TMM were minding their own business yesterday afternoon trying to block out all the noise coming in through their screens and were diverting themselves by debating the strangest of indices that they knew or have used, having just been watching the Rajasthan Onion index for clues to rising Indian inflation (true). Of course the Columbian Kidnap index was cited but that ticker died so its marvelous correlation with the Columbian Peso stopped (also true).
Next there was the Icelandic Fish Catch index which in the early '90s was proven to correlate to USD/DEM better than oil prices (spurious yet amusing) and there were the Danube and Rhine water levels, invaluable to European bargees yet somehow superfluous to the rest of us then employed in the Bond and FX markets.
The mention of water levels flicked the conversation back to weather and that greatest of weather indices, the Pacific Southern Oscillation (relating to El Nino/Nina), which we watch in relation to soft commodity markets. Meanwhile we were still discussing Asset Class attribution, Bitcoin ETFs and our perennial bugbear- Sovereign CDS and its use in tail risk hedging, when suddenly an idea dawned.
Sovereign CDS is bought in many cases not because it is expected to pay out, but as a hedge for price moves in underlying assets. As risk goes up of default (however tiny) the asset price falls but CDS price goes up as more buy the hedge (even if it isn't a hedge). But we were talking about climate change, El Nino and El Nina's, so we wondered what the tail risk hedge should be for the equivalent of global weather default or basically massive global warming. And then it hit us -
We buy up cheap tracts of the arid and useless Atacama Desert in Chile in the belief that if weather patterns change dramatically enough rain will once again fall on what is some of the most fertile soil on earth just waiting for a dousing to turn it, in the space of a few years, into highly productive farm land.
Genius! But why stop there? We then package it up as an ETF and sell it as a tail hedge against global warming, performing the same purpose as CDS does against underlying weather dependent assets. Also like CDS, the chances of ever having to deliver are tiny. It's just a hedge.
Of course once we create this ETF it should be easy to persuade investors that they only need to own a tiny amount in their hedge book, but as they start to buy we can then brand the product as a new "Asset Class", its price seemingly not correlating much to anything other than just going up (only buyers at this point remember). Then as soon as it is accepted as an asset class every benchmarked fund will have to own a piece of it too just because his peers do.
At this point someone notices that the price of this ETF is a one way street and it gets picked up by momentum followers and ultimately Jo Public investor who applies a gold like basic "end of the world" logic to it and scuttles off to talk it up on "Hero Zedge".
As the price really takes off another feedback loop kicks in when Robert Peston and other media reporters notice that the price of the Atacama ETFs are flying. Knowing that they are sold as a hedge against global warming they deduce, applying a flawed logic often applied to Sovereign CDS, that price must represent true probability of outcome and therefore the chances of a global warming cataclysm has rocketed in the eyes of the "experts". Such reporting (together with the liberal use of the word "crisis") will most likely spur the rest of the retail population to buy what's left of the product at an exceedingly high price.
Voila! Job done, issue sold. Who needs the Winklevoss brothers?
So TMM are launching their Atacama ETF with the following benefits
• Hedge against global warming.
• Hedge against authoritarian government (You won’t have to worry about the NSA in Chile)
• Hedge against inflation (Real Estate is always a hedge for food and energy inflation, right?)
• Limited Supply (well, there IS a limited amount of desert, isn’t there?)
• Cheap (if you are first in)
• No pesky management fees (except for taxes and our ‘administrative’ charge)
• Comes with animals and plants. (well, "will" if it rains).
• Helps save endangered desert species (until it does rain)
• Free option that there may be gold or oil under it.
• No need to rehouse indigenous occupants as there aren't any.
• Massive opportunity to build solar energy center while you wait.
• Not correlated to equities or bonds.
• It’s a REAL asset in its own REAL asset class that only correlates to Ponzi schemes and you don't own any of them do you?
What could possibly go wrong ?