Investment Bulletins
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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