I have made a bet that Trump will win the Republican nomination for President

Update 2017.08.15: I’ve added an image of the webpage where I placed the bet, which obviously doesn’t perfectly reflect the way it looked when I wrote this post.

In 2012 I wrote a post in which I suggested betting against people who believed that the world was coming to an end. Unfortunately I didn’t know how to find such people.

I recently discovered that you can currently go onto betting sites and get ~3:1 odds on a bet that Trump will be the Republican nominee (so if he’s the nominee, you get $3; if he isn’t, you lose $1). I bet some money on PredictIt.org on December 16 (about a week ago) at 3:1 odds that he’d do it, not because I’m totally convinced that he will, but because: Continue reading “I have made a bet that Trump will win the Republican nomination for President”

Investment Idea: Bet Against Apocalypse Believers

“What’s the idea?”

Find people who genuinely believe the world will end in 2012 and enter into contracts with them in which you give them the cash-equivalent of a fraction of the value of their property now (February 2012) and you get all of their property on January 1, 2013.

“A 2012 apocalypse? Huh?”

The idea of a 2012 apocalypse has been hyped up by the news for the past year or two.  I remember hearing about it being based on the Mayan calendar, but I also remember hearing about Christians talking about it, so honestly I don’t know what the whole story is.  I’m honestly not even sure how many people genuinely believe in it and how much of it is media hype, but I do remember the hype around Y2K and I’m pretty sure a bunch of people thought that Y2K would be the end.

“Why would a hedge fund / individual want to do this?”

Well, it might be too-small and too-expensive an idea for a big hedge fund, but for a smaller group or individual investor it might be profitable.

To understand the idea you need to understand that one of the main ways that people make money in a capitalist system is by removing inefficiencies from the system.  So, for example, if the owner of a painting thinks that his painting is worth $100, and you know that that painting would be valued by someone else at $100,000, it is inefficient for the current owner to have the painting.  You can make money by removing this inefficiency, that is, by buying the painting from the first guy and selling it to the guy who values it more.

In the case of the 2012 apocalypse believers, it is inefficient (from their perspective) to have rights to things that they will not need; that is, it is inefficient for them to have the rights to their property from 2013 on forward.  And from your perspective, these apocalypse believers have a mistaken view of the world that is a source of inefficiency in the economy: if someone believes in Y2K and loads up on food and equipment to prepare for the end, and then the end doesn’t come, that food may spoil and the equipment may never be used, and thus all the effort that went into creating those supplies has been wasted.

The real source of the profit here is the discount you might be able to get on the value of the property you’d be buying: since you’d be making an unusual offer, and since there probably aren’t other buyers out there who are making offers like this, you might be able to get extremely favorable terms with all of these sellers.  Since they think the world is going to end before 2013 anyway, what difference does it make to them whether they get 100 cents on the dollar for the value of their home or only 50 cents?  Or only 25 cents?  Their time is limited, and it doesn’t seem worth spending a significant portion of it trying to get the best possible price.

“How are you going to get these people to enter into the contracts?”

This is where some salesmanship may be required.  One thought that I’ve had is that you could find one believer who is willing to deal with you and use that person to convince the rest of them.  He could say something like the following: “Hey, I’m preparing for the 2012 apocalypse myself, and in order to spread the word to as many people as possible I’ve sold the rights to my property after 2012 to some foolish non-believers.  I’m then using that money to purchase advertisements on billboards and on Google to try to save as many people as possible before it’s too late.”

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Investment Idea: CDS ETFs

“What should I have read to understand what you’re about to talk about?”

As far as I can tell, this idea is mainly based on three things: The Big Short by Michael Lewis (from which I learned how profitable CDS can be), Kyle Bass’s 2010/2011 AmeriCatalyst videos (from which I learned how profitable a bet against indebted countries could be), and my CFA Level 1 Alternative Investment textbook’s explanation of what ETFs are (from which I learned how useful ETFs can be).  Google them to find them.

“What’s the idea?”

Create an exchange-traded fund (ETF) that is completely invested in a certain credit-default swap (CDS).  Basically, it’ll be a way to let the little guys out there with not that much money place bets on whether certain countries/companies will default on their debt.

“ETF? CDS? Huh?”

An exchange-traded fund (ETF) is a fund that is bought and sold on a stock market like any other company.  ETFs make it easier to quickly buy and sell small pieces of things that would otherwise be difficult to buy and sell.  For example, the most popular ETFs nowadays allow people to buy and sell packages of stocks; there are S&P 500 ETFs, tech stock ETFs, etc.

A credit-default-swap (CDS) is basically a life-insurance policy on bonds sold by a particular company or country; it protects people in case the country/company is unable to pay back the bond.  CDS became famous after a bunch of hedge fund managers (the first being Michael Burry) used them in 2008 to make a killing off the subprime mortgage collapse, and for some unknown reason banks are still selling CDS at very low prices.  Warren Buffett has said that he would charge much, much higher prices for CDS.

“Why would a hedge fund want to do this?”

It’ll be a way for a hedge fund to profit from the large body of people out there who are nervous about the state of the world right now.  On 2012/01/30 the WSJ had an article that said you could pay $155,000 for a CDS on $10 million worth of Japanese government debt.  If I understand this stuff correctly, that’s like a bet where you lose $1.50 if you’re wrong and gain up to $100 if you’re right; or to use a more pertinent example (based on the dollar amounts individual investors typically trade), a bet where you lose $150 if you’re wrong and make up to $10,000 if you’re right.  I would bet that a LOT of small investors would want to get in on that bet if they had the chance, but the problem is that CDS are typically only negotiated between the big guys in the market (big banks and hedge funds with hundreds of millions of dollars under management).  So if you could buy CDS from a big bank at a low price and sell shares of that bet to smaller investors at a higher price, you could make a profit regardless of how the bet eventually turned out.

“Why are you so confident people would want shares of the ETF?”

Well…1) The Big Short was a very, very popular book, and CDS was the centerpiece of the entire thing.  2) In just 2-3 months after Kyle Bass recommended the stock of a particular mortgage insurance company (MTG) at AmeriCatalyst 2011, the value of the stock almost doubled, which suggests that a lot of people are paying attention to Bass’s ideas.  If word spread that people could get in on a Kyle-Bass-style CDS bet against Japan, I think it would have the potential to go viral.  The sheer novelty of the idea could make headlines.

“What’s the downside risk here?”

Well…one risk is that no one will buy shares in the ETF.  If that happened you’d be stuck with the CDS unless you could re-sell it.  But the CDS doesn’t seem to be such a bad bet; I spoke to one guy who works at a fund-of-funds who said that his fund would have invested with Kyle Bass if they knew that his Japan bet would pay off this year (his Japan bet is to buy CDS on Japanese gov debt).  Their (fund-of-funds’) problem was that they couldn’t afford to have their money sitting around for 3 years waiting for a big payoff, because the people who have invested with them follow the fund’s yearly returns and will pull their (investors’) money out if they (the investors) don’t see results every single year.  Re-selling the CDS via an ETF could solve their problem because they could make an immediate profit from arbitraging* the difference in price between what the banks are willing to sell at and what individual investors are willing to buy at.

“Would this even be allowed by the SEC?”

I’m honestly not sure.  My guess is that the big hurdle here would be the fact that only accredited investors are allowed to invest in hedge funds, and CDS is something that is typically done only by hedge funds.  On the other hand, though, since little guys are allowed to invest in mutual funds / pensions that invest in hedge funds, and little guys are allowed to invest in ETFs, it seems plausible to me that the ETF would be allowed if structured the right way.  And from the SEC’s perspective, this could actually be a better way of pricing CDS: one of the touted benefits of a futures exchange is its ability to help find more efficient prices for goods, and so if there are tons of little guys out there bidding up the price of CDS, regulators might not have to worry as much about making sure banks are shooting themselves in the foot by selling the stuff too cheap.  That’s a thought, anyway; I’m new to this stuff, so I could be way off here.


*when I say “arbitrage” I’m using it in the colloquial sense, not the strict sense of “riskless profit”.

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