Is it a smokescreen, or is the savings rate exploding? Something unprecedented seems to have happened in the near-term aftermath of the passage of the massive $2.2 trillion CARES act: as a result of the massive unprecedented transfer of wealth from the deficit creating government to consumers in the form of countless stimulus measures, personal incomes soared [many due to the massive enhanced $600.00 additional weekly unemployment, and the forbearance “no need to pay” rent, school loans, mortgages of auto loans ] while personal spending plunged (as the economy was largely shut down especially for spending on services like restaurants, bars, and movies etc.), resulting in an explosion in the annualized amount of Personal Savings, which soared by a mind-blowing $4 trillion in this past May, rising from $2.1 trillion to a staggering ~$6.0 trillion a massive new record of 33% disposable personal income! Interestingly contrary to CNBC-hyped expectations that rational and logical consumers would promptly use this income wealth transfer to pay down debt and get their financial affairs in order, [what a joke] as many turned into speculators and spent those government checks to buy stonks. I only bring all this up because the US savings rate, which has since dropped of substantially as a result of the gradual reopening of the economy as Americans have been spending a significant portion of their precious Covid-19 stimulus checks; will likely soar again (potentially a NEW-record) when the latest personal spending and income data is released next month to account for the passage of the recent $964 billion stimulus package, and then it could soar like a rocket-ship, once Uncle Biden's various Covid-19 stimulus programs kick in.
Let us reflect upon the potential Tsunami wave of stimulus that is about to sweep over the US economy, both the consensus and apparently the Biden administration economists seem to be ignoring just how Covid-19 containment measures can delay the benefits of fiscal stimulus. In 2020, fiscal authorities were operating blindly and ignorantly as no amount of fiscal stimulus was going to revive the devastated service sector. The stimulus boosted some goods spending (panic hording) and some of what would have been spent on services went into such goods, but a major portion went into excess savings. This is one reason why the multiplier effects of the stimulus were quite low.
Will all these government transfer payments (taxpayer debt laden debt) and excess savings send the economy into and inflation overdrive...as the 3rd substantial stimulus in 12 months, following the $2.2 trillion CARES act and the $934 billion bipartisan relief bill that passed in December will likely lead to an even stronger economic tailwind than many expect...unfortunately it is extremely hard to know how much of this pent up spending power will be released and deployed when the economy reopens as I simply do not have any historical data of real experience to draw upon. However, logic and common sense suggests that this wave of stimulus will be quite a bit more than the effective stimulus last summer as much of it will be focused on services: So, we should expect there to be a rotation of the consumer basket towards experience-based spending from goods spending once the virus is sufficiently contained and as folks feel comfortable reengaging in pre Covid-19 activities.
Of course, it will take some time to see how this potential liquidity-transfer “bailout” plays out, but as I pointed out last week, we have already seen a significant boost to spending in the first half of January. It will also take some time to figure out how much of the Uncle Biden $1.9 trillion bailout package is going to pass (consensus appears to believe that the final number will be around $1.25 trillion). And we will not know the lagged impact of fiscal stimulus on the service sector economy until it starts to reopen.
Please also consider that the “Personal Savings” rate data likely does not include the fact that millions of Americans are now working from home. They are not commuting (buying gasoline, paying for parking, needing more-frequent auto service, taking fast-food meals on the fly, paying tolls etc.). They are not buying lunch, snacks, and beverages in high priced shops, kiosks and restaurants set up to service the American cubicle farms. They are not getting haircuts, manicures, beauty-makeovers as frequently. They are not buying business clothing as frequently. When at home are making their own meals as demonstrated by increasing grocery store sales paired with sharp declines in restaurant sales (seems quite logical right?). And they are using the money they are not spending to pay down some debt (but not rent and mortgages).
Note that most of the hype of consumer savings rates have been the TBTF-bankers. They are not saying people have burgeoning savings accounts. They are increasingly concerned that folks are not seeking money from banks (borrowing) as much as they used to. In the great USA Debt-farming is far and away the largest and most lucrative enterprise in America; vastly outstripping the actual buying and selling of goods and services. When Americans owe less debt to the TBTF banks, bankers become uncomfortable.
However, variants of Covid-19 as I predicted months ago could develop and could force new shutdowns and delaying the recovery. Now for the bad news because while the FED is so overly confident that there is absolutely no basis for expecting a surge in inflation, if I am correct and the overall US household savings soars to over $2 trillion and then is deployed aggressively in the coming months into the weakened economy due to pent-up-desires for services and things I guarantee that prices will rise sharply in the 2nd half of the year...which incidentally when I expect a market implosion to start! Because once even the omnipotent FED concedes that fiscal and monetary policies have unleashed a huge wave of inflation, the FED will once again be boxed in a corner and will be forced into having to aggressively start tightening financial conditions, especially if inflation surges above their “BS” 2.5% threshold.
Curiously: This past week’s, preliminary Markit PMIs were released for January, interestingly (as we predicted they would) the headline numbers ticked up. The release also showed unfortunately that input prices for services exploded higher again, to another all-time high. Unfortunately, those higher input prices have not yet fully made their way through to prices charged for said services. Given the close relationship between input prices and prices charged, we should expect prices charged to consumers to rise higher over the coming months. This makes logical sense since service providers will naturally seek to protect their so-called profit margins. Also interesting was that core personal consumption expenditure prices, which is the FED’s “BS” preferred inflation indicator, also appears ready to move considerably higher in order to catch up to the increase in overall input prices. This has obvious negative inflation implications for FED policy. Do expectations for rate hikes get pulled forward? Or, does the lecherous FED who serves the will of the TBTF-bankers, the elite and politicians just sit back and watch as prices move to and through their bogus inflation target...they have alluded to the premise that they will do the latter, and we may soon see how strong their real commitment is. The market implications here are pretty straightforward as tapering is tightening. Pulling rate hike expectations forward is tightening. Allowing inflation to run hot while doing nothing could be seen as a strange de facto easing, which could give even more fuel to the cyclical trade and make those inflation hedges like precious metals even more attractive.
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