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Consumers - Wiser than Street or Just Confused?

Jim Cramer
Jim Cramer

Consumer confidence surged to its highest level in over 4 years.

Looking at the latest numbers released by the Conference Board, the consumer confidence index rose to 73.7 in November from 73.1 in October. That's the best readings since February 2008.

Why is the consumer so buoyant when Washington grows ever closer to falling off the fiscal cliff. Read More: Sen. Reid Reports Little Progress in 'Fiscal Cliff' Talks
"There could be two reasons," said Jim Cramer on Tuesday's broadcast.

Reason 1. Homes prices are finally starting to increase and that matters much more to the nation's economic well being than anything Washington may say or do.

And there's no doubt that home prices are going up. The S&P/Case-Shiller index of property values in 20 cities climbed 3 percent from September 2011.

"When property values go up, consumers start to feel wealthier," said Cramer.

That may be especially true among people who bought houses within the past few years. "Millions of households may be transitioning from being in the hole on their house to being in the black again."

Because buying a house is the largest purchase most Americans will ever make, it stands to reason an improvement in the housing market will not only boost sentiment, but also generate a positive ripple in the economy.

Cramer believes the thesis is confirmed by the recent strength in a slew of housing related stocks – everything fromHome Depot to Whirlpool toEthan Allen and Masco.

If an increase in home prices is driving confidence – the stock market may be in good shape. However there's another possible explanation – and this one is much more ominous.

Reason 2. Perhaps the majority of people who live on Main Street are oblivious to the dangers of the fiscal cliff.

"Maybe they don't even know what it means," said Cramer. To make matters worse, Cramer fears some aspects of the cliff are just too niche for many Americans to even relate.

"So much of the discussion about going off the cliff has to do with the increases in capital gains and dividend taxes. However, the vast majority of Americans, including, I am willing to bet, a gigantic percentage of those polled in the confidence survey, don't have any taxable gains to speak off, nor taxable dividend income."

If the increase in confidence is because the fiscal cliff is misunderstood - the stock market may be extremely vulnerable.

Which is more likely?

Although Cramer feels that either explanation is sound, when push comes to shove, he worries that the second scenario is more likely than the first.

"It's more likely the surge in sentiment is due to a consumer who is blissful but ignorant," he said.

If Cramer's right, then the market is currently on thin ice.

"When it comes to the stock market, you can party right now but the bill will come soon enough if there is no agreement, and if we don't get a deal shortly –after all, there are only 34 more days--we aren't getting one at all. That makes me bullish for now but much more bearish for later," Cramer concluded.


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