More Consequences To Come From Katrina

FORECASTS & TRENDS E-LETTER
By Gary D. Halbert
September 13, 2005

1. My Thoughts On The Katrina Disaster

2. Where Were The Buses In New Orleans?

3. Gulf Coast Ports Could Tank The Economy

4. The Economists Just Don’t Get It

5. More Negative Consequences Of Katrina

6. Is This A Sell Signal For Real Estate?

Introduction

Two weeks after Hurricane Katrina, you would think that the worst news is over. Yet people are still being rescued along the Gulf Coast and in New Orleans in particular. The body count of those who lost their lives is still not known, yet the number of dead in New Orleans appears to be much lower than earlier predictions.

The “blame-game” continues with state and local officials blaming the federal government, and the Feds blaming state and local officials. The Democrats, predictably, are blaming President Bush for just about everything, but that seems to be backfiring. The truth is, there is plenty of blame to go around.

As bad as the situation is along the Gulf Coast, there could be much more negative fallout from Hurricane Katrina. The ports along the middle Gulf Coast are still not open. It will be months before most are back to 50% operational. Vessel traffic on the Mississippi is still restricted. As discussed in my August 30 E-Letter, this could have very negative consequences for the national economy. In this E-Letter, we will focus more closely on that issue.

I continue to believe that you should lower your exposure to stocks and equity mutual funds, as I recommended in my August 30 E-Letter. I also think you should consider lowering your exposure to bonds as well, for reasons I will outline as we go along. And lastly, I also recommend that you consider selling any real estate that you own strictly for investment purposes. I will tell you why near the end of this week’s discussion.

Roll up your sleeves, and let’s get started.

Thoughts On The Katrina Disaster

First off, our hearts and prayers continue to go out to the victims of Hurricane Katrina, America’s worst national disaster in history. It has been heartwarming to see the massive national outpouring of support. I am particularly proud of Texas, which has opened its arms to tens of thousands of evacuees. As of the end of last week, the American Red Cross had received over $500 million in cash donations from the public. Way to go!! Please help however you can.

Second, it is disgusting that at a time when all politicians should be standing shoulder-to-shoulder, and doing everything in their power to expedite the search-and-rescue efforts and in sending needed resources to the region, the political situation has devolved into the “blame-game.” Both political parties are guilty of this. But I’m getting ahead of myself.

The hurricane disaster unfolded so quickly and so dramatically, and knocked out power and communications in the entire middle Gulf Coast, that it is difficult for most of us to know just exactly what happened when. However, numerous websites have provided very specific daily (and even hourly) timelines of the events that occurred before and after Katrina devastated the Gulf Coast. I have studied several of these timelines closely. I have included a link below.

Clearly, there is plenty of blame to go around for ALL government agencies – federal, state and local. Louisiana Governor Blanco and New Orleans Mayor Nagin blamed the Bush administration and FEMA for not providing enough relief. The Bush administration blamed the governor and the mayor for mishandling the preparation and the evacuation prior to the storm’s landfall.

The fact is, everyone screwed up to one degree or another. I will leave the parsing of the correct amount of blame on the correct heads to others in the investigations that are to follow. But after reading the various timelines on the tragedy (including some that are slanted so as to lay the blame at one political party or the other), I have just one main question:

WHY WERE THERE NO BUSES TO TAKE THE EVACUEES OUT?

The New Orleans disaster emergency plan, which reportedly had a trial run last year to rave reviews, clearly enunciated that the city would have to evacuate people via buses to higher ground. There were over 10,000 buses in the city, more than enough to evacuate all those who did not have transportation. The residents of New Orleans were warned in advance to leave the city, and most did. But it was well known that thousands of inner-city residents would have to be transported out via public means (ie – buses).

When New Orleans Mayor Nagin ordered the mandatory evacuation, emergency workers told residents to go to the Superdome and other specific points where they would be evacuated by buses to other locations around the area and in the state.

BUT THE BUSES NEVER CAME. THE QUESTION IS, WHY NOT?

Why did Mayor Nagin never order the buses? We do not know the answer, but a thinking (ie – nonpartisan) person would have to assume that there was a valid reason why the buses were never ordered in to evacuate those people.

There are several possibilities; in no particular order: 1) Mayor Nagin panicked and forgot (not likely); 2) the bus drivers had already evacuated; 3) the people with access to the bus keys had already evacuated, even if the mayor could have commandeered volunteer drivers; or 4) they had no pre-planned destinations or shelters to send such a large number of people.

To date, we still do not know why there were no buses. What we do know is that there was plenty of warning and time to evacuate all that needed transportation. To me, this should be the first thing to be investigated.

More Questions Than Answers

As the pumping of New Orleans continues (and will continue for weeks, if not months), the list of unanswered questions gets longer and longer. The obvious question is whether to rebuild New Orleans or not. The politicians, including President Bush, all assure us that New Orleans will be rebuilt, and it certainly appears that Congress is prepared to fork over the hundreds of billions that will surely be required to do so.

But there is a major problem. The apprx. 500,000 residents of metropolitan New Orleans are gone, and many will never return. Hundreds, if not thousands, of New Orleans business owners will never be able to rebuild their businesses.

We have apprx. 4,000 evacuees here in Austin. The caregivers and Red Cross officials here tell the local media that well over half of the evacuees do not want to return to New Orleans. They want to stay here in Austin or go live with family somewhere else in the country. New Orleans is a city without a population.

This is a serious issue and one which must be considered carefully before we spend the hundreds of billions it will take to rebuild New Orleans.

Largest Seaport In America Still Closed

Apprx. 25% of this nation’s imports and exports go in and out through the Port of New Orleans and the surrounding ports. At this point, it looks like most of the port facilities remain largely intact, with no major structural damage. The Mississippi River did not jump its banks as many had feared. No huge ships sank in the river making it unnavigable. That’s the good news.

The question is, when will the ports reopen? The best assessment of the port problem I’ve seen was written by our old friend Dr. George Friedman of Stratfor.com. Here are some excerpts from his latest analysis (note that this analysis is very sobering, but you need to read it):

QUOTE: “The ports of South Louisiana and New Orleans, which run north and south of the city, are as important today as at any point during the history of the republic. On its own merit, the Port of South Louisiana is the largest port in the United States by tonnage and the fifth-largest in the world. It exports more than 52 million tons a year, of which more than half are agricultural products -- corn, soybeans and so on. A larger proportion of U.S. agriculture flows out of the port. Almost as much cargo, nearly 57 million tons, comes in through the port -- including not only crude oil, but chemicals and fertilizers, coal, concrete and so on.

A simple way to think about the New Orleans port complex is that it is where the bulk commodities of agriculture go out to the world and the bulk commodities of industrialism come in. The commodity chain of the global food industry starts here, as does that of American industrialism. If these facilities are gone, more than the price of goods shifts: The very physical structure of the global economy would have to be reshaped. Consider the impact to the U.S. auto industry if steel doesn't come up the river, or the effect on global food supplies if U.S. corn and soybeans don't get to the markets.

The problem is that there are no good shipping alternatives. River transport is cheap, and most of the commodities we are discussing have low value-to-weight ratios. The U.S. transport system was built on the assumption that these commodities would travel to and from New Orleans by barge, where they would be loaded on ships or offloaded. Apart from port capacity elsewhere in the United States, there aren't enough trucks or rail cars to handle the long-distance hauling of these enormous quantities -- assuming for the moment that the economics could be managed, which they can't be.

The focus in the media has been on the oil industry in Louisiana and Mississippi. This is not a trivial question, but in a certain sense, it is dwarfed by the shipping issue. First, Louisiana is the source of about 15 percent of U.S.-produced petroleum, much of it from the Gulf. The local refineries are critical to American infrastructure. Were all of these facilities to be lost, the effect on the price of oil worldwide would be extraordinarily painful. If the river itself became unnavigable or if the ports are no longer functioning, however, the impact to the wider economy would be significantly more severe. In a sense, there is more flexibility in oil than in the physical transport of these other commodities.

There is clearly good news as information comes in. By all accounts, the Louisiana Offshore Oil Port, which services supertankers in the Gulf, is intact. Port Fourchon, which is the center of extraction operations in the Gulf, has sustained damage but is recoverable. The status of the oil platforms is unclear and it is not known what the underwater systems look like, but on the surface, the damage -- though not trivial -- is manageable.

The news on the river is also far better than would have been expected on Sunday. The river has not changed its course. No major levees containing the river have burst. The Mississippi apparently has not silted up to such an extent that massive dredging would be required to render it navigable. Even the port facilities, although apparently damaged in many places and destroyed in few, are still there. The river, as transport corridor, has not been lost.

What has been lost is the city of New Orleans and many of the residential suburban areas around it. The population has fled, leaving behind a relatively small number of people in desperate straits. Some are dead, others are dying, and the magnitude of the situation dwarfs the resources required to ameliorate their condition. But it is not the population that is trapped in New Orleans that is of geopolitical significance: It is the population that has left and has nowhere to return to.

The oil fields, pipelines and ports required a skilled workforce in order to operate. That workforce requires homes. They require stores to buy food and other supplies. Hospitals and doctors. Schools for their children. In other words, in order to operate the facilities critical to the United States, you need a workforce to do it -- and that workforce is gone. Unlike in other disasters, that workforce cannot return to the region because they have no place to live. New Orleans is gone, and the metropolitan area surrounding New Orleans is either gone or so badly damaged that it will not be inhabitable for a long time.

It is possible to jury-rig around this problem for a short time. But the fact is that those who have left the area have gone to live with relatives and friends. Those who had the ability to leave also had networks of relationships and resources to manage their exile. But those resources are not infinite -- and as it becomes apparent that these people will not be returning to New Orleans any time soon, they will be enrolling their children in new schools, finding new jobs, finding new accommodations. If they have any insurance money coming, they will collect it. If they have none, then -- whatever emotional connections they may have to their home -- their economic connection to it has been severed. In a very short time, these people will be making decisions that will start to reshape population and workforce patterns in the region.

A city is a complex and ongoing process - one that requires physical infrastructure to support the people who live in it and people to operate that physical infrastructure. We don't simply mean power plants or sewage treatment facilities, although they are critical. Someone has to be able to sell a bottle of milk or a new shirt. Someone has to be able to repair a car or do surgery. And the people who do those things, along with the infrastructure that supports them, are gone -- and they are not coming back anytime soon.

It is in this sense, then, that it seems almost as if a nuclear weapon went off in New Orleans. The people mostly have fled rather than died, but they are gone. Not all of the facilities are destroyed, but most are. It appears to us that New Orleans and its environs have passed the point of recoverability. The area can recover, to be sure, but only with the commitment of massive resources from outside -- and those resources would always be at risk to another Katrina.

The displacement of population is the crisis that New Orleans faces. It is also a national crisis, because the largest port in the United States cannot function without a city around it. The physical and business processes of a port cannot occur in a ghost town, and right now, that is what New Orleans is. It is not about the facilities, and it is not about the oil. It is about the loss of a city's population and the paralysis of the largest port in the United States.” END QUOTE.

New Orleans port officials said last week that they are not exactly sure when the port will reopen. Their biggest problem, as Dr. Friedman points out above, is that they do not have the people to operate the facilities.

Gary LaGrange, the director of the Port of New Orleans offered this prediction over the weekend: “We think that within a month we can be back at 30 percent. In three months we can probably be back at 70 percent to 80 percent. We think that in four to five months we'll be back to 100 percent.” This is serious!

The Economists Don’t Get It

As Dr. Friedman pointed out in an article I reprinted in my August 30 E-Letter, a tremendous amount of economic activity is centered on the Mississippi River. In fact, the amount of commerce flowing up and down the river dwarfs that of all other transportation systems in the United States - including freight shipped by rail and highway. If the river cannot be used, dire consequences will hit the U.S. economy.

Yet the latest survey of economists indicates anything but dire consequences. Last week, the Wall Street Journal polled 56 top economists and corporate forecasters. Their average forecast now is for growth of 3.6% in the 3Q, down from 4.2% a month ago. For the 4Q, the average estimate is now 3.2%, down from 3.6% a month ago.

With the ports around New Orleans are still closed for the most part, these predictions look very optimistic. In my view, skyrocketing oil and gasoline prices – alone - could shave that much off of GDP. With the ports operating well below capacity for the next 4-6 months, we could shave another 1% or more off of GDP, putting it down in the 2-2½% range. Even that might be optimistic.

If GDP should fall to 2-2½%, can you just imagine how the Democrats and the media will go ballistic? This is not good news for Republicans going into the mid-term elections in 2006!

More Consequences Of Katrina To Come

As a nation, I do not believe most Americans realize that we may be about to go through a potentially very dicey time in the economy. Unless the ports and the Mississippi can get back up to speed fairly quickly, we may be facing numerous shortages of commodities, building materials, steel, etc., etc.

Shortages mean higher prices! Higher prices mean higher inflation. The Consumer Price Index in July jumped by 0.5% and was up 3.2% above July of last year. That number is higher than the Fed wants. While many of us have called on the Fed to leave interest rates unchanged at its September 20 FOMC meeting, in the wake of the hurricane disaster, we should not be surprised if rates go up again.

I don’t know about you, but none of the above sounds good to me for the economy or for the stock and bond markets.

In my August 30 E-Letter, I suggested that those of you who moved to a fully-invested position in stocks and equity mutual funds back in early 2003, when I recommended it, now take profits and move to an underweight position. I still recommend that.

Stocks have surprised just about everyone since the hurricane. The fact that stocks didn’t move lower after the hurricane should be an indication of strength and of better things to come. However, as I pointed out above, I do not believe that most Americans understand that we are likely facing some serious economic difficulties in the months ahead.

I don’t think it has sunk into the investment markets yet either. I still expect stocks to come under pressure later this year. I hope I am wrong.

At this point, my advice is to be under-invested in stocks and equity mutual funds, unless your money is managed by professionals that have systems to get out of the market (or hedge) should the markets go south as I expect.

Bonds won’t be immune either and, in fact, have already started to decline. If we get shortages and rising prices, the bond markets could fall even further. Bonds don’t like inflation. I would also be under-invested in bonds as well as stocks, at least for the next few months, until we see all of the fallout from the hurricane.

Your reaction might well be: Underweight in stocks and underweight in bonds… so what do I do with my money? For one, cash is better than losses. For two, this is an excellent time to consider “active” professional money managers – in stocks AND bonds who can move out of the market (or hedge) during down periods.

Consider Selling Real Estate

I am not a real estate expert by any means, although I have done very well in my few ventures into commercial and residential property. In keeping with my mantra of “professional management,” the lion’s share of the money I have made in real estate has come from investing with professionals who knew what they were doing.

There are signs that the boom in home prices is leveling off, certainly in some parts of the country. It remains to be seen if the housing bubble will end with prices going sideways for a while, or if the bubble bursts. That is a possibility, of course, but the timing is impossible to know, although I expect we will know sooner rather than later.

Here is my point: If you own real estate as an investment, now may be a very good time to sell and take some profits. As we all know, real estate prices have skyrocketed in the last few years, along with home prices. In some ways, the real estate market is just looking for a reason to go down. The fallout from the hurricane, as discussed above, could well be the trigger.

Do not read me wrong. I am NOT suggesting that you sell your primary residence. I have never in 28 years of writing recommended that people sell their primary home and rent. For people who sold their homes five and 10 years ago – thanks to fear-mongering by the doom-and-gloom crowd – it has been a disaster. They missed the best real estate market in decades.

But many readers of this E-Letter own real estate and real estate funds that they bought simply as investments, to diversify their portfolios, in the hope that prices would rise. And they have, spectacularly in most cases. If you have owned real estate as an investment for long, it is likely that you have seen tremendous increases in value. Now may be the time to take profits.

Unlike stocks, you cannot hedge real estate. There is no futures market in real estate. The only way to lock in profits is to sell. If we experience the problems discussed above related to the hurricane, this could well spell the end of the real estate boom of the last 5-10 years.

As always, I could be wrong. But I would seriously recommend that you consider reducing your exposure to speculative real estate right away. It never hurts to take a profit.

That’s it for this week. Let’s hope and pray that forthcoming news is better than I expect.

Very best regards,

Gary D. Halbert

SPECIAL ARTICLES:

Shipping of the nation depends on New Orleans.
http://www.chron.com/cs/CDA/ssistory.mpl/business/3347443

A hurricane of blame.
http://www.boston.com/news/globe/editorial_opinion/oped/articles/2005/09/12/a_hurricane_of_blame/

Welfare state failed the poor in New Orleans.
http://www.opinionjournal.com/columnists/bminiter/?id=110007250