As we entered 2021, we believed the year’s performances and allocations were heavily dependent on inflation and the recalibration many investors would have to take in an elevated inflationary environment. While still pivotal nearly halfway through 2021, we continually see a substantial discounting of an elevated inflationary market and will address the many layers that have occurred and what the sequencing of those will be throughout the rest of the year.
Only slightly less important has been the massive amount of liquidity in every corner of the economy and markets. We have discussed this and how it was a driver for the markets we currently are witnessing; however, there comes a point when we approach the top of the S-Curve (not to be confused with Scurvy) and marginal gains are best that can be expected. The economy is now getting traction, and this is represented in many economic numbers across the country which then leads to a draining of the excess liquidity in the system. We will look at the myriad of liquidity measures and what the draining from gains does to asset prices and fiscal and monetary responses.
First, we must always look at the household situation when this is nearly 70% of the driver of the economy. As Jim Costas mentioned last month, the levels of total cash equivalents in households is at all-time highs and approaching nearly $16 trillion in total. Perhaps the most telling statistic is the multiple rises in cash balances relative to debt. This is represented that nearly 97% of total debt on the household balance sheet is covered in some form of cash equivalent – a level not seen since 1990. The narrative of the debt-laden consumer and leveraged situation looks to be a legend much like saying “Beetlejuice” three times to make him appear. This at least is the case on the macro scale and not necessarily on the micro level where many households are still struggling from the pandemic-induced economic shutdown.
The following shows exactly what has been transpiring since the all-time high in interest rates in 1982 as well as what the last batch of stimulus payments have done to skew economic and liquidity metrics.