INTRO
We assume and conclude that volatility is: hard to measure, potentially very expensive to “buy”, and difficult to monitor, scale, and monetize. We’ve also made a case that the “systems” we are dealing with are complex at best and broken at worst. We ask ourselves questions like: What are we hedging? Why are we hedging? What is the real cost of this hedge? The bottom line and answer to all is the same – “I’m really not sure”.
The better question becomes – is there a better hedge?
A NEW DEFINITION OF VOLATILITY: “NEW VOL”
We have arrived at our destination. In order to implement our solution, we changed the definition of volatility itself: from a decline in the market to a “systems failure”. With our new definition, we try to hedge against one of the many snowflakes that can start the next avalanche. We are hedging against a system-wide catastrophe that would make our day-to-day living more challenging and uncomfortable.
Our new definition puts us in search of protection from market disruptions, systemic shocks, and chaotic outcomes that such an event would bring. All of a sudden the left tail (a 50% correction) does not sound that bad. We are now less afraid of the well-known left tail, which we have already seen three times since 2000, and our bigger concern is all the other related risks and potential outcomes of our Ice-9 (systems freeze) and Crack-up Boom (a race to convert fiat into real assets) type scenarios.
HAT TIP TO CHRIS MARTENSON & PEAK PROSPERITY
A goal of NEW VOL was to bridge the gap between the financial markets and the Peak Prosperity solution set of Personal Resilience & Parallel Systems (PRPS). In their book “Prosper”, Peak Prosperity has given us a blueprint to build our PRPS, which includes not just the financial bucket, but seven other buckets of capital (material, living, social, time, cultural, emotional, and knowledge) that are equally important, and possibly even more important, if/when SHTF. Check them out here.
WHEN THE SHTF
Since we had a hard time defining, qualifying, trading, and managing the risk of a market decline, let’s go after the big risk. The real risk. The dangerous risk. This NEW VOL lens is at the intersection of financial hedges and work/life hedges. Let’s stick with the extreme scenarios (Ice-9 & Crack-up-Boom) to make a point. And let’s reiterate our disclaimer – this is not a prediction, simply a thought experiment.
Let’s hedge our bets and invest in our most basic needs: food, water, and energy. Like most things in life, there is a spectrum to these investments. Let’s lay them out:
- Food: the spectrum of a deep pantry on one side to productive farmland on the other with lots of ideas, tools, and skills in-between.
- Water: everything from storing clean water and rotating it for use (free insurance) to water rights or a well on your property.
- Energy: there’s solar, generators, power walls, and a lot more I do not know.
A SIMPLIFIED CASE STUDY
ASSUMPTIONS: an individual with $1M net worth – a $500k home ($300k mortgage and $200k in equity), a $750k portfolio, and $50k in a checking account to cover expenses.
NEW ALLOCATION: we allocate 10% towards our new PRPS solution set and invest $100k in our basic needs of food, water, and energy. $100k can get you a lot, but there is always more we can do.
THE GOOD: we have real quantifiable insurance against a systemic shock. We have hedged food, water, and energy to give us additional time to think and respond. We can sleep better at night.
THE CHALLENGE: our investments are reduced by $100k. Retirement MAY get pushed out as a result. The markets can continue to grow without “an avalanche”, and then we feel we have made a bad decision and wasted our time and money.
THE CONCEPT OF TIME: time is a critical element in this story. Skills and mastery take time. Is time more important when things are “normal” or is time more valuable when SHTF? Just like investing, we can take smaller bites and build. No need to make a $100k investment into productive farmland without a plan…or a clue.
OUTSIDE THE BOX CONCEPTS: we have less exposure to the “”markets”” in case a correction occurs. We are closer to the Earth and our living systems – all of which can bring a richer meaning to life and community. We are more in control of our own lives.
CONCLUSION: a side-by-side analysis between our conventional market hedges (addressed in part 3) and our NEW VOL hedges leads us to believe that there IS merit to investing in basic needs.
THE CLOSE
We are not predicting doom or selling fear porn. We try to look at possible outcomes and solutions. We absorb the smaller risk of a market decline, and “buy insurance” against something “bigger” happening. The best part about our new hedge is that it can enhance the quality of our lives and protect at the same time.
Click links below to see parts 1-3 of this 4-part series. We hope you found this journey rewarding. Signing off from NEW VOL.
New Vol – Part 1
Cracking the Volatility Puzzle
https://chartsandparts.substack.com/p/new-vol
New Vol – Part 2
Exploring Solutions to Hedge Your Portfolio
https://chartsandparts.substack.com/p/new-vol-how-do-we-hedge-volatility
New Vol – Part 3
The Volatility Landscape
