Are Central Banks Stealing Your Safe Retirement Income?

The Bank of Japan will do everything to stimulate growth—but they will likely fail. According to the CIA world fact book Japan is tied with Germany for the highest median age population and has the oldest workforce. The average age of the workforce in Japan is 59 and last year there were more seniors using diapers in Japan than newborns. Speculation last week that the Bank of Japan could effectively start paying banks to borrow its cash caused the yen to tumble on Friday. Expect currency wars to heat up in the world over the coming years and for the U.S. dollar to generally remain strong—talk of the end of the strength coming back to the U.S. dollar is premature. In fact, Germany desperately needs the migration of younger Syrians to help with its structural demographic challenge as does Italy and Greece. The aging demographic globally is the most advanced in measurable history and it’s likely to get more stressed in the coming decades.

A few years ago the Bank of Japan started to buy ETFs and is now the single-largest holder of Japanese equities above Blackrock, the iShare company who is the largest asset manager in the world. Japan has monetized debt to buy these equities and it has not stimulated much growth compared to the risk of the additional debt monetization. Governments need to figure out that monetary and fiscal policies will become less effective as the world ages. Simply put, when someone is 60-years-old and their savings needs to last 30 years or longer, they are not going to go out and spend. If anything, this structural change to the world is very deflationary and a headwind to growth.

With Europe and Japan far more advanced in age than the U.S. and Canada, along with liberal immigration policies (unless Trump gets elected), North America will fare much better in the long run due to population expansion due to immigration. So look for the U.S. dollar to generally remain strong for years and possibly decades with central banks looking to stimulate growth in any way they can with zero (ZIRP) or negative (NIRP) interest rate policies. The primary tool for Japan and Europe will likely be through the export markets with a bias to weaker currencies by way of negative interest rates. And eventually, the euro needs to break up so each country can compete better on exchange rates. Japan’s population peaked a few years ago and growth for them can really only come from exports, which demand a weaker currency. Germany’s population is expected to peak in the next few years. Same for China in the next decade. Other places in the world have great demographics. India, sub-Saharan Africa and parts of the Middle East like Iraq and Afghanistan have very good demographics for population growth. Most of the world’s population growth in the coming decades will be from these countries. In sub-Saharan Africa, clean water and food are amongst the biggest issues.

Turning a bit more micro, what the FOMC says and does this week will likely be important for the next few months. The market is pricing 0% chance of a rate hike this week and only about 60% chance of a rate hike this year (this is the longest pause between rate hikes since 1989. The risk at the meeting is the Fed puts a June rate hike back on the table given recent market (and employment) strength, which the markets are not likely ready for. A strong dollar could weaken crude oil and halt the recent global commodity-based rally we have seen.

Remember, the U.S. economy has grown on average at 3.5% GDP since WWII prior to the Lehman moment, but since then, it has been only 1.4% and that has been with zero interest rates while borrowing and spending $9 trillion. If you back out the government borrowing and spending $9 trillion to stimulate GDP, the economy would be shrinking at an average of about 4% per year since the Lehman moment.

In the past few years, if you backed out all the debt spending in China, its economy is barely growing too and now it’s are talking about having banks reduce coverage for bad lending to further stimulate growth. Soros said recently that Chinese growth has been entirely debt fueled since the Lehman moment and is betting against Asian currencies and Chinese corporate bonds (DSUM).

In Canada this year, without the recent budget spending announcement of $30 million, the Canadian economy would be flat lining as well. You have every major economy in the world spending money like crazy and without it the world would barely grow at all. ZIRP and NIRP have forced investors that would otherwise like to have a safe 4-6% return in their portfolios to load up on dividend paying stocks. Globally, high dividend paying stocks are about 35% overvalued compared to their historical valuation for this reason. Eventually, all this debt is likely to cause another global recession and credit risks will likely become the catalyst for the next bear market. It could take a few years more to play out because governments will likely continue to throw the kitchen sink at it to keep the party going—but they are pushing on a string for the most part.

Low rates are likely here to stay just so the world can get anemic growth and what this has done is basically transferred over $1 trillion from retirement accounts and pension plans (savers) to governments and corporations (the borrowers).

Come out to one of the last few days of my roadshow this week so you can better understand how lower for longer interest rates (and global demand) could impact your retirement and what you can do about it. I’ll give you some thoughtful guidelines for how to thrive in the next market cycle.

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