A World of Pain Awaits Retirees

Contrary to popular thinking, share markets are anything but a sure bet.

The TINA (there is no alternative) mindset is seriously flawed. There are always alternatives.

This almost blind belief in the Fed not allowing anything nasty to happen, troubles me deeply.

When investors start believing that risk has all but been discounted out the equation, you know markets are at their riskiest.

Stability invariably leads to instability.

And that instability is beginning to reveal itself in all markets.

Mark J Grant, Chief Global Strategist of Fixed Income and Managing Director for B Riley Financial, recently wrote (emphasis added):

Our “Borrower’s Paradise” continues to be a “Fixed Income Investor’s Hell” and, with the Fed promising very low yields, for the next several years, this problem will not be going away anytime soon.

What will be quite interesting, as our new Administration takes power, is how much heat will be put on the Fed to buy a broader range of securities and to drive down yields, like the European Union, Switzerland, and Japan, into negative yielding territory.

Each increase in Federal spending is going to turn up the heat and, in my opinion, the American deficit is going to expand, next year.

A view of where we might be headed is illustrated by the 2-year sovereigns, listed below:

Current Yield

U.S. 0.160 %
Australia 0.110 %
Belgium MINUS 0.735 %
Denmark MINUS 0.622 %
France MINUS 0.692 %
Germany MINUS 0.729 %
Italy MINUS 0.406 %
Japan MINUS 0.124 %
Netherlands MINUS 0.721 %
Spain MINUS 0.582 %
Sweden MINUS 0.371 %
U.K. MINUS 0.031 %

If America approaches the levels of these other countries then our banks, insurance companies, pension funds, university endowments and retirees are in for real trouble, in my opinion.

It is not just profits but lifestyles, that will diminish, and you can expect a howl of protests from all of those who are affected. You can hear the anguish now, but the cries for help are likely to increase in volume.

One of my fears here is that our seniors and retirees could get into major trouble, as they leave the bond markets for riskier bets. Any kind of downturn in equities, as one example, could send these people into major problems, which may result in political fallout.

Having grandma and grandpa forced from their homes will not be a welcome occurrence for anyone, of either party.

This mind-blowingly stupid obsession with growth at all costs has taken us to a point where there are no good outcomes.

What lower rates mean for retirees…

Lower and lower rates might be every borrower’s dream, but they’re a nightmare for savers and retirees.

The consequences of this unhealthy fixation with growth are starting to come into focus. There was a time, not all that long ago, when portfolios could afford the ‘luxury’ of a 40% or more exposure to government bonds. Guaranteeing a high degree of security with a reasonable rate of return.

Not now. With rates a squeak higher than zero or slightly negative, how can banks, insurance companies, pension funds and retirees possibly generate sufficient return to fund retirement income expectations?

They can’t. Which is why they’re in real trouble.

Investors are being forced to leave the comforting embrace of treasury bonds for investments that are ominously described as…riskier bets. Junk bonds paying 4–5% come to mind. That extra return does not come for free. The spectre of default is ever-present in rubbishy end of the corporate bond market.

From Bloomberg 26 October 2020 (emphasis added):

Three cents. Two cents. Even a mere 0.125 cents on the dollar.

More and more, these are the kinds of scraps that bondholders are fighting over as companies go belly up.

Bankruptcy filings are surging due to the economic fallout of Covid-19, and many lenders are coming to the realization that their claims are almost completely worthless. Instead of recouping, say, 40 cents for every dollar owed, as has been the norm for years, unsecured creditors now face the unenviable prospect of walking away with just pennies — if that.

Hmmm…5% upside with a 97% downside…not really an attractive proposition. But this is what income seeking investors are being forced to dice with.

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And, if they decide to avoid the devil in the bond market for the deep blue sea of the share market, will they fare any better?

Any kind of downturn in equities, as one example, could send these people into major problems…

You bet it will.

The most overvalued market in the history of US share markets is poised for a massive collapse.

I know. I know. The Fed won’t allow this to happen. Here’s a friendly warning…believe that myth at your own peril.

When the market is in full panic mode, the ladies and gents who sit around central bank boardrooms will find out where the real power lies…in the hands of terrified investors who can see their retirement dreams being shredded before their eyes.

The following is from this month’s edition of The Gowdie Letter:

…this extract is from an interview Warren Buffett did with Fortune magazine on 10 December 2001…after the dotcom bubble had burst…(emphasis added):

“On a macro basis, quantification doesn’t have to be complicated at all…The chart shows the market value of all publicly traded securities as a percentage of the country’s business—that is, as a percentage of GNP [Gross National Product].

“The ratio has certain limitations in telling you what you need to know. Still, it is probably the best single measure of where valuations stand at any given moment. And as you can see, nearly two years ago [1999] the ratio rose to an unprecedented level. That should have been a very strong warning signal.

“For investors to gain wealth at a rate that exceeds the growth of U.S. business, the percentage relationship line on the chart must keep going up and up. If GNP is going to grow 5% a year and you want market values to go up 10%, then you need to have the line go straight off the top of the chart. That won’t happen.

“For me, the message of that chart is this: If the percentage relationship falls to the 70% or 80% area, buying stocks is likely to work very well for you. If the ratio approaches 200%—as it did in 1999 and a part of 2000—you are playing with fire.

Look where the current reading of the Buffett Indicator is at…a scorching hot 194.9%.

Investors are playing with fire.

Port Phillip Publishing

Source: Advisor Perspectives

[Click to open in a new window]

In encouraging people to borrow and pull forward years of future consumption into the present, authorities have pushed retirees into a corner.

Forcing them to take unhealthy levels of exposure to higher risk bonds and a share market that’s poised for an epic collapse.

A world of pain awaits retirees who have felt TINA.

The alternative is to accept — for now — that earning next to nothing on 100% of your capital is the least worst option…much better than risking being forced from your home.


Vern Gowdie Signature

Vern Gowdie,
Editor, The Rum Rebellion

Vern has been involved in financial planning since 1986.

In 1999, Personal Investor magazine ranked Vern as one of Australia’s Top 50 financial planners.

His previous firm, Gowdie Financial Planning, was recognised in 2004, 2005, 2006 & 2007, by Independent Financial Adviser magazine as one of the top five financial planning firms in Australia.

In 2005, Vern commenced his writing career with the ‘Big Picture’ column for regional newspapers and was a commentator on financial matters for Prime Radio talkback.

In 2008, he sold his financial planning firm due to concerns about an impending economic downturn and the impact this would have on the investment industry.

In 2013, he joined Fat Tail Investment Research as editor of Gowdie Family Wealth. In 2015, his book The End of Australia sold over 20,000 copies and launched his second premium newsletter, The Gowdie Letter.

Vern has since published two other books, A Parents Gift of Knowledge, all about the passing of investing intelligence from father to daughter, and How Much Bull can Investors Bear, an expose on the investment industry’s smoke and mirrors.

His contrarian views often place him at odds with the financial planning profession today, but Vern’s sole motivation is to help investors like you to protect their own and their family’s wealth.

Vern is Founder and Chairman of The Gowdie Advisory and The Gowdie Letter advisory service.

The Rum Rebellion