Markets

Foggy Thursday – Smoke on the Water is our Latest Environmental Disaster

June 8, 2023

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“When it all was over
We had to find another place
Swiss time was running out
It seemed that we would lose the race

Smoke on the water, a fire in the sky
Smoke on the water” – Deep Purple

This is just too depressing to discuss.

Smoke from over 400 ACTIVE fires in Quebec and other parts of Canada which, thanks to Global Warming, has had an extremely hot, dry spring have caused tens of thousands of evacuations in that region and that smoke is drifting down to the US and engulfing our northern cities.

Western Canada’s early spring came early, when the vegetation hadn’t yet started to green up in the forest, which resulted in more fuel that contributed to the wildfires. Because the ground was so dry from the winter and the spring, fires in the province got into the ground, and that lead to more organic matter in the ground burning. That means you have to dig up the dirt to get the fire out – making it almost impossible to control.

Fires at Fort McMurray, Canada - Image of the Week - Earth Watching

“Wildfires like heat, they like dry hot conditions,” professor Kent Moore says. “So if the average has warmed up by 4 degrees then the extremes will have probably gone up by double that. Extreme temperatures will be 8 degrees higher than they were in the past and these extreme conditions can get these fires going and help them propagate.”

Our already-neglected infrastructure is also failing because bridges and dams, for example that have been built to withstand anything but a 100-year event are collapsing because a 100-year events are now a 20-year events – they can’t take the repeated stresses.

From a market perspective, there are a number of major insurance carriers that have significant exposure to fire insurance or property insurance that could be triggered by fires. The two publicly traded companies (State Farm is first but private) with the most exposure are:

Allstate (ALL) is the second-largest property and casualty insurer in the United States, and it also has a significant amount of exposure to fire insurance. In 2021, Allstate reported that approximately 9% of its total property and casualty premiums came from fire insurance.
Progressive (PGR) is the third-largest property and casualty insurer in the United States, and it has a significant amount of exposure to fire insurance. In 2021, Progressive reported that approximately 8% of its total property and casualty premiums came from fire insurance.

ALL is on our Watch List and it’s a shame as we really like them as a value play but this is why we watch stocks before we decide to add them to our portfolios – a heavy wildfire season means they are too exposed to take a chance on for now but, if they sell off more than is warranted – we’ll be excited to jump in.

Now, in another kind of flood – a flood of debt – our beloved Government had not been able to borrow money since they hit the debt ceiling on Jan 19th but the bills kept coming in and now that we have authorized $4,000,000,000,000 more in debt, it turns out we need $1Tn by September.

As we can’t possibly expect to auction off $1Tn of new debt in the next 90 days externally, the borrowing spree is set to pull cash from Banks and other Lenders into Treasury securities, draining money from the financial system and amplifying the pressure on already stressed Regional Lenders.

To lure investors to lend such huge amounts to the government, the Treasury faces rising interest costs. Given how many other financial assets are tied to the rate on Treasuries, higher borrowing costs for the government also raise costs for banks, companies and other borrowers, and could create a similar effect to 1 or 2 0.25% increases from the Federal Reserve. That is on top of their June 14th, July 26th and September 20th rate decisions!

You can see how that’s already affecting the bond market and it’s not going to get better as rates will have to go up and up at auctions in an attempt to bring in over $300Bn/month when usually we struggle to get over $100Bn auctioned near the targets (new debt, not including the $300Bn that rolls over each month!).

At the same time (now!), bailing out the banks in March and April has left the Treasury General Account at $71.2Bn as of June 5th and they need to get it back to $425Bn by the end of June. If you have $353.8Bn laying around, please give Janet Yellen a call – she’s turning over couch cushions as we speak…

That is in addition to the FDIC needing a refill as well and they will shortly be requiring large Member banks to refill the tens of Billions of Dollars they just laid out to cover the recent banking crisis.

All in all – that means money is going to tight in Q3 – potentially a liquidity crisis but we’ll have to wait and see how creative our Government is going to be to fill in this multi-Trillion monetary hole we’ve gotten ourselves into.