The way in which the Federal Reserve has attempted to combat the economic effects of the coronavirus pandemic is very different to how it steered the US economy out of the 2008/2009 Global Financial Crisis. During the previous crisis, quantitative easing (QE) proceeds were directed almost exclusively towards repairing the balance sheet of major financial institutions.
Banks were provided with fresh liquidity but came under no corresponding pressure to lend that liquidity out into the real economy. Consequently, whilst the money supply expanded significantly, that additional money was not channelled into the hands of consumers, and thus had little impact on aggregate demand.
The Fed have obviously learned from the previous experience and the response to the virus has ensured that QE proceeds this time around have been directed to small and medium sized companies as ‘covid loans’. The impact has been to keep struggling businesses afloat whilst they are generating little, or no, revenue. Governmant debt is effectively financing payrolls. However, whilst this money has found its way into peoples’ pockets, the opportunity to spend has been severely curtailed.
How do we know this? The savings ratio in the US (the percentage of one’s monthly income that is saved rather than spent), shown below since 1990, has been running at extreme levels since the end of the 1st quarter 2020:
In April, for example, this rate hit a historic high of 33%. For reference, the previous record high was 17.3% in May 1975. Reinforcing this was a statement at the time by Bank of America, which has accounts for about half of American households, that current accounts have 30% to 40% more money in them compared with 3 months previous.
Whilst still running at historically elevated levels, (August’s figure was 14%), the savings rate has slowed a little recently, and there has been a corresponding improvement in the rate of US economic activity. This means that we might be approaching a turning point where some of that liquidity begins to find its way back into the economy, and that we start to see an uptick in inflationary pressure. If that scenario is correct, gold and equities are likely to outperform.
If we look for further evidence, there are definite signs of improvement.
New US business startups have risen to 3.2 million this year vs 2.7 million through the same period during 2019. Rising demand has generated 1.5 million new unfilled job openings over the past three months in the US. This is indicative of a moderately growing economy at the start of 4Q 2020. Finally, the US Institute of Supply Manufacturing (ISM) Index rose to 56.0 in August, having fallen to 41.5 during the depths of lockdown.
The US is already evolving into the “new now”.
Mask wearing, social distancing and improved hygiene have been the keys to fighting Covid. Targeted lockdowns of individual hotspots appear to have reduced the spread, and it appears that a second wave will be more of a health care challenge than an economic one.
The fight against Covid has also significantly affected the normal global flu season. In the US, measures to stop Covid in April and May appear to have brought an abrupt end to the 2019-2020 flu season. This is also true for the southern hemisphere, where far less people are contracting or dying from conventional flu. Covid has killed substantially more people in the southern hemisphere than the flu usually does, but the measures taken to address the pandemic have virtually stopped the normal seasonal flu. This should also be borne in mind when assessing the economic impact of Covid.
A British Medical Journal article from 2007 estimated that seasonal flu costs the US $90bn in lost revenue in 2003. Given the size of today’s economy, that would suggest a ‘positive’ impact on the US economy from a reduction in the effects of seasonal flu of about $170 billion.
In addition to this, US seasonal flu has been responsible for as many as 800,000 hospitalizations in a bad year (2017-2018). A ‘mild’ conventional flu season usually sees around 150,000 hospitalisations, which means that, in real terms, Covid measures may have prevented 650,000 hospitalizations for the year, acknowledging that a reasonable percentage of this additional capacity has been directed towards Covid treatment.
Elsewhere, the Chinese economy has been recovering in a V-shaped fashion for several months now and consumers have begun to spend willingly again. August retail sales increased 0.5% year-on-year, whilst car sales also rose 12% from a year ago. A host of high-frequency, independent, real-time China consumer indicators that we follow (including property prices in 70 key cities, domestic airport passenger flight growth and express package delivery growth) all indicate a sharp uptick in spending patterns.
Turning to heavy industry, Industrial production, electricity production and railway freight transport growth figures all rose in August, while the aggregate unemployment rate was slightly lower.
China was the only country for which the International Monetary Fund projected growth this year in its June forecast. UBS predicts over 8% growth for China's economy in Q1 2021. Perhaps most significantly, the World Bank’s latest report has also forecast a projected growth rate for China of 7.9% for the year ahead, adding:
“The East Asia Pacific region has largely kept the pandemic from worsening, unlike Europe and the Americas, which is considered a huge potential advantage over competitors in the West, with long-term implications for greater investment into Asia”.
US and Chinese data turning more positive underscores TEAM’s positive outlook for equities over the next 12 months, and we remain particularly optimistic for East Asian markets over the period.
Throughout corporate history, the combination of demographics and technology has resulted in sustained periods of above-average profit growth for those companies that have been correctly positioned. At TEAM, we apply a disciplined, thematic investment process that structures our portfolios for the world that will be, not the world that has been.
Cut through the noise. Don’t worry about short-term political events. Don’t fixate on potential US election outcomes. Focus on what you can control. In our case, that means devoting our efforts to identifying the most attractive companies from around the globe and patiently waiting for earnings to come through.
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