Investment Bulletins
By Charles Gillams on 05/07/20 | Overview

We have staggered, crawled, festered and fretted our way to the half year mark. So a time to reflect a bit on that, draw breath, even book a holiday and consider where this goes next, both as a business and as a market, and although not our remit here, no doubt, as individuals too.

As We Were
We will start with the parochial. We have long wanted to have more and indeed improved products to manage. The world of investing is an endless challenge, as however well you do, each quarter is a new one. The products people want today are seldom the ones wanted yesterday or indeed tomorrow, but underlying that you are, in the end, trying to produce a long-term product, some weird hare/tortoise hybrid that also looks attractive and is indeed plausible.

Investors entered the year keen to saddle a post Brexit hare, only to suddenly want to reverse course, dismount, hide and then ride a defensive armadillo instead, while still going forward at full tilt; all on a dime. Fairly clearly this was an impossibility. Our own evolution was a little slower, we brought on board a pure momentum model, which has the twin benefits of eliminating fallible judgements and providing enhanced transparency. Although at the same time our existing RJMG Global Total Return Fund found some favourable weather, making money in March when few others did so and indeed in June, another choppy month.   

But that for us was a departure point with the RJMG fund; we took the decision to place it all into cash, so that investors could move over to form a larger, still actively managed, fund, in the same space, with a rather more modern structure and lower costs. We hope to announce that transaction and our own ongoing involvement shortly.

We also decided our alphabet jumble of a name, while historically valid, had served its purpose. From now on we will sail under the Monogram flag. Encouragingly the Monogram model has also made money through these crazy markets. So, we have two products, with similar aims but very different approaches, giving investors a choice, a mix and match option even, depending on their own market view.
Smashing The Compass - Tesla and Gold
Having trained as an economist, then worked (and invested) all my life with the policy certainties it claimed to produce, I am now in the hapless position of not understanding how it will all operate next. I regard myself as in good company, as in a week when Tesla hit a market capitalisation of well north of US 200 billion and gold (simultaneously) dug in for an assault on $1,750 per ounce and who knows where beyond that, something is clearly out of kilter and there is little market consensus.

Add in government debt well above anything I have ever experienced, an apparently unstoppable expansion of ‘welfare’ spend and unemployment (real or disguised by being wrapped in loose furloughs) at a peak. I believe Tesla is incapable of surviving without fresh capital (we used to have a word for that type of stock), and I know gold is useless except possibly for avoiding the pilfering of governments. So, I can explain neither price excess, would wish on fundamentals to own neither, but of course in the world we live in, I have stakes in both, so intertwined are modern financial  products.

What then do I observe? Well for one thing a lot of prices are wrong. We are confidently told that inflation is not a threat (providing you are not measuring hot stocks or shiny metal) but I see plenty of evidence that it is. A lot of prices are rising, from services, through insurance, to basic consumer products.

Now that at least I do understand, the cost of providing everything has risen and must rise further.

The capacity of a coffee shop, for example, has at least halved, and you can see some units won’t now re-open just to trade at a loss. Some will try to strong-arm governments into extended tax holidays and subsidies and with perhaps more immediate success, invite landlords to repossess property stock if they want. But unless other inputs (staff costs are inflexible downwards) and processed food (generally at rock bottom already) can materially shift, something must give, if your capacity halves.

I rather doubt the utility of governments pouring grants and easy money into insolvent businesses, just to stop them evolving a viable business model. While I can at least assure those, who seem happy to take government favours and trade on at a permanent debt fuelled loss, that they are making themselves a hard new taskmaster, often for no purpose.

So, assuming governments can’t support this world for ever (they can’t), prices must then go up. Or in the old Soviet model, services must go down. Those who fly with certain endlessly bailed out airlines will know the experience of buying services from such zombies. High prices and lousy services follow, as the subsidised ruins squeeze out the better competition and protect their old monopolies with seemingly unlimited state aid.

So, I am expecting price rises, from one source or another. Although as ever international trade, which allows the direct import of cheap labour output, will focus inflation onto services and limited supply assets (time for an all gold Tesla?).
There are a ton of other issues apart from inflation but knowing whether you expect prices to rise or fall is pretty fundamental in economics. So, try to pin that down, you will invest very differently from if you expect deflation. Of course, low demand and fixed supply, should indeed be deflationary, and if the money supply was normal, would have to be.

But I am not seeing that price lowering effect, and now doubt if we will this year.

Tear Up The Map?
However, to my mind there is little evidence that governments can repeat the "success” of the 2008 crisis. At least for those smug regulators and politicians who still observe it as such, although I tend to feel if that was a success, what does failure look like?

I do see the democracies as being in a real bind in this world.

It is hard enough to navigate economic policies that seem to be a weird mix of applying full throttle and maximum braking all at once; if at the same time control of the steering wheel changes on a whim, disaster surely beckons.

So the summer should be, for both markets and individuals (and one wishes governments) a time to get to grips with this, to target far better the largesse spewing from an uncontrolled spigot, and work out which management teams have either the competence, or good fortune to be able to thrive in this.

So far, I see a great deal of "let’s just keep going” evident in both markets and board rooms. But increasingly we are going to (as I did this week) pick up the annual accounts of major companies and ask how on earth I thought I could ever own such a shambolic strategic mess.  
Markets are already thinning out, so perhaps it will all drift sideways till the start of Q4. After the first half there is no need for the traditional summer high jinks in markets, to increase volatility, quite the opposite.

But that maybe is just delayed not cancelled, unlike many more pleasurable events, in 2020.
By Ciaran Mulhall on 28/06/20 | Overview

This week Ciaran Mulhall looks at the strange divergence between bearish fundamentals, bearish market participants and the hot money bubble.

"That Was Then
It was in late 1996 that Fed Chair Alan Greenspan first mused about the challenges of measuring inflation in a high-technology world and the difficulty of knowing when "irrational exuberance has unduly escalated asset values.”

These days central banks not only take published inflation measures at face value, they even actively intervene to push asset markets higher. Despite the publicity given to day traders and their magic Scrabble bags (for those who don’t know what I am talking about, trust me you are better off), it’s probably fair to say that in aggregate investors are far from "irrationally exuberant.”

So, the actual price action? Well, that is another matter altogether.

When Greenspan’s famous speech hit the tape in December 1996 – risk assets sold off quite quickly. While the Federal Reserve engendered an immediate reaction and equities duly traded lower for most of the next week or two, ultimately the comments did little to stop risk appetite from marching on – and for a number of further years, before ultimately blowing out in the top of 2000.

That just goes to show that talk is cheap, but equally there is not much appetite to take away the asset market punchbowl when the party is still roaring along.

This Is Now
Coming back to the present day with the huge and unprecedented range of global central bank monetary support currently being provided, it remains evident that certain categories of investors are, even so, reluctant to drink the dodgy brew. Equity market sentiment remains "bearish” and has been that way for most of the rally from the March lows, as this table shows.

Table 1 AAII - Bullish/Bearish Sentiment (Source AAII)
  June 25, 2020 June 18, 2020 June 11, 2020 June 4, 2020 May 28, 2020 4-week Avg.
Bullish 24.14% 24.37% 34.28% 34.55% 33.07% 29.34%
Neutral 26.96% 27.85% 27.67% 26.58% 24.80% 27.27%
Bearish 48.90% 47.78% 38.05% 38.87% 42.13% 43.40%
Bull-Bear Spread -24.76 -23.41 -3.77 -4.32 -9.06 -14.07
This is in contrast to the credit markets, where in this time of unparalleled economic uncertainty, ratings agencies are warning of looming down-grades and corporations are rushing to borrow ‘rainy day’ money more quickly than ever. All of which comes on top of an already record high level of corporate debt relative to GDP. Investment-grade credit is even so trading close to the highs seen earlier this year.

Figure 1 iShares iBoxx $ Investment Grade Corporate Bond ETF

Clearly, we can thank the Fed and their massive intervention for this apparent miracle and as Chair Powell talked about a couple of weeks ago – the Federal Reserve is prepared to do nearly anything to support the "real” economy (rightly so) and the knock on effect to asset prices will be something they will consider at a later date. Or in other words for the Fed to be passive because of asset price inflation, is now just not a sustainable position.

Obviously, this is wonderful news if you are a borrower, though if you are a lender the ultimate benefits remain to be seen. We have talked before about the difference between solvency and liquidity.

Hangover Time?
Even so there is no guarantee that a nasty reversal is imminent, but we would not bet against it. You can at the least be fairly sure that the next three months in stock markets are not going to look like the last three.

Table 2 Equity Market Returns QTD %
NAME Change % QTD
S&P 500 INDEX 16.42%
Euro Stoxx 50 14.97%
FTSE 100 INDEX 8.59%
CAC 40 INDEX 11.68%
DAX INDEX 21.67%
NIKKEI 225 19.00%
CSI 300 INDEX 12.28%
S&P/ASX 200 INDEX 16.29%
This has been an incredibly challenging period for anyone willing (or foolish) enough to look beyond the money printing extravaganza. While major difficulties also remain in forecasting public health outcomes and indeed their economic impact.

The result is the essentially unprecedented divergence between negative sentiment and positive price action.

Money managers are not irrationally exuberant -- far from it, in fact.

Price action, on the other hand, has clearly been exuberant -- in some quarters, to a near record degree. How rational or irrational that proves to be, remains to be seen.”
By Charles Gillams on 21/06/20 | Overview
A few reflections on political risk, this week, from Charles Gillams

With COVID-19 starting to drift away into debates about culpability this week, we wonder what else we should worry about. Since while humanity will always devote its efforts to the most recent disaster, it will be always be hurt more by the next one. The desire to always fight the last war is ingrained.

Deja Vu All Over Again?
So, is this perhaps a rerun of 1968? Well despite having lived through those years, I have no real idea, and only a dim perception of what that year of unrest entailed. But it was a notable attempt to overthrow democracies, a time of military retreat, of the spawning of new violent anarchist factions. A time of a change in mood, even if now largely regarded like 1848, as a year of rebellions that failed.

What I notice is a palpable fear by the establishment, a feeling of a loss of control. A sense that what has been built up and defended has rather failed and is now expecting a rather good kicking. There is a defensive, appeasing feel in the hierarchies, an unwillingness to defend their ground.
So where do I see this? Well it feels most acute in the USA in the twilight of the Trump term. We have been saying for two years that Trump is unelectable, and that whoever replaces him will veer to the left.

That trend has been pretty clear since before the Mid-Terms, but only now do we see a range of institutions, from the Supreme Court to Wall Street, via the military and arguably including the Federal Reserve, suddenly look slightly craven as they all want to get on the right side again and disown Trump.

COVID-19 and the inoffensive lure of Sleepy Joe have between them shredded the last defence of an administration that has combined economic good sense and military pragmatism with a stunning mix of incompetence and disregard for any semblance of due process.

Although much of this current realignment looks sensible, you wonder why it was not sensible before. American (and European) inequality needs a long hard look, in particular at the sprawling impoverished areas that ring many cities. I am not sure either incremental legislation, or indeed directly distributed resources, are the only solutions and I am reasonably clear abolishing police forces is not either. There has to be some viable social infrastructure and most of those measures don’t help provide that.
What's Got Into The Fed?
Yet with the Federal Reserve no longer interested in inflation (and especially not wage inflation) it has to move to look at employability and resource allocation, to tackle its remaining employment mandate. There is a deep fear that the COVID-19 recession will shake out a lot of unemployable excess labour, worldwide, so the struggle for employment will become more bitter.

As in the UK, the standard punishment for local authorities and state institutions with no money, has been to load them with more debt. Unpalatable though rewarding failure is, punishing today’s citizens for the errors (and excess consumption) of the past has always looked like lazy justice. Both countries need some far-ranging debt amnesties to restart municipal government. Federalism and devolved power have been a notable winner from this crisis, especially in Germany, also incidentally leading on such amnesties.

But that debt restructuring needs to go along with a determination not to burden current citizens with past errors. So, a far greater flexibility in the municipal workforce is needed, perhaps by taking discipline and performance away from local decision making. Perhaps that should be implemented nationally. Placing the burden of re-hiring, re-training, retiring and discipline in a different (and possibly nationally funded) budget. If these topics are now broadly already in the Fed’s domain, why not complete the shift?

Exit Wounds
I also suspect the yearned-for return of due process is unlikely. Everyone has been pushed too far towards the extremes. I doubt if any significant Trump nominees will survive unless they have tenure, and the reckoning with Trump and his family is set to be long and divisive, however justified.
It now looks increasingly hard to predict the Senate election, and indeed to see Senators that are willing to stand up to a powerful presidential mandate. While the return to Republican rule looks to be unlikely before 2029. So, investors who (as they appear to be) are assuming that the good times unleashed by the 2016 election will continue, seem curiously misguided.

Of itself the US election will be increasingly discounted, but the tremors it sets off will be hard to call. Especially if populism continues to sway law makers (as it will), I can see some quite destabilising legislation being pushed through, that could well undermine the US economy.

While geo-politics is hardly likely to be peaceful either, as the long twilight of Trump and the absurd prolonged post-election interregnum, will make the more adventurous or desperate dictators and rogue states keen to grab an edge. China’s broad-based attacks, expansionism and bloody imperial adventures, slightly chilled by the unpredictability of Trump, are back underway.

So, do we see a rerun of 1968? Yes, in a lot of ways, a long post war expansion was grinding to a halt. There was a disaffection with the old ways. Along with a feeling of hopelessness, that simply grabbing power, moving the democratic counters round, may not solve a deeper desperation.  Political reform seems even further off now than it did then. The mix of mass unemployment, excess debt, a staggering new raft of regulation and unenforced, multi layered laws, designed to gesture as much as to rule, does not bode well. 

Well it is easy to be gloomy, despite the current exuberance of markets fuelled by vast excess liquidity, I am still not that fearful of the prolonged impact of COVID-19. But the related political risk has certainly jumped in the last few months.

What About The UK?
Well a rigid, over centralised system, absorbed in its own institutional battles has predictably failed to deliver in a crisis, headless chickens come to mind.

There is too much power focused in Downing Street, and too little skill, and that is endemic, the party involved is largely irrelevant. As we have noticed before, whatever the spin, the competence of power is easy to read in the trajectory of sterling.

(Click picture to link to original article)
Once again, however big the Parliamentary majority, that vote in the currency markets, is being lost.
As the evergreen Rolling Stones wrote, (in 1968);

"And I went down to the demonstration, to get my fair share of abuse,

Singing we’re going to vent our frustration, if we don’t we’re going to blow”.

….. because you can’t always get….
By Ciaran Mulhall on 14/06/20 | Overview


This week Ciaran Mulhall ponders the sudden chill dampening the early summer exuberance in stock markets.

"It appears that we have had a change of tone in the market – risk free assets (sovereign debt) has had an aggressive bid all week, with the US 10 Year yield as a result falling nearly 20 basis points (a lot when it is so low already). This move lower reverses nearly all the shift to higher yields we had seen over the preceding couple of weeks.

This was a move bookended by what initially looked like a better than expected United States May Employment report earlier in the month. While bond yields have been falling – risk assets are as usual moving in the other direction – with global equity markets having their worst week since mid-March.

Any More Surprises?
While the macro economic data has begun to improve as against expectations (see chart of economic surprises below, which shows the US and UK were never as badly shaken as Europe, and with the US now in apparently good shape) – market participants are worrying about the danger of a return of Covid 19 – particularly in the United States where a number of states including Arizona, Texas and Florida have seen a sharp spike in hospitalisations over the last week.

Figure 1 Citi Economic Surprise Index - G3

A Persistent Foe
The US disease progression contrasts with Europe – where the 5-day moving average of confirmed cases remains very subdued and materially below where it is currently in the United States. (see chart below)

Figure 2 COVID 19 - 5 Day Moving Average of Confirmed Cases (% Change)

All News is Local
When looking at the United States readers will note that at the national level matters continue to steadily improve. However, one of the thorny issues is that while national statistics matter, State and local trends do, too. After all, lockdown decisions are made at the State and local level based on prevailing conditions; sure, there are federal guidelines, but the chance of them being followed (to date anyway) is about as likely as you seeing Donald Trump wearing a face mask

There are other ways to map the data to see underlying trends (at the State level). One is seeing how many States are still seeing an acceleration in cases. If we look at the number of States showing a rising case rates in percentage terms, we find that the one-week average peaked on March 22 -- the day before the stock market bottomed. (see chart below)

Figure 3 United States - Number of States with Rising Case Rates (7 Day MA)

After a deep dip, the number of States showing rising infections has been picking up since the second half of April; so, trading on that apparently negative information, would have been a very bad idea. However there is an argument to be made that once Federal Reserve Chairman Powell refocused the market (at his Wednesday evening press conference) back onto the macro economic data and its correlation to the progress of Covid 19 – this chart became a lot more relevant to market participants.

So, was last week a big trend reversal in equity markets or simply another batch of noise? It is too early to say for sure but speaking to a number of different market contacts this week – it certainly seems that some of the bigger boys, who bought in early April, were indeed taking profits this week.
Time will tell – but we are happy to remain hedged as we see how the rest of June plays out.
By Charles Gillams on 07/06/20 | Overview

Last Week
To describe investors as smug this weekend, would barely cut it. It seems only the amateurs ran screaming from the theatre with their pants on fire in March. The professionals just got to work. So now most portfolios are sitting back about where they were last December, except with far more of the stocks you want, acquired at bargain prices. Even the utter dogs, that were so cheap you dare not sell them, have rocketed back up. While the chance to harvest gains and re-enter at nice prices, within tax shelters has been superb. It is the nuts and bolts work of portfolios, but essential.

So rather than opine much on a frankly crazy market, (beyond saying the shift into the "pack ‘em in” stocks that require extreme personal proximity, is entirely a vaccine trade) and certainly resisting venturing into any hint embedded in our title of politics North of Hadrian’s Wall, some choice words from an industry veteran, the management of the eponymous trust, caught our eye.

Edinburgh Eye
"There’s not much evidence that capital market ideology will take much notice of the crass failings of its prescriptions. Managers and consultants will continue to talk to themselves of tracking errors and Sharpe ratios as risk controls (the reader is fortunate if they are unexposed to those terms) whilst their clients suffer. The curriculum of the ever more dominant Chartered Financial Analyst (CFA) will not change although its teachings bear little resemblance to market outcomes.

These comments are meant to convey meaning beyond irritation. The opportunity for us in the last decade has come about because stock markets do not learn. This is unusual. Normally investors, speculators and traders leap restlessly onto new paradigms however questionable their underpinnings. But that hasn’t happened despite, for example the clear evidence of the power of the internet, the increasing returns to scale it tends towards and the consequent deep competitive moat it offers. Instead of embracing exponential growth, investors and asset allocators have fled. Performance chasing has its own evils but replacing it with endless rebalancing towards ‘value’ strategies backed by a blind conviction that reversion to the mean has been an investment tragedy. It’s largely been prompted by misguided theorising. But the theory has been reinforced by the extraordinary grip that Warren Buffet has exercised over the investment world.”
They go on, after pummelling Mr. Buffet and bemoaning Silicon Valley’s decay (sic) into near irrelevance, enlivened only by the genius of Musk.

"The investment management industry is ill-equipped to deal with the behavioural and emotional challenges inherent in today’s capital markets. Our time frame and ownership structure help us to fight those dangers. We are besieged by news, data, opinion. The bulk of this information is of little significance but it implores you to rapid and usually futile action. This can be particularly damaging at times of stress. Academic research argues that most individuals dislike financial losses twice as much as they take pleasure in gains. We fear that for fund managers the relationship is close to tenfold. Internal and external pressures make the avoidance of loss dominant. This is damaging in a portfolio context. We need to be willing to accept loss if there is an equal or greater chance of (almost) unlimited gain.

We are very dubious about the value of routine information. We have little confidence in quarterly earnings and none in the view of investment banks. We try to screen out rather than incorporate their noise. In contrast we think that the world offers joyous opportunities to hear views, perspectives and visions that are barely noticed by the markets.”

Strong stuff. Although perhaps not as fearsome as it seems, they fight shy of taking on the bizarre and archaic legislation sourced from the American insurance industry that has been grafted on en masse, by idle Westminster legislators, into UK securities legislation. Hence all that risk aversion.

UK Share Market Legislation Template
The FCA can of course simply say it is only following orders. One day, hopefully, it will have the spine to query them.

All markets will be shaped and respond to the legislative framework that is imposed on them, if markets are misshapen, look at the weirdly mandated rules the CFA industry is adhering to, as much as its own inherent folly. Enacted at the same time as some other nonsense (like laws to promote diesel engine cars) it is weird that dud financial sector legislation persists, as it ruthlessly destroys our investing environment.

Buffett of course now has egg on his face over airline stocks, where he bailed out of big positions in a panic at seemingly poor prices, itself a rookie error. Indeed, he exhibited little of the basic professionalism of adding to positions at the lows; others had to make the running instead, the baton it seems is truly passing.

Preference for the Unquoted Sector
Nor is Scottish Mortgage itself so bombproof, the ideologues of change deride traditional public company ownership structures and seek ones that are rigged against investors, who they see as sucking out dividends, to the detriment of innovation and investment.

But that drives them ever deeper into unquoted markets, and they are also rightly sensitive to comparisons with another fashionable fund management house that built up big illiquid stakes. Looking at their allocation of new capital, we can see that little of it now goes to quoted markets, indeed their quoted holdings proudly show a heavy bias to stocks first owned in the unquoted world. The familiar alphabet soup of private equity stock classes and rights is opaque and although disclosure (by industry standards) is excellent, it is broad not deep.
Many unquoted ingredients (if not the recipe itself) can be had elsewhere (such as in Pantheon International) a mere £1 billion pound trust still selling at a 24% discount to net asset value. Which also implies, as Scottish Mortgage ploughs deeper into unquoted stocks, (it is seeking consent to raise the level to 30%) it should logically then start to open that unquoted discount up on itself.

Although frankly unquoted valuations are anyone’s guess just now, will be all year, until audits start to expose which hulls are sound, and which got fractured on the rocks, as the tide melted abruptly away. After the tsunami they will all still float, but for how long?  We will all be taking a view, given timely access to the raw data.

What too of the home turf for this far sighted manager? Well the UK had a puny 3% representation in March 2019, and in the ensuing year that fell through sales and poor performance to 1%. In other words, zip.

At a time when we seem indifferent to capital flight, when the zeitgeist bemoans a lack of self-sufficiency, you do wonder at what point the crippling failure of UK public markets and investments to generate wealth, and allocate capital, will finally be spotted by the mandarins in London, and they will take heed of their utter failure to regulate a financial system incapable of fulfilling its most basic functions. When will they stop loading it with regulations and asinine virtue signalling that leave the nation defenceless and dependent?

Our brightest and best are it seems desperate to send their funds to the four corners of the globe, to the welcoming arms of tyrants and despots, rather than take their chance with a capricious and inept UK government. 

Looking at Performance at Scottish Mortgage
But what has happened to performance for Scottish Mortgage? Well in the last decade the fund has quadrupled in size, it sits at a market capitalisation of over £10 billion and has fairly steadily traded at a modest premium to net assets. I guess on that record, James Anderson has earned the right to be forthright.

My thanks to Baillie Gifford for their consent to using the above selective quotations from the 2020 Scottish Mortgage Investment Trust PLC Report and Accounts, and studious editorial indifference to our musings.

The quotations are theirs; the commentary and implications ours alone.
By Ciaran Mulhall on 31/05/20 | Overview

President Trump continues to try and pick a fight with China, even as China in turn sabre rattles at sensitive pressure points, from Hong Kong to Kashmir. It looks like Trump may therefore have decided to abandon his "trade deal” with China in the hopes of scoring some political points (blaming China for concealing information on the pandemic) ahead of the November election, just as we feared a couple of weeks ago.

We thought instead of puzzling about all that posturing, we might try and take a look at what is actually happening on the ground in the United States.

Looking though April’s US National Income data it appears that American households have had an interesting crisis so far. While the past few months have obviously been a stressful time as millions have lost their jobs or been furloughed, through the end of April at least, the fiscal response has, it seems, easily bridged the income gap.

With spending constrained by lockdowns, this has pushed savings rates up substantially in the U.S. and indeed across the world. While it will be natural for spending to increase once you can do so (as America begins to reopen), a key question moving forward is whether households will engage in more precautionary savings. That is if the scares of the last few weeks and a concern about a "second wave” in terms of the pandemic, will discourage people from opening their wallets, thereby keeping the savings rate at or close to its historic high (see chart below).
Figure 1 United States Personal Savings % of Disposable Income

The response to the 2008 crisis also indicates a fall in spending and hence a rise in net savings (or reduction in debt) is a likely consumer response to uncertainty.

If so, this in turn raises some doubt about how long "money printing” can prop up asset prices, unrelated to real demand in the economy. If economic activity stays suppressed, in other words the Panglossian "V” shaped demand recovery fails to arrive, the equity market will not be cheap, despite the sharp drop in the risk-free rate of return (on Treasury Bills).

Individual experiences can differ from the aggregate, but the American public seemed to have weathered this crisis well through the end of April. Bloomberg analysis suggests aggregate job losses pushed wage compensation down some $1.07 trillion, since the end of February on an annualized basis, while enhanced unemployment insurance gave back some $404 billion--roughly 3/8 of lost income. But government stimulus checks added another $2.6 trillion (again, on an annualized basis), meaning that aggregate household income in April was some 8.1% higher than it was in February. Add in a record decline in spending (see chart below) and for a month at least, household balance sheets look like they are in great shape.

Figure 2 United States Personal Spending YoY %

The obvious hole in this argument is that the stimulus cheques were a one-off boost, that will possibly be absent in May and beyond. Sure, unemployment insurance represents a pay raise for the lowest income bracket, but there are plenty for whom it does not.

Still, the idea that the public "got a massive pay rise for not working” may be a theme that bears watching in the coming debate about further stimulus. It seems to be a line that the Republicans have already latched on to.

To date, however, the impact seems inarguable; the latest money supply data shows (again from Bloomberg) that savings deposits have risen by $1.5 trillion, or 15%, since the end of 2019. There is perhaps an element of "fighting the last war” here, so determined are policy makers to prop up credit markets this time round, despite a very different causation, and indeed despite very solid bank balance sheets, that a flood of money (and debt) has been let loose.

Nor are higher savings just a U.S. phenomenon, we also saw a sharp rise in French household savings rates in the first quarter (currently at 20%). If you want a snapshot of the impact of the fiscal stimulus, look at how the U.S. savings rate rose above France’s for the first time in recorded history. Likewise, projections for the UK show the savings rate moving well into double figures.

What is notable, however, is that American savings rates have already been trending higher ever since the GFC in 2008. So that is one change that may also continue; memories are long it seems.

Where this goes from here is anyone’s guess but hoping that the US consumer will drive growth over the next few months to us seems somewhat unlikely. It is hard to read, as clearly pent up demand will be evident for some months, especially where supply chain disruption leads to shortages. In turn that will cause inflation (as anyone buying masks or gloves of late can attest). But that demand surge will then fade in the same time period that the welfare cheques also start to fall away.

Overlay all that uncertainty, with the four-yearly jamboree of buying votes on the tick, suggests numbers that are going to be rather harder than usual to read, for some while yet.

In the absence of hard knowledge, we expect an even more sentiment driven market than normal. 

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