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December 4, 2022

Financials Matter

"It's Not Just About Finance"

Déjà Vu for Bank of England?

In the global game of chicken, the Bank of England was the first to blink in the Banks-Don’t-Trust Banks arena last week.

As a result, we may be looking at Yogi Berra’s famous quote: “Déjà Vu all over again” in the form of another 2008 meltdown.

In case you missed it, BoE gave up its inflation fight to rescue its pension funds and bond market.

Huh?

Translation: They pivoted from significantly raising interest rates – which were 0.01% last December to 2.25% recently – back to quantitative easing.

AKA: Massive Money Printing.

So, in slightly more than a heartbeat they went from aggressively fighting inflation to “We’re all gonna die if we don’t bail out our pensions and bond market.”

Unfortunately, their bond and pension markets have been toast for many years.

And now they’re scrambling to avoid another 2008.

The crisis manifested itself in the UK pension system recently with plunging bond prices.

CNBC summed up the problem.

“In order to top up the collateral on these bonds, some funds had to raise cash. But due to the speed of this crisis, many funds were caught out and were forced to liquidate their next most liquid assets, long-term bonds or gilts, causing prices of bonds to fall even more.”

Translation:  They’re totally screwed.

Major Bank of England Screw Up

How did this happen?

In Plain English…When interest rates fall to zero, bond holdings in pension funds don’t generate income.

Duuuhhhh!

Pensions need this income to pay benefits.

So, in order to boost their incomes, pension funds borrow money at low interest rates to buy new long-term bonds using existing bonds as collateral

But when interest rates rise, the value of their bond portfolio collapses even as the interest on their debt rises.

And here’s the real kick in the butt.

This pension problem isn’t exclusive to the United Kingdom. Pensions systems worldwide face the same issue, including in the United States.

So, the $64 Billion question becomes:  When the SHTF here, will the FED follow England’s lead and fold like a cheap suit?

We’ve written dozens of articles about why you should be careful with bonds…especially government bonds (HERE).

And be sure to read: Bond Market Tremors = Why Banks Don’t Trust Banks February 24, 2020.

And now that the chickens are coming home to roost it’s going to get really ugly for ALL Central banks, pensions, and bond markets.

England is the tip of the iceberg.

Be sure to read how to profit from this inevitable madness in our October issue of “…In Plain English” (HERE).

And share this with a friend…especially if they own government bonds.

They’ll thank YOU later.

Remember: We’re Not Just About Finance.

But we use finance to give you hope.

FYI

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Invest with confidence.
Sincerely,
James Vincent
The Reverend of Finance
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