El Mano del Desierto
From The Macro Man:
TMM were minding their own business yesterday afternoon trying to block out all the noise coming in through their screens and were diverting themselves by debating the strangest of indices that they knew or have used, having just been watching the Rajasthan Onion index for clues to rising Indian inflation (true). Of course the Columbian Kidnap index was cited but that ticker died so its marvelous correlation with the Columbian Peso stopped (also true).
Next there was the Icelandic Fish Catch index which in the early '90s was proven to correlate to USD/DEM better than oil prices (spurious yet amusing) and there were the Danube and Rhine water levels, invaluable to European bargees yet somehow superfluous to the rest of us then employed in the Bond and FX markets.
The mention of water levels flicked the conversation back to weather and that greatest of weather indices, the Pacific Southern Oscillation (relating to El Nino/Nina), which we watch in relation to soft commodity markets. Meanwhile we were still discussing Asset Class attribution, Bitcoin ETFs and our perennial bugbear- Sovereign CDS and its use in tail risk hedging, when suddenly an idea dawned.
Sovereign CDS is bought in many cases not because it is expected to pay out, but as a hedge for price moves in underlying assets. As risk goes up of default (however tiny) the asset price falls but CDS price goes up as more buy the hedge (even if it isn't a hedge). But we were talking about climate change, El Nino and El Nina's, so we wondered what the tail risk hedge should be for the equivalent of global weather default or basically massive global warming. And then it hit us -
We buy up cheap tracts of the arid and useless Atacama Desert in Chile in the belief that if weather patterns change dramatically enough rain will once again fall on what is some of the most fertile soil on earth just waiting for a dousing to turn it, in the space of a few years, into highly productive farm land.
Genius! But why stop there? We then package it up as an ETF and sell it as a tail hedge against global warming, performing the same purpose as CDS does against underlying weather dependent assets. Also like CDS, the chances of ever having to deliver are tiny. It's just a hedge....MORE
