March 4, 2015 / 6:59 AM / 3 years ago

Speeding asset prices meet oncoming savings juggernaut

LONDON (Reuters) - If global population aging is the real mega-trend steering modern financial markets, don’t get too used to super-low interest rates or the anomalies cheap money has wrought elsewhere.

The Canary Wharf financial district is seen in east London November 12, 2014. REUTERS/Suzanne Plunkett

Once a curious sideshow for investors with limited attention spans, the slow grind of demographic trends and its impact on savings and investment is fast becoming a consensus explanation for the extraordinary market pricing of 2015.

Over the past week alone, both Barclays and Goldman Sachs revisited the aging story and both agree the 30-year expansion of workers in the peak savings years just before retirement was chiefly responsible for a glut of savings that has driven bond yields inexorably downwards since the late 1980s.

Morgan Stanley came to similar conclusion last October.

Ominously for record-breaking asset and real estate prices, all three investment firms conclude the global boom in savings is about to end - at least within the next few years - and that end will bring a potentially seismic reversal of financial markets.

“The prime savers’ population shift is largely over ... suggesting the decline in global rates nears its end,” wrote Goldman economist Sharon Yin.

Also, focusing on the looming decline in the prime savers bracket worldwide, Barclays’ Michael Gavin reckons: “A key secular driver of world asset prices has peaked and will be fading strongly in the years to come.”

Morgan Stanley’s Charles Goodhart and Philipp Erfuth last year insisted that zero to negative real interest rates was not the “new normal” and the “almost inevitable conclusion” of their study of savings and demographics was that real rates would reverse their recent decline and soon go back up.


These are all remarkable calls after yet another dramatic re-rating of asset prices.

The financial story of past year has been the near total evaporation of world interest rates - most starkly, long-term borrowing rates represented by government bond yields of up to 10 years that have fallen to historic records of zero and even below in Europe and Japan.

Even in the United States and Britain, where underlying economic recoveries have gained some traction, 10-year government yields are half the levels of just five years ago.

Explanations for this largely unforecast slide in long-term interest rates center on a “new normal” thesis that post credit crisis damage to world growth means it will be insufficient to boost demand, wages and inflation for many years to come.

The resulting bond-buying stimuli, or quantitative easing, by inflation-targeting central banks have sunk interest rates and bond yields even further. The collapse of energy prices late last year exaggerated the deflation scenario even more amid fear sub-par oil demand was unable to soak up a swollen supply glut.

This is not just a skew in borrowing rates and bond yields.

The wider distortions from such low yields are significant, not least investors’ search for riskier assets than government bonds to generate some investment yield even though their prognosis for the global economy remains dour.

Despite handwringing about falling earnings growth, equity prices are soaring to new records in large part due to switching to equity dividends from near-zero bond yields. That’s also been spurring companies themselves to make a killing by borrowing for next to nothing just to buy back their own “high-yielding” shares, boosting the equity prices further in the process.

This re-routing of monetary stimulus into extreme asset price gains rather than investment, research and jobs has magnified the long-expansion of potentially destabilizing wealth inequality that dominates the political and economic agenda in many Western countries.

So, calling the turn in this decades-old savings glut implies some whopping great shifts in the world economy.

As peak saving tends to occur in the decade or two before retirement and retirees flip from being savers to net consumers, the savings now seeking to be banked in safe bonds and fixed income will ebb too. And unless there’s a parallel acceleration of world growth potential as interest rates rise, then equity prices will also get drawn into the downdraft.

Even if there are positives such as halting the explosion in wealth inequality and prodding firms to eschew buybacks in favor of investing in the future, the prospect of bond and equity prices falling in tandem over many years is ominous not only for investors and prospective retirees but for the world economy at large, demand for goods and the many heavy debtors.

Barclays, for example, estimates the shift lower in savings could be worth almost 3 percent of global gross domestic product (GDP) in 10 years, or more than 15 percent of global savings, rising to nearly 6 percent of global GDP in 20 years, or roughly 25 percent of all savings.

National and regional variations will make some difference but all three of these studies were based on the aggregate world view, blending the behavior of Western savers - which peaked some years ago - with those in emerging markets, which have kept the glut inflated but where aging is simply lagging the West.

Perhaps the strangest aspect of these studies is that they appear almost like a consensus on what appears to be a contrarian view. Just how many investors are listening is another matter.

Additional reporting by Jamie McGeever; Graphics by Vincent Flasseur; Editing by Louise Ireland

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