I have no crystal ball with which to predict the Future, a confession that comes as a surprise to some journalists who interview me. Still less do I think I have the ability to out-predict markets. On every occasion when I've considered betting against a prediction market - most recently, betting against Barack Obama as President - I've been glad that I didn't. I admit that I was concerned in advance about the recent complexity crash, but then I've been concerned about it since 1994, which isn't very good market timing.
I say all this so that no one panics when I ask:
Suppose that the whole global economy goes the way of Japan (which, by the Nikkei 225, has now lost two decades).
Suppose the global economy is still in the Long Slump in 2039.
Most market participants seem to think this scenario is extremely implausible. Is there a simple way to bet on it at a very low price?
If most traders act as if this scenario has a probability of 1%, is there a simple bet, executable using an ordinary brokerage account, that pays off 100 to 1?
Why do I ask? Well... in general, it seems to me that other people are not pessimistic enough; they prefer not to stare overlong or overhard into the dark; and they attach too little probability to things operating in a mode outside their past experience.
But in this particular case, the question is motivated by my thinking, "Conditioning on the proposition that the Earth as we know it is still here in 2040, what might have happened during the preceding thirty years?"
There are many possible answers to this question, but one answer might take the form of significantly diminished investment in research and development, which in turn might result from a Long Slump.
So - given the way in which the question arises - I know nothing about this hypothetical Long Slump, except that it diminished investment in R&D in general, and computing hardware and computer science in particular.
The Long Slump might happen for roughly Japanese reasons. It might happen because the global financial sector stays screwed up forever. It might happen due to a gentle version of Peak Oil (a total crash would require a rather different "investment strategy"). It might happen due to deglobalization. Given the way in which the question arises, the only thing I want to assume is global stagnation for thirty years, saying nothing burdensome about the particular causes.
What would be the most efficient way to bet on that, requiring the least initial investment for the highest and earliest payoff under the broadest Slump conditions?
There is no magic bullet now, more than any other time. If there is, people all jump on it, and it stops becoming a magic bullet. Gold is the perfect example: it's being pumped up so high by speculation and 'safety' investors that it's intrinsic worth is no longer relevant - it's in a bubble.
I believe that the effect of this downturn on technology research will be tempered somewhat by this fact: if 'safe' investments are more risky, more speculative endeavours become >relatively< less risky. Furthermore, human resources become more plentiful (half of silicon valley will be sitting around with nothing to do, and willing to work for cheap). Of course, this put much of dent into the problem - no money to invest means no money to invest, but some calculations of comparative ROIs and risk would be useful to bring up in any investment pitch these days :>
I'm also not convinced that we will have a Japan style downturn. Why? Certainly not because anyone is doing anything to stop it, but because emergent technologies have such potential for wealth creation in the medium term. For instance (just one instance from many): how long until we get GM biofuels online? 5 years? Certainly less than ten.
In regards to investment, there are several strategies that might make sense that have been suggested to me. Here are a couple, off the top of my head:
Half of these companies will go to zero. The other half (or less, in all likelihood) will, just by the nature of surviving the downturn, pick up other business and increase in value and make up the loss. This worked well during the dot-com crash, as long as you did a good job of identifying the companies that would survive.
Real Estate:
At some point RE will become attractive again: quite likely obscenely attractive - so attractive that no one will go near it. You would need to be prepared to sit on them for a good long while though, and be very careful where you buy - entire cities are in danger of going down the tubes, which will postpone their real estate recovery into post-singularity era, whatever millennia that happens to occur in.
Of course, neither of these are investment strategies for before the slow down occurs. At this point, if you aren't trading, you are best keeping your money out of the market. Buy and hold is dead.
Naturally, this is just my two cents, and is opinion, not investment advice.
Ouch. The optimism in this 6 year old post hurts.
2009, January 22: Above comment made
2009, July 10: GM files for chapter 11 bankruptcy. It received a $51 Billion government bailout.
2010: GM has ~6 million "Flexible-Fuel" vehicles on the road, which can run on normal gas or E85 Ethenol.
I guess if the Flex Fuel was what Johnathan meant by "GM biofuels", then they came about much quicker than expected. If not, then it's been 5 years and we haven't seen m... (read more)