BlackRock CEO Fink: Negative & Low Interest Rates Eat into Consumer Spending at Worst Possible Time

“A hostile landscape” – that’s what BlackRock CEO Larry Fink called the global investment, economic, and political environment in his gloomy annual letter to his shareholders. It starts out propitiously:

Investors today are facing tremendous uncertainty fueled by slowing economic growth, technological disruption, and social and geopolitical instability.

More specifically:

In China, growth is slowing with global effects.

In the U.S., the quality of corporate earnings is deteriorating, with record share repurchases in 2015 driving valuations – an indication of companies succumbing to the pressures of short-termism in place of constructive, long-term strategies.

And electoral politics muck up the global landscape further:

Polarizing elections in the US and Germany; government transitions in Spain, Taiwan and Canada; allegations of scandal in Brazil, and the UK vote in June on whether to leave the European Union will all continue to drive volatility.

But the impact of low and negative interest rates central banks have imposed on economies around the world is “particularly worrying,” he said. And yet, it’s swept under the rug.

There has been “plenty of discussion” on how low interest rates help trigger asset price inflation, as investors chase yield by loading up on riskier and  less liquid asset classes – “with potentially dangerous financial and economic consequences.” But…

Not nearly enough attention has been paid to the toll these low rates – and now negative rates – are taking on the ability of investors to save and plan for the future. People need to invest more today to achieve their desired annual retirement income in the future.

For example, a 35-year-old looking to generate $48,000 per year in retirement income beginning at age 65 would need to invest $178,000 today in a 5% interest rate environment. In a 2% interest rate environment, however, that individual would need to invest $563,000 (or 3.2 times as much) to achieve the same outcome in retirement.

This reality has profound implications for economic growth: consumers saving for retirement need to reduce spending if they are going to reach their retirement income goals; and retirees with lower incomes will need to cut consumption as well. A monetary policy intended to spark growth, then, in fact, risks reducing consumer spending.

Is this why BlackRock is pulling its money out of Japan, where consumer spending, after two decades of ultra-low interest rates, and now negative interest rates, has been weak for just as long – and getting weaker?

The firm cut its outlook on Japanese stocks from overweight to neutral (a sell rating in polite society). It’s not the only one. Citigroup cut its outlook last week. Credit Suisse got cold feet too, along with LGT Capital Partners, a $50-billion asset manager based in Switzerland.

In total, foreign asset managers have unloaded ¥5 trillion ($46 billion) of Japanese stocks over the  past 13 weeks, the longest such stretch since 1998, and the largest amount since records have been kept starting in 1993, according to Bloomberg, “as economic reports deteriorated, stimulus from the Bank of Japan backfired, and the yen’s surge pressured exporters.”

“If foreigners don’t come back, the future of Abenomics could be jeopardized,” Masahiro Ichikawa, a senior strategist at Sumitomo Mitsui Asset Management, told Bloomberg. And this might trigger a “downward spiral.”

That downward spiral has already commenced: the Nikkei stock index plunged 25.7% from its recent high last June – deep into a bear market.

The Japanese have long harbored a visceral distrust of their own stock market, having gotten burned so badly for so long, and their distrust is once again validated. So foreign investors are crucial in propping up the market. They account for about 70% of the value of stocks traded at the Tokyo Stock Exchange, according to Bloomberg. Between 2012 and 2015, during the hope-and-hype days of Abenomics, they bought a net ¥18.5 trillion of shares. Now foreigners are learning what the Japanese have known for years, and they are bailing out.

In his annual letter, Larry Fink put his finger on the sore spot in Japan and elsewhere. A warning for all central banks: low interest rates and negative interest rates, when they drag on, eat into consumer spending.

Consumers who live off their savings, such as retirees, have to curtail their spending because their income disappears. In an aging society, that’s a big part of the consumers. Younger consumers saving for retirement are having to save more to reach their goals in this rate environment, which further eats into consumer spending. And since low or negative interest rates will prevent consumers from reaching their retirement-savings goals, these rates will also eat into future consumer spending.

In this manner, at a time when consumer spending is already struggling, low and negative interest rates insidiously diminish demand further. Turns out, when the return on money is zero or negative, suddenly, as far as the consumer is concerned, all bets are off.

But even ultra-low interest rates can’t keep asset bubbles inflated. Look at the condo market in San Francisco with its ludicrous prices. It’s now being done in by a historic construction boom that coincides with slack demand. Read…  It’s Over: San Francisco’s Epic Condo Bubble Bursts

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  39 comments for “BlackRock CEO Fink: Negative & Low Interest Rates Eat into Consumer Spending at Worst Possible Time

  1. VegasBob says:

    Don’t tell me someone on Wall Street is finally figuring this out.

    Since 2009, I’ve been saying that zeroing out savers’ interest income causes huge reductions in consumer spending.

    Maybe a central banker will read this and retreat from the insanity of current monetary policy.

    • Wolf Richter says:

      Yes, it took a long time! Central bankers still refuse to admit it, though.

      • d says:

        The vast majority of central bankers today are, ACADEMICS.

        Academics are Wedded/Addicted to their Academic theory’s, learnt by rote.

        They have no real practical experience, the vast majority of them are in fact unemployable, in any meaningful role, in the real business environment, without out the assistance of their crony associates…

        They may be forced to change their behaviors, they will NEVER admit their Academic theory’s, were, and are, proven wrong.

        • Merlin says:

          academicians and politicians smell the same!

          (warning – off topic: why do they hate and fear Trump?)

        • d says:

          For the same reason the intelligent feared , Hitler, Communists, and Stalin.

          Trump will take you to the same places they did. Left or Right populist demagogues always do.

          Incidentally both Hitler and Stalin were leftists.

        • polecat says:

          I could do a better job at economic prognostication by throwing chicken bones on the floor of the Eccles Building, then what ANY of these academic bozos are doing…….

          Put all of them in ‘stocks’ …… and let the rubbish be thrown !!

      • Winston says:

        “Central bankers still refuse to admit it, though.”

        Who are on that particular topic the only ones who count.

      • Mark says:

        Since when retirees are “economy’s driving force”, according to Mr. Fink???
        This stinks big time and just laying ground for helicopter money.
        He is not worried about anybody just his own profit.
        Invest in yourself by yourself and stay debt free if possible.
        Sorry for repeating same sentence over and over but people should finally start to use their own head.

      • VegasBob says:

        No, central bankers will never admit error. Like most academics and politicians, they are constitutionally incapable of uttering phrases such as ‘I was wrong’ or ‘I don’t know.’

        Most Boomers are probably struggling financially in this environment, but I’m a representative example of a Boomer who actually did save for retirement.

        I’m not quite at Medicare age but I am getting close. I saved for retirement most of my adult life and took early retirement at the end of 2007, before the financial crisis. At that time I was receiving a healthy chunk of interest income every year on my savings.

        When the Fed took interest rates to zero at the end of 2008, my interest income on a lifetime of savings dropped to near zero. So I reduced my discretionary spending accordingly, probably by $5-10K a year.

        I did switch a huge chunk of my savings to municipal bonds just to get some income back, but I never ratcheted my spending back up. After all, bonds are not FDIC-insured and therefore entail risk.

        When Obamacare was implemented and I was coerced into buying health insurance in 2014, I pretty much eliminated another $5K of annual discretionary spending to pay for Obamacare. Whatever you think of Obamacare, it is not cheap if you are in your 60s and don’t qualify for a subsidy.

        Like most old folks, my fear is that I might run out of money before I eventually croak. So I basically refuse to dip into the principal balance of my savings.

        So, no interest income = no discretionary spending. That’s a drag on the economy no matter how one looks at it. Only central bankers and Wall Street shills seem to have a hard time figuring it out. It’s common sense to most other people.

        • ERG says:

          They know, VB. They just don’t give a rat’s ass.

          Low interest rates are necessary to keep the debt-based economy going until the day comes when it doesn’t go any more. If, in the meantime, you have to eat cheese sandwiches and stay home most days, that isn’t their problem.

          Money has been hijacked by the Fed and flows in a closed loop between the government and Wall Street. Until that cycle is broken, nothing is gong to change.

      • DCR says:

        When will even those who somewhat understand our economic predicament finally grasp that consumption is not the key to economic improvement. Consumption is effortless, production is hard. Prices, including the “price” of interest rates, clears the markets. Government meddling in pricing screws up market-desired production, the financial markets, and economic growth prospects.

        Railing against lack of retiree consumption is the wrong approach. The focus should be on government manipulation of interest rates, and its affects on real (not financial) saving, real capital formation, the prices of long duration “assets”, debt accumulation, and leveraged speculation. This is what is destroying the middle class everywhere.

      • jan becker says:

        This is another bubble CREATED PURPOSEFULLY by the central banks. Every time they want to turn us over and empty our pockets, they generate a financial crisis. There is nothing natural or inevitable about this. Why don’t more people see this?

  2. “Real” investment rather than financial engineering mind games are the foundation of free market capitalism.

    It is a trite but true observation that before a good or service can be “consumed” it must be produced, and that 70% of the current US GDP is generated by consumer spending, By discouraging saving and investment by by negative interest rates, we are preventing “real” investment in productive activities, which in turn support consumption, but are instead promoting asset bubbles such as the dot com and real estate bubbles.

    In short, we are committing economic suicide.

    • Agnes says:

      After reading about the San Francisco housing situation I hunted around on Zillow to see what 3000$ would rent for a month. I admit the dome at 79583571 (listed this week) is exceptional, but it does explain why people move to Colorado If There Are Jobs. As a child I once saw a mining cabin with plates still on the table—people had abandoned everything to move to where there were new mining jobs. There was French wallpaper on that cabin wall!!

  3. Old Engineer says:

    My interest income has fallen from around $10,000 per year to around $1,700 per year which is significant to a retiree. It has also significantly reduced my Federal and state tax net incomes.
    NAFTA, the gutting of Taft-Hartley, rampant tax & utilty cost inflation, and virtually zero interest rates have all contributed to consumer income loss. I have no economic or financial planning, I never understood how depriving the consumer of income could benefit a consumer driven economy.
    Yet the very people losing sales are resisting any changes that would enhance the consumer’s income.
    And consumers continue to re-elect the people who have espoused and abetted this trend.
    Viewed objectively it seems like the whole country has a financial death wish.

    • Petunia says:

      I’m currently in an area that raised the sales tax to 10%. This tax hike is being absorbed, at the moment, by the retailers offering discounts and coupons of at least 10%. They obviously need to do this to maintain their sales. The overall loss of revenue to them off the top, will hurt the not only sales tax collection, but taxes on corporate earnings. The retailers seem to be subsidizing the bad govt policy and behavior of the past, along with the overburdened consumer.

      • VegasBob says:

        I live in a semi-rural area south of Tucson, Arizona. We are lucky in that our sales tax rate is ‘only’ 6.1% and our state income tax is relatively low.

        I also live in a 55+ age-restricted community, so we don’t have any school taxes included in our property tax bill.

        It takes effort, but there are ways to minimize one’s tax bill.

    • economicminor says:

      You should look closely at how the two party system has such a hold on the political process. We do not have free elections. This is contrived propaganda sold to the masses as democracy. Don’t blame the voters for something they have no choice in other to just not vote which many have already decided not to do.

  4. Cameron888 says:

    `A very good article Mr Richter.

    Mr Fink is absolutely correct on everything he his quoted here.

    What should be also concerning in western economies is the massive number in the baby boomer generation ( and a large percentage of the population) who are now at retiring age, are leaving the work force currently and will continue to leave in very large numbers over the coming 10 years. They are all very aware that those items which are essential to live, especially the bigger ticket items, are continuing to increase in price every year and will continue to do so. Whereas they were adding to their savings when working, they are drawing down on them to live once they have left the work force. Rather than being net buyers of investments, they will over time be net sellers which does not signify a good time for stock markets. Capital preservation is also more important to these people than return on capital if reasonably good returns only come with high risk (as they do now). Thanks to central banks, which in their infinite wisdom, have so comprehensively trashed interest rates around the globe causing a new set of issues.

    This comment in your article from Larry Fink is so very pertinent and when you add demographic factors into the mix it does not paint a rosy picture for growth as we have known it:

    “This reality has profound implications for economic growth: consumers saving for retirement need to reduce spending if they are going to reach their retirement income goals; and retirees with lower incomes will need to cut consumption as well. A monetary policy intended to spark growth, then, in fact, risks reducing consumer spending.”

    • Mark says:

      Yeah right, Mr. Fink is just member of same cabal that took financial world to this point of no return.
      Use your head and invest in yourself by yourself, stay debt free if possible.

    • Petunia says:

      The 401K was designed to be a pool of money to feed Wall St. greed thru fees and devaluation, and govt thru taxation. It is preforming as designed. It was never about having money for retirees to live on. If the govt wanted people to have money they would stop taking it and forcing people to put it where they can’t control it.

      They are now grooming millennials to have lower expectations with shows on tv like Tiny Houses. The problem with this is that the millennials have no intention of turning over their money to Wall St. or over priced housing. They saw their parents do this and they all suffered the losses together. This is a very mobile generation. They don’t even have the expectation of spending their lives in America. The govt wants open borders because they need all those new suckers.

      • bud says:

        I have been saying this for years. The 401K and all the rest of the ‘saving’ ideas only contributed to the demise of the people who put their money and faith into them. Your American company became a ‘global’ company and took your money, jobs, security, hope, faith, and future to China and elsewhere with not only your blessing but your cheerleading them on. The fools who made a few bucks on CNBC early lost it all later. The dancing puppets in front of the CNBC empty barn can keep the farmer distracted for only so long.

        None of these hedge funds and most of the stock traded companies and banks would be in the bread lines if it was not for the ZIRP and free money with no qualifying from the FED. The algos can move at the speed of light and rape just as fast. These companies now crying just didn’t have the right programmers….nothing more, but they know the FED has their backs if they muck it up in unison. What they are afraid of is the Quantum computer that wall street has financed and is in testing mode now, and if not that then… Trump.

        The young see what the old have and see a stage set with faded curtains and chipping paint. They want no part of it. Thank God they have eyes.

        • Why no “like” or up-vote? Very good summary of what actually occurred, no matter what the intentions were when the 401ks were introduced. As Dante observed “the road to hell is paved with good intentions…”

      • VegasBob says:

        Of course 401Ks are a scam. So are IRAs, but at least with an IRA you can manage it yourself.

        I was lucky. I retired at the end of 2007 and rolled my 401K money over into a self-directed IRA in February 2008, a month before Bear Stearns blew up.

  5. Merlin says:

    The overarching economic meme for the Boomer generation: Hunker down, you junkyard dogs!

  6. Arbuthnot says:

    Hopeful sign? Maybe, but not enough. Several members of the Fed now support interest rate increases even in the face of accumulating evidence that the economy is slowing. They wouldn’t dare come right out and say what Fink is saying but that’s what they must be thinking. Any schoolboy can see that zero and negative interest rates are effectively a 100%+ tax on savers’ income, imposed by a group of appointed bureaucrats who have no authority to levy taxes. Some stimulant.

    Taxation is supposed to be the job of the legislative branch. But if there was ever a do nothing congress, this is it. The executive branch is no better – never a word about the failure of Fed policies – just empty claims that the economy is doing well (who believes that one?) while dancing the tango in Cuba. And then to complete the picture, there’s our revered Supreme Court, bought and paid for by the K Street minions of the military industrial complex.

    Maybe this country deserves Trump, a mean spirited, hate mongering, damn the torpedoes rabble rouser. He’d probably be impeached before his first term ended but in the meantime the TV ratings would be through the roof….

  7. Michael says:

    Mark is right on here. Blackrock is the firm that bought up all the homes and apartments and are gouging rents. Wonder if that cuts into spending.

    • Petunia says:

      Yes, gouging rents do cut into spending to the point where you have to move out of their over priced houses. I just did. Not only do you get to the point where you can’t afford it, you stop wanting to afford it, and move on. I expect the areas where these corporate landlords own large amounts of houses to experience population loss. The corporate landlords will still be on the hook for taxes, hoa fees, and up keep. In general I see defaults coming.

      • bud says:

        Right again, and just where did Blackrock get the money? They got it from Deutche Bank, a foreign bank that was able to walk up to the FED window and get money for near free to lend to Blackrock to buy YOUR home. Yes, folks the privately owned Federal Reserve Bank was responsible for destroying the backbone of America. And, just who are the stockholders standing in the shadows?

        Even if everyone who rents their crap stopped paying rent, you can bet that they would get a tax holiday that you never could.

      • RE: The corporate landlords will still be on the hook for taxes, hoa fees, and up keep. In general I see defaults coming.

        Correct,but only to a point. In many cases the real estate is owned through corporate subsidiaries [many off-shore], and is financed with borrowed money [e. g. pension funds, insurance companies], in many cases guaranteed by the tax payers. The free cash flow is being skimmed, and when [not if] the asset bubble bursts, the only assets available will be the underwater highly leveraged real estate, with the tax payers again expected to “ride to the rescue”

        Even if the multiple “corporate veils” are some how pierced, for example by RICO actions, the individuals have managed to get most of their personal wealth beyond the reach of US courts, and the resulting socio-economic shambles will not effect them.

  8. Tim says:

    “May 12, 2015 … United States Government Accountability Office … About Half of Older Households Have No Retirement Savings, ….. Note: We are 95 percent confident that the 10th percentile amount is between $6,495 and $11,025, the 25th …”

    Savings are not net worth. interest rates affects on savings affect those with actual savings (vs net worth).

  9. unit472 says:

    Saw an article this weekend that showed how much, on average, Americans had saved for retirement broken down by age cohorts. 55-64 had the most, as you would expect, and twenty somethings the least. The 55 plus group, as I recall, had a little over $150K on average.

    The salient thing would be risk appetite. A person between 20 and 40 might not have a lot to invest but they can afford to take chances. A sixty year old not so much. This matters because the 55-64 year old cohort has 14 times the funds to invest than the 20 somethings. Even if Central Banks could entice every person under 40 to aim for the moon in their investment decisions its not going to amount to a major shift in how savings are invested. In fact, unless Central Banks want to pauperize those nearing retirement ( and the governments they serve) they’d better hope the older cohort doesn’t chase after Unicorn IPOs or momo stocks like Tesla or Facebook otherwise the elderly, instead of being the wealthiest Americans, could end up being wards of the state!

    Worse still, instead of the more affluent older population leaving their money to their children and grandchildren ( perhaps to offset somewhat the poor hand Yellen et al have dealt them via 8 years and counting of ‘financial repression) they will, instead, be forced to consume all of their capital to compensate for ZIRP! We are literally eating our seed corn to try and inflate today’s asset prices.

  10. Bobster says:

    These comments are way more informed than almost anything in the MSM fantasy land.

  11. d'Cynic says:

    Excellent points.
    I would add that young people who crowd into cities for jobs, and lifestyle, spend all their disposable income and more on rent, because of rocketing property prices. Thank you central banksters.
    Older people are equally not spending because of fear of running out of retirement income.

    My belief is that nature will eventually get even with mankind, but that process may take some time. Much faster way to ruin is through financial engineering. I look at Japan as one of the tripwires where it could all unravel financially.
    There are a number of failed states worldwide which are a tripwire of the other kind: they run out of food for their population.

  12. Chicken says:

    It appears to me, the longer term goal involves managing down economic activity due primarily to concern over climate change. How can we expect central banks will ever admit this “thinking out of the box” strategy?

    • economicminor says:

      Besides you cannot have exponential growth in a finite system. The planet can physically support so much life. It takes plants to make the oxygen we breathe. Industrialization and humans pollute. There is no way to continue present ways and not threaten human existence.

  13. DCR says:

    Larry Fink has been a cheerleader for most of the misguided economic/monetary policies which have placed us in our current predicament, and he is dead wrong in his assertion that low interest rates are hurting consumption and producing too much saving.

    Real “saving” is production above what is consumed, and leads to either capital formation or inventory accumulation. Retirees, of which I am one, save nothing. We may choose not to spend past savings, or to not spend the financial returns on past savings (e.g. interest, dividends, rents), but by doing so we are not “saving” in a real economic sense … we are simply not consuming as much of what others are producing.

    While retirees may not consume as much in a low interest rate environment, negative real interest rates disincentivizes producers’ (e.g. workers, corporations) saving (production in excess of consumption). In this life you get more of what you reward, and less of what you penalize.

    Negative real interest rates do reward the taking on of debt, especially in an economic system rife with agency problems where “heads I win, tails someone else loses” rules the day. Taxpayers seem always to be on the hook to bail out a crony loan gone bad. But in our monetary system debt creation, or borrowing, requires no saving. Banks create loans, and the associated deposits, out of thin air. No one is required to produce in excess of consuming for a time in order to lend in our increasingly insane financial structure.

    And that is why we are where we are. Absurd amounts of leveraged speculation. Absurd valuations on all long-duration assets (e.g. equities, l.t. bonds, real estate). Malinvestment as far as the eye can see. More and more of the real economic pie controlled by the holders of the inflating assets, and greater dissatisfaction from the losers in this leveraged financial game of grift.

    I used to believe that people like Larry Fink, Alan Greenspan, Ben Bernanke, and Janet Yellen were clueless Keynesian fools, but lately I’ve come to believe they can not possibly be that stupid, and in reality are just pernicious Grifters in Chief.

    • Agnes says:

      Capital formation, inventory accumulation or INVENTION…Luca Paccioli’s invention of double entry bookkeeping allowed savings to also flow toward Inventors (You might like to read some of Antale Fekete’s work on this).

  14. Christoph Weise says:

    NIRP and ZIRP are disastrous for retirement schemes but there is more to it. I have been on the lookout for a proper discussion of the effects on capital and the financial market but I did not find anything. Maybe some clever economists take a little time and ponder about the long-term implications of NIRP and ZIRP. Imagine a billionaire with a billion in fixed income at 4% a few years ago, getting 40 million in interest p.a., paying taxes investing and spending. Today he may be invested in Tesla and his yield is zero. There is no fixed income any longer to offset bad investments. Capital in private hands should be shrinking. And taxes should be shrinking as well. I always wonder how Schaeuble constantly gets more tax income against this background. Maybe he hired some statisticians from the US who earned their merits in the US unemployment and CPI statistics.

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