Macro Roundup

Good blog post from FRBNY that makes the case that the excess savings accumulated over the past year are unlikely to generate a demand surge as the pandemic recedes, "... these savings are not that excessive, when considered against the backdrop of the unprecedented government interventions adopted over the past year in support of households and that they are unlikely to generate a surge in demand post-pandemic...."

Their argument in terms of accounting identity the excess savings derive from excess (pandemic related) government spending, “…Excess savings are the accounting counterpart of “extra” government debt. According to the principles of national income accounting, the flow of private saving (by households and businesses) must be channeled to one of three uses. It can finance investment, be lent abroad, or lent to the government. In 2020, the U.S. government spent roughly $2 trillion to fight the COVID-19 recession, most of it financed with debt. The $1.6 trillion in “excess savings” is the accounting counterpart of this increase in government borrowing.As is often the case with accounting identities, this observation has limited economic implications. It does not reveal why households accumulated the “excess savings,” nor whether they will spend them once the economy fully re-opens. Nonetheless, it helps us to consider them under a different light—not as “extra” resources ready to be spent, but as the flip side of the extraordinary fiscal effort to fight the COVID-19 pandemic….”
In practical terms they believe this plays out as follows, “…. Excess savings are mostly held by…savers. One reason why many economists do not associate the exceptional increase in government debt over the past year with an imminent explosion in aggregate demand—even though they might worry about it for a host of other reasons—is the idea that government debt is money that citizens owe to themselves. As such, it would not represent “net wealth” that is ready to be spent. In economics jargon, this idea is known as Ricardian Equivalence. According to this proposition, public transfers financed with government debt do not affect consumption because households save them to pay for the increase in taxes that will eventually be necessary to repay that debt. If Ricardian Equivalence held, the marginal propensity to consume out of debt-financed transfers would be zero, and the resulting savings would never be spent. Ricardian Equivalence is the kind of theoretical benchmark that economists love, but it clearly does not hold in practice. In fact, many U.S. families did spend a significant share of the checks and other income support that they received during the pandemic. According to available estimates, this share is around one-third on average. The rest was used to pay down debt (also about one-third) or otherwise saved. It is hard to know exactly who holds these savings, but it seems reasonable to assume that they are individuals and families with a bit of a buffer in their budgets—and whose consumption decisions are therefore less sensitive to their immediate economic circumstances. This is presumably what allowed them to save part of the support they received. According to economic theory, these savers are more likely to be Ricardian, and hence to continue holding on to these savings. Of course, their economic circumstances might change in the future and they might find themselves in need to spend those accumulated resources, but the end of the pandemic in itself is unlikely to turn them from savers to immediate spenders. If anything, fewer households should face financial hardship as aggregate conditions improve. Excess savings are unlikely to unleash pent-up demand for services. One caveat to the previous reasoning is that some of the “excess savings” might be due to a dearth of spending opportunities in the sectors of the economy most affected by the virus, such as travel and entertainment. If this is true, some of that lost spending could materialize once those sectors fully re-open…”

They estimate ~ 1/3 of the savings will be spent, an estimate in line with the 2008 “Economic Stimulus Act” (the Bush checks)“…How large is this “pent-up” demand for services likely to be? On the one hand, there is little doubt that many consumers will enjoy a few extra restaurant meals and perhaps splurge on a nicer vacation after such a long period without them. On the other hand, there is a limit to how many extra restaurant meals and vacations people will be able to enjoy. To have a sense of how much of this pent-up demand might be activated by the “excess savings” accumulated during the pandemic, recall that available estimates of the propensity to consume out of the CARES Act transfers is about one-third. This means that the average household spent about 33 cents out of each dollar received in direct payments. As it turns out, this estimate is in line with those based on previous transfers of this kind, such as the Economic Stimulus Payments of 2008. Therefore, the pandemic does not seem to have substantially limited households’ ability to spend the support that they received….”

Aswath Damodaran, "Interest Rates, Earning Growth and Equity Value: Investment Implications,"Musing On Markets, March 25, 2021, http://pages.stern.nyu.edu/~adamodar/

Aswath Damodaran on the relationship btw rising rates and stock values, highly situational, "...the effect of rising rates on stock priceswill depend in large part on the precipitating factors. If rising rates are primarily driven by expectations of higher real growth, the effect is more likely to be positive, as higher growth and margins offset the effect of investors demanding higher rates of return on their investments. If rising rates are primarily driven by inflation, the effects are far more likely to be negative, since you have more negative side effects, with risk premiums rising and margins coming under pressure, especially for companies without pricing power...."
His example, "...To see how changes in interest rates play out in equity markets, I started with a simple, perhaps even simplistic adjustment, where I look at quarterly stock returns and T.Bond rates at the start of each quarter, to examine the linkage. While the chart itself has too much noise to draw conclusions, the correlations that I have calculated provide more information. The negative correlation between stock returns and rate changes in the prior quarter (-.12 with the treasury bond rate) provide backing for the conventional wisdom that rising rates are more likely to be accompanied by lower stock returns. However, if you break down the reason for rising rates into higher inflation and higher real growth increases, stocks are negatively affected by the former (correlation of -0.078) and positively affected by the latter (correlation of.087).It is also worthnoting that none of the correlations are significant enough to represent money making opportunities, since there seems to be much more driving stock returns than just interest rates, inflation and real growth. I also updated my valuation (from January 2021) of the S&P to reflect current rates and earnings numbers, and played out the effect of changing rates on the intrinsic PE ratio for the index: In making these computations, I looked at three scenarios, a neutral scenario, where changes in the T.Bond rate are matched by changes in the expected long term earnings growth rate, a benign scenario, where expected long term earnings growth runs ahead of the change in the T.Bond rate by 0.5%, in the long term, and a malignant scenario, where earnings growth lags changes in the T.Bond rate by 0.5%, in the long term. Note that in the best case scenario, at least with my range of outcomes, where rates drop back to 1.00%, but long term earnings growth runs ahead of riskfree rates by 0.5%, the intrinsic value for the index is 3919, just above current levels. In the worst case scenario, where rates rise to 3% or higher, and growth lags by 0.5%, the index is over valued significantly. Connecting to my earlier discussion of how inflation and real growth play out differently in earnings growth, I would expect a real-growth driven increase in rates to yield values closer to my benign ones, where an inflation-driven increase in rates will be far more damaging for stocks….”

Across western advanced economies housing in booming, with the winner seemingly being places with lower population density that still have access to urban centers,“…American house prices rose by 11% in the year to January, the fastest pace for 15 years. Those in Britain increased by 8% last year, and in Germany by 9%. The pattern is seen in much of the rich world (see chart 1). Across the 25 countries tracked by The Economist, real house prices have risen by an average of 5% in the latest 12-month period. Only in Japan have they fallen….. Prices per square foot in London, for instance, are 40% higher than in surrounding counties. House prices in less densely-populated, but still commutable, areas of Britain have risen faster over the past year than more populous ones. A similar pattern is also evident in America (see chart 2)….”

Japan as an exception makes sense to me given the demographics.

Economist Staff, "House prices in the rich world are booming,"The Economist, April 3, 2021, https://www.economist.com/finance-and-economics/2021/04/03/house-prices-in-the-rich-world-are-booming