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Posted June 21, 2021

Sean Ring

By Sean Ring

Crazy Ivan: Time to Look Behind Us

  • Good traders always ask this question: whats the worst thing that can happen?
  • Lets do the financial equivalent of a Crazy Ivan.
  • Some moves lately, including Jay Powells utterances, suggest alternatives to our ongoing hypothesis.

Keeping a weather-eye out

Happy Belated Fathers 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. Im better now, but I could really use some sleep.

But first, lets get crazy.

The Hunt For Red October

I cant believe its been over 31 years since The Hunt For Red October was first released in US cinemas.

In many ways, its 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 cant believe I was this naive, too!

Every time Im 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 wasnt 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 couldnt 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.

Crazy Ivan

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 anyones 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, were going to perform a Crazy Ivan on our own view.

What if Theres 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 youve got into other stuff.

Were 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 Dont Match.

JC Parets of All-Star Charts always makes me question the obvious. Hes a technical analyst par excellence and only pays attention to the media to pick fun at them.

Im 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.

Lets 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 dont 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.

Ill tell you what, though. The Asian markets look none-too-pleased with our Fed governor:

This is as of 3 pm HKT/SGT.

Lets 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 didnt 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 lets 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 wont recount all of it, as I want you to read it in full, yourselves.

But there are a few critical points Ill highlight here.

Roberts makes the point there is a clear correlation between the Feds balance sheet and the SPX. Whether its due to the psychologically comforting Fed put or liquidity moving into assets doesnt matter.

So it makes sense that any tapering of the Feds 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 wont be any different.

I agree.

As for that dollar rally, it snuck up on us:

Thats an over 2% rally in the dollar index in the last ten trading days.

It doesnt end our inflation hypothesis. It merely makes us re-examine what were doing.

A Crazy Ivan every once in a while is a good thing, no?

Lets see how it plays out over the next few weeks.

All the best,

Sean

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