Blain: Markets Still Look Daft

April 17, 2023   |   Tags:
Blain: Markets Still Look Daft

Authored by Bill Ban via,

“Money can’t buy happiness, but it can buy property.. and that’s a whole new can of worms.”

Markets are in wait and see mode – inflation, rates, earnings and all the rest weigh upon them. Back in the real world, the economic reality for young workers trying to find housing security in London feels more and more broken.

According to a big US bank, we are now in a Bear Market! Crashing major/minor chords.. Really.. how exciting…. yawn.. I’m expecting an interesting week’s play in prospect here in the Global Financial Markets as we watch US earnings, while wondering just how aggressively/mildly Central Banks will hike in May. I’m thinking markets still look daft: there is still much delusion, hopes, confusion, speculation and outright FOMO driving prices and trading.

Many market participants believe good times (like the 1920s and 2010’s) are just around the next corner – it’s just a matter of rates and central banks seeing the good sense of supporting markets… That is so last decade. There are a slew of complex factors making for a very muddy market picture that’s obscuring how a new reality of higher rates, more persistent inflation, changing global trade flows, but ultimately stronger growth and positive economies after some painful readjustment. Climate change, AI, and probably many things that ain’t occurred to us yet are going to drive a new investment age – as soon as we shake off the fug of this one.. SPACS might be unravelling, Tech madness is diminishing, Cryptos are back on a roll (why?), but there is still too much general FOMO and the belief markets only ever go up…

Major changes to valuations and expectations across the financial asset markets are happening as interest rates normalise. The threat of recession/stagflation is real. Many of the silly market “wisdoms” that have taken hold since 2008 are still to topple, but markets will offer some really exciting growth opportunities.

This morning I’m thinking about just one factor: housing – a critical confidence factor. Later this week, I’m hoping to find some time to focus on China, the dollar and emerging markets.  

There are lot of myths out there. Time to prick a few bubbles…

That’s what usually happens when the paradigm shifts – those still caught in the last one get tumbled up by the replacement and are loath to let it go, while the smart money is already running to chase the next set of opportunities.

Last week, my colleagues and I were talking about how to invest in a higher for longer inflation/rates environment – and came up with a series of fascinating conclusions of the Shard Litebite market podcast – you can find it here.

Broadly, we do expect selective stocks to perform well – areas like energy, some tech, etc, but acknowledge there is still a lot of dross to be exposed. The next year or so is going to see further unwinds. Beware indices, and focus on fundamentals. Much more interesting are bonds (including inflation linked if your share our view inflation will remain elevated) at positive real yields, including higher yielding cashflow based alternative investments in private debt – dull boring predicable returns from real assets, rather than speculative hype-driven hopes for stock upside.

A Moment in The London Housing Market…

One of the risks writing about markets is not actually seeing the woods for the trees. It easy to figure out what might be happening looking at prices on a screen, reading too many analyst reports, or talking with an investment manager on their trading views, but its seldom any of us get to view real economies in practice.

I did.. on Saturday in London.

My youngest dragged me to the London Home Show, a sales jamboree for the “shared-ownership” property sector. This a government sponsored initiative to help low-income workers find an affordable way to own their own homes. The idea is to buy 25-75% of the flat, and pay rent on the remainder to the “housing association” running the property.

Realistically, it’s the only way my daughter will get on the property ladder in London. She has a great job, but her rent was just hiked 30% plus (which will eat up all her savings), and she won’t spend the rest of her career being ripped blind by avaricious landlords. (Yes, I know most landlords are decent, but in her particular block every tenant just got notice to quit, and apparently, they are being replaced by Chinese students flocking back to London). Originally the block was affordable housing for key workers – not so much now…

The “home show” was packed with 20/30 somethings all caught in the same rent trap. All of them are looking for an element of housing security – if they don’t find it, London will collapse on a lack of workers. The enthusiastic marketing teams were extolling their new tower blocks around London. A one bed flat in this new block just 20 miles from the Centre of London? It turned out the minimum income threshold for such “affordable” property is £81,000 – when the average London income is £36k. (Not only do you need to persuade a bank to give you a mortgage, but the income test gives the landlord the ability to cherry-pick their tenants.)

On every stall the marketing teams were making the same pitch: “this block has sold out really fast, there are just a few left, and you would really need to reserve it now to be in with a chance..”

I wondered how the prices of these new build blocks (extolled as the best property to buy as they are energy efficient, green and full or modern appliances) are actually set? There isn’t a “grey” market in them – the price is the price the developer sets. If the marketing teams then create a hype to sell them at that price – that’s business. I asked a few of marketing folk who explained these prices were set in relation to the market.. How? Never got an answer on that.

My girl was asking great questions – if she is paying a mortgage, a rent on top of that for other 75%, plus her council tax and her “service charge” on the flat (typically £3k per annum), what’s to stop her being crushed if the “landlord” hikes the rent or the service charge? Again not much comfort except a vague undertaking that rents were market set or linked to inflation. Service charge questions usually got blanked. Instead, she was “reassured” that her share of the ownership would give here the “upside” to buy some bigger as prices rise. Really?

I like the idea of shared ownership to get on the housing ladder, and lots of very reputable firms are involved, but I can’t help thinking there is a massive element of hype around it. It feels fuelled by desperation. It will probably boom because London will remain massively short affordable property. Whenever demand massively exceeds supply – someone will exploit the opportunity. I sense that is happening.

When single bedroom “London” flats in the wilds of Essex, (closer to Amsterdam than the City), are only available to workers on incomes in excess of £60k… I can’t help but smell a rat.. and a massive element of hype where the developers and landlords controlling supply are setting the price. But I am just a suspicious guy…

I read about how difficult existing shared ownership owners find it to sell their properties – tied up in bureaucracy and valuation costs as the landlord/developers focus on selling the new stock – selling flats below that price might prick the bubble?

My kids are nowhere close to settling down, or having families of their own in the near future. How can they – living in expensive rental insecurity where they have to keep moving further out as rents are hiked to unaffordable levels? It’s no wonder population decline is the demographic reality, prompting the question…. Just who is going to buy all these expensive London flats when the number of young people coming to London inevitable crashes?

What’s the solution?

I’m not sure – but the shared ownership market, while no doubt well-intentioned, looks a tad frothy. Fortunately my girl is bright and clever enough to be going into it eyes wide open, and asking the right questions.. The Bank of Mum and Dad is…. nervous.. but trusts her.

Tyler Durden Mon, 04/17/2023 - 11:40