Weather Report: Expansion

Irma Resize

I was going to publish this blog last week. After all, in my last posting I said I wanted to get back to more regular releases. But as I was discussing the topic with an old friend with lots of wisdom I often draw on, I was advised that it was a bit too soon. So I waited. Long enough…at least as long as I could. I’m going to write about hurricanes…

This is not a topic that I’m taking lightly. I have friends and family who narrowly escaped major impact, and others that will be feeling it for years to come. I do understand that the last few weeks have wreaked havoc on large pieces of the country, and that disasters like these should be taken seriously not just with people you know, but as a whole. I hope that everyone reading in the US has found a way to contribute in the time since the storms struck, and that those outside the US do the same when their neighborhood or country endures something like this. This is when societies come together to help each other.  That is why we need and have societies in the first place. And societies drive markets, though I don’t think Thomas Hobbes and John Locke put it quite that way.

It’s well known that wartime is generally bullish for markets. Whether the cause is noble or not, the economy will generally reap a benefit in the form of invention, output, and employment. Wartime means more people in the armed services and less available for private employment. This of course leads to a growing economy as more people are employed, wages are pressured higher, spending expands, and with it the economy.

But what about hurricanes and other natural disasters. If ever there was a cliché that comes into play now, it’s that “Every cloud has a silver lining.” And seeing that silver lining will help us with our portfolios as well. Think about it. There’s a lot of rebuilding to do. A LOT. And while the unemployment rolls may increase, the increase is only temporary. People left their homes. Then they came back to a disaster area and needed to tend to their biggest concerns. Family ok? What can I salvage? Let me stop it from getting worse by emptying the house and cutting walls to prevent mold.

Then what? Rebuilding. And that takes money. So the government “finds” a few billion and then a few billion more and then a few billion more. Who is going to vote against that type of domestic aid? Private individuals like you and I contribute what we can. JJ Watt of the Houston Texans football team was able to raise over $37 million. The Hand In Hand concert raised over $44 million. That’s over $80 million and that’s just two efforts. Add the Red Cross, religious organizations, and the many other groups helping with financial donations and the numbers get pretty large, pretty quick.

Employment? Many people will claim benefits for a couple of weeks, but then will be employed again. Most large firms will bring back former employees to help rebuild, and of course keep them on still when business gets back to any sense of normalcy. The rebuilding effort itself will command a large workforce. Blue collar labor that is looking for work and willing to temporarily relocate won’t have any problem finding that gainful employment. The government programs that are set up for people to draw from for rebuilding can actually be used for rebuilding if people still have jobs to pay for food. This is what further expansion is all about.

Let’s look at retail. Home Depot received a hurricane alert 3 days before Harvey struck Texas. Immediately they dispatched “about 700 truckloads of supplies to its Texas stores in the path of the hurricane.” This was necessary as people prepared for the storm. But while Home Depot certainly worked hard with the idea that people’s lives would be somewhat less impacted with proper preparation such as boarding up windows, etc., the effort was not entirely altruistic. In fact, the title of the article was “How Home Depot Braced for (and Profited From) Harvey’s Impact.”

This was before the hurricane. And after? Building supplies…check. Appliances…check. Furniture…check. Clothes…well, you get it. These will all be bought to start all over. Cars? We lost one in “Super Storm” Sandy. I have told many people how impressed I was with the speed and ease with which my claim was handled. Approximately 250,000 cars were totaled in Sandy. I remember feeling lucky that I had a longstanding relationship with my dealer as many people couldn’t even find cars to buy.

BMW Resize

So let’s look at the private insurance part of the equation. Those will be some big checks. And those big checks are really just more money about to go into the economy. The insurance companies will whine, but after all, that’s what the insurance business is. Quietly make money for a long time and then pay some of it back out on occasion. Welcome to just such an occasion…or two in this case.

From Hurricane Harvey the current estimates are around 500,000 cars. From Irma up to another estimated 400,000 cars. So there is going to be a need to replace nearly 1,000,000 cars. One million cars. I wrote it both ways because I’m not sure which is more impressive. Either way, that’s a lot of cars! Unplanned replacements. Insurance money coming back into the economy. It is the insurance money that holds the key to part of the ‘thesis’ of expansion we’re discussing. For it’s that external money for replacement of lost property that negates the “Broken Window Fallacy.”

So out of this tragedy comes some good. The silver lining. For Home Depot and Lowe’s maybe even a gold lining. The people of Texas and Florida will rebuild. They have no choice. And we will all help. We have no choice. But as you pledge a donation, understand that as an investor you’re really just paying it forward. There is a great deal of profit potential for investors in these tragedies. There isn’t anything wrong with that. We invest unemotionally. At least successful investors do. The ones we admire most are those who know when it’s time to give some back…

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