Friday 11, March 2022

Who can we believe?

“The first casualty of war is the truth.” “They are not even pretending anymore. — Ben Hunt”

Control of the narrative is very important. We all learn that to get our own way, we have to persuade others of the correctness of our thinking. The easiest way to do this is to present one side of the story. Presenting one side of the story is a core competence of a politician. That’s why barristers (advocates) do so well as politicians. Their day job is convince a jury of the correctness of their argument.

Disinformation vs Misinformation – Neither Has Anything To Do with ‘Intent’ — The Ethical Skeptic

Will the Ukraine war affect UK property prices?

I don’t know. Nobody does. I’ll have a stab:

• sanctions on their own will not make much difference to UK house prices. Some top-end properties will have been purchased by oligarchs, but this is a market that is quite distinct from any rental property either of us is likely to own,
• energy price rises will feed into inflation, which ultimately will feed into salaries, which will in turn feed into house prices. In the long term, houses are the ultimate real asset. Interest rates may go up in the short term, though, which might make mortgages less available, which might push house prices down,
• the desire to “re-shore” production to the west will be a positive for the UK, which will support house prices (we don’t import much other than oil from Russia, but generally the exposure to overseas suppliers will be seen as something we want to reduce). Unemployment is already low, compared to the Eurozone, so if we avoid panicking over inflation we should see some wage growth,
• the pound will probably go down. Our current account deficit is 3.5%, which puts us between Venezuela and Columbia in the rankings. (And Columbia probably has more exports than are recorded in official statistics!). We’ve sustained this because we get a lot of foreign direct investment, but that’s largely stopped because we are now out of the EU. If the pound goes down, we will see even more inflation.
• ordinary people in the UK have seen stocks (FTSE) go nowhere in a decade. They do not trust fund managers. They get a modest yield on a house, and this is something the value of which cannot go to zero just because some stock exchange is subject to sanctions. All ownership is contingent on the government not seizing the asset, but a democratic government would have difficulty seizing houses. Crypto currencies (held on an exchange, which is where the vast bulk of them are), on the other hand, are really quite vulnerable: see here,
• banks continue to be happy to lend to finance residential property. In fact, I think that over 80% of all bank lending is linked to this.

​Having said all this, nothing is certain, and you should do your own research. ​

Monopoly and monopsony

I believe that a market where there is a lot of competitive suppliers and consumers is the best way to allocate resources to maximize overall consumer welfare. In the jargon of economists, a free market leads to Pareto Efficiency. That’s why I am against price fixing, whether it’s in the price of milk, money (i.e. interest rates), pencils or labour. To prove the Pareto Efficiency, there are a number of other assumptions, including neglible transaction costs. I am not an economist: look it up!

But many markets lack many of the attributes which characterize a truly free market. Read any book on business strategy (my favourite is Competition Demystified: A Radically Simplified Approach to Business Strategy by Bruce C. Greenwald and Judd Kahn) and you will find that businesses are tireless in striving to keep out of markets which are truly competitive. When business arrange themselves to stifle competition, the remedy is supposed to be the law. Developed economies have laws which are supposed to protect consumers from exploitation by businesses which combine in such a way to eliminate competition. Unfortunately, politics today depends heavily on campaign contributions from those very firms that should be regulated. The result is a steady weakening of competition law, especially in the USA, but (I suspect) throughout the developed world. Matt Stoller has written extensively on this. He has just written a new piece which focusses on employers combining to reduce competition for workers. Historically, “company towns” saw factory workers exploited during the Industrial Revolution. Unfortunately, for certain types of jobs, this is still a problem today.

I have always instinctively been against minimum wage laws. For a start, they are mis-named. If truly every worker was guaranteed the minimum wage, assuming this did not drive employers out of business, this would not be too bad. But for the marginal worker, the last guy who can be added to the workforce such that he allows the value of total output to go up (his marginal product) in excess of the wage that he is paid, when a minimum wage is increased, or introduced, and it is above his marginal product, his employer will terminate his employment, in the classical analysis.

But if the employer is a monopsonist, this will not be the case. There seems to be evidence that this is what is happening in the UK. I am still sceptical that this will apply everywhere, and a minimum wage will really have no impact on employment, but I accept that the effect is quite small, in practice, for the current UK minimum wage level.

However, clearly the better approach would be to be more vigorous in busting the cartels. This post (about the US) indicates that there is some cause for hope, but things are much worse than they should be.

Wrap

UK GDP forecast to rise 10% YoY. UK 10Y gilts yield now at ~1.5%, up 67bp YoY. Not exactly Venezuela, but probably worrying for the BoE, given that Germany’s equivalent yield is only 24bp. Generally, today was risk off. Equities were down, US bond yields were up (fractionally), dollar was up (against almost everything). Commodities were generally down, apart from oil and wheat, which had overshot.

Some WFH winners were fading strongly. Docusign was down 20% on weak results. Zoom, Peleton, Meta are all looking pretty sick. The SPAC ETF, $SPAK, is not available to short. Read into that what you will!