In 2008, the world was struck by one of the biggest financial crisis to occur since 1929. The sub-prime motgage crisis is also reffered to as the black swan since nobody saw it coming. Although some people, like Robert Shiller, and Peter Shiff were able to predict the housing bubble, few were able to spot define the exact timing of the inception of the crash. This concept was well represented in the movie The Big Short which demonstrated how fundamentalists can lag lack stock and bond price value. It highlighted that as long as the perception was fine and that buying exceeded selling, the market would work fine.
Investment analysts use fundamental metric systems such as p/e(Price–earnings ratio) , book value and discount cash flow analysis to make investment decisions. Even though these systems are useful when it comes to value enterprises , these methods have their limits when spotting a downturn. These metric valuations put emphasis on the past , and project value for the future. Nonetheless, these procedures can not detect potential reversal in trends ahead of time nor can they detect monetary flow.
Vision is the knowledge of the master investors but most investors like to trust classic valuation methodologies . The problem with this is that the fundamentals always look good at the market top. Just take a look at Valeant for a better exemple
Everything was promising at the top and fund managers and hedge fund gurus did not anticipate the drastic drop in sales.
We believe that non-traditional methods using cycles, math and models can help investors and traders spot downturns and boom-time ahead of the events. It helps them to see if they are within a 10% correction mode or a crash.
As feelings are not strategies that can lead to gain constant profit on a longer term, we decided to develop an effective methodology that moves away from model valuation for a better chance of success in our forecast.
Some of our models were able to anticipate the crisis of 2008 well before it occured. Based on our methodology, we were forecasting a crisis for the month of June 2007 which means our timing was off by only 4 months. One of the important factor we consider in our methodology is pattern recognition which can spot market flow years in advance. Furthermore, economic weakness is yet another good indicator to watch out for. Back in 2005, for example, the housing industry was one that we had in our radar.
Since money is created by the fractional banking sector, it is important to keep a watch on private debt creation. When people borrow from the banking sector, they inject new cash in the economy, so when housing began to deteriorate and then peak we knew that the credit expansion would slow down.
Even though liquidity dropped in 2006, the market kept climbing until 2007.85 because people chased the trend and they did not see the reversal coming. Markets take time to digest data, and only a few traders and investors can spot the market downturns and rally effectively.
It is hard to determine the right time to sell when based only upon fundamentals, but it is always better to sell sooner rather than later.
Portfolio managers and individuals hold their portfolios for a long term. They are paid to be invested which is why they keep their investments for as long as they can. Only during cases of a Bear Market will they begin to raise cash level. Fund redemption then forces them to sell and feed the bear but most of them look to raise cash before a downturn.
Some hedge funds have collapsed in 2008 and many have suffered big losses since the event occured. However, they must be invested in and will continue to be as long as money flows into their funds.
If my models are right, the next 3 years will be much difficult for most fund managers and investors. I think the next couple of years will be similar or maybe even worse than 2008 as both cases look similar. The fed have done a good job to engineer the recovery, but I think it will be hard for them to fight the business cycle and to avoid the anticipated slowdown based on our work.
The big guys are beginning to get nervous as they know that the bull market is old. They are waiting for the sign to sell because they are afraid of selling too soon. They know that market valuations are nearing the 2000 bubble level but yet again they will keep buying until money stops flowing.
When the market will drop more than 20%, they will scream to raise cash and that is when the bear market will take fold.
The question is when, will the dowturn happen?
Unlike many who analyze the market downturn for years, without succeeding to be accurate on the timing of the event, we warn investors now that our models can turn bearish in July 2017 as it did in June 2007. We can lose the mark by a few months but we believe that we are beginning a major bear market: one of the greatest in the last 100 years.
Our models have not reached perfection but we are confident in our methodology and we are extremely cautious right now. So for those who said nobody could have predicted the 2008 crisis, watch out for the next big one, it should start anytime now till the year 2020.
Following our market ananlysis, we urge investors to review their investments and make sure that they feel comfortable in the event of a major drop in the world financial market .
We gauge a suitable time for entering the market would be to wait for almost half a year, analyse the US market trend and raise cash.
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