Thursday, December 1, 2011

Uncorrelated with Disasters?

There seems to be a common claim that natural disaster events are uncorrelated with other market events.  I did some poking around and it seems that some have also been skeptical about this.

Here are my initial thoughts as to why I am wary of the claim...
  • Miami Hurricane of 1926
    • Is thought to have ended the waning Florida land boom of the 1920s.  
  • Hurricane Andrew in 1992
    • A bunch of insurance insolvencies and reinsurance took a significant hit
    • Difficulty in expanding subprime mortgage lending in Florida 
    • Some research indicates that even where Andrew did not cause damage, property values fell
  • Hurricane Katrina and Wilma of 2005
    • There was a gas shortage in the southeastern states and the price of that gas shot up.  
    • Industry and jobs were trampled in LA and MS
    • Inability to make mortgage payments resulting in a moratorium on foreclosures of FHA backed mortgages
  • Japan Earthquake 2011
    • I remember watching the market do all sorts of things after the earthquake, if I remember correctly the yen lost a lot of value quickly
  • In any predicted event, there seems to be a lot that goes on in the financial markets prior to the actual event and then again after some assessment. 
So, I think to claim that there isn't a correlation is bizarre.  But, the reactions seem different depending on the event's place, type and magnitude.

Here is a nice correlation reported by the FT.
The flooding in Thailand is expected to inflate insurance claims already made against the earthquake in Japan this year because of the disruption to carmakers and other producers that were taking the impact of lost Japanese production.

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