Wall Street and Main Street, at odds again...

Courtesy of Michael Panzner over at Financial Armageddon comes this provocative graphic, which displays a growing disconnect between stock prices and the public perception of our economic health. The "Present Situations Index" that the graphic cites is a monthly release compiled by The Conference Board since 1967. One of three major "Consumer Confidence" statistics, it is typically closely watched by market professionals, as it is a fairly reliable indicator of consumer attitudes.

It's tempting to attribute this growing gap to behavioral or psychological factors--"consumers don't trust Wall Street any more", "persistent unemployment is a drag on the consumer's psyche", "the fat cats are getting rich off the little guy", etc.--but I don't think this is all that's going on here.

Since the onset of the financial crisis, the Fed and our government have engaged in a significant and consistent dollar debasement policy. I've written about this here before, and it's again relevant here. Essentially, while nominal stock prices have risen back to pre-crisis levels (creating the widening gap), this is not indicative of more valuable companies or a more robust economy. It is simply a measurement anomaly--we continue to measure the S&P 500 Index in dollars, the dollar is worth less now, so the S&P 500 Index is worth more of those dollars. In real terms, it has barely budged from its lows--just like our confidence.

Rising asset prices do not, by themselves, indicate a healthy economy--it's a game that our Fed is playing that simply isn't working in the consumer's mind. In other words, "Main Street" gets the game this time, and won't play along. While I'd love to say that this is a gap that is bound to close--and no, I don't mean via a market crash, I mean via an increase in consumer confidence-- I don't think it's the case. Unless we reverse the debasement of the dollar, the gap in this chart is almost guaranteed to continue growing.


[Financial Armageddon]