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No Urgency For Cuts - Bond Market

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Another wrong prediction of the inflationistas was that if America and the UK continued running such large deficits that bond investors would demand a higher yield. To compensate for inflation risk and sovereign default risk.

But UK 10 year bonds now yield 3.14%, barely above the 3.1% official yoy inflation numbers. While in America the ten year has fallen all the way to 2.79%, which is a fair amount higher than the yoy inflation numbers running ~1%. But still to lock in for 10 years at 2.79%.. that does not sound like the bond vigilantis we were warned of.

It means the UK and USA governments have tons and tons of room to even increase the deficits if they feel like it(which currently they do not). The reality is investors have no where else to go. In the private sector risk adjusted return is probably negative now. With most assets likely to decline in value or already headed down, and yields already small. Since the flip side of money is debt if that debt elsewhere cannot be repaid the money also will be destroyed. With the sovereign debt the investors at least will get their money back.

Until the sovereigns are willing to step in with serious stimulus we'll probably see a slow grind down. And over time that will mean even lower bond yields.. yes it can go lower than 3% for 10 years. Actually it could go down to 0%, even below that, as long as that 0% is better than risk adjusted returns elsewhere.

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Another wrong prediction of the inflationistas was that if America and the UK continued running such large deficits that bond investors would demand a higher yield. To compensate for inflation risk and sovereign default risk.

But UK 10 year bonds now yield 3.14%, barely above the 3.1% official yoy inflation numbers. While in America the ten year has fallen all the way to 2.79%, which is a fair amount higher than the yoy inflation numbers running ~1%. But still to lock in for 10 years at 2.79%.. that does not sound like the bond vigilantis we were warned of.

It means the UK and USA governments have tons and tons of room to even increase the deficits if they feel like it(which currently they do not). The reality is investors have no where else to go. In the private sector risk adjusted return is probably negative now. With most assets likely to decline in value or already headed down, and yields already small. Since the flip side of money is debt if that debt elsewhere cannot be repaid the money also will be destroyed. With the sovereign debt the investors at least will get their money back.

Until the sovereigns are willing to step in with serious stimulus we'll probably see a slow grind down. And over time that will mean even lower bond yields.. yes it can go lower than 3% for 10 years. Actually it could go down to 0%, even below that, as long as that 0% is better than risk adjusted returns elsewhere.

Hard to kick a can when you have bloody toes.

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You are crowing a little soon I think. There is still plenty of time for us to get inflation.

The problem with markets is that is it usually fairly easy to predict the overall trend, but the timescale is very hard to get right (hence central banks are bad at predicting inflation).

One thing worth noting is that the market rate for loans on the high street is very, very much higher than the bank rates. Lending is also quite low by historical standards, so all the new money the BoE has created is not yet finding its way into the real economy.

Another is that the indexes for inflation have been politically massaged for so long that many of them no longer bear any relation to "real" inflation as felt by the man in the street.

We will know the answer in a decade or so either way.

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Another wrong prediction of the inflationistas was that if America and the UK continued running such large deficits that bond investors would demand a higher yield. To compensate for inflation risk and sovereign default risk.

You don't understand. The bond investors ARE the US government and the UK government. They are buying their own bonds.

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I find it strange that the ponzi government bond markets have yet to see a spike in yields but I get the feeling it is a bit like a bottle of coke that is still sealed and is being shook up. For some reason (government interference)the top is staying tight but the longer that it is kept on the higher the pressure is inside ... all well and good if you can keep the lid on forever but the moment it comes off we all know what will happen.

Edited by clloyd

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I think the Greek Government would have been buying its own bonds through its own central bank at 3%.

sadly, they cant print...

money is cheap when you pay yourself to produce it.

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I think the Greek Government would have been buying its own bonds through its own central bank at 3%.

sadly, they cant print...

money is cheap when you pay yourself to produce it.

China are buying Japan's bonds to keep the yen high.

Now even the surplus countries are fighting amongst themselves.

So long as their little game of keepy uppy goes on these surpluses will continue to finance western deficits. After that, the west can just default - as we're seeing Greece do with Germany - if the EU would let only let them.

When you owe a bank £1m it's your problem.

When you owe them £1 trillion it's definately theirs.

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Another wrong prediction of the inflationistas was that if America and the UK continued running such large deficits that bond investors would demand a higher yield. To compensate for inflation risk and sovereign default risk.

But UK 10 year bonds now yield 3.14%, barely above the 3.1% official yoy inflation numbers. While in America the ten year has fallen all the way to 2.79%, which is a fair amount higher than the yoy inflation numbers running ~1%. But still to lock in for 10 years at 2.79%.. that does not sound like the bond vigilantis we were warned of.

Meanwhile back at the ranch, collectivised capital is doing what it does best...

http://online.wsj.com/article/BT-CO-20100910-708716.html

AMSTERDAM (Dow Jones)--ABP, one of the world's largest pension funds warned Friday that it may have to reduce pension payments and called on authorities to change regulations, as historically low interest rates are making it increasingly difficult for it to maintain guarantees under current valuation rules.

The pension fund also warned that higher life expectancy will have a bigger negative impact than previously expected.

Experts say that the Netherlands' generous pension system, in which many citizens over the age of 65 receive 70% of the net minimum wage, needs to prepare for a drastic restructuring to cope with these challenges.

ABP, which covers 2.8 million active and retired civil servants and teachers in the Netherlands, said Friday it may have to cut pension payments as of 2011 because its coverage ratio--a gauge that measures the fund's assets relative to its liabilities--dropped to 88% in August, far below the legally required minimum of 105%.

It said it may not be able to guarantee current payout levels at the end of the year, adding that it will assess if it needs to take additional measures at the beginning of 2011.

It is another setback for ABP, which was hit hard by the financial crisis. The fund, which currently has EUR218 billion worth of assets under management, lost around 20% of its total capital in 2008, although it managed to offset most of these losses since 2009.

ABP said the low interest rate environment was the main cause of the current shortfall and called on authorities to change regulations. Under Dutch law, pension funds have to use market interest rates to value their long-term liabilities.

ABP's vice-chairman Joop van Lunteren recently told Dow Jones Newswires that market interest rates are very volatile and that it is "unwise" to use these in the current way to value financial obligations. "We prefer a system where the coverage ratio isn't so dependent on daily market swings," he added.

Because the Dutch pension system is one of the few in Europe that uses a mark-to-market methodology, it has been particularly hurt by low interest rates.

In the longer term, experts warn that Dutch pensions also face the same challenges as other pension schemes in Europe, namely a rapidly aging and longer-living population, a blurry economic outlook and volatile financial markets.

Dutch pension funds are making members aware they might have to accept lower and less stable pension payments than they had expected. In a nationwide advertising campaign, the five biggest funds, including ABP said Friday "there's something going on with your pension," telling members to realize that pension payments will increasingly be hit by economic cycles and higher life expectancy rates.

ABP's Van Lunteren told Dow Jones Newswires that participants still have a gut feeling that pensions are index-linked. "We should communicate more clearly that we're not able anymore to guarantee this. The benefit may be defined, it's not guaranteed," he said.

Lans Bovenberg, a professor of economics at Tilburg University, said it is inevitable that the system needs to change. "We will leave the defined-benefit system and move to one in which payment levels will depend on the economic cycle and the sentiment on financial markets," he said.

The Organization for Cooperation and Economic Development, or OECD, said in a recent report that without "a strong rally in equity markets, most Dutch pension funds won't be able to honour their internationally generous pension promises." The OECD said that in the longer term, promised pensions replacement rates can only be secured through a higher working age and a mix of higher contribution rates and lower real pensions and pension rights.

The Netherlands' population is growing older and living longer, making it harder to keep a decade-long promise that most Dutch citizens over the age of 65 will receive 70% of net minimum wage.

But experts say that the Dutch system, along with those in the U.K. and Scandinavia, is still in relatively good shape because many citizens have created large capital buffers by saving for their pensions themselves. This compares favorably with the pay-as-you-go systems in many parts of Southern Europe where pensions are paid through tax revenue and where it will be increasingly hard to keep them at current levels because of the region's aging population and shrinking workforce.

... well and truly Hubbardised.

Edited by ParticleMan

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Another wrong prediction of the inflationistas was that if America and the UK continued running such large deficits that bond investors would demand a higher yield. To compensate for inflation risk and sovereign default risk.

But UK 10 year bonds now yield 3.14%, barely above the 3.1% official yoy inflation numbers. While in America the ten year has fallen all the way to 2.79%, which is a fair amount higher than the yoy inflation numbers running ~1%. But still to lock in for 10 years at 2.79%.. that does not sound like the bond vigilantis we were warned of.

It means the UK and USA governments have tons and tons of room to even increase the deficits if they feel like it(which currently they do not). The reality is investors have no where else to go. In the private sector risk adjusted return is probably negative now. With most assets likely to decline in value or already headed down, and yields already small. Since the flip side of money is debt if that debt elsewhere cannot be repaid the money also will be destroyed. With the sovereign debt the investors at least will get their money back.

Until the sovereigns are willing to step in with serious stimulus we'll probably see a slow grind down. And over time that will mean even lower bond yields.. yes it can go lower than 3% for 10 years. Actually it could go down to 0%, even below that, as long as that 0% is better than risk adjusted returns elsewhere.

Have bond traders made large profits out of QE policies ?

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Meanwhile back at the ranch, collectivised capital is doing what it does best...

http://online.wsj.co...910-708716.html

... well and truly Hubbardised.

so, what the report is saying, is that Dutch pensioners are subject to mark to market in the real World...this means that payments are ABLE to take place, regardless of the final value, everyone gets something.

In OUR system, where they use mark to fantasy, they MUST be relying on the first few being paid IN FULL, the rest they HOPE will be made up by new entrants to the scheme.

This is clearly PONZI...and will fail...new entrants beware.

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Have bond traders made large profits out of QE policies ?

everybody has made money out of QE policies. Apart from savers with no debt - the lost tribe I call them.

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so, what the report is saying, is that Dutch pensioners are subject to mark to market in the real World...this means that payments are ABLE to take place, regardless of the final value, everyone gets something.

Yes, if you want to peek at the limit of the system, the fund's balance sheet will be far nearer its own liquid value (ie than its notional value).

As you say, the cake to people ratio is unlikely to become negative, this way.

The point though is to connect the dots - the "urgency" aa3's talking about has been asleep at the tiller, and was woken up mere minutes ago by a hungry dog (and one set to and barking at a bare cupboard, at that).

The most correct solution to all this being (and the one persued in the here and now), naturally enough, to petition to change the rules that the rule setter sets for the money printer to follow.

Someone described the Japanese economy as being like a clown car a few days ago - it's a rather apt metaphor for what's going on here (in the article, and indeed in the rest of the economy the world over, too).

As a final side thought, I was taught a long time ago about a rule of fifths (somewhat like the rule of twelves that those awful 70's car dealers and hire-purchase shysters will know far too much about).

The point being, every penny you spend took five times longer again to earn.

Now I never was brilliant at engineering, but I'd hazard a guess that if we start with some notional capital pool, then loot it at five times the rate we increase it, we're going to touch down far sooner and somewhat harder than we thought we might at the outset.

Strike?

Strike implies able to buy.

As I've said before, this ain't your parents' recession.

And it definitely isn't your grandparents' depression, either.

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Conversely the sheer amount of money out there has driven assets to astronomical levels rendering housing and pensions unaffordable...hence low yields...and as the yields continue to fall, people save ever harder to afford those houses and pensions...

THE SNAKE IS EATING ITS TAIL

Yes indeed. Imo the velocity of money has been slowing over the decades so now there is ~3x the debt relative to gdp than in the 1950's! This is a phenomenon across the whole industrial world. Debt being the other side of money in our debt based money system.

So it also means there is 3x as much money relative to gdp as back then!

There is this insane wall of money chasing yield. Yet the economy is only capable of producing so much yield. Imo eventually policies will be needed to get the wall of money to give up chasing yield and at least some of it out into the economy moving around.

As you said merely having this wall of money creates systemic problem in the economy, like those people spending so much on houses and pensions.

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Conversely the sheer amount of money out there has driven assets to astronomical levels rendering housing and pensions unaffordable...hence low yields...and as the yields continue to fall, people save ever harder to afford those houses and pensions...

THE SNAKE IS EATING ITS TAIL

If it weren't for the safety net it's tantamount to slavery for those without those assets except they keep on calling it democracy.

Very few if any have ever voted for these policies which only benefit a few such as those who can vote to set their own pay. Even the asset holders are unlikely to want such extreme unfairness as its outcome is so unpredictable.

It's extremely divisive but there's never been reluctance to divide people in the past there being plenty of examples of it being encouraged down the years.

Edited by billybong

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Thankyou for that Particleman. I was just posting the other day that Equitable Life was the canary in our goldmine when they failed to be able to guarantee a measly 3% a year to its endowment investors and explained why I had cashed in all my company pensions, endowments etc etc. - even stocks are at big risk because of the demands of pensioners on profits.

I don't think this has a particularly nice ending.

Eventually the major pensions will be forced to begin selling shares. When they switch from net buyers to net sellers there will be an epic downmove in stocks. That will take us some of the way there in correcting this overall problem of way too much paper wealth chasing a finite yield.

Obviously someone will have to take the pain for that re-adjustument.. but promises made cannot be greater than yield the economy is capable of delivering. And since those promises appear much larger than that yield, someone will have to break their promises.

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Another wrong prediction of the inflationistas was that if America and the UK continued running such large deficits that bond investors would demand a higher yield. To compensate for inflation risk and sovereign default risk.

But UK 10 year bonds now yield 3.14%, barely above the 3.1% official yoy inflation numbers. While in America the ten year has fallen all the way to 2.79%, which is a fair amount higher than the yoy inflation numbers running ~1%. But still to lock in for 10 years at 2.79%.. that does not sound like the bond vigilantis we were warned of.

It means the UK and USA governments have tons and tons of room to even increase the deficits if they feel like it(which currently they do not). The reality is investors have no where else to go. In the private sector risk adjusted return is probably negative now. With most assets likely to decline in value or already headed down, and yields already small. Since the flip side of money is debt if that debt elsewhere cannot be repaid the money also will be destroyed. With the sovereign debt the investors at least will get their money back.

Until the sovereigns are willing to step in with serious stimulus we'll probably see a slow grind down. And over time that will mean even lower bond yields.. yes it can go lower than 3% for 10 years. Actually it could go down to 0%, even below that, as long as that 0% is better than risk adjusted returns elsewhere.

Yeah, cos prices always go up init? There's a real "demand" for them, and not much supply init...?. Its supply and demand init..? There's a shortage init..?

It's different this time init?

Where have I heard all this before?

Edited by worst time buyer

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I was just posting the other day that Equitable Life was the canary in our goldmine when they failed to be able to guarantee a measly 3% a year to its endowment investors and explained why I had cashed in all my company pensions, endowments etc etc. - even stocks are at big risk because of the demands of pensioners on profits.

http://noir.bloomberg.com/apps/news?pid=20601110&sid=aBmLC0yRt3QY

Sept. 15 (Bloomberg) -- U.S. state pensions such as Illinois, Kansas and New Jersey are in a “death spiral,” with assets at many insufficient to cover benefits, payouts consuming a growing portion of resources and costs rising twice as fast as investment gains.

Less than half the 50 state retirement systems had assets to pay for 80 percent of promised benefits in their 2009 fiscal years, according to data compiled for the Cities and Debt Briefing hosted by Bloomberg Link in New York today. Two years earlier, only 19 missed the mark. Illinois covered just 50.6 percent of benefits last year, the lowest so-called funded ratio, which actuaries say shouldn’t be less than 80 percent.

Benefits paid by funds in at least 14 states equaled more than 10 percent of assets in the fiscal year, the figures show. In 2007, none exceeded the threshold. The growing burden prompted Colorado, Minnesota, Michigan and other states to trim benefits for millions of teachers and government workers. It also forced fund managers to keep money in short-term low-return investments to pay benefits, reducing chances pensions can earn their way back to financial health.

“Once you get into that dynamic, you’re in a death spiral,” said Michael Aronstein, who manages the $295 million Marketfield Fund of stocks as chief investment strategist at Oscar Gruss & Son, a New York brokerage. “There’s no financial or return solution.”

‘Different Era’

The largest Illinois pension, the $33 billion Illinois Teachers’ Retirement System, paid $3.7 billion of benefits in the year ended June 30, 2009. That’s 13 percent of its assets at the time, up from 8 percent two years earlier, according to annual reports and Dave Urbanek, its spokesman. The New York State system, the best-funded in the Bloomberg data at 107.4 percent, paid out 7 percent of its assets in fiscal 2009.

Part of the problem with pensions today is they were designed in a different era,” Richard Ciccarone, managing director of McDonnell Investment Management LLC, said at the Cities and Debt Briefing. “When our economy slows we no longer have the economic base to pay the pensions.

At June 30, 2010, after the Illinois fund’s investments had gained 13 percent and lawmakers borrowed $3.5 billion to shore up the system, benefits in the fiscal year had risen to $3.9 billion, according to Urbanek, or 12 percent of assets.

‘Too Harsh’

Lawmakers in Illinois, which, with California, has the lowest credit rating from Moody’s Investors Service of any state, were unwilling to approve another bond sale, for $3.7 billion, this fiscal year. As a result, the pension may sell $3 billion of assets to cover benefits, Urbanek said.

“Death spiral is too harsh a language,” he said. “It’s a concern, but we’re not on life-support.”

Selling assets, reducing services and cutting costs such as pension contributions are tactics states are using to confront what a June 29 report by the Center on Budget and Policy Priorities, a Washington-based research group, said was a record $140 billion combined budget deficit this fiscal year.

Lawmakers are willing to anger taxpayers and retirees to show investors who buy more than $400 billion of state and local debt a year that something is being done to stem rising costs.

Benefits Growth

Benefits paid by the 100 largest public pensions in the five years that ended June 30 grew an average of 8 percent annually, calculations based on U.S. Census Bureau reports show. In that period, the median annualized investment return was about 3 percent for public funds with more than $5 billion of assets, said an August report from Wilshire Associates, an investment adviser in Santa Monica, California.

The U.S. recession and stock-market collapse drained about $835 billion of value from the 100 largest public funds, according to the Census Bureau. As a result, benefit payments by those funds amounted to 7.5 percent of assets in the 12 months ended June 30, 2009, up from about 5 percent two years earlier, the census figures show.

Even an investment rebound in the year that ended June 30, 2010, when Wilshire reported the median return on public retirement funds was about 13 percent, did little to alter the trend. Funds in at least eight states that reported investment results for the fiscal year still spent more than 10 percent of their assets on benefits, Bloomberg data show.

Asset Outflow

“The fact such a large portion of assets is flowing out each year really challenges the longevity of these funds,” said Joshua Rauh, who teaches finance at Northwestern University in Evanston, Illinois. He projected retirement accounts in his and other states would run out of money within a decade. “It will be a crash landing,” he said.

The rising share of assets consumed by benefits is “interesting” but misleading, said Keith Brainard, research director of the Baton Rouge, Louisiana-based National Association of State Retirement Administrators. He pointed to the offsetting effect of annual payments into funds made by workers and state governments.

“Employer contributions tend to fluctuate, but employee contributions are remarkably steady,” he said.

From 1998 to 2008, the most recent full statistics from the Census Bureau, state and local government payments into retirement funds almost doubled to $82 billion. Over the period, worker contributions rose 70 percent to $37 billion.

130 Percent

During the same decade, however, benefits paid increased by 130 percent to $175 billion. Payments from the 100 largest public funds grew by another 9 percent during the first three quarters of the 2010 fiscal year compared to the first three quarters of 2009, according to the census.

The $11 billion Kansas Public Employees Retirement System had the seventh-lowest funded ratio in Bloomberg’s ranking at 63.7 percent in 2009. It paid out benefits equal to 10 percent of its assets in the fiscal year, double the rate of 2007, fund records show.

The pension’s funded ratio fell from 70.8 percent two years earlier and is projected to drop to 41 percent by 2015, according to a February report to state lawmakers. Another market decline could jeopardize the fund, the report said.

“Preservation of sufficient cash flow to fund current benefits may become paramount,” it said, which could constrain investment strategies and make it harder to achieve assumed returns.

Payments Skipped

The problem is magnified in states where officials skipped billions of dollars of contributions.

New Jersey Governor Chris Christie, 48, a Republican who took office in January, withheld $3.1 billion of payments in his first budget to cope with a record $10.7 billion deficit. Since 2004, the state has made only $2.7 billion of the $11.9 billion in scheduled contributions, according to bond-sale documents.

New Jersey’s $68 billion retirement system had a funded ratio of 66.1 percent in the Bloomberg data, the 11th-lowest. The state in August settled Securities and Exchange Commission claims that it failed to disclose the extent of its underfunding in documents for $26 billion in bond sales from 2001 to 2007. It didn’t admit wrongdoing.

Benefit payments are projected at 11.4 percent of available pension assets during this budget year, even after a 14 percent investment gain in the fiscal period that ended June 30, New Jersey records show.

Teachers Pension

Payouts by the New Jersey Teachers Pension and Annuity Fund, which serves about 236,000 working and retired educators, grew to $2.8 billion from $1 billion in the 10 years through 2009, an average annual increase of about 10.4 percent, its yearly reports show. Over the period, holdings returned an annualized 2.3 percent, according to the state’s Division of Investment.

Retiree benefits last year amounted to 11.2 percent of the fund’s $25 billion value, compared to 3 percent a decade earlier. Payments are on track to exceed 11 percent of assets again this year, state budget documents say.

To remain healthy, the New Jersey teachers fund should pay out no more than 9 percent of its assets each year, Scott Porter, of the Philadelphia office of Milliman Inc., the fund’s actuary, told trustees in February. He said benefit costs will rise to $4 billion a year within a decade, making it questionable the state will achieve its assumed 8.25 percent annual investment gain.

“As baby boomers retire and the benefit payments increase, that’s going to keep the market value of assets from growing substantially,” he said.

Lower Benefits Proposed

With such prospects, U.S. governors and lawmakers are proposing lower benefits. Colorado, Minnesota and Michigan are in court defending cuts, including a reduction in annual cost- of-living increases imposed on retirees during the last year.

In Connecticut, where benefit payments rose to $2.7 billion this year from $2.1 billion in 2007 as assets lost almost $5 billion in value, outgoing governor Jodi Rell wants to eliminate guaranteed pension payments for future employees. New Jersey’s Christie plans to revoke a 9 percent increase in benefits awarded in 2001.

Advocates for pensioners say such strategies illegally renege on promises to workers. Politicians themselves caused the problem by failing to make required payments, they say.

“This has been in motion for a long time,” said John Stember, a partner at Stember Feinstein Doyle Payne & Cordes in Pittsburgh, which represents retirees in six states challenging rollbacks.

“The state is making a compelling argument based on a set of facts it’s confronted with now, but that it didn’t necessarily have to be confronted by,” he said.

Ultralow risk-free yields aren't the only problem here, but sheesh...

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Eventually the major pensions will be forced to begin selling shares. When they switch from net buyers to net sellers there will be an epic downmove in stocks. That will take us some of the way there in correcting this overall problem of way too much paper wealth chasing a finite yield.

Obviously someone will have to take the pain for that re-adjustument.. but promises made cannot be greater than yield the economy is capable of delivering. And since those promises appear much larger than that yield, someone will have to break their promises.

Low interst rates - they'll have to sell many more shares tha would otherwise be the case to meet commitments.

Same goes for retirees selling other investment portfolios outside of pensions, hit by low rates and forced low yields.

Meanwhil there will be very little money left at all in terms of fresh money as those working will be hit by a deadly wave of above wave inflation.

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Ultralow risk-free yields aren't the only problem here, but sheesh...

That is alarming how fast those pensions are spending through their fund already. Pensions really need big bond yields to make any sense over a long period of time.

But as much as they may need them.. if risk free yield is simply not there.. its not there.

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Low interst rates - they'll have to sell many more shares tha would otherwise be the case to meet commitments.

Same goes for retirees selling other investment portfolios outside of pensions, hit by low rates and forced low yields.

Meanwhil there will be very little money left at all in terms of fresh money as those working will be hit by a deadly wave of above wave inflation.

On a macro level the economy has way, way too much money sitting there trying to earn a return. But the economy only can deliver so much yield. Say 10% of gdp I think is an estimate. Whether there is 1 trillion in cash, or 4 trillion in cash chasing that 10% of yield.. doesn't change the yield. All that happens is it drives up the price of the asset.

The market is giving a not so subtle hint to people that they will have to sell and spend their savings, not just the yield now. But obviously people do not give up so easily, or in the case of pensions generous promises have been made to millions of people.

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  • 189 Brexit, House prices and Summer 2020

    1. 1. Including the effects Brexit, where do you think average UK house prices will be relative to now in June 2020?


      • down 5% +
      • down 2.5%
      • Even
      • up 2.5%
      • up 5%



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