Caution: Consumer Confidence Is A 'Cognitive Casino'

This special guest commentary was written by Peter Atwater of Financial Insyghts. This piece was originally published on March 19, 2017. 


Caution: Consumer Confidence Is A 'Cognitive Casino' - 03.02.2017 consumer confidence


The Mirage – “Consumer confidence rose in March as Americans were more satisfied than any time in 16 years with the current state of their finances and the economy, while remaining sharply divided along party lines about the outlook.”


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That was how Bloomberg summed up Friday’s University of Michigan survey: Great, but highly partisan. While on average Americans feel good about things today, underneath the surface, eighty-seven percent of Republicans expect continued gains in the economy over the next five years, compared to just 22 percent of Democrats.

As I have offered repeatedly, when it comes to reported confidence, 2017 is 2009 in reverse.

What few took note of were these conference call comments from Michigan survey director Richard Curtin:

Consumers recognize, even Republicans recognize, that there’s lots of uncertainty about what economic policies will be passed and what the regulations will be… We have this unusual situation where we have a rise in optimism and a rise in uncertainty. (Bolded for emphasis.)

To explain the significance of this comment, I would draw your attention to this simple slide.


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As I have offered before, confidence requires perceptions of control and certainty. While one or the other is good, both are required. Confidence is not only about how we feel about the future, it is about we see ourselves faring in that future, too. Today, per Mr. Curtin, while Republicans may have a heightened sense of control, they, along with Democrats, sense a rise in uncertainty.


What Mr. Curtin unknowingly revealed is something that I have been concerned about since Election Day. Republicans aren’t “confident;” they are “relieved” and now hopeful. With the arrival of the new administration, and Republicans gaining control of both the House and the Senate, Republicans feel empowered; and, as a result, they are, as Mr. Curtin put it, now “optimistic.”

While optimism accompanies confidence, the two are not at all the same. There is a vast difference between being optimistic about something happening ahead and being confident in it happening. There is hope and then there is trust.

At the risk of oversimplification, I’d offer that the mood migration that we have seen among Republicans since Election Day is not from the lower left box in the chart to the upper right box, but a shift from the lower left box to the upper left box.


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While Republican voters are more optimistic and feel a much greater sense of control, they are not confident. They still do not have a high sense of certainty.
On the surface this may seem like I am once again dancing with angels on the head of a pin, but the distinction matters – a lot, too.

Environments of high control and low certainty are fragile. A poker game, for example, is an environment of high control and low certainty. So, too, are stock picking and active investment management. An environment of high control and low certainty defines games of chance.

To be fair, neither we nor those measuring confidence pay much attention to the distinction between the upper left and upper right boxes. Both environments express, if not ooze, optimism. Heck, the pharmaceutical, casino and financial services industries together spend billions of dollars every year in advertising trying to convince consumers that there is no difference between the two boxes. Whether it is a drug or an investment, consumers are routinely told to ignore the potential adverse side effects arising from uncertainty.


This chart from Gallup, though, suggests that ignoring the potential side effects is exactly what investors and Republican voters have done since the election of Donald Trump. Consumers’ “Economic Outlook” – “optimism” – went from -21 just before the election to +15 a week ago.


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Beyond the recent sharp decline in the black line evident in the chart above, I have two concerns with the current positioning of Republican voters in the upper left box today.

First, if the new administration has shown anything in its first days in office it is that uncertainty is the team’s normal operating environment. Stop, start, yes, no, true, false – we’ve seen more shifts in position from the Trump administration than a day-long yoga class.


Based on what we’ve witnessed so far, the new administration has no sense of the distinction – let alone the importance of that distinction – between the upper left and upper right boxes.


Rather than taking small steps that foster greater and greater certainty and build confidence over time, the new administration has thrown caution to the wind. From healthcare to financial services reform to the budget, nothing is now certain. They are, for lack of a better term, gambling with America’s future, comfortably running an administration in the upper left box.


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While that would be worrisome on its own, the current positioning of Republicans requires that Trump’s followers keep on winning. With Republicans’ optimism entirely a function of a greater perception of control, the new administration has no choice but to do whatever-it-takes to keep that perception aloft. To put things differently, if you think things look authoritarian now, just wait until uncertainty rises.

With Republicans having been mobilized into a cognitive “casino” with the election of Donald Trump, the new administration can’t now let them lose. Even more, having just gained control, after a long time without it, Republicans aren’t going to let it go of their new found power voluntarily.


But whether the consequence is greater authoritarianism or increasing stridence among Republicans, the confidence of Democrats is likely to be seriously threatened. With the zero-sum thinking that exists today in the White House, there is no way the new administration is going to take a bipartisan gamble that potentially boosts Democrats’ confidence, if it in any way puts at risk Republicans’ high perception of control.


The net of it all suggests a probable outcome that looks like this:


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Republicans (in green) will remain in the upper left box, while Democrats (in red) will move further and further into the lower left box. Needless to say, not only does this all but ensure extreme political partisanship ahead, but it will seriously limit economic growth. Without certainty, no one – Republican or Democrat – will move to up and to the right. All of that “optimism” being reported by Michigan, Gallup and the NFIB won’t translate into action.

(And while it is a topic for another day, I would not underestimate the vicious cycle that is likely to develop as “underconfident” Democrats lash out at the administration, which in turns results in greater authoritarian actions resulting in further backlash…)

To be clear, if the parties were reversed and there were a Democratic administration behaving in the same manner as the new Trump administration, I would be outlining the same scenario. What I see are confidence-driven, far more than ideology-driven, behaviors. “Box position” matters.

To sum it all up, optimism, not confidence, is at a 16 year high. While the stock market and surveys, like the one released by the University of Michigan on Friday, are reflecting hope, below the surface, uncertainty is building. Unless the new administration begins to takes steps to reduce growing anxiety, the bright future that consumers and investors see today will quickly evaporate.

Just like a Las Vegas casino, it will all have been a mirage.


This is a Hedgeye Guest Contributor note written by Peter Atwater, founder and president of Financial Insyghts. He previously ran JPMorgan’s asset-backed securities business. He is also the author of the book Moods and Markets (FT Press, 2012) which details how investors can improve returns by using non-market indicators of confidence. This piece does not necessarily reflect the opinion of Hedgeye.


Is This One of the Most Hated Stock Market Rally of All-Time?

Is This One of the Most Hated Stock Market Rally of All-Time? - trump stock market23


Wall Street really doesn't like Donald Trump.


Think about it. Data on Wall Street consensus positioning shows that investors have been betting against President Trump since his Election Day victory (even though U.S. economic data has been heating up).


Much to Wall Street's chagrin, and to the detriment of their P&L, broader U.S. stock indices are up between +10% and +13.2% since that fateful November 8th day.

And then stock market bears, finally, got some relief...

So far this week, U.S. stocks have fallen between -1.3% and -2.7%. Following the modest pullback, Wall Street celebrated "cracks" in the Trump trade. The sky-is-falling headlines came rolling in. 


  • Reuters: Wall Street sinks on fears of delays to Trump tax cuts

  • WSJ: Stocks Suffer Worst Day of Year as Confidence in Trump’s Agenda Wavers
  • Yahoo Finance: Wall Street set to open lower as 'Trump trade' fizzles
  • CNBC: Trump Tantrum looms on Wall Street if health-care effort stalls

The Germans have a word for this type of thing. "Schadenfreude" is defined as pleasure derived by someone from another person's misfortune. 

Betting Against Trump

All this hyperbole is actually pretty sad. Since Election Day, Wall Street has been betting on a big correction that hasn't come. Not to get too technical but the Chart of the Day below shows investors' wagering on a selloff in stocks.


(Specifically, it shows investor expectations of future volatility implied by options positioning in the S&P 500, Nasdaq and S&P 500 Technology sector.)


The big spikes in the chart show fearful investors piling in to buy downside protection. This has been the case since Election Day. In other words, politicized investors have been losing a lot of money on the other side of this rally.


Is This One of the Most Hated Stock Market Rally of All-Time? - 03.23.17 EL Chart

Bottom Line

We would bet against fearful Wall Street consensus. As we've said, over and over again, U.S. economic growth is accelerating. It's simple. That will continue to send stocks higher. 


Click here to get our investing ideas to help you beat this bull market.

McCullough: Did You Buy the Dip? (You Should Have)


In the highlight reel above from The Macro Show this morning, Hedgeye CEO Keith McCullough explains why we told investors to raise cash last week and buy the dip in U.S. stocks today.


  • Stocks Overbought, Raise Cash… Stocks Oversold, Buy Stocks – In our asset allocation model, we took cash up to the year-to-date max on Friday because the market was overbought. “It’s really simple. Raise cash at the top end of our ranges,” McCullough says. “On the pullback, when nobody wants to buy’em, you buy’em.” By the way, it’s almost time for the month-end, quarter-end mark-up. In other words, “Yesterday could be the lows of the quarter,” McCullough says.
  • Hedge Fund Performance Chasers – Our proprietary risk ranges, which investors use to buy low and sell high, are calculated via the price, volume and volatility of an underlying asset. Staring at one of these in isolation is no way to trade. “If all you did was look at the surface, at price, you’d sell low and buy high. That’s what a lot of people, in the hedge fund community in particular, are being pressured to do. What they’re constantly doing is chasing their own momentum tail and that really doesn’t help you.”
  • A Brief Note on Oil – Oil prices are breaking down, McCullough says. Stay away.


Cartoon of the Day: Fracking Americans!

Cartoon of the Day: Fracking Americans! - 03.22.2017 OPEC fracking cartoon


U.S. oil production has been ramping up just as OPEC has been trying to cut production. 


"US producers have added 102 new oil rigs since OPEC implemented oil production cuts," writes Senior Energy Policy analyst Joe McMonigle. "That's up 14 operating rigs on the week to 631. This is versus just 387 rigs a year ago."



Click here to receive our daily cartoon for free.

Got BEN? Franklin Resources Is a “Very Undervalued” Stock


If you’re looking for exposure to a “very undervalued” stock, one which is among the world’s largest asset managers, we’ve got an idea for you.


Buy Franklin Resources (BEN).


Sure, the fund manager, with $738 billion in assets under management, has had a great run over the last six months. It’s up +14.6%. But skeptics on the stock are backward looking and overly fearful of negative fund flows, according to our Financials analyst Jonathan Casteleyn.


The flows are slowly, but surely, turning around.


“The top 100 Franklin funds are still in redemption, with an annualized negative growth rate of -8.3% but that has improved from the high teens,” Casteleyn says.


Meanwhile, the company has a “solid” net-asset value (NAV), with $12 per share in unrestricted cash and investments, and annual free cashflow of $2 billion for an 8% free cash-flow yield.


“Franklin stock is very undervalued in the intermediate-term, meaning over the next 12 to 24 months,” he says.

Poll of the Day: Whose Market Calls Do You Trust Most?

Takeaway: What do you think? Cast your vote. Let us know.

Poll of the Day: Whose Market Calls Do You Trust Most? - poll manitee image