Pricing Little Green Men

The derision still given to discussing UFOs is a cultural bias. It violates notions of free speech and is costly at all levels.

We were always assured by prominent analysts that if a little green man from outer space appeared, the public would panic and the US Congress would send a torrent of spending to defend us. But, nothing of the kind happened when the much anticipated and long, very long, awaited military assessment of UFOs was released on June 25. For investors and analysts, it was a macro event without micro or macro results. We need to understand why.

Human psychology is one important reason for us not to react to news which, if believed, would be an appalling risk. We are sometimes too optimistic for our own good. Here we have a good example. COVID. The early reports about the risk of a pandemic were loudly proclaimed and just as loudly dismissed as absurd. That is as true for securities analysts as anyone else. Pandemic risks were dismissed in the industry even as the crisis was unfolding. We had a lot of experience with pandemics like AIDs and still didn’t take the issue seriously. Not to mention the very clear warnings we had ahead of the mortgage crisis.

The UFO dustup is important in financial analysis, but security analysts are no different than other people when it comes to consensus thinking. Silence helps consensus thinking here. The report itself says,

“Narratives from aviators in the operational community and analysts from the military and IC describe disparagement associated with observing UAP, reporting it, or attempting to discuss it with colleagues. Although the effects of these stigmas have lessened as senior members of the scientific, policy, military, and intelligence communities engage on the topic seriously in public, reputational risk may keep many observers silent, complicating scientific pursuit of the topic.”

The stigma against even discussing unpopular topics still limits the profession generally, though there are a few more voices in the UFO space.

A shot at an economic overview of UFOs

First, what was reported. Read carefully it has some news even if it is a short report. Coming in at a mere nine pages it’s got to be one of the briefer reviews ever given to UFOs. What could be redacted was redacted. Other material too shocking for the public was confined to a secure and secret appendix. (A note to the government – go ahead. Try to shock me.)

To be fair, by the way, the official term is Unidentified Aerial Phenomena (UAPs) but personally I don’t expect the name to stick. And what do we do with the flying saucer submarines now reported? A UFO is a UFO in this culture.

The report would be silly if the matter were less serious. The report found that “Most of the UAP reported probably do represent physical objects given that a majority of UAP were registered across multiple sensors, to include radar, infrared, electro-optical, weapon seekers, and visual observation.” They found physical objects, not clouds, mirages or electrical storms. Objects, not bad 1950s movies.

Can we put these objects in a risk / return context? What return do they offer? Anything alien actually captured would be incredibly valuable. But I guess we don’t have anything.

Is it a risk? Yes. Definitely.

We can only conjecture as to the exact nature of the threat level. But the reports have several possible geographic loci. One set of places often discussed, involves nuclear facilities, especially near military equipment.

Another place to look is simply the frequency of appearances. Given the uncertainty of the data, the mere number of reported sightings seems unlikely to be important. Rather, the military is reporting that UFOs are regularly spotted in US restricted air space.  Which seems logical, whatever they are.

What did the markets do?

Generally speaking, nothing. The sector most sensitive to news about the UFO report would have been the military. That too showed little response. For example, the Invesco Aerospace & Defense ETF started the month of June at 76.86 and ended Friday 7/26/21 at 74.55. On 7/1/21, it was 75.58.

What should you do?

We need to separate the wheat from the chaff on data. The truly silly stories will flood the papers and movies again. They should be ignored, just like other fake news.

The question at hand is where do the military data points in the report fit in a portfolio review? They are not systemic risk since it literally is out of the system. Nor is the risk diversifiable in any obvious way.  Neither is insurance an easy solution.

There are insurance policies for alien abductions etc. For the most part they are gags. This is no surprise given the derision of UFOs. What is more relevant is that homeowner’s insurance and other general medical insurance would probably cover claims about a UFO injury. UFO risks per se may not be an insurable risk anyway. These risks are probably not well enough understood to allow estimation.

And…

Thomas Young (1773-1829), the English scientist, is generally said to be the last person to know all there was to know. At least according to the English. No one would claim to know it all today. Nor could we say we learned all that much from the UFO report. But a little more cash in the portfolio and upping the allocations in some more of the obvious aerospace sectors makes sense. And add some space news as well to your Saturday reading.

But the real problem isn’t portfolio allocation. The essential problem is the stigma against talking about marginal topics. The stigma pervades our culture now. Silence is not a good data point.

What else is so silly or sensitive that the government cannot talk about it? The practice of silence has a price for our portfolios and the country.

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