Confidence makes the world go round.
OK, so I paraphrased from “Cabaret” and a Queen song. From an earlier post this is the Part II of it. Kind of alike a cliff hanger blog.
The problem with Economics is that it is a science. Behavioral Economics is more in line with my thoughts but it still doesn’t hit us where it needs to. University of Michigan releases it’s consumer confidence report monthly and when confidence rises all things are going well. Let’s face it, the 90s were a boom and confidence levels were at high levels. Early 2000 and in 2007 the confidence levels plummeted and in a recession we went. Even if you are sitting on a ton of money you are not going to invest unless you feel things are on the way up. Just human nature. That’s one reason why people don’t beat the stock market consistently (unless your last name is Buffet).
People put money in when things are going well. When other people think things are going well. When their wife or husband thinks things are going well. And they don’t invest or pull out when things are going bad, or the perception that things are going bad. Human nature and mob thinking essentially. That’s why the stock market can take a 500 or 700 point drop in a day (systems in place now to try to eliminate loss swings) and then the very next day go up 400 points. What changed? in the closing of the bell and the beginning of the next? Did Coca-Cola or GM or IBM suddenly become more valuable in the 14 hours the market was closed? Obviously the answer is no.
So if consumer confidence is not high then you and I are saving our nuts and not spending them. Our wives or husbands are clipping coupons. We’re not going out as often. It’s a staycation versus a vacation. Same holds true with businesses. They aren’t hiring when they could. They will wait until what next quarter looks like. It really comes down to do they see roses or thorns from those glasses. If it’s thorns nobody is spending and the economy as a whole will suffer. If there are successful days, weeks and months then the consumer sentiment changes and once a collective agreement occurs then the economy can again start moving on all cylinders.
I agree I took a very simplistic approach to the idea of confidence being the solution but it’s often the most simple things we overlook. We won’t be able to sell more materials until the businesses feel better about stocking more products and the consumers buying those products. In this case it’s the tail wagging the dog.