The Benefit of Being Realistic

May 2014 //
Optimism/Pessimism

It is hard to underestimate the role of consumer, business and investor confidence in a market economy.  Simply put, for there to be economic progress, people need to feel confident enough to buy durable goods (automobiles, appliances, etc.), start or expand businesses, and take the investment risks associated with business formation and job growth.  Understandably, after a recession as steep as the one during 2007–09, confidence takes time to improve.  That’s one reason why the current economic recovery has been slower to develop than others in our lifetimes. Importantly, it is often those individuals who are quicker to regain their confidence who benefit more when it comes to their own economic interests.  For example, those who bought a new home in recent years benefited both from low home prices and very low mortgage rates.  Those who invested in stocks over the last five years earned high returns.  Although it may not warm the hearts of those who remained worried over the last five years, their bank account and money fund savings helped to keep interest rates very low.  This enabled home buyers to acquire low-rate mortgages and enabled businesses to borrow funds cheaply, thus benefitting their profitability and stock prices.  Indeed, low-rate mortgages and corporate borrowings have in many instances been locked in for decades, so higher interest rates at some point will not necessarily increase borrowers’ costs commensurately.  In general, the fact of the matter is that those with low amounts of confidence unwittingly contributed to the success of those with more realistic outlooks.  As in many things, it pays to have a realistic view of both the risks and opportunities in life.