In the travel industry, prevention of accidents is at the top of its agenda. Safety drills for airplane takeoffs and landings are routinely practiced. On ships, passengers are assembled for lifeboat drills as soon as they board the vessel. Every passenger’s name is called out and checked off; both the passengers and crew take the drill very seriously in view of the fact that just a few years ago the Italian ship Costa Concordia ran aground on the coast of Tuscany and toppled on its side. Ship captains and sailors are in constant touch with weather stations, downloading data into their computers for the most up-to-date weather forecast and analysis.
Even after 2008, the majority of people in the investment business still pretend that financial shipwrecks never happen and financial hurricanes will never come again. Many financial advisers, bankers and stockbrokers collectively stick their heads into the sand and refuse to do any research on disaster prevention. The industry doesn’t want its clients to hear of the possibility that things can go very wrong even after Lehman Brothers, Bear Stearns and Merrill Lynch went bankrupt. Unfortunately, the Great Recession did not serve as a wakeup call.
Everyone complains about the weather, but nobody ever seems to do anything about it.
Be Alert to Changing Weather
We at Runnymede Capital have spent decades doing research and believe in the importance of systematically tracking financial weather conditions. As a matter of fact, our firm coined the phrase “financial hurricane” in an article entitled “Surviving Financial Hurricanes” published in the Spring 1996 edition of Financial Consultant magazine. In the article, we urged investors to be more vigilant of major financial disturbances, which we believe are likely to increase in severity and frequency in the coming years as central bankers continue to conduct untested financial experiments, printing money without discipline and creating more debt on all levels of society including federal and state governments.
Analyze Data for Direction
The heart of our firm’s market risk analysis is our multi-factor tracking system known as METV, which stands for Monetary, Economic, Technical and Value. These are the four major categories of variables that we have observed to heavily influence the trend and direction of the financial markets. In Monetary or M, there are twelve statistical series. We systematically measure Fed policy, banking liquidity, the cost of money and the supply and demand for credit. We gauge the liquidity in the banking system that will likely directly affect stock and bond prices. In the Economic or E which measures corporate profitability, there are sixteen series. Technical or T tracks market psychology with 10 indicators. In Value or V, we incorporate a comprehensive valuation methodology that includes price to earnings, price to book value, dividend discount model and yield analysis to quantify the market’s upside potential and downside risk. After all the analysis is put together, we evaluate whether these critical variables are providing positive, negative or neutral underpinnings for the financial markets.
The METV early warning system has helped us to guide our clients by actively implementing asset protection and risk control over the years. Governments, policy makers and the Federal Reserve have made many mistakes. When they make big mistakes, they can create major financial market disturbances that destroy your wealth and savings. Runnymede analyzes, detects and makes effort to anticipate these disturbances. Proudly, we protected our clients from the 1987, 2000 and 2008 bear markets.
What does METV tell us right now?
Our focus is on “E.” Business conditions are deteriorating because people are losing confidence in the international central banks and the Fed. Profits of economically sensitive industries such as machinery, retailing, transportation and commodities have been poor since 2014. As a result, capital spending and consumer goods orders have been declining. Politicians and average citizens aren't likely to get nervous until the unemployment rate starts to rise. We see one early warning indicator, the 4-week moving average of initial unemployment claims appear to be rising and could make headlines very soon.
Therefore, we think investors should address three questions too often ignored by the financial services industry:
- Who is your financial weatherman?
- What is your evacuation plan?
- Where is your lifeboat?
We are thankful to our clients who entrust us to captain their financial ship. Although not always an easy job, it is our privilege to navigate the ever changing financial conditions with you. Our goal is to be thorough in our analysis so we may act accordingly by anticipating when the wind might fill our sails or when there may be the risk of a storm brewing on the horizon. Storm chasers will tell you that achieving your end goal requires controlling risk and avoiding the eye of the storm.
Do you carry an umbrella when the forecast calls for rain? Post your thoughts in the comments section.