Gcp Infrastructure Inves... Share Discussion Threads

[jonwig] 12/7/2023 10:10

fordtin - good description of the multiplier effect at work!

I'm also not convinced of the strong inflationary effect of public sector wage rises. In fact, of course, this is their unions' basic argument. However, even though much of the wage rise returns to the government, its own spending commitments are mostly inflation-linked. So your apparent benefit gets lost in the grinder.

The key thing is the government borrowing requirement (and inflation-linked gilts are still a feature of its current borrowing as well as being a quarter of total gilts issuance).

The government is certainly concerned whether the appetite for UK gilts will weather other factors. The BoE is selling some of its gilts, and if pension funds can be steered into long-term infrastructure projects, they will buy fewer gilts.

[fordtin] 12/7/2023 09:57

Are public sector pay rises really a problem?


“The average salary for a Doctor is £76,300 gross per year”


If UK Gov gives an average doctor a 10% pay rise of £7,630

UK Gov takes back 40% income tax plus 2% employee’s NI, leaving £4,425.40 for the average doctor and £3,204.60 returned to UK Gov.

The average doctor spends the £4,425.40 and pays 20% VAT. Resulting in £3,540.24 to the retailer and another £885.08 returned to UK Gov.

The retailer makes a 20% profit on the products sold to the average doctor, resulting in £708.05 corporation tax to UK Gov.

The retailer’s wage bill absorbs 25% of the £3,540.24. Of the £885.04 paid in wages, employees’ tax, employees’ NI & employer's NI, result in another £221.23 being returned to UK Gov.

The retailer’s staff demand a wage rise .... increased employees' tax & NI, plus employer’s NI , result in 45.8% of employees’ wage rise going to UK Gov.

The retailer’s employees spend their wage rise on petrol, cigarettes & alcohol and pay 20% VAT plus an obscene percentage of petrol, alcohol and tobacco taxes to UK Gov.

The retailers of the employees' purchases pay corporation tax ............... and so on.


Also factor in taxes & NI throughout the chain from exploration for raw materials, extraction, transport & processing. Then component manufacture, transport of components to final product assembly, transport between various storage depots, until it eventually arrives at the retailers.
Net result; UK Gov claws back most of the average doctor’s pay increase.

[kinbasket] 12/7/2023 08:46

If one third of the workforce is the public sector getting 6% and the target is 2% then all workers in the private sector need to be awarded 0% to make the maths work.

Except there is little evidence that public sector pay effects inflation. The wage spiral theory doesn't work well if there is no end product. The gubmint can't increase prices to cover higher wages. It could be argued the increased cost will come in the form of higher taxation. Depending on how that lands it could be deflationary.

[donald pond] 12/7/2023 08:12

But wages in general have been lagging behind their trend rate for a long time. If low inflation means that normal people must get poorer and poorer that cannot continue indefinitely. And if benefits are riding in line with inflation and wages are not, the incentives are all wrongThe truest line in investment and economics is Mungers "you tell me the incentives and I'll tell you the results".

[cc2014] 12/7/2023 07:46

Average pay in the public sector rose by 5.8pc in the three months to May, according to the Office for National Statistics (ONS), the fastest quarterly growth seen since 2001.

Rishi Sunak has indicated that he was willing to ignore recommendations for public sector pay rises of up to 6.5pc, saying in recent weeks that workers “need to recognise the economic context we are in”.


If one third of the workforce is the public sector getting 6% and the target is 2% then all workers in the private sector need to be awarded 0% to make the maths work.

Inflation is embedded now. Getting it down will require workers negotiating power to be significantly reduced and that requires unemployment up. And that doesn't win elections. Awarding 10% rises to pensioners does.

[spectoacc] 12/7/2023 06:53

@kinbasket - interesting points.

You're right that wage rises are well behind inflation of course - consumer spending holding up due to spending savings (particularly Covid savings) and re-emptying the CC (also paid down during Covid). Are reasons why I think rates don't need to go much higher to cause the necessary recession.

But a recession is necessary IMO - 6-7% rises now entrenched (some public sector yet to even get theirs), and no way that's conducive to 2% CPI. 3-4% avg wages inc bonuses at most..

Also got to consider that interest rates are miles behind inflation too.

Most people thought when the cost-push rises fell out after 12 months, we'd have much lower inflation. But we haven't. Factory gate prices now at pre-invasion levels; gas given back the spike; petrol's not expensive anymore (except at Asda), more than a year on from the gas spike.

What was the 70's has become the 90's, with only a rates-induced recession to end wage-price. That's where I'm at, until data says otherwise, but I do think rates are nearly high enough already, and will peak at 5-something. That's my (so far wrong) bet on GCP & others.

[brucie5] 11/7/2023 17:05

Thanks to Kenmitch for alerting me to this note from Feb, which some may find worth a re-read:

[kinbasket] 11/7/2023 16:57

I also fear it may break but

"Inflation will fall, but wage/price is now entrenched, and only something early 90's is going to stop it."

I'm not sure it's as simple as this. I think there is a lot of nuance in the employment numbers that muddies the water. Brexit/labour withdrawal etc. Also, wage rises are running behind inflation so people are net poorer. So wage inflation to date only supports the new price environment it doesn't increase it further. Inflation can fall, wages can stagnate and we stay where we are in a newer higher priced world. The key there is "to date"

Studies show wages have little effect on inflation but inflation has significant effect on wages. i.e. inflation is the leader. (As usual there are plenty of studies which disagree) However, I think this time, since inflation was a supply problem, and rapid, it's a leader to wage inflation and the effect will be limited. But my opinion is worth what you're paying for it.

[spectoacc] 11/7/2023 16:39

Then it's going to break I fear.

The monetarists are wrong IMO. Inflation will fall, but wage/price is now entrenched, and only something early 90's is going to stop it.

(Or looked at another way - there's a danger of a generation not believing the BoE when it says it will keep inflation at 2%).

[kinbasket] 11/7/2023 16:30

DP said..

"I was just making the point that at base rates of 6% investment will stop. Not just for GCP, but for the whole country. So they cannot stay there for long."

Amen. A point the previously mentioned Hugh Hendry made recently on one of the Fin tv channels. We have built a system (whether by design or accident) that cannot survive without near zero rates. When or how we get there can be debated ad nauseam but we have to go there or it breaks.

[donald pond] 11/7/2023 15:00

I think there's lots of value here. I was just making the point that at base rates of 6% investment will stop. Not just for GCP, but for the whole country. So they cannot stay there for long.

[brucie5] 11/7/2023 14:38

Donald, forgive me for being slow: does this mean you are bearish on GCP; or see it as value at these levels?

The financial statement from June is worth reading, I'm sure you have. And includes the following line under 'final thoughts'.

"With long-term gilt yields at the same level as when the Company was launched
in 2010, the investment proposition remains as compelling as ever."

But now of course at >33% discount to NAV.

[donald pond] 11/7/2023 13:37

I agree linking benefits to inflation was insane. But taxes are rising sharply, economic growth is minimal and while there may be too much money chasing too little supply, it is the lack of supply that is the real problem. And yet it seems people no longer see much point in setting up business in the U.K. As for GCP, if interest rates at 6%, how much would they need to demand for a decent risk adjusted return? 11/12%? Given the amount of infrastructure investment the country needs, high interest rates are going to kill that and any hope of increasing productivity

[stewart64] 11/7/2023 13:23

Dp the economic data is dreadful because we don't produce enough, too much incentive not to work and get index linked bennies, which in themselves embed inflation.

But for what little we do produce ( and import) there is simply too much money chasing too few goods. If we just assume because the economy is rubbish inflation will go away, it won't. Think Turkey..base rate circa 8%, inflation 80%.

[stewart64] 11/7/2023 13:07

Dp..Can't agree that inflation will pass if you take a dovish approach to interest rates. We have still got hundreds of billions of unspent Covid printing, folk are loaded with wonga. If you have been to restaurants lately you will know they are rammed. Seen the price of secondhand cars, previously written off bangers are now worth thousands. Folk are ramming the airports to get away and if you think you can get a tradesperson just like that you are having a laugh.

Interest rates are still at negative 3.7% in real terms, you need to be ahead of the curve to flatten inflation.

[donald pond] 11/7/2023 13:07

And yet the economic data is dreadful. Something doesn't add up.

[spectoacc] 11/7/2023 12:37

@hindsight - apologies, you're right. Still far too many vacancies but they did indeed tick down again.

Tho this caught my eye:

"Real estate activities and other service activities saw the largest growth in vacancies"


@dp - higher rates are to press down on wages, by slowing activity and causing unemployment. Seemingly the only route left to halt the wage/price.

[brucie5] 11/7/2023 12:34

EC211 Jul '23 - 12:30 - 634 of 634
-------------------
Good post, EC211. Happy holder since yesterday.

[ec2] 11/7/2023 12:30

I believe investors should be looking beyond current market expectations of base rates going to 6pct in the near term. More important is the average rate during the lifetime of the underlying assets. One of my methodologies for valuing these is by going back to basics and applying a risk premium over the 10y gilt yield. The basic excel model that I use to apply this methodology gives a value of around 90p per share as opposed to the current price which my model is telling me is assuming the 6pct near term rate assumption remains for the next ten years. This is very unlikely to be the case. Price these on where you think yields will average over the lifecycle of the assets and not current six month expectations. Similar rule applies for all long duration assets. There are a number of mis pricings showing up across long duration assets.

[donald pond] 11/7/2023 12:25

If you have a tight labour market and raise interest rates then it will lead to higher wages. If they do nothing inflation will pass

[stewart64] 11/7/2023 11:58

Yes GCP holding up surprisingly well today, as indeed the Market. The 7.3% YOY Wage rise shocker( for May) must have really been a body blow for the hapless Bailey. Schroders outlier 6.5% Base Rate forecast by Christmas looking like becoming the consensus.
Don't think the Market has digested the full gravity of these figures tbh. Inflation is out of control by wage push, external price pressures have about washed through now. The MPC can no longer wait and see what might happen two years hence, their cataclysmic mistake of assuming transitory inflation is now coming home to roost. They have to raise 0.5% in August just to regain credibility. The penalty for their imbecilic decisions in 2021 and being too cautious with rises ever since.

[hindsight] 11/7/2023 11:57

Yes his fund went from $1bn plus in size to 50m and he closed Eclectica in 2017
Like most of them they try raise lot of capital with a good yarn, charge 2+20 and eventually the black swan arrives