Name that song

by Doug Brodie

 

/1. Swap ‘overdraft’ for ‘bonds’ and ‘tax’ for ‘tariffs’ and the picture becomes much simpler.

There’s lots of talk about ‘the bond market, the bond market’, and the infamous quote by someone from the Clinton era saying that he could come back after death as a ghost and scare some people or come back as the bond market and scare everyone.

The White House backed down on tariffs last week because of the bond market, not the stock market.

“Think of the bond market as Trump’s overdraft –
it’s got him over a barrel”.

Last year, 2024, the US government spent $1.83 trillion more than it earned; it funded this deficit by overdraft and loans, that borrowing is from the bond market. When you and I need to borrow money to build a garage it’s called a loan, when the US borrows to pay for its military jets, it’s called a bond.

The US 30 year treasury (loan) is slightly better with today’s yield at 4.8%, however last September under Biden it was 3.9%, and it’s now rising under Trump.  

Lose money – the price of that 30 year today is $96.28, last September it was worth $118.46, so investors lost circa 19% of their capital value on an asset that is supposed to be the safe haven. Remember that $1.83 trillion deficit? Well if the House passes a similar budget, Trump will need his overdraft increased by that amount and the current interest rate offering has now increased by 23% from where it was last year.

The interest rate determines the willingness of the market to provide the loan, and keeping it in the family, the first place for the government to go to borrow money is the major banks. 

“Oh no”, you say, “But the banks are full already”. What happens then?

What happens is the government goes to overseas countries and asks them for a loan, by selling them loan notes (known as treasuries). China holds $760 billion, which is actually $1.8 billion up since December.

Where the bond market kicks hard – if any of the holders of this US government debt get too hacked off they can simply dump their holdings on the market: this pushes the capital price down, which in turn pushes the yield up. Trump does not want a higher yield when he needs to raise money to fund his $1.8 trillion debt, so antagonising countries with tariffs is unlikely to prove successful over any period. The current thinking is that Japan has already dumped some holdings, we’ll see in a couple of months’ time when the trades are published. 

And the tax – for some peculiar reason Trump believes that tariffs are paid by the countries selling goods into the US; a tariff is a government tax paid by the importer, not the exporter. Tariffs will simply bump up the price that US consumers and manufacturers pay. This is why -pffft!! – out of the blue, as if by magic, Apple gets a tariff exemption on importing its iPhones.

/2. The free lunch that protects your investments (you did, didn’t you?)

Diversification.

You can’t read the detail of the table below – on the left is a list of companies and trusts, gilts and deposits, from Phoenix perpetuals to Microsoft. The figures in the middle are the % holdings of a client’s overall mix – ISAs, pensions, bonds and a GIA. On the far right is the total % of the stock that the client holds throughout the portfolio. 

We don’t do this with everyone or with every portfolio – you just need to know it’s there and we do this kind of detailed work to ensure we are not over-allocating and that we are diversifying correctly.

 If you are a DIY investor, you do tabulate this, don’t you?

/3. Are you cheap? Nutmeg, Vanguard, Interactive Investor, Passive, Index not active?

Oddly, the low cost passive schools use a high cost casino-named tool to do their financial planning, mainly because it looks complex and has an academic pedigree. I’ll forego the gratuitous picture that normally accompanies this item, it’s the Monte Carlo analysis of returns. 

If you’ve read the white paper you’ll have been through our analysis of Monte Carlo calculations and read our conclusions. Interestingly this week I came across commentary from seriously nerdy financial planners in the US, so nerdy, in fact, that they both have PhDs in planning and related disciplines. If there’s anybody who has researched to the n’th degree, surely, it’s not one but two PhDs together:

This is what the clever bods had to say about their Holy Grail: 

“Ultimately, although Historical and Regime-Based Monte Carlo models seemed to perform better than the Traditional and Reduced-CMA models, advisors are generally limited to whichever methods are used by their financial planning software (most of which currently use the Traditional model). However, as software providers update their models, it may be possible to choose alternative, less error-prone types of Monte Carlo simulations – and given the near-certainty of error with whichever model is used, it’s almost always best for advisors to revisit the results continually and make adjustments in order to take advantage of the best data available at the time!”

Now correct me if I’m wrong, but revisiting results continuously and making adjustments doesn’t sound very passive to me.

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/4. Don’t pay the ferryman – who is paying the most income tax.

You should probably remember the song ‘Don’t Pay the Ferryman’ by Chris de Burgh (who happened to be at Marlborough College in the year below Nick Drake), he of the ‘Lady in Red’.

Charon is the ferryman who transports the dead across the river Acheron to Hades. There is a price to pay for everything, seemingly, and the price we pay as citizens here is anchored in income tax.

The table above shows that the average rate of income tax across everyone is 18.6%, the average tax paid is £8,060 per person, and that there’s more tax paid via higher and additional rates than by basic rate. 

What this table doesn’t tell you, however, is how much tax was paid by basic rate tax payers; of the 31.7 million income tax payers, 82% were basic rate only, meaning 18% were higher and additional rate tax payers who paid more income tax than all the basic rate payers together.

 You only pay tax on profit, so if you’re lucky enough to earn more than most, Charon will dip his hand just a little deeper into your pocket. It’s how countries work. 

Acheron? Don’t you mean the River Styx? Back in the day, Virgil wrote that the Acheron was the principal river from which the Styx flowed. Homer called Styx the ‘dread river of oath’ in both books, the Iliad and the Odyssey. You, of course, having grown through teenage years in the 60’s and 70’s, may remember Styx les from Thrasymachus and more from A&M Records:

 
 
INVESTING SHORTS, CHANCERY BRAINdoug brodie