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Tipping Point? - Friday, 11/02/2012

Without dispute, the superstorm named Sandy has, and will continue to deliver, wide-ranging repercussions to the communities of the Mid-Atlantic and Northeast United States. Below I mention only a few of the many issues our country will tackle, but I believe these points are indisputable:

  • Several months to a full year will pass before we have an accurate assessment of the true cost of the storm.
  • Revenue loss to the cities and states will count in the tens of billions of dollars.
  • The contribution of some $7 billion by FEMA will pale compared to the overwhelming need.
  • The survival instincts of communities will enable the marshaling of resources in dramatic and effective ways. Recoveries from Hurricanes Andrew and Katrina are measurable successes.

Recoveries from Hurricanes Andrew and Katrina, however, were accompanied by a stronger national economy than what I believe we have now. The current financial strains on the government (federal, state and local) call into question just how rapidly a return to normalcy might occur. Even if the insurable recovery is 100% from the damage to the various physical infrastructures, such as the NY MTA (est. $20 billion), airlines or oceanfront communities, the country is still mired in a very low-growth period economically. Will Sandy become a tipping point for the creditworthiness of small, local governments?

History has demonstrated the resilience of municipalities in all types of business cycles and calamities. With some 60,000 issuers of municipal bonds from which to build diversified portfolios, I believe investors would benefit most from professionally managed products, such as ETFs. ETFs may help weather the storm through a process that generally seeks to avoid concentrating assets in a narrow region. In my opinion, municipal credit quality, while damaged in obvious ways from the likes of Sandy, should continue to hold its strength.

James Colby
James Colby
Senior Municipal Strategist
 

 

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