You hear the door slam and realise there’s nowhere left to run…

Mint – Bill Blain’s Morning Porridge October 31 2012

You hear the door slam and realise there’s nowhere left to run…

Yesterday turned into a risk-on day with indices tightening, a resurgent new issue market and investors very much refocused on markets. The US reopens today, and we’re expecting New Yorkers will find a way to overcome Manhattan’s broken transport system or work from home. It is month end, so perhaps the US closure could magnify some position squaring by compressing it into a single day.

Big economic event was Japan easing – and my colleague Martin Malone fears the market may be underestimating just how aggressive the BoJ has been. He’s recommending a sell bonds buy Japan stocks axis on the basis the balance sheet expansion through QE we’ve seen from global central banks means a new aggressive BOJ easing policy has less to compete with! Watch that space.

Back in Europe, and it’s same old, same old. Greece was saying the negotiations were complete yesterday. This morning EU is saying negotiations are “close to an end”. Really?

Spain remains a complete SNAFU this morning. I really can’t get terribly excited about how much more damage VAT imposition has done to its sinking economy, or that toll roads (which no one uses btw) need a bailout! What was interesting was the compare and contrast reported on the news wires – PIMCO saying they were holding back from going “maximum overweight” in Spain and Italy till the situation becomes clearer and they saw “execution risk”. On the other hand, Bluebay were quoted saying they are no longer so positive and are now a seller: “we’ve seen complacency on the part of policy makers, complacency in Spain, no process… now is the time to reduce. ”  Rather suspect the Euro story will be on the pinball buffers for a while.

But of course the really big news and potential game changer is Frankenstorm and I suspect we’re only just at the beginning of that story. First - politics. In the face of perceived economic disaster who wouldn’t agree to solve the Fiscal Cliff? It’s no longer a stick to beat Obama with. Interesting how quickly the New Jersey state governor got into bed with Obama thanking him for the swiftness he’d open Federal support.

And just how much damage has been done? Interesting comment I read this morning notes insurers should avoid much of the $100bn+ Frankenstorm Sandy costs – standard homeowner policies don’t cover flood damage. The government will be paying the infrastructure costs and probably much of the home damage also. Earlier estimates of a massive hit on global insurance firms now seem wide of the market, with some analysts suggesting Sandy will only make top three most expensive US weather events! So perhaps recent softness in insurance names will reverse?

And what are the medium-term implications? Papers are full of analysts predicting the negative short-term impacts of a closed subway in terms of lost production, and the possible positive effects of medium term repairs on US Growth. Some say a -0.7% impact on Q4. I rather suspect the complete rebuild of the salt-water deluged subway system in the shortest possible timeframe will be a significant growth multiplier!

However, I haven’t seen much yet on how the NY Storm Surge could be the shock to stimulate a global growth paradigm shift! Looking at the photos from New York this week and remembering our own miserable non-summer here in the UK, you have to wonder what happened to the global weather system.

What just happened to NY might be coming to any major coastal conurbation near you! China, Europe, US? Now I’m not a cranky environmental eco-warrior – but global warming is more than an inconvenient truth. It’s a fact. What the NY floods highlights is a few mm per year of sea level rising soon gets significant. If you don’t believe me, look at the Thames Barrier in London – it’s being used with increasing frequency to stop storm surges, and they are saying it will soon meet its design limit of 50 closures per year by 2035. A new barrier is being discussed for London, and I hear it’s now on the agenda in New York.

It’s highly unlikely any government will succeed in slowing greenhouse emissions to contain sea-level rise – the aspirations of consumers and capitalism are too powerful a tide to swim against. That means directly addressing the effects of rising sea levels is a more likely solution to global warming. (And bear in mind, it’s also low level productive land that will need protecting from the massive effects  climate change will have on global agriculture! )

So, is this the time to be looking at a global economy receiving a massive sustained growth multiplier and boost from a proper programme of flood defences? That’s going to be a massive ask – on a par with full wartime mobilisation over a sustained period of time to protect the critical portion of the global economy that lives close to the sea.

Who pays? I can’t think of a more obvious “Common Good” under Adam Smith. How to profit from it? Engineering? Construction? Cement technologies? A new impetus on new power sources? (Yes please, but let’s not waste any more money on stupid inefficient windpower.. go for tide!)

Just as shale oil and gas fracking has provided a whole new impetus to the US economy, might sea defences provide a boost to growth? (This is fun… I haven’t written about the economics of the environment since I was on the very first course in Environmental Economics back at University in the early 1980s!)

Finally, and bearing in mind the date…  as “She-who-is-no-longer-Mrs-Blain” powers up her Nimbus 2000, may the scary things stay away from your door tonight.. Unfortunately… they will still be there tomorrow! Mwhahaha…

“The foulest stench is in the air,

The funk of forty thousand years,

And grizzly ghouls from every tomb,

Are closing in to seal your doom”

Out of time..