How can you spot/indicators next big financial crisis (quantitatively speaking)?

warning, this will be a rant

TLDR - they're all mostly bullshit

I'm doing this from a long only perspective so traders may have other opinions, but I'm interested in long term wealth creation, and that's it. with the way technology goes, if there were singular or a small group of indicators that were tremendously reliable, it would be arbitraged away and retail investors couldn't take advantage. this is what firms like shaw, citadel, rentech, some of the desks at multimanagers like millenium, etc., do - they arb away fat pitches with their speed and computing power, you don't stand a chance of doing this.

now, what're some of the common factors I see talked about - real GDP growth rate, yield curve, PMI, consumer sentiment, PE ratios (and their siblings PB, PS, PCF, Shiller's CAPE, etc), equity risk premium, high yield spreads, put call ratios, and more. on one side you have macro indicators like PMI, GDP, and so on, and the thought process goes like this "if I can guess the direction of the economy and the magnitude of the move, I can make money." I'll readily admit that you can guess the direction of the economy (the atlanta fed does this) but what I take issue with is the idea that one can reliably do this with enough lead time to be one of the first and that this knowledge will lead to investment gains. I've said it before, I'll say it again - GDP has limited use for your stock portfolio. one of the worst recessions on record from an economic standpoint (early 80s) was only with a 5% drop in equities and was bookended by 2 >20% gains in the years before and after. the 1990 recession cost you 3% but you rebounded 30% the following year. so no, knowing GDP growth rates in advance will not lead you to investment glory. what about the other stuff, like PMI and other leading indicators? well, they are good for forecasting GDP (allegedly), but since we just debunked the idea that GDP and equity prices move in lockstep, you can toss those out too.

now let's move onto market metrics, like the yield curve, spreads, and so on. equity risk premium is a notorious one for justifying a conservative stance because it's negative or justifying a risky stance because it's positive. it was positive in the 60s right before the worst decade for stocks aside from 2000-2010. it was negative all throughout the 1980s & 1990s, the best 20 years for stocks ever (maybe not ever, maybe the 50s & 60s, but whatever). so no, these indicators are not useful in isolation, it's all relative. sure, ERPs were negative in the 80s, but that's also due to the tremendously high level of rates. sure they're positive today and the most positive they've ever been, but maybe that too has to do with the absolute level of rates. it's not just relative, absolutes matter kiddies.

ok what about the others like PE and the yield curve? look at shiller's studies, all they tell you is what quintile your 10 year returns will likely be relative to history based on current valuation, they will not tell you the timing of a crisis. the market crashed in 2007-2009 and trailing PEs were in the high teens, something I'd consider relatively cheap today, but in hindsight, it wasn't that which caused the crisis, and looking at the research done by people who love PE ratios they will readily admit they're terrible short term forecasting tools. yield curve? I find it hard to use an indicator with such a long lead time, it first inverted in 2005 and the market peaked in october 2007. we had a mini inversion last year, but only time will tell if that ends up punishing us. plus, since recessions don't mean market pain, it may not even be a good sell signal even if we do go into recession.

I wish I had the time to go through every indicator people look at to justify an investment posture but I don't care enough to do that. here's the short answer - be diversified, be long, trim your exposure when valuations get frothy and ramp it up when things get cheap. stick to spreading your bets around rather than trying to find that magic indicator that will lead you to success, it doesn't exist.

and if you're wondering what all of those economists and pundits are doing getting all sorts of airtime and massive salaries for doing these forecasts? they are harmful to your financial wellbeing, avoid them at all costs. I work at one of the top banks on the street and I've unsubscribed from my own internal economists/strategists, they're just as wrong as the rest of em.