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Welcome to Demographics School Presented by Rodney Johnson President HS Dent Publishing

Welcome to Demographics School Presented by Rodney Johnson President HS Dent Publishing

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Welcome to Demographics School Presented by Rodney Johnson President HS Dent Publishing

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  1. Welcome toDemographics SchoolPresented byRodney JohnsonPresidentHS Dent Publishing

  2. It Pays to Forecast

  3. 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 HS Dent

  4. Harry S. Dent, Jr. – Founder Rodney Johnson – President Harry Cornelius – Director, Business Relationships Lance Gaitan – Director, Advisers Network Charles Sizemore – Analyst Stephanie Gerardot – Research & Operations Nicole Nonnemaker - Publishing HS Dent Staff

  5. 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 What You Will Learn

  6. 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 a client or prospect’s business will be impacted Highlight the opportunities and risks that face clients and prospects in the next 3, 5,10 and 20 years What You Will Be Able To Do

  7. Economics Malthusian Economics Classical Economics Keynesian Economics

  8. Consumer Sentiment measurements gyrate month to month No correlation between the move in the indicator and the move in stocks or profits, either coincidental or on a lag Does How You Feel Change How You Spend?

  9. …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 Amended Monetary Act 1913

  10. Target Fed Funds Rate Source: Federal Reserve

  11. 30-Year, 10-Year, and Fed Funds January 88 through Jan 08

  12. Mandate – what they are SUPPOSED to do Tools – Fed funds, discount rate, money supply , and speeches/testimony Effects, and lack thereof Website of interest: www.federalreserve.gov What We Know About The Fed

  13. Demographics

  14. Strong Uptrends and Downtrends in Births

  15. Average Immigrants per Year by Age1945-2000 Source: US Census Bureau

  16. Immigration Adjusted Birth Index

  17. U.S. Population in 2007by Age Cohort

  18. 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 Demographics

  19. Analyzing Data

  20. Sampling and Central Limit Theorem Normal Distribution Dispersion Correlation Coefficients Statisticsand other fun math

  21. 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 Normal Distribution (Bell Curve)

  22. The Normal Distributionaka, the “Bell Curve” 68% fall within +/- 1 standard deviation

  23. The Normal Distributionaka, the “Bell Curve” 95% fall within +/- 2 standard deviations Source: H.S. Dent Foundation

  24. The Normal Distributionaka, the “Bell Curve” 99% fall within +/- 3 standard deviations Source: H.S. Dent Foundation

  25. Returns are normally distributed Returns are independent Unusable spread of expectations The Flaws of Return Estimates

  26. 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 Impossible Market Days

  27. Daily Price ChangesDJIA 1998

  28. 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”. True Distribution of Returns

  29. 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

  30. 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. Returns Gain Momentum

  31. 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 Volatility Clustering

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

  33. Because investment returns exhibit “fat tails”, the extreme observations or returns are more likely that we would assume. We value loss more than we value gains (2+x) These two facts together mean that investing in equities is much riskier than we normally describe. Investing is Riskier Than Commonly Described

  34. The Human Model of Forecasting “We won’t have recessions anymore” “It’s a soft landing” “Things are so bad they will never improve” Source: H.S. Dent graphic interpretation of data in 2002 Schweser CFA Study Program, Chapter 15, pp 144-45.

  35. We tend to estimate what will happen based on most recent experience When our accounts are up, we compare to others (relative income hypothesis) When our accounts are down, we feel greater loss because we value loss at 2x gains Investing Is NEVER Satisfying

  36. Stock Returns1966-1970 Source: Ibbotson SBBI, Large Company Stocks: Total Returns

  37. Stock Returns1996-2000 Source: Ibbotson SBBI Large Company Stocks: Total Returns

  38. “Average Return” is poor guide of what will happen – variance and standard deviation too great Returns are not “Normally” distributed, instead the distribution has “Fat Tails” Returns are not Independent, there is clear evidence of clustering of returns What We Know About Market Risk

  39. Explain to clients what is possible within their portfolios Explore options for hedging portfolios within your product mix Prepare clients for volatility clustering that is expected in the next economic season What To Do With This Information

  40. Understanding samples and margins of error Explaining normal distributions and standard deviations Explaining the flaws of applying normal distributions to investment returns Reading list – Mandelbrot, Taleb Understanding Risk

  41. Predictable Spending Patterns

  42. 46-50 $40,000 $35,000 $30,000 $25,000 $20,000 $15,000 $10,000 $5,000 20 30 40 50 60 70 80 Age Average Annual Family Spending by Age (5-year age groups) Spending

  43. Change in Spending at each Age & Stage of Life 46-50 Family, College Kids 22-30 Young Married 31-42 Young Family 50+ Empty Nesters 18-22 Single 60+ Retired

  44. Front end of Boomer generation began retiring in 2003 Wave continues through 2025 Spending STILL PEAKS approx. age 48-50 Boomers Are Not Different!

  45. The Adult Life Cycle Education (college, trade school, etc.) Workforce Apartments Marriage Children Home purchase Second home purchase Children leave Pay down debts Save for retirement Vacation property Retirement property

  46. Economies must be Industrialized Modernized Democratized in terms of consumers holding funds Only Works for Some

  47. Who Spends What in the Economy 2006 Source: U.S. Department of Commerce, Bureau of Economic Analysis

  48. Who Spends What in the Economy 2002-2006 Source: U.S. Department of Commerce, Bureau of Economic Analysis

  49. Personal Consumption Expenditures January 1990 through March 2008 Source:Bureau of Economic Analysis

  50. Potato Chip Purchases Vs. Age $ Per Year