How to Trade the End of the World
We've all seen the claims by some religious sect that the world will end on May 21.
Markets do not seem to be taking much notice of the forecasted end of the world. One reason for this might be that it would be hard for markets to price the end of the world.
Almost all pricing of financial assets is done with an eye to future returns or, at least, asset preservation. If there is no future, pricing is pretty much impossible.
You might think the end of the world would trigger a sell-off of all financial assets. But that’s not necessarily true. Cash isn’t more useful than stocks if the world is truly ending.
Perhaps some very illiquid investors might go to cash in the days leading up to the end of the world — simply so they can buy stuff they’ve always wanted but thought was too expensive. Or maybe take a trip to some exotic place they always wanted to see.
But most people with large financial holdings aren’t that illiquid.
They have enough cash to take that trip or buy a fancy car without selling everything.
The best way to trade the end of the world is probably to do nothing out of the ordinary. Why? Because by trading as if the end of the world was not approaching, you are protecting yourself against the risk that the world doesn’t end on May 21.
So perhaps I’m wrong. The markets may be taking notice of the end of the world. It’s just that “taking notice” looks exactly like not noticing at all.
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