Don’t fight the tide

We have heard this expression before, and no doubt have experienced both the joy of simply being carried by the tide and the battle of fighting the tide. But these can be good lessons to learn when understanding financial markets, the forces that move them and their ever-restless nature. In fact, there is a lot in common between the sea and the market. A cursory glance at the sea would not pick up much, except that it never sleeps, and is constantly changing. But observe it over a period of time and you will see that it has cycles and moods, actions and reactions within its apparent random activity. And so it is with the markets – the more we observe them, the more we see patterns and cycles to these seemingly random moves, and various degrees of trends (actions and reactions) superimposed on each other. Of primary importance is the major trend in any market (one spanning several years), which can be represented by the tides of the ocean – the underlying trend caused by the major pulling forces of the sun and moon. The tide – the underlying force and cycle of the ocean – catches us out time and time again. Why? Because we look at where the sea is now, and make our plans around the fact that the status quo will remain – instead of looking at what the trend is (rising or falling tide) and the historical limits of these trend cycles (low and high water marks) so that we are able to make informed and intelligent decisions. And so it is with the markets. We often make decisions based on where the market is right now, without any concern as to what the trend is or what stage it is in. Or worse still, we extrapolate the current market trend indefinitely into the future (as crazy as expecting an ever-rising tide), instead of understanding the direction of the current trend, and how far the market is expected to go before reversing – based on historical trends. And the result is disaster. Look no further than the Swiss National Bank for an example – when they decided back in 2011 to build a sand castle to protect the Swiss franc from dropping below 1.20 francs to the euro. The tide (primary trend) was against them, but they thought their sand castle would hold up. Which it did – but like sandcastles, it was only for a while until the enforcements gave in, and the sandcastle was swamped by the underlying tide. Eventually the tide won – as it always was going to. This should be a lesson for all Central Bankers and for all business with rand exposures – don’t ever fight the tide. You will lose the battle – and a lot more than just a sandcastle. www.ForexForecasts.co.za/ go/ZAROutlook