A Historic El Niño Is Coming That Could Cost the World Trillions

Every few years, weather nerds and agriculture analysts will talk about an upcoming El Niño, and then they mostly pass by with relatively few headlines. But sometimes El Niños end up being massively destabilizing -- leading to devastating droughts, flooding, and other catastrophes. And this year's emerging El Niño could end up being one of the big ones, with forecasters predicting record-breaking intensity. But what exactly is an El Niño, and what does it mean that this year's could be so big? On this episode, we speak with Justin Mankin, professor of geography at Dartmouth and director of the Climate Modeling and Impacts Group. We discuss the forecasting of El Niños, and why they can lead to large and long-lasting economic damage. Read more: Super El Niño Will Give Us a Glimpse of Life in 2035 https://www.bloomberg.com/news/articles/2026-07-09/super-el-nino-will-give-us-a-glimpse-of-life-in-2035?utm_medium=referral&utm_source=podcast&utm_campaign=odd_lots&utm_content=article Heat Wave and World Cup Hand UK Economy a Surprise Boost https://www.bloomberg.com/news/articles/2026-08-13/uk-economy-weathers-early-months-of-iran-war-with-0-4-growth?utm_medium=referral&utm_source=podcast&utm_campaign=odd_lots&utm_content=article Only http://Bloomberg.com subscribers can get the Odd Lots newsletter in their inbox each week, plus unlimited access to the site and app. Subscribe at bloomberg.com/subscriptions/oddlots https://www.bloomberg.com/subscriptions/oddlots?in_source=oddlotspodcast Subscribe to the Odd Lots Newsletter http://bloomberg.com/subscriptions/oddlots Join the conversation: discord.gg/oddlots https://discord.gg/oddlots See omnystudio.com/listener https://omnystudio.com/listener for privacy information.

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• 0:00Joe Weisenthal?

  There are some market stories where you want every detail. Tracy and I have made quite a few podcasts on that basis, but sometimes you've only got 10 minutes and need to know what's moving markets and why. That's the Barclays Brief Podcast. Every week, experts from Barclays Markets and research get you up to speed on what matters and what to watch next. About the time it takes to grab a coffee. So, search Barclays Brief wherever you get your podcasts.

• 0:24Speaker 01

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• 1:46Speaker 03

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• 2:02Tracy Alloway?

  Hello and welcome to another episode of the Odd Lots Podcast. I'm Tracy Alloway.

• 2:06Joe Weisenthal?

  And I'm Joe Weisenthal.

• 2:07Tracy Alloway?

  Joe, I don't know if I've ever told you about this, but I'm a little bit of a weather nerd.

• 2:12Joe Weisenthal?

  Okay, I did maybe a little, but I knew.

• 2:14Tracy Alloway?

  I just get really excited by weather. I love thunderstorms.

• 2:18Joe Weisenthal?

  I love a good thunderstorm if I'm inside.

• 2:20Tracy Alloway?

  Well, this is the thing. I love thunderstorms, except when I'm on an airplane or something like that. I do not like economically damaging weather. I feel like I need to throw that caveat in there.

• 2:30Joe Weisenthal?

  You know what I am? I'm like a weather truther. So, for example, I don't believe that there's any accurate way, for example, to measure wind chill. It's like, oh, it's like 25 degrees out and it feels like 15. It's like, how do you know what 15 feels like? You know what I'm saying? Like, I don't believe in some of these numbers. Also humidity, what, there's water in the air? Give me a break. There's no water in there. No, that one I believe in.

• 2:54Tracy Alloway?

  Tell me you've never been to Abu Dhabi in the summer without telling me you've never been to Abu Dhabi in the summer.

• 2:59Joe Weisenthal?

  This last week in New York.

• 3:00Tracy Alloway?

  You were just in Hong Kong. You know what humidity feels like.

• 3:03Joe Weisenthal?

  That one was a joke. I am a wind chill skeptic, even though I don't think that's the topic of our conversation today.

• 3:08Tracy Alloway?

  It is not. The topic of our conversation is actually economically damaging weather.

• 3:13Joe Weisenthal?

  Yes.

• 3:13Tracy Alloway?

  And specifically, the upcoming El Nino, which, by the way, it's not that that often that you see a lot of sell-side notes start to mention weather phenomenon. But just in the past, you know, few days, I've had a Thailand economics note from Citi talking about interest rates and quoting the potential impact of El Nino, potentially inflationary. I've had a Bank of England outlook from Morgan Stanley that mentioned El Nino. And also a Bank of America FX outlook talking about the impact on EM currencies. So, this is something that people are expecting to have an actual impact, both on the global economy and the investment landscape.

• 3:54Joe Weisenthal?

  You know, I will just say, even though I'm not a weather nerd the way you are, I sort of have this thought that if you look at like the really grand sweep of history, like thousands and thousands of years, maybe even hundreds of thousands of years, I sort of think there are two things that matter in human history. One of them, as you know, I'm interested in, is like basically technological evolution, media technology, and how it reshapes how we think. And then the other one is sort of climate change, weather, and storms. And I think that when we think about history, many things are contingent either on like brief or long periods of weather change, and it can reshape society in permanent, long-term, unexpected ways at the time.

• 4:39Joe Weisenthal?

  And have we ever even done any El Nino episode in like 10 years or 11 years of doing this? I don't think we have, but it sounds like this is one that we should cover if it's showing up on all these notes.

• 4:49Tracy Alloway?

  If we're going to cover one, this should probably be the one because at the moment, well, you have different El Nino forecasts, right? And you know, there's a range of probabilities involved here, but a lot of the forecasting models are currently forecasting that this is going to be a potentially record-breaking El Nino, something we haven't seen in decades.

• 5:08Joe Weisenthal?

  Do you think there are any people who are like, oh, it's interesting you bring up the El Nino? You know, I've always thought La Niñas are the more underrated one. Do you think that's the type of guy?

• 5:17Tracy Alloway?

  No, I hope not. But are you going to become like an El Nino truther? And you're going to be like, how do you know it's El Nino unless you're standing in the Pacific Ocean, measuring the water yourself?

• 5:26Joe Weisenthal?

  I'm going to become a guy who's like, you know, you really should be paying attention to the upcoming La Niña.

• 5:31Tracy Alloway?

  Oh, good. That'll be a fun transformation for you. Okay, well, we do in fact have the perfect guest. We're going to be speaking to someone who not only follows the weather, but also tries to measure its economic impact. We have Justin Mankin. He is Professor of Geography at Dartmouth and Director of the Climate Modeling and Impacts Group. So, Justin, thank you so much for coming on Odd Lots.

• 5:53Speaker 05

  Yeah, happy to be here. Thanks for having me.

• 5:55Tracy Alloway?

  I feel like maybe the first thing we should do is, can you convince Joe that El Nino is a real thing? No, apparently he needs like a first-person experience of it. What is El Nino?

• 6:06Joe Weisenthal?

  Yeah, what is it?

• 6:07Speaker 05

  Yeah, like wind chill factor. It is, in fact, real and measurable. And they're both kind of actually aerodynamically related, right? So, wind chill, the feeling you get on your skin is owing to the fact that the wind is wicking away latent heat from your skin, which is the heat associated with the phase change of water from a liquid to a vapor. And so, that's why when you get out of a shower, you feel cooler than before you get into it, right? So, that evaporation off your skin induced by aerodynamic resistance, i.e. the wind, that is the thing that's cooling you down, which is why we can measure it and why we can tell you that cold exposure is a bad thing.

• 6:50Speaker 05

  The El Nino phenomenon is an ocean atmosphere. It's kind of part of what's called the El Nino Southern Oscillation, which is essentially a relationship between the tropical Pacific and the overlying tropical atmosphere. And it has a tendency to be in what we call a neutral state, which is kind of average conditions, where you have these easterly trade winds. So, these are winds that are blowing from east to west across the tropics, along the equator. And what they're doing is they're dragging surface water. Surface water that's been warm because it's in the tropics. The sun is just shining there all year round. And so, that water heats up and then the winds kind of drag that surface water and create a, literally a pile,

• 7:34Speaker 05

  such that the sea altitude is higher in the West Pacific than in the East Pacific. And that pile of warm water is something we call the West Pacific Warm Pool. And so, it just sits there parked by Indonesia and Australia. And then every once in a while, those trade winds weaken and break down. And that pile of warm water that actually penetrates quite deep into the Western Tropical Pacific, that pile of warm water just spreads itself out over the vast expanse that is the Tropical Pacific. And so, that's actually how we measure El Nino, is we're measuring it as a function of sea surface temperature anomalies.

• 8:17Speaker 05

  So, how much warmer than average are ocean temperatures at the surface, you know, at this time in this location? And you know, there are different ways to kind of calculate what the regional average is, and we can get into that technical nitty-gritty. But essentially, all this water sloshes back eastward and in doing so, reconfigures all of weather, which is just energy redistribution from the sun on our fluid planet, right? It redistributes all of that energy differently than would have been the case if all that water were piled up in the Western Pacific. I guess like a really simple analogy, a listener could maybe grab on to is they've walked into a cold room.

• 9:01Speaker 05

  Where there's a little space heater plugged into the corner, right? And that little space heater, yeah, is maybe generating some heat that's warming up the room. But it's really only warming up that corner of the room.

• 9:13Joe Weisenthal?

  Yeah.

• 9:14Speaker 05

  That is akin to neutral or what are called La Niña-like conditions, which is an amplification of the neutral pattern, meaning that those winds are stronger than normal and eastern tropical Pacific is cooler than normal. When you slosh all of that water back across the entire expanse of the tropical Pacific, it's akin to walking into a room that has wall-to-wall radiators instead. The thermodynamics of that room, that's a totally different experience for you. That would have been the case if it was just that space heater in the corner. And so when an El Niño occurs, what it is doing, it is essentially, the tropics are the heat engine of global weather and climate.

• 9:56Speaker 05

  And it's a complete reconfiguration such that so much more of our global atmosphere is exposed to that heat energy from the ocean that would have otherwise been buried in the western tropical Pacific. Does that make sense?

• 10:09Joe Weisenthal?

  That was an amazing answer.

• 10:10Tracy Alloway?

  Yeah.

• 10:10Joe Weisenthal?

  And I totally, I understand something that I went 45 years without having any idea of. And now I get it. And as someone who used to live in a, in a drafty New England home, I have a lot of experience with space heaters that only heat up that corner of the room. What are the conditions or what are the drivers such that these El Niños are semi-regular? Why do they seem to come every few years? Why are they not a permanent pattern? Why is one year an El Niño year and another year isn't?

• 10:42Speaker 05

  Yeah, there's a lot of work on kind of the drivers of the breakdown of the winds in the eastern tropical Pacific. I think a simple answer is that we live on a sphere that's rotating and has stratified and unstratified fluids in the form of the ocean and the atmosphere. And that essentially means that energy is propagated as wave phenomena, right? With peaks and troughs. And El Niño is akin to a wave phenomena, right? It is kind of a pattern, what we call a mode of variability. George Philander, who is this Princeton geophysicist and, and major scholar of El Niño,

• 11:25Speaker 05

  called El Niño the trunk of the variability tree. When it comes to climate variation in terms of kind of regulating these pulses of energy redistribution around our planet. And so, you know, a phenomena like El Niño being modal, meaning it has a canonical pattern temporally and spatially, and then induces physical responses that we can characterize and use as a means of prediction, right? Like, we know what we should expect for Peru. We know what we should expect for Australia. And we're able to do that because we've diagnosed this mode of variability and given it a name and characterized its length scales and characterized what we call its teleconnections,

• 12:11Speaker 05

  meaning the kind of physical bridge between El Niño as a phenomenon and what it implies for the Indian monsoon or for the southwestern United States temperature and precipitation regime for that season. And we've given these things a name and they've become, they've come, instead of being purely a source of kind of stochastic uncertainty, just kind of random variation in weather and climate, they've become a means of predictability. And that's what's really powerful about investigating these type of phenomena and giving them names, right? We have El Niño or El Niño Southern Oscillation, which is the kind of teleconnection with the overlying atmosphere. We have the North Atlantic Oscillation. We have the Indian Ocean Dipole. We have the Madden Julian Oscillation.

• 12:55Speaker 05

  So we've, we've like identified these patterns and their, their kind of manifestation. And in terms of like their underlying drivers, which is, I think the question you're asking, I think it's just a function mostly of living on a complex planet with geophysical fluid dynamics, such that these wave phenomena just kind of emerge on these characteristic time scales. The precise mechanism of action that kind of leads the breakdown of these easterly trade winds, which like triggers what's called the Bjorkness feedback, which is this positive feedback loop. So an amplifying feedback that tends to reinforce itself can come from myriad different places, from, from changes in ice cover

• 13:39Speaker 05

  to, you know, a weakening of the equator to pole temperature gradient. All kinds of different things have some culpability and potentially causing a breakdown of these winds that allow the sea surface temperatures to slosh eastward again and reconfigure all severe weather on our planet.

• 13:57Tracy Alloway?

  So talk to us about what the forecast actually is for this particular El Niño. Cause I read these things like, apparently the Australian Bureau of Meteorology, which would be interested in this because Australia is particularly affected by El Niño. Apparently the relative oceanic Niño index, or RONI for short, apparently has never reached the 3.3 thresholds that they currently project before. So that seems extreme. What are, what exactly are we expecting here?

• 14:25Speaker 05

  So there, there's a bunch of different ways to forecast El Niño. All of them kind of stem from some of the original innovative work in the late seventies and early eighties by Mark Kane and Steve Ziediak, who built the first kind of physical model of El Niño to explain it as a phenomenon and then actually make predictions of its occurrence, which is pretty remarkable. But all these are kind of based on, some of them are statistical in nature. So kind of taking temperatures at time T and making a prediction given kind of autocorrelation in that time series, what it should look like at time T plus one. There are others that are physical models that are actually simulating the relationship between oceanic temperatures, winds, the overlying atmosphere,

• 15:08Speaker 05

  and what it does to the kind of pressure and circulation that actually gets air moving in the first place. And so those ones are called process-based models. And those are distinct from these statistical models. But all of them, regardless of how it's being modeled, are kind of converging on a record El Niño, at least since 1950, but arguably since much earlier, right? The 1877, 1878 El Niño, which was associated with the Great Famines. And, and Mike Davis has this amazing book from 2002 about that El Niño event. That one, I think, is, you know, kind of indistinguishable in strength from El Niño as we've already had, such as the ones in 1982 and 83,

• 15:53Speaker 05

  the 97 and 98 El Niño, which listeners may remember as being associated with Chris Farley's SNL skit of, I am the El Niño, right? And, you know, the 2015 and 2016 El Niño, which I believe is the one on record, depending on your indices. So we've had really strong El Niños, but this one is looking like it's much bigger potentially. Every forecast right now, I believe, puts the forthcoming, the unfolding El Niño, because we are in a, in a, in an advisory and we have been since June, according to the National Oceanic and Atmospheric Administration's Climate Prediction Center.

• 16:34Speaker 05

  Essentially, you're looking at every forecast being, uh, having a warmer El Niño than the 2016 El Niño.

• 16:57Joe Weisenthal?

  There are some market stories where you want every detail. Tracy and I have made quite a few podcasts on that basis, but sometimes you've only got 10 minutes and need to know what's moving markets and why. That's the Barclays Brief Podcast. Every week, experts from Barclays Markets and Research get you up to speed on what matters and what to watch next. About the time it takes to grab a coffee. So search Barclays Brief wherever you get your podcasts.

• 17:22Speaker 01

  Some people treat ChatGPT like some kind of smart search engine and some use it to get work done. ChatGPT Work is a new way of working in ChatGPT that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs and scattered information that you have to grind through to turn into something useful can just become something useful. Put ChatGPT to work on your most ambitious ideas and projects. Get started at chatgpt.com by selecting work mode, available on Plus and Pro plans.

• 18:04Speaker 06

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• 18:31Speaker 06

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• 18:35Tracy Alloway?

  How did we actually discover El Nino as a weather phenomenon? Because it happens with some regularity, but it's not like it happens every three to four years, like right on time at the same intensity as the previous, you know, round. So how did people identify this as an actual measurable phenomenon?

• 18:55Speaker 05

  You know, in terms of kind of like the modern instrumental and climate science era, I don't actually know the answer to that, but I do know something that's actually, I'd argue even more interesting. So the person who first modeled El Nino from a physics perspective, Mark Kane, an amazing geophysicist at LaMonte Doherty Earth Observatory at Columbia University, and his colleagues, John Chang, another climate scientist there at the time, and then an anthropologist by the name of Ben Orloff, who's an anthropologist at Columbia, they wrote this incredible paper, I believe in Nature, back in the 90s or early aughts, where they essentially showed that there was really good archaeological evidence that Peruvian potato farmers, as

• 19:40Speaker 05

  long as 500 years ago, were forecasting El Nino. And they were doing it based on the visibility of the Pleiades, which is a star system you can see from the Andes. And essentially, as El Nino occurs, what it's doing is it's reconfiguring the distribution of high versus low clouds in the eastern tropical Pacific. It's essentially taking convection that was happening near Australasia and moving it eastward. And in doing so, you're creating all this, these kind of high serous cloud shields over the Andes, and that reduces the visibility of this, this star pattern. So they were for, and they would alter their, their, their planting dates based on that.

• 20:25Speaker 05

  So there, there's just kind of this remarkable cultural knowledge of being able to grab onto something and be able to make a forecast, an informed forecast. And so I'd argue there's a lot of cultural knowledge about these innate climate phenomena around the world that we have yet to kind of appreciate and diagnose in the, in the highly industrialized world where we're so reliant on instrumentation.

• 20:48Joe Weisenthal?

  Yeah, folk meteorology or folk weather is like extraordinary and like how much they're able to anticipate. I was sort of, I was, you know, I imagined that there were probably various civilizations that interpreted El Nino as like, the king has lost the mandate of heaven, and now, you know, there's a drought, now we have to have a new political order. Also, this Mike Davis book that you mentioned looks fascinating and sort of speaks to the point of like, late Victorian holocausts, El Nino Famines and the Making of the Third World, talking about subsequent famines in India, northern China, and northeastern Brazil. Definitely going to have to read that book. When we talk about a quote record El Nino, what is the measure? Is it the heat variation?

• 21:32Joe Weisenthal?

  Is it the expected change in rainfall or drought? Like, what are the sort of, the gauges that we use to say this is a record El Nino or not, or measuring that? What are, what are the parameters of an El Nino?

• 21:47Speaker 05

  My understanding is it's all benchmarked to the magnitude of the sea surface temperature anomaly. An anomaly, you know, is a departure from expectation or a departure from normal. And so what constitutes normal becomes really important there for kind of setting the magnitude of how anomalous something is, right? And that's why, you know, when Tracy was talking about the relative Nino index, right? The RONI, right? That's kind of shifting, kind of a rolling baseline, because we have secular warming in the tropical Pacific owing to global warming that's occurring, right? As you heat up the planet, the largest reservoir of heat storage just happens to be the 70%

• 22:30Speaker 05

  volume of water that constitutes our planet's surface. And it takes a lot of energy to heat up a volume of water. It's much, much more energy intensive to heat up a volume of water than it is an equivalent volume of air.

• 22:44Joe Weisenthal?

  Right.

• 22:44Speaker 05

  So that specific heat is just much higher. So it's just a great energy reservoir, and the ocean has been doing humanity an incredible solid by absorbing all this excess heat, which is the problem of global warming, right? That we're not allowing our atmosphere to shed heat as efficiently as it otherwise would have been if greenhouse gases were lower in our atmosphere. And in doing so, we're having to heat up to reattain equilibrium such that the energy coming in from the sun is balanced by earthlight leaving out to space. That is not in balance at the moment, and a lot of that excess heat is going into the ocean, and that's how planetary temperatures increase such that in can equal out again. That's essentially a very simple global warming 101.

• 23:28Speaker 05

  But the way we're measuring El Nino as a phenomenon is by taking a regional average, so choosing an area in the tropical Pacific that is canonically associated with the manifestation of El Nino. And you can choose different regions and then benchmarking those average temperatures in this month to expectation, what have averages been over, over the, over time. And so you can choose different regions. So there's a Nino 3 region, which has kind of shifted towards the central Pacific. There's a Nino 4 region, which has shifted a bit more eastward. There's a Nino 3, 4 region, which is kind of the typical region that's now used, which characterizes El Nino over something in between those two regions.

• 24:13Speaker 05

  Then there's the E index, which is taking a dimension reduction technique on a spatial field and collapsing it to say, these are kind of the dominant directions of variability in that field. And that E index would kind of represent something differently in the sense that El Nino, while we think of it as a singular phenomenon, it has a geography associated with it. And that geography means that it has flavors associated with it. And so these flavors mean that different parts of the tropical Pacific warm differently and look anomalously different. And so not every El Nino is the same.

• 24:52Speaker 05

  And so its consequences in terms of the hazard it brings for the United States or for hurricane occurrence in the Atlantic basin or whatever, right? It's not the same for every El Nino event. The spatial pattern of the sea surface temperature anomalies also seems to matter. And so there's been a lot of work on kind of diagnosing these different flavors of El Nino, and the E index is intended to try to capture some of that. So there are lots of different ways for measuring it, but it's always a sea surface temperature anomaly in degrees Celsius benchmarked to some expectation or average of normal.

• 25:28Tracy Alloway?

  So one of the things that Joe and I have learned in doing various agricultural episodes over the years is that when you have a supply shock, the, the timing matters, right? So you generally don't want to declare war in the spring planting season, when all your soldiers might be off planting stuff instead. Does the timing of this particular El Nino matter? I keep reading that the peak of this El Nino is expected to be in the fall in the northern hemisphere. Is that particularly unfortunate timing?

• 25:59Speaker 05

  You know, there's been a lot of work that looks, you know, the planting and harvest of crops tends to be something that is highly calendar dependent, and there's a bit of flexibility that I think farmers have to be responsive to their expectations for, for weather variability. And certainly, ag forecasts have become important, and agriculture at large has become really dependent on, on El Nino forecasts. The thing about El Nino is that it does typically peak in December, January, and February. So this is kind of the boreal, meaning the northern hemisphere winter. And that has implications for the Austral summer, right? For the southern hemisphere summer, which is in the opposite season.

• 26:44Speaker 05

  It also, there's also kind of a time dependency associated with the impact. So let me just concretize this with an example. We've been in an El Nino advisory since June. That's also coincident with the typical onset of the South Asian monsoon, which is a determinant of feast or famine for billions of people, right? You can link monsoon onset to, you know, farmer well-being and farmer suicides. You can link the timing of monsoon onset to diesel prices within India and the political fates of people around diesel subsidies, because if the monsoon onset is delayed, you have a bunch of farmers suddenly needing to irrigate crops where they otherwise wouldn't

• 27:29Speaker 05

  have had to. And that, that irrigation is dependent on the generators that rely on diesel fuel. And so you can see price spikes around those types of things and, and the political fortunes of, of like municipal and kind of local politicians kind of surviving or not surviving in elections based on those kinds of things. So there's like lots of cascading ways in which an El Nino, even at this early stage in its life cycle, which tends to kind of start after what we call the spring prediction barrier, which is kind of this period in time.

• 28:03Tracy Alloway?

  Oh, yeah.

• 28:03Speaker 05

  Where it's difficult to make a prediction about whether or not an El Nino is going to occur to next February. So we're looking at kind of a wind down of this event in February, March of 2027. What's interesting about it is that it's going to lock in all sorts of phenomena. You know, 2026 has a non-trivial chance of being the warmest year on record, not simply because of global warming, but because of this emergent El Nino. So it is already kind of just increasing global temperatures over what they would have been in absence of this event. And it's nearly locked in a virtually guaranteed record temperature for 2027, even though we haven't actually had that year unfold yet.

• 28:48Speaker 05

  It's no coincidence that the hottest years on record have almost always been El Nino years, right? When you take a warming trend and then you impose an anomaly on top of that, you're just going to get the, these outliers. And so these impacts are arguably already manifesting. So the South Asian monsoon was delayed. That onset was delayed by this El Nino. And so while the kind of major teleconnections and the peak strength associated with this event is anticipated to be in the winter, which is typically the case associated with, with El Ninos and just kind of the, the life cycle associated with them, its impacts are manifesting now and will continue to manifest into 2027.

• 29:43Speaker 01

  Some people treat ChatGPT like some kind of smart search engine, and some use it to get work done. ChatGPT Work is a new way of working in ChatGPT that can take action across your apps and files, stay with a project for hours if needed, and turn a goal into finished work. It's designed to help you move from a chaotic starting point to a reviewable first version. So all the source materials, briefs and scattered information that you have to grind through to turn into something useful can just become something useful. Put ChatGPT to work on your most ambitious ideas and projects. Get started at chatgpt.com by selecting work mode, available on Plus and Pro plans.

• 30:25Speaker 06

  This is Robert Smith from Business History. If you're listening to this, there's a good chance you're a small business owner. And like every small business owner, you started with a dream to do what you love and watch it grow. What you probably didn't dream about, keeping up with cyber threats. That's where Mastercard can help with access to tools that help identify cyber threats to better protect your business. Building your dream business, priceless. For cybersecurity in a changing world, there's Mastercard.

• 30:52Speaker 06

  Learn more at mastercard.com/smallbusiness.

• 30:56Speaker 07

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• 31:57Joe Weisenthal?

  Let's talk a little bit about the economic costs that we associate with an El Nino. Like I said, up until your first answer in this interview, I didn't know what an El Nino really was, but that certainly doesn't mean I've never said it or read it before. You know, it used to be on TV, you have a guess. It was like, oh, the upcoming El Nino.

• 32:18Tracy Alloway?

  Joe stroking his beard, pontificating about the El Nino.

• 32:21Joe Weisenthal?

  Yes. Mm hmm. But it always seems like a sort of cyclical thing. It's like, okay, it hits every few years and there's some costs and then it goes back to normal. But if their whole book's about the long-term consequences of any given El Nino, it sounds like, at least in some serious ones, there can be quite a tale, quite a, you know, ripple effects. When you go back and look at maybe some of the more recent big El Ninios that we had, I think you mentioned there was one in the early 80s. How do you think about like tallying up? I don't know what the, what the global economy, the price the global economy paid for it?

• 33:02Speaker 05

  Yeah. Such a good question. I want to call out a key collaborator that I've had in this work, Chris Callahan, who's a professor at Indiana University and just a stellar, stellar scholar. I couldn't have asked for a better PhD student to get to think about these hard things with. So Chris had been thinking about El Nino and it's kind of projection uncertainty and other contexts, meaning what does the future of El Nino look like in a world with global warming and how to, how to understand that? Just be given that it's such an important part of year-to-year variation in weather and climate globally. And it's essentially unknowable, right? It's very hard to know what El Nino is going to look like in 2050, what it's going to look like in 2100,

• 33:46Speaker 05

  and how that picture changes as a function of what your background warming happens to be. One of the things we had been investigating is just, well, we kind of had pivoted from thinking about future to saying, well, we live in a world where global warming has already occurred. We can simply document what has happened. And so much of what my lab group does here at Dartmouth is investigate retrospectively, kind of build that documentary evidence of here how, here are the costs of climate change to date. And in thinking about the cost of climate change to date, one of the things you have to do is isolate those costs from the costs that would have happened anyway, such as the cost from El Nino, which is an innate

• 34:30Speaker 05

  form of climate variability, right? El Nino occurs in absence of people and their greenhouse gas emissions. And so isolating that cost and kind of partitioning it from the cost accounting of global warming to date became a pretty important exercise. So we're always in kind of detection and attribution science, trying to say, well, what is consistent with the world as it has been versus the world as it would have been absent global warming? And that means having a really clear picture of what we call internal climate variability, such as the variability from El Nino. And so we were interested in this cost accounting of El Nino, just to clarify the cost of global warming to date.

• 35:12Joe Weisenthal?

  Sure.

• 35:12Speaker 05

  And when we went back and did this exercise using these causal inference techniques, so this is all observationally built, right? We can take data of variation in El Nino, which is essentially a random treatment, right? It is stochastically generated while it has a life cycle, you know, against it. Our global economies aren't necessarily shaping sea surface temperature anomaly patterns in places like the tropical Pacific, right? So it's effectively exogenous to our, from our economy, right? And so that's really crucial in this empirical setting of trying to identify, well, what's the effect of an El Nino on an economy? And how does that upward aggregate to a macroeconomic toll?

• 35:56Speaker 05

  What you can do is just take a bunch of data of something like gross domestic product, which is summarizing all economic productivity, goods and services produced by an economy. We have pretty good data on that for, at the country's scale for a pretty long amount of time. And you can look at differences in that economic growth. So how did economic growth vary from year to year? So you're not looking at absolute levels of GDP. You're looking at changes in economic growth as embedded in changes in GDP. And then you can look at something like El Nino as a treatment. And then you have another source of variation, which is that not every country is equally linked to El Nino physically.

• 36:40Speaker 05

  El Nino is kind of remarkable in that it generates many different kinds of physical hazards, from heatwaves to droughts to floods to landslides to wildfires, right? And so in that sense, like its impacts, interestingly, look a lot like the wider impacts from global warming, which is a worthy discussion of itself, but we'll put that to the side for a second. And what you can do is you can exploit the kind of random variation we've observed in the real world of El Nino occurrence and El Nino magnitude, how that relates to the teleconnection, how tightly coupled a locations, weather and climate is to El Nino as a phenomenon, and then see what accounts for the variation in economic productivity as measured

• 37:25Speaker 05

  in changes in GDP. And so that's what we did back in 2023 and published in a paper in, in Science, where we showed that actually we can detect very sizable deviations in economic growth from El Nino as a phenomenon, and that scales in teleconnection strength, meaning countries that are most influenced climatically and from a meteorological standpoint by the phenomenon of El Nino are most impacted and negatively so. So Peru with road washouts disrupting commodities from, you know, mine sites in the mountains to port

• 38:10Speaker 05

  induces a shock. And that shock doesn't seem to be what an economist might call a level effect, meaning a simple deviation that you then recover from in a subsequent year. What we find in this empirical research is that observationally, El Nino seems to systematically depress growth, meaning your country is growing at a rate and then an El Nino occurs and then you are growing on a different trajectory. And so those losses just accrue ad infinitum in time, and that is a distinct finding than what was previously understood about El Nino.

• 38:49Tracy Alloway?

  Right. So this is really important. I think most people are used to thinking about weather-related shocks as the sort of short-term thing that, as Justin just said, impacts the price level. But what the paper actually found was that there's this longer-term impact on essentially output, like growth in the longer term. Why is that? Like, what exactly is happening here? Because, again, you would expect like, okay, a road gets washed out. It's probably inconvenient. It's probably expensive to replace. But it does get, you would think it does get replaced relatively quickly. And a lot of these negative effects would subside relatively fast.

• 39:28Speaker 05

  I think a one-off shock might look that way, right? A yield loss owing to a heat wave or drought in one part of the upper Midwest says nothing about major grain-producing regions in Russia or cotton prices, given growth in the Fergana Valley in Uzbekistan, right? Like, these, these things are disparate enough in space that maybe they're not experiencing simultaneous shock. What I think is kind of interesting about El Nino and why El Nino is an interesting analog for the impacts of wider global warming, which is a, you, kind of a universally experienced, you know,

• 40:11Speaker 05

  there, there's a high degree of correlation in the impacts of global warming, right? It's not simply a heat wave here. It's a heat wave here, here, here, and here, all at the same time, all experiencing loss at the same time, which is one of the reasons why I think it's this simultaneity of disparate regions experiencing hazards and experiencing losses that then can lead to these up-aggregating market forces that systematically depress growth and alter where capital investment can go. You know, the efficiency with which you're able to take labor and capital and mobilize it into productive parts of the economy.

• 40:53Speaker 05

  It is, it is hard to do that when there are lots of hazards being experienced around the world, right? So it's not one thing disrupting your supply chain.

• 41:03Joe Weisenthal?

  Yeah.

• 41:04Speaker 05

  It's maybe a dozen things. And I think that's the distinction why, you know, the 97, 98 El Nino was about 36 billion in economic losses as estimated at the time as a level fact, a shock and then a recovery. What we actually found is that there was empirical evidence for a systematic depression of economic growth. And over a five-year period, that amounts to about $5.7 trillion in global economic losses instead.

• 41:34Joe Weisenthal?

  Wow.

• 41:34Speaker 05

  By the year 2003, right? Five years after the 97, 98 event. What's really fascinating is we played this game where we use what's called a, a perfect model framework, where we simply ask the question, if we know that the impact of El Nino is permanent and of this magnitude, given the observational data we have, could we prove that it's permanent? So these kinds of statistics rely on the ability to pull a signal from noise, which requires a certain amount of data. And that amount of data affects the claims you can make robustly. And so what we were trying to do there is say, even if we had a known effect,

• 42:16Speaker 05

  can we recover that known effect perfectly, given our data record? And what we found is that we couldn't, which means that we cannot rule out the possibility that the economic impacts of El Nino at the global scale are permanent, meaning that every time an El Nino occurs, we're just knocked off our growth trajectory that would have been.

• 42:37Joe Weisenthal?

  Yeah.

• 42:38Speaker 05

  Absent that event, which is kind of remarkable, which implies that these costs kind of accrue ad infinitum in time. In our paper, we only went out to, to five and eight and 10 years of growth accounting. But it just says that the economic losses associated with these events are much higher than we understood before, which means, you know, it's just another kind of piece of evidence that shows that weather and climate matter for our economy and our climate system is endogenous to that economic growth, right? It, it is greenhouse gas emissions induced by economic growth that is altering our trajectory of climate.

• 43:17Joe Weisenthal?

  Yeah.

• 43:17Speaker 05

  And our climate also has a finger on the scale of what constitutes our economy. And so that endogenity, I think, is something really important to understand and represent, particularly around policies related to, to climate variability and climate change.

• 43:31Joe Weisenthal?

  That was a fantastic answer. When you think about the impacts of this El Nino or the El Nino in the year 2050 or the El Nino in the year 2100, you know, so obviously, like, one, you know, presumably, take a country like Peru, it's probably going to be richer in the year 2050. So it'll probably have more economic activity. It may also have better infrastructure in the year 2050, such that road washouts are less likely. Countries after, you know, you, I presume even since 82 or 97, there's been, you know, hardening against weather-related shocks and so forth

• 44:14Joe Weisenthal?

  as countries learn about these patterns. How do you model that aspect? Both the fact that, okay, there is more economic activity in the sort of temporally connected areas and also presumably governments and companies get better about anticipating the El Ninos and strengthening their infrastructure such that they're not as vulnerable?

• 44:40Speaker 05

  It turns out it's really hard, right? The predictions of future are not falsifiable scientifically. And, and so.

• 44:48Joe Weisenthal?

  I hope Peru's wealthier in 2050 and 2100, but.

• 44:52Tracy Alloway?

  Pure anchovies, though.

• 44:53Speaker 05

  Yeah, I mean, yeah, we didn't even talk about the fisheries implications.

• 44:56Joe Weisenthal?

  Yeah.

• 44:57Speaker 05

  One thing that's really, I, I think what you're, you're kind of raising is this, this question of adaptation.

• 45:01Joe Weisenthal?

  Yeah.

• 45:02Speaker 05

  And, and resiliency. And the way I, I've been thinking about that is evolving, right? There, there's a story we can tell that says, okay, if there are market inefficiencies or we're shown to be vulnerable societally in these particular ways, we're going to develop strategies to ensure resilience, right? Those Peruvian potato farmers noticed they were losing crops, you know, and they altered their sowing dates based on the visibility of the Pleiades overhead. Like, that is an adaptation.

• 45:33Joe Weisenthal?

  Yeah.

• 45:33Speaker 05

  And you can imagine autonomous adaptations, meaning individual-level adaptations. You can also imagine society-wide or planned adaptations, such as shoring up kind of resilience. And these things are linked to El Nino forecasts, right? Like, one of the things you're seeing, you know, you said at the outset, Tracy, of, of, of all these financial planners thinking about the implications of El Nino for markets around the world and supply chains, that is a form of kind of resilience strategy building that, that's occurring that is indelibly linked to the, the science of Enso forecasting and why El Nino forecasts are so important, right? The 1982, 83 El Nino, we didn't have the benefit

• 46:18Speaker 05

  of a tremendous amount of lead time in planning for its impacts, right? A tropical cyclone off in the ocean, right? Being able to track it and have sufficient time to get resources injected into the places you need and people out of harm's way, right? Like, that requires lead time, which is why these types of forecasts are so essential, because they allow us to, to pursue resilient strategies that we otherwise wouldn't have been able to. But this wider question of like, are we well-adapted to climate variability we have? And shouldn't we expect that we'll be even better adapted to climate variability in the future? I would say the evidence is pretty mixed.

• 47:00Speaker 05

  There isn't a whole lot of evidence that we're well-adapted to the climate we have. We are finding, documenting, observationally, that the costs of El Nino are astounding, despite the fact that we've been exposed to it for hundreds and hundreds of years, right? This is not something that is novel, right? While the coming El Nino is, is like, seems to be out of sample and the costs associated with it are really hard to anticipate because it is so out of sample, right? Like, when I think about the cost of this forthcoming El Nino, I estimate somewhere around $10 trillion of global economic losses conservatively.

• 47:38Tracy Alloway?

  Wow.

• 47:38Speaker 05

  Over the next five years, right? Up to $14 trillion of economic losses, if you take some of these tail. But I could, only 70% of that, only, you know, about $10 trillion of that is in sample, meaning supported by existing data we have on El Ninos and economic responses. Our global economy is larger. And so these losses are associated not just with the magnitude of the El Nino, but the size of our global economy. There's just more stuff to be impacted.

• 48:08Joe Weisenthal?

  Right.

• 48:08Speaker 05

  But what that tells me is that we are not optimally adapted to the climate we have. And so there isn't much evidence that we have that we are taking on board the feedback we're getting from the climate system about how things are going and pursuing strategies that really offset or mitigate losses in a coherent way. I think that's, you know, pretty, pretty telling, just given the documentary exercise. That's not to say that we couldn't be better adapted. I just think that we are not well-adapted and there isn't widespread evidence of adaptation to either El Nino as a form of climate variability or wider global warming, since the impacts of global warming look a lot like the impacts of El Nino.

• 48:52Speaker 05

  And so I think there's like a, a bunch to kind of disentangle there. But when we're thinking about these, these future growth impacts on, from Enso, we, we need a counterfactual world of what economic growth trajectory would have been.

• 49:08Speaker 05

  Absent El Nino, but given global warming. And that is a picture of future that I think is really hard to envision. But there are economic tools that people use to create those, those, those counterfactual worlds. And then you can measure deviations as could be the case, given what we know to be observationally true about the relationship between El Nino and an economy.

• 49:29Tracy Alloway?

  Yeah, I know you just said there aren't a lot of examples of successful adaptations for El Nino, other than perhaps Peruvian potato farmers sowing their crops early. But give us some hope here or some idea of what a successful adaptation could look like in an ideal scenario where this is an endogenous phenomenon, as you just described, where you have it basically happening all around the world simultaneously. What could we do to try to offset some of the economic impact?

• 49:57Speaker 05

  Gosh, that's, you know, it's such a great question. One of the ways I think about this is there's improving resiliency in global markets such that these weather and climate shocks don't alter prices and interest rates and all these things that are huge determinants of human well being. Then there is also like the direct hazards themselves, right? A stronger than average atmospheric river event that triggers a landslide along Route One in California, creating a road washout that is a massive disruption to communities there. A wildfire, you know, that rages through the bush in, in Australia, killing trillions

• 50:39Speaker 05

  of animals and, and raising insurance premiums on kind of wildfire protection for homes there. Right? There, there are all these kind of ways you can process trace how El Nino hurts an individual or a community. And so I think that protection of human well being from a proximate sense of like, are you okay, given these hazards? That to me is a different question than how do you shore up international markets such that they are resilient to the impacts of El Nino? And I think just separating them is, is really, really valuable. I think the fact that people are aware of El Nino as a phenomenon and that it can induce

• 51:21Speaker 05

  these cascading shocks through agriculture or through mining or through the transport sector, and that all of those things all around the world can up aggregate to a macroeconomic toll, I think is important to know. And I don't know enough about how people think about these portfolios, but I know that risk diversification is a strategy to ensure returns. And I imagine that's something that people are embracing, given modern portfolio theory or whatever. But I think this question of like, how do you protect people from hazard? That is a different question and requires different sense of warnings about the local manifestation of the hazards associated with El Nino.

• 52:04Speaker 05

  And to me, that means early warning systems. That means emergency management and response teams that are well placed and understand these consequences. That means that we have insurance markets that recognize the hazards, the unique geophysical hazards associated with something like El Nino and its regional dependencies and what it should imply for the types of products those people need to protect the most capital intensive asset they have, which is their home. It's many different kinds of things. And so none of this is out of the realm of possibility. There's a lot of these things we do anyway, right? We build reservoirs to mitigate drought risk already.

• 52:46Speaker 05

  Never mind the fact that Lake Powell, the central bank of the American West Water Economy is at a near record low.

• 52:53Tracy Alloway?

  He knows his audience.

• 52:54Speaker 05

  Anyway, I guess the point is, is that, you know, I think there are lots of, there's lots of evidence that we, these adaptations are within the realm of possibility, but the constellation and configuration they take is kind of regionally dependent. And so I think kind of a coherent global strategy about managing the impacts of El Nino is an interesting testbed for adaptation strategies that would lend itself to wider global warming. And that's something that I'm, I'm really intrigued by.

• 53:22Joe Weisenthal?

  So you talk about this idea that what you've discovered through your research is that El Ninos are not these sort of cycles that you bounce back from and then you resume to trend growth, right? That they change their trajectory. But if El Ninos are something that are very consistent and predictable throughout history, such that we've been, you know, there's evidence of farmers having tried to anticipate them going back over 500 years. Why should we not assume that, you know, it's seasonal? Like you could say, for example, that cold winter months depress economic growth, which they probably do.

• 54:03Joe Weisenthal?

  People don't go out as much and shop and travel as much in the middle of December. And so we could say, oh, if there were no Decembers, if it never got cold, then in the counterfactual, you know, we would have had much higher growth, which is true, but also absurd because the premise of not having a winter is absurd. If El Nino is something that will always and has always been with us, why do we even imagine there being a counterfactual trend rate of growth in a world without El Ninos?

• 54:39Speaker 05

  Yeah, I think, you know, that comes back to the kind of empirical identification strategy.

• 54:44Joe Weisenthal?

  Okay.

• 54:45Speaker 05

  Like, we don't have the benefit of resimulating the world as it has been and, and kind of the emergence of global society and the global economy absent El Nino.

• 54:56Joe Weisenthal?

  Yeah.

• 54:57Speaker 05

  And so we rely on models to create those counterfactuals. We know that El Nino, while being cyclic in nature, it is not perfectly so. It is as good as a random treatment. And so we can separate the experience of the world into those associated with El Nino and those not. And we can examine the differences in economic productivity under those two regimes. So that's essentially what we're doing empirically. It's akin to a medical control trial, right? Where you randomize a population into a treatment group that gets a drug and a control group that doesn't, right? Or receives a placebo and you compare medical outcomes, right?

• 55:41Speaker 05

  There are a year, there are people that may look the same in the treatment and control group, and there are people that may look different in the treatment and control group. But if you randomized effectively, those differences among individuals cancel out and the kind of efficacy of the drug itself is just the difference between those two groups. El Nino is as good as randomly assigned, despite the fact that it is cyclic in nature. And so you can treat it as this natural experiment, this treatment, and compare it to the control of non-El Nino years. And that's effectively what we're doing here when we're kind of talking about this, this counterfactual, right? We know what economic productivity looks like.

• 56:22Speaker 05

  And so you're right to say that, you know, economic productivity looks different in winter than in summer or in spring, right?

• 56:30Joe Weisenthal?

  Yeah.

• 56:30Speaker 05

  And it looks different in the face of a tropical cyclone than it does in the face of, you know, a civil conflict or something else, right? Like these, these things have impacts, but what we're doing here is kind of exploiting natural stochastic variation in it, despite its cyclic nature. And what I think is remarkable, and what I, what I'm kind of suggesting here is that despite the fact that El Nino is not a novel phenomenon, right? It is not something that we have never experienced before, which global warming is, right? Global warming is something humanity has never experienced and it is out of sample. And it is arguably making this El Nino that's unfolding, given the background warming, truly

• 57:15Speaker 05

  out of sample, truly out of sample event. It's something humanity has never experienced before. And I'm saying, despite the fact that we should be inured to experiencing El Nino, we have limited evidence of widespread adaptation and resilience to it.

• 57:31Tracy Alloway?

  All right, Justin Mankin, thank you so much for coming on Odd Lots.

• 57:34Speaker 05

  Good, thanks for having me.

• 57:48Tracy Alloway?

  Joe, I found that conversation fascinating. Love talking about the weather in all ways. But I think the point about this idea that like, okay, El Nino is something that we have experienced, it does come with some regularity. And yet there seems to be some proof that it has this lasting

• 58:04Joe Weisenthal?

  Yeah.

• 58:05Tracy Alloway?

  impact, not just on like the immediate economy, but on economic growth itself, is a very important one when you consider that, like, again, we're about to experience a potentially record breaking El Nino and with the wider backdrop of climate change, right?

• 58:20Joe Weisenthal?

  Super interesting. I learned so much in that conversation that I didn't know this term that I just heard throughout my life that I really, oh, it gets warmer or something like that. I didn't really know what it was or why it was or what direction. I thought it was really interesting. Okay, what makes an El Nino different from another random weather event? The global simultaneity of it is being key. Like, okay, other events you just bounce back from. I mean, everything must have some effect. You never like bounce back from anything that perfectly back to trend. But the simultaneity, of course, we saw that during COVID and the ripple effects from that. And so when you have this weather pattern that is truly global in nature and sort of

• 59:05Joe Weisenthal?

  very, I guess, predictable in the sense that you know what regions they're all going to get hit, it sort of makes sense to think about it in these terms of like, oh, there are real long-term costs, especially if they're intensifying during a trend of global warming.

• 59:19Tracy Alloway?

  Yeah, nowhere to run, nowhere to hide kind of idea. The other thing I was thinking, of course, back to some of our early agricultural episodes from this year, all of this is happening against a backdrop of higher fertilizer prices and lower supply. Like you still have, I think, 40%, 40%? I can't remember the exact numbers of global fertilizer supply stuck in the Strait of Hormuz. And that can't be helpful either when you're talking about the biggest El Nino on record.

• 59:47Joe Weisenthal?

  Yeah, no, it's going to be a, well, now we are well armed. Maybe we're not well adapted for the El Nino, but at least

• 59:54Tracy Alloway?

  We know about it.

• 59:54Joe Weisenthal?

  We are at least well armed to understand news stories that will be emerging over the weeks and

• 1:00:01Tracy Alloway?

  And sell-side analyst notes.

• 1:00:02Joe Weisenthal?

  And the sell-side analyst notes in the, in the months ahead.

• 1:00:05Tracy Alloway?

  All right, shall we leave it there?

• 1:00:06Joe Weisenthal?

  Let's leave it there.

• 1:00:07Tracy Alloway?

  This has been another episode of the Odd Lots Podcast. I'm Tracy Alloway. You can follow me at Tracy Alloway.

• 1:00:12Joe Weisenthal?

  And I'm Joe Weisenthal. You can follow me at TheStalwart. Follow our producers, Carmen Rodriguez at Carmen Armin, Dashell Bennett at Dashbot, Kell Brooks at Kell Brooks, and Kevin Lozano at Kevin Lloyd Lozano. And for more Odd Lots content, go to Bloomberg.com/oddlots, receive a daily newsletter and all of our episodes. And you can chat about all of these topics 24/7 in our Discord, discord.gg/oddlots.

• 1:00:37Tracy Alloway?

  And if you enjoy Odd Lots, if you like it when we talk about the weather, then please leave us a positive review on your favorite podcast platform. And remember, if you are a Bloomberg subscriber, you can listen to all of our episodes absolutely ad-free. All you need to do is find the Bloomberg channel on Apple Podcasts and follow the instructions there. Thanks for listening.

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