Key Points

• Human beings are very predictable. Predictability offers strong investment opportunities.

• In aggregate, U.S. households have never had more consumption capacity.

• >$4 trillion in consumption capacity is so large that it offers a multi-year consumption tailwind.

This has never happened in history.

Investors have a seemingly endless number of macro and micro datapoints to evaluate in the hopes of gaining an investment edge. We track the health of the U.S. economy through the lens of its primary driver, the consumer, and the chart above from Hedgeye Research highlights one of the most bullish datapoints we have ever seen. The consumer has a $4 trillion consumption cushion. The sheer size of this cash pile indicates that there will be a slow and steady trickle into our consumption economy for years to come. This is not to say there won’t be periodic bouts of volatility, especially as the Fed begins to taper their asset purchases and interest rates normalize. Nevertheless, investors need a dedicated allocation to the global consumption theme. Consumption drives the economy and due to COVID-lockdowns, fiscal stimulus, monetary stimulus, and deferred spending by consumers all over the world, there is now more money reserved for future consumption than ever before. Additionally, the wealth effect has never been more robust. Home equity levels and stock market wealth have never been higher. Finally, an estimated $30+ trillion is just beginning to pass from older Americans (baby boomers and the silent generation) to their Gen-X and Millennial children.

The vast majority of consumers are very predictable. When we have excess cash we save a little, invest a little, and spend a lot.

It is not just the consumer that is sitting on cash. Many of strongest corporations are currently flush with $2 trillion in cash on their balance sheets. Goldman Sachs predicts the level will rise to $3.1 trillion by the end of 2022. This offers an enormous buffer for the inevitable clouds that will emerge in the future. There will be continued buybacks, massive cap-ex cycles, R&D spending, dividend increases and a continuation of strong M&A trends. In fact, if politicians decide to tax buybacks, more money will likely flow to M&A than ever before. M&A deal value YTD by U.S. firms is already over $1.1 trillion, the highest level on record. We expect it to continue.

We have invested in the brands that are primed to benefit from these phenomena. They are still cheap, have fortress balance sheets, and are incredibly well positioned for what’s to come.

Consumption Booster Shot in 2022: Rising Wages

One of the biggest boosts to overall consumption capacity is rising wages. This important factor has largely been absent for as long as I can remember. But times have changed and employees now have massive leverage. Wage pressure is a blessing to consumers.

As the economy gets closer to full employment wage pressure should subside which can keep a lid on interest rates. But the rising wages of the “already employed” is much stickier than other inflation metrics. We favor businesses that will not experience significant drag from labor inflation.

Our team spends enormous amounts of time understanding and identifying the brands that sell high demand products and services with an ability to raise prices without crimping demand (pricing power). Many of 2022’s best performers will be the leading brands in key consumption industries that have pricing power and the ability to attract the most qualified workers. We suspect “wage pressure” and “an inability to find enough workers” will be key buzz words referenced on quarterly conference calls for at least another year. For consumers, however, a higher wage is a very positive development for consumer sentiment, which ultimately drives purchase intent. Higher wages for lower income consumers tends to get spent more quickly, adding to the consumption component of GDP and the revenue lines of the most relevant brands serving this cohort.

In 2022 total consumption should be broad-based given the large the savings glut. But our analysis has found that consumer services in particular are poised to revert back to the mean.

GDP Booster Shot in 2022: Inventory Rebuild

Supply chain bottlenecks (shipping delays, port delays, lack of trucking capacity, etc) have contributed to rising prices and to a reduction in inventories across most industries. While this is a source of frustration for consumers, it is great news for corporate margins and revenues. Revenue and cash flow feed directly into corporate earnings, which ultimately drives stock prices.

A historic inventory rebuild cycle will begin once supply is available again. When demand has been satiated and inventory has been re-built, prices (inflation) will normalize to lower levels. That will in-turn allow consumer sentiment to normalize back to more attractive levels. Inventory rebuilding and better job gains should allow GDP growth to stay “above trend”. The Covid normalization process will take time and the re-boot process has created distortions. While prices for every good and service are high, remember that there can be no better hedge to our spending then the capital gains we can generate from investing in the brands we know, trust and love. Embrace this epic consumption opportunity, it has a very long tail.

Summary:

·         Consumers have a record amount of cash that can be used for future consumption.

·         Consumers have significant leverage for higher wages which flows to higher spending.

·         A historic inventory rebuild cycle should allow GDP growth to stay above-trend.

·         Stability of earnings and strong pricing power ultimately flow through to better earnings and higher stock prices.

Disclosure: This information and the opinions expressed are those of the author as of the date of writing and are subject to change. Any research is based on the author’s proprietary research and analysis of global markets and investing. The information and/or analysis presented have been compiled or arrived at from sources believed to be reliable, however the author does not make any representation as their accuracy or completeness and does not accept liability for any loss arising from the use hereof. Some internally generated information may be considered theoretical in nature and is subject to inherent limitations associated therein. There are no material changes to the conditions, objectives or investment strategies of the model portfolios for the period portrayed. Any sectors or allocations referenced may or may not be represented in portfolios managed by the author, and do not represent all of the securities purchased, sold or recommended for client accounts. The reader should not assume that any investments in sectors and markets identified or described were or will be profitable. Investing entails risks, including possible loss of principal. The use of tools cannot guarantee performance. The charts depicted within this presentation are for illustrative purposes only and are not indicative of future performance. Past performance is no guarantee of future results.