The Crazy Ivan

“Those who know how to win are much more numerous than those who know how to make proper use of their victories.” - Polybius

Watching with interest the ongoing carnage taking place in various markets and asset prices, from equities to credit, as well as FX and bonds, when it came to selecting our title analogy we reminded ourselves of Cold War submarine warfare maneuver called “The Crazy Ivan” made famous by the movie “The Hunt for Red October” (one could opine Red Monday in the current context). The baffles is an area in the water directly behind a submarine or ship through which a hull-mounted sonar cannot hear. This blind spot is caused by the necessity to insulate the sonar array from the noise of the vessel’s machinery. Most sonars are commonly mounted near the bow of a submarine. During the Cold War, a submarine would frequently attempt to follow another submarine by hiding in its “baffles” where the sonar is ineffective, that is the blind spot at the rear. This led to the practice of the Soviet navy such as Yankee class submarines to “clear the baffles”, namely doing a hard turn and position the submarine to attack any followers. Hiding in the rear of a submarine, namely the baffle area is dangerous because of the risk of collision. With the advent of towed array sonar, the baffles’ blind spot effects have been negated. The "Crazy Ivan" maneuver came from the danger of initiating a 180 degree turn to both submarines, first being detection of the following submarine, which was commonly avoided by stopping the engines and going to maximum silence, and secondly by collision. It did happen. It was after a “Crazy Ivan” maneuver in the Arctic Ocean on June 20, 1970, that the Soviet K-108 (Project 675) submarine was rammed by the USS ‘Tautog’ (SSN-639), which was shadowing it. It happened again on February 11, 1992, when the USS Baton Rouge (SSN-689) collided with the K-276 Kostroma near the Northern Fleet base in Severomorsk. You might already be asking yourself where we are going with our analogy but an unexpected move can throw the other side off balance, but it should always have a purpose, such as tariffs.

The idea of taking a strategic but unexpected turn is a useful one in litigation as described by Jessica Mor from Breedon Mor LLP:

“This idea of taking a strategic but unexpected turn is a useful one in litigation. For many years I gave my articling students a copy of The Book of Five Rings, a manual by Miyamoto Musashi, arguably the most famous swordsman in Japanese history. One of Musashi’s many useful recommendations is to “cause a loss of balance” by doing the unexpected. This is a good strategy, provided that the unexpected turn is a strategic one. In other words, it cannot simply be “crazy,” but must have serve a larger purpose in the litigation, like checking one’s blind spot.

The other way that “Crazy Ivan” was apparently used during the cold war was to refer to the possibility of a Soviet submarine captain going rogue and firing nuclear weapons. I think that this was what my client was referring to – an all out, irrational assault. In my view, this is never a good idea. We should always assume that, at some point, we will have to justify whatever steps we have taken during litigation in open court. Acting unreasonably, for no purpose than the client’s (or even worse, the lawyer’s!) own catharsis, will never pass scrutiny.” – Jessica Mor

In similar fashion, one may opine that the initiation of the Trade war by the Trump administration is akin to an all out irrational assault. But, some others might argue it is a strategic move, yet a very aggressive one. Macro maverick Stanley Druckenmiller is not supportive of tariffs exceeding 10%:

“As long as we stay in the 10% range, ...I think the risks [from tariffs] are overblown relative to the rewards, the rewards on high, it’s more like they’re the lesser of two evils.” – Stanley Druckenmiller

Druckenmiller views tariffs as:

“simply a consumption tax, that foreigners pay for some of it.”

Simply said, one might argue that “Crazy Ivan” maneuver by the Trump administration by “clearing the baffles” or “trade deficits” it is indeed creating a “collision” hence the bloodbath ongoing in financial markets.

In our previous conversation we mentioned Professor Aftalion’s work. He showed in his book on the French Revolution how decisions taken in 1789 by the Constituent Assembly inevitably led to a deepening financial and economic crisis, and to increasingly radical and disastrous policies.

Is the “Crazy Ivan” tariffs strategy too radical and disastrous? We wonder.

In this conversation we would like to continue to look at the ongoing “risk-off and what it entails given the significant widening in credit spreads and where we see risks and opportunities and how to avoid the torpedoes from the USS Trump submarine.

Our long monthly musings are now for paid subscribers only. Don’t hesitate to subscribe and share our work if you like our musings.

As well, don’t hesitate to reach out to us if you have any questions or suggestions.