Posted by Paul Vignaon March 11, 2011 Geopolitical, Stocks /
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Well, it took your average institutional stock investor all of about four hours to digest the shock and horror of the devastation wrought by the earthquake in Japan, and start thinking about the profitable boost to economic activity that’ll occur once the Japanese are done burying the dead and start rebuilding.
Does that sound harsh? Of course it does, but the market operates under a cold, hard math. The fact of the matter is, stocks often get over these kinds of things long before the people who suffer from them do. They have to, because the markets hardly ever shut down. But that doesn’t mean the ramifications of the earthquake are already all known and discounted. That would be impossible, and as Simon Constable pointed out earlier, these things have a way of manifesting themselves in ways nobody right now can anticipate.
DJIA rises 60 (0.5%) to 12044, still down 1% on the week; the index is down two of the past three weeks. S&P 500 gains 9 (0.7%) to 1304, Nasdaq Comp rises 15 (0.5%) to 2716. It’s another low-volume day. Crude fell, both on the fears about lowered demand from Japan, and the fact that the much-hyped “day of rage” in Saudi Arabia didn’t amount to much. The yen also rose sharply, a sign that Japanese corporations and investors are already, or soon will be, repatriating money to the homeland for the rebuilding effort.
Markets tend to move past the shock of something like the earthquake pretty fast, and after yesterday’s sell-off a modest rebound is no surprise. Newswires’ columnist Tomi Kilgore noted that the market has a history of doing this, from the Kobe quake, to Katrina, to today.
“These types of events, they’re very sad and they’re very alarming, but they don’t have a huge impact on economic activity and momentum,” said Christian Thwaites, president and chief executive of Sentinel Investments. “They kind of distract people from their terminals but I don’t think people see them as big buying or big selling opportunities. Ultimately, they don’t stop an economy in its tracks.”
How the quake will affect Japan’s economy, and how that will affect the global economy, is the long-term question. UBS’ Art Cashin scratches the surface of the questions in his commentary this morning, and also offers a great insight into how traders react to tragedy. Hint: they’re not all computers.
U.S. stocks are turning moderately higher here in the afternoon, as traders get over their first reaction to the Japanese earthquake, which was to sell, and are calmly reassessing things. But the real effects of the quake won’t be known for some time.
Our colleague Simon Constable penned the following for WSJ.com’s Real Time Economics blog.
If you think Japan’s quake tsunami combo looks bad, just pause for a moment. There may be worse to come. We might just get financial devastation on top of a human and physical disaster.
And if history is anything to go by it could be monumental. Just look what happened when Mother Nature made an unexpected call in 1987. On October 15 and 16 a hurricane hit southern England. Hurricanes almost never hit Britain — I know, I grew up there.
As the cost estimates of the disaster grew insurance companies started to dump their holdings of stocks and bonds so they had cash to pay the mounting claims. By Monday October 19 there was enough to selling to cause the stocks to slide by over 22% in New York. It was Black Monday. It was worse in London than New York.
Posted by Paul Vignaon March 11, 2011 Inflation, Markets /
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Obviously, Japan is the big story, the very big story. But there’s something else worth pointing out today: inflation expectations here in the U.S. In short, they are rising, maybe faster than the Fed expected, and that may create problems for the central bank that it wasn’t exactly expecting to face this soon.
This is perhaps best illustrated by the story of William Dudley, the head of the New York Fed, who took a trip across the East River this morning to speak to the Queens Chamber of Commerce. You can read about his prepared remarks in this WSJ write-up by Newswires’ Michael Derby. But the really interesting part occurred when he took questions from the audience. Derby elaborates:
New York Fed President Dudley just faced down a Queens, N.Y., audience that was having a hard time buying his contention inflation is low and likely to stay that way.
He was challenged by one audience member, who said, “when was the last time, sir, you went grocery shopping?” Dudley responded “I certainly acknowledge food prices have gone up.” But he added some prices are lower and he noted “today you can buy an iPad 2 that costs the same as an iPad 1, that’s twice as powerful,” as an example of favorable price dynamics.
His example was greeted with widespread grumbling in the audience, in an unusual display of discontent at a Fed speech. Dudley’s struggle is a harbinger of the trouble policymakers are likely to face over coming months, amid the good chance food and energy prices are on a sustained move higher.
The ramifications of the Japan quake are impossible to know at this point, and the human toll will obviously be the most important, and devastating, aspect of the whole disaster.
In the cold math of the markets, the earthquake will spark economic activity. Lumber futures in the U.S. are higher this morning in anticipation of the rebuilding effort. There’s the thought that with the nation’s nuclear plants offline, crude oil demand will rise. But that’s cold comfort for all the bad things that are going to happen, both economically and from just a mere human standpoint.
Capital Economics’ Julian Jessop has started sketching out the ramifications:
The consequences of the major earthquake and tsunami that hit Miyagi Prefecture and other areas in north-eastern Japan today are not yet clear and the impact on local people is of course foremost in everyone’s minds. But the financial markets also need to consider the economic costs and the implications of the disaster for the public finances. These could be considerable.
While noting environmental disasters often have a smaller economic impact than initially feared, since the resulting reconstruction boosts demand, and that Japan is uniquely prepared for earthquakes. But considering the state of Japan’s economy, the timing is very bad.
The timing of the disaster could not have been much worse. The economy had already
contracted in the final quarter of last year. This shock may be too small and too late to have much impact on GDP in Q1, but does marginally increase the chance that output will decline in the current quarter as well. Moreover, a large part of the reconstruction costs will probably have to be met by local authorities and ultimately by central government, which is already struggling to bring public debt under control. Overall, it will be that much harder to deliver a credible long-term fiscal plan in the summer if the economy is stuck in recession, the public finances are in an even worse state, and many people are still suffering the after-effects of this disaster. At the very least, the scope for fiscal stimulus to mitigate the economic damage is much less than it was in 1995.
Japan is still the world’s third-largest economy, so what happens there is very likely to have some kind of impact overseas.
Posted by Kevin Kingsburyon March 11, 2011 Markets /
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US stocks are poised to trade down for a second straight day, with today’s action likely to be driven by the response to a massive 8.9-magnitude earthquake that struck northern Japan and a resulting tsunami that’s devastating coastal areas and could hit the US.
Futures have actually worked off some of their earlier weakness. S&P futures down 2.60 points, DJ futures down 40.
The quake extended Asian stock declines, already weaker because of Thursday’s Wall Street slump and China’s release of monthly inflation data that raised fears of further monetary tightening there. Oil futures are sharply lower, with Nymex crude falling to roughly the $100 level, accelerated prior losses.
In the aftermath of the quake, which hit shortly before 1 a.m. ET, the yen fell, but has been rising in European trading.
US Treasurys are little changed, with the 10-year yielding 3.37%.
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Michael Dorff, a professor at Southwestern Law School in Los Angeles, says CEOs are paid for performance – but it’s usually not their own performance. They’re paid millions for the performance of the economy, their industry, their employees, and sometimes just for having good luck. For years boards of directors – often made up of CEOs who believe in […]
