Friday, March 11, 2011

Tsunami sweeps away certainty for the world's third biggest economy

Today’s earthquake in Japan was truly tragic and devastating event. As time passes, the global public will come to recognize the scope of the devastation. For readers from Japan and the Far East, please stay well.

The San Francisco earthquake of 1906 had a great impact on the US economy even though the initial reports were largely subdued. Jesse Livermore discussed in great detail how investor perceptions about the extent of the damage to the local and national economy transformed quickly from apathy to fear in his book Reminiscence of Stock Operator. He discussed this 'slow transition' in terms of trading profits.

Japan is the world’s third largest economy. Can the global economy absorb this shock? Did the preliminary investment reaction account for the scope of the damage likely to be revealed in the coming weeks? One response will be certain as the global economy attempts to absorb this event – liquidity.

An earthquake of historic magnitude hit Japan this morning, centered off the coast of Sendai. All we know so far is that it caused substantial damage in many cities, including Tokyo. The quake also caused at least one, and possibly several, tsunami waves, which has caused even more damage to coastal areas and which could hit areas all around the Pacific today. Lives have been lost, and we extend our sympathies to everyone in Japan and elsewhere who has been affected by this natural disaster.

Anyone who tells you that they have a handle on the economic consequences of this event is wrong. There is no way to assess even the direct damage to Japan's economy, or to the global economy, that this will cause. Some idiot told a reporter the percentage of Japan's GDP that was generated by Sendai's economy, and the teen-aged scribbler then published that number as an indicator of the economic risk. We do not know what we do not know about the damage that has been done. Experience tells us that the economic shock can be, and likely will be, much bigger than anyone can imagine.

Source: financialpost.com

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