Inclement Weather Inbound
It's Best to Get Ready Before the Storm Breaks
“To make money in the markets, you have to think independently and be humble. You have to be an independent thinker because you can’t make money agreeing with the consensus view, which is already embedded in the price. Yet whenever you’re betting against the consensus, there’s a significant probability you’re going to be wrong, so you have to be humble.”
Ray Dalio, Founder, Bridgewater Associates
We were cruising quite comfortably across fairly flat seas, with a spinnaker up in less than 10 knots of breeze. It was a simple run, Hong Kong to the Philippines, one I had made many times before. We were at ease.
There was a cloud a few miles away, not very ominous. But within 15 minutes, it became a beast. The wind picked up sharply, and from a new direction. Time to act.
The spinnaker came down right away and we raised our large jib. Within five minutes, the wind reached 35 knots, and the cloud bank hit us. The sky turned black. I ordered to take down the jib, and we put two reefs in the mainsail as fast as we could.
The gusts laid us over time and time again, and the boat lay on its beam ends, flat against the sea. Then it all stopped. We found ourselves becalmed, in the eye of the storm. Rain, and dozens of lightening flashes hit the sea all around us.
I’ll admit it, we were frightened. The hull of our yacht was aluminium, and we were scared one of those flashes would hit it or the mast. The clouds passed over us. Then we got clobbered by the other side of this circular storm, and the winds whipped us again.
We were lucky. I take that back. We were well-prepared. The crew was up to the job of getting the sails shortened in less than 10 minutes, record time. It would have been very easy for someone to go overboard in the numerous knockdowns we had during that hour. We knew how to stay safe.
It was only another half hour before the situation returned to “normal”. We took down the storm sails, shook out the reefs in the main, hoisted the spinnaker, and champagne sailing returned.
As regular readers will know well, sailing is my vice. Rachel Lindsay was my first boat love, a traditional 35-foot ketch. And it’s an expensive vice at that! Especially moving on to bigger boats. A new mainsail for my 65-foot yacht will set me back a painful US$50,000. If my crew manages to damage it during a race, you’ll typically see me… ahem… “lose a little patience,” as it were.
Being at sea is second nature to me now. I’ve sailed in competitive regattas all over the world, from the Mediterranean to Antigua, all over Asia, and in both Australia and New Zealand. I’ve cruised the Beagle Channel and rounded the legendary Cape Horn. And for more than 30 years now, I’ve been sailing back and forth across the South China Sea to the Philippines, Vietnam and China.
Ask anyone who’s spends a lot of time on boats, and they’ll tell you the same thing: boats are a lot more dangerous than you think.
Things can go wrong in the blink of an eye. Bad weather, poor navigation, bad seamanship and freak accidents can wreak havoc. Even just a wet deck and the wrong shoes can spell trouble.
In 2013, the U.S. Coast Guard counted 4,062 acci-dents, resulting in 560 deaths and 2,620 injuries.
The top three contributing factors in accidents were sheer lack of attention to detail, a failure to watch where you’re going, and the inexperience of the skipper.
The bottom line?
If you get on a boat with people who don’t know what they’re doing, there’s a huge chance some-thing will going wrong.
Over the years, you develop a sixth sense. At any given time, you’re looking out for other boats, objects in the water, what the people on deck are doing, how much sail you have up, how much depth you have under the keel, what’s behind you, and of course what the weather is doing.
On my boat, everyone’s safety is my responsibility.
The sun might be shining, and fair winds blowing, but the weather can change in an instant … far faster than you can imagine. It doesn’t take much for you to be humbled by the power of Mother Nature.
Maybe it’s a sudden wind shift, or a “hole” in the wind where suddenly all goes calm. Maybe the swell starts to pick up in a way that’s not consistent with the wind strength. Different cloud formations, birds flying rapidly in a single direction … all these little variations tell you that the weather will change, even when the sky is blue and there’s no obvious storm on the horizon.
You get that spinnaker down. You bring the storm jib up on deck. Maybe you put a reef or two in the mainsail, reducing the sail area. Maybe you quietly ask someone to go up front and close the hatches.
Then wait to see if the worst happens. Sometimes it is not as bad as you feared. But at least you were ready…
This is how I feel about global markets right now.
It’s been 2,270 days since the S&P 500 bottomed out on March 9, 2009. That’s more than six years. And we haven’t had more than a 20% correction in that time.
The market has more than tripled, giving you an annual return of more than 20%.
In short, it’s been champagne sailing for U.S. equity markets for a long time. But right now, I see some signs that the weather could turn for investors. The markets, like weather, can change very quickly. I have seen both happen. The moment you think you’ve got it all figured out, markets, like the weather, can give you a rude awakening.
At sea, it’s often not a single change or observation that shifts my thinking. A sea swell by itself may mean nothing. But with a drop in wind, temperature and air pressure, it indicates that bad weather is close.
The signs are subtler with markets – there’s no big thunderstorm on the horizon. If that was the case, then markets would reflect it.
But my sixth sense is tingling. I am certain it is time for us to be shortening sail. And in this edition of The Churchouse Letter, I’m going to outline my concerns.
Regular readers will know I’m neither a permanent bull nor a gold-hoarding bear. I just try to use my three decades of experience in some of the choppiest financial markets to navigate them. As a newsletter writer, I now feel obliged to help my readers sail through those rough waters, too.
Monetary Policy Insanity
There aren’t many equity markets that paint as clear a picture as the S&P 500. It’s all there for anyone to see… the tech bubble and burst of 2000… the debt-driven highs in 2007 and subsequent crisis… and now, over six years of uninterrupted rally.
This rally might look like plain sailing, but we should be worried. The weather is about to change...
So how do you find a safe harbour for your portfolio in a storm? All without sinking your ability to profit?
Find out the investment Peter recommends that:
- gives you all of the market upside, AND
- still protects you if a financial storm strikes the U.S. stock market
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