UK goes all in

The UK bond market fell off a cliff with 5 year yields shooting straight past 4%. Sterling fell to 40 year lows too, just to make sure foreign investors took a proper pummelling. The Chancellor then jumped on the Sunday morning TV shows promising more of the same, prompting further collapses on Monday. A 98 basis point sell off in two days, an all-time record; which is saying something, because the UK has had a crisis or two over the years.

Among the budget treats were tax cuts for high income earners, a removal of the cap on bankers bonuses, scrapping increases in corporation tax rates as well as removing the planned increases in duty on beer and wine.

It was the biggest tax cutting event since 1972, and will be welcomed by exiled Russian businessmen and alcoholics right across Britain.

Surely then, it couldn’t get worse? I’m afraid it could. On Wednesday the spike in long bond yields was causing distress for UK pension funds. They are the primary buyer of longer maturity bonds to match their long dated liabilities. Margin calls were flying around some of the largest institutional investors in the country. The Bank of England was forced to intervene and start buying the longer dated bonds.

The scale of the panic was quite something as the Financial Times revealed:

Even so, London bankers who bought long dated inflation-linked Gilts before going to lunch on Wednesday had made a 124% gain before the close of business. They do say bitcoin is volatile don’t they? It has never done this though.

The scale of the intervention was also notable:

The Bank will carry out temporary purchases of long-dated UK government bonds from 28 September. The purpose of these purchases will be to restore orderly market conditions. The purchases will be carried out on whatever scale is necessary to effect this outcome. The operation will be fully indemnified by HM Treasury.

Essentially unlimited bond buying then.

KYC

Unfortunate times at Optus Australia. For those people affected you will be receiving an email just like this one.

They are sorry, they lost all your personal information including copies of your passport and proof of address; indeed all the things needed by another person to pretend to be you. They will get fined, their CEO will get a gigantic pay off and then leave. Someone new will arrive, sweeping changes will commence and then it will happen again somewhere else.

The real culprit here is not Optus though. It is the KYC gulag. It is impossible to transact in a modern economy without pouring out your personal details and documents all over the internet. Bank accounts, mobile phones, brokerage accounts, mortgages, credit cards, buying a car. There have been so many hacks now that it’s nearly certain that all your personal details are already for sale. You needn’t worry if you are a victim of the Optus hack, the dark web already has a copy of everything about you.

It is worth remembering that Optus (and everyone else) were forced by law to collect this data in the most insecure way possible. Every customer would have emailed their ID and supporting documents and as a result they already exist on pretty flakey email servers all across the world. Fair enough, when they reach Optus they should do a better job of securing them but it’s irrelevant. The moment you sent those documents across the internet it wasn’t secure and you should not have done it, but you were forced to do so.

The best way to protect privacy is to simply let people protect it themselves instead of continually forcing them to compromise it in the most insecure ways. It’s just unthinkably stupid that this happens every day. Even worse, it almost certainly doesn’t prevent crime. We know from the Westpac scandal that they had KYC’d every customer and it made absolutely no difference to anything.

Now Optus will spend tens of millions of dollars on new servers, new secure document collection methods that will not be secure as well as paying for customers to have passports and licenses reissued. Again, this is a total waste of money since all the key details of their clients are compromised. You can change whatever passport you want but your date of birth and face will stay the same.

There are ways to transact peer-to-peer that are of course much more efficient and secure than this. Every hack proves the value of the alternative system and the near total failure of the current one.

Something strange

The Japanese Yen is another currency under tremendous pressure at the moment. The Bank of Japan has been reluctant to increase rates to defend the currency because their debt burden is so large (258% of GDP) it would essentially bankrupt them.

Japan also happens to be the largest international holder of US Government Bonds and rumour has it they have been selling those bonds and using the dollars to buy Yen.

Japan owns $1.2 trillion in US Bonds. If they truly do start dumping them it could get very interesting indeed.

Note the third-largest holder is the UK, another country which will find it extremely attractive to dump US bonds from here.

So, the environment is something like this: Japan, selling. China, been selling for years. UK, selling. Federal Reserve; claims they are selling through quantitative tightening. Government of the United States, selling to finance deficits.

Buyer? Oh, that’s you through your superannuation.

Bankruptcy of the Reserve Bank

I was shocked to discover that the Reserve Bank of Australia went bankrupt this week. They reported losses so large that they have completely wiped out their equity stack and will ‘be unable to pay dividends to the government for some time’.

How did this happen? Well they made some risk-free investments in risk-free bonds and managed to lose about A$50 billion doing so.

Australia’s bonds are AAA rated so this is quite an achievement by the RBA.

The Deputy Governor of the bank was on hand to explain things:

“the bank itself could also print money to meet its obligations, and so it is not insolvent.”

“The negative equity position will, therefore, not affect the ability of the Reserve Bank to do its job,” she said.

A remarkably honest explanation to which I have nothing to add.

Euro-Trash

Bad news from the South-lands I’m afraid. Despite fiscal threats earlier in the week from the EU’s Chief Librarian  Ursula von der Leyen, Italians ignored her and elected a person they wanted. That is essentially how a democracy works. Unelected librarians from Germany don’t really have a voice in Italian elections. Ursula seems to have forgotten that.

The new Prime Minister of Italy will be a lady called Giorgia Meloni and she will be Italy’s first ever female Prime Minister. Far from being congratulated on this achievement though she is being condemned as an extremist, mostly because she thinks all sorts of crazy Italian stuff, like families might be important.

Still, it presents an issue for the EU. Von der Leyen referenced the punishments meted out to Hungary and Poland which have been sanctioned by the EU and had funding suspended because they had been thinking the wrong things and saying so quite loudly.

The likely path here is that the new Italian government will increase government spending massively (like the UK), while completely ignoring EU limits on borrowing.

We will then have an EU bond market crisis, Italian bond yields will soar and the EU will not intervene unless they get the government in Italy that they want. The Italian government will collapse into total shambles and an emergency government headed by Mario Drahgi will ‘temporarily’ sail in to rescue the situation. Pretty much that, in one form or another, over the next 36 months.

The unelected librarian from Germany will have her way in the end.

Sit back, enjoy and be short the Euro which now trades below parity at 0.97 US cents.