The Fog of Katrina

Monday, September 19, 2005 | 01:45 PM

The task of calculating the enormous damage from Katrina – in Human lives, in property damage, and in economic terms – continues. As insurance claims and Federal aid flow into the region, it is worthwhile considering a more difficult to measure effect of the hurricane: Its ability to obscure economic and earnings data. Katrina is looking a lot like a catchall excuse for all the shortfalls of Q3 & Q4. Apologists have begun using the storm to avoid responsibility for every disappointment. I anticipate economists, corporate officers, even politicians will take full advantage of the opportunity to scapegoat the storm for their own failures. (e.g., even spice seller McCormick blamed the storm on their shortfall).

To those of us who attempt to read the entrails of the market, even more troublesome is the obscuring of the true underlying economic conditions. How the fog of Katrina impacts investor psychology and behavior has yet to be seen. Human Nature being what it is, I expect we will see an unholy litany of Candide-like rationales – some justified, most not – for everything from consumer spending to energy costs to inflation data.

Let the excuse making begin!

Indeed, early signs of this were apparent last week in response to the University of Michigan Preliminary Consumer Confidence data. The survey saw a 14% decrease in measured sentiment, and a two month decline of 20%. The WSJ noted this was “the largest decline in points over a two-month period since comparable records began in 1978."

The Dismal set reacted as you would imagine, with one wag even opining that “The index was likely weighed down heavily by the emotional response to the devastating images that resulted from Hurricane Katrina.”

Go figure: a sentiment survey being impact by negative emotions. Is it any wonder these guys don’t have a clue?

Ultimately, investors may be getting set up for a nasty surprise. This may play out 60–90 days from now: As we’ve noted, with massive government stimulus fading prior to the disaster, growth was already decelerating, as Real Estate began to cool, and consumer spending slowed. Oil prices had nearly reached a tipping point. But now the disaster gives cover to the cheerleaders and perma-Bulls, allowing them to maintain their sunny outlook. Meanwhile economic decay gets obscured and rationalized.

Thus, the markets can continue to grind higher over that same 2 - 3 month time period. We have no idea what finally removes the scales from investor’s eyes, but eventually, something gets revealed that cannot be papered over as Katrina’s fault. The risk to those who buy into this excuse making is that once this occurs, an unseen trapdoor may get sprung.

We would expect to adapt a much more defensive posture 60 days hence.

Monday, September 19, 2005 | 01:45 PM | Permalink | Comments (6) | TrackBack (1) add to | digg digg this! | technorati add to technorati | email email this post



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Yet another key leading indicator turns gloomy. How much can the stock market and the Fed shrug off? [Read More]

Tracked on Sep 19, 2005 5:43:46 PM


One thing I think the perma-bulls will jump on right away is the return in government stimulus by the spending of Katrina aid in the Gulf region, as promised by the president.

The flipside of course (which cheerleaders fail to see): the stimulus is concentrated in a specific geographical area and the stimulus is highly inflationary (it focuses on raw materials and on human capital).

Thats what make this whole debate about Katrina baffling: if the president is spending hand over fist to clean up after Katrina, and this spending is highly likely to be inflationary, why again should the Fed stop? Because they feel bad?

I don't get it.

Posted by: erikpupo | Sep 19, 2005 1:57:21 PM

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