Watching recent television coverage of the Sandy "Frankenstorm" brought back memories of other recent disasters. Images of hurricanes Katrina, Rita, and Irene came flooding (pun intended) back into my mind. But these storms are no joking matter. Luckily, despite the widespread path of Sandy and a more-or-less direct hit on the largest metropolitan area in the country, the loss of life was amazingly low. Hopefully the recovery will be fast and efficient. North Easterners are a hardy bunch!
Watching pictures and video footage of flooded subway tunnels, burning neighborhoods, and transformers exploding, I thought to myself - who is going to pay for all of this? As if on cue, the TV reporter questioned an MTA official about the costs of getting the subway system up and running again. The answer he gave was that the MTA budget was already very tight prior to this storm - where will the funds come from? Who pays for pumping out the subways, infrastructure inspections, overtime hours, and replacement of salt water corroded electrical components?
For the utility industry, I suppose the costs of replacing blown-out transformers, downed utility poles and lines, personnel and overtime expenses will filter back to the consumer by way of rate hikes. The same is probably true of insurance costs.
But the big question is public infrastructure. The MTA official wondered if this was not the "new normal" and specifically mentioned hurricane Irene land global warming. Irene, you may remember, was the 2011 hurricane that hit the East Coast and became the 5th most costly hurricane in U.S. history. Sandy will surely eclipse Irene in terms of total damage costs. By a mile.
Imagine the costs of protecting the NYC metropolitan area from future ocean storms. Will it become the "new Amsterdam" with a complete flood and storm protection infrastructure? This is ironic, because New York City was at one time in history actually called New Amsterdam. But again, this is no joking matter. Do we go back to business as usual, assume this was just a "100 year storm", and believe we have another 100 years before we see anything like it again? Or, do we say hmmmm, these storms are becoming more and more frequent, and more and more severe, perhaps we should consider protecting America's largest city and its financial heart? These are all good questions. It seems we have two choices:
1) We spend money to build infrastructure to protect the cities.
2) We spend money cleaning up and rebuilding after storms demolish the cities.
Either way, spending is going to occur and a lot of it will be government spending. Since the U.S. government is already running huge deficits, at some point even more U.S. dollars will be printed. Well, they will be printed as long as the U.S. dollar remains the "reserve currency of choice" and the Fed can get away with it....
My own personal feelings is that global warming is real and should be taken seriously. We see it every day: more frequent and severe storms, widespread drought, huge wildfires, polar caps rapidly melting, insect infestation of our forests, and just plain old record hot and dry temperatures. And the science is clear, despite what the skeptics say. Oh I know the response, "Fitz - you just don't understand, weather is cyclical." As if "cyclical" is a magic word that explains away all science and data. My response is Fitzsimmons' 2nd law of economics:
"Of course weather is cyclical. But it is now cyclical around a rapidly rising temperature trendline. This new rising trendline is the result of massive emissions of CO2 and particulates by man."
Why is that a law of economics? For the same reason as my 1st law of economics is:
"You cannot solve a commodity problem (NYSEARCA:OIL) with monetary policy."
You see, both of these laws of economics are being ignored, and have been ignored, by U.S. policymakers. We continue to believe we can ignore our foreign oil import crisis by having the Fed print more money to "pay" for that oil. Our policymakers also apparently have decided we can also ignore global warming and it won't hurt us, either physically or economically. Nothing is more evident of this than both Presidential candidates Romney and Obama falling all over one another in the debate to prove he supports coal (the dirtiest of all fossil fuels) more than his opponent. It's almost as if our policymakers are like children: ignore a problem and it will go away. Well, any adult knows this simply isn't the case. Judgment day will come. Actually, it is here now. Both in terms of our oil crisis and our environmental crisis.
All this is obviously very bullish for gold investors. The government is printing money to fund our foreign oil addiction and also the cleanup and rebuilding of infrastructure from storm after storm after storm. Meantime, the logical solutions to many of these problems (adopting natural gas transportation and replacing all coal plants with natural gas generation) is seldom discussed while we are constantly bombarded with the hope (and myth...) of electric vehicles and the oxymoronic promise of "clean coal." Meanwhile, the reality is that we keep importing oil and consuming a lot of gasoline and coal. In fact, America's new "energy policy" is to export our natural gas (the cleanest and cheapest fuel) so we can consume more of the dirtiest and most expensive fuels (coal and oil). But the world keeps getting hotter and hotter. And generating more and more natural disasters. And this is all very bullish for gold.
Investors can choose to invest in paper gold via the SPDR Gold Trust ETF (NYSEARCA:GLD). If you don't like paper gold, you can go to kitco.com or apmex.com and buy yourself some gold bullion.
Additional Reference: Here is an article giving a look back at some of the worst storms of the recent past: 10 Most Costly American Natural Disasters Of The Past 35 Years.
Come to think of it, this topic may well be the reason Warren Buffett doesn't like gold as an investment. Perhaps Buffett to support gold as an investment fundamentally admits his primary business (re-insurance) is perhaps not as solid as some would like you to believe. That is, if storm after storm is going to continually push up insurance outlays (and premiums and deficit spending....), perhaps that isn't such a good long-term business to be in. Could it be that global warming is the root cause of Berkshire Hathaway's (NYSE:BRK.A) (NYSE:BRK.B) recent under-performance versus the over-performance of its glorious past? I'll let you decide that.