The Yajnik Letter

Regardless what the stock market or CNBC or some Wall Street executive says, consumer confidence is an important statistic to understand and follow. What we are seeing in economic numbers, the massive exodus from the jobs market, and resistance to incentives (save for Cash for Clunkers which was too good a deal to pass up) is that the free fall in confidence is real. Moreover, confidence is the key to a sustained recovery. People are not going to open their wallets in a meaningful way, banks aren’t going to lend in a meaningful way, and corporations aren’t going to hire people and invest in capital goods in a meaningful way until there is a wave of confidence. This equation becomes something akin to the old chicken and egg thing where determining what has to happen first is a riddle.

One thing is for sure though, confidence can’t be manufactured by the government…it must come from within. People can be nudged in a certain direction but can’t be done so in a sustained fashion until there is confidence to do so. We aren’t there yet because we are being told the way we became the greatest nation in the world can’t work anymore. The same people that built a nation on raw enthusiasm and rugged individualism are being told we must become a collective and take our marching orders from Washington. This creates uncertainty…not confidence. Government involvement can be that nudge however…just not in a sustainable way.

Through all the schemes, the trillions of taxpayer dollars and government commitments, people don’t have confidence. Ironically, the day after another jobs bill gets the green light in the Senate, we find confidence in the jobs market is all but completely gone. Check out these trends from yesterday’s consumer confidence report from the Conference Board on the state of confidence in February. It all points in the wrong direction. Although the notion that jobs are plentiful is infinitesimal, I have got to believe those that responded in the affirmative must have great throwing arms or families that own businesses.

I was also blown away by the present conditions component. Normally this part of the survey is depressed as people can feel awful or uneasy about the moment but have a ton of hope about the future. We have always been hopeful about the future; it is one thing that has been uniquely American. The spread between present conditions and expectations has narrowed but both are moving in the wrong direction, with the former landing at its lowest point since 1983. The White House must convince Americans that we are not going to tinker with socialism in words and in deeds because while words matter, action speaks louder and can just downright scare the public. While I understand that the banks were driven by unbridled greed, I also comprehend that our leaders bailed them out, thereby enabling the very behavior we are allegedly to abhor.

The present condition component is lower now than it was when the $862.0 billion stimulus plan kicked in, to me it’s the best evidence yet that the program was ill-conceived and horribly inefficient…unless of course you are a government or union worker. The masses have seen many special interest groups paid off for one reason or another and each time with Main Street’s money. It’s so frustrating, so confusing, and feeling more and more helpless.

There has been a lot of housing news this week, and it has all been disappointing. The Case-Shiller Index report yesterday showed that prices in December were flat to slightly down month to month. It was a sign that even though the nationwide tax credit for new homebuyers was extended and expanded, the demand for housing hit a snag. Home prices were down in most regions across the country, except in the hardest hit regions (makes sense), which has been a trend for the past few months. Those regions in particular are likely benefiting from bargain buying.

The latest two data points today show that housing demand has certainly stalled. First, mortgage applications last week declined 8.5% week to week, representing the third week in a row of decreases. The worst part of the release, however, was purchase applications which fell by 3.6% and hit its lowest level since 1997.

This scary piece of information came along with today’s new home sales report which showed an 11% decrease month to month in January and hit a new record low of 309,000 sales annually. It was surprisingly bad, especially considering the consensus was looking for a modest increase as the tax credit extension came back into effect. The new home sales report also showed more falling prices and a bump higher in supply.

Enjoy the rest of your evening and let me if you have any questions or general comments.

-Samir