|
 Once a curious sideshow for investors with limited attention spans,
the slow grind of demographic trends and its impact on savings and
investment is fast becoming a consensus explanation for the
extraordinary market pricing of 2015.
Over the past week alone, both Barclays and Goldman Sachs revisited
the aging story and both agree the 30-year expansion of workers in
the peak savings years just before retirement was chiefly
responsible for a glut of savings that has driven bond yields
inexorably downwards since the late 1980s.
Morgan Stanley came to similar conclusion last October.
Ominously for record-breaking asset and real estate prices, all
three investment firms conclude the global boom in savings is about
to end - at least within the next few years - and that end will
bring a potentially seismic reversal of financial markets.
"The prime savers' population shift is largely over ... suggesting
the decline in global rates nears its end," wrote Goldman economist
Sharon Yin.
Also, focusing on the looming decline in the prime savers bracket
worldwide, Barclays' Michael Gavin reckons: "A key secular driver of
world asset prices has peaked and will be fading strongly in the
years to come."
Morgan Stanley's Charles Goodhart and Philipp Erfuth last year
insisted that zero to negative real interest rates was not the "new
normal" and the "almost inevitable conclusion" of their study of
savings and demographics was that real rates would reverse their
recent decline and soon go back up.
AGAINST THE WIND
These are all remarkable calls after yet another dramatic re-rating
of asset prices.
The financial story of past year has been the near total evaporation
of world interest rates - most starkly, long-term borrowing rates
represented by government bond yields of up to 10 years that have
fallen to historic records of zero and even below in Europe and
Japan.
Even in the United States and Britain, where underlying economic
recoveries have gained some traction, 10-year government yields are
half the levels of just five years ago.
Explanations for this largely unforecast slide in long-term interest
rates center on a "new normal" thesis that post credit crisis damage
to world growth means it will be insufficient to boost demand, wages
and inflation for many years to come.
The resulting bond-buying stimuli, or quantitative easing, by
inflation-targeting central banks have sunk interest rates and bond
yields even further. The collapse of energy prices late last year
exaggerated the deflation scenario even more amid fear sub-par oil
demand was unable to soak up a swollen supply glut.
This is not just a skew in borrowing rates and bond yields.
The wider distortions from such low yields are significant, not
least investors' search for riskier assets than government bonds to
generate some investment yield even though their prognosis for the
global economy remains dour.
[to top of second column] |
Despite handwringing about falling earnings growth, equity prices
are soaring to new records in large part due to switching to equity
dividends from near-zero bond yields. That's also been spurring
companies themselves to make a killing by borrowing for next to
nothing just to buy back their own "high-yielding" shares, boosting
the equity prices further in the process.
This re-routing of monetary stimulus into extreme asset price gains
rather than investment, research and jobs has magnified the
long-expansion of potentially destabilizing wealth inequality that
dominates the political and economic agenda in many Western
countries.
So, calling the turn in this decades-old savings glut implies some
whopping great shifts in the world economy.
As peak saving tends to occur in the decade or two before retirement
and retirees flip from being savers to net consumers, the savings
now seeking to be banked in safe bonds and fixed income will ebb
too. And unless there's a parallel acceleration of world growth
potential as interest rates rise, then equity prices will also get
drawn into the downdraft.
Even if there are positives such as halting the explosion in wealth
inequality and prodding firms to eschew buybacks in favor of
investing in the future, the prospect of bond and equity prices
falling in tandem over many years is ominous not only for investors
and prospective retirees but for the world economy at large, demand
for goods and the many heavy debtors.
Barclays, for example, estimates the shift lower in savings could be
worth almost 3 percent of global gross domestic product (GDP) in 10
years, or more than 15 percent of global savings, rising to nearly 6
percent of global GDP in 20 years, or roughly 25 percent of all
savings.
National and regional variations will make some difference but all
three of these studies were based on the aggregate world view,
blending the behavior of Western savers - which peaked some years
ago - with those in emerging markets, which have kept the glut
inflated but where aging is simply lagging the West.
Perhaps the strangest aspect of these studies is that they appear
almost like a consensus on what appears to be a contrarian view.
Just how many investors are listening is another matter.
(Additional reporting by Jamie McGeever; Graphics by Vincent
Flasseur; Editing by Louise Ireland)
[© 2015 Thomson Reuters. All rights
reserved.] Copyright 2015 Reuters. All rights reserved. This material may not be published,
broadcast, rewritten or redistributed. |
