Looking for Early Warning Signs

As a finance professional, I’m in the business of predicting the future. That, in the best of times, is tricky stuff. In today’s world, it’s downright impossible. That said, there are some early warming signs I recommend examining.

Trying to find these pieces can be overwhelming. I look for early warning signs or opportunities, before the rest of the crowd finds them. In order to do this, I follow all types of financial news sites to look for signs of things to come. If an event will be significant enough that will affect the economy in the future, it usually starts to be re-reported by unrelated news outlets. By unrelated news sites, I mean the mainstream to the tin foil hat sites, and everything in between.  

Yellow Warning Signs

One important approach I use is to read every story I find objectively with no reaction. A given story could be false, blown out of proportion, or actually true. I file away these reports in my memory, no matter how bizarre they might be, so that I can recall the story if it appears again in the future. If I see it again, it gets my attention. The aggregate of the news is much more important than any one story. It could be a sign of things to come.

Allow me to share one example: after seeing the news that the Chinese stock markets would not re-open after the Lunar New Year Holiday on 1/25/2020, and the subsequent lockdown of its cities, I started to see recurring stories that these effects would eventually come to the U.S. I started to see recurring stories in early February of how citizens in Hong Kong were panic buying noodles and toilet paper. It made no sense, but I perceived this as a sign. For the next two weeks, every time I went shopping and saw full toilet paper shelves, I recalled the images of bare toilet paper shelves in Hong Kong and loaded on a few extra packages. (As a general principle, this is not a bad idea when you shop for a family of four.) Three weeks later, my local supermarket was stripped bare of toilet paper and the four of us were on stay at home orders. I was ahead of the crowd.

Red Warning Signs

In financial news, during the week of 4/15/20, I saw repeating stories that JPMorgan, the largest bank in the US, had increased its loan loss reserves by 450%, to $8.3B. This is the highest it has been since 2009. Loan loss reserves are set aside out of a bank’s net income, to absorb anticipated loan defaults in the future. Bottom line: this move suggests that JPMorgan in April expected to see bad debt climb. Wells Fargo also did the same.

What signs did those banks see? What did they know? I’d say they’re more tuned in to the U.S. economy than anyone else. Will the U.S. economy recover quickly from this quarantine? Will there be a second wave in Q4? Will it be a “U” or “L” shaped recession? Could JPMorgan and Wells Fargo’s drastic bump in loan loss reserves be a sign of things to come? All these questions are on the minds of business owners.

Word of Advice

Regardless of the exact way in which the future plays out, the actions of these banks signals to every business owner to shore up liquidity for Q2 and Q3. We should be saving dollars and making sure our cash reserves are as healthy as possible. Review your outstanding accounts receivables and see if there are payments to chase down. Explore improving terms with your customers. Make sure your internal operations are strong so there are no delays in sending invoices. Just as banks are expecting to see defaults on loans, it’s likely many customers may be delaying or not paying their bills in the weeks ahead.

We have clearly entered a recession, and it’s a challenge to sift through the noise in the news to find actionable steps to take. My last recommended advice is to approach it as a marathon, not a sprint. Each piece of news is a clue, and unfortunately, we all lack perfect information.

Here’s a list of some of the financial news sources I recommend:

• Cnbc
• Zero hedge
• Financial Times
• Dollar Collapse
• Real Vision (subscription required but highly recommended)