FYI | Mar 23 2011
– Recent threats and events have had a noticeable impact on US consumers appetite for discretionary durable goods
– Surveys by the Consumer Metrics Institute show another decline in spending was occurring prior to events in Japan
– Is there a parallel between human errors made at Chernobyl and Fed policies post the GFC?
News And The Consumer, Reflections On Chernobyl And The Economy
By Consumer Metrics Institute
During the past week we have again witnessed the extraordinary effect that major news events can have on "real-time" consumer demand for discretionary durable goods. On Monday March 14, 2011 our Weighted Composite Index set a new one-day record low of 89.06 (surpassing the similarly news-impacted prior record low of 89.43 set on Wednesday November 5, 2008 — the day following the U.S. 2008 presidential election), only to rebound over the next 6 days. We had witnessed a similar 10-day 5% dip in 2005 coincident with Hurricane Katrina (although at that time from a base level above 106), and we have no doubt that — if our data went back to 2001 — 9-11 would be the point of reference for scale and duration of such events.
The tsunami induced downturn can be seen in the daily chart of our Weighted Composite Index:
as well as the weekly chart:
and even in our 91-day trailing "quarter" Daily Growth Index, which had already turned lower again in late January before sharply accelerating that decline over the past week:
Again, our "Contraction Watch" (which follows the Daily Growth Index shown above and compares it on a day-by-day basis with the same index during the dip created by the "Great Recession") is perhaps the best way to visualize what has been happening with the consumers that we monitor, and that chart is still not showing any signs of a sustainable consumer driven "recovery":
When looking at the above charts there are two key points to remember:
– This depression of consumer demand in the U.S. is at this point a purely psychological effect — caused exclusively by empathy or distraction. There have not yet been any major economic consequences that have washed-up on U.S. shores. Those will surely follow as global supply chain disruptions begin to take their toll.
– The renewed downturn in our data commenced in late January (probably in concert with rising fuel and food prices), nearly 6 weeks before the Sendai earthquake and tsunami. If this truly was a "Black Swan," then it merely joined a flock of already dirty birds.
Chernobyl and the Economy
The recent nuclear emergencies in Sendai have drawn media comparisons to Chernobyl — although the causes, character and harm (to-date) of the two events are vastly different. However, when reflecting on the lessons of Chernobyl, at the Consumer Metrics Institute we can't help but think about the economy.
The Chernobyl reactor design had several critical and counter-intuitive characteristics that, when coupled with an inadequately trained operating staff and a lax safety culture, resulted in a 100% man-made disaster:
– The reactor used graphite to amplify the nuclear reaction and water to slow it down, meaning that the reactor increased power exponentially when a portion of the water coolant turned to steam — leading in turn to more steam "voids" and more power in a dangerous feed-back loop. (Most other reactors, including those at Sendai, inversely use water instead of graphite to maintain the critical chain reaction, with the loss of water actually quenching the reaction rather than amplifying it — until the loss of cooling becomes the more critical problem.)
– At low power levels the reactor tended to accumulate a fission by-product, xenon-135, which acts as a neutron absorber and slows the reaction down even further. This accumulation of a reaction moderating gas at low levels resulted in the counter-intuitive situation where the reactor was actually less stable at low power levels than when operating at full power.
– The seven meter long boron control rods used to shut down the reactor had 1.3 meters of graphite at their leading edge — meaning that while being inserted the control rods actually increased the reaction rate while the first 1.3 meters of control rod was passing through the core. Again, a counter-intuitive situation where the "shut down" process would initially cause a surge of power before the reaction was quenched.
The accident occurred during an experiment to test a new emergency shutdown process that would provide an alternative source of power for the coolant pumps while the backup diesel generators (similar to those damaged by the tsunami at Sendai) came up to speed. As a consequence of scheduling delays the experiment was being conducted at 01:23 a.m. by night shift operators that lacked adequate training in the experiment itself, let alone full understanding of the operational characteristics of the reactor under abnormal conditions.
The reactor was running at dangerously unstable low levels of power when the experiment commenced, and the experiment itself — when coupled with several operator errors — put the reactor into a supercritical state. When the operators finally realized the severity of a number of warning signals — signals that they had previously ignored — they initiated an emergency "SCRAM" shutdown process. That process quickly moved 1.3 meters of additional reaction amplifying graphite through the reaction zone, flash vaporizing the coolant into a steam explosion, and 3 seconds later triggering a nuclear explosion roughly 1/1,000,000th the power of a WWII era atomic bomb.
Why is this story relevant to the current U.S. economy?
The Federal Reserve has been conducting experiments of unprecedented scale on a non-linear and often counter-intuitive economy. Indications are that their traditional means of controlling (e.g. stimulating) the economy no longer work. And recent experiments in quantitative easing have caused bond rates to move in counter-intuitive directions. This raises several relevant questions:
– Can too much liquidity cause the economy to become unstable (e.g. creating asset bubbles)?
– Can the Federal Reserve deflate those asset bubbles without harming most Americans?
– Is there some level of liquidity that generates a dangerously supercritical economy that can tip into either deflation or hyperinflation at the slightest exogenous shock?
The operators at Chernobyl did not fully understand that hitting the "SCRAM" button to shut the reactor down would ultimately be their death sentence. They simply did not understand the complexity of their situation.
Let's hope Mr. Bernanke fully understands his.
Technical limitations
If you are reading this story through a third party distribution channel and you cannot see charts included, we apologise, but technical limitations are to blame.
