Don't judge me

My guilty pleasure is scrolling the Daily Mail app and its mixture of primarily irreverent news and celebrity updates. It’s pure escapism. It allows me to “stay current” and provides insights into the current state of human affairs. What strikes me however is the lack of good news. Now, before berating the press (or my peers) for being so negative - another favourite pastime - I attempted to find out if there was a logical reason for such negativity. It appears there is. It comes from evolutionary psychology. When we ran around in leather underwear fighting sabre-toothed beasts, bad-news was a defense mechanism: "There’s a bear in the cave, get out!". So, we’ve evolved to react more strongly, learn from and use negative information far more than positive information. The outcome: ‘"If it bleeds, it leads”, click-bait, social media algos and a huge decline in public sentiment over the past 50 years. Psychologists call this ‘negativity bias’ and you find it not only in the Daily Mail, but in all forms of journalism, even finance. Consider that, for every story on the broadening of the market rally you will find many more on the risks posed by market concentration. For every story on new cancer treatments like CRISPR, you will find many more on Covid (yes, even now). And for every story about the raging global bull-market in homebuilding stocks, you will find many, many more on the housing crisis.

The housing crisis, what an opportunity!

The 'housing crisis', a situation where affordable and quality housing is insufficient to meet the demand of the population, is a global problem. From the UK to Australia, New Zealand, Italy, Canada and the US, the industry has not kept up with household formation, a situation that in the US led to house prices rising last year, despite rising rates. Demographics (older people living/staying in homes longer and not recycling supply), skill shortages, Covid (pent-up demand), immigration (600k or so in the UK last year alone) and affordability all play a role. Consider, home prices are 8x average earnings in the UK, being at 4x for most of the past century. It takes 30 years to save for the average deposit in London (up from 4 years in 1995). And if it’s click bait you’re after, the last time house prices were this high vs income Queen Victoria was still in power – a period highlighted by extreme inequality and one that ended poorly (think WWI). For younger folk the idea of the housing ladder, the dream of home ownership is illusory, anachronistic. Don’t believe me? The median age of a homebuyer in the US reached a record last year, of 53 years old…..Yes. 53.

We need new constructs...

In the 1980’s, nearly 50% of British and American 30 year olds lived in their own home, making it the most common arrangement for young adults. The figure today is about a fifth. The most common set-up being ‘living with parents’. A set-up not entirely conducive to procreation. Renting comes next. At the other end of the age spectrum, there are 1.2 million renters in the UK with a median age of 55 who will soon see earnings fall (as they retire) but rents may rise further (aka pensioner poverty). This was not envisaged by social welfare policy which assumes retirees will live in their own home, mortgage free! So, save a baby + pensioner crisis emerging, one that will draw even more heavily on the indebted state purse, we need new constructs to frame the reality of housing in the UK and elsewhere.

New constructs and new construction

They say the best cure for high prices is high prices. Yet the supply response in housing has been lacklustre. Why? Demographics. Both in the UK and US there is a looming retirement crisis. Builders are aging faster than they are being replaced, with more than a fifth of British and American builders being aged 55 or more. This as the number of younger builders is rapidly in decline (hence my kids learning to spot-weld!). The outcome: a significant skills shortage. Indeed last year in the UK only 8% of job positions were filled (AI’s not helping much there, then!). As older builders retire, this scarcity, this value will only increase meaning those who can attract and retain workers – the larger builders – will consume the lion’s share of economics. This may explain why the second best performing sub-sector in the US last year, behind only technology, was homebuilding, up 72% to a record high. It may explain why Buffett bought stock in 3 of the 4 major homebuilders. It might explain why Sekisui House in Japan has just launched a 19% premium all-cash bid for US builder MDC. And it’s not just a US thing. The best performing stocks last year in Ireland were all property-related (Cairn, Kingspan, Glenveagh). Some of the best performers in Japan were homebuilders. James Hardie in Australia more than doubled (+113%) and so on. The only region that didn’t have quite the same uplift was the UK. Yet Brexit hasn’t stopped immigration or household formation. While up 25% the sector must rise another 50% to regain previous highs. It looks decent value too, on sub 10x PE with an average dividend +5% and provides an option on a Labour government victory. Why so? Because UK Leader of the Opposition Sir Keir Starmer has promised to “bulldoze” the planning system and work with the private sector to unleash "big build" across the UK as part of radical action to accelerate housebuilding. Some good news. Finally some good news (unless you have kids in private school).

...and more professional investors

As discussed, home ownership rates are falling in West, with the slack being taken by co-habiting and the private rental sector. Whereas renting was once considered the ‘waiting room’ to access the housing ladder, it’s now the destination for about 1 in 5 who choose to rent. The problem is about a fifth of available rental stock is deemed ‘inadequate’ with a number of landlords struggling to keep up with rising costs, rates and regulations. The opportunity exists, therefore, for large institutional buyers to consolidate an incredibly fragmented industry, roll-up smaller operators into a larger scale operation and improve outcomes for both renters and investors. Larry Fink is making a song and dance about infrastructure investment as a way for long duration pools of capital to invest in supply-constrained assets that are inflation linked and provide a public good. But that’s far from being novel. What is still quite niche, yet with similar characteristics, is professionally managed Build To Rent (BTR) investments. Despite strong recent inflows (see Legal & General and Aware Super who bought into Get Living), there are still only around 77,000 completed, professionally managed BTR units in the UK, accounting for less than 2% of the rental market. Industry experts believe this market could more than triple in the next few years, taking institutionally owned homes to 6% of the current total. To reach the concentration levels of a country like Germany (where 40% of rental market is owned institutionally) it would need to rise another six times! That’s probably unrealistic. But now, with government support, pension reforms and changes to insurance regulations, I suspect a lot more capital will enter this space.

Invest in scarcity

I remain bullish on supply constrained real assets (see above: housing). So too does Larry Fink, it seems, betting $12.5B of his employer’s capital on Global Infrastructure Partners. What’s driving this excitement is a trifecta of mega-trends which we’ve defined previously as the 3D’s: decarbonisation, digitisation and deglobalisation. The last D being essential to ensure the first two. But these trends don’t stop with infrastructure. They extend to the entire supply chain. Take digitalisation. Whichever excitable techno-tribe you subscribe too, be it Generative AI, Quantum, the Metaverse, Crypto/DLT, Augmented/Virtual reality or so on, at some point of their journey each and every technology is reliant on semiconductors. As Ed Conway reminds us in 'Material World', the scarcity lies not in the disruptors – the exciting new technology – but in those rare enablers; semiconductor and semi capital equipment stocks (see Sox Index for clues). Conway extends the logic of enablers to include not only those rare technologies, but also the materials needed to sustain them: the steel, the concrete, the copper. Like with semi-conductors, the supply side is highly concentrated and should benefit if demand expectations improve. Which they now might after Larry Fink’s endorsement of the need for more capital intensive investment.

...and supply constrained 'real' assets

The Fed seems intent on improving system liquidity despite the lack of any material increase in the output gap, suggesting greater inflation impulses may lie ahead (reminiscent of the ‘70s). While such price tension may conveniently take a year or so to emerge (convenient as it’s an election year), now may be the time to buy supply-constrained real assets in anticipation of such. As we discussed above, housing, infrastructure and commodities fit that billing. So too, arguably, does bitcoin. It faces a confluence of bullish factors from new demand channels (ETFs) to its fourth ‘halving’ where the incentive to mine bitcoin will dramatically fall, constraining supply even further (which you’ll remember is capped at 21m). Note the discontinuity in my argument? Yes, by definition bitcoin is a supply-constrained commodity but it’s not ‘real’, at least not in a traditional 'boomer' sense. But what if gold, which is real in that regard, was about to lay claim to the benefits of bitcoin – a store of value that’s divisible and portable – with the potential to become a new digital currency, backed by the oldest currency of all. Real Gold. What then?

Well, if the World Gold Council (WGC) has its way, this is exactly what may occur.

Digital gold

Prior to Christmas I was kindly invited to attend a meeting held by Curation Capital, run by a well-known City luminary, Nick Finegold. The meeting was with the WGC, outlining an initiative called GOLD247 which will create a distributed ledger on the blockchain to track every gold bar in the world. The intention is to store all responsibly- and legally-sourced gold, disenfranchise illegal mining, bring gold market governance into the 21st century, and drastically improve gold’s appeal and access to a new generation of investors. Historically, gold’s appeal has been one of capital preservation not appreciation. Such has kept many millions of investors from thinking of gold as a worthwhile asset. Insurance is, after all, costly. But what if that narrative changed? What if it morphed to something like ‘a digital currency backed by the oldest currency of all, one where all members in the ecosystem benefit from gold price appreciation’. Just imagine what a doubling of the gold price could do to central bank reserves and their balance sheet. Needless to say but watch this space!

The problem with fairytales

Finally, the flip-side to the media’s obsession with unhappy endings are the often unrealistic endings in some fairytales. Take Goldilocks. The problem I have using 'Goldilocks' as a metaphor to describe the current state of the economy, is how that fable ends. After her illegal entry and trespass, eating the bears' porridge, breaking one of the chairs and soiling their sheets, Goldilocks awakes, presumably freaks out and runs, for her life. If a journalist found her and interviewed her today, given the prevailing bias, the headline might read thus: “Goldilocks still in rehab”. Let’s hope that’s not a more accurate prescription for the economy next year. For if it is, I suspect consensus, like Goldilocks, will need to find a quick escape. I would prefer to invest instead like the third of the three little pigs. Find margin of safety (and safety in margin).