Whenever I count from numbers 1 to 10. I find it easier to count up, rather than down. If you don’t know already, try this for yourself: count from 1 to 10: do you find it easier to count up from 1 or down from 10?
Not only mental exercise, physically also, I find it easier to walk upstairs and drive my car up hills, than walk downstairs and drive down hill. Why? Perhaps to do with my self-confidence. What I do know is that I’m more comfortable with thinking down than up. Which isn’t the same as thinking positively and negatively. Thinking down can also be positive; it depends on the circumstances, such as for example whether you think (as I do) that recession is the ‘norm’ and a booming economy symptomatic of something wrong. Since most businesses are geared to wanting booming conditions, their ability to cope with downturns often leaves a lot to be desired, which to my way of thinking suggests a psychological imbalance at some level.
Experienced investors generally prefer stable conditions and an upward-only trajectory. Before the oil crisis inflation in the early 1970s, rent reviews were at 7 yearly intervals or longer, Since inflation became more of a measure, five yearly review intervals are considered about the right length of time for anything worthwhile to rub off on market rent. In a cyclical market, such as property, down times are necessary to provide the momentum for upward growth. The effort entailed in pace exerted is rewarded in the ease by which one progresses. I don’t know – this isn’t to say there isn’t one – of any plant that flowers every day all year round. A plastic flower yes, but in the natural world there have to be periods, often long, when the plant is gearing up to flower. And whether it reaches that flowering stage depends upon its hardiness and the weather conditions.
Living beings function best in perfect balance and harmony. A perfect state may be idealistic but that’s no reason not to strive for perfection. In the financial world, the right conditions for balance and harmony require debt levels to be sustainable and commensurate with actual profit. Where money has been artificially created, by central bankers injecting more into the economy to shore up struggling institutions, where that new money flows can result in a bubble.
Investors may like to risk their own money on hopes and dreams, but banks like tangible assets. Property is an ideal candidate for lenders, because of its established support system based on legal transparency and the opinion of valuation surveyors. Where investment is based on future profits and debt geared to expectations for those profits, the risk that the expectation will not materialise is greater. Expectation, no matter how well-informed or researched, is essentially a gamble on the future.
It is said the banks are cleverer than the people from whom the banks borrow, but not as clever as the people to whom the banks lend. Terminology and presentation is the key. Ask the bank to lend you some money so you can gamble on a property investment and likely they’d refuse, but say you want the money for investment and they’ll say yes, in principle. What’s the difference? None.
Bubbles burst. Sometimes pop. But often they simply hiss, then to relieve the pressure let off steam and deflate gradually until balance and harmony is restored. A flat market where the relationship between investment yield and rental income and prospects is sustainable. Not one like we’ve had over the past years where 10% investments can be sold for 5% or 6% and where hoards of inexperienced buyers have been duped in thinking an upward-only rent review means an increase in rent.
We are not supposed to come unstuck in times of change: intuition, our early warning system for what lies ahead is designed to be helpful, not ignored. Intuition is resisted by a need for tangible convincing evidence. Often by the time the person is convinced it is too late to do anything or the best time has passed. The longer something in need of change goes unheeded the harder the consequences are to deal with.The cumulative effect of inflexible thinking caused by addiction to logic leads to becoming stuck in our ways, regardless of the need for change.
As I write this the London stock market FTSE 100 index is falling. I enjoy keeping an eye on things, to check that my insight is working okay. On 8 December 2015, on the MotleyFool (uk) I posted my prediction for the FTSE, as follows: “FTSE year end 31December 2015 – £5800 or thereabouts; FTSE 2016 range 5800 to 5300 or thereabouts. Lowest point 4500?”
This morning the LSE (stock market) opened some 50 points higher than now. Although the further fall since earlier on is only about 1%, it is the direction in which the stock market is heading that is a guiding light. There are bound to to be ups-and-downs, the stock market is a casino where based on past achievements bets are placed on future prospects. The stock market is not however the economy. The direction the economy is taking can be affected by what’s happening on the stock market, but generally the direction the economy is taking is governed by the ability of larger companies to cope with the forces at work. On the whole, larger companies are not coping at all well. Borrowing and re-financing to support balance sheets. Pruning costs and employee redundancy wherever. Mergers, a reset button for failing businesses, are on the increase. Devices to give the impression of managing the headwinds.
The commercial property market, for all the amount of money that is invested in freehold and long-leasehold interests, is relatively small market compared with the residential property market. However, unlike residential where people need somewhere to live, the commercial property market is far more dependent upon businesses wanting a physical place in which to make a profit. As for retailers, the shop is a physical place in which to attract paying customers.
Amongst larger retailers and supermarkets, ’tis the season for ‘like-for-like’ trading statements. Ignore the headlines and the “teenage scribblers”, as former Chancellor of the Exchequer, Nigel Lawson, described analysts. “Turnover is vanity, profit is sanity.” Behind the scenes all is not well. Thanks to creative accounting, and continuing to throw mud at the wall in the hope that some will stick, many retailers are struggling desperately. Stress levels are overwhelming. Unsustainable debt and the pressure on achieving expectation is resisting change and destroying creativity.