Okay, I’ll bite on Fen’s comment in my previous post on opinion polls and climate change.
Suppose that you wanted, at the retail investor level, the cheapest and most efficient ways to go short on climate change policies, carbon regimes, whatever you think is relevant. (In general, I’m a believer in sort-of efficient markets, despite all … however, in matters political, I don’t think they are necessarily efficient even in the sense of predicting and pricing in political actions and policy. I think there are exploitable inefficiencies arising from politicized markets. Correct or not, go with the assumption.) So, what’s your short strategy? Not limited to stocks – tell me about bonds and credit instruments if you like, options and other strategies. Or, for that matter, is it ultimately unshortable because it is driven, or eventually will be driven, by taxes across the board?
However, tell me how you would do it at the level of the small retail middle class investor, and in addition, what hedges you would include even in a generally short strategy? Or is this kind of political risk – regulatory arbitrage bet too risky for small retail investors? Get thee to thy index funds, etc.?
(I understand, by the way, if you think the question merely a provocation. It is. But not completely. Speaking not politically, but as corporate finance professor, I would ordinarily advise someone that if you want to ensure that you truly understand your own financing strategy – at least if it involves public companies and instruments – you should be able to state clearly how you would go about shorting it and hedging it, and what the attendant costs and risks would be.)
Mark N. says:
I think it depends on how exactly you think policies will fail.
For example, you could buy coal stocks, or an ETF that invests in coal or coal companies, if you think that their price currently prices in a higher expected future cost of carbon regulation/taxation/capping/etc. than you think will actually materialize.
You could short alternative-fuel stocks or ETFs, or buy put options on them (the latter is a bit easier for retail investors), if you think they have priced into them a premium based on an expectation that carbon-based fuels will be suppressed, thereby making alternative fuels less valuable.
Nearly all options have you betting on multiple things simultaneously, though. For example, alternative-energy producers could still make lots of money even if a comprehensive climate treaty fails to pass, through the cumulative effects of federal subsidies and state mandates that a certain % of their power come from alternative sources. Coal companies are still exposed to a variety of regulatory risks, some of which might increase if a climate-change treaty fails and forces politicians to come up with a plan B (e.g. heightened regulation of coal power-plant emissions, or special excise taxes on coal producers).
December 18, 2009, 6:54 pmKenneth Anderson says:
Mark N: yes, the simultaneous multiple things in this situation exacerbates the risk a lot.
December 18, 2009, 7:19 pmElliot says:
Great question, but a bit confusing. I’m not sure what Fen suggested. Could you define exactly what you mean by shorting climate change policy?
Investing in expectation of:
1. Proposed climate policies failing to be enacted?
2. Proposed climate policies will be enacted but will fail?
3. Proposed climate policies will will indeed be implememted and enforced as planned.
December 18, 2009, 8:07 pmPeteP says:
The next time Obama heads to the nordic region for ‘a big deal’, go short, big time :-)
December 18, 2009, 8:14 pmBrett Bellmore says:
The problem is, most of the rational investments assuming global warming won’t happen are financially perilous due to regulatory risk. And global warming is so slow that the time horizon is quite long; You’d be betting that no unrelated change in the intervening decades would render your otherwise rational investment a loss.
December 18, 2009, 8:16 pmBrett Bellmore says:
4. Feared climate change won’t happen after all.
December 18, 2009, 8:18 pmCrunchy Frog says:
I can’t speak for Fen (I mean, who could, really?) but my guess would be number 1. Cap-and-Tax is totally dead for this year in the Senate, and bringing it up in an election year would be electoral suicide for the Dems. Even if there is some Kyoto-ish abomination coming out of Copenhagen, there is no way in hell that it would ever be ratified.
Green tech is going to go the same route as the dot-coms, and very soon. The time to dump it is now.
I don’t play commodities (too much regulatory uncertainty involved), but if I did I would have to look long and hard at natural gas. Coal is cheap and abundant, but messy, and about as un-PC as it gets. NG is not quite as cheap, but very abundant, and the cleanest thing around that still involves combustion. With the push for electric-this and electric-that, all that generating capacity is going to have to come from somewhere, and NG-powered plants will be it.
December 18, 2009, 8:28 pmSkyler says:
As a retail investor, if the global warming crap ever becomes law then I would find it very important to invest in some metric and some English.
As in millimeters and inches, most especially 7.62mm, 5.56mm, 9mm, .45cal, 30-30cal, etc.
December 18, 2009, 9:04 pmMikee says:
When I was day trading the first six months of the year, I would short whatever stock I was looking at whenever President Obama started speaking live on CNBC. It worked. Apparently trading stopped to some degree when he was talking, allowing sellers to drive stock prices down. That the market was declining until mid-March helped.
After about May or so, the attention paid to his pronouncements declined to the point that the “Obama Effect” stopped being so reliable.
December 18, 2009, 9:26 pmShelby says:
It seems the real question here is how to invest in the (expected) failure of climate-change-driven policies to actually materialize. My first thought is to look at which energy industries and/or companies are most leveraged on such policies — for example, it might be all-electric cars, or tidal energy, or industrial-scale solar. Whatever has placed its biggest bets on the occurrence of such policies.
Second, I’d be inclined to look at the international politics; which countries and/or transnationals benefit most if such policies do not eventuate? Maybe Brazil and its deep-sea petro bet?
December 18, 2009, 9:34 pmbyomtov says:
That the market was declining until mid-March helped.
No doubt.
December 18, 2009, 9:39 pmSimon Kenton says:
US Treasuries are like a 3rd order derivative of the results of all manner of failed and failing policies. Check out TBT.
What I’d really like to short is Japan. Their debt as a percentage of GDP is even greater than ours, hence I think their miseries will come due a little sooner than ours.
December 18, 2009, 9:40 pmA scientist says:
Do you have the honesty and courage to elaborate on your too clever by half threat?
Or do you merely anticipate a major comeback in wildlife population for hunting?
December 18, 2009, 9:43 pmMark N. says:
I agree natural gas will probably get more usage, but I’m not sure it’s a sure-fire bet as an investor, because the amount of supply is still pretty unknown, and could increase enough to cause gluts. Prices are down hugely this year in part because of large finds. In the longer term, an increase in LNG volume will cause natural gas to be a more globalized commodity, which could further decrease prices by bringing gas from areas that currently have local oversupply (like the middle east) into the global market.
December 18, 2009, 9:52 pmSkyler says:
Scientist, no nation has ever gotten out of debt like this without there being a major war or catastrophic economic collapse. I don’t imagine we’re going to be any different if in addition we also create more burdens like these.
Yes, I anticipate needing to hunt wildlife, too.
December 18, 2009, 10:14 pmMark N. says:
What about Ireland, which went from debt of 109% GDP in 1987, to around 30% today? Or Denmark, which reduced its debt from 80% of GDP in 1993 to 11% today?
December 18, 2009, 10:36 pmElCid says:
Shorting the possibility that emissions reductions will be enacted– that’s fair enough. But shorting this (from Brett Bellmore):
is crazy given the vast scientific consensus regarding global warming. You might as well play the lottery, the odds aren’t much worse. But no risk, no reward, right? My suggestion: buy lots of beachfront property on low-lying tropical atolls.
December 18, 2009, 10:52 pmA scientist says:
U.S. got out of a larger debt AFTER WW2 –from ~110% of GDP in 1945 to ~50% in 2008.
http://en.wikipedia.org/wiki/United_States_public_debt
December 18, 2009, 11:01 pmShorting Climate Change? | Liberal Whoppers says:
[...] the original here: Shorting Climate Change? Share this [...]
December 18, 2009, 11:11 pmKenneth Anderson says:
I’ve deliberately left the terms of reference here vague, because I’m curious what people would say across several areas … but looking at the comments, I think I’m less interested in the grand Climate Change questions, despite the post title, and more the kinds of specific things that commenters like Mark N mention, that are things like shorting emission targets that don’t get met, etc., or the natural gas comment. Someone mentioned a Treasury instrument – curious whether there are other credit market strategies. Also, dumb question, but the cap and trade regimes in Europe, are there ways for individuals to make bets, even side bets off the formal market, on them? And am I right in saying that nuclear is pretty much a long bet on this question? The narrower questions are more interesting, rather than AGW as such.
December 18, 2009, 11:26 pmPatrick S says:
Domestic natural gas supply is driven to some extent by tax policies. The accelerated deduction for drilling costs is a subsidy that is probably getting axed sometime soon. That’s bad for the drillers but good for investors in existing wells and, all things being equal, is bullish for NG. The alternative fuel start ups can’t effectively be shorted and even if they’re all going to zero, the DOE has a lot of cash left to pump them and the terms they’re giving amount to a gift so it would probably be too soon. Same with the electric car companies like Fisker (Biden’s favorite). I think Kleiner Perkins et al and Goldman et al have pegged alternatives as the next bubble and have convinced the DOE to prime the pump.
December 18, 2009, 11:56 pmA scientist says:
Why not buy up beach front real estate on low-lying South Pacific islands
December 18, 2009, 11:56 pm(http://www.countercurrents.org/cc-marks271006.htm)?
Patrick S says:
In re to nuclear, the best you could do is get long a utility that’s heavy into nuke (maybe hedge it by getting short the sector, making it a purer bet) but even then it’s only a partial bet and the reality of nuclear energy is it survives on subsidies (like more and more of our economy) so your at the mercy of the fedgov.
December 19, 2009, 12:28 amPatrick S says:
Actually, maybe this is partly why Warren Buffett bought Burlington. They are heavily weighted in hauling ags and cleanish coal. If AGW alarmism dies down that should be good for growth in China and India so we export more corn and coal from west coast ports and the trains come back loaded with Chinese toys for Christmas. God Bless everyone!
December 19, 2009, 12:36 amJames N. Gibson says:
Patrick has it partly right, the issue is coal burning and its distribution. As Jim Cramer noted over a year ago Clean-coal is becoming more and more the other fraud in the global warming saga. A japanese firm has put together a pilot plant to extract Carbon from CO2 produced (they just have not come up with away to permanently sequester the carbon. An American test plant involving extensive modifications now can sequester 3% of its generated CO2. The testing of the facility will determine the cost of increasing the extraction rate and whether the sequestration method will work long term.
For the next 10 years the global warming types will be pushing the implementation of these changes to all coal plants regardless of how much Carbon is captured and the cost that will be transmitted to the power plant customers. Then, after 10 years, if the concept fails, or Global warming is proven to have been over rated, the plants will simply deactivate the new systems and operate without. Any new plants built over the next ten years will have the new systems automatically in their designs, but they too can have them deactivated. What won’t happen is that the plant will be abandoned, not after all the cost of building it.
So in truth I would expect a Copenhagen agreement to push coal mining, transportation, and burning in the US with the additional cost of the sequestration systems. Then after its all found to be a big miss-understanding, the add on systems will be cut off and we’ll just learn that we have more coal burning plants in the United States.
Oh, and as for NG (Natural gas), remember the Carter era controls on NG production and drilling. He wanted it for fertilizer production to help with food production. I expect a similar control to be pushed to stimulate grain production both to feed those people’s displaced by “Global Warming” and the grow corn for ethanol fuel.
December 19, 2009, 1:17 amSteven Den Beste says:
If I really wanted to invest real money in the way you say, I’d be playing the Iowa Electronic Market or some equivalent futures market that permits gambling (for that’s what it is) on political outcomes.
December 19, 2009, 2:23 amPersonFromPorlock says:
So, are we talking about mere physics here, or are we talking about reality, i.e., which companies or industries own which politicians? The principal ingredient in ethanol, for instance, is famously brewed in Washington.
If mere physics is enough, I’d say that biodiesel and nuclear are the most likely future sources, respectively, for point-of-use and remotely-generated energy. There are a lot of contingencies (politics, competition from oil, development of fusion vs. fission reactors) but long term, those are the technologies.
Short term, though, who-owns-who is probably the way to go.
December 19, 2009, 7:16 amShvering Timbers says:
Trains could be a win either way with respect to carbon emissions: if CO2 isn’t heavily taxed or regulated, the train companies have a nice business hauling coal. If it is, trains about about an order of magnitude more efficient than trucks (in terms of tons of freight moved per unit of fuel) and get a carbon tax advantage.
December 19, 2009, 8:14 ambyomtov says:
Scientist, no nation has ever gotten out of debt like this without there being a major war or catastrophic economic collapse.
I can think of one.
US debt at the end of WWII was higher as a % of GDP (around 120%) than it is today.
December 19, 2009, 10:56 amRogervzv says:
General Electric is supporting the Leftist agenda and hopes to profit by Government imposition of Global Warming policies. I dumped my GE in favor of tech stocks and have done very well by doing so.
December 19, 2009, 11:21 amA scientist says:
Pardon for posting my comment before reading yours.
December 19, 2009, 12:09 pmElliot says:
Mini nuclear plants might have a promising future outside the US.
December 19, 2009, 12:12 pmJDS13 says:
Sell
December 19, 2009, 12:32 pmindulgencescarbon offsets.Ezra says:
You can speculate here, but you can’t hedge. Too many variables, too many permutations, too little information on interactions and outcomes. As for speculation, you really need a view of what regulations will come (because some will), and GDP, alternative sources, subsidies, etc. It’s complicated, but some will get this bet right.
Personally, I’d bet on big government partner companies like GE in a corporatist climate such as we have now. But that’s a political comment, not a market one.
December 19, 2009, 12:57 pmJohn Skookum says:
That’s not something to stake your life on. Our ancestors, who numbered a small fraction of our current population, hunted most North American fauna nearly to extinction a hundred years ago with black-powder rifles. If there is a real societal breakdown and it becomes necessary for large numbers of people to hunt or starve, every game animal within our borders will be dead in three months.
December 19, 2009, 12:57 pmJohn Skookum says:
We also had a robust manufacturing sector and an export market unchallenged by Europe, Japan, or China. Things are WAY different this time. We are doomed. It was fun while it lasted.
December 19, 2009, 1:00 pmlgm says:
Seeing far into the future: Obama and the rest of the world somehow will reduce greenhouse gas emissions to a level that does not cause massive climate change. When the massive climate change fails to materialize, VC Republicans will use the fact that climate change did not happen to belittle climate change once again. It will be Ozone, LA smog, “I didn’t wear my seat belt and didn’t die” all over again.
December 19, 2009, 1:26 pmDan Pangburn says:
All average global temperatures since 1895 are predicted by a simple model. There was no need to consider change to the level of CO2 or any other greenhouse gas.
The model, with an eye-opening graph, is presented in the October 16 pdf at http://climaterealists.com/index.php?tid=145&linkbox=true.
This model predicted the ongoing temperature decline trend. None of the 20 or so models that the IPCC uses do.
December 19, 2009, 2:40 pmA scientist says:
We also had top marginal income tax rate of 94%. Now it is 35%. Things are WAY different this time. We are doomed.
http://www.ntu.org/main/page.php?PageID=19
December 19, 2009, 3:07 pmD.D. Driver says:
The reason the U.S. was at 120% after WWII was because of WWII. But here’s the rub which you somehow didn’t consider: after WWII the US no longer had to fund WWII so it could divert its resources to paying down the debt!
Query: what are we going to stop paying for in order to pay down today’s debt? ***crickets chirping***
December 19, 2009, 5:28 pmRyan Waxx says:
Oh, you mean sort of how like taking out terrorist havens allows democrats to pretend there wasn’t any threat that Judge Judy couldn’t handle in the first place?
Here’s my predictions of what’s going to happen:
1. Because the co2 targets are just plain stupidly, irrationally, unachievably low… they won’t be achieved. Not by the U.S., and certainly not by China or any other major industrialized country.
2. Massive climate change will fail to happen despite not meeting the minimums the “the science” claims we need to meet.
3. With 20/900 hindsight, history will note that Obama went to a few meetings and made a few promises, note that the rate of growth (not the total amount, merely the rate of growth) of emissions was reduced, and conclude that he saved the planet. The minimums that “the science” claims we need to meet today will fall down the memory hole and never surface again.
4. The fact that China totally ignored the restrictions, surpassed America’s emission levels, and kept the total worldwide emissions way above what “the science” claims would send us into irretricable freefall… will also be officially forgotten.
5. “The science” will be vindicated, despite having predicted nothing correctly, and those munching caviar in Copenhagen will be lauded in the history books despite having achieved nothing. And mankind will have learned nothing… just in time for the next natural climate change (the inevitable cooling) to be taken advantage of by the same kind of statist scum.
6. I doubt they’ll even have to rewrite the papers… just replace the +’s with -’s. Who’s going to notice? The press? Don’t make me laugh.
December 19, 2009, 6:32 pmA scientist says:
http://www.treasury.gov/education/fact-sheets/taxes/ustax.shtml
There are two sides to this ledger, you know.
December 19, 2009, 7:59 pmDan Pangburn says:
Ryan Waxx,
December 20, 2009, 10:13 amI agree with your predictions. I think that it will be many years, say a generation or two, before the perceived integrity of science is restored.
byomtov says:
Funny, Skyler makes a statement of fact which is easily shown to be badly incorrect and we suddenly get all these modifications and explanations and so on.
after WWII the US no longer had to fund WWII so it could divert its resources to paying down the debt!..
In the years after WWII we hardly ever ran a surplus. We didn’t divert resources to paying down the debt. It declined as a % of GDP owing to GDP growth.
December 20, 2009, 7:01 pmSG says:
In the years after WWII we hardly ever ran a surplus. We didn’t divert resources to paying down the debt. It declined as a % of GDP owing to GDP growth.
You’re misrepresenting what was said. Eyeballing from this graph, it was ~1960 before federal expenditures matched what they were during WWII.
Which doesn’t invalidate your statement, but the fact is that expenditures declined AND GDP grew. If expenditures kept pace with GDP growth, the debt as a % of GDP would not have declined.
So the question remains, what spending are we going to cut in order to bring the budget into balance?
December 20, 2009, 10:25 pm