News

Thursday, November 01, 2012

Page 1

Daily Comment

Louis-Vincent Gave
lgave@gavekal.com

Sandys Impact
We have been told that, had the storm been called Sanchez (the NY Jets
quarterback) instead of Sandy, it most likely would never have made a
touchdown in New York City. But with the hurricane hitting the Big Bagel
head on, and grinding the North-East of the US to a halt, it makes sense to
think of the negative impacts, as well as look for potential silver linings:

The destruction to physical

capital is a crippling blow

The first economic negative is obviously the destruction of physical

capitalwith estimates in the US$50bn range. Still, if these predictions

are approximately right then this does not constitute a crippling blow
for the US economy or for a region which is among the wealthiest in
the country (by contrast Katrina wreaked about US$145bn worth of
damage in one of the poorest parts of the US).
The second negative is the more enduring drag on growth resulting

from storm damage. Can New York City really get back to work with a
subway system that remains severely impaired? Around 4.3mn New
Yorkers use these arteries every day. With the facility still flooded,
there is a risk that New York turns into a Mumbai-like traffic jam
Another concern must be the longer lasting impact on gasoline prices;

Disruption to New York Citys

vital transport arteries may be
a drag on growth

and, in turn, affect broad US consumption. In yesterdays trading

session, gasoline prices surged 9% at the start of the day, only to finish
up 0.5% as news that the North-Eastern refineries which had been shut
down started to re-open. So hopefully Sandys impact on overall energy
prices will remain fairly muted. If so, then it seems likely that,
sequentially, inflation rates will continue to ease up from here.
If silver linings can be found in such a traumatic event, and staying away
from Frederic Bastiats broken-window fallacy, we would highlight three
potential positive economic effects:

Checking The Boxes

Our short take on the latest news
Fact

A sustained spike in gasoline

prices would dampen
consumption

www.gavekal.com

US Chicago PMI rose

slightly to 49.9 in Oct, from
49.7

Consensus belief

Worse than expected 51.0

GK Research reaction
Matches lackluster readings
from several regional surveys;
big ISM index out tonight

China manufacturing PMI As expected; rst reading

rose to 50.2 in Oct, from 49.8 above 50 in three months

Growth data is stabilizing

around the world; not
rebounding yet, but stable

South Korea exports rose

+1.2% YoY in October, from
2.0%

Better than the expected

0.7%

Exports to middle east have

been strong, and now China
and US demand is stabilizing

EMU unemployment rose

Worse than the expected
to a record 11.6% in Sept, up
hold at 11.5%
from 11.5%

Meanwhile, EMU CPI growth

slowed to 2.5%more room
for further ECB activism

GaveKal Ltd. Redistribution prohibited without prior consent. This report has been prepared by GaveKal mainly for
distribution to market professionals and institutional investors. It should not be considered as investment advice or a
recommendation to purchase any particular security, strategy or investment product. References to specic securities and
issuers are not intended to be, and should not be interpreted as, recommendations to purchase or sell such securities.
Information contained herein has been obtained from sources believed to be reliable, but not guaranteed.

Thursday, November 01, 2012

Page 2

Sandys Impact

The storm makes is even more

likely that the scal cli is
softened or postponed

The storm makes it more likely that the fiscal cliff gets postponed or

significantly softened. After all, which congressman or senator will

want to be seen blocking bills designed to help the devastated region.
Of course, the bills will have to be better designed and implemented
than those that followed Katrina (when our favorite Senator,
Oklahomas Dr No Tom Coburn, raised a stink about Alaskas
bridge to nowhere). In reality, FEMA and other storm-related
spending will be tiny compared to total outlays and is unrelated to the
larger fiscal cliff issuewhich, at least initially, is mostly about tax
hikes. Indeed, politicians now have one more excuse to avoid much or
all of the fiscal cliff. They can tell voters: When we established these
spending cuts and tax hikes we had no idea that the east coast would be
licking its wounds after a terrible storm. Now is the time to rebuild.
The government fiscal contraction should be postponed for at least 6
months, maybe a year. Hence, in the short term at least, expect
continued super easy monetary policy combined with a neutral to
expansionary fiscal stance.
Another, longer-term, silver lining is that the storm will offer the

New York can use this tragedy

as a spur to upgrade needed
infrastructure improvements

New York area is a knowledge

intensive economy so the
impact on growth from
physical disturbance may be
limited

www.gavekal.com

greater New York area an opportunity to upgrade an infrastructure

backbone that was starting to look well past its expiration date.
Finally, the storm hit the part of the US whose GDP is most likely the

lightest; i.e., when Katrina hit New Orleans, refineries were destroyed,
the traffic of goods along the Mississippi River (the USs major artery)
was disturbed for weeks which led to price spikes and an inventory pile
up. By contrast, New York Citys main comparative advantage is in the
generation of services (financial, cultural, entertainment, etc). And
so while getting to work may be a hassle for weeks to come, the overall
disruption to the US economy may not be that large.
None of this analysis is to belittle the suffering many people are
experiencing right now. Every one of the 70 deaths reported so far in the
US is a personal tragedy. And there is no doubt that devastation on this
scale cannot be seen as good news. We also feel sorry for all of our family
and friends who live in the North-East, some of whom no doubt face days,
if not weeks, of clean-ups, hardship getting into work, school program
disturbances, etc. We wish everyone the best in their efforts to get back to
normal.