Michael Green - SUNY College at Oneonta · years of a uninterrupted bullish plurality and ten years...
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Formological Economics: The FearConfidence Cycle 1. Basic sentiments reach an extreme and then reverse 2. Such cycles work on various timescales 3. The current crisis is the beginning of a reversal of a very longterm cycle of increasing optimism, which is why the reversal process has been so long and the downturn will be protracted and severe. The Extreme Pessimism of the Early 1980s The Extreme Optimism of 2000 The illusion of control common to the confidence phase leads to overconfidence, and the assumption of risks beyond the capacity of the economic base to support them. The Extreme Optimism of 2000s The Extreme Optimism of 2000s Phase Two: Alarm Jan 2000Oct 2002 The initial downtrend was weak and investors were passive as they held on, waiting to see what happened. Even during the decline from 2000 2002, sentiment was still bullish, remaining above zero. Sentiment Extremes Transitional Rebound: Oct. 2002Oct. 2007 Relief Rally This was followed by a rebound that exhibited strong optimism in which investors were active. 1. After October 2002, sentiment rebounded sharply and was higher than it was at the top in 2000. 2. There was nearly five years of a uninterrupted bullish plurality and ten years in which bulls outnumbered bears. 3. Investors Intelligence was above 70 percent for 3 weeks and has had a bullish plurality for a record 180 weeks as of March 31, 2006. 4. The DSI has remained at extreme levels from 2005 until today. During this rebound, the 10day DSI hit a record high. By February 25, 2004, it was 74 percent, significantly higher than it was even at the top in 2000. In the week of March 26, 2006, it was 86.6 percent 5. At the top in 2007, AAII showed a bullish plurality of 28.87%. Panic Phase Part I: Insider’s Panic Oct 2007March 2009 Panic Phase Part II: Sovereign Entity Panic March 2009April 2010 1. Daily Sentiment Index (tradefutures.com) of traders registering 83% bulls. 2. AAII bullish plurality of 26.6 (9/17/2010) 3. Between November 2009 and September 2010 the bulls have outnumbered bears 95% of the time even though the stock market has made no net upside progress during this ten month span. Why the Depression Is NOT Over Michael Green - SUNY College at Oneonta 1. Panic Phase III: Mass Panic Panic spreads to the mass of investors. 2. Transition Optimism is weak and passive. 3. Despair Pessimism is strong, and investors exhibit a fatalistic passivity and have withdrawn from the markets en mass. The retail market in equities has completely collapse. When Will the Depression End? The decline will not be over until there has been five years of completely bearish readings and approximately ten years in which there is a plurality of bears over bulls. The bullish plurality was broken in 2007. This projects a rebound around 2017, at the earliest. Next Phases of the Cycle Institutions and Basic Sentiments 1. Institutions give form to basic social sentiments. 2. Identities, facts, and norms are developed that reinforce and are reinforced by these basic sentiments. Basic Sentiments in Economics 1. Pareto—the sentiments of combination and preservation 2. Knight—fundamental uncertainty and the rashness and timidity of entrepreneurs. 3. Keynes—spontaneous shifts in moods from pessimism to optimism 4. Bandura—strong and weak senses of selfefficacy are determinants of action Neuroscience Individuals with damage to the emotional areas of their brain are unable to make decisions Human Agency Human agency is giving structure to an emoonal impulse. The Depression is Just Beginning 1. Excessive confidence leads to excessive risk-taking, which produces unsustainable condions in the real economy. 2. The longer the excessive confidence lasts, the greater the imbalances and instabilies. 3. The unraveling of them will give rise to extreme fear and risk aversion proporonal to the preceding confi- dence. 4. Fear and risk aversion has not reached a level propor- onal to the preceding opmism and risk assumpon.
Transcript of Michael Green - SUNY College at Oneonta · years of a uninterrupted bullish plurality and ten years...
Formological Economics: The Fear-‐Confidence Cycle
1. Basic sentiments reach an extreme and
then reverse
2. Such cycles work on various timescales
3. The current crisis is the beginning of a
reversal of a very long-‐term cycle of
increasing optimism, which is why the
reversal process has been so long and the
downturn will be protracted and severe.
The Extreme Pessimism of the Early 1980s
The Extreme Optimism of 2000
The illusion of control common to the confidence phase leads to overconfidence, and the assumption of risks beyond the capacity of the economic base to support them.
The Extreme Optimism of 2000s
The Extreme Optimism of 2000s
Sentiment Extremes
Phase Two: Alarm Jan 2000-‐Oct 2002
The initial downtrend was weak and investors were passive as they held
on, waiting to see what happened. Even during the decline from 2000-‐
2002, sentiment was still bullish, remaining above zero.
Sentiment Extremes
Transitional Rebound: Oct. 2002-‐Oct. 2007 Relief Rally
This was followed by a rebound that exhibited strong optimism in
which investors were active.
1. After October 2002, sentiment rebounded sharply and was higher
than it was at the top in 2000.
2. There was nearly five years of a uninterrupted bullish plurality and
ten years in which bulls outnumbered bears.
3. Investors Intelligence was above 70 percent for 3 weeks and has had
a bullish plurality for a record 180 weeks as of March 31, 2006.
4. The DSI has remained at extreme levels from 2005 until today.
During this rebound, the 10-‐day DSI hit a record high. By February 25,
2004, it was 74 percent, significantly higher than it was even at the top
in 2000. In the week of March 26, 2006, it was 86.6 percent
5. At the top in 2007, AAII showed a bullish plurality of 28.87%.
Panic Phase Part I: Insider’s Panic Oct 2007-‐March 2009
Panic Phase Part II: Sovereign Entity Panic
March 2009-‐April 2010
1. Daily Sentiment Index (trade-‐futures.com) of traders registering 83% bulls.
2. AAII bullish plurality of 26.6 (9/17/2010)
3. Between November 2009 and September 2010 the bulls have outnumbered
bears 95% of the time even though the stock market has made no net upside
progress during this ten month span.
Why the Depression Is NOT OverMichael Green - SUNY College at Oneonta
Next Phases of the Cycle
1. Panic Phase III: Mass Panic
Panic spreads to the mass of investors.
2. Transition
Optimism is weak and passive.
3. Despair
Pessimism is strong, and investors exhibit a fatalistic
passivity and have withdrawn from the markets en mass.
The retail market in equities has completely collapse.
When Will the Depression End?
The decline will not be over until there has been
five years of completely bearish readings and
approximately ten years in which there is a plurality
of bears over bulls.
The bullish plurality was broken in 2007. This
projects a rebound around 2017, at the earliest.
Next Phases of the Cycle
1. Panic Phase III: Mass Panic
Panic spreads to the mass of investors.
2. Transition
Optimism is weak and passive.
3. Despair
Pessimism is strong, and investors exhibit a fatalistic
passivity and have withdrawn from the markets en mass.
The retail market in equities has completely collapse.
Institutions and
Basic Sentiments
1. Institutions give form
to basic social sentiments.
2. Identities, facts, and
norms are developed that
reinforce and are
reinforced by these basic
sentiments.
Basic Sentiments in
Economics
1. Pareto—the sentiments of
combination and preservation
2. Knight—fundamental
uncertainty and the rashness
and timidity of entrepreneurs.
3. Keynes—spontaneous
shifts in moods from
pessimism to optimism
4. Bandura—strong and weak
senses of self-‐efficacy are
determinants of action
Neuroscience
Individuals with damage
to the emotional areas of
their brain are unable to
make decisions
Human AgencyHuman agency is giving structure to an emotional impulse.
The Depression is Just Beginning1. Excessive confidence leads to excessive risk-taking, which produces unsustainable conditions in the real economy. 2. The longer the excessive confidence lasts, the greater the imbalances and instabilities.3. The unraveling of them will give rise to extreme fear and risk aversion proportional to the preceding confi-dence. 4. Fear and risk aversion has not reached a level propor-tional to the preceding optimism and risk assumption.
