Supplement 151023 – Re(:)Balance?

Oct 14, 2023

Life is like riding a bicycle. To keep your balance, you must keep moving.” – Albert Einstein, who needs no further introduction.


Welcome to the Supplement everyone. This week I wanted to take on the situation in the Middle East – but solely from an economic perspective and where that might affect the macro landscape, and the UK property market particularly. I’ve also had the pleasure of being on our Property Business Retreat for the past 7 days, and as always, come away with fire in the belly and some clarity – and some reminders – of a number of important things – so today’s second half is more reflective. The subject of the week is balance – hence the quote.


If you haven’t given me a subscribe on Youtube or the podcast platforms yet, I’d really appreciate it if you do – links are here to Youtube: and here to the Propenomix website: – thanks for supporting me spreading the word, more subscribers will lead to more and better content, and that’s the aim for everyone!


Before taking on this week’s deeper dives, onwards with the macro roundup. Plenty of releases this week, with Thursday being a particularly big day, so the bond markets’ activity at the end of the week is more indicative of the importance of the data. The bond bulls just about got the best of this week, with the 5-year yield moving down an incidental 7 basis points. After Thursday’s data releases, the yield was actually up a few basis points since then – so the trend next week might start upwards on the yield. 4.27 was the 5-year number at the close, with the 5-year swap closing at a narrow 4.47. 20 bps is the narrowest spread between the two for some time, indicating lower volatility.


The 5-year swap was lower than a month ago at Friday’s close (10 bps lower), and lower than a year ago (40 bps lower). That’s more indicative of how bad it was – but things have generally moved in the right direction, as long as we have seen the peak in the 5-year, which is my view. The US 30-year mortgage rate (the rate for new purchases) hit a 20+ year high this week (7.67%) – so they are having it tougher than us, and inflation numbers came in just above expectations – both of which have a second order effect on the UK numbers. It was close, though, and core inflation at 4.1%, with CPI at 3.7%, could easily be construed as highly desirable by the US government, to be honest. They have even more debt to deflate (in terms of % of GDP) than we do in the UK.


In terms of the ingredients of the recipe – a lot to choose from this week. The RICS house price balance is a metric I like to watch – it tells you a lot about surveyor sentiment. The print of -69 is only marginally worse than August’s number of -68, and sets a new low for this cycle and since 2009. Remember this means 69% more believe prices are going down than up, removing those thinking they are stable; so if there are no fence-sitters, the number right now is 15.5% saying up, and 84.5% saying down – a little better than one in seven optimists. 


August GDP was up 0.2%, although July if you recall was a disappointing -0.6%. Still, the last 3 months to August shows an increase of 0.3% – so recession stays at bay for the moment (although September will be important for Q3’s number, and a good June will drop out of that figure). The annual GDP number is +0.5%.


NIESR – the National Institute of Economic and Social Research – think that Q3 will prove to have been 0.1% down overall, but forecast a +0.2% Q4 GDP number meaning we avoid a recession. Construction output was up 2.3% year-on-year, defying more bearish forecasts at the beginning of this year – although it was below forecasts, as was industrial and manufacturing output.


The Bank of England also published their credit conditions survey for Q3. It won’t surprise many to know that household secured credit availability (mortgages in plain English) were down in availability compared to last quarter. Demand was also down significantly – which explains the negative prints of late in the Nationwide and Halifax indices. Also – however – it was August, before anyone gets carried away, and the most “traditional” August for a while. This shouldn’t really be a surprise, although the magnitude of the decrease looks like more than would be explained by a holiday month. 


Demand for purchases was down significantly – demand for remortgages was only down a little, in comparison. The default rate on mortgages increased significantly – the biggest increase for more than 5 years, on a quarterly basis. This continues the trend identified in the FCA data some weeks back.


Digging a little further, into the appendices – some news that didn’t make the report. Credit appetite from the lenders is deemed to be the same as it has been for the past 6 months. It hasn’t deteriorated since Liz Truss – but then again, it also hasn’t improved. The biggest factor looks like tight wholesale funding conditions – a.k.a. The availability and price of credit in the swaps markets. The expectation is that those conditions remain tight – AND, I’m afraid, that spreads increase – in the next few months (the spread is the difference between the 5-year gilt and the 5-year SONIA swap, in this example). 


Credit scoring criteria has also tightened significantly since the middle of last year, and that is expected to continue in the same vein in Q4. So lots of news on the macro front this week, and overall the news continues to look bearish for the interest rate. The economy lumbers forward, still. The “higher for longer” interest rate argument is still the betting favourite as far as the outcome goes of this hiking cycle – although it will be, until it isn’t……..although I hope you hear about it here first! Next week is the biggie – unemployment and inflation, with the market expectations being a small drop in September compared to August’s numbers. The jury is out – with where the predictions are, there looks a fair chance of a miss to the downside which would be welcome news for the base rate and the bond yields – but let’s see. Thursday will tell us what we need to know.


Next up on the agenda – the Middle East and the sad events of the last 8 days. Oil reacted – of course – upwards on Monday morning, as did gold. Gold has gained around 5.5% this week, and oil around 5.9%. The direction is no surprise, but the magnitude is where the story lies. What happens in these situations is that traders start to bet that things will spill-over, or escalate – involving, in this example, Iran who produces around 3-4% of the world’s oil. 

Where would that leave us – higher oil means higher inflation in the immediate future, as it filters through in first-order effects to petrol pumps, and also second-order effects to the cost of travel and transportation of everything, including food. The tightrope is the major point, however – because the upside risks here are massive. Iran’s involvement is by no means the only risk, with Lebanon and Egypt other potential participants, although Egypt is a lower likelihood than Lebanon.


With inflation expectations up (at this time), that could also feed through into higher interest rates, of course. The current best estimate from the markets is base rate topping out at 5.5%, which is a lower peak expectation than the past couple of months – but the hotter the war gets, and the more factions involved, the more that is likely to rise. 


The other effect could be displacement; an increase in refugees. There are quite literally hundreds of thousands of lives at risk of significant displacement here. Currently, it is only US citizens who have been welcomed into neighbouring countries from Gaza – for obvious reasons. This could and I’m sure will change as the UN gets involved, although the timeline is one that I wouldn’t be in position to guess. My parting comment would be that the longer it goes on without another country being directly involved, the more it is likely to come to a swift end – it is far easier to see a resolution here – albeit a bloody one – than it is in the Ukraine.


That leaves my thoughts on balance at the end of an incredible week on a personal level. Our Property Business Retreat this year attracted a very strong contingent of delegates, including some real go-getters who operate behind the typical radar. It was likely our largest challenge to date – as always, adding value and being completely open and honest were the orders of the week.


My favourite session was one where the delegate had achieved absolutely fantastic progress in property, and his career was really quite remarkable. However, as we started to peel back the onion, it was clear that these successes were coming at a significant price to his health, and also were close to causing significant problems in his relationship. 


He came for our insights in property – and hopefully got significant value from our sessions on deal finding, analysis and also case studies of deals done that we shared. However, what he got was a plan which he had fully bought into, by the end of the week, that was going to increase his sleep from an unsustainable and unhealthy low level, and to increase his quality time with family from an impending fireball to a happy family unit. Don’t worry – he’s also going to be increasing his portfolio with some very nicely defined and tight criteria, and will be effective in transitioning to the new work-life balance that we are going to work towards.


I never fancied myself much as a self-help guru – and definitely have not “gone there” – but, the notion of balance is one that springs to mind. You’ll have heard a variety of phrases I’m sure – such as “There’s no point being the richest man in the graveyard”, or “you don’t have to make yourself miserable to be successful” – but I prefer “balance is not something you find, it is something you create”.


I reminded our delegates this week of the difficulty – or near-impossibility – of being at the top of your game in one particular field. It is far easier – and has a far higher probability of success – to be in the top 5 or 10 percent in a number of complementary skill sets. For example, great property developers are fantastically organised, financially literate, great with people, and super at bringing investors onboard and at finding deals. Not easy – and some of those skill sets often don’t come together in one package, although all of them can be learned with enough effort. The person who scores highly in those 5 categories may well work their way into the top 1% of property developers, whereas excelling in 3 of them simply may not be enough.

We need to zoom out wider than that. There’s no point being the best in property – even if you could get there – and end up in an early grave, or with dementia, due to lack of sleep. Or divorced, due to lack of investment in your relationship, rather than lack of investment in your portfolio. Balance is key – “Power is nothing without control”, came to mind – but really, “achievement is nothing without balance” would be a better framing here. Seek balance, Propenomix People.


After that philosophical indulgence, the quest for answers goes on, and I continue to do my best to complete it – or at least get somewhere near the End Boss. I’d love to get some comments and feedback as always. Be sure to tune into the 9am live on YouTube if you can (or watch on repeat) – if you don’t already know about it, just search up “Propenomix” – please subscribe to the channel, and like and comment on the videos if you enjoy the weekly content (or even if you don’t, but if you don’t, how have you got this far!) – and Keep Calm and Carry On, of course.