People queue outside a supermarket in downtown Sendai, Japan, Thursday, March 17, 2011. (AP Photo/Mark Baker)
How you can pick Terry’s brain
In this column, I’ll respond to your most frequently asked questions regularly. Of course, you always can submit individual questions on my Sun-Times blog, reached on the home page at www.TerrySavage.com.
Updated: May 3, 2013 12:14PM
QHow will the devastation in Japan impact the global economy, the markets, and my financial future?
A. This is a question I’ve received many times in the past few days. While acknowledging that it’s more than a bit cynical to even ask the question in the midst of all the horror and suffering in Japan, we must also acknowledge that the global markets are responding to that question every day.
The markets were poised to take the earthquake, and even the tsunami, in stride. But the potential meltdown of three nuclear reactors is something that engenders panic in even the most stalwart bulls. That’s the emotional component of the market that always pushes prices to extremes — especially in the absence of hard, quantifiable measurements of the extent of the disaster.
Economic, financial issues
Japan is the world’s third-largest economy — and the impact on global growth is the key ingredient in the markets’ downfall. It’s wise to keep in mind, though, that eventually Japan will turn to rebuilding its economy, increasing global demand for raw materials, cement, and oil.
But in the near term, prices of those commodities are lower because the slowdown will reduce demand. Notably gold, which usually rises during fearful times, has fallen sharply — some say because the Japanese central bank may be selling its gold holdings to get yen that will be needed to finance the recovery. That is tempered by Wednesday’s report of a sharp rise in producer prices, especially for food and energy — a sign of incipient inflation.
Japan is also the second-largest holder of U.S. debt securities. If it has to sell dollars to bring yen home for the rebuilding process, that could put some upward pressure on U.S. interest rates. That has been offset by scared money moving into the U.S. Treasury debt market, pushing rates down. However the yen has traded below 80 — a new high value for the decade against the dollar.
Global energy needs
The events in Japan are seen as a setback for nuclear energy, reminding us that the dangers of a meltdown are dramatic. Much as a plane crash makes everyone a bit queasy about flying the next day, these events must be taken in context. Earthquakes of that magnitude are extreme events, and the reactors in question faced a double shock — from the quakes and from the resultant loss of power because of the tsunami.
If the United States, or the rest of the world, were to rule out the use of nuclear power for electricity it would put huge demands on the oil and coal markets, long before enough solar or wind power could be relied upon to make up the loss of nuclear power. Uranium stocks have fallen sharply, with some down as much as 30 percent in the past two days, while shares of coal producers are higher.
The stock market
The U.S. stock market has dropped sharply following the earthquake — and certainly some U. S. companies will be negatively impacted. But others may find increased business — either substituting their products for some that were imported from Japan (think automobiles, auto parts, consumer electronics, and chips) or by helping in the rebuilding process. But global companies that do business in Japan ( Coca-Cola, McDonald’s) could see a loss of revenues, causing losses in those stocks.
Earth-moving equipment and replacement parts for factories may now be shipped from the United States to Japan, as demand grows. Or Japanese companies that are unable to recover quickly, may move production to other countries, including the U.S. Increased production here of everything from computer chips to cars here could create jobs, and rebuild our own industry. Yet tech stocks have been losers on fears of supply disruptions.
Where will this all end? It’s impossible to predict. Japan is a strong country, but one with an aging population and a huge government debt relative to its economic output. However, since Japan represents only about 10 percent of the global economy, there is no reason for American consumers — or investors — to panic.
The best emotions we can have right now are a profound sense of respect for the things in the world that we cannot control, along with an appreciation for the American spirit of generosity that has helped so many people and countries recover from adversity. And that’s the Savage Truth.