Kwasi Down, Truss Hurt……Captain Freedom to Wardrobe?

Oct 16, 2022

“My mission in life is not merely to survive, but to thrive; and to do so with some passion, some compassion, some humour, and some style” – Maya Angelou, American Memoirist


Welcome to the supplement – another week, another chancellor. The order of play on Friday really was quite simple – after various votes of confidence, after multiple promises that various measures would not be rowed back on – they were immediately rowed back on. Kwarteng was thrown under the bus, which calmed markets for a princely few hours, until the remaining incumbent PM once again “managed” the press in a bloodbath of a press conference. 


Who’s out? Who’s in?

That, of course, sent markets haywire again and things really don’t look good. The entry from stage left, surprising many, of Jeremy Hunt, has as yet gone relatively unexplained. The PR machine that follows Hunt around has told a story of a meeting of greatness with the governor of the Bank of England, Andrew Bailey, who has – correctly – drawn his own fire over recent weeks and months. Bailey has missed several steps in the weeks preceding, in his own version of “managing” the situation where gilts have been selling off left, right and centre – driven primarily by pension fund margin calls against leveraged government bond positions as explained over the past fortnight or so, but also by impending potential downgrades in the UK credit rating, and the international markets wondering how these future tax cuts would possibly be paid for – and requesting a higher premium for taking on the debt.


So Hunt is the answer to all prayers, is he? He made few friends as Health Secretary – but during austerity, who would – you could argue? The man has at least been a successful entrepreneur with two business exits – Kwarteng has been under fire for his experience, although he was an analyst in financial services. He also did a PhD in Economic History, which you would have hoped would have been helpful – although the merit of “Political thought of the recoinage crisis of 1695-7” (his thesis title) could likely be questioned.


This is all very interesting and debatable; and indeed we will find out. It’s easier to remain manager of Watford, at the moment, than be the Chancellor of the Exchequer – and they get through their managers like hot cakes. Some are writing Hunt off as the nightwatchman before Truss is inevitably gone; however, the world does seem to be able to handle neutered leaders (just look at the USA), so I would not be so sure. It would be quite easy to paint “poor old Liz” as the victim, which might be the way forward given that at this time, almost no-one can see a path to the Conservatives winning a majority at the next election. 


Who’s running who now?

And will old Jezza just have stepped up to the plate like that? Or could we imagine a conversation between the PM and the very most senior axe-wielders in the party – the true puppet-masters – which went along the lines of something like – “Liz, either you both go, or you throw him under the bus and stick Jeremy in – you’ve never liked each other and it’s the only chance of repairing this damage. You do what we say from now on, otherwise we choose between the devil and the deep blue sea and rebel against everything you propose, and force an election.” 


Conspiracy? Perhaps, but quite likely I think. For those who are not close to politics (and who wants to be!) – they are not happy bedfellows. Hunt was a remainer. He sided with Sunak when he was knocked out of the most recent leadership contest when Truss defeated Sunak. If Hunt goes, at any point, Truss goes with him – there is no option. He’s being called the de facto PM in some quarters – I’d see it more as him having autonomy in number 11 and using the history to form a mutual respect with Truss but to allow the international markets to disassociate the gaffe-laden PM with the running of the UK economy. That should, at least, be a bonus. 


He’s the richest person in the Cabinet, and stands fairly clear on that front apart from Rishi, of course. The betting markets see him as the favourite to be next PM, but I think that looks unlikely. The party are seeing certain defeat at the next election, but any further changeovers would have to trigger a general election – instead, they may as well press on with some difficult decisions and try and do the right thing and minimize the damage.


U-turns you say? Quel surprise

Amidst the U-turns, and there are so many it is worse than anything Boris did on that front, at least in terms of the frequency, section 21 is back on the table to be abolished. It’s happening, apparently. I honestly see it as mostly a storm in a teacup but – as always – don’t put your head in your hands and take control of your asset management now. 


Meanwhile, Starmer is promising “no more buy to let landlords getting in first”. As someone who has rarely, and even if then unknowingly, competed against homeowners, and has brought more than 300 properties back to life through complete refurbishment, that sticks in the craw a little. Still, generation rent friendly chat is likely – the “too-big-to-fail” PRS looks fairly safe, and I think we can take heart in Labour voting down rent controls in Wales this week, which would have done further damage to the broken system.


Economic Philosophy and making the wrong decisions 100% of the time

Here’s the reality. Austerity was a terrible decision in the early 2010s. The obsession with monetarism (which is never stronger than in inflationary times, ironically, as an economic philosophy) meant that it was deployed after a great recession, which was never the right thing to do, particularly when borrowing costs hit the floor. The Conservatives realised this – years too late – although could have made some smart decisions back in early 2021, but missed the boat. They could have borrowed so much for so many good infrastructure projects, but were too slow to the party. 


As we are now, austerity looks inevitable. Instead, the economically clueless wanted to “go for growth”. There’s still – happily – a very clear and sensible head on the world market forces for borrowing. If you decide you are swinging the bat, and are just going to borrow without balancing the books (or even looking at them, you’d think) – things will wobble in a massive way. Investors will demand much higher returns for lending to the government, because the risk goes through the roof. Modern Monetary Theory (MMT) – the same initials as the Magic Money Tree, which is no coincidence – happily still has no serious basis in a conversation. 


Government ballooned during Covid and cutbacks have been somewhat organic, but not as large as is needed. Cutting the budget is the only way to keep the show on the road – if we simply borrow more, then it costs us more to borrow less debt (and the debt will be increasing for years until we are back on an even keel). Indeed, the penny has finally dropped that inflation is so far out of control that the Bank of England is quietly also buying index-linked gilts, to take the opportunity to buy them back whilst pension funds are still having to sell them off. 


The Governor – or is he?

So – onto Bailey. Let us reminisce over a titan of central banking that presided mightly over the Brexit referendum, and then the beginning of the pandemic after a contract extension – Mark Joseph Carney OC. His calm tones after a result that the market considered nearly impossible – trading at 12/1 before the votes were being counted – on 23rd June 2016 – steadied the ship and the economy rarely missed a beat on the back of it – it was, of course, years before Brexit then actually happened. During Covid – flawless in his execution of lower and lower rates. Avoided negative rates. Often disliked particularly by the right, mostly because he was a fairly obvious liberal, he simply won the intellectual battle and did the right thing in central banking – he talked, didn’t necessarily take action, and either way seemed to get the desired result. A great man.


Anyway – rose-tinted specs away, Bailey never looked like he measured up. The chief economist at the time, Andy Haldane, seemed a lone voice – he was a little off with the household dis-savings theories, that people would swallow inflation and stop saving so much when the pandemic finally ended (the most recent figures available show that in Q2 2022 which was very limp economically, households are still saving a higher percentage of their income than at any time since Q1 2016, ignoring Covid quarters); but he was bang on with the inflation and interest rate chat, advocating rises from the middle of 2021 in order to control the looming spectre that only some seemed to see coming.


Instead, Bailey has had to issue yet another ill-timed, embarrassing statement – after mismanaging the pension funds liquidity crisis this week with poor and combative communication. He simply came out to say that interest rate rises will be higher than expected, for longer – and was still trying to blame the mini-budget, even though it looks like most of that will be rowed back on, or accompanied by cuts. 


This is where Hunt’s job is basically impossible. Cuts to the NHS when 12% of the population are waiting for treatment on some sort of waiting list will be tantamount to political suicide. Having said that, the pin is already out on the grenades on the suicide vest – so, to an extent, why not? The Bank’s bullishness on rates staying at or under 6%, following on from my report of the Bank’s breakfast briefing some weeks ago, looks less tenable than when they answered my question on it.


But so what? What do I do!?

All this, of course, has implications and ramifications, and that’s where we start to depart from the macro, interesting though it is at the moment, and move to the micro. So what? What does this mean for all of us?


Well, I really liked a quote from Mike Kovacs who was on Rod Turner’s podcast – the Rodcast – a couple of weeks back. “In a recession, your job is to hold on to your assets.” Very sensible – because not everyone will be able to do that. There’s a few sage pieces of advice here that are worth repeating.


Ensure the numbers are solid

Firstly – understand the problem. Get a hold on the numbers. Is there a cashflow problem? When? How long might it last for? Is it a permanent problem?


Asset Management

Once quantified – what can you do? Raise rents? (If the alternative is you going broke, who will you choose?) Repurpose property to HMO or serviced accommodation? Sweat the asset harder, that is an option.

If you can’t make that work – are you going to sell? You might have noticed the 26% uplift in the past 2.5 years simply on capital values… is going to be in negative equity unless the circumstances are really incredible. The market hasn’t fallen off a cliff as yet – Solihull is still showing 65.6% SSTC (from lofty heights around 80% earlier in the year) – a definite cooling, of that there is no doubt. Still, stock levels are lower (although have trended down for years) – and the organic cooling that comes with the winter break, mid-November onwards, will be on us within 4 weeks. We are nowhere near buyer’s market territory just yet. If something needs to go because there are no other options, then take your head out of the sand, put the best foot forward, and get on with it.


It doesn’t stack anymore!

Further than this, when looking at purchasing, if some of the good old faithful tactics over the past few years look unlikely (for example momentum/BRRR) then creative solutions are needed. More equity in deals (lower prices) – always hard because it lowers volumes. Leave cash behind and work to lower LTVs? Always possible for those in a strong position. Vendor finance, so vendors can hit their targets but have to wait for their money, maybe? All on the table, and all parts of the toolkit which we are actively looking at using at the moment.


Options where you add value first? Assisted sales? Or, with asset prices more likely than not to go down over the next couple of years – rent to rent is much more attractive, depending on how the asset owner’s underlying finance is structured of course. And never forget your human capital – in this job market you might be able to go out and dictate terms on a 2-3 day a week commitment at a relatively outrageous day rate compared to some years ago – worth considering?



Lower rates with higher arrangement fees, putting some of those capital gains to use to remain sensibly leveraged? Back to the goal of holding on to the assets rather than expecting supernormal profits. For those who don’t stay in the game, or sell because of section 21, or any of the other straws that will try to break the camel’s back over the next few months and years – once out, getting back in is hard. For those who stay in, a woeful supply of good quality properties and a growing rental market will only lead one way.


I’m going to seek to expand on some deal-finding morsels over the next weeks and months as this situation emerges, so stay tuned to the Supplement for more rants, political soap operas, formulae, data and (hopefully) pragmatic conclusions. Stick with your reasons to be cheerful every morning, and let this be one of them on a Sunday! Until next time……