Broker Check

Do Consumers Have Confidence in this Economy?

| May 14, 2018
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The average consumer checking balance has increased in 23 of the past 30 quarters.

Stashing cash is generally seen as a sign of low economic confidence, and thus not portending good. The pre-global financial-crisis benchmark of less than $1,000 in the average checking account, compared with $3,700 today.

The median amount in checking accounts since 1991 is $2,263. Anything lower than this signifies the economy is doing well. Anything above this indicates the economy is not doing well.

This does not mean the stock market will crash. Seeing the economy all but collapse in 2008, with major financial institutions, household names, surviving only by the grace of taxpayer bailouts – makes an impression on people. This historic bull market has been the province of the well-to-do, who got the Fed’s helicopter money message that there is no place to go other than risk assets.

The mattress-stuffing approach to managing finances, on the other hand, has reflected a desire for safety after a crisis the likes of which was not seen since the Great Depression. Many – not residents of New York or San Francisco – were looking at an economy that seemed genuinely weak. The annual rate of GDP growth has slowed considerably since the 2009 recovery.

It suggests that the next downturn, whenever it may occur, may be acutely felt. All that cash hoarding will not provide sufficient cushion – the savings behavior observed is at odds with credit-card debt hitting $1 trillion.

The reason the next crisis could be a painful one is because the “recovery” occurring in between never really did the job. It made stock market investors rich, but it did not trigger mass affluence via significant employment growth and rising wages. Nor did we successfully deleverage; those who followed the economic news in 2007-09 will recall that a “levered” economy and the imperative of “deleveraging” were constantly discussed.

Yet public and private debt have reached new highs, while interest rates remain at near historic lows, leaving open the question of what ammo will the Fed have and who will lend us money in the next crisis.

When the full account of the current bull market is written, and future historians grapple with how long it lasted and how high prices soared, it was U.S. corporations who provided the biggest bid for their own shares even, and especially, at high prices. So while stock prices reached ever fresh highs, and corporate execs earned ever bigger bonuses, new investment in labor, plant and equipment, or pay raises, were in short supply. The moral hazard of “fixing the economy” by shoving money into the financial system rather than doing the hard work of seeding it for future growth could be detrimental.

According to the Conference Board, record-level optimism peaked in January in the same fashion as it did before the dot-com stock bust at the start of 2000. Now, there are as many survey participants expecting stocks to be lower in 12 months as there are those who expected stocks to be higher over the next year.

Ironically, those who had been insisting that we had not been seeing irrational euphoria earlier this year now insist we are witnessing irrational despair. Fear has a long way to go before it reaches the level of anguish associated with the tech wreck, the financial collapse and/or the eurozone sovereign debt crisis.

 

Stocks may hang in there and even push higher due to share buybacks, which have averaged a pace in 2018 that is twice the rate of the same period in 2017.

There is no economic boom around the corner. Only tighter monetary policy alongside political and geopolitical angst.

Gold/Silver Ratio: 2008
The gold/silver ratio reached above of 80.50 sometime in 2008, when silver was trading at about $9.73/ounce as we were entering the Great Recession of 2008. The price of silver after breaking down in the gold/silver ratio below the 80 level, exploded to the high in April 2011 of $49.82/ounce. That was approximately a 500% gain in the price of silver. During this period of time, fortunes were made, and fortunes were lost. The gold/silver ratio reached the high of about 88.86 in 2008, before it collapsed in the same time frame that silver exploded to $49.82, with the ratio reaching a low of 30.48 by April 2011. This all occurred within three years.

2008/2018: Nothing Has Changed
We have increased our debt level to a record level. It is unsustainable and increasing by the day. It appears that the policies are not going to change and that we will continue to increase the debt levels into uncharted waters. We do not really know yet what the consequences will be of such unbridled borrowing.

 

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