Catastrophic Disaster

Our heart and prayers go out to the residents and all affected in the ongoing disaster of Hurricane Harvey. The loss of life and property will continue to upend millions of lives for a long, long time.

I had begun this month’s letter before Harvey hit Texas noting that another summer month had passed and well, nothing happened. There is nothing un-unusual about a slowdown in the summer months, but with volatility at historical lows for both stocks and bonds, this summer became a virtual standstill.

We are used to slow times in the municipal bond market. Save a quarter or two in 2013 and another burst late last year, the past five years have been horrible volume-wise. Yet somehow we continue to scratch and claw finding worthwhile bonds along the way.

And now Harvey. EPIC, widespread, catastrophic, such adjectives seem to fall short of understanding the consequences of a foot of rain, or two, or three or four feet. We aren’t talking about an island, or a city, but an entire region of my huge state. And yes, there was a hurricane too, devastating Rockport and Port Aransas.

Growing up in Dallas, my aunt and her family lived in La Marque, elevation 16 feet, located between Houston and Galveston. Whenever a tropical storm entered the Gulf of Mexico my aunt would load the car with her kids and drive to Dallas. This was during the late 1960’s and through the early 1980’s. She was consistent: storm enters the Gulf and she came to Dallas. She was also usually early. Waiting until everyone else was on the Interstate would be more dangerous.  The key was being early. Better safe than sorry and we were always thankful she had the means and ability to leave, plus we enjoyed her visits.

Could seven million people evacuate Houston? Could one million? How many could evacuate in the few days of opportunity to leave? We know it is impossible yet we know it is entirely called for. We knew the rain was coming, we didn’t necessarily know (or could be told) the repercussions.

Financial disasters can be like natural disasters. We want to be invested because we want or need the return on investment. Selling, or getting out, seems to be a waste of time and perhaps costly. My aunts trips to Dallas to escape tropical storms were numerous. No large storm struck Houston until Allison in 2001, and by that time my aunt had moved to Mississippi. She heeded all warnings by acting quickly, leaving early and thereby averting a potential catastrophe.

Most investors choose to remain invested amidst brewing storm clouds. Experts, like Alan Greenspan in 2005, tell us sub-prime mortgages are just a blip and manageable. After stocks have fallen ten to twenty percent other experts urge us to ride it out or buy more. By the time stocks are down fifty percent, most investors are unwilling or unable to do anything.

All investors can’t leave the stock market ahead of time any more than all the residents can evacuate the greater Houston region. You as an individual investor or a money manager can make the decision to leave (or merely, lighten up) your investments, but you won’t be heeding the advice of authorities (or experts) when you do. You can only act early, using your own intellect and decision making ability.

Is the slowdown of the past summer a calm before the storm or is it just another summer that incidentally coincides with historically low volatility? I do not know any more than my aunt as to whether she was escaping a truly dangerous situation (though she always kept her family safe). However we all know that my aunt’s actions would have eventually paid off as Alison begat Ike in 2005 and Harvey this week. Markets may act calm for many years but they will always remind us they are markets that go down as well as up.

Hundreds of municipal entities are involved in the repercussions of Hurricane Harvey. I have seen no figures of damage but I can see hundreds of thousands of vehicles will need to be replaced. Schools, homes and businesses will need to be rebuilt and refurbished. This will not happen quickly and in some cases may not happen at all. These are but a few of the repercussions of Harvey. It is EPIC. Hopefully we will never see anything like it again in our lives.  We continue to pray for those affected.