Japanese Meltdown Will Inhibit Recovery

Modern economic theory implies spending for any reason is good.  The rebuilding following a disaster would logically be a plus economically.  Destruction triggers rebuilding – an economically positive event.

Immediately following an economic disaster, there is dislocation.  Modern supply chains are disrupted.  Transport is problematic.  Like a tsunami, the inter-linkage of modern supply chains ripple through all products.  Japan is an exporting nation.  There are products made only in Japan, or disruption of production of a product where Japan is a significant producer, or the need for Japan to import a product normally not traded internationally.  In other words, a ripple will go through availability and prices – both positive and negative.

The global supply chains will adapt and improvise.  What will go on inside Japan will be different.

Japan will have lost forever six nuclear power plants units.  A loss of six nukes leaves a huge hole in a nation’s ability to produce energy.  It will take many years to replace permanently – and the short term solution is building conventional fossil power plants.  Manufacturing needs energy.  But I fear energy may be a small component of the fallout for this event.

In the short term, this is a true black swan event for investors.

Modern nuke design currently on the drawing boards is presumably fail safe.  On the other hand, almost all existing worldwide plants require active measures (core cooling) to shut down the plant.  Having been a start-up engineer on a GE Mark1 nuke – I have not heard the type of information I would need to make an assessment on how this crisis will unfold.  But what images I see indicate man is no longer able to control the events at some of the units.

Throwing water on an overheated plant provides steam as a carrier to spread radioactive contamination.  Plant operators are already selecting the best of the terrible options available.  Observation tells that we are far beyond the design solutions available to cool the core.  Hail Mary plays are in progress.

The plant systems themselves are fairly robust – but conditions in the plant with heat, water and radiation have been unmonitored – and we have heard that operators have no clue if the monitoring systems are reading correctly.  Status is unknown.  Let me assure you, if your monitoring systems are suspect – the control systems are suspect.  The plant likely requires electrical jumpers to actuate cooling systems which must be installed by humans in a radiated environment.

Even if pumps can start, what about the operated valves?  Are the correct ones open?  Are pressure levels too high for actuation?  If the remote operated valves cannot cycle, can human’s get close enough to the valves to manually cycle?  What are the conditions in the piping in the suppression pools post venting – which is the Achilles Heel of Mark 1’s?  The suppression pools for the runaway reactors maybe dry due to a rupture.

So many options are available if the operators have electric power and radiation is low and access to the plant was not restrained.  Radiation levels alone have removed most options from the table as crews cannot spend enough time in the plant to execute modifications.  All the core cooling systems are closed loop.  There is likely debris in these loops if reports of meltdown is true – and this debris will likely take out the pumps if they start.  At this point, the systems need modification to open these cooling loops directly to the sea – it is one of the better terrible options.

The systems now require some modifications to bring the plants under control – and that means humans must be able to work in the reactor building – and possibly some time inside of the primary containment structure.  This does not seem likely based on the commentary and pictures.

Likely, the current thinking may be towards building a Chernobyl type sarcophagus – a concrete coffin.   How do you build one without killing those who build it?

Further, it is sad the spent fuel rods are kept in the plant (due to resistance to reprocessing by the greens) and will increase the potential for radiation release during the disaster – and make subsequent cleanup more difficult.  This thought continues to rattle around in my brain – clean up of a radiation contaminated environment is slow.  At this point, I am beginning to lean towards a very slow cleanup and reconstruction.

Investors are too optimistic on Japan’s future in the next 6 months to a year.  The situation, based on current wisdom, will never be as bad as Chernobyl, but it is already worse than Three Mile Island because of 6 units in close proximation.

Certainly, over the next few years, Japanese GDP will rise caused by the reconstruction.  GDP theory is that building things – regardless of reason or usefulness – is good.  This reconstruction flies in the face of the basic rationale of GDP which is intended to count productive use of the economy.  The only productive use is the slice of the rebuilding which is an improvement over the old.

Money spent is money spent.  The economy, in a broader sense – is simply money flows.  Money moving is good for business – productive or not.

Japan, however, is not suffering from structural unemployment – but suffering from massive sovereign debt and deflation.  For now, this disaster will not help the ills facing the pre-disaster Japanese economy.

But money flows are money flows – and money flowing is the real economy, productive or not.

The question: Is what is good for business good for the economy?  Whatever the answer, in the medium term – disasters are good for business after absorbing the initial losses.

With the loss of life and hardships the Japanese citizens now face – it is hard to see any economic good coming out of this disaster.

Economic News this Week:

Econintersect’s economic forecast for March 2011 points to a moderately improving economy with all segments of its non-monetary index positive.  This week the Weekly Leading Index (WLI) from ECRI improved from an upwardly revised 6.8%  to 7.1%.  This level implies the business conditions six months from now will be approximately the same or slightly improved compared to today.

Initial unemployment claims in this week’s release dropped slightly.  The data for the last two months as been quite noisy, and it remains
important to follow the four week moving average for analysis of unemployment to smooth out the reporting idiosyncrasies.  Overall, the loss of jobs is improving – and is now roughly the same as mid-2008.

The data released this week was positive and consistent with Econintersect’s January, February and March forecasts of slightly improving economic conditions overall.  The economy, similar to this period last year at this time, is gaining strength.

Weekly Economic Release Scorecard:

Item Headline Analysis
February Leading Economic Indicator Up Not Indicating real economy dynamics
March Philly Fed Survey Up New Orders at record levels
February Industrial Production Down In this case down is up – manufacturing improved
February Consumer Price Index Up 2.1% Energy & food driving forces
February Producer Price Index Up 5.6% Again driven by food and energy
February New Housing Permits Down The data is bad and the trend remains down
February Sea Container Counts Up Although up, data is much less good in February
February Import/Export Prices Up USA is exporting inflation
January Home Prices Down CoreLogic says prices fell 5.7%
March Empire State Survey Up Everyone’s eyes are on Japan
Exchange Rate Appreciations Currency appreciations can cure global imbalances
Global Crisis What we think are important relate to energy
January JOLTS Shows why January Jobs Report was so bad
Oil Prices How Libyan unrest will play out in energy prices
Dividend Paying Stocks How dividends stabilize portfolio returns
Market Volatility Jeff Miller questions if it Is time to head to the door?
U.S. Equities Eric McCurdy says market broke support levels
India Ajay Shay suggests how to break bad governance
MERS Crisis William Black points out unintended consequences of mortgage industry actions
U.S. Dollar Michael Pettis discusses the future of the world reserve currency
Economic Theory L Randall Wray discusses reasons economics has gone astray

Bankruptcies this Week: None

Failed Banks this Week: None