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The $3 trillion bounce back

Bloomberg wrote the other day that “consumers in the world’s largest economies amassed $2.9 trillion in extra savings during Covid-related lockdowns, a vast cash hoard that creates the potential for a powerful recovery from the pandemic recession”.

I was pretty riled about this paragraph and headline, as it’s a total mis-hit imho.

First who has savings? Those maybe on furlough schemes who now work two jobs and are earning more; the well off who are in work from home and have seen no change; or the wealthy who are seeing higher returns from their investments in digital companies; and possibly some who are liquidating assets (selling their investments, pensions and inheritances).

For many who have been able to work through the pandemic, of course they are saving. They are saving because they’re going nowhere and doing nothing. Therefore, the Bloomberg article assumes that a year of doing nothing means that all of that demand is sitting, waiting to be released. Once we unlock, everyone will rush back to the way it was and do it twice as much. We will eat lunch and dinner at top restaurants, go to the cinema every night of the week and desperately try to get back onto buses and trains to work in offices.

Are they nuts?

Second, I don’t see anyone rushing back to enjoy a daily commute for hours per day to and from the big cities. That’s why many companies are rethinking the office. For example, HSBC said last month that it plans to reduce its office footprint by 40% and Barclays boss said the days of the big office are over.

This gives people more flexible work structures. Sure, there may be face-to-face meetings and some days in an office, but equally most work at home has worked well (apart from children, dogs and other interruptions). It also frees up time to work harder longer. So, the overhead costs of commuting will decrease and that saving will be placed in the bank (for those who have work)0

Third, there’s going to be no major rush to get out more and do more shopping. People, if anything, may have realised that building up savings and paying down debt is a good thing. For most of our lives, we have been sold credit. Selling credit is good for the banks and drives profit, but spending years in hock is not a great feeling for most people. Now that some savings have appeared, I don’t see people throwing that away (for those who have work).

Fourth, the fact that we’ve got used to working and shopping from home, as well as being entertained at home, is a permanent shift and not temporary. This is well illustrated by the thoughts of Disney CEO Bob Chapek, who believes that consumption and behaviour has changed forever.

“The consumer is probably more impatient than they’ve ever been before,” he said during a Q&A at the Morgan Stanley Tech, Media and Telecom Conference, per TheWrap, “particularly since now they’ve had the luxury of an entire year of getting titles at home pretty much when they want them. So, I’m not sure there’s going back.”

This from the man who built a company that shattered box office records in 2019, with $11.1 billion in worldwide ticket sales. This included 33% of the domestic market alone, the first time since 1999 that any one studio accounted for more than one-third of North American box office revenue. In fact, due to the success of things like the Marvel Universe and Star Wars franchises, which Disney own, saw a stunning seven films exceed $1 billion each in ticket sales in 2019 alone, an unheard of feat in movie making history.

Fifth, as many pointed out when I mentioned this article on social media, it is the higher income families who have been most comfortable during this lockdown, along with essential workers who hve seen no change in pay. For those who kept their jobs, it’s not been a terrible time as their income was not impacted. But what about those who have had to completely readjust their lives and careers from success in one area to trying to create a living in another? And those who have no career or work at all anymore?

It does reference this at the end of the Bloomberg article:

Not everyone will be feeling flush. It’s those who earn the most who will likely have stockpiled, while lower-income households may have been forced to dip into their savings already and are the most likely to consume.

Some may be put off by the suspicion that at some point governments will jack up taxes to pay for their rescue programs.

“Short term, a lot depends on post-pandemic behavior — which may take time to revert to pre-pandemic norms,” said Yelena Shulyatyeva, senior U.S. economist for Bloomberg Economics. “Medium term, whether the extra funds go to consumption, paying down debt, or even stay in the bank as a rainy-day fund, that’s a positive for growth.”

According to JPMorgan research, it is the lowest income communities who were most likely to lose jobs, lose income, have no savings, and have increasing debt if they can get it.

The most financially vulnerable families have been impacted the most, with lower-income earners and Black and Latinx workers facing the highest job losses … median balances are falling, especially for low-income families. This suggests that the median family is spending down the cash buffer they accumulated during COVID-19. Moreover, if current trends continue, many families may become financially vulnerable in the coming months as relief programs expire.

I don’t see the general population having a massive spending party when the great unlock happens. Frugality, saving, covering the cost of living and paying down debt will continue to be the focus of the many throughout the early half of this decade. Combine that with increasing credit defaults among businesses and consumers, and you see a bad mix for banking.

Huge savings and deposits; decreasing credit and increasing bad debt.

Doesn’t sound so good to me.

Having said that … maybe there’s more opportunity for innovative FinTech entrepreneurs to service the wealth, support those with cash and help those with debt to survive. Now, which companies would they be?

About Chris M Skinner

Chris M Skinner
Chris Skinner is best known as an independent commentator on the financial markets through his blog, TheFinanser.com, as author of the bestselling book Digital Bank, and Chair of the European networking forum the Financial Services Club. He has been voted one of the most influential people in banking by The Financial Brand (as well as one of the best blogs), a FinTech Titan (Next Bank), one of the Fintech Leaders you need to follow (City AM, Deluxe and Jax Finance), as well as one of the Top 40 most influential people in financial technology by the Wall Street Journal’s Financial News. To learn more click here...

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