Mon 29 Oct 2012
Well, Hurricane/Tropical Storm/Extratropical Cyclone Sandy is currently beating the hell out of the mid-Atlantic, and apparently generating rain from Rock Hill, SC (about 75 miles to my north) all the way to Montreal. In Canada. That is a band about 820 miles wide. Earlier today, the heavy winds extended from Maine to South Carolina’s northern border. Lower Manhattan appears to be underwater. It is all pretty epic.
In all of the screaming and shouting, though, I have heard little about the possible dangers this storm could pose to our economy. Or, for that matter, the global economy. The damages from this storm are going to be spectacular – perhaps the most expensive single event ever, including the Boxing Day Tsunami. I speculate this simply because the storm is hitting the enormously densely populated DC-to-Boston megapolis, which contains a heck of a lot of really expensive real estate (especially by global standards). Far worse storms and events have hit populated areas on this planet, but I am not aware of anything of this magnitude coming ashore in an area this densely populated with high value real estate. Assuming a good bit of this real estate is insured, the insurance industry – and more accurately the reinsurance industry – are looking down the barrel of a really, really bad day. I have no idea who is exposed to what in this event, but I am sure a lot of folks are checking balance sheets to make sure they are not about to have an unable-to-cover-their-exposure kind of day. There has been talk of this sort of problem in the reinsurance industry for a while, but the industry is pretty robust. Last year it took a spectacular (and record) $105 billion in insured losses. I have no idea if Sandy alone will get us there, but it is a single event that could produce a very significant fraction of that total loss record. Those kinds of costs, all at once, are very daunting.
I’m also starting to worry about everyone who did not have flood insurance – which, I am betting, is a lot of people. It costs extra, and many folks don’t have money to spare, so they may have skimped. I doubt any state in Sandy’s path can afford to have entire chunks of productive neighborhoods in such high-value areas be treated in the manner some wards in New Orleans have experienced – i.e. abandonment, bulldozing, etc. Which means somebody is going to have to step in and pay for reconstruction…which means public money, either in state or federal funds.
Finally, the NY Stock Exchange is down, possibly for days. It is screwing up global trading by creating a gap in the trading day – basically, instead of largely continuous trading, there is now a sort of down time where prices close for a while, then pop open again when the next major market opens. It is hard to know the trend in prices during those down periods, which is introducing a little extra uncertainty into markets at the moment. I wonder what that uncertainty is going to cost?
Thanks Sandy. Nice job.