Markets in a Permanent Mini-Crisis: Why Investors Are Waiting, Not Predicting | Merryn Talks Money

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[00:00:10]>> [music] [music] >> Welcome to the Merryn Somerset Money Market Wrap, where we talk about the biggest moves in the markets this week and what is driving them. I am Merryn Somerset Webb, editor-at-large for Bloomberg UK Wealth. And I'm joined by Stevie Don, senior reporter and author of the Money Distilled newsletter.

[00:00:32]>> [music] >> Morning, John. Morning, Merryn. Morning, John. Thanks morning.

[00:00:37]John, I'm not even sure anymore whether this is a truce day or not a truce day.

[00:00:41]Well, basically I just look at what's happening in the market and the oil price today is up, so it must be a war on day. It's a war on day, not a war on day. Okay.

[00:00:52]>> So, here is the question then. Is this just where we are now? We're now in We're not in an extreme crisis mode when it comes to war, not in a constant let's all bomb each other mode. We're in a constant mini crisis, no one knows quite what's going on, rolling mode, uh which is totally different. I [laughter] mean, I suppose that's one way to put it.

[00:01:13]I guess a kind of state of permanent kind of hubbub. Um yes.

[00:01:18]>> A state of permanent hubbub, but not necessarily a state of permanent war.

[00:01:22]Yeah, I mean I think Well, I guess look, what's the the problem here is that everyone wants an off-ramp, but the two sides can't agree on a satisfactory off-ramp. Yes, but that rather suggests that we're on a very, very, very long, super messy, uh off-ramp. Yeah, I think that's >> Everyone wants one. Both sides kind of No one really wants to keep going. Um Iran doesn't really get one to get too much more involved with irritating someone who's so un un- predictable, so provocative, etc. And Trump is a bit nervous about taking anything further in case the also power [clears throat] problem really does get very severe. So, everyone kind of wants an off-ramp. No one wants to agree to everything, but so we're all on one. Just a slightly abnormal one. And somehow markets have to work around that. But if markets are supposed to look at the Look to the long term, maybe markets are right about kind of ignoring it all if we are on an elongated long off-ramp.

[00:02:24]Honestly, I think that's a little bit too upbeat. Um I I think >> No, John, I've I'm trying to make this podcast more upbeat.

[00:02:32]>> [laughter] >> I said, "Oh, people love a bit of doom and gloom." No, I I I think that I should I was looking at um kind of markets this week, so the UK particularly. Um and some of the noise was there was a couple of kind of significant sort of profit warnings. And one was from Chris Nicholson, which is a a housebuilder. And basically last month they said it looked as if things were fine. And you know, at the end of last month, so the war had been, you know, running for about a month. And they said it's it's basically okay. You don't need to worry.

[00:03:04]And then this month they came out with a trading update that basically said, "Well, actually no, things have have actually turned down quite a bit.

[00:03:11]And now we're going to It doesn't look as if we're going to sell any land this year. And also, you know, our profit's going to be much lower than we expected because we're going to have to kind of rein everything in." Um And the share price fell something like 35% in a day. And then you had a big consumer goods group, Reckitt Benckiser.

[00:03:29]They came out Now, their share price has been falling since February, but on the day they fell by another 5% because you know, they said that the disruption in the Middle East has set our sales, like-for-like sales, much lower than they expected. And I think what this kind of drives home is that the the market is now at the point where it it can't really put a price on stuff until it starts to see the impact coming through. And I think that's the problem.

[00:03:55]We sort of sit there and like it's so reflexive. It's like we look at the prices and we say, "Well, the market's not reacting, so it can't be that bad."

[00:04:02]But the But the market is waiting to get data from the real world because it's kind of like, "Well, you know, how do we know what's going to happen next?" There is no way to put a price on it. So, I think we're just going to keep seeing this as the bad data feeds through, maybe some of the kind of impact that we thought we were going to see earlier on will start to happen because you know, like that basically, you need a kind of prove it moment. Particularly because everyone's got conditioned. But this is very different to how I think we've thought of markets in the past. We thought of markets as being a predictive machine to a degree. You know, not everything is priced in always, of course it isn't. That would be a ridiculous idea. But quite often you think, "Well, you know, market participants are pretty clever and they're pricing a lot of stuff in in advance." And now you're suggesting there's this different environment. The market is not pricing things in. It's waiting till things actually happen.

[00:04:55]It's not predictive. It's It's reactive to reality. Well, I guess it ties in with this overall thing that, you know, whatever the kind of the 2010s were like the long duration decade. It It basically time didn't matter.

[00:05:08]Um and that was partly tied up with interest rates. You know, the the kind of far future, if if if you were going to make a load of money in the far future, that was worth as much as making a load of money tomorrow. So, you bought the companies that were going to make a load of money in the far future cuz the future seemed predictable. Whereas I think the predictability horizon of the world generally has shrunk to like massively. So, it's a kind of short duration world. And that's also reflected in the market's sense of visibility. If you want to get highfalutin about it, otherwise you could just say Well, actually nobody knows what's going to happen next, particularly whenever you know, Trump or the Iranians can turn around and say something completely different from day to day. Um so, I just think the market's It's rational that the market's discounting ability has shrunk massively.

[00:05:58]Um And then I wanted to talk very briefly about the the UK and that you know, we've been very positive on the UK stock market, but very negative on the UK economy. And I I remain pretty negative on the UK economy. In fact, very negative on the UK economy. But But there have been some very some slightly positive things happening, right? Mildly stronger than expected GDP growth in February, although we only half care about that because that was February before the war. Um a slight fall in UK unemployment that again wasn't 100% expected, although you could argue that that's simply due to do with people just going, "Well, I give up. I give up. I'm never going to get a job, so I give up." And there's also a very interesting conversation to be had around that, [clears throat] whether that's to do with effectively the UK being on the edge of a recession or whether it's to do with AI. I suspect the former, but I know a lot of other people think think the other.

[00:06:46]>> [snorts] >> And the final thing that has happened recently out this week is this news that the UK budget deficit is slightly lower than you might have expected at a three-year low.

[00:06:56]Um and again, that sounds good, but it's worth remembering that we still do have a whopping great deficit and the debt is still building. And that that fall in borrowing is presumably connected to the sharp rise in taxes, which may still have a lag reaction over the next few years. You know, you get When you put up taxes initially, you normally get a revenue bounce. But then people adjust their behavior and that revenue bounce monthly dissipates. Anyway, nonetheless, nonetheless, if you wanted to, you could have a go at dragging dragging some sparkle out of out of these three things.

[00:07:28]You can. And I mean, I I I'm I actually think the underlying strength of the UK economy is is better than most people had thought. And I've thought that for a while. And I do think the biggest problem the UK has is the headwind from bad governance.

[00:07:44]And it's been like that for a long time.

[00:07:46]It's not just Labor's fault, but Labor have certainly kind of raised it to you know, I'm sorry.

[00:07:52]That That is bad as the previous lot at least.

[00:07:56]and so, you know, we've got I mean, if you look at the PMIs came out today, so they're snapshots of activity in services and manufacturing industries. Much, much better than expected. And these are for April.

[00:08:08]Now, partly that's probably companies kind of stocking up ahead knowing that things are going pear-shaped in the Middle East. But the the point is that none of these economic figures by themselves, or and certainly not taken together, point to an economy that is in like massive distress.

[00:08:26]Um But they I mean, the sentiment indicators are just off the charts bad.

[00:08:32]You know, there was We saw an Ipsos consumer confidence reading yesterday that shows that people are gloomier than they were ahead of 2008 and in 1979 of all times. Um so, there's a there's a bit of a weird disconnect, which I think is probably driven by people hating inflation. I think I think inflation is probably the big driver of most people's misery because everyone feels poorer and feels that they're being ripped off and doesn't see things getting any better.

[00:09:07]But yeah, the underlying economy is not too bad. I think the big risk is that if interest rates stay where they are or even go up a bit because of, you know, the kind of energy crisis um that we're probably facing, then that will knock a lot of that on its head. Um particularly things like the housing market and the wealth effect from that, such as it is.

[00:09:31]>> Yeah, I mean, this is I was going to say people hate hate inflation, but one thing that's really, really difficult is um general inflation combined with falling house prices. That's very hard for a lot of Brits. Tough gig.

[00:09:44]Well, yeah, and you see all these news stories in the papers at the moment where people are saying, "Oh, I can't sell my, you know, XYZ house for this price." And obviously the solution is, "Well, cut the price." But the problem is people have spent so long Yeah, but people have spent so long thinking that their house is worth X. And the other thing is when you look at the prices from when they bought them, and this goes back to what we talked about the other day, they haven't actually made any money in real terms, even if they get to sell them for the prices that they can't sell them for. So, I think people are waking up to what is actually quite a big hole in their household psychological balance sheet.

[00:10:23]Yes. Yeah, so this is interesting and I've got We've got an interview coming out with Andy Haldane soon. And when I'm He used to be the economist at Bank of England, and one of the things that we talk about in that is something that we've talked about I think with Russell Napier and other people previously, which is about how actually household balance sheets The household balance sheets are in really good really good shape, you know, the UK household sector has really deleveraged over the last decade. And you know, were they to feel confident, a lot of a lot of good economic stuff could happen in the UK, but they really really don't.

[00:10:54]Um Okay, so that's that bit of misery. So, so much for optimism. Thanks for that, John.

[00:10:58]>> [laughter] >> Let's move on briefly to talk about this business of pension mandation and this idea that pension pension funds could be forced to invest in in particular areas of interest to the government. And that there's been some changes there in the House of Lords this week.

[00:11:13]Yes, thankfully so.

[00:11:16]Basically, so we know the Mansion House Accord was like a voluntary agreement with 17 of the biggest pension providers in the UK to stick 10% of DC pensions into private assets, and 5% of those had to be in the UK. Now, okay, let's park whether that's a stupid Well, it is a stupid idea, but let's park that. Um so, the government in the Pensions Bill, rather than saying, "Okay, well, these guys have agreed to do this. That's fine." They stuck in this clause which basically says that if they don't do it, we can force them to do it. And not only can we force them to do what they've said they'd do in the Mansion House agreement, we can force that is completely uncapped. We can tell them to invest in anything at all.

[00:11:57]The House of Lords thankfully kicked that back and said, "No chance. That's not happening."

[00:12:02]Um the government came back and said, "Well, okay, we will just be able to mandate basically to the the limits of what the Mansion House thing says." So, 10% in private assets. And last night the House of Lords voted against that again and pinged it back to them.

[00:12:17]Um and so now basically, unless the government can back down on those chances are are reasonable that actually the whole Pensions Bill will collapse.

[00:12:25]Um you know, or rather it won't get through in this parliamentary session.

[00:12:29]Um and the thing is the pensions industry is not especially happy about that, because they actually like a lot of the other changes and which I can't go through here, but Um but the point is you know, I don't know. I'm I'm kind of grateful for the House of Lords here.

[00:12:42]It's nice to see that someone's at least attempting to defend uh you know, our freedom to invest in what we feel we should be investing in rather than having it dictated to.

[00:12:54]I didn't know you were using Andy the House of Lords, John. Actually, well, I'm not. I'm not.

[00:12:58]I'm actually quite pro the House of Lords. It's one of these things that works a lot better in practice than it does in theory.

[00:13:04]Absolutely, and it's worked very well for many many hundreds of years, which maybe leave it alone. Anyway, that's not our area. All right.

[00:13:11]>> [laughter] >> Leave that.

[00:13:12]>> Yes, we're not political at all.

[00:13:14]Yeah, we are not political.

[00:13:15]>> [music] [music] >> On the subject of pensions, we were talking the other day, you and I, about NEST, the publicly backed pension fund that 13 and 1/2 14 million people have their their auto-enrolment pensions in, and how we're not 100% impressed. And you're writing about this week, but also there's there was a a letter this week that went from the the regulator for pension funds warning them that they need to keep an eye on their liquidity, and also that they will face or could face huge costs if they sell off their um private assets. And I thought that was very interesting. Costs, right?

[00:14:00]Costs.

[00:14:01]By which we partly mean actual costs, cuz it's expensive to sell private stuff, but by which we also mean losses.

[00:14:06]Yeah.

[00:14:07]Yeah, selling at a discount.

[00:14:10]It's almost >> a cost. It's a loss. It's almost like these people who think, "Well, I can't sell my house for for the stated NAV."

[00:14:17]You know, they say, "Well, that's because this not worth the stated NAV."

[00:14:21]Um there was a really good paper actually from a kind of asset manager that I saw in in FT Alphaville the other day.

[00:14:28]It's Sona Asset Management. And they sort of did a very good breakdown of private credit and its history and why it's kind of running into trouble just now.

[00:14:37]And I think that the biggest takeaway from it was not so much that private credit's going to cause something like 2008, or even that it's not a valid asset class, you know, it will still exist in the future, much like junk bonds still exist, even though they did have a big blow-up at the start of that Are you just asking for hate mail, John?

[00:14:58]>> [laughter] >> But But the the point was they're going to go through such a long period of poor performance. And I think this this really gets to why like we don't really, at least if it is in your pension funds, you want to know about it.

[00:15:14]Um and probably ideally, you don't want it in your pension fund, cuz now is probably not the time to be getting into this stuff.

[00:15:22]Um and again, it just comes back to what we said on the the podcast the other day, people need to just take responsibility for knowing what's in their pension, because otherwise, you know, no one else is going to do it for you.

[00:15:37]>> else is going to do it for them at this point.

[00:15:40]Yeah. Okay, let's end with something optimistic.

[00:15:43]Hey, the sun's out.

[00:15:46]Well, might be with you.

[00:15:48]>> [laughter] >> Go on, I can see through your window.

[00:15:51]It's quite bright out there.

[00:15:53]Oh, you're you're right. Near this.

[00:15:55]Sorry, take it back. Sun is shining with me as well. That's how bad things have got. I can't even see the sun shining.

[00:16:00]Um all right, brilliant. So, just let me say to everybody that if you want to know more about the miseries of the UK economy, and and some of the things that are great about it, and reasons to be optimistic, don't listen to me and John, but do listen to our podcast that's out on Monday with Andy Haldane, because he comes out with a lot of things that will make you think, "Well, actually, this is going to be okay." This is John You and I believe that with major policy changes, and the UK is in a great place.

[00:16:24]But now, without those major policy changes, things are going to be tough.

[00:16:27]But there's so much going on underneath all the misery that the future could be bright if only we had a competent government.

[00:16:37]Thanks for listening to this week's Merryn Talks Money debrief. If you like our show, rate, review, and subscribe wherever you listen to podcasts. Also, be sure to follow me and John on X or Twitter at MerrynSW and John_Stepek.

[00:16:48]This episode was produced by Sam Al-Shadi. Production support and sound design by Moses Andam. Questions and comments on this show and all our shows are always welcome. Our show email is [email protected].

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