In fall 2008, as I watched the stock market move steadily towards its date with destiny, I had what could be described as a moment of clarity - or perhaps more accurately, a rush of blood to the head. Witnessing Lehman Brothers' bowel-emptying demise, I decided to write a long financial missive to colleagues, friends and family. Let me tell you why.
In 2002 I had become strangely confident of two things. First, that the economy, house prices and stock markets would boom for several more years; second, that the bubble would burst spectacularly towards the end of the decade and lead to an historic, even epochal, long-term bust.
I soon told family, friends and anyone I thought might be interested. I pronounced to all and sundry that the coming downturn would be no ordinary recession but a huge downdraft in which the value of many people's pensions, investments and property would be devastated. I distinctly remember in 2003 instructing one friend to sell his house in 2008.
You can imagine his response. Most of my victims tended to nod politely, stare at the floor or look at me askance, the unspoken question being: 'but you're just an actor, what makes you think you could you possibly know all this?'
Sadly I have no special powers. I had simply stumbled upon an economic theory - based on academic research, economic logic and plain common sense - which claimed to be able to forecast booms and busts in our economy decades in advance. The very idea that this might be possible is met with almost universal disbelief. But rigorous statistical analysis and successful real-time forecasts over 20 years suggest that it might not be such a crackpot notion, as future posts here will show.
The theory's forecast since its inception in the late '80s had been that we were entering the greatest economic boom in history. It would be founded on technological and financial innovation, powered by the spending of the baby boom generation, and would end - not unlike the 1920s - with a bubble, which would burst around 2008.
This was one of only three long-term forecasts made since it was first published in 1989. Each has proved stunningly accurate.
It suggests that what we've dubbed the 'credit crunch' is merely the opening chapter in a full-length saga of recession, crisis and decline - a saga which will last another ten to fifteen years. Considering the potentially crippling financial fallout how could I, in all conscience, shore up my own finances yet make no effort to inform or warn my colleagues, friends and family?
So I wrote a report.
If you've not yet read it, feel free to download it from the above link (right-click and select 'save target as').
The tone was unapologetically alarmist. I suggested that we were flying into an economic Bermuda triangle, a once-in-a-lifetime financial storm which would not abate until the next decade is out.
I described in detail the reasons for my sombre view and how unprepared investors, pension-holders and home-owners who failed to protect themselves could see their wealth sucked into a financial black hole. I tried to show the risks of inaction, but also the numerous ways it should be possible to survive unscathed and even prosper, in this treacherous financial climate.
If I were proved correct we could expect to see some wild swings in share prices so, naturally, over the years I looked for ways in which I could profit. Having carefully studied investment and trading techniques, learned from my numerous mistakes and eventually made money, I had become just smart enough by the time the downturn struck to feel I could offer a little constructive advice to anyone who asked.
One or two friends did. Then, when it came time to send out my January report, I needed to show that my thoughts were based on something more than hot air. After all, I'm not a qualified financial advisor, I have no experience in the City and am not and never will be a 'banker'.
So I attached a year's worth of investment advice I had emailed to a friend, overlaid on a chart of the FTSE 100 index. This made it possible to see whether, between late 2007 when the storm was gathering and late 2008 when we were still hiding in bunkers (and my correspondence ended), I had had anything worthwhile to say.
It turned out that I did.
After my report went out in January 2009 there was an initial (no doubt embarrassed) silence, followed by a period in which my forecasts began to play out. In the spring, I sent a couple of updates to those who had expressed an interest. In the first on 4th March - two days before free-falling stock markets finally bottomed - I described a bullish scenario which I saw as increasingly likely:
...'the major indicies could rally in excess of 30%. The Dow would hit its target of 10,000 in the second half of this year...technical conditions here are definitely ripe for a substantial rally'.
Markets turned up violently two days later and never looked back. On 2nd April I sent out a postscript:
'Making definitive predictions in the short and medium term is fraught with danger. But there is one I can make with a high degree of confidence today. A SIGNIFICANT STOCK MARKET RECOVERY IS UNDERWAY. The US markets have gained over 20%...the chances of a further advance of at least 20% from our current levels are high'.
Between that email and the date of today's writing, the Dow Jones has broken 10,000 and risen a further 25%.
Over the last few months, then, I've increasingly found myself being asked for an opinion on the state of the economy, the markets and on what twists and turns might lie ahead. These twists can be sometimes be predicted, and the market turns can be tempting to take. But without a reliable map of the whole terrain it's all too easy to get lost.
In fact offering ad hoc advice in an environment which is constantly shifting and uniquely dangerous is a job for a full-time financial advisor which, of course, I have no interest in becoming.
Eventually it dawned on me that I could set up a blog.
Here, in this little black & white corner, I could update friends if need be, ring occasional alarm bells on the market's prospects, unabashedly ride a couple of hobby-horses and share some general investment ideas which have in the past proven to be either lucrative or life-saving. I can also provide links to a few sources I've found genuinely illuminating in this darkened financial landscape.
From now on I'll add new posts the first weekend of each month, with the first post proper being in six weeks time, December 6th.*
If I feel an urgent update coming on I'll post a little more often or, as and when chaos descends, update immediately if I feel I can add any insight. But usually the day-to-day swirls and eddys of financial news are dull and frankly irrelevant in the greater scheme of things.
I shan't waste your time with the kind of guff you could read in the daily business pages; I will try to provide a broader, shrewder, longer-term perspective which could help in the making of your most important financial decisions.
Today, my view is that we are entering a strange economic netherworld, a kind of halfway house in which we've passed over to the other side, yet everything seems pretty much the same as it did before. Like Bruce Willis wandering through his old neighbourhood in The Sixth Sense, most of us get on with our everyday lives unaware that, from an economic perspective, the world we knew has gone.
Unless you've lost a job or been turned down for a loan, this changed world may have barely impinged, except perhaps as something distantly gleaned from the news. The reality of our situation may only slowly become apparent, as a hoped-for return to normality stubbornly refuses to materialize, the markets gradually and inexorably roll over and our long economic winter begins to take its icy grip.
Meanwhile, economists and pundits continue to chirp their predictions for a 'V'-shaped recovery in the deluded belief that 2008 was little more than an inconvenient blip. Among the general public there remains a natural and heroic assumption that, yes, we had a nasty shock last year and we're having a nasty recession but we've had them before, we've beaten them before and they always end the same way - in a bloody good recovery.
'WHY THIS TIME REALLY IS DIFFERENT' will be the subject of my next post in early December.
Meanwhile, thanks for checking in and have a great month!
James Goode, October 2009
*Ed. note: this missive was originally posted in 2009. Now, new updates are posted as events warrant and on an ad hoc basis. To avoid missing any urgent updates, please subscribe via email or follow me on Twitter, using the links top right.