Thoughts On November


Bank of Japan In Wonderland

According to financial news today the Bank of Japan has announced a couple key things.  First it wants to set a 10 yr bond target of zero percent.  Second it wants to hit its inflation target of 2% or perhaps slightly higher.   This is surrealism brought to finance.  Its not limited to Japan.

The ten year bond return of 0% would still be higher than the current bond yield in Japan which is slightly less than zero.   So zero is in fact an improvement.   Setting a 10 year bond target and controlling it is a stunning objective in and of itself.   The Bank of Japan, along with a lot of other central banks, have failed to achieve other targets.   All would prefer a return to normal economic growth and yields.  In the absence of the ability to control that they are now setting insanely absurd targets as a goal, like zero percent on a ten year bond.

Meanwhile markets have reacted to this news with gains for the day.   When the markets view this news as positive it gives us some sense of just how distorted things have become.

The thing to consider is why.   Stimulating growth is the goal of virtually all industrialized nations central banks.   The operating premise is to much cash is on hand, negative rates might force the cash to be invested.  Investing is how you produce growth because companies produce growth.   But its whistling past the graveyard.  The problem is not a lack of money to be invested, nor a lack of desire to invest it.   The problem is a lack of reasons to invest.  For growth to happen their must be an increase in demand on the part of the consumers.   This has not happened.   Japan is leading the way in that.  The reason is there are fewer and fewer consumers.  The way to increase demand is to increase the number of consumers.   Negative interest rates do not increase the number of consumers.


Life Expectancy and Retirement Planning

Managing retirement funds for yourself or for another is a challenge.   Part of challenge of answering “do I have enough money” or “how much money can I withdrawal each year” lies in knowing how long the person will live.   Its a very impolite and seemingly immoral question to ponder “When are you ( or I ) going to die ?”   In truth no one could answer it anyway.   But it lies at the very heart of planning.

One approach is to simply look at the average life expectancy by birth year and gender.  This information is available via the Social Security Administration, CDC and various online sources.   The IRS relies on expected life expectancy to calculate your required minimum distributions.  These of course are just averages.  People live longer, lots longer.  I believe the current average age at death is 83 years presently.   I know, and have known, several to live into their 90s.   I’ve known some to die much earlier.

The moral questions for funds you may manage for another center on, “Have I maximized the amount of money available to them during their life ?”.   If a longer than actual life expectancy is chosen as a budget basis the result will be excess money left over unused.  If a shorter than actual life expectancy is chosen the result will be running out of money in retirement and the pain of a drastic life style adjustment that goes with that.

Generally I believe that estimating high on life expectancy is the right path.   Its what I plan for myself and it is what I would suggest anyone plan on.  It also is the more palatable option than saying “Ya I think you ( or I ) are going to die much younger than we hope.”



Zero and Negative Yield Opportunity

As negative interest rates spread, Germany is also now offering negative bonds, an opportunity is created.   The longer rates stay near, at or below, zero the more a sovereign nation can finance its debt at zero interest.    Unlike consumers the sovereigns can than, to the extent debt is financed in their own currency, kick the inflation option full speed ahead after they get enough debt at 0% and make a lot of their current debt vanish through inflation.  To the extent doing that is in the interest of more than one nation, and it would be, that suggest a real possibility of a soon and sudden pivot back to inflation.

Article 50 or Hotel California

To leave the EU a nation, such as England, is to invoke Article 50.  This is the clause that allows a nation a pathway to leave the EU.   My understanding of Article 50, limited as it is, suggests this is mostly window dressing as it does not in fact define an actual pathway.

Upon invoking Article 50 the EU and the nation begin negotiating the terms of the exit.  This is key because it means how the exit happens is as yet undefined.   The EU will undoubtedly make the terms less then pleasant for the exiting nation.  They will also create a long term process of negotiation to chew up the clock as much as possible.  If at the end of the first two year period the exit is not in fact fully negotiated and executed, the 2 year period can be extended as needed.   This can in fact be a never ending process or one so unfavorable the nation won’t wish to take it.

A nation can reject the authority of the EU and stop cooperating during this exit process.  However its probable that doing so will subject them to any number of penalties as part of their existing membership in the treaties that make up the EU.   A nation attempting to ignore the EU on this will encounter a focused headwind.

Ultimately the EU’s path will likely be the same as they ran with Greece.   They will drag it out, make it unpleasant, and try to cause pain for England that is associated with the exit in the hopes it displaces the upstart political movement attempting to exit.   If they can succeed at that then the exit can be reversed and the union preserved.

To let England successfully leave is to leave the EU toothless.   Other nations would then believe it is possible to leave any time they felt like.  That would make the EU a paper tiger.   Every possible leverage point will be utilized to make sure England, despite this vote, doesn’t actually leave.

Ultimately you can checkout any time you like but you can never leave.

Will London Fire On Fort Sumter ?


A union of states was created, and over time more and more states were added.  Eighty four years later some of those states tired of the union and attempted to leave it.  In time Confederate forces fired on Fort Sumter in South Carolina and the game was on.

A union of states was created and states were added.  Now twenty three years on from the founding England has decided to leave the union.   Unlike what the US went through the underlying cause for Europe is very different.  Also unlike what the US went through the European Union has an escape clause, namely Article 50.   There have been, I believe, a few smaller states leave the EU but nothing on the scale of England.

Will this start a economic war on the continent ?  Very possibly.   Especially if England decides it is not bound by Article 50 and decides when it wants to leave it does so on its own terms.

The parallel to the US crisis when states tried to leave the union is that, on the other side of strife, a stronger and larger Union emerged.   One can hope that is the same outcome for the EU.