Battles Unseen

I have something else longer written that I’ve been working on, but since we’ve recently (and unfortunately) returned to the June market lows, I wanted to touch base.

Although the Federal Reserve, interest rates, and inflation are dominating the recent headlines I want to emphasize there is a lot more going on under the surface.

With the value of hindsight, it can sometimes appear the market has predicted the outcome of major events/ turning points in its history.?Now the market isn’t a clairvoyant or a genius, but more of a weighing machine of statistical analysis and probabilities.??Last week has reminded me of one of its major historical pivots.

In early May 1942 during World War 2, a Japanese offensive began in the south Pacific to take Port Moresby in Papua New Guinea and the Island of Tulagi, opposite the Solomon Islands.?The purpose of taking these locations was for strategic ease in an eventual attack on Allied forces in Australia.?For 3 days the United States and Japanese Navy, through air and sea, battled back and forth in an effort to thwart the invasions.?After initially falling back, the Japanese eventually took Tulagi (you may recall from past writings my grandfather would fight in the land battle on the island that August).?But they were unable to take the more important Port Moresby.

The stock market sensed this shift in the war.?Although considered a draw, for the first time Japan did not get what it wanted militarily.?Although several more important battles were to take place later, including the pivotal battle of Midway, it was the battle of the Coral Sea that marked the exact bottom in the post-depression, war era of the stock market.

It wasn’t that the market knew the Allies would win the war, it just shifted the probabilities they would accordingly.?Had Midway, among others, gone wrong it would have done so in the opposite direction.?It’s only through history it looks like the market knew the future before it happened.

This past week I watched the market, very subtlety, but clearly react positively to both Chinese President Xi Jinping and (more so ) Indian Prime Minister Narendra Modi pressure Vladimir Putin about the war in Ukraine.?Modi practically rebuked him in public.??

European banks jumped 5% almost immediately.?

Although the interactions made the news, the financial news cycle largely ignored it.?At least as it related to the market movement.

A few days later, Vladimir Putin publicly addressed the Russian people.?He would be calling up roughly 300,000 reservists to join the war.?Almost immediately after came news Russia would be conducting “elections” in several Ukrainian provinces asking the people directly whether they want to be annexed by Russia.?Several days later, there is suspected sabotage to the Nordstream energy pipeline into Europe.?Inescapable to the market:

Escalation.

Combined with hawkish comments from the Federal Reserve, over the next few days you could almost feel all of the hope and optimism being sucked out of the markets.?The market isn’t clairvoyant.?But it has shifted probabilities accordingly.

As I write this Russia has declared victory in these sham elections and plans on annexing the Ukrainian territories, completely counter to international laws, most likely in an attempt to turn themselves into victims just “defending their land” upon any provocation.

I feel the need to write you here because I want you to understand that while the news cycle blames the Fed for the pain we’re going through, and everybody has some opinion about everything, the predictions are all bunk.?

We are in exhausting levels of shifts of probabilities and the constant recomputing and weighing of statistical analysis by the market (add the United Kingdom’s awful stimulus program to the problems).?And although in my own hindsight I feel I should have predicted that when powerful narcissists like Putin are sore losers, they double down on everything wrong they do regardless of the damage they do to their own country; I’ve found this to be the toughest part about managing assets right now.

Everything is completely fluid.??

And on a scale in the macro-economic sense unlike anything I’ve seen since the great recession.?With this I continue to argue it is the inability to calculate these all important pivot points that keeps this market from bottoming above all else.??

I still believe it would be in our best interest to have a sharp, painful sell off to move forward.?Could this be the bottom??Sure, with some help in resolving these issues, absolutely.?But at this moment I’m not there.?In the interim, I have target prices on the market, the dollar currency index, the volatility index, and several leading indicator sectors and securities front and center in my mind to help determine where we are at any given time, so we can all hopefully?sleep better at night.??

Although I don’t expect a battle of the Coral Sea moment of clairvoyance before this is all done, rest assured, that’s not going to stop me from trying to achieve it.?My advice to you now is to tune out the predictions and the noise as best as you can.?It’s all fluid.?The market is a weighing machine of analysis and probabilities; and someday we’ll look back and marvel at what appears to be its genius.

Hope all is well,?

Trevor

Written 9/29/22, approved for distribution 9/30/22

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