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Image | How to Hedge Against A Market Correction
How to Hedge Against A Market Correction
 PREVIEW
by Adam Taggart

Executive Summary

  • What you need to know about hedging with
    • Stops
    • Inverse and leveraged ETFs
    • Shorts
    • Options
    • Futures
  • Deciding which hedging instruments are appropriate for your portfolio

If you have not yet read Part 1: Defying Gravity available free to all readers, please click here to read it first.

OK – hedging sounds prudent. But how do you do it?

Our focus here in Part 2 of this report is to cover the most common vehicles used in hedging strategies. Each one merits its own dedicated report (a series we’ll likely create in the future) to truly understand how and when to best deploy, so this report will focus on providing you with a good introduction to each, with guidance on how to further explore the ones that strike you as appropriate for your needs and personal risk tolerance.

Before continuing further though, let me make a few things absolutely clear. This is NOT personal financial advice. This material is for educational purposes only, and as an aid for you to discuss these options more intelligently with your professional financial adviser(s) before taking any action. (If you do not have a financial adviser or do not feel comfortable with your current adviser’s expertise with these hedging vehicles, we’ll be happy to refer you to our endorsed adviser)

Suffice it to say, everything discussed in this report (even the % cash component mentioned in Part 1) should be reviewed with your financial adviser before taking any action. Am I being excessively repetitive here in order to drive this point home? Good…

How to Hedge Against A Market Correction
 PREVIEW by Adam Taggart

Executive Summary

  • What you need to know about hedging with
    • Stops
    • Inverse and leveraged ETFs
    • Shorts
    • Options
    • Futures
  • Deciding which hedging instruments are appropriate for your portfolio

If you have not yet read Part 1: Defying Gravity available free to all readers, please click here to read it first.

OK – hedging sounds prudent. But how do you do it?

Our focus here in Part 2 of this report is to cover the most common vehicles used in hedging strategies. Each one merits its own dedicated report (a series we’ll likely create in the future) to truly understand how and when to best deploy, so this report will focus on providing you with a good introduction to each, with guidance on how to further explore the ones that strike you as appropriate for your needs and personal risk tolerance.

Before continuing further though, let me make a few things absolutely clear. This is NOT personal financial advice. This material is for educational purposes only, and as an aid for you to discuss these options more intelligently with your professional financial adviser(s) before taking any action. (If you do not have a financial adviser or do not feel comfortable with your current adviser’s expertise with these hedging vehicles, we’ll be happy to refer you to our endorsed adviser)

Suffice it to say, everything discussed in this report (even the % cash component mentioned in Part 1) should be reviewed with your financial adviser before taking any action. Am I being excessively repetitive here in order to drive this point home? Good…

Image | Why The Dollar Is Gaining Strength
Why The Dollar Is Gaining Strength
 PREVIEW
by Chris Martenson

Recently, the US dollar has gained at lot of territory compared to the yen, pound, euro, ruble, and pretty much every other currency you can think of. The dollar is now at a 14-month high and has been on a real tear.

The reasons why are not that hard to understand, and it's important that we do.
Why The Dollar Is Gaining Strength
 PREVIEW by Chris Martenson

Recently, the US dollar has gained at lot of territory compared to the yen, pound, euro, ruble, and pretty much every other currency you can think of. The dollar is now at a 14-month high and has been on a real tear.

The reasons why are not that hard to understand, and it's important that we do.
Image | The Bad & The Ugly
The Bad & The Ugly
 PREVIEW
by Brian Pretti

Executive Summary

  • Lack of demand is the key drag on economic growth. And there's no end in sight.
  • Private sector credit expansion just isn't happening fast enough
  • Why the central banks' "wealth effect" policies have been a total bust
  • Capital flows are simply chasing yield, precious little economic productivity is being created

If you have not yet read Part 1: Where To From Here available free to all readers, please click here to read it first.

The Bad 

Who wrote this tired sea song set on this peaceful shore?  I think you’ve heard this one before…

~ Steely Dan

As mentioned, at least for the small business community, availability of credit has not been a key fundamental issue in the current cycle. In fact, their number one issue of concern for years has been lack of final demand.

Personally, I believe the experience of the small business community is simply a microcosm of the larger domestic and global macro. Subdued final demand IS the key macro. Is this why we see a growing gap between small business perceptions of credit availability and actual capital spending? Probably. The credit is there, but actual final demand that would support credit expansion is not. Hence the current cycle divergence in what has been a very tight data series correlation between credit and cap spending historically.

Of course this is a segue into a broader dark cloud of the current cycle that is private sector credit expansion, or more correctly, lack thereof relative to historical experience.  When we listen to pundits speak of the economy potentially reaching “escape velocity”, they are of course referencing prior economic cycle growth results, aided and abetted by prior credit expansion that is now lacking. This is perhaps most dramatically seen in the rhythm of banking system credit, in the change in actual loans and leases outstanding.

As is clear in the chart below, never in any expansion cycle of the last four decades at least has banking system credit not grown in double-digit territory until…

The Bad & The Ugly
 PREVIEW by Brian Pretti

Executive Summary

  • Lack of demand is the key drag on economic growth. And there's no end in sight.
  • Private sector credit expansion just isn't happening fast enough
  • Why the central banks' "wealth effect" policies have been a total bust
  • Capital flows are simply chasing yield, precious little economic productivity is being created

If you have not yet read Part 1: Where To From Here available free to all readers, please click here to read it first.

The Bad 

Who wrote this tired sea song set on this peaceful shore?  I think you’ve heard this one before…

~ Steely Dan

As mentioned, at least for the small business community, availability of credit has not been a key fundamental issue in the current cycle. In fact, their number one issue of concern for years has been lack of final demand.

Personally, I believe the experience of the small business community is simply a microcosm of the larger domestic and global macro. Subdued final demand IS the key macro. Is this why we see a growing gap between small business perceptions of credit availability and actual capital spending? Probably. The credit is there, but actual final demand that would support credit expansion is not. Hence the current cycle divergence in what has been a very tight data series correlation between credit and cap spending historically.

Of course this is a segue into a broader dark cloud of the current cycle that is private sector credit expansion, or more correctly, lack thereof relative to historical experience.  When we listen to pundits speak of the economy potentially reaching “escape velocity”, they are of course referencing prior economic cycle growth results, aided and abetted by prior credit expansion that is now lacking. This is perhaps most dramatically seen in the rhythm of banking system credit, in the change in actual loans and leases outstanding.

As is clear in the chart below, never in any expansion cycle of the last four decades at least has banking system credit not grown in double-digit territory until…

Image | Something Very Wicked This Way Comes
Something Very Wicked This Way Comes
 PREVIEW
by Chris Martenson

Executive Summary

  • How sovereign debt is becoming larger and more mis-priced each year
  • Why corporate borrowing is accelerating, but only being used for non-productive means
  • Junk bonds have never been priced so low (ever), indicating a complete denial of risk
  • Today's record bond prices are supported by near-historic low (i.e. extremely tenuous) levels of volume
  • Why, mathematically, nearly no-one will be able to exit unscathed when this overinflated market rolls over

If you have not yet read Is Part 1: I Blame The Central Banks available free to all readers, please click here to read it first.

Italy: Insanity On Display

Let’s look at one of the sovereign entities that has piled on the debt to staggering levels. In this case: Italy.

This can serve as a template for understanding the rest of the insanity that exists in the global sovereign bond market.

The rules for lending to a nation should be roughly the same as lending to an individual. You’ve got some measure of the country's credit-worthiness that needs to be taken into account, plus an assessment of its income.

After all, the future principal and interest payments have to come from future income. If there’s too much debt compared to income, then there’s an increasing risk that the debt servicing payments not only will not be made, but cannot be made.

Italy’s sovereign debt has been expanding enormously as the government borrows and spends. Its national debt finally cleared more than $2 trillion euros early in 2014:

Italy's public debt hits record 2.1072 trillion euros

Apr 14, 2014

(ANSAmed) – ROME, APRIL 14 – Italy's massive public debt hit a record 2.1072 trillion euros in February, the central bank reported Monday. The amount was up 17.5 billion euros since January, the Bank of Italy said.

The European Commission has criticized Italy's 2014 budget for not doing enough to bring down debt, around 132% of gross domestic product (GDP).

As a result it has put Italy under "specific monitoring" over its "excessive macroeconomic imbalances", which include high debt and poor competitiveness, as part of an in-depth review.

(Source)

Italy raked up significant debt at a far faster rate than its underlying economy was growing, leading to a steadily rising debt-to-GDP ratio as seen in this next chart…

Something Very Wicked This Way Comes
 PREVIEW by Chris Martenson

Executive Summary

  • How sovereign debt is becoming larger and more mis-priced each year
  • Why corporate borrowing is accelerating, but only being used for non-productive means
  • Junk bonds have never been priced so low (ever), indicating a complete denial of risk
  • Today's record bond prices are supported by near-historic low (i.e. extremely tenuous) levels of volume
  • Why, mathematically, nearly no-one will be able to exit unscathed when this overinflated market rolls over

If you have not yet read Is Part 1: I Blame The Central Banks available free to all readers, please click here to read it first.

Italy: Insanity On Display

Let’s look at one of the sovereign entities that has piled on the debt to staggering levels. In this case: Italy.

This can serve as a template for understanding the rest of the insanity that exists in the global sovereign bond market.

The rules for lending to a nation should be roughly the same as lending to an individual. You’ve got some measure of the country's credit-worthiness that needs to be taken into account, plus an assessment of its income.

After all, the future principal and interest payments have to come from future income. If there’s too much debt compared to income, then there’s an increasing risk that the debt servicing payments not only will not be made, but cannot be made.

Italy’s sovereign debt has been expanding enormously as the government borrows and spends. Its national debt finally cleared more than $2 trillion euros early in 2014:

Italy's public debt hits record 2.1072 trillion euros

Apr 14, 2014

(ANSAmed) – ROME, APRIL 14 – Italy's massive public debt hit a record 2.1072 trillion euros in February, the central bank reported Monday. The amount was up 17.5 billion euros since January, the Bank of Italy said.

The European Commission has criticized Italy's 2014 budget for not doing enough to bring down debt, around 132% of gross domestic product (GDP).

As a result it has put Italy under "specific monitoring" over its "excessive macroeconomic imbalances", which include high debt and poor competitiveness, as part of an in-depth review.

(Source)

Italy raked up significant debt at a far faster rate than its underlying economy was growing, leading to a steadily rising debt-to-GDP ratio as seen in this next chart…

Image | The Trouble With Natural Gas
The Trouble With Natural Gas
 PREVIEW
by Chris Martenson

One of the areas where there's an overblown amount of overtly politicized and outrageously propagandized information is shale natural gas (NG).

The US, for obvious geopolitical reasons, would love to supply Europe with NG and cut out Russia. But as we'll soon see, the basic facts just don't back up that desire just yet.
The Trouble With Natural Gas
 PREVIEW by Chris Martenson

One of the areas where there's an overblown amount of overtly politicized and outrageously propagandized information is shale natural gas (NG).

The US, for obvious geopolitical reasons, would love to supply Europe with NG and cut out Russia. But as we'll soon see, the basic facts just don't back up that desire just yet.
Image | The Rise Of The East
The Rise Of The East
 PREVIEW
by Alasdair Macleod

Executive Summary

  • The West is extremely vulnerable to financial and currency de-stabilisation through precious metals
  • Access to energy supplies will be the real weapon used in the battle over Ukraine (and future geo-political wars)
  • Why sanctions against Russia will not succeed
  • The East is mobilizing to become less dependent on the West

If you have not yet read Is Part 1: Ukraine: A Perspective from Europe available free to all readers, please click here to read it first.

Russia’s strategy towards Ukraine appears to be to ensure NATO is excluded from Ukrainian territory, the irony being that if NATO members hadn’t interfered with Ukrainian politics in the first place the current crisis would not have occurred. As it is, at a minimum she will seek to secure Donetsk and Luhansk and force the Kiev government to drop any ambitions to join the EU economic bloc.

The fact that NATO is divided between on the one side the US and UK plus all its ex-communist members and on the other the great European welfare states, requires there to be two distinct levels of Russian strategy. They must not be confused with each other, one macro and the other micro.

Macro-Geopolitics Linked To Gold

At the higher level there is the geopolitical clash with the US. This is not just a matter of Ukraine, but it is rapidly becoming the Shanghai Cooperation Council versus America. The US is also embroiled in territorial disputes between its allies and China over mineral rights in the South China Sea. The Middle-East now sells more oil to China than the US, and by leaving the US sphere of influence will fall increasingly under the SCO’s spell. Presumably, America has woken up to the threat to its hegemony from the powerful alliance that is the SCO, together with the loss of Pakistan and India into that sphere of influence. It goes further: even Turkey, a long-standing NATO member, plans to defect to the SCO, apparently a personal project of Recep Erdoğan, the recently re-elected Prime Minister.

American-initiated actions against Russia will probably be kept by Russia and the SCO in this big-picture context. It will be treated as an attack against an SCO member, speeding up integration and trade agreements designed to exclude the US dollar as a settlement medium. In this context the SCO members already appear to have agreed on the need to increase gold ownership as an undefined part-solution to replace the US dollar as the currency standard. In other words, the rush to acquire above-ground gold stocks will continue, and China through her refiners is processing and keeping increasing quantities of African-sourced gold as well as her own which would otherwise have gone to the West.

The Russian central bank has been adding to her monetary gold reserves and officially now has more than China (though China is known to have substantial holdings of bullion not currently declared as monetary reserves). All mine output is likely to be absorbed by the State. Russia has continued to build her gold reserves at a time when it could be argued by western analysts that she needs to hold on to all her foreign currency, given the prospect of escalating sanctions. The truth is that…

The Rise Of The East
 PREVIEW by Alasdair Macleod

Executive Summary

  • The West is extremely vulnerable to financial and currency de-stabilisation through precious metals
  • Access to energy supplies will be the real weapon used in the battle over Ukraine (and future geo-political wars)
  • Why sanctions against Russia will not succeed
  • The East is mobilizing to become less dependent on the West

If you have not yet read Is Part 1: Ukraine: A Perspective from Europe available free to all readers, please click here to read it first.

Russia’s strategy towards Ukraine appears to be to ensure NATO is excluded from Ukrainian territory, the irony being that if NATO members hadn’t interfered with Ukrainian politics in the first place the current crisis would not have occurred. As it is, at a minimum she will seek to secure Donetsk and Luhansk and force the Kiev government to drop any ambitions to join the EU economic bloc.

The fact that NATO is divided between on the one side the US and UK plus all its ex-communist members and on the other the great European welfare states, requires there to be two distinct levels of Russian strategy. They must not be confused with each other, one macro and the other micro.

Macro-Geopolitics Linked To Gold

At the higher level there is the geopolitical clash with the US. This is not just a matter of Ukraine, but it is rapidly becoming the Shanghai Cooperation Council versus America. The US is also embroiled in territorial disputes between its allies and China over mineral rights in the South China Sea. The Middle-East now sells more oil to China than the US, and by leaving the US sphere of influence will fall increasingly under the SCO’s spell. Presumably, America has woken up to the threat to its hegemony from the powerful alliance that is the SCO, together with the loss of Pakistan and India into that sphere of influence. It goes further: even Turkey, a long-standing NATO member, plans to defect to the SCO, apparently a personal project of Recep Erdoğan, the recently re-elected Prime Minister.

American-initiated actions against Russia will probably be kept by Russia and the SCO in this big-picture context. It will be treated as an attack against an SCO member, speeding up integration and trade agreements designed to exclude the US dollar as a settlement medium. In this context the SCO members already appear to have agreed on the need to increase gold ownership as an undefined part-solution to replace the US dollar as the currency standard. In other words, the rush to acquire above-ground gold stocks will continue, and China through her refiners is processing and keeping increasing quantities of African-sourced gold as well as her own which would otherwise have gone to the West.

The Russian central bank has been adding to her monetary gold reserves and officially now has more than China (though China is known to have substantial holdings of bullion not currently declared as monetary reserves). All mine output is likely to be absorbed by the State. Russia has continued to build her gold reserves at a time when it could be argued by western analysts that she needs to hold on to all her foreign currency, given the prospect of escalating sanctions. The truth is that…

Image | Is A Global Housing Bubble About To Pop?
Is A Global Housing Bubble About To Pop?
 PREVIEW
by Chris Martenson

Looking past all of the major events transpiring in Ukraine, Iraq, Ferguson, and other hotspots, there's still plenty of worrisome smoke emanating from the global economic engine compartment.

The most recent installment comes from what appears to be abundant signs of bursting housing bubbles in several major markets.
Is A Global Housing Bubble About To Pop?
 PREVIEW by Chris Martenson

Looking past all of the major events transpiring in Ukraine, Iraq, Ferguson, and other hotspots, there's still plenty of worrisome smoke emanating from the global economic engine compartment.

The most recent installment comes from what appears to be abundant signs of bursting housing bubbles in several major markets.
Image | The End of Dollar Dominance?
The End of Dollar Dominance?
 PREVIEW
by Chris Martenson

Dollar Daze

One thing that is absolutely crystal clear at this point is that Putin and Russia consider the US and its dollar hegemony to be a parasitic anachronism that no longer serves anybody besides the US.  Putin has made many direct comments to that effect and then followed them up with concrete deals struck in ways that bypass the dollar entirely.

Here's what he said back in 2011, well before any of the recent action started:
The End of Dollar Dominance?
 PREVIEW by Chris Martenson

Dollar Daze

One thing that is absolutely crystal clear at this point is that Putin and Russia consider the US and its dollar hegemony to be a parasitic anachronism that no longer serves anybody besides the US.  Putin has made many direct comments to that effect and then followed them up with concrete deals struck in ways that bypass the dollar entirely.

Here's what he said back in 2011, well before any of the recent action started:
Image | Meanwhile In Iraq, The Situation Grows More Dangerous
Meanwhile In Iraq, The Situation Grows More Dangerous
 PREVIEW
by Chris Martenson

As if there wasn't enough to concentrate on given all that's happening in Ukraine between Russia and the West, and in Gaza between the Israelis and the Palestinians, the situation in Iraq has been taking some decidedly worrisome turns of late.

As ever, we keep our eye on this hot spot because of its special importance to the world supply of oil, any loss of which will rapidly lead to much higher prices.
Meanwhile In Iraq, The Situation Grows More Dangerous
 PREVIEW by Chris Martenson

As if there wasn't enough to concentrate on given all that's happening in Ukraine between Russia and the West, and in Gaza between the Israelis and the Palestinians, the situation in Iraq has been taking some decidedly worrisome turns of late.

As ever, we keep our eye on this hot spot because of its special importance to the world supply of oil, any loss of which will rapidly lead to much higher prices.
Image | How The Coming Confrontation Will Unfold
How The Coming Confrontation Will Unfold
 PREVIEW
by Chris Martenson

Executive Summary

  • The 4 most likely scenarios of Russian response
  • Europe is more vulnerable, and will feel more pain sooner than the US (though the US is still at risk)
  • The risk to the world economy and financial markets
  • What you should be doing now, in case things worsen

If you have not yet read Part I: The West's Reckless Rush Towards War with Russia available free to all readers, please click here to read it first.

Europe Will Pay the Price First

Europe is already on the edge of slipping back into outright economic contraction and can ill afford any sort of protracted sanction warfare with Russia, a major trading partner in both directions.

While the sanctions levied by Europe were very carefully crafted to cause the least amount of pain for itself as a fist order of business, while imposing maximum pressure on Russia second, they will still bite.

‘EU sanctions on Russia will hit UK economy’ – Foreign Secretary

Jul 30, 2014

EU sanctions aimed at ‘imposing economic pain’ on Russia following the MH17 crash will hit the UK economy, Foreign Secretary Philip Hammond has warned, saying ‘you can't make an omelette without breaking eggs’.

Hammond said the measures had been “designed to maximize the impact on Russia and minimize the impact on EU economies.”

“It will affect our economy… but you can't make an omelet without breaking eggs, and if we want to impose economic pain on Russia in order to try to encourage it to behave properly in eastern Ukraine and to give access to the crash site, then we have to be prepared to take these measures,” he told Sky.

On Wednesday, The Russian Foreign Ministry criticized the new package of EU sanctions, saying it was disappointed Europe was unable to act independently from Washington in the International arena. 

“We feel ashamed for the European Union who, after long searching for a unified voice is now speaking with Washington’s voice, having practically abandoned basic European values, including the presumption of innocence,” the Foreign Ministry said in a statement.

(Source)

Indeed, it's easy to imagine how disappointed Russia might be to have so many unresolved questions about MH-17 lingering yet having Europe rush forward with punishment despite a long and warming history of economic ties.

Of course, the main consideration for Europe now that autumn is just a couple of months away is…

How The Coming Confrontation Will Unfold
 PREVIEW by Chris Martenson

Executive Summary

  • The 4 most likely scenarios of Russian response
  • Europe is more vulnerable, and will feel more pain sooner than the US (though the US is still at risk)
  • The risk to the world economy and financial markets
  • What you should be doing now, in case things worsen

If you have not yet read Part I: The West's Reckless Rush Towards War with Russia available free to all readers, please click here to read it first.

Europe Will Pay the Price First

Europe is already on the edge of slipping back into outright economic contraction and can ill afford any sort of protracted sanction warfare with Russia, a major trading partner in both directions.

While the sanctions levied by Europe were very carefully crafted to cause the least amount of pain for itself as a fist order of business, while imposing maximum pressure on Russia second, they will still bite.

‘EU sanctions on Russia will hit UK economy’ – Foreign Secretary

Jul 30, 2014

EU sanctions aimed at ‘imposing economic pain’ on Russia following the MH17 crash will hit the UK economy, Foreign Secretary Philip Hammond has warned, saying ‘you can't make an omelette without breaking eggs’.

Hammond said the measures had been “designed to maximize the impact on Russia and minimize the impact on EU economies.”

“It will affect our economy… but you can't make an omelet without breaking eggs, and if we want to impose economic pain on Russia in order to try to encourage it to behave properly in eastern Ukraine and to give access to the crash site, then we have to be prepared to take these measures,” he told Sky.

On Wednesday, The Russian Foreign Ministry criticized the new package of EU sanctions, saying it was disappointed Europe was unable to act independently from Washington in the International arena. 

“We feel ashamed for the European Union who, after long searching for a unified voice is now speaking with Washington’s voice, having practically abandoned basic European values, including the presumption of innocence,” the Foreign Ministry said in a statement.

(Source)

Indeed, it's easy to imagine how disappointed Russia might be to have so many unresolved questions about MH-17 lingering yet having Europe rush forward with punishment despite a long and warming history of economic ties.

Of course, the main consideration for Europe now that autumn is just a couple of months away is…

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