Oh, No, Not the End of the World (Again)
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I have a new column out in the Washington Post on why the crazies come out after major market and economic crises, titled Oh, No, Not the End of the World (Again). (Which I like better than the online headline “After a recession, the least rational rise (temporarily) to prominence. Ignore them”)
Excerpt:
“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.”
You can check out the full online column here, or click the graphic below for the print edition
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Source:
After a recession, the least rational rise (temporarily) to prominence. Ignore them.
Barry Ritholtz
Washington Post , June 4
http://www.washingtonpost.com/after-a-recession-the-least-rational-rise-temporarily-to-prominence-ignore-them/2011/05/31/AGWK96IH_story.html
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June 5th, 2011 at 12:36 pm
This reminds me of an excerpt in Barton Bigg’s Hedgehoggin. “Forget the past, and lose an eye. Look only to the past, and lose both eyes.”
June 5th, 2011 at 1:38 pm
Easy to take cheap shots against the doom-monger of the week – especially if you just conceive of yourself as a money manager, whose time horizon is no farther that the point at which you die.
BR you sometimes evoke evolutionary theory as a paradigm through which investment folly can be better understood. If you really get evolutionary theory, you’ll know that the time horizons you’re invoking are milliseconds relative to the age of life on the planet.
You judge human civilization from an very temporary winner’s circle – the slight, fading moment in which New York exists, matters, and believes it has the world in its back pocket.
Nothing like a sweet affirmation of happy endings to keep the publishers happy… fuck the laws of natural selection and thermodynamics.
June 5th, 2011 at 2:09 pm
What part of “the world has never ended?” was a cheap shot?
There was no one more Bearish on this market or economy prior to the crash than I was. I endured lots of ridicule for the Dow 6800 forecast back when the rest of the street was still Uber Bullish. But unlike the rest of the Depressionistas, once the bottom came I turned.
And I like the laws of natural selection and thermodynamics. Its just that I find the overall fetish with recession porn to be utterly tiresome.
June 5th, 2011 at 2:17 pm
Crutcher, let me guess:
Missed the rally?
June 5th, 2011 at 2:24 pm
The (relative) decline of western civilization, peak oil, and the failure of fiat debt based currency are not the same thing as the end of the world.
They are ongoing global adjustments which have been underway for years… not single events.
For the unprepared, it may at times feel like the end of the world… for the prepared, it is a rewarding opportunity… as it has been for the last decade.
June 5th, 2011 at 2:44 pm
“Recession porn”?
Hmm… makes me wonder how many socially acceptable compound nouns we can create using the word “porn”.
June 5th, 2011 at 3:15 pm
Great piece,
I’m not sure how scientific this is , but I find thinking about reversion to the mean as a great sanity check for when things go to extreme. An unrelated sanity check is thinking coming up with some type of transition matrix for what ever behavior I am modelling(e.g. housing).
June 5th, 2011 at 3:41 pm
@Byteme
“Socially acceptable….” Hm, I don’t know, but the Urban Dictionary dot com shows 852 variants on “porn____” .
June 5th, 2011 at 3:45 pm
“. . .the rise of the cranks, who have enjoyed undeserved credibility in the aftermath of the recession.”
____________
I don’t think we’re in the aftermath, yet. We certainly haven’t fixed anything or mitigated the underlying losses or risks that led to the recession. To borrow (and bastardize) some phraseology from George Thorogood: We all worried about black swans, when we should be worried ’bout the trillions of chickens we already know are coming home to roost. The front rent is coming due, and we’re going to borrow it, again. It definitely doesn’t inspire optimism.
That probably makes me a crank.
As for natural selection (and I’m not sure I get your meaning), if anything about our economy was Darwinian, the banks would be tits-up and buried.
June 5th, 2011 at 3:55 pm
“Its just that I find the overall fetish with recession porn to be utterly tiresome.”
Although I sympathise I’m not sure it has much to do with the recency affect but more to do with the underlying reality of a desperately ill and unbalanced world economy. There are blogs that only ever look for bad news but It’s not difficult to find.
Add to this that from an investment point of view good news seems to be dependent on policy responses that don’t address the fundamental problems of the economy and the bad news bears even have the medium term covered.
All that said here’s a nice case for human ingenuity..
http://www.creditwritedowns.com/2011/05/the-case-for-human-ingenuity.html
June 5th, 2011 at 4:27 pm
Calling for the S&P to go to 600 and for tough economic times is not the same as calling for the end of the world. The depression happened and the Dow fell 80% and here we are. If the S&P is at 400 the sun will still shine and the birds will still sing. Aside from a few religious zealots nobody is calling for the end of the World. I am not calling for the S&P tp fall to these levels but you are grossly misrepresenting the bears.
June 5th, 2011 at 5:17 pm
“… I like the laws of natural selection and thermodynamics …”
Charlie Munger: “You should thank God [for bank bailouts]. Now, if you talk about bailouts for everybody else, there comes a place where if you just start bailing out all the individuals instead of telling them to adapt, the culture dies. Hit the economy with enough misery and enough disruption, destroy the currency, and God knows what happens. So I think when you have troubles like that you shouldn’t be [complaining] about a little bailout. You should have been thinking it should have been bigger.”
It’s hard to see “Charlie” as the victor in any natural selection process without a big assist for “Charlie” from someone bigger and more virile. But, I guess winning is all that matters. I’m sure Charlie looks in a mirror and sees [young] Chuck Norris looking back.
Outside of the NYC center of finance and our Washington DC center of government, the recession is still on. We haven’t moved into the “after” part yet.
June 5th, 2011 at 6:13 pm
Everyone assumes what they told us was true, If we don’t bailout the banks the economy dies on Monday. Now maybe this was true but we will never know because natural selection and survival of the fittest was not allowed to happen. I for one did not thank God for the bailouts, I say get to the truth. If that truth was the end of our system as we know it, so be it.
June 5th, 2011 at 7:03 pm
You know what i find more interesting than an “US vs. Them” paradigm.
The fact that even when i look back a mere 6 months, Strategists and Economisst for sell side banks were predictating 4.4% GDP growth in the US for 2011.
Now when i look at what Barry refers to as perma doomers predicating 1.5%-2% 2011 GDP growth and falling into the end of the year as QE2 comes to an end. I am pretty certain who is going to be fairly close to correct.
The fact that i believe there is close to know growth in the US inflation adjusted, does not mean there is no trading oppurtunties. There is money to be made on the way up and on the way down.
For the record, the money made on the way up in the last 2 years wasn’t because of the undelying strength in the US economy. It was because of the policy response to the financial crisis and the aftermath of the crisis. The policy response did more for the stock markets than it ever did for the real economy. Pity, when i look at oppurtunity cost.
Also as a student of history, one should never fail to remember……Empires rise and fall. Humans prevail. And history always repeats itself.
June 5th, 2011 at 8:24 pm
Like “ByteMe” is what kind of compound noun. How about BiteMe Porn? Sheesh.
June 5th, 2011 at 9:28 pm
Test
June 5th, 2011 at 9:29 pm
@Liquidity Trader
“Crutcher, let me guess:
Missed the rally?”
No, just don’t buy the recovery religion. Happen to think that the American republic is evaporating before our eyes.
@BR
I know you don’t buy this extend and pretend nonsense, and you seem to be somewhat aware of the deep systemic issues which are only deepening as “leaders” allow them to worsen. You’re free to opine the “recession porn” is tedious, and sure many will blow their load way early in calling for the next crash, but the sort of blithe reassuring tone of your article only encourages the sheeple reading it to ignore the basic political and economic issues that confront us. What is it going to take to get Americans out on the streets?
June 5th, 2011 at 9:31 pm
So I’ve been working for a mechanical contractor on site at a semi tool manufacturing company since ’03. Came the crash of the Great Recession, and the semi tool manufacturer expected revenue to drop 40% that quarter. It dropped 96%. The magnitude of the layoffs/forced retirements was awe inspiring. There were two waves and they were bloody and brutal. The company got lean like a broomstick. I think they still hear echoes of the crash in the halls. Long time employees are contractors sans benefits now and asked to cover two positions . Those that are left. Is the company gun shy of living through that again? Fuckin’ “A” they are. Have concerns that did most of their business with them gone belly up? Again….. Have they outsourced to everybody they can? Again… Tossing ballast overboard has become the end and not the means. I don’t expect to relive the late 90′s through 2007 period in Silicon Valley again. The days of flush with cash and spreading it around because that is what you do are history. This is the new normal until the Great Recession unwinds. Match up employment plans at Tesla vs what was in place at Nummi. I’ve done very well since 1980, but I’m very skilled and good (lucky) at being in the right place and time… It makes seeing what goes on around me pretty depressing…
June 5th, 2011 at 9:50 pm
Mr. Rithholtz,
With all due respect:
You are not an investor. You are a speculator. A very successful one. You are making money with money. People who have extra capital desire to have this money grow without creating real value. You are now singing to the choir.
Enjoy the ride while it lasts.
Arthur.
~~~
BR: We run several different portfolios, of different duration. The Core Macro portfolio is very long term, hardly speculative at all, using mutual funds and ETFs.
Because our more aggressive portfolio makes tactical adjustments, that somehow turns me into a specualtor? I am not sure I am following your reasoning.
Our long term I managed
June 5th, 2011 at 10:36 pm
> you seem to be somewhat aware of the deep systemic issues which are only deepening as “leaders” allow them to worsen.
In that case you should really be loading up on QID and SDS . . . and sitting tight.
June 5th, 2011 at 10:43 pm
@Barry
“Oh, No, Not the End of the World (Again)”
With all due respect the World DID end. May be not for the financial class but it sure ended for million of unemployed people. It sure ended for 40 Million people who depend on food stamps to feed themselves and their families. I guess all this millions are just feeling the recency effect. Hell why don’t just get some cake!
June 5th, 2011 at 11:01 pm
I guess you mean not the end of the investing world – some say speculate, although you are investing your career and your reputation, I give you that – it is the end of a certain idea of the world for people who believe that money isn’t everything and human decency should always prevail, progress too.
As Petey mentioned, in his very eloquent way, nothing has been fixed and this will surely be a feel good article for those in Washington who should be feeling nothing but shame.
Now, can the next one be a scathing pamphlet about incompetence and legal corruption in the regulating world?
June 5th, 2011 at 11:11 pm
And for anyone interested on seeing that recency effect on the rest of the US (outside Versailles). I would recommend the June issue of http://contraryinvestor.com/mo.htm Titled:
How’s The Wealth Effect Workin’ Out For Ya’?
June 6th, 2011 at 1:31 am
@ByteMe
Hmm… makes me wonder how many socially acceptable compound nouns we can create using the word “porn”.
A pornful?
@anonymouse
It’s hard to see “Charlie” as the victor in any natural selection process without a big assist for “Charlie” from someone bigger and more virile.
Charlie is doing the natural selection thing. He is sticking close to the powerful ones in the herd. It is a symbiotic arrangement. They protect each other and stand up for each other. They also stick real close together in order to keep the wolves at bay
@beaufou
Now, can the next one be a scathing pamphlet about incompetence and legal corruption in the regulating world?
It is probably a bit too early in his article writing days at the WP. Let him build some street cred and loyalty with the readers first before he cuts loose the cannons
June 6th, 2011 at 5:53 am
After reading your article, I couldn’t help but look you up.
Your article Is not only haughty, arrogant and sarcastic but on many accounts it is just plain wrong.
First of all your account of “the end of the world” as you put it is wrongly taking a collective view of the world and using some nut cases religious prediction to somehow substantiate that view point. The truth of the matter is that every second spells the end of the world for someone on planet earth. And in certain periods of time, when a mass group of people die, that too could be considered a regional “end of world” scenario. You essentially say that no one has made money during an end of world scenario. I would consider the great depression to be an end of world scenario for America, and a select group of people did profit handsomely from it.
Your view point about the recency effect is also lacking any wisdom. It is obvious that past events create future trends but your surmising that past events have nothing to do with the future which is reverse logic.
Finally your also assuming that the “gold bugs” as you call them are worse off then the speculators who decided to play the stock market from the March 09 lows till now. But the truth is that the speculators are playing with inflated dollars that although are more in number, buy less on the open market. They are basically break even, as are the buyers of gold who buy it for protection against inflation.
And finally in closing, I guess your also assuming that somehow the “quantitative easing” that the Federal Reserve pursued, was somehow successful. Well let’s put that into perspective. Hmmm, government pumps easy money into the economy, prices go up, businesses on paper make more, stock market goes up. Not only that but people will drive into equities anyway if the value of the dollar decreases. They are trading price stability for risk to protect that value of their dollars. But guess what? Nothing has been produced and now we have to pay interest on those newly created dollars. Without new production, where do you think the new money comes from? By newly created debt. Simple logic here. And QE3 with 600 billion is just adding fuel to the fire.
If you think that everything is fine, then I’d rather be called a conspiracy theorist and be right, then be the man with the holier- than-thou attitude that is wrong.
June 6th, 2011 at 5:54 am
Who said anything is fine? As I detailed in BN, everything is a mess. But its ALWAYS been a mess.
And specifically, I urged caution at the end of the article:
How do you get everything is fine from that ?
June 6th, 2011 at 6:39 am
LOL, BR, sometimes I think you just can’t resist kicking the ants nest! The flurry of tutting and release of bear-pheromones is all to predictable.
Most of the bear stories seem to revolve around predicting that BadThingsWillHappen premised on a common yet essentially arbitrary moral and historical narrative that tells the story of how the economy used to work or should work, which only derives legitimacy from being a relatively common religion.
If indeed western capitalism is coming to an end, then its axiomatic that one will not be able to analyse that process using the standard thinking tools of western capitalism.
June 6th, 2011 at 6:50 am
There are a lot of thinkers today who believe that we’re on the brink of the end of OUR SPECIES if not our civilization from a number of factors, not least of which is the on-going climate change we’ve wrought on ourselves. In the short term, 20 – 50 years, it’ll just continually get worse (as far as food production, available energy, disproportionate wealth distribution, political unrest, scarce resources like water, disease outbreaks, military conflicts, and many others).
Here’s one that brings up the on-going middle class extinction:
http://www.theburningplatform.com/
June 6th, 2011 at 7:25 am
Ok, in GLD so I missed a 100% gain in equities over the past two years. First I doubt many investors were 100% in gold. But secondly, I just went to Yahoo Finance and charted GLD vs SPY over two years. BR, you should try this. Ok, you might cherry pick the index and have a different result. But if you were in those indices then you are much smarter than I am. I’ll stick with a significant hedge against not just the $, but the euro and other fiat currencies as well.
June 6th, 2011 at 7:58 am
old blue jeans- I hope you ar not 100% in gold. If so lighten up. Remember central banks have the ability to crush gold in an instant with overhead selling. Gold has value but can always be flattened by abrogation of the Washington accord which limited overhead c.b. selling. It might take a decade to recover from that as lower price would slowly bring in buyers after they recover from the shock of price destruction.
June 6th, 2011 at 12:12 pm
That nutbar Noah was right Barry!
BTW, what size was the Ark? 2×2