Heroes: Sold! 

 

‘Career opportunities, the ones that never knock 

Every job they offer you is to keep you out the dock’ 

 

‘Heroes’ is back, refreshed and ready to question everything. One of the benefits of laying on a deckchair is the time it provides for reflection. Thatcherism has dominated UK politics since 1979, even the Blair years owed much to her thinking. 

 
Thatcherism was based on the doctrine of free-markets, markets know best. It’s now clear that they don’t; free-market thinking is leading to the failure of capitalism. Why? Because it no longer serves the people; the way capitalism functions today it serves only to exacerbate the wealth gap. 

As a result it concentrates not only wealth, but power in the hands of the few. This is true of corporates as well as individuals. Ever wonder why there isn’t a UK version of big-tech? Why are our prestige brand motor manufacturers owned by German firms? We look down our noses at designers and luxury goods but they have made Bernard Arnault the richest man in the world. 

The City no longer has the depth of capital to create world-leading firms, and is dominated by short-termism. Government policy has allowed firms to be swallowed by overseas predators as a sign that ‘we are open for business’. 

The wealth gap ensures that, in virtually all instances, children born to ‘poorer ‘ families stay that way. It isn’t a lack of drive or desire, it is a lack of education and opportunity. 
 

‘in virtually all instances, children born to ‘poorer ‘ families stay that way’

 
One of Thatcherism key policies was privatisation. For some businesses, such as BT and British Airways this helped them grow, but for the key utilities, energy and water, it has been nothing short of disastrous. They ceased to be run for consumers, and became cash-cows for predatory investors, with a short-term focus of maximising their return on equity. 

The basic issue with the strategy was the way that Tory privatisers of the 1980s- 90s bought the ideological line of the influential free marketeer Milton Friedman, that the social responsibility of businesses is to maximise profit. It is a principle only mildly qualified in British company law, in which directors must have no more than ‘regard’ for the interests of workers, customers, society and the environment, because the overriding interest is that of the shareholder. There was nothing in-place to ensure that privatised utilities would put their social purpose first, other than a regulator to try and ensure that, in the absence of competition, price increases would not be excessive. 

The entire infrastructure of wastewater collection and treatment in Kent, including tens of thousands of kilometres of sewers, is controlled by the Australian asset manager Macquarie. These are these pipes of Southern Water, who is regularly criticised for noxious discharges into the sea. 

Whilst Thames Water was under Macquarie’s control it was criticised for underinvesting and for poisoning rivers with untreated sewage as it extracted billions in dividends while the company’s debt soared. In 2018, Ofwat, the UK industry regulator, lost patience and fined it a record £120m. But Macquarie had exited the company the previous year, leaving others to carry the can.     

Macquarie is just one a number of asset-managers who increasingly own and control our most essential physical systems. Collectively they earn substantial fees from these global housing and infrastructure assets; currently the manage C.$4tn of assets. Their business model squeezes profits out of the infrastructure they own by cutting costs to the bone and maximising the income the holdings generate.       

For the English water industry this model has been little short of catastrophic, the investors have stripped out all the cash, loaded-up on debt, and then expect the government and consumers to bail them out. Renationalising the industry is the obvious solution, but the Tories are ideologically opposed to it, and Labour doesn’t want to upset global capital. US investment firms own nearly 17% of English water. 
 

‘investors have stripped out all the cash, loaded-up on debt, and then expect the government and consumers to bail them out’

 
It isn’t just water that has fallen victim to asset managers; in Kent, the US firm Blackstone owns rental properties; Canada’s PSP Investments owns rolling stock; Luxembourg’s Cube Infrastructure Managers has a broadband network. Between 2010 and 2015 more than 1,000 infrastructure deals were completed in the UK, more than in the next 10 European countries combined. Hospitals, farmland, green energy: no sector is safe. Swedish schoolteachers’ retirement savings built and now maintain 24 Scottish schools. (1) 

Whilst I was on holiday, the government announced it was on standby to take Thames Water – our biggest water company, serving 15 million people – into ‘special administration’ as its £15bn of debt threatens to overwhelm it and its CEO resigned.  

Macquarie bought  the business in 2006, as part of a the consortium domiciled in low-tax Luxembourg. They and their co-investors made their position clear from the start, hiking dividends in the first year of their operations, 2007, to £656m when profits were a mere £241m. 

Over their 11 years of control, Macquarie and its co-investors paid out £2.8bn to shareholders, represents 40% of the total £7bn in dividends that Thames Water has paid between 1990 and 2022. The average yearly dividends paid during the Macquarie period were five times higher than those paid after it sold its final stake in 2017.  

As a result Thames debts increased to £8bn, with interest payments offsetting profit, meaning that it paid no tax in 2012 even while it paid £279.5m of dividends. At the same time it was granted an infrastructure guarantee on £4bn of extra debt to build the new Tideway sewage tunnel, with no reference to how it managed or organised its tax affairs. 

In 2017 Macquarie sold out, at the same time a report found that at the then current rates of investment it would take Thames 357 years to renew its pipe network. 
 

‘it would take Thames 357 years to renew its pipe network’ 

 
The consortium that took over ownership of Thames Water has not taken a dividend since, but the company has paid internal dividends – including £37m in the year to 31 March 2022. 

When she last week, Thames CEO Sarah Bentley told the BBC that Thames had been ‘hollowed out by decades of under-investment’.  

Another tenet of Thatcherism was homeownership, driven by ‘right-to-buy’ that enabled council house tenants to buy their homes as discount of up to 60% on the open-market value. This led to Britian being described as a property owning democracy, and tied our economic fortunes to property values. 

Post the GFC property prices rose by an average of 86% across the country. As a result, in England in 2021, this meant that the price to earnings multiple for prospective buyers was C.9x. To ‘help’, lenders stretched earning multiples from the previous 3x to 5, and sometimes 5.5x. This worked with the extended period of zero-interest rates post 2008, but with base rate rising from 0.5% to 5% borrowers are having to contend with rapidly increasing mortgage costs.   
 

‘BOE’s latest interest rate hike would see 1.2 million U.K. households (4% of households nationwide) run out of savings by the end of the year’

 
Research by the National Institute of Economic and Social Research, a leading independent think tank, estimated that the BOE’s latest interest rate hike would see 1.2 million U.K. households (4% of households nationwide) run out of savings by the end of the year because of higher mortgage repayments. 

That would take the proportion of insolvent households to nearly 30% (roughly 7.8 million), the NIESR said last week, with the largest impact set to be incurred in Wales and the northeast of England. 

‘The rise in interest rates to 5% will push millions of households with mortgages towards the brink of insolvency,’ said Max Mosley, an economist at the NIESR. ‘No lender would expect a household to withstand a shock of this magnitude, so the government shouldn’t either.’ 

There is a somewhat disconcerting parallel with this and what happened in the US mortgage market in the lead-up to 2008.  

In the US low interest rates led to the creation of a property bubble as the number of homes sold increased dramatically starting in 2002. At the time, the rate on a 30-year fixed-rate mortgage was at the lowest level seen in nearly 40 years. 

One of the mortgage products used to entice borrowers was adjustable-rate mortgages (ARMs). A mortgage that was initially affordable, but borrowers would then face substantial payment increases in 3, 5, or 7-yrs time.  

The theory was that come adjustment date borrowers would be able to refinance as property prices continued to increase in value. They didn’t; leaving borrowers with the untenable combination of a much higher mortgage payment, and falling equity in their property. 

For differing reasons this is what we are beginning to see today. 

In the US the host of repossessions led to the failure of many lenders, which is why yesterdays comments from the BoE intrigue me. 
 

‘The ‘mortgage timebomb’ is yet to be fully felt’

 
BoEz governor, Andrew Bailey, said our banks have sufficient loss-absorbing capital to keep lending to households and businesses even in a ‘severe stress scenario‘. 

The stress tests were based on a projected stressed base rate of 6% (these tests were designed last September). 

The ‘mortgage timebomb’ – the effect of borrowers gradually coming off fixed-rate deals – is yet to be fully felt; only half of mortgage accounts (about 4.5m) have yet to suffer increases in payments after rates started to rise in late 2021. A typical mortgage holder coming off a fixed-rate deal in the next six months will see higher monthly payments of £220. And almost 1m homeowners can expect to pay £500 more a month to cover mortgage payments by the end of 2026. 
 

‘capitalism no longer serves the people; the way capitalism functions today it serves only to exacerbate the wealth gap.’

 
The Bank says the overall mortgage debt-servicing burden will still be below peaks recorded during the 2007–08 global financial crisis and the early 1990s recession. This is completely misleading as it is referring to aggregated figures that include unmortgaged households.  

For renters, the situation looks worse and buy-to-let landlords contemplate reducing profits, which will inevitably translate in many cases to attempts to hike up rents. Here the Bank used a statistic related to interest coverage ratios (ICRs), a measure of rental income relative to interest payments: if landlords were to absorb higher mortgage costs themselves (in other words, keep the rent unchanged), the share of buy-to-let mortgages with ICRs below 125% would increase from 3% at the end of 2022 to just over 40% by the end of 2025. 

The big question as we look towards an election is how will the Tories seek to handle an economic mess that is the result of their own policies. 

The big fear is yet more austerity. 

Most economic forecasters expect inflation will fall back closer to 4-5% by the end of this year, before dropping near 2% by the end of 2024. That is still consistently higher than the Bank’s 2% target rate but there is more danger in rushing to hit that target over the short-term than taking a more flexible approach. 

Whilst there are supply-side factors such as the labour market, where Brexit and underinvestment in healthcare, skills and training are adding to the inflationary impetus. With near-record job vacancies unfilled, companies are putting up wages. 

Despite this, these supply-side issues are still a poor excuse for tighter fiscal and monetary policy to crush demand. 
 

‘these supply-side issues are still a poor excuse for tighter fiscal and monetary policy to crush demand’

 
The Bank has freely acknowledged in the past it is powerless to address these supply-side problems. For the government, there can be no good to come from further restraint in public sector pay, when the NHS and other public services are already at breaking point. In the face of persistent inflationary pressures, the focus should be on bolstering the productive capacity of the economy, not dismantling it. 

I started this piece by saying that ‘capitalism no longer serves the people; the way capitalism functions today it serves only to exacerbate the wealth gap.’ 

It would seem that even the super-rich are beginning to understand this. At an investment conference organised by Spear’s wealth management magazine, progressive advisers said that there was a ‘real risk of actual insurrection‘ and ‘civil disruption‘ if the wealth gap continued to widen as a result of energy and food price hikes hitting squeezed households. 

Julia Davies, a founding member of Patriotic Millionaires UK, a group of super-rich people calling for the introduction of a wealth tax, warned that global poverty and the climate emergency were going to get ‘so much worse‘ unless the wealthy did more to help poorer citizens. 

‘Everyone can say it is somebody else’s responsibility. But it is the wealthiest in society who are the people who can actually really do something about it. 

I very much doubt Sunak was listening! 

‘Choke on your lies 

Swallow up your greed 

Suffer all alone in your misery’ 

Notes: 

1. ‘Our Lives in Their Portfolios’ by Prof Christophers 

 
We’re very happy to welcome Philip back, and he’s come out all guns blazing; some very familiar topics, but presented after two weeks of budgie smuggler-clad contemplation.

Inequality has been a long running theme, but has there ever been quite such a yawning chasm between the haves and the have-nots?

For the avoidance of any doubt, Robert Jenrick cemented the Tories at the top of the nastiest party table, by sucking the welcome out of a ‘welcome’ centre for lone children asylum seekers; the man who burgled £45m from one of the poorest boroughs in the country by tipping off Lord Beaverbook about a tax avoidance opportunity, has apparently plumbed new depths. But then remember who his guv’nor is.

So, what was he thinking?

This week, after 2-weeks of reflection I have considered Thatcherism and free-market economics. 

Our idea of free-markets seems at odds with for example the US. They have a more pragmatic approach, whereas we are submerged in dogma. In addition, their society is far more meritocratic while we suffer the age-old problem of nepotism and, more recently, cronyism.

As a result their economy and capital markets are far more dynamic, whereas ours is moribund and backward looking. Sums up the two countries really.

With the Tory’s looking increasingly frantic they have returned to their old friend racism immigration.

The so-called Red Wall Tory MPs are demanding that the government slashes the number of overseas care workers, foreign students and refugees allowed into the UK in time for the next election. To support this they have issued a 12-point plan to cut net migration to Britain from 606,000 to 226,000 before the end of 2024.

One red wall source said that Tory MPs in the north of England had been “hammered on the doorsteps” over immigration. “We promised a lot in 2019 about taking back control of our borders and time is ticking.”

The proposal includes stopping graduating overseas students from staying on in the UK for up to 2- years to find work and extending the closure of the student dependent route that allows a student’s family members to access the jobs market. These two measures could cut LTIM by 125,000, the report claims.

Also they are advocating only allowing in skilled workers who earn £38,000 a year or more. This could reduce long-term inward migration by 54,000 people a year, they claim.

Ever quick off the mark, Robert Jenrick, the immigration minister, ordered staff at an asylum seeker reception centre for children to black out Mickey Mouse and Winnie-the-Pooh murals. Staff at the Kent intake unit resisted, but Jenrick was reportedly adamant, to make clear, he said, that this was a “law enforcement environment” and “not a welcome centre”, doggedly mimicking his boss, Suella Braverman.

Hopefully Jenrick and the red wall MPs will shortly be unemployed. If so, Jenrick could audition for the child-catcher in “Chitty Chitty, Bang, Bang”.

“Here we are children, come and get your lollipops, lollipops, come along my little ones”.

Lyrically, we start with “Career Opportunities” by the Clash, and play out with “Lies Greed Misery” by Linkin Park. Enjoy!

@coldwarsteve
 

 

Philip Gilbert is a city-based corporate financier, and former investment banker.

Philip is a great believer in meritocracy, and in the belief that if you want something enough you can make it happen. These beliefs were formed in his formative years, of the late 1970s and 80s

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