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Just reading an article there referencing the economic and market events of this week (Inflation hanging around, commodities rising, equities falling etc.) Investors buying gold and crypto as a hedge.

My thoughts are -
I fear the only hedge that will work if inflation gets sticky, (causing another 2022 type equity sell off, perhaps exacerbated by sovereign debt growing concerns of swimming towards the default vortex, combined with an injection of old fashioned fear, not seen for a while and central banks unable to rescue this time) are long dated out of the money puts on the most speculative equity securities, of which there are many to choose from. Or maybe it’s time to buy the VIX. The stress on the global financial system looks immense. The lack of concern from market participants and buy-in to the Goldilocks soft landing is mind boggling, in the face of a wall of challenges/risks (crypto vapour event, deglobalisation/trade war, Middle East war, US equity valuations, mean reversion of highest profit margins ever, wealth gap acceleration, political instability and government deficits at eye watering levels, unfunded government liabilities which are unpayable. A society stacked against youth).

This AI productivity boost better live up to the hype, if assets are to avoid being “good until reached for”…but truth be told, not one person, or economist has the faintest idea how this plays out. A time for prudence and cautious optimism at best.

<<<<This AI productivity boost better live up to the hype, if assets are to avoid being “good until reached for”…>>>>

Very well put. Put me in the camp that believes AI is "good until it is reached for..." at least economically speaking. Specifically, the impact on productivity at the macro level likely underwhelms. The tech is "cool" of course.

I fear the only hedge that will work if inflation gets sticky, (causing another 2022 type equity sell off, perhaps exacerbated by sovereign debt growing concerns of swimming towards the default vortex, combined with an injection of old fashioned fear, not seen for a while and central banks unable to rescue this time) are long dated out of the money puts on the most speculative equity securities, of which there are many to choose from. Or maybe it’s time to buy the VIX

There is the alternative of simply riding things out. Sure, prices for almost everything will go down for a while, that's the nature of markets. But usually there are some solid and growing businesses whose stock prices come all the way back up after the dip, and indeed all the way back up to their prior trend. If you're invested in those, there is no particular reason to fear the transient low prices: just ignore it and sit on your hands.

In that sense, rather than looking at hedging opportunities, think instead of bear market opportunities. Is there something I own now that I might lighten up on to make sure I have enough dry powder when the next big buying opportunity comes around? When the bear comes, what will I buy, and at what target price?

It's a shame that short selling is so darned hard. I think the main reason is the Karenina effect: all good companies are good in the same ways, but all problematic firms are in trouble in their own particular ways. This makes them fundamentally less predictable. Plus, the math works against you: if you take a dozen small short positions, once the prices move a little bit, you have the biggest bets on the bets that are doing the worst, and vice versa. (being long is the reverse of course). So you eventually have to rebalance the positions, taking losses on the losers and worsening your breakeven on your winners. But worst of all is the near impossibility of picking the moment that the cartoon character, having run off the cliff, will finally decide to look down.

Personally I just bought a bunch of T-bills maturing on Hallowe'en (figuring prices may go down) and put a smaller amount of cash into restarting my quant portfolio after a long hiatus (figuring prices will go up). Hedging my reasoning instead of hedging my security portfolio : )

Jim

Thanks for your thoughts there Jim. Dry powder is my largest defensive allocation. It’s the only thing that makes true sense for the reasons you have articulated. I also note Berkshire has more than a few barrels of dry powder.

I do have some out of the money long dated puts on Microstrategy and own a long VIX fund. I expect to loose on both but take comfort from having a little bit of crash insurance. The VIX product worked well end of last week, jumping 20% when everything else was falling 2% including Berkshire. The escalation yesterday in the Middle East will be cause more ripples on Monday.

Buffett’s biggest allocation over the last 2 years (OXY) starting to look pretty smart also.

I see after yesterday bitcoin fell 8% demonstrating that it’s a gambling token rather than a hedge against anything.

Talking to folks yesterday in U.K. in general about the state of the world. On the ground people are really starting to struggle. Particularly the working middle classes and the young. The level of government support for large groups of the population seems unsustainable LT. It’s hard to be bullish on equities these days and although owning quality cash flowing reasonably priced businesses will work out in long term, it does feel like we have hit the breaks and are skidding across the road waiting for impact. My hedges are small but I won’t feel so bad if the impact is bad. Nobody knows anything.

“I think the main reason is the Karenina effect:“

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In a continuing attempt to learn something new every day,
Jim has provided the education (from 1877) for me today!

This from WIKI,

“The name of the principle derives from Leo Tolstoy's 1877 novel Anna Karenina, which begins:
Все счастливые семьи похожи друг на друга, каждая несчастливая семья несчастлива по-своему.

All happy families are alike; each unhappy family is unhappy in its own way.”

ciao

& yikes…. my 1st thought he was referring to…..
https://en.wikipedia.org/wiki/Karen_(slang)…..:)

"I fear the only hedge that will work if inflation gets sticky, (causing another 2022 type equity sell off, perhaps exacerbated by sovereign debt growing concerns of swimming towards the default vortex, combined with an injection of old fashioned fear, not seen for a while and central banks unable to rescue this time) are long dated out of the money puts on the most speculative equity securities, of which there are many to choose from."

It should be noted that countries that have their own currency (and central bank) don't ever have to default on debt in their own currency. They simply print more currency. Yes, that is bad from an inflation standpoint, but inflation is a different beast than default. Countries that borrow in foreign currencies can default on that debt. The U.S. does not borrow in foreign currencies though so it won't have to default.

Now a country like the U.S. might default on its own currency denominated debt if it gets stupid and stubborn are simply refuses to pay its bills. But that is a political sideshow by a dumb congress (or a portion of them).

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