The LA Inferno Magnifies a Grey Swan Disaster Already In The Making

“As we know, there are known knowns; there are things we know we know. We also know there are known unknowns; that is to say we know there are some things we do not know. But there are also unknown unknowns—the ones we don’t know we don’t know. And if one looks throughout the history of our country and other free countries, it is the latter category that tends to be the difficult ones.”

– Donald Rumsfeld

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January 15, 2025— Only a dumpster fire in DC could knock the LA fires from the headline news.

The ritual of narcissism, also known as “confirmation hearings,” has begun in the U.S. Senate.

Pete Hesgeth either nailed his hearings or bombed them, depending on your news source. Hesgeth, a former combat veteran, is focused on maintaining military readiness and dealing with the secret corporate cult behind the military-industrial complex.

Pam Bondi, former Attorney General of Florida, is on tap to become the nation’s AG. Her hearings today could ostensibly help to de-weaponize a Department of Justice that just spent the better part of four years demonizing Donald Trump.

Tulsi Gabbard, the former Democratic Congresswoman from Hawaii, faces the biggest challenge of all. She’s called out the FISA bills that Congress has passed since 9/11, granting widespread surveillance powers that make a mockery of America’s 4th Amendment rights.

Given that Osama bin Laden has been buried at sea for over a decade, and that the U.S. has replaced the Taliban in Afghanistan with… oh… the Taliban … FISA seems like a post-9/11 excess that can go the way of the BlackBerry. But the Deep State wants what the Deep State wants.

The clown show out of DC is just a distraction from a significant development that’s critical to your wealth. So let’s not forget these fires yet.

The statistics are staggering. And, unfortunately, they may just be a prelude to a Grey Swan event: 35,000 acres, twice the size of Manhattan, have burned. An estimated $250 billion in damages. 12,300 structures razed. The nearly complete wipeout of the Pacific Palisades. And  24 dead.

The wildfires that kicked off 2025 on a dour note have been an international affair. Canadian firefighting planes and hot shots from Mexico have helped make a dent in the fires but have not fully contained them.

We have little to add to the mainstream’s coverage of the devastation. From what we can tell, their primary interest in the event is turning human tragedy into a political scandal.

LA’s mayor was on vacation in Africa…. reservoirs were dry for repair work… dams were blown up for environmental reasons…, and last year’s excessive rain was allowed to run out to sea to protect an endangered fish, the smelt.

California Governor Gavin Newsom reconvened the State Assembly to fund potential lawsuits against the incoming Trump administration.

Politics as usual. One disaster after another. But that’s not the Grey Swan event.

There’s a bigger disaster at play. It was already underway following the twin Hurricanes that hit the Big Bend in Florida and ravaged the East Coast in October.

Insurance rates have skyrocketed because of natural disasters all across the country. In Florida, recovering from Helene and Milton has proven difficult enough for hurricane refugees. North Carolina is in a whole new league following historic flooding.

As the Los Angeles Times reported nearly a year ago, in March 2024, several insurance companies were pulling out of California, citing wildfire and earthquake risk.

Per The Times:

The crisis reached new heights … when leading insurer State Farm General announced that it wouldn’t renew 72,000 property owner policies statewide, joining Farmers, Allstate and other companies in either not writing or limiting new policies or tightening underwriting standards.

The companies are blaming wildfires, inflation that raised reconstruction costs, higher prices for reinsurance they buy to boost their balance sheets and protect themselves from catastrophes, and outdated state regulations — claims disputed by some consumer advocates.

It’s critical that homeowners are able to insure against that risk.

We’re not reducing the catastrophes to cliche. For most Americans, the primary residence is the family’s most significant financial asset. According to the Federal Reserve, following the financial crisis in ‘08 and a decade of zero interest rate policies leading to historically low mortgage rates, home equity was at its highest level ever, estimated at $35 trillion in the final quarter of 2024.

Record credit card delinquencies in the same quarter also reveal that most Americans live more than just paycheck-to-paycheck but on the debit side of the ledger.

On the macro level, the average family has little in the way of direct retirement savings. For many, selling their home comprises the largest piece of their financial strategy.

With insurance companies absorbing disaster across their PnLs, increasing premiums for those even in regions relatively less prone to disaster, and completely pulling out of the more risky area codes… insuring the primary asset is more expensive at the least… but now carries the added higher risk of total loss.

We’ve been systematically following the breadcrumbs of consumer debt versus savings and the demographics of retirement financing.

Today, Grey Swan contributor John Rubino takes a look at how the insurance industry is doing its part to create, not prevent, financial disaster by creating a big “unknown unknown” for homeowners. ~ Beware, Addison

Is the Catalyst For the Next Financial Crisis…Homeowners Insurance?

John Rubino, John Rubino’s Substack

In October, two brutal hurricanes hit the US southeast. And last week, Los Angeles went up in flames and is still burning as this is written.

These natural disasters are, obviously, a nightmare for the people directly impacted. But they might be part of something much bigger and far-reaching.

Migration and Inflation

Over the past half-century, tens of millions of Americans have poured into sunny states like Florida and California that are catastrophically unsuited for large populations. Specifically, the former is in hurricane alley and is guaranteed a direct hit from a Cat-5 one of these days, while the latter is a desert prone to droughts and raging wildfires (see today’s news).

While this ill-fated mass migration was happening, the federal government was inflating away the dollar, causing the prices of financial assets like homes — especially in popular coastal cities — to soar to stratospheric highs. Miami, for instance:

Deadly Combination

Combine massive population increase with soaring home prices, then toss in recurring natural disasters, and the result is a doom loop for the insurance companies that have to replace those multi-million dollar houses. In response, insurers are either raising their rates beyond the means of many homeowners or exiting these markets altogether.

Millions of Americans are thus left with much of their net worth tied up in houses that are prohibitively expensive to insure — if insurance is available at any price — and are therefore unsellable.

The resulting “reverse wealth effect,” in which evaporating home equity causes people to reduce spending and/or sell other assets to fill the gap, could begin at the coasts and sweep through the rest of the country, catalyzing the next financial crisis.

As the Epoch Times notes with just one insurer dropping policies:

State Farm non-renewed approximately 1,600 policies in the region in 2024, of approximately 30,000 homeowners and 42,000 apartment policies it dropped statewide, citing rising costs and risks.

“This decision was not made lightly and only after careful analysis of State Farm General’s financial health, which continues to be impacted by inflation, catastrophe exposure, reinsurance costs, and the limitations of working within decades-old insurance regulations,” the company said in a statement.

“State Farm General takes seriously our responsibility to maintain adequate claims-paying capacity for our customers and to comply with applicable financial solvency laws. It is necessary to take these actions now.”

Approximately 6,000 structures were lost in the Eaton Fire, as of the most recent count on Jan. 10. The East Altadena and Hasting Heights neighborhoods sustained significant damage.

The average value of homes in the area is approximately $1.4 million, according to the online real estate listing firm Zillow.

Insurance Market Stability in Question

“At this point, it’s not an exaggeration to say the state’s facing an insurance crisis of both affordability and availability,” Ray Mueller, San Mateo County supervisor, said during a board meeting on Oct. 8.

Seven of the 12 largest insurers, including State Farm which represents about 10 percent of the market share, according to Department of Insurance data, paused writing new policies since 2023.

This is not an abstraction, though many are treating it as a policy debate. As noted previously here, the insurance industry is not a charity, and insurers bear the costs that are increasing regardless of opinions and policy proposals. Insurers operate in the real world, and their decisions to pull out of entire regions, reduce coverage and increase premiums are all responses to soaring losses, a reality reflected in these charts.

Losses rise with inflation, of course, but the losses are rising far above background inflation.

This raises a point few seem to ponder: the world isn’t simply a political structure, yet virtually all the proposed solutions to every problem are political or technological in nature: we can solve this or that politically, or with AI. That the private-sector can trigger crises that have no political or technological fix is on very few pundits’ radar.

The problems being exposed do not lend themselves to tidy political / policy fixes that magically return the world to a past era of lower risks. Risks and losses cannot be extinguished, they can only be transferred to others. This is the intrinsic limit of political fixes: we take the risks and losses and transfer them to others lacking the political power to contest the transfer.

Or we transfer the risks and losses to the entire system, increasing the potential for a systemic collapse. ~ John Rubino, John Rubino’s Substack

Regards,

Addison Wiggin,
Grey Swan

P.S. “There have been times when the family has packed up supplies and a few favorite things, and have been ready at a moment’s notice to leave our home, possibly for the last time before it burns down,” notes our own Portfolio Strategist, Andrew Packer, who grew up in San Diego County. “I’ve been fortunate. But the extent of the damage in LA right now is beyond belief.”

P.P.S. Are you “scared, Addison?” reader Paul M. taunts in the Grey Swan inbox. He’s apparently convinced we’re afraid to support Donald Trump’s bid to restructure the political landscape in his own image.

What he doesn’t know is we agree with most, if not all, of his points. We just don’t trust anyone in Washington. Much less those who promise they can fix it. More (with specifics) later…

We’ll return to our political tit-for-tat tomorrow. If you’d like to participate in our ongoing conversation, please send your comments on the Grey Swan to addison@greyswanfraternity.com.