Is The Fed Selling Out Our Kids?

Published on: 04/12/2021

In this edition of Chart Talk, Tony Ogorek and Jeff Viksjo examine the impact of the Fed’s zero rate policies on Generation Z.




Welcome to this edition of Chart Talk.  I’m Tony Ogorek, I’m here with Jeff Viksjo.  Today we are going to examine the impact of the Fed’s zero rate policies on kids who are in school right now.  So Jeff, let’s look at our first chart, which is 120 year retrospective on stocks, bonds, and inflation. 


So we’re going to start with what returns looks like in the past, and this is going back 120 years.  The top green line is stocks, the dark blue line below it is bonds, and the light grey at the very bottom is inflation.  And as you can see, if you invested in stocks and bonds you easily beat inflation, or in other words you built wealth.


The interesting thing is, you look at this picture, sounds great, sounds like this is where young people should be investing.  Let’s flip over to our next chart and we see quite a different picture because we look at this through the lens, through a generational lens, from the Baby Boomers to Gen X, Y, and Z.  And it looks like there’s real trouble ahead, Jeff, for the poor Generation Z kids, who are probably age 6 to 24, people basically who are in school right now.


Yeah, we can just start with how the previous generations faired.  Baby Boomers born in 1950 have earned about 6.5% on a 70/30 stock-bond portfolio, and it’s very similar for Generation X and Millennials to get very close to 6%.  But then we look at the prospect of the Generation Z going forward and what the Fed has done is brought rates down to near zero, which has pushed stock valuations higher.  And when stock valuations are that high, likely returns will be lower going forward.  Then with rates so low, bond returns are going to be much lower going forward.  I do think this is a case for active management, right?  I think this is a case for you not just putting your money in a 70/30 balance portfolio in a 401(k).  I think this really means you have to be actively managed going forward.


Yeah, because if you’re looking at the indexes, the bond indexes are telling us they are going to looking at negative returns and stocks, they’re only going to be at 3%.  Again, when we looked at historical rates for stocks, they were probably triple that.  So, it’s going to be a tough slot for these kids.  I think it’s important for parents to consider gifting to them.  And, again, it just shows the impact of timing on returns and the fact that these Fed policies really do have real life consequences, which are probably not going to be great for our kids still in school right now.

That’s it for this edition of Chart Talk.  Thanks for being with us and we look forward to seeing you soon!

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