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Improving Consumer Confidence: A New Transition?

by Joshua Enomoto, Founder of ContangoDown.com and CrushTheStreet.com Contributor

After four-and-a-half years since the global financial markets nearly melted down and giving rise to a pandemic of understandably bearish prognistications, it appears finally that the everyday American citizen is ready for a change. Instead of food hoarding, it is time for food consumption: clearly, one of the defining trademarks of the American way! And it’s not just us who are feeling juiced about our future prospects; RTT News reported that confidence amongst British consumers rose to its highest level in just over two years, with the general perception that economic conditions are improving. Although individual British citizens felt more pessimistic about their personal financial situation due to slowing labor productivity, according to the survey conducted by GfK NOP, more people were willing to spend money on big ticket items than in recent years, suggestive of confidence that macro changes will soon trickle down to individual benefits.

But is this change for real? Over the past years, many fiscal contrarians have pointed out fundamental defects in the fiat-based financial system that the developed world abides by and they would be quick to point out that surveys have an inherent range of error built into it; poorly conducted surveys are likely to yield drastic variances into the results. While such reservations are valid, we also have to acknowledge the information that is presented before us. For example, the most recent submission by the Conference Board, a non-advocacy, not-for-profit entity holding 501 (c) (3) tax-exempt status in the United States, suggested that consumer confidence has been steadily moving up, touching 87.3 in the CC Index, its highest level since January of 2008.  
 
As it turns out, when examining other consumer sentiment metrics and comparing them against the S&P 500 index, we come up with several confirmation indicators that the economy may in fact be on a reversal course for the better. First, we will take a look at the longer-term chart produced by the Conference Board:

CC (06292013)

While this particular chart tracks consumer confidence against the stock market (S&P), it’s also worth noting that confidence generally tends to decline while gold demand increases. For instance, the CC indicator declines from roughly 140 in 1969 to around 50 points ten years later. From 1999 to now (June 2013), CC drops again from 140 points down to 81.4. Of course, these two time frames coincide with the extraordinary bull markets of gold and silver.  
 
The other point that is particularly fascinating is that the CC index hit its absolute peak prior to the tech bubble bursting. Subsequently, when stocks were charging up to record heights prior to the 2008 meltdown, the CC index went up with them, but only so far. In fact, using technical analysis jargon, the CC index charted a bearish wedge formation, an ominous warning that bullish momentum is exhausting itself and that a steep correction is due. Also, the peak prior to the one seen in 1999-2000 did not reach its successor’s height, topping off at around 120 points. Because of this, the chart from 1983 to 2009 has the look of a bearish head-and-shoulders formation.

One may assume that with all the bearish indicators built into the CC index, consumer confidence is a dead market, but with indices measuring “inelastic” metrics (inelastic in the sense that no matter what happens in the economy, consumers will always consume something), chances are likely that extraordinarily volatile swings in such indices are ripe for a turnaround. Indeed, this is exactly what may be occurring here, as plotting the extreme lows of the CC index shows that, outside of the 2008 crisis, it is charting a series of higher lows. And with June 2013’s average point level above 80, consumer confidence is making a significant technical recovery.

Similar patterns and observations can be made from other consumer sentiment studies. This one comes from the University of Michigan:

CC (06292013) B

Despite the difference in scale, the head-and-shoulders looking pattern is immediately recognizable in both charts: as noted earlier, the highest level of consumer sentiment was prior to the tech bubble bursting. And in the years before the 2008 meltdown, while the bearish wedge formation is not evident in the University of Michigan’s chart, it does show a wide range of motion between peaks and valleys, indicative of volatility and anxiety.  

Finally, we have ABC News’ variant, called the Consumer Comfort Index:

CC (06292013) C

Here, the head-and-shoulders pattern is even more evident, with the head (peak level) occurring prior to the tech collapse. It should also be noted that consumer sentiment after the 2008 crisis, according to this chart, was nearly inline with the sentiment level bottoming of the early 90’s. This suggests that while the market crash four years ago has received the most attention (thanks to media outlets such as YouTube), the actual harm caused to individual citizens was no more greater than in past crises.

Ultimately, while this may not be a popular sentiment within the alternative investment community, the economy and the consumer does show signs of resurgence and when one considers the timeline of bull and bear market cycles, it does make sense. For example, noted commodities expert Jim Rogers has stated that the average bull market in commodities lasts 16 years. For gold and silver in particular, this suggests that there are three more years left before the cycle turns bearish. While no one is suggesting that the economy will suddenly boom overnight, the seeds of true recovery may begin to blossom soon.
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