March 15th, 2011 10:50 AM by Nick Rapplean
Wow! The 6-month T-bill pays a puny 0.13% at this point, which doesn’t come near covering the erosion wrought by inflation. The 10-year T-note stands rather tentatively at 3.35%. And mortgage rates edged down a few basis points last week (measured before the effects of the Japanese earthquake/tsunami/nuclear crisis had begun to make themselves felt).
And what of those effects? We can see that the economy was in its forward-foot-shuffle mode when the quake hit, but all bets are off after the quake. As I write these words, Japanese authorities are reporting that they’re no longer confident they can cool the fuel rods with ocean water at one of the reactors. The looming possibility is a melt-down that results in an uncontrolled release of radioactivity into the air.
The world waits tensely. Radioactive materials in the air could travel far from Japan. Europeans are worried that they could reach their countries and, though the Pacific Ocean is a lot of water to cross, it is not impossible that small amounts of radioactivity will make it all the way to American shores.
The Japanese Central Bank, already working with its own version of QE2 in efforts to stimulate the Japanese economy, has announced that it will double the size of the current programs, spending 10 trillion yen to purchase government and corporate bonds.
The staggering damage to existing buildings, manufacturing plants, infrastructure, and residential properties has investors running to safe havens and expressing great fear about how long it will take for Japan to recover. This easily explains the 0.13% 6-month T-bill. And the fears in the markets explain, too, today’s ailing stock market (where the Dow Jones Industrial Average is currently down 0.69%).
Notice, though, that we’re not looking at a rout. Unsurprisingly, gold fetches a higher price per ounce (about $1426) and crude oil is priced at $113.40 a barrel. Watch you local gas stations for high per-gallon prices (again). But nothing is rising to the sky nor plunging to unexpected lows.
It is simply too soon to make even the most tentative forecasts regarding what the quake will mean to Japan’s economy, or to ours. We can very likely suspect that interest rates will trend a bit lower for a time, that the price of oil will continue to rise and, perhaps conversely, a good deal of money will be spent inside and outside of Japan on reconstruction and on protecting the populations from radioactivity, and that could be good for the economy temporarily.
Most investors will probably huddle in the shelter of safe havens (like Treasury securities) and show very little desire to make major financial decisions for some time to come—even including the decision to finance or refinance a home.
One possibly important element in this situation: We have moved away from viewing our homes as investments that will pay solid dividends very quickly…to viewing them in more traditional terms. As shelters, where we live our best lives, where we do all that is most important to us. Current global conditions will intensify this psychological shift.
But keep in mind as well the worsening credit situation among countries like Ireland, Spain, Portugal and Greece, and the increasingly evident weakness in countries like Italy. When the earthquake headlines have ceased, we will probably be reading about new structural changes to the way European countries are helping one another avoid defaults—and Nouriel Roubini predicts that we’ll be reading about how the packages offer up too little, too late.
Very, very tense times. Yet there is a recovery slowly underway for all of that.