Is it even possible to predict a crisis?

Question

There are so many oracles out there but is it really possible for one to know for sure such a thing? What is the best probability with which investor can predict crisis in given month? quarter? year?

What are the indicators of crisis coming that we can use 'for sure'? Like interest rates, debt, capital, something else? How to learn how to predict crisis for a person who has no idea how to learn that skill?

Joe Villeneuve · Answer

The answer is "yes"...of course...just ask all the experts out there that have predicted one for the past 20 years (+/-).  Of course they conveniently forget the times they predicted it...and it was "delayed" until next year (which also never came), but they will remember when they finally guessed got it right and declare themselves (and will be referred to by others as such) to be an expert...for correctly predicting an economy crash/downturn.

Victor B. Champion · Answer

I found it amazing that in the film "The Big Short" there was so much truth told about market manipulation and institutional bank fraud leading up to the 2008 financial crisis. The reason I think that it is nearly impossible to predict with any accuracy, when the next crisis will occur is because there are people in places that we don't ever hear about, that determine when a bubble bursts. In spite of bond price charts, precious metals price charts, stock charts, housing charts, interest rates and consumer sentiment all screaming that a correction should already be underway, it could still take several weeks, months or even years before the bottom inevitably falls out. Now that the US economy is in the so-called "everything bubble", who knows what economic factor will represent the proverbial pin prick? I'm really interested to know everyone's thoughts on how to use real estate investment as a hedge against another global financial crisis.

Jonathan Twombly · Answer

This is the $64,000 question and, unfortunately, the answer is no.  No one can predict a crisis with accuracy.

What you can see is stresses building in the system, particularly with prices and with enthusiasm.  The higher prices go, the more it draws in the inexperienced, the greedy, and the lazy.  You also start hearing talk about how "this time is different" and seeing a lot of real estate cheerleader articles making all kinds of arguments about why it's still safe to invest in real estate.  You see lenders loosening their standards because all the strong borrowers are already full up on debt and getting anxious, and you see borrowers doing more and more creative financing to make deals work.  (Last time around, it was adding mezz debt to your permanent debt to raise the LTV and get better returns on equity.  This time around it is loans with a substantial interest-only component, because deals cannot work with fully amortizing loans.)

Once you see these stresses building up, then you know a crisis or correction is imminent.  At that point, it could be anything that pricks the bubble and causes the unwarranted confidence to dissipate. When it happens, it will happen suddenly.  So, while you cannot predict it with accuracy, you must prepare for it.  Preparing includes not investing at the top, and garnering funds and education so that you are ready and able to invest when the next bottom comes.

What could cause the bubble to pop?  Almost anything.  A bank failure.  A major scandal.  A war. The failure of trade talks with China. The Fed raising interest rates, when everyone thinks it won't.  Trump getting re-elected.  Trump not getting re-elected.  Who knows?  But if anything makes the markets skittish, then the whole thing collapses.

Jack Martin · Answer

The best book I have ever read on this subject is called "The Secret Life of Real Estate and Banking" by Phillip J Anderson.  It's about $35 on Amazon.  It covers the history of real estate in America and how corporations, government, and banking have played a part in the real estate cycles.

Victor B. Champion · Answer

So the question remains; What are the best ways to use real estate as shelter from the storm or at least as a firm hedge? I'd probably not want to be caught mid-flip or severely over leveraged when the bad news hits.

Jerry Murphy · Answer

@Vlad Denisov

No one can have certainty about the next crisis. There are people who can and do predict correctly but being correct is not the same as being certain.

Maybe you are the worlds foremost expert on corporate debt. You can look at the data and see that something is wrong and that it will end really badly.  But you aren’t likely to be an expert in everything. A war in China, a natural disaster, a crazy tweet from the White House could easily trigger a recession and make your knowledge irrelevant.

Grant Rothenburger · Answer

Haven't you seen The Big Short? Christian Bale can do it!

It will happen and one day and everyone screaming doom and gloom will be right. But no one really knows when a correction will happen, just that it will.

Caleb Heimsoth · Answer

@Vlad Denisov. There are ways to look at it, there are economic indicators.  Corporate debt, the inversion if the yield curve, most suggest a recession in the next 2-3 years.

Victor B. Champion · Answer

Touche' 👍🏻

Is it even possible to predict a crisis?

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