Thursday, January 12, 2012

Extreme Weather Events - The Headwind Missing From Financial Predictions for 2012

In reading financial predictions for 2012, the two biggest wild cards in forecasts are usually: 1) will Europe muddle through; and 2) will the Fed launch QE 3 and if so when. However, I would like to suggest that there should be a third wild card added to financial projections for 2012, and that is the impact of extreme weather events. My guestimate is that extreme weather events will have a significant negative impact on worldwide economic activity in 2012. Flooding and droughts will lead to the 2012 predictions of most economists being overly optimistic.

There will be more flooding and more droughts in 2012. Events such as the supply chain disruption caused by the shortage of hard drives from Thailand may be experienced again in 2012. Drought and flooding will lead to an increase in food costs. Property insurance rates will increase again in 2012. Florida is overdue to be hit by a hurricane. Texas may suffer from cutbacks in electricity.

According to TexasVox "If the drought persists into the following year (and the State Climatologist has predicted that it is likely much of the state will still be in severe drought through next August with even worse water shortages), the Electric Reliability Council of Texas (ERCOT – the operators of the electricity grid) has warned that power cuts on the scale of thousands of megawatts are possible."

The only economists that seem to be publishing information on the increasing costs from extreme weather are the team from Munich Re. Their Natural Catastrophe Review should be required reading for anyone that is skeptical about the increasing costs of extreme weather.

Extreme weather events caused over $55 billion in damage in the U.S. during 2011 and may cause even more damage in 2012. The snow drought this year is badly hurting skiing and snowmobiling destinations. Flash flooding has wrecked havoc on Houston. The Alaska town of Cordova has received 176 inches of snow and 44 inches of rain since November 1. Thus, 2012 is already on pace for another year of record setting costs from extreme weather.

So why is the frequency and damage from extreme weather increasing? Here are four theories (with not all being equally plausible):

  1. The earth has been going through warming and cooling trends for millions of years. We are in a warming trend and the natural increase in the earth's temperature is causing the extreme weather.
  2. Man made impacts upon the environment are causing global climate change and the increase in extreme weather
  3. Higher levels of solar activity and the sunspot cycle, as reported by NASA, is causing the extreme weather.
  4. Our solar system is passing through an interstellar cloud of electrical energy and this is causing the extreme weather according to astrophysicist Alexei Dmitriev.

Whether the frequency and damage from extreme weather events is increasing due to man made or natural causes is an unresolved issue. However, it is undeniable that extreme weather is becoming more common and costly. Extreme weather is a headwind that should be included in financial projections for 2012. It may reduce worldwide GDP by as much as 1-1.5 percent.

Related Posts
Will Extreme Weather Events Have A Measurable Impact On The Economy in 2012?
The 5 Factors That Will Crush 401K Rates of Return
Will Extreme Weather Events Batter the Insurance Industry in 2012?

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