If there is one thing in the world I’m excellent at - it’s worrying. I am a world champion. Best in class. Unbeatable.
With the markets peaking at the start of this year, the reptilian part of my brain is at its most scared. Will what has gone up, eventually come crashing down?
It will and then recover, the problem is we have no idea when and could miss out on a lot of investment upside if we stay on the sidelines. Hence the need for all serious investors to have their own "dashboard of doom".
To me there are two levels of financial armageddon. The first a full meltdown zombie apocalypse and the second a monetary crisis such as the one seen in 2008.
For the first, Warren Buffett in his 2016 annual meeting spoke about the threats of CNBC - cyber, nuclear, biological, chemical as the major catastrophic threats to the economy. In a CNBC scenario I’m afraid I can’t point you anything more than that survivalist mecca - Costco, where you can pick up a pallet of food that will last you 25 years. Hopefully you have a nicely lined radiation proof bunker you can store it in?
In the case of scenarios like the 2008 global financial crisis or the 1987 crash, I’ve for many years thought about putting together a dashboard of doom - some high-level indicators for when the wheels start to come off.
The large asset managers, banks and government agencies like the SEC, IMF and Bank of England, have their own complicated models for predicting downturns. It’s also going to be very hard for individual investors to get a hold of this type of research and understand it - a previous blog post explains why -The Oscars for bravery.
For me it’s easier to look at “purer” numbers instead of trying to interpret what other people have incorporated into a model as the GIGO caveat with models (garbage in, garbage out) often applies.
Buffett uses the indicator market cap/ GDP, US trucking volume and US railway volume as proxies for economic health.
The cost of shipping globally as encapsulated in the Baltic Dry Index (BDI) was another one watched by predictors of the 2008 GFC (Global Financial Crisis).
My friend Robert Macrae at the London School of Economics Systemic Risk Centre spends a lot of time thinking about financial risk. He’s sent me a whole bunch of additional items to add to my dashboard, although I haven’t had time to think through them yet in time for my weekly post. Instead I’ll link you to this summary for now.
I’d love to hear if you have additional ideas (indicators or just ways to think about market corrections) to include in my “dashboard of doom”.