Guest Post: A “Braided Basket” Trade On The Apocalypse

Tyler Durden's picture

Submitted by JM

A “Braided Basket” Trade on the Apocalypse

So we all know that gold prices and UST 10Y yields are as high, and low, respectively, as they have ever been.  This is nothing more or less than human adrenaline overriding reason and logic, driving return expectations to the distribution of max entropy.  It’ll pass.

Sometimes it makes sense to fight the crazy impulses of greed and fear.  But often this gets you creamed in the center.  Sometimes it doesn’t.  For those times, the prices of straightforward hedges like 10Y Ts and gold make them very unhedge-worthy.  There is no sense in jumping on trades that already have the risk premium baked in.

The alternative is to ride the apocalypse with an eye on the relative mispricing of extremal points.  I’m creating what I call a braided basket to do this.  I’ll take two pair trades and go short the rapier points of the apocalypse and long something correlated, but underperforming it.  In this way I’ll catch some hedge on tail risks on my core book due to the darkening outlook.  At the same time, I’ll catch some cover when people come back to their senses.  Why braided?  Check out the charts, and see how the pairs interweave. 

Note that the point is close correlations.  Actually, the point is coupling.  Coupling is a technique where two dependent copies (Xn, Yn) of a random process where Xn is stationary and Yn starts from a fixed arbitrary state—and they have the property that they coincide with higher and higher probability as time evolves.  So for example, the underlying random processes are negative real interest rates and credit risk spikes.
The endgame is minimizing the total variation distance between two probability measures p and q over all subsets A of G.  This is what the coupling method does:  it determines the time T is the smallest n such that Xn and Yn coincide.  The total variation distance between the law p(n) of Yn and the stationary law q of Xn can be bounded by Sup|p(n) – q| ? Prob(T > n).  The construction of a good coupling that estimates Prob(T > n) is the decisive issue for this technique.  Construction of a good coupling means finding pairs that exploit relative mispricing (measured by the total variation distance) of two assets. 

Remember that this is a hedge position on the irrationality that fear brings to the table, and the short is only there to cover pullbacks.  Core holdings should always go to buying what is cheap.  Here we can only say we are buying a relatively cheap alternative and shorting a way-too- expensive alternative.  It would of course be far better to buy cheap “just in case” hedges rather that these “just in time” hedges that are necessarily more complicated, but it is way too late for that now.  You need to balance it and not be equal weight short and equal weight long in either pair.  Not sure that cointegration helps here to determine the weights, because illiquidity implies non-stationarity, at least in a local sense of the term. 

Negative Real Interest Rates Leg:  Gold is fighting a lot of history here.

Long Platinum, Short Gold

Credit Risk Explosion Leg:  For this leg, it makes sense to go with more term risk, so I’m looking at 20Y nominal Ts and 20Y General Obligation Muni bonds.  This is really a play on my vision that credit risk and interest rate risk will become an expression of the same phenomenon going into the future.

Short 20Y, long 20Y GO Munis

Of course this assumes that basic recurrence, which is a very general notion of mean reversion, holds.  It may not, or mean reversion could be to zero, in the “naked I came into this world, naked I go out” kind of way.

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baby_BLYTHE's picture

Gold could hit $2,000 next week yet miners are only priced for gold some $1200, WTF!?

JW n FL's picture

Miners NEVER! EVER!! EVER!!! Pay shareholders when prices go up.. if you are not a principle you will realize no gain other than some retail / institutional bump in share price.. which is FUCKING STUPID!

ReactionToClosedMinds's picture

guess you are right ..... if hyperinflation dynamic perceived then miners will follow; if deflationary, credit collapse/liquidity/biz viability implosion apocalypse .... then miners offer nothing .... except some residual asset value

Banjo's picture

Agree they dilute share holdings, expand inefficiently and worse of all hedge production. I'll stick with physical but each to their own :)

CPL's picture

And that is exactly why every trader worth his weight in salt is sticking to physical gold and silver right now.  :)

global's picture

You have got to be kidding.  Buying physical gold and burying it in your back yard for fear of confiscation is not trading, its called "buy and hold", but for some reason this term is only considered derogatory when applied to equities. 

This is the result of not knowing a better use for your money and being scared.  Any trader worth his/her salt is using the volatility you are creating to outperform simplistic buy and hold strategies...thats what trading is.

ATM's picture

When everything in the world is going down in relation to gold what do you call the trade where you sell paper and buy gold?

mkkby's picture

And how is it a trade when you have a 10% spread to get in and out, and it takes up to weeks to do so?

Belive me, I can see a rising trend just like anyone else.  But who wants the wide spread, the storage and security issues, and the time it takes to find and ship to a buyer?  It's terribly flawed.  And let's not forget the high cap gains tax.  And let's not forget TPTB will never allow it to become currency again.

Try stopping out on gold when everyone decides it's done.

Panache for the Crash's picture

So even if the gummint confinscates gold or somehow prevents you from buying more Au, you will never! ever! ever! get exposure via miners? That's what happen in the US back in the 30's.  People bought miners because they could not get physical.

 Oh, this time its different, you will always be permitted to buy gold.  You will always be permitted to sell your gold.  Oh yeah you can always sell your gold in Canada or Chile. 

For the most part you are right though - principles have little interest in shareholders.  They should be paying shareholders.    

mynhair's picture

Smelters aren't buying mine concentrate, for whatever reason.

JW n FL's picture

thats becuase the repugnants bought it all up!

Smiddywesson's picture

Oh I don't know, unlimited naked shorting and unlimited fiat to drive them down? 

Silver and mining stocks are encased in amber like a fly until the banks stop doing what they are doing, which is buying gold.  That's your answer.  They can hold down silver and miners, but they can't hold down gold BECAUSE THEY ARE THE BUYERS.  Silver will get its day, but not until the central banks make the switch to a new monetary standard.

stateside's picture

Actually the miner are priced assuming gold is at $700.  You gotta love the long gold, short the miners trade - or maybe not.



IQ 145's picture

You've been mislead into mining stocks by internet gurus. There never was any reason to buy any mining stock. Period. the rationale for it is that it will exhibit "beta", (look it up), versus the underlying. Careful statistical research shows this is simply not true. A mining stock, is a stock; it has all the risks and problems of all other stocks. If you wish to increase your exposure to precious metals buy them on margin; this is what real traders do and it is how real large profits are made. You can own Silver on Margin at several different depositories; or simply buy one Comex contract; but you will need a $50,000 account to support the contract. Also, you'll have to become realistic enough to ignore the "if it's not in your hand, you don't own it, crap"; but then stocks are merely certificates.

I Told YOU So's picture

I respectfully disagree.......gdx.....16.50 to 61.50  less then 2 years.........

Sun Tsu's picture

+100    If you own gold and miners, then learn the difference between physical metals and paper shares in super-cycles, troubles and war.  Management, geopolitical and regulatory risks are just insanely high in mining stocks and the dividends are paltry. Patience, and research the companies you follow until it is time.

Man Bear Pig's picture

If miners believed that gold was topping at $1200 and hedged in anticipation of a reversal, wouldn't they also have capped their profits? Could this explain it?

JW n FL's picture

Long Platinum since $1730's or 40's..


so much for hedging! LOL!!

SheepDog-One's picture

Only costs $5 to dig it out of the ground :D

Hey havent heard that in a long time around here, and those who used to say it are long gone in a cardboard box under a bridge by now, or the one who now sleeps in his Ferrari is gues, since his gbig gold shorts at $1,300 cant be doing very well. 

Anyway, welcome to the New World Order and have a nice weekend.

Smiddywesson's picture

Only costs $5 to dig it out of the ground :D

Yes SD1, but it costs one their life to dig it out of my ground.

JW n FL's picture

but can you eat the over burden? thats the real question? LOL!!

JW n FL's picture

I was watching Bloomberg Yesterday... they had Lehamn on.. who had nice things to say about gold.. but the Bloomberg Mouth Piece shut him down.. and said something to the effect of.. Gold Commericals are on every 30 seconds.. it was becuase Lehamn's Mother called him about Gold..

point being the Stock Junkies have to puch product to make sale(s).. to hit monthly, quarterly and so on sales numbers to earn bonus monies.. these guys have their entire lives invested in selling shit to someone.


The Fact that Tangible Items are moving and paper / 1's and 0's off in cbyer space are tanking (in retail / dumb money) is becuase dumb money aint so fucking dumb.


the shit is coming down ALL around U.S.! LOL!!

Fortunes Favor's picture

Stock Market Strategy & Precious Metals Outlook

Gold prices hit a new high of $1,877.88 this morning and all I hear on CNBC are the top callers and naysayers. It seems obvious to everyone Gold prices are way overpriced, “At least a $200 risk premium” says the fund manager who has been wrong on Gold all the way up but somehow now can pinpoint the exact amount of Gold price appreciation attributable to risk.

Smiddywesson's picture

If someone could point out to me how the central bankers can find enough money to become solvent without changing the measuring stick of wealth to something they already own, then I would admit there is some risk to the gold trade.  But when I see this as their only way out, I start to feel like Soros when he trapped the bank of England.  There is only one way out of their predicament, and they will take it.

jm's picture

Because as loans sour, banks have to hoard more cash or cash equivelents against the impairments.  It doesn't matter how many dollars are in existence if banks hoard them in suffieicnet quantity.

The dollar is the world's vehicle currency, so most of the world's debt is dollar denominated.  Thus in a crunch you need dollars.  When you don't need them they are floating around all over the place. 

It is not that gold is a bad idea at all.  But there are cheaper alternative precious metals.

Mad Cow's picture


The only risk I see in the future, would be a move to a "cashless" DIGITAL ONLY currency. If that happened, you're either in The Matrix, or you're underground. At that point, the "Masters of the Universe" would set the price of gold to whatever they choose. In that case, gold would appear to be a fairly useless barter item if you stick with the "Red Pill." Obviously this would be an endgame scenario.

AustriAnnie's picture

"gold would appear to be a fairly useless barter item"


Would it?  Seems to me there would be high value in something which allows you to obtain goods on the underground market.  There are countless examples of citizens holding items for which the punishment would be death, if caught, simply because those items are of high value in exchange (BECAUSE of their illegality, not in spite of it).   Even the elite members of society who are "in" with TPTB often opt into the underground market to get certain goods.  The underground market thrives in countries today, and government officials are often taking part in the scheme.  They work both sides, and they know the value of the "cash trade".  In a world of digital currency, there is still value in buying and selling unnoticed.  Whatever currency is used in those exchanges will be highly valued.  The man who is illegally selling food on the underground market will not be accepting the most widely controlled, monitored, and manipulated form of currency, digital currency.  He will be accepting something he can feel the weight of and bury under his back porch.  

Also, if the gov't has made holding gold illegal, chances are it will have also instituted some kind of controls on commodities/gas/food/etc and the trading thereof.  If you can't legally buy or sell an essential good, you better have gold to buy it illegally.

The GREATER the control over the above-ground currency, the GREATER the value of the underground currency.   Seems to me, anyway.  

Mad Cow's picture

I agree there are always cracks in any system, and no system lasts forever, but, being in a position where you rely on someone's sense of "value," and using gold as your only "currency," means that you aren't prepared as well as you should be.

I would say that self sufficiency should be the first goal one attempt to obtain if it's a hedge against a SHTF scenario, then stack the precious as a secondary, if the first is realized.

mkkby's picture

I respecfully disagree.  Buying black market goods and services will not support saving your wealth in gold.  If it is illegal to trade in gold, you may be able to get small items.  You will never be able to buy real estate, major appliances, cars, business equipment, etc.

Unless you can use it to fulfill contracts legally, it will be unlikely to retain it's value.  The number of people trying to trade gold for cigs would likely bring out a lot of supply.

It is possible that gold will back a currency again.  But it is much more likely an electronic format will be used. Anyway, enough speculating on the future.  Nobody knows.

AustriAnnie's picture

Thats funny, people buy vehicles with food stamps, and thats not exactly legal either.....If it has value, its tradeable.  If it keeps its value longer than manipulated currencies, its definitely tradeable.

Think of the savings the guy who sells the property to you makes if he puts one price on paper and takes some gold on the side. Legal? No. Does it happen? Everyday.  The problem is that most people have no idea how to deal in the grey areas, they swipe their credit card and go to the bank.  A large part of the world finances businesses and real estate purchases through informal channels/networks.  Indians and Chinese for example rely heavily on private loan systems.  Most of the world knows how to deal in underground transactions because thats the only way to get by in most places.  Wonder what a farmer would sell his farm for in Zimbabwe during the worst inflation ever?  Something formal?  Or something that feeds his family?

Also, just because gold is not legal in the U.S. does not mean its illegal everywhere else.  

mkkby's picture

Mad Cow is correct.  TPTB will never allow gold to be a currency again.  It would mean they'd lose control of their empire.  It would mean they wouldn't be able to pay for their wars and social services.  You can't believe the bankers rule the world, and believe gold will be a currency again.

SilverRhino's picture

Silver's finally moving out of it's trading range.   42.86 OMG about fucking time.   .... Of course I EXPECT some kind of massive raid or rule changes that will drive it to 40 in the next 24 hours. 

IQ 145's picture

The price chart shows it's very overbought. It could trade at $1675 again, two months from now, and still be in a bull market. It went a "little bit exponential", kinda like being a little bit pregnant, I guess, but that's what the price chart looks like.

gwar5's picture


For the Apocolypse, I'm really looking for something with smooth edges I can just swallow to get through border crossings.


Missiondweller's picture

Then I'd recommend the Maples over Philharmonics. The serrated edges are a bit tough going down.

gwar5's picture

Much tougher coming out too, and the diameter is a real stretch. 

SheepDog-One's picture

Gold suppositories? For years, I wore this uncomfortable chunk of metal....up my a POW camp...for you.

Pulp Fiction- The Watch - YouTube

gwar5's picture

The watch was good to 100 psi.

flattrader's picture

Precious gems travel well.

And then there's these smallish gold items-


gwar5's picture

Those 1 ouncers are packaged. The 100g ingots are still small enough for any safe passage.




ReactionToClosedMinds's picture

First ... 'Tyler D' must be a team of 3 people .... how do you/they read so quickly, fathom then post  ... so much/so good/so relevant ... no editor, no sound boards, etc.  Observe Orient Decide Act (OODA)

Can someone frame the divergence between miners & physical ..... I can frame 5-8 reasons for some divergence of magnitude ... but nothing like this ...

papaswamp's picture

The first rule about TD is you do not talk about TD.

The second rule about TD is you DO NOT talk about TD.

IQ 145's picture

Just consider this your education; you're not supposed to own any mining stocks. mining stocks are stocks; that's the basic problem. precious metal people own the precious; not stocks.

gwar5's picture

What the other guys said...

but supposedly, the miners are primarily depressed because they've hedged their future gold production and they're not getting this ride. has recent guests explaining the miners and their prospects for turnaround.