For Heaven's Sake: Hedge!

Q: How do you make a small fortune on Wall Street?

A: Start with a large fortune.

~ old investing adage

Last fall, I wrote an article titled Defying Gravity that warned of the absurd price levels that stocks and bonds had risen to.

The piece first looked at the unbroken multi-year march upward in prices through the myriad money-printing cycles of the world's central banks, as well as the near-extinction of bearish investors on Wall Street -- which it then contrasted with the vast gap between valuations and the underlying weak economic data, deteriorating chart technicals, and evidence that the "smart money" was exiting the market. The takeaway? Prudence strongly recommended moving to cash and hedging one's open market positions. 

Less than a month later, the stock market abruptly dropped by 7%. Those who didn't seek safety in advance were left licking their wounds, panicked not knowing if the painful down-draft was over.

Fortunately for them, the Federal Reserve jawboned it's willingness to step in further if needed, the ECB announced a trillion-Euro stimulus program, the Bank of Japan waded into domestic and foreign markets as a buyer of last resort, and China's central bank continued its staggering balance sheet expansion. Collectively, this put a floor on the markets, which soon climbed back to record highs.

Where We Are Now

So here we are roughly six months later, and the same warning bells are ringing -- just louder this time.

Yes, stocks recovered from their brief October swoon, and yes, they are at -- or very close to -- their all-time highs. Indeed, everything is so awesome that investor sentiment has never been more positive. If you worry that having too many people on the same side of the boat is a sign of complacency and over-confidence, the following chart should frighten you:


But very importantly, the rate of increase in equity prices is changing. Specifically, it's slowing down. Prices are beginning to compress, forming a classic "wedge" which Charles Hugh Smith warns could break the relentless multi-year uptrend:

This is a dangerous sign at a time when, despite all the central bank stimulus programs raging around the world, economic growth is decelerating. Quartlery GDP growth for both the US and the Eurozone are barley above 0%, and China's recently-reported 7% growth is the lowest reported in over 24 years (and many analysts suspect this reported growth is substantially overstated).


Stocks, in theory at least, should be priced based on future earnings expectations. With anemic/moribund/near-recessionary growth numbers like these, what kind of delusional drunken rantings do we need to tell ourselves to justify today's record stock valuations?

Valuations, mind you, that can change on a dime as sentiment shifts. As proof: in the past 48 hours, due to disappointing guidance, Twitter's and Yelp's stock prices have plunged 25%. And as I've been writing this piece, LinkedIn's price has fallen over 22% in the aftermarket, evaporating 2 full years of gains.

Here at Peak Prosperity, we've long forecasted that crashes happen first at the periphery where the weaker players are, and then progresses steadily inward towards the core. The high-flying, unprofitable, dubious-value social media space is exactly where we'd expect to see the early failures occur before the larger market rolls over. That may very well be what we're witnessing now.

And in the age of high-frequency trading (HFT) where the majority of trades and nearly all quotes are generated by algorithms, the speed with which prices can collapse is orders of magnitude faster than what was possible in previous eras. When the market action becomes unfavorable, algos just stop trading -- within milliseconds. Since they're responsible for the overwhelming majority of trading in today's markets, price support vaporizes along with the algos. With the instantaneous disapperance of buyers, flash crashes result. HFT expert Joe Saluzzi explains this risk in depth in our upcoming podcast with him -- to be released this weekend -- in which he states:

The flash crash [of 2010] was caused by a poor market structure that went out of control. Where basically market makers were flipping back and forth and once their inventory positions got exhausted or their risk levels got too high, they were shutting down. And many of them were quoted afterwards explaining that they just stopped trading and exited the market. That’s why you had a flash crash: because it was a void in liquidity. 

For Heaven's Sake: Hedge!

All this worrisome data reminds me of another old joke:

A terrible storm came into a town and local officials sent out an emergency warning that the riverbanks would soon overflow and flood the nearby homes. They ordered everyone in the town to evacuate immediately.

A faithful religious man heard the warning and decided to stay, saying to himself, “I will trust God and if I am in danger, I believe God will save me.”

The neighbors came by his house and said to him, “We’re leaving and there is room for you in our car, please come with us!” But the man declined. “I have faith that God will save me.”

As the man stood on his porch watching the water rise up the steps, a man in a canoe paddled by and called to him, “Hurry and come into my canoe, the waters are rising quickly!” But the man again said, “No thanks, God will save me.”

The floodwaters rose higher pouring water into his living room and the man had to retreat to the second floor. A police motorboat came by and saw him at the window. “We will come up and rescue you!” they shouted. But the man refused, waving them off saying, “Use your time to save someone else! I have faith that God will save me!”

The flood waters rose higher and higher and the man had to climb up to his rooftop.

A helicopter spotted him and dropped a rope ladder. A rescue officer came down the ladder and pleaded with the man, "Grab my hand and I will pull you up!" But the man STILL refused, folding his arms tightly to his body. “No thank you! God will save me!”

Shortly after, the house broke up and the floodwaters swept the man away and he drowned.

When in Heaven, the man stood before God and asked, “I put all of my faith in You. Why didn’t You come and save me?”

And God said, “Son, I sent you a warning. I sent you a car. I sent you a canoe. I sent you a motorboat. I sent you a helicopter. What more were you looking for?”

If you still have capital invested in the financial markets and you haven't started moving a sizable portion of it to safety -- either into cash or positions that hedge against a correction -- what additional warning signs could you possibly be waiting for?

Don't be caught waiting too long to act. Once the next correction is upon us, it will already be too late.

As we originally advised before the market drop six months ago, strongly consider moving more of your paper investments to cash for the time being. This is one of those times when the benefits of safety far outweigh the risks of speculating to catch a few more up days in the market. (Remember, the research definitively proves that we feel much greater mental suffering when we experience a loss than when we miss out on a gain)

And for any capital you decide to keep in the markets, we urge you to explore hedging those positions against a market drop. 

"Hedging" is the practice of allocating a minority percentage of your investments to safer or inversely-correlated holdings relative to the majority of what's in your portfolio. So how to do you go about doing it?

In Part 2: How to Hedge Against A Market Correction, we explore the standard range of hedging techniques that are commonly used to offer portfolio protection and/or upside during a market downturn. These include raising cash, using stops, inverse and leveraged securities, shorting, options, and futures.

And for those who choose to forgo hedging, you might want to want to start donating to a wide range of churches, synagogues, temples and mosques. Like our friend in the story, when the next storm hits, divine intervention is going to be your best hope...

Click here to access Part 2 of this report (free executive summary; enrollment required for full access)

This is a companion discussion topic for the original entry at

…who are barely making do - admittedly because we are "investing" in things like seeds, food stocks, garden building, defensive weaponry, and system redundancy - and thus can not invest substantially in the marketplace in the first place, this entire affair can be watched from the sidelines. I'll be sipping a margarita and thinking about what else I need to add to my seed bank while the accident unfolds and people lose their wealth. For I have little fiat to lose in this game.

For those of you that ARE substantially invested in the markets, good luck and may the odds ever be in your favor.

We too have invested in metals, gardening and health and as CHS said recently it is not cheap by any stretch of the imagination to live and eat "right."  But I don't want to just survive, I want to thrive if shtf in markets, it's only right, fair and just. 
What I did was put $2000 into long term out of the money call options in SLV.  Bottom line if SLV gets to $50 I'm at about $400k.  If SLV gets to $100 it's $2.4M, if my math is right.

If SLV goes nowhere, fine, we've had another year to work and stack.  And yes I know there may be a break between SLV and phyzz at some point and there are issues with the prospectus but you can't trade PSLV options and I'm just hoping for some parallel tracking at least for a while. 

Anyway that's what I came up with purely as a gamble.  I'm all ears as to any other ideas.


Seems like very wealthy people have many more options when it comes to hedging: real estate, fine art, hedge funds, even entire businesses.  I'm with you two, my fellow middle classers, in that much of my hedging has been investing into my homestead. Over the last year I've taken $20k out of my non-retirement funds and used it to purchase physical silver, firearms and ammo, and tools, and expanding my garden and xeriscaping and permaculturing my front yard.  My remaining non-retirement funds are in a few stocks of companies that produce or provide always needed stuff, along with some paper silver (USV.)
My retirement accounts are a little tougher for me mentally.  I've moved both my wife's and my account to target date funds of 2020 and 2025, even though those dates are a bit "early" given our ages.  That's not really satisfactory to me but I definitely don't want the 10% penalty and I haven't found any better alternatives at this point.





Aloha! I have been "hedging" all my life. In order to be able to eat and have clothes and put a roof over my head I have been hedging against destitution and homelessness by working diligently all my life! You can "game" the system by not working and living off government handouts or "gambling" in the stock market, but sooner or later you get "game over"! Admittedly, the way the current monetary system is running it seems like government handouts and the "gaming" required to accumulate as much of those handouts as possible, like the stock market, has lasted much longer than I ever thought possible. Whether you have chosen to "game" or "gamble" it has been debt that has kept those two "markets" propped up for decades now. Unfortunately there is this thing statisticians call "the mean"! All things revert to it over time. In other words "margin debt" gets called and "sovereign debt" gets downgraded. When borrowing gets too expensive, when money costs too much then we get that reversion of all things to that long term "mean"!
I have always thought that having a farm where food grows year round and water is plentiful is the best damn hedge paper IOUs can buy! I mean come on … what good is a $1mil door knob in Beverly Hills if there's no water??? So many people I have met and know have always opposed that view and in fact they have backed up their own learned beliefs with action or as I see it "inaction". In other words, they just go along with society and buy into the idea of government and the nanny state whereby politicians will always take care of the masses and the needs of the masses. In America that belief system has panned out for a lot of people, especially government workers and bankers and those who dwell very close to the political money spigot. While the stock market is a more immediate concern in terms of a more imminent reversion to the mean I think many people are unaware of the impending sovereign debt crisis. It's like what good are your profits if your money is worthless? An awful lot of Europeans have been in the DAX and CAC and et al accumulating those beautiful profits denominated in Euros for decades now, well since 1998 or so. Of late the Euro has been flirting in the direction of par to the USD. If you own a Canadian dollar or an Aussie one then you lost approx 20% recently against the USD. All well and good until you travel to the USA or buy US goods and or services. Simplistically speaking if you never leave your country then none of those currency rates mean a damn thing unless you start to see the behind the scenes action your government engages in on your behalf. Your government also enlists the assistance of a central bank to make you think the system is impervious to outside influences and geo political socio-economic turbulence. It's looking like the citizens of Europe are headed for a reality check on their socialistic belief systems sooner than later. On the other hand maybe the city of Chicago will beat the EU to that reality check. Really … that reality is all about debt and currencies.

You can engage in all that "complexity" … all the mind numbing statistics and algorithms to out fox the market or slide into a cushy little government debt golden goose or you can cut out that "giant gauntlet" and just get back to basics. What do you really need in life? Food, water, clothes and a house. If you can provide yourself those four basics without being constantly leveraged by debt and dependent on government teats then you are miles ahead of anyone else on the planet. Now you are in the top 1% of the 1%!! And you don't even need to be in the 1% to do it! That to me is the most astounding part of it.

In the past when worlds went to war and markets crashed every family had a farm to go to. That was a very real safety net. Over a few generations we have been conned into selling the farms and buying a big lie. In reality we sold our independence and what we traded it for is government bonds backed by politics. You may not even own a US Treasury bond but your future is based on them. The entire US systemic universe is nothing but "Faith and Credit"! Now, how do you hedge that?


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There's a reason out of the money options are so cheap.
SLV doesn't move enough in price to be worth a look, much less a gamble.
Other ideas?
Trade stocks that move, buy in the money, buy time.

How about 20 contracts of AAPL, July 105 Calls, purchased on 20 January at the opening of the second 233 minute candle?  Out on Feb 23rd at 2:00 PM.  It was trading at $132.
That wasn't a gamble.  I knew it was going to work.


gamble with only one guaranteed profit taker. If it was that sure a thing the facilitator would only ask for a percentage of all your profits. The risk is all yours.

Well Adam, if your argument is that we've seen this before, and you made a great call by issuing a warning prior to a 7% drop, did you also make a call a month later that it was time to get back in? Have you been on the side lines ever since? In which case, how far behind are you now? 
So if the previous events you are so proud of repeat, then what I should really do is just hold on through the sharp one month correction and 8 months later the markets will be up another 1000 points. Unless you're calling that this drop (THIS drop), still hypothetical, is THE ONE. Is that what you're saying?

But PP has been making that call pretty much for years now anyway.

Why don't you be a little more specific about just what hedge(s) you are recommending. Because you've got some poor bastard out there plonking 2 grand on what must be WAY out of the money options, and thinking he could make $400K that way. (if his math is correct)

Nice show Derelict.  I've been wondering the same for quite some time.
For example, is NOW the time to buy XOM and even if if goes down with the deflation process, and then bounces back later, NOW seems reasonable. Buy and hold thru the downside.

OR, wait, again, until the deflation/correction % drops 50, 60, 70 or 80% and then jump in with XOM??

(Have you seen the Dent-Stockman new video on Sundown Strategy?)

Either way looks good, only if the former happens again (history repeats!!!) and guessing correctly at the bottom (could miss out, again).

What's one to do?  I do like Rickards' BARBELL Strategy.  Prepare for BOTH inflation AND deflation with appropriate financial instruments–the ultimate hedge???  Key word: appropriate.

I had a bit of a rant. But mostly I see the same thing in the proposed 'strategy' from Rickards et al - this is from the 25 insights piece. OK they went long gold miners? Gold miners have been pretty much a losing idea for years now. Just look at the 10 year chart of GDX. There's a whole 5 year period that if you'd bought gold miners, you will have lost half your money.
So these guys pick a recent bottom in March - a blip really, at this point - and want to say it's a winning strategy? All with hindsight of course. Did I mention I hate the name Incrementum? I felt the bile rise as soon as I started reading.

I like XOM better than I like any of these other ideas. But even at 85 it's trading near the top of the chart. You tread there with the angels.


derelict -
Despite your condescending tone, I'll respond to underscore an important point.

The article focuses on the importance of hedging as a loss-minimization strategy, especially at times when the market is flashing a preponderance of warning signs as it is now (signs the article highlights above).

Will the market plunge 7% from here soon? I don't know – no one does. But are the odds it could too high right now for comfort? Yes, in my estimation. I saw similar signs back in Sept which caused me to write the earlier piece. The warning turned out to be prescient then, and those who hedged certainly benefited by losing less. Will things play out exactly the same this time around? I don't know (again, no one does) – but the data lead me to conclude we're in a market environment in which it's prudent to prioritize safety over gain.

And if the warned-of drop occurs, will the markets rebound as strongly afterwards (1,000+ points)? Is that a bet to play? Possibly. For a certain kind of investor. But that's speculation, not hedging.  And that's not the focus of this article.

To your question about the specifics: Part 2 does go into the specifics of the tools & techniques we recommend concerned folks consider for hedging their long market exposure (again, for loss-minimization). But as to individual recommendations? Not going to make them. I'd be irresponsible to do so without having an understanding of an individual investor's positions, portfolio allocation, financial goals, risk tolerance, etc. That's why the start of Part 2 is so emphatic about working in concert with the guidance of a financial adviser well-experienced with these instruments. If you want specific recommendations and are having trouble finding a qualified adviser, we'll be happy to connect you with one we trust – but they for sure as heck won't provide trade guidance until they have a detailed understanding of your personal situation.

Go to, and buy a bunch of seeds you want, but be sure to get their fifty-cent “seeds for kids” packs.
Also, learn which weeds around you are useful and edible.
Also, build yourself a ‘go bag’, and learn to use the things in it to provide basic shelter for yourself.
…Is a better place to work from. Fear based decisions are frequently bad decisions. Just spend far less than you earn. Your savings rate should be 50% of your income. Do whatever it takes to reach that, even if it means not idling in the drive through in your Super Duty F350 lane for your Starbucks mocha-latte. If you are doing that now, you have a long, long way to go. If you drive your car 3 miles to go get bread and milk, you really don't get it.

You might try this as well:

by following the ways shown in the humorous movie “The Wolf of Wall Street”. i wish thing would be that easy to build as shown in the movie.

  • Este juegos tragamonedas en linea es el superior y encontrara para maquinas de poker y maquinitas, y esos sonidos de cas ino que promete lo haran experimentar como si se sintiera en uno de a de veras.

A few week's after writing this piece, it's clear the warning bells are being picked up by the mainstream media.
Here's a smattering of headlines I see tonight: