Investing for the Long Slump

I have no crys­tal ball with which to pre­dict the Fu­ture, a con­fes­sion that comes as a sur­prise to some jour­nal­ists who in­ter­view me. Still less do I think I have the abil­ity to out-pre­dict mar­kets. On ev­ery oc­ca­sion when I’ve con­sid­ered bet­ting against a pre­dic­tion mar­ket—most re­cently, bet­ting against Barack Obama as Pres­i­dent—I’ve been glad that I didn’t. I ad­mit that I was con­cerned in ad­vance about the re­cent com­plex­ity crash, but then I’ve been con­cerned about it since 1994, which isn’t very good mar­ket timing.

I say all this so that no one pan­ics when I ask:

Sup­pose that the whole global econ­omy goes the way of Ja­pan (which, by the Nikkei 225, has now lost two decades).

Sup­pose the global econ­omy is still in the Long Slump in 2039.

Most mar­ket par­ti­ci­pants seem to think this sce­nario is ex­tremely im­plau­si­ble. Is there a sim­ple way to bet on it at a very low price?

If most traders act as if this sce­nario has a prob­a­bil­ity of 1%, is there a sim­ple bet, ex­e­cutable us­ing an or­di­nary bro­ker­age ac­count, that pays off 100 to 1?

Why do I ask? Well… in gen­eral, it seems to me that other peo­ple are not pes­simistic enough; they pre­fer not to stare over­long or over­hard into the dark; and they at­tach too lit­tle prob­a­bil­ity to things op­er­at­ing in a mode out­side their past ex­pe­rience.

But in this par­tic­u­lar case, the ques­tion is mo­ti­vated by my think­ing, “Con­di­tion­ing on the propo­si­tion that the Earth as we know it is still here in 2040, what might have hap­pened dur­ing the pre­ced­ing thirty years?”

There are many pos­si­ble an­swers to this ques­tion, but one an­swer might take the form of sig­nifi­cantly diminished in­vest­ment in re­search and de­vel­op­ment, which in turn might re­sult from a Long Slump.

So—given the way in which the ques­tion arises—I know noth­ing about this hy­po­thet­i­cal Long Slump, ex­cept that it diminished in­vest­ment in R&D in gen­eral, and com­put­ing hard­ware and com­puter sci­ence in par­tic­u­lar.

The Long Slump might hap­pen for roughly Ja­panese rea­sons. It might hap­pen be­cause the global fi­nan­cial sec­tor stays screwed up for­ever. It might hap­pen due to a gen­tle ver­sion of Peak Oil (a to­tal crash would re­quire a rather differ­ent “in­vest­ment strat­egy”). It might hap­pen due to de­global­iza­tion. Given the way in which the ques­tion arises, the only thing I want to as­sume is global stag­na­tion for thirty years, say­ing noth­ing bur­den­some about the par­tic­u­lar causes.

What would be the most effi­cient way to bet on that, re­quiring the least ini­tial in­vest­ment for the high­est and ear­liest pay­off un­der the broad­est Slump con­di­tions?