Chart of the Day: How Much More Can We Take?
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- Published on Wednesday, 18 July 2012 15:03
- Written by Adam English, Associate Editor, Inside Investing Daily
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With European nations in trouble and global economic uncertainty festering, investors are suffering from the impact of quantitative easing.
It isn't inflation yet. A lot of the liquidity created through perverse central bank bond purchases isn't very liquid at all. It is all bound up in "too big to fail" banks.
Instead, it is the effect quantitative easing has on bond yields that is making retirement a nearly impossible dream... especially in Europe.
As much as the bond market is rigged through fiat monetary policy, it is an integral part of long-term saving. A sizable chunk of the funds in retirement plans -- before the recession -- didn't come from savvy managers. It came from U.S. Treasuries.
Unfortunately, that isn't possible these days. HSBC's global head of asset allocation, Fredrik Nerbrand, has a chilling hypothetical example for us.
Assuming low 2% investment returns and 1% annual salary increases over the next 30 years, a 40-year-old person today with a full year's salary saved who plans to retire at 70 would need to save almost a third of their current salary until retirement just to secure a pension worth 60% of their final salary.
The situation is bound to get worse as the European slide and U.S. stagnation persist.
Bernanke has already stated the current situation is unsustainable, which is widely interpreted as confirmation that another batch of QE is on the table.
Bank of America Merrill Lynch's latest monthly fund manager survey shows 71% expect more QE from the Fed by Q2 2013 and 73% expect similar action from the European Central Bank.
Small investors cannot take much more of this, but it looks like the chances of another batch of QE are increasing by the day.