Sunday Supplement – 14/11/2021

Nov 14, 2021


Sunday and all is wobbly at the governmental level this week, so that’s where we start – seems to be on the mind of a few I’ve spoken to. Equilibrium is not where things are at. It is a strange but predictable phenomenon as a result of a majority government…..the press absolutely tucked into various politicians, particularly Matt Hancock over the past couple of years, with points raised around the favours done for his ex-neighbour/publican friend and a £30m covid contract. It didn’t bite on a polling level in a meaningful way however, and indeed the photos of the affair was instead the end for his ministerial career (although, stranger comebacks have happened).

However the general public have finally, as a whole, woken up to what many commentators (and I’m not talking about people against Boris’ ideology – far from it, to be honest) have said ever since he was Mayor of London. Boris Johnson: The Irresistible Rise was a documentary I’ve watched in the past, first released 2013 (I only saw it during the lockdown, and watched with a cross of complete amusement, bemusement and horror) – not available on iPlayer at the moment but it is around on YouTube if you search hard enough. What remains in my memory is what his own family were quite willing to say about him – I guess because the second Mayoral term had already started they were quite happy to be quite truthful even if it didn’t put him in the most ideal light…….worth a watch if you are remotely interested in politics.

That’s Boris as an individual – and he is most definitely that. Limited or no respect for various institutions and the rules in general. Perhaps not ideal for a Prime Minister – on the other hand, perhaps absolutely ideal – or ideal on specific occasions. At a very simple level, I was always on the side that Donald Trump was likely, on balance, to be good for world peace – even an utter lunatic in charge of nuclear missiles or other long-range weaponry would realise that Trump would not hesitate to retaliate in a completely disproportionate way if you were to attack him/the US under his watch. There was, of course, a probability that was far too large that he himself would want to press that button……and that mutually assured destruction probability was too high for many to bear. It’s not really when you want to be praying for the “most likely scenario” to come through because some of the others are so damaging – but it did give me some comfort (even when he was around calling lunatic dictators “Rocketman” and similar…..).

Then you have the backdrop of the large majority government which I’ve referred to before. There are 2 outcomes after a large majority government, historically. The first is a slim win at the next election. The other is a reversal/hung parliament decision (the betting markets currently favour this one). Why? Like all of these phenomena I am sure it is of course multi-variate but the primary suggestion I’ve read and agree with is that there are a number of unpopular, ideological policies and examples of behaviour pushed through because there is power, and not enough accountability, and not enough listening to the people who put those people in those positions of power.

Economically this Conservative government, to me, looks very strong. I appreciate that with my proclivities of basically being obsessed with economics, I am likely to rate this more highly than Joe or Jane public. However, history dictates that the economy is always a large factor, alongside the health service, crime, and immigration. The one that has really crept up to the declared voters agenda during this parliament is, perhaps unsurprisingly, the environment as a major issue with voters now rating it a close third behind health and the economy, but on trend it looks set to be number 1 by the time we get to the next election.

Healthcare – well, we are in the strange position where this Government is making a fist of actually funding the NHS more than previous Conservative administrations have done – but then, with a backdrop of austerity, that’s not a massive achievement. On the flip side, the removal of NHS workers who do not accept the mandated vaccine by April next year may well reflect poorly on public opinion – I’ve seen plenty of double (treble?) vaccinated people voicing opinions that this isn’t the right way to deal with vaccine hesitancy.

I’m not convinced that Labour appear more responsible on the environment or more effective – although it is still difficult without making a large effort to satisfy yourself on many of their positions. Some of this is media driven, but some of this has to lay at the feet of Starmer.

However, what we’ve got here is a good old fashioned sleaze scandal. The last one that really captured imaginations was the expenses scandal (and that bit more at an individual level than a party level, because, largely, they were “all at it”). I heard an interesting argument around this the other day. The largest ever number since polling began of people who trust politicians is 24% i.e. fewer than 1 in 4. That’s as good as it gets. So when we hear “we can’t trust them” most are screaming “no kidding! I never did!”. This might well be an exercise in what people say in the now, rather than what they do – but only a fool wouldn’t listen to this week’s polling and not take action.

I’ve always maintained Boris’ exit will be every bit as meteoric as his rise to the top – those pulling the strings behind the scenes will not hesitate to execute him as soon as he doesn’t look like a surefire winner. In one way, that’s how politics works – in another way, his own lack of respect for the system and the rules will mean that those who do respect it will enjoy his demise, in my view. So – he doesn’t need to even lose – he just needs to look like he will lose (rather than looking like he might lose, which is where we are at today).

There’s a big difference between a poll and an election on the back of a campaign. In the past 15 years (perhaps, fair to say, since the demise of Campbell and Mandelson to be honest) the blue side have looked far more impressive from a detached perspective – the fun for me around election time is gauging whether they’ve missed the mark or not with the soundbites as these drive so much voting behaviour. “Oven-ready deal” seemed to work very well – “Strong and Stable” did not, for example.

So – the baby isn’t out with the bathwater, for me, just yet. Nowhere near, in reality. Does that mean the good old landlord is safe – because I’m sure you aren’t just reading this for interest! Well – despite my love of transparency, I can’t reveal the source on this one (otherwise they won’t talk to me again!) – but I’ve heard this week that the government “aren’t finished with landlords yet”. No doubt there is something in the locker to win some votes before the next election. We could spend quite a bit of energy on speculating over what that might be, and worry ourselves into oblivion – OR we could strengthen our resolve and our mindset and remember that every change will represent an opportunity.

I’ve said since June 2015 the message was very clear at the governmental level. Go big or go home. I’ve had many people angrily tell me that I can’t tell them how to run their portfolios. I’ve not tried to – I’ve made what I see as statements of fact, reading the writing I can see on the wall. Institutions are not scared of regulation – they like it. What they don’t like is random curve balls. Regulation means barriers to entry from an economic perspective – which leads to higher profits. It squashes cashflow and yield, but it actually increases total returns – I saw this represented in graphical format by the fantastic Allen Chilten of Patrizia who came to speak at our PIP London meeting this week; their activity in Germany last year was 10% of the residential property market there (yes, for real) – so their data quality (and their team of a dozen data scientists) needs to be respected of course.

My point remains the same – this is a business, the government want it to be a business – so get on the road to creating a business out of it if you haven’t already done, otherwise you, at very best, won’t be maximising returns – and at worst, will be forced out of the market when an unseen event does occur that shepherds you out with an exit below where you should have been. I buy properties like this in these situations all the time.

I have for some time been talking of nationwide regulation – we operate portfolios in Scotland and Wales so are trained and experienced with their different regulations and the (very fairly priced, I must say) nationwide schemes that actually also have some teeth unlike the pathetic local-authority run selective licensing schemes that are far too often not selective. SL actually works on a street-by-street level (this is evidenced) when it is used as intended – when taken on on a city-wide level it is an utter mess, with no oversight, and as usual – the ones who would have been compliant anyway are compliant, the rent goes up to make up for the unreasonable and unjustifiable cost of the licensing, and the bad landlords continue unreported and unaccountable. Will this be enough to win votes is likely the question that we need to ask. If spun in the right way – probably. However, further taxation pain should not be ruled out – not to make everyone lose sleep. The other point is how much political capital is garnered from the EPC C situation (back to the environmental point on voting importance) – this might be enough to tip the balance also, and I will reiterate that this could present the single greatest barrier to entry opportunity of all time for landlords. Rightly or wrongly – the entire business response to the climate situation is the number one wealth creation opportunity of the next two generations. Once you start framing the problem like that, you will understand a lot more of the proposed solutions, what’s already being done and what will be coming to the global market.

Anyway – with the “good news” out of the way there, onto one more subject that has been widely discussed here but needs revisiting. The chickens are home to roost – as advertised – with the US inflation number coming even a little above my expectations in at 6.2%. I’ve hammered home the point before – this wasn’t speculation, but simple mathematics. The rate of the journey has of course depended on the bounceback from Covid, further waves, variants, and consumer behaviour and expectations as always – and it also needs to be borne in mind, the US is in better shape to shake this off than the UK. It has held below target on average for some time and “one swallow doesn’t make a summer”. The point, though, is that this isn’t one swallow. From looking at all the measures that have been wheeled out, trimmed means, inflation without shelter, food and transport costs, and dozens of other US metrics – the core is still very high indeed. Between 10 and 30 year highs, across the board, have been breached. We’ve discussed the “gamesmanship” in central banking that has occurred thus far, where they have to say it is transitory even if they don’t think it is. The language will have to shift a little to persuade some more people that this is under control (even if it isn’t). There’s also an interesting wrinkle you might not be aware of because the chairship of the Federal Reserve is up for re-appointment (or not) in 2022, and the main candidate who isn’t Jerome Powell is considering more dovish i.e. will be less likely to raise rates and will have a more liberal attitude towards QE and tapering (although that’s all scheduled to be done and dusted by the middle of next year, but let’s see…..). This has lowered longer-term rate expectations, before the inflation number then put them back up because something will have to be done.

Anyway – the point is the slack in the system. What the US didn’t have to deal with that the UK did was a significant referendum in 2016. This took up some of our inflation slack that existed as inflation went towards 4%, primarily thanks to exchange rate market reactions to the result in a country that imports so much of its goods. The UK tends to “run hotter” than the US anyway with a higher inflation number (the long term currency weakness from the old days where sterling was the global reserve currency is one reason for this). However, even with 4.5% expected this month and 5% expected in Spring next year (as an aside….why? Because things had not yet taken off in early 2021, and because there are many markets where the Bank realises from talking to businesses that their price rises in January 2022 to start a new calendar year will be significant, because of the strong rise in input prices, the 6.6% increase in the minimum wage that will be coming in April, and the desire to maintain margins) – we are not expecting to go to where the US already has.

A lot of this can be put back to the pandemic response. It was a terrible time to change regimes, especially from one polar opposite to another. We were lucky to have the election when we did with no idea of the pandemic in December 2019 – we were also lucky to have a meaningful majority, despite the analysis in the first half of this week’s supplement! Bringing together a number of threads, I’ve spoken at length as to why furlough was a magnificent policy, and many of the pandemic response policies were highly economically sensible. The stamp holiday we could have done without, but there you go – it did not affect receipts considerably which is another aside as to the efficiency (or not) of using transaction taxes within markets. I could on the other hand have driven a truck through the US pandemic response, and the decentralized nature of the 50 states was a disadvantage compared to our central vs local government responsibilities.

This is now being manifested in GDP figures, and inflation figures. However, the 2 stock markets have also had relatively different responses – with US equities looking “reassuringly expensive” (although it definitely is not reassuring me), versus a FTSE that the world is looking at, at the moment, as relatively fair value. This will also serve us well over the next couple of years, in my view – and one more reminder……the market can stay irrational longer than you can stay solvent – and to disambiguate that further, from the same horse’s mouth (John Maynard Keynes) – in the long run, we are all dead.

We are not yet at the point where we are looking at inflation that will have anything but a positive impact for the landlord. Not ideal if you have a gigantic development underway – granted – and sensitivity analysis remains absolutely key when looking at big projects at the moment. Rents have raced forwards (rents on new tenancies, anyway) this year and there is still a lot of affordability headroom (and, indeed, even affordability headroom in London which has been missing for the past 5-6 years). Capital growth still looks likely under current supply constraints to outstrip rental growth, but the next few years see a relatively bright future on investment performance, in my view, on UK residential – and I will be sensibly acquiring accordingly. The inflation scenario can change, and economic mis-steps (the Treasury has not been perfect to be clear, but they’d get a solid 8.5/10 from me, versus other Governmental issues such as leadership and governance, where they’d get a 2/10) can change things – but there looks to be a solid helm at the tiller and thankfully Boris’ love of high level statements and deputizing/trusting the right people to do their jobs should serve us well until the regime change that will descend suddenly and brutally, as I’ve alluded to above. Personally I’d keep Rishi at the cost of having a Boris, but as I accept, I would be over-weighting the economy at the expense of some of the other voting factors mentioned.

More next week, when we will have some ONS stats and further central banking conversations to have, amongst other things………have a good week!