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The meltdown syndrome

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by Peter Switzer

The best advice for market players won’t come from someone like me with an academic economics background who has spent 35 years watching and analysing financial markets. What we need is an engineer who can tell us what will happen to those reactors in Japan.

So as investors, what is the course of action? You could go to cash and that option would be a smart one if we see a nuclear reactor meltdown in Japan, which could lead to a market meltdown.

However, if the reactor’s deterioration is contained, then the market will roar back on the basis that many oversold fearing the worst-case scenario.

It’s interesting that the Dow Jones was down around 300 points, or two per cent, but ended 137.74 points, or 1.15 per cent, lower and that’s US investors betting there’s no nuclear meltdown and the market comes back, but it’s still a gamble.

Global impact

The irony is that if the positive outcome prevails, the analysis which applies for Australians as a consequence of the Queensland floods will apply, but with steroids, in the Japanese case. That is, the natural disaster leads to a slump in economic growth for a few quarters but there would be a surge back when the reconstruction phase starts.

The world economy would also suffer a slowdown in growth as the world’s third-biggest economy struggles to clean up its infrastructure and rebuild its broken business, and the spirit of the people. But it would re-emerge and growth would flow to Japan and then the global economy.

Right now the world economy is expected to grow by 4.3 per cent in 2011 going up to 4.8 per cent in 2012. All of this was believable given the comeback of the US economy, which again came out with good industrial production news out of the state of New York and higher builder confidence readings.

Also, the Fed had a good economic view on the US economy at the FOMC meeting and continues to be committed to keeping interest rates low.

Keep an eye on the news

But all of this is economic and markets stuff, when the important news ultimately is going to be what’s going on with those reactors. If man wins over mother nature, then the market will roar back.

The brave who go long this market will make a killing or will be ‘killed’. The cautious long-term investor might just have to go along for the ride and cross his or her fingers.

Important information:This content has been prepared without taking account of the objectives, financial situation or needs of any particular individual. It does not constitute formal advice. For this reason, any individual should, before acting, consider the appropriateness of the information, having regard to the individual’s objectives, financial situation and needs and, if necessary, seek appropriate professional advice.

Watch more from Peter on SWITZER TV.

Published on: Wednesday, March 16, 2011

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