There’s an old truism people forget all too often. It has many variations and is attributed to even more, its core meaning goes something like this: “If the government can give it to you, than it can also take it away.” Some of you might be wondering if I’m talking about the current “tax” advantages that have made these vehicles so popular over the years. To that I’ll say no, not at this current time. But I feel that will be the least of worries coming down the pike in the not so distant future. No, what I’m directly addressing is what is now emanating from the one and only non-government, privately held institution, directed by a consortium of non-elected, Ivory Towered, policy wonks: The Federal Reserve. And those emanations are anything but 401K holder friendly. Let me explain.
*) I know many are wondering how a government inspired quote, a private institution, their retirement account, or savings account fits under one banner, or are some how all connected. Well, that’s easy:
The Federal Reserve has been the sole entity that dictates what any of them are currently worth. And if you don’t like their choices or decisions? Tough. There’s nothing you can do about it. Period.
Maybe that’s not quite correct: It’s not that there’s “nothing you can do.” The problem is – there’s nothing you’ll want to do. Hence where the real issues lie.
The following is for those who know of no other “investing” world (or 401K holder) other than after the financial crisis of 2007/08. Or put differently, if you’ve been working and saving only for the last decade or so. Ihe 35ish, 40-year-old bracket and younger.
Back in ancient history before algorithmic HFT parasites roamed the trading world (circa 2008 A.D.) One could retire comfortably with a modest sum of money and find relatively safe places to hold their assets receiving some form of interest payment for its usage. CD’s (certificates of deposit) bonds (such as U.S. Treasuries) and others were some of the most popular.
That was until the Fed. decided interest rates and everything that was connected to them was secondary (and even expendable) as to subjugate the financial markets and bring them into such a reflexive corollary that even if a Fed. official whispered- the effect on Wall Street was a realtime example of that other adage “When a butterfly flaps its wings.”
That’s what pumping (and printing) $4+TRILLION dollars via differing iterations of QE, Twist and a relentless death grip for years at the Zero-bound will buy you.
For those who don’t remember, it used to be when understanding investing prowess people used to say (or was advertised) things like, “When E.F. Hutton speaks – people listen.” Now it’s: “When The Federal Reserve whispers – Wall Street jumps!”
That’s what the greatest expression for capital formation the world has ever known has now become. Nothing more than a trained jumping flea circus. And again – all in less than 10 years.
Does a “Mission Accomplished” banner come with that? But I digress.
One of the reasons I can attest to much of what has been thrust upon (or taken from) retirees and others is that I actually am one, became one right at the beginning of the financial crisis. I was fortunate enough (via hard work and forethought) as to retire at the age of 45. A “dream” or ‘brass ring” many find elusive if not near impossible back in 2005.
It was a dream come true. It was smack-dab right before, and squarely into the teeth of the “out of the blue” financial shock and market melt down for the ages that would transform everything. I do mean: everything!
The idea of diversifying one’s financial assets into relative safety was gone, and I do mean just that, gone. Which is why I detest and so adamantly stand against all this over-simplified drivel once again appearing from so-called financial “expert” landscape.
It’s going to hurt far more people than it’ll ever help.
The Federal Reserve decided in its infinite “wisdom” that interest rates were now to be considered a “poison” to the economy and not only cut, but slashed them, and held them at the Zero-bound for years. What this meant was one could no longer expect to receive any interest bearing accounts to live. Eat, pay bills, et cetera. And I won’t even get into what it has done to pensions and insurance companies.
But no one has cared, especially the Fed. Let me use the following for demonstration purposes. Let’s say you were an entrepreneur and sold your business, or were able to some how via thrift or shrewd business acumen, and were able to amass a nest egg of let’s say $3Million dollars for the entrepreneur, and $1Million for the shrewd. Both scenarios are quite feasible for the prudent minded.
Just 10 years ago it was also not only feasible, but rather probable, one could safely allocate their resources finding returns of 5% (and higher, depending) in such mundane vehicles as CD’s, Treasuries, and more.
So, using nothing more than napkin math, one could easily calculate using the $1MM example that money would generate approximately $50,000.00 per year without touching the principal for one to live on.
This was also a relatively accurate proposition because there was precedent going back decades. Sure, $50K ain’t what it used to be, but it’s sure a hell of a lot more than Zero, which is precisely what interest rates have been now going on years. And on $3MM? It’s the same. Zero, as in zip, zero, nada.
“But wait! There’s more!!!” as they say, but it’s not a bonus anyone wants to hear about. What is that you say? Glad you asked. Not only does having a $Million dollars get you nothing at a bank (correct, not even a lousy toaster) if you are one of the fortunate (or unfortunate depending on perspective) who wants to put that hard-earned money safely under “lock and key” via the auspices of some bank, it’s going to cost you! And in some instances, they might not even want your deposit at all. Why?
Why else – it’ll cost them, and that’s a no-no in banking. Costs are something you pay, not them. And if enough profits can’t be made on legitimate transactions? See Wells Fargo for clues.
*) So what was the flip side? Here’s my opinion.
Welcome to the “markets” (or should I say casino) of today. Where 401K holders, and corporate buy-backs supported via the Fed’s balance sheet accrual, and zero interest rate financing meet the front running, algorithmic, headline reading HFT parasites which enabled the BTFD phenom to appear time, after time, after time, after time. Which, by its very nature and existence has allowed “investing” to be the equivalent of nothing more than following the strategy of a chimp hurling darts at ETF symbols backed by a central banks “bulls-eye.”
Ah, but what a difference an election does make, no? For that was then, and this is now. And “now” seems to be that the Federal Reserve is hell-bent as to raise interest rates regardless of what the “markets” desire.
Can you say, For years the cries of savers, pension plans, insurance companies and more have fallen on deaf ears. Actuary tables that prove these bedrocks of society can not sustain or endure under a Fed. policy such as what has been thrust upon them was relegated to the, “Who cares the “markets” up, deal with it!”
*) Now, That all seems to have changed.
Suddenly (as in the last few months) interest rates not only need to go up. They need to go up stat!
The Fed. via its differing speakers in public comments are signaling that not only is the raising of rates further, and quicker on the table, but so too is the balance sheet as to begin down sizing it.
If the above is to be taken at face value (and why shouldn’t it, after all, isn’t this why the Fed. makes public comments to begin with?) with signaling (via the Dot Plot and more) now stating 3 rate hikes for 2017 and some Fed. speakers signaling the possibility of even 4. Along with the abrupt metamorphosis of doves turning into hawks (using Ms. Yellen, and Ms. Brainard as examples) the “markets” are going to find fuel to propel them higher using what precisely?
The only fuel that has enabled the “markets” to propel this high has been all Fed. funded. And now this same Fed. is in no uncertain terms professing they’re out of the “hopium” business. Or at least, want to appear that way.
If this is true, taking them not just at their words, but rather via their actions, we now have 2 rate increases in 90 days with near shouting (as compared to prior discussions) that the Fed. is far more interested in raising further, and faster, than previously discussed. All while remembering it was only a few short weeks prior the Fed. Chair herself was touting the need for running a “high pressure economy” and has now flipped to jettison anything of the such, and is now the undisputed leader of “hawks are us.” The issue here is, the “markets” have been levitated via the “wings of doves.” Suddenl, those “doves” have all but vanished. And if that’s true? What’s vanished with it may just be the BTFD genius along with it. And that will turn into a very big problem indeed if correct.
When savers were (and still are) getting crushed, no one cared, not even the Fed. The problem?
*) It seems just as the Fed. turned its back on savers pain all these years, they might be signaling how they’re going to feel about any 401K holders losses that may appear via their new-found policy stance. To Wit: “What is the biggest S&P drop the Fed will accept before intervening?”
Minneapolis Fed. president Neel Kashkari: “Don’t care about stock market fall itself. Care abt potential financial instability. Stock market drop unlikely to trigger crisis.”
And with that, only one last saying comes to my mind:
Dear 401K holders – welcome to a savers world. Oh yeah, and buckle up. For things might get a little “bumpy” as that other saying goes.....