Sunday Supplement 27/09/2020

Sep 27, 2020

The Sunday supplement comes round again!

An interesting week which has seen some steps forward and some back, in my view.

First up has to be a discussion of the chancellor’s efforts this week – we’ve of course heard from the PM, and the scientists, but will spend more time on the chancellor.

Extension of the bounceback loan payback period seems to be a wise understanding that starting significant repayments early next year simply isn’t going to work. The whole thing is rooted in the government view that 6 months (at least) is needed of semi-lockdown to stave off the virus. That cashflow boost will help businesses but not today.

The furlough modifications announced have been received quite poorly, especially in the city, and you can understand why. It isn’t as good as the status quo and it is also better than doing nothing, but it won’t preserve a ton of jobs without yet more stimulus I don’t think. Here’s where it leaves an employer.

Let’s say you are in an industry which has seen demand collapse to 30% of its pre-covid levels.

If you bring back staff 1/3rd of the time, you will pay for that 1/3rd. The remaining 2/3 is split between the employer, the employee and the government. So the government pays 2/9ths of the normal wage, the employee loses 2/9ths and the employer pays 5/9ths. So labour costs 66% more than it does if the employer hires a new hire.

That doesn’t seem ideal, and with the doommongering that’s been going on, many will look into this I’m sure. I believe it smooths out the cliff edge of October 31st but by how much I am not sure. Of course any major redundancy consults had already happened or are at least underway so we will hear quickly. Job news has overall been much quieter in the past few weeks.

The 6 month forecast for the winter, effectively, leaves the stamp duty holiday in even more doubt. Extension is the current name of the game and I can see the BBLs further extended and recapitalised again and again over the next couple of decades if even remotely viable to do so. There’s been chatter already about this being treated as a war debt which means a 50+ year repayment period.

This all cements a view that has been forming for me over the past couple of weeks. The government policy is thus:

Ultra-low interest rates for years to come. 5 years has already been stated but let’s just say it will be longer than that. Saving is dead.

Get some inflation into the economy. Stimulus helps when it gets into the hands of the people. Find ways to do this that ideally create and/or maintain jobs. Not easy and billions has already been wasted (although – there would always be some inefficiencies in such a massive project so better put in percentage terms, being as fair as possible).Allow inflation to rise above the target 2% for a period to help inflate away some of this debt. Depart for a time from the traditional methods of controlling inflation by raising the interest rate. Risky! If the underlying economy isn’t strong this could be as damaging as austerity and create further pain for those less fortunate. It also means a big bill in pension rises (under the status quo ruling anyway…..)I’d see this more as a “current working strategy” than set in stone at all. All of this is a reminder that things are volatile at the moment and plans could easily change.

There is a clear message though. Sensible gearing at historically low rates isn’t even a choice… is a must!! I feel for those surviving on what they thought in 2005 (say) was a handsome sum in the building society/Bank for their retirement years.

So how will inflation be controlled when it has spent long enough above 2%? Or kept a lid on if it takes off? Taxes. Everyone knows that this money needs to be paid back (although modern monetary theorists would disagree or reframe that) and so tax rises are expected and will be more palatable than normal. Tax rises help control inflation in a roaring economy. The problem is – with the inflation basically being at least somewhat generated by somewhat false pretences (stimulus) will this work in the same way that the textbooks say? Likely not. It should never be forgotten that economics is a) a comparatively young discipline and b) a social science, full of theory and observation, not hard facts. We will need to be on our guard!

As it is the last weekend of September it is also worth harking back to the Oxford claims from back in April and May that there was an 80% chance of a vaccine being available by September. It looks like we are in 20% territory but steps have been taken, with 6 covid vaccines in stage 3 trials. Cost wise it looks like a vaccine will cost under 2.50 a shot (marginal cost) and the likelihood is cheaper shots in poorer countries with the juice being regained/subsidised in the richer countries. Good news for those who are nervy of the anti-vaxxers spoiling the party and making a vaccine ineffective – it is suggested that between 30% and 60% of the population will need to immunise to get on top of Covid. That should be workable. The world can then maybe return to normal……although let’s not forget normal was pretty bonkers anyway!

Regarding the property market in the now and its volumes – it seems that stock levels are rising, reductions are rising and sales agreed are pulling back slightly. This is almost certainly different in different parts of the country. Some good analysis is to track how many new rightmove or zoopla listing there are in your target area every week or month. Supply and demand remains very important as it always will!

One final thought around debt pressure. It has been off for months and because it is an absence of pressure it largely is just not talked about at all. The 6 month kick of the can this week at the top level means there will be pressure on banks and lenders to do the same or similar. Will they? The mooted busy q4 for asset managers looks potentially quieter on the back of the news, but this won’t wait forever…..when will unemployment start to rise in a very worrying fashion, or will it not happen!! Timing and sentiment will be everything – keep calm, stay liquid, don’t overleverage and carry on!