we didn't get into forced the leveraging. This 412 00:22:00,920 --> 00:22:03,399 Speaker 1: is fantastic, and they'll feel really great about that, and 413 00:22:03,440 --> 00:22:04,959 Speaker 1: I think that's good. But then they'll look at their 414 00:22:04,960 --> 00:22:08,160 Speaker 1: asset allocation and they just go whose asset allocation is this? 415 00:22:08,359 --> 00:22:11,679 Speaker 1: You know, this doesn't look like my asset allocation because 416 00:22:12,119 --> 00:22:16,159 Speaker 1: it was all pulled so out of kilter by the 417 00:22:16,240 --> 00:22:19,439 Speaker 1: changes that have occurred, not in the market values of 418 00:22:19,480 --> 00:22:22,240 Speaker 1: the of the additional things, but rather you know that 419 00:22:22,280 --> 00:22:26,399 Speaker 1: the bond portion is shifted around, the portion allocated to 420 00:22:26,640 --> 00:22:30,000 Speaker 1: liquids will be much higher than they'd probably had in 421 00:22:30,040 --> 00:22:32,919 Speaker 1: their policy, and so there will be this process of 422 00:22:32,960 --> 00:22:36,120 Speaker 1: how do you get back to where you thought you were? 423 00:22:36,920 --> 00:22:39,159 Speaker 1: And that's going to be kind of the next the 424 00:22:39,240 --> 00:22:58,000 Speaker 1: order of business for the next few months. And can 425 00:22:58,040 --> 00:23:01,439 Speaker 1: we beg We mentioned you had your your head of 426 00:23:01,480 --> 00:23:04,240 Speaker 1: asset allocation at Columbia Threadne Can you just talk a 427 00:23:04,280 --> 00:23:06,280 Speaker 1: little bit more for the You know, Tracy and I 428 00:23:06,320 --> 00:23:07,960 Speaker 1: have known you for years. We've had you on the 429 00:23:08,000 --> 00:23:12,840 Speaker 1: podcast Smart Guy on Details, Smart Guy on big philosophical 430 00:23:12,920 --> 00:23:15,440 Speaker 1: questions about the definition of money. But maybe for people 431 00:23:15,480 --> 00:23:17,680 Speaker 1: who are listening to you for the first time, can 432 00:23:17,720 --> 00:23:20,359 Speaker 1: you describe what you did? But also like, what is 433 00:23:20,400 --> 00:23:23,400 Speaker 1: the sort of normal state of the guilt market, who 434 00:23:23,480 --> 00:23:27,280 Speaker 1: is trading them, who owned them? And like what is 435 00:23:27,320 --> 00:23:30,840 Speaker 1: sort of like the the ecosystem of guilt holders and traders. 436 00:23:30,880 --> 00:23:34,600 Speaker 1: What does that look like in normal time from your perspective. So, yeah, 437 00:23:34,600 --> 00:23:36,399 Speaker 1: I used to be global head of as apllocation at 438 00:23:36,400 --> 00:23:40,119 Speaker 1: Colombia thread Needle, which is a large investment firm. My 439 00:23:40,200 --> 00:23:43,080 Speaker 1: team managed what about a hundred and sixty billion dollars 440 00:23:43,200 --> 00:23:46,680 Speaker 1: across teams in four time zones the UK. Frankly, it 441 00:23:46,760 --> 00:23:50,480 Speaker 1: is a fairly small part of that global that global area, 442 00:23:50,560 --> 00:23:52,439 Speaker 1: but I had quite a lot of contact because a 443 00:23:52,480 --> 00:23:54,840 Speaker 1: fund I managed, I mean, it served as a growth 444 00:23:54,840 --> 00:23:58,800 Speaker 1: fund for pension funds that we're looking at liability driven investment, 445 00:23:59,040 --> 00:24:01,280 Speaker 1: that sort of thing. So so I had conversations with 446 00:24:01,960 --> 00:24:05,880 Speaker 1: pension fund trustees and and and consultants over the past 447 00:24:05,920 --> 00:24:08,359 Speaker 1: sort of ten fifteen years to understand the kind of 448 00:24:08,359 --> 00:24:10,440 Speaker 1: aims and ambitions that they have and how they're trying 449 00:24:10,480 --> 00:24:12,440 Speaker 1: to implement these things. And in terms of the guilt 450 00:24:12,480 --> 00:24:15,399 Speaker 1: market more generally, the guilt market is I mean, the 451 00:24:15,520 --> 00:24:20,000 Speaker 1: UK defined benefit pension system is just very large compared 452 00:24:20,119 --> 00:24:22,600 Speaker 1: to the amount of fixed income out there. I read 453 00:24:22,640 --> 00:24:25,000 Speaker 1: I read a piece a few years ago which I 454 00:24:25,000 --> 00:24:30,000 Speaker 1: haven't revisited, which was looking at the amount of duration 455 00:24:30,720 --> 00:24:35,600 Speaker 1: in Sterling denominated instruments and comparing it to the duration 456 00:24:35,800 --> 00:24:38,440 Speaker 1: of defined benefit pension schemes, Like if they all wanted 457 00:24:38,480 --> 00:24:40,960 Speaker 1: to just allocate to bonds, could they know? Is the 458 00:24:40,960 --> 00:24:43,880 Speaker 1: answer there? Simply isn't enough UK to or at least 459 00:24:43,920 --> 00:24:46,520 Speaker 1: there wasn't enough UK duration for them to do that. 460 00:24:46,600 --> 00:24:49,040 Speaker 1: They would have to take basis risk, They would have 461 00:24:49,160 --> 00:24:53,080 Speaker 1: to go out and think of other strategies used derivatives 462 00:24:53,160 --> 00:24:55,719 Speaker 1: in order to try to get towards that kind of 463 00:24:55,720 --> 00:24:59,920 Speaker 1: locked funding ratio. I know we've been focused on pension 464 00:25:00,040 --> 00:25:02,479 Speaker 1: funds for the most part, but in terms of those 465 00:25:02,760 --> 00:25:06,960 Speaker 1: overlay strategies used to pump up leverage and therefore pump 466 00:25:07,040 --> 00:25:09,560 Speaker 1: up returns. I mean, this was one of the suspicions 467 00:25:09,600 --> 00:25:12,280 Speaker 1: about some of the big bond funds for the past 468 00:25:12,320 --> 00:25:14,879 Speaker 1: ten years or so. Um, I'm thinking of one in 469 00:25:14,920 --> 00:25:19,000 Speaker 1: particular selling a lot of volatility, you know, taking on 470 00:25:19,040 --> 00:25:21,560 Speaker 1: a lot of duration risk and things like that. How 471 00:25:21,800 --> 00:25:26,080 Speaker 1: endemic are these overlay strategies to asset management in general? 472 00:25:27,040 --> 00:25:30,280 Speaker 1: I don't think that they are particularly endemic, I mean 473 00:25:31,640 --> 00:25:34,960 Speaker 1: beyond the largest portion of the UK st management industry, 474 00:25:35,040 --> 00:25:37,800 Speaker 1: which which is a livelit d of an investment side. 475 00:25:38,000 --> 00:25:40,600 Speaker 1: But I think it's really really important because I realized 476 00:25:40,640 --> 00:25:43,200 Speaker 1: you said at the beginning, you can get really that's okay, 477 00:25:43,280 --> 00:25:45,800 Speaker 1: and I have done because you know, I'm part of 478 00:25:45,800 --> 00:25:47,960 Speaker 1: your your audience. I listened to your podcasts. I love it. 479 00:25:47,960 --> 00:25:50,439 Speaker 1: And I think lots of super geeky people do no 480 00:25:50,480 --> 00:25:55,600 Speaker 1: offense to the rest of the audience. Geeks unite. But 481 00:25:56,320 --> 00:25:58,080 Speaker 1: one of the things which I which I'm seeing in 482 00:25:58,200 --> 00:26:01,119 Speaker 1: the mainstream well all across the main seam press in 483 00:26:01,119 --> 00:26:04,480 Speaker 1: in the UK, is that leverage has been used to 484 00:26:04,640 --> 00:26:09,120 Speaker 1: deuce returns to pump up returns. It's and that's not 485 00:26:09,280 --> 00:26:12,840 Speaker 1: really what's going on here. What's really going on here 486 00:26:13,160 --> 00:26:16,080 Speaker 1: is that there isn't enough UK fixed in come duration 487 00:26:16,560 --> 00:26:20,840 Speaker 1: and it doesn't seem necessarily unreasonable to think about a 488 00:26:20,840 --> 00:26:25,080 Speaker 1: recovery strategy for UK pension scheme which uses which uses 489 00:26:25,119 --> 00:26:27,879 Speaker 1: synthetic duration to help you get there what's been I 490 00:26:27,920 --> 00:26:30,840 Speaker 1: think the lesson that will be taken away from here 491 00:26:30,920 --> 00:26:34,040 Speaker 1: is that you need to have way larger cushions in place, 492 00:26:34,480 --> 00:26:36,600 Speaker 1: sort of basis points to exhaustion, if you like, on 493 00:26:36,640 --> 00:26:40,040 Speaker 1: your derivative platform in order to know with confidence you're 494 00:26:40,040 --> 00:26:41,920 Speaker 1: going to be able to implement it properly or you're 495 00:26:41,920 --> 00:26:44,000 Speaker 1: going to have to have a much more liquid portfolio, 496 00:26:44,359 --> 00:26:46,879 Speaker 1: which flies in the face of everything the government's been 497 00:26:46,880 --> 00:26:48,800 Speaker 1: trying to do over the past few years to try 498 00:26:48,800 --> 00:26:53,040 Speaker 1: and incentivize pension schemes to invest in infrastructure or property 499 00:26:53,320 --> 00:26:55,960 Speaker 1: or venture capital or all the sort of things that 500 00:26:56,040 --> 00:26:58,840 Speaker 1: might help the country's growth profile. That's kind of like 501 00:26:58,880 --> 00:27:01,840 Speaker 1: going to reverse now, I'm going to up the geek sticks. 502 00:27:01,920 --> 00:27:05,280 Speaker 1: Now it talk to us why there isn't enough supply 503 00:27:05,440 --> 00:27:07,280 Speaker 1: of duration, because this is something that you hear in 504 00:27:07,359 --> 00:27:10,119 Speaker 1: the US as well, although you know a lot of 505 00:27:10,119 --> 00:27:12,640 Speaker 1: the commentary there is about the Central Bank having suck 506 00:27:12,680 --> 00:27:16,680 Speaker 1: duration out of the market by purchasing MBS and other bonds. 507 00:27:16,720 --> 00:27:19,920 Speaker 1: So yeah, I mean I've had this conversation about like, 508 00:27:20,640 --> 00:27:22,960 Speaker 1: why isn't a more duration in the UK market for 509 00:27:24,240 --> 00:27:27,480 Speaker 1: with various of degrees of success me trying to find 510 00:27:27,480 --> 00:27:30,760 Speaker 1: the answer for the past twenty five years. I've spoken 511 00:27:30,800 --> 00:27:36,040 Speaker 1: to you know, past heads of management office, the UK governments, 512 00:27:36,440 --> 00:27:39,720 Speaker 1: different corporate treasurers, and where I've sort of got to 513 00:27:40,119 --> 00:27:43,359 Speaker 1: on this is that actually, yeah, I would agree with 514 00:27:43,440 --> 00:27:46,919 Speaker 1: the UK government that the UK government issues way longer 515 00:27:46,960 --> 00:27:49,919 Speaker 1: than any other government. So the term structure of of 516 00:27:50,000 --> 00:27:53,640 Speaker 1: guilts is just hugely longer than any other G seven 517 00:27:53,640 --> 00:27:55,560 Speaker 1: government in orld, or in fact, I think any government 518 00:27:55,600 --> 00:27:58,119 Speaker 1: in the world, and that's partly trying to satisfy that 519 00:27:58,200 --> 00:28:00,920 Speaker 1: first duration at the same time and his balance a 520 00:28:01,000 --> 00:28:03,840 Speaker 1: question which I didn't answer sorry earlier, Tracy, when you said, well, 521 00:28:04,040 --> 00:28:05,840 Speaker 1: who else is in the market the guilts? Right, So 522 00:28:05,880 --> 00:28:09,000 Speaker 1: the shorter part it's insurance funds, and longer part is 523 00:28:09,000 --> 00:28:11,679 Speaker 1: all pension funds. The middle part is fairly sort of 524 00:28:11,720 --> 00:28:14,280 Speaker 1: makant really, So yeah, the UK govern already excuse their 525 00:28:14,440 --> 00:28:18,560 Speaker 1: in terms of corporate bonds, now, the corporate bond market 526 00:28:18,600 --> 00:28:20,879 Speaker 1: in the UK is just really tiny there isn't a 527 00:28:20,920 --> 00:28:25,320 Speaker 1: huge amount of bond borrowing by UK companies, and I 528 00:28:25,359 --> 00:28:27,280 Speaker 1: was kind of thinking, well, why, I mean, there's sort 529 00:28:27,320 --> 00:28:31,000 Speaker 1: of doing this through having an unfunded pension scheme. And 530 00:28:31,000 --> 00:28:33,560 Speaker 1: then it sort of struck me, well, maybe maybe they've 531 00:28:33,560 --> 00:28:37,719 Speaker 1: decided to do their long dadd corporate boring through an 532 00:28:37,800 --> 00:28:41,600 Speaker 1: unfunded pension scheme because the fees that go to the 533 00:28:41,680 --> 00:28:44,360 Speaker 1: Pension Protection Fund, which is our version of the PBGC, 534 00:28:44,760 --> 00:28:48,720 Speaker 1: might might actually be kind of lower than the aggregated 535 00:28:49,240 --> 00:28:51,760 Speaker 1: you know, the spread that you might pay. This is 536 00:28:51,800 --> 00:28:55,040 Speaker 1: what I mean by Toby being both technical and philosophical 537 00:28:55,040 --> 00:28:57,720 Speaker 1: at the same time. I like that, you know, it 538 00:28:57,840 --> 00:29:00,400 Speaker 1: sounds like if there's a shortage of duration, then the 539 00:29:00,440 --> 00:29:05,120 Speaker 1: government should enact a budget that increases guilt issuance by 540 00:29:05,280 --> 00:29:07,840 Speaker 1: Weren't they just trying to solve a basic problem there? 541 00:29:09,280 --> 00:29:11,520 Speaker 1: But in all seriousness on that point, I mean, it's 542 00:29:11,560 --> 00:29:13,720 Speaker 1: kind of a troll but also not really like what 543 00:29:13,960 --> 00:29:17,160 Speaker 1: is it? What was it about that announcement? You think 544 00:29:17,440 --> 00:29:19,440 Speaker 1: that was so like, this is what I'm still trying 545 00:29:19,480 --> 00:29:23,280 Speaker 1: to wrap my head around, right, and why I was 546 00:29:23,320 --> 00:29:26,200 Speaker 1: I trying to um, you know, what I was asking about? 547 00:29:26,200 --> 00:29:28,920 Speaker 1: What were liquidity conditions in the days run up to it. 548 00:29:29,120 --> 00:29:33,360 Speaker 1: What was it about the announcement? Such violence in the market. So, 549 00:29:33,480 --> 00:29:35,560 Speaker 1: I mean I was watching the announcement with with a 550 00:29:35,560 --> 00:29:38,920 Speaker 1: bunch of fellow geeks, you know WhatsApp group, and we 551 00:29:38,920 --> 00:29:41,400 Speaker 1: were looking at and going oh my god, oh wow, 552 00:29:41,880 --> 00:29:44,760 Speaker 1: as he was announcing these things. But if you'd asked 553 00:29:44,760 --> 00:29:46,760 Speaker 1: me before, you know, if I had been that guy 554 00:29:46,800 --> 00:29:49,200 Speaker 1: who's put into number eleven saying so here's what we're 555 00:29:49,200 --> 00:29:52,120 Speaker 1: gonna do, I go, wow, that's that's really that's a 556 00:29:52,160 --> 00:29:54,440 Speaker 1: bit of a shocker. If I was asked like, what 557 00:29:54,520 --> 00:29:56,560 Speaker 1: do you think the market is going to do? I 558 00:29:56,600 --> 00:29:59,360 Speaker 1: wouldn't have said what it did, right, you know. And 559 00:29:59,440 --> 00:30:01,520 Speaker 1: so I mean I think that you can explain what 560 00:30:01,640 --> 00:30:05,280 Speaker 1: happened by by two things. And this is kind of like, 561 00:30:05,360 --> 00:30:07,960 Speaker 1: you know, it was partly the substance. I think that's 562 00:30:08,000 --> 00:30:10,000 Speaker 1: definitely part of it, but it was also the style. 563 00:30:10,560 --> 00:30:12,400 Speaker 1: So you know, I mean that the new Prime Minister, 564 00:30:12,560 --> 00:30:16,040 Speaker 1: Liz Traus and her chancey Chancellor Quasi Quatain came to 565 00:30:16,240 --> 00:30:20,240 Speaker 1: power and Queen immediately died, and so nothing happened at all, 566 00:30:20,480 --> 00:30:22,680 Speaker 1: but they wanted to do stuff before Parliament sort of 567 00:30:23,240 --> 00:30:26,880 Speaker 1: went into recess. Now they're pretty iconoclastic in their style. 568 00:30:27,360 --> 00:30:30,360 Speaker 1: During the whole leadership campaign, the Prime Minister put the 569 00:30:30,360 --> 00:30:33,800 Speaker 1: Bank of England mandate into play. On the first day 570 00:30:33,840 --> 00:30:37,080 Speaker 1: in the role, Quasi Quantain sacked Tom Scholar, who was 571 00:30:37,120 --> 00:30:40,640 Speaker 1: the most senior respected official in the Treasury. From their perspectively, 572 00:30:40,760 --> 00:30:44,000 Speaker 1: be proud of the establishment. He Quasi Kana announces that 573 00:30:44,240 --> 00:30:45,680 Speaker 1: it will be a physical event and it wouldn't be 574 00:30:45,680 --> 00:30:47,440 Speaker 1: a budget because you know, the o B are the 575 00:30:47,520 --> 00:30:50,640 Speaker 1: Officer of Budget Responsibility are version of the CBO. It 576 00:30:50,640 --> 00:30:52,560 Speaker 1: has to look at budgets, it has to kind of 577 00:30:52,560 --> 00:30:55,280 Speaker 1: put forecasts out and it's like, you know, he didn't 578 00:30:55,320 --> 00:30:58,400 Speaker 1: want his homework marked by them, right, So all of these, 579 00:30:58,440 --> 00:31:00,600 Speaker 1: all of these sort of stylistic things come through and 580 00:31:00,600 --> 00:31:02,680 Speaker 1: then you make a sort of a big, sort of 581 00:31:02,960 --> 00:31:06,959 Speaker 1: shocking announcement which is way bigger than anyone was expecting. 582 00:31:07,280 --> 00:31:09,280 Speaker 1: And the gild market seemed to have have a bit 583 00:31:09,360 --> 00:31:12,080 Speaker 1: of a bit of a meltdown straight away, as the 584 00:31:12,080 --> 00:31:14,680 Speaker 1: Bank of England was already you know, hiking rates and 585 00:31:14,720 --> 00:31:17,200 Speaker 1: as you said at the start of the episode, rates 586 00:31:17,200 --> 00:31:20,360 Speaker 1: around the world are already rising. And then over the weekend, 587 00:31:20,680 --> 00:31:25,080 Speaker 1: you know, so Friday that was the biggest move and 588 00:31:25,160 --> 00:31:28,959 Speaker 1: yield in thirty five years, a huge move. So and 589 00:31:29,000 --> 00:31:31,640 Speaker 1: then so over the weekend KWASI Kartin's interviewed and he 590 00:31:31,680 --> 00:31:34,240 Speaker 1: doubles down. He's like, oh, we've got new unfunded tax 591 00:31:34,240 --> 00:31:36,560 Speaker 1: cards to add to this, and he's you know, he's 592 00:31:36,600 --> 00:31:40,520 Speaker 1: jocular about it. So so Monday you have a bigger 593 00:31:40,560 --> 00:31:43,640 Speaker 1: move and you had on Friday, you know, the even 594 00:31:43,680 --> 00:31:47,000 Speaker 1: bigger move in thirty five years. That the style is 595 00:31:47,080 --> 00:31:49,600 Speaker 1: really important, you know, if there's this kind of feel 596 00:31:49,880 --> 00:31:52,640 Speaker 1: to markets, which which I think I don't. I don't 597 00:31:52,640 --> 00:31:55,120 Speaker 1: think it's like putting a slide rule and saying, you know, 598 00:31:55,200 --> 00:31:57,120 Speaker 1: you do this measure, you get this number of basis 599 00:31:57,200 --> 00:32:01,280 Speaker 1: points rise. It's it's it's the style is important as well. 600 00:32:01,320 --> 00:32:04,080 Speaker 1: And that's why I think that's today in coming out 601 00:32:04,160 --> 00:32:07,600 Speaker 1: and doing a major U turn after everyone's saying they 602 00:32:07,640 --> 00:32:09,160 Speaker 1: were going to do. I mean, the Priminister was on 603 00:32:09,320 --> 00:32:11,800 Speaker 1: I was on National TV yesday saying we're absolutely not 604 00:32:11,800 --> 00:32:13,560 Speaker 1: going to U turn. This is absolutely you know what 605 00:32:13,600 --> 00:32:15,760 Speaker 1: we're going to do. And then there are mid the 606 00:32:15,840 --> 00:32:19,800 Speaker 1: middle of the annual party conference right now to come 607 00:32:19,840 --> 00:32:21,760 Speaker 1: out and you turn. I mean that's a that's a 608 00:32:21,760 --> 00:32:24,520 Speaker 1: big kind of like, okay, the styles over, you know, 609 00:32:24,560 --> 00:32:28,680 Speaker 1: we're changing now, this was going to be my next question. Actually, um, 610 00:32:28,800 --> 00:32:31,680 Speaker 1: you know, if it's more about the style and you know, 611 00:32:31,960 --> 00:32:34,400 Speaker 1: it really seems like there is a lack of a 612 00:32:34,440 --> 00:32:37,600 Speaker 1: cohesive plan at this point, you can argue that maybe 613 00:32:37,680 --> 00:32:40,120 Speaker 1: you know, some aspects of it makes sense, and I 614 00:32:40,160 --> 00:32:43,280 Speaker 1: know Joe has been doing his share of this on Twitter. Didn't. 615 00:32:44,800 --> 00:32:49,360 Speaker 1: But like after the U turn, we have seen bond 616 00:32:49,440 --> 00:32:52,880 Speaker 1: yields start to come down, we've seen sterlings start to recover. 617 00:32:53,480 --> 00:32:57,640 Speaker 1: Should that be the right interpretation of the market that 618 00:32:57,760 --> 00:33:00,239 Speaker 1: like the problem is solved now it's it seems if 619 00:33:00,240 --> 00:33:03,239 Speaker 1: it's a problem of style and the UK government not 620 00:33:03,360 --> 00:33:06,520 Speaker 1: really being sure what it's doing here, then that kind 621 00:33:06,520 --> 00:33:09,320 Speaker 1: of U turn doesn't necessarily bode well. I think the 622 00:33:09,360 --> 00:33:11,600 Speaker 1: big important U turn is on style. But there was 623 00:33:11,680 --> 00:33:14,360 Speaker 1: also a substance return for for your listeners who were 624 00:33:14,400 --> 00:33:17,840 Speaker 1: not in the UK realm. There was this idea of 625 00:33:17,840 --> 00:33:20,000 Speaker 1: of scrapping the top rate of income tax, which is 626 00:33:20,040 --> 00:33:23,400 Speaker 1: fort on over a hundred and fifty thousand pounds, so 627 00:33:23,440 --> 00:33:25,880 Speaker 1: you only you know, the top rate would be somewhat 628 00:33:25,920 --> 00:33:27,760 Speaker 1: lower than that that was only going to cost two 629 00:33:27,760 --> 00:33:29,880 Speaker 1: billion pounds a year. I say only two billion pounds 630 00:33:29,880 --> 00:33:31,240 Speaker 1: a year, but there we go. It's it was a 631 00:33:31,280 --> 00:33:33,960 Speaker 1: small part of that forty five billion package. But today 632 00:33:34,160 --> 00:33:36,400 Speaker 1: they also said, right, well, we're going to freeze various 633 00:33:36,440 --> 00:33:39,480 Speaker 1: other budgets and and that will deliver eighteen billion pounds 634 00:33:39,480 --> 00:33:43,280 Speaker 1: of savings. So put those two together. That's actually there's 635 00:33:43,280 --> 00:33:45,560 Speaker 1: some substance there as well. You know that the market 636 00:33:45,600 --> 00:33:49,360 Speaker 1: was looking for around about thirty billion unfunded tax cuts 637 00:33:49,400 --> 00:33:51,440 Speaker 1: and that would be using up all the fiscal room 638 00:33:51,520 --> 00:33:54,240 Speaker 1: from the previous O b R financial projection, and so 639 00:33:54,320 --> 00:33:56,720 Speaker 1: it was it was a thirty five up to forty five. 640 00:33:57,040 --> 00:33:59,680 Speaker 1: That was an element of surprise. And so the substance 641 00:33:59,720 --> 00:34:02,160 Speaker 1: has been in, you know, fully unwound in a way 642 00:34:02,200 --> 00:34:04,120 Speaker 1: which I think a lot of people here will be 643 00:34:04,560 --> 00:34:07,520 Speaker 1: horrified to find the public services which are falling apart, 644 00:34:07,560 --> 00:34:10,040 Speaker 1: are going to be impacted as as a way to 645 00:34:10,040 --> 00:34:11,920 Speaker 1: to kind of pay for some of the other unfinded 646 00:34:11,960 --> 00:34:14,400 Speaker 1: tax cuts. And then that sort of chef's kiss of 647 00:34:15,080 --> 00:34:17,719 Speaker 1: tax cuts for the very richest has been removed. And 648 00:34:17,760 --> 00:34:20,359 Speaker 1: that's very stylistic. You know, I'm looking at all these 649 00:34:20,480 --> 00:34:23,080 Speaker 1: charts on my screen. And again, if you just sort 650 00:34:23,120 --> 00:34:26,120 Speaker 1: of put a hand over on the screen over last week, 651 00:34:26,560 --> 00:34:28,359 Speaker 1: you have a bunch of lines almost where they were 652 00:34:28,400 --> 00:34:30,799 Speaker 1: before the tax cuts at this point. And I think 653 00:34:30,840 --> 00:34:33,480 Speaker 1: it was you though, and you've written like in the 654 00:34:33,560 --> 00:34:35,720 Speaker 1: last week, I think like five or six blog posts 655 00:34:35,760 --> 00:34:38,000 Speaker 1: and been a must follow on Twitter as always, But 656 00:34:38,360 --> 00:34:41,120 Speaker 1: I think it was you that saying something like you can't. 657 00:34:41,280 --> 00:34:43,799 Speaker 1: Did you say that you can't unburned toast? Was that 658 00:34:43,880 --> 00:34:47,760 Speaker 1: your line? Yeah? So so what does it mean starting 659 00:34:47,800 --> 00:34:51,720 Speaker 1: now here like October three, when people are thinking about 660 00:34:52,320 --> 00:34:54,040 Speaker 1: you know, we talked about, oh, well this move should 661 00:34:54,080 --> 00:34:56,920 Speaker 1: only happen once every hundred trillion years or something. No 662 00:34:56,960 --> 00:34:59,200 Speaker 1: one said that, but like now we've seen the move. 663 00:34:59,520 --> 00:35:01,759 Speaker 1: We now we seen that it's possible now that we 664 00:35:01,800 --> 00:35:03,920 Speaker 1: can we can't unburn that we can't un see it 665 00:35:03,920 --> 00:35:05,600 Speaker 1: even if I put my hand over the middle of 666 00:35:05,600 --> 00:35:09,799 Speaker 1: the screen. So what does it do for managers? And 667 00:35:09,840 --> 00:35:12,960 Speaker 1: they're thinking about risks that such a move are now 668 00:35:13,000 --> 00:35:16,360 Speaker 1: proven to be possible, right, right, So there's this huge 669 00:35:16,480 --> 00:35:21,080 Speaker 1: kind of efficiency versus resilience sort of battle, right, And 670 00:35:21,320 --> 00:35:22,839 Speaker 1: one of the things that the UK government was keen 671 00:35:22,880 --> 00:35:24,960 Speaker 1: to do is to reform solvency to which is a 672 00:35:24,960 --> 00:35:27,799 Speaker 1: bunch of insurance regulations, so that they would need to 673 00:35:27,840 --> 00:35:31,520 Speaker 1: have less capital dead capital sitting at the sidelines just 674 00:35:31,600 --> 00:35:34,799 Speaker 1: in case. You know, it's part of resilience and you 675 00:35:34,800 --> 00:35:37,560 Speaker 1: know what what they might well go through that and 676 00:35:37,719 --> 00:35:41,120 Speaker 1: maybe that's even so sensible. But from a risk manager's perspective, 677 00:35:41,200 --> 00:35:43,879 Speaker 1: that's using I mean, all risk models pretty much are 678 00:35:43,920 --> 00:35:47,799 Speaker 1: fed with with historical data sub description, and this is 679 00:35:47,800 --> 00:35:51,360 Speaker 1: now in the history. So every stress test that the 680 00:35:51,400 --> 00:35:55,200 Speaker 1: asset managers or investment banks used, which are kind of different, 681 00:35:55,360 --> 00:35:58,160 Speaker 1: like scenario stress tests, you'll have one which will be 682 00:35:58,200 --> 00:36:02,040 Speaker 1: you know, UK has a bit of a meltdowns as 683 00:36:02,040 --> 00:36:04,279 Speaker 1: one of those sort of stress tests, and you'll need 684 00:36:04,360 --> 00:36:07,680 Speaker 1: to make your portfolio survive that stress test. From now on, 685 00:36:07,840 --> 00:36:10,959 Speaker 1: if you have portfolio risk that you're looking at within 686 00:36:11,000 --> 00:36:14,239 Speaker 1: your portfolio risk system, your portfolio might look a little 687 00:36:14,239 --> 00:36:17,799 Speaker 1: bit riscue than it did because simply that historical data 688 00:36:17,880 --> 00:36:19,279 Speaker 1: is feeding it. And so if you've got a risk 689 00:36:19,280 --> 00:36:22,000 Speaker 1: budget that you're working to, you might need to take 690 00:36:22,040 --> 00:36:25,240 Speaker 1: a little bit less portfolio risk. I mean, that's it's 691 00:36:25,280 --> 00:36:27,560 Speaker 1: it just kind of goes into the into the plumbing 692 00:36:27,600 --> 00:36:32,480 Speaker 1: of risk systems on bank trading desks and portfolio managers, 693 00:36:32,960 --> 00:36:36,040 Speaker 1: and it'll fall out eventually, you know. I mean, these 694 00:36:36,040 --> 00:36:40,480 Speaker 1: things tend to be like exponentially weighted, um, so after 695 00:36:40,520 --> 00:36:43,000 Speaker 1: a few years even it'll it'll kind of be a 696 00:36:43,080 --> 00:36:45,920 Speaker 1: very modest thing, be more on a discrete scenario side. 697 00:36:46,280 --> 00:36:50,080 Speaker 1: But this now exists on everyone sort of blotter, and 698 00:36:50,239 --> 00:36:52,920 Speaker 1: it's going to inform decisions, whether people think about that 699 00:36:52,960 --> 00:36:56,279 Speaker 1: consciously or whether it's just you know, underneath. So this 700 00:36:56,440 --> 00:36:59,280 Speaker 1: to me is the sort of big picture change that's 701 00:36:59,280 --> 00:37:01,520 Speaker 1: happened over the past couple of weeks, which is this 702 00:37:01,600 --> 00:37:05,680 Speaker 1: idea that we're all coming to grips with severe interest 703 00:37:05,760 --> 00:37:09,040 Speaker 1: rate volatility, and we can see government bond yields that 704 00:37:09,080 --> 00:37:15,240 Speaker 1: are usually assumed to be relatively stable move very quickly 705 00:37:15,280 --> 00:37:19,200 Speaker 1: and very suddenly. And we've designed an entire financial system 706 00:37:19,400 --> 00:37:23,279 Speaker 1: around the assumption that that doesn't happen very much. So 707 00:37:23,360 --> 00:37:25,640 Speaker 1: we have a lot of bank capital rules like quidity 708 00:37:25,680 --> 00:37:30,719 Speaker 1: coverage rules, pension fund rules that tend to herd investors 709 00:37:30,840 --> 00:37:35,640 Speaker 1: into these stable and ostensibly safe government bonds, and so 710 00:37:35,760 --> 00:37:37,560 Speaker 1: when that doesn't happen, when they turn out to be 711 00:37:37,600 --> 00:37:44,080 Speaker 1: really volatile, it becomes extremely painful and in some circumstances problematic. 712 00:37:44,680 --> 00:37:47,160 Speaker 1: Is that, like, is that something you would agree with 713 00:37:47,360 --> 00:37:50,200 Speaker 1: or how would we resolve that tension? The idea that 714 00:37:50,320 --> 00:37:54,040 Speaker 1: you know, most big investors are supposed to hold a 715 00:37:54,080 --> 00:37:57,640 Speaker 1: whole bunch of government bonds, but then you know, we 716 00:37:57,680 --> 00:37:59,839 Speaker 1: get a week like like last week, and suddenly those 717 00:38:00,000 --> 00:38:03,240 Speaker 1: remant bonds turn into a liability. I should be careful 718 00:38:03,239 --> 00:38:05,840 Speaker 1: about using liability when we're talking about pension funds. But 719 00:38:05,920 --> 00:38:08,200 Speaker 1: you know what I mean, yeah, yeah, yeah, I mean 720 00:38:08,880 --> 00:38:12,360 Speaker 1: I think I think you some are brilliantly fantastic communicator. 721 00:38:12,400 --> 00:38:15,360 Speaker 1: I would just carvat a little bit, just in spirit 722 00:38:15,400 --> 00:38:18,840 Speaker 1: of geekiness, in that you know, four full pension funds, 723 00:38:19,360 --> 00:38:22,640 Speaker 1: the long end is the risk free asset simply because 724 00:38:23,320 --> 00:38:27,000 Speaker 1: that's where the liability sit. But you know, so on 725 00:38:27,000 --> 00:38:30,640 Speaker 1: on an unleveled basis, you're having a load more. If 726 00:38:30,680 --> 00:38:33,040 Speaker 1: there was enough duration, would would be a would be 727 00:38:33,080 --> 00:38:35,200 Speaker 1: a great, great thing for them. I mean, they would 728 00:38:35,200 --> 00:38:36,920 Speaker 1: be able to close the fund ration and that's it. 729 00:38:37,239 --> 00:38:41,360 Speaker 1: But because that market structure doesn't really facilitate that to happen, 730 00:38:41,920 --> 00:38:44,120 Speaker 1: then yeah, that's going to be a problem. You know, 731 00:38:44,200 --> 00:38:48,000 Speaker 1: just going back to earlier Tracy as like, well, how 732 00:38:48,040 --> 00:38:51,719 Speaker 1: should we sort of conceptualized or categorize the BOS intervention 733 00:38:51,800 --> 00:38:55,000 Speaker 1: shouldn't be considered quie or not? Or is it just 734 00:38:55,080 --> 00:38:59,200 Speaker 1: some other kind of market operation. If guilt government bonds 735 00:38:59,280 --> 00:39:03,360 Speaker 1: are the like by definition are the definitional risk free asset, 736 00:39:03,680 --> 00:39:06,799 Speaker 1: then the central bank in any country can't just let 737 00:39:06,880 --> 00:39:08,839 Speaker 1: them deviate too far. I mean that people talk about 738 00:39:08,840 --> 00:39:12,000 Speaker 1: a bailout, but essentially like it sounds like they they 739 00:39:12,040 --> 00:39:14,920 Speaker 1: just have to step in. Yeah, I completely agree with that. 740 00:39:14,960 --> 00:39:17,200 Speaker 1: You you have to have a government curve, you know, 741 00:39:17,239 --> 00:39:21,239 Speaker 1: without that and nothing else works. Right. Also, I mean 742 00:39:21,360 --> 00:39:23,440 Speaker 1: the sort of striking thing is there's a lot of 743 00:39:23,480 --> 00:39:27,319 Speaker 1: talk about central banks losing control of the long end 744 00:39:27,520 --> 00:39:31,080 Speaker 1: of bond markets, but then, as you pointed out, when 745 00:39:31,080 --> 00:39:34,120 Speaker 1: the BOE announced its intervention, it actually seems to have 746 00:39:34,160 --> 00:39:39,200 Speaker 1: had more impact than it might have expected. Yeah. No, absolutely. 747 00:39:39,239 --> 00:39:41,799 Speaker 1: I mean if people talk about losing control of along 748 00:39:41,840 --> 00:39:44,480 Speaker 1: and it's not something that that the Bank of England 749 00:39:44,480 --> 00:39:46,480 Speaker 1: would typically want to have any control of at all. 750 00:39:46,520 --> 00:39:50,120 Speaker 1: They'd want market expectations to shape that. But getting into 751 00:39:50,160 --> 00:39:52,640 Speaker 1: a doom loop is going to be something which will 752 00:39:52,680 --> 00:39:57,000 Speaker 1: cause systemic problems potentially, and so as a as as 753 00:39:57,040 --> 00:39:59,360 Speaker 1: the lender of last resort or market maker last resort, 754 00:39:59,400 --> 00:40:01,640 Speaker 1: you need to step So, Toby, we're going to have 755 00:40:01,680 --> 00:40:04,719 Speaker 1: to wind up our conversation now. But I guess just 756 00:40:04,960 --> 00:40:07,160 Speaker 1: going back to the big picture of what's going on 757 00:40:07,400 --> 00:40:10,400 Speaker 1: with the UK government and UK market, what are you 758 00:40:10,480 --> 00:40:15,879 Speaker 1: on the lookout for for next steps or developments that 759 00:40:16,000 --> 00:40:22,759 Speaker 1: might inform the future path. So I'm kind of on 760 00:40:22,800 --> 00:40:25,600 Speaker 1: the pension fund side, I'm sort of thinking that a 761 00:40:25,640 --> 00:40:28,960 Speaker 1: bunch of pension funds will unfortunately have lost their hedges 762 00:40:29,160 --> 00:40:31,560 Speaker 1: and so you know, will they be coming back into 763 00:40:31,560 --> 00:40:35,160 Speaker 1: the market to actually buylong dated bonds in order to 764 00:40:35,560 --> 00:40:38,000 Speaker 1: know which could cause a real rally from here at 765 00:40:38,040 --> 00:40:40,719 Speaker 1: the long end. Some people I speak to in the 766 00:40:40,760 --> 00:40:43,880 Speaker 1: market on the investment consulting side and hedge funds side, 767 00:40:44,200 --> 00:40:46,640 Speaker 1: they're they're sort of thinking, right, is there going to 768 00:40:46,719 --> 00:40:50,040 Speaker 1: be some kind of stop loss safari that goes on? 769 00:40:50,520 --> 00:40:55,400 Speaker 1: Because that's a great term, because you know, what was 770 00:40:55,440 --> 00:40:58,840 Speaker 1: revealed during this whole debacle was that actually, if you 771 00:40:58,880 --> 00:41:01,200 Speaker 1: push up long dated you US boy a hundred basis points, 772 00:41:01,239 --> 00:41:04,560 Speaker 1: you can throw some of these structures into unwind. And 773 00:41:04,680 --> 00:41:08,439 Speaker 1: so I think schemes are trying to manically make sure 774 00:41:08,480 --> 00:41:11,640 Speaker 1: they're in a situation whereby once the Bank of England 775 00:41:11,719 --> 00:41:15,760 Speaker 1: intervention ends, that that's not going to be possible anymore. 776 00:41:16,080 --> 00:41:18,240 Speaker 1: So that's that's going to be very interesting to watch, 777 00:41:18,760 --> 00:41:20,320 Speaker 1: al right. I love the idea of going on a 778 00:41:20,360 --> 00:41:24,400 Speaker 1: stop loss Safario. It's not as fun as it sounds, 779 00:41:24,560 --> 00:41:27,239 Speaker 1: all right, Toby Nangle, thank you so much for coming on. 780 00:41:27,280 --> 00:41:30,760 Speaker 1: Odd lots, fantastic to talk with you as always. Thanks 781 00:41:30,760 --> 00:41:32,719 Speaker 1: for having me. Great to speak to you again. Thank you. 782 00:41:32,840 --> 00:41:36,319 Speaker 1: So it's been too long to well, we'll have you on. 783 00:41:36,560 --> 00:41:38,279 Speaker 1: We'll have you on again, tune to talk about how 784 00:41:38,280 --> 00:41:54,399 Speaker 1: to stop lost so far as go. But that was great, Joe. 785 00:41:54,440 --> 00:41:58,080 Speaker 1: I thought that was a fantastic conversation and it did actually, 786 00:41:58,719 --> 00:42:02,640 Speaker 1: I guess, help in my mind crystallize some of the 787 00:42:02,640 --> 00:42:06,080 Speaker 1: there's been so many big ideas floating around based off 788 00:42:06,120 --> 00:42:09,319 Speaker 1: of the price action that we've seen over the past week. Yeah, 789 00:42:09,400 --> 00:42:12,200 Speaker 1: I just think it was very helpful just to get 790 00:42:12,200 --> 00:42:16,960 Speaker 1: that distinction between liquidity verse solvency and the context of pensions, 791 00:42:17,040 --> 00:42:19,759 Speaker 1: because it's easy to sort of like have this cruse. 792 00:42:19,800 --> 00:42:22,320 Speaker 1: It's like, oh, the pensions, they have a lot of guilts. 793 00:42:22,560 --> 00:42:25,680 Speaker 1: The value of the guilts plunged another insolvent. Actually they're 794 00:42:25,680 --> 00:42:29,160 Speaker 1: not unsolvent in large part because by the conventions of accounting, 795 00:42:29,360 --> 00:42:32,719 Speaker 1: their obligations went down to But this theme and the 796 00:42:32,719 --> 00:42:34,279 Speaker 1: fact that we talked about it earlier in the year, 797 00:42:34,320 --> 00:42:37,000 Speaker 1: like five months ago, with the commodity markets, we see 798 00:42:37,040 --> 00:42:41,960 Speaker 1: how really fast moves in leveraged areas can create liquidity crises, 799 00:42:42,040 --> 00:42:44,799 Speaker 1: even when the fundamentals aren't so bad. Right, And this 800 00:42:44,960 --> 00:42:47,640 Speaker 1: kind of gets to the central bank point that Toby 801 00:42:47,760 --> 00:42:50,080 Speaker 1: was making as well, which is as as fun as 802 00:42:50,120 --> 00:42:52,560 Speaker 1: it is or as bizarre as it is to watch 803 00:42:52,600 --> 00:42:56,480 Speaker 1: a central bank that is ostensibly reducing its balance sheet 804 00:42:56,520 --> 00:42:59,160 Speaker 1: and embarking on quantitative tightening actually go back into the 805 00:42:59,160 --> 00:43:03,080 Speaker 1: market and start buying bonds. That's the role, right, Like 806 00:43:03,160 --> 00:43:06,399 Speaker 1: that is the classic lender of last resort. You see 807 00:43:06,400 --> 00:43:09,560 Speaker 1: a liquidity issue like this, not a solvency issue, a 808 00:43:09,560 --> 00:43:12,840 Speaker 1: liquidity issue, they're supposed to step in. This is really 809 00:43:12,960 --> 00:43:15,400 Speaker 1: key and I tend to think that this is where, 810 00:43:15,440 --> 00:43:18,880 Speaker 1: you know, I get a little frustrated with some of 811 00:43:18,880 --> 00:43:23,720 Speaker 1: the commentary because central bank is part of the modern 812 00:43:23,800 --> 00:43:26,960 Speaker 1: financial infrastructure, and so I think people like to pretend 813 00:43:27,000 --> 00:43:30,160 Speaker 1: that like, oh, like real capitalism or real markets is 814 00:43:30,160 --> 00:43:33,040 Speaker 1: when the central bank is hands off and then you know, 815 00:43:33,120 --> 00:43:35,480 Speaker 1: let the chips fall where they may. But I think, like, 816 00:43:35,560 --> 00:43:38,720 Speaker 1: you know, part of this, the central bank does exist. 817 00:43:38,800 --> 00:43:40,799 Speaker 1: It's coret of the system, and part of its role 818 00:43:41,040 --> 00:43:45,080 Speaker 1: is to stabilize, especially the government bond market for very 819 00:43:45,080 --> 00:43:47,960 Speaker 1: good reason. I don't think that per se means it's 820 00:43:48,000 --> 00:43:51,239 Speaker 1: like cheating or a bailout or I'm not I'm not 821 00:43:51,239 --> 00:43:54,680 Speaker 1: convinced that these are like useful terms when describing the 822 00:43:54,719 --> 00:43:57,160 Speaker 1: central bank playing its role. Now, I think that's right. 823 00:43:57,239 --> 00:43:59,440 Speaker 1: What I would say is it does seem like a 824 00:43:59,520 --> 00:44:03,200 Speaker 1: very calmmplicated place for the BOE to be in. And 825 00:44:03,600 --> 00:44:06,480 Speaker 1: you know, the idea that tomorrow we could wake up 826 00:44:06,600 --> 00:44:11,120 Speaker 1: and the Conservative government has made some new announcement or 827 00:44:11,160 --> 00:44:13,480 Speaker 1: a new U turn, who knows, and the b o 828 00:44:13,560 --> 00:44:15,440 Speaker 1: E is going to have to try to formulate the 829 00:44:15,520 --> 00:44:18,040 Speaker 1: correct response to that. Like that does seem tricky. I 830 00:44:18,360 --> 00:44:20,839 Speaker 1: completely agree, And I would say there's two things. One 831 00:44:20,960 --> 00:44:24,160 Speaker 1: is every central bank right now is an inflation fighting mode, 832 00:44:24,239 --> 00:44:27,280 Speaker 1: right none of them want to be using balance sheet policy, 833 00:44:27,360 --> 00:44:30,080 Speaker 1: you know, they're all like QT of some sort. And 834 00:44:30,120 --> 00:44:32,279 Speaker 1: so the idea that like this is gonna put qt 835 00:44:32,480 --> 00:44:34,600 Speaker 1: on hold, or that they might even have to expand 836 00:44:34,600 --> 00:44:37,440 Speaker 1: their balance sheet. I think is an uncomfortable position to 837 00:44:37,480 --> 00:44:40,000 Speaker 1: put in. But what I would say, also to your 838 00:44:40,040 --> 00:44:43,120 Speaker 1: point about responding to policies and something could change tomorrow. 839 00:44:43,200 --> 00:44:45,239 Speaker 1: There could be a new tax cut or two high 840 00:44:46,080 --> 00:44:49,000 Speaker 1: tax hiker. Who knows, We have no idea. But what 841 00:44:49,040 --> 00:44:51,640 Speaker 1: I would say is, you know, I think going back 842 00:44:51,640 --> 00:44:55,040 Speaker 1: to this, it's like, can they respond on the inflation 843 00:44:55,120 --> 00:44:57,200 Speaker 1: side of the mandage? So if there's more spending or 844 00:44:57,200 --> 00:44:59,680 Speaker 1: more tax cuts, okay, we're gonna have to hike rates 845 00:44:59,680 --> 00:45:04,239 Speaker 1: to hit target high grates further while also with you know, 846 00:45:04,360 --> 00:45:06,200 Speaker 1: with the left hand, while with the right hand making 847 00:45:06,200 --> 00:45:09,040 Speaker 1: sure markets stay stable. It's a tricky situation. Well, this 848 00:45:09,120 --> 00:45:12,400 Speaker 1: kind of goes back to the whole designing a financial 849 00:45:12,400 --> 00:45:15,279 Speaker 1: system around government bonds thing as well, and I think 850 00:45:15,280 --> 00:45:19,040 Speaker 1: it was Connorson had a great tweet about how you know, 851 00:45:19,280 --> 00:45:22,439 Speaker 1: it's not just the financial system, it's monetary policy as well. 852 00:45:22,480 --> 00:45:26,160 Speaker 1: Like monetary policy works through changing the price of government debt. 853 00:45:26,280 --> 00:45:29,440 Speaker 1: So if you want to change employment or inflation, you're 854 00:45:29,440 --> 00:45:30,880 Speaker 1: going to have to do something to the price of 855 00:45:30,920 --> 00:45:34,360 Speaker 1: government debt, which makes everything a lot trickier at a 856 00:45:34,440 --> 00:45:36,640 Speaker 1: time when you know people are really focused on interest 857 00:45:36,719 --> 00:45:39,400 Speaker 1: rate volatility. Yeah, all right, we should leave it there, 858 00:45:39,400 --> 00:45:42,640 Speaker 1: because we could talk about this for another two hours probably. 859 00:45:43,400 --> 00:45:45,879 Speaker 1: All right. This has been another episode of the All 860 00:45:45,880 --> 00:45:48,640 Speaker 1: Thoughts podcast. I'm Tracy Alloway. You can follow me on 861 00:45:48,680 --> 00:45:51,640 Speaker 1: Twitter at Tracy Alloway and I'm Joey Isn't All. You 862 00:45:51,680 --> 00:45:54,759 Speaker 1: can follow me on Twitter at the Stalwart. Be sure 863 00:45:54,840 --> 00:45:58,560 Speaker 1: to follow our guest Toby Nangle He's at Toby Underscore. 864 00:45:58,640 --> 00:46:01,800 Speaker 1: And follow our produce user of this episode, Dash Bedding, 865 00:46:01,920 --> 00:46:05,920 Speaker 1: He's at Dashbot. And follow our other producer, Carmen Rodriguez 866 00:46:05,960 --> 00:46:09,399 Speaker 1: at Carmen Armand. And if you're looking for even more 867 00:46:09,440 --> 00:46:12,359 Speaker 1: discussion on the pound, guilt and everything else going on 868 00:46:12,480 --> 00:46:15,880 Speaker 1: in the British economy, definitely check out In the City. 869 00:46:15,880 --> 00:46:18,960 Speaker 1: It's a new podcast from Bloomberg UK and it's toasted 870 00:46:19,000 --> 00:46:21,960 Speaker 1: by Francine Lachlaw and David Merritt. It's covered all these 871 00:46:21,960 --> 00:46:25,720 Speaker 1: finance stories straight from the heart of London. Thanks for listening.