Triple Calamity in Japan - Update

 
March 18, 2011



Last Friday, March 11, Japan suffered through a major earthquake of possibly 9.0, a devastating tsunami of 30 feet or more traveling at enormous speeds, and the resulting nuclear disaster affecting six nuclear reactors in northeast Japan. One of the problems for us and the Japanese people is that we don’t know which reports are credible. It appears that the news being released by the Japanese government about the nuclear plant is being delivered to the government by TEPCO (Tokyo Electric Power Company). How much of the news is accurate or filtered, we cannot be sure. So the credibility is questionable.

As of this writing, this is the information we believe to be fairly accurate:

·         There are 6,911 people reported dead and 9,522 people missing.

·         Helicopters have resumed water dumping and fire engines are continuing the water cannons on the reactors on Friday.

·         Search and rescue teams are in Japan from all over the globe, but are frustrated in their efforts because they need to constantly get permission from Japanese authorities to enter various areas.

·         A power supply cable has been run to reactor #2. But we don’t know if the power units at reactor #2 are undamaged enough to make the connection. And why “only” reactor #2?

·         Efforts to cool down the reactors have been “somewhat helpful but radiation levels are still high” according to authorities.

·         The Nuclear Regulatory Commission states that the U.S. does not have to fear the radiation. There will be sufficient dissipation before it reaches the U.S.

·         According to Reuters, foreign bankers from such institutions as BNP Paribas, Standard Chartered, and Morgan Stanley have left Tokyo and maybe Japan on commercial and charter flights.

·         There are 1,479 fuel rod assemblies and more than 11,000 spent fuel rods in the plants, totaling more than 4.3 million pounds of uranium to be concerned about and dealt with.

·         The crisis has been raised to a level 5 (of 7), the same as 3 Mile Island. Note: Chernobyl was a level 7.

Short and long term impact to be expected

Clearly the human toll of this disaster is profound for Japan and the world as whole. That said, we would expect that the global economic and market impact of this event will be relatively modest over the longer term. Natural disasters rarely, if ever, have major intermediate, much less long term, impacts on global economic growth rates or market results. Usually, the uncertainty immediately following the event creates a selloff in the market directly affected, as well as the immediate surrounding regions/markets, as we have seen in Japan.

The longer term issues that will be dealt with in Japan and elsewhere may be country and economic sector specific. The concerns with Japan’s nuclear reactors may become a broader issue. If the situation degrades further and ends in some type of Chernobyl-like worst case scenario, Japan and other countries may seriously reevaluate the use of nuclear energy productions (anti-nuclear power protests have already begun in Europe). If significant policy changes were to result from this reevaluation, that could have the potential of creating even more demand pressure for oil and natural gas as well support for growing green energy initiatives.

A real unknown from this is the reaction of the general population to this catastrophe and whether the ensuing rebuilding effort will rekindle the type of spirit and energy that drove the Japanese people to create the world’s second biggest economy following World War II. The prime minister has already evoked the notion that this is the biggest challenge the country has faced since World War II. It may ultimately be the catalyst that re-energizes the population after the “lost decades” following the bubble of the late 1980s. If the population is re-energized this may drive long term growth to attractive levels. This is far from certain but an eventuality that can’t be dismissed out of hand. (Source: Russell Investments)

Impact on investment portfolios

The economic and investment implications of this event will unfold in the weeks, months and years ahead. In an interview Monday with Reuters, Stephen Wood, chief investment strategist for Russell Investments in New York, said “Everybody who is human is just standing in awe of the human tragedy.” Mr. Wood also said the “short-term impact would likely remain negative, but in the longer term, the rebuilding effort could be stimulative for overall demand in Japan.”

The only thing certain right now is uncertainty, and the markets do not like uncertainty. It is impossible to determine what the intermediate and long term effects will be from the nuclear disaster until that scenario fully plays itself out. We will continue to monitor the situation.

Let’s continue to keep the people of Japan in our thoughts and prayers.

Late news bulletin: Probably as a result of the UN Security Council calling for a “no-fly zone” Libya has called for a halt to all military operations. (Source: CNN)

Sincerely,

Edward J. Kohlhepp, CFP®, ChFC, CLU, CPC, MSPA

Edward J. Kohlhepp, Jr., CFP®, MBA

This information should not be construed as investment, tax or legal advice. The publisher is not engaged in rendering legal, accounting or other professional services. All information is believed to be from reliable sources; however, we make no representation as to its completeness or accuracy. If assistance or further information is needed, the reader is advised to engage the services of a competent professional.

 

Additional sources: MSNBC, CNN, Russell Investments, Goldman Sachs Asset Management, AdvisorOne.com, Mondrian Investment Partners, WSJ.com

 

Wow! U.S. Treasuries face a possible downgrade!
Earthquake & Tsunami

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Kohlhepp Investment Advisors, Ltd.
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