Bernanke cartoon extrapolation

Extrapolation has killed more people, companies and portfolios than almost anything else we can think of. You assume that you’ll continue to be healthy until you get that cancer diagnosis or fall to the floor from a heart attack. You assume profits will continue to flow in until a disruptive technology brings you to bankruptcy. You assume your portfolio will continue to grow until you get hammered by a recession…

 

The Lull of the Status Quo:

Why do people continuously fall victim to extrapolation? The simple answer is that more times that not it is correct. If you are healthy today, the odds are extraordinarily high that you will be healthy tomorrow. If you’re company is profitable today, it likely will be tomorrow. If the economy is healthy today, it likely will be tomorrow. You’re hypothesis (either explicit or implicit) that the trend will continue is rewarded over and over, eventually lulling you into the false belief that it will continue forever.

Humans by nature try to conserve resources. We are driven to get as much benefit at as little cost as possible. Questioning the trend takes energy. But, as we will see it is worth it.

 

What’s the Solution?

For every single major change in the status quo that we can think of there are early warning signs. There are numerous early warning signs of your health deteriorating. Simple tests like blood pressure can give you valuable information. Blood test can provide specific markers that you’re at a high risk for virtually every ailment. Your LDL cholesterol and triglycerides are common example. Tests for circulating tumor DNA (ctDNA) are currently under production that will give you early warning of a variety of cancers. Advances in genetic testing offer a whole new array of health indicators.

For corporations, you could look at customer survey data, technological advancement and a variety of more complex measures.

Why stop there? Before an earthquake, seismometers pick up P-waves that aren’t very destructive, before the destructive S-waves hit. Low barometric pressure can give you early warning of a thunderstorm. A psychologist can predict divorce with 95% accuracy just by analyzing a brief interaction between a couple.

 

What We Do:

Like for health, bankruptcy, earthquakes and weather, we believe that there are early warning signs before major turning points in markets (whether up or down). One of our better-known leading indicators is our recession model, which predicted the beginning and end of the last US recession in real time.Recession signal

Just as meteorologists run multiple models simultaneously, our recession model is composed of twelve sub-models that are composed of inputs like the yield curve, building permits, initial unemployment claims, and market and credit inputs.

We’ve also created leading indicators designed to flag turning points for most major markets and sectors. Our corporate clients, for example, can get an early warning sign when retail sales are about to decline.

retail sales indicator

Conclusion:

Start paying attention to these early warning signs in all areas of your life. The trend will continue until it doesn’t and it is at those moments where massive changes (often for the worse) happen. So, get screened for your health and request a trial of our research for your company and/or portfolio.