The New York-based Conference Board’s household sentiment index has slumped to the lowest level since March of 2009…
But hold on…don’t dismiss it as more bad news! It’s actually good news.
Sure the U.S. unemployment rate has held at about nine percent for about 30 months now. Sure, 8.75 million jobs were lost in the recession that ended in June 2009. And, with only about two million jobs created since the recession ended, the unemployment picture is not looking good. How can consumer confidence not be taking a beating?
There’s also the poor housing market. The S&P/Case-Shiller Index reported yesterday that home prices in 18-out-of-20 major U.S. cities fell again in August. It’s difficult for consumer confidence to rise when one-out-of-five U.S. home is worth less than the mortgage on it.
But think about this…
What happened to the stock market when consumer confidence hit bottom in March of 2009. We all know that stocks rose almost 100% from March of 2009.
And this exactly what I have been writing about for a month now. A couple of weeks ago, the number of bearish stock advisors hit a high not seen since March of 2009 (Source: Investors Intelligence). Now consumer confidence is at its lowest level since March of 2009.
It is during times of extreme bearishness and negative consumer confidence that the stock market rises. No, I’m not predicting that the stock market is going to double from its current level. But I am saying that investors, stock advisors and consumers are usually wrong when the majority of them have the same opinion. The stock market has historically done the opposite of the herd mentality. And I believe this time will be no different.
The more negative the consumer confidence reading, the more stock advisors who have turned bearish, the more the chances the stock market will climb the “wall of worry” higher. And that’s exactly what I believe is going to happen now. The poor consumer confidence reading released by the Conference Board Tuesday is good news for the stock market.
Michael’s Personal Notes:
Quietly, with little fanfare, the U.S. dollar has fallen to its lowest level against the Japanese yen since World War II. Yes, the country we beat in World War II—its money is now worth more than ours!
But it’s not just the yen that has been rising against the U.S. dollar. So far this month, the U.S. dollar has lost 4.4% of its value against a basket of industrialized country currencies. Actually, I’m surprised the U.S. dollar hasn’t fallen more in value against other world currencies.
Let’s face the unpleasant facts again:
The Federal Reserve has kept short-term interest rates near zero for almost three years now. On top of that, the Fed has purchased $2.35 trillion in assets to help spur the economy. The “official” national debt sits at about $15.0 trillion. When you include off-balance sheet government obligations, our debt stands at between $100 trillion and $200 trillion depending on whose report you believe.
Yes, the stock market has been rallying as of late. But we all know the U.S. economy is very fragile, very sick. We have a currency that returns zero interest rates issued by country that is awash in debt. And there are plenty of U.S. dollars in circulation to boot, thanks to the Federal Reserve’s expanding balance sheet.
From March of 2009, when U.S. stocks fell to a 12-year low, to today, the U.S. dollar index (a measure of the value of the U.S. dollar relative to a basket of six currencies: euro; yen; pound; Canadian dollar; Swedish korona; and Swiss franc) has fallen 16%. During the same period, the price of gold bullion has risen by approximately 80%.
“Michael, what is the long-term play here for investors?” What I see few people talking about is the effect of the debt crisis in Europe on the U.S. dollar. When Greece’s problems started to flare up in 2010, we saw investors running to the U.S. dollar. And we had a corresponding spike in the value of the U.S. dollar in the summer of 2010.
But today, the crisis in the Europe is graver than last year. Greece is bankrupt. Italy and Spain are not far behind. Citizen rallies against austerity cuts in Europe are becoming larger and more violent (70,000 Greeks protested against government cuts on October 19, 2011). And, against the backdrop of all this, the U.S. dollar is not rising, which is obviously negative for the greenback.
My strategy has remained unchanged. I’m exiting U.S. dollars for gold. If I’m right about future inflation, the value of the U.S. dollar will only continue to deteriorate, while the price of gold bullion rises even further.
Where the Market Stands; Where it’s Headed:
The stock market opens this morning slightly above where it started 2011. I continue with my opinion that we are in a bear market rally that started in March of 2009. The strong combination of investor pessimism, an expansive monetary policy, and stronger than expected corporate earnings will see the bear market rally continue to climb the proverbial “wall of worry.”
What He Said:
“Prepare for the worst economic period ahead that we have seen in years, my dear reader, as that is what I see coming. I’ve written over the past three years about how, in the late 1920s, real estate prices fell first before the stock market and how I felt the same would happen this time. Home prices in the U.S. peaked in 2005 and started falling in 2006. The stock market is following suit here in 2008. Is a depression coming? No. How about a severe deflationary recession? Yes!” Michael Lombardi in PROFIT CONFIDENTIAL, January 21, 2008. Michael started talking about and predicting the economic catastrophe we started experiencing in 2008 long before anyone else.