Looking beyond the pandemic's impact, there are several external factors that merit consideration by investors now.
For obvious reasons, everyone is focused now on the pandemic, the mitigation policies being put in place to control it and the huge monetary, fiscal and medical implications. But there are other external factors worth discussing for the impact they could have on the world’s major economies.
The first one is inventory levels. Over the last couple of years, we’ve seen an overall decline in the growth rate of inventories. Last year it was about uncertainty over U.S.-China trade. This year, it's about uncertainty over how the pandemic is going to play out. Given that level of uncertainty, nobody is eager to build out a huge amount of capital and inventory right now. This is a global phenomenon – we're seeing low inventories across the board. We see it, for example, in the recent figures for U.S. as well as Chinese auto inventories.
The point here is that when we start to see less uncertainty and the global economy gets a little better footing, investment in inventory could be a source of additional growth, benefiting both the developing world and developed world.
Another potentially external positive influence is housing, a huge driver of the U.S. domestic economy. We look at the combination of the year-over-year change in mortgage rates and the year-over-year change in unleaded gasoline prices. These two key variables clearly influence economic behavior in the U.S. In the case of gasoline, it influences consumption. In the case of mortgage rates, it influences housing.
Right now, we've seen significant declines in both gasoline prices and in mortgage rates. So far, the shift in mortgage rates has had a bigger impact. They have come down significantly, and housing is really starting to see signs of recovery. I’d say it's kind of back to punching above its weight.
On the gasoline side of things, things are taking a little longer to unfold. Initially, the big decline in oil prices led to a significant pullback in CapEx in the U.S. around the energy industry. Energy has become a huge part of our economy, so that's meaningful. But the decline in gasoline prices ultimately more than compensates for that negative impact. When I add these two together, given where we are today, it should actually be a net positive for consumption in the U.S. around gasoline prices, and housing should continue to see improvement based on still very low mortgage rates.
Cash on Hand
On top of all this, there are high cash balances across all aspects of the economy around the globe, reflecting high levels of uncertainty. We expect that as we see uncertainty diminish, some of this cash will be put to work -- a net positive for the underlying economy and also for markets.
Consider the Treasury's balance at the Fed. Its general account deposits have spiked off the charts; the Treasury has issued a lot of T-bills. Some of this cash is just prefunding, some is actually dedicated to the PPP. But some of this cash is going to work its way into the real economy. And that should be positive for economic growth.
Looking at the corporate sector there’s been a lot of bond issuance. Some of that is now simply parked in cash. But it's not just always going to be there, because it reflects how in this environment central banks and the Fed are punishing savers. Not surprisingly, fund managers appear to be holding more cash as well. It’s important to note that there’s nobody on this planet who has been managing money in the kind of pandemic environment that we're experiencing now. Still, the fiscal and monetary response has chipped away at the uncertainty, and I think that that's sort of winning the war right now, and should be the catalyst to get some of this cash to be put to work.
Capital expenditures (Capex) , also called capital spending, is an amount spent by a company to acquire or upgrade productive assets (such as buildings, machinery and equipment, vehicles) in order to increase the capacity or efficiency of a company for more than one accounting period.
The Federal Reserve Board ("Fed") is responsible for the formulation of U.S. policies designed to promote economic growth, full employment, stable prices, and a sustainable pattern of international trade and payments.
A Treasury Bill (T-Bill) is a short-term U.S. government debt obligation backed by the Treasury Department with a maturity of one year or less. Treasury bills are usually sold in denominations of $1,000. However, some can reach a maximum denomination of $5 million in non-competitive bids. T-Bills are available in a variety of maturities, including 1 month and 3 months.
Purchasing Power Parity (PPP) is an economic theory that estimates the amount of adjustment needed on the exchange rate between countries in order for the exchange to be equivalent to each currency's purchasing power.