The Bank of England has raised bank rate to 4.25% which will create howls of anguish among mortgage holders. The US Federal Reserve also raised its rate. But with UK inflation still above 10% p.a. it is quite justified in my view. We do need to get back to reality with real interest rates, i.e. they should be at or above the rate of retail price inflation. At least PM Rishi Sunak has made it his top priority to clamp down on inflation. Let us hope he sticks to it.
High interest rates will certainly put a damper on stock market investment but the short-term pain is worth it. As I suggested in my comments on the budget, the probability of inflation falling to 2.9% by the end of the year is a grossly optimistic forecast.
We also now have sight of Rishi Sunak’s last tax return. The prime minister paid £325,826 in capital gains tax and £120,604 in UK income tax in the last tax year. Good for him is all I can say. He clearly has a lot of investment holdings but might have done better with his tax planning. However he has contributed to the UK exchequer so we should not complain. But the politics of envy always rule in such circumstances.
The key point to remember is that someone from a modest background can become both Prime Minister and wealthy in the UK – it’s clearly the land of opportunity! Note: you don’t need to tell me how he acquired his wealth, but it was legally I believe.
Another disaffected group are those who held the Credit Suisse AT1 bonds who have been wiped out by the terms of the rescue by UBS. Investors are complaining that ordinary shareholders should have been wiped out first in priority as is normally the case. But these bonds have rather specific terms and were acquired by sophisticated institutions. They should have read the small print, as always when investing in bonds.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )You can “follow” this blog by entering your email address below. You will then receive an email alerting you to new posts as they are added
On the 23rd March I warned about the dangers of the rise in speculation among small retail investors. I said this: “I suggest that buying shares on margin should be accompanied by very strong health warnings to investors and tougher regulations. It was one of the reasons for the collapse of the US stock market in the 1930s. Too many folks geared up with broker loans that were unsupportable when the market headed down. Investors were unable to meet margin calls, and the lenders then went bust”.
But this is also a problem among larger investors. Today the FT reported that Credit Suisse and Nomura – two of the world’s largest banks – faced large losses after their client Archegos Capital Management, for whom they acted as prime broker, failed to meet margin calls.
Nomura said it estimated that its claim against the client might be $2 Billion or more if asset prices continued to fall. The share price of Nomura fell by 16% as these events might wipe out its second half profits. The losses at Credit Suisse might be even higher at between $3 Billion and $4 Billion it is suggested in the FT article.
Archegos, an investment company, has been dumping shares after sharp declines in ViacomCBS and Chinese technology stocks.
The problem is that whenever a few big players become over-leveraged their failure can have the effect of falling dominoes as they trigger the collapse of other players. Even if the lenders don’t fail, the sales of holdings when margin calls are not met depresses the share prices of those holdings. In summary there are too many people betting on rising markets and trading on margin. Financial market regulators seem to have taken no notice of the growing risks attendant on this structure.
Roger Lawson (Twitter: https://twitter.com/RogerWLawson )
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