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HS Dent

Welcome to Demographics School Presented by Rodney Johnson President HS Dent, an Independent Economic Research Company. HS Dent. Independent Economic Research Company Forecast economic change based on three key tools: 1. Demographics and demographic trends

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HS Dent

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  1. Welcome toDemographics School Presented byRodney JohnsonPresidentHS Dent,an IndependentEconomic Research Company

  2. HS Dent Independent Economic Research Company Forecast economic change based on three key tools: 1. Demographics and demographic trends 2. Predictable consumer spending patterns, and 3. Technological innovation acceptance rates

  3. Forecasting Doesn’t Always Work Out I think there is a world market for maybe five computers. - Thomas J. Watson, 1943, Chairman of the Board of IBM We don't like their sound, and guitar music is on the way out. - Decca Recording Co. rejecting the Beatles, 1962 With over 50 foreign cars already on sale here, the Japanese auto industry isn't likely to carve out a big slice of the U.S. market. -Business Week, 1958

  4. Especially In Finance We’re looking for home sales to turn upward before mid-2008, on a national average basis, and we expect recoveries in housing starts and construction spending to commence before the end of the year. The Longer-Term Housing Outlook Is Excellent! David F. Seiders, NAHB Chief Economist, 1/9/08 Stocks reached a “selling climax” on July 15 (2008), which will be seen as the bottom for the current market.”BusinessWeek, August 2008 Jeremy Siegel — the famous Wharton School professor

  5. What You Will Learn Background of Economics The sources of our research The statistics involved (good and bad) What the Average American looks like Three main tools of HS Dent research – demographics, predictable spending patterns, technology innovation and acceptance How these tools are applied to forecast changes in the markets and real estate What changes are expected around the world

  6. What You Will Be Able To Do Describe how modern, industrialized economies work Help your clients see the next economic “season” Use the tools to forecast changes in your local area Explain how businesses will be impacted Highlight the opportunities and risks that face clients and prospects in the next 3, 5,10 and 20 years

  7. Economics Malthusian Economics Classical Economics Keynesian Economics Austrian School

  8. S1 An Economy at Equilibrium Price D1 Quantity

  9. S1 Demand-Based Inflation Price D2 D1 Quantity

  10. S1 Supply-Based “Good” Deflation When a new technological breakthrough pushes the supply curve out, prices fall while unit production rises. Price D1 Quantity

  11. S1 Demand-Based “Bad” Deflation When an external event like a credit crisis reduces the ability to finance consumption, prices and unit production fall Price D1 D2 Quantity

  12. The Boom & Bust Cycle Why does it happen? How can it be stopped? Free markets or intervention?

  13. Keynesian Circle

  14. Keynes’ Animal Spirits The colorful name that Keynes gave to one of the essential ingredients of economic prosperity: confidence. According to Keynes, animal spirits are a particular sort of confidence, "naive optimism". He meant this in the sense that, for entrepreneurs in particular, "the thought of ultimate loss which often overtakes pioneers, as experience undoubtedly tells us and them, is put aside as a healthy man puts aside the expectation of death". Where these animal spirits come from is something of a mystery. Certainly, attempts by politicians and others to talk up confidence by making optimistic noises about economic prospects have rarely done much good. Economist.com

  15. Basics of Hayek(Austrian School) • Free markets allow best allocation of resources • Government intervention (interest rates and other monetary policy ) causes mal-investment • Those mal-investments must be worked out of system over time

  16. Hayekian Triangle Mises Institute

  17. VideoFear the Boom and Bust

  18. The Federal Reserve

  19. The Fed’s Forecast…

  20. Amended Monetary Act 1913 …the Fed "shall maintain long run growth of the monetary and credit aggregates commensurate with the economy's long run potential to increase production, so as to promote effectively the goals of maximum employment, stable prices, and moderate long-term interest rates." • www.federalreserve.gov • www.federalreserve.gov/kids

  21. Target Fed Funds Rate Source: Federal Reserve

  22. 30-Year, 10-Year, and Fed Funds January 88 through April 2010

  23. Adjusted Monetary Base

  24. Federal Reserve Balance Sheetas of 4/17/10 in $ billions Courtesy of www.market-melange.com Data from Federal Reserve

  25. VIDEOChris Martenson, Crash CourseMoney Supply & The Fed

  26. What We Know About The Fed Mandate – what they are SUPPOSED to do Tools – Fed funds, discount rate, money supply, and speeches/testimony, trading illiquid assets for reserves, loans, purchasing of mortgage-backed securities Effects, and lack thereof Website of interest: www.federalreserve.gov

  27. BREAK

  28. www.dilbert.com

  29. Demographics

  30. Strong Uptrends and Downtrendsin Births

  31. Average Immigrants per Year by Age 1945-2000 Source: US Census Bureau

  32. The Immigration Adjusted Birth Index

  33. Demographics How many people born in each year The numerical effect of immigration Composition of US population by age groups Where the information comes from (NCHS, Census) Websites of interest: www.cdc.gov/nchs/www.census.gov

  34. Analyzing Data

  35. Statistics And Other Math Dispersion Correlation Coefficients Normal Distribution

  36. Normal Distribution (Bell Curve) Gaussian distribution needs only two parameters to describe – mean, and variance 68.26% of observations fall w/in 1 standard deviation of the mean 95.44% w/in 2 standard deviations of the mean 99.74% w/in 3 standard deviations of the mean

  37. The Normal Distributionaka, the “Bell Curve” Number of Observations 68% fall within +/- 1 standard deviation -4 -3 -2 0 1 2 3 4 -1 Standard Deviations Source: H.S. Dent Foundation

  38. The Normal Distributionaka, the “Bell Curve” Number of Observations 95% fall within +/- 2 standard deviations -4 -3 -2 0 1 2 3 4 -1 Standard Deviations Source: H.S. Dent Foundation

  39. The Normal Distributionaka, the “Bell Curve” Number of Observations 99% fall within +/- 3 standard deviations -4 -3 -2 0 1 2 3 4 -1 Standard Deviations Source: H.S. Dent Foundation

  40. Assuming Returns Are “Normal” Financial software assumes that investment returns are normally distributed around a mean, or average, return (9% for Large Cap Stocks, per SBBI through 2007) This assumption is made because it is true – usually.

  41. The Flaws of Return Estimates(Why Returns Are Not Always “Normal”) Returns are not independent of each other Returns can be “clustered,” as individual returns are influenced by the same outside variable Dispersion renders return estimates unusable

  42. Volatility Clustering Returns are not independent, they rely on underlying economic events and trends These trends can occur over long periods Tech Bubble Tech Bust 9/11 Recent Credit Crisis

  43. Returns Gain Momentum(not independent) Most days on equity markets are marked by small, incremental changes. Large percentage changes, however, tend to be followed by large changes. This is called “volatility clustering”, indicating that exceptional volatility happens in sequence.

  44. True Distribution of Returns Instead of being Gaussian, or Normal Curve, investment returns fall along a Cauchy Distribution, which exhibits a higher mean, less observations along the curve, and “fat tails”.

  45. Stock ReturnsNormal Distribution Assumed 1987 Crash was 20 standard deviations past the mean – a statistical impossibility if returns were truly normal! 1933 “impossible” one-day rally Monster Bear Market Rally in July 2002 Back-to-back “long tail” days during 1929 Crash

  46. Daily Price ChangesDJIA 1998

  47. Dow Industrials Daily % Price ChangeJanuary 2007 – March 2008

  48. Daily Price ChangesDJIA 1928-2010 Credit Crisis Returns vary wildly over time Tech Boom and Bust 1940s-60s: Low Volatility Low Volatility Roaring 20s and Depressionary 30s: High Volatility 1987 Crash: Unprecedented Volatility Source: Bloomberg

  49. Daily Price ChangesDJIA 1997-2010 …until volatility began to explode in 2007 Volatility declined during the early stages of the 2000s bull market Stocks enjoyed a period of calm, “normal” returns for most of the mid-2000s… Source: Bloomberg

  50. Impossible Market Days Chance of August 31st, 1998 – 1 in 20mm Chance of the 3 declines in August 1998 – 1 in 500mm Chance of October 19th, 1987 – less than one in 10 to the negative 50th power, a number that does not occur in nature

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