Cumberland Advisors Market Commentary – Wildfires Out West

Author: Patricia Healy, CFA, Post Date: October 8, 2020
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On Sunday, Bloomberg reported that this year’s California fires had scorched more ground than the last three years of fires combined. Higher temperatures and greater winds have contributed to the spread.

Patricia Healy, CFA

Year-to-date, the California fires have covered 4 million acres in 8,200 fires throughout the state. Some 8,400 homes and buildings have been lost, and unfortunately 31 lives; and there are still almost two months of peak wildfire season to go. Our hearts and prayers go out to all the affected families and first responders.

The loss is horrendous; however, California is a large state with a population of almost 40 million, covering 101.5 million acres, 33 million acres of which are forested. In terms of GDP, California has the fifth largest economy in the world. The majority of the population lives in several large cities, although more folks have moved to less populated and more forested areas that are prone to fire.

Each year, fires cause havoc and demands on resources, and then fire season is seemingly over. The rest of the world forgets as those who are affected rebuild with FEMA funds, state funds, insurance proceeds, and their own resources. States work on fire-prevention plans; first responders recover. Then rising temperatures, stronger winds, and still high “tinder” loads in forested areas combine, and the process repeats itself. Bloomberg notes that wildfires are estimated to cut 0.7% from US GDP in the third quarter. Will rebuilding in California, Oregon, and other affected states make up for that loss in the coming quarters? In many cases the rebuilding eventually does provide a benefit through increased sales taxes and employment as homes and business are restored.

Although many localities will benefit from FEMA aid and the increase in economic activity that comes with rebuilding, a fire or hurricane disrupts lives-business as usual, drains resources, and potentially leads to credit downgrades.

Hurricanes, flooding, and wildfires continue to wreak havoc on municipalities. Some are affected repeatedly, as longer-lasting and lingering storms are now causing severe flooding in areas that may not have seen it in the past. This year has brought one of the busiest hurricane seasons on record, and fires have affected much of the West. Evacuations, already fraught with anxiety, are a greater challenge given COVID-19 fears and the need for social distancing in an emergency. The frequency of events in some places may have inhabitants, insurers, and governments questioning the viability of rebuilding again and again in areas at high risk.

A September 2020 report by Moody’s reviewed the City of Mexico Beach, Florida, which was essentially flattened by Hurricane Michael in October 2018, and the City of Paradise, California, which was practically destroyed by the Camp Fire in November 2018. FEMA and state funding helped with debris clean-up and overtime costs. Mexico Beach and Paradise both have access to resources and technical advice; committed regional, state, and federal partners; revenue-raising ability in the case of Florida; and access to significant liquidity in California from the Pacific Gas & Electric Co., which was held liable for the fire.

Moody’s notes that Mexico Beach benefits from Bay County’s relatively desirable and affordable location on the Florida Gulf Coast and has attracted new residents and investors. The population increased approximately 44% from the point of the most recent census in 2010 until just before the hurricane, reaching nearly 1,500 people. Following the hurricane, the state estimated the population at 627. While older residents are choosing not to stay in Mexico Beach and rebuild, the desirability of the beachfront properties, whether for owner occupancy or investment purposes, is contributing to faster recovery for Mexico Beach.

Paradise embarked on a plan to make the town more resilient, but rebuilding has been constrained by the high cost and an extended timeline for rebuilding that has dissuaded both displaced and new residents and inhibited investor interest. The population of Paradise had remained relatively stable for 30 years before the fire, at about 26,500. Following the fire, the state estimated the population at 4,485. In total, about 35,000 residents of Paradise and surrounding unincorporated areas were displaced by the Camp Fire. The town’s nearest neighbors, the cities of Chico and Oroville, both saw a 20% increase in population, significantly straining their resources; but by the end of 2019, nearly half of those displaced by the fire had completely left Butte County.

At Cumberland Advisors we generally invest in municipal bonds that are supported by a large and diverse service-area economy with good financial management and strong financial metrics, which are characteristics of AA ratings. Diversification and financial strength allow these entities to weather a storm.  There are numerous other stresses that can affect the credit quality of an issuer, including high-grade issuers, which are not immune to downgrades. Some stressors can be long-tailed, such as the future funding level of a pension fund, and that has been one of the reasons for our not investing in New Jersey and Illinois over the years. Another example is the exodus of population over time which in the past has affected California’s bond ratings. The stressors can also be more immediate, such as an issuer taking on an unexpectedly large amount of debt or experiencing a fast drop-off in revenues, such as many issuers are contending with currently with the pandemic-induced economic shutdown. We constantly evaluate conditions, both short-term shocks and long-term trends.  In the case of fires and storms, prior to or during a potentially catastrophic event we evaluate our holdings to see if they are in the path of the event and make a decision to hold or sell.

Patricia Healy, CFA
Senior Vice President of Research and Portfolio Manager
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