Consumers Still Broke, But More Confident
By: Adam Sharp
Tuesday’s consumer confidence index drew cheers from Wall St, despite rising unemployment and record consumer debt. For any real growth to occur, we need to shed that debt and create jobs. Consumer deleveraging has barely begun, and unemployment ain’t pretty. But economists of the George W. Bush school aren’t hearing that nonsense. They insist selfish consumers need to get out there and SPEND! Stimulate that economy, baby. Go ahead and buy that Gucci purse.
Not smart. This graph from from the SF Fed brings us down to reality:
Debt-to-income and debt-to-wealth ratios are out of whack, clearly. Consumer spending has hit a wall. Servicing our debt (at all levels) has finally become too much of a burden. Houses can’t be used as ATMs any more, corporate debt is still sky-high, and public debt is ramping up like Google circa 2004. The funding crisis has begun.
This will take a while to play out. Going forward, markets could become even harder to forecast as Bernanke throws the kitchen sink at the problem. Inflation is the only thing I’m confident in.
Mr. Rosenberg Weighs in on Consumer Confidence
David Rosenberg of Gluskin Sheff offered his take in their most recent newsletter:
…we welcome any rise in consumer confidence but an honest appraisal of the data would show that 54.1 is still a very depressed level. In fact, the average index level during recessions is 73.0 — August’s reading was nearly 20 points below that. So, if the recession is indeed over and done, somebody forgot to tell this 70% chunk of GDP otherwise known as the consumer.
Now, what about Mr. Market, who is still in a most joyful mood. Well, the normal level of consumer confidence in the month in which the S&P 500 is up 55% from an oversold bear market low is 100. So, the stock market is behaving as if consumer confidence is twice the level it really is.
Rosenberg is one of the sharpest analysts around. You can get a free trial of his daily newsletter here.
P.S. – It’s worth noting that this rally has pushed the S&P 500 P/E ratio to 144 as of July 31 2009, up from 134 June 30. Everyone is hoping that consumers will drag us out of this, assisted by TALF. But giving consumers more 20% credit cards won’t solve anything. Besides, TALF seems more focused on saving CRE from the glue factory than anything else.
Disclosure: No position in any companies mentioned.
Adam Sharp