Since the Truss mini-budget, the “moron premium” epithet has been applied to the UK gilt market. It’s the extra yield investors demand to hold UK gilts over comparable government debt elsewhere, not because Britain’s problems are unique, but because, as this week’s guest puts it, “there is no clear direction of travel to make our current debt trajectory sustainable.”
That guest is Damian Pudner, who spent 25 years on interest rate desks at Merrill Lynch, Bankers Trust, Salomon Brothers, Nomura and UBS, finishing as Head of Rates Sales for EMEA, meaning his day job was explaining exactly this kind of risk premium to the world’s largest macro funds.
He retired at 40, burned out, and assumed markets were behind him. Then, after his twin brother died of cancer in 2018, he went back to university to study monetary economics, worked alongside the well-known monetarist Tim Congdon, and recently co-founded the Great British Think Tank that is trying to strip the political spin out of Britain’s economic data.
For your capital markets training needs, visit my friends at Finance Talking.
In this episode, Damian discusses important issues for anyone who owns UK assets.
The Bank of England is targeting the wrong things. As a self-described “broad money monetarist,” Damian watches M4X as the real signal for future inflation, not the headline CPI number the Bank fixates on. He argues the 2% inflation target, borrowed decades ago from the Reserve Bank of New Zealand, was never properly justified and no longer fits a structurally higher-inflation world. His preferred fix: move toward nominal GDP targeting, somewhere around 4%, forcing the Bank to weigh growth and inflation together rather than chasing a single, increasingly unreachable number.
The UK’s debt problem won’t end in a dramatic default, but a slow one. Damian doesn’t think Britain is heading for an IMF-style bailout like 1976. Instead, he expects a “controlled default”: gilt yields rising, sterling weakening, mortgage costs repricing, and the Bank of England eventually stepping back in as buyer of last resort; a modern equivalent achieved through currency debasement rather than a formal default. He puts real probability on this playing out well within the next parliamentary cycle unless a government is willing to make deeply unpopular spending and tax decisions.
He explains his positioning. For most investors, Damian suggests keeping government bond exposure short, one to five years. His own portfolio skews roughly 50% US, 30% Asia and 20% Europe/UK, weighted more heavily toward equities than bonds. He treats gold as the natural hedge against a fiat currency system that has generated structurally higher inflation since 1971, and he calls Gordon Brown’s decision to sell most of the UK’s gold reserves in 1999–2002 “unbelievably stupid.”
The conversation also covers where Damian agrees and disagrees with Gary Stevenson’s wealth-inequality argument, why he thinks AI’s economic impact is currently overhyped, and why he believes Britain needs a Thatcher-, Reagan-, or Milei-scale reset before it can resolve its fiscal problems.
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