The Garrulous Jay – Beware The Little Boy

The world’s attention is currently taken by the developing situation in the Middle East, the on-going mega-cap IPOs in the US and, on a lighter note, the group stage of the FIFA World Cup.

It is therefore unsurprising that El Niño has garnered less attention, but with meteorologists predicting a potential ‘super’ event this year the consequences of this warrant greater consideration.

The term ‘El Niño’ derives from the longer El Niño de Navidad, which was the name given to the periodic warming of waters along the coast of Ecuador and Peru in the 17th century by local fisherman. It was named in honour of the Christ Child as the phenomenon peaked around Christmas.

The El Niño effect is caused by a weakening of the Trade Winds that normally blow warm surface water away from the coast allowing nutrient-rich colder water to rise to the surface. It actually spreads beyond coastal waters into the wider central and eastern Pacific Ocean.

For those 19th century fishermen this was bad news, as it led to a fall in their catches, but the effects of El Niño spread far beyond the fishing ports of those coastal Latin American countries.

An El Niño event has repercussions for many of the world’s major weather systems through its effect on the jet streams that normally run from south to north across the Americas. Droughts may follow in regions as widespread as Brazil, India and Australia, while the southern US and west coast of Latin America may experience high levels of rainfall and severe flooding.

These events can in turn have profound consequences for fish stocks and agricultural productivity globally. There are predictions of price shocks of 10% to 50% across food commodities, with far more significant increases for the most impacted crops such as rice and coffee.

There may also be knock-on effects for the wider global economy, driven by changing patterns of demand for energy as sources of hydroelectricity dry up and the need for air-conditioning spikes, as well as the disruption to mining operations caused by heavy rainfall.

In addition to the above, the effects of a Super El Niño may be exacerbated by the longer-term changes in the climate and rising global temperatures in ways that are not yet well understood.

One research paper estimates that the cost to the global economy of the 1997-98 El Niño was $5.7 trillion, whilst forecasting the overall cost of the El Niño effect across the 21st century would be $84 trillion.

It is sometimes unanticipated events or peripheral concerns that turn out to be the ones that cause markets to turn.

With a brittle geopolitical backdrop, persistent macroeconomic uncertainty and rising fears of an AI-fuelled stockmarket bubble, I wonder if it might be “the little boy” that tips the balance in markets.

Call me a Cassandra if you wish, but remember Cassandra was always right, it’s just nobody believed her until it was too late. And if I am right, that’ll throw up opportunities for investors.