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    This Is a Terrible Time for Savers

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    In an upside-down world of financial markets, expected returns after inflation are at record lows.The Bank of England in London earlier this year. Worldwide demographic trends tied to the aging of the baby boom generation have contributed to a glut in savings.Matt Dunham/Associated PressIf you are saving money for the future, one way or another you had best be prepared to lose some of it.That is the implication of today’s upside-down world in the financial markets. The combination of high inflation, strong economic growth and very low interest rates has meant that “real” interest rates — what you can earn on your money after accounting for inflation — are lower than they have been in modern times.This outcome is a result of a glut of global savings and the Federal Reserve’s extraordinary efforts to bring the economy back to health. And it means the choice for a saver is stark. You can invest in safe assets and accept a high likelihood that you will get back less, in terms of purchasing power, than you put in. Or you can invest in risky assets in which you have a shot at positive returns but also a substantial risk of losing money should market sentiment turn negative.“For people who are risk averse, they have to get used to the worst of all possible worlds, which is watching their little pool of capital go down in real terms year after year after year,” said Sonal Desai, the chief investment officer of Franklin Templeton Fixed Income.Inflation outpacing interest rates is good news in certain circumstances: if you are able to borrow money at a fixed rate, for example, and use it to make an investment that will provide something of value over time, whether a house, farmland or equipment for a business.But consider the options if you are not in that position, and instead are saving money that you expect to need five years down the road — for the down payment on a house, or a child’s college expenses.You could keep the money in cash, such as through a bank deposit or money market mutual fund. Short-term interest rates are at zero or very close to it, depending on the specific place the money is parked, and Federal Reserve officials expect to keep rates there for perhaps another couple of years. Inflation has been at 4 percent to 5 percent over the last year, and many forecasters expect it to come down slowly.Or, you could buy a safe Treasury bond that matures in five years. The annual yield on that bond, as of Friday, was 0.77 percent. That means that if annual inflation is above that, the buying power of your savings will diminish over time. The highest-yielding federally insured bank certificates of deposit over that span offer only a little bit more, just over 1 percent.If you’re particularly nervous about rising prices, you could buy a Treasury Inflation Protected Security, a government-issued bond that is indexed to inflation. The five-year yield on TIPS? A negative 1.83 percent. That means that if inflation were 3 percent annually, your holding would return only 3 percent minus 1.83 percent, or 1.17 percent. In exchange for protection against the risk of high inflation, you must tolerate losing nearly 2 percent in purchasing power each year.Then again, you could take on a little more risk and buy, say, corporate bonds. But that adds the risk that the companies that issued the bonds will default — and it’s still only enough to roughly keep up with anticipated inflation. (An index of BBB-rated corporate bonds yielded only 2.19 percent late last week.)The stock market and other risky assets offer potentially higher returns, with some degree of protection from inflation. The corporate profits that are the basis for stock valuations are soaring, one reason major indexes hit record highs in recent days. But this comes with the omnipresent risk of a sell-off — tolerable for people investing for the long run but potentially problematic for those with shorter horizons.This extreme negative real interest rate environment leaves people whose job is to analyze and recommend bond investing strategies with few good options to advise.“It’s hard to even make an argument for fixed income at these levels,” said Rob Daly, the director of fixed income for Glenmede Investment Management. “It’s the old ‘pennies in front of a steamroller trade.’”That is to say: Someone who buys bonds with ultralow yields is collecting puny interest in exchange for taking the substantial risk that higher inflation or a surge in rates could more than wipe out gains (when interest rates rise, existing bonds fall in value).For those reasons, Mr. Daly recommends investors allocate more of their portfolios to cash. Yes, it will pay almost no interest, and so the saver will lose money in inflation-adjusted terms. But that money will be ready to invest in riskier, longer-term investments whenever conditions become more favorable.Similarly, Rick Rieder, the chief investment officer of global fixed income at BlackRock, the huge asset manager, recommends that investors focused on the medium term build a portfolio that combines stocks, which offer upside from rising corporate earnings, with cash, which offers safety even at the cost of negative real returns.“It’s surreal,” Mr. Rieder said. “This is one of those periods of time when the fundamentals are completely detached from reality. Where real rates are today makes no sense relative to the reality we live in.”The Fed, besides keeping its short-term interest rate target near zero, is buying $120 billion in securities every month through its quantitative easing program, and is only now starting to talk about plans to taper those purchases. That has the effect of putting an enormous buyer in the market that is bidding up the price of bonds, and thus pushing rates down.Fed officials believe the strategy of keeping easy monetary policy in place even as the economy is well into its recovery will help bring the American job market back to full health quickly. The aim is also to establish credibility that its 2 percent inflation target is symmetric, meaning that it will not panic when prices temporarily overshoot that target.Many of the people involved in market strategy are less than thrilled with this approach, and the consequences for would-be investors.“Nominal yields are low because of how much the Fed is buying,” said Ms. Desai of Franklin Templeton. “It’s ludicrous given where we are” with growth and inflation.At the same time, Americans have accumulated trillions in extra savings during the pandemic, money they are parking in all sorts of investments, which has been pushing asset prices upward and expected returns down. Arguably, the flip side of low expected returns on safe assets is stratospheric prices for real estate, meme stocks and cryptocurrencies.Globally, demographic trends tied to the aging of the enormous baby boom generation are causing a surge in savings. Gertjan Vlieghe, a top official with the Bank of England, has shown that the pattern of retirement savings evident in Britain and across advanced nations points to continued low interest rates.“We are only about two-thirds of the way through a multidecade demographic transition that is affecting interest rates,” Mr. Vlieghe said in a speech last month. “The key mechanism is not that older people have lower savings rates, but rather that, as people age, they hold higher levels of assets, in particular safe assets,” then spend those savings down slowly when they hit retirement years.That helps explain why interest rates have been persistently low across major economies — in Europe, the United States and Japan in particular — for years, even at times when those economies have been performing relatively well.In other words, Fed policy and the unique economics of the pandemic are major factors in the extremely low rates of summer 2021. But it doesn’t help that these come in an era when so much of the world is eager to save — and that part won’t change anytime soon. More

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    The Bond Market Is Telling Us to Worry About Growth, Not Inflation

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    The economy remains hot, but the future is looking less buoyant than it did just a short while ago.Steam rising from a grate in New York’s financial district on Thursday morning. Swings in the bond market this week pointed to more subdued expectations about inflation.Mark Lennihan/Associated PressFor months, the United States has been experiencing the growing pains of an economy rebooting itself — surging economic activity, yes, but also shortages, gummed-up supply networks and higher prices.Now, shifts in financial markets point to a reversal of that economic narrative. Specifically, the bond market has swung in ways that suggest that a period of slower growth and more subdued inflation could lie ahead.The yield on 10-year Treasury bonds fell to 1.29 percent on Thursday, down from a recent high of 1.75 percent at the end of March and the fourth straight trading day of decline. The closing price of inflation-protected bonds implied expectations of consumer price inflation at 2.25 percent a year over the coming decade, down from 2.54 percent in early May.These are hardly panic-worthy numbers. They are not the kind of jaw-dropping swings that markets show in moments of extreme turbulence, and analysts attribute the moves in significant part to technical factors as big investors shift their portfolios.Moreover, there is a reasonable argument that the economy will be better over the medium term if it experiences moderate growth and low inflation, as opposed to the kind of breakneck growth — paired with shortages and inflation — seen in the last few months.But the price swings do show an economy in flux, and they undermine arguments that the United States is settling into a new, high-inflation reality for the indefinite future.In effect, the bet in markets on explosive growth and resulting inflation is giving way to a more mixed story. The economy remains hot at the moment; the quarter that just ended will most likely turn out to be one of the strongest for growth in history. But market prices aim to reflect the future, not the present, and the future is looking less buoyant than it did not long ago.The peak months for injection of federal stimulus dollars into the economy have passed. The legislative outlook for major federal initiatives on infrastructure and family support has become murkier. The rapid spread of the Delta variant of Covid-19 has brought new concern for the global economic outlook, especially in places with low vaccination rates. That, in turn, could both hold back demand for American exports and cause continued supply problems that result in slower growth in the United States.“The overriding concern being reflected in the bond market is that peak growth has been reached, and the benefits from fiscal policy are starting to fade,” said Sophie Griffiths, a market analyst with the foreign exchange brokerage Oanda, in a research note.The evidence of a more measured growth path was evident, for example, in a report from the Institute for Supply Management this week. It showed the service sector was continuing to expand rapidly in June, but considerably less rapidly than it had in May. Anecdotes included in the report supported the idea that supply problems were holding back the pace of expansion.“Business conditions continue to rebound; however, like everywhere, the challenges in the supply chain are numerous,” reported one anonymous retailer that participated in the I.S.M. survey. “We continue to see cost increases, delayed shipments, pushed-out lead times, and no clarity as to when predictive balance returns to this market.”The bond market shifts could leave the Federal Reserve wrong-footed in contemplating plans to unwind its efforts to support the economy. At a policy meeting three weeks ago, some Fed officials were ready to proceed with tapering bond purchases in the near future, and some expected to raise interest rates next year, in contrast with a more patient approach that Jerome Powell, the Fed chairman, has advocated.In one of the odder paradoxes of monetary policy, what was perceived in markets as greater openness at the Fed to raising interest rates has contributed to declines in long-term interest rates. Global investors are betting that potential pre-emptive monetary tightening will cause a stronger dollar, slower growth and less ability for the Fed to raise rates in the future without tanking the economy.“The market read the views of the minority within the Fed about tapering and about raising rates as signals the Fed has blinked on its decision to allow the economy to run hot,” said Steven Ricchiuto, chief U.S. economist at Mizuho Securities. “A weaker global economy and stronger U.S. dollar all imply greater potential for us to import global deflation.”There are silver linings to the reassessment taking place in markets. Lower long-term rates make borrowing cheaper for Americans — whether that is Congress and the Biden administration considering how to pay for infrastructure plans, or home buyers trying to afford a house.And the adjustment in bond prices can give Fed officials more confidence that inflation is set to be consistent with their goals in the years ahead, even as businesses face supply shortages and spiking wages at the moment.For example, bond prices now imply that inflation will be 2.1 percent per year between five and 10 years from now, down from expectations of 2.4 percent in early May. The Fed aims for 2 percent inflation (though targeting a different inflation measure from the one that is used in the value of inflation-protected bonds).That could make it less likely the Fed acts prematurely out of fear that inflation will get out of control, recent communication problems notwithstanding.Markets aren’t all-knowing, and the signals being sent by bond prices could turn out to be wrong. But investors with, collectively, trillions of dollars on the line are betting that the rip-roaring economy of summer 2021 is going to give way to something a good bit less exciting. More

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    AMC Stock Sale Raises $587 Million as Meme Traders Buy Shares

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    The theater chain altogether raised more than $1.2 billion in capital this quarter, thanks in part to Reddit traders, but cautioned that the stock could still sink.It was a conflicted sales pitch: We’re selling new shares of stock, but don’t buy them unless you can afford to lose all your money. Also, free popcorn. More

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    Global Shortages During Coronavirus Reveal Failings of Just in Time Manufacturing

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    Global shortages of many goods reflect the disruption of the pandemic combined with decades of companies limiting their inventories.In the story of how the modern world was constructed, Toyota stands out as the mastermind of a monumental advance in industrial efficiency. The Japanese automaker pioneered so-called Just In Time manufacturing, in which parts are delivered to factories right as they are required, minimizing the need to stockpile them. More

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    Activists Crashed Exxon’s Board, but Forcing Change Will Be Hard

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    The tension between climate goals and lifting Exxon Mobil’s profits could make it difficult for activists to make progress.The growing urgency to address climate change and concerns about the financial performance of Exxon Mobil aligned this week to help activist investors place two directors on the company’s board.But it is not clear if the activists can deliver on their dual goals — reducing the emissions that are warming the planet and lifting the profits and stock price of Exxon. The potential tensions between those objectives could doom the investor effort to transform the company and the oil industry.Getting Exxon, a behemoth company with $265 billion in revenue in 2019 and oil and gas fields around the world, to switch to cleaner energy will be a yearslong and difficult process. It is unlikely to produce quick returns and could sap profits for a while as the company spends a small fortune to retool itself.And the biggest investment firms, which lent critical support to the activists and control a lot of Exxon’s stock, may be too timid to keep the pressure on company executives and board members who are determined to resist big changes.The manifesto put together by Engine No. 1, the hedge fund with a tiny stake in Exxon that led the dissident effort, is not particularly extreme. Nor does it contain a lot of details. The two people who won seats on the board declined interview requests, citing their new roles.“Two votes on a board of a dozen directors doesn’t win the day,” said Dan Becker, director of the Center for Biological Diversity’s Safe Climate Transport Campaign. Still, he argued that it was “enough to bring a message” to the rest of the board. “Will it change everything? Probably not quickly.”Engine No. 1’s victory, which was not expected and came in the face of fierce opposition from management, has delivered a jarring reminder of the perils of doing too little to change — and veteran oil executives say it will encourage activists to push for change at other companies like Chevron, the second-largest U.S. oil company after Exxon.“This is an example of the domino theory,” said Jorge Piñon, a former senior executive at Amoco and BP who is now at the University of Texas at Austin. “One piece has fallen and you will see others follow. Exxon and Chevron are going to face quite a bit of pressure that in my opinion they are not going to be able to withstand and they will have to give in to new demands.”With governments around the world making ambitious commitments to cut emissions, including offering incentives for electric vehicles, and requiring utilities to shut down power plants powered by fossil fuels, the demand for Exxon’s main products could decline, depressing profits. Investors say Exxon and Chevron have been too slow to adapt to that shift compared with European oil companies like BP and Royal Dutch Shell.“If you want to be a public company in a carbon-intensive industry you are going to have to convince investors that you still have a viable business in a low-carbon future,” said Mark Viviano, a managing partner at Kimmeridge, an energy-focused private equity firm.Exxon management says it realizes it must prepare for a lower-carbon future, and has supported the goals of the Paris climate agreement. But the company gave up on solar energy decades ago, and today its efforts to remake itself for an energy transition rely on some moonshot ideas that may not work out.It is a global leader in capturing carbon from industry and storing it below ground, and in recent weeks it has proposed an enormous $100 billion carbon capture and storage project along the Houston Ship Channel that could be a model for the world. But for the plan to be economically viable, the federal government would have to impose a carbon tax or another kind of price on carbon, a tough sell in Washington these days.Exxon has also worked for years to make advanced biofuels from algae, a project that other companies have abandoned. And it continues to bet heavily on exploration for oil and gas at a time when demand for such products may be peaking.Shareholders voted to retain Darren Woods as chief executive and chairman, a move that a Morgan Stanley research report viewed as an endorsement of his strategy to spend less on capital projects, reduce costs and continue to pay a generous dividend.“I’m not sure Exxon is going to change how they are going to deal with the energy transition,” said Mark Boling, a former executive vice president at Southwestern Energy, a Texas oil and gas company. “I think they have made a decision on how they are going to go and a few new board members are not going to make a difference.”Engine No. 1 managers are not saying much about their plans.“We’ve redefined what’s possible,” Chris James, founder of Engine No. 1, said in an interview after the vote. “Our overall goal is really greater transparency, which brings accountability, transparency on the impacts of what the business does as well as accountability on how to manage those impacts.”The two Engine No. 1 nominees who won election so far, Gregory Goff and Kaisa Hietala, have deep experience in the energy industry. Mr. Goff was chief executive of Andeavor, a refining and marketing company, while Ms. Hietala was executive vice president at Neste, a Finnish refiner and pioneer in biofuels.Engine No. 1 managers come across as cautious and modest in interviews. They don’t make brash pronouncements or hurl insults at Exxon as many climate activists often do.“There is no one big change,” said Charlie Penner, Engine No. 1’s head of active engagement. “Nothing is going to happen quickly.”Some big asset managers contend that companies like Exxon will have a better performance over the long run if they reduce their reliance on selling oil and gas, which many believe will fall in price if the world moves toward electric vehicles.Bryan Derballa for The New York TimesThe votes of giant asset management firms with big stakes in Exxon were critical in securing victory for Engine No. 1’s nominees. But it’s not clear how hard asset managers that voted for the hedge fund’s candidates like BlackRock, Exxon’s second-biggest shareholder, and Vanguard, its largest, will now push for climate-focused objectives.Laurence D. Fink, BlackRock’s chief executive, has said in recent years that he sees climate change as a big threat — and his firm has often used its enormous voting power to influence companies, and frequently targeted directors.In explaining its Exxon votes, BlackRock said Wednesday that the company had not done enough to assess the impact of a reduction in demand for fossil fuels, and contended this had “the potential to undermine the company’s long-term financial sustainability.”These big investors place a lot of faith in companies and the profit motive to make changes that can cost trillions of dollars. This year, Mr. Fink wrote that he had “great optimism about the future of capitalism and the future health of the economy — not in spite of the energy transition, but because of it.”But investors have not always rewarded companies that have announced ambitious plans to reduce emissions and move toward cleaner energy.Over the last five years, Exxon’s shares have fallen by about a third — a period over which the S&P 500 stock index was up about 100 percent. Its stock has done worse than the shares of other large oil companies. Yet, the shares of BP and Shell, two European companies that are investing a lot in cleaner sources of energy, are also lower — BP is down more than 17 percent over five years and Shell is down more than 26 percent.And despite their efforts, energy companies as a whole have not reduced emissions by nearly enough to stop temperatures rising above levels that scientists believe are dangerous for the planet, and many experts are calling for more far-reaching changes. The International Energy Agency said last week that countries needed to stop approving new oil and gas fields immediately for the world to reach net zero carbon emissions by 2050.Roberta Giordano, finance program campaigner for the Sunrise Project, an environmental group, said BlackRock, Vanguard and other asset managers needed to go much further, starting with the removal of Mr. Woods as Exxon’s chief executive.“Once again this shareholder season, BlackRock has failed to fully use its massive voting power on climate,” she said.But more optimistic analysts argue that Exxon could help the world reduce emissions and make money doing it. For example, the company’s experience with offshore oil drilling could be used to build offshore wind farms, said Geoffrey Heal, a professor at Columbia Business School. And Exxon could spend more on technology that removes carbon from the atmosphere and help make it affordable.“If I was one of the directors,” Mr. Heal said, “I’d be pushing for that.” More

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    China’s Biggest ‘Bad Bank’ Tests Beijing’s Resolve on Financial Reform

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    Chinese regulators say they want to clean up the country’s financial system, but a state-owned conglomerate may ultimately get in the way.HONG KONG — BlackRock gave it money. So did Goldman Sachs.Foreign investors had good reason to trust Huarong, the sprawling Chinese financial conglomerate. Even as its executives showed a perilous appetite for risky borrowing and lending, the investors believed they could depend on Beijing to bail out the state-owned company if things ever got too dicey. That’s what China had always done. More

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    Meme Stocks and Archegos: Fed Calls Out Financial Weak Spots

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    The Federal Reserve painted a picture of a generally stable financial system, but one bubbling with risk-taking that merits attention.The Federal Reserve warned about financial stability risks emanating from frothy stocks and debt-laden hedge fund bets in its twice-annual report on potential vulnerabilities in the system, pointing to the rise of so-called meme stocks as one sign that risk-taking could be getting out of hand. More

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    ‘A Perfect Positive Storm’: Bonkers Dollars for Big Tech

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    The dictionary doesn’t have enough superlatives to describe what’s happening to the five biggest technology companies, raising uncomfortable questions for their C.E.O.s.In the Great Recession more than a decade ago, big tech companies hit a rough patch just like everyone else. Now they have become unquestioned winners of the pandemic economy.The combined yearly revenue of Amazon, Apple, Alphabet, Microsoft and Facebook is about $1.2 trillion, according to earnings reported this week, more than 25 percent higher than the figure just as the pandemic started to bite in 2020. In less than a week, those five giants make more in sales than McDonald’s does in a year.The U.S. economy is cranking back from 2020, when it contracted for the first time since the financial crisis. But for the tech giants, the pandemic hit was barely a blip. It’s a fantastic time to be a titan of U.S. technology — as long as you ignore the screaming politicians, the daily headlines about killing free speech or dodging taxes, the gripes from competitors and workers, and the too-many-to-count legal investigations and lawsuits.America’s technology superpowers aren’t making bonkers dollars in spite of the deadly coronavirus and its ripple effects through the global economy. They have grown even stronger because of the pandemic. It’s both logical and slightly nuts.The wildly successful last year also raises uncomfortable questions for tech company bosses, the public and elected officials already peeved about the industry: Is what’s good for Big Tech good for America? Or are the tech superstars winning while the rest of us are losing?Americans have more money in their pockets thanks to government stimulus checks and pandemic savings, and the tech giants are getting a significant share. Their combined revenue is equivalent to roughly 5 percent of the gross domestic product of the United States.Big Tech’s pandemic big bucks have an understandable root cause: We needed its services.People gravitated to Facebook’s apps to stay in touch and entertained, and businesses wanted to pay Facebook and Google, which Alphabet owns, to help them find customers who were stuck at home. People preferred to buy diapers and deck chairs from Amazon rather than risk their health shopping in stores. Companies loaded up on software from Microsoft as their businesses and work forces went virtual. Apple’s laptops and iPads become lifelines for office workers and schoolchildren.Before the pandemic, America’s technology superpowers were already influential in how we communicated, worked, stayed entertained and shopped. Now they are practically unavoidable. Investors have scooped up Big Tech shares in a bet that these companies are nearly invincible.“They were already on the way up and had been for the best part of a decade, and the pandemic was unique,” said Thomas Philippon, a professor of finance at New York University. “For them it was a perfect positive storm.”Times weren’t so good for these companies in the last economic rough patch. In the downturn from 2007 to 2009, Microsoft’s sales dropped slightly, and its stock price fell 60 percent from the fall of 2008 to March 2009, a low point for U.S. stocks. Google and Amazon each lost as much as two-thirds of their market value.One sign of how this time is different: Amazon’s revenue is growing much faster in 2021 than it did in 2009, when the company was one-fifteenth its current size. Sales in the first quarter rose 44 percent from a year earlier, and Amazon’s profits before taxes — which have never been exactly robust — more than doubled to $8.9 billion. Businesses are addicted to Amazon’s cloud computer services, where sales rose 32 percent, and shoppers can’t live without Amazon’s delivery. Investors love Amazon, too. The company’s stock market value has nearly doubled since the beginning of 2020 to $1.8 trillion.For the other tech giants, it’s as if their brief pandemic nosedive never happened. Advertising sales typically rise and fall with the economy. But as other types of ad spending shrank when the U.S. economy contracted last year, ad sales rose for Google and Facebook. The growth was even better for them in the first three months of this year.A year ago, analysts worried that Apple would be crippled as the pandemic gripped China, which is the hub of the company’s manufacturing operations and its most important consumer market. The fears didn’t last long. In the first three months of 2021, Apple’s revenue from selling iPhones increased at the fastest rate since 2012. Sales in mainland China, Taiwan and Hong Kong nearly doubled from a year earlier.Apple’s revenue from iPhone sales in the first three months of the year rose at the fastest pace since 2012.Agence France-Presse — Getty ImagesThe tech giants are not the only companies rallying in dark times. America’s big banks have also been on a tear. So have some younger technology companies, such as Snap and Zoom, the maker of the pandemic-favorite videoconferencing app. The crisis forced all sorts of businesses to go digital fast in ways that could help them thrive. Restaurants invested in online sales and delivery, and doctors went full bore into telemedicine.But the dictionary doesn’t have enough superlatives to describe what’s happening to the five biggest technology companies. It’s all a bit awkward, really. It’s rocket fuel for critics, including some regulators and lawmakers in Europe and the United States, who say the tech giants crowd out newcomers and leave everyone worse off.Big Tech companies say they face stiff competition that leads to better products and lower prices, but their bank statements might suggest otherwise. Facebook’s profit margins are higher now than they were before the pandemic.Some of their success is explained by the peculiarities of the pandemic economy. Some people and sectors are doing awesome, while other families are lining up at food banks and while companies like airlines are begging for cash. Unlike the stock market clobbering in the Great Recession, stock indexes in the United States have reached new highs.The tech superstars have also capitalized on this moment. Alphabet and Facebook have used the pandemic to cut back in places that matter less, such as promotional costs and travel and entertainment budgets. And the tech giants have generally increased spending in areas that extend their advantages.Alphabet is now spending more on big-ticket projects, like building computer complexes, than Exxon Mobil spends to dig oil and gas out of the ground. Amazon’s work force has expanded by more than 470,000 people since the end of 2019. That deepens the moat separating the tech superstars from everyone else.Big Tech is emerging from the pandemic lean, mean and ready for a U.S. economy expected to roar back to life in 2021. Meanwhile, there are still long lines at food banks. Some American workers who lost their jobs last year may never get them back. Housing advocates are worried that millions of people will be evicted from their homes. And being Big Tech is an invitation for everyone to hate you — but you do have towering piles of money. More