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Unconfident Confidence

Summary:
When the going got rough, Bernanke…blamed the weather? It was September 24, 2008, amidst financial chaos the likes of which the entire world hadn’t seen since the early thirties. Hauled up before Congress’ Joint Economic Committee to explain what was going on, or attempt some kind of reasonable sounding explanation, Bernanke pointed to a few positives out there despite so much wreckage piling up. This was the week following Lehman and AIG, the repo shocks still reverberating underneath yet to fully process the real liquidity withdrawal soon to rock Wall Street and Main Street alike. Still not even expecting a recession (though a pretty nasty one had already begun almost a year before all this), the sharp drop in oil and therefore gasoline prices since that summer could, Bernanke

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When the going got rough, Bernanke…blamed the weather? It was September 24, 2008, amidst financial chaos the likes of which the entire world hadn’t seen since the early thirties. Hauled up before Congress’ Joint Economic Committee to explain what was going on, or attempt some kind of reasonable sounding explanation, Bernanke pointed to a few positives out there despite so much wreckage piling up.

This was the week following Lehman and AIG, the repo shocks still reverberating underneath yet to fully process the real liquidity withdrawal soon to rock Wall Street and Main Street alike. Still not even expecting a recession (though a pretty nasty one had already begun almost a year before all this), the sharp drop in oil and therefore gasoline prices since that summer could, Bernanke testified, help buoy consumer sentiment.

Hey, he had to hang his hat on something. If only Hurricane Ike hadn’t gotten in the way of this quickening commodity crash.

On a more positive note, oil and gasoline prices–while still at high levels, in part reflecting the effects of Hurricane Ike–have come down substantially from the peaks they reached earlier this summer, contributing to a recent improvement in consumer confidence.

Janet Yellen, his successor, would make a similar claim six and seven years later. Falling oil prices seem like a good thing, a tax cut-like boost in spending power. But why had commodity prices, especially oil, been set on a course to crash (twice; in 2008, then again in 2014) to begin with?

Any positive impacts from lower prices at the gasoline pump would be easily set aside, in the negative way, by the underlying problems deflationary commodities would really represent. Not subprime mortgages, or some supply glut, rather the repeating acute phase of an fundamental global dollar shortage causing such worldwide tightening to begin with.

That’s not usually how consumer confidence, at least, is perceived as actionable, but in September 2008 the guy couldn’t mention stock prices as the usually positive contributing force against the chaos.

That’s really how – in the mainstream – it gets imagined; the Fed “accommodates” financial players either through lower interest rates (better borrowing) or, as in the QE era, via direct “money printing.” The Fed’s balance sheet, they claim, shows up in stocks which inflates share prices and then makes for much happier consumers who then spend the economy into a far healthier, and inflationary, shape.

It sure didn’t happen that way in 2008; the panicky FOMC slammed interest rates from September 2007, the “money printing” narrative unleashed all the way back in that same year with the first overseas dollar swaps and TAF auctions.

The truth is that stocks and the monetary system parted direct company back during the Great Depression. The Crash of ’87 offering merely more proof that money and share prices are separate issues, even though central bankers would love to use some sort of influence over Wall Street in order to better shape consumer expectations.

There are time periods when stocks and the Fed’s balance sheet do sync up somewhat well – which are the specific instances where this broader stock/bank reserves idea for a connection comes from. But it’s not real money which explains them.

Instead, it is psychology alone – not necessarily to/from the man on the street but more so aimed squarely at fund and portfolio managers of the professional variety. Those in the financial services industry who have been most thoroughly steeped in the legend of the “maestro” and his Greenspan put from their very first Econ 101 class; those who manage money for a fee on behalf of others who control at their fingertips not one portfolio of potential stock buying but many.

Thus, the Fed puts on its puppet show for the financial services industry which loves the client cover such smoke and mirrors gives them for taking risks and bidding stocks higher. That, then, translates into happier consumers which means, in the textbook, those more likely to spend even beyond their means.

Over the past several years, this has played out though not exactly the “money printing” way; including 2016 and 2017 when the Fed was signaling fund managers via first rate hikes and then QT.

Unconfident Confidence

Consumer confidence seemed buoyed as stock indices roared to record highs during those years – even if consumer spending didn’t quite respond nearly the same way. Though they reported higher levels of satisfaction as equities seemingly reflected the Fed’s confidence in higher rates and balance sheet reductions describing an inflationary take-off, there was no inflationary takeoff as the bond market had priced all along.

Instead, the same deflationary pressures – in commodities including oil – slammed things late in 2018. Eventually, given repo problems that are yet to be explained by officials, not-QE(5) was unleashed by September 2019 (after/during ineffective rate cuts). When it was, share prices again soared…but consumer confidence did not.

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Followed by COVID; if it was arguable about the US on the verge of the same recession already impacting the global economy late in 2019, there was no doubt by March 2020.
From the depths, though, share prices climbed even higher, more records, while consumer confidence has yet to recover even minimally. The real “transmission mechanism” seems clogged, and it goes back before COVID, too.

The difference seems to be the simple matter of employment. At least in 2017 and 2018, employment could plausibly have been claimed as robust – especially the unemployment rate. It confirmed, seemingly, the action on Wall Street peering forward into that inflationary, accelerative future.

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Once the jobs situation materially changed late in 2018 and throughout 2019, optimism matched jobs rather than shares. Despite a huge “money printing” orgy in this QE6, which, like Pavlov’s canine, has fund managers salivating, consumer confidence therefore consumer spending doesn’t appear to care much if at all for any of these signals.

How can they when the employment condition to end 2020 remains worse than at any other time since the 1930’s.

If Bernanke was to be taken at his word, we better hope for another commodity crash to boost consumer confidence because stocks all the way up there aren’t doing the trick. Neither is sharply lower oil prices (compared to before March) Instead, the narrative pushing more narratives is how more huge fiscal “stimulus” will make none of this matter; including, obviously, QE6.

Jeffrey P. Snider
As Head of Global Investment Research for Alhambra Investment Partners, Jeff spearheads the investment research efforts while providing close contact to Alhambra’s client base. His company is a global investment adviser, hence potential Swiss clients should not hesitate to contact AIP

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