With ultra-loose monetary policy coming to an end, it is best to tread carefull
IN HIS classic, “The Intelligent Investor”, first published in 1949, Benjamin Graham, a Wall Street sage, distilled what he called his secret of sound investment into three words: “margin of safety”. The price paid for a stock or a bond should allow for human error, bad luck or, indeed, many things going wrong at once. In a troubled world of trade tiffs and nuclear braggadocio, such advice should be especially worth heeding. Yet rarely have so many asset classes—from stocks to bonds to property to bitcoins—exhibited such a sense of invulnerability.
.. Rarely have creditors demanded so little insurance against default, even on the riskiest “junk” bonds. And rarely have property prices around the world towered so high. American house prices have bounced back since the financial crisis and are above their long-term average relative to rents.
.. If today’s asset prices have been propped up by central-bank largesse, its end could prompt a big correction. Second, signs are appearing that fund managers, desperate for higher yields, are becoming increasingly incautious. Consider, for instance, investors’ recent willingness to buy Eurobonds issued by Iraq, Ukraine and Egypt at yields of around 7%.
.. But look carefully at the broader picture, and there is some logic to the ongoing rise in asset prices. In part it is a response to an improving world economy.
.. A widespread concern is that the Fed and its peers have grossly distorted bond markets and, by extension, the price of all assets. Warren Buffett, the most famous disciple of Ben Graham, said this week that stocks would look cheap in three years’ time if interest rates were one percentage-point higher, but not if they were three percentage points higher.
.. But if interest rates and bond yields were unjustifiably low, inflation would take off—and puzzlingly it hasn’t. This suggests that factors beyond the realm of monetary policy have been a bigger cause of low long-term rates. The most important is an increase in the desire to save, as ageing populations set aside a larger share of income for retirement. Just as the supply of saving has risen, demand for it has fallen. Stagnant wages and the lower price of investment goods mean companies are flush with cash.
These days our accumulated wealth is our savings – and far from being a way to protect us from financial shocks, they are toxic and slowly killing the world’s economies.
Firstly there is the sheer scale of savings held by individuals, companies and governments. Earlier this year the International Monetary Fund felt the need to add it all up and declared it a savings glut.
It says institutional investors such as pension funds, insurance companies and mutual funds, along with the sovereign wealth funds of oil-rich nations and central banks, hold around $100 trillion in assets under management.
.. The unprecedented size of these savings might not matter if investors only wanted a modest return. Unfortunately investors are greedy and there are simply not enough things to invest in that can offer the high returns they demand.
.. Then there is the way most people, businesses and governments have accumulated their savings. Just a quick look at the $100tn total and we can see that most of it is the result of tax avoidance.
According to a new survey by Bank of America U.S. Trust, the bank’s private wealth management arm, many wealthy individuals in the U.S. start saving in their teenage years. The report, “Insights on Wealth and Worth,” surveys nearly 700 people and offers an inside look at the attitudes and behaviors of ultra-high-net-worth individuals. The survey’s respondents have at least $3 million in assets, and 30 percent have more than $10 million.
.. What is rare is the average age when these individuals started working and investing in stocks—15 and 25 years old, respectively.
.. On average, the survey’s respondents estimated that 52 percent of their wealth came from income, while 10 percent came from inheritance, and 32 percent from investments.
.. Data from the U.S. Bureau of Economic Analysis indicates that the national personal saving rate—the percent of a person’s disposable income that goes into savings—is currently 5.4 percent. However, for America’s wealthiest 1 percent, that rate is as high as 51 percent.
.. So why are the wealthy so good at saving money? It’s not just that they have ample funds to do so. Researchers who study the wealthy have long suspected that it might have something to do with the way wealthier parents teach their childrenabout money
Yet it’s often lost, both by the scolds who lecture Americans for not saving enough and by the self-appointed personal finance gurus who claim that anyone can become rich simply ye saving more (and following their dodgy investment advice). Saving is sometimes seen as some kind of moral virtue, but from another perspective it’s just the ultimate consumption good: saving now buys you a sense of security, insurance against misfortune, and free time in the future, which are all things that ordinary people don’t have enough of.