MCM 2014 Annual Report

“A rising tide lifts all ships” is bandied about in our profession like a shuttlecock at a garden party badminton game.

It seems that whenever an analogy is that simple and quaint, there must be a catch. And there is: the waves. In their endless repetition they mask the invisible but prodigious ebb and flood tides. The daily headlines are almost always about the waves, particularly, even if unnoticed, when the tide is rising.

Those of us who worry top-down are keenly aware of those signs that may give us an early indication of an impending change in phase (i.e., from when the flood tide peaks at high tide and begins to reverse its flow or vice versa). If we are patient and aware, a rising tide is today’s ally, and within an ebbing tide is tomorrow’s opportunity.

Because security markets are the outward expression of an endless stream of millions of individual decisions—all along the continuum from brilliant to banal —that is both cause and effect of the market’s ups and downs, they lack anything approaching the harmonic symmetry of the tides. As random as they seem from day-to-day—or even yearto-year—there is nonetheless a rhythm to them, as there is to all of nature.

This year’s letter seeks to identify the tidal ebbing and flooding of the markets since the turn of the 20th century. The endeavor is simple in concept, yet anything but easy in implementation. Like the changing effect of the sun and the moon on the amplitude and duration of the tides’ rising and falling, the forces impacting the markets are forever changing as well. The crucial difference is that with the latter, these forces are unpredictable. We invariably find ourselves on the horns of a dilemma: We may have a general idea about the stage of the tide, but we know it’s a
fool’s game to attempt to predict when or at what level high or low tide will occur.

Read entire report here: Why We Worry Top-Down.