Tuesday, April 27, 2010

Consumer confidence is still very low, and that is good


The Conference Board's measure of consumer confidence rose more than expected this month, but as this chart shows, it is still in the dumps. Consumers remain extremely worried about high unemployment, out-of-control fiscal policy, the big decline in housing prices, the threat of higher taxes (a VAT tax, which the administration seems to be flirting with, would hit everyone, particularly the struggling middle class), and equity prices which haven't made new highs for over a decade. There is no shortage of things to worry about.

As a contrarian and as a bull on the prospects for the equity market, I take a good measure of comfort from this. I don't see how equities could be overvalued in an environment that is chock-full of worries and perceived risks.

The risks are so plentiful and widespread that short-term interest rates have been almost zero for more than 18 months now. Trillions of dollars are sitting in cash that pays almost nothing, and the only explanation for why the money remains in cash is that the owners of the money are terrified of the risks they perceive. Even the Fed is so concerned about the economy that they have been unwilling, so far, to entertain even tiny rise in interest rates. (This may well change with the FOMC meeting announcement tomorrow, and I hope it does.)

9 comments:

brodero said...

According to Ned Davis Research below 66 is bullish....

Benjamin said...

If this chart is accurate, consumer confidence actually plummets before a recession. It seems to accurately predict recessions.
Must be some investment-insight value in that.

John said...

Benj,

I think the economy goes into a decline before the actual recession begins. It takes a few months of falling GDP to turn it negative. I would think the leading indicators would turn down before consumer confidence. I suspect that CC is more of what economists call a coincident indicator (Scott, correct me here if I've got that wrong).

Family Man said...

Judging on someone's standing from others perespective is thoughtfull.
Bank of Canada has changed its view on a risk that could potentially channel trough to Canada from a US weak eco.
They disregarded this risk factor in latests minutes, acknowledging the fact that US moves the right way.
I hope FED is aware of this.

Benjamin said...

Hey-o John-

I am blaming today's stock dump on you. You called it.

John said...

Benj,

It was absolutly all my fault. The rumor got out that I was selling and they ALL headed for the hills. YUK YUK. ;)

ronrasch said...

Scott, thank you for a very gutsy call backed up with data. Also, for being right for a long time. What would it take to turn your scenario bearish? As we are long stocks what should we watch for as potentially predictive of a decline?

W.E. Heasley said...

“Consumers remain extremely worried about high unemployment, out-of-control fiscal policy, the big decline in housing prices, the threat of higher taxes (a VAT tax, which the administration seems to be flirting with, would hit everyone, particularly the struggling middle class), and equity prices which haven't made new highs for over a decade. There is no shortage of things to worry about.”

The current economic environment along with the current administration’s economic policy (Barack Millhouse O’Caternomics) has created a wall of economic uncertainty. The horizon is very, very uncertain. Very difficult to be ahead of the curve when the rules change every day. Then of course the rules aren’t the rules.

Scott Grannis said...

Re: predicting recessions. In my experience it is never very easy to predict the onset of recession, but it's not impossible, as several here suggest.