If you could know one asset price twenty years out

by on February 8, 2016 at 1:11 am in Economics, Philosophy, Uncategorized | Permalink

Dennis Shiraev emails me:

You are an investor with $10 million planning to cash out in 20 years. A genie appears and offers to send you the price of one but only one asset 20 years from now to inform your investment decisions (a stock, currency pair, commodity, equity index, etc.). What do you want to know? The genie also gives you 20 year cumulative inflation (or exchange rate change for non USD assets) so you won’t need to worry about price/value disentangling.

I said the price of Bitcoin but also considered the IBOVESPA or Shanghai composite index prices.

This isn’t as simple as it might seem at first.  You might look for the most volatile price among the liquid assets whose trading you can access.  But knowing the price only twenty years out then tells you little about what is happening in the meantime.  Which price twenty years out gives you the most information about the global path of prices along the way?  That may suggest looking for a price with some persistence, and which contains lots of information about other prices too.

For purposes of tractability, let’s assume that prices are not rescaled in the meantime, through say major changes in currency names or index definitions, and that knowing the future price of a variable is in some way commensurable with the current understanding of that same variable.

Then I would opt for the Shanghai composite.  I don’t see Bitcoin prices as correlated with enough other facts about the future state of the world.  Plus, if it turned out that price would fall to zero or undefined, you might find it hard to short significant quantities of Bitcoin in the meantime.

1 Alex Godofsky February 8, 2016 at 1:34 am

I think oil would tell you a bunch.

2 Londenio February 8, 2016 at 1:42 am

Recent price movements have showed us that the oil price contains less information about other assets than we previously thought.

3 HL February 8, 2016 at 10:26 am

What would the price of oil in 2016 tell someone in 1996 about the years in between?

4 Arthur Pigou February 8, 2016 at 11:00 am

That oil is still a major energy source. That we have not significantly descaled our use of fossil fuels.

You would miss the commodity supercycle of the late 90s-late 00s, but you’d be able to predict the cratering that came after.

5 Chris February 8, 2016 at 11:05 am

Unless you are in a time like right now where oil is $30 a barrel, that might give someone the false impression that we did indeed increase our use of renewable energy and slow down our demand of oil, which is in fact false.

6 Londenio February 8, 2016 at 1:53 am

Just thinking about equities, GOOG would an interesting data point.

7 Alain February 8, 2016 at 2:18 am

One company bet, eh? You are truly a gambler.

Well if you are going to gamble, might as well gamble on a company like Alphabet (AlphaBet?) which is (1) close to the largest company in the world by market cap and (2) is making a number of very large bets.

I would go with the Shanghai composite, but if I wanted to swing for the fences I would go with Baidu.

8 Alain February 8, 2016 at 2:19 am

I suppose if I really wanted to go for broke I would consider: Mobileye.

9 londenio February 8, 2016 at 4:35 am

I did not mean that I would put the $10m in Google/ Alphabet. I just would like to know whether they own the universe post singularity or they are some kind of myspace. I would probably invest in an index of some kind if the latter us true.

10 Damien February 8, 2016 at 12:15 pm

It’s not really a gamble if you know the end price, right? I mean assuming you don’t use leverage that would bust you on fluctuations.

I like GOOG as an investment but I wouldn’t use them for this exercise because of their Alphabet move, which signals that they will likely be spinning off successful businesses and keeping Google as the pure search play. So, the 20 year price may not indicate a lot of successful divestitures that occur in the meantime.

I’d be more likely to look at Apple (unlikely to divest), but I think there must be much better answers overall. Even the price of gold might be better.

One important aspect I haven’t figured out yet is what kind of price allows you to make a series of highly informed bets versus a single guaranteed bet.

11 Asher February 8, 2016 at 1:58 am

How about something with extremely thick markets (futures, variety of options, shorts etc.) so that you could be well positioned make a highly leveraged short term bet 19+ years out. Oil is one example but there are plenty of others.

In the meantime you can sit on the money.

12 8 February 8, 2016 at 8:40 am

This. Your best bet is to avoid capital losses and make a large leveraged bet with 100% certainty.

Other than that, I would ask for the price of something like EURUSD, and see if the genie says: the euro does not exist. The New Dollar exchange rate with current dollars is $150,765….

13 Shane M February 8, 2016 at 2:22 am

$10 million is a lot to start with – enough to live very comfortably if invested conservatively – so I guess my first observation is that I have more than I need and there’s no reason to risk that unnecessarily. Buffett said something along the lines of “never risk something you have for something you don’t need.” (I think he was speaking of a former business partner who got wiped out because he got too leveraged during a major drawdown and couldn’t hold out for an ultimate recovery.) So first line of thinking is don’t get too greedy. In that case, knowing something diversified like the MSCI might be a good thing to know so you could remove much of the risk of your financial plan. If that index is down or has performed poorly in 20 yrs, well, you know something very bad has likely happened on the planet and could plan accordingly.

If I was wanting to make a lot of money at the 20 year mark, I guess I’d try to pick a highly volatile commodity that is very likely to be in demand in 20 yrs, and try to lever up with options on commodity futures at that point in time.

14 A Definite Beta Guy February 8, 2016 at 9:32 am

“So first line of thinking is don’t get too greedy.” -hedge, hedge, hedge, always hedge!

15 Shane M February 8, 2016 at 2:03 pm

The nature of the question makes me think about how I could maximize returns, but knowing myself, if I had $10mil, I’d likely be concerned with minimizing downside. Knowing the MSCI level in 20 yrs would help me know with fairly high confidence if something very bad is on the way.

16 RohanV February 8, 2016 at 2:51 am

Is there any way to make money of the exactness of the genie’s answer? For example, placing a wager with a betting firm that the price on day X will be Y? They might offer you significantly higher odds since guessing correctly is near impossible 20 years out.

17 Pat Sullivan February 8, 2016 at 9:34 am

Yes. You would want the day of reckoning to coincide with an options expiration and, with any luck, you pick a volatile asset (imagine oil today). Knowing the expiration price of the underlying, you build a long butterfly position with your short strike as close to the genie’s answer as possible. Basically what the London banks did for years in the Eurodollar options market when they controlled the survey of LIBOR.

18 Axa February 8, 2016 at 3:49 am

Commodities index. The historical trend is to go down since automation makes cheaper agriculture and mining. If commodities are much higher or lower than today something went wrong during those 20 years.

19 tjamesjones February 8, 2016 at 3:53 am

S&P 500.

20 cheesetrader February 8, 2016 at 11:39 am

This would be my choice – the SPY – gives me a huge amount of flexibility in the pure index as well as trading major components.

21 jorgensen February 8, 2016 at 12:37 pm

My choices would be:
1) S&P 500 or
2) the average price in the United States of an on demand kilowatt hour of electricity or
3) a pound of copper.

22 Oli5679 February 8, 2016 at 4:07 am

If you want to make money by directly trading the asset, an individual stock is more valuable due to it’s greater volatility. If you know for sure that Linkediin is going to 0 or 20 x current price, piling in on certain options lets you pront money

23 JWatts February 8, 2016 at 8:22 pm

The problem with that plan is what if the future answer is 2x the current price. You’ve wasted your wish if the answer isn’t an extreme if you only go with a singular asset.

24 daguix February 8, 2016 at 4:42 am

You want something very liquid, very cheap to short (eg with a large future market), trading in a market that will never shut down and volatile.
You may come up with better strategies like buying and selling each time it crosses the future 20-year price. You end up picking an equity index. Then you chose either the best one or the most promising one (so S&P500 of Shanghai). The risk in the Shanghai index is that some sort of Chinese NASDAQ gets created in the meanwhile and you end up with an overweight of underperforming SOEs and miss the call.

25 carlolspln February 8, 2016 at 5:26 am
26 prior_test February 8, 2016 at 5:35 am

Ah, a solid climate change barometer, with a good view of Japan’s future thrown in.

Clever.

27 Axa February 8, 2016 at 6:14 am

I have no historical context of people paying high prices for coffee. I understand your reasoning, people pay a premium for coffee sold with “altitudes” and lots of “onlys”. Said people, can pay the premium for being prosperous. Japan is 80% of market today, thus if they price go down it may mean that Japan industry sunk by 2036……..but it also can mean that people in Japan found a new fad drink. Also, if this AOC coffee sale are diversified around the world, the price may stay high even if Japan sinks.

28 prior_test February 8, 2016 at 9:19 am

‘but it also can mean that people in Japan found a new fad drink’

Sure – but probably not a high priced coffee. In other words, Blue Mountain has pretty much always been the world’s most expensive coffee (certainly during my life time), but as it is right now, that price is clearly being supported by huge Japanese demand. Obviously, the price can either rise or fall – but rising would tend to mean that some other rich industrial nation would pay more for Blue Mountain coffee than Japan, or that Japanese demand had remained at least a factor over that 20 years. (And Blue Mountain is very good coffee, to be honest.)

Falling would mean that Japanese demand had likely decreased significantly, and was not replaced by another rich nation’s demand.

By some measures, another Japanese fad drink is whisky – https://en.wikipedia.org/wiki/Japanese_whisky

The Japanese tend to have strange tastes even in their devotion to fads.

29 Michael Savage February 8, 2016 at 5:26 am

I think there’s too much uncertainty over a twenty year period even to know what will give you the most information. Shanghai might appear to have boomed, but actually the US crashed and Shanghai did less well than almost all other markets. It’s hard to leverage or trade on knowledge of price in 20 years, because you don’t know intermediate volatility, collateral calls, regulatory or tax changes or counterparty risk – and anyway, 20 year futures markets are illiquid for most assets. I’d go for the price of an asset that’s easily invested – not a physical commodity or index. Something that might fall to zero, but might boom. I’m too sceptical to choose Bitcoin, but maybe the price of a major tech stock like Google or Facebook. If it’s zero you could punt by shorting it (but when?). If it seems high, you can invest now but still get out if it becomes clear it’s just risen in a rising market with better options, or if tax or regulatory changes make it uneconomic to hold. I think practicalities of how to invest over the very long term are quite a material consideration.

30 Damien February 8, 2016 at 12:21 pm

Right, maybe I’m too conservative but it seems like for any short strategy you’d probably be best waiting 19 years and then going heavy the last year. In the meantime you’d still need to work, etc.

It’s quite tricky to devise a multi-trade strategy based on a single number in 20 years. Great mind puzzle!

31 JG February 8, 2016 at 1:58 pm

Probably can bet small amounts along the way and increase the size of those bets as a percentage of your bankroll as you get closer. I guess theoretically you would want to keep detla hedging a position where you simultaneously owned both a call and a put at the 20yrs from now strike price (for your full bankroll always). When it’s near the money with lots of time remaining your delta is very very small (but not 0), and your delta will increase as you get farther away from the strike. This is probalby not quite right as when you get really close you might want some leverage, but you would always have SOME risk with leverage whereas with the just delta-hedged strategy it’s risk-free as you’ll never be fully leveraged and growing your bankroll (most likely) along the way.

32 SeanV February 8, 2016 at 5:49 am

Any of the major share indices would do it – for you americans the S&P500, Dow, Wilshire 5000, etc. – for us brits the footsie, or the All-Share. Then the algorithm writes itself:
IF the total return is approx. 10% (so the index at perhaps 7-8%, and then dividends which reinvest).
THEN – stick your money in that and you don’t need to spend time doing stock-picking, and taking on that risk, also any currency risk if you are buying foreign, etc. Plus of course you know inflation which would be very unlikely to be higher anyway.
IF less than 10% then try stock-picking or at least something more active.

Of course if you’re not rich then £10M is such a large, life-changing sum of money then so long as it beats inflation you may be happy with that.

Plus in 20 years time it will be worth more to you cos less time to gain utility from it and different priorities, etc. You’re not going to blow it all on hookers in Vegas – well not all of it anyway.

Otherwise I think in terms of some kind of house price index which could be extremely useful both for your nest egg but also for your own decisions to rent or buy, etc.

33 bjk February 8, 2016 at 5:52 am

Why isn’t the obvious answer the thirty year US bond? It’s true that you’re given the cumulative inflation, but the bond price would also give you an idea of inflation expectations in 20 years. It would also give you an idea of how fiscally prudent the US system has been over the last 20 years. And since the US bond is the risk free rate, it’s the rate you need to price every other asset.

34 bjk February 8, 2016 at 10:43 am

The biggest question in the next twenty years will be “how does US manage its entitlement promises?” and the best answer to that question will be UST 30-year. Really no choice, actually.

35 rayward February 8, 2016 at 6:58 am

I am amused when I see those mutual fund ads soliciting retirement accounts, especially the ads in which everyone carries a big number, the number being the amount she must save by age 65. The ads are little different from the question posed by Cowen – although Cowen does acknowledge that the price in 20 years doesn’t indicate what happens in the intervening years. Of course, people look at the price of Apple stock today and lament they didn’t but the stock 20 – 30 years ago. Chart the price of Apple stock during the period – it looks like a roller coaster. Pity the poor fellow who has an emergency when the stock price is down and must cash in, marvel at the good fortune of the fellow who doesn’t. Real life goes up and down not in a straight line, and fear of falling is just as real.

36 Roy LC February 8, 2016 at 7:03 am

I think the inflation number would be more useful than anything else, especially if it jumped. But even if it didn’t it would be incredibly useful to know.

As to the commodity I would go with oil, because of the same thinking, it prce vs inflation would give some sense of the energy economy while every other thing could just be substitutions, while even 100+ a barrel oil did not do that. Of course if we suddenly don’t need oil in only 20 years, it would be so earth shattering that I would be happy with the result.

37 Ironman February 8, 2016 at 7:38 am

Let’s make this a little easier – suppose you know that the price of just one asset, the S&P 500 (or rather, the price of a simple index fund or ETF representing it), will be over the next week given certain defined situations, but not precisely when those situations will come into play to affect the price. What investment strategy would you develop to maximize your returns to exploit that knowledge?

If any of you are up for the challenge, please consider the scenario described here and provide your response to the challenge in the comments at the linked site [although I’ll see your responses here, I will see them there first.]

38 cheesetrader February 8, 2016 at 11:46 am

If I’m understanding you correctly, you’re asking what we’d do if we knew the price of X on Y date – but not what would happen in between?

If that is so – and assuming that X is lower than where we are now – you’d want to but puts for the leverage factor. You would NOT want to sell calls – b/c you don’t know if there’ll be a rally in between which might get your position called.

39 Viking February 8, 2016 at 7:34 pm

@cheesetrader

Any good sources of wpc80 prices? Why has costco protein powder gone from $3 to $10 per pound (2002 to 2016), while price of milk in the US market has pretty much been flat for 35 years? My recollection is $1.99 per gallon in 1991, and $2.59 per gallon today.

http://future.aae.wisc.edu/data/monthly_values/by_area/10?area=US&gtype=bar&yoy=true

40 Jeff February 8, 2016 at 8:40 am

I don’t have enough information to provide a good answer. I will assume here the goal is to maximize wealth rather than happiness. $10 million is already enough for me.

1. Can I borrow money and if so how much? If I can then I might be able amplify returns quite a bit.
2. Can I exit the investment at any time or am I constrained to own it until the end of the period? If the former, I can exit the trade whenever the price deviates from the forecast and earn extra returns. Or if it goes to zero after five years and I know that will be the price in 20, can I exit immediately and invest in a diversified portfolio?
3. If the asset is, say, the stock of a company that is acquired before the 20 years run out, what impact does this have?
4. It’s also worth noting that the genie might say my pick will not do anything much for 20 years in either direction. I would then have to consider how to use that knowledge profitably … somehow. Maybe sell lots of option straddles for 20 years or so?

At any rate, I’m not sure the choice of asset matters as much as understanding these other parameters so that I’ll know how best to maximize profits.

41 jorgensen February 8, 2016 at 12:39 pm

the asset you ask about may not be the asset you invest in…

42 anon February 8, 2016 at 8:52 am

You pick a major asset, like Shanghai, and the genie says “zero!” Oh no.

Other than as an Armageddon signal, 20 year knowledge has little excitement. I say choose gold, and then if it is nonzero (whew!) set a buy trigger based on bond yields. Boring.

43 JWatts February 8, 2016 at 8:26 pm

Do you ask for the Shanghai priced in $?

44 Jon m February 8, 2016 at 9:14 am

If we’re just doing maximum return, I would setup my own asset that paid out very specific amounts 19 years from today depending on various combinations of other prices and indices throughout the period before that. In other words, I’ll leave a message for myself encoded in my special asset.

45 anon February 8, 2016 at 9:36 am

Ha! Jon is the smartest, wins.

46 Mark Thorson February 8, 2016 at 10:53 am

That’s cheating! I’d be a very angry genie indeed!

47 Damien February 8, 2016 at 12:25 pm

Bravo. I’ve written this type of input encoding before, I should have thought of that. Nicely done!

48 JWatts February 8, 2016 at 8:27 pm

Brilliant!

49 Ray Lopez February 8, 2016 at 9:22 am

Gold. If gold’s price is much different from inflation, you know somethings not right, and you can plan for that something.

50 MMK February 8, 2016 at 12:41 pm

If (when) shit really hits the fan, the price of gold will be irrelevant. The new currency will be clean water and ammunition.

51 JonFraz February 9, 2016 at 1:24 pm

Even on the day the Goths sacked Rome, gold was still valuable– it was one of the prime things the Goths were looting.
For gold not to have value you’d have to go to the very verge of human extinction. (OK, or maybe assume that we found a giant gold-laden asteroid and could profitably mine it)

52 A Definite Beta Guy February 8, 2016 at 9:27 am

Local real estate prices, either for condo units or mutli-family units. I can scrounge up a lot of cash to make leveraged investments in the local real estate market and knowing what asset prices are 20 years out gives me a good barometer of how the rental market is and whether my leveraged assets have retained their value.

If I had more time I might clarify exactly WHICH barometer to use, but that’s the general direction of my inquiry: local real estate.

53 Shane M February 8, 2016 at 1:45 pm

ADBG, Leverage with unlimited downside is a scary thing to me even knowing the ending price. Many real estate guys have gone bust with leverage and bad things happening in the interim. As I was thinking about this problem I kept coming back to options because you can limit your downside exposure.

54 Whatever February 8, 2016 at 9:30 am

If I said “land” – would I get index for the price of any plot of dirt on Earth?
Because that would give a serious heat map for any major catastrophes/successes over the next 20 years and the information would be guaranteed to provide solid investment opportunities.

55 Johnny A February 8, 2016 at 9:45 am

Am I missing something? If I know the exact price of an asset 1 minute before, I can make a very, very large amount of money buying or short-selling it at the last minute. I’m my own hedge fund.

I can then borrow against this near-infinite amount of money to live comfortably in the intervening 20 years.

56 Michael Savage February 8, 2016 at 9:55 am

Yes. It’s actually hard to make money even one minute before, especially if the market expects the price to be what you know it will be. Buying some assets is really quite difficult – storing oil, for example. And leverage is risky if you only know the terminal price. You might be wiped out by margin calls, despite knowing the trade would come off in the end. Or your counterparty might default, leaving you nearly nothing.

57 Ethan Bernard February 8, 2016 at 11:58 am

You can’t. No one believes your knowledge is so accurate, so they won’t lend you all that much money. The thought experiment fails if the rest of the world believes that you have certain knowledge of the future price.

58 Chris February 8, 2016 at 9:50 am

Bitcoin isn’t helpful. There are other virtual currencies that will sprout up in the meantime and it isn’t known whether bitcoin will be here 20 years from now.

59 Matthew February 8, 2016 at 1:03 pm

I think Ethereum will supplant Bitcoin, and that’s how I’m investing some of my Bitcoin position now.

60 Ray Lopez February 8, 2016 at 8:43 pm

@Chris – yes, but can’t you short Bitcoin if you know it won’t be around in 20 years?

61 Tom February 8, 2016 at 10:25 am

I would suggest the MSCI World Total Return Index. If it shows strong returns then you can be a lot more aggressive in biasing your asset allocation towards equities and away from bonds. And generally would allow you to take on more risk in other real assets (e.g. housing). You need to make a few assumptions about inflation to get the most out of the prediction but even if you know the nominal return I think it helps you a lot (as you avoid bonds and probably cash).

Trouble with oil is that you have a lot more technological/geopolitical factors involved so the price in the year 2036 might not give an accurate indication about the health of the global economy.

Issue with the US 30 year bond or other interest rates is that even if you know that the yield is 1% or 3% in 2036 it doesn’t necessarily help you decide what the state of the stock market (or any other risk assets) will be at that point. If it’s 5% then you can guess we are experiencing inflation but perhaps if nominal economic growth is 7-8% then you still want to be in equities.

I don’t like the Shanghai Index as an indicator as it is largely comprised of banks/real estate companies that will likely require huge recapitalisation over next 5 years and so China (ex-banks) may do very well but the index itself might not be higher in 20 years as a result of the dilution. In fact, I think this might be the “best case” scenario for the China rebalancing scenario so the SHCOMP won’t be a good indicator of China’s success.

Gold again I don’t know if you find out it’s US$300 in 20 years it’s bullish or bearish for other assets.

62 Shane M February 8, 2016 at 1:48 pm

I agree on the MSCI. It provides a lot of useful information to guide you in a wide range of decisions. It would be especially useful in a negative return scenario to give time to build your bunker. 😉

63 ptuomov February 8, 2016 at 5:45 pm

I agree. Maybe the terminal value of a total-return index of long MSCI World in USD funded by borrowing by shorting US government USD denominated short-term debt might be even better.

64 Brian February 8, 2016 at 10:30 am

I assume the purpose of the question is to gain enough information to make a good investment with your $20MM.

The Shanghai doesn’t tell you much. Right now it’s possibly in a huge, huge, bubble. It’s completely possible that market goes sideways for 20 years while other asset classes boom.

Commodity prices don’t tell you a great deal, unless you plan on buying commodities with your $10MM. That’s especially true for oil. If the price of oil 20 years from now is still $30 does that mean the world economy sucks or that we’ve successfully transitioned to alternative fuels?

Knowing the price of bitcoin tells you nothing, accept whether Bitcoin is still a thing in 20 years.

The best answer is to a broad asset class that is most relevant to your likely portfolio. For that, it’s hard to beat the S&P 500. If the price is up a ton 20 years from now, you heavily weight your portfolio in U.S. stocks. If the price is flat or down, you heavily weight your portfolio in U.S. bonds.

65 Ray Lopez February 8, 2016 at 8:44 pm

Dr. Cu. Paging doctor copper.

66 Derek February 8, 2016 at 10:34 am

First don’t lose it. The vaunted rule of law means it will cost you most of that $10 million to get it back if someone takes it.

Second, if you don’t know what to do you are what is called dumb money. Your amount is what is called rounding error.

Third, the world is awash in dumb money. Money with no intelligence or ability to generate returns except by the virtue of existing. The Fed was pumping out $50 billion or so a month, your stash is a rounding error.

Fourth, the natural and logical destination is the financial market. This same market that collectively lost $trillions of dollars and only exists because government and treasury wrote big checks. The smart money became stupid money. And they will gladly assist you to part with yours.

Fifth. What will characterize the next few years is a desperate need for cash. Unencumbered cash. Every bureaucrat in North America and Europe and much of asia will see your cash as a nice contribution to their pension fund. They will use every measure imaginable (see rule of law above) to enable the transfer.

Sixth, and this is important. It isn’t that much. And it won’t buy much.

So what to do? Two choices. Put it somewhere safe, treasuries maybe (they are beholden to you). Get a job, make some money and in 20 years you will have about the same amount.

Second is to learn something that can generate income and use the capital to do it. Property management, inventory, etc. There are lots of opportunities but they require knowledge and skill. A friend bought an old building with potential, his investors are getting 15% return. They are set up to weather any economic conditions, have relationships throughout the industry, and are doing well, and I don’t think they started with $10mil. Interestingly, another very similar instance didn’t turn out well. They started with a pile of cash and got cleaned out partly by stupidity and mostly by not imagining that they could lose.

67 Yancey Ward February 8, 2016 at 10:42 am

I will just point out that knowing a price 20 years in advance is no guarantee of profit if you deploy the 10 million dollars now, or do so in increments. You could go broke long before the 20 years is up for any number of reasons, including bankruptcy reorganizations of individual firms and groups of firms. Even asking for the price in “dollars” is iffy over a period of time- even if the genie gives you the “inflation number”.

I would much rather know the certain price of something tomorrow or even 10 minutes from now.

68 derek February 8, 2016 at 12:03 pm

In the last 6 months the CAD-US has changed by 30%+. It takes how many years to double $10mill at a good return? 8 years? And you could lose a third in a few months if you happen to be on the wrong side of something you can’t control or foresee.

69 Matthew February 8, 2016 at 1:01 pm

Prices of assets are measured in some kind of underlying monetary system. Today we would use the US dollar.I would ask what denominator will be in use in 20 years. Pretty sure it won’t be the US dollar.

70 Njnnja February 8, 2016 at 1:34 pm

He didn’t specify that it had to be a financial asset, so I would want to know the value of either 1 PB of data storage or 1 PFLOPS computing power. Knowing whether Moore’s Law and Kryder’s Law continue in the future (or get faster or slower) is going to tell you a lot about what the world is going to look like in 20 years.

71 Andao February 8, 2016 at 4:42 pm

Interesting but how to know who will win the PFLOP race? At least you could profit from that knowledge

72 Njnnja February 9, 2016 at 8:40 am

I guess I am thinking of 2 things with this whole exercise: first, 20 years is too long to make investments in single companies, and in the long run, most studies show that asset allocation is more important than security selection anyways.

20 years ago, GM was in the Dow and hadn’t gone bankrupt. The most valuable company today (GOOG) didn’t even exist privately. So I doubt there is any single stock that we can be reasonably sure will still be a barometer 20 years from now.

Knowing the future of computing speed lets you decide among many feasible paths of future technological advancement. And technological advancement is the basis of all economic growth. Knowing the correct order of magnitude of economic growth will tell you which asset classes should do well: equities in growth worlds, bonds in stagnating worlds, and commodities in shrinking worlds.

Note that this is more of a minimax strategy than an optimization strategy.

73 Dan Lavatan February 8, 2016 at 8:52 pm

Ok, if it is the same, Intel makes money selling the same processors for 20 years. If it improves, Intel makes money selling slightly better processors for 20 years.

74 Doug February 8, 2016 at 2:27 pm

Long-term treasury yields. I would be able to take a highly-leveraged long or short position on a 20-year zero coupon bond. As the price of the bond moves above or below the “glidepath” dicatated by the expected interest rate, I can reverse the position, based on where were are on our 20 year journey.

75 Doug (the one that normally doesn't have a link on his name) February 8, 2016 at 3:21 pm

From the standpoint of maximizing expected return on investment, you’d want to pick a price that’s generally mean reverting. Assume you pick an asset like that follows a random walk, e.g. equity indices, bitcoin, single-name stocks. You only make money as it moves in that direction over time. You may get a little more juice at the end if it overshoots or undershoots just prior to its 20 year mark.

In contrast if you have a mean-reverting asset, like treasury yields, commodities or the VIX index, then it will tend to overshoot and return frequently. That’s just what mean-reverting assets do. If you know the long-term trend, you can be really enhance a mean-reversion strategy, because the biggest risk is regime change. Instead of making money on one trade, you’ll have many profitable trades, particularly closer to the end.

76 wally February 8, 2016 at 5:38 pm

Knowing a single commodity price would not help you. You need the context, too. For instance, let’s say you pick gold and you learn that the price will go up 5X. You invest everything. Lo and behold, gold goes up 5X… but inflation has gone up 6X. You lose.

77 Ray Lopez February 8, 2016 at 9:07 pm

But the genie also tells you inflation, “The genie also gives you 20 year cumulative inflation (or exchange rate change for non USD assets) so you won’t need to worry about price/value disentangling. “

78 ptuomov February 8, 2016 at 5:43 pm

I’d say a global equity market index total return measured in USD. It’s liquid enough to make a number of large bets in both directions over time. It’s volatile enough and doesn’t have too much mean reversion for the terminal value in 20 years to contain significant information today. It’s also highly indicative of how all the other assets in the world will do, so you can first compute the base-case expected path for all the other assets and then trade reversal relative to that base-case scenario for 20 years (in moderation).

79 GMC February 8, 2016 at 7:13 pm

“Long-term treasury yields. I would be able to take a highly-leveraged long or short position on a 20-year zero coupon bond. As the price of the bond moves above or below the “glidepath” dicatated by the expected interest rate, I can reverse the position, based on where were are on our 20 year journey.”

/agree, although I’m not sure about the plan of action.

Perhaps a 30 year bond, so that you can sell out before maturity.

80 Michel February 8, 2016 at 8:49 pm

I think that you would want to choose something with the following characteristics:

1. Extremely liquid and very likely to still be trading in 20 years.

2. High beta stock or etf that will generally grow with the global economy and likely faster than the S&P 500. Choosing something that might go to zero really limits your max profit. Something that ends up not changing much in price also severely limits your profitability.

3. has a deep and liquid options market

i think that EEM would do the trick. You could swing for the fences by selecting a specific emerging or frontier economy and that choice probably has a higher expected value but EEM would be a safe bet for a multi-nagger that you could buy deep out of the money call options on and generally keep buying dips on.

81 Dan Lavatan February 8, 2016 at 8:51 pm

I would think corporate bonds that go out that far like Ford would provide the best indicator of value. If they are worth anything, you would be guaranteed x% rate of return up to that point. If they are worthless, you know you could buy put options until they go insolvent.

82 homeandhosed February 8, 2016 at 9:31 pm

I’d have a strong preference for long us treasuries, but would probably opt for 10Y.

1) Highly liquid today and very likely high liquidity in 20 yrs time.
2) Historically reliable indicator – knowing the 10 yr rate had moved from roughly 6% to 2% from 1996 to today is as good a summary of how the world has changed over that period than any other single data point I can think of.
2) A diversified set of historic correlations to other asset classes, allowing me to place a number of independent bets that don’t necessarily correlate strongly to each other, except insofar as they relate to the underlying known variable (eg commodities, property, fx pairs, infrastructure, etc.). Just about any asset class will be influenced by US Gov’t long bonds.
3) A reliable reference rate for borrowing costs to provide capacity to invest in above idea set. Ability to fix (or not) for long periods in the US mortgage market.
4) An unusual answer (eg undefined, 90%) is of itself a rich data point – you don’t need to know much else to know the world in 20 yrs is a very different place. Might help inform other life choices, eg travel lots today, save little for retirement, etc.
5) I say 10 yr rather 30yr because I think the signal is a little stronger – a 30 yr estimate likely contains more reversion to the mean expectation noise than 10 yr.
6) I get an additional clue to the environment for free, because I get to find out what actual inflation has been, so may make some additional inference about real forward rate expectations.

83 Michael Hartley February 8, 2016 at 11:16 pm

What currency is this price measured in?

If you say “Shanghai composite index” and it shows returns of 17003% vs the US dollar, does that tell you China has boomed, or that the GOP finally caused a real default on US debt?

And for me, the US dollar is not terribly relevant – directly, anyway. I can’t spend them at the local store, and my bank charges a high premium to convert them to something useful. I might not want my price quoted in US dollars at all. or I might, if that gives me the most information.

The real question is not “what one commodity would you like to know the price of”, but “which two commodities would you like to know the relative prices of?”

84 vak February 9, 2016 at 7:57 am

Not really useful unless you can convince investors that you have seen such a genie. Even if the genie is not a prank, what probability do you assign to the genie not being a prank.

85 BTDNYC February 9, 2016 at 10:24 am

I think you ask for SPY but instead of just buying it, you then go to a bank and ask to buy a call option 20 years in the future and figure out how much leverage you want based on the strike price you ask for. You can basically determine how much money you want in the future based on the price you are given.

86 Jon M February 9, 2016 at 2:35 pm

I still think creating your own asset is the best approach (see above), but if you can’t do that, then you’re best off choosing an asset that has maximum volatility over a short-term fixed period and minimum volatility over the longer period. In other words, if you get one data point you’re best off maximising your clairvoyance in the short term.

I would choose an asset that will fix its price after the first year. e.g. an insurance contract on the value of a particular asset one year into the future that pays a fixed amount on redemption. This gives you immediate actionable information you can make a highly leveraged bet on now. You then take your winnings and put them in an index fund for 19 years.

87 James February 9, 2016 at 6:44 pm
88 Granite26 February 11, 2016 at 1:34 pm

The resale value of a 10 million dollar life insurance plan on one Granite26….

Resale value may not be 100% the right phrasing, but you get the point.

Covers personal and existential risks, plus you know if waiting twenty years is a good idea.

89 Rob Dawg February 12, 2016 at 12:29 pm

While tempted to ask the hours of median labor necessary to book a moon trip I would rather ask for the global GINI. If you think about it hard enough they are actually very similar questions.

90 Ian Kemmish February 13, 2016 at 7:33 am

Isn’t the trick to game the question instead of trying to game the market?

If indices like the S&P 500 are considered a single asset for the purposes of this question, then so is “the total value of my investment portfolio”. That is the single number I would want to know.

So long as the answer is not “zero”, in which case I still won’t know when I am going to run out of money, then I can guarantee that for at least 19 years I will not have to worry about money or the quality of my investment decisions. And in the meantime I can blow as much as I want on five star travel, cordon bleu food and vintage wines….

Comments on this entry are closed.

Previous post:

Next post: