Damage Assessment & Recovery
In preparing for this article, I was certainly thinking about the impacts from Hurricane Ian, but I was also pondering the recent market activity. This title clearly applies to both.
First is the consideration of Ian’s devastation on Florida. Clearly the damage has been extensive. We are also not clear on tragic injury and loss of life. When an event such as this occurs, we know that the warning systems and the advanced planning can never be enough.
Early damage estimates are in the range of approximately $70 billion. This level of damage surpasses any event in recent memory. What caught my attention was the Governor’s emphasis on the damage to a few bridges that would need structural attention. There was another report of the collapse of a causeway approach to a bridge. Conditions must be somewhat safe for the engineers to be able to go out to conduct their assessments.
In the case of repairing bridges, there is the time element. Ordering, fabricating, and installing specialty steel even when the order is pushed to the head of the line may take months. What alternatives may be available in the meantime also takes careful planning.
Florida has had the CAT Fund in place for many years. There has always been issuance on a short-term basis ongoing to provide liquidity when an event occurs. This time it is probable that there will be some long-term issuance that will be necessary. The CAT Fund is the primary insurer for many residences in the state.
The economic fallout from such an event also has a pattern to it. Initially, there is a decline in economic activity due to many distinct factors. When the recovery effort commences, the economic activity accelerates, and the early evidence may be seen in sales tax receipts. There may be some categories of items that are employed in the recovery that may receive special treatment or exemption from the sales tax for a period.
Another principal factor is FEMA’s actions in the aftermath. There is always the discussion of FEMA’s operations on the ground and the level of coordination with local officials. In the past there have been criticisms about slow response time. There was more time for preparation in this instance.
Localities tend to have umbrella insurance in place for property & casualty exposure or they have a self-insurance fund of some kind. Flood and hurricane are often not covered fully or there are very high deductibles for each event. One would anticipate after federal and state aid and any successful insurance claims that localities in Florida may have to do some issuance for the recovery phase. The market should be receptive to the supply holding other factors constant.
The other damage assessment is intended for this market we are experiencing. Any recovery appears to be a distance away. One day’s gains in equities have been tempered by the next day’s losses. We have a sound understanding of what course the Fed will adhere to in the name of taming inflation. But what we do not have is confidence about whether a modicum of stability may be gained.
Turning to the municipal market, despite the credit strengths and relatively cheap ratios to the equivalent Treasury securities, the market has been under pressure from elevated outflows from the mutual funds. When this condition will abate is far from clear. One bright spot is that the municipal ETFs are benefitting from inflows. The feature that an investor may sell at any time is helping the category.
Municipals are certainly appealing from the Buy & Hold perspective. Now that yields have climbed it is easier to see the way clear towards doing so. Holding municipals on the shorter to intermediate end has appeal at higher yields while stocks are sinking. There is a level of price exposure on the shorter end if one were more interested in trading.
The old rubric that the next best fixed income investment to a Treasury security is a municipal rings true. It is just exceedingly difficult for many to maintain confidence in this environment. Any safe harbor or just sitting in cash is the real competition and we know that the latter behavior has its own costs.
John Hallacy
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