Paying for Natural Disasters

Insurance companies have been hit hard after a slew of costly natural disasters these past couple of years.  That has resulted in them having to reevaluate risk and then charge premiums accordingly.  Additionally, some companies pulled out of markets completely.  And for those homeowners lucky to still have an insurance option, the premiums for those policies have gone through the roof.

 

For our discussion today, I want to separate natural disasters from other types of disasters.  The cause of the horrific destruction in the southeast right now was the result of a hurricane.  The insurance companies will once again be on the hook for billions in damage.  Unlike the Lahaina fire, whose origin was compounded by a natural occurrence – high winds from a hurricane, the recent report from the government shows that utilities, government, and the landowner all played a contributing factor.  For Lahaina, the insurance companies will seek reimbursement for the losses they’ve paid out.  For the losses from hurricane Helene, it was an act of nature solely.  They can’t collect from others.

 

Here's a radical idea that would benefit all Americans.  What if in the case of a true natural disaster the Federal Government were to pick up the tab?  Before half of you get upset, read on.

 

Last year there were an estimated $28 Billion in insurance losses due to natural disasters.  Again, disasters where mother nature is to blame, and the insurance companies can’t collect.  Also last year, the US government provided $70 Billion in foreign aid to countries around the world.  You see where I’m going - but the other half of you, don’t get upset yet either.  I am all for helping those less fortunate, especially those in impoverished countries.  But we should prioritize our tax dollars to help our citizens first.

 

I can imagine many of you right now saying “hey idiot, why should our tax dollars bail out the insurance companies?”  If the insurance companies had the risk on their portfolios reduced, it would result in significantly lower insurance premiums for all of us.

 

If you don’t know how insurance works, it’s pretty simple.  The companies collect premiums.  They invest that money while they hold it, to help grow the portfolio larger.  They use that portfolio to pay out claims.  Your premiums are calculated by some pretty smart bean counters.  They estimate the risks and collect what they must pay out, plus some extra for contingencies.  That math results in what we as policy holders pay in premiums.  If the companies need to pay claims higher than the smart boys calculated, you’ll see a higher insurance bill.  All insurance works this way – health, auto, etc.

 

I know this idea sounds very controversial, but I don’t know why.  If natural disaster risk and obligation were removed from the insurance companies, we all would benefit greatly.  As for where our tax dollars go, I emphatically demand it get spent on our citizens first.  The sad news is that ideas like this will never happen.

 

Below is the foreign aid the US government dished out in 2022, according to US News& World Report, the last year I could find statistics for.  I’ve only listed the top 60 countries.  The report listed 179.  You tell me why these countries deserve it more than our citizenry?  Some of these countries downright hate the US.

 

 

Some Comments on the Labor Report

If you haven’t noticed by now, my newsletter is split into two parts.  Commentary and analysis are here at the top, and a straight recap of the economic news is listed below.  So if you just want the news, minus some in depth review, jump to the news section.

 

Below you’ll read about the glowing employment report.  The report released today made headlines that sent the bond market running scared.  Looking for another weak report, this one shocked investors because it describes an economy not slowing down or heading for a recession, but one adding jobs and getting heathier.  I’ll skip the conspiratorial conjecture of these government reports being drastically different than what was forecast, while just a month away from the presidential election.

 

Let’s just jump into some of the numbers that when you dig deep, don’t make sense, and certainly don’t point to a healthy economy.

 

The monthly jobs report is a combination of two sets of data.  There’s a business component that estimates the number of jobs created or lost based on computer modeling.  The models estimate the creation or death of businesses.  Based on that birth/death result, the business component estimates the number of jobs created or lost.  Any time you have computer algorithms and modeling the data can easily be manipulated.  This is the official methodology used to report the number jobs created or lost each month.

 

The second component is called the household survey.  This data is derived from thousands of actual phone calls the government makes to people across the country each month.  This survey also tracks the number of people that either obtained employment or lost their job.  The survey also tracks the total number of people working in the labor force, along with those on unemployment.  It is from this data that the monthly unemployment number is reported.  The monthly figure is simple math:

 

# of those unemployed

÷                           = the unemployment rate

     Total US workforce

 

The figure reported today is 4.1%.  It is known as the U-3 measurement.  But only is Washington can they have more than one unemployment rate.  There’s also the U-6 measurement.  That unemployment rate is 7.7%.

 

The U-3 number removes people that have been unemployed for more than 4 weeks.  The government falsely thinks that if you haven’t found a job in 4 weeks, you aren’t actively looking, and therefore should not be counted.  In our math above, if you shrink the number of unemployed, you get a smaller unemployment number.  By contrast, U-6 counts all those reporting to be unemployed, even those still looking after 4 weeks.

 

In this month’s household report, they reported the economy added 430,000 jobs!  But here is where is gets weird and doesn’t make sense.  Of those 430,000 jobs, 231,000 were from those age 16-19.  And out of the 231,000 jobs, 159,000 were from those 16–17 years old.  Why I find that odd has to do with the month being reported.  September is a time when kids are going back to school – either high school or college.  That’s not a time when you traditionally see kids running out to get a part-time job.  It just doesn’t make sense.

 

Computer generated reports, surveys with questionable results, believe them or not, it does affect you.  If the employment picture paints an economy moving along, inflation is a fear, and that drives up interest rates.  Mortgage rates should never have gone to almost 8% and should be much lower today than what they are.  Mortgage rates are based on government data.  The rates I quote you today are a result of that data.

 

 

 

 

 

And now the week’s economic news…….

 

Labor Market Excels

The major economic news this week was not favorable for mortgage markets.  The key Employment report released on Friday exceeded expectations by a wide margin, and comments from the Fed suggested that rate cuts will take place at a slower pace than investors anticipate.  As a result, mortgage rates ended the week higher.

 

The economy added 254,000 jobs in September, well above the consensus forecast of 140,000, and the results for prior months were revised higher.  The largest gains were seen in the hospitality, healthcare, and social assistance sectors.  The unemployment rate unexpectedly fell from 4.2% to 4.1%, the lowest level since May.  Finally, average hourly earnings were 4.0% higher than a year ago, far above the consensus forecast, and the highest level since March.

 

Two other significant economic reports released this week by the Institute of Supply Management revealed mixed results.  The ISM national services sector index jumped to 54.9, far above the consensus forecast and the highest level since February 2023.  By contrast, the national manufacturing index was just 47.2, a little below expectations.  Since readings above 50 indicate an expansion in the sector and below 50 a contraction, these reports continue to highlight that service companies have outperformed manufacturers over the last couple of years.

 

In a speech on Monday, Fed Chair Powell indicated that the pace of lowering the federal funds rate may be slower than anticipated by investors.  If the economy performs as forecasted, Powell expects that there will be another 50 basis points in rate cuts this year, while investors had priced in 75 basis points in reductions before the end of the year.  He added that officials are not "in a hurry" to cut rates quickly and that future decisions will be based on incoming economic data.  The news that monetary policy easing may be more gradual was negative for mortgage rates, and Friday's strong labor market data reinforced the case for smaller rate cuts.

 

 

 

 

Next Week

Investors will continue to look for Fed officials to elaborate on their plans for future monetary policy and will closely monitor the situation in the Middle East.  For economic reports, the main event will be CPI on Thursday.  The Consumer Price Index (CPI) is a widely followed monthly inflation indicator that looks at the price changes for a broad range of goods and services.  The Producer Price Index (PPI), another inflation indicator, will come out on Friday.

 

 

 

 

Until next week…….