LA wildfires

Is it me or does every year in markets seem to get busier and more eventful? Sometimes you just need a weekend with little planned to breathe and catch up, like I do this weekend thankfully.

When thinking about the impact on financial markets of the tragic LA wildfires, it is easy to think of it as an isolated event, especially while the exact cause is still unknown. However, stand back, and disaster events in the US with a meaningful financial impact have been increasing in frequency over time. In 2024, there were 27 confirmed weather/climate disaster events with losses exceeding $1 billion each to affect the US. The 1980–2024 annual average is 9 events (CPI adjusted) but the annual average for the most recent 5 years (2020–2024) is 23 events (CPI adjusted).

Every month from June 2023 to August 2024 has set a new monthly global average temperature record, with 2024 likely to be the first year to briefly surpass the 1.5?C warming threshold according to Berkley Earth. Climate change is increasing the risk of disasters globally, with wildfires primarily occurring after prolonged dry spells when the air temperature is high. The largest wildfires recorded in California since the 1930s have predominantly occurred since the beginning of this century, which also coincides with years with the most exceptionally high temperatures and unusually dry conditions. Significant losses from wildfires in the US have become unfortunately a more frequent occurrence.

While some sources claim that the LA wildfires are shaping up to be the costliest climate disaster in US history (AccuWeather predicted economic damages of $250-275bn compared to inflation adjusted damages of $200bn from Hurricane Katrina), Goldman Sachs Economics team think AccuWeather’s larger damage estimate of $250bn-$275bn likely overstates potential property damage from the fires, in part because their estimate is for “total” losses which may include both property damage and economic losses, and because their damage estimates for past disasters have typically been significantly higher than other estimates. Through their own methodology revisiting previous research on the economic effects of natural disasters, GS estimate a net drag of closer to 0.2% on GDP growth from the fires, a lot smaller than some previous disasters.

No surprise then that there is unlikely to be a significant impact on jobless claims or employment. Looking at the next chart from BNP, we can see that the 2017 and 2018 wildfire episodes did not cause a discernible shift in CA jobless claims, relative to typical patterns.

There will of course be longer lasting rebuilding effects, helping construction in the region, though even if rebuilding happens quickly, the scale is unlikely to stress supply chains or prices at the national level. Current estimates of the number of structures lost (2k-12k) equate to 1%-5% of total single-family housing units started in the western US states last year. As for home insurance, it comprises only a 0.07% weight in the PCE price index, so even a doubling of national home insurance costs in the PCE index would boost inflation by only 7bps cumulatively. Perhaps a more important risk to monitor is wage inflation for construction workers in the area, considering the new administration’s policies combined with the fact that immigrant workers make up a large proportion of the California construction workforce.

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Bernie’s weekend eats – Gjelina, Venice Beach, Los Angeles?

Opened in 2008 on Abbot Kinney Boulevard, this Venice institution is still going strong. The location doesn’t hurt but even the space itself has such a cool vibe, without trying too hard. Sit inside or out, come here for breakfast, lunch or dinner, it’s one of those places I could happily visit often. The menu has plenty of choice and creativity – for breakfast try the lemon buckwheat ricotta pancakes with crème fraiche or the poached egg with Oaxacan grits, confit tomato and salsa verde. ?For lunch or dinner, they have amazing vegetable dishes with incredible produce – the wood roasted beets or Japanese sweet potato are both delicious, there is a great range of proteins, and they are known for their pizzas so you will be spoilt for choice.