Psychologists call it the “Anxiety Gap.” Today, we begin by applying it to consumer confidence.

The gap between how anxious you are about inflation or rising interest rates and how anxious some other poor fool is depends upon where you reside in the monetary food chain.

“America’s economy is splitting consumers into two very different realities,” reads Fortune magazine’s William Daniel. On the one hand, “despite near record inflation,” he continues, “Americans continue to do what they do best—spend. Even if it means leaning on savings and credit cards, all income brackets have been taking vacations and eating out at restaurants.”

We’ve already noted here in the daily missive that even higher income earners are living paycheck to paycheck. And the gap between consumer credit and savings has reached a historic level.

Trouble is, when people spend beyond their means, there’s higher demand and more money is injected into the system – the two things the Powell Fed has vowed to crush in its “fight” against inflation.

“Real personal spending rose 1.1% in January, according to the Federal Reserve’s favorite gauge,” Daniel notes. The figure is one among a few data points the Fed has interpreted as strength in the economy. Strength leads to a more sustained campaign to raise rates.

“Economists fear that with interest rates set to remain ‘higher for longer,’ and inflation proving to be stubborn,” Daniel concludes, “lower and middle income consumers are beginning to feel pinched.”

We’re headed for an economy in which the American consumer splits into two very different camps: one for the wealthy and one for the working class. For the time being, consumer credit and depleting savings are staving off the Anxiety Gap. But that’s unlikely to last. And then big retailers – like Walmart and Home Depot – will see their earnings get pinched, too.

Bloomberg’s MLIV Pulse survey, taken from a test size of around 2,200 participants, echoes Daniel’s analysis. “Investors are divided over where the US economy goes next,” Bloomberg reads. “Less than half see a soft landing, which respondents defined as inflation slowing to below 3% without growth slowing too much. More than a third expect a hard landing, and about 18% see no landing at all.”

The Conference Board publishes the Consumer Confidence Index at 10am EST on the last Tuesday of every month. Tomorrow, we’ll get the latest read on how the average spender has fared despite eight consecutive rate hikes. It will be a “lagging indicator,” of course, but it will be a piece of intel the data-driven Fed will file away for their next FOMC meeting on March 21.

Our goal is not to be a laggard, at all. Rather to forecast what we think will happen next.

Investment Director at The Essential Investor Zach Scheidt claims that this year’s January uptick– what he calls a “Resolution Rally”– was propelled up by an economic principle called “The Greater Fool Theory.”

You’re likely familiar with the term. The Greater Fool Theory suggests that one can make money buying overvalued assets —  stocks with a purchase price drastically exceeding the stock’s intrinsic value — if those assets can later be resold at an even higher price.

“When the Greater Fool Theory comes into play,” Scheidt says, “and you can make money doing it, you better not overstay your welcome. When bull markets end, the greatest fool– whoever paid the most for those speculative stocks– they’re the one who’s going to be left holding the bag and taking the losses that everybody else profited from on the way up.”

The theory works… until the market runs out of fools. If you don’t know who the fool is, you’re the greatest one.

“It’s a dangerous game to play,” Zach warns, “But Addison, we’ve talked about this a lot.” He continues.

I’m an investor at heart. I believe that’s where you grow and protect your wealth over time. But I am more than willing to take on speculative positions here and there as a small part of my family’s wealth because there are times that you can turn $5,000 into $15,000 over a few months period. You need a specific insight on what’s going on with the stock, the economy or with the market, in general.

I believe that there is a time and a place for speculation, and I believe that it can be a profitable strategy, but I don’t think that it’s wise to make that your primary source of wealth or your primary source of income.

Last week, the Dow, S&P 500 and Nasdaq all had their worst one-week performance of the year. It’s likely the bull run between September 30, 2022 and February 14, 2023 has run its course.

Stocks, especially tech and retail, are already overvalued. That 5-month rally drove price-to-earnings on the S&P 500 to over 28%. The modern historical average is only 19%. That’s before consumers of a wide variety of income levels get “pinched.”

Take away: If you’re still hoping to “buy high and sell higher,” beware. You don’t want to be the greatest fool.

Follow your own bliss,

Addison Wiggin
The Wiggin Sessions