Kwarteng's plan?

[NotSure]

Interesting contribution from Patrick Minford tonight:

https://www.telegraph.co.uk/news/2022/0 ... ds-idiots/
[i]There is no sterling crisis, except in the minds of idiots
It is important to leave the pound free to find the level that will allow the Government's pro-growth policies to work

This article appears to have been dropped from the Telegraph main and business pages. It was only there for few hours. Almost seems like they don’t want people to read it.

I'd always assumed they (the publisher, DT in this case) promote what gets clicks and demote that which doesn't. They're in the business of selling ads after all.

Regarding the article, if correct, then UK gilts are a screaming buy. Genuine question - is anyone piling in? They certainly look cheap compared to a few months ago (or even a few days ago) but I've not the mettle.

[NotSure]

Here's a fund that gives exposure to the long term gilts the article suggests are very under-priced:

https://www.vanguardinvestor.co.uk/investments/vanguard-uk-long-duration-gilt-index-fund-gbp-acc/price-performance

[servodude]

Average outstanding mortgage is 3.6X average wage
Average property price is 7.5X average wage

Ok - so why the divergence?
3.6 doesn't seem a huge multiplier for borrowing
So why do things seen unusually expensive

3.6 because I assume that since most mortgages are repayment (unlike former times), a significant amout of the principle has already been repaid.
I have read that many more houses are now owned mortgage free than in previous years, and the current mortgage debt is thus much more narrowly held mainly among the young and middle aged. If there is a repayment nightmare to come, it will affect a much narrower group than formerly.

I think you're on to something
I don't think it's necessarily the principle on the same property though - and a lot depends on whether that's "mortgage" when taken or currently

[NotSure]

I think you're on to something
I don't think it's necessarily the principle on the same property though - and a lot depends on whether that's "mortgage" when taken or currently

My guess it is current, hence ranges from almost 0x to 7.5x, averaging to about 3.6x?

[servodude]

I think you're on to something
I don't think it's necessarily the principle on the same property though - and a lot depends on whether that's "mortgage" when taken or currently

My guess it is current, hence ranges from almost 0x to 7.5x, averaging to about 3.6x?

Which suggests a risky lending profile... or a very skewed sample set?

[Nimrod103]

I think you're on to something
I don't think it's necessarily the principle on the same property though - and a lot depends on whether that's "mortgage" when taken or currently

My guess it is current, hence ranges from almost 0x to 7.5x, averaging to about 3.6x?

Which suggests a risky lending profile... or a very skewed sample set?

Not necessarily more risky, if it is just a function of the amount of all mortgages which have been partially paid off, which is what I think that the 3.6 figure actually is - it is just all outstanding morgages divided by the average wage.

OTOH in the last few years property prices have continued to go upwards rapidly, and this must be reflected in the size of new mortgages issued.

[Nimrod103]

Interesting contribution from Patrick Minford tonight:

https://www.telegraph.co.uk/news/2022/0 ... ds-idiots/
[i]There is no sterling crisis, except in the minds of idiots
It is important to leave the pound free to find the level that will allow the Government's pro-growth policies to work

This article appears to have been dropped from the Telegraph main and business pages. It was only there for few hours. Almost seems like they don’t want people to read it.

I'd always assumed they (the publisher, DT in this case) promote what gets clicks and demote that which doesn't. They're in the business of selling ads after all.

Regarding the article, if correct, then UK gilts are a screaming buy. Genuine question - is anyone piling in? They certainly look cheap compared to a few months ago (or even a few days ago) but I've not the mettle.

I don't think publishers work exactly like that, they will be heavily influenced by their editor's philosophy and what their other contributors might say or threaten. The article was not up long enough to accummulate many clicks.

[Bubblesofearth]

Not necessarily more risky, if it is just a function of the amount of all mortgages which have been partially paid off, which is what I think that the 3.6 figure actually is - it is just all outstanding morgages divided by the average wage.

OTOH in the last few years property prices have continued to go upwards rapidly, and this must be reflected in the size of new mortgages issued.

Yes, 3.6X is the average of all outstanding mortgages. New mortgages will be a somewhat higher multiple. Current practice, easily searchable, is to lend between 4X and 5X wages. More if certain criteria are met.

Like anything the price of houses will be pushed up at the margin. I remember a few years back when London prices were around 16X wages, not sure if that's still the case but at the time it was difficult (for me) to compute coming from the 3-4 multiple era.

BoE

[88V8]

Not necessarily more risky, if it is just a function of the amount of all mortgages which have been partially paid off, which is what I think that the 3.6 figure actually is - it is just all outstanding mortgages divided by the average wage.

Yes, 3.6X is the average of all outstanding mortgages.

Our first house in 1975... we borrowed 3x my salary plus 2.5x OH's.
It was a push at the time, we had to use a mortgage broker to borrow that much. It ate 60% of my gross salary.

Fortunately over the next decade inflation plus career advancement shrank that 60% to insignificance.

Inflation has its merits, for some.

V8

[ursaminortaur]

Well, it has to be somebody's fault and it obviously cannot be the fault of those responsible for it, can it?

I find myself once again blaming the banks. If, as others have done, I hark back to the 80's then I remember 3X wages or 2.5X joint wages were limits for mortgage borrowing. And house prices were considered cheap at less than 3X wages and expensive at over 4X wages.

But of course repayments on those smaller mortgages were just as much because the interest rate on those mortgage were far higher than in recent times.
Base interest rates in the 1980s were above 10% for most of that period. With lower interest rates buyers could afford to pay higher prices and mortgage lenders recognised that by increasing the wage multiples that they allowed .

https://thinkplutus.com/uk-interest-rate-history/#:~:text=Interest%20rates%20began%20to%20rise,to%2014.88%25%20in%20October%201989.

The 1979 Conservative government
The incoming administration of Margaret Thatcher raised interest rates to 17 per cent, as the government of the time saw this as a critical weapon in combating inflation, which was steadily rising at the time. It did have the effect of reducing inflation, although critics noted its negative impact on UK manufacturing exports. Interest rates began to rise again towards the end of the 1980s, partly under the pressure of house price rises. Interest rates had gone from 17% in 1979 down to 9% in 1982, and were back to 14.88% in October 1989.

September 1992
Known as "Black Wednesday", the UK withdrew from the European Exchange Rate Mechanism on 16th September 1992. This meant that the Bank of England base rate interest sat at 12%, up from 10%. This was at 10.30am. John Major, the prime minister, promised to raise the rate even further to 15%. This was due to the encouragement of speculators to buy Sterling. This did not happen, with the government reducing interest rates back to 10%

[Nimrod103]

Interesting contribution from Patrick Minford tonight:

https://www.telegraph.co.uk/news/2022/0 ... ds-idiots/
There is no sterling crisis, except in the minds of idiots
It is important to leave the pound free to find the level that will allow the Government's pro-growth policies to work

Interest rates over 2 per cent and heading to 3 per cent are already tightening monetary conditions sharply. Energy and other commodity prices have peaked and are now falling in the face of a gathering world slowdown, with recession threatening the US, the EU and China. It is likely that interest rates being set by the Fed and the ECB are rising too rapidly for comfort and may have to level off pretty soon.

Part of sterling’s weakness is simply the result of rising interest differentials versus the UK’s. With inflation likely to fall soon it makes little sense for the Bank to speed up its steady tightening of money. The growth rate of UK money supply is now down to about 3 per cent – already quite tight enough. This is why I think long term gilt rates, which mirror expectations of future short rates, will eventually settle around 3 per cent.

There is another element in play: the current account of the UK balance of payments. This has been stubbornly in deficit for some time, at around 4 per cent of GDP. Sterling is the market price that in the long run has to bring this into balance. Currently the deficit is worsening because of the ballooning price of our net energy imports, but this should be temporary as energy prices are set to fall.

The idea that the BoE are moving at the correct speed (and everyone else is being too hasty) is repeated by John Redwood, quoted in today's Telegraph:

The IMF are coming from the errors of the past which they share with the world's leading central banks.
They didn't foresee the big inflation which they triggered, they didn't have sensible advice in good time to see off the inflation and now late in the day when the inflation is very visible for all to see they are suggesting taking measures to tackle it when the world has moved on and they should now be warning the world about the coming recession, which is in danger of digging in in many major countries because of the policies being followed and will be the enemy of the future.

We should know by early next year who was right.

[tjh290633]

Average outstanding mortgage is 3.6X average wage
Average property price is 7.5X average wage

Ok - so why the divergence?
3.6 doesn't seem a huge multiplier for borrowing
So why do things seen unusually expensive

Historically the criterion was that your mortgage repayments should not exceed 25% of your monthly income. In those days they were tax deductible, of course. If you were on an interest only mortgage, you got tax relief on the insurance premiums on the endowment policy intended to repay it.

Interest rates about 5% or so when I started.

TJH

[servodude]

Average outstanding mortgage is 3.6X average wage
Average property price is 7.5X average wage

Ok - so why the divergence?
3.6 doesn't seem a huge multiplier for borrowing
So why do things seen unusually expensive

Historically the criterion was that your mortgage repayments should not exceed 25% of your monthly income. In those days they were tax deductible, of course. If you were on an interest only mortgage, you got tax relief on the insurance premiums on the endowment policy intended to repay it.

Interest rates about 5% or so when I started.

TJH

Agreed
But I don't recall the "average" house price being that much higher than average salary then
Perhaps it's just numbers getting further apart by their nature that feels bigger in perspective rather than fact

[AsleepInYorkshire]

There is no plan.

The man has to go and if he's any sense he can throw himself on his own sword before the back benchers tear him from his political limbs.

Bank of England to buy government bonds to stabilise market

AiY(D)

[Lootman]

Lootman is interested in better living standards and prosperity for Lootman, not for the majority of people. I'm sure he'll correct me if I'm wrong.

You are wrong but not for the reason that you think.

Like everyone else, I am guided first and foremost by what is good for myself and those I am close to. I feel sure that you put your own family's welfare above that of others, and I am no different. The only material difference there is that I acknowledge any selfishness I have, and you apparently do not.

Now, would it be nice if everyone was well off? Sounds good but if you really think about it, that isn't possible. If everyone in the UK was as well off as you and I then we would have much higher prices for everything, since demand would be so much higher, but supply would not be. We would not feel as well off because we would not be as well off in terms of buying power.

Besides there is really nothing I can do to improve the financial situation of strangers, other than to do my bit to try and create more prosperity in the hope that it will be shared through my purchase of products, services and labour.

As for what the "majority of people" want, we have elections for that. And in my lifetime the Tories have won about 2/3 of the time, whilst a left-wing government has not won one for 48 years. Perhaps that tells you that what the majority want is a bit more complex and nuanced than you claim. The electorate does not wish for a mind-numbing mediocrity as the price of some flawed and doomed concept of "equality".

As for these tax cuts, they are fairly modest in the grand scheme of things. Certainly nothing like the hatchet Thatcher took to tax rates in the 1980s. The media fuss is overblown.

[NotSure]

There is no plan.

The man has to go and if he's any sense he can throw himself on his own sword before the back benchers tear him from his political limbs.

Bank of England to buy government bonds to stabilise market

AiY(D)

So we have BoE raising rates on one hand, QEing on the other, and HMG cutting taxes and ramping up borrowing.

Am I the only one a little confused as to what the overarching strategy is here?

[NotSure]

...As for these tax cuts, they are fairly modest in the grand scheme of things. Certainly nothing like the hatchet Thatcher took to tax rates in the 1980s. The media fuss is overblown.

They are modest as in 45 to 40% for top rate, rather than 60 to 40%, but combined with cutting NI and basic rate tax and reversing corporation tax, they are bigger in GDP terms than Lawson. Only Barber 1972 exceeds them in this respect (and didn't that work well....)

(And the lower 50% of households only see 12% of the benefit, but that's another story).

I'm not reading the media, just looking at charts. I guess those are just overblown fuss too?

[NotSure]

Dash for growth? (A bit of overblown media fuss )

Britain’s biggest companies are facing record borrowing costs as Kwasi Kwarteng’s debt-funded tax cuts continue to wreak havoc across financial markets.

Blue-chip companies that raise money by issuing bonds face record refinancing costs after the Chancellor doubled down on his fiscal plans, fuelling speculation that the Bank of England will be forced to accelerate interest rate rises.

The difference in the interest rate that investment-grade companies need to pay if they issue sterling bonds now compared with the rate on existing debt climbed to 3.25pc, according to Bloomberg data.

This represents the highest ever refinancing cost for British companies since the metric was first tracked more than 20 years ago, even exceeding the previous high reached in the aftermath of the 2008 financial crisis.

It means that companies would have to pay an additional £3.25m for every £100m they borrow at a time when they are already facing increased costs from spiralling energy bills......

https://www.telegraph.co.uk/business/2022/09/28/british-companies-face-highest-borrowing-costs-record/

[AsleepInYorkshire]

There is no plan.

The man has to go and if he's any sense he can throw himself on his own sword before the back benchers tear him from his political limbs.

Bank of England to buy government bonds to stabilise market

AiY(D)

So we have BoE raising rates on one hand, QEing on the other, and HMG cutting taxes and ramping up borrowing.

Am I the only one a little confused as to what the overarching strategy is here?

I've spoken about this about three or four months ago and asked the simple question - if the BoE raises interest rates to bring down inflation (thus removing disposable income from the monthly wage packet) how can they prevent the government lowering taxes to "counter" this?

And low and behold along comes Kwasi with the answer - they can't!

We have a Chancellor that simply cannot grasp the fundamentals and a Prime Minister that has the cheesiest and smuggest grin I've seen in many a year.

You couldn't make it up!

On the upside we are looking at seeing much more of Rachel Reeves as Keir let's her lose on the opposition. She's capable.

AiY(D)

[SalvorHardin]

As for these tax cuts, they are fairly modest in the grand scheme of things. Certainly nothing like the hatchet Thatcher took to tax rates in the 1980s. The media fuss is overblown.

Indeed. The tax cuts are nothing special. The hysteria over them is, however, quite something. I think that the the fairly poor response of the markets to Friday's budget, combined with infighting in the Conservative Party (fuelled by the ludicrously drawn out election for leader), and the delay in announcing the energy subsidy package caused by the Queen's death, has encouraged opponents (particularly remainers) to bash the government from all angles. A fairly poor performance by ministers doesn't give much confidence in the government which in turn leads to nervous markets.

Yesterday I saw comments yesterday from Crispin Odey (a very influential British hedge fund manager for those on TLF who don't know the name), where he said that much of the selling is driven by hedge funds run by remainers who saw an opportunity to bash Liz Truss and Kwazi Kwarteng. He, like you and I and several others on TLF, expects the pound to soon reach parity with the dollar and has held this opinion for long before last Friday's announcements:

"Mr Odey, arguably Britain’s best known hedge fund chief, told The Telegraph: “I never felt the kind of hate that Friday stirred up for a long time. “Amongst lots of friends of mine who are Remainers, they just decided that they hate this Government. Obviously Kwasi they hate now as well, and they think Liz Truss is useless. They can't stand poor Jacob Rees-Mogg.”"

"“The truth is that I didn’t do anything on Friday. I shot. I haven't put a trade on for the last two months. I didn’t need to. This was easy to see from miles away and didn't depend on Kwasi coming into government or anything else.”"

https://www.telegraph.co.uk/business/2022/09/27/remainers-blame-run-pound-claims-hedge-fund-tycoon-crispin-odey/

Earlier today, I took the huge level of doom and gloom on TLF (which increasingly resembles the comments threads of The Guardian) and several other sites as a mild buy indicator. So I put about £50,000 into the central London REITs when I saw that Derwent London's yield had increased to almost 4.4%. That said I've also been buying a bit of antique silver and ceramics (at least these look nice!).

If anyone is wondering where Liz Truss is, my guess is that she's on the way to Kyiv.