The UK pensions market is largely a defined benefit market, with the funds needing to match long-term liabilities with the assets they hold. When rates rise quickly the value of their bond holdings falls while the net present value of their liabilities doesn’t change as materially, threatening deficiencies in the funds.
In the UK that potential problem has been exacerbated by the widespread use of leveraged derivative strategies (called “Liability-Driven Investment” or LDIs) that are used to effectively hedge their liabilities. The LDIs are estimated to represent about £1.5 trillion of assets or, as the Financial Times noted, roughly the size of the entire UK bond market.
The collateral for those derivative positions is largely the funds’ fixed interest securities holdings. As rates spiked they would have been hit with what are essentially margin calls and forced to dump some of their bonds, creating a spiral that could only end in disaster for the funds, the wider market and ultimately the UK financial system.
They hedge their liabilities with "Liability Driven Investments". I assume the "liability" is to the investor in the fund.
I am a bit lost, interest rate rises reduce the value of their bond portfolio but aren't LDIs hedging this? I thought hedging was to protect an investment in all situations not make a bad situation worse.
Sounds like the UK pensions were using leverage (derivatives) to maximise their returns. When the collateral (UK govt bonds) crapped out they got margin called. Sounds like the financial system tried to contract but the UK CB saved the speculators once again.
The question is, shouldn't the risk takers suffer the losses not the UK general public and everyone else screwed over by money printing and inflation?
The people who ultimately suffer are the people relying on the pensions but shouldn't the morons (masters of the universe?, smartest men in the room?) running the funds be held accountable for their actions.
Bill Bonner points out the obvious.
Why was a 5% yield on a 30-year government bond cause for panic? It still leaves the yield on gilts 510 basis points below the rate of consumer price inflation. Investors who lend money to the government agree — if everything stays the same — to lose more than half their money. Nothing ‘normal’ about that!
I do not think the RBNZ is being ironic on purpose. Or maybe they are and are having a little joke at the expense of savers and banks.
The RBNZ worried about savers getting a raw deal has to be one of the most ridiculous statements I have heard in a long time.
Stop suppressing interest rates while pushing up inflation. That is a simple suggestion to stop savers getting a raw deal. let the market set interest rates without RBNZ interference or bring the inflation target to 0%, they are other ideas.
Worrying that the trading banks are screwing over savers seems a bit ingenuine from the RBNZ.
It just seems a bit hypocritical the organisation that has hurt savers more than anyone or anything else now stands as their protector or voice.
In Orr's own words, "inflation is a thief in the pocket"
Then it depends on why you think we have inflation, Putin?, supply chain issues? RBNZ dropping the OCR to .25% in Mar 2020 and leaving it there until Sept 2021 despite asset prices going ballistic (particularly housing), the RBNZ increasing its asset base from $25 billion in Dec 2019 to $96 billion in August 2022 (still expanding by the way but the pace has slowed) looser lending, etc etc.
To express concern for savers seems a bit ingenuine coming from the RBNZ. The RBNZ are scum if you have been trying to save without taking big risks. They have been stealing your money for the benefit of borrowers and if you think of money as a store of value and you work for wages they are also stealing your time. A heinous crime that goes unpunished.
I thought we were nearing a point where banks did not need savers anymore. They can just issue bonds that a central bank will buy with freshly minted money.
Lucky Ben got this now. It might be there is much less opportunity to kick the can down the road next time we have a crisis, but I suspect there is more printing to come before it becomes obvious that Ben's response to the 2008 crisis turns out to be stupid and amoral.
It might also turn out that the last 30 years is a gigantic failed experiment in money printing and financial repression. It might turn out that you can't print your way to wealth. At least not for society as a whole. I think Ben is doing OK working for Citadel though. The voices of anguish regarding rising rates seem to be growing in volume. They talk about things "breaking" rather than "correcting". Apparently interest rate rises are "breaking" the bond market.
No talk of reducing the inflation target. Adrian thinks 1%-3% is ideal although Arthur Grimes who came up with the idea has suggested taking it back to 1-2% after seeing what happened to the housing market.
A greater weighting for house prices in the CPI?
Hierarchy of objectives? (i.e. stating that the MPC should put greater focus on either price stability or maximum sustainable employment) "could mitigate risks around competing price stability and MSE objectives".
A heirarchy of objectives... does Adrian really need one, inflation at 7% unemployment at 3.3%, record lows for unemployment, does Adrian need targets when he has proven an inability to hit them?? His results appear to be an extremely overstimulated economy, which does not seem that hard to do, especially when following a path of least regret. Although Alokdhir on the Black Monday thread seems to be keen on a pivot sometime soon. Alokdhir's insistent call for a pivot or central bank intervention makes me suspicious that he is a professional money manager.
The sack is what Adrian should get but Robertson needs a weak governor to keep kicking the can down the road so Grant can try and buy another election, currently National hold the highest bid. I have to say Adrian is being stronger than other world central bankers but that is not saying much.
Not sure what "self-selected" and "representative" mean but assume individual and organisation views.. maybe?
Anyway not a lot of confidence in the RBNZ, but economics is an Arts subject so there is no right answer and a lot of guessing so how could anyone be confident in the RBNZ. I suspect central bankers are the only ones arrogant enough to believe they know what they are doing, despite history disproving that time and again.
I am confident they are way more worried about deflation than inflation and it might be a case of "whoops" did we not raise rates aggressively enough, oh well.
That said debt, demographics and technology are supposed to be creating deflation, I guess they could not keep up with the money printing, but for all I know there might be a sudden swing to deflation that will require more stimulus. That seems to be how it works in Japan.
Another educated guess about house prices. 15% nominal but 24% real. Scary how inflation makes everything more confusing.
Apparently we are 3,000 baristas short. Put the burden for climate change on productive farmers with our world beating climate change bs, while filling the cities full of people wandering around with their sippy cups of wa*kachino coffees. Clogging up the motorways and landfills while productive land is developed to house more people.
What about the brain drain? Weren't up to 1 million people leaving according to an MYOB survey that was much repeated in the media?
So instead of 1million leaving we had 47 net arrive. Could it be a war on inflation, not asset price inflation but wage inflation... you know, the bad kind of inflation, like CPI inflation. Finally the govt can fill the country up with more people consuming more stuff, not only that but they produced world leading climate change policy, "charging farmers for climate change" well done Labour. I am getting mixed messages is man made climate change bad? do more people consuming more stuff make it better? how does the wealth effect improve the climate crisis?
Charge the farmers because they use fertiliser to produce our food and their animals fart methane. It would be interesting to compare CO2 output from a week of Aucklanders sitting in traffic (one person per car, maybe 3 or 4 if it is a school pick up) compared to the total output of farms covering a similar sized area. For that matter Cars and house construction compared to total national farm green house gas emissions.
National should get a mention as well, as both parties are aligned on the immigration issue.
'Cruel', 'unacceptable' and 'overdue' - MPs react
National Party immigration spokeswoman Erica Stanford said reopening the skilled migrant category should have happened months ago.
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Originally Posted by Aaron
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