The Independent Investor: The Price Tag of Disaster
|Damage from Superstorm Sandy back in 2012.|
Over the past four weeks, just two hurricanes have cost the country upwards of $300 billion. This has easily surpassed the 2005 hurricane cost of $200 billion, which included Katrina, Wilma and Rita combined. The cumulative cost of weather continues to escalate and with good reason.
Before you leap to the conclusion that global warming is the culprit, let me lay out some facts. Coastal storms are no more (or less) frequent an event now than they have been throughout our history. So what gives?
The answer lies in population growth and demographics within our own society. A few years ago, a study funded by the National Oceanic and Atmospheric Administration, found that although hurricane intensity varied decade to decade, there has not been a spike in either the number or intensity of hurricanes, nor is there any evidence that global warming is the culprit.
The study pinned the blame for the elevated level of property damage and deaths on the growing concentration of people and property in coastal hurricane areas.
Today, well over 55 percent of the nation's population lives in roughly 673 coastal counties. That's over a 30 percent increase since 1980. The Southeast had the largest rate of change, with a 58 percent increase during that time. The Pacific region and the Northeast are also seeing the same phenomena. At this point, over half of us are crowded together on only 17 percent of America's land mass (excluding Alaska). As a result, some catastrophe modeling companies predict that losses because of coastal storms will double every decade or so due to this trend.
Where there are people, there is also infrastructure — roads, bridges, ports, schools, hospitals, etc. There are also businesses such as stores, restaurants, factories, movies and the like.
Finally, there are homes, from hi-rise condos and apartment buildings to row after beachfront row of single and multi-family dwellings. More than 55 percent of the nation's housing stock sunbathes along our coasts. This social migration is happening all over the world. Whether scientists look at Europe, Asia or anywhere in between, the results are the same. People are deliberately putting themselves and their property in harm's way at an alarming rate.
Today, when even a middling hurricane makes landfall, the chances of $1 billion in damages and greater loss of life is higher than ever before.
The same can be said for earthquakes, according to FEMA. Its studies found that although the number and intensity of earthquakes have stayed the same (more or less) over the last hundred years, damage has skyrocketed due to "significant growth in earthquake-prone urban areas and the vulnerability of older building stock, including buildings constructed within the last 20 years."
At some point, when the cost of insuring "home, sweet home" on our nation's coastal areas grows to be greater than your mortgage payments, the trend will reverse, or at least we hope so. But in the meantime, as long as one keeps wishing for that place by the shore, the economic costs will continue to grow. It's your move, America.
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@theMarket: Markets Brace for the Weekend
Usually, the weekend is a time when traders try to relax, reduce stress, and prepare for the coming week's markets. This weekend will be an exception to that rule. Just about everyone is focused on the latest news of Hurricane Irma's landfall in southern Florida tomorrow and into Sunday.
Over in Southeast Asia, analysts are also expecting North Korea to fire off yet another missile. Exactly where and when is up in the air.
As if that were not enough, an earthquake and Hurricane Jose both hit Mexico simultaneously last night causing quite a lot of damage. Investors have no idea what economic impact these natural disasters will have on the North American economy. As for Kim Jong Un, there is always the possibility that an "accident" could happen, setting off World War III.
So it is not surprising that the stock market has gone nowhere this week. About the best you can say was that the averages were mixed. The only good news seemed to be that the debt limit was passed as part of a bill that provided the first flood relief money to beleaguered Houston. That surprised many, since the deal was forged by President Trump and the Democratic leadership.
Facing a protracted battle within his own party, Trump reached across the aisle for the first time in his presidency. The results were surprisingly quick and altogether positive. Of course, the rank and file within the Republican Party were at first surprised, and then angry, since they were gearing up for a protracted struggle within their own party. The various GOP splinter groups were planning on adding spending cuts, various pet pork-barrel projects, etc. to both the Harvey Relief aid, as well as the debt ceiling.
The markets took this sudden about-face by Trump positively. It helped support the markets in the face of all the other bad news. One could even hope that the president might resort to even more bipartisan help to further his agenda in the future. That could loosen the political logjam that has prevented any substantive legislation from passing Congress in the first eight
months of his term.
In a media atmosphere that wherever you look the first thing you see is the swirling visual of this "storm of the century" approaching American soil, it is understandable to be concerned, fearful, even panicked. Let's hope that like so many weather-related crises that the media hypes, this one won't be as damaging as they predict. If it turns out to be so, you could
even see stocks rally.
September is certainly providing the increase in volatility that it is known for. I guess the best that can be said for the markets so far is that in the face of overwhelming negatives, stocks have hung in there. That is a testimony to the underlying strength and conviction among investors that the future continues to look bright. It is why any pullback in the market, in my opinion, will be a single-digit decline at best and nothing that should concern you.
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The Independent Investor: America, the Battered
Extreme weather and other climate disasters appear to be occurring far more frequently than we would like. The loss of life and economic damage also seem to be increasing. But does the data support those opinions, and if it does, what price do we pay for all of these perfect storms?
Long-time readers may recall my columns of four and five years ago, where I examined the price tag the world (and the U.S.) pays for weather-related disasters. Given the fact that we are between hurricanes (Harvey has departed Texas, while Irma bears down on Florida); it may be a good time to educate new readers on the economic cost; not to mention the loss of life.
In 2016, the U.S. suffered twice the amount of weather-related economic damage versus the prior year, according to the National Oceanic and Atmospheric Administration (NOAA). Weather and climate were responsible for 297 deaths and $53.5 billion in damage in 2016. Fifteen of these events cost at least $1 billion and covered 38 states.
In 2015, the costs were $21.5 billion. If you look back even further, over the past six years, there were at least 66 extreme weather events in the U.S. with a price tag of $1billion or more. Weather-related events caused 1,628 fatalities and $297.6 billion in economic losses throughout 44 states.
And now let's see what has happened so far in 2017. As of July 7, there have been nine weather events of $1 billion or more across the country, which caused 57 people's lives. And then came Harvey. Estimates so far put the price tag at $190 billion in damage with an additional 70 lives lost.
While Hurricane Irma, which some call "the largest storm in modern history" has yet to make landfall, most forecasters predict it will hit Florida dead-on by this weekend. Assuming it does, the economic damage could easily exceed $100 billion. No one knows how many lives will be lost. But by the end of this month, we could easily see as much as $300 billion in damages from these two events. And in the wings, Hurricane Jose and Katia are strengthening in the Atlantic.
If the magnitude and number of disasters appears unprecedented, it is because they are. Back in the Eighties and Nineties, according to the National Climatic Data Center, which is part of NOAA, it was rare to see more than two or three $1 billion, weather-related damage events annually. We had many years where the losses totaled less than $20 million a year. But today, billion-dollar events have become twice as frequent as they were back in 1996 as well as in the proceeding 15 years.
Looking at the time period from 1980-2016, the average number of annual weather events, according to NOAA, was 5.5 events per year. For the most recent five years, we have had twice that many events. And this year we have already hit 11 (and possibly number 12) by this weekend.
Expense-wise, we have also witnessed a big up-tick in the economic cost of these catastrophes. In October 2012, Hurricane Sandy, the "Super Storm," hit the New Jersey, New York coast killing 131 people. The estimated damages peaked at $50 billion. Only weather catastrophes in 2005, the year of Hurricane Katrina, Wilma, Rita and Dennis, generated more deaths (2,000) and worse damage ($187 billion).
All of the above, however, is small potatoes considering that in just the last two weeks we face possibly more damage than all of these hurricanes combined. In my next column, I will examine some of the causes of both the increase in weather events, as well as the severity of the economic damage.
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@themarket: Global Interest Rates Rise, Global Stocks Fall
It is something we really haven't seen in quite some time. Back in the day, before the financial crisis, interest rates and stocks most often moved in opposite directions. This week investors got a taste of what the future might hold.
U.S Treasury yields on the 10-year note (the benchmark average) ticked up to 2.39 percent at one point. Across the pond, the German Bund (their benchmark) rose .5 percent. Those were big moves in the debt world. Why are interest rates on the rise all of a sudden after years of declines?
Some would say it just had to happen. Global central bank policy has just been too loose for too long. I don't necessarily agree with that view, but at the same time, our own Fed has given the markets ample warning that the time to tighten is upon us.
But before we bid adieu to their past policies, let's give all those central bankers a hand. In the absence of any fiscal help from the world's politicians, these heroes single-handedly not only pulled us away from the brink, but have guided global economies to their present state of growth. What is different this week from other weeks is the perception among investors that other central banks may now be following our lead.
Throughout the first half of the year, I wrote that it was not Trump and his promises, but low interest rates, a growing economy, and declining unemployment that was supporting the stock market. I also warned that the real arbiter of further equity gains would be the Fed and how they implemented their new tighter, monetary policy.
So far, their actions have been transparent, moderate and, to the best of their ability, telegraphed to the markets well ahead of any future moves. The problem now is that if (and right now, it is only an if) other central banks begin to tighten, than no one knows what will happen.
How will various central banks coordinate policies? What will tighter monetary policy overseas mean for our bond market yields? Will Japan start to tighten as well, and if so, what will that mean for both U.S. and European interest rates? One thing we do know is that today's traders are quick to pull the trigger before taking the time to see what transpires.
Stock indexes hit six-week lows this week. That doesn't mean much in the grand scheme of things. Granted, we hit my target on the S&P 500 Index at 2,444 weeks ago but that doesn't mean I called a "top." We could still start to rally back next week when this holiday-shortened work week is over. In the summer, when participants are on vacation and volumes are low, it is easy to manipulate the markets.
Technically, we had better rally hard in the coming week because we are hovering just over support for the S&P 500 index at 2,414. The action of technology stocks is also bothering me. It is this sector that has led the market up and it feels like we still have more to go on the downside.
But so what; I and everyone else have been waiting for a sharp, shallow sell-off of the 5-6 percent variety so let it happen. July would be an auspicious months for that. As for your portfolios, do nothing right now. If this is truly the beginning of that downdraft, I see 2,345 as the first support for the index. That would bring us down to a 4 percent decline or so. Big deal!
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The Independent Investor: The Market's Half-Time Report
Financial markets worldwide ended the first six months of the year much better off than they started. Here in the U.S., the Dow and the S&P 500 Indexes both gained 8 percent, while NASDAQ delivered 15 percent.
The Russell 2000, the small cap index, underperformed (up 4 percent) and the Transports gained 5 percent. All-in-all, it paid to be in large-cap, especially the large cap growth sector for the first half. At the same time, the Volatility Index continued to make new lows, despite the fact that at least half the investing population was/is worried and fearful of our new president's agenda.
All of the top 20 economies around the world are growing this year. That recovery is broadening out to include emerging markets as well. It's the best global growth investors have experienced in five years. And economic forecasts have continued to indicate gains, especially in Europe. While over in Asia, recession-ridden Japan has managed to gain ground (up 8 percent).
Their economy is stronger than at any time in the last 10 years.
As a result, international developed markets outperformed our own stock market. The French market gained 15 percent, Germany 16 percent, while Spain and Italy also gained by double digits.
Emerging markets have done even better, racking up a 17 percent gain. Individual countries like Hong Kong were up 16 percent, while China lagged (only up 12 percent). Most investors do not realize that the decline in the dollar since the beginning of the year had a lot to do with that overseas performance.
As the greenback fell, the foreign currency-denominated stock prices overseas gained.
Just this currency effect alone boosted foreign returns by 5 percent or more. If you subtract out the currency impact, foreign stocks actually lagged their U.S. counterparts, despite stronger economic growth. All of this was especially impressive given the political climate, as well as the changes in monetary policy here at home.
For years, investors have been concerned with what might happen to the stock market once the easy money policies of our central bank ended. Dire predictions of major declines caused by Fed tightening have not come true. Given that we have weathered three rate hikes since December and stocks are at or near record highs, says volumes about those overblown fears.
Two variables have saved the market from those bearish predictions. The economy and employment are both gaining with the jobless rate hitting historical lows over the last six months.
Low foreign interest rates have also kept a lid on rising rates here at home. Believe it or not, even at these low rates, foreigners are buying our bonds because interest rates and bond yields are much lower in their own countries.
But what about all this crazy partisan politics, tweets and the like, why hasn't this political turmoil decimated the markets as so many expected? Well, I come to discover (thanks to work done by Ned Davis Research, the Fed and Liz Ann Sonders, Charles Schwab's equity strategist), that "stocks rise faster when partisan conflict has been elevated on an absolute basis and relative to the recent past." There have been times since 1984 when the S&P 500 Index has made gains of 17 percent annually under these circumstances.
It simply proves that stocks do climb a wall of worry. But what is in store for us in the second half of the year? It appears that as long as the same set of circumstances prevails, we should have another strong year in the stock market. Let's hope they do.
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