Just When Consumers Are Getting Happy

U.S. consumer confidence rose more than expected in January to the highest level since June, 2002. Unfortunately, that’s bad news.

It’s bad news because consumers are usually wrong. Economically, the thinking of consumers lags what is really happening in the market place. If we look at many forms of investment, we see evidence of consumers leading the wrong way throughout history.

We can look at the tech stock rally that lasted until early 2000. Who were the final players to enter the tech bull market? You guessed it–consumers. If we go as far back as the gold bull market of the early 1980s, who bought most of the gold at $800 an ounce before the metal collapsed in price? You guessed it again– consumers. And, of course, it’s usually consumers that are the speculators at the tail end of every real estate growth cycle.

Consumers’ opinions of what is happening in the investment or economic world is usually too late. And I believe this is great reason for concern. Despite 14 interest rate hikes by the Fed, consumer confidence is at a three-and-a-half year high.

We don’t have to look much further than collapsing U.S. auto sales and record debt levels (of consumers and government) to see, in reality, the economic picture is not that bright. “The public be damned” was a famous remark made by a railroad executive in the late 1800s. Regrettably, not much has changed in terms of consumer economic education since then.

Why? Because greed is a core human characteristic. Consumers see or hear their neighbors or friends doing well in stocks, real estate, gold or other investments and that’s what (unfortunately) motivates consumers to act. It’s not the search for value, but the “keeping up with Jones’” that motivates and opinionates the majority of today’s consumers. A sad truism. And, when I see a report that consumer confidence is at a record three-and-a-half year high, I get concerned simply because I believe consumers are usually wrong in their predictions.

NEWSFLASH—Bank of Canada Governor David Dodge (he’s the Canadian equivalent of the U.S. Federal Reserve Chairman) said global imbalances, such as the U.S. current account deficit and the ballooning surplus in Asian countries, if not corrected, could result in “periods of outright recession.”