Saturday, September 10, 2005

Part III of Katrina's Impact: Mitya's Brain

Katrina has really set my brain back a few. This was intended to be a distressed view of Katrina. But you don't need a Phd to figure that out. United may not exit until Q2 2006 (at the earliest). Delta will file. Independence Air is just trying to figure out if its even worth filing. And Northwest will file. The USAir / AmWest merger will turn out to be dud. The only thing I really wonder about is how will GE cope? That is a lot of engines and a lot of loans. Katrina could have some significant impact on them, but I give it low odds. Of course a flood of chapter 7 and chapter 13 filings designed to beat the mid-October change over will occur just as Katrina's waters subside. But then again, we already knew all of that.

What I can't get my mind around, and what sends my brain into constant shivering, is what happens in 2006? From my perspective, the housing "bubble" is finished. The last day pre-Katrina marks the market's crest. That means China is finished. Which means Japan is finished. Which means we are finished. Well, you see the problem. Let's look at it again.

Chriss has called for a cut to US domestic 2006 GDP growth towards something like 3.2%. This is almost a full point below some reputable forecasts of even a few weeks ago. But Sharpshanks has a guess of a half-point or so off Asian GDP. I presume the discrepancy is because of the new found faith in Asian domestic deman. Hogwash!

Asia, all of Asia, is still an export economy. It is a levered play on the US. If you increase forecasts in the US, you better increase them more in Asia, or else. And the same goes for decreases, indeed, it is moreso the case there. To be fair, Sharpshanks and Chriss work at very different places and their views weren't intended to mesh. But this problem is not just found here, it is found in every macro view I see published anywhere! The whole world is making the same mistake. That is point numero uno.

Point numero dos is that no one is mentioning the really horrible impact of Katrina. Not the dead. Not the destruction. The deficit! We're headed for another huge deficit spending year here, and in 2006. I predict '05 and '06 will be the biggest budget buster years of all time. You can't have two wars and a major regional reconstruction effort going on at the same time without spending gobs of money. As an aside, this makes Former Secretary Snow's statement about permanent tax relief not only the most fiscally irresponsible statement of all time, it is equally absurd. What this economy is going to need to get through is a tax-hike, if anything. That's how bad life is right now.

Point three is, no politician is stupid enough to raise taxes anytime in the near future. They'll likely cut them more. Greenspan, who is perhaps wondering what to do for the first time in a long while, will be forced to continue tightening up to 4%. Then he'll retire off into the sunset, and the best housing market in history will ride with him. What happens then? The "debt liquidation" Greenspan has been chatting about recently. People like me like these circumstances, but that is only because it will increase distress for hitherto untouched industries. The rest of the world will hate it. Katrina makes Greenspan's "debt liquidation" inevitable, deep, and soon.

Point four is that as the housing market goes, so goes China. Lots of Asian equity players will be caught in this, and the potential for a domino effect is large. I'm actually surprised Sharpshanks didn't mention this as we had a conversation about this just a few weeks ago. Perhaps it wasn't too memorable for him, but it was for me. Without fast appreciating assets, consumers will face more expensive items, which will lower prices on imported goods. But with the worst energy crisis in thirty years, pricing power ain't what it used to be. Squeeze Asia a little more.

Oh yes, Katrina is a bitch. A first class bitch. With every major airline except two in chapter 11, profit pressure on corporate America, half of the southeast in chapter 7, government spending like there's no tomorrow, current account deficits exploding again, interest rates rising, and energy costs soaring, Katrina has really fucked the US economy.

Now, on the flipside, Chriss's wonderful point about the softer gentler Katrina. The one who decreases demand, and thereby eventually decreases energy costs. That Katrina, the one caressing me now, is a wonderful seductive lover. She could help the last half of '06 look like paradise for the US economy, low energy costs, lowered equity values, fresh credit availability, and lowering interest rates, and perhaps, shrinking deficits. This Katrina, America will love. And like any good lover, her bad moods, as bad as they may be, will only be temporary, and her good moods may last a long, long time.

Cut a point off of full year GDP for the US, and a point and a half for Asian GDP. Throw in a deep, burning, painful recession that lasts only a quarter and a half. Bake with a simmering economy in the last half of '06, and enjoy.