The Upside of Declining Consumer Confidence

The Conference Board reported that consumer confidence dropped in August, giving up nearly all of its July gains.

As the Conference Board reported it ...

"A softening in business conditions and labor market conditions has curbed consumers' confidence this month. In addition, the volatility in financial markets and continued sub-prime housing woes may have played a role in dampening consumers' spirits. But, despite less favorable conditions and in spite of all the recent turmoil, consumers still remain confident. And, current Index levels suggest further economic growth in the months ahead."

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It was reported that this was a prime cause of weakness in the stock market today. Despite notions to the contrary, declining consumer confidence is a good, healthy response to the indebtedness of both the consumer, and the federal government.

Acting otherwise would be a denial of reality. For those soundly in the bullish camp, let's review some facts:

1. Household debt at unprecedented levels;
2. A negative household savings rate, something never seen in the midst of an economic expansion;
3. Federal government debt at the highest levels in recent memory, and still growing;
4. The continuing trade deficit;
5. The prospect of a continuing decline in the currency, meaning the Fed has to continue to walk the tightrope between importing inflation on the one hand, and managing the orderly decline of the currency on the other. All the while trying to massage the debacle in the credit markets. An undertaking fraught with short and/or long term risk. Take your pick.

Yes, there's times to be confident, like when things are humming along really well. This isn't one of those times. Then there's the confidence that comes from having been in a place of despair, but when the trends are moving in the right direction. This isn't one of those times either.

Now is a time to make sure you get your own financial house in order.

Start with the basics - your household budget. Review it for unnecessary expenditures. Trim your debt levels, with the most expensive interest rates first. Save some money! Use a high yield account, or find some solid blue-chip stock prospects, or broad-based ETFs. Save (anyone remember the word?) ... save ... save ...

In short, the upside of declining consumer confidence is the ability to not to be a monkey brain - to recognize the potential for trouble (like now), and put some preventative personal actions in place. While the trouble may or may not materialize, planning and acting like this will serve you well in any case. Now isn't the time to be an overconfident consumer - its' the time to be a confident saver!

Don't be blind to reality - open your eyes, look around, think, plan, and act. Are you a monkey?

JW

The Confused Capitalist

Ring, ring. Ring, ring. (Hello, is anybody there?)

And who says they don't ring a bell at the market top (or close to it)!

I think that the US market is very close to a top for the next several years, and it isn't because stocks are overly expensive. There's been lots of research showing that, relative to recent historical norms, stocks remain at roughly fair value (I'd define fair value as within 10% of its perfect actual value). The PE ratio of the S&P500 at about 18 or 19 isn't something to get alarmed about.

What is, is the rising interest rates. This will drain liquidity from the market as rates will be - I predict - rising far above that foreseen by most commentators today. That's because interest rates aren't just used to control inflation - but to support a weakened currency and attract needed outside financing, when a deficit situation exists when internal lenders no longer buy enough bonds to support the deficit (i.e. the USA today). In two years, I predict that a 30 year fixed mortgage will be in the 8.5% to 10.5% range, between 200 to 400 basis points higher than today.

Secondarily, the downdraft from the real estate market (expect that to be a serious force about 12 months from now), will also drain liquidity from stocks, as some owners of investment or secondary real estate, will partially cash out of the stock market to support their increased real estate loan payments. Others will sell their investment or secondary homes, but with the stock market also in a secular decline, won't redeploy their additional capital (if that exists for them), into the stock market. They'll keep it on the sideline in CDs and other savings intruments that will have relatively attractive yields.

Finally, the yields of savings instruments will continue to become more attractive, and will also compete for cash that recently was almost automatically deployed into the stock market, or real estate.

Real estate and the stock market returns will be well correlated over the next three to five years. Negative returns. Or am I the only one that hears the bell ringing?


JW

The Confused Capitalist

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