Sunday Supplement 03 Aug 25 - Black Swans?

"A black swan is an event with three attributes: it is an outlier, it carries extreme impact, and it is retrospectively predictable." - Nassim Nicholas Taleb, author, The Black Swan This week’s quote again takes us straight to the deep dive - I was lucky enough to be near Dawlish, in Devon, this week with family taking some R+R time. Dawlish is the home of the Black Swan - and so, of course, it got me thinking……. Before we go into this week full hammer - Rod Turner and I will be running our next Property Business workshop on Wednesday 1st October, in London - subject matter this time is Investment, with an emphasis on what metrics you really need to be considering to run your property business properly, and building your business to scale. We’re digging into the real fundamentals of property investment for growth—from proper valuation and strategic debt structuring to the investment metrics serious pros use (hint: ditch ROI and yield). Learn why some deals work for some and not others, how to manage risk as your portfolio scales, and when to shift gear from side hustle to scalable business. We’ll break bottlenecks, build strategic pillars, and unpack real-life case studies of fast company growth. How have we done so many deals? We’ll tell you! Book the SUPER EARLY BIRD tickets with 20%+ off, now: http://bit.ly/pbweight Kicking off, then - Trumpwatch. Some news, some opportunities, all to be scrutinised closely. A weak jobs report - always descended upon in the US media - was released. 73k jobs added - compared to a consensus figure of 110k - was enough to light up the dials. Not a huge miss in the context of the size of the US machine, but also recent months were revised downwards, showing the slowest 3-month hiring pace since 2010 if you exclude the pandemic. The overall numbers are still a fair bit stronger than the UK though - 4.2% unemployment, annual wage growth a sustainable enough 3.7%, and inflation around 2.7%. The markets sold off anyway though as this appears to be a sign of coming economic weakness, as it stands. One to watch closely over the next quarter. Compared to the UK - where we’ve been net shedding jobs - and the underwhelming reaction in the UK - it is at the very least very interesting how they vary from month to month. Trump responded by firing someone - for revising the reports on her watch. Manipulating data, he says - so, change the data when the picture becomes clearer and if he doesn’t like it, you get a bullet. I’m sure this won’t affect data integrity in the US for the next few years at all. Much. Two Federal Reserve members started their campaign to be Governor, or at least keep their jobs, by dissenting at the Federal Reserve meeting to vote to cut, whereas the remainder voted to hold, much to the annoyance of Mr Trump who is seeking lower interest rates and believes that the way to get them is just cut regardless of what inflation is doing. August 7th will see the new tariffs coming into effect - from 10% to 41% from 66 countries - getting to an average US tariff rate of over 15%, the highest for around 90 years. India are next in the crosshairs for a deal, to ease “trade tensions” - I’m sure it will be a very good deal, one of the best deals, one of the best deals ever made - some people will say that, I’m sure (you kind of need to say it in his voice, in your head, to get the full effect of that). Meanwhile the wonderfulness of these policies slows economic growth to 1.3%, and manufacturing jobs are still down 37k since April on the back of this slowdown. Not quite working yet - recent polling showed 38% approving of his economic stewardship, those willing to trust him to plough a very different path to a better world. Mid-terms will be here sooner than anyone expects and that will be interesting, since the Democrats still look bereft of competent leadership (to me, as a neutral, anyway). What we do know is there will be continuing volatility, perhaps steps backwards to maybe go forwards, and possibly legal challenges to tariffs to deal with as yet. Underlying demand is clearly slowing, and slow growth really isn’t what the US needs to try and outrun its ridiculous deficit (they expect to be $1tn short in the coming quarter - yes, ONE TRILLION). Does anyone want to lend them a fiver? Over to our mainstream subject matter on this side of the pond - the real time UK property market. Chris Watkin was back - Week 29 is in the can. Listings printed 33k, another drop from last week’s 34.3k as the school holidays kick off around the country as far as the figures go, and are now only 4.2% higher than 2024 YTD and 7% higher than the pre-pandemic market. My “10% more stock than a normal market” ready reckoner is still working on the back of circa 2 years of overperformance in listings. We are 13.1% ahead of the 9 year average, but that does include 2020 which pollutes the figures somewhat. We are limping around the mean for this time of year, not forging further forward into even more listings than historically precedent - but we are still listing more than we are selling, so it is all eyes on the withdrawal rate as a general rule. “Only” 23,500 price reductions in week 28, 14.1% being July’s current number, with 14% reduced in June, compared to last year’s 12.1%, May’s 13.4%, and the 5-year average of 10.6%. More stock, more reductions - absolutely and relatively. 33% more reductions than the 5 year average, if you take the difference between 14.1% and 10.6%. “25% more reduced properties than a normal market” also works as a ready reckoner. One in seven properties on the market are being reduced each month (so we are currently running at a little over ONE HUNDRED THOUSAND price reductions per month, to be clear!). Can’t find a deal? Just keep the legwork up and you’ll get there. 26k homes sold subject to contract. Healthy is still the watchword. SSTCs are up 7.6% year on year and 14.8% on 2017-19, and still nearly keeping pace with 2022 (which to this point was a very hot market indeed). We went into July with 758,064 homes on the market - a tiny increase on June’s number. For context, as the market got stickier before the pandemic that number was c. 660k, a sellers’ market is more likely to be under 600k. At the end of June 2024, 700k were on the market. These are more “higher high” numbers and so the “flat” feeling as I’ve been saying for some time now will likely manifest in a steady market without much excitement as we get through the school holidays. It’s very close to June’s number and nearly a pullback - we’ve had weeks of the listings not being as high as they were in 2024 - are we nearing or at the peak? We can’t read too much into August anyway but there’s always an extra surge in September when the school holidays are over, so we likely need to see those figures before drawing conclusions. Looking forward to seeing how many properties there were on the market as we went into August, though. Chris also looks at the per square foot on sold STC properties - it has a very strong correlation with prices that hit the land reg in 5 months’ time. This time round - June was at £346.45/sqft and that was 2.46% higher than June 2024 but only 1.48% higher than June 2022 (which was the previous peak). I think we are holding on to about a 2.5% up market for 2025, a little under prediction and also below inflation, wage rises and the likes. July’s figure to follow next week, I’m sure! Fall throughs nudged above the long-term average of 24.2%, printing 24.4% - relatively normal “noise”. The net sales are still playing ball - 19.7k, 5.8% up on last year and 10.6% higher than 2017-19 - not quite at 2022 levels but the stamp cliff will have forced a few more transactions out of bed of course, and as the year progresses then in the absence of any more shocks, things will likely catch up because transactions were significantly “disturbed” by the 2022 budget and the bond markets, of course, in comparison. I always give Chris a weekly shout out here because he’s more prolific than “just” this epic tome he releases weekly on the UK property market - he comes up with some great stats on a regular basis. Drop him a like, subscribe, and all the rest of it and some kind words for his content creation. If you are in the industry and want support in growing your business or to be a more effective communicator/be more in touch with your local market - that’s his core business - give him a shout. The article gets published on the Property Industry Eye website, and the video on his YouTube channel - @christopherwatkin

Into the MacrOverdraft, as another month ends and the advanced economies of the world get that little bit further behind the 8 ball. The Bank of England Money and Credit report always gets a slot, as it contains several items of interest. The Nationwide House Price Index slid out on Friday too. Since I looked at it last quarter, and have a keen interest in it because it is the only “plan” for job creation in the UK at the moment, I’ve also slipped in the public sector productivity Q1 report too. Then we will get into the gilts and swaps as always.

Money and Credit, then. The bit that makes the press is usually only the amount of borrowing that gets done on mortgages - and indeed, there was a significant increase to £5.3bn of net mortgage lending in June. Mortgage approvals at 64,200 sounded a bell that says “decent times coming” in the housing market. The benchmark around 65k mortgage approvals a month is a sign of a well-functioning market with a little steam behind it, but very much a sustainable bit of steam. This is very much in line with what I’ve been saying over recent weeks, because mortgage approvals take months to turn into completions. Remortgages also stayed over 40k - and indeed went to 41,800 (up another 200) as those who are remortgaging are simply accepting the higher rates environment, by the looks of it, compared to a year or two ago (and of course, rates are down a little, or a lot if you are looking at 2-year mortgages). That’s the best number for remortgages since October 2022, one of the last months where the “old days” rates were nearly still with us. Net borrowing of consumer credit by individuals rose to £1.4bn, which is on the “too fast” side of healthy, and is one to watch. One swallow doesn’t make a summer here, but consumer credit is always worth watching closely. SMEs actually increased the amount they are borrowing year on year, by a teeny 0.3%, but that’s the first month of growth since massive contractions following August 2021. Nearly 4 years. The money supply also picked up yet again. M4/M4ex which is in the report is moving forward month on month - 0.3% upwards. Households increased their holdings of money by £7.8bn, with £3.6bn into ISAs and £1.2bn into instant access savings accounts. The country braces for another budget? There was also the highest net lending figure since September 2022, so investment (whether it is in housing, or businesses) certainly seems to be picking up on the back of this, you would think - and rates are not putting people off or causing apathy/delay. The finer detail parts - the effective interest rate, the average rate at which newly drawn mortgages are issued, fell to 4.34% from 4.47%. This 13 basis points is a large monthly shift. This likely has more to do with the 2-year bond yield coming much closer back towards the 5-year (the flattening of the yield curve) than rates really decreasing - but the BoE don’t break the figures down to that level of detail sadly, so this will remain a speculative comment rather than a factual one! The overall rate paid on the stock of outstanding mortgages only crept forward ever so slightly in comparison, from 3.87% to 3.88%. Not a big deal. Those two numbers move ever closer and for the first time in this normalization cycle, the gap is under half a percent (46 basis points). Convergence looks closer than we thought on the back of this, but I still don’t see the two curves overlapping until 2026. This will mark the time when the market has truly absorbed the impact of the available mortgage rates moving from 1-2% on resi (3% on investment) to 6%+ and back again (current resi rate 3.82% best buy, 5.5% or so with a comparable fee in the BTL market, limited company, best buy). Consumer credit growth was 6.7% year on year. Above wage increases, above inflation, not unsustainable and still repairing from a massive contraction during Covid - however, one to keep an eye on since it has now been at this sort of enhanced level for about 2.5 years. Overdrafts come in at 22.23% on average, credit cards at 21.49% when they are not 0% cards (about 50% are), and personal loans are at 8.42%. £7.8bn increase to household deposits at banks and building societies tells you people are still saving diligently. Less than many of the previous months, in fairness, and the chart shows giant allocations of cash into ISAs in both April 2024 and April 2025. April 2025 was slightly more aggressive - but this has more than doubled since 2023 and in ‘21 and ‘22 people really didn’t bother. I think this shows you this is a different kind of saving compared to what happened in the pandemic - but also interest rates have changed significantly since then of course. Whether there’s an element of enjoying the cash ISA limit while it lasts - possibly. Difficult to prove of course. New timed deposits received an average of 4.02% in June - the rate on the outstanding stock of time-tied deposits is 3.57%, and the outstanding rate on the instant access funds dropped to 1.91% from 1.96% in May. The remaining figure to watch? The £18.9bn net lending to private sector companies and households. The highest net lending since September 2022 (you know what happened just after yet, in case you forget, even if I remind you every week. The lettuce). The country is capitalised - but will they sit on it before the budget and/or squeeze in their last cash ISA at £20k (if indeed the Chancellor is set to raid savings) or not? Nationwide House Price Index? Well, it didn’t fit the mainstream narrative this year, so it looked more calm in the broader media. House price growth for the year up 2.4% (for once I’m in significant agreement, although do remind everyone that the picture is very different between cheaper properties and more expensive ones, at this time). 0.6% up month-on-month which can only be described as healthy. Nationwide also chose this month to highlight something I’ve been banging on about for years - the HPER (house price to earnings ratio) is at the lowest it has been for a decade (indeed, more like 2013 times as I have harked back to before). If you adjusted this for taxation under the current system - as strange as this will sound - the effect is even more pronounced. This is because of a much more generous personal allowance and a lower basic effective rate of income tax at 28% compared to 33% or similar. A significant difference, actually. If you track it across (I used it as this week’s graph) you can see it also compares with 2003/2004, as I’ve pointed out a number of times. Now we know there was a crack-up boom that had started in around 2001, but we were less than halfway into it. The “record”? 6.9 x earnings on Nationwide metrics as recently as 2022, just before (yep, again). There’s most definitely a path to more sustainable growth from here, but for the moment, earnings continue to outstrip house price growth and I think will do for the rest of 2025 at the very least. How did Nationwide frame it all this month? A modest pick-up in house price growth. Activity holding up well after the end of the SDLT “holiday” as they choose to call it (technically correct, slightly political). They provide data on the 64.2k mortgage approvals for June, comparing it to the 2019 average of 65.8k and the 2014-19 average of 66.3k, a healthy enough market as you know with regional distortions (that actually stalled quite a bit in 2019, but mortgage approvals didn’t show that in the data). The point overall is that we are only just below normal, and could happily post another 5000+ mortgage approvals per month before anyone started talking about a boom. It seems they don’t necessarily bother with the edit button month on month since their only comment on unemployment is that it “remains low” - we are 1%+ off where we were on that front, and “historically low” would be a better description. Household balance sheets are strong (they sure are, looking at savings) and borrowing costs should moderate a little further (and that’s true, they should - but only in the short term, looking at the shape of the yield curve). Public service productivity, then. GROWTH of 1% in Q1 2025 compared to Q1 2024! Hurray! All that extra money on the state is being used a little more efficiently! It will be interesting to see how the ONS break that down. Healthcare was far more productive - up 2.7% (perhaps due to doctors’ strikes in Q1 2024 - this time they have appeared in Q3 2025 of course). All good news. The bad news - we still aren’t as productive as we were in 2019. A reminder - in 2024, total public service productivity was down 4.2% from 2019 - the bright side is that it means that productivity gains really are available. The dark side - of course - is that we are not achieving them. It’s actually much more depressing than the ONS highlight in their summary - the base level of the public sector productivity index is 100 in 1997 (I kid you not - it is usually 2015, 10 years ago, or 2022 or similar - with the majority of the pandemic out of the way) - and 2024 achieved 100.3. A 0.3% increase in 27 years. In 2019 we were 4.7% ahead of 1997 - not enough, really, but still a heartening figure. More work needs to be done to get back there, it suffices to say. Healthcare is 8.8% less productive than 2019. This is the figure I’d be waving at the doctors in the current pay negotiations, that is for sure. So - progress? Maybe. Let’s see next quarter, but overall, rather be going forward than backwards, and there does have to be some element of pandemic recovery on a system that was “put on” more than any other during the pandemic, of course. Gilts? I thought that’s what I heard. A down week on the 5-year, mostly driven by an afternoon drop in the yields on Friday which was the result of the US jobs news as discussed earlier. The open was 4.026% and the close was 3.946% for the week, 8 basis points to the “good” for the borrowers. Thursday’s close of 4.01% was comparable to the 5y swap’s close of 3.682%, with the 33 basis points still surviving as the discount. For the first time I’ve noticed in recent times, the 3.682% was higher than one month ago (3.594%) and one year ago (3.606%). Again, particularly stable, although a lower short term bank base rate is baked into these figures than it was a year ago. What about the 30 year gilts? 5.413% at the open and similarly took a tumble on Friday PM - to close at 5.357%. 5.7 basis points down on the week, so the shallowness we picked up in the yield curve last week was reversed - again, ever so slightly - as things look set to stay very steep towards long dated bonds for some time. Without further ado, I will get into the deep dive. Black Swans, and reflection. That is the subject matter. I kicked off my thinking by asking GPT about the 10 most likely black swans (If you haven’t read the book from the title quote, Taleb has a scathing cynicism in his writing and a rapier-like wit, so he is - in my opinion - being both sarcastic and genuine when he says Black Swans are “retrospectively predictable”). Long-time followers will know I am rather partial to the movie “The Big Short”. Indeed, I think it is one of the great educational movies of modern times. Not because it is a sign of things to come, or that the next crash will be like the last one (arguably, we had it - it was a pandemic, but the state just absorbed it - and so it was completely different). What the Big Short teaches us is that with the right amount of analysis, asking the right questions, and not accepting the broader societal norms or media influences, the next crash is actually inherently predictable and indeed it might be possible to make an outsized profit on the basis of it. Many great figures in finance truly made their billions from crisis situations and Black Swans. George Soros - the man who broke the Bank of England - making over a billion in a day back when a billion really was a billion (30 B.I. or so, before Inflation - yes I’m being flippant). If you listen to the legendary hedge fund manager Bill Ackman - basically every position he has ever taken has been after a stock has endured a dramatic pullback, and one of his big skills is taking advantage of overreaction to bad short term news in what are inherently good businesses. The list is long. So - when’s the next one. GPT says - guess what, and it was most definitely my number one as well - Sovereign Debt Crisis in a G7 nation. Who did GPT name first - The UK. Gulp. Italy next up, third favourite, da da da - the USA. So what? GPT says spiking yields, currency turmoil, forced austerity. A fascinating little precis. This is by far my betting favourite for the next problem. Out of interest, the other 9 that GPT went for? Shadow banking collapse in China; Cyberattack on a major financial infrastructure; AI-disruption shock to employment (some are claiming this is already happening, but I think unemployment is being explained much better by cyclical factors and fiscal policy at the moment, personally); energy supply shock 2.0; private credit and commercial real estate domino (US based); a political/constitutional crisis in the USA; Climate-driven insurance and property market collapse (One for another day); A major tech/cloud outage or breach (not sure that needed its own one there); or another UK financial crisis/LDI 2.0. So - I’m going to concentrate on what was GPT’s number one, and my own. Indeed, it is arguably so visible it is instead what has started to become called a “Grey Swan”. Semi-visible. “Should have seen it coming”. Best to summarise the overall situation with a bit of background. The UK, anyone can see, has been limping along for some time now. The one time since the pandemic effects (and stimulus) had subsided, and we looked to break out of the shackles of very ordinary growth, the ruling party then decided to call a general election. Regardless of political allegiances, it was always going to be a big one, as it was obvious to anyone paying any kind of attention that there would be a change of Government as there was significant disquiet - and indeed there was only one alternative in town. (Don’t things feel very different just over 12 months later!) This was also always going to freeze business decisions and have a drag impact on economic growth. The new leaders have then proceeded with a variety of decisions which have impacted growth in a negative way, amongst some small adjustments (large in the property sector) to legislation to engineer some growth. The most recent and high profile - the financial deregulations. The big one for Supplement readers - planning reform. Business has been screaming, moaning and grousing at various points. Everyone has left the UK, except they haven’t and those reports have now been more officially debunked in the Financial Times. However, the pain isn’t over yet, we are told, and commentators like Robert Peston are going around saying the Chancellor will need another £20bn haul in this upcoming budget at the very least. This can only come from revising growth figures downwards (most forecasting houses have, so the OBR will likely have to do that, although I’m very sceptical that the OBR don’t get backed into a corner into manipulating their growth figures upwards, personally) - or by borrowing more than needed (remember, in spite of the rhetoric, we are smack on the OBR forecast for borrowing in this fiscal year so far, so it has already been budgeted for). The rate we pay on that debt - well, we are very gradually shrinking that number simply because it was relatively high when the forecast was put together. Large debt pile - yes, pandemic inspired and not managed properly throughout, in the aftermath, or now. Doing one of the poorest jobs with one of the best financial reputations in the G7. Poor issuance of long-term debt, in terms of timing, poor choice of index-linked gilt issuance, poor management altogether. Disappointing all round. Bad debt to GDP ratio, but really bad when you look at it next to other G7 nations too. Canada - for example - is sitting very pretty with some decent Government assets on the balance sheet, and a net debt to GDP ratio (be careful here, because this is rarely discussed, although it should be - we often discuss gross figures, but this is not that helpful as you will see) of c. 14% of GDP. Japan hits 78% down from 235% gross debt, because it holds such significant foreign asset reserves (including well over $1tn of US government debt). Italy is at 135% gross debt to GDP, and is right where it was in the mid-2010s, during and following the debt crisis in Europe. Figures are more opaque for Italy but it seems netting off between 35% and 40% for Government assets is about right - taking things to 95%-100% of net debt to GDP. In the UK, that 35%-40% number - when put next to our “sickest” economic compatriot in the G7, is a weak 12.5% or so. This puts our net debt down to around 84%. Better than Italy! Yay. Worse than Japan - goodness me. Last comparable - the big boys. The USA. Not dissimilar to us, only holding about 15%-16% of GDP as assets, netting off against their 123% or so gross position. That takes them to 108%-109%. The biggest loser. Ah, they are different, everyone says, and of course they are because they still represent the global reserve currency. They don’t seem that bothered at the moment at putting that at risk, championing crypto really - the very system that’s supposed to undermine the Government control of money. Not many people saw that coming. If the consequence was the US losing the global reserve currency status, regret would be a serious understatement for the emotions that would emerge. The differences other than that? Well, rate of growth. The US is lagging at the moment - tariffs have an impact on GDP, and strengthening manufacturing (although jobs are still going south in manufacturing, as discussed) comes at the expense of other sectors - and also increased tax slows down growth, and the VAT-style impact of the tariffs is doing exactly that already. However, their 1.3% laggardly growth still looks good compared to the UK who printed 0.7% year-on-year last time out and have topped out at 1.7% growth in December 2024, our best print since October 2022 (fancy that, eh?). Italy - 0.4% year-on-year, so even worse. What about the cost of the debt, though? If we compare the 10-year bond yields, the biggest one for liquidity worldwide - Italy is paying 3.518%, UK 4.53% and the US 4.225% - so, we definitely lose that one. Bonds are basically interest-only (effectively) and so we are paying 29% more interest than Italy (it would really be the effective pay rates, rather than the 10-year spot yields, to get this mathematically correct - but it is a reasonable proxy). So - we don’t look quite as sick as Italy right now - but remember, Italy has the EU behind them. The framework is one of the reasons why their interest rates are lower on their Government debt. Iexit, or whatever you’d call it, would do them no favours there - not that we ever had monetary union anyway. That concludes our need for “comparables”, then, I think. We are not doing well in comparison to our peers. What’s needed to keep the music going, then, and not have a Sovereign debt crisis? Perhaps it would be an idea to go through GPT’s excellent little summary of the consequences. Spiking yields - yes, this means debt would be even more expensive. The immediate result - borrowing costs would go up for households. Mortgage rates up. A situation of significant stress. How would this be counteracted? Most likely by the Bank of England Governor wheeling out that crisis phrase “Whatever it takes” - we would be buying our own bonds, in volume, in order to try and stop the yields spiralling. This happened in October 2022 when the pension LDI situation kicked off, to try and contain it - and contain it it did. This would be on a different scale, of course. So - how much money do the Bank of England have in that situation to throw at the problem? Effectively, both none, and infinite. None, because it doesn’t exist yet, and infinite, because they control the printer in these circumstances. It isn’t really infinite, of course, because if people lose faith in the pound, there are far larger problems afoot. So it is a matter of trial and error, and judgement (I’m sure that makes you feel great!). What else manifests itself - the currency volatility. No-one wants GBP. It gets much weaker. This creates inflation (because we import so much) and at the worst time, when you really want and need to get interest rates down for so many reasons. If you are already at a fragile time (when underlying inflation is over 3.5%, say) that timing is really terrible. Another reason to try and get inflation back down to the target! Then - the last bit. Forced austerity. This is where the soapbox will come out, has been dusted off, lacquered, varnished and strengthened for a long stand. A filibuster, if you will. Buckle up. The recent ONS report, which I analysed, basically told us a few things. Firstly, we are broke within 50 years, and no-one will want to be anywhere near us. Secondly, climate change isn’t the (economic) problem. Thirdly, we desperately need to sort out the health of our nation. Fourthly, we need to throw everything at improving productivity, and if we do, we can actually solve all our economic malaise. Let’s analyse those one-by-one. There are factors coming (the age of the population and their working status) that are unavoidable. We then have either a shrinking population (such is the feeling against immigration) who get poorer and poorer by the year, or we import enough people of working age to keep some kind of balance between the workers and the retired. The most recent ONS population forecast for the next decade showed exactly the same number of births as deaths, and the only growth being down to net migration. That’s a fairly binary choice. Only productivity gains save that from being a tautology - but if you use productivity gains, then the standard of living for everyone undergoes a huge drag compared to where it would have been. In plain English, you need really huge improvements and then you need to use the majority of them to fix what’s gone wrong in the past rather than to make the future much better. Climate change - and the economics of it. I can summarise very briefly - because at some point, likely when EPCs or their replacements are on the statute books, I will get into it - but, we are not in control of 99%+ of the world’s carbon emissions. We are takers here, not leaders, not movers and shakers. The spend on many net-zero initiatives leads to an outsized profit for the supplier, and poor value for the taxpayer. The economic consequences of the shifting climate specifically for the UK are not actually that bad, and are nothing like as bad as the consequences of obesity and diabetes epidemics, or productivity crises. Health - the UK is leading the way in Europe for the consumption of ultra-processed food. What a terrible metric. Governments now and in the future need to take action, nudge behaviour, punish big food, and make investments in their people that will pay positive rewards and lower healthcare requirements. Productivity. We need meaningful gains, we need the best people in the country to be working solely in this field, we need to learn from around the world, and we need to implement. Not threaten to strike because we can’t work from home any more. Strong leadership is required in this direction including an overhaul of the R&D tax credits system, flushing out the bad actors within it. This alone could solve the problem, if enough resources were put into it.

What if we fail? Well, what’s ahead, according to GPTs last comment (and again, I agree) - is forced austerity. We won’t live within our means. We refuse. We need lower working-age benefits, but politically that won’t wash. 100+ MPs are willing to believe that we just accept that double the number of people are needing disability benefits compared to a few years ago. It is utter nonsense, but that’s where we are. We need pensions to kick in later in life - there has been cowardice around this for at least 50 years, politically.

Here’s the starkness of this choice. We either do this ourselves, or the system does it for us, when this crisis kicks off. What’s the catalyst for this? That’s the hardest bit to see, but an external shock could make the dominoes fall. What’s the alternative, if we don’t manage it ourselves? The IMF. This is what they exist for. The International Monetary Fund. And we’ve been there - indeed, within the last 50 years. We embarrassingly called them in, in 1976. There’s usually a whopping great loan - in exchange for massive cuts in public spending. This was a major factor in the winter of discontent in 1978 and the election of Thatcher and a near-2-decade run for the Tories on the back of it, the general public being so sick about what had happened. “Can’t happen today” - oh, don’t be so sure! If the problem was so large that the Bank of England knew they couldn’t contain it - because the inflation issue due to a drastic need to cut rates (they might not even be able to cut rates first, needing to hold them for a period, meaning even more pain for the public - they might even need to go up before they go down) - and no-one wanted bonds (there is already a significant undercurrent of discussion about the only people left to buy bonds being the people, although that is more US centric than UK centric) - then the IMF could very much be involved, either on a more informal or a formal basis. What would it mean? Structural reform, not entirely controlled by our sovereign nation. Current spending cuts, immediately. Tax rises (income, VAT, most likely). A multi-year debt reduction rule. A stronger role for the OBR, possibly - moving from influence to power? The chief jobs would be getting inflation down (made much worse by a debt crisis) - and comprehensive stress testing (although the UK is pretty robust in this department, as much as any central bank in the G7 in my view). There would then possibly be forced deployment in productivity investment (no bad thing, if it was good value/worked), pension and welfare reform (Italy and Greece have already endured this as part of the EU Debt Crisis management) and efficiency savings in public services (the DOGE fans applaud!). What sort of money would we be talking about here? £50bn, perhaps, something to that order. Maybe more. Not huge, in today’s numbers - the intervention is more about credibility and basically becomes effective when the Bank of England’s “Whatever it takes” mantra no longer has credibility in the markets. The “problem” in 2022 was small, in comparison, because it was confined to longer-dated bonds, almost exclusively owned by pension funds. It was margin calls, and in the end, a few billion (rather than the £20bn pledged) was enough to sort it out (although pension funds made losses and hedge funds made large profits, but that bit is conveniently not publicly discussed). What would it mean? Well, the ruling party would be out at the next election. No doubt. It would be a “Truss on Steroids” moment. Ratings would go down on Government bonds, increasing the longer-term cost of borrowing. Domestically, there would be protests and perhaps riots, as the people refused to accept the economic reality of spending decades living above our means. So, effectively it only happens if we lose “open market access” - if the markets don’t believe in us enough, anymore, to invest their money in the United Kingdom. The triggers would look something like - yields moving to 6%+ on gilts, on a sustained basis (bearing in mind the longs have very recently been at 5.5% already….), sterling falling to a low against the dollar (again a more sustained one than October 2022), and a downgrade in credit rating to BBB or lower for the UK. On the ground - an emergency budget, a fiscal rule “reset”, public sector pay freezes, tax rises as discussed. Potentially an acceleration in infrastructure investment to rebuild. Welfare and pensions “savings” for the state. The very simple rule - and Ray Dalio is doing the best work on making this accessible for the general public in his recent book “How Countries go Broke” - Ray and indeed the IMF would say - get the deficit down to 3% of GDP. Mitigate debt - reduce spending, increase taxes, lower interest rates. It’s only part 3 that Mr Trump is interested in, although 2) is coming in via the back door thanks to tariffs. The UK has focused on other taxes, as you know, that have second order consequences - like employer’s national insurance. We may well sell off what little we have left of the family silver, not doing anything for our net debt to GDP ratio but helping the gross a little. More of a gesture than anything, to be honest, given that the cupboard is not exactly laden with treasures. What would happen (once you looked at mortgage rates for a while and though - uh oh, this really doesn’t work any more with leverage) - well, yields would drop back but not much below where they are now, of course - perhaps keeping a “tax” on there for the credit rating downgrade. That seems the most likely. Then, there would actually be a surplus, because it would be enforced, and debt payments would go down. I wonder what Reform would be saying, as I’d expect them (and perhaps the new Corbyn party) to be the most vocal in this situation. Passive-aggressively nearly encouraging riots? Telling people that they wouldn’t be allowing the IMF to tell us what to do, because it is a breach of sovereignty? If this was to happen before an election, and Reform were indeed in front (reminiscent, but on the other side of the spectrum, to Syriza in Greece in the 2010s), I suspect the gilt markets would once again start to get very wobbly indeed. The IMF would be faced with a very tough choice. If the Reform party line remains some kind of Swiss cheese fantasy about 5%+ GDP growth per year, (and they aren’t just talking about their own net worths), then I suspect the IMF would be very nervous indeed. Would that matter? To me, sure. To Supplement Readers and Listeners? Let me know, I’d sure hope so. To the people, who have been told their wages are freezing and they now need to be 70 before getting a pension? It isn’t so clear, is it? Reform wouldn’t have an answer, but if they could persuade the public that they did, would they get elected anyway? There would most certainly be a change of Government if we did get anywhere near an IMF bailout. The alternative to getting the IMF involved would be far more painful. A housing market freeze, and big drops in house prices in real terms because inflation would run rife for a while; No-one moving because interest rates were at 7%+ and people were waiting for them to come down - a real nightmare. The sort of thing that keeps me up at night - even when I’m relaxing in Dawlish - if we go back to the 2022 times of those who “don’t care about the detail” or “blame the blob” are once again in charge at number 10 and 11. The current incumbents are idiots, mostly harmless, a drag on output, all of the above - but as I’ve said in recent weeks, please be careful what you wish for! If that hasn’t cheered you up, nothing will. It isn’t a “tomorrow” thing but it is a potential Black Swan waiting for its catalyst. Hopefully not anytime soon - it would be even better to think the politicians will solve these long-term problems before they become a crisis, but politics just never works like that, sadly. Before I do close, don’t forget to book your SUPER EARLY BIRD tickets to the next Property Business Workshop that Rod and I are running on Wednesday 1st October in central London. This time around - investment metrics and how to run your property business at scale. My favourite topic of all! Book here: http://bit.ly/pbweight Above all - please remember to Keep Calm, ALWAYS listen to or read the Supplement, and Carry On; there will be opportunities abound this year and towards 2030 and beyond - the landscape has been set for a surefire bull run. It will be slow(ish), and take a little while longer to get off the ground - and the amount of stock around is still keeping things suppressed at the moment - but as yields currently continue to improve, it is a case of “here we go” in my opinion.

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