The Ball Is Rolling

August has brought welcome news for the Commonwealth of Puerto Rico and for creditors eager to see a resolution to the bankruptcy process that started more than two years ago with the passage of the Puerto Rico Oversight, Management, and Economic Stability Act (PROMESA).

Market Commentary Puerto RicoThere is now a restructuring agreement for Sales Tax (COFINA) bondholders and a court decision validating the powers of the Fiscal Oversight and Management Board (FOMB), as well as a restructuring proposal for the Puerto Rico Electric Power Authority (PREPA), all of which offer reason for optimism. These developments join the restructuring of the Government Development Bank (GDB), along with better-than-expected economic conditions.

When observers look back at the bankruptcy of Puerto Rico, they will point to the restructuring of COFINA as a major milestone. The formal agreement between the FOMB, the government of Puerto Rico, and both senior and junior creditors as well as monoline insurers marks a momentous step forward. It follows months of court-supervised mediation efforts. As part of the arrangement, COFINA bondholders have agreed to give up a portion of sales tax revenues to the Commonwealth: 53.65% of the Pledged Sales Tax Base Amount on a “first-dollar” basis would back new COFINA securities, while 46.35% would flow through to the Commonwealth. The disclosed term would see existing bondholders receive new senior lien bonds secured by the 5.50% sales-and-use tax (SUT), with recoveries of 93% for senior bondholders and 56% for subordinate bondholders. The accrued COFINA interest currently held in escrow will go to COFINA bondholders, with final disbursements between senior and junior bondholders still to be determined. In light of the circumstances, we believe this is a good outcome for bondholders as well as the Commonwealth, as the deal provides approximately $17.5 billion in debt-service savings. Execution risks do remain, and terms can change, so this is still far from a done deal.

In addition to the COFINA agreement there was Judge Swain’s August 7th decision affirming the authority of the FOMB over the Commonwealth’s budget and fiscal plan. The Commonwealth had challenged the powers of the FOMB for a number of reasons, including budgetary actions. As the judge wrote in her decision, “The power bestowed on the oversight board by Section 205(b)(1)(K) of PROMESA allows the oversight board to make binding policy choices for the Commonwealth, notwithstanding the governor’s rejection of Section 205 recommendations.” She held that while the board has the power to implement a budget or policy, it does not have the “power to affirmatively legislate.” The decision is a blow to the Commonwealth that will likely be challenged on appeal. The decision is significant, as it affirms the FOMB’s powers and will hopefully clear the road to the restructuring of the Commonwealth’s general-obligation debt at some point in the future.

Following congressional hearings and well-publicized turmoil involving PREPA’s top post, a tentative deal between the Commonwealth, the FOMB, and creditors holding roughly $3 billion of PREPA debt was also announced. Under the terms, creditors would receive two series of bonds. The first tranche would provide a recovery of 67.5%, and the second tranche would be a “hope” note at a recovery of 10%. Combined, this would be a total recovery of 77.5%, assuming the “hope” notes pay off. While not the 85% recovery outlined by the previous restructuring agreement that the FOMB scuttled, it is at least in the parking lot if not the ballpark. The terms have not been sufficient to entice monoline insurers on board, so we will wait to see how the situation develops.

Prices of both insured and uninsured debt have risen in accordance with these developments. Uninsured debt, specifically that of COFINA, has seen some of the most dramatic price increases. We still believe carefully selected insured paper offers value, and we continue to take advantage. As with most things in Puerto Rico, though, we view new developments with a grain of salt. Execution risks remain, but at least the ball is rolling. The path is now a little clearer, and the end is a little closer, but there is still a long journey ahead.

 

Shaun Burgess
Portfolio Manager & Fixed Income Analyst
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




USFSM hosts successful seminar on Cuba and the Caribbean

Excerpt below:

SARASOTA, Fla. (Feb. 23, 2018) – USF Sarasota-Manatee hosted a day-long seminar about Cuba and the Caribbean islands on Thursday with panels of internationally renowned experts that included two representatives of Congress and a former U.S. diplomat, among others.

The seminar, “Cuba and the Caribbean: What Now?” focused on past and current travel and investment options in Cuba, the nation’s economic and political outlook, and the impacts of Hurricanes Irma and Maria last summer on Puerto Rico, the U.S. Virgin Islands and the Florida Keys.

Continue reading at MySuncoast.com




Money, Banking, Energy, Economics on February 22

Economic and financial issues will be thoroughly discussed on February 22 at USF Sarasota-Manatee. The confirmed lineup includes Sara Banaszak of Exxon Mobil, who has expertise in the energy sector. Everything from Puerto Rico Electric Power to offshore drilling to national constraints is on the table. Eugenio Alemán carries the Latin connection; he is senior economist at Wells Fargo Securities.

To round out this discussion we add banking, including payments issues, with David Seleski, president of Stonegate Bank; and we have confirmed the participation of Steve Kay, director of the Americas Center, Federal Reserve Bank of Atlanta.

The full program and registration information can be obtained with this link: https://www.wusf.usf.edu/cuba_and_the_caribbean_what_now

This full day is designed to inform a broad range of people — tourists, travel agents, investors, policy wonks, and weather-forecasting folks. And those who wish to think about the government’s responsibility and actions in the hurricane-damaged parts of Florida or Texas or Virgin Islands or Puerto Rico or Cuba or elsewhere in the Caribbean, this program is for you.

The event costs only 50 bucks, and that covers lunch. This open forum is made possible by USFSM, the Atlanta Fed Americas Center, and the Global Interdependence Center. All media are welcome to cover the panel, and the entire community is invited.

Cumberland Advisors provided a grant to USFSM and to GIC to assist this event aimed at public education. Please come.

Cumberland Advisors is a proud sponsor of the Global Interdependence Center: https://www.interdependence.org/

David R. Kotok
Chairman and Chief Investment Officer
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




Puerto Rico fiscal plan submissions delayed again

Cumberland-Advisors-Shaun-Burgess-In-The-NewsIn mid-November Bloomberg News reported that the board’s chief lawyer, Martin Bienenstock of Proskauer Rose, said at a Nov. 15 Title III Puerto Rico bankruptcy hearing that a plan of adjustment for the debt might exclude any debt payments for five years.

“I hope they do include debt service, but I think the commonwealth may use the [lawyer’s] comments as an opportunity, and  justification, to cut them out,” said Shaun Burgess, Puerto Rico portfolio manager for Cumberland Advisors, which holds insured Puerto Rico debt.

The board originally asked Puerto Rico’s Fiscal Agency and Financial Advisory Authority to submit a proposed revised plan by Dec. 22. On Dec. 20 the board sent a letter to Gov. Ricardo Rosselló saying that it was extending the deadline to Wednesday, Jan. 10.

The board also pushed back the deadlines for proposed plans for the Puerto Rico Electric Power Authority and Puerto Rico Aqueduct and Sewer Authority to Wednesday from Dec. 22. Once the Puerto Rico government and these authorities present the plans to the board there will be additional steps before they become adopted as official plans.

Board executive director Natalie Jaresko has said projecting economic trends will be key to creating a good fiscal plan.

 

Read the full article here: Bond Buyer




Puerto Rico – Fourth Quarter 2017 Review

The Commonwealth of Puerto Rico entered the fourth quarter having suffered one of the most devastating natural disasters in the island’s history. Hurricane Maria left billions of dollars in damage in its wake, including both infrastructure damage and economic losses. The human costs have been equally terrible, with millions of US citizens suffering.

Three months later and the lights are still out – only 70% of power has been restored.  Many businesses remain closed due to the lack of electricity and the high costs of using diesel generators. An estimated 20%-30% of the island’s 65,000 businesses may close permanently. Residents have fled to the mainland in the wake of the hurricanes. According to a study by the Center for Puerto Rican Studies at Hunter College in New York, the island’s population is expected to decrease by 14% to 2.9 million people by 2019, as residents flee the devastation. Whether they return remains questionable. The deeper the roots they establish on the mainland, the less likely they are to return home. Hurricane Maria has magnified an already exceedingly complex situation. Rebuilding will take months, a full recovery, years.

Fortunately, bipartisan support for the Commonwealth remains strong. Many millions of dollars have already been spent on recovery and rebuilding and they are set to receive a share of the multi- billion dollar disaster aid package currently making its way through the Senate. How much the island ultimately receives remains to be seen; but whatever the amount turns out to be, it should help with their long-term financial health. The influx of federal dollars is indeed a benefit to bond insurers, even in light of the rhetoric that creditors should not benefit from the destruction, as previously dilapidated infrastructure is rebuilt to a more resilient form.

The island’s electric grid will be modernized and resistant to future hurricanes according to FEMA officials. That’s welcome news: Maria will not be the last to strike. Our hope is that they will use this ‘Hurricane Andrew moment’ to look closely at how they build on the island.

On the legal front, court proceedings are again underway following a delay due to the storms. The Commonwealth, COFINA, Employees Retirement System (ERS), Highway Authority (HTA), and Electric Authority (PREPA) are currently restructuring their debt under Title III of the Puerto Rico Oversight, Management and Economic Stability Act (PROMESA). The Aqueduct and Sewer Authority (PRASA) may also eventually follow this path due to damages sustained during Hurricane Maria. The restructuring of the Government Development Bank for Puerto Rico remains the only Title VI restructuring currently underway.

We await the Commonwealth’s new five-year fiscal plan, which will incorporate storm related damages and economic losses. The fiscal plan will likely contain no debt service payments for the five-year term. How the fiscal plan accounts for federal dollars and treats creditors remains to be seen. Additional court decisions expected in 2018 should give welcome clarity and a clear direction to the Title III cases highlighted above.

If Hurricane Maria was a left hook, then the Tax Cuts and Jobs Act may be the overhand right that knocks the island to its knees. Congress is set to end one of the Commonwealth’s few competitive advantages that helped to make it a medical manufacturing hub at a time when billions in taxpayer dollars are expected to be spent on recovery and rebuilding. The legislation includes a tax on intangible property of controlled foreign corporations (CFC), including those operating on the island. This tax would essentially treat Puerto Rico and other US territories as foreign countries.

Congress’s well intended attempt to protect American jobs with this new tax may have the unintended consequence of doing the exact opposite in Puerto Rico, where roughly 235,000 US citizens are employed in the manufacturing sector. This would not be the first time the island’s future has been directly impacted by the United States government. It was the phase-out of section 936, signed by then-president Bill Clinton, as well as their own inability to adapt, that marked the beginning of the end. The problems they face require long-term reforms that spur economic growth. We hope that future legislation addresses those needs.

Uninsured debt traded lower in price in response to the hurricanes, driven by the expectation of a reduction in economic activity and the possibility for lower recoveries. Insured debt has been driven to higher yields because of uncertainty and tax-loss selling pressure. With the entire picture in view, we think that carefully selected insured debt can still offer an attractive opportunity. As such, we remain buyers. Cumberland Advisors’ Puerto Rico Insured strategy does not include uninsured debt from any island authority but focuses instead on the headline-driven opportunity in carefully selected insured debt.

Shaun Burgess
Portfolio Manager & Fixed Income Analyst
Email | Bio


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




Key West, Bob Bunting

Bob Bunting, a friend and accomplished professor whose expertise includes hurricanes, joined our small, fact-finding group on a trip to Key West and five other Keys that were hit by Hurricane Irma. Here is his narrative of the trip, which he has agreed to share with our readers. We thank Bob for joining us and reflecting on his findings.

Hurricane Irma - Florida Keys

UPDATE – September 10, 2018 – Bob Bunting reminds us that one year ago, Hurricane Irma terrified citizens of Florida as the largest evacuation in US history and moved 6M people before the storm struck with 140 mph wind gusts at Marco Island before traversing the center of Florida. Had the storm moved 50 miles west, a knockout blow to Florida’s West Coast would have changed life as we know it. Now on the first anniversary of Irma, there is another massive storm named Florence that could have a catastrophic impact on the Mid Atlantic states after a weak hurricane season in 2018. It just takes one!

UPDATE – February 22, 2018 – Bob spoke,  at “Cuba and the Caribbean: What Now?” The full event ran from 8:00 a.m. – 3:00 p.m. and Bob participated in a presentation moderated by WWSB’s Chief Meteorologist Bob Harrigan. Focus was severe weather and it was held at the Selby Auditorium at USF Sarasota-Manatee.

A video of the day’s talks is available here: Cuba and the Caribbean: What Now?

On Monday, it was my privilege to accompany David Kotok, a small group of thought leaders and the press to Key West in the wake of Hurricane Irma. David, an avid fisherman, was concerned about the recovery of a small but important group of people who are professional fishing guides. As an atmospheric scientist and a former senior manager not only at NOAA but also at the National Center for Atmospheric Research, I was intrigued. Much of my life has revolved around studying, researching, and predicting severe weather events, especially hurricanes. When I was five, Hurricane Carol struck and damaged my childhood home, scaring my family. That was the moment I knew I wanted to be an atmospheric scientist. As life evolved, other interests have entered, but all have leveraged patterns and predictions as the baseline.

My takeaways from this personally impactful visit to Key West and the lower Florida Keys are far-ranging, and David asked that I share them with you.

With Hurricane Irma leading a record September for hurricanes in the Atlantic, the media was “all hurricanes, all the time.” But how quickly we forget disasters as the news cycle becomes shorter and shorter in the age of social networking, tweets, and 30-second sound bytes. The communications revolution seems to have reduced people’s ability to focus, and as a consequence very little is ever reported about the aftermath of serious disasters like Irma and Maria. That is too bad, in my view. Our visit was rich and impactful and much more interesting and educational than what we are exposed to in the daily blur. How I long for in-depth reporting.

Expectations of the government’s role in disasters have certainly changed over time. Government was created to protect life and property as its first and most important mission. It is not the government’s job to repair all the damage and rebuild once the initial disaster recovery phase is over. This is what I was told when I was forecasting severe weather events for NOAA.

The expectation of a bigger, more costly government role is hurting actual recovery processes. The real recovery structure starts with government, but the handoff after the initial phases is to a complex network of organizations, helpful volunteers, and storm victims, each with different strengths, weaknesses, and time frames.

Upon our arrival at the still lightly damaged Key West International Airport, our host Doug, a leader of professional fishing guides, began an all-day tour. He masterfully guided us as we observed how the hurricane and its aftermath had impacted the venerable and important economic subgroup of professional fishing guides.

Our first stop is a great-looking fishing retail store in downtown Key West. The owner laments that he is waiting for customers who are not coming because their impression is that there has been great damage to Key West.  Key West, 30 miles southwest of where Irma’s eye made US landfall, did sustain damage, but most repairs are complete and the town is open for business.

Next we see Doug’s house, further north and closer to ground zero where Cat 4 Hurricane Irma roared ashore.  As we pull up to his home heavy damage is evident, and the sights and sounds of workmen rebuilding create a memorable scene. Doug says he is experiencing a “too long” lull in business and explains with a half simile that he is “self-insured.” Sadly, while the hurricane was bad, the lingering perception created by media hurricane coverage continues to amplify the negative economic impact some two months after landfall.  The fish, not knowing any of this, are reported to be biting strongly.  Too bad the fishermen are not enjoying themselves here on this nearly perfect day!

Now it’s on to Big Pine Key – ground zero – some 12 miles further north.  It’s two months since landfall and we see massive damage, piles of debris, boats strewn along the roadways, one painted with “Do Not Remove.” Then more visuals, including, wrecked cars, every conceivable household item, piles of broken mangroves, and mangled street signs, one reading “Do Not Dump: $500 Fine,” next to a field of small American Flags.  Goosebumps!

This is where John, a guide with a wife and two young children, once lived. John did not want to join us in his ruined neighborhood where we met the Millennial philanthropists. He and his family are in temporary housing supported by cash philanthropy of the Guides Trust Foundation. But meet him we would at the end of this memorable day!

Money plays a critical role in recovery, but actual human assistance should not be underrated. On Big Pine Key we fortuitously crossed paths with a group of Millennials that were highly motivated to help. Going house to house, helping folks in need and sleeping in a nearby church, these young people were having a wonderful time with one another while doing great service. What a human interest story and one that has been totally missed by the media, which has long departed. BTW, this Y generation is often talked about as being both entitled and spoiled.

While I can attest to those attributes after having taught about a thousand of these young adults in my entrepreneurship classes at the University of Colorado Leeds School of Business, it is also fair to say that they are focused on helping the world be a better place. They should get credit for that! The cadre of young adults on Big Pine Key are building self-esteem and perfecting the ability to communicate socially without devices. This experience will serve them well in a 30-second-soundbite and multi-megabyte world!

All of this is “good news,” and we need to focus on more on it. The media outlet news cycle seems to recognize only political controversy and deviant behavior, while real news stories like this one are not of interest. Having met thousands of people, my guess is that 95% of them are caring, helpful, and good-to-great human beings. Such is the case in Key West, where people have pulled together in the face of great adversity and have become closer, more optimistic, and grateful!

I have questions running though my mind. Isn’t it ironic that gratitude sprouts when times are tough? What ever happened to in-depth reporting? Is it a victim of rapid communication and our multitasking society? Is the communications revolution really increasing communication or making us more remote because human interaction is not needed and perhaps not wanted? I continue to ponder.

After lunch at the No Name Cafe we stop at National Key Deer Refuge. The park ranger assures us that the wildlife and biota are all recovering nicely but says they had to truck in water for the deer because after the storm the water was too salty. Interesting!

As we head back toward Key West, iguanas are darting across the road.  They somehow found their way to the lower Keys and seem to be flourishing on the hibiscus. We pull into a small waterway, where John, the guide without a home, boats in and begins talking with us.

Still worried but not afraid, he is bubbly and optimistic about his family’s future and displays solid determination despite many issues with business and rebuilding his home.  After two months, he still waits for FEMA and the insurance companies to get to his case. His children are in a new school and the family is comfortable, thanks in part to a gift from the Guides Trust Foundation. I am struck by his clarity, resolve, and gratitude in what is a nightmare situation. His children are not afraid of hurricanes but wonder when the next one will hit. John says he has experienced three hurricanes in the past 18 years or so.

He says there is only one thing he hopes will not go back to its pre-storm condition, and that is the connection he now has with his coworkers in the guide business, not just on the Keys but all over.  I realize that John has gained something special from the disaster that took away his home, damaged his livelihood, upset his kids’ schooling, etc. Watching him, I wonder why society is so averse to experiencing setbacks that provide such meaningful learning and growth.

Hurricanes are ever-fascinating, so magnificent in organization, scope, and awesome power – but so scary when they are headed toward you! To see the gradient of damage from downtown Key West to Big Pine Key was amazing, even to someone who has flown into hurricanes. Destruction was contained in Key West but almost beyond belief in Big Pine Key just 29 miles away, where a 10-foot storm surge and 130 mph winds created an unearthly scene. As an atmospheric scientist who is one because of a hurricane long past, I am certain I followed the right path.

The piles of debris are memorable. The fact that we humans lead lives that are defined in part by artificial “needs” and the consumption a lot of stuff hit me. I am told that 1.2 million cubic feet of debris has been removed from the area north of Key West, and it looks like millions more are still waiting for removal. It will take time.

It is remarkable how well the infrastructure did in the face of the storm, even on Big Pine Key, confirming that hurricane-prone areas need to be built using methods and materials that ready them for storms. A few weeks after Irma, Maria hit Puerto Rico. The impacts were similar, but the outcome was different.

Clearly, investments in infrastructure in the Keys have provided a strong backbone, but Puerto Rico lacked that advantage. My takeaway is that governments can function well at strategic levels if the people running them are capable, honest, and motivated to protect. After all, this is the #1 function of government.

As we took off in the Twin Air for our trip back to Sarasota, I looked back at the runways and a view of the beautiful Keys just before sunset. I am ever more clear as to how what happened on Big Pine Key could have happened on Longboat Key/Sarasota, where the forecast was for a Cat 5 hit with a 10-foot storm surge. A very small change in path happened as Irma moved over Big Pine Key – that jog to the north drove Irma inland east of Longboat/Sarasota by about 30 miles… the same distance that separates Key West from Big Pine Key! So grateful!

In closing, I am surprised at how much this trip inspired me. First we saw devastation, then we observed that the initial government-led recovery, followed by a complex web of nongovernmental help backed by individual and organizational philanthropy and victim self-help, seems to be working – more proof, in my opinion, that we can do anything we want once we decide what we want to do. What a Good News story!

Bob Bunting
CEO, Waterstone Strategies
bobsstocks.com

Pledges to the Guides Trust Foundation can be made through their website: http://guidestrustfoundation.org/memberships-donations.cfm

See pictures online at www.cumber.com/key-west-bob-bunting/


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




Puerto Rico and Recurring Hurricanes

Last Monday, November 6th, I was privileged to serve on a panel discussion at the American Enterprise Institute in Washington DC, where the topic was Puerto Rico after Hurricane Maria. The discussion covered a wide range in topics that included the damage to Puerto Rico as well as issues of finance, law, and markets.   The proposed solutions to the problems ranged from a Marshall Plan-type of approach to direct Federal oversight.  Included in the discussion were the social issues that are also affecting Puerto Rico and in some cases are obstacles to progress.  The link to see this panel discussion is here:

http://www.cumber.com/john-mousseau-panelist-at-american-enterprise-institute-puerto-rico-discussion/

One of the panelists at AEI was Alex Pollock. Alex is a distinguished fellow at the Washington-based R Street Institute, where he provides thoughts and policy leadership on financial issues.  Here is the link to his bio:

http://www.rstreet.org/people/alex-j-pollock/

Alex has written a terrific piece on the meteorological conditions that affect Puerto Rico, and hurricanes in particular. His analysis has implications for the rebuilding of Puerto Rico near-term, as well as longer term-implications on issues running from federal intervention to possible future statehood.  With Alex’s permission we present it here.

John R. Mousseau, CFA
Executive Vice President & Director of Fixed Income
Email | Bio

 


Puerto Rico has a long history of many disastrous hurricanes, as once again this year with the devastating Hurricane Maria.  These disasters recur frequently, historically speaking, in an island located “in the heart of hurricane territory.”   Some notable examples follow, along with descriptions excerpted from various accounts of them.

-In 1867, “Hurricane San Narciso devastated the island.”  (Before reaching Puerto Rico, it caused “600 deaths by drowning and 50 ships sunk” in St. Thomas.)

-In 1899, Hurricane San Ciriaco “leveled the island” and killed 3,369 people, including 1,294 drowned.

-In 1928, “Hurricane San Felipe…devastated the island”–“the loss caused by the San Filipe hurricane was incredible.  Hundreds of thousands of homes were destroyed.  Towns near the eye of the storm were leveled,” with “catastrophic destruction all around Puerto Rico.”

-In 1932, Hurricane San Ciprian “caused the death of hundreds of people”—“damage was extensive all across the island” and “many of the deaths were caused by the collapse of buildings or flying debris.”

-In 1970, Tropical Depression Fifteen dumped an amazing 41.7 inches of rain on Puerto Rico, setting the record for the wettest tropical cyclone in its history.

-In 1989, Hurricane Hugo caused “terrible damage.  Banana and coffee crops were obliterated and tens of thousands of homes were destroyed.”

-In 1998 came Hurricane Georges–“its path across the entirety of the island and its torrential rainfall made it one of the worst natural disasters in Puerto Rico’s history”—“Three-quarters of the island lost potable water”– “Nearly the entire electric grid failed”—“28,005 houses were completely destroyed.”

-In 2004, Hurricane Jeanne caused “severe flooding along many rivers,” “produced mudslides and landslides,” “fallen trees, landslides and debris closed 302 roads,” and “left most of the island without power or water.”

-And in 2017, as we know, there was Hurricane Maria (closely following Hurricane Irma), with huge destruction in its wake.

These are some of the worst cases.  On this list, there are nine of them in 150 years.  That is, on average, one every 17 years or so.

All in all, if we look at the 150 year record from 1867 to now, Puerto Rico has experienced 42 officially defined “major hurricanes”—those of category 3  or worse.  Category 3 means “Devastating damage will occur.”  Category 4 means “Catastrophic damage will occur.”  And Category 5’s catastrophic damage further entails “A high percentage of framed homes will be destroyed…Power outages will last for weeks to possibly months.  Most of the area will be uninhabitable for weeks or months.”

Of the 42 major hurricanes since 1867 in Puerto Rico, 16 were Category 3, 17 were Category 4, and 9 were Category 5, according to the official Atlantic hurricane database.

Doing the arithmetic (150 years divided by 42), we see that there is on average a major hurricane on Puerto Rico about every 3 ½ years.

There is a Category 4 or 5 hurricane every 5.8 years, on average.

And Category 5 hurricanes occur on average about every 17 years.

There are multiple challenging dimensions to these dismaying frequencies–humanitarian, political, engineering, financial.  To conclude with the financial question:

-How can the repetitive rebuilding of such frequent destruction be financed?  Thinking about it in the most abstract way, somewhere savings have to be built up.  This may be either by self-insurance or by the accumulation of sufficiently large premiums paid for insurance bought from somebody else.  Self-insurance can include the cost of superior, storm resistant construction.  Or funds could be borrowed for reconstruction, but have to be quite rapidly amortized before the next hurricane arrives.  Or somebody else’s savings have to be taken in size to subsidize the recoveries from the recurring disasters.

Is it possible for Puerto Rico to have a long-term strategy for financing the recurring costs of predictably being in the way of frequent hurricanes, other than using somebody else’s savings?


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




John Mousseau Panelist at American Enterprise Institute Puerto Rico Discussion

Hurricane Maria delivered a serious body blow to the Puerto Rican economy by severely damaging much of the island’s infrastructure. This raises the prospect of a humanitarian crisis on the island and a mass wave of migration to the mainland.

John Mousseau of Cumberland Advisors joined other panelists during a seminar at the American Enterprise Institute that took stock of Puerto Rico’s post-hurricane economic prospects.

John Mousseau Panelist at American Enterprise Institute Puerto Rico Discussion

Having occurred Monday, November 6, 2017 between 2:00 pm & 4:00 pm, it also explored the appropriate policy response from Washington to the Puerto Rican crisis and the issue of how the island’s debt might be restructured. A livestream of the event was generated from AEI’s  YouTube page.

Panelists & Participants:
-Andrew Biggs, AEI
-Jose Carrion, Financial Oversight and Management Board for Puerto Rico
-Anne Krueger, Paul H. Nitze School of Advanced International Studies
-Desmond Lachman, AEI
-John Mousseau, Cumberland Advisors
-Alex J. Pollock, R Street Institute
-Antonio Weiss, Harvard Kennedy School

Join the conversation on social media by following @AEI and @AEIecon on Twitter and Facebook.

Watch the recorded video of this engaging panel talk below:

Learn more about John Mousseau here: http://www.cumber.com/team/john-r-mousseau/


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.




Puerto Rico Needs a Plan

Excerpt below:

President Donald Trump suggested last week that Puerto Rico’s $74 billion in debt would be wiped out. In response, Puerto Rico’s bonds, which had been surprisingly resilient up until Maria hit, plummeted.

Even some insured municipal bonds fell, after initially trading above par post-Maria. Yields, which move inversely to prices, rose from about 4.1% to 4.75%, and then fell back to 4.3%. “That’s a lot of gyrations off of one statement that didn’t mean anything,” says John Mousseau, director of fixed income at Cumberland Advisors. His firm owns insured Puerto Rico debt and bought more during the panic.

What’s next? Puerto Rico needs emergency aid—whether in the form of grants or very low-cost loans—and Congress has no choice but to step up. After that, a comprehensive plan to rebuild and modernize its infrastructure is needed. That could halt the dire problem of outmigration by creating new jobs and boost the economy by allowing tourism to flourish, says Mousseau.

Read the full article here: http://www.barrons.com/articles/puerto-rico-needs-a-plan-1507351565




Trump sends Puerto Rico bonds reeling

The stock market has gotten pretty good at discounting some of President Trump’s more freewheeling rhetoric on North Korea, taxes and other issues. But the bond market had no idea what to make of Trump’s comments late Tuesday that the U.S. might have to wipe out Puerto Rico’s $74 billion in publicly held debt.

Cumberland Advisors’ David Kotok emails on Trump: “No idea what he means. It certainly threw a curve at markets. There is a federal oversight system already in place. The pre-hurricane debt needs restructuring and this is widely known. Trump is an enigma.”

Read the full article here: http://www.politico.com/tipsheets/morning-money/2017/10/05/trump-sends-puerto-rico-bonds-reeling-222655


Links to other websites or electronic media controlled or offered by Third-Parties (non-affiliates of Cumberland Advisors) are provided only as a reference and courtesy to our users. Cumberland Advisors has no control over such websites, does not recommend or endorse any opinions, ideas, products, information, or content of such sites, and makes no warranties as to the accuracy, completeness, reliability or suitability of their content. Cumberland Advisors hereby disclaims liability for any information, materials, products or services posted or offered at any of the Third-Party websites. The Third-Party may have a privacy and/or security policy different from that of Cumberland Advisors. Therefore, please refer to the specific privacy and security policies of the Third-Party when accessing their websites.

Sign up for our FREE Cumberland Market Commentaries

Cumberland Advisors Market Commentaries offer insights and analysis on upcoming, important economic issues that potentially impact global financial markets. Our team shares their thinking on global economic developments, market news and other factors that often influence investment opportunities and strategies.