Looking at data from groups such as the Federal Reserve Economic Data (FRED), the University of Michigan Survey of Consumers, the Consumer Protection Financial Bureau (CPFB), and other consumer sentiment/home finance research sources might give you an aggregate picture of what is going on across the country, and yet it sometimes helps to also put yourself in the shoes of hard working Americans. Sometimes affluence can make you out of touch with certain key decision points that others have to make.
Take for example the current situation where a lot of family savings have been depleted, and increasingly people are turning to credit cards to finance their day to day purchases. The overnight Fed funds rate interest rate hikes eventually showed up in car loans, bank loans, mortgages, and other expenditures. The situation where everyday goods are increasing due to inflation and having to purchase those with a credit card further puts families at a disadvantage.
Depleted savings also means smaller equity when you want to buy a home. That leads to higher monthly mortgage payments, which in turn have increased because of the rate hikes.
The tech sector has seen significant layoffs these past few weeks brought about by the lagging reaction to more expensive corporate debt. Even though some of these top tech companies have cash surpluses, it does not appear that they want to risk keeping salary and benefits expenditures for the rest of 2023 given the recession forecasts from experts.
For those who are paying for mortgage and car loans, the increased monthly payments have made their discretionary budgets smaller after basic food, clothing, education, and other necessary expenses are paid off. This can affect the decision whether to keep expenditures such as streaming services like Netflix, though it can be argued that for a few dollars a month families might opt to keep it as a cheaper form of entertainment instead of going off on that planned vacation trip this year.
Economists frequently say that less liquidity in the system can mean that risk-on assets like tech stocks and crypto will suffer in favor of more stable investments like bonds or dividend yielding old economy stocks. But that’s if you think about it rationally. People who buy meme stocks and crypto for example are not necessarily logical thinkers. Some of them might actually just disregard all the bad news and go for it anyway.
Someone for example might argue that, “if I don’t buy 0.1 Bitcoin now, I might not be able to afford it in the future when it rises to $100K.” Another might always find a way to rationalize why they won’t buy it yet. When the price is high, they’ll say it’s too high and it might crash. When the price is low, they’ll say “I’ll wait until it drops down further.”
Most people will likely do what they think is in their own best interest. But that might not be what scientists and experts think that is. It might be nice to think that we can predict human behavior with a complex mathematical model that runs on the latest AI, but we humans have our own minds and we behave individually in our own complex way. Smoking is bad for you and can kill you in the long term, but a lot of us smoke anyway. The same can be said for a lot of things that experts don’t recommend.
So if economic experts think that there won’t be a bull market, that people will avoid risk-on assets, that people will wait for more favorable home mortgage rates because it is in their own best interest to do so, in the aggregate they may be right.
But not everyone thinks or reasons in the same way. Some of us follow the herd, some of us run contrary to the herd. Some listen to experts, some do the opposite of what experts say. Some do things contrary to their well-being, and some simply don’t think.
We can only assume that most people think rationally the way the scientists build their models, but that’s not always the case.