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Posts Tagged ‘earthquake’

What Would An Eruption Of The Yellowstone Supervolcano Look Like?

April 1st, 2014

volcanoOn Sunday, the worst earthquake in about 30 years rattled the Yellowstone supervolcano.  Overall, there have been at least 25 significant earthquakesat Yellowstone National Park since Thursday, but it is the 4.8 earthquake that has many observers extremely worried.  Read more…

Economy

What Happens When The ‘Big One’ Hits California?

March 18th, 2014

californiaOn Monday, a 4.4 magnitude earthquake threw the city of Los Angeles into a bit of a tizzy.  The ground shook, people screamed and news anchors ducked under their desks.  But it was just a 4.4 magnitude earthquake.  So what would happen if the “Big One” hit California? Read more…

Economy, Government, World News

Monster Sinkholes An Indication That Major Earth Changes Are Coming Along The New Madrid Fault?

December 2nd, 2012

Michael Snyder: The most powerful earthquakes in the history of the United States happened along the New Madrid Fault in 1811 and 1812.  Those earthquakes were reportedly Read more…

Economy, World News

The Inflation Tsunami (Part Three of Three)

April 8th, 2011

While we are confident in our ability to understand the deleterious effects that the current set of suboptimal policies are likely to have on the global economy over time, we nevertheless don’t purport to know exactly how these policies might change from here or what impact or on what time horizon financial markets will adjust accordingly. There are too many unknowns, too much pure uncertainty. As such, when seeking to protect and preserve wealth, we need to rely primarily on the most fundamental form of insurance available to investors: Diversification.

The problem many investors face, however, is that they have been conditioned to regard diversification in a rather narrow way. For example, instead of buying a single stock, some might seek to buy a stock market index. Yes, this diversifies within stocks but, in a world in which most large companies have huge direct or indirect exposures to the capriciousness of policymakers, does this really diversify the fundamental risk? No. Some investors might diversify into bonds but, if policymakers are seeking higher inflation, at some point these bonds are going to lose a substantial amount of purchasing power. The same is true for cash.

The unpredictability of policymakers’ actions and consequences–negative as they are likely to be in our view–casts a shadow over the entire spectrum of financial assets: Stocks, bonds and cash. What investors need to do is to get some portion of their assets off that spectrum entirely. This is where commodities come in. Unlike stocks and bonds, which pay dividends and coupons, commodities produce no cash flows. Unlike corporations and municipalities, commodities cannot go bankrupt and leave their investors with only a fraction of their investment, if any. Unlike financial assets, the prices of which are necessarily a function of the arbitrary and increasingly desperate policies of central banks around the world, commodities represent real goods, with real supply and real demand. This does not mean that they are always going to go up in price, nor does it imply that they are always going to outperform financial assets. But given the current, unfortunate state of the world, they offer real, tangible diversification in a way that financial assets do not.

Yes, as policymakers consistently choose to pursue inflationary policies, it is more likely than not that inflation rates in future will be higher than those of today. Commodity prices will most likely rise. But we do not presume to forecast by how much, over what time horizon, or what commodities are likely to be the best performers. What pertains to asset diversification in general pertains to commodities specifically. Other factors equal, a larger basket is better than a smaller one.

This is our response to those that claim that gold is the ultimate insurance policy against unsustainable and counterproductive economic policy. History offers much evidence for this claim. Yet it also offers much evidence that blending other commodities with gold can better diversify a defensive investor’s overall portfolio. These other commodities should include metals, both precious and base; energy, in particular crude oil; agricultural products, in particular grains; and other soft or industrial commodities, with the understanding that, as one moves away from those most widely traded, liquidity will decline.

From there, investors can further enhance returns by moving into business investments which represent the various stages of value added for these commodities: Mining, agribusiness, transportation and other infrastructure. Relative to history, stocks for these sorts of companies may be trading at what appear to be lofty valuations, but keep in mind that, if commodity prices continue to rise, those valuations are more likely to be sustainable and, of course, the dividends paid by these firms should continue to rise in future alongside commodity prices and profits, also providing an effective hedge against future inflation.

Regards,

John Butler,
for The Daily Reckoning

[Editor's Note: The above essay is excerpted from The Amphora Report, which is dedicated to providing the defensive investor with practical ideas for protecting wealth and maintaining liquidity in a world in which currencies are no longer reliable stores of value.]

The Inflation Tsunami (Part Three of Three) originally appeared in the Daily Reckoning. The Daily Reckoning recently featured articles on stagflation, best libertarian books, and QE2

.

Read more here:
The Inflation Tsunami (Part Three of Three)




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Commodities, Uncategorized

How the VaR Model and Japan’s Tragedy Affect Investors

March 24th, 2011

Our thoughts and prayers are with the people of Japan. The videos, images and stories of the devastation caused by last week’s earthquake and tsunami have touched our hearts and rattled investor psyches around the world.

The threat of disaster from the damaged Fukushima nuclear power plant unleashed a ferocious sell-off of Japanese equities, but the damage to other major markets has been limited. Already experiencing a slight pullback prior to the events on March 11, U.S. equities and emerging markets have held up quite well. The MSCI Emerging Markets Index has only pulled back 2 percent since the earthquake and the S&P 500 Index only 3 percent.

Japan has experienced similar disasters before on a smaller scale. In 1995, the Great Hanshin Earthquake severely damaged the port city of Kobe, killing more than 6,000 people. Japanese industrial production (IP) fell by 2.6 percent during the January following the earthquake, according to Societe Generale analyst Takuji Okubo. However, that drop-off was short lived. Okubo reports that IP sprang up 2.2 percent the following month and 1 percent during March.

Goldman Sachs estimates that the total cost of damage from the March 11 earthquake will be $198 billion—roughly 1.6 times that of the Great Hanshin earthquake. That works out to roughly 4 percent of GDP. However, Martin Wolf from the Financial Times points out that as of March 17, Japan has lost $344 billion worth of market cap since March 11, equaling nearly 7 percent of the country’s GDP.

Why have investors reacted this way? Investor anxiety and the selloff have been exacerbated by two trends which have plagued Wall Street over the past few years: The excessive use of Value-at-Risk (VaR) models and a risk-averse herd mentality.

The VaR Model is used by investment firms and others to measure the market risk of their asset portfolios by calculating the probability of maximum loss given a certain time period, i.e. “how much could I lose in a really bad day (month)?”

VaR models have three different components: A time period (generally a day or a month), a level of confidence (generally 95 or 99 percent confidence level) and an estimate of investment loss. There are three mathematical models used to calculate VaRs: Variance-Covariance, historical simulation and Monte Carlo Simulation.

All of the major investment firms have a risk management officer who uses some form of a VaR model. Their biggest concern is the daily, weekly, and monthly volatility. There’s a certain level of volatility that financial institutions can’t stomach because they are leveraged themselves.

It’s similar to the freezing point when water turns to ice. Once this level is reached, the risk management officers give portfolio and money managers a “tap on the shoulder” to reduce risk and raise cash levels. Since risk managers all over the world are using very similar models, it creates a herd mentality and stock sales all get triggered at the same time. Similar herd mentalities and groupthink have led to some of history’s most infamous financial calamities such as the crash of 1987 and 2008 after the fall of Lehman Brothers.

The VaR herd mentality shows up in the volatility index, or VIX, which is a measure of stress in the system. Currently, it’s a combination of forces (the ongoing turmoil in the Middle East and North Africa and Japan’s natural disaster) that is injecting stress into the system. The VIX pushed toward the 30 level last week, a level that has historically been associated with “extreme market turbulence.” As of mid-week, the two-week change in the VIX represented the sixth largest move in the past 20 years, according to Greg Weldon.

Once stability returns and a new equilibrium is found, the VIX then falls and the risk management officer allows the money managers to invest again.

Periods of high volatility and uncertainty generally cause investors to head for cover and liquidate assets but we think investors should do the opposite—classic contrarian thinking.

A prime example occurred two years ago. On March 18, 2009, we highlighted for investors in a special alert that a shift in government policy—an amended FASB-157 “mark to market” rule, a change to the short sell (uptick) rule and a $300 billion liquidity injection from the Federal Reserve—meant a strong wind was hitting the market’s sails and was likely to cause a massive price reversal. We were confident of this shift because these events fit into one of our core tenants of our investment process—that government policies are precursors to change.

Two years later, large growth funds, large value funds and world stock funds have all risen 40 percent or more, according to Morningstar. Some asset classes such as midcaps and natural resources stocks have doubled off of their lows but are still working to regain previous highs.

Unfortunately, instead of buying into the opportunity, more than $25 billion was pulled out of domestic and international stock funds while $22 billion flowed into bond funds, such as intermediate-term, short-term and intermediate government bond funds. The returns on those asset classes over the same March 2009 to March 2011 period were 11.9, 6.8 and 5 percent, respectively.

Another example is last year’s explosion of the Macondo Well in the Gulf of Mexico. Many investors dumped their investments in British Petroleum because of the regulatory uncertainty and growing costs of the cleanup, but BP’s stock has recovered more than 67 percent since its June 2010 lows.

The key difference between the events of two years ago and today is that natural disasters tend to cause great short-term anxiety but have minimal lasting effect, while shifts in government policy are generally precursors to significant change. BCA says that “natural disasters rarely change an economy’s growth trajectory and this earthquake should be no exception.” They continue to say that “the earnings picture of the Japanese corporate sector is unlikely to be significantly affected by this natural disaster.”

In fact, the total impact of the earthquake on Japan’s economy is likely to amount to 0.5 percent of GDP, not even comparable to the global credit crisis that reduced Japan’s GDP by 10 percent between the first quarters of 2008 and 2009, according to the Financial Times.

In America, following Hurricane Katrina, we saw that there are basically six to 15 weeks of misery before the rebuilding begins. Estimates show Japan will spend $500 billion to rebuild its economy and given the government’s long history of investing in the country’s infrastructure, we expect they will waste no time in rebuilding and repairing. Reconstruction spending will probably kick in some time during the second quarter, supporting the country’s growth rate, according to BCA.

We are also seeing nuclear projects being pushed back until engineers from around the globe can learn from this tragedy. This makes coal, natural gas and crude oil more attractive in terms of near-term demand.

A final variable to consider is the immense patriotism and pride inherent in Japanese culture. In his Financial Times column, Martin Wolf says “if any civilization is inured to such tragedies it is Japan’s. Its people will cope. This seems certain.” Japanese culture has a very strong family unit with high savings rates. If the picture of the family above is any indication, this strong culture of family will help them endure, adapt and move forward.

Regards,

Frank Holmes,
for The Daily Reckoning

P.S. John Derrick serves as director of research for U.S. Global Investors and contributed to this commentary. Also, for more updates on global investing from me and the U.S. Global Investors team, visit my investment blog, Frank Talk.

How the VaR Model and Japan’s Tragedy Affect Investors originally appeared in the Daily Reckoning. The Daily Reckoning now provides over half a million subscribers with literary economic perspective, global market analysis, and contrarian investment ideas.

Read more here:
How the VaR Model and Japan’s Tragedy Affect Investors




The Daily Reckoning is a contrarian e-letter, brought to you by New York Times best-selling authors Bill Bonner and Addison Wiggin since 1999. The DR looks at the economic world-at-large and offers its major players – investors, politicians, economists and the average consumer – some much-needed constructive criticism.

Uncategorized

Why I Pray Japan Will Avert a Bigger Nuclear Disaster

March 14th, 2011

Nuclear power plant explosion in Fukushima, Japan, on Saturday, following that nation's strongest earthquake in history.
Nuclear power plant explosion in Fukushima, Japan, on Saturday, following that nation’s strongest earthquake in history.

Explosions and meltdowns at nuclear reactors in Japan this past weekend will forever change the world of energy.

Authorities have already scheduled widespread power outages starting today — and they could continue the planned outages for weeks or even months.

But that’s just a metaphor for the sustained global energy shortages that are likely, as the safety and long-term viability of nuclear power comes under more intense scrutiny than at any time in history.

How do we know that’s the likely outcome?

Because prior nuclear disasters, such as Three Mile Island and Chernobyl, had a major long-term impact on nuclear plant construction.

Moreover, those two disasters were ultimately written off to antiquated facilities or poor safety precautions. In contrast, the Japanese nuclear industry prides itself on safety, and the plants struck by the earthquake had far better staff training and equipment, including multiple back-up systems, all of which failed.

Some nuclear experts will counter that newer and safer technologies now exist or can be developed. But given the history of similar promises in the past, those are bound to fall on deaf ears.

The public will now ask …

Is there a fundamental incompatibility between
the potential dangers of nuclear energy and
the unpredictable wrath of Mother Nature?

That question defies any quick answer and could take years to resolve. Until then, further growth in nuclear power production could be drastically reduced, with potentially far-reaching consequences:

  • Chronic global energy shortages, especially in countries that were counting on new nuclear energy for a large portion of their electric power.
  • Massive, long-term upward pressure on crude oil prices as producers, consumers, and investors upwardly revise their forecasts of fossil fuel demand.
  • Vast sums of investor money diverted from nuclear power plant construction to other alternative energy sources, such as wind, solar, and bio-fuels.

Impact on the U.S. Nuclear Industry

In the U.S., no new nuclear power plants have come online since 1974, largely because of the Three Mile Island disaster. And still, nuclear energy accounts for 20 percent of the nation’s electricity supplies.

One new nuclear reactor is due to start production next year, and another 16 reactors are expected by 2020. But some of those could now be delayed, and any new plans could be ditched.

What does all this mean for the immediate future?

Even before the earthquake struck Japan on Friday, the House of Representatives had scheduled hearings on nuclear energy for this week, and Energy Secretary Chu is expected to testify the day after tomorrow.

So you can expect the entire focus of the hearings to shift to the unfolding disaster in Japan, with serious questions raised about its implications.

Again, expect mounting political pressure to delay or cancel construction plans, followed by massive upward pressure on crude oil prices, commodity prices and global inflation.

And all this assumes the situation in Japan gets no worse!

If there’s an even larger catastrophe than what we’ve seen so far, all bets are off: There’s no financial or econometric model in the world that can forecast what the global consequences might be.

But that’s not the only reason I’m praying Japan will avert a bigger nuclear disaster.

A Chuo Line elevated train pulling into a Japan Railways (JR) station near the center of Tokyo.
A Chuo Line elevated train pulling into a Japan Railways (JR) station near the center of Tokyo.

The other reason is that our son Anthony — and many of our friends — live in Japan.

When the Big One struck on Friday, Anthony was on the Chuo Line, pulling into the Akihabara station in the center of Tokyo.

Ironically, I didn’t learn about his whereabouts through typical communications. Instead, it was in a Los Angeles Times article that I was reading online shortly after the quake.

In fact, just as I was wondering where Anthony might be, there he was, “talking” to me — and thousands of other LA Times readers — about the train rocking sharply back and forth, dust and small debris falling, people scrambling for the doorways, and aftershocks continuing every few minutes.

Now he’s safe in his apartment on the other side of town, but our concern has shifted to the explosions and meltdowns at the nuclear reactors in Fukushima, 175 miles to the northeast.

It seems that, at each new stage of the unfolding disaster, officials add another new layer of vague promises and reassurances, always seeking to minimize the danger.

Their actions, however, speak louder than any words:

At first, they delay any aggressive steps as long as possible. Then they resort to desperate, last-ditch measures, such as flooding the reactors with salt water, destroying them forever.

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At first, they evacuate only a few thousand residents in the immediate vicinity. Then, they evacuate hundreds of thousands.

They admit “minor meltdowns” are occurring, but fail to define what that means. A standard definition of “meltdown” is temperatures in the reactor core rising higher than 2,000 degrees Celsius, releasing dangerous levels of radiation into the atmosphere. And that’s precisely what has happened at the reactors in Fukushima, Japan. But how they manage to utter the word “meltdown” in the same breath as the word “minor” escapes me.

Prime Minister Naoto Kan declares that Japan is “facing its worst crisis in the 65 years since the end of World War II.” But still, neither he nor anyone in an official capacity seems willing to reveal any meaningful details.

The Japanese people are heroic in their preparedness, calm and stoicism. But government bureaucrats seem almost as concerned about information leaks as they are about radiation leaks.

We are not reassured.

Nor are investors who count on stable commodity prices. Indeed, it seems that …

Nearly every recent crisis or
global trend creates ever scarcer
natural resources and energy!

The unrest in the Middle East, which continues to deepen and spread, threatens the largest reserves of petroleum in the world. (See “Inflation surges! Silver near 31-year highs! Profit opportunities abound!“)

The disaster in Japan, which is far from over, could lead to massive political resistance against nuclear energy and far bigger demand for oil.

Most important, as we’ve stressed here continually, we are witnessing a long-term global shift of wealth and economic growth from the West to the East. Yet it’s in the East where we find the majority of the earth’s population, also driving up the demand for natural resources.

Everywhere, the upward pressure on prices is mounting.

My Recommendations:

  1. Keep most of your money safe in the strongest financial institutions you can find. (Stand by for a new Weiss Ratings press release on this subject.)
  2. Protect yourself against inflation with a stake in gold, using instruments like GLD.
  3. Plus, use any intermediate corrections to buy a stake in the most promising mining companies.

Good luck and God bless!

Martin

Read more here:
Why I Pray Japan Will Avert a Bigger Nuclear Disaster

Commodities, ETF, Mutual Fund, Uncategorized

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