3 Interesting things that happened last week #3

3 Interesting Things That Happened Last Week…

  1. Markets had to deal with structural inflation, again
  2. Zoopla published the Rental Market Report for March
  3. One tweet from Elon Musk cost billions of dollars in a crypto flash crash

1. A Week of Volatility

One tweet from Elon Musk was enough to send reverberations across billions of dollars worth of crypto. More on that later.

Last week, the Bank of England said it expects a much faster pace of growth this year. The first-quarter GDP figures showed that, while the economy contracted 1.5% over the first three months of this year, it remained relatively resilient through the latest lockdown. Growth in March points to more ahead in the coming months as lockdown restrictions ease, and could perhaps approach the Bank’s 7.25% estimate for the year.

Growth, on the one hand, inflation on the other

The growth in part prompted a surge in global commodity prices. This has been particularly helpful to them FTSE because of its high exposure to energy and commodity companies. The prospect for higher global growth has also led to revised expectations for inflation and as a result the future path of interest rates.

Building-related Commodities Price Surge

Shortages of copper and declining inventories have driven up prices to levels to record highs. A year ago oil prices we negative. Those same prices have risen 37% this year alone. There is a construction boom taking place around the world, as governments look to build themselves out of the pandemic’s economic woes. The UK government will allow construction companies to claim a super-deduction, in the form of 130% tax relief, on new plant and machinery.

Lumber futures surged past $1,700 for the first time, a pretty meteoric rise for a commodity that was sitting below $400 this time last year.

Iron ore surged to $230 from $173 per tonne on Tuesday, as Chinese steel mills continue to ramp up production.

This has all pushed the price of building-related commodities through the roof – see what I did there?

In the US, consumer prices rose by 4.2% year-on-year, their highest rise since 2008. In China, the cost of the raw materials going into its factories increased by 6.8% year-on-year in April, the fastest pace of growth in three years. Both were expected to rises, but they went up at a much greater rate than expected.

inflation
Commodities Inflation
Interest Rates Far Likelier to Head Up Than Down

Given the ultra-low interest rate environment, and the promising signs of post-pandemic growth, it’s clear that interest rates are far likelier to head up than down. This has made investors anxious, and the markets volatile.

It’s been a long time since markets had to deal with structural inflation. Higher-than-expected price increases and an accumulation of economic news appears to have given investors the jitters.

2. Zoopla Publish Rental Market Report

Post pandemic there seems to be distinct markets changes emerging in the rental sector. Increased demand for certain types of rentals has been met with constrained supply. This time last year there was almost zero demand in city centres and rising stock levels which put downward pressure on rents, while elevated demand in the wider commuter zones supported strong rental growth.

London is still dragging the rental numbers down

Rents are still down year on year in central Manchester (-1.1%), central Leeds (-0.7%) and central Edinburgh (-3.2%) in the year to March. In London rents have fallen nearly 10% since the start of the first lockdown last year,

The fact that short let providers and services accommodation landlords switched to long lets over last year hasn’t helped rental prices either. This lead to more competition for fewer tenants and an oversupply of landlords properties

Demand Coming Back?

Rental demand is building again in city centres as lockdown eases and offices begin to reopen. Since Easter (April 5th), tenant demand has risen sharply in central Edinburgh, up 26% compared to the previous six week period. In central Leeds, rental demand is up 7%, while in Manchester, demand is up 5%.

Rental demand in inner London also went up, but from a low base, as monthly rents in boroughs like Kensington and Chelsea hit their lowest levels since the Zoopla index began in 2011. Rental falls have started to ease in Q1, with rents down year to March by 9% compared to the 10% in the year to February.

There are exceptions to this demand story. Mainly in Birmingham, where demand has slowed since Easter.

Increasing affordability for renters

A lot of the demand is driven by dramatically increasing affordability in most cities, with rents in Manchester now accounting for 28% of an average earner’s income, down from 30% in March 2019. Rents in London are at their most affordable levels in a decade. The average monthly rent accounts for around 42% of a single earner’s gross income. This is down from 49% last year.

Rents are rising fastest in the North East of England (+5.5%), which is one of the most affordable rental markets in the UK.

Regions with higher rental affordability are showing the highest rental growth, and there is even more headroom for rents to rise in some regions. The improved affordability levels in London could mean the rental increases are not far away.

Tenant Demand

Supply/Demand

We could be moving into the next phase with elevated levels of rental demand, but constrained supply. This, along with the low base and better affordability could underpin strong rental growth this year. But it will not be a quick snap back to rental levels seen at the start of 2020. Instead, it will be a slow build over the coming 12-18 months, especially in central London zones.

SA Landlords Who Switched To Long Lets Now Moving Back to Short-term

With the return of global tourism and business travel, the additional short-term rental stock that moved into the rental market in early summer last year will start to move back to that purpose, putting more pressure on the supply of rental properties. This will also start to underpin future rental price recovery.

Wildcard

At the same time, the increased availability of mortgages for those with lower deposits may result in more people leaving the sector to buy their first home through 2021, but the wider economic uncertainty will limit this trend.

3. Crypto Flash Crash

A crypto crash happened last week, with several of the most popular cryptocurrencies taking a beating. At one point, the market lost roughly $150 billion in an hour.

Why did the crypto crash?

I’ll preface this by saying Crypto are very volatile commodities, sure. But more importantly, we know relatively little about what informs their price action. Bitcoin is an odd commodity too in that the supply is fixed.

So always be cautious when people claim to have all the answers about why the price is doing in a certain direction.

Crypto Investors Don’t Like Charity

Ethereum’s Co-Founder Vitalik Buterin donated over $1 Billion to the India Covid Relief Fund and other Charities. Buterin, who launched the Ethereum blockchain back in 2015, became the world’s youngest billionaire on the planet at the tender age of 27 when Ethereum’ surged past $3,000 a few weeks ago.

His donation spooked the market over fears it could somehow hurt the retail investors if it was all dumped on the market in one go.

Binance Holdings investigated by the US Justice Department

At the same time, according to Bloomberg, Binance Holdings is being investigated by the US Justice Department and Internal Revenue Service as officials look into the use of the exchange by employees and/or customers for money laundering and tax evasion.

Binance, one of the biggest crypto exchanges on the planet, has denied any wrongdoing, and pointed to their anti-money laundering program as a success: they’ve also while taken on a number of former US politicians and regulators to strengthen regulatory compliance.

Blame Elon Musk for cryptocurrencies falling

I think Elon Musk has to take a lot of the other blame for cryptocurrencies falling on last week.

He announced on Twitter that Tesla is no longer accepting Bitcoin for payments. They will continue to hold the Bitcoin it already has on the balance sheet, and won’t sell it. This decision was made in connection to the effect that mining and transactions of the crypto have on the environment.

 “BTC has a promising future but that it can come at the cost of the environment” – Elon Musk

Is It Really About The Environment?

Musk’s comments about the environment are somewhat ironic because no actual fossil energy is used in a bitcoin transaction. I’d love to debunk the energy story once and for all, but it’s difficult to have a conversation about the right amount of energy usage without talking about the value Bitcoin brings more broadly. Whether as a store of value or a medium of exchange, or an inflation hedge for the world at large. It’s only then can you have that conversation about energy usage.

Traditional Banking System’s Energy Usage

The other interesting parallel to draw is with energy usage in a traditional banking system, which so opaque. It’s simply impossible to tell how much energy the global central banking system uses. But all estimates are that it is significantly greater than the Bitcoin ecosystem. Some would argue that the value Bitcoin plays, the fact it’s online 24/7, unlike traditional banking systems.

Unfortunately, Bitcoin is very transparent. You can see easily see the energy used to secure the crypto-asset network and that makes it a natural target.

Bitcoin Uses Electricity Not Coal

If we do focus on energy, Bitcoin doesn’t run on coal. It uses electricity. So the question is not about how much energy it uses but where that energy comes from. The focus should therefore be on green and sustainable energy generation and storage. Whether that is hydropower, wind, solar, geothermal, and bioenergy. This applies to Bitcoin,  Tesla cars, and Homes in general.

Path to Green

Bitcoin ecosystem has evolved a lot since its inception. A lot of mining now uses sustainable energy practices and renewable energy. Some of this is only viable because Bitcoin’s value as a source of revenue means the renewable energy production assets are more productive. And there is already a plan for up to 75% of miners to use renewable energy as their source of electricity.

Not to mention that the net impact on fossil fuel consumption over time will be negative anyway, because of the Paris Climate Agreement,  and the sustainable development path set by the UN.

The Democratisation of Finance  – Intangible Value

There are several Alternative Coins to Bitcoin. When you buy an altcoin, you are essentially acting as a venture capitalist. You’re funding a small blockchain startup that is trying to unseat entrenched, inefficient capitalist models and companies. Ultimately, the hope is that this investment in blockchain technologies will lead to innovations that make our lives easier, more productive, and more efficient. How do you attach value to that?

You can read previous articles here.

Hope you have a good week! See you next week.

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