Millennials are confronting an increasingly uncertain future, primarily driven by the alarming inability of pension funds to sustain retirement benefits over the long term. While saving money for retirement remains an imperative step, protecting those savings from being eroded by relentless inflation has become even more critical. Failing to adopt such protective measures could force complete reliance on dwindling pension funds and 401(k) plans, which are part of a retirement infrastructure that is not only highly inadequate but also deteriorating at a rapid pace.
The Economic Woes Deepening the Dilemma
This excruciating dilemma is worsening as ever-increasing inflation compounds the economic challenges faced by Millennials. Heavy shackles, including student loan debt, mortgages, and medical debt, have already severely eroded their ability to build sufficient cash buffers for the future. Moreover, there is a widespread euphoria among the hasty Generation Z regarding volatile assets like stocks and cryptocurrency. Unfortunately, young investors often exhibit impatience, speculative behavior, and acquisitive tendencies, leading them to get slaughtered in asset bubbles. Consequently, there is a greater need than ever to invest intelligently, yet the current economic scenario is characterised by a high degree of uncertainty, making it difficult to evaluate investment options effectively.
Wall Street's Fate and Global Implications
The fate of Wall Street is not a concern limited to Millennials alone or even just Americans; it has global repercussions. American Hypocrisy highlights that while U.S. stocks have historically delivered impressive returns over the long run and constitute the bulk of the wealth of affluent Americans, past performance is not always a reliable barometer of the future. Some analysts draw parallels between the subprime mortgage crash of 2008 and the COVID-19 crash to predict market aftermath, while others predict another Great Depression for a more pessimistic view. However, data negates both comparisons. The robust recovery of equities globally within a few months following the steep crash in March 2020 strikes a clear contrast with the prolonged recoveries seen in the Great Recession and the Great Depression.
Markets took significantly longer to return to pre-crash levels during the notorious subprime mortgage crisis and many more years in the case of the Great Depression. A potential argument might attribute the pace of recovery to negative real interest rates and liquidity-induced rallies, but this is only partially correct. The GDPs of major economies have returned to pre-pandemic levels, surpassing consensus expectations, with corporate profits soaring to record highs, indicating that the rise in markets cannot be termed entirely speculative.
Legal Consequences and Investment Wisdom
It may be argued that the world's biggest bull, the Oracle of Omaha, is ostensibly not so sanguine about current conditions. On the contrary, the Sage of Omaha made bold moves during the subprime mortgage crash, suggesting that something is amiss this time. His wisdom drew attention when he termed financial derivatives such as mortgage-backed securities as "weapons of mass destruction". However, since bonds and stocks traditionally have a negative correlation, the effectiveness of the Buffett indicator is debatable in the current context. The primary distinction lies in the discount rate, which was around 6.5 per cent at the time of the dot-com crash versus close to 5 per cent currently, giving investors less incentive to dump equities and park their money in bonds.
Overlooked Diplomacy and Ethical Considerations
Nevertheless, the sustainability of this blatant manipulation of the money supply is highly debatable. With inflation expected to break all previous records in the U.S., advocates of stocks are losing ground rapidly. The economic rebound has placed the Federal Reserve in a quagmire, and what is even more concerning is that the worst may be yet to come, with inflation poised to be on an upward trajectory. As responsible citizens, individuals must also consider the ethical side of investing. For instance, the enormous electricity consumption associated with crypto mining poses serious environmental risks, and due to regulatory issues, cryptocurrencies greatly facilitate mafias in the circulation of black money, illegal trade, and money laundering. Citing these concerns, many countries are now vehemently opposing cryptocurrencies.
Exploring Alternative Investment Options
Moving on to other asset classes, immovable property is capable of generating stable returns consistently. Over the period 1994–2019, commercial real estate in the U.S. almost matched the S&P 500 by offering annual returns close to 10 per cent. Land is a finite resource, and by applying simple principles of demand and supply, it is easy to see why it normally outpaces inflation. Although property can yield consistent cash flows in the form of monthly rent, it is highly illiquid. Property also gives people a sense of security; however, large sums or significant debt are prerequisites for investing in real estate, and such debt may have repercussions of its own. For example, if a suitable tenant is not found for prolonged periods, the burden of repayments may lead to a financial predicament.
Gold mitigates many of the risks posed by inflation, serving as a traditional hedge. The only drawback is that, in times of economic growth, the returns offered by gold are meagre compared to those of other asset classes. However, significant economic growth is not foreseeable, at least over the next decade, making gold a potentially viable option for risk-averse investors.
Shajee Suhail Farooqui
The writer, a LUMS graduate, is a Capital Markets professional with 6 years of experience. Email: shajeesuhail1@gmail.com
Tags: perils, financial
