Consumer Despair Is Probably Worse Than We Realize

In economics, the misery index is obtained by taking the current rate of inflation and adding the unemployment rate. By this measure, there was a lot of misery in the 1970s, and not so much in the 2010s, as both inflation and unemployment fell to negligible levels. But a misery index that I informally developed years ago that looks at the ratio of financial assets to hard assets is suggesting that despair is probably worse than most economists realize.

Financial assets such as stocks and bonds are things that we want. Hard assets, taken to mean things along the lines of fossil fuels oil, agricultural products and other commodities, are things that we need. When the price of the things that we need go up and the price of things that we want go down, it creates economic misery. It would be fairly easy to construct such an index by taking a linear combination of the S&P 500 Index and the Bloomberg U.S. Aggregate Bond Index divided by one of the popular commodity indexes. To give a sense of where things stand, the S&P 500 was down more than 6% this year through last week . The Bloomberg Bond Index is having perhaps its worst start ever, tumbling more than 6%. The Bloomberg Commodity Spot Index has soared, surging about 25%.

This is being reflected in the various consumer confidence metrics, which are plummeting even though the economy is expanding and the labor market is as tight as ever. What the consumer confidence numbers are capturing is this sentiment around the things we want versus the things we need. We need gasoline, beef and clothing, and the price of all three is much higher than it was six months ago. We want stocks, but the stocks that we possess are down anywhere from 10% to 20% from their peaks. Wealth has evaporated and the cost of living has increased.