Markets Wrap: AI Jitters, Budget Expectations and UK Housing Rebound?

0:02 Bloomberg Audio Studios. Podcasts. Radio. News. Welcome to the Merrin Talks Money Market Wrap, where we talk about the biggest moves in the markets this week and what is driving them. I'm Merrin Somerset-Webb, UK money editor-at-large.

0:21 And I'm George Stepak, senior reporter at Bloomberg, author of the Mindstilled newsletter, and the only person on this podcast who isn't dying of the cold.

0:32 I am not feeling great, John, and that's why you are going to be carrying this podcast.

0:37 That'll make a change. Right.

0:39 Well, there's a lot going on either way. And we're finally beginning to see some major jitters in the AI part of the market, although all the market is AI, as we keep saying. And I'm not actually sure that we have a huge amount to say on that, because we've talked a lot over the last few months about our worries around The level of CapEx are worries about how much the big companies have to make in the way of revenues and profits to justify the CapEx and to live up to the valuations, etc. So it should be no surprise that the market as a whole is starting to ask a few questions around this now.

1:10 It does feel as if that is all that's happening. It's not obvious that there's anything explicit to say that this is a broken moment. It's more investors have gone from saying, just get me AI at any price at all, to starting to just be a bit more picky. And I think one of the kind of obvious things was that at the end of last week, a big Australian data centre IPO that was meant to be a bit of a kind of flashy one had to get pulled at the last minute because they were just asking for too much money. And whenever you read about it, it is actually pretty clear that they really were just asking for too much money. It's not as if this was the first time at which any concern had been expressed to these people about how much they wanted. Investors were

1:55 already a bit jittery about it, but I think the fact that it fell over and then obviously the South Korean market, the KOSPI, actually peaked quite a few months ago. So in a funny way, this sort of almost feels as if it's more like a slightly delayed reaction to all of the pressures that have been building and obviously including financing costs because that's kind of like treasury yields in particular have gone up. There's this background issue of tightening finance conditions. And I suppose the ironic thing is that, or not ironic, I suppose I say completely predictable, but as the AI stuff has actually run into proper trouble this week, so government bond yields have actually started to come back down again as people have sort of said,

2:39 I want something safe now. And there's a kind of knee-jerk instinct to just go back into all the government bonds that a moment ago they were treating as completely untouchable.

2:48 That's interesting, isn't it? The delayed reaction thing. I don't know if you... Remember a few months ago, we did an interview with the author of that book, 1873, about that bubble and collapse then. And one of the fascinating things about that was that there was this horrible collapse in Vienna that it took forever for it to translate.

3:06 It was like, oh, just a one-off, just a little sort of private thing going on here. And then it eventually, but a good year afterwards, translated into a full-on collapse of the railway bubble and that Cap-8 boom. And maybe Korea is our Vienna.

3:20 Yeah, and I think the other thing that's really interesting about the parallels with the 1873 book are that then, unlike, say, the kind of 1929 crash and the Great Depression or the 2008 financial crisis, actually putting a finger on the trigger or why it happened is actually really pretty difficult and it was much more of a kind of lingering, lasting, on-and-off thing kind of slump that came out of it.

3:51 It's interesting to see talks about bimetallism, so basically a change to the monetary kind of standard as being one of the big issues there. And it's interesting that we've got our own kind of questions about the monetary order and fluctuations there in a way that we haven't had for many decades. But obviously, you know, there might be a parallel there as well. But no, it's kind of fascinating.

4:14 We had a very interesting question on gold. We're going to come back to another time, didn't we? Yes, yes.

4:19 It was a good question, actually. Good question.

4:22 We will come back to that in, we've asked for questions and we will do another question on the session quite soon. And there's an interesting question on goal that we will come back to. But listen, John, the other thing that has popped into our radar again this week, it's never off our radar, let's be honest. No. Is UK house prices, which we are as obsessed with as our readers are. And I noted something from Zoopla. which I sent to you, so I hope you saw it as well, saying how much affordability has actually improved for people in a certain sector of the bias market. So if you've got a 20% deposit and you're borrowing four and a half times your income, your affordability has actually significantly improved from a couple of years ago, thanks to

4:58 falling house prices and a rise in real wages. So this is good news. The fall in house prices is doing its job. Even with higher interest rates, it's making it easier for people to buy houses. But then there's the matter of that 20% deposit, which not everybody has.

5:14 Yeah, that's tricky. But this may be where a report from Simon French over at Panmure Liberum comes in. Simon was making what I think is fair to say still was a contrarian idea that the UK housing market may bounce back a lot quicker and a lot sooner than anyone expects. And there's various factors behind that, including the economy being a bit stronger than people expected, etc., etc., But one of the main ones that he brought up, and I thought that this was quite eye-catching, is this idea that... So from April, pensions, private pensions, are going to be included in the inheritance tax net. And so that actually really upturns a lot of financial planning that's been around for at least a decade now. And the

5:59 idea was that you would save your pension to last and spend it last because that's the thing you could pass on to your kids free of inheritance tax. So now. The pension is no longer going to be protected from inheritance tax.

6:13 It was always ridiculous that you could hand on this big pile of effectively state subsidized or taxpayer subsidized, depending on how you like to look at it, cash to your heirs tax-free. And I know that your heirs had to pay income tax on it, but nonetheless, there were ways to make sure that money ended up untaxed, which obviously I would like all money to be untaxed, John, but in the great scheme of things, this didn't make sense inside the UK tax system, did it? No, it didn't.

6:39 It was always a loophole that was crying out to be shut, and the only bad thing, I guess, is that it wasn't closed earlier. Your listeners know that we are not typically people who are calling for taxes, and this is very much more about the exceptional aspect of it. But I remember whenever we were writing about this when it first happened, A, we couldn't believe our ears, and B, it was something we were always careful to describe as, this is a grey area, this surely cannot continue. And even at the time, HMRC was treating it as a grey area. But it then stuck around for long enough that people started to take it for granted as part of their tax planning. And unfortunately, that means it did get embedded. And the main source of irresponsibility here is

7:20 government not tackling it earlier. But so now that they have, it means that people are obviously having to change what they do. And as Simon points out, one aspect will be that it will be more of an impetus for people to pass on their money before they die. And one very obvious outlet for that is helping kids or even grandkids with housing deposits. And then if you throw in the fact that there's also less impetus to downsize, because in relative terms, the family house is still an IHT-advantaged asset, whereas pensions are not. And so now you're better off sending it out. better spending your pension before you take equity out of your house rather than the other way about then that means that we're basically throwing

8:08 a big demand side boost as in people wanting to buy or hold on to property at a market that is completely unable to build any more property because it's too expensive for house builders to do it so i think that's actually pretty compelling and logical argument for housing rebounding possibly faster than we expect And if you throw in the your first home nonsense on top, then I don't actually see that having as big an impact. But it's definitely part of it. And it's also the fact that it's very obvious. And also from what the Conservatives have said about IHD and family homes, politicians are lapsing back into this habit of pitching proposals that will boost house prices without actually improving the market at all.

8:54 They go on and on and on, don't they, about how important it is to make housing more affordable than in every single policy they put in place. They're the opposite.

9:04 Yeah, it's extremely cynical and short-termist, but then that is where we are at the moment in politics, unfortunately.

9:13 Which makes us nicely into the budget, John. One thing that we might hope for from the budget... Coming up in the UK next week is what would we hope for? We'd hope for nothing. Absolutely nothing.

9:24 Yeah, basically nothing.

9:25 Leave us alone, please.

9:26 Yeah, there are so many things that we need to improve. But at the moment, simply leaving the system alone, regardless of how bad a state it's in, would be better than making it even worse, which is what has happened certainly over the last two budgets.

9:44 And at least.

9:45 Britain's not currently in the full glare of the bond market. It's France's turn. Thank you, France. Merci beaucoup. And the other thing is that the economic, the surface economic stats are not that bad. We've just had... you can't trust the monthly GDP figures as far as you can throw them. But the latest ones, you know, showed a big bounce, whereas it was expected to fall.

10:07 And yes. We're in a big bounce, John. We have to stop this. And I'm glad that it's positive.

10:12 This is great.

10:13 I'm really pleased to see positive. We've got to stop pretending. that all these tiny numbers.

10:20 Good no absolutely two to.

10:22 Three percent of real growth every year four percent of real growth every that'd be great this is just less bad than it could be.

10:28 Yeah you're exactly right but yeah so long story short britain's probably got some breathing space and the best thing that john healy could do is just do nothing and then spend some time thinking about how to actually make things better in the country. And if he doesn't have the appetite for that and this government doesn't have the appetite for it, maybe we need to wait for one that does. Absolutely.

10:50 I don't know. That might be a long wait, John, but let's see. The timing of election to be discussed possibly next week. Thanks for listening to this week's Merrin Talks Money Market Wrap. 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 MerrinSW and John underscore Stepak. This episode was produced by Saman Saadi and Moses Andam. Sound design by Blake Maples and questions and comments on this show and all our shows are always welcome. Our show email is MerrinMoney at Bloomberg.net.