In today’s 7:30 Report, Kerry O’Brien reported of a good news on the Australian economy. The good news, as it turned out to be, was a surprise jump in consumer sentiment as measured by the Westpac-Melbourne Institute index. It was the largest jump in 22 years. Words to describe this rebound include, “remarkable” and “surprise.”

What was the reason for the jump? According to Bill Evans, chief economist of Westpac, it was “very likely that the dominant factor behind this extraordinary rise was the release of the March quarter national accounts last Wednesday.” Other reasons include the lowering of interest rates, stock market rally and so on.

The fact that economists got excited over something so meaningless shows that shonky economics is practiced here in Australia.

As we quoted Wilhelm R?pk in his 1936 classic at Why is the market so easily tossed and turned by dribs and drabs of data?,

It was indeed an ingenious idea to apply the principle of nautical astronomy to economic forecasting, but there was one fatal flaw. For as long as we have not made a thorough investigation into the causal relationships between the time-series, the mere temporal sequence does not tell us any more than that something has happened in the past which might not happen in the future if some variables in the causal mechanism should change. But in investigating the causal relationships we are thrown back from statistical empiricism to ?theory? in the deductive and analytical sense.

…

By the statistical method, we ascertain facts, but we cannot explain them, i.e., bring them into logical order so that we ?understand? them. Only analytical theory can do that, and if there has been, in recent years, any furthering of our insight into the mechanism of crises and cycles, this has been the work of the theorists and not of the empiricists.

Where is the critical thinking by those mainstream economists?

It is very easy to understand why consumer sentiments improved. Today, many people’s ‘wealth’ are tied to the asset markets. Many have their retirement ‘savings’ invested in superannuation funds, which in turn pour the money into the stock market. Also, many have most of their ‘wealth’ tied to their primary asset, their home, which in turn depend on the property market. To put it simply, people’s sense of financial well-being are tied to asset prices. For those deep in debt, if their asset prices collapses, it’s curtains closed for them.

Naturally, if

1. One’s sense of financial well-being depends on asset prices and
2. Having read about “green shoots,” recovery ‘hopes,’ Chinese appetite for Aussie dirt, and sustained stock market rallies on the mainstream media daily and repeatedly,

… it is easy to feel optimistic as an indebted consumer. As the Nazi propaganda chief, Gobbels once remarked, if you repeat something long enough, eventually people will believe it as truth.

Allegedly, the stock market, in response, rallied hard upon this ‘good’ news. In some ways, this rally will feed back into consumer confidence. This reminds us of this story at Do sentiments make the economy or the economy makes the sentiments?,

It was autumn, and the Red Indians on the remote reservation asked their new chief if the winter was going to be cold or mild. Since he was a Red Indian chief in a modern society, he couldn?t tell what the weather was going to be. Nevertheless, to be on the safe side, he told his tribe that the winter was indeed going to be cold and that the members of the village should collect wood to be prepared.

But, being a practical leader, after several days he got an idea. He went to the phone booth, called the National Weather Service and asked, ?Is the coming winter going to be cold??

?It looks like this winter is going to be quite cold indeed,? the meteorologist at the weather service responded.

So the chief went back to his people and told them to collect even more wood. A week later, he called the National Weather Service again.

?Is it going to be a very cold winter??

?Yes,? the man at the National Weather Service again replied, ?It?s definitely going to be a very cold winter.?

The chief again went back to his people and ordered them to collect every scrap of wood they could find. Two weeks later, he called the National Weather Service again.

?Are you absolutely sure that the winter is going to be very cold??

?Absolutely,? the man replied.

?It?s going to be one of the coldest winters ever.?

?How can you be so sure?? the chief asked.

The weatherman replied, ?The Red Indians are collecting wood like crazy.?

This Westpac-Melbourne survey result is like the Weather Service man ‘predicting’ cold weather ahead by observing the Red Indians collecting firewood like crazy, who in turn did so on the Weather Service’s ‘prediction.’

It doesn’t take a genius to deduce that another panic in the stock market will cause consumer sentiment to tumble again.