The U.S. Consumer's Strange Exuberance

 | Nov 27, 2012 | 1:32 PM EST  | Comments
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Consumer confidence the highest in four years? Number of people planning to buy a house at a record high? Robust holiday season sales from the get-go? Right while we are perched on a fiscal cliff, an abyss that should stop any consumer spending in its tracks?

Welcome to a world of confusion, as a highly respected survey of the Conference Board released today shows a buoyant and happy consumer who, at last, sees her way out of a downturn at the exact same time that Washington's policies would, by all empirical data, send us right back into one.

How can this be?

There could be two reasons. The first is that what really matters to the U.S. consumer is the value of her No. 1 asset, her house. You get the property values up, you get a consumer who feels that all is not lost. The idea that 14 million households may be transitioning from being in the hole on their house to being in the black again could be driving this whole confidence locomotive. It makes sense when you consider that this is the single biggest variable that has changed in the last year. After all, the last time we were at this consumer confidence level, score it 73.7, up from 73.1 the prior month, was in February 2008, when home prices were just beginning their traumatic fall.

It's not chimerical. The widely respected Case-Schiller index of home prices showed a 3% year-over-year increase in home prices this morning, including huge gains in some of the previously hardest-hit areas, such as Phoenix, which showed an astounding 20% increase in prices year over year.

If you go back to those old days of heady house-price appreciation, you might recall that Phoenix was the epicenter of house speculation. The homebuilders tried to curb it by limiting the number of homes people could speculate in, but they failed to do so. So there was a dramatic overbuild, as the homebuilders presumed the prices would continue to spiral higher, and the speculators were given ridiculous loans to do their speculating. Hence the proximate cause for our real-estate-related Great Recession.

Now, today, we learned that there is literally a housing shortage in Phoenix, according to David Blitzer, the spokesman for the Case-Schiller index, who told me this astounding fact when I interviewed him this morning on "Squawk on the Street." That shortage is spurring the new level of homebuilding in that area of the country as well as other areas that have become ultra-hot after being ice-cold for so long.

The idea that we could actually have a developing home shortage explains the constant bid underneath the homebuilders' stocks. It also explains the endless buying in the home-goods stocks, which include everything from Home Depot (HD) to Whirlpool (WHR) to Ethan Allen (ETH) and Masco (MAS).

But more important, the price increases have to be considered tectonic when it comes to the psyche of the homeowners.

Which brings me to the second question that stems from the buoyant confidence report. Are a majority of those polled happy homeowners or prospective buyers? Or are they just oblivious to the dangers of the fiscal cliff? Do they even know what it means? Do they know about the tax increases? Do they know about the layoffs? Do they know about the takeaway of stimulus? Are they just befuddled? Uncaring? Foolish? Incredibly brave? Incredibly confident and smug? Maybe a little of all of that?

First, maybe we should not be putting all that much faith in the predictive worth of these consumer confidence numbers. When they were highest the last time, shouldn't they have been plummeting? I mean, it was right at the beginning of the breakdown of society as we know it. February 2008 was the modern-day equivalent of the Roaring Twenties. Sure, they were confident. But they were wrong. The Great Depression was right around the corner.

Second, many of the people polled might be paying little or no income taxes and are indifferent to the cliff. We know that as many as 50% of the people in the country have not had to pay much of any federal income tax at all. We know the rates go up big for the wealthier, but that cohort is small and is therefore a small part of the survey. Maybe the richer people haven't been able to assess it, given how difficult the tax code is to comprehend. I know I can't figure out how much I would owe. That makes me more cautious. But maybe I am an outlier.

Third, maybe we are overstating the whole fiscal cliff issue. There are plenty of rational people out there who watch television, read the newspapers and calculate how much more they owe that they shouldn't be spending as aggressively as they are, say, for the holidays. And by all accounts they are spending aggressively.

Or maybe that's because so much of the discussion about going off the cliff has to do with the increases in capital gains and dividend taxes. The vast majority of Americans, including, I am willing to bet, a gigantic percentage of those polled in the confidence survey, don't have any taxable gains to speak of or taxable dividend income. Yes, there has been a spate of special dividends declared -- today's Brown-Forman (BF.A) and yesterday's Las Vegas Sands (LVS) and Dillard's (DDT) are the most pronounced, other than the move up of the Wal-Mart (WMT) payment from a few weeks ago. But these don't affect more than a handful, percentage-wise, of the populace.

In other words, the capital gains and dividend tax increases may not be enough to move the confidence needle to the negative for those who are thinking about buying a $180,000 house. Especially when you consider that your principal asset, if you own a house already, is moving up in value more than anything in your stock portfolio could go up. Dividend taxes are probably not on the vast majority of people's minds, and most stocks haven't appreciated enough to have meaningful taxable capital gains income if they were sold.

Finally, there's the possibility that most people genuinely believe that a deal will be reached in Washington, D.C., that the extremists who do not want to rise above politics aren't in charge. Maybe they believe that the radical Democrats don't really want higher taxes for all if they can bang the rich. Maybe they believe that the radical Republicans aren't controlled by some guy named Grover Norquist, who created a pledge that doesn't allow the signatories to compromise. Maybe they have never heard of Norquist and don't know that he may be the most powerful person standing in the way of compromise.

On this issue, I must say that I grow less confident by the day that we will have a deal. We are reading about how some Republicans are breaking ranks with the Norquist pledge. But we aren't reading about how the Tea Party people are determined to go against any deal that raises taxes, even if it is agreed to by the House leadership. I am sure that many of the Norquist hardliners don't regard the presidential election as a referendum on anything and instead just believe that to vote for any tax increase is a total betrayal of their own words and beliefs.

We are not reading about Democrats who may actually like falling over the cliff because the tax increases would amount to a de facto destruction of the Republicans' word not to raise taxes no matter what. In other words, if you are a hardline Democrat, you get your cake and eat it, too. You get higher taxes for the rich, and you can run against Republicans who said they wouldn't raise taxes but ended up doing so because of their own intransigence. The only spending programs really crushed by the cliff would involve defense projects. Maybe many of the Democratic hardliners want a smaller defense budget anyway and could finally be getting their wishes.

The combination of all of these factors makes me believe that ignorance is bliss now, but it won't be later on in 2013. That means you can party right now, but the bill will come soon enough if there is no agreement, and if we don't get a deal soon, we aren't getting one at all. Bullish for now; bearish for later.

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