RE: Economic impact of last week's tragedy
Unfortunately I think the costs may be staggering. Far higher, I suspect, than the Gulf War, and this time the Saudis and Kuwaitis will not be the ones to finance it. It's not just the direct costs of losing the 5,000 lives and the buildings and the airplanes and paying for the rescue and cleanup and the disruption that may last for weeks and months, and the likely "retaliation", and the Arab response to our reaction, ad infinitum, as in Israel.
There are costs of the removal of the last remaining leg of the economy: consumer confidence. Growth, previously at zero, will now certainly tip into the negative region. There will be rising unemployment in the months ahead, which will require the necessary transfer payments.
There will be a massive counterintelligence operation, massive security buildup and an increased defense buildup. These are investments of the non-productive type. In other words dead weight costs. And they will also result in costs associated with additional friction in the economy -- longer delays for passengers and cargo. Disruptions in the supply chain. Good-bye just-in-time inventory management, at least for a while. Goodbye peace dividend.
Then there is the important question of who pays and when. Do we fund these additional costs through taxes or do we borrow the money and return to deficit spending and the ugly stagflation of the seventies? Already in the past 2 days yields on 30 year Treasury Bonds have begun to spike.
I am not sure today's politicians fully understand the economic implications of all this. I'm not sure investors here fully realize how special the last 20 years have been.
When you say, "what we are doing here is determining how many times our money we will make", I believe you may be making an erroneous assumption that is based on realities of a previous era. If interest rates rise, which I am assuming they must in the months and years ahead, PE ratios will be pinched. We will revert to more "normal" PEs and more normal price levels for stocks. PE of 30 will once again be regarded as astronomical. It may take 10 years to double your money rather than the 3 years you may expect. You may have wished you had simply stayed in CDs.
I urge you to be more realistic in your expectations of what the next peak in the cycle may look like and how long it may take. An exogenous event has occurred of enormous magnitude, in my opinion. The "model" must be adjusted to reflect it.
Sam |
