I’ve been running myself in circles trying to figure out the whole negative rates/inflation/global outlook thing.  Usually writing it out helps, but not in this case.  But seeing if some baby steps might help break the writers (and thinker’s) block.

I have had one very calming analytical breakthrough in the last week or so.  I’d been burning a lot of cycles trying to figure out why rates are so low globally.  I’d got some ideas, but nothing definitive.  It finally occurred to me that the WHY doesn’t matter.  I can just take the WHAT for granted and move on from there.

What is the What?  Risk Free Returns Will Suck.

Returns on low-risk assets are going to suck for a long long time.

The current 30 year treasury yield as of September 04, 2019 is 1.97%.  Risk-free (and a lot of risky) bond rates across most of Europe are outright negative.  For all the loud protestations about Central Bank manipulation, those are largely market-driven rates.

A bond investor buying today will probably lose a little ground to inflation year after year.  Even outright deflation probably won’t save fixed income investors.  They might break even on their bond investments, but all their other assets (Real Estate) would lose value.

Bonfire of the (Boomers) Vanities.

Its worth remembering that Sherman McCoy, Bonfire of the Vanities 80’s Master of the Universe, would be a cranky 70-year old man today.  Looking for a safe return to fund his twilight years.

That incoherent howling heard from so many quarters is the Baby Boomers (or their financial advisors) trying to twist their way out of an inescapable, market driven, read-it-in-the-paper-every-day truth.   Because they are (or were) counting on those bond yields to finance their retirement.

If we shout loud enough, Daddy will give us back those 4%-6% treasury rates we see as our birthright.  We’re OK tanking the economy and impoverishing our grandkids to save our own skins.  After all, self-absorbed pursuit of our selfish best interests (conveniently re-narrated as the “common interest” because that was true for most of our lives) is just our nature…

I say incoherent because the boomers themselves are the authors of their own troubles.  The engine driving rates ever lower is their collective, global urge to move into lower-risk assets as end of life nears.  It is a self-destructive, self-reinforcing cycle.

Risky Asset Returns May Suck.

One way or another, you are going to have climb a long way out on the risk curve to make a decent return.

Pushing back on the other side of the economic equation are the non-Boomer, still-working-age generations.  That is one reason why the (relatively young) US has positive rates why (relatively old) Europe and Japan don’t.

Ummm, Grandpa?  I gotta buy a house and pay the mortgage and we haven’t seen decent wage gains in like forever so….

Yes there is a lot else going on (hopefully this post sparks further thinking).  But under it all its just demographics and an ugly tug of war between an aging generation and everyone else.  At least in the developed world.  Japan went into that demographic spiral first.  Europe is following.  The US is touch and go (higher birthrate and net immigration).

The question remains,.  What the heck to do about all of this?  Hoping this baseline gives me the mental closure to move forward.

Any and all feedback would be deeply appreciated.