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

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2:51Merryn Somerset Webb: Welcome to the Maren Talks Money Market Wrap where we talk about the biggest moves in the markets this week and what is driving them. I'm Maren Somerset-Webb, UK Money Editor-at-Large And I'm George Stepek, Senior Reporter at Bloomberg author of the Mindstilled Newsletter and the only person on this podcast who isn't dying of the cold. I am not feeling great, John, and that's why you are going to be carrying this podcast. That'll make a change. Right. 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.

3:26Merryn Somerset Webb: 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. 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.

4:05And 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, no, 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 already a bit jittery about it but i think the fact that it fell over and then obviously the south korean market the cost be actually peaked quite a few months ago so in a funny way that 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 kind of like tightening finance conditions.

5:04And 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, 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.

5:26Merryn Somerset Webb: Now, it's interesting, isn't it, the delayed reaction thing? I don't know if you remember a few months ago, So 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. 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 CapEx boom. Maybe Korea is our Vienna. Yeah, and I think the other thing that's really interesting about the parallels with the 1873 book are then, unlike, say, the kind of 1929 crash in the Great Depression or the 2008 financial crisis, actually putting a finger on the trigger or why it happened, actually really pretty difficult.

6:22and it was much more of a kind of lingering, lasting, on and off kind of slump that came out of it. It's interesting because he 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 is. It's kind of fascinating.

6:52Merryn Somerset Webb: We had a very interesting question on gold. We're going to come back to another time, didn't we? Yes, yes. It was a good question, actually. Good question. We will come back to that in that we've asked for questions and we will do another question on session quite soon. And that's an interesting question on gold 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, 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 as well, saying how much affordability has actually improved for people in a certain sector of the buyers market.

7:28Merryn Somerset Webb: 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 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. Yeah, that's tricky. But this may be where a report from Simon French over at Panmur Liberum comes in. And Simon was making what I think is fair to say still was a contrarian idea that the UK housing market might bounce back a lot quicker.

8:09a 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 can 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 idea was that you would save your pension to last and spend it last because that's the thing you could pass on your kids free of inheritance tax.

8:46So now the pension is no longer going to be protected from inheritance tax.

8:51Merryn Somerset Webb: It was always ridiculous that you could hand on this big pile of effectively state subsidised or taxpayer subsidised, 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 There are 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. 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.

9:24Your 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, And 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 government not tackling it earlier.

10:01but 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 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 a big demand side boost as in people wanting to buy or hold onto 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 a pretty compelling and logical argument for housing rebounding possibly faster than we expect.

11:08And 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.

11:33Merryn Somerset Webb: 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? It's the opposite. Yeah, it's extremely cynical and short-termist, but then that is where we are at the moment in politics, unfortunately. Which means that's 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. Yeah, basically nothing. Leave us alone, please. 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.

12:22At least 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 and yes we're in a big bounce

12:48Merryn Somerset Webb: john we have to stop this and i'm glad that it's positive okay it's not a big bounce i'm really pleased to see positive we've got to stop pretending that all these tiny numbers good Well, it's good. 2-3 % of real growth every year. 4 % of real growth every year. That'd be great. This is just less bad than it could be. 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 we 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.

13:28Merryn Somerset Webb: Absolutely. 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.

13:58Merryn Somerset Webb: are always welcome. Our show email is merynmoneyatbloomberg.net.

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