September 24th, 2012
by Jeff Miller
Everyone agrees that the economic recovery has been disappointing. There is no consensus on the cause. Nearly everyone has missed the most crucial element: The crisis of confidence.
Confidence is essential to economic success, as we have known for more than a century. Listen to this brief sound clip, instantly recognizable to many. (Click on small icon.)
The background story is not so well-known. The Teaching History site provides an excellent description of the drafts of FDR's first Inaugural Address, and the changes involved. The most memorable line was actually taken from discussions in the business community, as noted here:
The phrase “The only thing to fear is fear” and its variants, therefore, were demonstrably “out there” in circulation within the business community during the first few decades of the 20th century. William Safire makes the point that it does not really matter where the phrase came from because it was FDR that used it during his speech to inspire the nation and it was he, therefore, who transmuted the linguistic coin into rhetorical gold.
When confidence is lacking, we get less (not all or nothing, but less) of the following:
- Employers are less willing to expand -- new plants, new workers;
- Potential entrepreneurs are less willing to act -- new businesses, new jobs;
- Young families are less willing to buy new homes;
- Anyone worried about employment is less willing to make a major purchase;
- Banks are more reluctant to lend;
- And many other similar effects.
Without the ingredient of confidence, the economic engine is missing an element. It is time to retire the "pushing on a string analogy" which has outlived its usefulness. I suggest that we call this the "Confidence Gap."
We have all of the elements for the economic engine -- deferred demand, strong balance sheets, and potential profits for all. There is one thing missing. I think of it as the "spark plug gap" being a little too wide, but that is because my education includes the ignition coup of a young sailor with his cap at a jaunty angle.
Who is responsible for the "confidence gap?"
There are plenty of candidates, especially after last year's debt ceiling fiasco.
I'll offer some of my own expectations in the conclusion, but first let us do our regular review of last week's news.
Background on "Weighing the Week Ahead"
There are many good sources for a list of upcoming events. One source I especially like is the weekly post from the WSJ's Market Beat blog.
In contrast, I highlight a smaller group of events. My theme is an expert guess about what we will be watching on TV and reading in the mainstream media. It is a focus on what I think is important for my trading and client portfolios.
This is unlike my other articles at "A Dash" where I develop a focused, logical argument with supporting data on a single theme. Here I am simply sharing my conclusions. Sometimes these are topics that I have already written about, and others are on my agenda. I am putting the news in context.
Readers often disagree with my conclusions. Do not be bashful. Join in and comment about what we should expect in the days ahead. This weekly piece emphasizes my opinions about what is really important and how to put the news in context. I have had great success with my approach, but feel free to disagree. That is what makes a market!
Last Week's Data
Each week I break down events into good and bad. Often there is "ugly" and on rare occasion something really good. My working definition of "good" has two components:
- The news is market-friendly. Our personal policy preferences are not relevant for this test. And especially -- no politics.
- It is better than expectations.
The news last week was very good, even better than the market result.
- Rail traffic is better, especially measured by intermodal traffic. See Todd Sullivan's take and his helpful chart.
- Sentiment (a contrarian indicator) is below the bullish average of the recent market rise (via Bespoke).
- Housing had a good initial reaction to the QE3 announcement (via Dr. Ed).
- Home sales data were encouraging (via Calculated Risk) where you can see a comprehensive look at sales and building permits as well as this revealing look at the improving inventory situation: