Cumberland Advisors Market Commentary – Hurricanes

Author: David R. Kotok, Post Date: August 27, 2020
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In the Indian Ocean they are called cyclones, in the Pacific Ocean, typhoons. The latter term comes from the Chinese tai fung, which translates as “great wind.” The Kʼicheʼ Mayans called their god of wind, storm, and fire Hurakan. European colonists adopted the word, and it became hurricane. (Source: A Furious Sky: The Five-Hundred-Year History of America’s Hurricanes, by Eric Jay Dolin, https://www.amazon.com/dp/B07ZTTHPB8/. This marvelous book, recommended by John Mousseau and me, covers 500 years of hurricane history.)

David R. Kotok

American history buffs will relish the story about the very first European settlements in the present-day United States – not Plymouth, MA, or Jamestown, VA, but a half century earlier at Fort Caroline (now Jacksonville) and St. Augustine. There is also the 16th-century history about how a September hurricane was the determining factor in a Spanish victory over the French. Jamestown wasn’t spared when a hurricane disrupted supply lines from England in 1608. Plymouth got hit, too, on August 15, 1635.

 

Hurricanes mean credit risk, property risk, and physical risk. They also lead to rebuilding and new growth. They are economic factors and investment market factors, and these days they are political factors as voters determine civic readiness and emergency aid deployment. In sum, hurricanes are a big deal. Because the Gulf of Mexico is so hot now relative to previous decades, Laura, which has barreled through Louisiana and Texas, causing extensive damage, is a very big deal — bigger than the storm would have been in a cooler Gulf. And that means the climate change debate heats up further; and it, too, is a big deal. 

 

We will leave this political debate aside, having had a lot of it in the last two weeks and anticipating a massive amount more in the next two months. 

 

Cumberland has focused a lot on hurricanes and on their credit impacts involving state and local governments’ municipal bonds. We have an internal review system of those credits, and we consider hurricane and other natural disaster risks as part of the muni management function.

 

Here’s our most recent piece that discusses muni credit and hurricanes: “Managing Hurricane Risk in a Bond Portfolio,” https://www.cumber.com/cumberland-advisors-market-commentary-managing-hurricane-risk-in-a-bond-portfolio/, by John Mousseau and Patricia Healy.

 

And here are a number of links to our earlier hurricane missives. We decided to list a few of them for readers who might then be able to draw some inferences about hurricane risk management and munis. You might enjoy the one about “domino” effects.

 

“Katrina,” September 1, 2005; https://web.archive.org/web/20061024101825/http:/www.cumber.com/commentary.aspx?file=090105.asp&n=l_mc. A summary of Cumberland’s portfolio strategy in response to Hurricane Katrina, written by David Kotok. Commentary on each asset class is included, by John Mousseau (tax-free municipal bonds), Peter Demirali (taxable bonds), and Matt Forester (exchange-traded funds).

 

“Katrina Bonds: Tax-free Municipal Dominoes??” David Kotok, September 4, 2005; https://web.archive.org/web/20061024101244/http:/www.cumber.com/commentary.aspx?file=090405.asp&n=l_mc. A case study of potential Katrina muni dominoes. Also summarizes Cumberland’s muni bond management actions taken in response to Katrina.

 

“Does Katrina = Fed to Full Stop?” David Kotok, September 7, 2005; https://web.archive.org/web/20061024102518/http:/www.cumber.com/commentary.aspx?file=090705.asp&n=l_mc. Advances the argument that Katrina could lead to a full recession and not just a few months of slowdown.

  

“Looking Irma in the Eye,” David Kotok, September 10, 2017; https://www.cumber.com/looking-irma-in-the-eye/. A personal account of meeting Irma head-on in Sarasota.

 

“Key West,” Bob Bunting, November 21, 2017; https://www.cumber.com/key-west-bob-bunting/. Guest commentary by Bob Bunting. Reports on a fact-finding trip to Key West and five other Keys that were hit by Hurricane Irma.

 

“It’s Hot and Getting Hotter – The Case for Adaptive Strategies for a Warming Planet,” Bob Bunting, August 29, 2018; https://www.cumber.com/guest-commentary-by-bob-bunting-its-getting-hotter/. Guest commentary by Bob Bunting, professor and meteorologist for both NOAA and the National Center for Atmospheric Research.

 

“Is Climate Warming Creating More Dangerous Hurricanes?” Bob Bunting, December 21, 2018; https://www.cumber.com/is-climate-warming-creating-more-dangerous-hurricanes/. Guest commentary by Bob Bunting.

 

Recorded livestream of the January 25, 2019, Climate Change Summit at the University South Florida Sarasota-Manatee, https://buff.ly/2WgFkWU. Patricia Healy speaks on how municipal bond ratings are affected by the preparedness of the issuers for severe weather events, the impacts of climate change, and other factors that may affect credit ratings.

 

In the risk-management business there are specialized research services that actually break down natural-disaster exposure by the CUSIP identifier on a municipal bond. Here is the risQ website, where you can get a sense of the nature of the service: https://www.risq.io/. By the way, it works for California wildfires, too. 

 

Laura is this season’s version of the Mexico Beach wipeout that hit Florida in 2018 or the Waveland, Mississippi, disaster in 2005. In our view the destruction from hurricanes will only worsen over time as sea levels rise and temperatures climb. 

 

Climate change is real. Just visit one of the places hit by a hurricane shock and judge for yourself. I have

David R. Kotok
Chairman of the Board & Chief Investment Officer
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Adapting to a Changing Climate – Global to Local Impact

From hurricanes to red tide and sea level rise, learn how a changing climate affects the Sarasota-Manatee region and the state of Florida. Speakers discuss the challenges and impact on Florida and other coastal communities while uncovering the adaptive strategies that bring unique social and economic opportunities.

Climate Change Summit 2019 USFSM

Watch the Climate Change Summit here: https://buff.ly/2WgFkWU

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Cumberland Advisors® is registered with the SEC under the Investment Advisers Act of 1940. All information contained herein is for informational purposes only and does not constitute a solicitation or offer to sell securities or investment advisory services. Such an offer can only be made in the states where Cumberland Advisors is either registered or is a Notice Filer or where an exemption from such registration or filing is available. New accounts will not be accepted unless and until all local regulations have been satisfied. This presentation does not purport to be a complete description of our performance or investment services. Please feel free to forward our commentaries (with proper attribution) to others who may be interested. It is not our intention to state or imply in any manner that past results and profitability is an indication of future performance. All material presented is compiled from sources believed to be reliable. However, accuracy cannot be guaranteed.
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