Sometimes there is no bright side

March 17, 2011


James Saft is a Reuters columnist. The opinions expressed are his own.

If rebuilding after tragedies is actually good for the global economy, someone clearly forgot to tell investors.

In the days after Japan’s earthquake and tsunami and its still unfolding nuclear disaster, global stock markets have fallen sharply, as have bond yields and even energy prices, all indicators that someone, presumably someone with quite a bit of money, thinks this all will not end well.

While replacing broken windows will flatter GDP, it does not do a whole heck of a lot to increase productive capacity. The contrary argument, of course, is that Japan is suffering from a surfeit of savings and that these funds will finally be given something worthwhile to do in rebuilding.

Perhaps demand from Japan will do someone some good, but the idea that we can all grow rich by rebuilding our ruined houses seems little better than the old canard that we’ll all get rich buying each other’s houses. Both theories rest on employing more debt and both, therefore, present considerable risks.

Even beyond the idea that Japan’s plight will somehow provoke a bond crisis, of which there is no evidence yet, two factors may explain why markets are so scared; the nuclear risk and the spreading unrest in oil-producing nations in the Middle East and North Africa.

First, the events at the Fukushima nuclear plant are as unpredictable as they are frightening. Reports are confused and attempts to control the situation, such as a failed bid to dump water by helicopter, evoke images of the kind of movie happy endings we all view as far fetched.

This brings fear and that kryptonite of risk markets, uncertainty.

This cuts a much wider swath than just Japan, where nuclear power represents 29 percent of electrical generating capacity.

The truth is that nuclear power, one of the most important sources of electricity in many markets around the world, now has a very uncertain long-term and immediate future. That could have a nasty impact on energy prices, and in turn on growth and inflation.

The impact is spreading quickly; European Union energy officials agreed Tuesday to apply new stress tests on plants across the 27-nation bloc and Germany moved to switch off seven older reactors. China’s cabinet on Wednesday said it will suspend approvals for nuclear power stations to allow for a revision in safety standards, while Switzerland put on hold renewal of three of its atomic stations.

This is significant; nuclear power represents a third of Japanese electrical generating capacity, 20 percent in the U.S. and 75 percent in France.


JAPAN-QUAKE/Oil prices initially fell after the earthquake, operating on the assumption that immediate demand in Japan will fall. Prices rose on Wednesday, as fears of nuclear power rose and people worked through the implications.

This is all made even harder to predict by the unfolding path of revolts and protests in the Middle East. Libyan forces supporting Muammar Gaddafi were predicting on Wednesday the fall of rebel stronghold Benghazi within 48 hours, a development that, while ghastly, would actually help to suppress oil prices if it came to pass. That, ladies and gentlemen, is your global economy, 2011 edition, left hoping for the restitution of a vicious dictator.

Developments in the gulf state of Bahrain, which used tanks and helicopters to drive protesters from the streets on Wednesday, added to uncertainty. Bahrain has brought in troops from fellow Sunni-ruled Saudi Arabia, Qatar, Kuwait and the United Arab Emirates as it seeks to put down a largely Shi’ite-led protest movement, risking retaliation from Shi’ite-dominated Iran.

There is simply no way to know how this will work out, but financial markets look to be pricing in elevated energy prices for an extended period.

It is possible, of course, that protest is stifled, that nuclear doubts are damped and that the price of oil sinks rapidly, in which case you can expect a massive rally of risk assets and for the Federal Reserve to resume making noises about the transition away from quantitative easing.

If not, and if energy prices remain high or rise, they will be a tax on growth and consumption, all the while fanning the flames of inflation in food and energy.

It is worth noting that U.S. producer prices spiked last month, with finished foods rising 3.9 percent, the highest rate since November 1974, when President Gerald Ford was attempting to lead a “Whip Inflation Now” movement.

Tension in the Middle East, oil spikes, inflation and nuclear fears; It is all looking a bit 1970s now, and that is not something to be nostalgic about.

(At the time of publication James Saft did not own any direct investments in securities mentioned in this article. He may be an owner indirectly as an investor in a fund.)

Photos, top to bottom: A red umbrella is seen among the ruins as survivors walk past in Kamaishi, Iwate Prefecture, days after the area was devastated by a magnitude 9.0 earthquake and tsunami March 16, 2011. REUTERS/Damir Sagolj; A Japan Self Defense Forces helicopter fights a mountain fire after a magnitude 8.9 earthquake and tsunami hit near Kamai City, Iwate Prefecture in Northern Japan March 13, 2011. REUTERS/Kyodo


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Posted by Sunraynews | Top US news | Report as abusive

What’s the problem? No one reads your articles? They’re some of the best.

And we can always expect more disaster. There have been so may in the past few year that I am suffering from disaster fatigue. A few more and it will turn into disaster addiction.

Perhaps we are becoming like the Roman Empire that needed its continuous warfare to divert attention from the top-heavy distribution of wealth and required the removal both by war and the gladiatorial games, of surplus males (and females). But the poor and disenfranchised got their revenge in savage retributions on the upper classes. People like Nero and Caligula were their heroes.

The western countries are not going to take easily to an eastern style group consensus, however controlled and dishonest that consensus is. But they would lap it up if the group consensus made the upper tiers’ needs paramount.

The vultures that inhabit the money markets don’t seem to have any other priority than their own appetites and ambitions.

I am 60 and never again expect to see “prosperity”. Now the only question remains – how much is it worth to keep my under funded, uninsured and underemployed carcass alive? What’s it worth to me and society at large? My gut instinct tells me: not very much.

One could lay the blame on a world birth rate. Compared to the nearly flat rate prior to the industrial revolution, the growth charts are nearly vertical.

One can easily relate the present course of action by the central government to the well meaning and useless initiatives the French Monarchy tired before the revolutionary forces dominated the discussion and promptly set about murdering the dissenting and more rational voices.

Some of the rabid comments in these pages and others make me think that is what will take over.

And the future rhetoric will make your well reasoned outlook hopelessly beside the point.

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Posted by ChooseGold.Net » Gold Will Continue to Shine Amid Market Uncertainty – Money Morning | Report as abusive

The last time the gap between rich and poor shrank was the 70s.

You would have to be pretty rich not to look forward to this back to the future game.

Posted by Dafydd | Report as abusive

Kudos to James Saft for this well-written and thoughtful article.

In the short term, the ‘bright side’ to recent events is completely absent. In the long term, it is hopefully just heavily overshadowed by the more obtrusive ‘dark side’.

Either way, the sky continues to darken.

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testing comment censorship

Posted by Greenfelder | Report as abusive

It’s interesting how Salmon’s commentary and this one allow comments to post immediately, however other more obvious corporate propaganda pieces like Chrystia Freeland’s deplorable bashing of Syria don’t allow it. Clearly some writers are working with the censors to prevent valid criticism of their articles. Typical behavior for an editor like Freeland. The only comment that made it through on her article had Noam Chomsky’s Marquis name attached to it. They couldn’t very well censor that one!

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What’s the deal with Cyran’s column. There doesn’t appear to be any comment capability at all. Does he like to be the only guy in the room at parties?

Posted by Greenfelder | Report as abusive

The title of this article should be: usually there is no bright side.

When you bring up remembrance of the 1970’s, I just remember nothing has been done since then to avoid the energy mess we face today.

I can tell you upfront that the UN will not act on Jemen no matter how it will escalate, other then in Libie.

The reason is, there’s no oil in Jemen.

Look at every future conflict with energy in mind and you understand that there will be alot of war and bloodshed.

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