The Los Angeles wildfires that began Jan. 7th are still raging, and containment is low. Winds have slowed some but are expected to increase towards the end of the weekend, and some fear the fires could spread to San Diego County – so this disaster is not yet over. Little rainfall, dry tinder, and extremely high winds have made it difficult to fight the fires and have contributed to their rapid spread. At the governor’s behest the president declared the fires a disaster, allowing FEMA folks and funding to aid in dealing with the disaster and with rebuilding.
Our hearts and prayers go out to those who have lost loved ones and homes, and to residents experiencing stress from not knowing how long the situation will last (unlike with a hurricane, where forecasters have a pretty good handle on the timing and path of the storm). As of this writing, at least 13 lives have been lost and over 10,000 homes destroyed. Electricity has been turned off to reduce downed live wires from causing damage. But this means water is not pumping at some locations. Air quality is poor from the smoke. Schools are closed. Damage estimates by AccuWeather are $135 billion in property damage, affecting some very affluent areas; and economic losses encompass many items, including loss of pay, cost of relocation, etc. This estimate will likely grow as the fires rage on. Evacuation orders have affected 153,000 in a county of over 9.6 million people, covering 4,753 square miles.
The initial costs to communities affected by natural disasters can be great; however, after a natural disaster, there is usually a surge of economic activity that continues for an extended period as people and communities rebuild and FEMA funding, insurance money, and workers flow into the area, increasing income tax and sales tax revenues to municipalities. In desirable locations like California, earthquakes and wildfires, hurricanes and floods do not seem to deter residents from rebuilding. The declining availability of insurance for disaster-related risks could be a factor in rebuilding and could lead to more resilient properties on one hand or less development in risky areas on the other.
At Cumberland Advisors we invest in high-quality municipal bonds that are supported by a diverse economic base and strong financial and management metrics. These municipalities are generally highly resilient to economic challenges and natural disasters. Depending on the extent of damage and the ability to get the local economy moving again after a disaster, there could be strain on some issuers’ credit quality. We will continue to monitor our exposure and the paths of the fires, as well as the extent of local, state, and national support.
Patricia Healy, CFA
Senior Vice President of Research & Portfolio Manager
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