The Day Markets BROKE!! How to WRECK a Currency 💷

Last week saw one of the most dramatic Meltdowns in the financial markets for Years a meltdown which could have led to A complete collapse in the UK sovereign Debt Market It was so severe that it forced the bank Of England to try and calm the situation By turning the money printer back on However every action has an equal and Opposite reaction unintended Consequences will rear their ugly heads In this video I’m going to explain Exactly what happened and what it could Mean for the markets going forward so Don’t go anywhere Now I assume that not all of you have Been keeping up to date with UK politics Recently and to be honest I don’t blame You so three months ago then prime Minister Boris Johnson was forced to Resign having lost the faith of the Conservative party why this happened is Beyond the scope of this video suffice To say that it had been a long time Coming the conservatives then held a Lengthy internal election process to Determine who would be the new leader of The party and hence prime minister Conservative MPS narrowed the field down To two candidates who then had to secure Votes from The Wider party membership After a long better and frankly often Tedious battle with former Chancellor Rishi sunak Liz truss won the election

With a total of 81 000 votes that’s Right 81 000 party members decided the Future leader of an entire country that Folks is democracy apparently anywho Liz Julia pointed her cabinet and named a Loyalist and close friend quasi quateng As the chancellor of the exchequer this Is effectively the Minister of Finance It’s akin to the treasury secretary in The U.S we Brits are just better at Titles now after a Hiatus caused by the Death of Queen Elizabeth and a Subsequent period of mourning business Was resumed quasi unveiled his new Mini Budget in the House of Commons and it Did not go down well Now one of the most contentious parts of This mini budget was a tax cut which was Overwhelmingly favorable to the rich Quasi effectively scrapped the top 45 Tax rate now this of course meant that The government would be short of change 45 billion pounds to be exact more on That later now if that didn’t Sufficiently Dent the Market’s Confidence then the energy subsidy Certainly did 60 billion pounds worth Over the next six months however it’s Not only the cost that we would witness Over the next six months that’s the Issue it’s the cost of this fiscal Package over the next five years by some Estimates this could be as much as 161 billion pounds so the inevitable

Question naturally arose how on Earth is All this going to be paid for well what Does anyone do when they want to spend Without earning income that’s right they Borrow the thing is that markets are not All that happy to invest in the Sovereign debt of a country that’s Becoming less credit worthy they’re also Not too happy to hold the currency of a Country that is likely going to feed Further inflation with Reckless fiscal Spending The result was an unprecedented shock to The markets the pound hit a near All-time low of 1.4 cents in the early Hours of Monday morning it had many People including myself wondering Whether parity was on the cards but the Collapse in the pound was not even the Worst of our concerns that’s because the Moves in the guilt Market were even more Alarming Now for those unfamiliar with archaic British fiscal terminology guilts is the Term used to refer to British government Bonds it’s a shortening of the term Guilt-edged Securities fact fans Now in the wake of the mini budget Announcement foreign investors began Dumping their guilts as they digested The news the scale of the selling was so Bad that it was the worst Day in the UK Guilt Market since 1990. according to The head of UK rate strategy at HSBC

Quote the moves in long-end yields were Nothing short of incredible the guilt Market was in free fall As a result of this sell-off there was An unprecedented rise in the yield on Guilds now over here you can see the Charts on the yield of the longest dated Guild 30 years it’s quite hard to Appreciate how crazy moves like this are In a 30-year instrument but this was one For the record books they went from About 3.6 on the 22nd of September to Over five percent the following Wednesday the highest level in 20 years And it’s not only the fact that the Yield was reaching such crazy levels but It’s also the speed at which they were Moving here you can see the volatility Around these yields it’s pretty crazy so Why is this a problem well if you were An investor who got exposure to guilts Synthetically I.E through derivatives You would need to post collateral to Fund these traits but it was even worse For those investors and institutions That had entered derivative agreements That were exposed to moves in guilt Yields the largest investors of this Type were those who employed an ldi or Liability-driven investment strategy for Those unfamiliar this is an investment Style that attempts to hedge out Liability exposure and those with the Most exposure to longer dated guilt

Yields were Pension funds that’s because Their liabilities present value of Pension payments are discounted using Applicable interest rates now I’ve Linked to some resources that explain Ldi in a bit more detail down below But whereas older ldi strategies just Involved holding longer dated government Debt new strategies involved complicated Interest rate derivative structures in What are called ldi funds these included The likes of interest rate swaps guilt Total return swaps swaptions and other Complex instruments not only that but These were leveraged up to four times This meant that those Pension funds or Indeed anyone who invested in ldi funds Were exposed to outsized moves in Interest rates they would need to post Collateral as their derivative Hedges Unwound quicker than they could raise The cash now I know what you’re thinking Who on Earth structured and developed These ldi funds well that would be the Likes of BlackRock Insight legal in General and their ilk It’s pretty crazy to think that your Mum’s pension is being hedged by the Likes of these chaps but hey this is the World of Fiat Finance folks it’s like an Iceberg with a whole lot of risk lurking Beneath the surface Now the point is that Pension funds were In a deeply unfortunate situation as

They were forced to post collateral on Derivatives trades that no one had Anticipated this meant that these Pension funds had to conduct a fire sale Of their Assets in order to free up Liquidity to post this collateral Apparently some funds even made calls For cash to employers backing their Plans According to the financial times Outsourcing groups Circo provided 60 Million pounds after a request from Pension trustees something incredibly Unusual for such a well-funded scheme But the rush to sell assets had an even More perverse effect a self-inducing Chain reaction that could actually have Brought the financial markets to a Standstill Basically in order to realize that Liquidity these Pension funds needed to Sell other assets to free up cash Well it turns out that Pension funds Hold a lot of guilts as well Not only that but these are among the Most liquid assets they hold and thus Some of the easiest to realize for cash Hence Pension funds started dumping Their guilds too this of course meant That there were further falls in the Prices of these guilts and rises in the Interest rates on them higher rates more Collateral calls on leveraged ldi trades More guilt selling it’s a spiral of

Guilt fire sales and collateral calls Things were getting seriously out of Hand There was a legitimate concern that this Could devolve into a full-blown Financial crisis and unlike in 2008 when It involved Banks this would have Involved the 1.5 trillion pound pension Sector According to a senior London Banker Quoted in the same ft article quote at Some point this morning I was worried This was the beginning of the end He also added that at that time there Were no buyers of long-dated UK guilds According to Karen Rosenberg cardano Investment chief executive quote if There was no intervention today guilt Yields could have gone up to seven to Eight percent from 4.5 percent this Morning and in that situation around 90 Percent of UK Pension funds would have Run out of collateral for reference Cardano Investments manages ldi Strategies for about 30 UK pension Schemes worth roughly 50 billion pounds In assets and know nothing to do with The layer 1 blockchain Project Now this statement was made as part of a Plea to the bank of England the Central Bank of the UK to intervene in the Market however could the bank really Step in and do something I mean it was In the middle of a rate tightening cycle

And had stopped its guilt buying program Only a few weeks ago Well the fear in the markets was just Too great and caused the bank of England To warn of a quote material risk to UK Financial stability it duly Unleashed a 65 billion pound Bond buying program on Wednesday in other words quantitative Easing or in the parlance of our times Money printer go It was an unprecedented action for a Central bank which had only a week Previously raised interest rates by 50 Basis points a bank that stated it was Committed to fighting inflation a bank Which now finds itself turning on the Printing presses again all to clean up The mess that kamakwazi kwatang and ldi Funds had got us into speaking of which Did you guys know that BlackRock Threatened to Halt trading for numerous Pension fund clients yup it sent a memo To clients that it would quote freeze Funds more at risk of assets being Exhausted Trustees at Pension funds mentioned that The actions left pension schemes unable To take steps to protect their members Literally These funds could not buy or Sell assets at that time Anyway the bank of England’s emergency QE was able to bring calm back to the Markets in a pretty dramatic fashion Guilt prices rocketed and yields on the

Instruments fell dramatically for Example the 30-year guilt fell as much As 100 basis points on the day it was The biggest rally in a single day since 1992. in the days that followed the Yields kept on falling and Sterling Marked a pretty decent rally it seemed As if the markets were breathing a sigh Of relief but at what cost Well there’s the immediate question of What impact the mini budget could have On the UK’s economy it was a pretty ill Thought out plan and has resulted in Near Universal condemnation I mean even The folks at the IMF issued a statement Rebuking the British government it said Quote given elevated inflation pressures In many countries including the UK we do Not recommend large and untargeted Fiscal packages at this juncture Moreover quote it is important that Fiscal policy does not work at Cross Purposes to monetary policy I mean the But perhaps most damning of all is that The IMF said that these measures are Likely to increase inequality which is Indeed true that’s because not only are The richest people in the country Getting a tax break but the poor are Getting a tax hike not directly of Course but through increased inflation It’s already at record highs and now you Also have to add the impact of the Unfunded fiscal spending then you have

The pound which given its devaluation Makes Imports that much more expensive Pushing inflation still higher now I’ve Spoken to many many friends and family Members in the UK and they are already Feeling the impact of the falling pound Moreover the weakening pound means Higher energy costs which could even Dampen much of the short-term relief Derived from those energy subsidies then Of course there is the impact that the Actions by the bank of England are Likely to have it was supposed to be Fighting inflation and selling guilts in The market however its actions last week Ran counter to that policy not only do We now have more money in the system Inflationary but it also dealt a massive Blow to the bank of England’s Credibility for central banks Credibility is essential people build Their inflation expectations on the word Of central banks in August inflation was Already at 9.9 and there are many Analysts who think it could go into the High double digits next year for example Citibank thinks that if the energy Crisis deepens we could see inflation at 18 early next year just think about that What this means is the Bank of England Is going to have to be even more Aggressive when it comes to hiking Interest rates in the coming months and That itself has some really adverse

Implications for the UK mortgage Market You see not only did the mini budget Lead to panic in UK Pension funds but it Also led to Mayhem in the mortgage Market numerous mortgage providers in The UK started withdrawing their Products in the days after the budget That’s because they were unable to price Them amid all the market uncertainty According to the guardian about 40 Percent of mortgage deals have been Withdrawn During those days when guilt yields were Rallying these fixed rate mortgages were Becoming instantly unaffordable for many Of the smaller Banks operating on Tighter profit margins there was also a Flood of applications for these Fixed-rate mortgages in the immediate Aftermath of the budget people were Scrambling to secure deals before they Were priced up on the market According to a mortgage executive quote I was literally watching the application Numbers by the minute we saw a Three-fold increase in existing Customers contacting us according to Andy Golding the chief executive of one Savings quote there were queues around Southampton row and up high Hoban people Wanting to buy a 10.5 percent fixed rate Mortgage Panic appeared to be gripping The market as people rushed to try and Grab what might be their last chance at

An affordable mortgage and bear in mind That not so long ago 10.5 percent would Have been deemed laughably expensive how Things change however what really Concerns me is what happens when these Mortgage rates reset You see unlike in the US for instance Where fixed-rate mortgages can be signed For a term of 10 to 20 years fixed rate In the UK are usually much shorter in Duration we’re generally talking two to Five years Max longer terms of 10 years Are available but less common what that Means is that once these fixed-rate Mortgages expire they will have to be Refinanced at a much higher rate and as We know interest rates are shooting up Thanks to the bank of England’s rate Policy after this latest mini budget Announcement Bank of America analysts Revised their estimates for base Interest rates in the UK to 4 by August Of next year may I remind you that the Rate is currently at 2.25 which means That anyone who secured a fixed-rate Mortgage over the past two years is Going to have to refinance with much Higher mortgage payments next year alone The fixed rate mortgages of 1.8 million Households are due to end now according To data from Bloomberg economics the Cost of a two-year mortgage Will Rise by 70 by March of next year compared with January of this year how many UK

Homeowners will be able to afford to Refinance at this higher rate with Everything else going on could it Exacerbate the cost of living crisis and Further squeeze ordinary Brits all while The rich squirrel away those supposed Tax break savings they’ve been handed Well at least we have our super secure Pensions to fall back on right Okay time for a few of my closing Thoughts now as a proud Brit watching The Fallout from this catastrophic Budget was painful That’s because not only was the aim to Reduce taxes for the rich but given how Haphazardly it was planned and rolled Out it’s the poor who will ultimately Foot the bill all at a time when things Are already Tough Enough for many many People now as we were preparing to shoot This video Kamikaze kwatang finally Realized he had spectacularly failed to Read the room and announced that the 45p Tax cut would be scrapped a wise move But the damage has been done The collapse of the pound and the fall In the guilt markets led to some severe Market stresses that almost brought Pension funds to the brink Pension funds Were the ultimate beneficiaries are Likely to be middle-income earners with Limited nest eggs Pension funds where The trustees were duped into leverage by High-flying ldi funds from the likes of

BlackRock edel a budget that ultimately Led to cascading collateral calls that Threatened to drive the UK guilt Market Into the ground it was only when the Bank of England took the DraStic and Embarrassing step of emergency QE that The markets breathed a sigh of relief But that didn’t come without Consequences not only for the bank’s Reputation but also the inflation and Interest rate outlook for the coming Year as we’re now seeing with the Mortgage product moves in the UK higher Interest rates are already starting to Break things people are being squeezed From both ends and now it’s not even a Question of whether they can afford able To heat their home but whether they’ll Be able to keep it Now I know I know it all sounds gloomier Than a rainy day in Stoke on Trent but There are some Silver Linings to This Cloud guilt yields appear to have Stabilized and the Panic appears to have Subsided Pension funds may also use the Opportunity to reassess the ldi Strategies they employ moreover a higher Rates environment does mean that the Present value of these liabilities is Much less pronounced I.E better funded And while the energy subsidy may lead to Additional inflation in the long term it Should help some of those who are Struggling at least make it through the

Winter every little helps these days Right That’s it for my video today folks but I Am Keen to get some of your All-important feedback any fellow Brits Want to comment on the situation are There any homeowners who would like to Appoint on the mortgage crisis let me Know down below and while you’re down There you can also find links to all the Other places that you can follow me Twitter telegram Instagram and Tick Tock If you want a preview of what videos are About to be released as well as my Personal portfolio then you should also Sign up to my free newsletter oh and if You would like to support the channel Then you should also check out my merch Store that’s where you can pick up this Magical little number and so much more Finally if you think this crypto guide Did a fine job smash up that like button Don’t forget to hit that subscribe Button as well oh and don’t forget the Bell so YouTube can give you a bell as Well Till next time folks toodaloo [Music]