Hurricane Florence Illustrates Company Town Risks
Total wealth is comprised of four elements: Human Capital (represented as the present value of all future cash flows from work); Pensions; Real Estate, and; Investments.
As I have written about in my Company Town Risk series here, here, and here, many investors have overlapping risks throughout their total wealth.Total wealth is comprised of four elements:
- Human Capital (represented as the present value of all future cash flows from work);
- Real Estate, and;
Hurricane Florence and Wilmington, North Carolina
Investors living in Wilmington, North Carolina, where Hurricane Florence made landfall today, are likely facing severe negative impacts to many, if not all, elements of their total wealth.If they work in Wilmington or own a business there, their Human Capital will be impacted, possibly severely, if their physical place of business is heavily damaged or destroyed. If the business should fail, their pension could be at risk as well.Needless to say, any real estate owned in Wilmington is at extreme risk should the tidal surge risk precipitously. (Current estimates are for up to an 11 foot surge.)Lastly, if the investor has their financial assets invested in Wilmington specifically and North Carolina generally, there could be surprise negative impacts. In particular, if the investor owns Wilmington municipal bonds and is heavily concentrated in North Carolina State municipal bonds, they are likely to decline in value. For most investors, this would be a decline at the worst possible time, especially if those bonds needed to be liquidated to support a rebuilding of their real estate or business.These overlapping risks can be illustrated in a Venn Diagram.
Chart One: Company Town Risk Venn Diagram
For some investors, especially those that live and own a business in Wilmington, all four of the elements in the Venn Diagram would overlap. It would essentially be one big exposure to Wilmington.Despite the obvious nature of these risks, I continue to see municipal bond portfolios heavily weighted to local and home state bonds.This is an unforced error and a completely avoidable risk.