Man-Made Disasters

After Hurricane Katrina, most Americans believe that the natural response to a disaster of that gravity is panic and chaos. However, Dr. Marc Faber points out that reactions to this type of devastation may be culturally driven…

Following my visit to Iran, my odyssey continued through Copenhagen – a very beautiful city in wonderfully socially minded, civilized, and friendly Denmark – on my way back to Asia via London. Just as I was about to check out of my hotel in Copenhagen to catch my flight to London in transit to Bangkok, I was advised that traffic at London’s Heathrow airport had come to a virtual halt. Gate Gourmet – British Airways’ (BA) supplier of in-flight meals – had sacked 600 of its catering workers, which prompted unofficial secondary action by BA’s Transport and General Workers Union staff in support of their Gate Gourmet colleagues. The result was complete chaos at Heathrow, where most of BA’s flights were cancelled and more than 70,000 passengers were left stranded.

In any event, after spending hours on the phone and on the Internet, I managed to avoid Heathrow and returned home via Frankfurt. Upon my arrival at Chiangmai airport, the taxi driver I was about to hire told me that he couldn’t take me home, as the central area of Chiangmai, where my home is located, was totally flooded.

Thinking that the driver was exaggerating, I called my wife, with the intention of asking her to pick me up. As it turned out, she couldn’t leave the house, which now I had no way of reaching. (The flooding was likely caused by a government employee suddenly opening a dam after a period of heavy rain, which caused a tidal wave of water and mud to pour down the riverbed, raising the water level within a few hours by more than three meters.)

Flooding in Thailand: Calm and Helpful People

The following day, when the floods had retreated somewhat, I ventured to our house, which is situated adjacent to the river. First a tuktuk (motorized tricycle) took me around the centre of the city to where the flooded area began, and which was about a mile from our property. Numerous heavy army trucks were driving up and down those flooded inner-city roads that were still accessible, picking up people who needed assistance in getting out of the flooded areas. I hopped aboard one of the trucks and was taken to an intersection from where I walked through waste-deep water for another 500 meters to our house. At times the current was so strong that I had to hold on to the sidewalls and fences of the small alley that leads to the house, where I finally arrived completely exhausted.

What struck me on that and the following day, during which I struggled back and forth between the hotel where I was staying and our house, was how calm the population had remained and how helpful people were to each other in the wake of Chiangmai’s worst floods in 40 years. Nowhere was there any sign of looting (nor was it evident in the south at the time of the Boxing Day tsunami), and although for many families the material loss was considerable, the atmosphere in town was not one of desperation but was more like that during the annual water festival (Songkram) or the carnival in Rio.

Moreover, I was surprised that in Thailand – a country not exactly known for its high productivity and efficiency, at least not during the day – help had arrived almost instantly. A few hours after the flooding, police boats sent from other provinces had arrived and distributed emergency packages to the people living adjacent to the river, which contained food, water, candles and matches.

I don’t wish to compare the floods in Chiangmai with the far greater disaster brought about by Katrina in New Orleans and the coastal regions of Mississippi, but the cultural differences are evident. Thailand is a country where the people will never have the opportunity to enter heaven – most Thai people follow the teachings of Buddha. Buddhism is not a religion but a way of life, whereby the individual, rather than pray to a god, should try to improve himself. Violence, evil behavior, and bad language are shunned, while tolerance ranks high in human behavior, and so – at least in the north of the country – there is a sense of "mutual aid", which manifests itself as less reliance on the government and greater co-operation between free individuals.

Moreover, aside from the capital cities, Asian cities are still much closer to a "household economy" with far less division of labor than in highly developed and sophisticated cities in the Western world, which become very vulnerable to any supply disturbances – irrespective of whether this relates to food, water, tissue paper, electricity, telephone services, and so on. It is in this context that we must understand – at least partially – the looting that followed the New Orleans flooding. If no supplies are reaching a city immediately following a natural disaster, and the local and federal governments, through their own gross incompetence, fail to provide adequate relief within a short period of time, then it is a natural reaction of desperate people to open up stores and help themselves to the daily necessities, including guns (indispensable in a violent society).

As an eyewitness recounted, Katrina was a natural disaster, but what followed was a man-made disaster. I would amend this statement and say it was "administration-made" (not that the Democrats would have done a better job!). In fact, when one considers how passengers are continuously harassed by totally inept Home Security officers at airports, one wonders whether the competence of Michael Chertoff, the Homeland Security Secretary who took four days to arrange for relief supplies to be dropped on New Orleans by helicopter, can be of much comfort to the world’s most productive nation.

The Bush administration – despite constant warnings from the Southeast Louisiana Flood Control Project – elected to under-fund the Lake Pontchartrain levee project by nearly 80%. The Financial Times of London reported, "if the Iraq war had not caused the Bush administration to raid money for the levees, New Orleans might not be a corpse-filled cesspool" (Financial Times, September 7, 2005). Worse, in 2003, President Bush reversed a "no net loss" of wetland policy, which was launched by his father’s administration and bolstered by President Clinton, and allowed developers to destroy the sensitive wetland between Crescent City and the Gulf, which acts as a buffer against sudden sea surges. (Every two miles of wetland reduces the surge by half a foot.)

Flooding in Thailand: "Driving the Opposite Way on the Freeway"

As an observer pointed out, it was the equivalent of taking the seat belts, air bags, and bumpers off a car and then driving the opposite way on the freeway. But when four leading environmental groups concluded in 2004 that, without wetland protection, New Orleans could be devastated by an ordinary hurricane, the chairman of the White House’s Council of Environmental Quality dismissed the study as "highly questionable", and thought that "everybody loves what we’re doing."

Investors will naturally ask what the impact of Katrina’s devastation will be on the economy. This isn’t an easy question to answer, but to some extent the investment markets have already given some answers as market participants initially expected the Fed to stop raising the Fed fund rate sooner than would have been the case without this natural disaster, which was exacerbated by an inept administration. The initial expectations of slower or no interest rate increases therefore strengthened the stock, bond, and commodity markets (including gold), while the US dollar sold off sharply.

Homebuilding companies, which prior to Katrina had been weak, rebounded strongly on the expectation of more housing inflation as a result of the Fed no longer raising rates. However, when the inflationary impact of reconstruction became evident, bonds sold off, gold and the dollar strengthened, and stocks remained range-bound.

Since the region affected by Katrina accounts for less than 2% of US GDP and for less than 10% of US oil consumption, the impact of Katrina – everything else being equal – should be minimal. In fact, I would make the case that, in the medium term, Katrina will boost economic activity, as reconstruction work will be undertaken.

Since most of the money for reconstruction will come from the government, it is likely temporarily to boost the budget deficit, whereby even a US$100 billion reconstruction budget would be irrelevant compared to the US’s military expenditures in Iraq and Afghanistan. Also, whereas Katrina may lift energy prices somewhat because of the damage it caused at refineries and on oilrigs in the Gulf of Mexico, in the context of global oil demand and supplies it is quite meaningless. In fact, the administration’s decision to release oil from the strategic oil reserve following Katrina may lead, temporarily, to lower energy prices than if Katrina had not occurred. So, overall, the economic impact should be minimal. If anything, as a result of reconstruction work, which will begin almost immediately, and dissaving on the side of the government, because of the release of oil from the strategic reserves, GDP growth in the fourth quarter could be boosted above expectations.

Flooding in Thailand: Minimal Impact on the Economy

Still, it should be clearly understood that while the reconstruction of an asset that was destroyed by a natural disaster or a war does boost GDP temporarily, it doesn’t lift the overall wealth of a nation, as a lost asset is merely replaced with a new one. (In the case of the levees, let us hope, however, with better ones.)

In sum, it is my view that the impact of Katrina on the US economy should be minimal. Still, I concede that Katrina could dent the American people’s confidence in the political system very badly and dampen consumer confidence. It could also make people think that faith in and reliance on the government is misplaced, and that some savings might be useful in the case of emergency situations. A rising saving rate would naturally come at the expense of consumption.

Therefore, I think that the psychological impact of Katrina could potentially accelerate the current slowdown in the economy and lead to a recession in 2006. Naturally, the government is aware of this possibility and it may therefore use the devastation brought about by Katrina, along with support from the Fed, as an excuse to implement some additional interventionist measures. Foremost is the possibility that, having increased the Fed fund rate to 3.75% in late September, the Fed may postpone further such increases – presumably under some pressure from the White House and also for fear that deflating the current housing bubble through further interest rate increases could entail significant risks.

Regards,

Marc Faber
for The Daily Reckoning

October 27, 2005

Dr. Marc Faber is the editor of The Gloom, Boom and Doom Report and author of Tomorrow’s Gold, one of the best investment books on the market.

Headquartered in Hong Kong for 20 years and now based in northern Thailand, Dr. Faber has long specialized in Asian markets and advised major clients seeking bargains with hidden value, unknown to the average investing public.

Dr. Faber is a regular contributor to Strategic Investment.

A central banker’s lot was never as simple nor as easy as it looked. Even so, it has gotten much harder, because the things he is trying to control now happen in other countries and other economies, not his own.

The Greenspan Fed, colluding with the federal government, brought about the biggest dose of financial stimulus the world has ever seen. Did it create a boom in America? Yes, but not the boom it wanted. What it had hoped to create was a charming old-fashioned economic upturn, in which consumers bought more, businesses hired more, and everyone ended up with more money. Instead, it created a boom in debt, and residential property. Americans were able to spend more, but they had no means of earning more. The new jobs were created in China, not in America. It was a boom, but it was an ugly, ungainly one.

Now, when Americans spend, the Chinese hire. And when Americans stop spending, the poor Chinese assembly line worker gets laid off. Financially, too, globalization has brought a strange division of labor. The Chinese (and Asia generally) export deflation. They can make "stuff" cheaper than anyone. The more they compete for market share, the more sophisticated their production facilities become, and the further prices fall. We Americans (and Europeans, too) are happy beneficiaries. Let the poor Asians bust their humps! We’ll think.

But how do we think we’ll pay for the things they make? Ah…that’s the other side of the globalized financial market. While they export deflation, we export inflation. We export money. Our money is then recycled to central banks all over Asia, where it is bought with local currency. The central banks must create currency to buy it, which causes inflation all over the world. Since prices of manufactured goods are falling – thanks to Asian production – the inflation seeps into the prices of things Asians can’t manufacture: property, oil, gold and luxury goods and services.

Asian central banks now have enough dollars to control every company on the Dow. But rather than buy equities, they’ve bought bonds. This, combined with a 24-year bull market in bonds, is what made Alan Greenspan a genius. As long as the Asians were buying and rates were falling, asset prices increased; the maestro looked like he knew what he was doing.

But now, Ben Bernanke faces the lopsided world that Alan Greenspan helped to build; he may not find being a central banker so agreeable. The great bull market in bonds appears to have come to an end in June of 2003. Since then, the 10-year T-note has gone down. As it falls, the cost of credit goes up, reaching 4.59% yesterday. If the trend continues, as it is likely to do, the next Fed governor may pull on levers, twist knobs and find that nothing good happens. Asset prices will decline with bonds; Americans’ purchasing power will fall with their homes. Bernanke won’t have to raise rates; bond investors will be raising them for him.

More news from the pundits at The Rude Awakening…

————–

Justice Litle, reporting from Reno, Nevada:

"The big news this week: President Bush disappointed the wags by refusing to appoint his personal tax accountant to the Federal Reserve. Instead he chose Ben Bernanke…"

————–

Bill Bonner, back in sunny France with more views…

*** "Mass layoffs highest in 4 years," says a headline in the L.A. Times. Hmmm…we thought the Chinese were the only ones who still lay off employees. We’re all thinkers now, aren’t we? Thinkers don’t get laid off, do they?

*** The latest news on the property front. U.S. homebuilder Lennar used to prohibit speculators from buying its new units. It wanted to be sure there was a real user, homeowner on the other side of the transaction. But Lennar’s stock is down and the new house market seems to be cooling down. Lennar says it will welcome speculators. It will take anyone’s money.

In Orange County, CA, sales and prices are still strong, but realtors report that houses are staying on the market longer before they are sold.

*** And gold still shows no sign of dropping below $450…our buying target. The price is still above $470.