Sunday Supplement – 31/10/2021

by Oct 31, 2021

Spooky how quickly the year is going, isn’t it? OK, that’s the last bad joke until the next one. We hit the end of October at, well, the same pace as we always do, but whether it is one more year on the clock, or the pandemic pressures biting, or, realistically, a mixture of both, it certainly seems to have been record time from where I’m sitting.

The supplement this week will focus on the budget in a bit more detail, and I can’t write this week’s without passing comment on the Trillion Dollar Tesla on which I’ve read some very intelligent commentary this week, but have got some additional thoughts on, and also a bit of a foray further into the whole green/renewable/ESG/EPC economy that we are embroiled in, one way or another, and heavily exposed to as property investors.

The few days after the budget is interesting. There’s a race to get out some kind of commentary of course (I myself was part of that, this year, and got some good thoughts from both sides of the spectrum before the post descended into ideological arguments over who is the “better human being”). The better output is, once the dust has settled and you’ve read beyond what the headlines have highlighted, from the OBR (Office of Budget Responsibility) although there is a lot of mileage, as always, in reading across the spectrum.

One of the things you will note, if you are a keen reader, is that a number of the predictions I have made “in the now”/real time, are cemented in the report – which is good, but even a stopped clock is right twice a day. I’ve made plenty of mistakes in the last couple of years too!

The OBR have confirmed likely growth of 6.5% this year, far better than their March forecast (not a hard one to pick up on, it is unsurprising that after basically 5 months of lockdown that forecasts were pretty gloomy) – and also that unemployment is likely to peak at only 5.25%, lower than the most optimistic forecast last year, but as predicted here. This is pretty massive, putting £180+ billion on the figures predicted for next year (which is still predicted to run a massive deficit, by the way – so the debt gets worse before it gets better).

They’ve also forecast CPI inflation to hit 4.4% next year, which, all things taken into consideration, is likely within 0.5% of the “perfect number” right now – no-one is likely to come out and say that because markets would lose their marbles if the “it’s transitory” line was dropped as discussed several times before – reality dictates that a number between 3 and 4 per cent will keep government happy (and bond investors very unhappy indeed). I talked a little last week of my overall bearishness as it seems a case of WHEN rather than IF this penny drops, and the reaction when it does drop will be a downward move in the markets for sure.

There’s also an amount of the past 30 years of property capital growth that must be ascribed to the lower real interest rate – the trend has been to drop, but it is close to the nadir right now – base rate at 0.1%, inflation at 3.1%, real interest rate -3%. This continues to fuel capital growth (as does the supply shortage, often mentioned) and so this, if we head to -4% real rates which looks basically guaranteed at some point next year, without a major easing in supply, suggests a continued up-market over the next 6-9 months.

If we take a brief segue to look at Scotland, because they did the service of 1) not having anything like as significant a stamp duty break as England did, and 2) bringing it to an end over 6 months ago, at the end of March – we saw a slightly quieter/more sane Q2 although prices still moved upwards, but Q3 has raced away again – showing the limited effect that the stamp holiday was having. As I said – much more significant in England, but as discussed before, it has been used by too many as the obvious answer, possibly believing the media headlines a little too much – whereas the reality is that 90%+ of this hot market has not come from the SDLT holiday in England. Future research will bear that out, I am sure – time will tell.

So – I’m pleased that the OBR have caught up with what was happening in the now, this year. This is no criticism of them – they have a calendar and a schedule, and they stick to it. It is just that we need to operate in the now and that’s why “nowcasting” – using what is in front of us to make forecasts of what’s happening immediately, before we worry too much about the future – is key.

Overall GDP forecasts have also gone up. They are extremely bullish about next year, in a forecast which would leave us most likely better off than if there had been no pandemic at all. I can’t bring myself to agree with this, it just seems the bullish/bearish pendulum has swung, slowly, too far the other way. Let’s be clear – I think the investment part of the budget, in terms of levelling up (which does appear, finally, to be more than a soundbite), and infrastructure investment, is great news and brilliant business when the interest rate is so low and the money is not only free, but the government is being paid to borrow it thanks to inflation. Of course if all those bonds are bought by the Bank of England, then it starts to all look a bit silly, but there are still plenty of customers for Gilt Issues and until the penny drops, this is likely to continue.

Let’s recap – remember the hardest figures to accept about last year. For the first year in history, households were nearly a TRILLION pounds better off thanks to stimulus measures. This cost the government less than half a trillion in debt and stimulus monies. Overall, a net positive measure (this is purely in economic terms – to achieve this without the pandemic would truly have been genius, the pandemic instead offered the chance for the government “not to waste a good crisis”, as the saying goes. No argument about “paying for this in the future” really torpedoes this; we’ve had the money, we will be paying it back in small marginal chunks over time but realistically be better off as a country. That’s crazy, I know, but that’s what the data tells us.

We need to understand that to put into context the largest tax burden since the 1950s (that’s what’s coming, thanks to the freezing in allowances while inflation stealthily picks our collective pockets over the next 5 years) and the largest government spending as a percentage of GDP since the 1970s. The whole “big-state” Conservative government is one that many voters, I think, will “believe when they see it” but it is happening and it puts a squeeze on the Labour position as the days of small-state monetarism look on ice, for the moment, and Milton would be an unhappy bunny if alive today and living in the UK.

The OBR is actually forecasting a budget surplus in 2024-25. That’s one I will believe when I see it! The likely path of course is a spring/summer election in 2024 which sees tax cuts in the 2023 October budget if not before.

Spend on infrastructure will reach the people, one way or another. It is a MUCH more efficient way to stimulate the economy than quantitative easing – which is why I am very pleased to see it. However, we seem to be forgetting this is against a backdrop of limp growth post-financial crisis, and getting anywhere near 2.5% GDP growth per year, on average, over a decade once the pandemic is truly over, would be an incredible achievement, and is unlikely. We still haven’t solved the structural productivity issues – and we know that capital offers poor returns after a pandemic. This may of course stimulate MORE investment in order to drum up returns and because there are few other places for the money to go, although this is not textbook stuff and not the way that we would want that to happen. Higher costs of labour (6.6% rise in the minimum wage, more than double inflation) do mean there will be ever more pressures on smaller businesses and ever more incentive for large businesses to invest in machinery/people replacement as a whole – we will surely see the £10 minimum wage before the next election in order to disrupt the centre ground floating voters and the workers who might well see themselves become better off, and ascribe that to the ruling party (rather than the inevitable consequence of the pandemic).

So you can put it into context – the Chancellor was operating with £50bn more money than he was forecast to be back in March – and of that £50bn, £30bn is being spent on the NHS and NOT CUTTING government departmental spending (so, reversing austerity pre-planned cuts, basically) – the other £20bn means we will be borrowing £20bn less than we thought we would be. Sounds fairly prudent, when framed in that way.

So – why am I bearish? Well, other than the incoming stock and bond market freight train (as discussed, this train may only just be leaving the station, so don’t take cover just yet), tax as a rule is a suppressor of growth. It is one of the few economic facts that is often quoted that is well supported by the data. A bit of me still believes, if the next election goes the Blue way, that the corporation tax rise will be cut again some time during the next parliament, citing lower tax receipts.

Before concluding the budget extended output summary, I thought I would just mention housing! 180,000 affordable homes in a £24bn programme which has had an extra £11.5bn allocated to build these homes. Quick calculation – that’s £63,888.88 build costs per property. Either that tells you the sorts of “houses” they will be building, OR there will be a huge overspend, or they will miss this target. The bigger picture of course is that now the ever-ballooning number of new houses we need – 345,000 a year is the new number, will not have a huge dent put in it by 180,000 houses over “several” years. It might pick up the 45,000 bit but of course by the end of this programme, being 100,000+ per year short (which we will be) will see that target move up to 400,000+. That’s not a difficult prediction to make.

So, for me the budget was overall good news that I knew was coming, although it manifested itself in ways that didn’t directly benefit me (apart from the business rates cut!) – these days, it is good enough not to be massively disadvantaged by the budget, which tells you how property investors feel after the past 5-6 years of barrage…….still, nationwide licensing and section 21 repeals are coming soon, so let’s not get too comfortable!

Onto Tesla and the trillion dollar market cap. Not massive, any more, thanks to Microsoft taking the number one spot again and hitting $2.5 trillion this week (yikes) They are only $10bn or $20bn ahead of Apple – pocket change, in this space, of course. Still, Elon holds enough shares for that to make him the richest man in the world – he truly has channeled the inner Grant Cardone as his net worth is up 10x from pre-pandemic levels – the poor man was scratching around with only $26bn to his name in March 2020, and now he sits at $260bn thanks to the market moves.

So, how crackers is this? Crackers. Spoiler alert. This is ridiculous. A snapshot of some of the analysis I have read. Tesla now takes up basically half of the market cap of all auto manufacturers (or all significant, listed ones). Half of it. There’s very little room to grow. The comparison was made this week to the legendary Cisco share price in 1999 – and when that one is wheeled out, you know there is trouble! At a point in ‘99, Cisco’s multiples suggested that within 50 years it would be larger than the entire US economy. That is, of course, mathematically impossible and tells you how ridiculous share prices can be sometimes. It doesn’t mean that those who knew this could profit from it – they may well have lost their shirts shorting that stock long before that moment.

Worse, in a way, is the massive growth in the market cap of all car manufacturers pre-pandemic. Yep – everyone needs a new electric car, if they want a car, within the next 20 years or so. The sector itself (ex-Tesla) has grown over $310bn in the past 2 years. Why? I can’t find a single good reason for that rise – so, the whole sector is likely overpriced without even considering Tesla.

There’s a massive bet going on here – the bet that Elon, the quintessential genius, will do more within Tesla than just electric cars. And they do already, of course. Roof tiles for solar. Powerwalls. Gigafactories might be producing batteries for all sorts of things, not just cars. However, this is now officially “baked in”. We are at a stage where these non-core parts of the business will need to be insanely successful to justify this level of pricing. Revenues of $60bn, and the progress made in recent months in becoming much more mainstream, versus the pressures from all the other manufacturers, and the fact that electric cars ultimately will be cheaper to produce and sell than traditional ones, mean that there’s a storm coming in my view. This is the CISCO moment (but, not necessarily, the top of the curve). If expecting Tesla to do so much more, what’s stopping Elon doing that in another company……he already has a few of them, after all. Seems like a strange bet to me – or a good time to cash out, at least partially, if you’ve held fast on this rise to the moon.

Of course, the environmental chatter has accelerated this week. Timely visit to Glasgow for COP26 for the world leaders, or some of them at least, to be greeted by bin strikes and horrific downpours. The reverse of the beautiful weather that emerged for the first lockdown. Strange how nature seems to have a timeliness about it, sometimes!

There’s a hugely interesting phenomenon developing and it is one that will harm supply chains yet further. Natural gas is trading in the US at $6 per unit – in Europe, we are at $30 and the UK is more exposed than most. The current enviro chatter is fueling an utter hatred for fossil fuel usage. We need to move away – absolutely. We HAVE to manage that transition. That’s where the headline operators are massively failing at the moment. Not managing that transition will cause utter catastrophe, of which the current energy price crisis is just the start.

This is a bigger conclusion from some observations I have made over the years from an element of involvement in renewables. My first solar panels (Not seen that one in Jack and Jane, as yet) were in 2010, well incentivized and rewarded by the Government with the feed-in-tariff scheme (which, frankly, should have stayed for homeowners). I’ve got my air source heat pump already. At a bigger scale, we are making efforts to make our largest investment site, by area, into a net-zero-carbon site including a huge (for us!) solar array on the site. The conversation with the installers who won our tender process was interesting – when I pressed them on the footprint of the actual panel production, they assured me “it wasn’t needed for the calculations”. Eh? What sort of calculations are these?

As usual, it is what you measure and how you measure it. There’s an element of playing the game. And when you start to get into it (a leading “realistic thinker” in this space is a guy called Michael Shellenberger, a climate activist who has reversed his position on nuclear, which is absolutely critical to zero-carbon – search youtube for his Tedx talk to see more), you see quite quickly that as usual, most people are operating on emotion not fact. As alluded to last week, we need to insulate homes – we don’t need people glueing themselves to roads or making terrorist-style demands that can never be acceeded to to reach that goal. We need incentivising! You might say there’s no better incentive than prices rocketing up, although it leaves many at the bottom 20-40% of earners who won’t be able to afford upgrades and will just get skinned, or very cold, because of what’s going on. In my “straw poll” of the week, everyone not in the industry that I spoke to I asked about EPCs and what their EPC was – the vast majority did not know what an EPC was and even when they did, they “couldn’t remember”. This is NOT being factored into purchasing decisions, but it IS being factored into lending decisions – and like everything, will creep up on people. Opportunity is abound here for those who can navigate these waters, and green technology will see more wealth created than anything before it in history. The first trillionaire. The first $10tn market cap company. I am convinced. Sadly, some or even much of it will be spin, and even a bit of a scam, a case of fixing numbers – so there will be some holding of the nose to go on.

Get your head around this. Why would it make sense for India to import and burn as much coal as possible, right now? Because currently, they burn wood, which is far worse for the environment. That’s where some countries are at (and big ones, at that) – and progress needs to happen quickly but in a managed fashion. If no-one buys and owns big oil, there will be a) supernormal profits to be had by buying them at prices that are lower than they should be and b) far more price crises to hit us in the future if they can’t raise funds to continue operations which are a critical part of the world economy.

We can’t just stop – the damage to human life would be unthinkable. Deaths in the hundreds of millions. I’m no climate change denier – you have to be an idiot (or very young) to deny how the UK climate has changed in the past couple of decades, and all the weather records bear that out (alongside the visual cues we get so very often these days!). We need a sensible and steady transition, with massive incentives to get green ASAP. We need sensible and open conversations – not adhesive and spraypaint. This has been at the top of the agenda for the past couple of years (Covid aside) and for great reason – let’s hope some real and actionable positives come out of COP26 – I’m sure there will be further commentary next week! Until then, happy hallowe’en……..