By DAVID MOON, Moon Capital
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
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
(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
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).