This weekend we are looking at RISK through the lens of a weather/natural disasters and other assorted bad actors. Harvey has impacted the Texas gulf and Irma is bearing down on Florida while Jose churns in the Atlantic. Southern Mexico is dealing with the impact of a huge earthquake. North Korea is doing some serious saber rattling. A doomsday person must be loving this; the end is nigh! The fact of the matter is that all these events have a real economic impact. At the beginning of the summer the auto industry was under pressure as their market softened. Now, the auto industry and related suppliers outlook has brightened with the replacement of flooded property. At the same time the insurance industry looks pretty concerned from a liability. For traders, there are certainly short term opportunities here, but there’s likely something more durable afoot – the impact of a less benign mother nature – that, as investors, we all need to consider.
Howard Marks latest missive to his shareholders, an amazing chart on the world economy over time and a wonderful presentation on risk from Barry Ritholtz round out our list this week.
Here is a curated list of important stories outside the main headlines that caught our attention this week.
There They Go Again…Again? (Howard Marks, Oaktree Capital Management). Howard Marks wrote one of my very favorite investment books, The Most Important Thing, and this is his latest memo to his investors. Not surprisingly, he is writing about the state of valuations and the risks that he sees to those valuations from market factors and exogenous risks. In short he argues that the current state of things is unusual in the number of risks, their severity (in terms of consequence) and their insolubility relative to history. This is an excellent read to ensure our feet are squarely on the ground as we look at our investments at a portfolio level as well as individual positions that might be vulnerable to these risks.
The Economics of Extreme Weather Events (Malte Jahn – Hamburg Institute of International Economics). This is an academic paper from 2015 published in Europe that does a wonderful job orienting an outsider to how extreme weather events affect our Western economies. You know we like frameworks and that is exactly what this paper offers us – a framework for structuring what we know about an extreme weather event and then beginning to make hypotheses and draw conclusions about it’s effects going forward.
How Hurricanes Harvey and Irma Will Slam the U.S. Economy – A Complete Walkthru from BofA (posted to ZeroHedge.com) – In the spirit of treating the “short termists” in all of us with equal time, here is a synopsis of Bank of America’s Michelle Meyer on how the hurricanes will be used as scapegoats for earnings misses and then the actual economic effects as they see them. It is a fascinating contrast to the above academic, more long run view.
Morningstar: Crashes & Terrorists & Sharks, Oh, My! (Barry Ritholtz @ The Morningstar ETF Conference). This is a paper about how to think about and thereby manage to risk(s). As Barry points out in the presentation, “we’re all going to die” and that’s a risk we live with and manage every day. But we have fears of how we might die that are down right unreasonable when you look at the data. My favorite fact from this presi, you ask? More Americans have been married to Kim Kardashian than were killed by sharks last year. True…true. Ritholtz goes on to talk about market risks, particularly exogenous ones and how we might think about those relative to history and our own internal fear of loss.
2000 Years of Economic History in One Chart (Jeff Desjardins – The Visual Capitalist Blog). One of Erik’s most interesting innovations is his visualization of option positions – gaining and accepting exposure and using those red and green bars to layer positions that include price and time to show up our risk exposure. The Visual Capitalist blog is a super place to get our economic and investing visuals on. This chart and some accompanying sub charts outline 2000 years of economic history in one place. Desjardins draws some interesting conclusions after carefully outlining some of the chart’s shortcomings. This is a cool read to see how the global economy has evolved over time and where the horsepower has come from.
