I'm a LinkedIn Ninja. How do I write a blog?

You've read I'm on LinkedIn. Now What? You've got your fifty LinkedIn Groups sorted out, and you have more than 500 contacts. You are officially operating in social media Ninja territory. But now you need Shipment. If you want to make an impact, you require high-quality Shipment.

Shipment, unsurprisingly, is the stuff you ship; it's what you write, it's what you actually produce. If you don't produce much, you won't achieve a lot. A highly effective way to create great Shipment is to write a blog.

Perhaps writing has never been your thing, and fine words don't come easy. That doesn't matter. For many people, driving wasn't their thing; they still learned to drive. Playing piano wasn't their natural gift, they still learned to play.

It's the same with blogging; you just need to learn to blog. With conviction and passion.

I'm no blogmeister, but I do it fairly often, so here are my suggested steps for writing your blog posts.

But first, the terminology of the blogosphere. Each time you write a piece (say, 300 words) it's a "post". The complete collection of posts is your blog.

How do you get started? How do you decide what to write about?!

Let's start with a question:

What if?

Everything extraordinary starts with "What if?"

"What if we could put all the songs you could ever listen to onto a phone and build in an amazing high definition camera?"

"What if we limited every message to 140 characters?"

"What if I run for President?

"What if (aged 19) I could write music so sublime it moves the listener to tears?"

"What if I had the courage to quit my job and pursue my vision - the one I've had for the last two years?"

Ask yourself:  "What if I wrote a post about [     ]?" Fill in the space with whatever, right now, at this very moment, gets you passionate and inspired. It doesn't matter whether you think you can write a great post, just write in the space:

"What if I wrote a great post about the urgent need for financial education in schools?"  

"What if I wrote a post about what makes for incredible, powerful leadership?"

"What if I could write a post explaining why everyone should try fly fishing?"

Whatever you wrote in the "What if?" gap, that's the topic for your post. If it inspires and challenges you, it has a good chance of inspiring and challenging your readers. Otherwise, it doesn't.

Invention

You have your topic. Now you're going to work out what to say. In the art and science of rhetoric, this is called "invention". It's collecting all the ideas you have in your head that you want to articulate in your post.

Write down SEVEN key concepts or points you absolutely need to get across. Read them through several times. Then cross out the TWO weakest points; the ones that least inspire. They have to go.

The five remaining points are your post.

But you're not done yet.

Arranging

In order to create your story board, you have to arrange your points.

Choose which of the five killer points should come first. It's the one that sets the scene.

Let's say you decide to open with this introductory point:

Lack of financial education in early life, means likely poverty in old age.

Use a series of short, dramatic or provocative statements. This opening is your "exordium". It's where you reach out and grab the reader's attention. And you have just a few words in which to do it:

Ella is five years old. She will live to be one hundred. The last ten years of her life will be spent in total poverty without family or friends. And, although she will suffer and be afraid, she will remember none of it.

Then develop and explain this first point in a couple of further paragraphs.

Order your remaining four points to take your readers on a journey, ending with the climactic finale of triumph or disaster, in which they finally grasp your imperative:  the importance of financial education from a young age:

It is the year 2108. Ella is one hundred years old. Though she is frail, she is happy. Though the weather is bitter and cold, she is warm. And though others go hungry, she does not.

You need to do it your way. You need your own style. 

Style

Whatever style you choose, your passion has to show up or your blog will rapidly join the ranks of largely ignored mediocrity served up daily on the web. No one reads it, no one cares, no one is moved by it and no one changes because of it.

So don't be shy about using powerfully evocative language that inspires and enlarges and enriches. Avoid cliches like the plague. 

Read your post out aloud to yourself, and listen to what you say, because that is what your readers will hear. Are there too many words? Cut them down. In your heart, you know that sentence is clumsily clunky. Write it again. Do your words inspire? They should.   

Ask someone else to read your post- listen to their comments. If you don't like what they say, ask someone different. If they tell you the same thing, there's something you need to fix. So fix it. Your post will be better. Find a friend who is a good writer and ask them to read your stuff. Write down what they tell you and reflect on what they say. Feedback is the food of champions. 

You don't need to be Shakespeare or Sebastian Faulkes. But your writing does need to be compelling and clear, insightful and passionate. Beauty and elegance are helpful, but optional. Insight and passion are not. 

Even in the shortest post, you are creating a work of art and, like all art, your work needs careful revision and subtle shading before it truly conveys your message. At the very least, that means no spelling mitsakes and no misplaced apostrophe's. 

None. Really; I mean none. 

When you read your post out aloud, and you finally feel the passion rise and the wind filling your sails, that's when you know your Shipment is ready to ship.

So ship!

exordium: The introduction of a speech, where one announces the subject and purpose of the discourse, and where one usually employs the persuasive appeal of ethos in order to establish credibility with the audience.

I'm on #LinkedIn. Now what?

So you 're on LinkedIn; you have 300 or 400 contacts. Every now and then, you take a half-hearted glance at someone's profile because you opened an email from the LinkedIn team. The big news is that your contact got promoted to assistant senior supervisor.

Hmm. That's nice for them, but not exactly key information for you. 

Then, last week, you thought about changing jobs (you're made for so much more) but, despite its reputation as a good place to find exciting new employment openings, LinkedIn didn't help. Nada.

"If this is social media, I really don't get it" you think to yourself.

I don't blame you. That's not what social media is really about. It's about influencing change and making stuff happen through what you say and write.

Here are some questions. If you answer "yes" to more than four, read on. If not, I can't help:

1. Does anyone care what you think?

2, Do you think original thoughts?

3. Can you write 100 words containing your original thoughts?

4. Could you find the motivation to write 100 words once a week?

5. Do you want to "make a difference" even if it's a small one?

6. Do you have any emotion?

7. Do people seek your opinion?

8. Is there something you know more about than most people?

9. Is there something you care about more than most people?

10. Are you up for a 12 week experiment? 

If you're still reading, the rest of this will provide the tools you need to achieve one primary goal: to have hundreds of people read your stuff and to think about it. 

To some of those people, your stuff will make a difference.

We're going to do this using LinkedIn.

This is Week One of twelve.

1. You need more than 500 contacts on LinkedIn. Not immediately, but over the next 12 weeks. At that level you will get a 500+ tally next to your name. That tells everyone you are one of the ninja team. LinkedIn has been going for long enough; there's really no excuse for not being one of the ninja team. And it's not very difficult. Invite ten people a day until you hit the ninja number. No excuses.

2. It goes without saying that you must update your LinkedIn profile. When you meet a new contact, there's a very high chance that they will check you out on LinkedIn. Take the time to make sure it tells them everything they need to know. As far as they are concerned, you are what LinkedIn says you are.

3. You need to belong to 50 LinkedIn groups. Not 30 or 40 or 49. Fifty. This is how you compensate for not yet being a ninja. Groups are insanely powerful. If you have 20,000 people in your groups, they will ALL see your amazing stuff when you group-share it. Now that's what I'm talking about. 

Many LinkedIn groups are private and you have to apply to join them. Assuming you're a reasonably respectable and upstanding member of society, it shouldn't be difficult to get accepted to most groups whose criteria you fit. The group's moderator decides. Choose three groups across your interests; say, pensions groups, cycling groups and social media groups. As a rule, try to join groups with upwards of 1,000 members. This maximises your distribution power.

4. Write a great blog once a week. It doesn't need to be more than 500 words. Quality, not quantity, reigns in the Kingdom of Social Media. Don't hold back on your insightful views. Be a bit provocative (that's not the same as being offensive); if you never push the status quo you'll never change anything.

5. Copy Paste the link to your blog into the "Share" box at the top of your Profile Page:

LinkedIn creates a nice synopsis for you and you are now ready to click Share:

This pushes your hot thought-piece into the Newsfeed of all your direct contacts. But this is as nothing compared to what you're about to do next...

6. When you have shared your link with your contacts (which was merely the amuse bouche) it's time for the main course. Here goes. Click the "Share" button again. Yes, you just did that, but that was just a shout out to your contacts. Now it's Group Time. You are moving into the Premier League. 

A new set of options pops up, which allows you to post to your groups: 

7. Click "Post to group(s)". Three new boxes appear labelled: "Group(s)", "Subject" and "Detail" respectively.

Now type the letter "a" into the box labelled Group(s)". All your groups starting with "a" appear in a drop down menu. Click the first one. Type the letter "a" again and click the next relevant group. I say "relevant", because your cycling groups don't want to read your pensions blog and will tell you so if you post blogs on actuarial liability smoothing techniques.

Then move to the letter "b" and click the first one:

You get the idea. Keep going until you get to the end of the alphabet. You should have several groups in your Group(s) box. Maybe around 15-20.

8. Click Share. You just showed up in about 10,000 people's newsfeeds! Ay Caramba!

9. You're now in the big league. Your stuff is being seen by many, many people. Some will ignore it; some won't like it. But some will like it and even love it.

At this stage, you are ready to take things up yet another level. Here's how: You will soon receive comments on your post in one or more of the groups:

Make sure you reply to comments with a thoughtful response. Not only is this polite, and good form, but you continue to show up in the newsfeeds of your groups. Just as you drop off the radar through the passage of time (a day or two), your comment exchange pulls you back into the mix.

10. If you comment enough, you will quickly find that you become the most influential contributor in some of your groups. Make a few salient observations in your group threads and your influence will rapidly rise. Which isn't to say you'll become the Dalai Lama, but a few more people will know what you are about.

Operating in this new and revolutionary space is like going to the gym. The more you go, the more you can see the effects and vice versa. So, if you post one blog and share it one time, don't be surprised if nothing happens. On the other hand, write good stuff and GROUP SHARE it once or twice a week and you'll be amazed at the impact you will have.

After twelve weeks, drop me a line on here and let me know how it's working out. If you invite me to connect on LinkedIn, I would be grateful to accept. For LinkedIn connecting, my email address is dawid@mallowstreet.com.

Good luck!

Life of Pi: Lessons for your Gilts Portfolio

This year's cinematic visual stunner is Life of Pi. Published in 2001, Yann Martel's extraordinary book was generally regarded as too demanding, technically, to portray on the big screen. A ferocious Bengal tiger in a lifeboat for most of the story?

Well, legendary film director, Ang Lee, is always up for a challenge (think Brokeback Mountain) and, in Pi, he does not disappoint, serving up a fabulous feast in 3D. It's a breathtaking masterpiece of cinematography and production. Last night, Life of Pi won most Oscars at this year's Academy Awards:

Best Director: Ang Lee
Best Cinematography: Claudio Miranda
Best Original Score: Mychael Danna
Best Visual Effects: Bill Westenhofer
 

Early on, a huge cargo ship founders in wild, heavy seas directly above the Mariana Trench, the deepest point on earth - an incredible 6.83 miles below the surface of the western South Pacific Ocean. Ang Lee vividly portrays the confusion and terror of a boy awaking in the dead of night, on a roaring, heaving ocean, to the terrifying realisation that in a few minutes he will go down with the ship. On the drop-down menu of nightmare scenarios, that's right up at the top.

The UK and, wider, the major European economies are sailing directly above the Mariana Trench in rough seas. That doesn't mean they're going to sink, but they might. After the Global Financial Crisis of 2008 (the "GFC" as they call it in Australia) it is manifestly obvious that seriously bad and uncontainable outcomes are real possibilities. Anyone who remembers Lehman Weekend (which is all of us) understands we were briefly staring over the rails of a supertanker in the eye of a perfect storm. I recall a dinner event hosted by Blackstone's chief, Stephen A. Schwarzman in 2009. He was personally in the room when the chief executives of Merrill, Lehman and AIG finally tumbled overboard into the lifeboats: "That week, the world stared into the abyss. Even now, I don't think any of us really appreciates how close we came to catastrophe."

Increasingly, the prevailing view is that we are sailing out of the GFC into calmer waters; shipwreck has been averted. But the truth is, no-one really knows if that is true. Greece, Spain, Italy, Portugal are definitely still in choppy, shark infested waters at best and still directly above the Trench, at worst.

The United Kingdom is also sailing somewhere in the western South Pacific, and the credit rating downgrade from Aaa to Aa1 by rating agency Moody's is an official reminder to the ship's captain (one George Osborne) that he is on the bridge of a supertanker that might yet go down. Of course, a Aa1 rating is still a robust certificate of seaworthiness but, then, Titanic had one of those.

In Moody's own words:

"In summary, although the UK's debt-servicing capacity remains very strong and very capable of withstanding further adverse economic and financial shocks, it does not at present possess the extraordinary resilience common to other Aaa-rated issuers."

So, although the downgrade has been described by UK Business Secretary, Vince Cable, as "largely symbolic", and "background noise" it would be a naive mistake to regard it purely in those terms.

My clients have sought my views on whether all this means they should consider reducing their exposure to UK government debt (which they hold in the form of fixed and inflation linked gilts). 

They ask: What if the mighty ship Britannia should actually sink?? What if the much-vaunted Safe Haven turns out to be the bottom of the Mariana Trench? What if Cap'n George has gone for the wrong strategy (throwing ballast overboard, throttling back the engines and dropping anchor) instead of powering his way out with economic growth strategies? What if...?

At 04:00, in pitch black, life threatening storm conditions in the Pacific, there are no easy answers. Everything is complicated - especially when the ship is tossing like a cork on the waves and the Captain's team comprises a motley crew whose compass is an assortment of unaligned political and fiscal persuasions and directly competing ideologies, and whose guiding North Star is an election just beyond the horizon.

But just because the question is complicated, doesn't mean you don't have to answer it. So, for what it's worth, here's my view on whether, on the basis of Moody's downgrade, the time has come to abandon your gilts.

Put simply, the answer is "No". If the economic storm deteriorates sufficiently to sink the United Kingdom, it is unlikely to leave our bellwether corporations unscathed. Should the UK be unable to meet its debt obligations as they fall due, the odds are that debt issued by UK based borrowers will be in an equally sorry state, and, almost certainly, worse. Think about it. The supertanker goes down in the middle of the stormy night and the flotilla of accompanying small boats emerges untouched, safe and sound? In the words of Bradley Cooper, "that's not gonna happen". No matter how bad the storm, you will probably fare better on board the supertanker.

Bradley Cooper

Even if, at odds of a million-to-one, you happen to find yourself in the lone lifeboat that does survive the killer storm, chances are there'll be a Bengal tiger in it with you.

Although corporate debt should sit alongside your gilts within the pension scheme's fixed income allocation, it's not a substitute for (even recently downgraded) government debt.

All that said, there are a few reasons you could consider replacing some of your gilts. One, might be that, due to never having got around to de-risking, your particular pension scheme now requires a higher investment return than you can achieve from gilts. Without that higher return, pension benefits probably won't get paid out in full to your scheme members. 

Another, is that gilts are the most liquid of debt instruments and your pension scheme may be able to forego that level of super-liquidity. Thus, less-liquid assets that pay more (due to their illiquidity (rather than their additional risk)) could be considered in those circumstances.

But if you just want to hold the least risky, most liquid assets available, and if, because you did de-risk, you don't need to go hunting for higher returns, (which always go hand in glove with greater complexity, higher risk or lower liquidity) then in my view your gilts still remain the safest haven.

Although, of course, we may yet all find ourselves at the bottom of the Mariana Trench.

Ask the crowd - it might not work

Flying Machine - A sketch by Leonardo Da Vinci

Whenever I can, I try something that might not work. The tantalising thing is that it might. I'm guessing Jobs, Edison, Dyson, Branson, Zuckerberg, Da Vinci et al, tried a lot of things that didn't work. But some did, and they changed the human experience fundamentally and profoundly.

So, in fulsome homage to things that might not work (but might), I present our attempt at crowd sourced wisdom. It's straightforward; we put a hard question to a wise, independent, diverse and experienced crowd. Then we wait for six weeks or so, and hey presto, the question gets answered. Or not - we'll find out in a few weeks.

If you're going to road test your thing, you might as well really hammer it hard. In this case, ask people to answer a very difficult question - one that has troubled experts, regulators, accountants - even the government - for the last fifteen years. If you don't even understand the question, that's OK. It's a micro-niche question aimed at a tiny minority of Deep Blue experts and it may not even have a "right" answer.

Deep Blue

We're trying to find out whether, (no matter how complex and Deep Blue the question), if you ask the right mix of people to work together, the best answer can be found.

So here's the hard question - the Big Thing the government really wants to know:

• whether the smoothing of assets and liabilities would be appropriate in schemes undertaking technical provisions (part 3) valuations, considering impacts on members, sponsoring employers and the Pension Protection Fund;

• how smoothing might be applied;

• whether a new statutory objective for the Regulator is necessary, or whether the appropriate considerations can be delivered under existing objectives, or alternatively whether other changes to the legislation are required.  

I'm not even going to bother to explain the question. You either get it or you don't. The mind blowing fact is that the crowd is answering the question - right now! That's never been tried before.

You see, the government is running it's own consultation  process - which is standard stuff when it wants to test a controversial proposal: "Is this a dumb idea or a smart one?" The problem with that approach is you don't know what the entire wise crowd really thinks. You just get individual responses that you have to sift through and try to make sense of. Which is better than nothing, but not as good as actually asking the people to work together as a team.

Check it out. Get involved if you have a view. At the moment, the proposition with most votes is Jeroen Wilbrink's provocatively titled: "Pensions should not be Ponzi Schemes" which is Jeroen's subtle way of saying he thinks smoothing is a dumb idea. Now you wouldn't see that in a formal consultation document. But guess what? It leads a distinguished field with a cool 95 votes. You gotta love it! For now, the voting crowd agrees with Jeroen, but things can change. Smoothing has a lot of supporters and the clock is still ticking.

In a few weeks, I'll send all the proposals and their vote scores to the government. Who knows what the government will make of expert crowd sourced wisdom? I've no idea. Maybe they'll just ignore it; but that's usually dangerous. First, the crowd might be right, and, second, the crowd doesn't like being ignored.

By the way, we've just launched a second hot question - easy to understand, this one - but still hard to answer: 

What is your blueprint for a workable pensions system?

Answer in no more than 500 words and, if your blueprint gets the most votes, you also get an iPad Mini and mentioned in Despatches.

Anyway, like I said, maybe this whole thing won't work. But maybe, just maybe, it will. It's a Jobs / Edison / Dyson / Branson-esque experiment and, if you get involved, it will be that much more likely to succeed, and you'll be part of the story. What's not to like?

Here's where it's all kicking off. Vote, make a comment or post your own idea.

The government (I bet) is watching.

The Kerviel-Adoboli Principle (aka The Big Short)

MAYDAY! MAYDAY!

The cries of hopeless desperation fill the cold night air. The cost of de-risking defined benefit pension plans has officially reached insane levels. The real yield is negative, which, in plain English, means you now have to pay the government in order to lend money to the government for 20 years. Yes, that’s right. You lend money to the government when you buy an index linked gilt, and now they charge you for the privilege. Plainly, (you would think), only a madman or an ignoramus would even contemplate such a transaction.

It just doesn’t make any sense. 

And yet, and yet. There remains a snaking queue for long-dated inflation-linked government bonds. Even at these "crazily" low yields (negative, in fact), pension plans continue to hoover them up. Che? The rest of this blog is explains why that is, and why it may well remain the case for some time to come.

If you have read any of my earlier stuff you will know that for the last ten years I have obsessively advocated the systemic (and systematic) hedging of pension fund liabilities. The earliest published piece I can find dates back to 2003. 

And, I found this in the archives - me at a conference somewhere on Wall St, October 2003: 

I wasn’t the only one, by any means. For the best part of a decade, investment banks and asset managers have been united in urging pension plans to Keep Calm and Hedge the Liabilities.

But for many pension plans, it was always “too expensive” to hedge, so they held off buying protection against plunging interest rates and rising inflation. They waited for interest rates to rise and inflation expectations to fall (i.e. a HIGHER real yield) which would have allowed them to purchase their hedges at more attractive levels. Pension plan advisers typically, consistently, and misguidedly, advised that in a mean reverting world, a higher real yield was a racing certainty, a sure thing; guaranteed.

It wasn't. They were waiting in vain; instead of rising, the real yield has plunged to depths James Cameron would struggle to locate. In fact it has turned negative. We are in the Mariana Trench.

Madness!?
This is a catastrophic development and one that has caused much head scratching and general bewilderment. Why on earth, people ask incredulously, would a sane, rational investor continue to buy long dated government bonds when they could buy cheaper equities (or practically anything else) instead??

Here are some observations:

Much has been eloquently written about the negative impact of Quantitative Easing (“QE”) on the price of gilts and, no doubt, QE has not helped the pension crisis as it pushed gilt yields lower.

A lot has also been written about the secular decline in yields across the world’s markets (and consequent soaring bond prices) as governments struggle to revive their semi-moribund economies.
Both these points are valid and provide a useful backdrop to the crisis.

However, in our quest to understand why pension plans continue to buy bonds at these sky-high prices, we should also consider “The Big Short” otherwise known as “The Kerviel-Adoboli Principle”. This states that if you enter into financial transactions which you do not hedge (i.e. offset) at the point of undertaking, there will come a time when the cost of covering those positions will be higher than you ever imagined possible.

Here's the background:

Kerviel
In 2008, a previously unknown trader named Jerome Kerviel, employed by the French bank Société Générale, carried out a series of "unauthorised transactions" racking up gigantic losses as he traded equity index futures in a vain attempt to generate profit. The more he traded, the more he lost. 

On 19 January 2008, Société Générale finally realized what Kerviel had done. Sacrebleu! On 21 January they began to unwind the intergaulactic positions.

The equity index futures markets moved against the bank (to put it somewhat mildly) and, three days later, Kerviel’s transactions had cost Société Générale an incredible 5 billion Euros, give or take.

Adoboli 
In 2011, a young chap named Kweku Adoboli, a trader at Swiss banking giant, UBS, did roughly the same thing in the ETF (exchange traded futures) market. Like Jerome, our man Kweku failed to hedge his gargantuan and escalating position with any equal and opposite transactions. 

That’s because he was, as the lawyers would have it, a rogue on a frolic of his own. When UBS discovered the miscreant transactions, they immediately closed out the positions (just as Société Générale had done in 2008) at a cost of US$2 billion.

"Я думаю, что метеорит просто поразил нас!"* as they say in Cheylabinsk.

In both cases, in the days following their respective heart-stopping discoveries, the compromised banks transacted industrial quantities of futures contracts and, as they did so, the market quickly figured out that they were scrambling to cover huge positions. On both occasions, the markets moved heavily against the banks and Operation Close Out cost a fortune.

Closing Out The Position
Presumably, UBS and Société Générale could have attempted to manage their massive, uncovered futures positions tactically, by buying gold or pork bellies or US Treasuries or Australian farmland. In other words they could have utilised other attractive, cheaper, asset classes until the equity futures market reverted to more favourable levels. But neither bank chose to do so. Au contraire, Société Générale closed out its positions irrespective of the cost.

As did UBS. That's what a responsible bank (I know, I know) always does when it discovers an un-hedged short position. No exceptions.

And that is what is happening in the bond markets today.

A (Very Big) Short Position
Put simply, corporations in the private sector, and the government in the public sector, have written very long-dated inflation-linked contracts (liabilities) with the many members of their pension plans: 

“You work for us for 20 years and we will pay you an annual pension from your retirement date for the rest of your life, however long that may be. We’ll calculate your pension with reference to your salary and we’ll inflation proof it.” 

As far as the recipient is concerned, it’s a perfectly fair (and enforceable) commercial bargain.

Thus, the company (via the pension plan) is "short" liability-matching long-dated, inflation-linked assets in huge size just as surely as Société Générale and UBS were short equity futures in huge size.

Some pension plans have realised this, and are now desperately attempting to cover their Super-Size Me short positions. The market is moving against them (that is what happens) and they are feeling the same excruciating pain that Société Générale and UBS felt as they bought up all the equity futures in the Western world. It’s cripplingly expensive to cover a short position.

Those pension plans that have not yet woken up to The Big Short and believe that this is just a temporary dislocation are right at the back of the lengthening dinner queue. When they finally do, it is very possible – likely even - that the cost of covering their short positions will have risen still further. In my opinion we could see real yields at minus 1% before this thing is over. And even if you believe the markets are dislocated, that this all some distended bubble, remember Keynes’ sobering maxim: “Markets can remain irrational longer than you can remain solvent.”

Pension plans that haven’t hedged yet, have been seduced by the beguiling argument that, prima facie, equities look cheap to bonds right now. No kidding. That's because equities, gold, pork bellies, etc, are not what pension plans are short. The price of those assets relative to long dated bonds may be cheap, or expensive, or the same, (due to their own idiosyncratic supply and demand factors), but defined benefit pension plans globally are systemically and chronically short ONE asset: long-dated bonds. In the UK, pension plans are specifically short long-dated inflation-linked bonds. As the price of inflation linked bonds goes UP, the real yield goes DOWN. Always. 

For those of us who prefer graphics - here's the Killer Pic. It's a graph of the 20 year real yield. Notice how it has fallen by 2% since that talk back in October 2003. Like it or not, this was always going to happen. Just as intense commercial pressure to deliver cheap beef means supermarkets use horse instead (it's cheaper - if you know where to get it), the Big Short was always going to lead to a supply / demand imbalance in the bond markets. It was inevitable.

I hear Kilburn is Cheap Compared To Kensington
Trying to understand why long-dated inflation linked bonds are so expensive, is a bit like attempting to figure out why a maisonette in Kensington costs £14.5 million. 

Kensington

You cannot do it by calculating the number of bricks used to construct the apartment, working out the time it would take to build and multiplying that by the unit cost of a building firm’s billable hours.

No. The cost of the maisonette in Ennismore Gardens, London, SW7, is the number of pounds sterling a Russian or Chinese or American billionaire is prepared to pay for it, because he or she is, well, short a pad in Kensington. The maisonette is plainly expensive relative to a seven bedroom house in Kilburn, but the oligarchs are not short a place in Kilburn. Even if it has seven bedrooms. Sadly, for the good folk of Kilburn.

Kilburn

By all means blame regulation, accounting, sponsor pressure, QE, low growth, President Hollande, or the Food Standards Agency, if you will, but, make no mistake, the world's defined benefit pension plans are firmly ensconced in a regime where they have no choice but to cover their short positions.

Wrapping Up
So, coming back to the Kerviel-Adoboli Principle, you could reasonably argue that, for the last ten years, every time a pension plan chose not to close its short, long-dated inflation-linked position (using bonds and/or derivatives) and elected instead to invest in "more attractive, better value, growth assets" it was as though the CEO of Société Générale decided that tomorrow would be a better day to close out Monsieur Kerviel’s un-hedged transactions.

Unfortunately, as many pension plans are discovering, tomorrow has a way of never coming.

*I think a meteor just hit us!

Pensions Policy Makers - Beware the Romanian Horses!

I owe my buddy, Paul McGill, an apology. Fifteen years ago, we disagreed over whether or not it was acceptable for Tesco and the other supermarket big boys to muscle out small high street shops that had sold high-quality produce for several generations. I reasoned that whilst it was undeniably unfortunate for the small butcher and baker, who simply could not compete with the hyper-stores, that was simply brutal commercial reality. Tesco and Co were able to offer the consumer greater choice and better quality at lower cost through their massive purchasing power. What was wrong with that? It was a win-win for everyone, apart from the butcher and the baker.

 

Paul vehemently disagreed - I seem to recall coffee cups getting knocked over in the heat of it – maintaining passionately that, in the long run, quality would inevitably decline as the supermarket giants relentlessly drove down prices and competed to the death.

 

A few years ago, when the BBC announced that, on the High Street, one in every eight pounds is spent in Tesco stores, I congratulated myself on sticking to my guns in the face of my friend’s powerful onslaught. Those guys are geniuses, I thought, lost in admiration.

But I was wrong and it seems Paul was spot-on. In the last few weeks it has become clear that in a nightmarish, scarcely believable tale of poorly-understood plots and sub-plots, extreme pricing competition, a complex global food chain, sleepy regulators and a government department that failed to read the signs, the beef bolognaise you last consumed could very easily have been Romanian horse bolognaise. Worse, it turns out that Romanian horses suffer endemically from some type of Aids-related virus, (Equine Infectious Anaemia) which is why they are subject to onerous export restrictions by the rest of Europe. (Want to know more? Watch this). It also turns out that it’s very straightforward to mince up a diseased horse (cost: zero Euros) and label it as prime quality, great value, beef (sale price: 500 Euros). You can understand the business model.

In addition and separately, although horses in and of themselves aren’t dangerous to eat (they taste like, er, beef), many horses (particularly race horses) are regularly injected with a strong painkiller phenylbutazone (“bute”). Horse racing in the United States is huge business. Horses are pushed to the very limit and, when they get hurt, they are often administered bute and then pushed some more. It’s horrifying reading. When they are finally put out of their misery, it appears the bute-filled horses are often exported to Europe where, because no-one is monitoring properly, they sometimes enter the food chain. If consumed by humans, bute causes aplastic anaemia and is potentially carcinogenic.

 

And then there's some other murky connection with Poland.

For several reasons, then, you really do not want to be eating horse when you believe you are eating beef.

In short, there is intense pressure on supermarkets to deliver food at affordable prices in an austere environment where many people have little money to spend, at the same time as food production costs are soaring. Something had to give, and, as government food inspectors have been steadily culled due to limited resources, it wasn't difficult for someone in the food supply chain to switch expensive, genuine ingredients for cheap, false substitutes. In fact, it was only because an enterprising food safety officer in Ireland decided to check for horse DNA, that any of this was uncovered.

Is there anything we can learn in our own pensions industry from this truly abysmal tale? Well, for a start, it is clear that any industry is only as safe as its regulator is competent. If he or she falls asleep on the job, doesn’t understand that a serious problem is unfolding, can’t spot the tell-tale warning signs and doesn’t have a game plan, things can and will spiral out of control.

The Pensions Regulator and the UK Government preside over a pensions industry in deep crisis.  Between them, there are major policy decisions to be made in the near future: Should pension liabilities be discounted using market interest rates and inflation expectations (as is currently the case) or should they be smoothed? To what extent should the corporate sponsors of defined benefit pension plans be obliged to fund the deficit? Should pension plan trustees be properly qualified and trained before they are permitted to make investment decisions?   Is auto-enrolment a good idea and, if so, has the government really thought through exactly how to make it work? What amount should we be obliged to contribute to our health care in old age? Since there is no money in the kitty, the government is under insane pressure to lift a little here, a little there, from pension benefits (like switching  pension inflation indexation from Retail Price Indexation to Consumer Price Indexation) – after all, it won’t be around when the chickens come home to roost in thirty years’ time. Should an independent expert body scrutinise these things in order to prevent the pensions equivalent of not-so-much a dog’s breakfast, more a Romanian equine lunch?

This horse / beef debacle is a blaring klaxon wake-up call to every regulator and government department. Now would be a very good time to sit with your strategists and advisors and think through all the possible nasty stuff that could be unfolding right now in your own back yard as a consequence of your actions, or inactions - as the case may be.