Selloff's Odd Profile; Hurricane Michael vs. Funds
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What is the main topic discussed in this episode?
With your money briefing, I'm J.R. Whalen at The Wall Street Journal in New York. In addition to homes and businesses, pension funds and large investors could take a financial hit as a result of Hurricane Michael. We'll explain why in a moment. First, these money and market stories you should know. The Wall Street Journal heard on the street team says that Wednesday's 831-point sell-off by the Dow Jones Industrials and the Nasdaq's biggest drop since Brexit in 2016 had an odd and peculiar feel to it.
Why did Wednesday's large stock selloff feel peculiar to investors?
Namely, financial markets overall did not exhibit a classic flight to safety. Two safe assets, specifically gold and bonds, were essentially flat on Wednesday. heard on the street points to the weakness of Treasury bonds and rising yields as sending a shiver down investors' spines. And it says a trillion-dollar federal budget deficit along with slowly rising inflation and interest rates on the move upward could bring more volatility to Wall Street. And analysis by Deloitte Consulting indicates annual defaults on loans taken against investors' 401ks threatens to reduce the wealth in U.S.
How did safe-haven assets like gold and Treasuries behave during the selloff?
retirement accounts by about $210 billion, when the lost savings are compounded over employees' careers. The numbers highlight the problem of tapping 401k savings before retirement, which is known in the industry as leakage. And most leakage occurs because about 30 to 40 percent of people leaving jobs elect to cash out their accounts and pay taxes or penalties rather than leave the money or transfer it to another 401k or an individual retirement account. The projected future loss amounts to about 2.7% of the $7.8 trillion currently in 401k-style retirement accounts. And while 401k loan defaults currently amount to about $7.3 billion a year, the impact is far greater given that many borrowers in default withdraw additional money to cover the taxes and early withdrawal penalties they owe on their outstanding balances.
As Hurricane Michael batters the Florida panhandle, homes and businesses are bracing for the worst.
How could 401(k) loan defaults and leakage reduce retirement savings?
But so are pension funds, endowments, and other large investors. And Wall Street Journal Global Investing Editor Jeff Rogo is here with details. So Jeff, this has a lot to do with investors' ownership in catastrophe bonds that in many cases have exposure to Florida.
Yeah, it's a great point, JR. So in Florida, you have this situation where you have a lot of catastrophe bonds.
Why could Hurricane Michael hit pension funds and endowments financially?
Catastrophe bonds are used by insurance companies to pool the risk of a disaster. So if a disaster hits, an insurance company is on the hook to pay for that disaster. They've pushed some of that risk off into a catastrophe bond, which is purchased by a pension fund, by an endowment. And they pay into this cat bond. And if there's a big catastrophe and it goes to a certain level of payouts, they've got to put a bunch of money in.
What are catastrophe bonds and how do they expose investors to storm risk?
And so if this causes $20 and $25 billion worth of damage, that could mean these investors are on the hook to put money into this and their returns will be lower as a result.
And these cat bonds have been an attractive investment for some because they offer diversification, but also a higher return.
Yeah, absolutely. I mean, we've had rates since the financial crisis, global interest rates have been near zero around the world. Catastrophe bonds can pay out 5%, 6%, 7%. Now, you lose a lot of that return if there's a disaster, and so that's the risk you're running as a pensioner or an endowment. But if nothing happens, you have this wonderful return and it's a good place to put your money. So you can put $200 million in, you're getting these natural returns, but then you lose big if there's a disaster like this. So it's sort of, in some sense, it's a bet against climate change and a lot of big changes in our environment. But last year was a terrible year for catastrophe bonds. This year is not looking great.
And it'll be interesting to see what that demand is going forward.
You know, for many years, the insurers focused on wind damage, but now flooding is typically so severe that the government issued flood-related cat bonds for the first time this year.
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Chapters
7 chapters
1
What is the main topic discussed in this episode?
0:05–0:34
2
Why did Wednesday's large stock selloff feel peculiar to investors?
0:34–1:09
3
How did safe-haven assets like gold and Treasuries behave during the selloff?
1:09–2:14
4
How could 401(k) loan defaults and leakage reduce retirement savings?
2:14–2:36
5
Why could Hurricane Michael hit pension funds and endowments financially?
2:36–3:02
6
What are catastrophe bonds and how do they expose investors to storm risk?
3:02–4:26
7
How has Florida's insurance market and development changed the risk landscape?
4:26–6:41
Speakers
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