The pandemic changed the way consumers spent their income. Economic studies tell us that during periods of uncertainty, the savings rate increases as people postpone spending.
High savings rates have been seen all over the world, with the United States consumer leading. In other words, there is a lot of money stashed away in savings accounts, ready to be deployed, should the optimism come back.
Optimism is warranted. The United States vaccinates over 2.5 million people a day, and the economy bounced back strongly, as shown by the last NFP report. As a consequence, the yields have risen, as they do in an economic recovery, without the Fed signaling any intention to stop the rise. Just the opposite – last week, Fed’s Chair Jay Powell did not say that the move in U.S. yields was disorderly, suggesting the Fed is comfortable with the outcome. As such, yields surged some more, triggering a strong reaction from the U.S. dollar.
Could it be that the Fed allows higher yields as a sign of increased optimism for the economic recovery? If yes, the optimism should trigger a wave of spending from the American consumer as capital simply lies around, as suggested by the high savings rate. As the chart above shows, it is not about the U.S. only, but the global consumer reacted similarly.
If optimism comes back, a new wave of economic stimulus hits the global economy, this time fueled by consumer spending. It is this savings rate that the Fed and other central banks try to convince households to lower, as it will directly fuel the economic recovery.
High Savings and Investment Rates
The new reality brought by the pandemic showed how consumer behavior changes. Faced with more time to spend online, a big chunk of the fiscal stimulus received by the U.S. consumer was also directed to investing. Not only the savings rate increased, but the investing one too.
The best example comes from one of the most recent ETFs launches. David Portnoy has become a legend among retail traders, as it “led” an army of new retail traders and bought the dip in the stock market during the March-April 2020 market decline. The move brought him worldwide fame, and at the start of this month, he launched an ETF called BUZZ.
It ended up close to $500 million traded on day one. It dwarfed other launches, from names like JP Morgan or Fidelity. The retail trader, therefore, has plenty of cash stashed away – the quicker the government and central bankers convince the population to spend its savings into the real economy, the better for the recovery.