London Is a Bust

Niels Jensen, an economist and partner at London-based Absolute Return Partners whose latest investor letter is titled “Green Shoots or Smoking Weed,” talks about how the economic mess looks in Europe.

How’s London holding up?
Pretty shitty. If you think you¹ve got a recession on your hands, just come over here. It’s even worse.

We have a financial-services industry that is a much bigger part of the GDP than you have. If you take all financial-service-related companies throughout the U.K., it explains close to a quarter of the U.K. economy. It’s huge over here.

So recovery is not in the air?
No, we’re not done yet. Optimism has sneaked into the markets over the past few weeks, but it’s a little bit misplaced. I can understand why it happened, because the markets were definitely oversold. Sentiment was so overwhelmingly negative that even the smallest piece of good news could change that. Now I think we have moved too far in the opposite direction.

Will the rally spell the beginning of recovery?
The collapse began with the housing crisis and it will only end when the housing crisis ends. I think this is a point missed by a lot of people, because not since the Great Depression has America had to deal with so many mortgages that exceed the value of homes. We had that in the U.K. as recently as the early nineties. It was not unusual for U.K. property owners to be 30 to 40 percent underwater. I can guarantee you that if Americans react the way the Brits reacted in the early nineties, it will have a serious effect on consumer spending for a sustained period of time.

What is the property market like in the U.K. right now?
It depends on whether you¹re a forced seller or not. If you¹re getting divorced, if you are moving to another country or even another part of the country and you have to sell, you are probably getting somewhere around 30 percent less than what you got at the peak about eighteen months ago. It’s not so bad. A lot of people aren’t forced sellers, they’re just waiting for someone to turn up.

There’s been a lot of talk about bankruptcies, but other than GM and Woolworth’s in the U.K., not many have happened.
There aren’t that many yet, but to give you an idea of how fast this can move, only three months ago the default rate for corporate high yield was about 1.5 percent. Now it’s between 7 and 8 percent. I will bet you that before we get to the end of this calendar year, the corporate high-yield default rate will be closer to 15 to 20 percent. That will panic a lot of people.

Is the economic distress evident on the street level?
Our office is in Richmond, an affluent suburb in the southwest corner of London. It has the highest average income of all the counties in London, sort of like Greenwich, Connecticut. Richmond is far enough away from London that it has its own commercial center. There’s a High Street, which you call a Main Street, with good-quality shops. The landlord that we rent these offices from is telling me that well over 50 percent of all the retailers in Richmond are behind with their rent.

Fifty percent? That’s going to be a wipeout.
You have to remember, in England, if a retailer is struggling, the last thing he will pay is his rent, not the first thing. It’s quite difficult to evict people in England. But 50 percent delinquencies in the most affluent corner of London—that is quite serious.

How do Europeans look at the U.S. economy?
There has been an Obama effect over here. People have clearly changed their view on America following his inauguration. I think there’s a growing realization here that, yes, the U.S. got us into this mess, but at the same time the U.S. policy response to this crisis has been far more aggressive, and therefore the U.S. economy will probably come out of this crisis before Europe. That seems to be the consensus that’s building quite rapidly.

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London Is a Bust