Arrowhead Asset Management Investment Update - A 2021 Analysis
First, Happy New Year to you and your loved ones.
Economically, all we hear about these days is the supposed pent-up consumer demand “V-shaped” recovery that awaits us once we all get vaccinated (or at least enough of us).
This “all clear” premise assumes that we will all be going out to eat, fly, and again do everything that is fun, from movies to the theatre to the theme parks to the casinos to sporting events to cruise ships, etc.
However, there are two important issues at play going forward.
First, the consumer sectors hit most by Covid-19 that are supposed to create a huge release of "pent-up demand" equals a grand total of only 8.5 per cent of total consumer spending.
FYI, the truly big spending items in the consumer sectors are rents, utilities, and health care, which make up nearly 40 per cent of the aggregate national spending pie. These consumer spending outlays were already up fractionally in 2020.
There are other areas of low wage service sector spending that especially took it on the chin — housekeepers, day care, dental services etc. — but they don’t trade on the major stock market exchanges.
The second issue is that spending growth in the largest consumer sectors has already benefited strongly from the pandemic, almost doubling in 2020 from the non-pandemic historical norm.
And because of the pandemic, spending in 2020:on consumer goods in the United States rose by $180 billion more than normal - had the pandemic crisis never happened.
So, in 2021, this highly anticipated "pent-up consumer demand" projection would only equal an increase of less than 1 per cent of total consumer spending over 2020.
As investors, are we being set up to get excited about what may turn out to be only a one-per-cent lift in “pent-up” aggregate consumer demand?
The post-Covid-19 consumer spending bump for 2021 stock prices
When investment pundits talk about future pent-up consumer demand pushing up the stock market, what other assumptions are they making?
Are they assuming that there will be no reversal in consumer demand - or even a levelling-off in the already booming consumer goods sectors?
For perspective, here is what occurred in 2020:
Furniture spending soared 16.4 per cent, more than double the typical annual growth.
Major appliance spending rose 7.6 per cent, more than double the typical annual growth.
Home improvement expenditures ran up 20.8 per cent in the year through November, four times the normal 5 per cent.
Spending on games and toys grew 34.4 per cent, compared to the normal 4 per cent.
Yes, in early 2020, we did see a huge plunge in select consumer spending; but we also saw many items in select consumer goods soar in the second half of 2020.
The big consumer demand question for 2021
As we all go out and party later in 2021, just how many more cars, skillets, television sets, patio furniture and backyard decks are we going to need in the year ahead?
Contrary to what pundits are promoting, there may be much less pent-up consumer demand waiting to pop up stock prices than the hype wants us to believe.
If anything, consumer demand may aleady be saturated. Nobody is really talking about the fatigue in consumer spending that may already be integrated into potential investment opportunities in 2021.
Will the anticipated post-Covid employment surge increase consumer spending?
We are also being told that new jobs and re-hiring will come back in a major way. That’s the assumption, in any event.
But the reality here is that in the lower-paid jobs community, government incomes from Covid-19 relief programs - after the biggest 2020 Covid job layoffs - actually increased the overall money Americans had to spend, had the pandemic never happened.
Why? Because many low-paid workers who became unemployed and started receiving government stimulus income support actually had higher incomes than what they were earning while employed in their normal low wage jobs.
This is the result of two reasons:
1) Lower paid America workers have been stuck in low wages jobs years prior to the Covid pandemic. Fortunately, in the November election, numerous state passed new legislation raising the minimum wage to at least $15.00 an hour or higher to address this problem.
2) The unprecedented income transfer from the Federal government to the wealthiest of Americans after the first Covid stimulus package.
What about after the pandemic vaccine rollout?
So, what will happen to US middle class and lower wage incomes when the Coronavirus survival benefits fade, even with whatever jobs will be created (or re-hired) after a successful vaccine rollout?
First, more than half of the jobs lost in early 2020 have already come back in the past six months - yet incomes have fallen in three of the past four months. This was because government support was cut off due the stalling of the second Covid stimulus program.
To make it even more confusing and unprecedented, on a year-over-year basis, actual employment is down 6.1 per cent but real personal incomes are up 3.8 per cent.
Why?
It’s because in 2020 stimulus income from the government expanded worker average annual income to 18 per cent above normal.
Typically, a 6.1 per cent decline in employment would see average income down roughly 4 per cent. But that did not happen in 2020.
Today, we have reached a situation where government stimulus income benefits now make up nearly 20 per cent of total median personal income. At its 2020 peak, government-provided income was 31 per cent back in April.
The current government income support percentage has never been this high in recorded US history, and that includes the 2008-09 Great Recession.
When the government share of personal income accounts for the historical high it is today, some economists would say we are in an “economic depression.”
The "managed" decline of government income support
Not only do we have a situation where already oversaturated lack of consumer spending will probably offset the benefit of any pent-up demand we see post-vaccine, a hasty Congress-imposed pull-back in government income support could end up swamping whatever new employment spending we get from returning service sector workers.
Given where the stock market is now, at some point the saturated consumer demand reality described above will set in.
It may very well be that the "pent-up consumer demand" V-shaped recovery thesis for 2021 is as overdone now as it was heading into the final few months of 2020 - absent any big new central bank fiscal stimulus announcements.
Clearly, we don't know yet how skilled the Biden Democrats will be managing the post-Covid economic recovery.
But compared to the rigid austerity mindset of the Republicans, the Democrats are generally more likely to be sensibly cautious to take special care weaning worker co-dependency from government income assistance.
Like an addiction, any 2021 and beyond government income reduction program needs to be gradual - and with intelligent oversight.
Perennial Republican Party economic failures
Historically, if we look at it objectively, with each economic collapse after almost every stint of Republican presidential rule, the Democrats are elected to come in, clean up the mess, and get at least some of the Main Street economy moving and headed in the right direction.
In other words, Republicans hate government. And when combined with their antiquated "trickle down" economic rigidity, they generally end up failing to use tax revenues productively - for the primary benefit of most citizens.
Instead, the Republicans sway their voters with their increasingly irrelevant "conservative" economic rhetoric, pilfer the Federal tax coffers, gives too much of our tax dollars to their favored elite cronies, and then lose to Democrats when national incomes and economic stability gets way out of whack.
This has been especially true with Trump and his legally criminal "family" of kleptocrats, which is why he is a one-term president. "Good Riddance" is what a majority of both the popular vote and Electoral College shouted.
In summary, during this year's post-pandemic America, Biden and the Democrats need to be very careful not to help facilitate a deeper recession by irrationally starving American workers of needed government income assistance.
Commentary
The current Republican Party leadership, especially those with the sick MAGA mindset of Donald Trump, are simply not smart or adaptable enough to successfully problem-solve the complexities of modern American society.
We saw it very clearly with Trump's domestically-focused white nationalist racism and his deadly Covid-19 pandemic response.
Donald Trump’s legacy, if written honestly, will be two-fold:
1) 400,000 Americans died from the Coronavirus – largely due to Trump’s executive incompetence and his lies and promotion of quack medicine. When it was obvious Trump was too stupid to organize a competent national pandemic response, he simply gave up and shamefully called the deadly virus statistics "fake news" and overblown numbers."
2) Trump's ugly white grievance political philosophy directly uncloseted the resurgence of 21st century American Jim Crow racism, encouraging far-right domestic violence with his dog whistle tweets and campaign slogans that promoted divisive and seditious anger and hate.
So, on January 20, let's all remember how Trump, his MAGA Republican Party, and millions of his voters - in a state of racist scapegoating - accused mostly black and brown voters in the major cities of Detroit, Philadelphia, Atlanta, Milwaukee, and Phoenix of being part of a vast conspiracy of election fraud - with absolutely no proof that could be claimed as true or valid by the leaders of this sick MAGA servitude.
All productive Americans who want to move forward from the pandemic and the Trump political hate machine should thank the citizens in our urban centers for their voter turnout that helped to remove the racist Donald Trump from office.
Finally, the obviously discredited and seditious Trump can now relocate to Mar A Lago and take up his new role as America's King Lear.
In 2021, the majority of non-MAGA citizens can again see life with the lens of a sane cognitive reality, move forward, and go out and make money in a healthy and productive political economic manner!
Rocky Boschert
