It's April! Spring is playing hide an seek as baseball season kicks into gear and BlackRock shareholders get to read the thoughts of Larry Fink in his annual letter.
A magical time of year, indeed.
But, like the abnormally frigid weather we've been dealing with, Larry seems a little frosty this year, especially with regard to the interest rate environment...
There has been plenty of discussion about how the extended period of low interest rates has contributed to inflation in asset prices. Investors are being forced to trade liquidity for yield by taking on more risk and investing in less liquid asset classes — a potentially dangerous combination for retirement savers.
But when Larry says "retirement savers," he's not referring to himself and his fellow Boomers, a generation that has benefitted from - y'know - actual interest rates, he's talking about their selfie-taking, Uber-riding, sharing economy-loving kids...
Not nearly enough attention has been paid to the toll these low rates — and now negative rates — are taking on the ability of investors to save and plan for the future. People need to invest more today to achieve their desired annual retirement income in the future. For example, a 35-year-old looking to generate $48,000 per year in retirement income beginning at age 65 would need to invest $178,000 today in a 5% interest rate environment. In a 2% interest rate environment, however, that individual would need to invest $563,000 (or 3.2 times as much) to achieve the same outcome in retirement.
That's....a lot more money.
And in an environment where even Ken Chennault is making less money, it stands to reason that Millennials will need to save a considerable more amount of money that we put at an approximate "sh!t ton." But to save more, Millennials will need to spend a whole lot less, which Larry understandably sees as problematic.
This reality has profound implications for economic growth: consumers saving for retirement need to reduce spending if they are going to reach their retirement income goals and retirees with lower incomes will need to cut consumption as well. A monetary policy intended to spark growth, then, in fact, risks reducing consumer spending.
So there you have it, Larry Fink sees the future for American youth as one in which they make less, spend less and get less return on their savings, leaving them penniless well into their never-happening retirement.
Happy Spring from BlackRock!
To my fellow shareholders [BlackRock]