Transcripts

"Reviving the Economy"-The Confidence Factor

SUSIE GHARIB: Every night this month, we're taking a closer look at the markets. We'll examine topics ranging from what's the small investor to do to the safety of the Treasury bond market. It's the latest installation of our continuing series "Reviving the Economy." In tonight's "Money File," the importance of investor confidence. Here's Eric Schurenberg, editor in chief at Bnet Moneywatch.

ERIC SCHURENBERG, EDITOR IN CHIEF, BNET MONEYWATCH: The big rally of the past couple weeks cemented, in my mind anyway, an idea that is taking root among economists. The economy is not truly explained by the supply demand equilibrium functions taught to every econ freshman. Psychology is what really matters. At heart, what we have here is a confidence game. And I mean that in the best possible sense. The rallies were launched by a surge in consumer confidence. Some commentators remarked on the circularity of it all. Consumers feel better really because stocks have risen since March; in other words, stocks rose because they had risen. But maybe stocks went up because there is nothing more powerful in this economy than confidence. If confidence rises, stocks may follow first, but then might come car sales and home sales and then corporate profits. All of sudden, the merely psychological turns into something you can bank on. In the stock market, confidence is measured by the price/earnings multiple, the price that investors pay for each dollar of earnings they're entitled to. If you expect more earnings where today's came from, you pay more. So far, most of the spring rally has come from an increase in P/E. Eventually, these expectations have to be confirmed by higher earnings, but yes, it gets circular. Higher earnings can't happen until people have those higher expectations. The market's role in the recovery, then, will be a familiar one: the first herald of a return of confidence. Warren Buffett famously said that the market is a weighing machine in the long run but a voting machine in the short run. You can't have recovery until investors vote for it. Since March, the vote has been clear. I'm Eric Schurenberg.