It’s becoming a national obsession to lament the demise of the London stock market … 🇬🇧 | 🇺🇸

Unfortunately the tedious & lazy “it was the pension funds wotdunnit” trope continues.

Why that’s unhelpful & wrong 👇

thetimes.co.uk/article/85f99a… And @TheEconomist at it too

Why this is such an unhelpful narrative -

Lets gov’t totally off the hook for decade+ of stagnant growth, subpar investment, lack of strategy, ducking institutional reform … and yes, Brexit

economist.com/britain/2023/0…

Pretty stark picture of Britain’s (relative) decline in @TheEconomist This seems to have really hit a chord with a lot of folks! Clearly this is something we need to talk about …

Hey if you liked this why not join my newsletter for fortnightly macro/ markets real talk & more

danmikulskis.substack.com

The scale of the big DB pensions asset reshuffle

Can we use public data to get a rough handle on numbers on a rainy Sunday?

Summary

🔄£270-380BN asset flow needed to rebalance

PV Liabilities PPF⬇️ 600bn
PV Liabs buyout ⬇️⬇️ 802bn
LDI ⬇️ 560bn (bonds + derivatives) Tl; dr -

DB pension funds had assets fall by ~£500bn, and ended up better off overall / on avg

Because liabilities fell by the same or more

But, rebalancing asset allocations is big challenge

Hundreds of billions have moved / are moving

One big picture thing I think maybe being under-appreciated in the whole gilts / LDI story :

How much demand for gilt expansion 2010-2021 was driven by pension funds , and what this means now

Is this as much a demand-peaking story as a technical derivatives story? 👇 Pension fund demand for gilts increased by about £1trn 2010-2019 according to industry LDI surveys . That’s TRILLION with a T . Huge.

Some of it might be re-labelling, but mainly new demand I’d say

And it coincided with HUGE gilt issuance post crisis

A brief history of LDI -

WHY pension funds did it, HOW it started, key players, key events on the timeline …

How we got to now

My story my version. “Recollections may vary”

Cos it’s the weekend and what else are we going to do , right! 👇 First, mythbusting: It’s commonly said that regulators forced pensions to do it. 🛑

I don’t fully agree w that.

The picture is, at the very least more nuanced than that

What do soaring gilt yields mean for DB pension funds?

Implications for markets, strategies & managers

DB pension schemes hold about £1.5Tn in assets, ~50% of which in gilts

(source: PPF 7800 index & purple book)

ppf.co.uk/ppf-7800-index Important context: higher gilt yields are generally GOOD for DB pension schemes

Future liabs are discounted at higher rates, so other things equal you need less assets today to meet same liabilities

6 vital investment frameworks we learnt speaking to @mjmauboussin

+ one thing to take away and most underappreciated thing about investing 👇

lcp.uk.com/our-viewpoint/… 1. Expectations investing

what are the expectations in today’s price.
“how high is the bar set”?

Assess whether will meet, exceed, or fall short
“how high can the jumper jump”?

And so do we want to buy sell or hold
“will the attempt be successful or unsuccessful”?

Now do bonds. They are in a rare bear market, here’s how different sectors have fared.

Not surprisingly, more duration = worse performance this year In bonds , spreads and defaults remain pretty low

Insights from the latest (30 April) JP Morgan guide to the markets (isn’t it good!) @JPMorganAM

am.jpmorgan.com/us/en/asset-ma…

S&P PE valuation is back below pre Covid levels because 👇 Combination of higher earnings and lower prices.

S&P PE valuation now roughly in line with LT average (17)

We put knowledge into silos

But there’s value in the wisdom that comes from “thinking like” someone else (from the work of @ShaneAParrish @JamesClear @ScottAdamsSays )
Eg (1/6)

Think like a behavioral psychologist: what are the incentives? What are the cognitive biases in play? Like an economist: what are the cost/benefits, is there sunk cost? What’s supply and demand?

like an evolutionary biologist: what are the underlying motivations?

(2/6)