escalation → de-escalation
Hawkish Apogee
Good afternoon!
This spring, I made money using the “escalation → de-escalation” pattern, and now we’re going to talk about it—specifically, about understanding the mechanism itself. This overlaps somewhat with the principle of “ask for $10 to get $1.”
Starting in April, there was a clear pattern: after every escalation, a de-escalation followed, and after that, a re-escalation. This happened time and time again, with one trend giving way to another. Often, the trend change occurred once a week—sometimes on the weekend, sometimes at the start of the week.
That is precisely why, when the narrative shifted on one of those Thursdays, it struck me as a significant sign to pay attention to one specific de-escalation.
And it seems to me that this is not just about Trump at all. The issue lies in the patterns that have formed and been accepted by the market.
During the active phase of the conflict in the Middle East, this happened almost every week. The market was overheating and running at full speed. Partly because of this, we’re seeing a very sluggish currency market in June. In the first month, we saw only two significant moves, both of which occurred during the NFP release and the FOMC meeting. This is because the narrative had run its course, and news releases served as the new triggers.
It seems to me that this principle can be applied to the current situation with Kevin “Home Alone” Warsh. The principle remains the same. Escalate to de-escalate. Hawkish → Dovish. Soar high (according to BofA’s silly forecasts, up to three hikes) to end up at the expected point, which is -90% of what was requested ($1 out of $10). Where is -90%?
This is all abstract and defies precise mathematical calculation. But it allows us to understand the events that will unfold. We don’t need to wonder whether this is a joint plan by Trump and Warsh to somehow enrich themselves through it. Or perhaps it’s a plan to make an impression at the first meeting, dispel beliefs about his dependence on the president, and affirm his independence. Or maybe it’s a way of communicating with other Fed members—none of that matters. Because here I’m trying to discuss where all of this will lead.
After every escalation, there is always a de-escalation. It’s like a return to the mean or a stabilization of volatility. It’s a law that restores balance. When the escalation reaches its peak—everyone who wanted to buy the dollar has already done so, there are no new buyers, and any de-escalation triggers a reversal that is disproportionately strong relative to the event itself.
That is precisely why I do not expect a complete 180-degree reversal in rhetoric anytime soon. I am simply waiting for even the slightest factors that will be perceived by the market as highly volatile and will allow a new trend to form in the medium term.
«Over time, I realized one thing. It is much easier to predict what people will do than what the economy or central banks will do.»