Don't worry about Japan. They are a resilient people and will be just fine. But the global equity markets are overvalued by 25% to 30%. When I first heard this take of Grantham Mayo's Ben Inker on the nuclear disaster, I raised my eyebrows.
The meltdown at the Fukushima Daiichi nuclear plant has prompted many commentators to plant their feet firmly in their mouths. Witness CNBC's Larry Kudlow who put it all in perspective last Friday by noting that while it is a human tragedy, at least the U.S. equity market was up that day. That didn't last long. Another commentator in our office believes the whole disaster is being sensationalized by the liberal media hawking its anti-nuclear-power agenda. Really? Does he include Matt Drudge, who together with ABC News, is having a field day with the disaster, in the liberal media?
To be fair, GMO's Inker believes it is important "to separate the human cost" from the long-term economic cost. "However horrific the human cost, economically, most disasters are hard to spot in the data," Inker, who serves as head of asset allocation at GMO, writes. "GDP does not necessarily fall, and if it does, the bounce-back is usually quite rapid. Given the long duration nature of equities, where the bulk of value comes from the present value of dividends that will be paid ten or more years in the future," GMO doubts the quake will have a long-term material effect on the fair value of Japanese equities.
I hope the brave Japanese engineers sacrificing their lives succeed more than I hope Inker is right. His contention is that there are "excesses from the previous credit boom that have yet to be fully purged from the financial system."
Global equities have "every right to fall significantly, with or without a large unforeseen catalyst," he said. Maybe so, but it seems far too early to reach any conclusions about the impact of this horrible disaster, as Mohammed El-Erian writes.
Before the earthquake, GMO considered Japan to have one of the cheaper stock markets in the developed world, and as Inker notes, it is 20% cheaper now. Then he goes on to acknowledge that Japan may experience inadequate electricity generating capacity for years to come. Who knows what other problems will emerge in the coming weeks.
Other voices in the commentariat have proved equally bizarre. The March 17 New York Times ran an op-ed piece by Waseda University professor Hiroki Azuma saying how the crisis was helping the Japanese people regain the sense of pride they lost after defeat in World War II. Certainly, admirable behavior has been on display there over the last week, but I'm not at all certain that the earthquake and subsequent reconstruction will turn out to be the perfect prescription to jolt this insular nation out of two decades of malaise and stagnation. Right now the problem reminds one of the seemingly endless agony of the BP oil spill or the Iranian hostage crisis, only with a higher human cost. I hope I'm wrong and the optimists are right.