One of the arguments supporting a Roaring Twenties thesis – and the return of inflation – is that there’s a lot of money sitting on the sidelines waiting to be spent. Investors tend to think this means waiting to be invested but most people don’t invest – they save or they spend.
Crucially there is inequality to this saving. We all know the big story about inequality in society, but the micro-dynamics here are important. A minority of consumers/citizens boast much more savings than the average. In reality, savings are hugely skewed to the top 10% – as are stock market investments.
So, when we see data that suggests there is a lot of money sitting on the sidelines waiting to be spent, what we actually mean is that a minority of people have a large amount of money sitting on the sidelines.
One other point worth repeating. The K shaped narrative about the recovery contains an important truth. Many businesses – not most but more than a tiny minority – are actually booming. And I don’t just mean Amazon or Google. My partner talked to a rat catcher (chickens, who’d have guessed!) who said that the pest control industry had a record 2020. As have more than a few rather ordinary sectors. The pet care industry. Check. Supermarkets. Check. My local home supplies store. Check. Bakers. Check. The list is long and varied. Put simply many industries and many employees in those industries have had an excellent 2020. As a result, many, many people have a lot more money in their pocket now.
How much money might be out there, waiting for a home?
One interesting clue came in a piece on inflation risk by the New York Times excellent Neil Irwin – from their Upshot publication. You can read his piece HERE
Here is the relevant nugget of information:
“Here’s a number that came out Friday you might have missed: JPMorgan Chase said its total deposits were 37 percent higher in the fourth quarter than a year before, a rise of $582 billion.
It’s a little shocking for what was already the United States’ biggest bank to experience such a vast rise in deposits, but not exactly surprising if you’ve been following the economic data. From March through November, Americans saved $1.56 trillion more than they did in the same period of 2019, reflecting a pullback in spending combined with federal spending that, in the aggregate at least, offset the loss of income from job losses.
And that’s before the $900 billion pandemic aid package Congress passed at the end of 2020, which includes $600 per-person checks to most Americans, and before whatever emerges from President-elect Biden’s plan to spend an additional $1.9 trillion, including a further $1,400 per person.
That is an enormous amount of money sitting in savings — whether in an account at JPMorgan, physical cash or invested in stocks and other riskier investments. So what happens if everybody starts spending at once?”
Another perspective comes from US fund managers at the Collaborative Fund in THIS excellent post.
This eminently sensible piece points out that personal income in the US is currently ABOVE where it was January 2020. Household debt servicing payments as a share of income are also at near RECORD lows. And the personal savings rate is at near-record highs. All probably due to massive government fiscal stimulus – and that inequality I mentioned earlier.
Again, here is the key part of this narrative, in terms of income.
“Last year was the best year for income in American history. By far. It’s not even close. A lot of the surge came from stimulus payments and unemployment benefits. But private wages and salaries are back at a new high. So are average hourly earnings. And weekly earnings. These are not small numbers: Americans made $1 trillion more from March to November of 2020 than they did from March to November of 2019.”
And another insight …on credit cards
“Credit card balances declined by more than $100 billion over the last year. Americans have less credit card debt today than they did in 2007, despite an economy that’s 48% larger and has 30 million more people. There is no precedent for balances falling more than 10% in one year. But it just happened….. In aggregate, mortgage payments as a percent of household income have declined from 7% of income in 2007 to less than 4% today, now a new generational low”.
Now the fly in the ointment here is that these consumers might not spend their money very quickly if China is anything is to go by. There, although the local economy has picked up sharply, local consumers are still holding back. My sense is that the vaccine will be the key catalyst. But once we get close to herd immunity (either via infection or vaccination), my guess is that money will stay on sidelines. But when that caution is lifted my guess is that we’ll see a tsunami of money spent…