Wondering what caused the stock-market swoon earlier this week? The clues are on almost every page of the newspapers and have been for months. In the UK, the minimum wage and auto-enrolment pension contributions made by employers go up in April. And a review of employment practices may award holiday and sickness pay to millions of workers in the gig economy.
In Japan, Prime Minister Shinzo Abe is demanding that employers offer 3% pay rises across the board. In Germany IG Metall, the country's most powerful union, has just won a 4.3% wage rise for 900,000 members and the right for all to demand a 28-hour working week (no, you aren't alone in wishing you were a metal worker in Baden-Wrttemberg). In the US, millions of employees are getting one-off bonuses, staff benefits are on the up (staff at Walmart are to get maternity leave for the first time) and in January average wages rose 2.9% on the year (a number so unexpected that mainstream economists insist it is suspect).
In short, there is a very good chance that the long period of very low inflation across the globe is fast coming to an end. This more or less confirms for us that we are on the edge of the biggest shift that most of us will see in our investing careers. For the last 30-odd years, interest rates have been falling. For the last nine, thanks to the great deflation scare and the scorched-earth monetary policies our central bankers deployed in reaction to it, they have been falling very fast indeed. Wage inflation (if it keeps going) means they will now rise possibly faster than the market expected.
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Normalising wage growth and bond yields are good news: they tell us that there is a chance that for the first time since the great financial crisis the global economy is managing self-sustaining growth. We have felt for ages that central banks should give up on their extreme monetary policy now, if they want to stick to their inflation targets, they won't have a choice. Hooray. What all this does mean, however, is that you need to be more careful than ever about how and where you invest markets (being made up of the emotions and prejudices of their millions of participants) hate change.
So there will be no end of mini-panics of the type we saw on Monday. The most vulnerable investments will be those that have benefited the most from very low rates (property, companies with large amounts of debt) and those that have been driven to what the ex-chair of the Federal Reserve Janet Yellen calls "elevated" prices by cheap money.
It's time to look for stable, low-debt stocks at reasonable prices. That is more easily said than done, but we will, as usual, be on the look out. Most people won't think that Chinese internet stocks fall into this category but reserve judgement until you have read Rupert Foster's take in this week's cover story. You may end up a convert.
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