Gilt Trip Looms For Panicked Markets
Update: Trussonomics is dead. Jeremy Hunt on Monday effectively scrapped every key element of Liz Truss's growth plan. Read the full story here.
A relative dearth of US economic data in the new week won't likely mean calm markets.
There's plenty to fret over in China, and on the off chance it slipped your mind, the UK is still embroiled in crisis.
Kwasi Kwarteng's ouster failed to calm nervous gilts late last week, and they'll trade without a Bank of England backstop for the first time sinc
Three observations. Truss has to go. Bank of England has to buy more long bonds. This is a credit event, so risk free yields should decline shortly.
Which came first, pension funds and insurance companies growing tired of their safe, boring businesses and moving into riskier products vulnerable to black swan events every twenty years or so, or pension funds and insurance companies being forced into riskier products as the collapse of the Soviet Union/NAFTA/China’s integration into the WTO regime/the advent of swaps, etc. drove rates to historic lows? Maybe a little both? Whatever the correct answer, Buffett was and is right about derivatives.
Derivatives serve two purposes. One, they provide protection from certain adverse market events. Two, they produce fee income, something all banks crave because its source generally stays off the balance sheet. When economic growth is shrinking, taking organic growth in revenues with it, derivatives create fees that can raise revenues and profits at a rate above the basic nominal economic growth rate. The more layers of derivatives, the more revenue. From the vantage point of a naive market outsider, it now appears that the actual market instruments underlying the financial derivative structure have become, as Charles Laughton most ably said in “Witness for the Prosecution,” superfluous!