The Next Big Bad Thing

Today's trivia question: Who's ever heard of the Reelfoot Rift? Answer to follow.

I'm always amazed how everybody but me knows what the next big bad thing {NBBT} will be. I'm talking here about the next horrible event that either the media, Wall Street or the Federal Reserve says will bring dire effects to the markets, the economy or both. I thought for the fun of it I'd list a few that come to mind starting with the ones that have been around for years.

First there's the consumer. He or she is always spending too much money or not enough. My take is that the average family has a better idea about their checkbooks than most economists want to give them. This also is tied into the national angst about our low savings rate, although why people are going to be excited about investing in assets paying less than 2% is beyond me. A cousin of the consumer is anxiety related to monthly unemployment numbers. Either too many people have jobs and therefore interest rates have to go up or more are being laid off thus ushering in fear about a slowing economy. We also can add to this list of worries the current price of oil.
Next there's the deficit-State & Federal-but since nobody really knows how to define it or how to measure it against the nation's net wealth it's hard to get our hands around its actual effects.
Then rounding out the perennial list is Social Security (one of my concerns as noted in earlier posts) but not a problem that will likely affect the overall economy in the next 2 years.

To this list we can add worrisome current fads.

Hedge Funds-(usually shorthand for private limited partnerships) I'm not really sure why they raise the bile of the press.
The cost of housing. The financial press chatters incessantly about this. We may or may not be in a housing bubble in parts of LA, Boston, Chicago or Miami. My guess is I could find all sorts of places in the country where prices haven't shot to the moon. Besides I can take you to areas of Chicago & Miami that have missed the housing boom.

These things are all areas to be concerned about and certainly should not be ignored. But they are probably not NBBT. The reason being that we are already on guard for these events (or things just like them) and they are eventually discounted into share prices. Yet way too much ink is spilled and airtime wasted covering NBBT. You want proof? Watch an hour's worth of CNBC and I'll guarantee you that they will devote at least one segment to any of the above mentioned stories.

There is a NBBT out there though. Unfortunately I don't know what it is and you probably don't either. There will always be NBBT. It may be in its genesis phase at the moment or it may be festering underneath the surface close to exploding. Portfolio insurance was part of the 87 market crash's NBBT. Iraq's invasion of Kuwait was the NBBT of 90-91. LTCM was the NBBT of the 98 financial crisis and we're still dealing with the repercussions of the ultimate NBBT, the 9-11 attacks. (A subject of a future post.) NBBTs are events that are either impossible to game into the system (meaning it is almost impossible to discount the risk and result of some hypothetical event into security prices) or they are considered so remote as to be beyond the realm of current possibility. Stocks for example don't discount a large asteroid vaporizing the earth from space in the near future. They probably do to a certain extent discount future terrorist attacks.

Here is the kind of thing that is NBBT which gets me back to our trivia question. The Reelfoot Rift, A.K.A. the New Madrid Fault is a crack 3-15 miles under the earth tracing a SW-NE line between St. Louis and Memphis. It caused in 1811-1812 a series of earthquakes estimated to have been stronger than the tremblers that rocked San Francisco in 1906, Loma Prieta, San Francisco in 1989 and Northridge, California in 1994. The average of these 3 was 7.5 on the Richter Scale. New Madrid's series of quakes is estimated to have been north of an 8.5. The geology in our midwest is different than California so an earthquake here would be felt far from its epicenter. The 1812 quake which is estimated to have been a 9.0 on that same scale, was felt as far away as Boston and changed the course of the Mississippi River for a time. Its history is largely unknown because it happened when few people lived in the area. By comparison, the Sumatran quake that spawned last December's tsunamis was a 9.0 The death toll from that event is over 300,000.

Most of the lower midwest isn't constructed to withstand a similar event even though there is a greater awareness about earthquakes today. A 9.0 event in this area would have the potential to be the greatest natural disaster ever recorded in the US and would be economically devastating. The loss of life could dwarf anything witnessed in modern American history. But here's the rub. New Madrid might bounce tomorrow or in 10,000 years. You can't go to ground and wait for an event that may not occur in your life.

So as investors we have to understand that NBBTs happen just as the media loves doomsday stories. They don't have to be as extensive a scenario as I've described. But the ones incessantly talked about today are probably not the ones that will cost you money down the road. And there's nothing we can do right now to plan for the ones that will. Because I don't know what the next NBBT will be....and neither does anybody else.