Trust, But Verify
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Intellectual honesty, let alone accountability, is increasingly in short supply these days.
Take for example a certain brand of celebrity economists, financial hobbyists, and macro tourists who have spent the last six months never missing an opportunity to publicly exclaim how baffled they are about the cause of our current inflationary environment, as if it couldn’t be explained by a 5-year-old with a lemonade stand.
It’s more proof that the promise of the Internet - and that of its bastard child, social media - has failed us.
Far from unlocking rainbow-colored portals of wisdom and access to unlimited amounts of knowledge, the technology that was supposed to facilitate “The Great Smartening” of society has instead enabled us to become passive consumers of the worst kind of content.
And in the process, we’ve absorbed and internalized the techniques of obfuscation, avoidance, and double-think so prevalent amongst the talking heads, influencers, and those, who despite any semblance of their work matching the term being purely coincidental, we still call journalists.
These days, once someone has dug in on a position, facts and data rarely seem to matter when positing an opposing view. Yet there is a technique that even the most vacillatingly duplicitous opponents find hard to counter; confronting them with their own words.
The second most epic example in history of this came about in the late fall of 1985, when after years of stalled negotiations, a young man with a backbeat for a heart and a left leg that never stood still, switched up his tactics and made the breakthrough of a lifetime.
“Mom,” I said. “You’ve always told me that my money was mine to use as I want, right?”
“Within reason,” came the expected reply.
“So would it be okay if I bought a stereo system and promised not to play it when you were home?”
“Sure, I guess that would be okay,” she said.
The trap was set. All I had to do was spring it at the right time. That time was Christmas eve, at the dinner table.
“Hey mom,” I said. “Remember last month when you told me that as long as I didn’t play it when you were home, I could buy a stereo system with my own money?”
“Yes, I remember,” she said, oblivious to the fact that she was about to run into a buzzsaw of inescapable logic.
“Well then, why couldn’t I buy a drum set, with my own money, as long as I didn’t play it when you were home?”
Facing down the “yeah, why couldn’t he?” stares from three generations worth of family, through clenched teeth came the reply.
“Gee…I guess you could.”
Scoring that kit was sweet, an achievement so awesome it took saving the planet from nuclear annihilation to surpass it.
Right around the time I was hatching my scheme, the United States and the USSR were engaged in talks designed to shake off a lingering hangover from the Cold War, but negotiations were at an impasse.
The Soviets had agreed to all our terms, which included a bilateral reduction in the number of ICBMs and long-range bombers, but being the communist bastards they were, they didn’t want to give our inspectors access to make sure they were complying.
And when we pushed the issue, they offered up the same argument as your junkie brother-in-law does when he wants to borrow your car.
Don’t you trust us?
Of course, we didn’t, but it would have been the textbook definition of politically incorrect to say as much.
Instead, President Reagan replied with the now iconic retort, “Trust, but verify.”
It was a brilliant quip, not just because it was the perfect soundbite, but because it used the Soviet’s own words, or more accurately, mindset, against them.
Translated it is “Doveryay, no proveryay,” a rhyming Russian proverb whose exact origins are unknown.
What is known is that the spirit of this saying was embodied regularly in the writings of one Vladimir Ilyich Ulyanov - better known as Vladimir Lenin - a few examples of which are below.
"Put no faith in words; subject everything to the closest scrutiny—such is the motto of the Marxist workers"
"To test men and verify what has actually been done— this, this again this alone is now the main feature of all our activities, of our whole policy"
"Healthy distrust makes a good base for cooperation"
All of these are roundabout ways of saying, “trust, but verify,” something that applies to markets as well, and which I translate to, “It’s not the initial move, it’s the move after the move.”
Meaning, we judge the validity of a move not by the move itself, but by what happens after the first countertrend move.
If we look at the chart of the SPX above from the beginning of the year until now, we see several times - indicated by the orange circles - in which price action failed after the first move up or couldn’t follow through into new highs after the first countertrend pullback.
That all changed from late June to mid-August, shown inside the blue rectangle.
If we zoom in on that area we see a complete change in character as the initial move up - which starts on June 30th - is “verified” once it breaks the July 7th pivot high on July 19th. From there price action builds as the market enters a healthy uptrend with minor pullbacks along the way.
The action this past Thursday was very impressive and there were lots of opportunities to get involved intraday when the market started to reverse and then lift.
However, that price action on Friday was ugly.
As long as we stay above the Thursday lows on a closing basis there is still a chance that this nascent rally has legs.
But I’ll continue to trade less frequently, and when I do, with smaller size and shorter time frames until I see what happens with the move after the move – if we get that move at all.
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It should go without saying - but I’ll say it anyway - all opinions expressed in The Lund Loop are my own personal opinions and don’t reflect the views of my employer, any associated entities, or other organizations I’m associated with.
Nothing written, expressed, or implied here should be looked at as investment advice or an admonition to buy, sell, or trade any security or financial instrument. As always, do your own diligence.