Macro Roundup

"...after a buying spree over the past decade or so, the region’s [East Asia} ten biggest economies now hold nearly $28trn in foreign financial assets, more than three times the amount in 2005 and equivalent to a fifth of global assets held by foreigners. Once-staid institutions that are little-known in the West—from obscure Japanese banks and Taiwanese insurers to South Korean pension funds—now wield heft in markets for assets ranging from collateralised-loan obligations (CLOs) in America to high-speed rail lines in Britain.... The Economist has looked at figures for the gross foreign financial assets for ten East and South-East Asian economies. We define these as total gross foreign assets excluding foreign direct investment by multinationals; our measure captures investment portfolios and bank lending, among other things. The combined foreign financial assets of our ten countries rose from around $8trn in 2005 to nearly $28trn in 2020, increasing the region’s share in global foreign-held financial assets by five percentage points (see chart 1).The composition of Asia’s savings hoard has also changed, strikingly so in some places. When Mr Bernanke conducted his analysis foreign-exchange reserves held by governments and central banks in our set of ten economies accounted for about half of a country’s foreign financial assets, on average. These had been stockpiled after the Asian financial crisis of 1997-98 as a bulwark against future currency collapse, and were held in safe, liquid assets. The average share of reserves has now fallen to nearer a third. Meanwhile, two-thirds of the stockpile now reflects an explosion in portfolio and other financial flows, as institutional investors in the region have hunted for yield (see chart 2)....But understanding what’s going on could become more important, if China follows the path of East Asian economies. Its reserves of more than $3trn dwarf its other financial holdings. A shifting composition of foreign assets is not a matter of destiny, and would require some loosening of China’s capital controls. But even a marginal move towards more portfolio investment could produce huge flows of capital. “Chinese insurers have a lot of interest in investing overseas,” says Rick Wei of JPMorgan Asset Management. “They want to diversify their holdings, increase returns and match their liabilities with longer-term assets.” Even after more than a decade of rampant growth in Asia’s private foreign assets, more may be yet to come...."

Economist Staff, "The $28trn global reach of Asian finance,"The Economist, January 10, 2022, https://www.economist.com/finance-and-economics/the-28trn-global-reach-of-asian-finance/21807121

The $28trn global reach of Asian finance

THE COUNTRIES of East and South-East Asia are renowned, even envied, for reshaping global supply chains. Less well appreciated is the extent to which they have redrawn the map of global capital flows. After a buying spree over the past decade or so, the region’s ten biggest economies now hold nearly $28trn in foreign financial assets, more than three times the amount in 2005 and equivalent to a fifth of global assets held by foreigners. Once-staid institutions that are little-known in the West—from obscure Japanese banks and Taiwanese insurers to South Korean pension funds—now wield heft in markets for assets ranging from collateralised-loan obligations (CLOs) in America to high-speed rail lines in Britain.

The shift is drawing the attention of financial watchdogs. In December the Bank for International Settlements (BIS), a club of central banks, concluded that Asian institutional investors had contributed to dollar funding stress in March 2020, as covid-19 first began to spread and markets panicked. Yet much about these financial interlinkages, and the risks associated with them, is still poorly understood.

Our sample of countries can be split into three camps. The wealthiest handful—Hong Kong, Japan and Singapore—hold significant foreign-exchange reserves, but their hoards of other financial assets are between five and eight times larger. Their holdings are now mature, and slower-growing by regional standards.

A bigger shift has taken place in South Korea and Taiwan. In 2005 almost half of Taiwan’s foreign financial assets, and two-thirds of South Korea’s, took the form of reserves. Although reserve holdings have since more than doubled for both countries, portfolio and other assets have expanded at a far more rapid clip. South Korea and Taiwan now own $1.5trn and $2.1trn in foreign financial assets, respectively, less than a third of which is held in reserves. In Malaysia, too, non-reserve financial assets now outweigh reserves two-to-one. By contrast, for a third set of countries, which includes China, Indonesia, the Philippines and Thailand, reserves still retain a large share.

The growth in foreign financial holdings has gone hand-in-hand with the transformation of conservative institutional investors into big players in distant corners of financial markets. A prime example is Norinchukin Bank, an agricultural co-operative based in Japan. It holds some ¥4.8trn ($42bn) in CLOs, securities made up of a portfolio of loans, most of which are denominated in dollars. Before it slowed purchases in 2019, it was widely considered the largest buyer of CLOs in America.

Taiwan’s insurers, such as Cathay Life Insurance and Fubon Life Insurance, have become influential institutions in a number of international markets. Their total assets have nearly tripled over the past decade. And more of them are now held overseas. By the end of 2020 almost 60% of their assets comprised foreign investments, up from 30% in 2010.

Such institutional investment is now so widespread that Formosa bonds, foreign-currency bonds issued in Taiwan by a range of global firms and governments, have exploded since the securities were designated as domestic rather than foreign debt, allowing insurers to skirt regulatory limits on foreign-security ownership. By the end of 2021 the outstanding value of dollar Formosa bonds alone was $195bn, compared with $84bn six years earlier.

South Korea’s National Pension Service has also sought more overseas exposure, announcing a flurry of global ventures. Foreign assets made up 37% of the pension fund last year, nearly double the share in 2013, and the firm aims to increase that to 50% by 2024. The strategy is to chase returns not only abroad but also in less-liquid asset classes, before the fund’s benefit payouts start to increase in the early 2040s and its revenue surplus turns to a deficit.

Malaysia’s Employees Provident Fund (EPF), which manages mandatory pension investments for the country’s private-sector employees, provides another illustration of Asian institutions’ foreign reach. Last year it launched what it called the world’s largest sharia private-equity fund, with BlackRock, HarbourVest Partners and Partners Group each managing a third of the allotted $600m. The EPF’s foreign assets have also climbed from 29% of the total in mid-2017 to 37% in mid-2021.

The result of all this activity is that Asian institutional investors have become enormous swing buyers in certain markets. “They’re disproportionately large in Australia,” says Martin Whetton of Commonwealth Bank of Australia. The country, he says, is the third-largest location of assets for Japanese life insurers, and tends to make up about 10-15% of their portfolios. Mr Whetton points out that purchases of Australian dollar assets in North Asia are large enough to shift the country’s cross-currency basis (the premium traders pay to temporarily exchange currencies).

Some institutions have made promises of guaranteed payouts to clients and, as interest rates have sunk to rock-bottom levels, have had little option but to hunt for yield in less highly rated or more illiquid asset classes. Industry insiders note that insurers in the region have moved increasingly into emerging-market debt and higher-yielding Asian bonds. Private, illiquid assets have also become more popular. Asian investors have long been drawn to private equity and property, says Anish Butani of bfinance, an investment consultancy. Now “we’re really seeing a surge of activity in infrastructure and private debt”.

To observers such as the BIS and the IMF, all this signifies greater financial risks than when more holdings took the form of safe, highly liquid reserve assets. Cross-border financial flows can be volatile and flighty, transmitting stress from one part of the world to another, and posing risks both to the buyers and the markets in which they participate. Although many institutions must pay clients in their domestic currencies, few appear to hedge their entire foreign-currency exposure. Private assets are harder to sell quickly at reliable prices, potentially posing liquidity problems should investors need to pull out. Precise, coherent figures on the composition, riskiness and liquidity of holdings are still hard to get hold of, making it difficult to gauge the overall picture.

But understanding what’s going on could become more important, if China follows the path of East Asian economies. Its reserves of more than $3trn dwarf its other financial holdings. A shifting composition of foreign assets is not a matter of destiny, and would require some loosening of China’s capital controls. But even a marginal move towards more portfolio investment could produce huge flows of capital. “Chinese insurers have a lot of interest in investing overseas,” says Rick Wei of JPMorgan Asset Management. “They want to diversify their holdings, increase returns and match their liabilities with longer-term assets.” Even after more than a decade of rampant growth in Asia’s private foreign assets, more may be yet to come.

"... U.S. adults who fall on either end of the ideological spectrum are more active than other Americans across several measures of political engagement, from voting to posting about politics on social media to donating to campaigns. Americans who hold less consistently liberal or conservative views, by contrast, tend to be less engaged on these topics, as Pew Research Center studies have long found....About 85% of adults in the two groups at the ends of the political spectrum voted in 2020 (85% of Faith and Flag Conservatives and 86% of Progressive Left). Moving from either end of the typology toward more ideologically mixed groups shows a gradual decrease in turnout.Faith and Flag Conservatives and those categorized as Progressive Left were also the most likely to report having contributed money to candidates and political organizations in 2020, to have posted support for a candidate or campaign on social media, and to have attended political rallies in person or virtually....The typology groups at the ends of the spectrum register much higher levels of general interest in politics as well. More than half of Faith and Flag Conservatives (55%) say they follow what is going on in government most of the time, followed by Progressive Left (44%), Establishment Liberals (41%) and Committed Conservatives (42%). By comparison, only 19% of Stressed Sideliners say they keep such close tabs on politics and government. Those categorized as Progressive Left or Faith and Flag Conservatives are also generally more likely than other groups to say they talk about politics frequently...."

Carrie Blazina, "Americans at the ends of the ideological spectrum are the most active in national politics," Pew Research Center, January 5, 2022, https://www.pewresearch.org/fact-tank/2022/01/05/americans-at-the-ends-of-the-ideological-spectrum-are-the-most-active-in-national-politics/

Americans at the ends of the ideological spectrum are the most active in national politics

U.S. adults who fall on either end of the ideological spectrum are more active than other Americans across several measures of political engagement, from voting to posting about politics on social media to donating to campaigns. Americans who hold less consistently liberal or conservative views, by contrast, tend to be less engaged on these topics, as Pew Research Center studies have long found. Here are some recent findings that illustrate this dynamic.

In a major 2021 study, the Center sorted Americans into nine political typology groups, based on an analysis of their political attitudes and values. The typology groups at either end of the political spectrum - Faith and Flag Conservatives on the right and Progressive Left on the left - are also the most politically engaged by several measures. The groups toward the middle of the ideological spectrum, those deemed Stressed Sideliners, Ambivalent Right or Outsider Left, have much lower levels of political engagement.

Among social media users, Republicans who identified as moderate or liberal were 15 percentage points more likely than conservative Republicans to say they never or rarely post or share about political or social issues (83% vs. 68%). Similarly, roughly eight-in-ten conservative or moderate Democrats who use social media (77%) said they never or rarely post this type of content, compared with a smaller share of liberal Democrats (56%).

In addition to being at the ends of the political spectrum, prolific political tweeters were especially likely to report engaging in political activities. In the year prior to the survey (a time period that included the 2018 midterm election), 34% of this group reported attending a political rally or event, while 57% said they contacted an elected official and 38% said they contributed money to a political campaign.

Joseph Politano unpacks the ~ $2.5 trillion in American excess savings, given the distribution he is skeptical that excess saving are keeping low skilled workers out of the labor market. "... Since the start of the pandemic, Americans have spent approximately $1 trillion less than the pre-COVID trend and have earned approximately $1.4 trillion more than the pre-COVID trend. Total excess savings are approximately $2.5 trillion. Incidentally, excess savings have been shrinking over the last few months as total consumer spending runs above the pre-pandemic trend....Additionally, households are not the only members of the private sector. Business and non-profits have also increased their savings since the start of the pandemic. Undistributed corporate profits (analogous to “corporate saving”) are up significantly in 2021. Note that this is not “total corporate profits” but rather “corporate profits not distributed to shareholders”. One reason why capital income growth has been below trend since the start of the pandemic is that businesses are currently distributing a smaller share of their profits in order to shore up their balance sheets given pandemic uncertainty....All but the bottom 20% of households have accumulated significant additional liquid financial assets,but the top 1% have seen their liquid financial assets increase by a staggering 150%. That number is even more astonishing when you remember that the top 1% already held an extremely large amount of liquid financial assets before the pandemic. As a result, the top 1% has accumulated an additional $1 trillion in bank deposits, currency, and money market fund shares since the end of 2019. The next 19% have accumulated another $1 trillion with all other income levels adding less than $1 trillion combined.Eagle-eyed readers will note that the total change in liquid financial assets is higher than the total $2.5 trillion in excess savings we previously identified. Keep in mind that this is measuring total change in financial assets while the $2.5 trillion is excess (that is, above-trend) savings. Also keep in mind that excess savings could have been socked into paying down debt or new investments, not simply accumulating extra cash. Finally, remember that an increase in liquid financial assets can come about without additional savings by converting other financial assets to cash (like through the Federal Reserve’s Quantitative Easing bond-buying program). These are complimentary, not analogous, data points....JPMorgan Chase Institute’s Household Balance Pulse Report. They see higher percent increases in checking account balances of low-income households but higher nominal increases in checking account balances of high-income households. In other words, the majority of aggregate excess savings are held by the top earners even though low-income households have seen a higher percentage increase in savings. This data also excludes liquid financial assets held outside of checking accounts, likely missing some cash held by high-income households in savings accounts or money market funds....What do excess savings mean for America’s short term economic outlook? For one, I am extremely skeptical of claims that excess savings are hampering employment growth or keeping workers out of the labor market. Mark Zandi, the Chief Economist at Moody’s Analytics, claims that as excess savings deplete “the financial pressure to return to work is thus quickly intensifying”. I flatly do not see it this way. The median checking account balance of households in the bottom 25% is up a meagre $363 from its level in 2019—hardly enough to sustain a long period of time without labor income. Even before the pandemic, the vast majority of Americans did not have sufficient savings to cover even 3 months of expenses (personal finance experts usually recommend an emergency fund large enough to cover 3-6 months of expenses). Fundamentally, the majority of excess savings are held by high income households who retained their jobs throughout the pandemic while the majority of government benefits went to low income households who may have lost their jobs during the pandemic...."

Joseph Politano, "Understanding Americans' Excess Savings,"Apricitas, January 15, 2022, https://apricitas.substack.com/p/understanding-americans-excess-savings

Understanding Americans' Excess Savings

Since the start of the pandemic, Americans have socked away an extra $2.5 trillion in so-called “excess savings”. A drop in consumer spending coupled with increased income from stimulus checks and enhanced unemployment benefits resulted in a large pile of household savings. In April 2020 the personal saving rate hit a record 33.8%, absolutely dwarfing the previous record of 17.3% set in May 1975. What Americans do with their savings will define the economy in the coming years.

That’s why it is critical to dig deeper into the causes, composition, and distribution of America’s excess savings. Though government benefits have played a crucial role in buoying the savings rate, they are by no means the only factor. Households aren’t simply keeping more cash on hand either—a lot of excess savings have been used to pay down debt or replace borrowing. Nor are households the only ones saving money—corporations have been shoring up their balance sheets with excess savings since late 2020. And while low-income Americans benefitted the most from the expansion of government transfers, it is high-income Americans that have accumulated the largest stockpiles of cash. These facts are critical to understanding how, or if, Americans will spend their excess savings.

A Penny Saved…

Now, this rise in personal incomes and the personal saving rate is a mechanical result of deficit-financed stimulus spending. Public sector deficits are private sector surpluses, meaning that a net increase in deficit spending will also represent a net increase in private sector financial balances. Or to put it simply, for the government to owe additional money—an increase in the deficit—the private sector must be owed additional money—an increase in private sector surpluses.

In normal times this does not really matter due to the Federal Reserve’s monetary offset. In theory, whenever the federal government enacts expansionary fiscal policy the Federal Reserve simply tightens monetary policy to keep aggregate income growth stable and prevent inflation. In other words, the Federal Reserve offsets increased public sector borrowing by raising interest rates to curb private sector borrowing. COVID is not normal times, however. The Federal Reserve chose to limit their monetary stimulus so as to not drop short term interest rates below zero while committing to accommodative monetary policy for the near future. Essentially, they announced that they would not be offsetting fiscal stimulus for the duration of COVID. Stimulus money therefore directly increased total household income and personal savings.

Since the start of the pandemic, Americans have spent approximately $1 trillion less than the pre-COVID trend and have earned approximately $1.4 trillion more than the pre-COVID trend. Total excess savings are approximately $2.5 trillion. Incidentally, excess savings have been shrinking over the last few months as total consumer spending runs above the pre-pandemic trend.

First, it is obvious that increased government transfers—stimulus checks, enhanced unemployment benefits, and child tax credit payments—are single-handedly pushing savings up the most. Since the pandemic stimulus programs represented extreme upward deviations from the trend growth rate of government transfers, they show up as having a large cumulative affect on excess savings. The cumulative reduction in personal consumption expenditures (household spending on goods and services) also explains a large chunk of increased savings. Either one of these items is more than enough to offset the reduced labor income and capital/proprietor’s income that households have received since the start of the pandemic. Decreased interest payments have pushed excess savings slightly higher while increased taxes pull savings marginally lower.

At this point, it is worth examining what personal saving actually means in the National Income and Product Accounts. Personal saving is simply total income minus total outlays, which leaves a lot of ways for saving to manifest. That includes increased bank account balances, additional retirement contributions, cryptocurrency purchases, paying down the principal of mortgages or other household debt, and even home remodeling (technically categorized as “residential investment”). In other words, it is not like there is precisely an additional $2.5 trillion sitting in household bank accounts because the personal saving rate has increased by $2.5 trillion.

Finally, it is worth remembering that aggregate saving rate to increase in one sector it must generally decrease in another. The last six months have seen a dramatic reduction in household saving and increase in corporate saving as consumers spend more of their money and corporations distribute a smaller share of their profits. We have also seen a large decrease in the federal budget deficit, mechanically reducing private sector surpluses. However, without the government running a surplus private sector cash savings cannot decrease (though it is worth remembering that not all personal savings are financial and that governments will likely need to run large deficits in the future in order to counteract a declining real interest rate).

…Is A Trillion Earned

So far, we have only examined excess savings in the aggregate. But to truly understand how excess savings are affecting the economy, it is critical to examine how those savings are distributed throughout the economy. For this, the Federal Reserve’s Distributional Financial Accounts are an indispensable tool.

Eagle-eyed readers will note that the total change in liquid financial assets is higher than the total $2.5 trillion in excess savings we previously identified. Keep in mind that this is measuring total change in financial assets while the $2.5 trillion is excess (that is, above-trend) savings. Also keep in mind that excess savings could have been socked into paying down debt or new investments, not simply accumulating extra cash. Finally, remember that an increase in liquid financial assets can come about without additional savings by converting other financial assets to cash (like through the Federal Reserve’s Quantitative Easing bond-buying program). These are complimentary, not analogous, data points.

Conclusions

What do excess savings mean for America’s short term economic outlook? For one, I am extremely skeptical of claims that excess savings are hampering employment growth or keeping workers out of the labor market. Mark Zandi, the Chief Economist at Moody’s Analytics, claims that as excess savings deplete “the financial pressure to return to work is thus quickly intensifying”. I flatly do not see it this way. The median checking account balance of households in the bottom 25% is up a meagre $363 from its level in 2019—hardly enough to sustain a long period of time without labor income. Even before the pandemic, the vast majority of Americans did not have sufficient savings to cover even 3 months of expenses (personal finance experts usually recommend an emergency fund large enough to cover 3-6 months of expenses). Fundamentally, the majority of excess savings are held by high income households who retained their jobs throughout the pandemic while the majority of government benefits went to low income households who may have lost their jobs during the pandemic.

Most attempts at analyzing the effects of pandemic stimulus spending seem to miss the mark either by over-aggregating fiscal transfers or by treating stimulus money as equivalent to windfall earnings. Take this Goldman Sachs research note that ascribes half of the drop in labor force participation to increased fiscal transfers due to the correlation between fiscal transfers and the drop in labor force participation. Unsurprisingly, countries that experienced a large drop in labor force participation tended to increase fiscal transfers because more unemployed workers means more spending on unemployment benefits, not because unemployment benefits created unemployed workers. Or take this Richmond Fed economic brief that uses data on the employment outcomes for lottery winners to estimate the effects of fiscal benefits on aggregate employment levels. I shouldn’t need to tell you that getting unemployment insurance is not like winning the lottery.

While most of the excess savings is held by high-income Americans, who do not have a particularly high marginal propensity to consume, I do think that high income earners will consume more of their excess savings than they would under a traditional increase in wealth. For one, high-income households have been stockpiling extremely liquid financial assets, an indication that they may only be waiting for a good opportunity to spend their money. For two, historical episodes of excess savings (like the post-WWII era) have seen a slow but steady drawdown of excess savings over the following 5-10 years. For three, polling from earlier this year showed that consumers intended to spend down some of their excess savings, and personal consumption expenditures have already exceeded their pre-COVID trend.

Where high-income households spend their savings will also prove just as important as when they spend their savings, especially given high inflation and the disproportionate spending on goods throughout the economy—but I will leave that for a future blog post.