Boom & Doom
I’m rarely invited to anything interesting, but April brought me two invitations to very exciting events.
The London School of Economics held a small seminar on financial crises (doom). Speakers from the US Fed, the IMF and the Bank of England came together to share how they try to predict economic crisis.
The second free lunch I was given was by Northfield, a boutique financial risk management research house who I have great respect for. They hosted their annual London powwow.
When I was a baby, a very heavy math book possibly fell off my Dad’s desk and hit me on the head, but I find studying market risk enthralling. It helps my worrywart tendencies to just spend unadulterated time thinking about what can go wrong.
Risk managers (to me) tend to be the clearest thinkers about the economy. Instead of getting stuck thinking of just bonds, China or some other narrow market area, they HAVE to take the 30,000 ft view.
I’d written in January about my wish to create a lay person’s “dashboard of doom” — some high-level indicators for when the wheels start to come off the economy.
A few salient points from two days exclusively thinking about boom and doom:
Boom and doom always happen. That seems obvious but it’s really brought home sitting through several lectures that look at the markets and the economy over 200 years. Technology and opportunity cause markets to boom and then we inevitably have a cooling off and correction. As painful as these have been for those who live through them, the economy without fail has picked back up and gone on it’s upwards trajectory.
As for high level identifiers, these are the ones I’m currently most enthusiastic about including in my lay person’s dashboard of doom:
Vanguard’s “fair-value” approach
Since the 70’s the Shiller CAPE has been the gold standard for signalling overheated markets. It hasn’t fared too well in our QE environment as it doesn’t take into account investor behaviour. The folks at Vanguard have come up with a tighter approach explained here.
I’d forgotten about Now-Casting in my original dashboard of doom post. It seems like a very obvious thing to do but no one had done it until academics at London Business School put together dozens of economic indicators (such as unemployment statistics and consumer surveys) and created a high level index called the NCI (Now-Casting Index). This used to be available for free on their website, but unusually for academics they’ve gotten their act together and it’s now a paid for service.
Bank share prices
Another (duh!) very obvious realisation was that when bank share prices fall, that’s a good tip off that the economy is going South. The reasoning is that investors who know how to read a bank’s balance sheet in detail (I certainly don’t), will start to sell off bank stocks when they realise the level of bad loans — a signal of a bad economy before other signs. So watch what bank shares are doing by following something like the KBW Bank Index!
Despite writing about doom, it’s cheered me up that there are folks out there who can read the economy clearly. Thanks to the internet you too can put together your own personal “dashboard of doom”, attempting to protect what you’ve made during a boom.
Mallika Paulraj is the creator of The Superinvestar Framework which teaches investors how to make confident investment decisions. You can download your own copy of Ten Timeless Principles From The World’s Greatest Investors here. Her book How The Best Invest, which outlines the method, is available on Amazon.
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