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You know, it's bad when the CEO of JP Morgan Chase says the following quote: "I was surprised to see how much leverage there was. " Oho. Three days ago, my friends, the Bank of England warned us that you had three days left to basically get your affairs in order due to the potential for huge pain in the markets and the potential collapse of the world's sixth largest economy.
This is the United Kingdom. It was previously the fifth largest. Well, today that time has come. And in this video, I'm going to tell you about the new facts about the near- bankruptcy cases that have occurred over the last three weeks. To give you some idea of this . We will also talk about what is happening today and, most importantly, what will happen next.
Now, before we begin, hat happens next is the expiration of this coupon, linked below, for all of your wealth creation programs. Please note that after this coupon expires, we are returning some of the lifetime access benefits as we are offering a completely revamped wealth course. And so some of the benefits there will be different.
So if you want lifetime access, make sure you join by 11:59 PM tonight. You get lifetime access to any course you take, whether it's lectures or access to live streams, however many I do, which I expect will be for a very long time because I enjoy doing them and they're a great way to share market information with you .
Okay, friends. Let's move on to the Bank of England. On September 6, Liz Trust took office as Prime Minister of the United Kingdom, replacing the disgraced Boris Johnson, whose reputation was badly shaken during his CO trial and accusations that he regularly partied while the country was in lockdown.
This became known as Partygate. 2 days after Liz Trust took office, Queen Elizabeth died, and Queen Elizabeth was buried on September 19, 11 days later. Then, just 4 days after that, less than 3 weeks after Liz Truss took office, her finance minister, or equivalent, the former checkered chancellor, Kazi Klatang , announced plans for a mini-budget to be voted on in November.
And in this budget he called the United Kingdom a nation of entrepreneurs and said that the way out of the depressed economy that we are currently facing is to simply lower taxes for many people, and in particular lower taxes for rich people, for example by reducing the top tax rate from 45% to 40%.
And instead of raising the 19% corporate tax rate to 25%, get rid of that increase, as well as reduce stamp duty on property purchases and offer incentives to pay electricity bills for businesses and homeowners. All of this was supposed to be officially announced in November. Of course, that evening, Quasi Kartang allegedly went to a party with hedge funds, who are likely to benefit from lower top- tier taxes.
It was on Friday. But on Monday, oh my God, the market made it clear to the Liz Trust staff that they hated it , because to the market it sounded like the UK was going to spend a lot more money and reduce tax revenue in a period of inflation. Essentially stimulating the economy while reducing revenue for the government, essentially requiring more money to be printed, which again is more inflation.
At the same time, interest rates need to rise to reduce inflation, especially when the inflation rate in the United Kingdom has just fallen from a high of 9.9%. Yes, that's true. In the United Kingdom, the inflation rate is almost 10%. So when you combine a 10% inflation rate with a bunch of additional stimulus, of course the market goes crazy.
And over the next week, the British pound fell to a new low of $3, which means, uh, one British pound can buy $13.3 at almost a 1:1 ratio. It did recover to 112, but it caused a huge amount of stress in the bond market and really exposed, as Warren Buffett says, when the tide goes out, that's when you really find out who's been swimming naked.
You see , what happened was essentially their equivalent of 30- year Treasury bonds, known as Guilts. It's just a bond. It's like a debt bill in the UK. They lost 20% of their value extremely quickly. So just think about owning stocks, for example. Let's say they're worth 100 and now they're suddenly worth 80.
Well, at first, if you're a buy-and- hold kind of person, it doesn't really matter. You just say, "Okay , well, that's terrible." You know, I could buy more if I had the cash, or I'm just hanging around and hoping that one day things will pick up, right? But pension funds are not buyers and owners. They borrow and own.
In fact, there is a whole system of pension funds known as LDI asset management, which stands for liability-driven investment management. That's why Jamie Diamond came out today and said, "I was surprised to see how much leverage there was in some of these pension plans." And this is where the real drama in these LDIS arose.
Essentially, because interest rates have been so low for over a decade, in order for pension funds to do their job, they have felt the need to borrow a lot more money. Remember what pension funds do? They are essentially a retirement plan for you, right? Let's say you're retiring and you're promised a pension of £50,000 a year for the rest of your life.
Just call it $50,000 a year for the rest of your life , right? You invest for 30 years, expect to receive a pension or a retirement statement, whatever. The pension fund needs to invest the money it has today to ensure it can make these payments to you every year in the future. Because interest rates were so low and cash flows so low for what they could invest in, they decided it was best to simply borrow money to increase their profitability.
And you know, it works very well when the market is growing. But this becomes a problem very quickly when suddenly bonds fall 20%. And this quickly led to a spiral of panic as pension funds began receiving margin calls on their debts due to the precipitous fall in the value of their assets. This prompted pension funds to sell more bonds, further reducing their value.
And this spiral is known as the death loop. There are currently around £1.5 trillion of LDI investments in the system. So, essentially, that's a way of saying that this is potentially too big to bankrupt a segment of the entire UK economy. Furthermore, one of the custodian banks that dealt with these pension funds had so many margin call inflows that they didn't even have enough staff to help process the volume of margin call inflows.
And there wasn't enough liquidity to easily cover it. This means that pension funds did not have enough cash. So they had to get rid of the bonds to be able to move the money and cover it . So, there were a lot of steps. The problem here was not so much that rates rose and bonds fell. The thing is how quickly the bond market reacted when the crazy Liz Trust plan came along, which seems to have ultimately required further rate hikes to prevent even more inflation.
So after this madness, the Bank of England intervened on September 28, just 5 days later, promising unlimited financial assistance, effectively setting a floor price below the price of these bonds. This helped the bonds recover their value by about 20%. But they also quickly abandoned this as the inflation rate in the United States hit zero on October 13th at an absolutely catastrophic level.
And look, the more the Fed raises rates, the more people are looking to invest in US bonds, so they dump their UK bonds and go invest in something they think is safer, like US bonds. This is really bad for the United Kingdom and only creates more pressure for them. So, to ease the drama even more than the central bank's claim that we're just going to buy all the bonds we can and essentially bail everyone out, we'll take a closer look at how much they've actually managed to do.
The List government turned around. They abandoned the idea of getting rid of the top tax rate on October 3rd. They will not abolish the 45% tax bracket. And at this stage her popularity has fallen to a lower level than Boris Johnson's popularity or approval rating, which is a bit sad because she's only been in office for three weeks .
And today she turned around again. She said the corporate tax rate will not actually be held at 19%. They are going to repeal this 25% rate increase and raise corporate tax rates to 25%. This will be in April, as planned. And after Kuwazi Kuwart escaped from the IMF in Washington yesterday, he returned home to find out he had been fired.
Now he has been awarded the distinction of being the shortest-serving Chancellor of the Exchequer in almost 190 years. He's here, in the yellow box on the left, having worked for only 38 days. He is the second person in British history to have such a short term. List Trust said today that its plans have progressed further and faster than markets had expected.
So she appointed someone else to the position of Quasi-Keng. This new person's name is Jeremy Hunt. And the goal is to maybe get the markets to relax a little bit. What is this whole 3-day story? On Tuesday, Andrew Bailey said he is the governor of the Bank of England, it is their central bank. He told pension funds and investment institutions that you have three days left to sell any bonds you have .
And he said, and I quote, "You have to do it." And although the Bank of England said it would buy an unlimited amount of bonds, they have put aside expectations that they may have to buy around a hundred billion bonds. Well, today three people came and saw what we had. This is the total number of bonds purchased.
And as of today, only $19 billion worth of bonds have been purchased. Most of them were bought in the last 3 days, just before the deadline, which in some way signals that potentially pension funds are simply not ready to liquidate and take advantage of the Bank of England deal. Although there is also an argument that what the Bank of England was prepared to pay was effectively fixing losses.
It's like, "Hey, we're going to save you from your, you know, terrible $100 stock that's now worth $80, and we're going to save you for $80 ." And you say, "Uh, but I don't really want to sell for 80." Well, I guess I'll give you some . In any case , technically the Bank of England has now ceased to exist.
And so now there are concerns that pension funds were not sufficiently prepared to be able to sell. I mean, you've heard about how difficult it was, especially in the era of margin challenges. And so some people say, "Oh , this is a bomb ready to explode now." This is the darker side. Of course, there are positive people, like at BlackRock.
By the way, they invest heavily in LDI, and he is the CEO. He is a little more optimistic. He believes that all this madness we have just experienced is a way to bring markets more normal. Of course, this was also said when Bear Sterns failed to join the 1998 bailout, and then they famously went bankrupt during the Great Recession just 10 years later.
The CEO of JP Morgan is playing both sides here. He says: “On the one hand, and I quote, my life experience shows that when things like what we are experiencing today happen , other surprises also happen . "Someone will be behind." In other words, warnings about future bankruptcies and surprises that we don't even suspect yet.
Now, at the same time, he's also saying, "Hey, but it looks like at least some of the problems are being addressed now, and we don't see anything systemic." This is his argument. My answer is: "Yes, you just don't see it yet." So what's next? Well, technically, the minimum level of financial aid is gone.
And if panic breaks out again, the market will have to deal with it. Unless, of course, the central bank intervenes again, which would create complete moral hazard and undermine their credibility because they said they were fine. So if they come back, no one will ever believe them again, and they will just think they will always come to save the day.
Well, if the markets have to deal with any collapse of pension funds, they could go bankrupt. Technically, people are still owed money by the corporations they worked for, their pensions. So this means that if pension funds go bankrupt, corporations have to pay those pensions. And if corporations have to pay out these pensions, their stocks could plummet.
The shares of huge corporations could plummet because they will now have to absorb all these additional costs. The only way out of this situation is corporate bankruptcy, which is quite possible, leading to the complete destruction of shareholders and potentially having global consequences, with companies simply going bankrupt one after the other like dominoes.
But eventually, you'll probably see the government step in to try to restore some confidence in the pension system and ensure that the 11 million pensioners in the United Kingdom are covered. Of course, in the meantime, huge shockwaves will spread through the economy . Again , there is a flip side where the central bank can intervene, but again, that kills trust even more than trust is already killed.
And so, really, as a sort of long-term summary of all of this, other than the idea that you should check out these wealth growth programs linked below and use this coupon before it expires tonight, raising rates is dangerous. Raising rates and watching them rise rapidly is even more dangerous. That's when quantitative easing starts to feel like quantitative destruction , when in reality we haven't had full-fledged quantitative easing yet.
It just goes to show that once again, people who are out there swimming naked or in big debt are getting caught, and unfortunately, it can be really big institutions. So somehow pension funds are now trying to find up to £280 billion to have enough collateral to stop the pressure on margins. Now, this could lead to short-term corporate borrowing, with pension funds essentially saying, "Hey, corporations, we need time to get rid of some of these other assets." Can you just lend us a bridging loan and we'll pay you back once we sell the other stuff.
Good. This buys the pension fund a little more time. But do you know what they then liquidate? Well, they probably end up liquidating things that take longer to sell, like real estate. After all, in the United States, by comparison, 87% of public pension funds and 73% of private pension funds invest significantly in real estate.
And selling now could allow them to capture relatively higher prices and create the capital buffers needed to repay debts they have taken on elsewhere. While this may help offload some of the risk from these pension funds, you could potentially see a collapse of the property market due to the offloading of pension funds in both the UK and the United States and perhaps even other countries.
Consider the Netherlands. The Netherlands has the world's largest pension system, accounting for 214% of its gross domestic product, with assets of over $1.9 trillion , almost all of them in defined benefit plans. It is the type of plan that often uses liability-driven investments, LDIS. So, what could happen?
Well, a few things could happen. First, the UK could trigger a domino effect in the form of additional liability requirements, pension fund bankruptcies and corporate bankruptcies, ultimately leading to liquidations in the real estate market, the United States market and the Dutch market. This could cause a global depression, or nothing would happen.
And this was all just a small warning. Yes. Don't take on too much debt. I don't know.
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