The Nvidia Shock and Britain’s Housing Problem

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1:41Bloomberg Audio Studios. Podcasts. Radio. News.

1:57Welcome 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 am Merrin Somerset-Webb, UK Money Editor at Large.

2:07Merryn Somerset Webb: And I'm John Stebbick, Senior Reporter at Bloomberg and author of the Money Distilled newsletter, which has occasionally been described as award-winning. Go you, John. Now listen, John, as an award-winning person, if you were caught having an affair with someone who may or may not be a Chinese spy, would you resign from your position as the editor and author of the Money Distilled newsletter award-winning or not? I mean, would you just brave it out, keep going? I mean, I think I would definitely brazen it out until it turned out that I'd also been having an affair with a subordinate. And I think then by that point, I might struggle to keep the show on the road with a straight face.

2:50Fair enough, which brings us neatly to

2:54Merryn Somerset Webb: yes yes i think it's the only market story of the week really isn't it yes um mr jensen wong has actually literally as we're going on air uh just resigned as the chief executive of nvidia so it's been a really really tough week for nvidia shareholders i mean actually to be fair there's a there was a lot going on before the resignation a lot going on before the revelations about the affairs and the shares are already down 20 % or so in a month. We are speaking just before the market opens on, what day is it? Thursday, just after the resignation. And in pre-market, it's down around 8%. So if you hold those shares directly, you have lost a lot of money.

3:39But if you've been listening to our recent podcast series on Portfolio Reset, you will know that even if you do not hold the shares directly, and even if you do not know you hold the shares,

3:49Merryn Somerset Webb: you've also lost a lot of money haven't you john yeah you have just the other day i was pointing out the nvidia it's actually only the second biggest stock in the s &p 500 by the time it had already fallen 20 % odds behind apple but yeah seven pounds out of every hundred pounds you have in an s &p 500 tracker is in nvidia and if you're talking about the top 10 kind of magnificent seven stocks which in it mostly is magnificent seven in the top 10 um then it's more like 40 pounds out of the 100 pounds most people will have some nvidia in their portfolio there's nothing wrong with having one of the biggest stocks in one of the biggest sectors and one of the biggest economies in the world in your portfolio but the point is this is a stock that is almost universally owned by anyone who owns shares um so it's a it's a it's a big big deal whenever something like this happens.

4:43Yeah. And it's a bigger deal for a company like NVIDIA than it is for most companies. You get your average giant company with a manager CEO, i.e. someone who's been put in place after the creation of the company and maybe post its major growth phase. And you find out that the CEO has been up to no good and he's chucked out and they look for a new CEO. And that's a matter of three, four, five percentage points, right? It's not such a big deal. But when you have something like this where you've got a founder CEO and you have I mean their last proxy statement on this matter we are highly dependent on the services of our long-standing executive team there's the risk stated by the company up front and now you no longer have the man who's both the founder hero and the top of that management team it makes a very significant difference.

5:32Merryn Somerset Webb: well yeah and it is interesting about the management team because um there was a very good chart on Bloomberg the other day we'll just point out that um he had 60 direct reports the average direct report for an S &P 500 company is 14 so in other words there's he's got a whole load of people who report directly to him um he had no I mean obviously they've got an interim CEO just now, but he had no obvious successor. You know, there's people in most of the big companies who you would say, including the Mag7 ones, who you would say, right, okay, that's the person who would be the go-to if the CEO, you know, something happened to them.

6:15Merryn Somerset Webb: But it's definitely not the case with Jensen Wong. And that's where, I mean, well, I suppose the concerns come from two areas, don't they? The one is he is very much a key man in this company. And the other issue is that Nvidia itself is a key company in the AI bubble. I mean, it doesn't seem to have spread dramatically to the other companies yet, but you know, people have described Nvidia as the central bank of AI. So the idea that you can have this much disruption in this company and for that not to have any knock-on effects to the rest of the AI sector strikes me as a little bit hopeful to say the least.

6:59Yeah, well, it's interesting, isn't it, going back to key man risk and that number of reports that the interim CEOs collect Crass, who's the CFO and has been for a long time, but practically no one has heard her name, right?

7:12Merryn Somerset Webb: Yeah, yeah. I mean, I think this is the first time most people, I mean, certainly it's the first time I've heard over. I don't pay a lot of attention in the video, but I suspect it's the case for an awful lot of people. So we don't know what will happen next, but what we do know is that this whole sector is all fully connected. Everyone depends on each other one way or another, data center owners, near clouds, AI companies, chip makers, et cetera. They're all caught up in this web of independence, which is very hard for people to understand. And I suspect that most journalists, I've certainly got one.

7:46You've probably got one as well. John, I've got a chart sitting up on their desk somewhere showing them how all these companies are interconnected and how the different parts of the infrastructure are interconnected. This is complicated and dangerous. And a new level of scrutiny on the company sitting in the middle of all of it could be dangerous for everybody, particularly for valuations and for the perception of the sector. And into that, into that comes blazing the Anthropic IPO. Yeah.

8:20Merryn Somerset Webb: Yeah. Well, because that's the other big story this week. they finally

8:26Merryn Somerset Webb: they kind of chose their moment really badly they chose it badly they probably needed to go about two months ago roughly if they wanted to pick the top whereas now they're coming out and trying to get at one point it was 2 trillion now it's roughly 1.4 trillion but that's up there was a point when we were going oh 1.2 and some people were saying maybe we'll go down to I mean apart from anything else John But this is a completely insane world. We are talking about, you know, half a trillion as a price can go up and down by half a trillion dollars. I mean, this is a mad, mad world. And anyone who says there's nothing bubbly going on here should look at the fact that you and I are having a conversation about a valuation of admittedly an extraordinary company, but nonetheless a company flipping around the place by half a trillion dollars.

9:19For context, remember that the UK's entire debt, government debt, is a trillion pounds. Just a little context.

9:28Merryn Somerset Webb: Maybe we should just convert it all into kind of AI company equity. Well, that might work. Now, listen, the thing to say about Anthropic is that obviously I have applied for shares because I apply for all this stuff. You know, as everyone knows, I hold a tiny bit of Bitcoin. I hold a tiny bit of SpaceX. I just, you know, I like to feel it with everybody else. I get terrible FOMO. And of course, I also buy lottery tickets. So there we are. But if you, like John, are not going to apply for any shares directly, let's go back to the very conversation we were just having about NVIDIA. Even if you don't have shares, you have shares or you will have shares, right?

10:05Merryn Somerset Webb: Well, probably, yeah. I mean, the difference with Anthropic, I suppose, is that it's a bit like SpaceX. So unless you if you if you own the S &P 500, then you won't get them for at least a while because they are stricter about their requirements for entering the index. But if you own a NASDAQ tracker, you'll get it pretty quickly. And you'll get quite a large amount. I mean, SpaceX, listed, what, a couple of months ago, it's now the 11th biggest stock in the NASDAQ 100. So again, you're talking about nearly£3 in every£100 you've got invested in the NASDAQ is in SpaceX. now you may not care and that's absolutely fine but i think this goes back to the problem that we were talking about in the portfolio reset podcast that we just did um and it's where we've had these companies basically grow from zero to you know again the point where we can be talking about 500 billion dollars as not a rounding error but you know something that you can fluctuate at and you've missed all that and now you're getting landed with them just as they're at the point where their future is at its I guess most uncertain and its valuation is at its highest so again you have to think seriously like do I want to be the person who is left holding the bag as it were for the people who have sold out of this and if you don't want to then that's why you have to take a more active approach to the way that you invest yeah okay well we'll see what happens I know I said to the team before that if I made a lot of money on my SpaceX chairs we'd all go out to dinner and it kind of didn't happen making money and then going out to dinner let's all pin our hopes on Anthropic now okay

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14:35There's a whole idea of being left holding the bag is something that brings up another thing I want to talk about today, which is not about AI or about America, but it's about one of the things that our UK based listeners like to hear about the most, which is house prices. And I know, John, you've just been writing about that again. I mean, I know we always laugh about people wanting to talk about house prices all the time, but they are unbelievably important. And people have enormous amounts of their wealth in lots of cases are 100 % of their wealth tied up in property in their house. So the extent to which prices fluctuate is very important.

15:08And if your flat in London is worth£1.5 million one day and£930 ,000 the next day, this is not a joke. This really matters. And I know that we're not in the bit where prices aren't freefall yet outside parts of central London, but definitely there's nothing good going on in the UK property market, isn't there?

15:25Merryn Somerset Webb: No, it really does look worse by the month as this year's gone by, mostly because interest rates have risen more sharply than people expected, or in fact risen at all. It really has kind of dented confidence in the housing market or what was left of it. And certainly in the last few months, it really has started to take a bit of a nosedive. Mortgage transactions have gone right down or mortgage approval numbers, which point to transactions have gone down. all of the surveys prices have started to actually fall and it does look increasingly messy and the latest one is obviously the Royal Institution of Chartered Surveyors, they've got a pretty good survey where every month they basically go out and ask their members who are mostly estate agents or surveyors, you know, what's going on in your neck of the woods and they're surprisingly honest about it actually so they'll tell you whenever things are bad and you know it's just got gloomier and gloomier, particularly Interestingly, I don't know, in the southwest of England, the comments from the agents there, and I'm assuming this is because it's obviously a big second home place, they're just talking openly about prices falling to 2018 levels and being down anything you want to sell.

16:44Merryn Somerset Webb: They're asking prices got to be down 5-10%. And it's quite unusual we see that level of frankness. Even in the other pits of the country that aren't doing so well, you just don't get that. So basically, if you're looking for a house in the southwest just now, bargain very hard. Yeah. Is anything a bargain? I mean, the key thing that seems to be happening at the moment is that we're at this point where rising interest rates and disillusionment in the market as a whole are putting a lot of pressure, downward pressure on prices, but the cost of building is clearly not going down. And so it's unlikely that we're going to see a dramatic rise in supply any time soon because this effective pinching of the available margin means that our house builders are not that prepared to go out and build them volume no not at all and i mean taylor wimpy came out uh earlier in the week and they warned on their profits gonna be lower than expected um persimmon actually had a pretty solid update but it's more solid in the sense that our plans are going fine but it's not as if they're rushing out to build a load more houses or taking advantage of a booming market or getting excited about the your first home thing I mean there was an interesting report out earlier this week I think it was that was basically pointing out that the reason it's so expensive to build a house in the UK is because of primarily all of the government regulation that's been put on top of it and the things if you don't change any of that and the raw material prices keep going up and land prices are not falling then yeah that's just not viable to buy a house because you can't sell it for a price that gives you a sufficient margin of safety on the profit side and I think the only way that really can get corrected is if the cost of building goes down.

18:46Merryn Somerset Webb: And I guess the most likely answer to that is house prices coming down. How can the price of building come down if house prices come down? Oh, sorry, not the price of the house. Well, the end result would be house prices coming down, but basically you need something to demolish the value of the land. Yes. And the only way you get that is by a proper nominal price crash. Alternatively, maybe you get some sense in terms of planning regulations and all the rest of it. But I wouldn't hold my breath for that. I wouldn't hold your breath at all. I am just writing today about the new mansion tax in the UK.

19:24And the more I write about it, the more I think we are never, ever, ever going to get a sensible policy out of this government. It's of all the taxes I've ever looked at. It's basically the worst. I mean, if you think back to Adam Smith's four canons of tax, right, that they should be fair, certain, convenient, economic, are you sort of cheap and easy to collect? Except you don't very often come across taxes these days in our age of institutional idiocy. You don't often come across taxes that meet all four. Obviously, who would expect that? But it's very hard to find one that doesn't meet a single one of those criteria.

20:00Not one, not one.

20:01Merryn Somerset Webb: Yep. That's really unusual. So looking at that and looking around the housing market, But I think if you've got an administration that is prepared to introduce a tax such as this new mansion tax in the UK, you also have an administration that is probably incapable of doing anything useful in the housing market. So that's depressing. I suppose that's basically the mercy of interest rates. And it does look as if interest rates will go up further. and I guess that at that point I mean I think one of the interesting things and one of the points I was making in today's letter is that weirdly enough the British economy is still in relative terms doing better than the rest of the G7 apart from the US and even this year it's actually we've almost caught up with the US now obviously GDP is a very ropey economic figure and figuring it out is a bit of a guess but it's about direction isn't it Yeah, and the thing is, it's like, well, why hasn't the fact that essentially for the housing market recession for about three years at least now, why hasn't that and why hasn't the corresponding negative wealth effect had a big impact on consumer spending?

21:16Merryn Somerset Webb: And I guess my best guess is that we're not quite as leveraged to the housing market as we used to be because more people own their homes outright. Fewer people have got outstanding big mortgages. so at the end of the day and also people just generally don't have as much debt so in a way the kind of scale of the wealth effect is bound to be lower because you haven't effectively spread your balance sheet on your house but it's still got to have an effect at some point maybe it's when we start to see widespread falls yeah and it has an effect I suspect when you get to the point in the cycle the generational cycle where all the people who have been saying for years my property is my pension attempt to affect that transformation.

22:03Merryn Somerset Webb: Yeah. That's when you start having a fairly unpleasant wealth attack. So for the moment, at least, the housing market is in hock to interest rates, but the economy is not in hock to the housing market. But that could easily change as we move through this cycle of retirement. Yeah, and you also have to wonder, what does it mean about the banking mum and dad? Oh. Because a lot of these, you know, BOMAD deposits are drawn from imaginary future equity in the parents' house. Yes, quite a lot of equity relief. Yeah, basically people have essentially given their kids their inheritance before they've actually died.

22:43And it's going to turn out that they couldn't afford to do that. Yes, one of them never existed.

22:49Merryn Somerset Webb: Yeah, so that's going to be an interesting slash scary thing to watch. but this is a very slow motion yeah we're spiraling John spiraling into pessimism spiraling into pessimism I'm going to stop this podcast before we go any further we do stop right here okay

23:11thanks 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 at merrinsw and john underscore stepek This episode was produced by Samasadi and Moses Andam. Questions and comments on this show and all our shows are always welcome. Our show email is merynmoneyatbloomberg.net.

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