What is the Central Bankers' Bubble and Will It Burst?

Easy-money policies across the globe have set us up for some rocky times ahead. Here's why, and what retirement savers and investors should be doing now to protect themselves.

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In the 1990s we had the dot-com bubble. In the 2000s we had the real estate bubble. In a book I published at the end of 2005, I predicted that real estate bubble would burst. And now we have the central bankers’ bubble.

The central bankers’ bubble has formed thanks to a concerted effort by several government central banks around the world to boost their economies. Since 2008 they’ve used a combination of strategies, including setting low interest rates (even negative interest rates in certain countries), buying their own government bonds and even buying actual stocks. This has driven up asset prices worldwide. Due to all this stimulus, we are currently in the second-longest bull market in history. March 2018 marked the nine-year anniversary of this bull market!

I believe that this current bubble will burst, sending asset prices down again.

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Easy Money Fuels Bubbles

Since the very beginning of lending, when you borrowed money from someone you paid that loan back with interest. Remember the days of 18% CDs in the 1980s? However, many countries today have exactly the opposite: very low interest rates. Historically, artificially low interest rates lead to real estate bubbles and stock market bubbles. That’s because people can afford to pay more for that asset due to the lower monthly payments from those low interest rates. The reason why real estate bubbles often correspond to a rising stock market is that as real estate prices rise, people feel good financially and often spend more money. Higher spending leads to higher company profits and thus higher stock prices.

Since 2008, to keep interest rates low, keep the markets liquid and subsidize our banking system, the U.S. government has bought $4.5 trillion in U.S. government bonds. And we’re not alone in this stimulus strategy … the Bank of Japan owns approximately 66% of Japanese ETFs. And Switzerland’s government’s bank has over $88 billion invested in U.S. stocks alone.

Currently, more than a dozen European countries have negative or 0% interest rates, including Germany, Switzerland, Denmark and France. Japan has negative interest rates as well.

Once Rates Start Rising, the Tide Turns

Rising interest rates are a big concern to a debt-fueled bubble, and interest rates have nearly doubled in the past year in the United States. On July 1, 2016, the U.S. 10 Year Treasury Note was paying 1.46%. About a year and a half later, on Feb. 21, 2018, it had doubled to approximately 2.94%. It has since slipped a bit from there. The U.S. government has stated that it will start selling its $4.5 trillion of government bonds back in the market over time, unwinding that stimulus, which also has caused interest rates to rise. In February 2018, the Dow reacted to this increase in interest rates with a drop of 10.3% in only two weeks!

Another factor that could affect the global economy is China’s potential real estate bubble. China has built entire cities that are completely empty to stimulate its economy and keep its markets moving forward. Regrettably, many Chinese citizens are investing in WMPs (wealth management products) that invest in real estate and other speculative assets, which are like the CDOs in America that got our economy in trouble back in 2009.

Our Most Troubling Issue: The Graying of America

Perhaps the biggest concern we have right now is America’s aging population. Right now, every day approximately 10,000 Baby Boomers are turning 65, and this will continue for over 10 more years. These retirees will be turning on Social Security and Medicare and may be taking money out of the stock market instead of contributing to it like they did during their working years. In addition, retirees typically downsize their homes and spend less on average than they did during the earlier part of their lives when they were still working. Reduced spending is bad for the U.S. economy, because 69% of our economy is based on consumer spending. This aging demographic is a real potential threat to America’s consumer spending-based economy.

What this Means for Investors and Retirees

In the face of these mounting challenges, retirees and retirement savers alike must establish a risk management to minimize the risks of the market cycles. Most my clients are retired, ages 65 to 80, and are pursuing their retirement dreams. Their main goal at this point is to not give back all the gains they’ve made over the past nine years since 2009. They’re more concerned with managing principal and income, than making big gains going forward … because the more risk you take on, the more upside potential you have but the more downside risk you face, and my clients tell me they never want to go through another 2008 again.

Using a dynamic software program called Riskalyze, I can show my clients exactly how much risk they have now in their current portfolio. I can also show my clients exactly how much they are paying in fees on their mutual funds and variable annuities.

A Few Steps to Consider

The markets are driven by fear and greed. Warren Buffett has a saying about the stock market and investing: "Be fearful when others are greedy and greedy when others are fearful." My recommendation to all retirees at this point is to make sure they aren’t taking more risk than they are comfortable with. Here are some steps I recommend:

  • Reduce exposure to stocks by locking in some potential gains is a good start.
  • Use shorter-term bond strategies, which can work well in a rising interest rate world.
  • Consider ETFs (exchange traded funds), which may give you further diversification and low fees.
  • Also, if you own a variable annuity, you might want to get a second opinion on it as it may have high hidden fees and higher risk to principal. For retirees whose goals have changed to safety of principal and lower fees, a variable annuity may not make sense for their retirement plan.

Lastly, I recommend having a good, trustworthy financial adviser to steer you through retirement. Sometimes the adviser who got you to retirement is not the same one you want to guide you through retirement, when your goals may have changed. Your old adviser may have that same “growth” mentality when you’re in retirement, at a time when many people’s goals have changed to safety of principal and income rather than higher growth potential.

Vanguard, one of the leading low-cost brokers, wrote a paper titled “Quantifying Vanguard Advisor’s Alpha,” which estimated that the value added of working with a competent financial adviser is roughly 3% per year. Vanguard states that the primary extra value of a financial adviser is during times of profound fear and greed — preventing clients from making foolish decisions.

Additionally, Morningstar’s “Gamma” study states that the true value-added of an adviser includes: asset allocation, withdrawal strategies, tax efficiency, product allocation and goals-based advice. The research strongly supports that having a good financial adviser could add tremendous value to your retirement plan and your financial confidence.

Investment advisory services offered only by duly registered individuals through AE Wealth Management, LLC (AEWM). AEWM and Stuart Estate Planning Wealth Advisors are not affiliated companies. Stuart Estate Planning Wealth Advisors is an independent financial services firm that creates retirement strategies using a variety of investment and insurance products. Neither the firm nor its representatives may give tax or legal advice. Investing involves risk, including the potential loss of principal. No investment strategy can guarantee a profit or protect against loss in periods of declining values. Any references to protection benefits or lifetime income generally refer to fixed insurance products, never securities or investment products. Insurance and annuity product guarantees are backed by the financial strength and claims-paying ability of the issuing insurance company. AW03181969

The appearances in Kiplinger were obtained through a PR program. The columnist received assistance from a public relations firm in preparing this piece for submission to Kiplinger.com. Kiplinger was not compensated in any way.

This article was written by and presents the views of our contributing adviser, not the Kiplinger editorial staff. You can check adviser records with the SEC or with FINRA.

Craig Kirsner, Investment Adviser Representative
President, Stuart Estate Planning Wealth Advisors

Craig Kirsner, MBA, is a nationally recognized author, speaker and retirement planner, whom you may have seen on Kiplinger, Fidelity.com, Nasdaq.com, AT&T, Yahoo Finance, MSN Money, CBS, ABC, NBC, FOX, and many other places. He is an Investment Adviser Representative who has passed the Series 63 and 65 securities exams and has been a licensed insurance agent for 25 years.