No, The Economic Impact of Harvey Is NOT Positive
The Market Ticker - Commentary on The Capital Markets
2017-09-03 07:00 by Karl Denninger
in Macro Factors , 667 references Ignore this thread
No, The Economic Impact of Harvey Is NOT Positive
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I keep hearing this crap all over the so-called business media today.

Look folks, here's the reality on losses of this sort:

1. Homeowners and renters insurance does not cover flooding.  If you want (or need) it you need to buy FEMA-backed flood insurance.  If you're not in a rated hazard zone it's reasonably cheap, but most people don't buy it unless they are in a rated zone because the government has decided to force-subsidize people in rated zones by jacking premiums on those who are not.  This has dramatically dropped the "take rate" for those who buy it voluntarily, exactly as one would expect.  Note that flood insurance has gotten much more expensive since the last round of Florida hurricanes, plus Katrina.  If you are in a rated zone you can't get a mortgage without it, but for everyone else you can and take your chances.  I've seen estimates that only 20% or so of household properties have flood insurance in the Houston area and that plenty of places well outside of known flood plains have in fact flooded, but the bottom line is that Houston was built on low-lying, and often reclaimed coastal swamp.  In addition FEMA coverage has modest limits; you're capped off at $250,000 and $100,000 for contents.  And if that's not enough if you take more than a certain percentage of value damage you're required to rebuild to enhanced codes to reduce the risk of a second incident and after a second incident you can't buy it at all.  That is, if you're living in a McMansion you are going to eat a good part of it, especially if you have expensive possessions, irrespective of having the coverage.  Worse, if you get pounded and have to rebuild with elevation improvement or similar in order to continue coverage -- which you will have to do if your property is financed -- you are very likely to wind up eating a large part of the bill yourself.

2. Commercial properties can't get FEMA insurance that's anywhere near adequate (if they can get it at all) but can buy it privately, and some do.  But not many, especially small businesses, do because it's quite expensive.

3. Cars are covered if they have comprehensive coverage.  If not, then nope.  Again, if financed then it's covered because the finance company will insist on it.  However, note that you may still be upside down on the loan after the insurance company pays, especially on newer notes that were written for 6, 7, 8 or even 9 years.

If you have an insured loss then the economic impact to you is not very high, and you will spend the settlement to fix/replace/whatever the property, so that will be additive to GDP.

But if you have uninsured losses, and a hell of a lot of the losses will be uninsured, then your capital investment has been destroyed and so has the ability to use it as collateral to borrow for future expenditures that would add to GDP, and in addition that leverage is no longer available to you.  And by the way, if the Government "steps in" and hands out money (which they probably will) that's negative too to the economy as a whole because it's deficit spending which destroys the purchasing power of everyone's money, so instead of a positive impact from that it's a negative impact -- although it won't be reported that way.

What's worse is that many uninsured losses are greater than the actual loss of value because you have to pay to clean it up!

So no, folks, this is not "good news" from a GDP perspective -- at least not in real terms.

Not at all.

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User Info No, The Economic Impact of Harvey Is NOT Positive in forum [Market-Ticker]
Little_eddie
Posts: 1081
Incept: 2009-04-30

Delaware
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If I burn a $100 Bill, than take another $100 out of my pocket, how am I any richer?

Even if I get someone else to give me a c note I'm still not richer

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Think of how stupid the average person is, and realize half of them are stupider than that. - George Carlin

Mtdm
Posts: 375
Incept: 2009-07-23

NH
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My (limited) experience has been that the mortgage companies require excess flood coverage to take care of the value above the FEMA/NFIP limit. Are you saying this is atypical?
Ktrosper
Posts: 3287
Incept: 2010-04-06

ft collins co
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KD wrote..
your capital investment has been destroyed

Yep. Massive loss has occurred. The question is, who realizes it.

Definitely those who's stuff was destroyed are realizing most of it, but you can bet you ass the gov will come in and save the day (with deficit spending) and spread the loss across everyone who transacts in the currency that they instantly devalue when they do that...

They'll pat themselves on the back for being compassionate even a they are stealing from EVERYONE.

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The unexamined life is not worth living.-Socrates
The only stable state is the one in which all men are equal before the law.-Aristotle
Liberty exists now in the spaces government has not yet chosen to occupy.-Doc Zero
I anticipate that 10 Dallas Cowboys Cheerleaders will blow me this evening.-K.D
Attilahooper
Posts: 2741
Incept: 2007-08-28

New York, by way of Montreal Canada.
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And, like after Katrina, ins companies will jack rates of all of us and lay additional <hurricane> premium if you are anywhere near water. I'm within 300-400 yards of the long island sound, but I'm on a bluff 90-100 above sea level. Hurricane intensity is muted by the traversal across land and sea level rise is barely noticeable from my vantage. But the actuarials **** it up by taking a loss covering flood prone lands - and nail it to my ass because of horizontal distance to water.

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We are the Champions - No time for losers - Queen
https://www.youtube.com/watch?v=04854Xqc....

Zappafan
Posts: 2961
Incept: 2007-11-30

Atlanta
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Big question in my mind is to what extent will there be "walk aways." The scenario you mentioned of having no flood insurance means you're looking at a compete and total "gut it and rebuild" scenario. If you have low or no equity then it makes sense to walk away and start over somewhere else.

That would force some counter party to "eat it" but as you say the government will be there to try and interfere. The pressure to "do something" will be big and as we saw in 2008 there will be programs to encourage the same stupid behavior again, i.e. living in a coastal swamp with no flood insurance.

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Ich bin der Tankendau!
Dmj625
Posts: 658
Incept: 2010-03-01

New Orleans, LA
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Spot on. I can speak first hand on this topic. I flooded in Hurricane Katrina and my experience represents the "best case" scenario:

I had the maximum amount of Flood Insurance. When I purchased my first digital camera in 2004, I took pictures of every room of our house and burned them to a CD which I stored in my insurance folder. When we evacuated I took my insurance policy and the CD with me. I was able to get back into New Orleans immediately after the storm before the looting and curfews were implemented. I contacted my insurance company before most people even knew what they were dealing with.

So, let's review:
- Fully insured
- Supporting documentation for claims
- First in line
- Oh, and I didn't lose my job (many, many did)

Sounds good, right? Well it's not so easy. It took 8+ weeks to get an adjuster out. My insurance co (USAA) was great and did not fight me over the claim (people with Allstate and Farmers had to argue over every dime). They cut a check for the full amount of the policy.... jointly payable to me and the Mortgage Company.

The Mortgage company would not release any funds until I had a signed agreement with a General Contractor. This is no problem if you have a fire in your house, but when every house in a 50-mile radius is damaged... not so much. I couldn't even get someone on the phone (if we had service).

Fortunately, I reread my policy and found a clause that allowed me to declare myself as my own general contractor and to file for reimbursements at 25% intervals. I ran credit lines at Home Depot and Lowes materials and used savings (you have those emergency funds, don't you?) to pay cash for labor. I had to rent a trailer and drive 82 miles (repeatedly) to HD and Lowes in Baton Rouge for materials.

I contacted the CDC and got their guidance on mold remediation. I removed all of the wet stuff (carpets, furniture, sheetrock, insulation) myself. I treated the entire inside of the house with a bleach solution per CDC recommendations. Then I had the house rewired and electrical service restored. Then I found an HVAC guy 90 miles away and paid him an additional $100/day trip charge to get heating and air restored.

Now, once I had power and A/C, it was much easier to get other contractors to work on my house. You are competing with people that have hot, wet, moldy houses, so it helps to have good working conditions.

Once I had some progress to show, I called the Mortgage company and they hired an independent inspector to assess my % complete. The inspector judged me to be 78% rebuilt. The Mortgage company balked at releasing 75% of the insurance funds to me and said that they only paid out 25% at a time. After much back and forth over the fact that I had funded the existing repairs myself and threatening to involve a lawyer, they relented and released the 75%. I paid off my credit lines and finished the house.

Katrina hit August 29, 2005. We were the first people in our neighborhood to return and moved back into our house on May 13, 2006. (That's approximately 9 months)

Now consider other's experiences:
- If you had Flood Insurance but not much supporting documentation, you spend a good amount of time and effort justifying your claims (esp w/ Allstate and Farmers)
- If you weren't first in line, you waited weeks or months for adjusters
- If you weren't able to be your own GC, you waited for contractors to be available.
- If you didn't vet your GC properly, you probably got ripped off by one of the fly-by-night companies that sprung up.
- If you were uninsured, you applied to FEMA for assistance and WAITED
- If you received FEMA assistance, you were subject to audits and clawbacks if they determined that they miscalculated your eligibility for up to 8 years (I know people that had to repay $1000's)

In the meantime, there were very limited services available in New Orleans. Gas, groceries, supplies, healthcare, etc. were all in (sometimes) very limited supply.

Long story short - Karl's recommendations are 100% right. You need to be prepared and able to take care of yourself and your loved ones.

David
DM625


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Sometimes I wonder whether the world is being run by smart people who are putting us on.or by imbeciles who really mean it. Mark Twain
Oldpool
Posts: 1180
Incept: 2010-06-23

LI NY
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Not to mention the rise in material costs due to the increase in demand, then factor in the ongoing loss of value of the currency due to the current emission of credit, pre-Harvey.

What gender do I feel like today?

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Liberty, Comrade!
Exppi
Posts: 67
Incept: 2013-10-15

PDX
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Could be a double whammy with Irma lurking.
Tickerguy
Posts: 149707
Incept: 2007-06-26
A True American Patriot!
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Right up the Potomac sounds like a reasonable solution for Irma.

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Winding it down.
Mangymutt
Posts: 434
Incept: 2015-05-03

Vancouver WA
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When we buy (finance) a car the lender does not ask for full coverage insurance, they require it. They are protecting their investment and if you can not afford to pay full coverage insurance, you can not afford to fiance the car.

Whether it is car, house or an education, it is the financial institutions job to protect their investment. Therefor requiring insurance.

If the person getting the loan gets wiped out the insurance company should pay what they can, up until they are wiped out. If there is still a loss, the lender needs to eat it and if that means they too get wiped out, well so be it.

However we have lenders and the general public believing it is FEMA's or the governments job to make people whole. You take the risk, you reap both the reward or destruction.

Little_Eddie - Let conduct a scientific experiment, you send me $100 once a week and I will tell you when I feel richer.

And if anyone else wants, they too can send me $100 - Thanks in advance :)
Mangymutt
Posts: 434
Incept: 2015-05-03

Vancouver WA
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Karl when you say

"Right up the Potomac sounds like a reasonable solution for Irma."

You almost make it sound like "Right up the sphincter sounds like a reasonable solution for Irma."


Hmmmm you could not have possibly meant THAT!!!!!!

Killben
Posts: 273
Incept: 2009-12-07

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Since when is truth (that a disaster does not improve economy) an impediment for propaganda. Add possibility of stimulus and government spending and you can make it look like it is what the doctor ordered for new ATH.
Smacktle
Posts: 1833
Incept: 2009-01-20

Texas
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I've been working in the houses around the Houston area and I don't see how these people losing everything can help anything.

Pretty amazing how so many people are just showing up to help these people.

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The faults of the burglar are the qualities of the financier.
- George Bernard Shaw
Mannfm11
Posts: 5407
Incept: 2009-02-28

DFW, Tx
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There is never a net gain out of war or a disaster. Only more financial claims.

In the meantime, I suspect there is going to be one hell of a demand for flooring people, drywall, Carpenters for trim and doors and mold prevention. I doubt most houses got more than 1 or 2 feet of water in them, so getting them dry is going to be the most important. Furnishings is another matter.

I'm on a creek and a good heavy rain covers about 1/2 my back yard. The thought has crossed my mind to get flood insurance for a total freak. I suspect 20 inches in a day might get me. 12 is the most I can ever remember, from a hurricane in 1964.

The Trinity River levees in Dallas are something that comes to mind. I think the 1964 storm would take them out today. We had a rainy May 2015, which got close. It rained twice as much 70 miles north of here, so Dallas dodged a bullet. It should be a high priority, but I suspect the politicians would rather let their cronies get rich in a disaster. This would be real GDP, a long term beneficial improvement.

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The only function of economic forecasting is to make astrology look respectable.---John Kenneth Galbraith
Allanhvii
Posts: 6
Incept: 2017-01-27

Marion, MA
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"The Economic Impact of Harvey Is NOT Positive". I completely agree.

You cannot raise the standard of living by destroying the means of production. People tend to conflate job creation with raising the standard of living, when actually it's productivity that counts. The great thing is, most Texans know this intuitively, and they're eager to get to work.

Harvey has destroyed the productivity and the standard of living (most people don't want to live in a shelter!), and even if there is net job creation (which there probably isn't), it will all be at a lower standard of living for a long time to come.

The only "good" from this will be people learning to appreciate each other and be happy with less.
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