Ebb and Flow

I have the pleasure of looking over the River Neris from the terrace along one edge of my house.  The restful and usually peaceful view often assists my thinking.  As anyone familiar with the great works of literature or even the main religions of the world will know, there are not many tales that don’t at some stage involve a river. Two of the great rivers of the world get a mention in the very first chapters of the Bible, the very pen name of Mark Twain is derived from the language of the river and there are more examples of books that feature rivers heavily than I could possibly list.  See how many you can think of!

I mention this because a large powerful ever flowing river is a good analogy for global stock markets.  Most of the time it flows along with the level varying not much from day to day topped up by occasional rain and supporting the activities of all sort of dependent beings from fishermen and ducks to factories and hydroelectric schemes.  But at times the level changes more than usual and I have noted this happens in two main ways, which is the same for stock markets.

A less common but very noticeable event is a sudden increase or drop of several meters in the water level.  This is prompted by a single event or series of closely linked events – exceptional rainstorms or a call to release water rapidly through the dam of the downstream hydro electrical system, for example.   Generally such a rise or drop is reversed very quickly.  The 1987 stock market crash, or the correction in Summer 2015 would be analogous events.

More commonly there is a seasonal change in the long term weather pattern and the river rises gradually to eventually reach a flood level or declines until near drought conditions prevail.  In both the flood and drought outcomes the consequences are serious, but are only appreciated right at the end of the long process.  On  a day to day basis, the changes are not very noticeable and not even consistently in the same direction.

This is how it is with markets most of the time.  A very sharp correction can often be reversed almost immediately.  Long slow declines or periods of steady appreciation can seem almost endless and indeed the ‘inflection’ point when an underlying change in the long term background conditions is rarely detectable until after the event.  However, large amounts of money are made and lost by investors who are in reality not even paying much attention.

In my view we have passed the inflection point for the long rising market that started in 2008.  The conditions have changed – liquidity (a very appropriate word) is now flowing less freely and will be further constrained and the overall volume of wealth in the system is already shrinking.   Investors need to understand that and expect not to make money from rising river levels, as suggested by the famous saying “a rising tide floats all boats”, but from seeking out protected pools and rivulets fed from long nourished underground springs.  That requires rather more effort in exploring and researching.  Doing nothing will likely see wealth declining over a period of several years.