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The Financial Ironmonger Blog No 24/2017

The Financial Ironmonger Blog No 24/2017

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.


They all said that it couldn’t be done, and maybe they will yet be proved right, but whether you like the Donald or not, you have to admit that his highly unconventional approach is getting things done. There is no doubt that the Chinese have played a large part in dragging North Korea to the table, which he acknowledged in the press conference by saying that he noted they had eased up on border controls in the last two months, but that was “fine”.

90% of the country’s trade is with China, who also provide considerable support, largely because they don’t want a volatile situation spilling in to their territory.  It seems fanciful to think that this can become a modern economy, but both China and South Korea have achieved this in the recent past, so it is possible. And as China becomes part of the new world order, the last thing it needs is a rogue on the doorstep.

This ought to qualify the President for the Nobel Peace Prize, if progress is made. His predecessor, Obama, was awarded one on taking office, in the forlorn hope that he might do something useful. Meanwhile, the Democrats in particular, and the liberal elite more generally, are left gnashing their teeth in the corner, for they have no answer.

All of this with a majority of just one in the Senate; as our Foreign Secretary, Boris, pointed out this week, we need him on our Brexit negotiation team, where the whole thing has, somewhat predictably, ended up in the weeds.

I suspect that it actually went wrong some six months ago, with the backstop deal on northern Ireland where the EU suggested a dual status, as a temporary measure, whilst other arrangements were put in place. Since the UK would never abandon the province, it ensnared the whole country in the brilliantly laid trap from which there is no escape, bar the nuclear option of no deal, for which the Treasury has repeatedly frustrated all preparations.

The EU negotiators can see all this playing out through our brilliantly informed media, so all they need to do is sit back and watch. In any case, they have other problems, such as the Italians withdrawing whatever they can from their banking system, possible only because the funds are replaced by the European Central Bank, in effect the Germans. These numbers are big, scary, and accelerating.

Then, of course, there is the Donald, again, who left the G7 meeting in total chaos, having carried through his threat to impose tariffs on steel and aluminium. When the other participants started to complain, he suggested making the zone completely tariff free. This from the Financial Times, (albeit faint praise, usually).

“Imagine an industrialised free trade area. From Europe in the Atlantic east to Japan in the Pacific west, it would cover a $36tn economic zone, and almost half of global output. It would be a remarkable free-market alliance against a rising China and its brand of state-directed capitalism .Talk about a presidential legacy project. It would be huge.”

It won’t happen; too many vested interests, and it is not clear that he had cleared this with his voter base. But, and it is a big but, his ability to think totally outside the box has completely floored his detractors, who are reeling. He just needs to work out how to reconcile the free trade idea with his high barriers on the movement of human capital, which every advanced economy needs, in ever greater numbers.

The Fed duly raised interest rates on Wednesday, with the expectation of two further increases this year, and four next, lifting the rate to 3.5%. They cited inflation, stoked by high energy prices, and the growing economy, helped by the tax cuts. They are also looking to reduce their balance sheet by selling off $500bn of bonds a year, acquired through their QE activities. Most recessions are caused by an excessively tight Fed, i.e. they crank up rates to a point where they kill the growth off.

This tipping point is reached when interest rates are higher than nominal GDP, which over the last five years has averaged 3.9%. So if rates hit 3.5% by the end of next year, as envisioned above, and growth slows down to the same level, at that point, the Fed would become tight, and a recession would be possible.

In the past year, nominal GDP growth has accelerated to 4.7%, and next year it could hit 6%, with the economy on its present trajectory.  No one is forecasting interest rates to get anywhere near that level, even if it could be proved, mathematically, that increasing rates causes recessions. On these numbers, a recession in 2020 is not a given, by any means, and forecasts that far out are meaningless, anyway.

Except the one that I will allow myself. In 2020, the American people will vote for who will be President for the following four years, against a background of a healthy economy. Join the dots.


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.