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- [00:04]
John Stepek
What's driving the markets this week? What's on investors minds as they look ahead? Find out in 10 minutes or less on the Markets podcast from Goldman Sachs.
- [00:12]
Maren Altman
Listen now.
- [00:16]
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- [00:59]
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- [01:31]
Bloomberg Audio Studios Podcasts Radio News so.
- [01:37]
Maren Altman
Marantalk's many listeners, or at the very least the London based ones. Have you actually done it? Have you signed up to join us at Bloomberg's European headquarters in the heart of the city? On November 27, we will be taping an episode of the podcast in front of a live audience the morning after the UK Budget. I will be joined by Helen Thomas of Blonde Money, Stephanie Flanders, Bloomberg's Head of Government and Economics, and of course John Stepek will also be there. So if you haven't signed up yet, find the registration link in the show notes and do join us. We hope to see you there. There will be coffee, there will be croissants. Onto the episode.
- [02:22]
Welcome to the Marin Talks Money Market Wrap where we talk about the biggest moves in the market this week and what is driving them. I'm Maren's Onset Web Ed Large for Bloomberg UK Wealth.
- [02:31]
John Stepek
And I'm John Stebik, senior reporter and author of the Money Distilled newsletter.
- [02:35]
Maren Altman
Excellent.
- [02:38]
Hi John.
- [02:39]
John Stepek
Hi man.
- [02:40]
Maren Altman
Now listen, I know that, I mean, you know, be nice to have a little casual chat right now, but there's literally no point because all you can think about is the housing market. Yes, as regular listeners will know, John is absolutely obsessed with house prices in the UK and the latest Rick survey is just Chris does mill.
- [02:57]
John Stepek
It's just fascinating stuff. Well, actually, I suppose it's not that fascinating. There's an awful lot of estate agents saying that they're nervous and the buyers are nervous ahead of the budget, that people are putting off sales, they're putting off buying. They're a little bit gloomy about how things are going to go over the next three months, but they're not that gloomy. And basically all points to prices being kind of flat tape lower, assuming that the budget goes broadly according to plan, which is quite a big assumption. But the one thing I would say is, and I think is probably more important than any of this stuff is the fact that interest rates have been steadily dripping lower and mortgage rates have been steadily dripping lower. And the one thing that you and I know from years and years of better experience is that really house prices are driven by one thing and that's the price that somebody can get a mortgage for. The reason that they've been flat to fallen for the last three years is because mortgage rates obviously shot up with interest rates and now that they're kind of just ever so slightly dropping lower because markets now expect the bank of England to have to cut interest rates more, I suspect that we may see house prices not go up a lot, but can move away from the flat line maybe in the next six months.
- [04:16]
Maren Altman
Yeah, I mean that's an interesting point, John, and you're right, we always say that the price of a house is about the price of money, but it's also about some of the uncertainty. So at the moment we're in this hopefully short term situation of huge economic, economic uncertainty and concern about what taxes might come up in the budget. And there's lots of concern about new property taxes, new wealth taxes, changes to the council tax regime, et cetera. And an awful lot of people feel very uncertain about buying a house at all, let alone paying over the asking price by any means for a house in this kind of environment, right?
- [04:48]
John Stepek
Oh yeah, absolutely. I think, to be fair, I think that mostly affects people at the wealthier end of the spectrum, mainly because they're the ones who will be sitting there going, right, well if I put this off, I'm going to be able to see how hard she's going to hit me and whether I actually want to go ahead with this or not. I mean, it's kind of slightly different if you're moving, you know, maybe under a half a million pounds or under Three quarters of a million pounds if you're in London. And it's just, well, look, you just get to get on with life, you know, it's not like you can leave the country if you don't like what Rachel Reeves does. It's not like you've got an awful lot of evasive action things that you can do. So I think at that end of the market, it probably doesn't actually have that much effect. It's just a useful conversation piece for the estate agents to talk about, but definitely the high end.
- [05:36]
Maren Altman
The other thing I think is useful to point out is that even if house prices over the full year do reach the level that most analysts are forecasting of, say two and a half, 3% growth over the year, we're still looking at things being flat in inflation adjusted times at best. And in fact, house prices have fallen quite a lot in inflation adjusted terms over the last few years.
- [05:58]
John Stepek
Yeah, and that's actually, I find this really interesting because when you think about how buoyant things like equities and gold have been, the fact that house prices have probably, for one of the first times in my career, been the least interesting asset market for a prolonged period of time now to the point where people are actually sort of getting the message. There was a very good piece posted on LinkedIn yesterday from a chap who was talking about how he bought a flat in 2016 and rented it out. And he was basically explaining how over that whole time, with the changes to taxation and buy to let and also with the fact that capital gains have gone nowhere because this was in London, so it's been a bit flat for 10 years in London. He'd worked out that he'd been paid less than minimum wage for all the work he'd done running this side business as a kind of amateur land landlord. And he basically said that it was a complete waste of my time, I should have sold it and put all the money in the equities. And I haven't heard much stuff like that, even though it's probably been true for at least kind of five or six years now. So it's really interesting that I think people are starting to get out of the mindset of you can't go wrong with bricks and mortar.
- [07:14]
Maren Altman
Yeah. I mean, this is. It's interesting, isn't it? Because it used to be that there were so many problems with buy to let. And we got to the point where we remember us making various calculations showing that the average buy to let investor was actually cash negative on the average Month. But nobody cared because if they were making great capital gains, it was still absolutely worth it. Yeah, but if you're not making capital gain, suddenly it turns into a bit of a nightmare.
- [07:41]
John Stepek
Yeah. And I do think it's also that thing. I thought it was really sensible. The guy made the point, you know, I'm actually having to manage this. So, like, whereas, like my equity portfolio never phones me up and says the toile broken. You know, that happens. You know what I mean? It's like it's a low maintenance kind of business running an equity portfolio. Whereas, yeah, you know, you're kind of taking up your weekends and your spare time stressing about things and you want to get compensated for that as well. So even if you are managing to make some money, it's got to be worth your real money. Yeah. So I thought that was really interesting.
- [08:19]
Maren Altman
That is interesting. Okay, so moving away from that and the idea that there may finally be the beginning of a change of mindset about property prices in the UK about, you know, my property is my pension and all that kind of thing that we've written about a lot over the years, we are suddenly seeing, despite the appalling political shenanigans in the UK and the miserable state of the UK economy, growth coming in at almost nothing. Almost nothing in the last quarter. We're still seeing the equity market doing rather well. And it's kind of exciting. We have this idea that quite soon we'll go through 10,000. Right.
- [08:52]
John Stepek
Oh, that would be great, I hope. I mean, I can see the footsie doing its usual and just like really horribly teasing us all as it has been doing this week. But yeah, there's no reason why you shouldn't get to the big round number of 10,000 at some point before Christmas, assuming that, you know, the, the American AI bubble doesn't pop before then and just ruin everything for everyone.
- [09:14]
Maren Altman
Which, by the way, we should, we should say, by the way, that this still leaves the FTSE very significantly down from its peak and infl adjusted terms. So, you know, 10,000 might feel nice, but you will still be down in real terms.
- [09:29]
John Stepek
Oh, that's such a spoil sport. That's not a total return terms law. It depends on when you purchased it.
- [09:36]
Maren Altman
Okay, all right, all right, Mr. Optimistic.
- [09:41]
John Stepek
I just like to put all the facts out there.
- [09:44]
Maren Altman
Round numbers are exciting, but they don't always tell you the whole truth. And we should mention, by the way, while we're Talking about the FTSE 100, that 3i Group has had a bit of a nasty day we're talking on the day when its results came out and it fell, I think at one point down sort of 15% or so. And that's I think partly because people are suddenly noticing the extent to which is dependent on, on one company. So it's got an awful lot of the portfolios of 70% of its total asset value in a Dutch retailer. So it makes it sort of very top heavy and it's also trading at a premium to its nav. So there are, there is things to, to worry about with that, but I think a lot of people probably have it in their portfolio. So just a head because the FTSE 100 is doing well does not mean that every constituent in it is doing exactly what you want it to do.
- [10:32]
John Stepek
Yeah, I mean it has been a good week for some of the stocks, but that is quite a big one.
- [10:37]
Maren Altman
It is. And it's also, you know, you always think of it as a private equity portfolio, don't you? So when you suddenly realize that in fact it's a, it's a large, it's a large retailer with a couple of little private equity things around the edge. It's a slightly different kind of portfolio. Anyway, leaving that aside, UK growth, do we want to talk about the miseries of that?
- [10:56]
John Stepek
Do you know what I find? GDP figures really just send me to sleep. It's terrible. They're so constantly revised all the time and all you really need to see, you know what if it had been 0.2 instead of 0.1, okay, the response would have been a bit more positive, but it's still rubbish. So I think all we can say is that the economy continues to be very, very sluggish and it's basically down to incredibly bad management. Not just by this government, but by.
- [11:25]
Maren Altman
Previous governments as well, but many, many previous governments. But certainly the run up to this budget is not helping. I mean, we were talking before we started recording, weren't we, about, about all the different taxes that might come and go. Everything from changes to pension tax to different, different income tax bans to, God, I don't know, salary sacrifice and not being able to put your expensive bicycle through. I think I slightly approve of that one, to be honest. Should you really be able to put through those expensive bicycles? I don't know.
- [11:51]
John Stepek
It's the pension bit that bothers me a little bit more, I have to say.
- [11:55]
Maren Altman
Really?
- [11:55]
John Stepek
The idea she's going to cap it on bicycles?
- [11:59]
No, no, the idea she's going to cap it at 2k, that's not very pleasant for anyone. Who's attempting to kind of save for the retirement during their peak earnings season.
- [12:10]
Maren Altman
What do you mean? And it's not going to cap what you can put into your pension to 2K?
- [12:14]
John Stepek
No. But it's going to cap the amount.
- [12:16]
Maren Altman
Oh no, no, no, no.
- [12:19]
John Stepek
Before your employer is going to have to shell out national insurance and you're going to have to shell it as well. So it thing, I mean, and again, you know, it might not happen. It's like. But I mean, you're right. This. I think the problem is that on the one hand the overton, the fiscal Overton window has been blown wide open. So like, you know, a while ago there were certain things you could say, okay, the government's stupid, but they're not going to do this because that would just be so obviously a bad idea. And so there was a group of policies that they would do. The Dem says now someone could come in and just make something up and you still wouldn't have any idea if it was actually going to happen or not. Because anything goes. And this is partly the result of the havoc at the top because there is clearly a war at the top for who gets to see what's going to kind of be in the budget. And Rachel Reeves is worried because obviously she's worried about appeasing her own party members and kind of, you know, the guilts market and also the voters. And I think obviously she's thinking, well, am I actually going to survive this? And that's why we're also hearing talk about getting rid of this 2 child benefit cap, which is clearly not an affordable situation or choice and it hasn't become any more affordable since she said it was unaffordable last year. But it's a kind of swap to the left wing in her party.
- [13:41]
Maren Altman
And I suppose it's also worth noting that when we talk about the 2 child benefit cap, a lot of the conversation around it sort of suggests it's not possible to have more than two children. And of course you can have as many children as you like outside the benefit system and also within the benefit system and there are only certain parts of the system that are capped at two children. There are, yes. It's a complicated system. It's a very complicated system. The UK benefits system is, is much more complicated than most people realize. And in fact, we've been chatting earlier and I would encourage anybody who's interested in how the benefit system actually works and what you can and can't get on welfare to go and look at a website called entitled two.co.uk where you can input all sorts of different variables and find out for yourself exactly how it works. It is complicated. It is complicated. Yeah.
- [14:27]
John Stepek
You may also find that you're entitled to something that you didn't know you were.
- [14:30]
Maren Altman
That's not what we're encouraging.
- [14:32]
John Stepek
I'm not encouraging it, but I think a lot of our listeners would be surprised if they were to tell you that is true.
- [14:37]
Maren Altman
They might be surprised to find that they are inside the system. Anyway, moving on from that, this is not a program about how to claim benefits. The TikTok is available for that. Let's move on to talking about the US market. There have been quite a few interesting pieces on Bloomberg about this recently. And so there is. I mean, for starters, let's say that there's been a report from Peter Oppenheimer at Goldman Sachs who points out that US equities are likely to lag other markets for the next decade or so. I mean, this is all about if you're going to invest, the starting price is what matters. And he expects over the next 10 years to see six and a half percent from US markets, which personally I think is ambitious, but he's looking at totally different numbers for other markets. So emerging markets, 10.9%. He sees those as the strongest over the next decade. Now, of course, the thing to worry about in the US is the great AI bubble, which I think you also think is a bubble. I think we're as one on this bubble thing, aren't we, John?
- [15:35]
John Stepek
Definitely. I think we've got to acknowledge that just because you think something's a bubble doesn't mean that you have any idea when it's going to pop. And it also does, absolutely, to a certain extent it is meaningless. But there's been a lot of interesting stuff come out about it and I think that they're starting to get. I think we're starting to get a better sense of where the problems lie.
- [15:57]
And it's sort of this whole thing about. Do I talk about the chip depreciation?
- [16:02]
Maren Altman
Yeah, I do, but I want to briefly mention things that people are now talking about in a much sort of wider and louder way than they were previously. I mean, we've talked before about the, the energy problems of AI, the ability for data centers to connect to the electricity that they need to keep things going, and the extent to which data centers are already using vast amounts of electricity in the US and indeed in, in the uk. So there is this limiting factor of energy that is beginning to be discussed more outside the niche areas that we're discussing previously. And then there's also the infrastructure issues. There's a lot of people who want companies that want to use a lot of data center capacity and are finding that the data centers aren't going up fast enough. So you've got an energy problem, you've got an infrastructure problem, and then as you say, you've got this quite interesting depreciation issue.
- [16:52]
John Stepek
This is interesting. I'm not completely across it, but the basic point is that for AI to work, these companies need to keep investing in very expensive microchips. And the issue is that these things have an uncertain shelf life. So if you want to keep up with the latest AI, you need to keep investing in the latest chips. But that means that the ones you spent hundreds of millions of billions of dollars on three years ago are no longer as valuable on your balance sheet as you thought they were going to be. Basically the amount that you're having to write off every year is you're already investing a lot, you're writing down a lot, and are your kind of revenues going to actually cover that? And then on top of that you've got all of these slightly weird circular deals that they're all doing with each other where somebody buys the chips, but then they rent them back off them or whatever. And then on top of that you've got the interaction of private debt markets with all of this. So where's the funding coming from? How opaque or not is it? What happens if the smaller players particularly start to go bust or be unable to keep up with the payments, that sort of thing. So you see that there's a running out of road element to it.
- [18:12]
Maren Altman
I suppose. Just to go back to the depreciation, the key point is that there is an idea that possibly the big companies are underestimating depreciation. They're not doing it fast enough. And that makes their balance sheets looks rather better than they should. Right? Their accounting assumptions are just a little bit too generous. That brings us back to something we were talking about last week, to this idea that J.K. galbraith had about his term the bezel, which he wrote about in the Great Crash, his book on that great crash, 1929. Shall I read you the paragraph?
- [18:51]
John Stepek
Might as well.
- [18:53]
Maren Altman
Alone among the various forms of larceny, Bragg is embezzlement has a time parameter. Weeks, months or years may elapse between the commission of the crime and its discovery. This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled oddly enough, feels no loss. There is a net increase in psychic wealth at any given time. There exists an inventory of undiscovered embezzlement in or more precisely, not in the country's business and banks. Now he's talking here about the bezel, this idea that there bubble where there's a lot of fraud and corruption, arce embezzlement, whatever you like to call it that people don't know about. And when they begin to know about, this inflated sense of value collapses. Right? Yes.
- [19:34]
John Stepek
And to be clear, we are not talking about anything.
- [19:38]
Maren Altman
Moving on to that. Okay, yeah, I am moving on to that, but so he talks about things that are basically illegal or close to illegal. I mean, he doesn't push the whole idea on quite as far as some other people have. But since then, Charlie Munger at Buckshire Hathaway, I mean, he sort of developed it in to more about the story when the story isn't quite true or the story doesn't help you understand everything. And this too creates a sense of psychic value. So the bezel is the word for the disconnect between what you think the value of an asset is and what you will come to understand it is over time. Time that's also the bezel. So it's not necessarily about illegality, but it is about things like vendor financing, that kind of circularity that we've talked about before. It is about perhaps getting your depreciation slightly wrong and making things look better than they really are. It's about all these things that aren't necessarily fraud. They're not larceny, they're not actually embezzlement, but they are part of the bezel that comes towards the end of most bubbles.
- [20:43]
John Stepek
Yeah, it's the stuff you can get away with because everyone wants to believe firmly. And I do. Yeah. And it's interesting to see that this is the sort of. We're starting to get signs of where that may crop up. And I think that that sort of, again, you're getting the sense that people are looking at AI and starting to ask, okay, so how is this going to actually pay off? Now you've got a little bit beyond people just unthinkingly just buying into the hype and starting to say, right, so where's the payoff?
- [21:15]
Expectations are starting to crystallize a bit. So we're interested to see what happens with that. I mean, I still find.
- [21:24]
It'S fascinating stuff because I am not an AI skeptic. Things are clearly happening in some industries more than others.
- [21:33]
And people. It is having an impact on certain jobs in some places. I was reading another piece in Bloomberg this morning that was pointing out that a lot of banking customer service layoffs have been driven by AI and I can see things like that happening. So I guess it is like the dot com boom all over again. Something big is going on, but simultaneously we can also have a big market crash simply because we priced in too much too soon.
- [22:04]
Maren Altman
And so it's probably the point in the cycle when people heavily invested in the US should wonder what part of their wealth is psychic wealth and what part of their wealth is real wealth.
- [22:17]
John Stepek
That's an interesting one. It's a bit like your household balance sheet for your house price in the uk. You may need to adjust that depending on when you bought your home.
- [22:28]
Maren Altman
Exactly how much do you think your house is worth and how much is it really worth? I remember again, I will just say I don't know how often I tell you the story, but I'm going to tell you it once more. Once more about that wonderful survey. Possibly my favorite survey ever. It must have been 2009ish asking people in the UK about house prices in the UK and what they expected. And everybody said house prices are falling across the UK and going to continue to fall across the uk, but they're not going to fall in my neighborhood because we have a special community or a really great pub or a marvelous market or the best school or whatever it is. And so people went into a period of time of absolute denial about their own houses while accepting that the nominal price of everybody else's houses was going to fall.
- [23:16]
We may be approaching that period again.
- [23:20]
John Stepek
At least we make you some comedy selfies of it.
- [23:24]
Maren Altman
Oh, I'd love to see that survey again. Obviously I can't actually find that survey. I've been looking for it for ages so that I can actually read you bits of it because I loved it so much I can't find it. But when we finish this, I'm going to look for it again. In fact, we're going to finish this right now, so and go look for it again. Okay, thanks John.
- [23:41]
John Stepek
Thanks Mel.
- [23:49]
Maren Altman
Thanks for listening to this week's Maryn Talks Money Debrief. If you like our show, rate, review and subscribe wherever you listen to your podcast. Also, be sure to follow me and John on X or Twitter ErinSW and JohnStepec. This episode was produced by Sama Saadi. Production support and sound design by Moses Anda Questions and comments on this show and all our shows are always welcome our show. Email is merriamoneylumberg.net.
- [24:20]
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- [25:02]
John Stepek
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Maren Altman
So that means a half day.
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