By Robert Sloma Several months ago a friend of mine who is a chemical engineer for DuPont, and is involved with sustaining the uptime (increasing the reliability) of production systems, introduced me to a tool. It is used to help predict when failures of various equipment may occur, regardless of the cause. Technically this is called multi-cause failures or mixed failure modes.
Knowing that I have a mechanical engineering background as well a substantial background in finance, especially regarding portfolio management, he posed to me the question on whether this methodology would work for predicting the next major market correction (or more specifically a bear market). This proved to be too good an opportunity to learn if this could be another tool in my pocket to at least have a fair chance of projecting a market related “failure” that might be used to make sure my clients are informed of the possibility and its potential timing. I don’t want to give you the impression that I am becoming a market timer or advocating the practice.
Way of Engineers
However, knowledge utilizing sophisticated tools, especially those combining engineering principles with finance concepts, always intrigue me. Let me state upfront that engineers are wired differently than most other people. We approach problems from a process perspective and rely heavily on data to base our decisions and designs of processes and equipment. The prospect of building a tool that could possibly predict the next recession and/or bear market is one of my aspirations. It is not to time the market. I'm interested in the ability to manage the risk of my clients’ (and my own) portfolios to the low end of their respective risk ranges as the probability of a recession or bear market rises.