U.K. Hit By Worst Economic Contraction On Record Amid Covid-19 Pandemic

Britain’s economy shrank by a record-breaking 9.9% in 2020, new figures by the Office of National Statistics show, highlighting the impact of Covid-19 restrictions, employment uncertainty and reduced demand, with limited growth in the final quarter narrowly avoiding a double-dip recession.  

The Office for National Statistics said Friday that the U.K.’s economic output fell by 9.9% in 2020, the largest annual fall on record.

Though the economy grew 1% in the last quarter when looser restrictions boosted the services industry, overall output was down 7.8% from the last quarter of 2019, the ONS said. 

The slump is twice that of the 2009 financial crisis and is possibly the worst in 300 years, with models from the Bank of England suggesting a decline of 13% during the Great Frost of 1709.

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U.K. finance minister Rishi Sunak said the figures show that the U.K. has suffered a “serious shock” as a result of the Covid-19 pandemic.

“While there are some positive signs of the economy’s resilience over the winter, we know that the current lockdown continues to have a significant impact on many people and businesses,” Sunak said, adding that his focus “remains fixed on doing everything we can to protect jobs, businesses and livelihoods.”

Key Background

The pandemic and associated public health restrictions made for an economically bumpy 2020, especially in economies like the U.K. which are heavily reliant on services. In the U.K., the first and second quarters of 2020 shrunk the economy by 2.9% and 19% respectively, but there was record growth of 16.1% in the third as restrictions were lifted. 

Tangent

In contrast, the U.S. economy shrank by a record 3.5% in 2020, the worst year since the aftermath of World War 2.    

What To Watch For

Strict public health measures and a resurgent wave of Covid-19 infections driven by a dangerous new variant of the virus have the U.K. economy likely falling again in 2021. While the U.K. has the worst coronavirus death rate in the world, it also has one of the best vaccination records, priming the country for an economic comeback. The BBC reported Bank of England Chief Economist Andy Haldane describing the economy as a “coiled spring” ready to release large amounts of “pent-up financial energy”.

 Further Reading

GDP first quarterly estimate, UK: October to December 2020 (ONS)

UK economy suffered record annual slump in 2020 (BBC)

UK economy shrinks by most in 300 years (Financial Times) Follow me on Twitter. Send me a secure tip

Robert Hart

Robert Hart

I am a London-based reporter for Forbes covering breaking news. Previously, I have worked as a reporter for a specialist legal publication covering big data and as a freelance journalist and policy analyst covering science, tech and health. I have a master’s degree in Biological Natural Sciences and a master’s degree in the History and Philosophy of Science from the University of Cambridge. Follow me on Twitter @theroberthart or email me at rhart@forbes.com 

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BBC News

The “economic emergency” caused by Covid-19 has only just begun, according to the UK’s Chancellor Rishi Sunak, as he warned the pandemic would deal lasting damage to growth and jobs. Please subscribe HERE http://bit.ly/1rbfUog​ Official forecasts now predict the biggest economic decline in 300 years. The UK economy is expected to shrink by 11.3% this year and not return to its pre-crisis size until the end of 2022. Government borrowing will rise to its highest outside of wartime to deal with the economic impact.

The government’s independent forecaster, the Office for Budget Responsibility (OBR) expects the number of unemployed people to surge to 2.6 million by the middle of next year. It means the unemployment rate will hit 7.5%, its highest level since the financial crisis in 2009. Newsnight’s Political Editor Nick Watt and Policy Editor Lewis Goodall report. #BBCNews#Newsnight#Coronavirus​ Newsnight is the BBC’s flagship news and current affairs TV programme – with analysis, debate, exclusives, and robust interviews. Website: https://www.bbc.co.uk/newsnight​ Twitter: https://twitter.com/BBCNewsnight​ Facebook: https://www.facebook.com/bbcnewsnight

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5 Things You Shouldn’t Do During a Recession

In a sluggish economy or an outright recession, it is best to watch your spending and not take undue risks that could put your financial goals in jeopardy. What happens to the economy during a recession can negatively impact your personal finances and wealth. However, by being prepared and taking a few simple steps to reduce your risks, you can improve your chances of weathering the financial decline. Below are some of the financial risks everyone should avoid taking during a recession. 

Key Takeaways

  • When the economy is in a recession, financial risks increase, including the risk of default, business failure, and bankruptcy.
  • Avoid increasing, and if possible reduce, your exposure to these financial risks.
  • For example, you’ll want to avoid becoming a cosigner on a loan, taking out an adjustable-rate mortgage, and taking on new debt—all of which can increase your financial risk during a recession.
  • If you’re an employee, you’ll want to do everything you can to safeguard your job, such as performing top-notch work and improving your productivity.
  • If you’re a business owner, you might need to postpone spending on capital improvements and taking on new debt until the recovery has begun.

Becoming a Cosigner

Cosigning a loan can be a very risky thing to do even in flush economic times. If the individual taking the loan does not make the scheduled payments, the cosigner could be responsible to make them instead. During an economic downturn, the risks associated with cosigning a note are even greater, since the person taking out the loan has a higher chance of losing their job—not to mention the cosigner’s own elevated risk of ending up unemployed.

Cosigning potentially leaves you on the hook for the life of a loan. Consider other ways to help the borrower if you can.

That said, you may find it necessary to cosign for a family member or close friend regardless of what is happening in the economy. In such cases, it pays to have some money set aside as a cushion. Or, instead of cosigning, it may even be preferable to assist with a down payment or other types of assistance rather than leaving yourself on the hook for a cosigned loan on an ongoing basis. 

Taking out an Adjustable-Rate Mortgage

When purchasing a home, you may choose to take out an adjustable-rate mortgage (ARM). In some cases, this move makes sense (as long as interest rates are low, the monthly payment will stay low as well). Interest rates usually fall early in a recession, then later rise as the economy recovers. This means that the adjustable rate for a loan taken out during a recession is nearly certain to rise. 

While interest rates usually fall early in a recession, credit requirements are often strict, making it challenging for some borrowers to qualify for the best interest rates and loans.

But consider the worst-case scenario: You lose your job and interest rates rise as the recession starts to abate. Your monthly payments could go up, making it extremely difficult to keep up with the payments. Late payments and non-payment can, in turn, have an adverse impact on your credit rating, making it more difficult to obtain a loan in the future.

Instead, assuming you have decent credit, a recession may be a good time to lock in a lower fixed rate on a mortgage refinance, if you qualify. However, be cautious about taking on new debt until you see signs the economy is recovering.

Taking on New Debt

Taking on new debt—such as a car loan, home loan, or student debt—need not be a problem in good times when you can make enough money to cover monthly payments and still save for retirement. But when the economy takes a turn for the worse, risks increase, including the risk that you will be laid off. If that happens, you may have to take a job—or jobs—that pay less than your previous salary, which could eat into your ability to pay your debt.

In short, if you are considering adding debt to your financial equation, understand that this could complicate your financial situation if you are laid off or have your income cut for some reason. Taking on new debt in a recessionary environment is risky and should be approached with caution. In the worst-case scenario, it could even contribute to bankruptcy. Pay cash if you can, or wait on big new purchases.

Taking Your Job for Granted

During an economic slowdown, it is important to understand that even large corporations can come under financial pressure, leading them to reduce expenses any way they can. That could mean scaling back on operating expenses, cutting dividends, or shedding jobs.

Because jobs become so vulnerable during a recession, employees should do all they can to make sure their employer has a favorable opinion of them. Coming to work early, staying late, and doing top-notch work at all times is no guarantee that your job will be safe, but doing those things does increase your chances of staying on the payroll. From an employer’s perspective, it makes more sense to cut marginal workers rather than reduce hours or wages for their more productive employees. Make sure that you are not a marginal worker.

Taking Risks With Investments

This tip applies to business owners. While you should always be thinking about the future and investing in growing your business, an economic slowdown may not be the best time to make risky bets. Early on in a recession is not the time to stick your neck out. Later, as soon as the economy starts to show signs of sustainable recovery, is the time to start thinking big when prices for capital purchases and labor costs for new hiring are low. 

Especially avoid investment projects that would require you to take on new debt to finance.

For example, taking on a new loan to add physical floor space or to increase inventory may sound appealing—particularly since interest rates are likely to be low during a recession. But if business slows down—another side effect of recessions—you may not have enough leftover at the end of the month to pay interest and principal on time. Wait until interest rates just start to tick upward and leading economic indicators for your market or industry turn up

The Bottom Line

There’s no need to live a monk’s existence during an economic slowdown, but you should pay extra attention to spending and be wary of taking any unnecessary risks. Even in the midst of a significant economic downturn, there are many positive steps you can take to improve your situation and recession-proof your life. These include implementing a realistic budget, establishing an emergency fund, and generating additional sources of income.

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Bad Credit Getting a Home Equity Loan With Bad Credit Mortgage Adjustable-Rate Mortgage: What Happens When Interest Rates Go Up Home Equity 5 Ways a Home-Equity Line of Credit (HELOC) Can Hurt You Real Estate Investing The Risk of Subprime Mortgages by a New Name Purchasing A Home Financing Basics For First-Time Homebuyers Mortgage How To Find the Best Mortgage Rates

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Understanding Recessions

Effect on the Economy

Effect on Businesses

Investing During a Recession

History of Recessions

Recession Terms A-F

Recession Terms G-Z

The Shapes of Recession Recovery

Stimulus Check Qualification Rules Could Change With a Second Payment

Congress is scrambling to piece together another relief package before the end of the year that would, if some legislators have their say, include a second economic stimulus check for individuals and families who meet the requirements.

Sen. Bernie Sanders, an independent, and Sen. Josh Hawley, a Republican, are looking to modify a $908 billion plan with an amendment that would authorize a second check for up to $1,200. The unamended proposal doesn’t include another direct payment. If Sanders and Hawley’s amendment is successful, the new payment would likely follow the same outlines of the first stimulus check for speed and simplicity, but even minor changes could have a significant impact for millions.

Another new proposal, this time from the White House, would provide $600 apiece for each qualifying adult and child, Though it’s less likely we’ll see this proposal become law, if it did it would clearly affect how much money a household could get, by halving the share per qualifying adult and increasing it by $100 per eligible child dependent

Even if no stimulus check is approved in 2020, the discussions happening now could impact the stimulus check conversation in early 2021. There’s clearly enough support for a second round of aid before there are enough available doses of the COVID-19 vaccine to inoculate the US population.

Read on for more information about what may happen to stimulus eligibility now. We update this story often.

How the qualifications could change with a new bill

While many members of Congress agree on the need for more aid, they differ on the specifics, and the two sides continue to discuss who needs assistance and how much to spend. Based on proposals that’ve been on the table this fall, here’s what lawmakers could do (or have already done):

Update the definition of a dependent: The CARES Act capped eligible dependents at kids age 16 and younger. One proposal this summer expanded the definition to any dependent, child or adult, you could claim on federal taxes. That means families with older kids or older adults at home could potentially see $500 more in their check total per individual if that proposal is adopted.

Read more: Nobody can take your stimulus check away, right? Not quite

money-dollars-bills-sock-american-flag
If the definition of a dependent changes, your family could benefit. Angela Lang/CNET

Raise the amount of money per child dependent: One White House proposal from October would’ve kept the definition of a child dependent used in the CARES Act but increased the sum per individual to $1,000 on the final household check. (Based on that, here’s how to estimate your total stimulus money and here’s the IRS’ formula for families.)

The White House’s new Dec. 8 proposal would reportedly raise the sum for each qualifying child to $600, up from $500 in the CARES Act.

Stop seizing overdue child support: The Democrats this summer pushed to let a parent who owed child support receive a payment; the original CARES Act allowed the government to redirect payments to cover overdue support.

Send checks to people who are incarcerated: After months of back and forth, the IRS is sending checks to those who are incarcerated and eligible for a payment. A Republican plan this summer would’ve excluded the payments.

Include noncitizens: The CARES Act made a Social Security number a requirement for a payment. Other proposals would’ve expanded the eligibility to those with an ITIN instead of a Social Security number because they’re classified as a resident or nonresident alien. A Republican plan this summer would’ve excluded those with an ITIN.

Who could qualify for a second stimulus check

Qualifying groupLikely to be covered by the final bill
IndividualsAn AGI of less than $99,000 (Same as CARES)
Head of householdAn AGI of less than $146,500 (Same as CARES)
Couple filing jointlyAn AGI less than $198,000 (Same as CARES)
Dependents of any ageNo limit (HEALS proposal; up to 3 in Heroes)
US citizens living abroadYes, same as CARES
Citizens of US territoriesLikely, with payments handled by each territory’s tax authority (CARES)
SSDI and tax nonfilersLikely, but with an extra step to file (more below)
Uncertain statusCould be set by court ruling or bill
Incarcerated peopleExcluded under CARES through IRS interpretation, judge overturned
Undocumented immigrantsQualifying “alien residents” are currently included under CARES
Disqualified groupUnlikely to be covered by the final bill
Noncitizens who pay taxes (ITIN)Proposed in Heroes, unlikely to pass in Senate
Spouses, kids of ITIN filersExcluded under CARES, more below
People who owe child supportIncluded in Heroes proposal, but excluded under CARES

Would the income limits be similar with another check?

Under the CARES Act, here are the income limits based on your adjusted gross income for the previous year that would qualify you for a stimulus check, assuming you met all the other requirements. (More below for people who don’t normally file taxes.) With the amendment proposed by Sanders and Hawley on Dec. 10, the requirements guidelines would follow those set out in the CARES Act.

  • You’re a single tax filer and earn less than $99,000.
  • You file as the head of a household and earn under $146,500.
  • You file jointly with a spouse and earn less than $198,000 combined.

What role do my taxes play in how much I could get? What if I don’t file taxes? 

For most people, taxes and stimulus checks are tightly connected. For example, the most important factor in setting income limits is adjusted gross income, or AGI, which determines how much of the total amount you could receive, be it $600 or $1,200 for individuals and $1,200 or $2,400 for married couples (excluding children for now).

Our stimulus check calculator can show you how much money you could potentially expect from a second check, based on your most recent tax filing and a $1,200 per person cap. Read below for your eligibility if you don’t typically file taxes.

coins-measuring-spoons
How much stimulus money you could get depends on who you are. Angela Lang/CNET

What should retired and older adults know?

Many older adults, including retirees over age 65, received a first stimulus check under the CARES Act, and would likely be eligible for a second one. For older adults and retired people, factors like your tax filingsyour AGI, your pension, if you’re part of the SSDI program (more below) and whether the IRS considers you a dependent would likely affect your chances of receiving a second payment. 

If I share custody or owe child support, how does that affect eligibility?

Due to a specific rule, if you and the other parent of your child dependent alternate years claiming your child on your tax return, you may both be entitled to receive $500 more in your first stimulus check, and in the second if that rule doesn’t change.If you owe child support, your stimulus money may be garnished for arrears (the amount you owe). https://playlist.megaphone.fm/?e=CBS4695642448&light=true

I haven’t submitted my federal tax return for at least two years. Can I still get money?

People who weren’t required to file a federal income tax return in 2018 or 2019 may still be eligible to receive the first stimulus check under the CARES Act. If that guideline doesn’t change for a second stimulus check, this group would qualify again. Here are reasons you might not have been required to file:

  • You’re over 24, you’re not claimed as a dependent and your income is less than $12,200.
  • You’re married filing jointly and together your income is less than $24,400.
  • You have no income.
  • You receive federal benefits, such as Supplemental Security Income or Social Security Disability Insurance. See below for more on SSDI.

With the first stimulus check, nonfilers needed to provide the IRS with some information before they could receive their payment. (If you still haven’t received a first check even though you were eligible, the IRS said you can claim it on your taxes in 2021.) This fall, the IRS attempted to contact 9 million Americans who may’ve fallen into this category but who haven’t requested their payment. Those in this group can claim their payment on next year’s taxes.

I’m part of the SSI or SSDI program. Am I eligible to get a stimulus check?

Those who are part of the SSI or SSDI program also qualify for a check under the CARES Act. Recipients wouldn’t receive their payments via their Direct Express card, which the government typically uses to distribute federal benefits, but through a non-Direct Express bank account or as a paper check. SSDI recipients can file next year to request a payment for themselves and dependents.

For more, here’s what we know about the major proposals for another stimulus package. We also have information on unemployment insurance, what you can do if you’ve lost your job and what to know about evictions.

Coronavirus updates

First published on June 25, 2020 at 4:15 a.m. PT.BudgetingTaxesPoliticsPersonal Finance How To

By: Clifford Colby, Julie Snyder, Katie Conner

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U.S. Households’ Net Worth Hits Record $123.5 Trillion As Stocks Boom, But Debt Is Also Surging

While unemployment has remained stubbornly above pre-pandemic levels, record highs in the stock market have pushed the net worth of all households in the U.S. to a new high, despite the fast growth in household debt.

The net worth of households in the United States climbed to $123.5 trillion in the third quarter, up 8% from a year ago, the Federal Reserve said in a report Wednesday.

The Fed, which calculates net worths by subtracting overall debt held from the sum of assets like savings and equities, attributed the gains to the surging value of stocks, which jumped $2.8 trillion in the third quarter, as well as real estate, which increased in net value by $400 billion.

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Meanwhile, household debt, which includes mortgages, credit card debt and personal loans, jumped at an annual rate of 5.6% in the third quarter, reaching $16.4 trillion; that’s the fastest growth this decade, beating out a 3.9% increase in 2017.

Business debt fell 0.9% to $17.5 trillion in the third quarter, while federal government debt jumped 9.1% to $26 trillion.

CRUCIAL QUOTE 

“We’ve seen home prices rise, market prices for tradable instruments rise and savings increase… but those gains skew to upper income people,” KPMG Chief Economist Constance Hunter told the Wall Street Journal. “It’s a vicious cycle,” she added of the pandemic’s disparate impact on lower-income Americans. “Not only are lower-income households more impacted, they also are less likely to have the resources to draw upon to support their families.”

KEY BACKGROUND

The S&P 500 jumped 8% in the third quarter, while the tech-heavy Nasdaq Composite soared nearly 12%, and both have reached record highs in the fourth quarter–as has the Dow Jones Industrial Average. But far from everyone benefits from those gains. According to a Gallup poll in March and April, just 22% of Americans making less than $40,000 annually said they owned any stocks, compared to 84% of people making at least $100,000 per year.

TANGENT

There were 10.9 million unemployed people in the country last month, when the U.S. economy added a much lower-than-expected 245,000 jobs, according to data released by the Bureau of Labor Statistics last week. The number of unemployed people in the U.S. remains more than three times higher than it was before the pandemic, during which 22 million Americans have been forced into unemployment.

FURTHER READING

U.S. Household Net Worth Hits Record in Third Quarter (WSJ)

Unemployment Claims Spike Again As Covid-19 Spreads And Americans Wait For Federal Relief (Forbes)

10.9 Million Americans Are Still Unemployed—Rate Ticks Down To 6.7%, But Job Market Could Take Years To Recover (Forbes)Follow me on Twitter. Send me a secure tipJonathan Ponciano

I’m a reporter at Forbes focusing on markets and finance. I graduated from the University of North Carolina at Chapel Hill, where I double-majored in business journalism and economics while working for UNC’s Kenan-Flagler Business School as a marketing and communications assistant. Before Forbes, I spent a summer reporting on the L.A. private sector for Los Angeles Business Journal and wrote about publicly traded North Carolina companies for NC Business News Wire. Reach out at jponciano@forbes.com.

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The Fear Fund: Nancy Davis’ ETF Aims To Protect Investors From Scary Stuff, Like Recession And Inflation

Stocks have recovered from last fall’s crash, low interest rates stretch out to the horizon and the VIX volatility index is half what it was at Christmas. Sit back and coast to a comfortable retirement.

No, don’t, says Nancy Davis. This veteran derivatives trader runs Quadratic Capital Management, where her somewhat contrarian view is that investors, all too complacent, are in particular need of insurance against financial trouble.

The Quadratic Interest Rate Volatility & Inflation Hedge ETF, ticker IVOL, is designed to provide shelter from both inflation and recession. Its actively managed portfolio mixes inflation-protected Treasury bonds with bets, in the form of call options, on the steepness of the yield curve.

Those options are cheap, for two reasons. One is that, at the moment, there is no steepness: Yields on ten-year bonds are scarcely higher than yields on two-year bonds. The other is that the bond market is strangely quiet. Low volatility makes for low option prices.

                                   

“Volatility has been squashed by central bank money printing,” Davis says, before delving deep into the thicket of option mathematics. If volatility in interest rates rebounds to a normal level, her calls will become more valuable. Alternatively, she would get a payoff if the yield curve tilts upward, which it has a habit of doing when inflation surges, stocks crash or real estate is weak.

If IVOL is all about peace of mind for the investor, it’s all about risk for its inventor. Davis, 43, has poured her heart, soul and net worth into Quadratic, of which she is the founder and 60% owner. If the three-month-old exchange-traded fund takes off, she could become wealthy. If it doesn’t, Quadratic will struggle.

The fund showed its worth in the first week of August, climbing 2% as the stock market sank 3%. But it needs a much bigger shock to stock or bond prices in order to get big. It has gathered only $58 million so far. A crash had better arrive soon; IVOL’s call options expire next summer. Quadratic, moreover, needs to somehow scale up without inspiring knockoff products from ETF giants like BlackRock.

Davis was a precocious trader. As an undergraduate at George Washington University, she took grad courses in financial markets while earning money doing economic research for a consulting firm. She put some of her paychecks into a brokerage account. “Some women love to buy shoes,” she says. “I love to buy options.”

This was in the 1990s, a good time to indulge a taste for calls. Davis made out-of-the-money bets on technology stocks, which paid off well enough to cover the down payment, in 1999, on a New York City apartment. Nice timing.

There may be a sour grape, but there’s also truth in her current philosophy that hedge funds are not such a great deal for investors. ETFs, she says, are more liquid, more transparent and cheaper.

Davis spent a decade at Goldman Sachs, most of it on the firm’s proprietary trading desk, then did a stint at a hedge fund. At 31 she quit to actively manage two kids. Returning to Wall Street after a three-year hiatus, she worked for AllianceBernstein and then did what few women do, especially women with children: She started a hedge fund.

Quadratic, whose assets once topped $400 million, used a hedge fund platform at Cowen & Co. When Cowen ended the partnership last year, Davis set about reinventing her firm. There may be a sour grape, but there’s also truth in her current philosophy that hedge funds are not such a great deal for investors. ETFs, she says, are more liquid, more transparent and cheaper.

IVOL’s 1% annual fee is stiff, but Davis says it’s justified for a fund that is not only actively managed but also invested in things that ordinary folk cannot buy. If you want to duplicate her position in the Constant Maturity Swap 2-10 call due July 17, you’d need to know what banker to ring for a quote, because this beast is not traded on any exchange. Each of these calls, recently worth $7.71, gives the holder the right to collect a dollar for every 0.01% beyond 0.37% in the spread between ten-year interest rates and two-year interest rates. The spread has to move a long way up before the option is even in the money. But at various times in the past the spread has hit 2%. Could it do that again? Maybe, at which point the option pays $163.

Starting a firm like Quadratic is like buying an out-of-the-money call: long odds, big payoff. Davis is doing what she was doing in college. You can’t stop a trader from trading.

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Source: The Fear Fund: Nancy Davis’ ETF Aims To Protect Investors From Scary Stuff, Like Recession And Inflation

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Nancy Davis, founder and CIO of Quadratic Capital Management, introduces her new ETF that takes advantage of interest volatility and inflation expectations: IVOL. In this interview with Real Vision’s co-founder & CEO Raoul Pal, Davis deconstructs the structure of the ETF, highlights the cost of carry associated with the strategy, and discusses her macro outlook and where she thinks the yield curve is headed next. Filmed on May 29, 2019. Watch more Real Vision™ videos: http://po.st/RealVisionVideos Subscribe to Real Vision™ on YouTube: http://po.st/RealVisionSubscribe Watch more by starting your 14-day free trial here: https://rvtv.io/2KHDkoc About Trade Ideas: Top traders unveil their specific plans for cashing in on the market’s next move. In these short videos, our traders cut straight to the point and lay out their thoughts on the best risk-reward trades of the moment. Each episode concludes with a visual recap of trade details including profit-loss potential and trade duration. About Real Vision™: Real Vision™ is the destination for the world’s most successful investors to share their thoughts about what’s happening in today’s markets. Think: TED Talks for Finance. On Real Vision™ you get exclusive access to watch the most successful investors, hedge fund managers and traders who share their frank and in-depth investment insights with no agenda, hype or bias. Make smart investment decisions and grow your portfolio with original content brought to you by the biggest names in finance, who get to say what they really think on Real Vision™. Connect with Real Vision™ Online: Twitter: https://rvtv.io/2p5PrhJ Instagram: https://rvtv.io/2J7Ddlw Facebook: https://rvtv.io/2NNOlmu Linkedin: https://rvtv.io/2xbskqx The ETF Play on Interest Rate Volatility (w/ Nancy Davis) https://www.youtube.com/c/RealVisionT… Transcript: For the full transcript visit: https://rvtv.io/2KHDkoc NANCY DAVIS: So we invest with options with a directional bias on everything. So our new product that we recently launched, IVOL, is the first inflation expectations and interest rate volatility fund out there. It’s a exchange traded product. RAOUL PAL: Does anybody even know what that means? NANCY DAVIS: So what we do is for an investor, if you’re an equity investor, you want to have tail protection, for instance. It’s hard to own equity volatility as an asset allocation trade because it decays so aggressively. So it’s a more benign way to carry volatility as an asset class from the long side using fixed income vol. It’s not as sensitive as equity vol, but it’s a lot lower level. Like, the vol we’re buying is 2, 2 basis points a day in normal space. So it’s very, very cheap, in my opinion, and it gives you a way to have an asset allocation to the factor risk of volatility without having as much decay as you would in the equity space. And then for a fixed income investor, the big risk there is obviously Central Bank policy, fiscal spending, trade wars, as well as inflation expectations. And we saw a need to really give a fixed income investor a way to capitalize on the deflation that’s been priced into the market for the next decade. I mean, so current US inflation is around 2%. The five-year break-even is 1.59%. So that’s an opportunity in an option space. And so it’s long options with TIPS. And so that gives investors exposure. It gives you inflation-protected income, but also options that are sensitive to inflation expectations. And we think it’s pretty– you know, you’re never going to time these macro calls perfectly. But given the Central Bank in the US is so focused right now on increasing inflation expectations, and there’s been so much talk about the yield curve inverting– and that’s kind of crazy. If you step back and you’re like, all right, we have a $3.9 trillion balance sheet. We have a fiscal budget deficit. We have unclear or radically changing monetary policy. If you look where we are now with so many cuts priced into the interest rate markets in the US versus where we were four months ago, it’s wildly different. And at the same time, interest rate volatility is literally at generational lows. Equity, while people talk about equity vol, I think VIX today is 17. It’s low, I guess, in the context. But when you look at a percentile, like one-year vol over the last decade in equities, it’s about the 70th percentile. So it might be low, but it doesn’t mean it’s cheap. Interest rate volatility is literally at, like, 2, 1, you know, 0.
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