Sunday, April 11, 2010

Panic Investing And Profiting From Disaster

Not long after Passover, it's nice to see the James Altucher in the WSJ attempting to help people profit from a nice list of several plagues.  I'm a fan of contemplating disaster.  Most friends think I spend too much time on the topic.  This piece stinks like rotting corpses after the death of the first born.

The first fundamental problem: Free insurance rarely exists.  Making money when something out of the ordinary happens, especially bad things, typically requires losing money when things don't go wrong.  Why?  I've written more about this here, but the basic idea follows because you want to insure against the vary same things others want to insure against, which means (a) you want someone else to hold risk you don't like and they probably don't like it either, and (b) your insurance requires your counter-party tie up capital waiting for the event. 

Second fundamental problem: He suggests public equity market hedges for all his risks.  Public equity markets, all prognostications aside, operate pretty darn efficiently.  This means two things: First, often equity prices reflect expected economic growth, in the broadest sense.  Second, equity prices reflect a risk premium, or how much investors will pay for a dollar of future earnings potential.  Neither of these factors really change in response to the ills of Altucher's world. Acute disasters don't matter in the long run.  Big, long run disaster expectations efficiently work their way into prices.

With those two warnings, let's look at his suggestions....

Hurricanes.  He says buy Campbell Soup and Hill-Rom Holdings, a hospital bed manufacturer.  Survey says: No.  Sure, people buy canned goods.  So, you get a short term inventory build in the household that gets worked off over the next six months.  When a retailer buys too much inventory, does that help the manufacturer?  No really.  One time event.  In a hurricane, how many hospital beds get destroyed?  Could it be a lot?  I guess.  A lot relative to the growth of demand for hospital beds around the world for a global manufacturer?  I don't see it.  You want hurricane insurance?  It's not free.  Go to the CME and buy some.


Clean water.  He wants you to buy pipes and treatment plant designers.  Good luck.  That;s the same dam (hah hah!) growth story as hospital beds.  Except, I'll venture to guess buying water treatment plant designers in fact reflect primarily emerging market growth.  You want water, buy water rights.  

Terrorism.  Again, Altucher points to x-ray and video sniffing technology.  Everybody and their brother already bought luggage x-ray equipment.  This play reflects increased demand as airports get built.  Growth story, not catastrophe response.  Terrorism insurance costs you a fortune.  (See my discussion of TRIA.)

Global Warming.  Not bad, suggesting uranium miners.  My personal favorite here has always been frozen wasteland in northern Canada.  Attractively priced, and my grandchildren can farm it when becomes the breadbasket of the 22nd century.

Hyperinflation.  He's lost his mind suggesting indexed equities.  Either that, or he doesn't understand what hyperinflation means.  Stocks potentially provide protection against moderate, more or less predictable inflation.  Unpredictable, out of control inflation means producers can forecast neither input prices, nor output prices.  Disaster.  Hyperinflation takes you full circle back to Campbell Soup...the cans, not the equity.

1 comment:

  1. Your northern Canada idea actually covers two of the cases. Global warming opening shipping channels has made that area much more interesting: the Northwest Passage, now that it's a real passage, is now officially called the "Canadian Internal Waters." You also get a great investment in water crises being that Canada sits on a generous chunk of the available freshwater in the world.

    ReplyDelete