By: Ronald D. Struck                                                               July 20, 1998

WHAT’S THE MARKET GOING TO DO?

Normally there is an inverse relationship between interest rates and consumer confidence – when rates are high confidence is low, and when rates are low, confidence is high.  When a direct relationship has existed, it has been because of fundamental structural problems in the economy – i.e. the great depression of the 1930s, the real estate/financial institution bust of the late 1980s/early 1990s.

Consumer confidence has recently been at the highest levels in 20 years.  The previous highs were in 1988, just before their collapse to 20 year lows in early 1992, the middle of the period when the economy was undergoing major re-adjustments precipitated by the severe problems of the real estate industry and the financial institutions that serve it.  During this period of low consumer confidence, interest rates fell 300 basis points.

What’s the market going to do this time?  If consumer confidence declines will it be because of concerns about increasing interest rates or because of concerns about fundamental problems in the economy?

I believe it will be because of the fundamental problems facing the global economy, not increasing interest rates in the U.S.  The problems facing Japan, Russia and Asia make those that we faced in the U.S. in the late 1980s/early 1990s pale in comparison.  The only thing that will address these problems is a major worldwide economic re-adjustment, and not because of the efficiency of the world’s political leaders in controlling interest rates, currency exchange values or acting as lenders of last resort.  My belief is based upon the following - 

·         It is highly unlikely that most political leaders will pursue policies that will address the fundamental problems.  Most of their actions will be nothing more than short-term Band-Aids.

·         Even if there are political leaders who are willing to pursue efficient long-term policies, they will not initiate them quickly enough to achieve the desired results.

·         Even if they are prepared to do the right things in a timely manner, the international community does not have the financial where-with-all to address the problems.

·         Finally, the U.S. is an integral part of the global economy and we cannot avoid being impacted by the major problems facing overseas economies.

In conclusion, I believe that the global economic problems will slow down the U.S. economy and this will cause the current high level of consumer confidence to decline sharply.  Therefore, even though interest rates are already relatively low, I believe there is a very high probability that they are going to fall even further.

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