The Private Equity for Families Blog

Moon Tides

The moon tides in Maine this summer reminded me about risk in investing. Normal tides can be 8-9 feet but a few days every several months the tides change by 12-13 feet. Your complacency spikes when almost every dangerous shoal and rocky point has 25% more water than during a normal tide. Conversely, ebbing tides reveal a frightening number of rocks and shoals you didn’t even know were there.

For most of us there is also a hypnotic fascination with nature revealing the bottom. You get a short peak at how things really are. Warren Buffet likes low tide because it reveals who has been “swimming naked”.

Equity investors in the stock market and private asset classes like real estate and private equity seem to be underwriting to a perpetual  high moon tide;  the swelling volume of capital for stock buy backs, leveraged loans and mezzanine debt takes care of everything.

Tides and time are coordinated, however. Every six hours gravity insures a low will be followed by a high and then a high by a low. The only variation is the amount of flow. Nature is unfailing in the precision of these repetitions. You can bank on volatility in the ocean as a constant. You will be on the rocks or over the rocks every six hours so vigilance and caution are required.

This is certainly not the popular trade today in financial markets today.

Many astute investors believe we have vanquished volatility. “The CBOE Volatility Index, known by its ticker symbol VIX, is a popular measure of the stock market’s expectation of volatility implied by S&P 500 index options, calculated and published by the Chicago Board Options Exchange” (source:Wikipedia).

Here is a chart from Indexindicators.com of the VIX (green) and the S&P 500 (black) since September 2015:

Notice there only a few moon tides (circled in red) with the most recent spike in volatility coming in February of 2018 when tariff terror caused the S&P to plummet. Many investors were short the VIX and had to cover as the VIX spiked 3x in several days. They were reminded about swimming without their trunks when that tide rushed out.

Contrary to the enlightened US capital markets, I expect volatility to rise in all US markets for these four reasons:

  • Debt based market liquidity is quietly becoming too expensive
  • For now, the Fed appears serious about removing liquidity
  • Politics may trump business for the first time since Jimmy Carter
  • Deficits will have to be financed with high cost, short term debt

I expect the capital markets outflows to mimic the moon tides for August 10-13 which are predicted to go from a high of 11.83 feet to a low of minus 2 feet. That is a massive flow in one direction and it may be happening soon. Tighten up those bathing suits.

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Rob McCreary

Rob McCreary has more than 40 years of transactional experience as an attorney, investment banker and private equity fund manager, and has spent his career in building entrepreneurial organizations with successful track records Founder and chairman of CapitalWorks, he is responsible for developing and maintaining senior relationships with investors and portfolio governance.

This blog represents the views of Rob McCreary and do not reflect those of CapitalWorks or its employees. This blog is not intended as investment advice. Any discussion of a specific security is for illustrative purposes only and should not be relied upon as indicative of such security’s current or future value. Readers should consult with their own financial advisors before making an investment decision.

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