Natural Disasters: How They Impact the Economy

Natural disasters can influence many aspects of life, including your financial investment strategies. In this episode we explore how natural disasters impact the economy and your investment portfolio. Scott Bauer, Chief Executive Officer at Prosper Trading Academy LLC, joins Cassidy Clement to discuss.

Summary – Cents of Security Podcasts Ep. 88

The following is a summary of a live audio recording and may contain errors in spelling or grammar. Although IBKR has edited for clarity no material changes have been made.

Cassidy Clement:

Welcome back to the Cents of Security Podcast. I’m Cassidy Clement, Senior Manager of SEO and content here at Interactive Brokers, and today I’m your host for the podcast. Our guest is Scott Bauer, CEO at Prosper Trading Academy. Natural disasters can influence many aspects of life, including your financial investment strategies. So in this episode, we’re going to explain how natural disasters can impact the economy and your investment portfolio. Welcome to the program Scott.

Scott Bauer:

Thank you so much for having me, Cassidy. Glad to be here.

Cassidy Clement:

Yeah, for sure. So what exactly is your background in the industry? Where did you get started? I know I’m familiar with some of the work that you do because you’ve done various content creation with IB and IBKR Campus, but, you know, how’d you get started? How’d you get where you are?

Scott Bauer:

So I started as a market maker back on the CBOE like on the floor that’s behind me here, way back in the very, very early 1990s. I hit the trading floor in 1991 and I just got backed by a few buddies. That’s kind of how you got into the business back in those days. You know, if you knew someone and they said, come on, I’ll teach you how to trade, or, you know, you could be my clerk, that’s how you got into this business. Fortunately, I was in the right place, right time and got into it, and within a few years, the two guys that were traders that hired me, we actually formed our own trading firm called Botta (B-O-T-T-A) Capital Management, and we wound up having a couple hundred traders trading for us globally.

Not just at the CBOE but pretty much every exchange in the US and globally. In 2007, I went to work for Goldman Sachs. We got out of Botta, mid 2000s. In 2007, went to work for Goldman Sachs and I ran their S&P 500 options operation at the CBOE. That’s the pit that you see right here.

And then in 2013, I left floor trading to trade offline. Like pretty much what all retail traders do, but also start a trading academy, an educational trading academy, Prosper Trading Academy, where we teach people how to trade live in the market. So, you know, my two passions are trading and teaching. I also teach some classes at my alma mater, the University of Illinois, and you know, that’s my story. I’ve been around for a while.

Cassidy Clement:

So then you’re the perfect person to ask about some of, these economic impacts. I know, it’s a little topical, if you will, after the fires in California and, you know, we’re going through the winter here in the Northeast. So there’s many different things that you start to see get impacted by storms or floods, et cetera. And it usually comes down to hitting most people on the wallet, of course. So when it comes to actual, like natural disasters having an impact on the economy, what really is constituted as a natural disaster that we would consider, I guess you could say common and large enough to impact a greater economic trends and landscape.

Scott Bauer:

So typically, and I’m not gonna include the wildfire, the recent California wildfires yet, ’cause we just don’t know what the impact is gonna be, though, it’s probably gonna be pretty huge. But overall, natural disasters typically don’t have a major impact on US GDP. Now the outlier, the exception to that was Hurricane Katrina. That was a massive outlier and that one did have a big, effect and I would think that once we probably get into the second or third quarter of this year, we’re gonna start seeing that effect from the wildfires, the recent wildfires on GDP right now. But, typically as horrific as these events are, from an economic standpoint, overall, they don’t have a big impact.

Now, hurricanes, they are the most costly weather related disasters. I think there’s a stat out there and, you know, fact check it. I want to say, when I was doing some research on that, since 1980, I wanna say there’s been about a trillion and a half dollars worth of damage in the US due to hurricane.

So that’s like an average of 20 or 25 billion per storm. But again, unless there is, you know, and, it’s difficult to talk about it because we don’t want to talk about tragedy and, you know, bad things that happen. But unless there’s a big outlier like a Katrina, typically really is not a big hit to the economy.

Cassidy Clement:

So even when we get into that element of what we can say had a big economic impact or just selective sector impacts with all of your economic background, what would you say are the certain elements of the economy, or even if we have to go more narrow, like the stock market that will usually see the most change or impact? During the different stages of these natural disasters occurring. I think most people will initially think insurance, but you know, are there other elements like banks, utilities, et cetera?

Scott Bauer:

Yeah, absolutely. So, insurance for sure. I mean that one is a no brainer. But then you do talk about banks because if you talk about the amount that people either A, have to then go out and borrow to rebuild and get footing, or the flip side of that. In a worst case scenario where we’ve had such a loss of homes, like in the wildfires right now, what happens to all of those mortgages?

What happens to all of the finances? And, you know, we don’t think about it, but you know what, happens down the road? You’ve got a mortgage, let’s say, with, you know, Bank America or whomever who’s probably sold that off in a portfolio down the road. You know, there is a very long process and it’s kind of this never ending range, if you will, of where the effects can really go.

So the financial industry is a huge one, and I think there’s a real big cloud because of, if you think of the banks that give out loans, whether it is a mortgage or after the effect of something here. They’re packaging and selling those loans down the road, so we really don’t know where that’s going. And so that does bring in volatility very much to the marketplace, and obviously to the market and to individual stocks as well.

Cassidy Clement:

Yeah, the thing that I was curious about, especially with California as the most recent touchpoint, is that mortgage scenario. So just out of curiosity, how would we see that rippled throughout the sector? Would it be banking sector start to see default issues, like how exactly does that reflect?

Because Hurricane Katrina is another one that people can really, I guess you could say think back to and remind themselves of how much news coverage it had, the large amounts of devastation, it seemed a little more tangible. Nowadays we’re in a 24 hour news every single second type of thing. So how exactly would you see that reflected in one of those sectors like if, something were to happen?

Scott Bauer:

Yes. So defaults would be to me the most concerning and I’m not sure that, you know, the banks or the government have really set out yet what happens to people that have completely lost their property. And again, it, it’s very difficult to talk about this because we don’t, you know, we, don’t want to make something, out of someone else’s, you know, downfall. Right? But it is reality so, that is the difficult part of this. We don’t really know the people that have these mortgages, do they have to still pay them? Are they liable? Is the insurance company going to cover that? So you are going to see defaults, there’s no question about that.

And what does that do then to the lending arena? What does that do to the financial sector overall? It’s gonna make things more difficult. We’re already in a difficult situation here with interest rates, right? I mean, I know everybody wishes for one reason or another that we had 30 year mortgages back at 3.5 – 4% like they were a few years ago. Maybe not for the reason why we had that, but we all know how difficult the housing market is between house prices being at all time highs, mortgage rates not being so friendly right now, and that’s just gonna get worse. And then for the people, all across the country, but especially if you just isolate LA where the wildfires were, what does that do to the rental market?

Well, that comes down to just the basics of supply and demand, right? Economics. The economy works on supply and demand. Well. Now all of a sudden, a greater shock to the system is hit. And now there’s a massive demand for the rental market here with not a lot of supply. So it’s really this, unfortunate, vicious cycle right now, and I think it’s gonna be really tough to come out of it in the near term.

Cassidy Clement:

You had mentioned the rental property market, which I think is really interesting. That kind of leads me into my next question, which is that’s something to kind of think of in almost a cause and effect. Pretty straightforward idea of how maybe displaced people now have to look towards something to rent, to now stay in the area that they wanted to stay in, whether it’s for work, family, et cetera. And that then causes some supply and demand shifts, thus impacting the price. But are there certain examples of natural disasters and their economic impact that you can give? Maybe that paints it in a different light in the sense of maybe impacts in other ways. I initially think of when I was in my teen years and Hurricane Sandy occurred, the way that I saw that economic impact was it hurt.

I grew up going to the Jersey Shore and that completely changed the landscape of that area, the economics of that area, places to stay, eat, have fun, and all the roads and bridges that you drove on to get there. So the economic impacts went from workers to utilities to you know, recreational everything.

So what are some examples that you can give that it maybe would help, you know, allow our listeners to have a little bit of an understanding of, hey, it’s not just like a wildfire or a flood here and there. There’s actually items that, events that have happened that impact items you may not think of.

Scott Bauer:

Absolutely, and, you know, I’ll talk about one that’s probably not on anyone’s radar, but I’m gonna bring up, a specific one that affected me. And it, in no way, shape or form, is it comparable to Sandy or, Katrina, or to the wildfires. The week before I was to get married back in 1992 in Chicago, okay? There was a massive flood. So in Chicago, the way that the city is built, all of the sewage and everything, it’s all connected underground, miles and miles beneath the city. And there was a massive flood in the sewage system in Chicago that essentially shut down the financial district in the city.

Not only did it, you know, shut down the financial district in the city, but obviously then it’s spread out to some of the suburbs, O’Hare airport, which is not too far from the city, was impacted. So for me, here I am, it’s literally, it’s six days before my wedding, and I’m thinking of not just the people being displaced, not just how am I gonna get to work at the Board of Trade.

How are people that are coming in from outta town going to get to my wedding? So the economic impact of something from is, and I’m not gonna say it’s small, but as small as that compared to some of the big disasters is absolutely major. And then what happens if you think of it, what happens to consumers spending patterns when something hits right? Well, they have to go out and you, you first look at some of the retailers, home Improvement, Home Depot, Lowe’s, stores like that. Those are the companies that you believe are going to probably get a really big pop. From any sort of disaster, again, whether it be from a hurricane, a fire, or you know, a flood like this.

And that’s exactly what happened to the people in Chicago. They all had to go run out. They had to get generators, they had to get, you know, some pumps. They had to make sure that their foundations weren’t cracking. So if you think about the economic impact to all of that, you really need to think about not only just securing, taking care of yourself, your family, your house, your home, whatever it is, what companies could possibly benefit from that and what companies could get hit?

So when something like this happens, again, not hugely a big hit or a big impact to GDP, but there are absolutely sectors and companies out there that are going to benefit from some of these disasters. And again, I just brought that one up because that’s, fortunately for me, that’s the only thing that’s really from a disaster standpoint, affected me personally where I had to act on it myself. Everything else is something I had to read about or what you experienced with Sandy. Let me ask you a question if you don’t mind. You grew up going to the Jersey Shore, how long did it take? Because I honestly don’t know. How long did it take for things to revitalize, rebuild, and get to the point where people started coming back?

Cassidy Clement:

I mean, I, grew up going there every single year since I probably was in diapers. I was always going there. So I had a very routine vision of what it was in my mind and I really think it probably was like four to five years before I started seeing the beach still be able to handle the amount of people that would go.

There was massive beach erosion and huge drops, so it narrowed a lot of where people could actually go on the public beaches and thus impacted all the condos and hotels in those areas ’cause people didn’t wanna drive and walk like miles to the beach, which used to be right there. Then it was completely exposed and there was plumbing and piping. It definitely took a while. I actually, I remember having to write a paper on it actually in high school, now that I think about it. But it definitely opened up my understanding of how, oh, this isn’t just something that happened. I believe it was like in the fall of that year that I forgot about and was a very rainy week or two in my hometown.

This really hits some places hard, especially small businesses that made their money, for example a beach town, that’s how they would make their money is all the tourism in the summer. And I saw that economic impact right in front of me. I mean, I like the example you used about your wedding because when you think about this in the grand scheme, most people take, you know, the positive approach. Like you said, you don’t wanna think about people’s unfortunate realities, but if you think about, oh, well this didn’t impact me, I’m just going to keep moving on, there is a very strong chance that it can impact you financially in terms of your portfolio, especially if you’re exposed to any of the businesses or securities that are part of those sectors or even headquartered in some of those areas.

 That kind of leads me into my next question, which was like, when you have a portfolio and a natural disaster occurs, what is some way that an investor can think about or plan for strategically building or adapting their portfolio? Or even if it’s something a little bit more preparing for things on the horizon, if it was more of an environmental concern or something of that nature.

Scott Bauer:

Sure. So, I think that what everybody needs to do, and you should do this on a pretty normal basis, is look at your portfolio and assess the risk that you might have. Is that risk due to tariff risk? Is it due to whatever economic risk? And do you have some risk due to natural disasters? Because natural disasters happen, they’re not going away. They will happen every year, whether it’s a hurricane, a flood, you know, whatever it may be. So you have to assess what risk do you really want to take? And again, I think what it really comes down to, are you a trader? Are you an investor? As a trader there are lots of opportunities around economic disasters or, you know, when we have something that is an outlier, right?

That’s what traders seize the opportunity. And I don’t mean that in a bad way from a longer term investing standpoint, you assess is that part of your balanced portfolio? Now one stock in, you know, that I like to kind of use as an example that people always turn to when there’s going to be a weather event. That maybe electricity is going to be shut out for an extended period of time for whatever circumstance. Generac, they make generators, right? And it’s a very widely held stock and you can look at the performance of a company like that, a stock like that. And you can tell, by looking at the stock chart when there has probably been something that caused people to run out and, you know, buy up everything that they could.

And yes, it all comes down to the basic economic principle of supply and demand. So as a trader, that mindset, I look for opportunities like that. But for my longer term, gold, you know, stuff that’s put away and, you know, for retirement, I just always wanna make sure that I have a balanced portfolio. And I’m not going to worry as much if one stock or something that I’m holding happens to get hit in the short run due to a disaster.

Because again, that mindset is 10, 15, 20 years as opposed to maybe 10 days, 20 days and it’s a big difference. And you know, the people, my clients, my team, my students that I work with on a daily basis, I know that it is very difficult to separate trading from investing. You have to have two completely different mindsets. And that’s part of the emotional or the psychological part of trading that a lot of people have a hangup with.

Cassidy Clement:

Yeah, there’s definitely adifferent viewpoint with the trading versus investing type of, not strategy, but I guess initiative of how you’re going to go about what you’re looking for, how

long you’re investing, and the various strategies you use. That kind of brings me to my last question, which is the trading environment or investing environment for sectors and businesses around natural disasters. Because sometimes laws and legislature and regulation can enter the picture, which then can maybe completely change up your investment strategy that you thought was a 20 year solid thought or your day-to-day trading idea, which you thought was good for the next two months. So from your perspective, are there certain things that people should keep in mind when it comes to, at least in the past several years, all of the regulation and legislation change? Or is it more like slow and steady and there’s relative predictability?

Scott Bauer:

I think it’s more slow and steady and if you try and break things down into every micro piece, and if you’re trying to let’s say outsmart the system because there may be a piece of legislation out there that could hinder or help something. I don’t think you’re gonna be successful as a trader. I do think you have to look at longer term trends.

You have to look at longer term technicals. I know me personally, I’ve been doing this for 35 years now. Do I, you know, like to trade on stocks that get affected when something happens, yes. Will I put a trade on ahead of time? So if there’s a report out there, you know, that the Gulf of Mexico is, you know, an impending storm is coming and it could affect some of the oil refineries or wherever it might be.

Maybe there’s a tsunami warning. I am not going to take a position based on something that might happen. I will look after the fact say, okay let’s assess what happened, what happened to these individual companies, and then I’m gonna assess both from a technical standpoint and a fundamental standpoint. Okay, how do I want to approach that? So I’m not worried so much about the government political end of things. I really, when it comes down to trading, I’m doing what I do best, and that’s reading the charts, reading the paper flow, looking at fundamentals, looking at trends, and that’s how I find the opportunities.

And I’m not so worried about, you know, some of the static or some of the noise out there. And this is off topic a little bit, but it’s really the same thing when an announcement comes back that the FDA is investigating a company or the EU is now investigating Google for X, Y, and Z and we see this happening all the time. Those are opportunities. Those are not things we should be worried about. Those are not things you can anticipate, but those are things that you can react to and really look for those opportunities, and I think that’s a good way to approach it.

Cassidy Clement:

So you are saying within this realm of natural disasters, sometimes the strategies have to be a little more reactive than proactive because there’s no dedicated place that you could just go onto on your computer to saying 100% guarantee tomorrow we’re going to have this problem for this amount of days.

Scott Bauer:

That is my experience. I have seen so many people say, okay, this is gonna happen in a week, you know, and, this is how I’m gonna position myself only to find out, you know, that, it didn’t work out or the weather pattern changed or whatever it might be. I think that’s a really tough game. That’s where you get more into rolling the dice, and as a trader, I don’t roll the dice. I put the odds and the probabilities in my favor of things that I know. Volatility, trends, charts, and I don’t want to bring in something that has just such a wild card to it. So again, maybe that works for some people. For me, slow and steady is the route to go.

Cassidy Clement:

Yeah, that seems to be like you said originally of the day-to-day trader versus the long-term investor. Things are gonna vary for each person, but there’s also different strategies you can take depending on how your exposure is. But thank you for joining us today Scott, you brought up some great points.

Scott Bauer:

I really appreciate your time. Thank you so much for having me.

Cassidy Clement:

Yeah, of course. So as always, listeners can learn more about rave financial topics for free at interactivebrokers.com/campus. Follow us on your favorite podcast network, and feel free to leave us a rating or review. Thanks for listening, everyone