Sunday Supplement – 25/07/2021

Jul 25, 2021

Welcome everyone to the last supplement of July, unbelievably! I’m going to make no apologies this week for going into Covid numbers and analysis, once more, and the potential economic consequences and a scenario which I think has a material probability of playing out.

One of the ways that my brain tends to work is it tends to go very long term. Too long term, without a doubt. I had an interview once, many years ago, to be a strategic consultant and made the partner laugh because at the beginning of one of my answers to the question asked, I talked about what would likely be happening in 40 years time. I did temper this by pointing out that shareholders (and thus consultants) would not care about 40 years time – but the point is, that’s where my mind went immediately before I drew it back to the shorter term.

So, I’ve been in my element in the last 18 months or so – a very dynamic environment (many years ago, I ran a betting syndicate, and the level of change management required in such an environment is incredible, exhilarating, and exhausting at the same time – for me, it could never have been a long term proposition), the long term being extremely uncertain, but the music (in terms of financial markets, property markets etc.) barely pausing and certainly not stopping. What does this mean? There’s more guesswork going on right now than ever before.

There’s also more data. Way more data. But the skill is always finding the trustworthy data, and then interpreting it in the right way. A lot of it can almost be ignored! Which all brings me back around to Covid.

I’m only one person – so I can change my mind, angles, approaches etc. very quickly – the benefit of my background – but this is why the long term is very important to me. I got into property because I wanted stability, and a career/interest(/obsession?) for the long run. This is also why I’ve historically operated at the lower risk end of the market i.e. single family homes.

The pandemic has changed so much, so quickly. There has been talk this week in recognition of the recession that DID emerge in 2020 (long forgotten it seems, with limited wreckage caused compared to say 2008-9 or 1990-91) which from a technical perspective lasted 2 months in the USA, and longer in the UK. But GDP levels are nearly back to where they were (UK) or beyond them already (US). But what happens then?

With such a short cycle, compared to a typical recession which might be 9-18 months long, do we then have a short cycle on the upside? Will it be 2 years long rather than the typical 8-9-10 years? This is possible. There are so many potential things yet to come that it is difficult to gauge what is really likely versus some more wild and wonderful theories.

We also know now what we knew months ago, but more accurately are living through it. Case numbers are on the wax, other figures are lagging ominously behind, and deaths in the hundreds, daily, are on our doorstep again, sadly. The average forecast is suggesting these will be far more under control than earlier this year, and again the maths behind that looks solid – it will be very interesting where the cases do top out – and the extra protection against the delta variant offered by the Pfizer jab, looking at the data (3 times more protection against symptomatic covid, from latest studies, than AZ) means that a Pfizer shot for all those who’ve had AZ seems very likely indeed, in my opinion.

The finer points will play out without any of us being in control of them. There is much disquiet – and for good reasons – over civil liberties points. So far, the simple overview of that would be fairly characterised as:

Freedoms (that, on a global level, we are incredibly privileged to have) have been curtailed as we would never have imagined them to have been if we went back to new year’s day 2020

Provisions for significant civil liberties infringements and the framework to implement them have been in place since the coronavirus act in March 2020

What’s been enacted and enforced is a small percentage of what there has been scope to do/enact/enforce, from a legal perspective
The primary fear remains “scope creep” i.e. taking away freedoms or deemed freedoms on a more permanent basis after the pandemic truly is under control.

A much-used example of this is airport security post-911 for example. I wonder how many people feel about this. I never get upset by enhanced security, because I feel it is for the greater good. I also think I personally benefit from an enhanced approach, because I’m never going to be carrying anything I shouldn’t be (maybe the odd bottle of water in the bag by accident…..fair cop), whereas others might well be carrying things they shouldn’t be, and I want the probability of them being caught to be as high as possible of course!

The fallout from the pandemic is unlikely to be as clear from a cost-benefit perspective in my opinion; the classic argument against ID cards of any kind in the UK for example (and we are in the minority worldwide, very much, with this approach – although not when you consider the most liberal democracies, we are more “where you would expect us to be”) is about freedoms, but why would you be worried if you aren’t doing anything wrong (after all, that’s what I’ve just said above about airport security, right?). Not necessarily – the use of the data and historical uses and abuses of such data is the scary part. ID cards and similar have historic precedent in rounding up all sorts of people of faith, creed, colour, etc. and not for good reasons – let us just leave it at that. Vaccine passports come very close to ID cards and elicit a significant reaction from a decent slice of the population who are conscious of civil liberties violations worldwide in the past century or so.

The fragility around civil liberties and any freedom of choice that exists to take the vaccine, for example, has been a tightrope from the start. I’ve discussed the “nudge theory” side of it before. As I see the situation at a simplified level:
The ideal world would see everyone make an informed and intelligent decision, and this decision may well be different based on your age, gender, racial heritage, and co-morbidity factors. This is entirely unrealistic for the majority of the population due to time constraints, interest levels, and sources of reliable information in granular enough detail.

There are lots of people who are in the “I don’t want to vacinate” camp who are making those decisions based on misinformation and disruptive propaganda that comes from questionable sources internationally, or is propagated by them. That doesn’t mean they’ve come to the wrong conclusion, just that they’ve got there in the wrong way. The same applies to those who are willing to vaccinate, although their information is likely to be better, on balance, but still imperfect.
Some people are very very unlikely to have a bad reaction from the vaccine but also very unlikely to have a severe outcome from catching Covid. The difference is really quite marginal (the workable difference between say one in a million and one in ten thousand is not one that the average member of the public can process – very few people can really understand this at a useable level) and this is the case for a huge majority of those who remain unvaccinated – it is quite a hard decision with likely limited consequences either way!

People will act in their own best interests but also many have a strong sense of doing the right thing; nudge theory comes into play here because the government ideologically wants to be able to coerce people, but that is a bridge too far even in current times and so nudging them by all means necessary is definitely politically acceptable as far as they see it, so for the moment that is what they will do (including vaccine passports for nightclubs etc.)

First doses have now slowed down to a number that looks more like the daily case numbers at the moment. However, something else interesting has happened in the past 4 days – case numbers have also started dropping in the UK. There is a very clear reason as to why that would happen, of course; school holidays. What this means is a pause on the testing from symptomatic children at schools but also asymptomatic testing, across schools and further education institutions. Having seen such a large number of children off school due to bubbles, self-isolation etc. and hearing numbers like 200,000, 500,000 etc. (not convinced the government ever knew the number at one time, of course), this would be expected in the summer holidays to drop numbers, initially, on a considerable level. The next 7 days will be critical, because the R number has been quite so high of late – and the strong likelihood is that cases will settle now the school holidays are in, and then start going up again from this lower base (the more accurate assessment would be “registered cases”, because of course, if you have fewer tests you will have fewer cases in general). Week on week from Friday the number of tests taken were down around 15%.

So, the likely path is still upwards towards the 100,000 cases daily and perhaps beyond. It would be lovely to think we have hit some kind of magic ceiling and herd immunity is here, but the timing is just too convenient.

So what? So, we are not yet far enough away from a long-lasting, mentally scarring lockdown to change our habits and behaviour, generally, just yet. Sure, we can be militant and determined to carry on – but the reality is, social experiences at this time are subdued in comparison to what they were. Add on the new habits formed – a 10% preference to stay at home rather than go out is massively damaging to the restaurant/hospitality business in general. Freedom day (ha ha) was merely 6 days ago.

This is the reality that I see emerging – in my view, the most likely scenario at this time. Over 50% likely. A continuance of lower marginal propensity to consume – for those who are not economists, a higher savings ratio of money coming into households every month – and a slower velocity of money. Disappointing economic tailwinds rather than the “great spend” forecasted by some economists/boosterists. Companies struggling with higher input costs, scarcity of labour and a percentage choosing to remain economically inactive for safety reasons or because they don’t “need” to go to work (or don’t want to) as much, in a pandemic (second or third income earner in a household, for example). Marginal differences there – some of them in the 1% department or below – but many pointing in the same direction.

So, I would be seeing revisions down in the GDP figure expected for 2021. A more drawn out recovery process before we get to steady state. No expectations here of normality before say April 2022, with tail risks just as last winter around a bad flu season. Lots of obvious reasons why people might be immuno-surpressed at the moment, and with mixing far more likely, even IF the vaccines do hold up against the deadlier variants, even IF there is a winter booster shot of the vaccine you haven’t had (particularly if you have had AZ, because of its lesser protection against severe Delta), the disappearance of flu (which, unlike those on the “heavy sceptical” side, seemed utterly unsurprising to me, simply because of the mathematics of the R number for flu vs Covid) which will of course reappear with people not locked down (I’m assuming no further lockdown, although at this time that is a 70% probability in my book, sorry to report); hefty chance of a bad flu outcome.

Overall, there will be a HUGE dependence on what happens to stimulus. Rishi’s job is as important as it has ever been. With no SDLT holiday boosting demand, and no furlough propping up the companies that have struggled, then the return of debt pressures will make a difference – although I see this being postponed beyond the winter, as it has been for commercial landlords. There is expectation of carrying on stimulus – and it may well be needed. But, given that largely at this level the decisions have been correct so far, and favoured households significantly above government, which is extremely rare – there is pressure on this record to be kept up, otherwise much of what has been done so well so far will potentially go to waste.

In short – I’ve turned more bearish than the current forecasts, and expect them now to be revised downwards, not upwards. I have spoken all year of likely wobbles, and this looks like the ingredients for the first possible big one. The stock market adjusted to this new reality this week, partially, and is in a typical summer sideways pattern at the moment anyway. All news is bad news, until post-summer.

In the meantime, the sensible move is to not make knee-jerk reactions, not overpay for stock, leverage sensibly at these low rates that are out there, and also to take a break over the summer because I’m sure we are all overdue one!

I will be watching with interest, and updating weekly of course, so watch this space…….