• Michael Rosen Michael Rosen
    • Investment Insights are written by Angeles' CIO Michael Rosen

      Michael has more than 30 years experience as an institutional portfolio manager, investment strategist, trader and academic.

    PATRICIA

    Published: 10-23-2015

    It’s another beautiful day in Santa Monica: blue skies, a few high wisps of stratus clouds. But 1500 miles south of here is the strongest hurricane ever recorded in the Western Hemisphere. It will slam into Mexico tonight and will likely continue into Texas in a few days. Patricia is a Category 5 storm, with sustained winds in excess of 200 mph. This morning, the NOAA recorded 880 millibars of pressure, the lowest ever (1013 millibars is “normal” pressure at sea level). The satellite image below looks benign, just another cloud layer, but that’s very deceptive. Patricia is powerful.

    pat

    Experts (really, their computer models) are predicting a strong El Niño this winter. Equatorial waters of the Pacific heat-up, and the trade winds that normally blow east-to-west reverse course, bringing rain to the eastern Pacific and drought to the west. The map below shows the effect, with blue as wetter and red as drier. Note the dots are spread across the globe.

    gs-elnino

    Current temperatures in the Pacific are 2.5 standard deviations above normal (see below), comparable to the severe El Niños of 1997-98 and 1982-83 (when the Santa Monica Pier was destroyed).

    gs-elnin1o

    Assuming a strong El Niño season, the archipelagos of the western Pacific will be most negatively affected (lower GDP and higher inflation), whereas the west coast of the Americas will likely see an economic boost. But the impact will really be global: eastern Europe will suffer while the eastern Mediterranean should be helped (see below).

    7

    It’s easy to be oblivious to weather conditions that are not directly outside your window, and easy to get complacent about the weather when living in Santa Monica. But aside from the human tragedy (which is a silly phrase, as human tragedy should not be put aside; “in addition to” the human tragedy would be a better statement), weather (and climate) have measurable impact on the global economy. And it looks like the season is just beginning.

    [Graphs courtesy Goldman Sachs]

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