American Ennui

Friday, investors had to digest news on the housing market and the latest read on the consumer confidence. Once again, the financial media got it all wrong, reporting the news separately, as they were released at different times, and not connecting the two and Main Street to the real crisis that would address how a nation slips into an economic malaise, and how to rebound from it. Housing starts and permits beat consensus, and many have pointed out that it was driven by apartments, which spiked to the highest share of housing starts in 40 years.

The 1970s was one of the worst decades in American history, which saw the end of an extraordinarily violent war that America could not win. Moreover, while many could argue that not winning means the same thing as losing, no one could argue that the war was so unpopular that it lead to the shameful treatment of our soldiers, and a certain disdain of the American might and the nation at- large.

Added to the mix, a political scandal for the ages, as the Watergate scandal destroyed the career of Richard Nixon, who had won 49 of 50 states in perhaps the greatest White House election landslide in history. The office itself became a mockery, and future incompetence made public perception worse.

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Prices for everything went through the roof. For instance, gasoline began the decade at $0.38, only to finish near one dollar a gallon. Food prices skyrocketed after a spark in prices that began with the Peruvian Anchovy Collapse (caused by over-fishing and El Niño, in which production dropped from 12 million tons in an average year to 2 million in 1972), a major source of feedstock.

Role of Expectations

Although there were exogenous events and factors that sparked the surge in inflation during the 1970s, a lot came from monetary policy which suggested that as long as unemployment was low, people could handle higher prices. This is certainly important to note because higher inflation expectations seem to be at the forefront of the minds of the Federal Reserve, today. I happen to believe successful economic conditions are also partly self-fulfilling, but that is different from a trade-off.

For many, the greatest risk with any policy is that it over-promises, and under-deliverers. This is why there is so much fear about over-optimism and the stock market. (I have written a few times each month about the fact that there is nothing near over-optimism with respect to the stock market. Last week, the bear bandwagon reached capacity with prognosticators that I thought long retired, jumping on the crash bandwagon. All I can say is that it is going to be a crowded victory lap, and so many books on how "I" was the only one that saw it coming. The punch line though, will not be in print: I gave you seven years of warnings!)

The chain of disappointments often lands a nation in a period of malaise.

We are at the point in the old classic equations where there should have been an inflection point with respect to mood. At this point, positive surprises against a backdrop of low expectations should result in an upsurge in optimism... even a dollop of optimism would be a change of pace. On the contrary, good news is bad news, and bad news is bad news. I do not think it is a secret, but it is the political realm that is affecting our attitudes.

The resolve of the data mostly proves that you cannot crush a $16.0 trillion economy overnight- no matter how hard you try. However, the simple act of launching a war on success and all those new taxes and regulations, has proven to be a mountain preventing the expansion of optimism. It is the non-economic news from Washington DC that is fueling apathy in this nation like no other period since 1973.

• NSA Spying Scandal
• IRS Targeting Scandal
• Benghazi Scandal
• VA Scandal

These are all scandals that have crossed party lines and that have affected all Americans. The fact is that while it was the spirit of arrogance that lead to Watergate, the scandals are so much more dangerous-listening to every phone call and logging every search. Moreover, using the most feared branch of government as a blunt object against your political foes has a chilling effect. What is happening to our veterans, and the flippant attitude by the administration is not only scandalous, but heartbreaking as well.

OPEC is not holding back cheap energy, and B-list Hollywood types and rich (ex) investment bankers are looking, perhaps, to cleanse their soul before heading to the pearly gates spout leftist rhetoric. Then again, most of these guys do not believe in the pearly gates.

Of course, the rhetoric could fade overnight, and there could be an olive branch toward the tradition of American exceptionalism, but that mountain of debt is not going away, and the Fed balance sheet casts a shadow that will cool the economy for a long time. Imagine if we Okayed Keystone, lowered corporate taxes, and did not tell every financially successful person that they are the product of luck or the lucky gene pool. That would alter expectations, and it would spark this economy without gimmicks or excessive risks.

Frustrated, Bored & Dissatisfied

The wealth effect is still not materializing, even after housing starts and permits came in ahead of consensus on Friday. The fact that apartments were the highest percentage of starts crushed the notion that higher asset prices alone can make people spend the money they have, once the consumer sentiment and the market moved hand in hand. That changed after the crash of 2000, and even the rebound in 2007 saw confidence with a more shallow bounce. Now the gap is mind-boggling (see chart below).

I call it the Dropout Nation, and this is what we get when there is widespread frustration, boredom, and general lack of interest. You can call it the American Ennui.

Still, stocks trade on earnings growth and margin expansion in the long run, and those things are being driven by businesses outside of America.

At some point, however, we need the greatest economy ever created, to kick into a higher gear and lift the American spirit in the process. That is a tall order, since expectations influence outcome and not the other way around. In the meantime, this is an antsy period, which feels like anything could topple the nation over, and you wonder what will be the great anchovy crisis of our era?