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John Norris (00:30):
Well, hello again everybody. This is John Norris at Trading Perspectives. As always, we have our good friend, Sam Clements. How are you doing, Sam?
Sam Clement (00:39):
I am doing great.
John Norris (00:40):
I’ve got to tell you, we’re both doing much better than a lot of people are out in California right now.
Sam Clement (00:45):
It’s been an ugly scene, scary scene.
John Norris (00:47):
It’s been an ugly and scary scene. And of course there’s been a lot of hue and cry hullabaloo, if you want to call it that, about just what California and Los Angeles’s government did and did not do in order to help mitigate the damage caused by these fires.
Sam Clement (01:04):
Yeah, and there’s probably a lot of that’s still being figured out, but in general, I think the sentiment is we’re the best country in the world, people would say. I mean, we’re the most developed. We have all this stuff and we’ve still… they ran out of water. Reservoirs, were empty. I mean, how does this happen in one of the biggest cities in the most developed country in the world?
John Norris (01:29):
Well, and one of the most important cities, not just biggest, but one of the most- an alpha city or an alpha minus city. I think it’s really truly the stories that you get off of just about every media website, regardless of political leanings, is you just kind of hold your mouth open. How could this possibly happen? Now, before we get too much down into that, and I do have to say this with my own personal feel, and here’s a caveat out there. Listen, government in California can’t prevent forest fires. Sure. I mean, they just can’t do, we call them wildfires, forest fires, whatever. Can’t prevent that. The Santa Ana winds come every January thereabouts, 90 miles an hour, that times …
Sam Clement (02:08):
It’s extra dry this year,
John Norris (02:09):
Extra dry this year, they would not have been able to stop all the sparks from falling on the ground and some measure of wildfire activity just absolutely impossible when a 90 mile an hour wind gets an ember from a fire … it’s going to go. And I get that. I get that. So I’m not certainly not saying that, that Sacramento or Los Angeles has the ability to stop the Santa Ana winds from blowing or stop all fires, but it’s the fire hydrants, as you mentioned, not having pressure or being empty and the Santa Ynez reservoir, 117 million gallons being empty for over a year waiting for repairs since February of last year, just about a year as you’re absolutely right on that. And just budget cuts to wildfires, which Los Angeles knows it’s going to get. And then state budget cuts for firefighter and firefighting activities.
(03:07):
And it’s just everything that’s out there. And I would tell you that my personal take on this, Sam, is having been a lot older than you, and this is my personal take, not necessarily the views of anyone else except for me, that it seems as though maybe the government isn’t as efficient or as capable as it was maybe when I was a kid. And of course, I could be looking back on things with rose colored glasses, waxing nostalgic. But I do remember even the post office used to have a saying, it is neither rain nor snow nor gloom of night will keep the post office from completing its appointed rounds. It snowed here in Birmingham on Monday, and I didn’t get any mail. You catch my drift. So what is it? So that’s my personal take. I mean, I’m in Gen X, I guess I’m born in 68, I guess it started in 63, 64, so relatively one of the older members of Gen X. That’s my take. It just seems like a steady sort of drip, drip, drip, drip. Things aren’t as efficient as they were and yet we’re paying more for it. How do people in your generation view things like the government’s response to the wildfires in California?
Sam Clement (04:21):
I think you’re seeing two thoughts around it. I mean, the general take is everybody is saying it feels like this shouldn’t happen, right? I mean, the extent of this, it feels like that shouldn’t happen. I think everyone feels that some people are pointing towards and then focusing on, Hey, State Farm canceled insurance policies. Their fire insurance policies and what have you, and it’s the company’s fault and it’s the company’s and businesses and what have you. And then you have other people that are saying, Hey, well, government cut firefighter budgets. I mean, the reservoir has been empty. All of these things. There were bills that were passed to prevent these insurance companies from raising their rates. And so I think everybody feels the same that this shouldn’t have happened, but people are pointing fingers in different areas. But to me, it’s hard to not just point it out to exactly what you mentioned. I mean, government failures have led to the exacerbation of not only this issue, but countless others.
John Norris (05:23):
These wildfires, and I keep on want to say flowers, but wildfires come on the heels of really what maybe a lot of people would say, sort of, not the best response to Hurricane Helene and the Carolinas and elsewhere. And when you take a look at things, it’s just like, is the government really capable of pulling it off? And then that begs the question, are we paying government too much for what it is?
Sam Clement (05:49):
Yes. I mean, it’s kind of hard to argue with at this point. I mean that things have gotten worse in so many areas. And the joke has always been like, go down to the DMV and do you want the people running the DMV running the country? And they kind of are. And so I think that sentiment that you’re not getting what you feel like you’re paying for and the cost and the taxes and everything seems to be going up and up and up, and you still have these failures at every level of government. You have local failures, you have state failures, you have federal failures across the board, and I think it just adds up. And then you have these big kind of blowout events that really shine a spotlight on it. It goes from being, I can’t get a pothole fixed that’s busting up tires to, okay, now we have probably the most expensive wildfire in the history of America.
John Norris (06:48):
More than likely
Sam Clement (06:50):
That shines a much bigger light on something that everybody has felt in some way or another.
John Norris (06:54):
Now, what do you think success would look like after the last wildfire is put out? And apparently they’re doing a better job of containing them here this week, but it’s been over a week, obviously. What do you think success looks like for residents of Los Angeles County moving forward?
Sam Clement (07:10):
Well, I wonder if this changes because I think the status quo is often in place in lots of areas, and LA is not…. they’re pretty much the exact same way. I mean, they vote in the same people and the same policies. And we’ve started to see that shift in some areas.
(07:27):
It’s not going from necessarily Democrats to Republicans in a city like San Francisco, but it’s going to a far left Democrat to a moderate Democrat. And so I wonder if this event shifts that sentiment more across, again, this is a national conversation, so does it shift the voter base Overton window, whatever term you want to use for the state of California as a whole? And it remains to be seen, but there’s something, Caruso who ran for mayor, his shopping complex was unarmed. And so I don’t know the symbolism of that, but maybe that’s something that changes.
John Norris (08:09):
Well, when I take a look at all this and kind of take a look at just sort of overall sentiment regarding the fires in California, and I could be wrong on this. There seems to be maybe a lot of people on the far right that are saying, Hey man, you live out in California. You voted for this and you live in an area that are prone to wildfires. That’s some sort of assumption of the risk and you get what you pay for. But on the flip side, you got people out in California that could say every hurricane season to people live on the Gulf Coast. Hey, guess what, buddy? You chose to live there. So there’s certainly some assumption of the risk. Now, that takes me to the next question. And it’s going to be about climate change. Whether or not all these things that we’re seeing these weather events are truly due to some sort of massive climate change. And let me ask you, as a member of Gen Z or millennial, you’re right on the cusp. How much of that is an excuse for government failure and how much of it is perhaps legitimate?
Sam Clement (09:15):
Look, there may be truth to it. There may not. I have zero way of knowing that… to even have an opinion on that is kind like have an opinion on astronauts. I mean, I have zero expertise in the state. And so whether that’s the case or not, it is undoubtedly used as an excuse, an excuse for what goes on. I mean, we’ve talked about, look, these insurance companies are some of the best risk managers in the world.
John Norris (09:46):
That’s what they do. That’s what they’re paid to do.
Sam Clement (09:46):
They have their money- every dollar on the line for that. And so when you see these companies that can’t raise their policy rates, and so therefore they cancel them, that is them saying the risks of these things are going up. And they’ve talked about brush and under clearing and cutting back and the things you have to do…
John Norris (10:03):
Burying power lines,
Sam Clement (10:05):
All these things that should could be done and they just haven’t. And so that is undoubtedly a failure. And whether we’ve seen reports of people going and starting fires and there was a Wall Street Journal article about a fire starting a week before in the same spots, I don’t know what causes this, maybe climate change makes it worse. Who knows whether it does or doesn’t, doesn’t discount the fact that here and now in the present, and the thing that can be changed is the government failure around it and using that as an excuse is just exacerbating the issue and kicking the can down the road. You have countless people, I mean pretty large percentage probably saying, this is climate change, this is it. And that’s the issue. Whether that’s part of it or not, is discounting the thing that we can change here and now with a vote.
John Norris (10:57):
Well, I would tell you this. I mean in terms of my generation, perhaps this is just me again, Sam’s opinion on climate change and mine or just ours alone or not necessarily those of Oakworth Capital Bank or any of our associates or shareholders or directors or anything like that. I would tell you that my view on this in terms of whether this is caused by climate change is very similar to yours. I certainly don’t know, but I’ll also tell you that I don’t think you can have 7 to 8 billion people walking around on the planet that all need to be clothed, fed, housed, all that stuff, and it’s not going to have some kind of impact on the environment. I mean, I don’t see any way around. It has some kind of impact on the environment. It serves the reason that it could have some impact on the overall global climate. Okay, fine. That’s fair. Fair enough. That’s the way I feel about it. I don’t know what we do about it other than reduce the number of people on the earth, and I’m not volunteering to go first. There you have it.
Sam Clement (11:48):
Fair enough.
John Norris (11:49):
Now with that being said, blaming climate change, in my opinion, as the reason why everything is burning down around you. It’s kind of like playing poker in some ways. It’s kind of like I didn’t win this hand because all the aces were given out in the previous hand. It doesn’t really matter.
(12:07):
You got to play the hand you’re dealt. And if this is the hand that you’re dealt, you have to take extraordinary steps. You have to take greater steps in what you did previously. If this is the way it’s going to be moving forward, you can’t behave the way you have or you can’t respond the way you did 50 years ago. It means that you don’t bust up dams in California, I think they busted up three dams to protect a small fish. And that’s great and well and good makes people feel good about it. But those dams are providing water for irrigation, for drinking, for putting out forest fires. And if climate change is going to cause all this every year, then maybe you figure out a way to stop all that snowfall from ending up in the Pacific Ocean. Maybe you keep the reservoirs filled, maybe you do these types of things, and it means that you have to change your behavior along with the change in the climate if that’s what you think is causing all this. Now, I would sit there and tell you, you can go through a list on Wikipedia of wildfires that have happened in North America since 1800. And you can see that in terms of acreage, this one’s not that big a deal. It just happens to be that where the acreage is, is very heavily developed.
(13:18):
By global standards. The wildfires themselves aren’t big. It’s just again, area where they are been to real estate. Wildfires have always happened, hurricanes have always happened. All these things have always happened. If we want to say it’s climate change, that’s the reason why we’re having hurricanes. Well, I don’t know about that, but even so, you have to take precautions to mitigate your damages. And they do that on the Gulf Coast. The building codes are much different now than they were 20 years ago. I mean, shoot, homeowner’s insurance has gone through the roof on the Gulf Coast, and that’s if you decide that you want to live down there or build a home down there, it’s going to cost you a heck of a lot more in order to do that sort of thing. And I would imagine once all this smoke clears, I guess that’s an apt way of putting it out there in California, a lot of Californians aren’t going to like what happens next.
After the moratorium is lifted on canceling policies, you’ll see a lot of homeowners insurers either get the hell out of the state or they’re going to raise the premium so high that the average person just simply won’t be able to afford them. And then rebuilding these homes, you should have different codes, I suppose. And then the cost of materials is going to go through the roof as everyone wants their own home built first. And so Californias aren’t going to like that. And then they’re going to complain about that. They’re going to complain about climate change, they’re going to complain about government response, and then they’re going to complain about what happens after that. And I got to tell you, welcome to the club, California, because we’re all complaining about this nationwide, about government inefficiency to a point where there’s smoke, there’s fire, if you catch my drift. And maybe a bad analogy here, but what do we do about it moving forward? Understanding these things are going to happen. We’re paying more and receiving less. How do we turn that around? And that’s a great question for people of your generation and younger that are going to be walking around this earth a heck of a lot longer than I’m going to be.
Sam Clement (15:21):
I’m curious with the insurance component, how much, I mean, because that’s dollars and cents, that’s money people pocket.
John Norris (15:26):
I’ve seen estimates over $120 billion.
Sam Clement (15:28):
But in terms of what it looks like once they start to rebuild exactly what you mentioned in terms of policies, being able to even get them, I mean, we’ve seen insurance companies leave the market of Florida because of it. And so whether that changes and if the government steps into being involved in the insurance market, it is undoubtedly going to only make things worse. If they say the equivalent of saying: You have to give a 99-year-old life insurance at the same rate you give a 25-year-old, they’re going to have problems and people are going to just say, you know what? This isn’t worth it. This isn’t profitable anymore. If I have to insure these high risk houses at low risk rates, I’m not doing it. I’ll go invest our money in treasury bills.
John Norris (16:14):
And that’s a good point because there’ll be some all moratoriums on this and blah, blah, blah. However long term Sacramento, believe it or not, even with all of its authority and how big the California economy is, number four in the world, whatever the number is, if I can’t make money in California, I’m not going to do business in California. Like you said, If I can make more money in a three month treasury bill, than I can make ensuring homes in the Palisades. Guess what I’m going to do? And so there is going to be an enormous amount of political pressure on the powers that be out in California for all intents and purposes, put price ceilings on insurance premiums out there, and you put a price ceiling on something if it’s above the market. I mean, if it’s above the market clearing rate, it really doesn’t matter. If it’s below the market clearing rate, which is where they always are, you’re going to have a shortage of rocks. So it’s just as sure on the nose on my face, any attempts to try to limit what property insurers will do in the future in California is going to lead to a shortage of insurance being written in that state.
Sam Clement (17:29):
The other part that’ll be interesting to me, what’s interesting about this has significant impact on large swaths of people that probably have continued to vote for a status quo policy and
John Norris (17:42):
Status quo is always, I mean, it’s like almost inertia. It’s very difficult to get around.
Sam Clement (17:47):
Yes. And so I’m just curious how all this will, once we get to the other side of things and start rebuilding houses and just what that’s going to look like, this is going to significantly change probably a lot of people’s opinions and the government starts to get involved. And I think people have the whole NIMBY philosophy. Not in my backyard.
John Norris (18:09):
Not in my backyard,
Sam Clement (18:10):
Okay. Does California uses as an opportunity to change some zoning laws. But who’s going to like that in the Palisades?
John Norris (18:18):
I mean, who’s going to like that? Who’s going to like what to me would be a very logical solution for housing shortages in California? And that’s more high rise apartment buildings and condominium complexes, but apparently they don’t really like those things out there, and no one really likes controlled burns in their backyard.
Sam Clement (18:36):
So when you start doing these things that actually have impact… people will continue to go with the status quo as long as it doesn’t have an impact on them,
John Norris (18:44):
Of course,
Sam Clement (18:45):
Why wouldn’t they?
John Norris (18:46):
Yeah,
Sam Clement (18:46):
It’s kind of bird in the hand. And so when you start to see these significant impacts to the people that are voting for them, how that will change the sentiment? And California is a left-leaning state, but we’ve seen it. We’ve seen it in some other left-leaning states, that trend has shifted. I mean, it’s not as significant. I think most states are kind of going more closer to a 50 50, but it’s not that significant of a change We would need to see to have a state that previously voted Republican in the not too far distant past.
John Norris (19:23):
Within my lifetime.
Sam Clement (19:23):
Yeah, go back that direction.
John Norris (19:26):
Yeah. Well, for me, it’s ultimately people do vote with their pocketbooks. Ordinarily, vast majority of people vote with their pocketbooks whether or not they feel as though they’re getting ahead. If this situation in California turns to the point where people feel as though they’re falling behind economically, then they will vote for something different. I would imagine that’s the way people typically tend to behave. Now, California is the largest and most economically important state in the country in my estimation, sorry to folks in New York, but it’s just the way the number, or Texas. But that’s the way that just the numbers are. So what happens in California definitely does have ramifications throughout the remainder of the country. I wouldn’t say the same is not true of Alabama, where we live. So if because of these fires and because of what happens afterwards with insurance policies and all that type of stuff, it could have a real detrimental impact on the overall economic output from California, which could be a drag on the nation’s gross domestic product as a whole. And so if that remains to be seen, and it also remains to be seen what home builders are going to be able to do in California, if we don’t have some changes to the zoning walls,
Sam Clement (20:45):
A coastal commission, I mean all these…
John Norris (20:47):
All that type of stuff. From what I understand and what I have read, it appears as though the cost of regulations in doing business, where home builders in California, just dealing with the red tape, adds something like 50% or more to the cost of building a new, building, a new home out in California. If they don’t change that, people are going to hate what’s going to happen when they go to try to rebuild Los Angeles County.
Sam Clement (21:15):
I agree.
John Norris (21:17):
So with that being said, I’m not sure if we really solved anything about the wild fires in California. However, what’s happened out there, the calamity that has happened out there and all of the loss of life and all the destruction of property, all of it is just lamentable. It just absolutely lamentable, horrible. There’s no getting around that. However, could we have mitigated some of it? That remains to be seen, and probably we’ll be talking about that for years to come and just what government can do and be more efficient and more sort of realistic about what the future holds. We can’t just sit there and pretend that, hey, we can behave as we did 20, 30 years ago and expect things to remain the same. That’s not going to happen, particularly if you feel as though the climate is changing or to take different steps.
(22:04):
So with that being said, guys, we always love to hear from you. Also, if you have any comments or questions, please by all means, let us know. You can always drop us a line at where you can leave us a review on the podcast outlet of your choice. Of course, if you’re interested in reading more or hearing more of what we got to say or how we think, you can always go to Oakworth.com, O-A-K-W-O-R-T h.com. Take a look underneath the Thought Leadership tab and find all kinds of exciting information, including links to previous Trading Perspectives, podcasts, links to our newsletter / blog Common Cents, which comes out every Friday, as well as links to our quarterly analysis and magazine, which we call Macro & Market, which is due any minute now or should be, as well as periodic articles and commentary from our advisory services group headed up by Mac Frazier, as well as some of our client advisors like Janet Ball, Richard Littrell. That being said, Sam, this might be all for today, but I’m sure we will continue to have this conversation moving forward.
Sam Clement (23:04):
That’s all I’ve got for now.
John Norris (23:05):
That’s all I’ve got today too. Y’all take care.