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The Financial Ironmonger Blog No 26/2017

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.


Every so often, and rather too often for my liking, the compliance team send me an e mail demanding that I complete some online training, or refresher course, to be followed by ten questions which are not only badly couched but also have a pass rate of 80%. Fortunately, the other members of the team have to go through similar nonsense, so we can usually find the right answer, albeit that it makes you a jack of all trades, and master of none.

It is nothing more than a stupid box-ticking exercise, but it keeps the regulators happy. They still insist that we inform clients that the least risky asset is cash, (not if your bank goes bust), followed by government bonds, which now yield far less than inflation, and are going to destroy a lot of wealth, when interest rates start to go up.

Anyway, the last online course that I completed referred to the Bribery Act 2010. Described as the “toughest anti-corruption legislation in the world” it has ended up criminalizing behaviour that was perfectly innocent. Fund management groups have, mostly, taken this very seriously, decimating events such as Cowes Week which was heavily dependent on corporate sponsorship. I have always taken the view that I would not attend any such event unless I was prepared to pay for it myself, turning down the Wimbledon Finals, for instance.

However, when we entrust our clients’ funds to the management of others, it is vital that a long term, trusting, relationship is built, helped by social interaction. I see only good in this.

Imagine, therefore, my reaction to the news that the government has agreed to pay £1bn to the DUP to secure their votes, thus giving them a technical majority. Another £480mn is due in two years’ time. Under Section 6 of the Act, bribery of foreign public officials is a distinct crime, and whilst one might argue that the government bribing its own is ok, I doubt that the foreign aid budget would survive a proper audit.

On a wider note, the government behaving one way, whilst insisting that the populace does otherwise, has no long term credibility. Clearly, a money tree has been discovered in Downing Street, probably too late, unless they can keep the stricken captain on board, which I seriously doubt.

Meanwhile, the Italians have found £17bn to close down two of their troublesome banks, but did not include the senior bond holders, against European rules. These people had been lent the money to buy the bonds by the banks, the “retail offer”, but no different to the Barclays deal with Middle Eastern investors referred to recently, if any or all of these allegations prove right.

No such joy for bond holders in the Co-op Bank, who will lose 55% in the latest restructuring, which also sees the main group diluting its’ stake from 20% to around 1%. Those monster, vulture, hedge funds of Wall Street reckon the only chance of recovering their 2014 investment is to pump more money in, belying the old market adage of “cut the losers, run the winners”. Wise guys, as their President might tweet.

Both of these actions demonstrate that, outside America, the banking system has not been cleaned up, at all, some ten years on from the great disaster. The Fed is now trying to move interest rates up, and the UK is fast approaching the same point, but disaster looms if they push it very far. Global debt has now risen to £168 trillion, which is 327% of global GDP, up from 276% at the time of the crash, and 246% some fifteen years ago. Put simply, governments have tried to borrow their way through the aftershocks of the crash, as have consumers, and herein lies the rub.

Imagine that you are paying 1% on your mortgage, (and such fixed deals are around), and then rates go up, so instead of paying £1,000 a month, at 2%, the amount is £2,000. Normalised rates were 5%, at which point, a lot of people go bust. So, there is no way rates are going there, but the alternative is that negative interest rates have to go lower in each cycle to compensate. So the Co-op lends at 4%, say, and gives the depositors, (those holding cash), minus 0.25%, dressed up as an account handling fee.

It is unclear how negative rates would have to go before people simply take the cash out of the bank, and put it under the bed, but the wise people think the rate to be around minus 2%. But the point is that governments and individuals cannot keep borrowing ever increasing amounts of money, whatever sophistry they use. In the UK, there is recognition of this, albeit that there is no one reason to blame, such as Brexit.

On one property website, there are some 27,000 houses for sale at more than £1mn, across the UK. Last month, 481 sold, so if you extrapolate that, it would take more than four and a half years to clear the present backlog, assuming no more are listed, which seems unlikely. The Evening Standard, now a paragon of virtue, reckoned that central London house prices have fallen by 14.4% since 2014.

It is no better out here, in the sticks. Houses that were on offer for £1mn are now asking £800/-, whilst the trophy asset ones have all but halved in price, with not a buyer in sight. Brexit, (in London), and Corbyn are the problems; few seem to have spotted that, deep in the Labour manifesto, there was a proposal to introduce a Land Value Tax.

Under this, your house is deemed to be worth 45% of the total valuation, the other 55% being the land value, on which you will be taxed; in Kensington and Chelsea, the average bill would jump from £1,208 to £22,005, according to the Telegraph, hardly sustainable out of taxed income, let alone democratic accountability.

But the wind has turned cold; car production fell by 9.7% in May, compared to one year ago, despite the currency tanking, during the interim. Even the sofa makers are issuing profit warnings, all of which leads me to think that safety might be the best bet over the next five years, but in any case, keep very close to your chosen fund manager.


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.