The “Impossible” Scenario that Threatens Retirees
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The decade-long bull market has infected advisors and their clients – especially those in or nearing retirement – with a dose of complacency that hides the perilous outcomes most consider impossible.
By relating a personal story, my hope is to convey, in a thoughtful fashion, this message: Advisors should plan for outcomes that, at the very least, are extraordinarily unlikely if not impossible.
I can’t stop thinking about Japan. Something happens, and it’s as if I’m transported right back to 1989. That’s when my story takes place. I’m still not over 1989. I’m not over the “impossible outcome scenario.”
In 1989, I was operating as a consultant to the then national brokerage firm PaineWebber. I was tasked with delivering educational presentations to audiences of its prospective clients. My topic was a new one for that time. It centered on a concept I originated: using investment-oriented life insurance as a method to fund tax-free retirement income.
To populate the seminars, PaineWebber placed newspaper advertising in cities where branch offices were located. I visited two to three cities per week, showing-up at a four-star hotel where between 100 and 250 “buying units” were assembled. Honestly, I gave a rip-roaring presentation. Stockbrokers followed-up with attendees to book appointments. The effort launched PaineWebber’s nascent life insurance department, producing thousands of life insurance policy sales.
Accounting for the strong emotional impact of my seminar was a section that concerned Japan. If you don’t remember 1989, it will be hard for you to appreciate the anxiety many Americans felt about Japan’s expanding economic prominence. The common perception was that, within a few years, Japan’s economy would overtake the U.S. to become the world’s largest.
Gazing at the audience, my voice rose, loudly and passionately. “I just saw a survey that says eight of the 10 largest banks in the world are Japanese!”
I’d next walk to a nearby easel, pick up a magic marker and start to write:
- Sumitomo Bank
- Dai-Ichi Kangyo Bank
- Fuji Bank
- Sanwa Bank
- Mitsubishi Bank
- Industrial Bank of Japan
- Norinchukin Bank
- Tokai Bank
I’d pause while starring at this list and continue. “Why?” Turning back to the audience, I continued:
“Why? As a nation, the Japanese save money. As a nation, we don’t. The Japanese save 14.5% of their annual incomes. We Americans barely save 3%!”
This device had a powerful effect on my audiences. The message resonated.
For context, in 1989, Japan was frequently the topic of newspaper headlines and TV news reports. “Japan Buying America,” was one headline I vividly recall. When it was reported that Japanese companies had purchased Rockefeller Center, the Pebble Beach Golf Club and Firestone Tire, people began to feel that the headline was accurate. Many more high-profile Japanese purchases of signature American assets followed.
Americans were also worried about increasing losses of high-paying, auto industry jobs. By 1989, the Honda Accord had become the top selling car in the U.S. The Oldsmobile Cutlass was America’s most popular car when the decade began.
A revolution in consumer electronics products was being led by Sony, the world’s most admired company, and the developer of the Walkman, Trinitron TV, and the VCR. Other Japanese companies were becoming household names, including Sharp, Toshiba and Panasonic.
The Washington Post published an article by Pat Choate entitled, “How did Japan destroy the American television industry?” which included the following:
Today, only one American television manufacturer – Zenith – is left (and under intense pressure to give up its TV division). Zenith is alone because between 1968 and 1988, a roster of some of the most distinguished names in U.S. consumer electronics – Philco, Sylvania, Emerson, Motorola, RCA, Westinghouse, Admiral, GE, Magnavox, and many others – either went out of the TV manufacturing business or were acquired by foreign competitors.
Referring to an escalating climate of conflict between The United States and Japan, in May 1989, The Atlantic wrote, “That conflict arises from Japan's inability or unwillingness to restrain the one-sided and destructive expansion of its economic power.”
In 1989, Japan’s economy was on a tear. That year, Japanese real estate peaked in value. Ascending to a value of $139,000 per square foot, the 215-acre Tokyo Ginza district had a market value that exceeded the 106 million acres that comprises the State of California.
In December 1989, the NIKKEI 225 reached its all-time high of 39,300.
In 1989, most people would have judged it “impossible” for the events that followed in Japan to occur.
You know what happened to Japanese stocks:
- The NIKKEI crashed, and it’s never come back. In 2012, another tough year for the Japanese economy, and 23-years after it had peaked, the NIKKEI 225 stood at 8,596, 30,000 points below its 1989 high. Now, 33-years later, the NIKEI is still 12,000 points in the red.
- Prices of other asset classes also crashed. Japanese “prime A” real estate eventually lost 99% of its value.
- Japan’s world-leading personal savings rate plummeted from 14.5% to 1.7%.
- Those signature U.S. assets were sold off at an average 70% loss.
- Sony did not endure as the world’s most valuable company. Instead, it lost market share to new competitors like Apple and Samsung. In 2012 alone, Sony, Sharp and Panasonic lost a combined $20 billion.
Would you agree that Japan no longer seems a threat to overtake the U.S. economy?
Other examples of the “impossible outcome scenario”
- Another example of an “impossible outcome scenario” took place in 2011. Once again, it happened in Japan. A Tsunami ignited by an earthquake created ocean flooding so extreme that ocean water breached the walls protecting the Fukushima nuclear power station, leading to the meltdown of three nuclear reactor cores. More than a decade later, contaminated water is still spilling into the Pacific Ocean. The designers of those nuclear plants though it “impossible” for this series of events to unfold as they did.
- When 17 Eurozone countries linked their economies to a single currency and interest rate, the economists who designed this economic system would have asserted that the 2009 European currency crisis was “impossible.”
- In 1994, when Viacom paid $8.4 billion for Blockbuster Video, Viacom’s executives would have thought it “impossible” that within a few years Blockbuster would be auctioned off for 4% of its previous purchase price. In 2000, when presented with the opportunity to purchase Netflix, Blockbuster’s management turned down the deal. Netflix’s current market value is about $225 billion.
- There’s no map or model that says it can be 94 degrees in South Dakota two days before the beginning of winter. But it was exactly that in 2012.
- As a Bostonian, I root for the home team Red Sox. On September 9, 2011, there was a 99.6% probability that the Red Sox would make the MLB playoffs. That extraordinarily high “confidence rate” didn’t prevent the Red Sox from crashing and burning.
- I also root for the New England Patriots. Recall Superbowl LI. With eight minutes remaining in the third quarter, the Atlanta Falcons were leading the Patriots by a score of 28-3. A 99.95% confidence rate said the Falcons were about to become Superbowl champions. But “confidence” didn’t save the Falcons. You know what happened. It was the Patriots who became champions, winning the game by a score of 34-28.
It’s easy to be seduced by the events of the recent past. A 13-year bull market will do that. The distorting phenomenon of recency bias is a memory prejudice; mentally we allocate greater importance to our more recent experiences. Events and experiences in the near past are the ones which are simply easier to recall.
Most recently, my Japan fixation was ignited when the NASDAQ entered correction territory. It was further stimulated by the recent minutes of the FOMC meeting, which revealed that the Fed is considering reversing its unprecedented money-printing strategy by substituting its program of quantitative easing (QE) with quantitative tightening (QT). After breathlessly expanding its balance sheet to almost $9 trillion, in part to prevent asset prices from crashing, the Fed’s strategy is about to shift into reverse.
I’m worried, because I can’t forget 1989. I’m working on a new seminar. As I walk to the easel, I start to write…
- Industrial & Commercial Bank of China
- China Construction Bank
- Agricultural Bank of China
- Bank of China
- China Development Bank
- Postal Savings Bank of China
- China Merchants Bank
I’m sensing some eerie similarities.
My advice to financial advisors is to build in safeguards, especially for your retiree clients, many of whom will be financially impaired for life should the “impossible outcome scenario” strike here.
Wealth2k® founder, David Macchia, is an entrepreneur, author, and public speaker whose work involves improving the processes used in retirement income planning. David is the developer of the widely used The Income for Life Model®, and the recently introduced, Women And Income®. David has authored many articles on the subjects of retirement income planning and financial communications. He also wrote the consumer finance book, Lucky Retiree: How to Create and Keep Your Retirement Income with The Income for Life Model®.