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The Financial Ironmonger Blog No 40/2017

The Financial Ironmonger Blog No 40/2017

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.


That America has managed to create 441/- new jobs in the last two months is testimony to an economy on fire, boosted by the sugar surge on Trump’s tax cuts. Unemployment now stands at 3.7%, the lowest rate for 49 years. But these headlines mask distortions, and the possibility of trouble brewing.

Inevitably, these rates of growth stir inflation, already rising due to high fuel costs, which means that transportation prices are up 15% in a year. The Texas hurricane sharply increased demand for drivers, as reconstruction got under way, exasperating a pre-existing shortage. Starting salaries of $100/- a year are not uncommon, with signing on bonuses.

The Fed have been increasing interest rates, and will continue to do so through 2019, as these inflationary pressures build, not that it will have any impact on the price of oil, for example. But it does have other knock on effects; if you are a “millennial” seeking to buy your first house, you have never seen interest rates this high.

The danger is that the Fed is focusing on the wrong numbers, and will kill off the economic recovery. And since America really is the last game in town, we should all worry about that. Indeed, some already are.  40% of the S&P 500 companies have lower share prices than they started the year with, the overall market only supported by higher “tech” valuations.

Global Macro leading indicators have already turned negative for the G7, and more sharply so in Europe. Earnings per share growth, which has been clocking 20%, are closely correlated to these indicators, albeit with a twelve month lag. So, you need to think what happens to equity prices if EPS growth turns negative. It is not pretty.

China, Hong Kong, India, and most emerging markets are down some 20% this year, but still look overvalued. Dollar denominated debt will only get more expensive, as the currency strengthens, whilst trade wars are in nobody’s interests. You might think these only effect China, but the ripples from a stone thrown in to a pond travel a long way.

Some might think this all rather theoretical, and unlikely to significantly impact the part of the globe that they occupy. For those that own cars, for sure it costs more to fuel them, but it is a minor blip. For those that sell them, it is a very different story. New car sales in the UK in September were 20% lower than 12 months earlier, and that figure was 9% down on the preceding 12 months. Some blame this, inevitably, on Brexit, whilst others cite a new emissions testing regime for clogging supply lines.

Brexit uncertainty has replaced bad weather as the excuse de jour for many underperforming companies, but as I write, the news headlines are indicating that the chief EU negotiator thinks a deal can be done in November, a significantly positive note on the back of eighteen month’s relentless negativity. Whatever is cooked up, it will be a fudge, but amicable divorces do not exist, much like Unicorns.

Maybe the EU has bigger things to worry about, such as the utterly parlous state of the Italian banking system, almost totally unreformed ten years on from the GFC. Or perhaps stuff more visible to all. Sales of Audi cars were down 22% globally in September, pretty much in line with the UK experience, but in Europe they fell 55.5%, and in their home market, Germany, 69.4%, which can hardly be blamed on uncertainty over Brexit.

My conclusion is that whilst the American economy will continue to romp along, ( and carry the Donald to victory in 2020), markets will see increasing volatility, and a narrowing of market participation, jargon for saying that it will become much more difficult to make money in equities, outside a select few companies.

A testing time for fund managers, then, some of whom have ridden the wave of cheap money, and easy returns. As the tide goes out on one of the longest bull runs in history, we will see who is wearing a bathing costume, or not.


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.