Confidence is everything to a trader.
Unless you genuinely believe you’re going to make money, then you’re simply wasting your time.
Because without it, the markets are just too competitive and will soon take your money.
I’ve often seen even the most experienced traders lose their confidence.
“Bread-and-butter” trades they once jumped all over suddenly have them confused.
They start second-guessing themselves to the point where they no longer have the confidence to trade.
And once you lose your confidence, regaining it is no easy task.
Now, I’m concerned that we’re seeing the same thing play out in the economy.
When times are good and cheap money is in abundance, it’s too easy for folks to trade up to a bigger house or to buy a fancy car they know they can’t afford.
However, when that confidence starts to wane (as interest rates jack higher), there are major ramifications for the economy.
Because just as confidence builds on itself, it also works the other way. As it dries up, consumers are happy to keep their hands firmly in their pockets.
That’s why recent data from the University of Michigan’s Consumer Sentiment survey really caught my attention.
The survey captures three key data points: how consumers see their own personal financial prospects and how they perceive the near-term and long-term prospects for the general economy.
Right across the board, consumer confidence has evaporated.
You can see that in the chart below…
University of Michigan Consumer Sentiment
TradingEconomics.com, University of Michigan
Consumer sentiment is now around half of what it was back in early 2020.
The current reading also means sentiment is right back where it was at the height of the global financial crisis in 2009.
However, the data over the past two years highlights the problem.
After dropping in early 2020 as the COVID pandemic took hold, confidence gradually returned throughout 2020 and into the first quarter of 2021.
But after peaking in April 2021 (in this current cycle), it’s been steadily decreasing since.
Meaning, consumers worked out long before the stock market peaked late last year, that there would be consequences for the unlimited amounts of money printing.
However, what really stood out amongst the latest data was that a whopping 79% of respondents predicted business conditions would be bad for the year ahead.
The problem is that this negative loop feeds on itself.
Businesses put off hiring new staff and put a hold on things like capital investments and launching new products.
And that’s what puts a real handbrake on the economy.
The way I see it, the cause of this massive decline in confidence lies predominantly with runaway inflation.
Because it was in April 2021 when inflation suddenly started turning up on people’s radars. And as we’ve seen since then, it has run off to multi-decade highs.
What some might not yet recognize is that this 40-year high inflation number represents the biggest decline in living standards in almost half a century.
The chart also reveals that the ordinary consumer worked out long before the Fed did that inflation was anything but “transitory.”
The problem for the Fed is that they’re now trying to play catch up after burying their heads in the sand for a year. And are now forced to ratchet rates ever higher without blowing up the entire economy.
As I’ve said before, good luck with that!
What I remember only too well from the 1970s is that once inflation becomes entrenched (as it has now) it takes years, and a lot of pain, to get it back anywhere near under control.
Regards,
Larry Benedict
Editor, Trading With Larry Benedict
Reader Mailbag
In today’s mailbag, Wagner shares his thoughts on the Fed and inflation…
Is it no wonder the Fed got inflation wrong? The government decided we needed to change how inflation was being calculated. Likely because they wanted to show they were keeping inflation in check all these years… when in reality, it was nothing more than a twisted shell game for the public.
Somewhere on the way, they decided we need to allow for the extra technology we were getting in our newer products. Like computers, autos, farming equipment, and other technological goodies and spin it that we were more productive. And that – although these were more expensive than previous versions – the additional benefits made it more efficient/productive to offset the additional costs.
In reality, as a consumer, we don’t feel that way. A car is a car… it still provides the basic need of transportation, and all the other technological “whiz-bang” stuff is nice, but it doesn’t add to the basic need for transportation. Same with computers, farming equipment, etc.
All this did was protect our government officials from the reality that inflation was taking place at a higher rate than they were being told. This happened a long while ago. Is it no wonder that our great thinkers missed inflation or that it was transitory if they were depending on these manipulated gauges?
Our government is no longer about taking responsibility for their actions… it’s about keeping their power and being able to blame the problems on someone else!
– Wagner R.
Thank you for your thoughtful comments. We look forward to reading them every day. Keep them coming at [email protected].