Corona Daily 209: Human Catastrophe, Markets Boom

Europe and America are stifled by lockdowns. The worldwide case count nears 100 million. Officially, 2 million have died. Jobs have been lost, businesses closing, schools shut. The world is in a catastrophic state, and the stock markets are euphoric, most indexes reaching all-time records. 2020 was the best year for newly listed companies. Share prices of lossmaking companies like Airbnb more than doubled on the day they started trading. Tesla shares are zooming as if Tesla was a rocket.

How can this be explained?

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USA has published its “National Income and Product Accounts data” until November 2020. It captures the aggregate earnings, expenditure and savings of Americans. For those who understand numbers, the table makes for fascinating reading. A New York Times article this month analyses the data well. The analysis compares the Covid time data (March-November 2020) to the previous year (March-November 2019) data.

US markets are a benchmark. World markets now move up and down in a choregraphed fashion. For example, India receives more than $50 billion annually from foreign investors, mostly in stock markets, rather than infrastructure. Withdrawal of foreign funds would cause Indian markets to collapse.

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The US national data table starts with personal income that includes wages and salaries. The total employee compensation in Covid times went down by 0.5%. (March-November 2020 compared to 2019). With severe lockdowns, millions unemployed, half a percent slide is surprisingly small. Number of jobs declined by 6.1%.

The reason is that lost jobs were relatively lowly paid. High paying executive jobs were hardly affected. Most high paid jobs continued online, while wage workers couldn’t work from home. If an executive got a bonus of $100,000 for leading the company successfully through the pandemic, and four restaurant workers earning $25,000 each lost their jobs, the net effect on total income was zero. True, you have one guy who has become wealthier and fatter, and four guys stressed, depressed and perhaps hungry. But the aggregate income is not affected.

Despite the mass unemployment, the total compensation was down only by $43 billion in the nine months.

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On the other hand, Americans’ income from unemployment insurance benefits was a staggering 25 times higher than previous year. The government pumped in $499 billion more into American pockets. The $1200 stimulus checks in the CARES act added another $276 billion to the personal income, though much of it went to families that had maintained their jobs and earnings. The Paycheck Protection Program to protect business and farm owners added another $29 billion. All other income went up by $265 billion, resulting into a total increase of the disposable personal income by an incredible $1.03 trillion.

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The other part of the story was the fall in expenditure. Spending on services fell by $575 billion (8%). This included savings on flights, hotels, restaurants, sports, concert tickets and all other services that were banned. On the other hand, Americans spent more on goods; $60 billion on durable goods (computer chairs, bicycles) and $39 billion on fast moving consumer goods (food at home). Thanks to reduction in spending on services, the interest payments dropped by $59 billion.  

The net expenditure went down by $535 billion (575+59- 60-39).

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In effect Americans’ savings, in aggregate, went up by $1.56 trillion ($1.03 trillion additional income+ $535 billion reduction in expenditure). This is a 173% increase compared to the equivalent period in 2019.

What to do with the $1.56 trillion extra money? Currency in circulation went up by $260 billion (14%). Deposits in banks by 19%. But holding cash and deposits don’t grow wealth, with central bank lowering interest rates to near zero.

Those willing to risk threw all that money into shares and assets. S&P 500 went up by 16%. Home sales in the USA surprisingly surged, with prices up 8.4% in October. Even a fictional asset like bitcoin skyrocketed. The Fed is still pumping $120 billion into markets every month. Joe Biden this month will give an additional stimulus of $1.9 trillion. So, the market euphoria may continue for some more time before crashing to the ground.

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Does that mean it is a mistake to offer stimulus? I don’t think so. Anyway, the rich will get richer and poor will get poorer. But a $2000 check may allow someone to survive who wouldn’t otherwise.

Ravi