"No Country For Old Men?" Bernanke Plan To Exterminate Savers Is Unsustainable

Tyler Durden's picture

Bernanke's recognition of his penalizing savers with low rates as an 'issue for people' sparked an interesting note from the WSJ on how sensible and stoic savers are being herded (unsafely) into risky investments. Bernanke's insistence that "our savers collectively have to hold all the assets of the economy and a strong economy produces much better returns in general" must be juxtaposed with comments from a money manager that "I don't think that's a fair-trade" for money intended to be invested safely. By removing the last shred of hope for a rise in savings rates anytime soon, the Fed is once again creating the potential for major unintended consequences as the 30% drop in interest income for US savers from the 2008 peak forces them to extend duration (TSYs), lower quality (corporate bonds), and/or increase leverage/risk (equities). One only has to look at Treasury yields, Muni yields, investment-grade bond yields, and now high-yield bond yields for how tempted investors (retail and professional 'insurance/pension' assets) have become to take their safest net worth asset (low risk liquidity) and expose it to the business/credit cycle and all its myriad event risks. While reducing the rate of savings might seem sensible for the short-term from the Fed perspective, it leaves a wholly unsustainable recovery (or bubble in who knows which asset class next) and as Nordea notes this week, based on their models, a considerably higher savings rate will be needed going forward (for any sustainability) even as 'saved money' is rotated into risk or spent on quality-of-life maintenance. Perhaps it is time for many to listen to the sensibilities of the WSJ's last (75 year-old) interviewee who notes "At my age, I can't be a risk-taker anymore" as maybe it is time to consider the reality of the recent good US data in relation to coinciding elements such as inventory build-up, plummeting household savings, and lower gas prices when adding to that risky investment.

Wall Street Journal: Itchy Investors Ramp Up Risk 

 Robert Marcotte can't afford to play it safe anymore. With interest rates likely stuck near zero for nearly three more years, the 61-year-old retired telephone-company manager is about to ramp up his holdings of stocks and municipal bonds, using money now at the bank in certificates of deposit.

 

"It gets me a little uneasy," says Mr. Marcotte. "Since I'm not working, I am very risk-averse, but still need to generate income."

 

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The Federal Reserve is presenting a broad swath of conservative investors, from retirees and college savers to banks and insurance companies, with a tough choice: move into riskier investments or continue coming up short from low-risk investments that aren't even keeping pace with inflation.

 

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The Fed has "removed the last shred of possibility that interest rates were going to revert to normal in the near future," says Johns Hopkins University economics professor Christopher Carroll.

 

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In congressional testimony on Thursday, Fed Chairman Ben Bernanke acknowledged that low rates penalize savers. "We understand it's an issue for many people," he said. "That being said, our savers collectively have to hold all the assets in the economy and a strong economy produces much better returns in general."

 

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The low interest rates of the past several years have taken a toll on U.S. savers. All told, Americans collected interest income from CDs, savings accounts, insurance products and other sources at a seasonally adjusted, annualized rate of $976 billion in the fourth quarter of 2011. That's down nearly a third from the peak rate of $1.42 trillion in the third quarter of 2008.

 

 

 

 

One worry is that some investors will take on risks they aren't prepared to handle.

Brent Burns, an investment manager who builds bond portfolios for financial planners, says that since the Fed announcement he has fielded a flurry of questions from advisers considering high-yield and international bonds, and real-estate investment trusts. "I don't think that's a fair trade" for money intended to be invested safely, he says.

 

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It isn't just retirees who are taking on more risk. Sotirios Keros, a 39-year-old pediatric neurologist in New York, says he plans to shift his emergency reserve to a long-term municipal bond fund when his CDs mature this summer. "I would still like to keep that as liquid as possible and as risk-free as possible, but I'm not really happy with the available options," he says. The Fed's decision makes it clear that "there's no value in waiting" for higher rates, he says.

 

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Low rates are also pressuring life-insurance companies, which rely in part on returns from high-quality bond investments to pay their obligations. "We have about $175 billion in cash and investments, and 94% of that is conservatively invested," says Chris Blunt, executive vice president of New York Life.

 

After waiting three years for rates to rise, Jenny Fleming, a financial planner, is putting client funds into dividend-paying stocks. One of her clients, Margie Stewart Alford of Austin, Texas, is using dividend-paying stocks to provide interest income that might normally come from CDs. While Ms. Alford, 75, still plays Friday-night poker, she says she can't afford to boost her stock exposure too much. "At my age, I can't be a risk taker anymore," she says.

 

From Nordea Bank this week - Households´ savings have plunged


One likely factor holding up personal consumption is that US households have diminished their savings ratio at a rather brisk pace in H2 2011. While one can argue about the reasons behind this, we believe that it is unsustainable. On the contrary, our models suggest that savings actually should increase (see fig 4 above).

The average savings ratio since 1960 is 7% and considering the appalling fiscal situation (and the lack of will to do anything about it), a higher savings ratio is most definitely in the cards going forward.