by Gary Alexander

May 12, 2020

“I’ll tell you what the King is feeling tonight
He’s numb, he shakes, he quails, he quakes
And that’s what the King is doing tonight.”

— The final lines from “I Wonder What the King is Doing Tonight”
(from Camelot, 1960, words by Alan Jay Lerner)

Americans have raised records amount of cash – as much as they can, under the circumstances – while Congress and the Fed are pouring trillions into the economy, and not asking for much in taxes in return.

How much new liquidity? On “Fox News Sunday with Chris Wallace” May 10, Treasury Secretary Steve Mnuchin said the federal government has created $5.5 to $8.0 trillion out of thin air in just two months.

“The House and the Senate worked together to get over $3 trillion into the economy [and] another $2.5 to $5 trillion working with the Federal Reserve. This has never been done before… We spent a lot of money. A lot of this money is not into the economy yet…. We want to make sure that before we jump back in and spend another few trillion of taxpayer money that we do it carefully.”

Normally, that’s a formula for prosperity, if only the nation were willing to spend some of that money, but stores are closed and the stock market (despite the recent rise) feels scary, so we’re hoarding our cash.

Many are suffering, of course, but in the aggregate, consumers are sitting on a pile of cash. Liquid assets soared $1.7 trillion from the end of February through the April 20 week, to a record $15.5 trillion (chart).

Liquid Assets (trillions of dollars) Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

I credit economist Ed Yardeni with these charts and this cash analysis from his May 4 briefing (“Liquidity and Distress”) last week. Dr. Ed says that many businesses took out loans, fearing an impending cash crunch. Commercial and industrial loans jumped $657 billion from the end of February through the week of April 22, a rapid surge that has never happened since these statistics have been kept (since 1973).

In these uncertain times, most of these businesses parked this borrowed cash in money market funds held by institutions, a category that rose $830 billion over the same period to a new record high of $3.2 trillion.

Our personal savings rate is also spiking. There is no direct statistic called “personal savings rate,” but what we call the “personal saving rate” is calculated by subtracting personal consumption expenditures from disposable personal income. In March, when the lockdown began, households cut back spending sharply – say, by not driving or eating out, and not even paying rent or taxes in some cases. In most cases, they were still generating income, so their savings volume soared, rising from $1.3 trillion (annual rate) in February to $2.2 trillion in March (see chart below). The savings rate rose from 8.0% to 13.1% in March.

Personal Savings (trillions of dollars) Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Longer-term, the quarterly personal saving rate has been on an uptrend since 2005, when it was around 2% (and 2008, just before the financial crisis, when it was 3%). It reached 9.6% during the first quarter of 2020, but that includes three months of rising rates – 7.7% in January, 8.0% in February, and 13.1% in March. Due to the coronavirus crisis, we may see sustained double-digit savings rates for all of 2020. If so, that would be the first time since the 1950-1980 period, when double-digit savings rates were normal.

Personal Saving Rate (percent) Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

This high rate of savings argues for a slower recovery if consumers hoard their cash in fear of another lockdown or layoff – or a fast rate of recovery and stock market boom if savers start spending again.

The Stock Market is Many Months Ahead of the Recovery

Historically, the stock market has been said to trade about six months ahead of the news – it anticipates the news rather than reflects the news. The rapid (-35%, 33-day) decline from February 19 to March 23 represented a fast-spreading virus, while the equally rapid (+35%, 37-day) recovery reflects the market’s hope for a “V” shaped recovery in some economies and a “U” shaped recovery in the rest of the world.

This quick rebound in stock prices felt like the explosion of a starter’s gun in a 440-yard dash. The gun was the Fed’s announcement of “QE4ever” on Monday, March 23 and their expansion of the monetary base, including buying corporate bonds for the first time, giving a huge boost to market confidence.

Fed Assets (trillion dollars, weekly) Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

From the end of February through the end of April, the Fed’s balance sheet rose by $2.5 trillion to a record $6.6 trillion. The other two major central banks followed suit, so that the total assets (in U.S. dollars) from the Fed, the European Central Bank, and the Bank of Japan rose $3.2 trillion in just six weeks, from the end of February through April 17 – from $14.6 trillion to $17.8 trillion (see chart).

Major Central Banks: Total Assets (trillion dollars, weekly) Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

There is plenty of liquidity provided by these three major central banks to stabilize the global financial system and stimulate a U-shaped economic recovery. Of course, if the virus returns in force, all bets are off and we could suffer a return of the stock market malaise as well, retesting the March 23 lows.

And finally, we’re seeing global manufacturing levels (via the Purchasing Managers Indexes) all in contraction (below 50) except China, which just emerged from contraction. This is a hopeful sign that the country where the virus originated is now back in operation and the rest of the world might follow China.

Total Global Manufacturing Purchasing Managers Index Chart

Graphs are for illustrative and discussion purposes only. Please read important disclosures at the end of this commentary.

Selected Global Manufacturing PMIs Table

Only China now has a Manufacturing PMI above 50 (signaling expansion). The rest of the world is mired in the range of 27 to 42, in significant contraction territory. It’s even worse in the service sector in the U.S., where about 70% of the GDP is measured and 80% of the job losses have occurred. The Service PMI fell over 10 points to 41.8 in April from 52.5 in March, the largest decline and lowest measure ever.

As Asia returns to work, then Europe, the U.S. will follow, so we can see our future by watching the world. Then, maybe, we won’t be too scared to invest that money we squirreled away on the sidelines.

All content above represents the opinion of Gary Alexander of Navellier & Associates, Inc.

Please see important disclosures below.

About The Author

Gary Alexander
SENIOR EDITOR

Gary Alexander has been Senior Writer at Navellier since 2009.  He edits Navellier’s weekly Marketmail and writes a weekly Growth Mail column, in which he uses market history to support the case for growth stocks.  For the previous 20 years before joining Navellier, he was Senior Executive Editor at InvestorPlace Media (formerly Phillips Publishing), where he worked with several leading investment analysts, including Louis Navellier (since 1997), helping launch Louis Navellier’s Blue Chip Growth and Global Growth newsletters.

Prior to that, Gary edited Wealth Magazine and Gold Newsletter and wrote various investment research reports for Jefferson Financial in New Orleans in the 1980s.  He began his financial newsletter career with KCI Communications in 1980, where he served as consulting editor for Personal Finance newsletter while serving as general manager of KCI’s Alexandria House book division.  Before that, he covered the economics beat for news magazines. All content of “Growth Mail” represents the opinion of Gary Alexander

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