Probabilistic profit from UFOs?

Let’s say the rest of the market was undervaluing the chance of UFOs being “something interesting.”  What might be the proper trade?  David S. emails me, and I will dispense with further indentation but what follows are his words not mine:

“Some potential food for thought:

– Going long volatility or long defense stocks seems like the most conventional answer.

– An even more conventional answer would be that it wouldn’t matter since any apocalypse means that even a correct bet is unlikely to have material redeemable value.

– Rather than framing the payout event as the binary of an actual UFO invasion, an alternative framing would be to bet on further government leaks causing the market to move it’s probability of invasion / apocalypse from 0.00% to 0.01%.

  • Should you at least shorten the duration of your holdings on the margin? With interest rates near zero and record(-ish) high PE multiples, shouldn’t you be (marginally) less willing to pay for far-out cash flows? Could this finally fuel a resurgence of the value factor vs the growth factor?
  • To take it a step further, should people consume more today and invest less given that the EV/NPV of these payouts will be somewhat lower?
  • Other than high-dividend stocks and cash, what other trades are short-duration without going to zero if the apocalypse fails to arrive on time?

– My contrarian approach would be to go very long due to the underrated potential of technology transfer and overrated potential of apocalypse (especially in the near-term).  For instance, if we found intelligent life on a planet like Mars (but less intelligent than humans), it would likely be decades between first contact and when humans would muster a military force to extinguish or fully dominate the other species (if ever).  Also, based on the continued existence of thousands of species (many of which are flourishing) on earth in parallel with human existence, its not clear why we would assume that a more intelligent form of life that engages with humans would even try to extinguish. Per Steven Pinker, more intelligent species would likely also be more moral and therefore less likely to be focused on zero-sum extinction.”

TC again: Obviously many short positions would be in order. In terms of longs, my intuitions would be to buy a very diverse bundle of natural resources.  Presumably the aliens have not brought many minerals with them, and they will need some minerals to do…whatever it is they plan on doing.  Maybe lots of minerals.  But you don’t know which ones.


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