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What is Driving Todays Investors?

CFA Society of Saskatchewan 21st Annual Forecast Dinner January 24, 2013

Market Cycles, Behavioral Economics & Post Credit-Crisis Investor Psychology

Presentation by Barry Ritholtz CEO, Fusion IQ

Conexus Arts Centre, Regina 200 Lakeshore Dr, Regina, SK S4S 7G4

Todays Powerpoint Presentation:

10 Steps To a Financial Crisis

Tonights Agenda Agenda

Macro View: Housing & Employment Understanding Long Term Secular Market Cycles Behavioral Economics & Todays Investors 10 Key Trends to Watch

Factors of Employment Overhang
Structural Demographic Global Costs Skillsets

NonFarm Payrolls Post-Recessions (1948-2007)


NFP Post-Recessions (Composite versus 2007)


NFP Post-Recessions (Composite versus 2007)

Post WW2 Job Losses During Recessions

Source:, Calculated Risk

NFP Post-Recessions (Composite versus 2007)

Post WW2 Job Losses During Recessions

Source:, Calculated Risk

Residential Real Estate

Drivers of Housing Recovery:

Huge Govt Support Affordability Credit Availability Underwater Homeowners Cannot Put houses up for Sale Deleveraging of Household Balance Sheets Constrained Supply Foreclosure Abatements

Residential Real Estate Boom Was Global

Source:, McKinsey

Existing Home Sales

Source:, Calculated Risk

New Home Sales

Source:, David Rosenberg, Calculated Risk

Excess Mortgage Debt

1990: $6 trillion of housing collateral could support $2.5 trillion of mortgages 2006: $23 trillion of housing collateral could support $10 trillion of mortgages 2010: $16 trillion of housing collateral could support $6 trillion of mortgages. Problem is, mortgage debt has remained at $10 trillion $4 trillion too high.

Source:, RAB Capital

Part II: Long Term Market Cycles

Understanding the Drivers of Secular Cycles P/E Multiple Compression & Expansion 100 Year Floods Occur Every Decade Composite of 19 Secular Bear Markets The Bond Market as Safe Haven Sentiment Cycle The Upcoming Generational Bull Market

100 Years of Secular Markets, P/E Expansion & Contraction

Source:, Crestmont Research

100 Year Dow Industrial Chart

Source:, Bloomberg

1966-82 Cyclical Markets

Source:, Bloomberg

100-Year Floods seems to come along far more often than their name implies


Composite 19 Secular Bear Markets

Source:, Morgan Stanley Europe

US Bonds Are A Safe Haven During Crises


Pension Funds Have Too Many Bonds, Too Few Stocks

Bonds were 34% of pension fund assets in 2012 versus 20% in 2006. Stocks were 61% versus 39% UK 75% of pension-fund assets in 1999; Insurers have less than 10% of assets in stocks.
Source:, Socit Gnrale

Sentiment Cycle


Part III: Behavioral & Cognitive Issues

Herding, Groupthink Experts: Articulate Incompetents Optimism Bias Confirmation Bias Recency Effect Emotions change the way we perceive events (e.g., Sports, Politics)

This is your brain

Your brain weighs 3 pounds, and is 100,000 years old. It is a dynamic, opportunistic, self-organizing system of systems. MRIs have revealed to Neurologists what our brains looks like when making decisions . We can observe it 1) in real time; 2) under actual conditions, and 3) in reaction to financial risk/reward stimuli. Once we begin trading stocks, however, our brains begin to undergo subtle physical change that we can actually see in the MRIs of Traders . . .

This is your brain on stocks


Mutual of Omaha Lone Gazelle

Source: Kal, Economist

Wall St. Groupthink: Buy Buy Buy!

1. Only 5% of Wall Street Recommendations Are SELLS
-NYT, May 15, 2008


Why Analysts Keep Telling Investors to Buy

-NYT, February 8, 2009


Equity Analysts Too Bullish and Bearish at the Exact Wrong Times
-McKinsey, June 2nd, 2010


None of the S&P 1500 have a Wall St. Consensus Sell on them
-Robert Powell, Editor, Retirement Weekly, August 2011

It is better for one's reputation to fail conventionally than to succeed unconventionally. -John Maynard Kyenes

Sources:, NYT, McKinsey, Marketwatch

Optimism Bias
Here, Kitty, Kitty, Kitty

Dunning Kruger Effect: DK is a cognitive bias in which unskilled people make poor decisions and reach erroneous conclusions, but their incompetence denies them the metacognitive ability to recognize these mistakes. Metacognition: The less competent you are at a task, the more likely you are to over-estimate your ability to accomplish it well. Competence in a given field actually weakens self-confidence. This has devastating consequences in the investment world.

Expert Forecasting versus Ambiguous Uncertainty

Bennett Goodspeed, The Tao Jones (1984) discussed The articulate incompetents: Expert forecasters do no better than the average member of the public; The more confident an expert sounds, the more likely he is to be believed by TV viewers Experts who acknowledge that the future is inherently unknowable are perceived as being uncertain and therefore less trustworthy. (Isaiah Berlin: Hedgehog vs Fox) The more self-confident an expert appears, the worse their track record is likely to be. Forecasters who get a single big outlier correct are more likely to underperform the rest of the time.
Source: Zweig, Your Money & Your Brain; Grants Interest Rate Observer,

Analysts: Over-Optimistic GroupThink

Analysts have been persistently overoptimistic for the past 25 years, with [earnings] estimates ranging from 10 to 12 percent a year, compared with actual earnings growth of 6 percent On average, analysts forecasts have been almost 100 percent too high -McKinsey study

Source:, McKinsey

Confirmation Bias
Selective Perception & Retention
1. We tend to read that which we agree with; We avoid that which disagrees with our preconceived biases, notions or ideologies; 2. Our biases change the way we perceive objects literally, the way we see the world. 3. The same biases affect our memories we retain less of what we disagree with . . . 4. Expectations Affect Perception

Beware the Recency Effect

WSJ: 2007 WSJ: 2010

Source:, WSJ

What Just Happened vs. What is Going to Happen

Time, June 2005 Fortune, June 2005

Source:, Fortune, Time

2003: Politics and Asset Management Dont Mix

These are poorly designed tax cuts - Stay Out of Markets!


2003: Politics and Asset Management Dont Mix

2003 Tax Cuts > $1 Trillion How did that political trade up over 90% over 4 years work out for you . . . ?


2009: Political Investing

Obama is a Socialist! Stay Out of Markets!


2009: Politics and Asset Management Dont Mix

FASB 157, ZIRP, QE +VERY Oversold Markets The political trader missed the best rally in a generation Up 108% over 36 months


A brief intro to

Neuro Finance

If u cn rd ths

This animation . . .

. . . is not an animation

When it absolutely positively has to deceive your eyes overnight

A Species of Dopamine Addicts

What does this mean for investors/traders? We have an Optimism bias (helps our survival). Our brains are better at processing good news about the future than bad. Anticipation of financial reward > than actual benefits (Buy Rumor, Sell News) Gamblers, Alcoholics, Sex Addicts, Junkies, OA, Hyper-Traders = Dopamine High.

Monkeys Love a Narrative

We prefer stories to data Pre-writing, story-telling is how Humans evolved to share information We are vulnerable to anecdotes that mislead or present false conclusions unsupported by data

We have met the enemy, and he is us. -Walt Kelly, Pogo, 1971

The Upcoming Generational Bull Market

Drivers of Long Cycles Factors Key Areas

What Drives the Long Cycle ?

Drivers of Long Cycles

Major Societal Shifts Technology Public Works Innovation Sociology & Lifestyle


Coming Genera>onal Bull Market

Creative destruction wrought by Youth Post Gen-Y think of themselves as their own brand Expanding beyond traditional technology regions Every generation seeks to bypass their elders No longer a Left vs Right debate, but small & nimble mammals versus slow-witted Dinosaurs Attracting skilled immigrants to North America will remain key competitive advantage

Coming Genera>onal Bull Market

Key Areas
Mobile Cloud, Software, Social Web 3.0 Cheap energy driving US manufacturing renaissance Nano technology, Materials Science Biotech, Genome Design, 3D Printing


Source:, Stock Traders Almanac

10 Finance Trends to Watch

1. ETFs are eating everything. 2. The financial sector continues to shrink; advisers continue to leave large firms for independents. 3. Increased pressure on fees and commissions. 4. Hedge fund troubles. 5. Dispersal of financial news. 6. Demographics are a huge driver. 7. The death of buy-and-hold has been greatly exaggerated. 8. What hyperinflation? 9. The bond bull market has ended/interest rates are spiking. 10. Central Bankers are still holding the system together.
Source: Washington Post, January 12, 2013

for more information, contact

Barry L. Ritholtz
CEO, Director of Equity Research Fusion IQ 535 Fifth Avenue New York, NY 10017 212-661-2022 x7104 516-669-0369 The Big Picture