Sometimes there is no bright side
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.
OIL ON TROUBLED WATERS
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