Underestimating the Loss of a City
by Comstock Partners, Inc.
Thursday, September 8, 2005
In our view the spin masters are seriously underestimating the potential negative consequences of Katrina. They are treating it as just another storm, stating that the dislocations will be temporary; that the money pumped in will be a positive; and that the Fed could halt its policy of hiking funds rates. They also point out that the stock market, knowing all this, has behaved very well in the aftermath of the destruction. The overall focus has been extremely narrow, concentrating mainly on the day-to-day and intra-day fluctuations of oil prices. If only things were that simple.
In a recent report by Stratfor Forecasting, George Friedman sheds some light on the overwhelming importance of the port of New Orleans to the U.S. economy. The port is the largest in the U.S. in terms of tonnage and is the final point of the vast interior river system that provides low-cost water transportation for agricultural and industrial commodities and manufactured materials. A large proportion of U.S. agricultural products are exported from the port and a significant amount of industrial imports come in. While the oil complex is of great importance, the disruption to the movement and distribution of agricultural products and industrial materials may be even more difficult to bring back. There is not enough port capacity, trucks or rail cars available in the U.S. to compensate for the loss of New Orleans.
While the damage to the port itself may be less than originally thought, the lack of a city to support it may turn out to be the more enduring problem. In Friedman’s words, “The displacement of the population is the crisis New Orleans faces. It is also a national crisis, because the largest port in the United States cannot function without a city around it. The physical and business processes cannot occur in a ghost town, and right now, that is what New Orleans is. It is not about facilities, and it is not about the oil. It is about the loss of a city’s population and the paralysis of the largest port in the United States…the United States has lost not only its biggest port complex, but also the utility of its river transportation system—the foundation of the entire American transport system. There are some substitutes, but none with sufficient capacity to solve the problem.”
Compare the above analysis with the mush we are getting from Wall St. and financial TV, and you’ll see the gravity of the problem. All of this is happening at a time when home building is showing early signs of softening, the savings rate is negative for the first time since the 1930s, and home heating cost are already 50% higher than a year ago. In our view economic growth and corporate earnings will be highly disappointing in the period ahead, and the Fed will not be able to prevent it even if they don’t hike the funds rate at the next meeting.
We also don’t believe that the stock market is sending us a bullish message about the outlook. In October 1973, the market actually went sideways for two weeks after OPEC shut down oil exports to the West, and the pundits were similarly complacent. The market then dived 16% over the following six weeks and 45% over the next year. While the market may never be wrong, it often changes its mind, and we think that will be the case this time around.
© 2005 Comstock Partners, Inc.
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