Sunday Supplement – 01/08/2021

by Aug 1, 2021

School holidays are now well underway and with that in mind, the supplement is going to go down a slightly different route for the month of August.

I’ve long been an advocate of August being the right month to put the work in to property simply because so many people don’t. The same goes for December. A few years back I seriously considered completely concentrating acquisition efforts in these two months alone; the reality is though that whilst there is some edge in these months, it isn’t large enough in itself to make it the cornerstone of a business/portfolio/acquisition strategy.

Then, of course, covid came along. Even before that, December 2019 was in itself highly anomalous because in “normal” political times there would never be an election in a December. But of course there was one and it was a bit of a snap one to boot. So, in summary, I’m pretty glad I haven’t done that. However I’m well aware of the lower desire for 5000 word treatises over the summer hols and with that in mind I want to do something a bit different.

That’s going to look like an individual look at a market trait, economic concept or business strategy. I’ve planned the next few posts but the topics are by no means set in stone – so please feel free to comment, message or get in touch if there’s anything you’d like to see discussed in some detail, with an attempt to look at both/all sides of the argument!

This week the concept I wanted to focus on is over-correction. I think this is really timely because there’s still lots of volatility around, and, in my view, this is going to be fairly persistent.

Covid has broken some markets altogether – you couldn’t count how many graphs we’ve all seen with the last 20, 50, or 100 years being completely marginalised by the volatility up and down of 2020 and beyond.

The tendency is for markets to overcorrect or overreact to news that is rare or difficult to price. The tendency is always there when markets are emotional rather than factual. The more there is uncertainty and volatility, the more the tendency to overcorrect and overreact.

Then, there are phenomena that make things even harder to understand. For example, no-one doing a reasonable amount of refurbishment work at the moment would have been able to escape either or both of the difficulties of rising materials prices in concert with genuine supply shortages. Lumber has been widely discussed worldwide because, while important in the UK construction market it is absolutely integral to the US construction market. The commodity price is one thing – but the impact on the retail price or the trade counters has a lag. This is reasonable when you think about it – order lumber for next month (or next quarter) to make sure your shelves are full (or at least not empty…..) – so watching the lumber price will only give you an idea of what the price might be to you in, say, 2 months time.

Then, consider logistics. The price of oil has a significant impact on anything of significant weight and comparatively low value per ton – a ton of diamonds would not be adversely impacted by the oil price in a significant way, but a ton of lumber would be.

THEN bear in mind the retailers will often be faster to raise prices than they are to drop them. The higher input price doesn’t guarantee more margin – indeed it is often the other way around. I pointed out last year how supermarkets would likely increase turnover but make less profit in the pandemic – and that’s exactly what happened. These guys don’t want volatility – it isn’t their friend, and nor is it ours unless you are employing strategies that will benefit from significant volatility generally. In their defence the retailers need to try and maintain their margins when they’ve paid the top price 2 months ago even if that price is now well below that blow-off top that has been reached.

I’m a big fan of the simple questions – e.g. so what? In this context I prefer cui bono….who benefits? Largely, no-one. But the supply chain disruption inevitably sees some profiteers (like those who bought up bags of plaster during the shortage last year and then ebayed them at hundreds of % markups) – just as in any war or disruptive situation, profiteers will always rear their heads. Those who did plan to produce more wood this year when a lot of the rest of the world was lowering production have also benefited of course. The very large businesses will likely have hedged via futures contracts however, and so won’t see that benefit anyway (the futures traders, or the successful ones anyway) and the market makers will benefit. Overall: pretty faceless and not helpful to 99.9% of us.

So why are we talking about this? Because this is one of hundreds if not thousands of overcorrections – and a much easier one to see. It gives us an insight into the forthcoming overcorrections that are also somewhat likely. It gets us thinking…..what happens if house prices do go down say 2-3% in relatively short order over a couple of months. With the reintroduction of the stamp duty this is highly likely and wouldn’t represent any kind of drop in the money needed to purchase a property (whether it be cash or mortgage) – just where the transaction monies are allocated (95-96% vendor, 1% lawyers, 1% agents, 2-3% HMRC rather than 98% vendor, 1% agent, 1% lawyers) – costs stay exactly the same but house prices fall.

2-3% might be considered material if it was fast…..which it will be of course because even with a taper, there are cliff edges.

And then it’s wise to re-examine the doomsday predictions of last year. We should split into two here. Firstly those who ply a living by writing books or let’s say “producing content”. The man himself – the rich dad, poor dad author Robert Kiyosaki fits well here.

Robert has a “daily express weather forecast” approach to the economy and economic predictions. He’s a self taught MBA dropout. If you look closely you’ll find a prediction of utter economic turmoil every few months for the last decade plus. Like the stopped clock, but correct less often than twice a day of course.

This is a value proposition. It gets headlines. It sells books/content. It keeps him relevant (to some). This is not to denigrate the rich dad poor dad story, which may well have influenced a few readers into thinking differently – but the concept needs to be divorced from the marketing, to say the least.

There’s plenty of kiyosaki copycats out there in crypto, forex, and every other field going. What you don’t see is transparency – and that’s what you never see because if there was a transparent record of projections and predictions, it would show that the predictor has no predictive skill whatsoever. Of course not, when you think about it…..they are one trick ponies, and shell and pea merchants. The business or economic equivalent of a medium (likely with less skills than an average one). Smoke and mirrors I’m afraid.

The others should be characterised as “unchecked pessimists”. Normally not very self aware and normally not very well researched either. They make two classic mistakes.

The first is that the next one will always be the biggest one we’ve ever seen. We have to be careful with “biggest”. Thanks to inflation alone every number tends to get bigger every year anyway. So if you have a mega crash once every 20, 30 or 70 years, the numbers will likely make it the biggest anyway thanks to that eighth wonder of the world – the compounding effect (of inflation rather than interest here, of course). Nominal stuff makes headlines but real stuff is what we are really interested in when trying to create and/or preserve wealth.

The second is that they tend to suffer from a large dose of recency bias. They remember 2008 and it was likely uncomfortable for a short or long while. Many lost businesses and some of that was thanks to unethical behaviour by banks etc. However it doesn’t take much economic history research to find out that the trigger is always different (of course it is – if you ascribed 2008’s root cause as a credit freeze/crunch – more a symptom than a cause, but it is how a lot of misinformed see it, and it has political relevance also) – we are back into the territory of overcorrection. What’s happened since 2008 and what happened last year in a big way? stimulus taps on full bore. Desperation to not let credit dry up.

Look out for both of those characters going forward whenever the headlines get particularly bearish. And the stopped clock theory still applies – very often people are right for the wrong reasons.

The effect at the moment of the keenness to not allow credit to dry up has been a transfer of wealth from the government (which is the people, of course) to the people. Net last year 500 billion was added to household balance sheets even when considering government borrowings. This comes from a massive reduction in consumption – government sponsored by scaring the living daylights out of the consumers, and cutting off certain channels for spending money like international travel – and also from the stimulus packages directly transferring government funds to businesses and individuals.

Overall, despite everything, looking solely through an economic lens – a good result so far. Or, digging a little deeper, good for the haves and not so good for the have nots.

So….the moral of the story is??? Don’t fall for the content sellers, don’t be swayed by the pessimists either…..listen carefully and think before you act – if you can get a piece of this overcorrection that I think has a fighting chance of happening later this year, I’d suspect you’ll be very pleased you did in 2-3 years time. Be prepared…….see you next week!