Reflections on Katrina

09/23/2005 12:00 am EST

Focus:

Daniel Wiener

Editor, The Independent Adviser for Vanguard Investors

Many advisors have written about the impact of Katrina. But few were as affected as Dan Wiener, whose family and friends come from New Orleans. Here, the advisor offers an insightful and personal assessment of recent events, and his outlook for what lies ahead.

"The impact on those affected by Katrina will be felt for years. But what we can’t know is the impact on the massive US economy. Will higher oil and gasoline prices, rebuilding costs, and the huge dislocation of an entire region slow our economy to the point of recession? Maybe. Anyone who says ‘yes’ or ‘no’ with assuredness, however, is only guessing.

"Either way, it’s important to remember that there is a flip side to the grim news. Massive rebuilding will require materials, labor, and vast numbers of washers, dryers, and refrigerators, not to mention cars, computers, and all manner of personal goods to fill the void. Insurers have hedged the possibility that they might have to one day pay for a good bit of this damage and yes, it’ll be expensive, but the money is there. The government will provide disaster relief as well. And that money will flow through the complex US system that is our economy like blood and oxygen flow through the vastly more complex human body.

"Markets adjust. Those of us who drive mostly for pleasure will drive a bit less. Those who drive to work may have to shed gas guzzlers for more efficient vehicles. Or maybe we’ll have to run our air conditioners less, or wear a sweater in the office. Our bodies can adapt as can our habits. We are remarkably flexible as individuals, and as an economic system. That isn’t to say the dislocation won’t be unsettling or, at times disturbing.

"Nature is one of those risks we live with, all the more so when we live below sea level. Risk was also the subject of one of the final speeches given by soon-to-retire Fed Chairman Alan Greenspan, who opined that investor expectations remain inflated— maybe more so than in decades past—as they willingly take on more risk while settling for lower overall returns.

"Indeed, investors who’ve continued to bid up prices of ten-year Treasury bonds, yielding just 4.02% at August’s end, are taking on substantial interest rate and inflation risk for a mere 20 basis point advantage over a two-year Treasury yielding 3.82%. Likewise, those who’ve taken to buying condos, apartments, and homes with the expectation that they will be able to flip them for a quick profit, and shareholders pushing oil company stocks higher on the belief that the marketplace will not eventually adapt to higher oil prices and ultimately push them lower, are caught in the trap Greenspan describes.

"The financial markets, and the economy are adaptive mechanisms. Short-term fluctuations, often caused by the unexpected such as hedge fund failures, investor exuberance or say, a devastating hurricane, can obscure the longer-term response which is to accommodate and maybe even embrace the changes that have been wrought. No question, the human and social disruption following Hurricane Katrina will be felt for years to come.

"I know that your thoughts, like mine, are with those most harmed by its devastating winds and rains. But again, it’s the economy, with its improved labor markets, still-low interest rates, still-reasonable inflation, and growing corporate profits, that will ultimately be the catalyst for higher stock prices over the long haul."

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