Monday, September 12, 2005

Anybody Remember the Hurricane of '38?

But while rebuilding hurricane-ravaged regions will eventually mean more orders, it's also bringing more immediate supply glitches and rising prices, particularly for petroleum-based raw materials.

Certain manufacturers are building inventory of steel, plastic resins and cardboard boxes and such stockpiling could eventually lead to even higher prices in the near term. The result is an uneven picture, as certain manufacturers gear up to produce more, while also facing negative cost and supply-related fallout from the storm.

—Wall Street Journal, 9/12/05

The bond market’s immediate reaction to Hurricane Katrina was a big sigh of relief.

Not, however, because the human catastrophe of lives lost and homes destroyed might be less than feared—no, that's not what the bond market worries about.

The big sigh of relief came because the only thing the bond market worries about, economic growth, suddenly looked imperiled by the massive structural damage to the country’s infrastructure.

Bonds soared on the short and long end as the bond market decided that by destroying great parts of the Gulf Coast, Katrina would, therefore, cause the Federal Reserve to ease up on its previously relentless program of 25-basis-points-a-meeting-until-it-hurts.

But the bond guys weren't reading their history.

The Hurriance of '38 decimated Long Island and hit a large part of New England with 121 mile an hour steady winds (gusts up to 180 MPH), killed 700 and left 60,000 homeless.

And the rebuilding effort from that hurricane helped start bringing New England out of the worst of the Great Depression (of course, when World War II came along, that recovery turned into a boom).

Katrina was bigger, and the rebuilding efforts will be enormous—already the Federal Budget Deficit is being revised upwards by one-third thanks to Katrina, and companies ranging from Masco to Massey Coal have discussed the highly inflationary impact of Katrina on their own operations.

If I were a bond guy, I’d read today’s Wall Street Journal very carefully before paying up for sub-4% 2 year notes.

And also dust off some history books.

Jeff Matthews
I Am Not Making This Up

The content contained in this blog represents the opinions of Mr. Matthews. Mr. Matthews also acts as an advisor and clients advised by Mr. Matthews may hold either long or short positions in securities of various companies discussed in the blog based upon Mr. Matthews' recommendations.


EricBrock said...

I can certainly sympathize with the notion that natural disasters are stimulative, though it is hard, of course, to extrapolate outcomes from prior situations that may share some commonality.

I wonder what else we have in common with that time frame?

I do not believe we had anything close to the massive credit bubble we see today. In fact, I think by 1938 time the country had more than worked off the speculative credit overhang from the 10+ years prior.

Clearly government stimulus can be accretive to growth and, perhaps inflationary pressures. However, those pressures may in turn quickly lead to slower demand from the rest of the overlevered economy.

Given the weak consumer balance sheets, its hard to think we have a sustainable inflation problem as consumers would have great difficulty financing the direct costs of price increases as well as the higher financing costs themselves.

Sith Lord said...

The Sith Lord wants to remind all the people of New Orleans that they can rebuild their homes using surplus building materials from OVERSTOCK.COM.

We can all thank Patrick B for making the world a better place.


Evil Master Manipulator

bsilly0 said...


I dusted of some history books...

I found it interesting that after 1938, the yield on the ten year treasury dropped from 2.5% and pretty much stayed below that level until 1950 - right through the world war and beyond. Economic growth and inflation be damned.