How prepared are you for the impending crash?

So for the start of 2015, a theme that I will be exploring is how to prepare your business for the impending crash.

Whether its later this year or the middle of next, despitre what Governments do to try to postpone the impending crash, one will inevitably come.

It may be just a minor inconvenience for a few months as stock markets fall and cash becomes tight; or it may be a full blown recession worse even than 2008-9.

Either way now is the perfect time to prepare.

What’s the evidence of a likely crash

Forecast-for-2015

The Goldman Sachs analysts point out that their U.S. equity market Sentiment Indicator currently stands at a maximum possible reading of 100, indicating the S&P 500 has near-term downside risk during the next six weeks. Though on a tactical basis, S&P 500 indicates downside, strategically the analysts anticipate that 3% GDP growth will drive 5% earnings growth in 2015, and hence upside exists if crude prices remain low.

The challenge in this is the height of the USD and the proportion of profits earned overseas… see next two charts

USD index showing recent strength of USD, ostensibly on foreign economic weakness and risk aversion, plus better US domestic economy

tr-usd-us-dollar-11

 

If you own or earn in USD this is GREAT. Your profitability is soaring.

Conmversely is you have borrowed in USD or your costs are factored in USd you are not in good dhape- your local currency can’t keep up with the soaring exchange rate and your costs could have exploded by 5-10% in the last couple of months. And if you have borrowed in USD your intrest charges are going up even without an interest rate hike… and when this comes it will be a double whammy, interest up plus exchange up too

 

Proportion of S&P profits earned in US and overseas.

S&P foreign earnings

 

So investors had better be prepared for a third of the total profits on the S&P to be less, with a rising USD.  this certainly won’t assist the increased valuations people are forecasting.

Commodity prices certainly don’t indicate a positive future…

this is Oil pricing its collapsed further to be nearer $40/barrel- see previous posts

tr-crude-oil-11

and this has led to the total commodities portfolio to languish, which doesn’t suggest a positive futuretr-commodities-jan15

 

The total market then appears to be over valued

Shiller-PE-Cape-Ratio

probably even worse than the above CAPE graph, which estimates forward profits, but as we’ve seen these are likely to reduce with forex challenges.

Here’s Goldman Sachs again forecasting oil pricing and also the S&P sensitivity to this… they were’nt very successful in forecasting last years oil collapse nor rise of the USD so please take this with a grain of salt.

Oil-price-Vs-SP-500

 

We also have to take into account the potential for interest rates rise

target-federal-funds-rate-graph-png

The dots represent individual US Federal Reserve policymakers’ projections of the appropriate federal funds rate target at the end of each of the next several years and in the longer run. It should be noted that these projections reflect the views of all the participants, irrespective of whether they are a voting member or not

Summary

The purpose for all these graphs is to show you the potential for extreme volatility in markets outside of the US.

With both positive US economy and the potential for rising interest rates will attract more and more US investment home weakening the currencies of many emerging markets, and this has been seen in the last two months around here.

All it takes is for a small surprise to surface somewhere for the whole economy to be shocked and fall, precipitating either a small or large crisis- the primary results for your business, a halt of consumer spending, resultant cash-flow problems, and late payments.

Are you monitoring these potential signs of future problems and do you have a plan in place to deal with the next crisis? If so great, if not then I’ll deal with these in subsequent posts.

 

One Reply to “How prepared are you for the impending crash?”

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