Martin´s Capital Market Observations
After a long while I am once again ordering my thoughts and analysing developments on the capital markets. I will not be able to address every topic, but I am happy to pick up once more on my observations from the end of October 2022 (please read up on them there).
One important topic, in my view, is the development of the inflation rate. Politicians would have us believe that inflation is under control and will rise no further. In October 2022 the inflation rate actually stood at an official 10.4%, and in April 2024 it now registers at “only” 2.2% (source: Federal Statistical Office, Inflation rate in April 2024 expected at +2.2% – Federal Statistical Office (destatis.de)). Unfortunately, however, that is not even half the truth, as you can easily read from the charts below. This is what the politicians show you:
The inflation rate has indeed eased markedly within a year, from 8.7% in January 2023 to 2.9% in January 2024. That does not, however, mean that prices have become cheaper, but rather that the rise in prices has slowed. The effects can be seen very clearly here: (sources: Federal Statistical Office and own calculations)
This chart means that for a good or service which you bought in January 2020 for, say, €1,000, you already had to pay €1,186 in March 2024. These are the official figures of the Federal Statistical Office, Price statistics at a glance – Federal Statistical Office (destatis.de). This therefore represents an increase of 18.6% over 4 years, which works out, simply calculated, at roughly 4.65% per year. Please compare that with the figures above which the politicians put before you.
In addition, the perceived inflation rate in May 2023 stood at around 18%. That was roughly three times as high as the official inflation rate of 6.1%. “Perceived inflation” in Germany at 18 percent | tagesschau.de
How something like this comes about you can see from the following illustration: Why perceived inflation is higher than actual inflation – Capital.de
The composite and officially used consumer price index simply contains many products, goods and services which, in everyday life, you use with completely different priorities and degrees of usage than are assumed in that calculation.
This clarification is important, on the one hand for your everyday life, but on the other hand also for your monetary and asset investments. If we take once more the average 4.65% inflation rate of the past 4 years and invest the money at a current rate of around 3%, 098_Konditionen_im_Einlagengeschaeft.pdf (bmwbank.de) then each year you lose around 1.65% of purchasing power.
For an investment of €100,000 this means that, after one year, you are indeed credited with €3,000, but in reality you would have €1,650 less purchasing power at your disposal. For a single year that may not be so bad. Over 5 or 10 years, however, it is. The so-called real return in this example would therefore amount to minus 1.65%.
I am of course aware that I am presenting this example in a very simplified way, but it makes the mechanism clear.
For investors it is wonderful that interest rates have risen again since the start of 2022, but on balance it brings them nothing. For borrowers, however, this development is in part dramatic. In this context I would like to refer once again to my paper from October 2022 and to set this out expressly here once more.
From the start of 2019 to the start of 2022 the current yield was “under water”, only to rise very rapidly and, for many market participants, surprisingly. With that, mortgage rates also rose markedly and remain at a comparatively high level.
Source: Interhyp
After mortgage rates had fallen continuously for almost 20 years, the rates for 10- or 15-year fixed-interest periods are no longer at 1% or 1.5%, but, depending on the provider, still at 3.5% to 4%. What this difference means, over the sum of payments, for a long-term financing arrangement you can likewise trace in the attached Capital Market Observations from October 2022.
At what interest rate most mortgages were taken out you can see from the following chart, and you can then calculate when existing financings will run into problems with follow-up financing, should interest rates not fall again:
Source: Deutsche Bundesbank and own calculations
According to this, the first loans from the years around 2015 will probably fall due between 2025 and 2030 and will then have to be prolonged at a current rate of 3.5% to 4% instead of 1.5% to 2%.
To make matters worse, this does not even take into account the likewise sharply increased electricity and heating costs, which further restrict financial room for manoeuvre considerably (please read the detailed calculation in the observations from October 2022).
I am curious how this will affect the future development of the property markets.
Now you might object, “I don’t care,” I won’t be buying property anyway and prefer to stay in rented accommodation. “Fair enough,” but then you should take a look at how your unit of payment – called the EURO – has developed since its introduction.
For that I will then show you this chart:
According to current data, the EURO has, since its introduction, lost a sporting more than one third of its purchasing power, over and above the entirely normal 2% inflation planned by the ECB (as at 2024). Had you been a smart cookie and exchanged your good old Deutsche Mark into gold – rather than into euros – you would have been spared a loss of purchasing power of 85 to 90%.
A currency will only be accepted as a means of payment for as long as economic actors have confidence in the currency in question…
The economic environment described so far (high interest rates, even higher inflation, high costs, etc.) is also causing considerable problems for companies and will lead to markedly rising insolvencies.
In this connection one should also know that, for example, in the USA (where the longest data series are available), no fewer than 24% of the companies in the Russell 3000 Index (the largest listed public companies) are described as so-called zombies. By this is expressed that these companies do not even generate enough income to merely service the interest expense on outstanding loans!
What is remarkable here is the significant increase since 2020 – and that at a time when interest rates were still negative. What will happen now that interest rates have, as described earlier, risen so sharply? How much longer until insolvencies explode here?
The level is markedly higher than at the time of the dot-com bubble in the year 2000.
A current analysis by Allianz arrives globally at the following conclusion: Outlook 2024: seizing opportunities | AllianzGI
According to this, the global share of these endangered companies rose over the past 10 years from 3% to 9%. That is an increase of no less than 200%!
As soon as these businesses cease to exist, unemployment also rises, and so does the question of Germany’s competitiveness.
But of course we know: “…The companies are not bankrupt or insolvent. They simply stop producing…”
You will, of course, not notice this immediately in the coming year, but rather in 5–10 years’ time, when you wish to retire.
And there we are at my absolute “favourite topic”, provision for retirement. I have been dealing with it since 1990, when I completed my second training course at Allianz Versicherung. Even back then it was clear to me that we (the baby boomers and the following age groups) are heading towards a financial disaster. I will illustrate this with a few charts, and you can then draw your own conclusions for yourself and your dependants (including children). This is what the so-called age pyramid looked like back then (in 1990): Population pyramid: age structure of Germany from 1950 – 2070 (destatis.de)
People aged 67+ accounted at that time for 13% (10.4 million) of the total population (79.8 million).
By the year 2024 the working population slowly but surely moved upwards, towards the retirement phase. The age group 67+ accordingly now already accounts for 20% (16.9 million), out of a total population that is now 84 million.
This in turn means that the age group 67+ has risen from 10.4 million people to 16.9 million people. They too must first be “paid for”.
By 2040 (by which point all baby boomers should be retired) the age group 67+ rises to 20.9 million people and then accounts for 25% of the total population (81.8 million). You can see that the total population will shrink, but that the potential pension recipients will by then have gained considerably in weight.
In 2015 the pension insurance scheme took in around €200 billion and even then paid out €267 billion. The difference was subsidised through tax revenue. By now the gap to be financed stands at a good €100 billion.
And this against the background that, at present, many people (baby boomers) are still paying into the statutory pension insurance scheme. Once these drop out as contributors in 5–10 years and wish to receive benefits from the pension insurance scheme, I do indeed wonder how many federal subsidies will then have to be paid, or – worse – what deductions, levies, etc. pension recipients will have to bear, or will no longer receive, to offset the gap.
The trickery began decades ago (already in the 1970s – I have attached three newspaper clippings as a PDF) and culminates, for the time being, in the step-by-step increase in the taxation of pension benefits. I describe the statutory pension system as the largest legal Ponzi scheme!
I would be glad to accompany you in determining your pension gap and in showing you solutions to make the scenario described as bearable as possible.
This is not just about some savings plans or other, but also about how existing assets (shares, property, monetary assets, etc.) can be preserved – or secured on an inflation-adjusted basis – against the background of negative real returns, a low interest-rate environment and shrinking purchasing power (including during the retirement phase).
Since my last Capital Market Observations at the end of October 2022 (that is, over 18 months), the DAX (yellow), international equities (light green), gold (blue) and silver (dark green) have achieved between 25% and 35% in value gains:
Bitcoin and other cryptos I have not included, because these would have “blown up” the chart.
Any questions? Then get in touch with me, with no obligation.
Dr. Martin Dilg – 0172 / 86 11 97 8
martindilg@t-online.de
Expert for international capital investments and financial planning
This study claims neither completeness nor does it constitute a call to action.
The information provided is likewise not part of any investment advice!
For personal questions I am very happy to be available on an individual basis.
02.05.2024
