When I was growing up my father told me more than once that "if you do that, son, you aren't going to like the consequences."   Generally, those words were spoken to me just before I wanted to do something to fill an immediate desire - such as spending all my yard mowing money to buy my first car.  It was cool, it looked fast and it was the first car I saw on the lot.  Nothing else mattered - that car was mine and I have to have it right then and there.  I was too young to know it then but I had fallen victim to the "immediacy trap."

What my father was trying to tell me, and of course I didn't listen, was what he already knew - the car was a total piece of crap.  I didn't like the consequences.  Had I been patient, done my research, and shopped around for the right opportunity - I would have been much better off.  Now, I will pass that experience down to my son - who, most likely, won't listen to me either.  That is the bond between father and son.

Experience has always been the best teacher if life, love and money.  Those that tend to disregard what experience has tried to teach them are often doomed to repeat the same mistakes over and over again.  Yet, when it comes to economists, analysts and investors, past experience is something that is readily set aside when it disagrees with the overwhelming power of greed.  For example, over the past couple of weeks there have been numerous articles posted about how the recent rise in oil and gas prices either haven't, or won't, affect the economy "this time".

What is generally wrong with the analysis is the context from which the assumptions are made.  What experience teaches us is that there is a lag effect between the consumer and higher oil and gasoline prices.  Unfortunately, most economists, analysts, and investors fall victim to the "immediacy trap".  The trap is assuming that just because an uptick in oil and gas prices doesn't create an immediate downtick in retail spending - "this time must be different."  In reality, what experience teaches us, is that there is lag effect between the direction of oil and gas prices and retail spending. 

Why, because of human nature.  When the price of anything moves in one direction or another - consumers do not immediately change their habits.  Prices have to flow through the system to impact the consumer and this takes time.  Individuals, for the most part, are creatures of habit.  For example, if the price of a particular brand of beer rises the consumer will continue to purchase that brand of beer until the prices rises to a point where it pushes them into having to sacrifice something else.  Only then will they consider changing brands or cutting back the purchase.  Unfortunately, increases in oil and gas prices impact the the family budget on a large scale basis as the cost of a certain standard of living rises globally.

For clarity purposes I have annotated the chart of oil prices and real retail food and service sales with numbers corresponding with my explanations below. 

1) 1993 to 1997 oil prices increase.  The stock market rally, combined with increases in consumer credit, was creating an artificial wealth effect for consumers which allowed them to increase consumption.  However, while retail sales remained positive on a year-over-year basis, sales began to slow as oil prices weighed on family budgets.

2)  1997 to 1999 oil prices decline.  As the stock market began to launch into overdrive, with the technology boom going into the turn of the century, retail sales began to rise as oil prices declined.  The increases in perceived wealth combined with extra cash left in the wallet, retail sales, along with confidence, improved.

3)  1999 to 2001 oil prices jump.  As oil prices turned back up in 1999 and exploded into early 2000, along with the stock market, retail sales sustained advances for a while until the sustained increases in pricing pressures impacted the consumer.  The Fed, concerned at that point with the "inflation boogyman", Fed raised interest rates.  Rising interest rates, along with rising commodity prices, impacted consumers and retail sales declined sharply.

4)  2001 to 2003 oil prices slump.  As the shock of terrorist attacks and the impending war in Iraq loomed over the economy - retail sales continued to decline even as the back of oil prices was broken.  Finally, at the bottom of the recession in 2002, the economy began to regain some traction as interest rates were lowered and the crisis of confidence from the flagging stock market and terrorist attacks subsided.  In order to ensure the recovery The Fed and Wall Street then turned their full focus on the housing eventually starting a massive bubble in real estate and once again creating a wealth effect for consumers.

5)  2004 to 2009 oil prices relentlessly climb.  With Alan Greenspan's endorsement of adjustable rate mortgages in early 2004 the real estate race was on.  Banks allowed to credit to flow to anyone that could manage to fog a mirror and, in some cases, even that standard was worked around.  As banks and brokerage firms, which were brought together by the repeal of the Glass-Stegall act in 1999, the speculation in real estate, mortgage backed securities and the stock market was once again revived.  Speculative money flowed into the commodities markets driving oil and gasoline prices relentlessly higher but the consumer, more than willing to play the game of mortgage equity extraction, spent like drunken sailors through early 2006.  However, even a booming economy could not withstand the continually rising input costs.  Retail sales began to flag early throwing off warning signs of trouble ahead.  However, mainstream analysts and economists kept touting that it was nothing to worry about - it would be a "soft landing scenario" and a "goldilocks economy."   Well, we know now how this story ended.

7) 2010 to Present oil prices persistent push.  As quantitative easing, home tax credits, cash for clunkers and other programs ran out in summer of 2010 - oil prices pulled back as liquidity was extracted from the options market.  Retail sales slumped simultaneously this time due to an immediate impact for the lack of capital.  However, it wasn't long before the Fed realized this delimma and implemented QE 2 to "increase asset values to spur consumer confidence" in the late summer of 2010.  Retail sales immediately recovered as the stock market once again surged but it was short lived as the economy was impacted by the Japanese earthquake, fears of a U.S. default and an European crisis ran the media headlines.  Even the brief decline in oil prices in the summer of 2011 did little to spark retail sales. 

With oil prices now pushing higher once again the year-over-year deterioration in retail sales in accelerating.  The point here is that experience teaches us that the consumer can continue to purchase items in the face of rising costs - at least for a while.  Eventually, the finite amount of disposable income that is available for consumption by the average family has its limitations. 

This is very much a point of concern that is being readily dismissed by the media.  The "immediacy trap" is that while the month to month data may be positive - the trend of the data can be deteriorating.  The current negative trend in retail sales is such a case and point.  While the media makes prognostications that the consumer can weather higher oil and gasoline prices "this time" - the reality is that the trend of the data already says otherwise.  Eventually, this deterioration will show up in corporate profits as the consumer is squeezed between stagnant incomes and rising price pressures.  

Furthermore, the recent rise in oil prices compared to the magnitude of decline in retail sales is very similar to the 1999-2001 period.  The current rise in stock market prices, created once again by mass injections of liquidity, is creating an artificial wealth effect.  That wealth affect may account for the recent increases in consumer credit of $40 Billion in the last two months of 2011.  However, even as consumers tapped credit lines in order to just maintain their current standard of living, the level of retail sales has remained stagant, as real disposable personal incomes declined.

Not only is the increase in credit, without a subsequent increase in consumption, a sign of strain on the American consumer; but they shifted from buying new goods to used goods in recent months in a big way.  An era of "frugality" has impacted the average American home and with high unemployment, underemployment and wage pressures weighing on the family budgets - cost increases hit home much faster than in past years.

The media has once again fallen victim to the "immediacy trap".  Just because the recent rise in oil and gasoline prices haven't already caused a recessionary drag on the economy then, obviously, this time must be different.  Experience teaches us that "this time is never different" and that it is only a function of time before increases in oil and gasoline prices, if sustained, will grind the economy to a halt. 

Maybe it's time that we start to listen to our father's advice.