Danielle was a guest with Jim Goddard on Talk Digital Network talking about recent developments in the world economy and markets. You can listen to an audio clip of the segment here.
Re the news I mentioned about virus variants, see How a changing virus is reshaping scientists’ views on COVID-19.
For recent data on Canadian real estate trends see Canadian home prices set a new record high in January. Should we be worried?
The Canadian economy shrank 5.4% in 2020 (the sharpest annual decline since World War II) despite government transfers that totalled an incredible $20 for every dollar of other income that Canadians lost. See: Canada’s GDP Collapse reveals how Trudeau’s debt-binge went awry.
While many have borrowed and spent irrational amounts on housing and home improvements during the pandemic, overall, government transfers have elevated household savings as a percentage of nominal GDP to the highest level si
nce 1985, as shown here.
After 25 years under 5%, an increase in the savings ratio was overdue and much needed to boost individuals’ financial stability. A similar phenomenon is evident in other countries, too. Americans have added $1.7 trillion in extra savings (source: Bloomberg Economics). Businesses, too, have continued to hoard cash and reduce spending as many struggle to survive.
While some commentators see higher savings as fuel for a spending boom later in the year, this is not sure. Milton Friedman’s Nobel Prize-winning work in the 1970s pointed out that only increases in income and wealth believed to be permanent tend to increase spending behaviour. See more in Three basic economic laws the pundits are overlooking as we enter the recovery phase.
Emergency government transfers aren’t permanent, and the masses feel this in their highly-indebted bones. Meanwhile, after recessions, jobs take years to recover and often lead to lower-paying work once people are rehired.
The impulse to pay down debt, file for insolvency, reduce costs and build savings is likely to be a lasting preoccupation for many. This will be better for financial footing in the longer-run but detract from economic momentum nearer-term.
As Nouriel Roubini explains in The COVID Bubble, record stock prices are of little import to most people. They won’t pay the bills.
The bottom 50% of the wealth distribution holds just 0.7% of total equity-market assets, whereas the top 10% commands 87.2%, and the top 1% holds 51.8%. The 50 richest people have as much wealth as the 165 million people at the bottom…
With equity markets reaching new heights at a time of rising income and wealth inequality, it should be obvious that today’s market mania will end in tears, reproducing the economic injustices of the 2008 crash. For all of the talk of supporting households, it is Main Street that will suffer most when the music stops.
The wealth effect of asset bubbles has always been transitory. Despite what many like to hope, there’s no ‘permanently high plateau’ in market cycles. As explained in Robert Frank’s excellent book The High Beta Rich (2011), as bubbles burst, spending and wealth among asset owners contracts too.
The ‘free’ money of the last year is not free. Economies, taxpayers, workers and investors will be paying it back for years to come.
Some of the largest funds held in retirement savings accounts–presumed to be well-diversified–are not. This exposes holders to larger drawdown risk and volatility than most understand. As hot stocks and sectors have pulled markets higher, their concentration in benchmarks and portfolios has increased. See Tech Stock Rout is raising risks for American pension plans:
A handful of mega-cap tech stocks make up around 30% of some of the most popular funds in retirement plans, according to data compiled by Bloomberg.
Those big slugs of tech have rewarded investors handsomely — in 2020, Apple Inc. gained more than 80% and Amazon.com Inc. more than 76%. But when benchmark 10-year U.S. Treasury bond yields spiked to a one-year high on Thursday, and fears grew that an era of very low-interest rates could be nearing an end, the soaring valuations of mega-cap tech stocks became harder to justify and the shares led the broad market down.
…With mega-cap tech shares on a tear, and a stock’s weight in the S&P index determined by its market capitalization, just five tech companies — Apple, Microsoft Corp., Amazon, Facebook Inc., and Google parent Alphabet Inc. — make up 24% of the index, up from 17% at the start of 2020.
In the last market bust in 2000, the leading tech darlings fell an average of 80% and took 15 years to recover their 2000 high. With boomer savers now 20 years older, a similar setback will be that much harder to recover from.
