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The Financial Ironmonger Blog No 6/2018

The Financial Ironmonger Blog No 6/2018

Every week our guest blogger, David Oakes of Mosaic Money Management (aka The Financial Ironmonger), shares with us his take on some of the major UK and overseas macro and political events that shaped the previous week.

Please be reminded the value of investments, and the income from them, may fall or rise. The views expressed in this article are those of the author at the date of publication and not necessarily those of Chelverton Asset Management Limited or Mosaic Money Management. The contents of this article are not intended as investment or tax advice and will not be updated after publication unless otherwise stated.


The sell off on Wall Street on Monday was of truly biblical proportions, according to unbiased media reports, whilst the Donald has said that it was a big mistake. I commented last week that the thirty year Bull Run in bonds was thought to be over, but it was a pretty innocent statistic that prompted this latest setback.

Last Friday, jobs data from the US showed that annualised wage growth had “surged” to 2.9%, said to be well ahead of analysts’ expectations. In fact they were expecting 2.7%, and the survey only covered 20% of the workforce, those in managerial positions. But as with all bar room brawls, identifying the original cause is difficult.

Such corrections are a healthy and necessary part of markets, and never more so than when investing had become thought a one way ticket. This has fuelled the rise in Exchange Traded Funds, (ETF’s), which replicate an index. On the way up, an ever increasing amount of money is allocated to the best performing stocks, (thus making them even more expensive), whilst on the way down, everything is sold indiscriminately.

Increasing sophistication has been brought to bare in this area of the market, so instead of your ETF tracking an index such as the Dow Jones, you can have one that follows the fortunes of companies that are engaged in fracking, say, or regional banks, if that is your preference. There are now far more indices than quoted stocks.

The problem with this increasing specialisation is not only the distortion of individual equity prices, described above, but that of whole sub sectors. And when there is a panic, and the retail investors rush for the exit, there are no buyers, because they themselves were the market. The violent price swings that result are further driven by algorithms, computer generated trading systems that spot a trend, and then pile in to exasperate it, the financial equivalent of a vulture.

But back to the proximate cause of this, rising wages. All that is happening is that labour is extracting, at the margin, a slightly larger slice of the action than before, their proportion of profits having sunk to multi year lows. In economies dominated by consumer spending, which America and the UK are, this is a good outcome, especially when inflation is low. One reader has commented that in the companies he sees, the response of management is to increase automation, suggesting that this is not the start of a runaway inflationary trend.

In fact, what little inflation we have seen appears to have peaked, and only occurs in places where there is no competition, such as rail fares, or council taxes, where local authorities charge more and deliver increasingly less. Should this trend continue, your taxes will end up paying for nothing more than the pensions of the former employees, a legalised version of a Ponzi scheme.

The natural reaction of central bankers is to raise interest rates with dire warnings that there may have to be three such increases in the UK over the next eighteen months, all of 0.25% each, the economic equivalent of a fox in your chicken shed, causing havoc. It is but a step to normalising the situation, and it may expose companies that have been held in a zombie state for years, as a result of ultra-cheap money, but so be it. In a growing economy, such assets can be recycled to a more productive outcome.

I think that this is a baby step to returning economies to a more normal way of functioning, which can only be taken because growth has returned, and therefore ought to be welcomed. It does not herald the onset of the next recession, as these figures from America show, sent to me by a strategist last Tuesday morning.

“260 of the S&P 500 have reported and earnings are up 16.4%!!! Ex-financial earnings up 18.7%!!! Economy accelerating. Tax cut working. Yes…this is just a correction!”

Uncomfortable as it is to see wild price gyrations, even the BBC cannot conjure up an impending downturn on the back of these figures.


David joined Manchester stockbroker Henry Cooke, Lumsden in 1977 and after becoming a member of the London Stock Exchange in 1984 held a number of senior positions within the firm including Managing Director of the in-house fund management company and member of the Executive Committee.

After senior appointments at Cazenove Fund Management and latterly Mercater Capital Management, David joined Mosaic Money Management in 2013. He has successfully managed private client and fund portfolios for over thirty years and has particular expertise in providing a multi manager service to his loyal client base.

The Financial Ironmonger is a hat-tip to Ironmonger Lane, the location of Chelverton’s London office.