Watch the Weather – it’s the No-See-Um that could roil markets

Blain’s Morning Porridge July 2 2021 – Watch the Weather – it’s the No-See-Um that could roil markets

“Julius Caesar and the Roman Empire, couldn’t conquer the blue sky…”

This Morning – The dramatic global weather seen in June could be a wake-up call for us all. Green-bond huggers and ESG-compliant investment committees are determined to do the right thing to get us carbon neutral by whenever, but the climate crisis may be upon us now… which means we need immediate solutions – like insurance and how to mitigate the enormous and escalating potential costs of weather events like “heat-domes”, storms, flood and drought. Today. Not Tomorrow.

I should really be thinking about the US payrolls number later today, what other indications of a rampant or deflating global economy are occurring, or wondering where the current bond yield/gold breakdown stems from. Every morning I wake up terrified of what I might miss in terms of markets – and often I miss the stuff in clear sight.

Throughout my inglorious career in financial markets I’ve come to realise its No-See-Ums that tend to cause the biggest crisis. A no-see-um, (some might call them black swans) tend to be so blindingly obvious that most folk can’t see them at all.

This morning might be one of these days, or perhaps I’ve stumbled on to something really important: The Weather. Maybe it’s the big No-See-Um?

Thinking out loud, but what if all the massive government support and central bank intervention to stem the economic consequences of the pandemic has just been a rehearsal, a rehearsal for much more challenging times ahead caused by increasingly unstable global climate events?

Wow, you think… what have I been smoking…

Let me explain

This morning, while perusing my iPad, I got fixated on a Bloomberg article: “Summer Is Already Off to a Wild Start”. It chronicles a series of recent freakish weather events around the globe; the 4-Sigma “heat dome” that’s killing hundreds of Canadians (4-Sigma meaning it’s 4 standard deviations away from the mean (actually 4.4)), a tropical storm in the South Atlantic (in winter! It shouldn’t happen), Tornadoes in Czech, and droughts around the planet. The article cites all these as further evidence of global warming, and concludes things will likely get worse.

I read it twice. It didn’t even refer to the Texas IceStorm earlier this year, and the power-outs that devastated the area. The article didn’t need to. It made its point well enough with June’s freak weather.

I sat back and thought about it.. It hit me like a one-ton hailstone… For all we worry about banning ICE cars by 2040, climate change is upon us – now. The costs of the real economic damage likely to be inflicted tomorrow by weather disasters could massively outweigh the theoretical economic gains that might be made in years to come from ESG led investment programmes…. Time to get practical about climate change – which means… insurance and massive state intervention to stem the negative consequences.

But first, a digression on weather..

Although I am not an Englishman – being from the far superior Northern Part of these Isles – I share their fascination for the weather. No matter where, or what the conditions, two Englishmen meeting in some foreign place will first comment on the weather before going to other matters. If you want to know where the most powerful computer in the UK is – ask the Met Office. Their predictions are getting more and more accurate as their models break down the incredible complexity of the weather system.

We can now download accurate weather predictions, watch live weather radar maps on your phone, and chart the perambulations of the JetStream. Our knowledge is far better than when Admiral Fitzroy set up the Met Office relying on observations from ships at sea and coastal stations. (He is the same Robert Fitzroy who skippered HMS Beagle taking Charles Darwin around the globe and inspiring “The Origin of Species”.)

Yet for all that we can obtain accurate forecasts, if I was to comment on the weather this year in Blighty, I could sum it up as “pants”. One day of sun and heat followed by weeks of torrential downpour. The point is – science increasingly understands the weather, but we remain powerless against it.

I don’t pretend to understand the weather’s complexity, but I do live it by it. As a keen sailor I want to know what its doing. I’ve come to understand the significance of where the Jet Stream is. We’ve all heard of La Nina and El Nino events in the Eastern Pacific, and how they change weather patterns around the globe – even if we don’t know which is which, or how their respective ocean-cooling and heating mechanisms work.

But it’s pretty simple – warm water powers up climate events, and the oceans are getting warmer.  Warm water powers the ocean currents. Warmer oceans mean storms – a succession of which are battering the UK this summer, following the jet stream straight into our coast. There are fears melting glaciers in Greenland, and cold water flowing into the North Atlantic exacerbates the problem.

The UK is probably lucky – we are getting it cold and wet.

In Canada the problem is a high-0pressure area of warm air being compressed by weather systems either side – the jet stream is forced to go around the resulting heat dome, compressing it more, meaning it gets hotter, keeping colder air out. The same thing is happening around the Caspian Sea. The result is over 300 deaths and a rising threat of wildfires up the whole Pacific Coast. Secondary effects include melting ice in the Rockies causing mountains to literally crumble. (It’s happening in the Alps as well!)

The market response to climate change is mixed.

For years no one believed in it. Climate was, at best, a minor issue – something for the PR dept to engage with beardy environmental cranks to generate good PR about saving polar bears……

Then things changed…. The market got woke and ESG became increasingly important. Now banks, investment managers and the while vast parasitical industry that feeds from savings, has embraced climate change full on. Everyone (except the US nutjobs who still don’t buy it), wants to mitigate climate change…

But, constructing more windfarms, building more nuclear reactors, and pockmarking the planet with lithium mines and land fill sites to bury the pollution they generate – well, it’s all essentially reactive.

Weather is happening. It is happening now.

The economic damage from weather events is rising and rising fast. No matter how well-intentioned…. Greta Thunberg, Climate Wokery, and ESG/Climate-aware investment committees are not going to stop rising 3,4 and 5 Sigma climate disasters. No amount of pontification by investment management committees about not-investing in a steel plant is going to hold back the next, more powerful Atlantic Storm. Billionaires attempting to burnish their green credentials by sucking CO2 out the atmosphere aren’t going to stem a terrible wild-fire season.

Wake up, and smell the burning forests… Climate change is here…

The best we can do is be aware of the crisis coming and ready for it. If you think buying a Tesla today, or investing in green hydrogen will save us… think again. The crisis is here. Sure, we need long-term thinking to repair and improve the environment and climate, but in the next few short years the priority is going to switch to paying immediate costs.

The damage is going to be immense. The cost of insuring against weather disasters is going to rise – dramatically. Natural disasters caused $268 billion of economic losses in 2020 according to a report by the World Economic Forum; “The industries most at risk from extreme weather – and how to protect them.”

The WEF suggests climate-impact is now the major priority. It recommends “Parametric Insurance” which pays out depending on the severity of weather events (read about it in the report). Swiss Re reckons the level of the global protection gap in 2020 was $113 bln – uninsured losses that will occur from catastrophe events. The sectors most at risk from climate disaster are Agriculture, Construction, Tourism, and Renewable Energy (yeah, you were not expecting that one…)!

If you tend to think in terms of crisis spelling opportunity… well here is your chance to reinvent the insurance industry. Perhaps it’s time to be thinking as much about how to pay for immediate mitigation of climate change and weather events as much we do when considering and evaluating “green technologies”.

If the immediate risk is being wiped out by rising temperatures and wild fires in the next few years, then maybe it’s time to stop hi-fiving ourselves about “green bonds” and renewable/sustainable greenwashing programmes that might deliver some future benefit 30-40 years down the road, and start worrying about the immediate threats!

If weather disasters are going to ramp up, then get set for much more government intervention, and time to read up on Catastrophe Bonds I think….

(And, remember: Blain’s Market Mantra No 4: Things are never as good as you hope, but never as bad as you fear…))

Five things to read this morning

BBerg – Six Fully Vaccinated People Died of Covid in Most Vaccinated Nation

FT – Lambda Covid variant’s “unusual” mutations puzzle scientists

FT – How to cope with the climate apocalypse

WSJ – Oil Prices Surge as OPEC Weighs Rising Demand in Rich Countries

Torygraph – Ireland rebels against Biden tax-deal in blow to US

Have a great weekend, out of time and back to the day job…

Bill Blain

Strategist, Shard Capital