This is last week’s Washington Post column;

The headline of print version –  Oh, No, Not the End of the World (Again) — is so much better than the online headline After a recession, the least rational rise (temporarily) to prominence. Ignore them.

~~~

After a recession, the least rational rise (temporarily) to prominence. Ignore them.

By Barry Ritholtz, Published: WaPo June 4

If you are reading this, the previously scheduled end of the world did not occur. Perhaps the date was wrong — next Saturday night? 1994? October?

No matter.

Despite millennia of Armageddon forecasts, betting on the end of the world has always been a money-losing wager. Given this oh-fer batting record of 0.000 percent, one wonders why people still regularly make this forecast. Wall Street fund strategists, religious zealots and economists seem strangely drawn to it. Never mind that if it were ever a winning trade, no one would be left for you to collect from. (That is called counterparty risk.)

You humans are a hardy breed. No matter how dire the circumstance, your species has managed to prosper.

You survived the Ice Age, the Dark Ages, the Middle Ages, the Age of Aquarius (as well as Disco and Polyester). Mother Nature has thrown floods, earthquakes, droughts, plagues, pandemics, tornadoes, asteroids, tsunamis, hurricanes, melting glaciers and global warming at you. Not to mention world wars and nuclear proliferation.

Economically, you’ve withstood the Panics of 1819, 1825, 1837, 1847, 1857, 1866, 1873, 1884, 1890, 1893, 1896, 1907, 1929, 1933, 1938, 1973, 1987, 1998, 2000, and 2007-09 — and that is just over the past two centuries. You also saw through the Tulip Bubble, the South Sea Bubble, the Great Depression and the Great Recession, the Nifty-Fifty, the Asian Contagion, the Dot-com Bubble, the subprime fiasco and Bernie Madoff.

What is it going to take to kill this species off — or at least to bankrupt it?

Given this long and storied history of survival, why does anyone pay attention to the dang fools predicting the end of the world?

It turns out there is a very good explanation: the recency effect — the unfortunate tendency to greatly overemphasize our most recent experiences. Our memories of recent events is more vivid than those of older events and can even trump the here and now.

In other words, we tend to concentrate most on what we can see in the rear-view mirror and not what we are looking at through the windshield.

This has enormous consequences for investors. It helps to explain why you buy so much stock at market tops and sell most heavily at panic bottoms. You are looking at the past few days or weeks, versus the bigger, long-term picture.

How does this manifest itself in the world of investing? Traders have a tendency to describe themselves as bullish after they buy stocks. They also are more likely to describe themselves as bearish after they sell them. What happened recently is used as part of a broader self-rationalization process. And it is how you justify your own actions.

The recency effect also helps explain the rise of the cranks, who have enjoyed undeserved credibility in the aftermath of the recession. These are the people who, after a tremendous collapse, only see doom and gloom.

They include:

• Crisis rock stars: The collapse made their reputations, and they are reluctant to go back to a more normal footing.

• Hyper-inflationistas, who are convinced we are returning to the days of the Weimar Republic.

• Gold bugs: The yellow metal may have underperformed equities for four decades, but it is their excuse for missing a 100 percent market gain over two years.

• Conspiracy theorists: From Birthers to Truthers to all manner of blithering idiots, these folks would be totally ignored during normal times.

• Austerians: The people who believe the only way forward is through painful spending cuts.

• Thinly veiled partisans who opportunistically grab the crisis as proof the other guy is unfit to govern.

• Analysts trying to turn one good call into a new business model.

•  One-sided Web sites that never see anything positive; their URLs tend to have “Doom” or “Collapse” in their titles.

It is no coincidence that negative predictions increase after major recessions or market collapses. They are predicting what just occurred, not what is likely to happen.

And they are not making their followers money.

Listening to their advice, their readership missed the greatest market rally in four generations. They piled into commodities in time for a major collapse; they got frightened out of municipal bonds that have no credit issue or default threat. They have otherwise missed opportunities and lost capital.

I have never been a perma-bull — not only because it is money-losing to be one-sided but also because throughout most of my career, equities have been somewhat overpriced.

This is not a suggestion to abandon risk management and make blindly optimistic bets. Indeed, market risk is now higher than it has been during any time since the rally began in March 2009.

In our tactical accounts, we are carrying only a 50 percent long position, with 30 percent cash and 20 percent short. That is a rather defensive posture. But it is based on data and expectations that we are overdue for a major correction — and not the end of the world.

~~~

Ritholtz is chief executive of FusionIQ, a quantitative research firm. He runs a finance blog, The Big Picture.

Category: Apprenticed Investor, Media

Please use the comments to demonstrate your own ignorance, unfamiliarity with empirical data and lack of respect for scientific knowledge. Be sure to create straw men and argue against things I have neither said nor implied. If you could repeat previously discredited memes or steer the conversation into irrelevant, off topic discussions, it would be appreciated. Lastly, kindly forgo all civility in your discourse . . . you are, after all, anonymous.

33 Responses to “After a recession, the least rational rise (temporarily) to prominence. Ignore them.”

  1. VennData says:

    There are bull markets and BS markets, and bull markets in BS.

  2. MayorQuimby says:

    Barry prefers to read and gauge sentiment but I prefer to look at numbers and simply put – USA is on a completely unsustainable fiscal trajectory. Either gvmt will shrink or the consumer gets taxed much more. Even with those adjustments, Social Security and Medicaid will be unsupportable before long. Throw in cost of living issues, Fed theft (forced inflation) of purchasing power, oppressive local taxation (property taxes to support predatory public sector unions), jobs outsourcing, rampant corruption, an emasculated population and well – it’s hard to be bullish.

    It’s easy to say, “We’ll figure it out” because we usually do. But there are times when systems collapse, reset and major upheaval occur. I believe we are entering one of those times and see absolutely no reason to be bullish about anything until at least 2/3 of the aforementioned issues are addressed.

  3. ilsm says:

    Quimby…………………………..

    Why just cut entitlements?

    End the military industrial congress complex and stop its perpetual wars for profit.

    Raise a tax or two, impose a tariff or three. End corporate welfare, and tax entitlements.

    Privatize risk, stop expecting the old and poor to pay for the debacles in Washington and Wall St.

    Otherwise don’t expect the lower 99% to worry on the top oners lack of bullish temperamant.

  4. crutcher says:

    This again?? Maybe the reason this kind of article rubs so many of your blog readers wrong is that by harping on the failed/irrational negative calls is that your tone is smarmy positive, and fails to engage the most serious arguments for why the world (as we know it) is likely to come to an end. Energy, climate change, population, just for example. You don’t really hit these issues very hard, BR, and so your core audience who respects your integrity and POV gets POed when you’re weak on these fronts.

    One the plus side, you get face time in a hugely influential paper…. but your content is being shaped and bounded.

  5. yuan says:

    “Social Security…will be unsupportable”

    social security is projected to meet its obligations until 2036.
    please play again.

    “Fed theft (forced inflation)”

    **flashing light**
    **please insert coin**

  6. Dow says:

    Major Quimby,
    Most of the union manufacturing jobs have long since been outsourced. So wtf are you talking about.

  7. droubal says:

    It’s a good thing we are a resilient breed. Some of us survive and prosper better than others.
    If is ever does get down to the last few survivors they will probably be banksters. Cockroaches making $100 million a year are hard to crush.

  8. socaljoe says:

    Franklin Roosevelt, Ronald Reagan, Bill Clinton, George Bush, Barack Obama, and Adolph Hitler all rose to prominence following difficult economic times.

    Ditto for millions of disenfranchised Arabs in Tunisia, Egypt, Libya, Syria, and Yemen.

    How rational they were is in the eye of the beholder…

    …but it would have been a mistake to ignore them.

  9. beaufou says:

    If the government is spending, it has to have a plan, not just throw money at millionaires.
    The idea that we could have a jobless recovery was completely misguided, the system is saturated with credit and debt.
    We need jobs with decent wages and need to work on the standard of living; if the issue of Health-care and pretty much everything else weren’t plagued by lobbying, we could see some serious advances.
    The military budget is also ridiculous, 700billion a year and the Pentagon still relies on mercenaries to fight wars and torture people, disgusting.

    The government should be investing in small private local enterprise and end the reign of corporations who have become a burden.
    Having access to the same store from coast to coast is convenient, but slave wages and outsourcing are killing the western economies.

  10. lippard says:

    quimby wrote: “But there are times when systems collapse, reset and major upheaval occur. I believe we are entering one of those times …”

    What’s more frequent for major world powers, a quick collapse or a long slow decline?

  11. ab initio says:

    I don’t get the incessant ridiculing of the “gold bugs”. How do you know that the gold bugs were not long equities since March 2009? They could very well have been in equities since their rationale for owning gold which is money printing is also a critical reason behind the rise in equities since 2009.

    In any case they have a decade long positive performance. $250/oz to $1,500/oz is not something to sneeze at!

    I don’t consider myself to be a gold bug but I do own gold in my portfolio and have since 2001. Compared to other assets that I have had to trade around since then, gold has been a buy & hold position and continues in that manner today.

    ~~~

    BR: These are not abstract comments — the people and managers and funds are real; it would be impolite to refer to by name, but they know who they are.

  12. hondje says:

    I suppose I am a blithering idiot, because I don’t believe the Anthrax attacks were performed by Bruce Ivins.

  13. VennData says:

    I’d rather hear about Quimby’s emasculation.

  14. FS says:

    Come on Barry-”painful spending cuts” ? We have too many people riding in the wagon, and too few pulling it. The middle class has been dumped on for years with an expansion of programs, government workers, and lessening of self responsibility. We’re paying for it in higher taxes, higher fees, less effective government (have you noticed how people who think government isn’t getting it done always want more government) and a lower quality of life and culture.

    Cut spending. Cut it now.

  15. Robespierre says:

    “The recency effect also helps explain the rise of the cranks, who have enjoyed undeserved credibility in the aftermath of the recession. These are the people who, after a tremendous collapse, only see doom and gloom.

    • Gold bugs: The yellow metal may have underperformed equities for four decades, but it is their excuse for missing a 100 percent market gain over two years.”

    I mean do you really want to go there? Compare returns between DOW, GLD, SP500 for the last two years and you will see that those “Gold bugs” sure have missed the %100 market gains in the last 2 years mostly because their returns have been better. So you pick the time frame (last 2 years) show me how the gold bugs missed anything. You know like you like to say with data!

  16. Petey Wheatstraw says:

    FS Says:

    “We have too many people riding in the wagon, and too few pulling it.”

    Like US FedGov Contractors and the thousands of high-paying but unneeded cost+ jobs they provide to keep us safe from Iraq, Afghanistan, Libya, and ourselves? Like corporations and wealthy individuals who pay no taxes, offshore our jobs and their profits? Like bailed-out bankers and their fat bonuses? Or are you talkin’ ’bout dem goddamned welfare queens? The private sector is Government cost ++ (if you disagree, show me a privatized success story), and they are accountable to no one.

    “The middle class has been dumped on for years with an expansion of programs, government workers, and lessening of self responsibility.”

    I don’t think we’ve had an expansion of social programs since Reagan (again, military programs have mushroomed). As for self responsibility, you show me 10 self made men, and I’ll show you 8 who are sucking the Federal tit (directly or indirectly), for all it’s worth.

    “We’re paying for it in higher taxes, higher fees, less effective government (have you noticed how people who think government isn’t getting it done always want more government)”

    We’re paying lower taxes than at almost (if not outright), any period in history. Apparently, and in spite of the low taxes we pay, the government has enough revenue to allow the uberwealthy to own an unprecedented share of the wealth of this country without burdening them by requiring them to carry their fair share (and I don’t give a damn what percentage of the overall Federal revenue they pay if what they get to keep is even greater AND starves the rest of us of effective government). (On a related note, rhetorically, could someone please explain how it is that the rich keep getting richer and the government is going broke if the rich are overtaxed).We do have higher fees for some things the Post Office (compare their prices and services to FedEx, and they don’t look so steep), and National Parks (National Parks, for Christ’s sake), but I can’t say that increased FedGov fees are impacting my life.

    Have you noticed how people who say government doesn’t work always want to get elected so that they can go to DC and prove their contention by destroying it?

  17. willid3 says:

    seems like we are always hearing that if for example we raised taxes on gasoline the world would end (sound familiar?). but thats its ok if companies raise the price of gasoline by a dollar or 2 (with their speculating) in a few weeks, or months, or even days. and of course we get no value from their speculation at all, unlike the roads etc we could either build or repair if did raise the gas tax. and of course if we raised taxes on the wealthy elite or corporations, they would leave, or cut jobs (hm. they already did that. and they didn’t need any threats of a rise taxes). or that they just need a tax cut to start hiring (wait a minute. haven’t we seen this movie before? and we didn’t get much if any job growth at all from it. little wonder too. we gave them tax cuts for doing nothing. why should we expect them to do any thing? after all their incomes went up for doing nothing). the last time taxes were raised. in 1993. seems like the economy took of. since those job creators actually had to do some thing to get more profit or income. as opposed to sit on their backsides. laughing at the rest of us.
    and those austerians have no care to create jobs. its nothing but a political stunt to trash the democrats. not a big fan of them as expected they would actually do some thing for the middle class. unlike the GOP who only play lip service to us.

  18. MayorQuimby says:

    “ilsm Says:

    Why just cut entitlements?”

    Because they are by far the biggest liability and problem and are entirely unaffordable.

    “End the military industrial congress complex and stop its perpetual wars for profit.”

    Then you lower profits and the economy deteriorates further (perhaps Afghanistan can be finished without much of an economic impact however).

    “Raise a tax or two, impose a tariff or three.”

    Increase inflation while at the same time removing purchasing power from peoples’ pockets. Not exactly the recipe for economic prosperity!

    “End corporate welfare, and tax entitlements.”

    Yes!

    “Privatize risk, stop expecting the old and poor to pay for the debacles in Washington and Wall St.”

    Yes again.

  19. MayorQuimby says:

    “Dow Says:

    Most of the union manufacturing jobs have long since been outsourced. So wtf are you talking about.”

    Outsourcing continues to this day. That’s what I’m talking about.

  20. MayorQuimby says:

    “VennData Says:
    June 11th, 2011 at 3:15 pm
    I’d rather hear about Quimby’s emasculation.”

    Truth hurt?

  21. zdog says:

    “hondje Says:
    I suppose I am a blithering idiot, because I don’t believe the Anthrax attacks were performed by Bruce Ivins.”

    Must be one too. The case against Ivins was a joke. The FBI report was laughable.

  22. EIB says:

    > They piled into commodities in time for a major collapse;

    What “major collapse” in commodities did I miss ?
    Gold is within 3% of all time highs.

  23. MaciekKolodziejczyk says:

    Barry – I, too, don’t understand why the constant bashing of Gold Bugs in general.

    The data is against you.

    Gold stocks have returned 100% since March ’09 lows and 230% since Oct ’08 lows.
    Gold has returned 70% since March ’09 and 120% since Oct ’08 lows.
    Silver has returned 200% since March ’09 lows and 300% since Oct ’08 lows.

    Gold bugs do not buy gold alone. They also buy gold stocks and/or silver. A 80/20% portfolio of gold/silver have returned 100% since March ’09 and 150% since Oct ’08. And virtually any Precious Metals portfolio have beaten general equities over 3, 5 and 10 year timeframes.

    I understand, that you want to criticize some specific subset of individuals that are fund managers AND Gold Bugs at the same time. But doing so by bashing Gold Bugs in general is as inadequate as bashing fund managers in general.

  24. HEHEHE says:

    From an investment perspective BR is absolutely correct – you do yourself a disservice as an investor believing in market extremes and investing accordingly- I learned the hard way for a while.

    However, the underlying structural economic problems are still here and have never been addressed. The Federal Reserve and the Federal Government have spent trillions of dollars for a couple years worth of miniscule “growth”. Every country in the world has basically followed suit. The only upside is that some major corporations and banks were able to restructure their debt without going bankrupt so even more people didn’t lose their jobs. The major downside is there’s only so much money the governments can spend before it starts having a real impact on their ability to fund themselves. Which begs the question – what will they be able to do when the next crisis arises and if it is at a size they don’t anticipate?

    They’ve successfully kicked the can down the road for a few years without any riots in the street in the US. Watch the market and see what happens each time the Fed ends QE. What does that tell you about the “growth” we’ve experienced the past two years? Basically since the Fed won’t let the system be cleansed of the overflowing bad debt then a real sustainable recovery is not going to happen absent some outside development on par with the internet revolution. Consequently, my game plan is be long the market when QE is announced and be short the market when QE is ending – give or take a month to lock in gains. I am not an investment professional so don’t take my advice.

  25. Greg0658 says:

    “constant bashing of Gold Bugs in general” .. I think it goes back to hunter gatherer days .. returning to the cave after that days hunt .. and the old guy in the corner says “I’ll trade you this lovely chunk of yellow to hang on your neck .. it’ll get you girls” .. buy it?

  26. MaciekKolodziejczyk says:

    @ HEHEHE
    I do not know what kind of extremes you write about.

    For me gold going up every year ~15% annually for 10 years in a row doesn’t sound extreme.
    General equities dropping 50%, going up by 100%, then again by 50% down and 100% up in the same timeframe – now that sounds extreme. But maybe it’s only me.

  27. bergsten says:

    @BR — you again (inadvertently) bring up yet another question — who owns the “copyright” on an article’s “title”? If an editor changes the title of a piece (or book for that matter), who owns the new title?

  28. contrabandista13 says:

    One of the most efective ways to attract attention is to use the “danger meme”… Other than the “sex meme” this is the one meme where you can pack the largest cluster of associated memes… In other words, these are all “Trojan Horses”…. Just like the abstraction we call “The War on Terrorism”….

    There is a higher probability that you will be murdered by a Catholic priest than a terrorist, not to mention molested… :-) That’s a fact…!

    Best regards,

    Econolicious

  29. HEHEHE says:

    Macie,

    I was talking about stocks. From an economic standpoint there’s no reason for the size of the run-up since the March 2009 lows other than QE and other government manipulations – corps have been profitable due to lowering overhead and currency manipulations – which aren’t sustainable longterm. For a long time I fought it and it ate my capital- and I am not some millionaire investor here I am just fortunate to have a little $ to play with. At some point when you see the game is rigged you swallow your convictions and play along.

    The problem with gold is it is currently such a one sided trade. If the stock market tanks with the end of QE2, which I don’t see how it doesn’t, then commodities will go with it. Most people presume QE3 is coming but what do you do if the Fed waits six months to a year and lets things get really bad before they tip their hand that it is coming? A severe correction in gold will see a lot of weak hands shaken out and a lot of people lose a lot of money. Most investments do not appreciate 15% every year.

  30. MaciekKolodziejczyk says:

    Obviously, there’s no reason for stocks to go up 100% in two years. They were extremely oversold, now they are somewhat overbought.

    Gold can get a hit, if FED goes wild with tightening stance – no doubt. But the question is – can they and will they? Everything Bernanke does (and Greenspan did) suggests that they prefer to err on the easing side. If they tighten too much, gold will anyway go up, as the financial system disintegrates – US financial system cannot stand real positive interest rates now.

    Long term I’m with you and Barry – stocks are way better than commodities or gold. But mid term (5-10 years), I cannot own equties @ 20+ PE, I cannot own cash @ negative real interest rate and I cannot own Treasuries of a country that is very likely bankrupt, spending 70% more than it collects in taxes.

    Maciek.

  31. Shamim Adam says:

    Roubini Says ‘Perfect Storm’ May Threaten Global Economy
    June 13, 2011, 12:12 AM EDT

    June 13 (Bloomberg) — A “perfect storm” of fiscal woe in the U.S., a slowdown in China, European debt restructuring and stagnation in Japan may converge on the global economy, New York University professor Nouriel Roubini said.

    There’s a one-in-three chance the factors will combine to stunt growth from 2013, Roubini said in a June 11 interview in Singapore. Other possible outcomes are “anemic but OK” global growth or an “optimistic” scenario in which the expansion improves.

    “There are already elements of fragility,” he said. “Everybody’s kicking the can down the road of too much public and private debt. The can is becoming heavier and heavier, and bigger on debt, and all these problems may come to a head by 2013 at the latest.”

    Elevated U.S. unemployment, a surge in oil and food prices, rising interest rates in Asia and trade disruption from Japan’s record earthquake threaten to sap the world economy. Stocks worldwide have lost more than $3.3 trillion since the beginning of May, and Roubini said financial markets by the middle of next year could start worrying about a convergence of risks in 2013.

    The MSCI AC World Index has tumbled 4.9 percent this month on concern recent data, including an increase in the U.S. unemployment rate to 9.1 percent in May, signal the global economy is losing steam. U.S. Treasuries rose last week, pushing two-year note yields down for a ninth week in the longest stretch of decreases since February 2008, on bets the Federal Reserve will maintain monetary stimulus.

    ~~~

    BR: A perfect example, thanks Shamim

  32. Moss says:

    I guess no one should listen to Kyle Bass on Japan.

    BR: You forgot about those (Julian Robertson comes to mind) who were positive that shorting long US Bonds were the trade of a lifetime.

    The only thing that really mattered, in relation to the ‘market’ surge since the lows, was understanding what impact the extraordinary Government response would have on financial assets. Now the only thing that matters is understanding the impact that Government restraint will have on the ‘market’.

    G + I + C + (E – I) = GDP

  33. [...] seem to often find myself at the angry disciplinary end of a chat dialog with a neophyte austerian theoretician.  My positions, though they seem contrary relative to my adversary’s, [...]