The Crypto-Crazed Millennials on a Saving Spree
The global financial markets recently completed the longest-ever bull run at the remarkable stretch of a decade. A slow and steady boom rose in March 2009 from the ashes of The Great Recession of 2008. This, however, was not enough to heal the scars that the recession and the dot com bubble had left on the minds of the then-young millennial. While the pre-teen millennials witnessed their parents go through a financial crunch, the older ones stepped right into a slough of joblessness. This has contributed to their unnaturally high sensitivity to losses. As a result, even the near-zero federal funds rate (which directs the global rates) has not been enough to channelise their funds towards the financial markets. This is a major concern for the global economy, especially when you factor in the fact that the millennials are at the cusp of surpassing the Boomers as the largest living adult generation.
While some millennials, burdened by low-income jobs and debt obligations, living from paycheck to paycheck, are genuinely unable to finance stock purchases, the statistics tell us how even better-off millennials are straying away from investing and are preferring to save instead. Unfortunately, their risk-averse tendencies are miscalculated and are costing them precious returns, since the S&P 500 (adjusted for inflation and dividends reinvested) averaged a 7.92% return between 2007 to 2017, while the money market bank accounts averaged a 0.3% return during the same period. Nearly 42% of millennials are conservative investors, as opposed to 38% of GenXers and 23% of the Boomers. They are unwilling to fully embrace the financial markets, and when they do, it is only through a safer, less costly mechanism such as that of an Exchange Traded Fund (ETF), which is a type of fund that holds multiple underlying assets rather than a single stock.
What is worth noting is that their caution seems selective. Millennials’ risk-aversion appears to be more about scepticism when one realises how they have stayed away only from what they personally saw fail - the stock markets. They are still the ones responsible for inflating the crypto-market, despite its lack of intrinsic value or any ‘faith’ backing. The only argument in defense of their wild investment choice is perhaps the sophisticated distributed ledger technology used in the asset which makes the case for fostering technological innovation in the stock markets.
Additionally, the politically correct environment, with encouragement from Hollywood, has put capitalism out of style for many. The ones still willing to invest have raised the bar over mere profitability when making an investment decision. Company ethics and transparency are a primary consideration for millennials when they choose to invest, and these additional filters reduce the overall amount invested. The rate of investment for women is in an even poorer state. The Harris Poll survey revealed that a staggering 79% of women do not invest at all, with 70% of them stating that the process is confusing to them, while 60% of them believing how they felt investing was ‘an old-white man’s game’. Clearly, the Millennials need a better education when it comes to managing their finances and getting over The Wolf of Wall Street impression.
The bigger picture is clear: Millennials are savers and not investors. 71% of Millennial workers are saving for retirement, and begin saving at the median age of 24, which puts the GenX’s median saving age of 30 to shame. And while they rely on the banks for saving, they try to keep away from availing any of the other services. A three year study from Scratch, an in-house unit of Viacom, as a part of the Millennial Disruption Study, found that not only were banks among the ‘Most Hated’ brands, but a third of this demographic cohort believed that they’d be better off without them. This is a major concern for banks, who are now resorting to appeasement techniques. Providing special discounts on credit card bills and easing out the enrollment mechanism for loans are a few examples. This has also partially fueled the rise of fintech in the formal banking system and is encouraging the development of such technologies. Developing a system with a user-friendly interface and greater transparency by incorporation of Artificial Intelligence (AI) and machine learning is an obvious solution to this issue. For instance, a ZeroHedge survey revealed that one in three Millennials would rather invest in Bitcoin than in the stock market, simply because of the unconventional and futuristic technology involved.
It is worth noting that in traditional economics, the West had never been considered the saver’s economy, and this pattern is shifting for the better. The situation is quite akin to the rise in savings post the hyperinflationary periods in Germany after World War I, which incidentally was also a result of the psychological impact of the crisis. At the macro level, greater savings would imply lesser dependence on foreign investment. Lesser inflow of USD denominated investment in the USA implies lesser demand for the dollar. The consequent decline in appreciation of the USD is great for recovering the Current Account Deficit, which has been a primary long-term concern for the nation. But this advantage is dwarfed when growth concerns step in, as slowdowns are the projected case for the next few years. Additionally, with the rise of protectionist, right-wing governments around the globe, millennials are increasingly inclining towards what they think is socialism, which implies increased disinterest towards the financial markets. And that is a terrible prospect for growth. Hence, even though this demographic cohort has been through quite a lot at an impressionable age, they must put their concerns aside and take up a more rational approach. They have made a wise decision to save, considering the depleting ability of the burgeoning federal balance sheet to finance their post-retirement expenses. But they must learn to be comfortable with the idea of some risk.
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