Horace W. Brock, Ph.D. President Strategic Economic Decisions, Inc. WWW. SEDINC.com

Decreased Business Cycle Risk vs. Increased Financial Cycle Risk: A Resolution of this Paradox from First Principles

PERCENT DROP DURING 5 RECESSIONS OF KEY US MACRO VARIABLES

STANDARD DEVIATIONS – US GROWTH RATES Source: BEA, SED

STANDARD DEVIATIONS OF THE S&P 500 (Nominal) GROWTH RATES Source: Standard & Poor’s, BLS, SED

STANDARD DEVIATIONS – EUROPEAN UNION GROWTH RATES

STANDARD DEVIATIONS OF THE S & P 500 (Nominal) GROWTH RATES

THE CHANGING COMPOSITION OF EQUITY MARKET RISK

INCREASED ENDOGENOUS RISK IN GLOBAL EQUITY MARKETS Source: SED

Detailed Reasons for Greater Endogenous Risk ( ) Increased “pricing-model uncertainty” Benchmarking of performance New information on market expectations (first call) New ability to “know” and to “react” to the news Collapse in cost of trading

Long-Term Endogenous Risk – Bull and Bear Market Regimes –

REAL RETURNS AND NET WORTH GROWTH – The Three Most Recent Regimes – REAL HOUSEHOLD NET WORTH REAL D-J IND. INDEX REAL BOND INDEX REAL HOUSEHOLD REAL ESTATE ASSETS

STOCK MARKET VERSUS BUSINESS CYCLES

EVOLUTION OF MARKET BELIEF STRUCTURES Source: SED

BEFOREAFTER