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today was probably one of the most significant days I've seen yet in the markets and there is an old expression no one rings a bell and what that expression means is that there's no warning when there's a major top or a major bottom it's not like somebody rings a bell and tells you well in my experience sometimes they do ring a bell in fact often times there are many bells that are Rong the problem is people don't hear them or if they hear them they don't understand them and that also happens in bubbles because bubbles always find a pin but if you don't know you're in a bubble you generally don't see the pin and if you don't understand that there's a problem even if there's a bell that's wrong you're likely to be dismissive cuz you don't get the meaning of that Bell but today they rang the mother of all Bells the Bell was in England in the United Kingdom the bank of England was the first major Central Bank to Blink in This Global game of chicken the bank of England has already pivoted and has returned to quantitative easing now this is very significant because up until yesterday the governor of the bank of England Andrew Bailey he he was just as hawkish as Jerome Powell he was talking tough about how Resolute the bank of England was to fighting inflation they've got the highest inflation in Europe it's way above their 2% Target it's a double digit number it's above 10% and so Bailey was committed to Bringing Down inflation he even said no matter the cost I'm willing to endure some pain just like your own pal would say well that was all a bluff in this video Peter Schiff discusses one of the most significant days he has witnessed in the markets highlighting the recent actions of the bank of England as a major indicator of economic Trends he begins by explaining the old expression no one rings a bell emphasizing that there is often no clear warning sign when Major Market shifts occur however he argues that the bank of England's decision to Pivot back to quantitative easing serves as a significant bell ring in the global economic landscape Schiff explains that the bank of England previously committed to fighting inflation reversed its stance and return to quantitative easing as a response to potential crises in the UK pension system he describes how Pension funds facing challenges due to low bond yields had resorted to leveraging their portfolios leading to increased risk exposure when interest rates Rose unexpectedly these leveraged positions became unsustainable prompting potential Market turmoil furthermore shiff criticizes the British government's decision to implement tax guts despite record inflation and budget deficits exacerbating economic challenges he argues that these actions contributed to a sharp decline in the British pound and a spike in bond yields prompting the bank of England's intervention let's get back to the video because we got some pain overnight and Bailey folded like a cheap suit and instead of quantitative tightening they're back to quantitative easing the rate hikes are probably permanently on hold because the bank of England refused to allow a potential crisis to unfold as a result of rising interest rates and the crisis manifests itself in the UK pension system see the problem that pensions have had all around the world this is not a situation isolated to the United Kingdom so you're going to have these type of problems everywhere including the United States you have a lot of these defined benefit pensions where the pensions are obligated to pay out the pensioners certain amounts of money for the rest of their lives after they retire well what pensions typically do is they invest a lot of money in bonds and then they take the income from their bond portfolios and they use that income come to meet their pension obligations well what do you do when the central banks bring interest rates down to zero and you can barely get any income on your bonds how do you match your liabilities with your assets when your assets are barely throwing off any income well the way a lot of these British Pension funds solve that problem is they leverage their bonds for example let's say that a pension fund was typically getting a 6% yield on a longer term British guilt and now because the central bank had lowered interest rates so much the yields on those longer term bonds had dropped to 3% well maybe 3% income is not enough to meet their obligations so what did they do well short-term rates were down at 25 basis points they were practically giving that money away so what that enabled these bond funds to do was to go out and borrow some really cheap money and pay maybe 25 basis points on that borrowed money and then take that money and buy a longer term bond that yielded 3% so let's say the pension fund now buys twice as many bonds that yield 3% as when it was buying bonds that yield 6% it still basically gets the same yield but it's doing it by taking on a lot of debt it's not buying bonds with the money it has has it's buying bonds with the money it's borrowing but of course what they're doing is they're taking on a tremendous amount of RIS because what happens if interest rates go up then they're holding a bond portfolio that's collapsing in value at the same time the cost of servicing their shortterm debt is rising and then you get a huge problem and that's exactly what happened in the UK all of the Pension funds that had borrowed short to buy long-term Bonds were getting crushed because the value of the bonds they owned was collapsing and the cost of servicing the debt was soaring and they were in a position where they were going to get margin calls and those margin calls were going to force an already collapsing bond market to fall even more and that would have re Havoc throughout the United Kingdom so all of these pension fund managers had a big problem and they just substituted it with an even bigger problem but one that wasn't going to manifest itself for the longer term they had a situation where they couldn't meet their obligations with the income they were able to generate from their bond portfolios so their solution was leverage their solution was to borrow money so they can actually earn interest on more bonds than they could afford to buy but because interest rates were so low the money was basically free and so they can earn interest on bonds that they really couldn't afford to buy Plus because so many Pension funds were actually buying more bonds than they had money this put an artificial bid in the bond market it was helping to artificially prop up bond prices and suppress yields because there was more demand for bonds than there was actually savings to buy those bonds because the central bank was creating money out of thin air and basically giving it away for free now there was a better way that Pension funds could have solved these problems a more honest way a far less risky way they could have told the people contributing to the pensions hey interest rates are really low so you need to contribute more money to your pensions see that would have gone over very well with a lot of these employees who don't want to put more money in their pensions they need that money for themselves they want to pay their rent they want to buy food they don't want to have to contribute more to the pensions now the other thing that the pensions could have said is cost interest rates are so low we're going to have to cut pension benefits because we can't earn enough money on our bond portfolios to pay what we promised so we have to reduce what your benefits are going to be well that doesn't go over very well either nobody wants their benefits cut so the Pension funds took the easy way out but the very Reckless way out of borrowing money and everything was working fine until interest rates Rose and interest rates Rose so much as especially in the last week because the newly elected British prime minister wanted to reward all the people who voted for her by giving everybody tax CS so despite the fact that the United Kingdom has record inflation and record budget deficits they decided to cut taxes and throw gasoline on a RedHot inflation fire I pointed this out when it happened that this was going to backfire and it did because the British pound started a free fall it went to a new all-time record low it traded below a do four and yield started a spike in fact as of yesterday yield on 30-year British guilts was up to about 5% and what was happening is the Pension funds were getting margin calls on all the money they had borrowed and so they were going to be forced to sell their guilts into a depressed Market that would have crashed the market Great Britain was looking at a potential crash in the bond market which would have set yields soaring even more and everything would have imploded and so to prevent that financial crisis the bank of England folded they pivoted they decided to launch a new QE program remember they were committed to quantitative tightening now they said they will buy whatever it takes they have now committed to another QE Infinity in order to prop up the bomk Market they now have to print British pounds to buy these guilts and so instead of fighting inflation which yesterday was Public Enemy Number One it had to be brought down at any cost now all of a sudden when you see the cost well forget about that we're now going to create inflation because that is what the bank of England is doing they are now creating inflation now they went out of their way to try to hide behind what just happened by saying well this is not a monetary policy decision meaning we didn't decide to do it because we wanted to we had to to avoid a crisis but of course it is a monetary policy decision because that's the only policy they make deciding to launch QE is monetary policy I don't care what you want to pretend and so inflation one the British people now have got to accept reality that inflation is here to stay not just regular inflation but extremely high inflation it's not going to go away the Bank of England has already made that choice ultimately shiff concludes that the bank of England's shift towards quantitative easing signals a broader trend of inflationary pressures and monetary policy responses he warns that inflation is likely to persist at high levels urging viewers to recognize and prepare for the consequences if you found this analysis insightful consider subscribing to our channel for more in-depth discussions on economic Trends and market analysis your subscription will keep you updated on future developments and provide valuable insights into navigating today's complex Financial landscape
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