The Effects of the Great American Squeeze


April 23, 2020

My Dear Reader,

With the stock market and speculation comes the inevitability of loss. This doesn’t have to mean a general economic crisis, but individual stocks and even blue chip companies can experience a major and unpredictable setback.  For instance, in 2019, historic plane manufacturer Boeing faced a major public backlash as the GPS systems inside their aircraft were not functioning as expected. A Forbes article written at the time states that 

“This comes just as extensions have been announced to the grounding of Boeing 737 Max aircraft following accidents that killed 346 people, as well as speculation around aircraft drone safety measures. And so the quality and reliability of aircraft flight support and navigation tools have been very much headline news.” 

The fallout from these events crushed Boeing’s stock price and some market experts were debating whether or not the 100 year old airplane manufacturer should still be considered a safe bet.  All of this occurred during a market boom, when the news reports and economic plans were reportedly positive across all economic and political channels.  In the ensuing months, Boeing’s stock did rebound, but its impact still severely impacted traditionally conservative investments because conservatively geared investment portfolios are based on traditionally blue chip or safe investments.  However, these portfolios also have a significantly lower gain because the companies that are invested in these plans have a much lower ceiling as a trade off for their consistent profits.  This means that any loss while taking a conservative investment track will take longer to indemnify, but will never be regained due to the loss of forward momentum and opportunity cost.

Yet the average investor seems to be stuck in what I will call “The Great American Squeeze”. This phenomenon is fertilized with low interest rates and inflation.  In an era of protracted low interest rates, many formerly secure and safe positions such as bonds and bank CDs have incredibly low interest rates to the point in which they no longer outpace inflation. This appears to be a widely accepted fact by many well educated investors in charge of large funds.  Simon Black, owner of Sovereign Man investing, reported this development in 2018. 

“According to the World Economic Forum, pension funds around the world are short around $70 TRILLION. State, federal and local pensions in the US are $7 trillion short… and a recent report by Boston College estimates 25% of private US pensions will go broke in the next decade. This is all happening because investment returns have been too low. Pension funds need to earn about 8% per year to meet their obligations. And they traditionally do that with a conservative mix of bonds and stocks. But with interest rates near the lowest levels ever, it’s impossible for pension funds to achieve that 8% with their usual tools (over the past year, they’ve only been earning around 5.5%). So they’re getting desperate, and, across the board, pensions are taking on WAY more risk in hopes of breaking even. Since 2008, public pensions have increased their allocation to risky assets by 10%. 10% may not sound like much, but it’s a huge move by these conservative funds. It translates into TRILLIONS more invested in exotic speculative investments.”

Aside from just forcing government workers into riskier positions, this means that the average investor, even if they attempt to play it conservatively, cannot rely on traditionally safe investments.  The outlook for bonds doesn’t look much brighter in the future either, and its clear that the market will force investors and their advisors into funds with supposedly higher returns, with much more risk, just to keep up.  In the same article, Simon Black notes:

“When stocks fell from their September highs, [in 2018] you would have expected investors to run for cover in the world’s safe-haven asset – US Treasury’s. But that’s not what happened. While stocks were plunging, Treasury’s also fell. Yields on 30-year Treasury’s increased to 3.4% from 3.22% (and yields have already more than doubled from their 2016 lows). It’s a sign that the market is worried about the US government’s ability to pay its exploding debts and that inflation is creeping back into the market.”

Along with low interest rates comes the added incentive to borrow money, as its “cheap” at very low rates, which has driven consumer debt to income ratios higher than we’ve ever seen before.  This in the long run hurts investments because there is less capital for advisors to work with, which could drive up the need for riskier investments even more.  This further compounds the issue of opportunity cost and taxation.

Because more and more investors are forced into higher risk funds and positions, they will most likely feel a greater impact from a market correction or crash.  When the market does crash, remember two things: it stops the forward momentum or compounding interest of invested dollars and adds opportunity cost to the lost potential.  Remember that the basic premise of compound interest is that every dollar you spend today could have been invested to yield more money over time. In the long run, this cuts deeper into savings accounts, which forces savvy investors into even riskier growth funds in order to potentially make up the lost ground.  On top of it all, if the funds are tax deferred, then the potential gain actually increases the tax liability to the IRS and the average American is squeezed even harder.  

This culminates in the everyday investor riding each wave of corrections as they are stuck in a no win situation regardless of how they invest.  Knowing this reality, can we be sure that the market is the best place to place all of our chips? Perhaps there is a better way of saving for the future.

To your creation and potential,

Kevin Prendiville