A Song of Ice and Fire

A Song of Ice and Fire¹
Friday Reflection | February 19, 2021

Extreme weather conditions brought the state of Texas to a grinding halt this week. Millions went without power or heat as temperatures plummeted, and millions more questioned why infrastructure as critical as the energy grid was so unprepared to cope with a winter storm. Similar questions were asked when California battled wildfires sparked by historic heat and wind events last year, and millions in our home state had their power disrupted. For investors, there are lessons about the resiliency of large complex systems and the new realities of climate change for our interconnected economy.

While Texas and much of the Midwest hunkered down, the broad stock market similarly took a pause and finished relatively flat on the week. New economic data shows a fragile recovery underway. We learned that consumer retail spending jumped by 5.3% in January, snapping a three-month streak of declines and coming in well above economists’ expectations for a 1.2% increase.² Retail spending is linked to consumer confidence, and both are vital as the recovery progresses.

Counterbalancing this positive data is the news that initial unemployment claims saw 861,000 people filing initial claims for the week ended Feb. 13, which was higher than the previous week and well above the 773,000 projected by economists.³ These mixed signals, plus no significant news on impending stimulus or vaccine progress, led investors to catch their breath and look for confirmation that the underlying economy is growing enough to justify current market prices.

Complex systems like energy grids or financial markets aren’t perfect, but they are designed to be resilient. Their limitations are occasionally tested, and it can feel catastrophic when the power shuts off or when markets seize up as they did in 2008. For some, it is catastrophic. We don’t want to downplay the negative impacts of recent storms or market crashes, but, there is another story to be told as well.

Despite the historic weather events in Texas and California, most people had their power restored within a few days, and the grid is expected to be fully operational again within a few weeks. The Electric Reliability Council of Texas (ERCOT) said during a briefing that widespread rolling blackouts may have saved the state from going completely dark for a much longer duration.⁴ By taking short-term rescue measures, long-term damage was averted.

External shocks like the pandemic can cause uncertainty and confusion. Investors and financial markets can react so dramatically that prices gap downwards, triggering circuit breakers and effectively stopping normal operations. When these crises happen, the Fed stands ready with emergency support. Some investors choose to get out of the market entirely and decide the risks of investing are not worth the financial benefits, just as some residents choose to relocate after a disaster.

Most investors and residents choose to stay. They elect to rely on a combination of policy and individual action to strengthen the shared systems that support our social and economic resiliency. For power grid concerns, residents in impacted areas have been buying back-up generators along with solar panels with integrated batteries to bridge these smaller outages. For financial market concerns, efforts focus on reevaluating liquidity needs and then making appropriate shifts to bond allocations or other buttresses of financial stability. In our recent piece on the Arc of Change, we wrote of the hard work that is required to create change, whether social change or the task of updating energy infrastructure built in the last century for the needs of the coming century. Staying invested and engaged is the surest way to benefit when those changes become reality.

The title of this reflection harkens to George R.R. Martin’s novel (though many may be more familiar with the television adaptation Game of Thrones) and the threats posed by the novel’s cornerstone warning that “winter is coming”. In the case of Texas this week, it was literally a winter storm that disrupted life for millions. The book’s warning can offer broader lessons as we look ahead at the coming decade for investors. We will explore these more in our reflection next week.

For our clients, we aim to build portfolios that, like the overall market, prioritize resiliency over perfection. We understand that financial shocks will happen along the way, and prices can be volatile in the short-term, but with a combination of patience and careful planning, we retain the strong conviction that our client portfolios will navigate the changing seasons ahead.

¹ A Song of Ice and Fire is a series of epic fantasy novels by the American novelist and screenwriter George R. R. Martin. He began the first volume of the series, A Game of Thrones, in 1991, and it was published in 1996.

² Retail Sales Jump in January, Boosted by Stimulus. By Teresa Rivas. Published Feb. 17, 2021.  Barrons.com

³ U.S. Unemployment Claims Rise, Pausing Recent Downward Trend WSJ.com

⁴ Texas Power Grid Was ‘Seconds Or Minutes’ Away From Complete Failure, Leaving Whole State Dark, ERCOT Says Forbes.com