“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.
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