Bernstein - Implementing Liability Matching and Risk Portfolios - in 2020

gm0

I am not suggesting CPI is currently rigged. But I might once have said the same about LIBOR
In contrast the political caution over eventually ending RPI is proving extremely long winded. 

However in a any crisis or long running problem the government is not at all shy about avoiding liabilities to the person in the street or creating legerdemain solutions which are not all they appear to be.  Political expedience comes ahead of transparency, equity or horizontal/vertical fairness. There are many examples. 

- NSI throttling for fear the banks share of deposits will fall (In fact this is irrelevant as the banks feel utterly free to brutalise the retail saveras they have plenty of wholesale finance).  So it removes access to a safe, modest return option for the financially conservative.

- Allowing banks to renege on deals conceived pre interest rates hitting the floor when they became actually consumer advantageous - as written. (Offset mortgages around 2008 a good example).  It is not obvious why these contacts should just get reset in favour of the banks for that part of the loan book.  Was not how my early life mortgages worked when interest rates spiked up.

Green things - MCS scheme for RHI (Green crisis - money is really aimed at building up the trade and not the householder hence the subsidy moving via inflated prices from the consumer to the installer (cowboy or legit) for MCS installers over non-MCS and this rigging of the market being tolerated. It is the design and may even be a necessary policy given the scale of the challenge. But that is not how it is marketed politically to the consumer.

Tolerating inflating down the cost of government debt while brutalising fixed income savers (1970s)

If 2020s inflation spike occurs then if there is a way to suppress CPI uplift on linked indexation payouts or avoid uplifting indexation on allowances then it will be found and exploited in Westminster.  My prediction is behavioural
Treasury have already created nominal return tax traps (LTA), general fiscal drag on allowances uplift.  Why would they be shy about more of these.

[Deleted User]

Linton said:

Deleted_User said:

gm0 said:

Thanks Linton and Mordko.  Both useful suggestions which I will follow up on. 

The concept of short duration bond ladder as cash alternative is big enough on each step (5) to buy actual bonds rather than an ETF.  I'll have to bone up on reading bond data (again - have done this but forgotten) and then look at some numbers/cashflows.  

Classically of course this would be linkers not just gilts (TIPS in US parlance) but actual protection from a possible inflation spike may turn out like a lot of insurance to have all the cost and none of the result (when the argument/manipulation of CPI occurs at the point it is needed later). Will ponder some more.

Buying government bonds is easy. The only hard part about bonds is weighing risk of default and pricing it.  Gilts and treasuries are risk free money, so the price is always right.  Treasuries can be bought directly from the US government, most cost efficient way to do it.  There is currency risk but I am ok with USD risk for a portion of my fixed income.  I have a mixture of inflation protected fixed income and standard bonds which protect against deflation.

For most private investors, UK Gilts can only be bought on the secondary market.  Not that it makes much difference since new gilts are auctioned by the government rather than being sold at face value, so there is no chance of a good deal.

However gilt yields are so low, negative in £ terms in some cases especially for index linkers if inflation stays at current values, I dont believe a gilt ladder is worth the effort taking into acount the risk of unplanned capital loss should you need to sell early.

I think you are being paranoid if you believe CPI is manipulated.

I never said CPI is being manipulated. Wouldn’t buy bonds at negative yield. Hopefully that issue is a short term problem.

itwasntme001

Wealth preservation is perhaps the hardest its ever been.  Even buying a 10 year index linked gilt is locking in a 25% loss if inflation turns out to be as expected and held to maturity.

CGT has focused on investing in countries like Japan and Australia where you at least get a positive yield on their linkers, however if inflation turns out to be less than is assumed, even these can show losses if held to maturity.  There is certainly value in active management when things are at the extremes.

CGT admit that market timing for the medium/long term works.  It is what any tactical asset allocator or macro investor does.

Linton

Deleted_User said:

Linton said:

Deleted_User said:

gm0 said:

Thanks Linton and Mordko.  Both useful suggestions which I will follow up on. 

The concept of short duration bond ladder as cash alternative is big enough on each step (5) to buy actual bonds rather than an ETF.  I'll have to bone up on reading bond data (again - have done this but forgotten) and then look at some numbers/cashflows.  

Classically of course this would be linkers not just gilts (TIPS in US parlance) but actual protection from a possible inflation spike may turn out like a lot of insurance to have all the cost and none of the result (when the argument/manipulation of CPI occurs at the point it is needed later). Will ponder some more.

Buying government bonds is easy. The only hard part about bonds is weighing risk of default and pricing it.  Gilts and treasuries are risk free money, so the price is always right.  Treasuries can be bought directly from the US government, most cost efficient way to do it.  There is currency risk but I am ok with USD risk for a portion of my fixed income.  I have a mixture of inflation protected fixed income and standard bonds which protect against deflation.

For most private investors, UK Gilts can only be bought on the secondary market.  Not that it makes much difference since new gilts are auctioned by the government rather than being sold at face value, so there is no chance of a good deal.

However gilt yields are so low, negative in £ terms in some cases especially for index linkers if inflation stays at current values, I dont believe a gilt ladder is worth the effort taking into acount the risk of unplanned capital loss should you need to sell early.

I think you are being paranoid if you believe CPI is manipulated.

I never said CPI is being manipulated. Wouldn’t buy bonds at negative yield. Hopefully that issue is a short term problem.

Sorry not you Mordko.! gm0  seemed to be suggesting that.

Thrugelmir

gm0 said:

- NSI throttling for fear the banks share of deposits will fall (In fact this is irrelevant as the banks feel utterly free to brutalise the retail saveras they have plenty of wholesale finance).  So it removes access to a safe, modest return option for the financially conservative.

UK savers have built up a war chest somewhere in the region of £100 bn in the past 9 months.  Taxpayers shouldn't be landed with even more debt. A little insurance against inflation wouldn't go amiss. As this money eventually will filter out into the real economy. Not that the BOE or the Government will mind the inflationary effects. 

[Deleted User]

They might have an issue as the interest payments go up and a much higher proportion of the budget has to be dedicated to debt repayment 

itwasntme001

Deleted_User said:

They might have an issue as the interest payments go up and a much higher proportion of the budget has to be dedicated to debt repayment 

This may not be an issue if CBs successfully enact yield curve control.

itwasntme001

If AI/robotics reaches a level to displace most/all goods production and knowledge based jobs, where will the inflation come from?

itwasntme001

It is worth pointing out that linkers are NOT a pure play on inflation.  Break-evens are.  Linkers can do well with inflation expectations rising but only if nominal rates do not rise as much as inflation expectations rise.  In other words linkers can also do well as rates fall and inflation expectations not fall by the same amount (an example of deflationary conditions).  They are only a play on real interest rates.

[Deleted User]

itwasntme001 said:

Deleted_User said:

They might have an issue as the interest payments go up and a much higher proportion of the budget has to be dedicated to debt repayment 

This may not be an issue if CBs successfully enact yield curve control.

I don’t know what it means but once inflation takes off, central banks will be forced to act and raise the interest rates. Sooner or later.