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So Merrin Talks Money 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 twenty seventh, 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 Steppek 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.

Welcome to the Merrin Talks Money Market Wrap, while we talk about the biggest moves in the market this week and what is driving them.

I'm Maren zumset webeditor, a large for Bloomberg UK Wealth.

And I'm Joined Stebic, senior reporter noted at the Money Distilled newsletter.

Excellent.

Hi John, Hi Ma, Now listen I know that I mean you know it'd 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.

Yeah, as regular listeners will know, John is absolutely obsessed with house prices in the UK and the latest Rick survey is just Christian's mill.

It's just fascinating stuff.

Well, I say, I suppose it's not that fascinating.

There's an awful lot obviously, the agents saying that the nervous and the buyers and nerves ahead of the budget that people are putting off sales, they are putting off buy in.

There 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 to lower, assuming that the budget goes broadly according to plan.

That's just quite a big assumption.

But the one thing I would say is, and I think it 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.

And the reason that they've been flag to fall in 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 might see house prices not go up a lot, but can of move away from the flat line maybe in the next six months.

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 uncertainties.

At the moment, we're in this hopefully short term situation of huge economic uncert you 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, etc.

And an awful lot of people feel very uncertain about buying house at all level and paying over the asking price by any means for a house in this kind of environment.

Right, Oh, yeah, absolutely, I think to be feeling that mostly affects people at the wealthier end of the spectrum.

Yeah, mainly because you know, they're the ones who will be sitting there going very 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 gotten 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, you know, conversation piece for the stagents to talk about, but definitely the high end.

The other thing I think it's useful to point out is that even if house prices over the full year do reach that reach the level that most analysts are forecusting and say, you know, two and a half three percent growth over the year, we're still looking at things being flat and inflation adjusted terms at best, and in fact, house prices have full and quite a lot in inflation adjusted terms over the last few years.

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, have been the least interesting asset market for a prolonged period of time now and to the point where people are actually sort of getting the message.

There was a very good piece posted out on LinkedIn yesterday from a chart who was talking about how he'd bought a flat in twenty sixteen and rented it out, and he was basically explaining how over that whole time, with the changes to the taxation and buy to let it and also with the fact that capital gains have gone nowhere because this was in London, so it's been about flat for ten years in London.

He'd walked 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 landlord, and he basically said that there was a complete waste of my time.

I should have sold it and put all the money into 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 watar.

Yeah, I mean, this is it's interesting, isn't it, Because it used to be that there was so many problems with buy to letting.

We got to the point where we remember us making various calculations showing that the average by to let invest it was actually cash negative on average months, 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.

Yeah, And it is that.

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 any managed this so like where it's like my equity portfolio and never phones me up and says the toilet's broken.

You know that happens, you know what I mean, It's like it's a all mazing kind of business running an equity portfolio, whereas yeah, you know, you're kind of taking up your weekends and you just spare time stressing about things.

You want to get compensated for that as well, So even if you are managing to make some money, it's going to be worth your real money.

Yeah, so I thought that was really interesting.

It is interesting, Okay, So moving away from that and the idea that they 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 ten thousand, right, Oh, that would be great.

I hope.

I mean, I can see the seeding.

It's usual and just like really horribly teasing us all as it has been doing this week.

But yeah, it's just no reason why you shouldn't get to the big number of ten thousand at some point before Christmas, assuming you know, the American EA bubble doesn't pop before then it is ruined efflent on everyone, which, by the.

Way, we should we should say, by the way, that this still leaves the foot seat very significantly down from its peak and inflation adjusted terms, So you know, ten thousand might feel nice, but you will still be down in real terms.

Oh, that's such a spoil sport.

That's the one law.

It depends on when you pop.

Just it.

Okay, all right, all right, mister optimistic.

Just like.

Round numbers are exciting, but they don't tell you the whole truth.

And we should mention, by the way, while we're talking about the footy one hundred, that three I 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 set of fifteen percent or so.

And that's.

I think partly because people are suddenly noticing the extent to which is dependent on one company.

So it's got an awful lot of the portfolios of seventy percent of it's a total asset value in a Dutch retailer, so it makes it at the very top heavy, and it's also trading it at a premium to it's navy, So there are various things to worry about with that, But I think a lot of people probably have it in their portfolios.

Just it heads up that just because the firsty one hundred doing well does not mean that every cant situent in it is doing exactly what you wanted to do.

Yeah.

I mean, it has been a good week for some of the stalks, but that's that is quite a big one, it is.

And it's also you know, you alwas thinking 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 acty 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?

Do I find GDP figures really just send me sleep.

It's terrible.

They're so constantly devised all the time, and all you do is need to see you know what, if it had been point two instead of point one, okay, the points would have been a bit more positive, but it's still rubbish.

So all we could say is that the economy continues to be very, very sluggish, and it's basically don't incredibly bad management not just by this government but by previous governments as.

Well, but many many previous governments.

But certainly they run up to this budget is not helping it.

We were talking before we started recording with me about about all the different taxes that might come and go, everything from changes to pension tax, two different different income tax bands, to god in a salary sacrifice and not being able to put your expensive bicycle through anything.

I think I slightly approve of that.

Want to be honest, should you really be able to put those expensive bicycles?

I don't know, be a little bit more really going to bicycles?

No, she's going to cap it two key.

That's not very pleasant for anyone who's attempting to can save for the retirement during the peak ending season.

What do you mean, did you not get a cap what you can put into your pension to two k?

No, but it's going to cap no, no, no, no.

Before your employer is going to have to share national insurance, you're gonna have to share it.

As well, So I mean, I think, 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 stupids, 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.

And this is now something 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 or who gets to say 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 gelp's 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 too child benefit CAUP, 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 I kind of saw up to the left wing and her party, and.

I suppose it's also worth noting that when we talk about the two child benefit CAUP, a lot of the conversation around it so it 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 capped at two children.

There are.

Yes, it's a complicated system.

It's a very complicated system.

The UK benefit system is much more complicated than most people realize.

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 dot co dot uk, where you can input all sorts of variables and find out for yourself exactly how it is complicated.

It is complicated.

You may also find the entitled Suddenly didn't know what we are.

That's not what we're encouraging.

I'm not encouraging it.

More of our lessons would be surprised if the will is true.

They might be surprised to find that they are inside the system.

Anyway, Moving on from that, this is not not a program about how to claim benefits that TikTok is available for that.

Let's move on to talking about the US market.

And they've been quite a few interesting pieces on on Bloomberg about this recently, and.

So there is em for starters.

Let's say that there's been a report from Oppenheimer at Goldman SAX 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 prices what matters.

And he expects over the next ten years to see six and a half percent from from US markets, which personally I think is ambitious, but he's looking at totally different numbers for other markets, so emerging markets ten point nine percent, he sees, it's just the strongest over the next decade.

Now, of course, to think 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, 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 doesn't absolutely.

It's the only extent is it is meaningless.

But there's been a lot of interest and stuff come out about it, and I think that's starting to get I think we're starting to get a better sense of where the problems lie.

And it's sort of this whole thing about Do you want to talk about the chep depreciation?

Yeah, I do, But I want to briefly mention things that 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 energy problems of AI, the ability for data centers to connect to the electricity that they need to keep things going in the extent to which a data centers already using vast amouns for electricity in the US and indeed in the UK.

So there is this limiting factor energy that is beginning to be discussed more outside the niche areas that we're discussing it previately.

And then there's also the infrastructure issues you and there's a lot of people who who want companies that want to use a lot of 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.

This is interesting, I'm not like completely across.

The basic point is that for AI to work, these companies need to keep investing in very expensive micro chips.

And the issue is that these things have an uncertain shelf life.

So if you want to keep up with the latest DII, you need to keep investing in the latest chips.

But that means that the ones you spend, you know, 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.

Understand And basically the amount that you haven't a right off every year is you know, 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 with private debt markets.

With all of this, so where's the funding coming from?

How it opaque or not?

Is it what happens if the smaller players particularly start to kind of go bust or be unable to care popular payments, that sort of thing.

So you can see that there's a there's a running out of road element to it, and.

I suppose that just to go back to the depreciation that the key point is that there is a there's an idea that possibly the big companies are underestimating depreciation, they're not doing it fast enough, and that makes the balance looks rather better than they should right their accounting, their accounting assumptions are just a little bit too generous.

Now, that brings us back to something we were talking.

About last week, to this idea that JKKW Brave had about his term the bezel right, which he wrote about in The Great Crash, his book on that Great Crest nineteen twenty nine, and shall.

I read you the paragraph as well alone.

Among the various forms of larceny, bragger's embezzlement has a time parameter.

Weeks, months, or years may allapse between the commission of the crime and this discovery.

This is a period, incidentally, when the embezzler has his gain and the man who has been embezzled oddly enough field to 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 is a period in each bubble where there's a lot of fraud and corruption, larseny, embezzlement, whatever you like to call it, that people don't know out and when they begin to know about this inflated sense of value collapses.

Yes, to be clear, we are not talking about moving on to that.

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 bucks you halfway.

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 acid is and what you will come to understand it is over 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 an appreciation wrong and making things look better than they really are.

It's about all these things about necessarily fraud, they're not last andy, they're not actually embezzlement, but they are part of the bezel that comes towards the end of most bubbles.

Yeah, it's the stuff you can get away with because everyone wants to believe Yeah, funnly and I do.

Yeah.

And it's interesting to see that this is the sort of we're standing to get signs of where that might crop up.

And I think that that 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, so, where's the payoff?

You know, like kind of expectations are starting to crystallize a bit, so we're interested to see what happens with that.

I mean, I still find it's it's fascinating stuff because I'm not I am not an e I skeptic.

Things are clear happening in some industries more than others, you know, and people you know there is having an impact on certain jobs in some places.

I was reading another piece of Bloomberg this morning.

I 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, 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're priced in too much too soon.

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.

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 ads that depending on when you put your home.

Exactly him you think your house is worth, and how much is it really worth?

I remember again, I will decide.

I don't know how often I tell you the story, but I'm going to tell you once more, once more about that wonderful survey, possibly my favorite survey ever.

It must have been two thousand and nine ish, 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 and continued 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.

Absolute denial about their own houses while accepting that the nominal price of everybody else's houses was going to fall.

We may be approaching that period again.

Well, at least they make it some commity selfies out of it.

Oh, I'd love to see that survey again, you know, 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.

When we finished this, I'm going to look for it again.

In fact, we're going to finish this right now so I can go look for it again.

Okay, Thanks John, Thanks Mail.

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