How the Pandemic Chose Its Haves and Have-Nots

By Berna Barshay

Thursday, January 7, 2021

► Much has been written about the stark contrast between the stock market and the ‘real economy’…

The market offered stellar returns in 2020. Meanwhile, the “real economy” saw many people suffer and entire sectors pushed to the brink of complete collapse.

In an article on New Year’s Day, the New York Times did a great job of diving into the numbers that made this phenomenon possible. The basic construct of their analysis was looking at aggregate personal income, spending, and savings across all households.

This is akin to looking at the aggregate household profits and losses (P&L) in 2020… Personal income is just another name for revenue, spending is analogous to expenses, and what’s leftover (savings) is just another word for profits available for reinvestment.

Looking at the personal income side of collective household income statements, revenue fell a lot less than you might have guessed…

And any personal income that was lost was made up nearly 20 times over via fiscal stimulus from the government. Take a look…

Source: The New York Times

Salaries and wages fell by $43 billion, but they were more than replaced with $499 billion in unemployment benefits and $276 billion in stimulus checks. In fact, cumulative income from unemployment benefits was 25 times higher in March through November than it was in the same period during 2019. This increase was partly because a lot more people were unemployed, but also largely due to the extra $600 per week handed out through July, as well as some new programs that gig economy workers were eligible for.

If the magnitude of the lost wages seems small to you… I hear you and had the same reaction. I was shocked to see that total employee compensation only dropped 0.5% year over year in that period.

But a lot of this is because of who lost their jobs…

The job losses were disproportionately concentrated in low-paying service industries – workers at restaurants, hotels, theme parks, arenas, etc. The people who lost their jobs overwhelmingly were people who didn’t make that much and comprised a small part of the total income pie to start with. And there was some component of hourly workers who saw raises… such as grocery and warehouse staff – who suddenly found themselves “essential,” and in many cases got a higher hourly rate, at least temporarily.

Another factor in the smaller-than-you-might-expect wage drop is that office workers, who make more than hourly service workers, generally didn’t lose their jobs… They just worked at home. And a lot of them in booming areas like tech and finance actually saw their income rise materially. As the Times explains…

The arithmetic is as simple as it is disorienting. If a corporate executive gets a $100,000 bonus for steering a company through a difficult year, while four $25,000-per-year restaurant workers lose their jobs entirely, the net effect on total compensation is zero – even though in human terms a great deal of pain has been incurred.

Meanwhile, the Paycheck Protection Program – for all the valid criticisms leveled against it – flipped what would have been a $143 billion personal income drop for proprietors (small business owners) into a $29 billion gain.

Add all this up, and aggregate personal income was up a staggering $1 trillion last year.

Moving away from the revenue side and looking at the cost part of household P&Ls provides more info…

Regular readers of Empire Financial Daily will find this part of the Times article no surprise… Not spending on travel, dining out, and other in-person experiences led to more money available to spend on material things, such as tripping out your home or backyard with new furniture, electronics, or kitchen appliances.

Source: The New York Times

Americans didn’t totally stop spending on things other than food and household goods (except perhaps in late March and April), they just allocated their spending differently. The Times breaks it down, referencing in the process a few pandemic beneficiaries I previously wrote about, such as home office furniture, bicycles, and fancy booze

Americans spent meaningful dollars – those they wouldn’t or couldn’t spend on services – on stuff. Durable goods spending was up by $60 billion (a better chair for working from home, or maybe a new bicycle) while nondurable goods spending rose by $39 billion (think of the bourbon purchased for consumption at home that in an alternate universe would have been logged as “services” consumption in a bar).

But people whose income was unaffected (or even enhanced) by the pandemic couldn’t find enough stuff to spend their canceled travel budget on…

Let’s also remember, that first round of $1,200 stimulus checks went to a lot of people who didn’t lose their jobs. Having $1 trillion more income collectively – but fewer ways to spend it led to savings going up a lot. Take a look…

Source: The New York Times

From March through November, personal savings were up an astonishing 173%. That’s what happens when income goes up by $1 trillion and spending goes down by $500 billion: Savings goes up by $1.5 trillion.

Savings can either sit in cash or get invested. Some of it did sit in cash… Deposits at commercial banks are up 19% since March.

But with rates near 0%, a lot of it ended up in the market. And when people put more money in the markets than they take out, markets go up. That isn’t hard to figure out.

The other place that savings went? Personal real estate. People bought houses, driving up the S&P CoreLogic national home price index more than 8% in October.

Essentially, the rise in savings among the people who have avoided major economic damage from the pandemic is creating a tide that’s lifting the values of nearly all financial assets.

As the Times explained, while the Fed helped, you can’t give it all the credit for the surge in financial assets during 2020…

The article does acknowledge that the Fed was essential to the markets stabilizing in March and April through their interventions… but suggests that since that period, the gain in financial assets has more to do with savings than with Fed action. As the article points out, areas that the Fed has not explicitly touched (like equities and bitcoin) have soared.

I would argue that if the Fed had only stabilized markets in the spring – but not also put in so much monetary stimulus that sharp declines reversed quickly – then the gains in the second half of the year might not have been as dramatic.

Markets were only meaningfully down for about a month before starting their rapid climb back… The psychological damage from the fall was limited by how quickly the drop reversed. That was essential for putting people in the mindset to speculate, which was the other big factor that drove markets higher.

So what happens next?

If 2020 taught us anything, it’s that predicting the future is hard. Here’s a phrase I often repeated during my years at hedge funds: “If I had today’s paper yesterday, I still would have made the wrong trade.”

That’s because sometimes companies report stellar numbers that beat all expectations, and their stocks go down anyway. Similarly, sometimes the world falls apart – and classic economic indicators like employment and GDP go down – but the market goes up anyway.

It’s easier to make a prediction about the direction of household revenue and expense lines than it is to forecast what the market is going to do… Clearly, as the threat of getting COVID-19 diminishes, more people will spend more on things like travel, dining out, and attending sports and live entertainment events. When these experiences start getting consumed in mass again, the lost jobs associated with them will come back, lifting cumulative household income.

What’s less obvious is how much spending on home goods and other “stuff” goes down. Some areas will likely stay elevated and others may abate, but if you add it all up, people will clearly start spending more in aggregate once they have more choices… which almost certainly means they will save less. Saving less takes away a market tailwind, but unless people start actually selling stocks to fund vacations, the return of experience spending won’t necessarily be a headwind for the market, either.

The bigger question may be when does inflation kick in from all the spending… and when will the Fed even care? As I wrote about last week, the Fed has already explicitly indicated that it will take a more hands-off approach to reacting to elevated inflation when it initially hits.

Putting it all together, this year will probably lack some tailwinds for the market that we had in 2020…

We’ll have less stimulus, more spending (and therefore lower savings), and likely lower equity inflows as a result.

So, some tailwinds are gone, but that doesn’t mean there will be big headwinds. It seems unlikely that rates will go up a lot this year based on Fed signaling.

We’ve shifted from an environment with many tailwinds to one with fewer, but it’s still going to be a while before explicit headwinds emerge. This leaves us in a less supportive environment for stocks than we had in 2020, but far from a hostile one.

Stocks will likely continue going up, but we may see more differentiation between them. This kind of environment might argue for stocks being driven more by fundamentals than speculation this year… But it’s hard to be that confident in this call, given all the momentum-driven Robinhood traders still lurking out there.

The wild card in this calculus that adds up to a continued accommodative environment for stocks (but slightly less accommodative on the margin) is that the flip of the Senate to the Democrats after the races in Georgia means that the White House and both sides of Congress will now all be controlled by the same party, and it’s the one that wanted to send $2,000 checks as opposed to $600 ones recently.

Already this morning, rumors are brewing of another round of stimulus. If that happens, it would be very bullish for the markets… not only because recipients would spend a lot of that money, boosting corporate revenues and earnings for the companies on the other end of that spending – but also because like we saw in 2020, some of those funds would convert to savings and in turn equity inflows into the market. Markets were up today, anticipating that potential stimulus, and despite the appalling events at the Capitol yesterday.

In the mailbag, a reaction to my New Year’s Eve essay and a question. Also, several readers wrote in to correct something that was asserted in a reader letter yesterday…

The correction pertains to farming techniques… admittedly not an area of expertise for me!

Did you find either your income up or your expenses down in 2020? If so, did you invest all your extra savings, leave some in cash, or invest in real estate or other hard assets? Do you think the recent stimulus checks should have been bigger? Let me know at [email protected].

“Berna, After reading your New Year’s Eve newsletter, I reflected on it and said to myself, ‘you know what, Berna is really a nice person. I wish she was my friend.’ Well I am claiming you as a friend who I meet up with each day that I am able to read what she has to share. Happy New Year!” – Tim N.

Berna comment: Thank you so much for your kind words, Tim! Hope to meet you in real life someday.

“Hi Berna, Happy New Year too and of course happy investing! THANK YOU for all your interesting emails. I have difficulty finding a site to buy Tomra on – could you advise me please?” – Nik H.

Berna comment: Most online brokerages will allow you to buy shares in Norwegian stocks, including Tomra (TOM.OL) on the local stock exchange, in Oslo.

I would recommend putting in a limit order if you plan to execute the trade overnight, especially if you don’t live on the East Coast. (Oslo is six hours ahead of New York, so you can also catch their market still open in the morning on the East Coast.) Sometimes you need to complete a form to allow for purchasing stocks on exchanges in other countries, but it isn’t an onerous process.

“As a farmer, I cannot let the statement about ‘all’ wheat being sprayed with glyphosate two weeks before harvest go unchallenged. I farm in Kansas, so I think I know what I’m talking about. I know OF NO ONE who does this! For one thing, the margin on growing wheat is so slim, the extra expense of that herbicide pass would eliminate most of the profit. I’ve seen this statement before and it’s just not true!” – P.E.

“Dear Berna, Sincere condolences on the passing of your mother.

“On another matter, as the son of a Saskatchewan wheat farmer, I was amazed by the assertion by Vincent S. ‘(did you know that all wheat is sprayed with glyphosate two weeks before harvest?)’. This is simply not true. Maybe sometimes, somewhere, but not in my memory, not in my lifetime. For an independent opinion you can refer to Snopes.

“This is not to say the changes Vincent S. made in his diet and exercise routine to lose 80lbs did not leave him feel fitter and healthier. Live long and prosper.” – Mark L.

“All wheat is not sprayed with glyphosate (Round Up) before harvest, I know, grew up on a wheat and cattle farm in Oklahoma, been farming/ranching for over 50 years and have produced hundred if not millions of bushels of hard red winter wheat. We have never sprayed wheat with glyphosate.

“Stating something untrue as though it was a fact, like what Vincent did, and then seeing it published by Empire Financial is a very troubling. His statement is untrue.

“By the way, I get the gluten free diet can be successful and have no problems with folks that follow it, just don’t spread false information.” – Randy W.

Berna comment: I thank you all for writing in and letting me know I had unknowingly published false information. I do not censor people’s opinions when they write in, but I will try to do better in the future with fact-checking assertions. I don’t want to ever spread misinformation.

I have done some research in the past on corn farming and I know how nitrogen-based fertilizers are used, but that is admittedly the limit of my commercial farming understanding. Thank you for the education!


Berna Barshay
January 7, 2021 

Whitney Tilson
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About Whitney Tilson

Prior to creating Empire Financial Research, Whitney Tilson founded and ran Kase Capital Management, which managed three value-oriented hedge funds and two mutual funds. Starting out of his bedroom with only $1 million, Tilson grew assets under management to nearly $200 million.

Tilson graduated magna cum laude from Harvard College with a bachelor’s degree in government in 1989. After college, he helped Wendy Kopp launch Teach for America and then spent two years as a consultant at the Boston Consulting Group. He earned his MBA from Harvard Business School in 1994, where he graduated in the top 5% of his class and was named a Baker Scholar.

Click here for the full bio.