Climate Change Will Eat Your Bond Portfolio
A monster is lurking just around the corner
The Washington Post story entitled Survivors of Hurricane Michael in the Florida Panhandle fear they have been forgotten stood out when I was looking through my news feed the other day.
One of my first climate change articles, Two Tales Of One City detailed the effects of a changing climate on a specific company, The St. Joe Corporation JOE, whose main assets are properties in the Florida panhandle.
I wrote Two Tales of One City back in October, after Michael bulldozed straight through St Joe Corporation’s home base of Port St. Joe, but didn’t think much about the situation again until I received a phone call from a resident of the city asking for help.
The caller was at wit’s end. The beachside resort with the charming small-town feel that she calls home is still in tatters, six months after the storm. The St. Joe Corporation doesn’t seem motivated to help with rebuilding, she said, if rebuilding were even possible. She explained that, right now, construction work was close to impossible on account of a lack of housing for victims, let alone workers.
The Post article fleshes out the caller’s plight and the plight of her neighbors:
Many residents are living in damaged homes or trailers unfit for human habitation. Some live in tents. Homeowners are frustrated by stingy insurance companies and bewildering government paperwork, and they’re wary of shady contractors.
To add insult to injury, FEMA housing vouchers for Hurricane Michael survivors are expiring this month.
Donations to victims of Hurricane Michael have been much lighter than to those of other Atlantic and Gulf Coast storms, but while the depth of people’s suffering on Florida’s forgotten coast is unusual, the fact of it is not.
Houston, my hometown and one of the wealthiest cities in the nation, still has large swaths of housing that remains unlivable and unlived more than a year after Hurricane Harvey dumped millions of gallons of rain. This situation persists despite the importance of the Texas electorate to national politics and half a billion dollars of charitable contributions flowing into Houston after Harvey.
Do I even need to bring up Puerto Rico? American citizens living there have been offered proof, if further proof were needed, that they are — by any sensible definition of the term — second-class citizens.
These examples offer a grim look at what I believe to be an underappreciated effect of climate change: economic stagnation.
A flurry of economic activity has occurred, to a greater or lesser extent, at each of these sites of not-quite natural disasters ( Natural disasters are no longer purely natural says the EDF). While that economic activity might be counted as “growth” when GDP statistics are compiled, in a very real sense, it is not.
The money, time, and energy flowing into areas affected by climate-related disasters (which include Midwestern flooding, California wildfires, and the hurricanes mentioned here) are applied to restoring a region to its original condition rather than to expanding capacity.
To paraphrase Bono, climate change is forcing us to run to stand still.
Stagnation and the increasing risk of loss due to climate-related disasters will, I believe, start to negatively affect the market for financial instruments traditionally thought of as “safe” — government and corporate bonds.
Government’s ability to issue bonds rests on their power to tax its citizens. Municipal, state, and federal governments have a partial claim on all economic activity within their jurisdictions, and if the value of that claim falls, bonds backed by the claims will become riskier. Investors demand higher yields from riskier investments, suggesting that the price of current on-the-run bonds will fall (bond prices move opposite to yield).
For a case study of this — albeit not one related to climate change — one has only to look at how Detroit’s bonds fared as its economy sputtered.
On the corporate side, the PG&E bankruptcy shows us that economic risk is rising for companies as well. While the effects of climate change are still fairly diffuse, the bond market impact due to the failure of a single regional utility provider is slight. But as these types of events cluster and become more notable, the impact on corporate yields is likely to become more obvious as well.
And now for a few questions to my gentle readers:
- How much of you and your family’s investment portfolios are allocated to “safe” government and corporate bonds?
- Do you have a sense when you invest in bonds that the asset you hold is another party’s liability? (Thanks to Real Vision’s interview with Anthony Deden for underscoring this point to me)
- Have you attempted to increase the yield on your bond portfolio by investing in riskier assets or in longer-tenor bonds? (Both of which strategies expose an investor to increased sensitivity in changes in yields…)
Investing during paradigm shifts is perilous. Beneath every crisis lies an opportunity. These are facts that anyone seeking to build and maintain intergenerational wealth must consider. Intelligent investors take note!
I am an investor interested in public and private companies whose focus is finding ways for human civilization to adapt to climate change. You can find out more about my work at IOI Capital.
Originally published at https://www.forbes.com.
