The financial markets rarely pay attention to wildfires. They are acts of God, unpredictable and unhedgeable. But when three firefighters are killed in a blaze straddling Colorado and Utah, the City takes notice. Not because of the human tragedy, though that should give any civilised person pause. No, the market cares because disasters like these have a nasty habit of crystallising risk. They remind investors that the natural world is not a diversified portfolio. It is a volatile asset with no stop-loss.
Let me be clear. The loss of three firefighters is a human cost that cannot be modelled. But as the Chief Financial Editor, I am paid to be cynical. And my cynicism tells me that this tragedy will have downstream effects on insurance premiums, government spending, and ultimately, gilt yields. British crews are on standby, ready to deploy. That is a fiscal reality. Every firefighting aircraft, every hour of overtime, every piece of equipment shipped across the Atlantic costs money. And that money comes from the taxpayer.
The Colorado-Utah fire is not a one-off. It is part of a broader trend. Wildfires are becoming more frequent and more severe. The insurance industry is already recalibrating its models. Last year, Swiss Re estimated that natural catastrophes caused $120 billion in insured losses globally. That figure is rising. And as it rises, so do premiums. This feeds into inflation. It is a supply side shock, reducing the productive capacity of the land and increasing the cost of rebuilding.
The Bank of England will not raise rates because of a wildfire in Colorado. But they will watch. Because inflation is a cumulative beast. Every shock adds a layer of cost. And the market hates uncertainty. The VIX, the fear gauge, tends to spike on news like this. Not because of the fire itself, but because of what it represents: a reminder that the world is a risky place.
Capital flight is the other concern. When investors get nervous, they sell risk assets and buy bonds. That drives down yields. But if the government has to borrow more to pay for disaster relief, yields could rise. It is a tug of war. The Federal Reserve will have to step in if liquidity dries up. But quantitative easing is not a cure-all. It is a bandage on a haemorrhaging patient.
The British crews on standby are a reminder that this is a globalised world. We are interconnected. A fire in Colorado affects insurance premiums in London. It affects the reinsurance market at Lloyd's. It affects the cost of capital for infrastructure projects. And it affects the fiscal outlook for governments on both sides of the Atlantic.
I do not want to sound callous. Three firefighters are dead. Their families are grieving. But the market does not grieve. It prices. And the price of this tragedy will be felt in boardrooms and trading floors for months to come. The question is whether governments will respond with fiscal discipline or with the usual spigot of spending. My bet is on the latter. That is why I remain bearish on long-dated gilts.
In the meantime, the fire rages. The crews battle on. And the City watches. Because in the end, everything is about the bottom line.
