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 FINANCIAL IRONMONGER BLOG NO 42/2017–
Inflation has hit 3% in the UK, driven by the weakness of sterling, which makes imports more expensive, and the rise in the price of oil. The later is a double hit; not only has the price gone up 20%, but it has to be paid for in dollars. These might be one off effects, in which case the headline rate will fall back. Yet, in the background, there is a push for higher wages, the public having grown tired of austerity.
The obvious answer to higher inflation is to push up interest rates. The last time they were increased was July 5th, 2007, which seemed reckless for those of us who were already building financial bunkers to survive what we thought was coming. Just over two months later, Northern Rock collapsed triggering a domino effect across banking, from which the sector has never really recovered.
Since then, interest rates have declined to a point where they are officially 0.25%, the lowest ever. It has been great news for those that have assets, the price of which have increased considerably. It is easy to understand why. Cash deposits yield 0.25% before tax, if you are lucky, but inflation is eroding the value by 3% per annum, so you are suffering a massive negative interest rate, probably unknown in modern times. Hence the rise in asset prices.
Thus, the Bank of Mum and Dad has survived the storm, thus far. Which is a generalisation rather than a specific observation. What happens from here is probably more politic rather than economic. It is pretty clear that large numbers of people are struggling to make any economic headway, so any increase in interest rates will simply push them in to a worse place. If you think that people do not become economically aware until the age of twenty five, (debatable), then anyone under the age of thirty five has never experienced interest rates going up.
For those saving for a deposit on a house, a mortgage becomes unaffordable, overnight. True, house prices might stall, as they have done, but the present levels are due to lack of availability, rather than affordability. It seems unlikely that we are heading back to the levels previously seen; I can remember being delighted to have fixed my mortgage at 9.75% , for five years, when rates went to 15% after the UK was ejected from the ERM.
And now, it is clear that any kind of normalisation, (defined as a move towards 5%), would see the economy implode, hitting the key voter age group of 30-40 year olds very hard. These were the voters that deserted the Conservatives in the last election, but it is hard to see how they can be won back, given that there is no economic or political capital to spare. Twelve months ago, you could have easily predicted that the Conservatives would govern for the next 25 years; now only self preservation will carry them through to June 2022, assuming that they can get some kind of Brexit deal.
On which subject, more trees must have been felled to fuel the printing press of speculation than can have been reasonably expected. Some say that the Germans and French are digging in, others that the Germans are open to a sensible compromise. But for all the posturing, it is pretty clear that this is down to hard cash, specifically the price of the divorce bill.
Which is going to be big. So far, the hardliners on the right of the Conservative party have not baulked at the two year extra payment that is needed for the “implementation period”, and no doubt there will be further settlements for science funding, defence, whatever, that pushes a final cut off way in to the long grass, such that we never get a true answer as to whether this is beneficial. And the tectonic plates of politics and economics will have moved, considerably, in the meantime.
Politics, especially in Europe, is in considerable flux right now; there is no German government, for instance. Venice and the Veneto vote on Sunday in a bid to become part of a more federalist Italy, with greater powers devolved to the regions. Core EU needs to strengthen up in order to react sensibly to these problem children.
–MORE ABOUT OUR GUEST BLOGGER, DAVID OAKES–
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.