Forget most of what you are reading about the post-Katrina
recovery. This is an unprecedented U.S. disaster that will have repercussions –
around the global economy, but most especially domestically. A major American
city has been all but wiped off the map, taking the country’s largest port with
it. To put this into context, the costs for rebuilding New Orleans after
Katrina will exceed those of rebuilding Chicago after the great fire, San
Francisco after the 1906 earthquake, and New York and D.C. after September 11th
– combined. And that’s after adjusting for inflation.
Despite what some of the more bullish pundits have been
saying, the stimulus of rebuilding New Orleans will not outweigh the
overall loss to the economy; if it did, we would level a different city each
year and rebuild it from the ground up, shiny and new. But it doesn’t, and so
This comes when the Consumer is running increasingly low on
dry powder. As we noted last week, the consumer is nearly – but not quite – shopped out. Gas price spiking added some caution to their already waning sentiment.
Additionally, we note that the market’s impressive
resilience in the face of such adversity is not historically unprecedented.
When the great San Francisco earthquake hit, it took markets several weeks to
register the colossal costs and impact. So too, the market all but ignored the 1973 Arab Oil Embargo of the
U.S. For two weeks, US stock markets
actually traded sideways, before recognizing what the enormity of what the
embargo meant to the U.S.
Further, we note that Katrina has revealed the surprisingly
steep learning curve of key economic players. Alan Greenspan has learned (to
his dismay) that Jawboning is a 2 way street. He has discovered the Markets can
exert a formidable force. Having declared that the Fed must now pause on 9/20 –
and rallying in anticipation – the markets will throw a tantrum in the event
the Fed does not. How he handles this may impact how quickly the economy
Thus, for the second time
this year, I am changing my
expectations for the market for the calendar year. Recall that previously, I was looking for a mid year peak in the markets, sliding off to finish the
year flat. What we’ve seen instead is a low set in May, followed by a sizable
rally. The endgame for this cyclical Bull now looks less and less like a blow
off top. In its stead, a more rounded top – a grinding affair, lower, slower,
and far less dramatic than previously expected – is increasingly likely, as the
the impact of Katrina makes its way into the equity markets.
This Bull is now more likely to end with a whimper, and not
with a bang.