Invest Or Die

by: Wade Slome, CFA

Seventy-six million Baby Boomers are earning near 0% (or negative rates) and aren't getting any younger in the process, which is forcing them and others to decide... invest or die. The risk of outliving your savings is becoming a larger reality these days. Demographics and economics are dictating that our aging population is living longer and earning less due to generationally low interest rates.

Richard Fisher, the former Dallas Federal Reserve president, understands these looming dynamics. Fisher has identified how low interest rates are increasing investor discontent by pushing consumers to save more in order to meet retirement needs. The unintended consequence from low rates, he said, is "You're going to have to save a hell of a lot more before you consume."

Besides saving, the other option investors have is to lower your standard of living. For example, you could continually eat mac & cheese and sleep in a tent - that is indeed one way you could save money. However, your kids and/or desired lifestyle may make this way of life unpalatable for all. Rather, the proper approach to achieving a comfortable standard of living requires you to invest more efficiently and prudently.

What a lot of individuals fail to understand is that accepting too much risk can be just as dangerous as being too conservative, over the long run. Case in point, depositing your savings into a CD at current interest rates (near 0%) is the equivalent of burning your cash, as any income produced is overwhelmed by the deleterious effects of inflation. It would take more than a lifetime of CD interest income to equal equity returns earned over the last seven years. Since early 2009, stocks have more than tripled in value.

Given the prevailing economic and demographic trends, investors are slowly realizing the attractive income-producing nature of stocks relative to bonds. It has been a rare occurrence, but stocks, as measured by the S&P 500, continue to yield more than 10-Year Treasury Notes (2.0% vs. 1.6%, respectively) - see chart below. The picture for bonds looks even worse in many international markets, where $13 trillion in bonds is yielding negative interest rates. Unlike bonds, which generally pay fixed coupon payments for years at a time, stocks overall have historically increased their dividend payouts by approximately 6% annually.

div-vs-treas-2016

Source: Avondale Asset Management

With a scarcity of attractive investment alternatives available, investors will eventually be forced to adopt higher levels of equity risk, like it or not. However, this dynamic has yet to happen. Currently, actions are speaking louder than words, and as you can see, risk aversion reigns supreme, with Americans tucking over $8 trillion under their mattress (see chart below) in the form of savings accounts, earning next to nothing and jeopardizing retirements.

Source: Calafia Beach Pundit

Source: Calafia Beach Pundit

Even if you fall into the camp that believes rates are artificially low by central bank printing presses, that doesn't mean every company is recklessly leveraging their balance sheets up to the hilt. Many companies are still scared silly from the financial crisis and conservatively managing every penny of expense, like a stingy retiree living on a fixed income. Thanks to this reluctance to spend and hire aggressively, profit margins are at/near record highs. This financial stewardship has freed up corporations' ability to pay higher dividends and implement discretionary stock buybacks as a means to return capital to shareholders.

With the dovish Fed judiciously raising interest rates - only one rate hike of 0.25% over a decade (2006-2016) - there are no signs this ultra-low interest rate environment is going to turn aggressively higher anytime soon. Until economic growth, inflation, and interest rates return with a vengeance and the persistent investor risk aversion abates, it behooves all the cash hoarders to... invest or die!

DISCLOSURE: Sidoxia Capital Management (SCM) and some of its clients hold positions in certain exchange traded funds (ETFs), but at the time of publishing had no direct position in any other security referenced in this article. No information accessed through the Investing Caffeine (IC) website constitutes investment, financial, legal, tax or other advice nor is to be relied on in making an investment or other decision. Please read disclosure language on IC Contact page.