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Big Water

Bob Bryan, Business Insider, People are ignoring one of the most obvious ways to make money in the market, here. These guys are getting close to Big Water. We have been thinking about Big Water on and off for about a year. What CMBS/RMBS (collateralized mortgage backed securities) commercial and residential loan prepayment factor adjustment is required to account for US coastal weather fluctuations or sea level rising? Get all the coastal topographical maps  and location of all the properties – and the insurance coverage details – make an assessment based on the data. Flooded out buildings may repay loans early and refinance with insurance money. The Insurance co. may fail if too many loans get hit and the loan will go into default. Maybe  sea levels are not really rising and this is a temporary fluctuation with no lasting economic impact.  Who can say? Big Water can find out.  Find out what the Dutch or the guys in Venice do for the last 500 years to control sea level encroachment on their land/buildings. Can they do that in South Carolina or Florida or Long Island? Are there any plans?  Are they funded? Yes, the aggregate adjustment quantity will be modest, but it is not zero and it is not uniform up and down the coastline. Why is this interesting? Well given the political polarizing nature of the US climate change discussion – I’m pretty sure you are going have a very nice two way market that periodically dislocates from the data aka reality. Lots of confident Buyers and Sellers at all times – good liquidity with no actual knowledge behind it. Super asymmetric information potential, I do not know exactly what is going to happen, let’s just look at the data, build some models, and make some money off the believers. This is Big Water.

Investors typically do their best to price in as many factors and risks into their evaluation of an asset as possible. Miss anything and your return could be ruined.

According to John Tierney at Deutsche Bank, however, investors are consistently missing one huge factor when deciding where to put their money.

“All the available historical evidence strongly suggests that investors do not start to price in evolving weather patterns until things are fairly far along,” wrote Tierney, a strategist for the firm, in Deutsch’s latest Konzept magazine.

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