Economic Effects of Disasters (or the Lack Thereof)


July 1, 2011
Written by: Sam Fitch

With everything that is going on in the world, I thought this was a timely article.  It is easy to believe that natural disasters are also problematic for the stock market.  While this is true at certain times….it may not be true all of the time.  Below is a recent article by Bob Veres, who has been a watchdog of the financial planning industry for over 20 years.

Title:  Modeling Disaster

Author:  Bob Veres, Inside Information

May 2011

What, exactly, IS the global economic (or investment) impact of the Japanese earthquake, or the no-fly zone over Libya, or the expected bail-out of Portugal and write-downs on Irish bank debt?  It appears that nobody really knows. 

Nicholas Bloom of Stanford University has reported his latest research, where he and a group of graduate students looked at the behavior of companies in the face of 17 different "uncertainty shocks," ranging from the Cuban Missile Crisis to the 2008 credit crunch.  He found that industrial production typically falls by about 1% in the first months after an uncertainty shock--an effect similar to a seven percentage point hike in interest rates. 

But, interestingly, industrial production has tended to surge six months after the uncertainty shock, and these heightened levels of production can last for more than two years.  We really don't have a good economic model for evaluating the aftermath of disasters, except that they seem to have an odd tendency to surprise on the upside once the shock has worn off.  

Source: http://www.economist.com/node/18389167

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