September 29, 2022

Yesterday the stock markets around the world bounced. You might think, ‘Phew!’, but the realities of the marketplace are somewhat more complicated. Don’t get excited.

Over the past 48 hours, the mini-budget in the UK has caused a lot of turmoil, and unfortunately, the reaction of the UK central bank was a distress call, not a support call. Due to the changes in the UK budget at least some bonds held by major insurers dropped significantly causing stress on the UK financial system.

A spiking yield; A drop in price…UK debt is signaling difficulty ahead

The ‘limited time’ bond buying was an effort to support the economy and avoid a locking up of credit. We have seen this before and it is the prelude to a serious systemic economic risk. There is no way to know whether a collapse will actually happen, but that event is a marker of severe financial distress in at least some assets.

There are two big messages that can be taken away from these events. The first is that the market has spoken very loudly, very clearly, that budgets that lower taxes and print money to support a flagging economy are no longer welcome. Even the IMF stepped in with an unusual, if not unprecedented, statement that the budget was unacceptable.

The second message is that these events are nearly impossible to detect before hand, and particularly on a day to day basis, so standing aside is likely the best course for most investors.

The UK’s actions provided hope for traders (and a negative event for short sellers) that other governments around the world might return to their path of buying assets, lowering rates and saving asset prices. There doesn’t appear to be any other evidence of that path currently and the markets will begin to get hit in the coming weeks with earnings revisions that suggest profitability will be declining.

There is no clear path higher for asset prices. There are dozens of potential paths leading to lower asset prices. When those odds are more balanced, it will be time to step back into markets with new money. For now, building cash is the best way to proceed.


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