False Confidence

Politicians and the media tie consumer confidence to the economic health of the nation. Not that I blame them, the stock market moves up and down based on consumer confidence. I do remember that the great depression was an event centered on a fall in the stock market. But the economy is much more multifaceted. Including

I also know that increasingly, America has become dependent upon the stock market. Private retirement accounts and the heavy involvement of public funds guarantee we are all affected by the rises and falls in the market. Day traders and penny stocks are examples of how fascinated we can be with the potential of the market.

The problem, at least as I see it, is that we are watching the rises and falls in the stock market like they are an indicator of the health of the economy, rather than only an indicator of consumer confidence. People buy when they are confident and sell when they are worried.

Of course, there are exceptions. For example, when people lose employment they look for other forms of income. Some file false claims for disability, others gamble in the market—buying at times when more savvy investors would be pulling back. These investors will push the market up even when there is no confidence.

People treat the market like it is a gauge, like an oil gauge on a car. When things are beginning to go south, the gauge slowly drops. If it drops all the way to zero, say goodbye to that car. Smart money fixes the problem before it gets there. But the market is more like an oil light. An oil light comes on when the pressure has gone already.  It doesn’t give you time to avoid something expensive before it happens, it only confirms for you that something expensive already happened.


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