7/29/2019 Saskatchewan CFA

1/53

CFA Society of

Saskatchewan

21st Annual Forecast DinnerJanuary 24, 2013

ConexusArtsCentre,Regina

200LakeshoreDr,

Regina,SKS4S7G4

What is Driving Todays

Investors?

Market Cycles, Behavioral

Economics & Post Credit-Crisis

Investor Psychology

Presentation by Barry Ritholtz

CEO, Fusion IQ

7/29/2019 Saskatchewan CFA

2/53

Todays Powerpoint Presentation:

7/29/2019 Saskatchewan CFA

3/53

10 Steps To a Financial Crisis

7/29/2019 Saskatchewan CFA

4/53

7/29/2019 Saskatchewan CFA

5/53

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

Agenda

Tonights Agenda

7/29/2019 Saskatchewan CFA

6/53

Employment

Factors of Employment Overhang Structural Demographic Global Costs Skillsets

Employment

7/29/2019 Saskatchewan CFA

7/53

Source:Ritholtz.com,TheChartStore.com

NonFarm Payrolls Post-Recessions (1948-2007)

7/29/2019 Saskatchewan CFA

8/53

Source:Ritholtz.com,TheChartStore.com

NFP Post-Recessions (Composite versus 2007)

7/29/2019 Saskatchewan CFA

9/53

Source:Ritholtz.com,CalculatedRisk

ostWW2JobLossesDuringRecessions

NFP Post-Recessions (Composite versus 2007)

7/29/2019 Saskatchewan CFA

10/53

Source:Ritholtz.com,CalculatedRisk

ostWW2JobLossesDuringRecessions

NFP Post-Recessions (Composite versus 2007)

7/29/2019 Saskatchewan CFA

11/53

Residential Real Estate

Drivers of HousingRecovery:

Huge Govt Support Affordability Credit Availability Underwater

Homeowners Cannot

Put houses up for Sale

Deleveraging ofHousehold Balance

Sheets

Constrained Supply Foreclosure Abatements

7/29/2019 Saskatchewan CFA

12/53

Source:Ritholtz.com,McKinsey

Residential Real Estate Boom Was Global

7/29/2019 Saskatchewan CFA

13/53

Source:Ritholtz.com,CalculatedRisk

Existing Home Sales

7/29/2019 Saskatchewan CFA

14/53

Source:Ritholtz.com,DavidRosenberg,CalculatedRisk

New Home Sales

7/29/2019 Saskatchewan CFA

15/53

Source:Ritholtz.com,RABCapital

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.

Excess Mortgage Debt

7/29/2019 Saskatchewan CFA

16/53

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

Part II: Long Term Market Cycles

7/29/2019 Saskatchewan CFA

17/53

Source:Ritholtz.com,CrestmontResearch

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

7/29/2019 Saskatchewan CFA

18/53

Source:Ritholtz.com,Bloomberg

100 Year Dow Industrial Chart

7/29/2019 Saskatchewan CFA

19/53

Source:Ritholtz.com,Bloomberg

1966-82 Cyclical Markets

7/29/2019 Saskatchewan CFA

20/53

Source:Ritholtz.com,TheChartstore.com

100-Year Floods

seems to come along

far more often thantheir name implies

7/29/2019 Saskatchewan CFA

21/53

Composite19SecularBearMarkets

Source:Ritholtz.com,MorganStanleyEurope

7/29/2019 Saskatchewan CFA

22/53

US Bonds Are A Safe Haven During Crises

Source:Ritholtz.com

7/29/2019 Saskatchewan CFA

23/53

Pension Funds Have Too Many Bonds, Too Few Stocks

Source:Ritholtz.com,SocitGnrale

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.

7/29/2019 Saskatchewan CFA

24/53

Sentiment Cycle

Source:Ritholtz.com

7/29/2019 Saskatchewan CFA

25/53

Herding, Groupthink Experts: Articulate Incompetents Optimism Bias Confirmation Bias Recency Effect Emotions change the way we perceive events

(e.g., Sports, Politics)

Part III: Behavioral & Cognitive Issues

7/29/2019 Saskatchewan CFA

26/53

Thisis

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 . . .

7/29/2019 Saskatchewan CFA

27/53

Thisis

your

brainon

stocks

7/29/2019 Saskatchewan CFA

28/53

Source:Kal,Economist

Herding

Mutual of Omaha

Lone Gazelle

7/29/2019 Saskatchewan CFA

29/53

Sources:Ritholtz.com,NYT,McKinsey,Marketwatch

Wall St. Groupthink: Buy Buy Buy!

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

2. Why Analysts Keep Telling Investors

to Buy-NYT, February 8, 2009

3. Equity Analysts Too Bullish and

Bearish at the Exact Wrong Times-McKinsey, June 2nd, 2010

4. 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

7/29/2019 Saskatchewan CFA

30/53

Optimism Bias

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 weakensself-confidence.

This has devastating consequences in the investment world.

Here, Kitty, Kitty, Kitty

7/29/2019 Saskatchewan CFA

31/53

Expert Forecasting versus Ambiguous Uncertainty

Source:Zweig,YourMoney&YourBrain;GrantsInterestRateObserver,

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 worsetheir track record is likely to be.

Forecasters who get a single big outlier correct are

more likely to underperform the rest of the time.

7/29/2019 Saskatchewan CFA

32/53

Analysts: Over-Optimistic GroupThink

Source:Ritholtz.com,McKinsey

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

7/29/2019 Saskatchewan CFA

33/53

Confirmation Bias

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 ourmemories we retain less of what

we disagree with . . .

4.Expectations Affect Perception

Selective Perception & Retention

7/29/2019 Saskatchewan CFA

34/53

Beware the Recency Effect

Source:Ritholtz.com,WSJ

WSJ:2007 WSJ:2010

7/29/2019 Saskatchewan CFA

35/53

What Just Happened vs. What is Going to Happen

Source:Ritholtz.com,Fortune,Time

Time, June 2005 Fortune, June 2005

7/29/2019 Saskatchewan CFA

36/53

Source:Ritholtz.comBigCharts.com

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

2003: Politics and Asset Management Dont Mix

7/29/2019 Saskatchewan CFA

37/53

2003: Politics and Asset Management Dont Mix

Source:Ritholtz.com,BigCharts.com

2003 Tax Cuts > $1 Trillion How did that political trade up over 90% over 4 years

work out for you . . . ?

7/29/2019 Saskatchewan CFA

38/53

2009: Political Investing

Source:Ritholtz.com,BigCharts.com

Obama is a Socialist! Stay Out of Markets!

7/29/2019 Saskatchewan CFA

39/53

2009: Politics and Asset Management Dont Mix

Source:Ritholtz.com,BigCharts.com

FASB 157, ZIRP, QE +VERY Oversold Markets

The political trader missed the best rally in a generation

Up 108% over 36 months

7/29/2019 Saskatchewan CFA

40/53

A brief intro toNeuro

Finance

7/29/2019 Saskatchewan CFA

41/53

If u cn rd ths

7/29/2019 Saskatchewan CFA

42/53

This animation . . .

. . . is not an animation

7/29/2019 Saskatchewan CFA

43/53

When it absolutely positively

has to deceive your eyes overnight

7/29/2019 Saskatchewan CFA

44/53

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.

7/29/2019 Saskatchewan CFA

45/53

We prefer stories to data

Pre-writing, story-telling is howHumans evolved to share information

We are vulnerable to anecdotes that

mislead or present false conclusions

unsupported by data

Monkeys Love a Narrative

7/29/2019 Saskatchewan CFA

46/53

We have met the

enemy, and he is us.

-Walt Kelly, Pogo, 1971

7/29/2019 Saskatchewan CFA

47/53

Drivers of Long Cycles Factors Key Areas

The Upcoming Generational Bull Market

7/29/2019 Saskatchewan CFA

48/53

WhatDrivestheLongCycle?

48

Drivers of Long Cycles Major Societal Shifts Technology Public Works Innovation Sociology & Lifestyle

7/29/2019 Saskatchewan CFA

49/53

ComingGenera>onalBullMarket

Factors 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 remainkey competitive advantage

7/29/2019 Saskatchewan CFA

50/53

ComingGenera>onalBullMarket

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

7/29/2019 Saskatchewan CFA

51/53

WAR & PEACE + INFLATION + SECULAR BULL = + 500%

Source:Ritholtz.com,StockTradersAlmanac

7/29/2019 Saskatchewan CFA

52/53

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:WashingtonPost,January12,2013

7/29/2019 Saskatchewan CFA

53/53

Barry L. RitholtzCEO, Director of Equity Research

Fusion IQ

535 Fifth AvenueNew York, NY 10017

212-661-2022 x7104

516-669-0369

The Big Picture

http://www.ritholtz.com/blog

for more information, contact