Crazy Ivan: Time to Look Behind Us
- Good traders always ask this question: what’s the worst thing that can happen?
- Let’s do the financial equivalent of a “Crazy Ivan.”
- Some moves lately, including Jay Powell’s utterances, suggest alternatives to our ongoing hypothesis.
Keeping a weather-eye out…
Happy Belated Father’s Day!
Sorry, I should have mentioned it on Friday, but my mind was on waffles and ales.
The only thing I got this weekend was a cold. I’m better now, but I could really use some sleep.
But first, let’s get crazy.
The Hunt For Red October
I can’t believe it’s been over 31 years since The Hunt For Red October was first released in US cinemas.
In many ways, it’s the quintessential Cold War film. The good guys win. The bad guys lose. And the CIA(!) is doing everything it can to bring peace and prosperity to the world.
I know. I can’t believe I was this naive, too!
Every time I’m on a plane, in a hotel room, or just flicking around at home, if this movie comes on, I just have to watch it. And mouth the words, as I know every line.
You see, I wasn’t born into libertarianism, where the children have no sense of patriotism or humor.
Nor did I come in from The Left. Most reformed Leftists made the mistake of asking themselves the one question socialism cannot answer satisfactorily: “How are we going to pay for all this?”
My school years were 1980-1992. Not knowing any better, I assumed everyone from New Jersey was a Republican. (I know, I know.)
Then, there was no real left/right divide.
Sure, you had the women wanting to distribute more to those who couldn’t figure out how to make money when Reagan was president.
Their husbands (usually) cursed those people as fools and their wives as dupes for wanting to give away their hard-earned taxpayers’ funds.
Yes, most of our mothers had jobs, but they were never more than to supplement our fathers’ income. Back then, those jobs just kept former housewives whose children were in school all day from getting bored.
But I digress.
I loved this film. And being from a solidly Conservative family, the film was right up my street.
One of the coolest things in the movie was the “Crazy Ivan.” I had never heard the term before.
In the movie, Seaman Jones defines it:
“Russian captains sometimes turn suddenly to see if anyone’s behind them. We call it ‘Crazy Ivan.’”
Back then, the reason they turned is the baffles. The baffles is the area in the water directly behind a submarine through which a hull-mounted sonar cannot hear.
Crazy Ivans have since fallen out of use because the newer towed-array sonar negates the baffles’ blind spot.
Unlike our new submarines, we still have blind spots. And today, we’re going to perform a Crazy Ivan on our own view.
What if There’s No Inflation?
Before I begin, I must write this definitively: this is a hypothesis. Under no circumstances are you to liquidate your portfolio, fly into a panic, or trade out of everything you’ve got into other stuff.
We’re just thinking out loud here.
There’s a good reason for this, but keep in mind we may be initially correct, and this is just to make sure.
The Charts and the Press Don’t Match.
JC Parets of All-Star Charts always makes me question the obvious. He’s a technical analyst par excellence and only pays attention to the media to pick fun at them.
I’m a subscriber of his and read his stuff nearly every day.
What he has to say is, “open your eyes.”
The first image on his email last Friday was this:
Always look for the journalists to give you your contrarian indicator. And magazine covers certainly count.
Perhaps the most famous example of them getting it wrong was this gem from BusinessWeek in late 1979.
And Now to the Charts
Remember how we were inflation-mad not six weeks ago? Things may have changed. Again, we just have a look.
Let’s look at each of these in turn, starting with our two favorite commodities:
Lumber went up about 175%, before falling a touch over 50%.
Copper was up 40%, before giving back half the gains.
If inflation is so bad, why are bonds rallying? The TLT (Long-term treasury ETF) just broke its downtrend line.
The Game of Trades guys just did a video on this. Look at the TLT to HYG (high yield bond ETF). This looks very risk off, as investors flock into the perceived safety of government bonds and out of junk bonds.
Also, the Dow Transports have puked. Definitely not good. The transports lead the industrials so that *can* mean that the industrials are next.
The Industrials don’t look that much better.
Powell may have spoken too soon.
Now I Think Jay Powell Made a Mistake
I may have to thank Jay Powell for opening his gob last week. He may have awoken the market from a long slumber.
I’ll tell you what, though. The Asian markets look none-too-pleased with our Fed governor:
This is as of 3 pm HKT/SGT.
Let’s see how it opens in the States. The futures are flat to small down as of this writing.
When your Minneapolis Fed President openly opposes your rate hikes, you may be in for open rebellion.
Neel Kashkari has always been a dove. But when the Minneapolis Fed President said on Friday that he didn’t want to see rate rises until at least 2023, he directly opposed Fed Governor Powell.
“The vast majority of Americans want to work, and I am not ready to write them off – and I want to give them the chance to work,” Kashkari told Reuters in his first public comments since the end of the Fed’s policy meeting earlier this week. “As long as inflation expectations remain anchored … let’s be patient and let’s really achieve maximum employment.”
Kashkari has his eyes on the big seat, but still. This is a bold move.
And now, the Dollar Rally
Lance Roberts over at Real Investment Advice wrote a fabulous article on the Fed signalingits taper.
I won’t recount all of it, as I want you to read it in full, yourselves.
But there are a few critical points I’ll highlight here.
Roberts makes the point there is a clear correlation between the Fed’s balance sheet and the SPX. Whether it’s due to the psychologically comforting Fed put or liquidity moving into assets doesn’t matter.
So it makes sense that any tapering of the Fed’s balance sheet will reduce that liquidity into assets or the warm, fuzzy feeling of the Fed put.
Roberts shows that this, combined with a higher Fed base rate, leads to asset price reduction, which should be no surprise.
Roberts ends with, “There have been ZERO times in history when the Fed started a rate hiking campaign that did not lead to a negative outcome. We suggest this time won’t be any different.”
As for that dollar rally, it snuck up on us:
That’s an over 2% rally in the dollar index in the last ten trading days.
It doesn’t end our inflation hypothesis. It merely makes us re-examine what we’re doing.
A Crazy Ivan every once in a while is a good thing, no?
Let’s see how it plays out over the next few weeks.
All the best,