Stage 1: Short The Rip (bear market rally)
Stage 2: Low-Vol Chops (the calm before the storm)
Stage 3: The Panic (inflation, schmeflation… whatever the case)
Stage 4: Back Up The Truck (disinflation & deflation)

If 2023 had levels to this, I believe that we are currently in Stage 1. Markets are never this easy, especially the ones we have concocted with all the ivory tower policies that have become so embedded in the system economically, socially and psychologically. The purging process has to be deep, and it operates with fast asymmetries inside the OODA Loop of most market speculators. Understanding how the OODA loop works require respect to three principles.

• The first one is the Law of Thermodynamics, which suggests that all natural processes will reach a stage of entropy (markets are a natural process, and we need to be cognizant of the stage we are in).
  
• The second is Heisenberg’s uncertainty principle, suggesting that the velocity and location of an atomic particle cannot be accurately predicted concurrently (it’s hard to differentiate being early from being wrong, and when data is convoluted with volatile accelerations & lags, predictions of point to point data makes no sense).
  
• The last one is Godel’s incompleteness theorem. The theorem states that in any reasonable mathematical system, there will always be true statements that cannot be proved (things happen for many reasons because complex systems are essentially made up of fractals of black boxes).

At the start of 2022, the 60(Bonds)/40(Equities) portfolio got killed > lot’s of speculators subsequently entered 2023 net short or with elevated cash positions; in this case, the shorts got killed in the first two months of the year, and those with high cash levels suffer looking like a fool to their LPs and forced to chase (this is where we are, and we suspect these guys will be taken to the woodshed). Here, the concept of fast asymmetries is on full display, and the market is looking to score 3 in a row of confirmed kills that make the market a proverbial aerial ace against its speculators.

How do we get inside the loop of the market? The premise is that it’s always challenging to beat a market whose time of high entropy (chaos) has arrived when the convoluted policies of yesteryears present all sorts of accelerations and lags in the data that throw even the most astute of watchers off. A great analogy takes us back to the Korean war (MiG Alley), where the USAF’s F-86 Sabres scored a miraculous ratioed victory against the superior soviet made MiG 15s. In theory, the F-86s had no chance of winning the MiG-15s in a dogfight because it was way more cumbersome and less manoeuvrable than a MiG from an aerospace standpoint, but what made up for it was a combination of pilot ingenuity and the only asymmetry the Sabre had (faster asymmetries). With all its faults, the Sabre had only three things going for it: superior pilot training, a large cockpit which provided almost a 360-degree view and an intuitively designed cockpit where the rapid transitions of control to control could be made seamlessly. As opposed, a MiG, with all its superior technical specifications, had a view that was described by pilots as if looking out of a Coke can, unintuitive controls that make switching lagged and, most importantly, poorer quality of pilots. USAF pilots leveraged their 360-degree vision to get a High-Level view; they literally flew way above altitude to spot MiGs and used their intuitive cockpit design to their advantage, allowing rapid switching of controls to barrel-roll down from height (gains rapid speed due to gravity) to get to a MiG’s 6’o’clock to score kills.

This analogy is very much like today’s market environment, where there is little point in scouring amongst the weeds in your inferior Sabre because you’ll just be picked off by market forces that are in a prime-time high-entropic state. To get inside the loop of the current market function, we have to take a 30,000 ft view (pun intended) and be prepared to barrel roll into opportunities when they present themselves. States of high entropy (Stage 1) beget states of low entropy (Stage 2), and it is in Stage 2 where we need to gain altitude again to scour for opportunities that will surface in Stage 3.

At the end of the day, knowing the machine you’re operating (yourself) is paramount to mission success, as was evidently shown in the Korean War, where clean execution is everything.