Sunday Supplement – 31/01/2021

Jan 31, 2021

January 2021 won’t be fondly remembered in many memories. Probably the best thing about it is that there were 5 Sundays so that means 5 supplements!

However, this week has seen some interesting news and progress. Further vaccines, it is now difficult to keep track of the real information around all of them. I fear this means more opportunity for disinformation and spent some time listening to the radio yesterday (LBC) and there were some interesting interviews with community leaders who were doing their bit to fight misinformation. Happily they had lots of success stories. Lets hope for more.

I also can’t let the GME (gamestop) situation pass without comment. For those who haven’t heard, a group of traders who are only associated via a message board on the reddit platform have come together to perform the greatest “short squeeze” in history. They picked one stock (to start with) that so many short sellers were short on (I.e. they profit if, as and when, the price goes down), and bought it to hold (for a while anyway). Temporarily. That means the short sellers get huge margin calls to cover their losing trades and need to pump in huge volumes of cash. One hedge fund needed $2bn to stay afloat.

It’s great to watch from the sidelines and who doesn’t want the underdog to give wall street a bloody nose? But this is a dangerous game. Let’s concentrate on the fact that fundamentally, gamestop is a crap business. At some point this needs to unwind and when it does, there will be blood on the carpet. Yes the market can stay irrational longer than you can stay solvent. The hedgies are re-learning that lesson right now. However, fundamentals will get there in the end. This is not unwindable at this time.

Remember George Soros broke the bank of England? Some of these hedgies are some of the cleverest people on the planet. Once they work out how to manipulate or better r/wallstreetbets there will be a problem. But for the moment let’s enjoy it.

What we have this week is some more property news and data to work from. 2021 auctions have started and SDLs last Thursday of the month offers some info. There will be quite a lot more next week. I’d say SDL looked like further bad news for auction buyers and good news for sellers. We were agents on one lot that sold approx 20% above its current full value based on its condition. A lot we were interested in sold at 20% above our maximum. Several of the opening lots sold above their refurbed end value, even though they need refurbs (not uncommon with the first lots in a catalogue). I didn’t see a bargain although I haven’t been back and scrutinised. Arguably Andy Parker has perfected the art of the online auction, talking many lots up above their value in current condition, so perhaps that is also a factor. But auction, as the fastest moving part of the market from a data at size perspective, is not showing us a market slowdown just yet.

Of course all of those lots will complete before 31st March, although very few have a significant SDLT bill as SDL tend to sell cheaper stock. The 3% additional will be the major SDLT there. But sometimes it is more perception than reality.

One more important thought this week is around the longer term. Any long-term cycle will have constraints and challenges. Before the covid clear-out and stimulus we were “overdue” a recession. My argument for years has been that we had an extended business cycle due to low growth, dragged down by austerity, and also couched by very low interest rates. In the US where they had a lot less austere approach, their growth figures were much better but they didn’t get too far with raising rates even in the face of a stronger economy. And they were also struggling to hit the growth figures they used to hit pre-08.

We now have even lower rates and for much much longer to come. It is very difficult – without a seismic, systemic shock – to imagine interest rates moving very far at all within the next 3 years. 5 years. Even 10 years. This suggests even flatter returns, and continues the wealth transfer between the savers and the borrowers. Saving to keep the head above water and get real returns (or even nominal returns) is a thing of the past. You now can only save for emergencies, and/or use savings as risk capital to try and get returns above inflation I.e. speculate with them somewhat.

Then throw in inflation. The UK has seen very little over the last 10 years. A lot of what we have seen was referendum related and came from our currency devaluing and the amount of goods that we import getting more expensive. I expected significant disruption at this point but there really wasn’t much. At that point in time UK PLC would not have wanted inflation much. It was an enemy, and an annoyance.

Fast forward to 2021. Not so right now. Inflation has a strategic benefit. All the press is about the % of GDP that the debt represents. As always, focusing on one metric is folly. What about the cost to service that debt? It is a fraction of what it was several years ago.

What does that mean? It means government will want interest rates to stay low. It also means borrowing to fund projects that have positive net present values – such as intelligent infrastructure investment – is the right thing to do. Governments aren’t people and debt doesn’t work the same way – but a simple investment analogy would be to borrow 100k to develop a property that will put 150k-200k+ on the value of that property. That’s a sensible thing to do and it creates value. At the government level – spending that improves the economy means higher tax revenues in the future. Payback. Sensible governance.

And back to inflation. Is inflation the enemy right now? Well no. It is our friend. Govt will want debt under 90% of GDP again ASAP. 2 approaches – 1) grow GDP 2) shrink debt. Any ways to shrink debt without actually paying it back? Well, yes – inflation.

If the GDP is 2 trillion p.a. and the economy inflates by 10%, it hits 2.2 trillion. If it owes 2 trillion, after the inflation it still owes 2 trillion (this is vastly oversimplified). However, 200 billion of headroom has been created simply by inflation.

So – we now have a government that actively wants inflation. Above the bank of England 2% target. And the bank have said they will allow inflation above that target to persist for “a time”.

If you put together a real rate of return of 0% from government bonds with a 3% inflation rate, the money under the mattress loses 3% of its value each year. The real return is -3%. That puts everyone behind to start with. The first 3% of returns from taking risks just gets salted away by inflation. So EVERYONE pays the bill before even considering tax rises. This is the stealthiest tax of all – and in my view, this is economic reality once the lockdowns are no more.

Forget the great resets – this is soundbite stuff. It is more of the same. There’s historical precedent for all of this and I’ll be surprised if there’s a different outcome from the one laid out above.

So what? (I hear you cry). The so what is that you need solid risk assets that produce equity/stock market style returns with limited/bond style volatility. Where do you get that? In property.

This alone is a reason why residential property has an amazing decade ahead of it. The institutions were already onto this before Covid – after it I expect a massive uptake in private investment in housing.

The 2020s will be remembered for several things, when we get some time last the end of the decade. A significant up-market in property will, in my view, be one of them.