Hurricane.
-Lisa LoebSkeleton boy by the side of the road
He warned me, he told me
He said: There’s this woman, she’s a hurricane
She will heal your heart up, she is hurrying.
He said, Don’t look for holidays
Don’t look, just run away
Go suffocate, and choke your own cry
Go where the water, where the water, seeps from the pink sky
I guess the folks at Hedgestreet have been reading the Park Paradigm. From USA Today:
On Thursday, HedgeStreet, a government-regulated online futures market, is launching hurricane contracts. The simple contracts allow investors to speculate on the economic fallout of hurricanes or tropical storms. They are the latest example of a growing Wall Street trend that gives investors a way to play short-term fluctuations in economic events or markets.
…”We are interested in creating new risk-management vehicles,” says HedgeStreet co-founder Russell Andersson. “There’s a need for a hurricane-type product as evidenced by the events of last year.”
Killer Hurricanes: No End in Sight was the August cover story for National Geographic. (I’ve rediscovered National Geographic over the last year or so after having subscribed as a gift for my son - if you haven’t had a look since you were a kid I highly recommend you check it out; and in the internet age it’s even better as you can look anything up in the archives and don’t have to try to remember when you read it!) Anyhow it is a very well written article for any non-expert wanting to have a good understanding of the current state of scientific thinking on the subject of Atlantic hurricanes. The article finishes with a point that is in some respects obvious but too often overlooked:
While the debates go on, hurricanes will continue to strike increasingly populous coasts. That, says Landsea, is reason enough to worry. “The changes in society are as important, if not more important than global warming, or even natural cycles,” he says. “When you double some vulnerable populations every 20 to 30 years, that’s what’s going to cause disasters. We’ve got a huge problem even if hurricanes don’t change at all.”
Understanding this point is key to understanding how new markets - in insurance, in carbon, in weather, in alternative energy - can help drive behaviors in a way that will achieve an optimum outcome. As I have written in a previous post, (hurricane) markets won’t stop the next Katrina from barrelling into the Gulf Coast, but they may help determine patterns of investment and engineering that will mitigate the human and financial cost of such events in the future. And it is heartening to see that interest is indeed growing in these markets: from retail betting firms like Hedgestreet, to traditional and new futures exchanges like the CME and CCX, to specialist investment firms like Coriolis Capital. Mike Foster at Financial News did an interesting write-up on Coriolis (unfortunately behind a paywall, I hope they don’t mind if I give you a short excerpt:)
Companies are prepared to pay high prices to protect against the weather
Global weather extremes have been boosting returns at boutique fund manager Coriolis Capital as businesses and reinsurers seek protection from the elements.
Coriolis, founded by former banker Diego Wauters, uses clients’ funds as securities to sell contracts that allow companies to hedge their risk against inclement weather. It invests in catastrophe bonds issued to the capital markets by reinsurers to reduce their exposures.
Coriolis’ annual returns since its launch in 2003 range between 5% and 12%. Sums deposited by clients are invested on the money markets.
Wauters said: “We set out to diversify our exposures to different types of weather and catastrophe. We can gear that up because the underlying volatility of the resulting profile range of contracts is so low.
The NY Times also recently reported on the strongly growing interest from hedge funds in trading and managing hurricane and weather risk, mainly via involvement in various forms and flavors of re-insurance.
Hedge funds are also seeking returns from investments that are not tied to movements in the stock and bond markets. That desire for such uncorrelated returns has become more pronounced in recent months as traditionally uncorrelated assets have moved in the same direction as the markets. That unnerved a lot of money managers. Their response? High-risk bets on Mother Nature.
And for those of you who read French, Coriolis points to an article in Agefi talking about the growth of catastrophe insurance market.
Popular awareness of these issues will continue to grow and drive these markets. Whether it is Al Gore making films or British Gas selling retail energy hedges, these issues are moving out of the domain of specialists and wonks and into the mainstream. Innovations in technology and changes in the way we live will be shaped by the economic and political signals that these markets will uncover. Our future would seem to depend on it.
I leave you with a very powerful editorial by Bill McKibben that ran in the same issue of National Geographic. It starts:
This is the year when we finally started to understand what we are in for. Exactly 12 months ago, an MIT professor named Kerry Emanuel published a paper in Nature showing that hurricanes had slowly but steadily been gaining in strength and duration for a generation. It didn’t attract widespread attention for a few weeks—not until Katrina roared across the Gulf of Mexico and rendered half a million people refugees. The scenario kept repeating: Rita choking highways with fleeing Texans; Wilma setting an Atlantic Ocean record for barometric lows; Zeta spinning on New Year’s Day. Meanwhile, other data kept pouring in from around the planet: Arctic sea ice melting past an irrevocable tipping point; thawing permafrost in northeastern Siberia creating so much methane that lakes didn’t freeze even in the depths of boreal winter; the NASA calculation that 2005 had been the warmest year on record.
In January, a trinity of announcements sealed the mood. First, British scientist James Lovelock, who invented the instrument that allowed us to detect our eroding ozone layer, published an essay predicting that we’d already added too much CO2 to the atmosphere and that runaway global warming was inevitable. He predicted that billions will die this century. A few days later came a less dramatic but equally alarming announcement. The steady and long-serving NASA climatologist James Hansen defied federal attempts to gag him and told reporters that new calculations about, among other things, the instability of Greenland’s ice shelf showed “we can’t let it go on another ten years like this.” If we did? Over time, the buildup of CO2 emissions would “imply changes that constitute practically a different planet.” Less than ten years to reverse course. Not our kids’ lifetimes, or our grandkids’. Ours.
Please read the whole thing. Read it twice. Read it every week. It is at first depressing and upon re-reading optimistic. It is not alarmist, but balanced. He finishes:
Environmentalism isn’t dying. In fact, the need for it has never been greater. But it has to transform itself into something so different that the old name really won’t apply. It has to be about a new kind of culture, not a new kind of filter; it has to pay as much attention to preachers and sociologists as it does to scientists; it has to care as much about the carrot in the farmers market as it does about the caribou on the Arctic tundra. That’s what the printouts on atmospheric concentrations of carbon dioxide tell us, and it’s a message echoed by the researchers studying happiness and satisfaction. We don’t need a slightly rejiggered version of the world we now inhabit; we need to start working on changes on the scale of the problems we face.
Fear of what will happen unless we shift, desire for what might happen if we do—together they’re creating new openings for a more thorough shake-up than any American thinker since Thoreau has envisioned. But ten years is not a lot of time; we’d best get started.
Yes. Let’s.
