Teaching from Truell
The view of Edmund Truell at 8.43 yesterday evening, an evening the other side of Donald Trump’s withdrawal from more aggressive tariffs to most and an example setting tariff for China. Here is the circular shared on Linked in.
Another £100+billion hit to UK pension funds. As I said yesterday morning on the BBC rather too politely “ a misplaced view of risk “ by persisting with LDI-lite and anything-but-safe bond assets...[hedging counterparties] are calling in margin and so pension funds and insurers are selling their gilt holdings. This has started the ramp in the 10 year from 4.446% Friday to c.4.75% today. And the 30 year from 5.11% Friday to a 27-year peak of 5.6% today.As for Corporate bonds, the mark-to-market down 20%+ will cause further carnage.
The view of the FT’s US Financial Control is less pension-centric but equally clear that it is bonds that matter most and that recoveries in equities are a matter of opinion
Good morning. The Nasdaq rose 12 per cent yesterday — its biggest rise since 2001 — and the S&P 500 jumped by 9.5 per cent. Why, then, don’t we feel much better?
Now we know Donald Trump’s pain threshold: 12 per cent down on the S&P 500, followed by a 60-basis point jump in the 10-year Treasury.
Trump withdrew the craziest of his “reciprocal” tariffs before the liberation day sell-off could even wipe out a year’s stock market gains, and before the Fed even had to face hard questions about intervening in the Treasury market. Trump was not prepared to take markets all the way to the edge.
Investors were right to celebrate. Not because the remaining 10 per cent universal tariff and a full-on trade war with China will do no damage to corporate earnings or economic growth. It will take a while to recalibrate how bad the harm will be. But we now know the market has Trump on a leash, and we have an initial estimate of its length. Whether “this was the plan all along” is an academic question. Whatever the plan may have been, its extent and its timing were ultimately determined by the movement of capital. Good.
Amid the relief, a couple of dour points to bear in mind:
- The existence of a market guardrail trims the range of possible outcomes, but uncertainty is still high. In particular, the tariffs that remain are plenty high enough to have inflationary implications, a risk the market does not seem to be taking particularly seriously right now (as we wrote yesterday).
- The valuations of all risk assets, but especially large-cap US stocks, are right back to uncomfortable highs. It won’t take much to kill yesterday’s burst of upward momentum, which already looks like an overshoot.
- The bond market, unlike the stock market, has not retraced its losses. Zoom out to a five-day chart and yesterday afternoon’s relief rally is hardly even visible (see next piece). This is probably a better gauge of the balance of risks than equity prices.
Risk is meaningfully lower today. It is not low.
Excuse me for not trying to make sense of this.I am recovering from a recent operation , the results of which are doing my head and body in, rather like Mr Trump is doing the markets!
This comment on Truell’s linked in comment (see the top of this blog) is pretty much in line with mine.
Trump signed another executive order yesterday, concerned with shipping. The US does not build any ships, containers or cranes worth talking about. We won’t know the detail until April 17th but it is clear that this is yet another ‘war’ with China and also likely to be profoundly inflationary for the US consumer. It isn’t over yet.
It would reward the time to revise O level game theory. A strategy where all parties lose but the bully loses most looks to be one way forward.
https://m.youtube.com/watch?v=RHkKJibHnWg
One of the victims of Trump is an elected Republican politician another or a Trump supporter or adviser who is past their usefulness, like Giuliani or on,the same track, like Musk. They are tolerated until surplus to requirements.
Plainly Trump does not understand the economics of tariffs he is stoking inflation and destroying growth. How does this play out for the transitory surplus discussion?
Add in an understanding of sociopaths and we may have a strategy.
On UK Pensions, I thought it might be worth repeating my early comments “Should pension schemes ditch gilts – at least for valuation purposes?” which were published on this blog on the 13th and 14th November https://henrytapper.com/2024/11/13/should-pension-schemes-ditch-gilts/
https://henrytapper.com/2024/11/14/should-pension-schemes-ditch-gilts-part-two/
Hopefully the more objective led approach now being publicised by The Pensions Regulator will trigger them to re-appraise their previous approach (particularly the DB Funding Code) in the light of this fresh market challenge. There is a significant risk that current surpluses are being overstated – what is even worse the misleading surplus measurement may lead to a further loss of assets required for the future benefit payments through surplus distributions to employers.
Just a thought!
If we could just take ourselves (actuaries especially) away from net present values towards a more nuanced and richer approach (ALM, anyone?), then short-term bond yield fluctuations would lose their power and sponsors and members would gain a much clearer idea of what is likely to happen (discrate.com). Let me add that the beneficial impact of ILGs has been far over-rated and we’d have been better of without them (https://www.ukrpi.com/who_wanted_ilgs.htm).
I found a re-reading of a 28-page 2019 research paper, Economic Thought and Actuarial Practice, Dr Iain Clacher wrote for the Actuarial Research Centre of the UK’s Institute & Faculty of Actuaries relevant to Jon’s observations above.
“… actuaries are potentially passive recipients of economic thought rather than proactive and challenging of the economics that impacts on actuarial practice.
“… Consulting actuaries are very good at making calculations. They are frequently terrible at making the assumptions upon which the calculations are based. In fact, they well may be peculiarly ill-equipped to make the most important assumptions if the world is one of economic discontinuities. They are trained to be conventional. Their self-interest in obtaining and retaining business would be ill-served if they were to become more than mildly more than mildly unconventional. And being conventional on the crucial assumptions basically means accepting historical experience adjusted by a moderate nudge from current events. This works fine in forecasting such factors as mortality and morbidity, works reasonably well on items such as employee turnover, and can be a disaster in estimating the two most important elements of the pension cost equation, which are fund earnings and salary escalation.
“This is the challenge of estimating and managing long-term liabilities in a world of economic discontinuities. I can think of no other group that would be able to meet this challenge.”
Not the UK’s OBR, certainly.