By Richard Pickering, Head of Futures Strategy
Crash! – Ten years ago this week the unthinkable happened. Lehman Brothers, the fourth largest US investment bank and a 150-year-old stalwart of the financial sector, filed for Chapter 11 bankruptcy protection. The NYSE listed company had in the previous three years posted record profits and in 2007 had been rated AA- by S&P. Lehman wasn’t the first victim of the sub-prime housing market collapse; a couple of Bear Stearn’s hedge funds (judged to be riskier propositions) had already gone under in 2007. Lehman was however seen as the bellwether for what has subsequently been termed ‘The Great Recession’, and the point where the mispricing of risk became alarmingly apparent. Within the course of a single day’s trading the bank’s stock fell by 93%, and a stream of sick-looking employees filtered out of its Canary Wharf headquarters carrying cardboard boxes filled with their personal effects. The UK economy was already in decline by that point and would over five quarters witness a 6.2% drop in real GDP. ‘If these things were so large, how come everyone missed it’, asked the Queen, as well she might. For those not old enough to remember, this was not a fun time to work in real estate. For my part, I was still in my twenties (just), and hadn’t worked through a recession previously. Hatches were battened, and those with greater experience adopted the brace position. This ended up being not just a recession, but a defining moment for the subsequent 10 years. And what a ten-year period it has been in so many ways. In this week’s New Europe we take a look at what has changed and what has not.
Ups and downs – Economic recessions are typically short and sharp compared with intervening periods of growth. The Great Recession was sharper and less short than any in living memory. It would take five years to restore the loss suffered in five quarters. But much more had already changed. At points during 2008 a pound earned you more than two dollars, and following the release of that year’s Sex and the City movie, everyone was flying to New York for shopping trips. Those highs were not to be repeated. The recent fall in sterling due to Brexit has nothing on the fall during 2008, or even the general trend since 2014. Whilst sterling repricing wasn’t matched by the kind of inflation one might expect, wages took a battering, meaning that in net terms UK workers were quickly and substantially worse off. Property returns also turned south sharply, hitting around -13% in the first quarter of 2009; capital values fell by about 35%, and the REITs haemorrhaged value with the FTSE Nareit index falling by almost 75%. The Bank of England (and many other central banks around the world) reacted by slashing base rates from 5.0% to 0.5% and by rolling out quantitative easing initiatives. GDP ultimately recovered, but rates did not – ‘a new normal’. The low yield environment in which we now live has significantly supported asset pricing. Those who owned assets became richer. Those that were reliant on investment income suffered. I gave up any hope of ever retiring. As monetary policy around the world starts to tighten is there an end in sight for this new normal? The very long run shows that it is the late 20th century that is the aberration rather than the norm, with rates of 3% more typical over 300 years; meanwhile economic cycles continue to get longer and longer.
Politics – If, as Chairman Mao once noted, “Political power grows out of the barrel of a gun,” then ideology is the bullet and disaffection is the trigger. Either way, as George Orwell wrote, ‘In our age there is no such thing as keeping out of politics’, and in that regard the past 10 years have been a rollercoaster ride back to different times. It would be easy to look at the Brexit vote and consider that to be the defining political moment of the past 10 years. The vote cast a light on differential fortunes and core beliefs in our previously united kingdom. However, on a world stage, it was inconsequential. In late 2010 a Tunisian man, Mohamed Bouazizi set himself on fire; the flame would subsequently ignite the entire region. The Arab Spring set in course a reorganisation of power in North Africa and the Middle East; one that would replace old dictators with new ones, result in the rise of ISIS and set in course the largest migrant wave since the second world war. Europe reacted, and far right leaders once judged to be fringe agitators become power brokers, speaking for significant proportions of their electorates. In the UK, a counterbalancing push leftwards saw anti-austerity candidate Jeremy Corbyn overcome 100/1 odds to lead the Labour party, and perhaps in the future the UK’s most socialist government. Meanwhile across the pond, The Donald trumped his 150/1 odds in a journey that would lead him to the White House, to the brink of thermonuclear war with North Korea and to the dawn of a new age of global protectionism. After a relatively benign few decades, this is the picture of the polarised world in which major decisions are now taken.
Technology – I’ve always had a keen interest in technology. However, when choosing my career, my parents discouraged me from following that path, (‘law would be a good profession’). Jesus once said that ‘the meek shall inherit the earth’, and the past 10 years have proven him to be correct. Today’s business superstars aren’t investment bankers; they are Mark Zuckerberg, Elon Musk, Jeff Bezos, and the late Steve Jobs. The biggest trend in the past decade has been the shift to a digital economy, and the associated rise of platform businesses and subscription models; all supported by the growth of mobile internet. It is barely believable that at the start of 2008 we were still on iPhone Gen 1 (no GPS or 3G). Now the ability to access data when out and about is ubiquitous and at the core of how we work, shop and communicate. In the latter regard, Facebook had 1m users in 2004, 100m in 2008, and now has more than 2.2bn. WhatsApp, Snapchat, Tinder, Airbnb, Uber, Spotify and Instagram are all inventions of the past decade. And we’re just getting started. Mobile phones and the social web have dramatically driven the number of connected devices in the world, but the new breed will come through the internet of things. All of this is culminating in an explosion of data (90% of all data was created in just the last 2 years). The ability to harness this data is leading to exciting developments in customer profiling, public health, city design and the trading of financial assets. It is also now in the early stages of unlocking workplace performance data – a holy grail for the property industry.
Social trends – In 2008 Millennials were young people – typically a phrase applied to coders, hipsters and aspirant urban youth. In 2018, the definition includes middle-aged people like me and the phrase has lost all meaning. However, the underlying truth is that society has been changing, and the habits of today’s younger generation do differ from those of their parents. In the past 10 years church attendance dropped to < 2% of the population; online dating overtook introductions by friends to become the primary (17%) way of meeting one’s partner, the average age to get married crossed the 35 threshold and now stands at a higher average age than having children (33), the number of people that drink regularly dropped by 10%, and for the first time in living history privately owned housing stock in the UK fell, whilst the number of people in rented accommodation rose significantly. As a society we are eschewing commitments. The same is true of real estate, as lease lengths have fallen and over the past decade a new breed of pop-up and licensed terms have risen into the mainstream. Ten years ago, there was no Boxpark, no Secret Cinema and no WeWork.
Adieu – As new trends and businesses take hold, we need to bid farewell to others. Recent casualties include BHS (est 1928), Maplin (est 1972) and a near miss for House of Fraser (est 1849). But over the past 10 years, many more have succumbed to new business models and changes in customer behaviour, including: household names such as: Woolworths (confused offer), Blockbuster (product became digital), Kodak (product became digital), and Comet (online competition). Whereas in Japan businesses endure for millennia, the average longevity of corporations in the West has been falling. However, the primary reason that large companies cease to exist is not failure, but rather merger. In spite of the profusion of start-up activity, our world’s turnover is becoming dominated by fewer, larger organisations and conglomerates, drawn together by the lure of synergy savings and economies of scale. Now, almost 50% of the value of the S&P500 is held by the top 10% of its constituents (admittedly not an entirely modern position), but more importantly, the top few companies account for an increasing percentage of its growth. Global capital has gone in the same direction, with fewer hands on more money. The best are getting better, the frontier is more important than ever and for those without leading platforms there are fewer places to hide.
Haircuts, lobsters and snakes – This blog is about looking forwards, so why dedicate an entire edition to looking backwards? It is sometimes difficult to conceive the extent of change in prospect until one considers the change that has already occurred. Nobody notices when your hair grows, in the same way that the lobster doesn’t realise it is being boiled. However, haircuts get comments and boiling water hurts. A look back to 2008 reveals the major changes that we have seen over this period, but in my view with greater changes to come over the next 10 years. In 2008, unknown singer Katy Perry ‘kissed a girl’; whereas in 2018 she is the most followed person on Twitter. Just think what Dani Dyer might achieve by 2028, (actually don’t). Meanwhile, for those invested in real estate, change presents both challenges and opportunities. Greater variance of outcomes and business strategies bring with them both greater potential to succeed and to fail. The former requires an approach which is cognisant of the past, informed about the changes that lie ahead, and underpinned by a willingness to do things differently. As Friedrich Nietzsche noted, ‘The snake which cannot cast its skin has to die.’