US - ADDICTED TO STUFF - Arca Fondi
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Aprile 2021
US — ADDICTED TO STUFF
People obsess about post-Covid debt. But the reality, as the pandemic begins to wane, is that private
sector balance sheets (in aggregate) are healthy. They’ve been boosted by forced savings and buoyant
asset prices. Fed up of doing nothing, people are itching to spend. The government is not shirking either.
High deficits are going to persist amid ongoing transfers to the private sector and higher discretionary
spending to keep the economy humming. Only heretics mumble austerity. Demand will show up
everywhere, higher external deficits, higher corporate profits but also higher prices. In fact we haven’t
seen conditions like this since the late 1980s. Boom times for now.
There have been numerous papers written of late, drawing comparisons between the outlook for the post-Covid
world and the so called roaring 1920s. This seems odd. For many, the 1920s were actually pretty grim. Europe
was recovering from the war to end all wars, troubled by recessions and reconstruction costs. Even in the US,
where growth was rapid, we saw quite a bit of volatility, with three technical recessions before the big one hit at
the end of the decade.
This looks far from removed from the conditions of today. Sure we’ve had Covid. But there has been no capital
destruction. Even human loss avoided the productive sectors of the economy, to look at it through a crude macro
lens. In many respects, today’s economy and society look more like a coiled spring than a populace that is weary
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and exhausted. A more appropriate time comparison to
make is probably the latter half of the 1980s, where the
rapid liberalisation of developed economies unleashed
the last real organic demand boom. That is where you
need to focus if you want to go back to the future.
The post-Covid bounce isn’t going to be your regular
recovery. While the pandemic hit certain sectors of
the economy and millions of individuals hard, for many
there have actually been material improvements in their
economic positions. That comes as a result of generous
transfer payments and the forced thrift imposed by
lockdowns and restricted social and economic mobility,
which are visible across the developed world. This shows
up in everything from savings rates to bank deposit data
and credit.
Looking at the US, households have accumulated
around US$2-3trn in excess savings since the start of
2020 (Figure 1). That’s around 9% of GDP and closer to
13% of household disposable income. The $16trn stock
of savings compares to total household mortgage debt of
$11trn. And these gains pale compared to the surge in
household net worth, which has been juiced even further
by rising asset markets. Indeed, based on the historical
relationship between savings and net worth we should
expect to see the savings rate drop back towards 5%
over the next couple of years (Figure 2), amplifying the
natural recovery we should see in demand.
And more is to come as President Biden’s spending
plans wash through. The third round of stimulus
cheques paid in March is hitting an economy that was
already recovering strongly. We can see an increased
willingness to spend in the data even before this money
hit. Whereas at the onset of the crisis worried Americans
squirreled away nearly all of the stimulus cash paid out,
by the time the second cheques landed in January, 35%
was spent immediately (Figure 3).
The liabilities side also continues to improve. Consumer
credit has been shrinking as households have used
free cash flow to pay down debt. Mortgage borrowing,
transaction volumes and prices have all surged as
wealthier householders — now spending more time at
home — have been tempted into moving. This is not
the distressed adjustment you typically see in recessions
and certainly not the pattern we saw during the sub-prime
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crunch! In fact, the market has bifurcated between the
low-risk (where mortgage delinquencies have risen) and
high-risk ends of the credit spectrum. Any widespread
tightening of credit conditions that such developments
would normally trigger have been almost completely
avoided. And this backdrop looks set to persist amid very
low housing inventory levels, an offset to a probable drop
in transaction levels due to the recent rise in mortgage
rates. That’s not to be confused with the earlier drop
in financing costs (low rates which borrowers locked in)
and a preference for these cheaper mortgage deals over
pricier consumer loans.
The reality is that consumer balance sheets are in rude
health and flush with liquidity. Having been cooped up
for the best part of a year in many cases, they have
an unprecedented spending itch to scratch. Big ticket
items shunned during uncertain times are likely to be
big winners as are services missed during lockdown
— dining out with friends, concerts, holidays and alike.
Book early!
But the gains do not end there. The forced changes
imposed on society will leave a lasting effect on many
people’s lives. Huge numbers of workers will find
themselves liberated from the office-based nine-to-five
routine. The office isn’t going to die entirely, but its role
will be transformed with more flexible working conditions.
And that will change both the daily grind and consumption
habits. While working lives will continue to be rapidly
digitised, demand for the services that suffered most
acutely during Covid will rebound strongly. Less dead
time and dead money spent on commuting for instance
will free up resources that can be used elsewhere. Bad
news for the downtown barista but great news for the
local brunch place and gym.
Demand from the consumer side is not the complete
equation of course. Many businesses not directly
affected by the restrictions seem to have managed to skirt
the pandemic relatively effectively. A good barometer of
This memorandum is based upon information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell
or a solicitation of an offer to buy or sell the securities mentioned herein. Independent Strategy Limited has no obligation to notify investors when opinions or information in
this report change and may disseminate differing views from time to time pertinent to the specific requirements of investors. Independent Strategy Limited is authorised and
regulated by the Financial Conduct Authority in the UK. Save for any liability or obligations under the Financial Services and Markets Act 2000, Independent Strategy Limited
accepts no liability whatsoever for any direct or consequential loss arising from any use of this memorandum and its contents. It may not be circulated to or used by private in-
vestors for any purpose whatsoever, or reproduced, sold, distributed or published by any recipient for any purpose without the written consent of Independent Strategy Limited.
3
this is investment spending. And the data for that are
very encouraging. Not only was the decline in capex
modest compared to typical downturns but the recovery
has been swift and robust (Figure 4). Furthermore,
inventory levels are low which will further support the
recovery. The Federal Reserve Bank surveys and PMIs
corroborate this tone, all reporting brisk growth in new
orders.
And like consumers, corporates will also benefit from
ongoing fiscal largesse, directly and indirectly. The
federal government will still be running an 11% of GDP
budget deficit this year (down from 14.7% last). Gone
is the austere logic that drove decision-making after the
GFC; today’s tone is that the risks of not doing enough far
outweigh the risks of doing too much. Biden’s US$2trn
infrastructure package is further evidence and more is
planned for education, social services and health. That’s despite signs the overall economy is moving quickly
back towards business as usual and the strong balance sheet the private sector has emerged from the crisis with.
So the outlook for this coming year is a stark contrast to last, where the fiscal push was needed to basically offset
the forced savings of the private sector (Figure 5).
Now, with all three sectors effectively dissaving, a number of things are likely to happen. First, the external deficit
will widen, driven by the recovery in domestic demand. America’s current account balance came in around -3.0%
of GDP last year; it could well be double that this year as the relative outperformance of the economy boost
imports over exports and the persistence of Covid slows recovery elsewhere. US dissaving will require more
foreign investors. But the market seems to be moving to facilitate this with the rise in medium and long-term US
yields. And the traditional export powers will end up with more dollars for their reserves pile anyway. This is a
strong dollar story, not a weak one.
This excess cash is also likely to feed into higher corporate profits as households and the government boost
consumption. It’s a story that is going to be kind to margins. But it could also feed into prices. While digital
goods are not supply-constrained, many of the things consumers are going to want are. We’ve already seen a
big increase in shipping rates. And certain inputs are also supply constraints. Most topical are the stories of chip
shortages, and this doesn’t simply cover the latest cutting-edge silicon but more of the rudimentary stuff: the chips
that make millions of fairly mundane goods tick. Demand drivers are also likely to be present across services.
Alongside the base effects from the disruptions of the past 12 months, headline inflation rates could end up looking
healthier than they have in a while. Deglobalisation trends also feed into this reflationary narrative.
The last time we saw these type of demand conditions, certain (optimistic) individuals were cruising round in their
convertibles, hair gel excessively applied, with Robert Palmer at full volume.
Policy makers meanwhile seem committed to staying behind the curve; the Fed wants to see inflation sustainably
above 2%. Such aims proved merely hopeful in the last cycle but macro conditions post-Covid seem to be rather
more favourable. We’re not going to get 1980s bond prices, but pressure on yields should remain on the upside.
We are short US 10-year Treasuries.
4
There are a few risks of course. To what extent will the most burdened sectors and the associated workers that have been displaced impact the recovery? While businesses as a whole saw a rise in net savings, those most acutely impacted by the pandemic required billions of debt and support to stay afloat. Will this lead to more permanent scarring? Looking at the unemployment insurance claims data there is a large sticky group that remain out of work as a function of the pandemic that do not show up in the headline unemployment rate (Figure 6). But assuming the shuttered areas of the economy can return to normality these jobs (or similar) should come back. We’re optimistic based on spending power and the ability of flexible businesses to capture such opportunities. Or as Mr Palmer might phrase it, we might as well face it we’re addicted to stuff. This memorandum is based upon information available to the public. No representation is made that it is accurate or complete. This memorandum is not an offer to buy or sell or a solicitation of an offer to buy or sell the securities mentioned herein. Independent Strategy Limited has no obligation to notify investors when opinions or information in this report change and may disseminate differing views from time to time pertinent to the specific requirements of investors. Independent Strategy Limited is authorised and regulated by the Financial Conduct Authority in the UK. Save for any liability or obligations under the Financial Services and Markets Act 2000, Independent Strategy Limited accepts no liability whatsoever for any direct or consequential loss arising from any use of this memorandum and its contents. It may not be circulated to or used by private in- vestors for any purpose whatsoever, or reproduced, sold, distributed or published by any recipient for any purpose without the written consent of Independent Strategy Limited. 5
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