Katrina, not likely to effect US economy

By DAVID MOON, Moon Capital Management
September 11, 2005

For years, clients have asked me if prudence suggests that a portion of a portfolio be invested as a hedge against some type of major economic catastrophe. This sort of question was particularly frequent following the terrorist attacks four years ago today, when people feared that an organized group of international thugs might bring our economy and infrastructure to its knees.

I recall my first catastrophe discussion with a client. It was 1985. He was concerned about a potential Soviet nuclear attack on the United States. I told him to be more concerned about the nuclear rather than financial fallout. Even if the US dollar became completely worthless and our country fell into anarchy (his fear at the time), investing ten percent of his portfolio into gold bullion wasn't going to do him any good. If he wanted a hedge against a Soviet nuclear attack, he needed a bomb shelter. He should have invested his portfolio in canned food and shotgun shells. Food would be a more valuable currency than gold. And if folks knew he had any food, he'd need the weapons to protect it.

Doctor Smith probably thought I was joking at the time, and I probably (mostly) was. But it doesn't seem so funny now.

After the terrorist attacks on New York and Washington, the US stock market closed for four days. When it reopened, prices went into a free-fall. The decline was emotional, not logical. Although the human and emotional losses were immeasurably enormous, the macroeconomic impact of 9/11 proved relatively mild. Since that initial decline, the S&P 500 has increased more than thirty percent. There are more people employed today than in 2000. Tax collections are higher. Gasoline prices may be higher, but it has nothing to do with terrorism or the war in Iraq. (Nor does it have anything to do with the greed of your local gas station owner. I'll address this issue in another column.)

I've written it many times: plenty of people have gone broke betting against the US economy. I'm not willing to do it now.

(Nothing I am about to write is intended to minimize the horrible nature of this human tragedy. Others are much more capable of addressing personal and emotional issues. My comments are, admittedly, purely economic.)

What will be the long-term financial fallout from Katrina? I don't know, but the disaster will likely not be a lasting economic drag on the overall US economy. The gas pipelines are already substantially reopened. When the port reopens, the major economic influences of New Orleans will be back to work. The local economies of Mississippi and Louisiana may suffer for some time. But these local economies constitute only two percent of the total GDP of the United States. Compared to the rest of the country, leisure/hospitality and government spending were two of the fastest growing areas of Louisiana's economy. These are not the financial shoulders on which the US economy sits.

There is an old joke about economists having successfully predicted nine of the last five recessions. I wonder if this economic calamity falls into that category?

David Moon is president of Moon Capital Management, a Knoxville-based investment management firm. This article originally appeared in the News Sentinel (Knoxville, TN).

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