Global Climate Change and its Potential Impact on the Banking Industry and Borrowers

As has become apparent, the very concept of global climate change has become one of the most divisive issues of our times.  Those on the denying side of the debate insist that changes in global temperatures are transitory and are most definitely not connected to the increased and cumulative emissions of greenhouse gases while those on the pro-climate change side of the equation sound regular alerts that climate change is about to have an irreversible and negative impact on our future survival as a species.  While all of this debate is interesting, a recent publication shows us that the debate itself is immaterial since all that really matters is how corporations, particularly those in the banking industry view the issue.

The Federal Reserve Bank of San Francisco recently published an extensive series of articles under its Community Development Innovation Review entitled "Strategies to Address Climate Change Risk in Low- and Moderate-income Communities".  One article in this publication by Michael D. Berman is of particular interest because it shows us how climate change (or the perception of climate change) could ultimately impact all of us, particularly those Americans who are living in flood-prone regions.

Let's open this posting by looking at data regarding both fluvial (river) and ocean/sea level flooding for the United States.  A 2018 paper "Estimates of present and future flood risk in the conterminous United States" published in Environmental Research Letters indicates that about 40.8 million Americans or 13.3 percent of the entire population of the study area are at risk of one in 100 year floods from flooding along rivers.  This is significantly higher than the estimates from FEMA which significantly understate the population impact of flooding as you can see on this graphic from the paper with SSP2 representing a medium population growth scenario and SSP5 representing a higher population growth scenario:

From the author's calculations, he author also calculates that this will have a $2.9 trillion impact on GDP and will impact $1.2 trillion worth of assets that are vulnerable to flood damage. 

In retrospect, let's look at fluvial flooding predictions for the main flooding season in 2019.  Here is a map from the National Oceanic and Atmospheric Administration (NOAA) showing the flooding outlook for the spring of 2019:

   

Now, let's look at ocean-related flooding.  According to NOAA, in 2018, the United States, the frequency of high tide flooding days reached five days, tying the record of 2015 as shown on this graphic:

Here is a map from Global Flood Map showing the regions of the United States that will be prone to flooding if sea level rises by 18 inches:

A sea level increase will result in the displacement of just over 14 million people.

  

Now, let's look at the paper entailed "Flood Risk and Structural Adaptation of Markets: An Outline for Action" by Michael Berman.  In his paper, Mr. Berman states that current tools are incapable of quantifying the risk of floods as the severity and frequency of floods increases across the United States.  While financial institutions and property owners have relied on historical flood data supply by FEMA, it is increasingly apparent that these maps are outdated and highly inaccurate and that new tools to accurately assess the likelihood of flooding need to be developed.  He states that financial institutions need to do four things:

1.) work together to create standardized metrics and tools, scoring systems and risk assessment tools to be utilized at the time of mortgage origination.

2.) oversee the creation and updating of these metrics and tools.

3.) utilize these new tools to better understand the risk of flooding at the time of mortgage origination.

4.) design and implement mortgage loan products that encourage prudent behaviour by borrowers. 

Here is a quote showing the results of these actions:

"The result of these actions will catalyze a series of additional steps as municipalities, engineers, architects, and building materials manufacturers “follow the money” to promote behaviors and capture new markets to reduce flood risk, as public awareness is increased. The new initiatives will in turn reduce losses to property owners, lenders, insurers, munici­palities as well as all of those who share in the direct and indirect losses from floods. The total positive impact on the social welfare of communities is truly beyond quantification."

Now, let's look a key and very important quote from this paper:

"From December 2017 to July 2018, the author of this article conducted a series of unstruc­tured interviews with over 20 national and regional participants in the mortgage and real estate industry. No lender, asset or portfolio manager, or buyer of commercial mortgage-backed securities (CMBS) first loss B-Pieces interviewed accounts for flood risk at the transac­tion date or over the life of the asset, other than determining whether a property requires flood insurance solely because it is in the 100-year floodplain at the initial transaction date. When specifically asked, no participant takes into account any of the following potential life of investment risk factors: (i) increases in flood insurance premiums, which may be substan­tial in light of the new FEMA risk rating system expected in 2020; (ii) adverse impacts on asset values and business interruption due to projected or actual increased flooding;15 or (iii) increases in local real estate taxes, as municipalities and counties increase spending on infrastructure to mitigate flood risk and/or sea level rise. For instance, no respondent had taken into account substantial new and/or projected infrastructure costs such as the $500 million of bonds for flood mitigation in Miami Beach or the estimated multi-billion dollar cost of converting from septic to sewerage systems in Miami-Dade County.

There is a real possibility that real estate values in some communities will be decreasing due to increased flood risk just as the real estate tax base is being relied on for funding of new flood mitigation infrastructure. Furthermore, if and when a 30-year mortgage is no longer available in a particular neighborhood due to flood risk (or the prohibitive price or lack of availability of flood insurance), property values will undoubtedly be substantially adversely impacted. This can be disastrous for a homeowner whose house is their largest asset and a substantial portion of their net worth. This will have a disproportionate adverse impact on low- and moderate-income (LMI) households. Obviously, this can result in a downward spiral of property values for such communities. While this is unlikely to be a substantial issue in the near term, the adverse impact on real estate portfolios of the GSEs, banks and other financial institutions may be substantial in the long run." (my bold)

I hope that you read that carefully.  What the author (a representative of the world's most influential central bank) is telling us is that, in the future, we can expect one of two things:

1.) financial institutions may decide to stop issuing mortgages to potential home purchasers in regions where there is increased risk of flooding.

2.) this will have a negative impact on the value of homes in these flood-prone areas which could wipe out the value of the real estate asset.

Let's close with this thought.  As I noted at the beginning of this posting, the concept of global climate change is one of the most divisive issues of our time.  While we are being distracted by this division, behind the scenes, changes that will impact millions of American households (not to mention households around the world) are in play.  Whether or not we believe that global climate change is to blame for the rise in flooding is immaterial.  It is the viewpoint of the world's financial institutions that matter.  If they believe that global climate change is negatively impacting the value of their enterprise, we can be assured that they will do everything possible to protect themselves and their profitability and will show absolutely no regard for our viewpoint on the cause of rising waters in our neighbourhoods.  As the 2007 - 2008 collapse in the banking sector proved, we matter little to the bankers among us. 

China's Chengdu J-20 - A Game-Changing Stealth Fighter

A recently released video by the People's Liberation Army Air Force (PLAAF) gives us a sense of the advancements that China has made in its stealth fighter aircraft program, a program that is clearly designed to counter Washington's recent moves in the region.

The Chengdu J-20 fifth generation multirole fighter made its public debut in November 2016 as shown on this news item from CCTV:

Let's look a what is known about the J-20's specifications.  This multirole fifth generation fighter is equipped with the latest Chinese fly-by-wire technology as well as advanced fire control and engine management features.  Pilots will control the aircraft through a traditional Hands on Throttle and Stick or HOTAS arrangement and will have access to a wide-angle, full-colour cockpit LCD display similar to the display in the Lockheed F-35 Lightning II.  It is suspected that the power plant is a turbofan capable of outputting 30,000 pounds of thrust.  The power plants will have thrust vectoring nozzles for improved maneuverability and super cruise capability.  The J-20 can be equipped with a variety of Russian and Chinese air-to-air missiles, air-to-surface missiles, anti-radiation missiles, laser-guided bombs and conventional drop bombs.

Here is a very recent video from CCTV showing the J-20 in action:

According to Jane's Defence Weekly, in July, Chinese state-owned media (CCTV) released a photograph of a J-20 bearing a serial number of a known combat unit of the PLAAF on its tail as shown on this picture which appeared in Global Times, another Chinese state-controlled media outlet:

The number 6 on the tail indicates that the J-20 is on combat duty and that combat troops have mastered the fighter jet.

The number 62001 indicates that the aircraft is assigned to the PLAAF's 9th Air Brigade based at Wuhu (located 280 kilometres inland from Shanghai) which operates under the PLA's Eastern Theatre Command.

Let's look at another recent fighter jet development in Southeast Asia.  Here is an announcement from the Defense Security Cooperation Agency outlining the proposed sale of sixty-six F-16 fighter aircraft along with various spare equipment for an estimated total cost of $8 billion to the Taipei Economic and Cultural Representative Office in the United States (TECRO)/aka Taiwan as shown on this news release:

According to Defense News, the Trump Administration has officially cleared the sale of the F-16s to Taiwan however it must still receive Congressional approval

Now, let's put the two stories together.  Here is what Defense World has to say about the implementation of the J-20 and its impact on the United States and its recent sale of F-16 jets to Taiwan:

"State television showed a video released by the PLA-AF showing seven planes taking off and flying in formation during a night sortie. The message seems aimed squarely at Taiwan which recently received a US State Department approval for 66 F-16s of the latest Block 70/72 standard which come equipped with the latest phased array radar, data links and electronic countermeasures.

The message behind showing seven J-20s could be that China's military is already operating a considerable number of J-20s, “which could achieve regional aerial superiority and destroy the enemy's strategic facilities deep in hostile territory,” Global Times said quoting unnamed experts." (my bold)

While Donald Trump claims that China has "stolen" American technology, it is quite clear that the J-20 is a game-changing development in the region and one that can be used for both defensive and offensive operations.

Let's close with this sobering quote from the chief designer of the J-20, Yang Wei:

"To truly achieve peace, defending our homeland is not enough.  We just not only defend but attack."

China's recent J-20 flights show that Beijing is not sitting on its laurels while Washington attempts to exert its power in the South Pacific region.

De-dollarization - The End of the U.S. Dollar's Dominance

At the recent Russian Energy Week meeting held in Moscow from October 2nd to 5th, 2019 Russian President Vladimir Putin made some very interesting comments about the changing role of the United States dollar as the world's foremost reserve currency during a panel discussion.  Let's look at some background information on the world's reserve currencies followed by quotes from President Putin's commentary and how Russia is handling its affairs in light of the potential tectonic shift in global reserve currencies.

According to Philosophy of Metrics, the history of the world's reserve currencies since the 15th century and their duration are as follows:

Portugal - 1450 to 1530 (80 years)

Spain - 1530 to 1640 (110 years)

Holland  - 1640 to 1720 (80 years)

France - 1720 to 1815 (95 years)

United Kingdom - 1815 to 1920 (105 years)

United States - 1920 to 2030 (estimated) (110 years)

As you can see, the United States dollar has now reigned as the world's foremost reserve currency for longer than most other currencies.

The United States dollar ascended to the throne in 1914 when the first U.S. dollar as it is known today was printed; this took place shortly after the creation of the Federal Reserve Bank under the Federal Reserve Act of 1913.  It was during the First World War that many nations had to abandon the gold standard in order to pay their military expenses using paper (fiat) currencies.  Even the United Kingdom which had clung to the gold standard to maintain its position as the world's reserve currency of choice had to abandon the gold standard in order to borrow money to fund its military.  In 1944, a meeting of 44 Allied nations in Bretton Wood, New Hampshire, negotiated a new system of foreign exchange.  In this new system known as the Bretton Wood Agreement, central banks would maintain fixed exchange rates between the currencies of their nation and the U.S. dollar.  In turn, the United States would redeem the American dollar for gold upon demand of their allies.  It was at this point that the U.S. dollar was officially declared the world's reserve currency, largely because it was backed by the world's largest gold reserves.

Here is a table from the International Monetary Fund showing the currency composition of the official foreign exchange reserves for the entire world, showing the dominance of the United States dollar:

Here are both a pie chart and bar graph showing the same information:

As of the second quarter of 2019, $6.792 trillion or 57.9 percent of the world's total foreign exchange reserves are held in United States dollars.

Now, let's look at the comments made by President Vladimir Putin in October 2019 about the United States dollar and its historical and future roles:

"The dollar enjoyed great trust around the world.  It was almost the only universal currency in the world.  For some reason, the United States began to use dollar settlements asa tool for political struggle.  Imposing restrictions on the use of the dollars.  They began to fight the hand that feeds them.  They'll collapse soon.  Many countries in the world began turning away from using the dollar as a reserve currency.  They restrict Iran in its dollar settlements.  They impose some restrictions on Russia and other countries.  This undermines confidence in the dollar.  Isn't it clear?  They are destroying the dollar with their own hands."

  

Let's look at some examples of how Russia and China are working around the United States dollar.  Back in September 2019, the South China Morning Post announced this:

In July 2019, the Moscow Times announced this:

Here is a graphic showing Russia's growing gold reserves:

Just for interest's sake, here is a graphic showing China's growing gold reserves:

Let's close with this graphic showing the significant readjustment in China's U.S. dollar foreign exchange reserves from 2014 to 2017:

In conclusion, while Vladimir Putin's opinion on the United States dollar as the world's reserve currency may be nothing more than wishful thinking, it is clear that both Russia and China, the world's second largest economy and likely inheritor of the global superpower "crown" are taking significant steps to protect themselves from the possibility of a tectonic shift in the global monetary reserve reality.  Given Washington's penchant for using economic warfare as part of its efforts to retain its dominant status in the global village, one could easily see why nations would elect to insure themselves against such economic bullying.

A Divided Ukraine - The Story That the West Doesn't Hear

Thanks to the ongoing impeachment procedures against Donald Trump, Ukraine and Russia are, once again, headline news.  While most people could not even point out Ukraine on a world map, there is another factor that completely evades most Americans in this time of the "all things Russian are unconditionally bad" narrative.

Let's look at one of the key issues that has impacted the West's view of Russia.  In the Western mainstream media, we repeatedly hear that in March 2014, Russia illegally annexed Crimea despite the fact that a referendum was held.  For your illumination, here is a map showing the Crimean peninsula (in purple) and the evolution of Ukraine in the post-First World War era:

Note that Ukraine was not granted ownership of Crimea until 1954, a very recent development given Crimea's long association with Russia.

Let's look at how Washington saw the 2014 Crimean referendum.  Here is a quote from an interview entitled "Why the Crimean Referendum is Illegitimate" with John B. Bellinger of the Council on Foreign Relations, one of Washington's most influential think tanks, from March 2014:

Note that Ukraine was not granted ownership of Crimea until 1954, a very recent development given Crimea's long association with Russia.

Let's look at how Washington saw the 2014 Crimean referendum.  

"Voters in Ukraine’s republic of Crimea opted to join Russia in a referendum Moscow called the starting point for determining the future of the peninsula. CFR Adjunct Senior Fellow John Bellinger, former legal adviser for the U.S. State Department, said the March 16 vote violates both the Ukrainian constitution and general principles of international law, which respect the territorial integrity of states. Despite concerns about the vote and Russia’s deployment of forces in Crimea, he said, the international community has limited options to overturn the result. But Bellinger added: "Russia may find that its support for Crimea’s independence might trigger referenda or secession movements that it opposes, such as in Chechnya."

The Obama administration and most European governments argue that the referendum violates both the Ukrainian constitution and international law. The Ukrainian constitution requires that any changes to the territory of Ukraine be approved by a referendum of all of the Ukrainian people. The requirement is consistent with general principles of international law, which respects the territorial integrity of states and does not recognize a right of secession by a group or region in a country unless the group or region has been denied a right to "internal self determination" (i.e., its right to pursue its own political, economic, social, and cultural development) by the central government or has been subject to grave human rights violations by the central government. These factors, which could give rise to a right of remedial secession under international law, are not present in Crimea.

International law prefers to preserve the territorial integrity of states and limit the right of popular self-determination because minority secession movements, if allowed to proceed without limits, do not reflect the views of the majority in a state and could lead to the breakdown of the international system." (my bold)

That is, the American model of how the international system should function.

As you will see in this posting, Crimea is a somewhat different case given its history.  In 1744, Princess Sophie, the daughter of Prince Christian of Analt-Zerbst, a small Prussian principality, was sledged to be the wife and heir of the future Emperor of Russia, Peter III.  Sophie and Peter were married in St. Petersburg Russia in 1745 and Sophie converted to Russian Orthodox and changed her name to Catherine.  In 1762, Peter III came to the throne and threatened to incarcerate Catherine in a convent so he could marry his mistress.  Instead, Catherine seized the throne through a military coup and began ruling Russia until her death in November 1796 at the age of 67.   Catherine is better known to the West as Catherine the Great and the period of her rulership over Russia is considered by many to be the Golden Age of Russia.  It was during her rulership that Russia expanded its territory  as shown in light yellow on this map which shows the territorial expansion between the end of Peter the Great's rule and the end of Catherine the Great's rule:

In the bottom centre of the map you will note that the Crimean peninsula was added to the territory of Russia during Catherine's rule.  Here is a quote from the Smithsonian magazine about Russia's expansion into the Crimea:

"Catherine risked her reputation in the West as an Enlightened ruler, however, to expand her territory into Ukraine. While Catherine entertained European royalty and thinkers at her court, her armies fought in a war with the Ottoman Empire (modern day Turkey) for control of the Black Sea. Peter the Great had opened Russia up to the Baltic Sea, founding St. Petersburg on the Baltic Coast, but Catherine was determined to expand her south eastern frontier and develop a permanent Russian presence on the Black Sea.

When the Russo-Turkish War began in 1768, the Tatars who lived on the Crimea operated somewhat autonomously under a Khanate. The predominantly Muslim population descended from centuries of intermarriage between the native Turkic people and Mongol armies who had occupied the region during Genghis Khan’s time. They had a fractious relationship with the surrounding Russian and Polish-Lithuanian Empires because they raided their neighbors, engaging in human trafficking. As Russia expanded southward, these raids decreased in frequency, but continued to take place until the annexation of the Crimea.

The 1774 Treaty of Küçük Kaynarca temporarily ended the conflict, leaving the Crimea with nominal independence but giving Russia control of key ports on the peninsula. Catherine refused all offers from Prussia, Austria and France of further mediation, determined to continue pursue her territorial ambitions in the region. Catherine’s fellow monarchs ultimately accepted the loss of the Crimea’s independence, and Russia formally annexed the Crimea in 1783.

Russo-Turkish wars and three successive partitions of Poland during Catherine’s reign brought much of the rest of modern Ukraine under Russian rule after the region had spent centuries under Polish-Lithuanian control. Catherine’s victories enabled Russia to establish a Black Sea fleet. Special access to the Dardanelles and Bosporus Straits that connected the Black Sea to the Aegean Sea via the Sea of Marmara became a key foreign policy goal for Catherine’s descendants during the 19th century, contributing to the outbreak of the Crimean War (1853-1856)."

Russia's control of the warm water port at Sevastapol began in 1783 and played a key role in the strength of Russia's navy, a most important measure of the military strength of all of the world's most powerful nations at the time.

The close connection between Crimea and Russia continued through the First World War and to the end of the reign of Tsar Nicholas II.  In fact, given the warmer climate of Crimea, the Russian royal family spent a significant period of time at their Livadia palace as shown on this video:

 Here is a map showing how Europe was divided during at the beginning of the First World War:

...and here is a map showing how Europe was divided at the end of the First World War:

While the borders of Europe's member states changed dramatically in the post-war period, Russia still retained its ownership of the Crimean peninsula.  This lengthy period of connection resulted in this:

As you can see, the eastern regions of Ukraine and, in particular, Crimea, have Russian as their unique mother tongue.  While speaking Russian as your first language does not necessarily mean that your political leaning will be toward favouring Russia, it certainly has impacted voting patterns in Ukraine since it achieved independence from the U.S.S.R. in 1991 and, as shown on this map, had a significant impact on the percentage of Ukrainians who voted in a referendum on December 1, 1991 to break away from the Soviet Union with western Ukraine (the Ukrainian-speaking portion of Ukraine heavily favouring secession when compared to eastern Ukraine:

Those of us who live in nations that consist of people that are more-or-less ethnically and geographically homogenous cannot hope to understand the political environment of a nation like Ukraine.  The West's blanket condemnation of Russia and its so-called annexation of the Crimean peninsula in 2014 would suggest that more of us need to educate ourselves on the history of Russia and Crimea in particular before we whole heartedly swallow the narrative that our political leaders and media foist on us.

The Two Americas - Our New Reality

No it's not your imagination, there really are two Americas....at least according to a new study by the Brookings Institute entitled "America has two economies - and they're diverging fast" by Mark Muro and Jacob Whiton.

The authors open with this observation:

"We’ve been harping for a while on the stark economic divides that define American life in the Donald Trump years.

To be sure, racial and cultural resentment have been the prime factors of the Trump backlash, but it’s also clear that the two parties speak for and to dramatically different segments of the American economy. Where Republican areas of the country rely on lower-skill, lower-productivity “traditional” industries like manufacturing and resource extraction, Democratic, mostly urban districts contain large concentrations of the nation’s higher-skill, higher-tech professional and digital services."

Based on a new data analysis that was developed with the Wall Street Journal's Aaron Zitner and Dante Chinni, the authors suggest that the change being experienced in the red and blue United States  is happening very quickly and in real time, transforming the economies of the Democrats and Republicans.

Let's start by looking at how voting patterns have changed over the past decade by examining several metrics:

1.) Land Area:   This map shows that the Democrats are far more reliant on urban, coastal districts than they were in 2008:

In 2008, Democratic-voting, urban districts encompassed 39 percent of America's land area compared with 61 percent the land area voting Republican.  By 2018, the Democrat's share of America's land area had fallen to 20 percent with the Republican's share rising to 80 percent.  

2.) Median household income and GDP per seat:  GDP per seat and median household incomes have changed drastically for Democratic and Republican districts:

Democratic districts GDP per seat:

2008 - $35.74 billion

2018 - $48.50 billion

Republican districts GDP per seat:

2008 - $33.25 billion

2018 - $32.60 billion

Democratic districts median household income:

2008 - $54,000

2018 - $61,000

Republican districts median household income:

2008 - $55,000

2018 - $53,000

Here is a graphic showing the aforementioned data which clearly shows how Republican-leaning districts have seen declines in both GDP per seat and median household income over the past decade:

3.) Productivity:  Productivity has varied greatly over the past decade with Democratic districts showing marked improvement and Republican districts productivity remaining stagnant:

Democratic districts productivity:

2008 - $118,000

2018 - $139,000

Republican districts productivity:

2008 - $109,000

2018 - $110,000

4.) Share of adults with at least a Bachelor's degree: Over the past decade, the percentage of people living in Democratic districts have seen a significant increase in the percentage of people attaining a Bachelor's degree or greater compared to a very small increase in Republican districts:

Democratic districts share with Bachelor's degree:

2008 - 28.4 percent

2018 - 35.6 percent

Republican districts share with Bachelor's degree:

2008 - 26.6 percent

2018 - 27.8 percent

5.) Metro area population share: Over the past decade, the Democratic Party represents an increasingly urban population while the Republican Party represents a more rural and exurban population:

Democratic districts metro population share:

2008 - 86.7 percent

2018 - 94.6 percent

Republican districts metro population share:

2008 - 82.7 percent 

2018 - 75.6 percent

6.) Basic manufacturing job share: Over the past decade, the percentage of people involved in the manufacturing sector has increased for Republican districts and decreased for Democratic districts as workers in Democratic districts increasingly took jots in professional and digital services:

Democratic districts manufacturing job share:

2008 - 53.8 percent

2018 - 43.6 percent

Republican districts manufacturing job share:

2008 - 46.2 percent 

2018 - 56.4 percent

With this data in mind, let's look at what the authors' conclude:

"...there are few signs of any coming reversal of the decade’s divergence. Instead, the current economic trends underlie the current party divide and reinforce it. For at least the foreseeable future, therefore, the nation seems destined to struggle with extreme economic, territorial, and political divides in which the two parties talk almost entirely past each other on the most important economic and social issues, like innovation, immigration, and education because they represent starkly separate and diverging worlds. Not only do the two parties adhere to very different views, but they inhabit increasingly different economies and environments."

Election results in the United States are increasingly showing that the United States of America is becoming the Untied States of America.  From all appearances,  a commentary by Ronald Brownstein in "The Atlantic" which stated the following:

"Today, the two parties represent no only different sections of the country, but also, in effect, different editions of the country....The parties' ever-escalating conflict represents not only an ideological and partisan stalemate.  It also encapsulates our collective failure to find common cause between what America has been, and what it is becoming."