Harry S. Dent | Monday, December 10, 2012 >>
I’ve always been in the forecasting business. As such I’m constantly on the hunt for accurate, consistent and reliable leading indicators that show me what is going to happen around the cornrner.
The best such indicator I have ever found is The Spending Wave, which is a simple 46-year lag on the birth index of any major developed country, to show the peak in spending of the average family.
It’s not always a 46-year lag, mind you. In Japan it’s a 47-year lag because the country has lower immigration and a higher percent of its population going to college. And the lag may be slightly higher or lower in different developed countries around the world.
But here in the U.S., consumer spending has a 46-year peak on the birth index, which is how we knew to prepare for the roaring boom in the 2000s, why we warnrned of a major economic peak in late 2007 and why we continue to warnrn that the worst is not yet over.
Of course, it appears that consumer confidence is edging up so what gives?
Quite simply, consumer confidence is a terrible indicator. At Japan’s greatest peak in stocks and the economy, and the greatest crash to follow, consumer confidence was great! That’s because consumers only reflect the present and recent past. They don’t look ahead. And they have NO clue how to predict the economy.
All they’ve got going for them is their misplaced idea that they’re better-than-average lovers and drivers and that they have higher-than-average kids. And they think this qualifies them to predict economic shifts accurately.
If life is good, if trends are up, consumers are more confident. Japan looked the best it ever did, and ever will, in late 1989 just before its stock market crashed 84% and home prices crashed 64%.
And that’s not the only time consumer confidence failed miserably to indicate the direction of the markets or the economy. There are numerous examples throughout history.
That’s why consumer confidence means little to us, except as a confirmation of other leading indicators we monitor.
One of those more short-term indicators is the Daily Growth Index from Consumer Metrics. This index measures real-time buying trends on the Internrnet and right now it’s indicating that consumer demand is going to suddenly slow as we head into the first quarter of 2013.
Now, this indicator hasn’t been around as long as some of the others (only a few years actually) but it has been more leading than other, older indicators, which don’t work as well in a Fed-manipulated economy.
The Twist in This Tale…
Okay… so the average person’s spending peaks around age 46 (here in the U.S.). If you apply that number to the enormous bulk of the Baby Boom generation, you’d see that our economy should have topped on the growth front around late 2007.
In part, it did and we experienced the 2008 crisis, which experts are now proclaiming is over.
But in the U.S. the top 1% and top 10% of people claim a higher percentage of the economy’s wealth, income and spending than most developed countries in Europe or Australia.
Did you know that the top 1% of people in the U.S. hold nearly 50% of the wealth or net worth in this country?
Did you know that the top 10% of people in the U.S. control almost 50% of the income and spending?
And did you know the top 10% of people in the U.S. peak about five years after the average person in spending?
Well, they do because they tend to go to school for longer… and their kids go to school for longer… except for Paris Hilton and Lindsay Lohan.
If most households that control nearly 50% of consumer spending peaked in late 2007, then the other 50% should peak somewhere between late 2012 and late 2013. That does not bode well for the coming years!
Consumer sentiment, home sales and GDP – all the unreliable indicators people look to for guidance – will go down when the economy declines ahead… but they won’t see it coming.
So do yourself a favor. Don’t listen to consumers, or even most of your friends. Learnrn to value the few long-term and shorter term leading indicators that work better… and keep reading Survive & Prosper.
P.S. Our Spending Wave is among one of the indicators warnrning us that the Dow will collapse, first to 6,000 and eventually to 3,300, before the end of this economic Winter Season.
Ahead of the Curve with Adam O’Dell
Is Consumer Confidence a Double-Edged Sword?
To astute investors, consumer confidence is a double-edged sword. And, as Harry pointed out, it is often misunderstood.