1. How Will The LA Wildfires Change California’s Bond Ratings?

Dozens of questions remain in the aftermath of LA’s horrific wildfires. Yet, Standard and Poor’s wasted no time cutting California bond ratings. LA Power and Water bonds received a rare double-downgrade last week. Uncertainties around fault, reimbursement, and future utility rates weigh on credit ratings.

We’re no strangers to wildfires in Butte County. The Camp Fire in 2018 and the recent Park Fire displaced people and left community rebuilders with big decisions.

The persistence of wildfires puts a financial strain on the state and insurers. While Municipal bond interest is tax-free, bonds are never risk-free. A default on any of LA's debt could cause re-rating across the state, sending California bond prices down further.

We’re watching investor portfolios for changes in credit ratings, cash reserves, and insurance coverage.

2. Will Home Insurance Rates in California Stabilize?

State Farm was the largest home insurer in California. In 2023, they decided they didn’t want the business. First, new insurance applications were denied due to “construction costs, inflation, and rapidly growing catastrophe exposure”. Next, they dropped 72,000 policies. Travelers, Hartford, Nationwide, and Chubb (mostly) followed suit.

Insurance works on the principle of collecting a dollar from insurance buyers, paying out 90 cents in claims, and keeping 10 cents to pay overhead, employees, and shareholders. When insurance claims cost more than the premiums collected, rates need to increase.

With fewer insurers available to share the cost, things are getting expensive. Last week we spoke with clients whose insurance costs 4X what it did 5 years ago. The current trajectory simply isn’t sustainable.

3. Will AI Builders Turn a Profit?

It’s 1968. The IBM 360 takes up the space of an entire office. Don Draper and the installer discuss the machine:

“This machine is frightening to people, but it’s made by people,” Lloyd explains

“And people aren’t frightening?” Don asks

“It’s not that,” Lloyd says. “It’s more of a cosmic disturbance. This machine is intimidating because it contains infinite quantities of information, and that’s threatening… The IBM 360 can count more stars in a day than we can in a lifetime.”

Don looks at him. “But what man laid on his back counting stars and thought about a number?”

-Mad Men, S7, ep.4

Today’s sentiment around Artificial Intelligence feels the same.

Will AI eventually be a massive leap forward for technology? Yes.

Has its usefulness arrived? Not for most people.

Tech has spent Billions on AI (adding Trillions to stock values), but there's not much customer revenue to show for it…yet.

2025 will be the year "there's an app for that". New, industry-specific AI programs are arriving weekly. Within our office, we implemented an impressive AI note-taker, but nothing else.

AI may be able to count the stars, now it's time to discover how useful that is to humans.

4. Biotech Stirs, Will AI Take it To New Heights?

Between the Biographies of Steve Jobs and Elon Musk, author Walter Isaacson wrote “The Code Breaker” (2021). It describes incredible healthcare advances through the human genome project and Crispr Cas-9 gene editing tool. In short, users can manipulate DNA. This has powerful implications for curing diseases through gene therapy vs treating them with drugs.

Project Stargate reinvigorated biotech enthusiasm last week. During the announcement, Oracle Founder Larry Ellison described a scenario where AI could help analyze a person’s bloodwork, and then use mRNA to develop personal cancer vaccines.

Biotech investors have seen the index jump over 3% since the announcement. The index is still 25% below all-time highs reached in 2021, but a scientific breakthrough can change that quickly.

5. Tax Reform (sigh) Again?

Congress never wants you to get too comfortable with the tax code. Below are some headline-making proposals for tax reform for 2025 and beyond.

Existing Tax Provisions that Lawmakers May Cut:

• State and Local Tax (SALT) Deduction

• Mortgage Interest Deduction

• Head of Household Deduction

• American Opportunity Credit, Lifetime Learning Credit for education

• Municipal Bond Interest exemption

New Tax Break Proposals:

• Eliminate the Estate Tax

• Reduce Income Tax Rates

• Raise (or Eliminate) the SALT Cap (contrary to above)

• Make Auto Loan Interest Deductible

• No Tax on Tips

• No Tax on Social Security

Investors who itemize taxes may want to hold off on big-dollar trades until we have more clarity on income and deductions for 2025.