Predictions are a mug’s game…but let’s play anyway

As the old joke goes: it’s hard to make predictions…especially about the future.

And generally, making predictions is unnecessary for good investing.

That’s because index investing allows you to “piggy back” off the wisdom of crowds. As the smart money moves capital to growing businesses and growth areas of the economy, money in an index fund follows automatically. 

But having said that, it’s only human to speculate about what the future might look like. Plus, as long as we realise that we might be wrong, it can be helpful for financial planning to think about what might change in our future.

Here are some things that might change:

1. Manufacturing is coming home

Right now, manufacturing supply chains are being re-evaluated everywhere. If all protective equipment and generic pharmaceuticals are made in China or The Philipines or other countries, what happens when there is a crisis? If there’s a shortage, who are they going to prioritise? To ask the question is to answer it.

The medical and pharma supply chains are fiendishly complicated but over time they will be simplified and key aspects (e.g. manufacture of PPE & generic drugs) will be re-shored even if (when) its more expensive than buying from overseas.

Things like 3D-printing and increasing automation will gradually make domestic manufacturing more price competitive.  But this is an emergency and its not about price, it’s about security and resilience. We’ve cosied up to China for too long. This is why, although consumer goods will continue to be made overseas, the manufacture of medical supplies and other essentials is coming home.

2. More flexible working

Commuting sucks. Reclaiming say 2 or more hours per day of extra time is a HUGE win.  It’s like getting a 25% payrise without any extra work and with LESS stress.

Even before CV-19, working from home was on the up. Did you know that in the UK, every employee ALREADY has a legal right to request flexible working? You can put a flexible working proposal to your employer to:

  • reduce your hours / work part-time
  • change / have flexibility with your start and finish time
  • do your hours over fewer days
  • work from home or elsewhere
  • share the job with someone else

They have to consider your proposal and respond reasonably. It’s not binary (all or nothing); you could propose just one day a week working from home.

Can your employer say no? Of course. Are there career (promotion) risks to asking? Of course, there are risks in everything. This may mark you out as an independent thinker and many employers don’t like that. The key is to choose your moment, your arguments and your evidence carefully. Pitch it in terms of the benefits to the employer, not the benefits to you (obvs).

If you can show that your productivity stayed the same or increased during lockdown then you’ll have a strong case. So now is one of the best opportunities you’ll ever get to win a big quality of life upgrade.

Do you have a business case for this ready to go for when lockdown is lifted?  The 4 Hour Work Week by Tim Ferris has some good tactics for negotiating with your boss.

3. More cycling

From a personal finance perspective, cars are money incineration units.

Cars burn money and are an incredibly inefficient use of space in towns and cities. Our cities should designed around people and community…not around cars.

In a world where we need new transport solutions and a transformational improvement in cardiovascular health and fitness (and a reduction in obesity), bikes are the perfect solution. In a rational world, we would see an explosion in bikes, cycle lanes and those little electric skateboards / scooters (which were everywhere in Paris when I was there earlier in the year).

Cycling is booming and you should join the party. Now is a good time to ask your employer for more showers, bike racks and office changing facilities.

Image credit: @cjhamblin

4. House prices are headed down 

Right now, the housing market is screwed.

Most deals have fallen over or been put in the deep freeze. Problem is, any price agreed before CV-19 is now a terrible price for the buyer. Rational buyers will seek price cuts or pull out of these deals where they are not yet legally committed. 

In a housing market crash, prices are “sticky” and slow to adjust downwards as sellers resist price cuts.  Transactions dry up, people stay put and it can take years for prices to adjust fully and the market to function normally again.

Much of the adjustment happens via inflation (see below). In other words, house prices can flat-line for several years whilst inflation cuts those prices in real terms. The last proper UK housing crash was in 1990 and it took over 5 years for the market to clear and normalise.

Many Buy To Let Landlords won’t be able to collect rents during the crisis and will realise that their safe-as-houses asset is more risky and more hassle than they realised. Immigration is (temporarily?) headed down whilst air travel is on hold. And interest rates can’t go much lower.

And finally, a bunch of office space will surely be converted to residential (see point 2). If I was a mixed-use property developer or architect or landlord, I would be making BIG changes in my plans.

Lower demand and higher supply mean lower house prices; good news for those looking to “get on the ladder”.

5. Inflation risks are rising

As I wrote in How The Magic Money Tree Works, the Government has turned to printing money to finance an exploding deficit between government spending and tax receipts.

Hopefully this will be temporary. But once voters realise that there is a Magic Money Tree (at least in recessions where the economy has spare capacity) will this become a permanent feature of the political landscape and the policymakers toolkit? There is huge scope for abuse resulting from the interaction of public opinion with politician’s desire to retain power.

I’m not predicting high inflation. I’m just saying that the “tail risks” are increasing.

As a result, there will be an upsurge of chancers selling speculative products dressed up as anti-inflation hedges. 

In the 1970s / 80s / 90s gold coins and bullion adverts took off whenever inflation fears rose. 

Today, we are more likely to see crypto-currency adverts in our Youtube / Facebook / Google newsfeeds (I am already seeing this online).

6. A break-up of the Eurozone?

In times of crisis, people remember the value of the nation state.

The CV-19 crisis is testing EU solidarity. The French President has warned of the EU unravelling and the EU president has apologised to Italians for the EU’s (lack of) response to the crisis. It’s now looking increasingly possible that Italians will vote for a “leave” government.

The big problem is that countries like Italy, Spain, Ireland etc don’t have the ability to provide helicopter money to their own people without the European Central Bank, based in Frankfurt.

It looks to me like The Euro, if it is to survive long term, will need full-blown quantitative easing in order to ease adjustment and recovery and reduce government debt burdens. This is printing money and its been anathema to the German political classes with their folk memory of Weimar Republic hyper-inflation.

Are you overweight EUR denominated cash? Remember The Ice Sculpture, The Turkey and The Rollercoaster.

7. A greater awareness of health

Personally, I wasn’t very worried about getting the virus at the outset of the outbreak (certainly not worried for myself but I do have elderly parents). Since then, I’ve got even less worried about it, having heard more about the low mortality rate for people without other conditions.

To me, CV-19 has been a reminder to focus on what you can control and ignore the noise in the media.  I’ve been eating clean, walking and taking vitamin C and D (sunshine) which are either free or cheap as chips and are an investment with asymmetric payoffs (no downside, big upside).

When it comes to health, average just isn’t good enough anymore. We need to improve health rather than just treat sickness. We have got too used to popping pills to treat the diseases of abundance and sedentary lifestyles.

Drugs are sticking plaster solutions with side-effects and they are poor substitutes for natural food, exercise, sunshine etc. I think (hope?) that people will re-prioritise health as it becomes clearer that most Covid casualties had pre-existing conditions.

8. P2P Lending gets massacred

I’ve been warning about the risks of P2P Lending for several years and am able to confirm that this doesn’t win you any friends or any thanks from novice investors. 😉

In The Ice Sculpture and The Turkey I described most P2P Lending as a form of sub-prime lending where borrowers who couldn’t get loans from banks go to fund lifestyles they can’t afford. This is a turkey strategy and it looks like Christmas came early this year.

In a downturn, people get reminded that fixed income returns depend more on the return of your capital rather than the return on your capital.

9. Less travel, more expensive?

Right now, planes look like super-spreader hotspots: metal tubes filled with people packed together breathing each others recycled air.

Once the virus has receded, its certainly possible that we’ll quickly bounce back to the old normal with hyper-mobility and ever-increasing air travel.

But I do wonder whether governments looking for new sources of tax revenue will get together to introduce more border controls, levy tax on aviation fuel and perhaps levy visa charges on tourists to enter other countries? The result could be a world with less air travel: fewer foreign holidays and less business travel as people get more used to Zoom and MSFT Teams.

Will any of this come to pass? We can’t know for sure but it will be interesting to see how things play out.


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19 comments

  1. Great article. Plenty of positives that should come out of this crisis. I just hope the world does not revert back to the greed and consumerism that was so evident pre-crisis.

    Personally, I’m focusing on bodyweight training, eating well, investigating other sources of income, home improvements. Also planning to do far more cycling to run errands, shopping etc when this is all over.

    It’s provided a great opportunity to take stock and work out what changes we should be making to our lives going forwards.

  2. Jamie · · Reply

    Great article! Expect you’ll be spot on with 8 out of 9 of your predictions. A good number of silver linings to this crisis.

    Can’t see the inflation risks though, if anything the opposite. As household and business incomes are obliterated surely we’ll see a major slump in consumption and business activity, leading to a decrease in prices (your point about house prices).

    We’ve been on a deflationary trend for some time now as technological innovations – particularly those related to artificial intelligence, big data, and mobility – have ushered in a more generalised breakdown of traditional economic relationships and an erosion of pricing power… the Amazon/Google/Uber effect.

    While the Amazon model pushes down prices by allowing consumers to bypass more expensive intermediaries, Google undercuts companies’ pricing power by reducing search costs, and Uber brings existing assets into the marketplace, further eroding pricing power of established firms, as well as that of the labour market (the gig economy).

    Can’t see any of these trends being reversed anytime soon, and no matter how much stimulus the gov. throws at it, it won’t make people get back on planes or head out to restaurants and concerts anytime soon. New car to ease the commute to and fro’ the office? Forget it!

  3. ” Right now, planes look like super-spreader hotspots: metal tubes filled with people packed together breathing each others recycled air. ”

    Airplanes don’t recycle air. They have to constantly inject some pre-heated outside fresh air into the cabins, just to make sure that emitted carbon dioxide or monoxide levels from breathing don’t go over a certain threshold level. Carbon dioxide is very toxic, as you know, just try to breath cooled chimney fumes… A normal seated adult requires about 30 cubic meter of fresh air per hour, to keep him/her in a good breathing condition. Multiply this by a few hundred persons packed in a cylinder tube, and you can appreciate why there is a big compressor fan put on and connected to the main turbine engine on each side of the cylinder tube, that compress outside sucked in air, let it pass near the hot engine turbine to heat it up a bit (it’s -55°C at 10 000 m height out there), before being pressure injected into the cabin at a pressure equivalent to 2500 m for the cheapest airlines, and 1000 m for the more expensive ones (the lower the cabin air pressure injection level = higher altitude levels = less engine energy consumption = more profits. Lower simulated air altitude levels = less profits per flight).

    1. Al, I think your detailed technical explanation regarding cabin air systems slightly misses the point TEA is trying to make. Passengers in modern aircraft do indeed breath in a mixture of fresh and ‘recirculated’ air, however for many people the prospect of being packed into a metal tube along with 200-300 other travellers is something they will decide is a risk they are not willing to take for some time, or indeed until a vaccine comes along.

      1. Prof, I totally got the point that TEA is making concerning “recycled cabin air” (contaminated covid air flowing from the front to the back of the plane, before exiting it through “the back”), and the reluctance of most people to ever board again such covid infested places. I don’t agree with his view on that, knowing how we chimps are long on pleasure seeking + showing off to everyone else, and short on memory. As the theme in this blog clearly is illustrating post after post, we are quite good at assimilating all the publicity that is getting thrown down our eyes to our ‘brains’. And most of that advertising is for pleasure seeking stuff (food, travel, outfits, etc). Corona beer instead of corona virus sells better and more. Maybe buy some AB Inbev stock shares, they sell a corona beer brand (AB Inbev’s fundamentals are however awfull: huge goodwill + debts on it’s books, but it’s share price is now quite cheap).

        1. Is anyone old enough to remember when you could book smoking and non smoking seats in planes? I remember the cigarette smoke filling the non smoking section.
          That was just cigarette smoke – imagine a cough or a sneeze.
          Screw the arm’s length rule – that guy next to me has man spread his legs in to my personal space, along with his airborne phlegm.
          Ech-hem

        2. https://www.marketscreener.com/news/As-flying-returns-jetmakers-seek-to-quell-fears-over-cabin-air–30629838/

          Jet manufacturers and airlines are launching an urgent initiative to convince nervous travellers that the air they breathe on planes is safe, believing this is critical to rebuilding a travel industry floored by the novel coronavirus.

          In an office building, air is exchanged about four times every hour. On a modern jet aircraft, that rises to 20 to 30 times.

          In most cases compressed air is fed from the clean part of an engine – untainted by fuel which is added later – to air conditioning packs and from there to fans in the cabin ceiling.

          Both planemakers say cabin air pours downwards not lengthways through the fuselage, reducing risks of infection.

          Half that air is then recycled through hospital-grade HEPA filters designed to remove some 99.97% of contaminants including viruses. The other half is flushed outside through valves.

          Planemakers say cabin air is renewed every two to three minutes, though scientists caution that in reality, air is always a blend. But the quicker the rate, the faster old air is diluted.

          The spectre of in-flight contamination dates back at least to the SARS epidemic in 2003, though no link has been proved.

          In March that year, a 72-year-old man infected with SARS, which is also a coronavirus, took a flight from Hong Kong to Beijing. At least 22 of the 119 passengers and two crew later developed the illness.

          It was the only significant case of in-flight transmission but prompted measures to prevent ill passengers boarding planes.

          Such “kerb-to-kerb” measures must again be part of the strategy to keep the new virus off planes, Delaney said. Research on technology like ultraviolet-cleaning systems and anti-microbial materials may join the fight in the future.

          => my personal view: in other words, just business as usual, we chimps will be buying plane tickets by the boatload again soon enough, just to once again be crammed like sardines into airplanes, craving to be on our way to some exotic place, since we are short on memory and long on everything else. End of thread, the future will show what happens on this subject. Time to buy some British Airways stock market shares, at triple down the road, for sure.

  4. I think a lot of these predictions will be highly accurate, in particular inflation and property prices.

    People look at the last 30 years of disinflation driven by technology and globalisation and assume the current drop in output and spending will continue this trend however, you can’t have high inflation without first having a deflationary bust. There will be a huge reversal of globalisation which will drive up inflationary pressure.

    Property is essentially a long bond trade and I wouldn’t want to own bonds over the new two to three decades with rates now at 0%.

    I would be interested to hear your thoughts on traditional equity / bond portfolio considering your predictions above.

  5. Well personally ,once were through this ,and Im writing the rest of the year off, and next year but hopefully with alot less restrictions, I just want fun and laughter which includes getting on a plane, even with a bl…dy mask on, and enjoy life, travel, socialising, sightseeing , dancing . This lock down makes me feel I’m gonna come out the other side and appreciate my life and freedom soooooo much more.

    1. Rosario · · Reply

      I agree about enjoying life… my slant on that though is that I’m even more keen to escape the Prison Camp. Having to dance to someone else’s tune throughout this period has certainly sharpened my focus and given me a renewed urgency to take even more freedom back from The Man.

      1. ladyaurora · · Reply

        Rosario
        Well I’ve reached FI and it feels good!
        I dont need any government help.
        My passive income is supporting me just fine through this time.
        I work partime by choice, not necessity, which has had to stop for time being. Im not entitled to benefits but i dont need them.
        People say im lucky which bugs the hell out of me cos. No. I worked and saved damn hard to be where I am.
        So keep working towards FI and get your finances sorted.

        1. Rosario · ·

          Excellent, what a position to be in. Well done on all your hard work.
          Yes I absolutely agree about the lucky comment, everything comes at a price and chances are you’ve intentionally paid that price to get you to where you are today. There’s no “luck” involved.

          Thanks, I’m well on the road and confident everything is in order. Its inevitable and just a matter of time. I’m inpatient to a degree though so always looking at ways to make the wheels turn faster!

        2. Great work Ladyaurora and Rosario,
          I’m about to turn 30 and probably still 5 years or so away from FI (been hard at escaping since graduating). I have no idea about your situations, but I’m inclined to disagree with Rosario about ‘no luck involved’.
          – We’re lucky to have our health and not have been wiped out paying for treatment for unexpected conditions (I know some people who have done everything right only to have this happen).
          – We’re lucky to have been born in wealthy nations (travel to a third world nation and you often meet people who work far longer and harder than we do).
          – We’re lucky to have had the genes or upbringing that’s allowed us to get the education, job, or support to get to where we are now.
          That’s not to say we haven’t had to work hard, forgone many things, stayed disciplined, read and develop diversified portfolios, etc. Just that a large number of people in the world don’t get these opportunities. For most successful people, these tailwinds are invisible. If someone who has had the same opportunities as you (or even more) tells you it’s just luck though, then slap ’em. There are enough people out there squandering their good fortunte.

        3. ladyaurora · ·

          So true

  6. James M Jones · · Reply

    You could also view cruise ships as floating petri dishes!! A lot of people packed like the proverbial
    sardines and sleeping in air-conditioned cabins.

  7. […] TEA is playing the predictions game for the aftermath of COVID-19 (29) – Some, but not all I agree with […]

  8. […] in favour of working flexibly and/or starting a lifestyle business as you approach financial independence. I’m also a big fan […]

  9. […] in favour of working flexibly and/or starting a lifestyle business as you approach financial independence. I’m also a big fan […]

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