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The financial services industry is founded on catering for the risks of either dying too soon or living too long.The financial effects of dying too soon can be evaluated and the risk then covered through the use of life assurance.

The issues of living too long are more complex and the real risks are often overlooked by even the most sophisticated investors.

Investors generally have an intuitive grasp of what they perceive as investment risk but in many cases that perception is based simply on the fear of making a definable financial loss.

Rarely does the typical investor take into account the far more serious but much less obvious risks associated with their own life expectancy and the onerous erosive effect of inflation.

With improvements in medical science (particularly over the past twenty five years) a man who has attained the age of 60 nowadays has a life expectancy of 21 years. Contrast that to the situation 25 years ago when the life expectancy of a 60 year old was just 16 years. That is a substantial increase and brings with it a considerable increase in risk.

Developing that theme, a man of 65 now has a life expectancy of 17 years whereas in 1987 it was 13 years and a man of 70 has an expected 14 years ahead of him as opposed to the 10 years he could have expected to live for in 1987.

A similar situation pertains for female lives. A woman of 60 today has a life expectancy of 24 years (up from 20 in the late 1980’s), whilst a 65 year old female would now be expected to survive for another 20 years (up from 17) and a 70 year old has an expectation of 16 more years (increased from 13).

Continuing improvements in research and medical care will further extend the average life expectancy of those living in the developed world.

Quite simply we are living much longer and the finances we have built up will be required to see us through a longer period of time than we may have originally planned for.

Whilst this alone poses a real risk and a grave threat to our personal financial stability and security that risk is magnified much further when we take into account the effect of inflation.

Even a modest level of future inflation has a severely detrimental effect of the real value of our capital and income. We are told that inflation in the UK is currently running at just under 3% per annum.

If it continues at that level then over 5 years it would reduce the real value of our finances by 14%. Over 10 years the effect is more onerous and translates to a reduction in value of 26% and over 15 years the impact is an even more considerable fall of 37%.

Putting that into monetary terms, £100 at today’s values would effectively be worth £85 in 5 years time, £73 in 10 years and just £63 after 15 years of relatively low inflation. Of course, if the rate of inflation rises then these falls in purchasing power become even more significant.

The combined impact of increased life expectancy and future inflation pose a very substantial threat to one’s financial wellbeing and yet these significant risks are all too often overlooked when investment decisions are being made.

An investor opting to take what he believes to be a low risk investment (simply because he is fearful of making an investment loss) is actually leaving himself exposed to the much greater ‘hidden’ risks of extended life expectancy and inflation. As the figures above illustrate, the investor would be in grave danger of unwittingly making his financial position much worse. Sleepwalking towards financial disaster would not be too strong a description of this scenario.

Decision making in relation to investment

It has long been proven that investment in equities has been the most efficient way to maintain pace with inflation over a period of time. The importance of maintaining the integrity of your income and capital cannot be overstated, particularly in light of increased life expectancy and the effect of future inflation.

As has been demonstrated above, inflation erodes the nominal value of your capital and so it is essential to maintain the value of your wealth and the purchasing power that flows from it.

In order to do so it is necessary for your investment manager to try to preserve and grow the real value of your assets through a measured exposure to investment risk. The risks associated with stockmarket investment can be controlled through astute selection and consistent monitoring.

At Quotidian we only make investments where and when we feel that the potential for profit is compelling and we scrutinise our investment decisions on a daily basis.

We seek to invest in assets that have strong liquidity and are readily tradable. We apply a combination of technical analysis and fundamental analysis in arriving at our investment decisions. In so doing, we seek to maximise investment returns whilst controlling exposure to equity risk.

As part of our risk control process we are content to switch into money for extended periods if markets are relentlessly negative and less likely to produce a profit commensurate to risk.

We strongly recommend that investors combat the detrimental risks of longer life expectancy and inflation by including selective and controlled exposure to equities into a well planned investment portfolio.

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Deception masquerading as ‘facts’ was the hallmark of the ‘remain’ campaign.

The quality of the debate between the ‘remain’ and ‘leave’ factions was depressingly low to non-existent. The status quo side seemed to be content with scare tactics underpinned by questionable figures (much of which had been stage-managed or belatedly seen to be based on fallacy) whilst the ‘enough is enough’ campaign was fractured and seemingly incapable of creating a coherent strategy.

No serious mention was been made of Europe’s disastrous and continuing migrant crisis and its economic, social and safety implications. Neither was there any focus on the inherent problems of the common European currency and its adverse economic effects, particularly on unemployment.

In light of just the trade numbers alone (and setting aside the need for democracy, the ongoing migrant issues and the Euro with its ‘one size fits all’ philosophy) one questions why the UK could or should feel the need to remain in an excessively bureaucratic, anti-democratic, demonstrably corrupt and economically bankrupt alliance.

Forty years of experience have shown us that the European Union is intrinsically undemocratic, financially incontinent and deliberately unwilling to change. Leaving the EU would no doubt cause some short-term economic turbulence but the issues set out above make the case for Britain to leave the EU ever more compelling.

The European Union as it currently exists is a cesspool of rotten politics, inept leaders and a badly constructed monetary system which is the central cause of so many of the EU’s problems (and that was flawed from its very outset).

Does the UK want to remain to the bitter end or, by leaving, does it then want to lead the way forward to a truly democratic European Economic Union where free trade, protected borders and freedom of choice will replace the anti-democratic and faintly absurd notion of a Federal Europe ruled by unelected and unaccountable bureaucrats.

Winston Churchill has been purposely misquoted in the course of this campaign in the hope of supporting the ‘remain’ case. What he actually said was “We are with Europe but not of it. If Britain must choose between Europe and the open sea, she must always choose the open sea”.

Methods of leaving the EU – Article 50 and beyond

The first step is to invoke Article 50 of the Treaty of Lisbon. The UK controls the timing of that in entirety. Whilst the EU might wish to rush things (in order to avoid any contagion of Brexit to other countries) it is entirely in the UK’s gift as to when that button should be pressed.

We are already in the EEA (European Economic Area) which is where (once outside the EU) we must choose to remain. This, together with an application to join the European Free Trade Area (EFTA) gives the UK an immediate solution to the ‘access to the single market’ trading problem.

Furthermore, under Article 112 of the EEA Agreement, we also have the unilateral right to claim a partial opt-out from the EU’s ‘freedom of movement’ rules. This would allow us to set up a quota system to control immigration from other EU countries.

However, the EU will no doubt seek to press us into going along with their much-touted plans for a ‘two-tier’ Europe which would leave the Eurozone countries united and centralized and with the UK and other non-euro nations sitting on the sidelines (and possibly joined by ‘neighbouring’ countries such as Turkey and Morocco).

This will be portrayed by the EU as an attractive compromise whereas it is, in fact, a highly deceptive strategy. It would leave the UK still in the EU but as a second-class member with all the disadvantages that we voted to extract ourselves from. We would still be subject to much of the ‘supranational’ system we voted to escape from and it would leave us even worse off than we were.

The most disastrous option is that we could reach the end of our two-year negotiation period without any agreement having been reached. Bear in mind that the EU have already taken 10 years to negotiate a trade deal with the USA and still there is no agreement in sight. Likewise, negotiations with India were abandoned after nine years of pointless wrangling and inability to make a decision by the EU end of things. The impossibility of 28 countries reaching accord is palpably obvious when one looks at the pigs-breakfast they have made of trade negotiations thus far.

Finally, on invoking Article 50, the UK should immediately apply for an extension to the 2 year negotiating period (as the rules allow us to do) in order to avoid the absurd situation where, after leaving the EU but failing to reach an acceptable exit agreement within 2 years, the remaining EU counties could sell to us but we would no longer have the necessary paperwork to sell to them!

We must hope that our negotiators are capable and well-informed enough to negotiate the labyrinth.

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Italy is facing its greatest financial crisis in the post-war era. The country’s banking system is bankrupt and no one in Europe seems willing (or able) to fix it. Since 2009 Italian bad debts have multiplied from less than 3% of total loans to more than 18% today. As a result, many Italian banks have far more bad debts than they have capital to back them up.

To put that into better focus, banking regulators generally begin to worry when banks’ non-performing loans reach 5% of the bank’s assets. In Spain, for example, during the height of their housing bubble burst in 2010 (when the whole country appeared bankrupt) non-performing loans never went much above 10%.

In Italy today the total value of non-performing loans is an unprecedented 18% of assets. Italy now has the biggest concentration of weak large banks in the world; nine institutions in all. Moreover, five of Italy’s nine weakest global banks are megabanks, each with over $100 billion in assets:

  • Unione di Banche Italiane, with $132.8 billion in assets;
  • Banco Popolare SC, with $139 billion;
  • Banca Monte del Paschi di Siena (the oldest bank in the world), with $197.6 billion;
  • Intesa Sanpaolo, with $796.9 billion; and
  • the largest of all, UniCredit SpA, with over $1 trillion.
In theory, the solution to any banking crisis is essentially straightforward: You bankrupt the shareholders and the bondholders and then you recapitalize the banks. According to most estimates, Italy would need about $40 billion to get the job done; a large but still manageable number.

There is, however, one very nasty glitch to this ‘simple’ plan. In Italy, the bonds of these banks are not owned by institutions but by very many small retail investors. According to Bank of America Merrill Lynch, small investors own 235.6 billion euros of bank bonds and the banks do not want to panic them (with all the civil unrest and social deprivation that would bring in its wake).

To make matters worse, Italy also has more public debt than any other EU member except Greece whilst having an economy that is nine times larger than that of Greece. In a full-blown banking crisis, not only would Rome be hard pressed to come to the rescue but Brussels and the EU would have a tough time saving Rome.

So we find ourselves in a standoff. German Chancellor Angela Merkel (and even the Italian-born head of the European Central Bank, Mario Draghi) refuse to budge on this issue and will not bail out the Italian retail bondholders. Italy’s technocratic Prime Minister Matteo Renzi (put in place by the EU itself) is desperately trying to reason with them but, thus far, the talks are at a standstill. If Italy is forced to do a “bail-in” (which is banker’s terminology for bankrupting the bondholders) then the political and social backlash could tear Europe apart.

Italy already faces a very strong independence movement in the Five Star party and it has been winning local elections at a rampant rate. If Merkel and Draghi force Renzi to effectively wipe out 15% of the country’s wealth as a result of bank recapitalization then the backlash will be huge.

Italy is the third-largest economy in the Eurozone and if it goes then the eurozone will probably crumble soon thereafter. If the all the parties concerned can’t come to a practical agreement soon then the situation will go from bad to worse. The euro will come under increasing pressure and the political crisis in Italy along with the collapse of their banking system will most probably result in Italy leaving the EU. The EU will then collapse.

The EU project in its current form and with its deliberately anti-democratic aim of creating a Federal Europe will ultimately be a failure of epic proportion and we predict its demise by 2021. Perhaps then (if not before) we can return to the original concept of a pan-European free trade area without all the federal baggage. For those who still harbour lingering doubts about the very positive benefits of Brexit, the Italian crisis and its likely denouement would strongly suggest that the UK has dodged a bullet.