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Sequoias And Markets

Sequoias are often thought of as the monarchs of the Sierra Nevada ecosystem with good reason if you think how tall and old they can grow to be. The main cause of their death is toppling, since they are so resistant to diseases. Sequoia groves adapted to natural processes that must continue if they are to remain healthy.

There are similitarities between the natural processes that help sequoias remain healthy and markets. These monarchs remind me of big banks and corporations that dominate and have dominated the markets over the past decades.

During a visit to the Sequoia National Park, one of my girls asked me why there were fires in the forest and no one was doing anything to suppress them. I was surprised to find the answer as I was not aware of the importance of fires for sequoias. Fire is actually one of the major processes essential to the health of giant sequoia groves. In markets as well, fires can be important for the health and growth of the financial markets ecosystem. Researchers have determined that low intensity fires swept through the trees approximately every 5 to 15 years. Sequoias rely on fire to release most seeds from their cones, to expose bare mineral soil in which seedlings can take root, to recycle nutrients into the soil, and to open holes in the forest canopy through which sunlight can reach young seedlings. Sequoias also need fire to reduce competition from species such as white fir and Incense cedar, both of which compete with sequoias for water and nutrients. A natural fire cycle thins these competing species, and provides suitable conditions for sequoia growth. That is why forest management policies are aimed at restoring fire to its natural role in Sierran conifer forests. This is accomplished by prescribed fires burning.

Here are a few more reasons why fire is so precious to sequoias and how this could relate to markets:

- Seebed preparation. In a sequoia-mixed-conifer forest, moderate to heavy surface fires provide soft, friable, ashy soil on which the lightweight sequoia seeds fall and in which they are buried. Each crisis is good to prepare the environment for the next trend and expansion. Companies restructure and reorganize, governments improve the framework for investors.

- Nutrient recycling. Fire plays a significant role in returning various mineral nutrients to the soil. The ash deposit increases available phosphorus, potassium, calcium, and magnesium. Entrepreneurs reallocate efficiently capital to increase their returns.

- Impact on succession. Species requiring sunlight, such as pines and sequoia, were favored over shade-tolerant forms such as white fir and incense-cedar; and fire-resistant and fire-dependent species and associations were favored over nonfire-dependent forms. Big banks and corporations are favored in this environment of small and moderate fires because competitors don't manage to upscale their operations enough before the next crisis arrives.

- Formation of a vegetative mosaic. Periodic burning causes development of uneven-aged stands, comprised of even-aged groups of trees of various age classes. Crisis and recessions create a landscape of investors and entrepreneurs which is rich and varied as old farts disappear and new players appear on the scene.

- Faunal relationships. The influence of fire on wildlife is largely related to fire's role in stimulating germination of plants and trees that are useful to animals for food or cover; or making openings in the forest that favor wildlife. Fires create new opportunities and inefficiencies that can be exploited by market players.

- Influence on insect-suscptible trees. Fire apparently has a sanitizing effect by thinning stands or eliminating old stands or old trees before insects and disease have overtaken them. I think here of the role of crisis to get read of scams and market cancers (see for example Madoff or the dotcom situations of Enron and others).

- Influence on fuel and fire hazard. It is believed that the worst enemy of a fire-suppression agency in this regard may be its own efficiency because "the longer forests go without burning, the greater the fuel accumulation and the greater the hazard". Trying to avoid recessions and suppress fires may eventually lead to bigger problems for the ecosystem as a whole. Through fire-suppression programs, the cycle is slowed and it occurs a higher buildup of fire hazard. The 2008 crisis came after a long time where measures were taken to keep the economy going (may be unnaturally?). The crisis was so big that almost burned even the big giants so resistant to fire. Only the government help managed to avoid a profound reshaping of the ecosystem with the "too big to fail" considerations that were made (except for Lehman).

Many other questions could be asked, such as:

- What is the role of regulators or the Fed in managing prescribed fires?
- Even after a big fire, the forest grows again. It is just a different forest. With no sequoias. Is it good or bad?

Disclosure: no positions