Assessing Japan

My hedge fund was long Japanese equities through the ETF -symbol EWJ going into the earthquake. We sold out on the next open because I was pleasantly surprised the Japanese market was not even down more than it was, we sold for less than a 2% loss from the previous close. I thought the market had completely underestimated the risk of the hit on nuclear reactors knowing that so soon after the event, no accurate assessment would be forthcoming and politicians and utility officials would down play the seriousness particularly in light of uncertain facts as not to cause a panic. That is not mention the risk the situation could always run away from them and it looks like I was right.

The problem is financial market commentary in situations like this seems cold and cruel and to ignore the human suffering that has occured and it is. Think of the stock market’s normal reaction to these types of events, after a selloff they usually rise soon after on the notion that destruction from earthquakes, hurricanes etc is good because it means money will be spent re-building so it increases economic activity. So cement companies and cooper companies make more money, never mind the people who have lost their lives and homes.

I just wanted to caveat the above, so I didn’t appear insensitive, because any economic analysis of these situations is by its nature callous. 

The problem with comparing this disaster in Japan to other disasters is that this one is an outlier. We have no experience with a disaster like this – Chernobyl was in an isolated area of the old USSR – which is not the same economic consequence of Japan as Japan is the third largest economy in the world and the USSR was a Communist country whose economic impact was not close to what Japan is today. Additionally, can you name one thing that the USSR supplied other than vodka and caviar that was purchased in the West unlike more important things like cars, car parts, consumer electronics and semiconductors that the West gets from Japan. Anyone driving a Russian car outside of Russia, even today? Not only that the site of Chernobyl was far away removed from even what economic activity actually occurred in the USSR.

Aside from Chernobyl and Three Mile Island fell far short of the what appears to be happening in densely populated Japan, all other disasters including ones I lived through like the Northridge earthquake did not have the same total disaster potential of a nuclear meltdown. And to be frank about Katrina that human toll was far worse than the business toll – the important oil and petroleum industry located in the New Orleans was damaged but not catastrophically and not beyond being repaired. If you have a meltdown in Japan similar to Chernobyl there will be no quick fix, not in our lifetimes.  Also keep in mind while no the focus is on a single nuclear site in Japan, there were many more that took a hit and there was no way to instantly assess how many were damaged unlike Three Mile or Chernobyl which were single sites – which is why the decision to sell was the prudent one.