Walking home from our bank Wednesday eve
You can say there’s no manipulation
But as for me and Grandpa, we believe
She’d been living off her CDs
And we begged her to diversify
But she needs her monthly income
So she stumbled when inflation intensified
-Sung to the tune of “Grandma got Run
Over By a Reindeer” by Randy Brooks
Federal Reserve Chairman Ben Bernanke has effectively stuck a knife in the backs of current retirees and those who will be retiring in the near future.
It has been noted in a number of recent Tycoon Report articles that tens of thousands of baby boomers are retiring every day and will continue to do so for the foreseeable future. Unfortunately, those Americans have little chance of living off their savings alone.
The key point that sent stocks, bonds, and commodities soaring on Wednesday afternoon after the Chairman’s quarterly press conference was the fact that current economic conditions will "warrant exceptionally low levels for the federal funds rate at least through late 2014."
According to the last Fed meeting, low rates were expected to last only through the middle of 2013. Congratulations asset bubble, you now have another 18 months of life!
What was truly telling about the Chairman’s opinion of those on a fixed income, as many retirees are and future retirees will soon be, was not revealed in the Fed’s statements but rather during the press conference. This is an era of new transparency for the Federal Reserve, and Chairman Bernanke might have been a little too clear.
Greg Robb of MarketWatch confronted Bernanke with concerns that have been bubbling up during recent Republican presidential primary debates, in which Bernanke has been taking a beating. But this is not just a Republican problem; it is a problem that most affects all current and soon to be retired Americans, the baby boomers. Mr. Robb asked:
Bernanke’s response was peppered with umms and ahhs, but I will omit them:
“In the case of savers, we think about all these issues and we recognize that the low interest rates that we are using to stimulate investment and expansion of the economy also impose a cost on savers who have a low return ... And we do hear about that, obviously, and we do think about that.
"I guess the response I would make is that ... the savers in our economy are dependent on a healthy economy in order to get adequate returns. In particular, people who own stocks, corporate bonds, and other securities, as well as treasuries, and say, other securities, and if our economy is in really bad shape, and we’re not going to get good returns on those investments.
"So I think what we need to do, as is often the case when the economy goes into ... a very weak situation, then low interest rates are needed to help restore the economy to ... something closer to full employment and to increase growth and that in turn will lead ultimately to higher returns across all assets for savers and investors.
"So I think that’s how we would explain it. But again we recognize that in periods like this ... savers are getting a lower return. One reason that it’s extremely important for us to maintain price stability, of course, is that minimizes any loss due to inflation that savers might suffer.”
Unless, of course, real interest rates are negative. Let me put this in basic terms: if you are hoping to see your money grow in conservative investments to sustain your lifestyle for your golden years, you can forget about it.
Bernanke doesn’t care that you may have insufficient funds to invest in the market, or don’t want to risk your principal on inappropriate investments. You need to get your money out of the bank, or from under your mattress, and throw into the market. Whether it’s stocks, junk bonds, or commodities, throw money at them, because the Fed is going to keep negative real rates in place for as long as the eye can see, and unless you own these assets you are going to suffer.
Most people are fully aware -- painfully so -- that inflation on the cost of everyday goods is much higher than the Fed’s key measure suggests, or even what its projections are. Between today and the end of 2014, the inflation expectations proffered by the Fed average around 1.7% per year based on the core Personal Consumption Expenditures Price Index (PCE).
Let’s make the wild assumption that the Fed is dead on with these rather tame inflation projections, and you want to make a nice conservative investment to preserve your principal and maybe try to earn a little extra. So you go out and buy yourself a three year treasury note yielding a princely 0.31%.
Let’s also assume that you can go to the grocery today and buy a gallon of milk, a dozen eggs, and a loaf of bread for a nice round $10.00, and that will last you a week. You will probably want the same groceries in three years, so you put $10 into a 3 year treasury to make the same weekly purchase when you need it down the line. The cost of that same basket of goods now costs, 3 years later, roughly $10.52, but the $10 you put aside to buy that basket of goods is only worth $10.09. Looks like you are going to have to cut back, maybe only buying a dozen eggs every 2 weeks.
This is a very simplistic example, but the point is this: In today’s environment, this is exactly what investors in or approaching retirement are facing; savings cannot keep up with inflation, even in the most benign scenario. Negative real interest rates are a very real problem for savers in America, and it won’t be going away any time soon thanks to the Fed’s easy money policy.
This is exactly the reason that IFII is offering my new educational course Wealth 4 Life. We want to enable people to take control of their own financial destiny... and do it right. Whether you have already retired, are nearing retirement, or just have dreams of retiring, now is the time to look beyond the traditional and take hold of your future, because no one cares more about your money than you.
Price Shock Trader