Wednesday, November 18, 2015

Terrorism is Only one of Several threats to Global Economy

* Terrorism attacks only one of many potential catalysts that could bring down global economy

* Prior attacks in 2004 and 2005 didn't happen under the same economic conditions

* Stocks associated with tourism are taking the initial and biggest hits

* There is more fragility in the global economy than many think

There are obvious short-term repercussions from the terrorist attacks in Paris, as most companies serving in the tourism sector will experience a downturn, as evidenced by the stock market opening this week, where numerous companies were taking a hit.

Among the tourism sectors under pressure were travel agencies, airlines, cruise lines and hotels.

What isn't as obvious is the potential for more attacks which could cause some real problems in the industry over the long term; especially if important tourist destinations are hit.

All that said, there is a more ominous impact from the attacks, which highlight the fragility of the global economy in general, and how not only attacks like these, but a number of disruptions could be the catalyst many believe is coming that will cause it to collapse.

Goldman Sachs (GS) has went so far as to say the impact on the market should be "short-lived," as if this can be isolated from the other many factors weighing on the economy.

Sure, if nothing else happens, that may be true in the short run, but further out there are too many other factors that could cause disruption if they continue to weaken; things like rising interest rates, more surprise crises, defaults reaching an inflexion point, significant drop in consumer spending, and outside factors such as weather, which may be partly causing the slowdown in retail, and is disappointing on the energy side because of it being warmer than normal.

Terrorism risk

We've had risk associated with terrorism for a long time, and that has been priced into the market for years. What is different this time around is the rise of ISIS and the refugees crowding into Europe.

The problem is there has been no mechanism in place, or the will to introduce one in order to properly vet the refugees, so an unknown number of terrorists have entered the region, which could result in long-term disruption if the number of attacks increase.

This is far more than a nuisance or the loss of life; it could crush the economy of the Eurozone if people stop visiting the region and spending money. There is also growing nationalism which could cost enormous unrest as resistance to the flood of refugees and others grows.

Investors have to now start analyzing Europe and immigration as the top threat to the economy and stability of the EU, and the companies doing business there. The risk has definitely increased over the last 6 months, and it will probably get worse.

Past terrorist risks and the economy

One of the things Goldman Sachs used to make its determination there was only short-term risk was a reference to past attacks, where it didn't have a long-term effect on the economy. Those were attacks in Madrid in 2004 and London in 2005.

I take issue with that because from 2003 to 2007 there had been extraordinary financial gains. That economic scenario isn't the one we face today. And as already mentioned, the migration issue at that time is nothing compared to what it is at this time.

If we were to take into account the Paris attacks as some type of unusual, one-time event, than it would make sense to assume it would only be a temporary drag on an economy or industries associated with the attacks. I don't believe we can make that assumption any longer, and for that reason, even when taking terrorism in and of itself, consider it far more disruptive than it has been in the past.

Add to that the underlying global economic challenges, and these types of events could do some serious damage, especially if people no longer view Europe as a vacation destination.

Tourism segments and companies to look at

Most if not all sectors related to tourism were under pressure to start the week. There are some more vulnerable than others.

For example, online travel agencies like Priceline Group Inc. (PCLN) and Expedia Inc. (EXPE) have and will continue to experience some downward pressure on their share price, and when thinking it through, that is the one legitimate segment of the tourism market that may only experience a short-term impact.

I draw that conclusion from the likelihood of people decide to not go to Europe to visit, they can easily change their plans and visit a region they consider safer. It's doubtful people will fore go vacation travel altogether unless the perception grows it's not safe to travel internationally.

But even there people in the U.S. could divert their destinations to domestic attractions.

Other segments of the tourism market don't have that option. If people stop flying to Europe, the airlines serving those markets would take a big hit. In the U.S. people could choose to drive instead of fly if they decide to visit somewhere closer to home. That means there is no guarantee someone cancelling flying to Europe would then fly domestically; it's not a direct correlation. 

There will already be a small disruption for those airlines serving Europe, and if things deteriorate in France and spread to other parts of the EU, it is going to have a significant impact on airlines.

Cruise lines were also lower on Monday, with Carnival (CCL), Norwegian Cruise Line Holdings Ltd. (NCLH) and Royal Caribbean Cruises Ltd. (RCL) all trading down. These shouldn't be affected as much as airlines, but when people feel uneasy about travel, it dramatically affects their plans, even if there seems to be less chance of a threat.

Terrorism produces fear, and fearful people are less inclined to travel, no matter what the means used.

A final sector to look at is hotel and resorts, which is also trading down. These would be more geographic-specific, as I don't see people in the U.S. not staying in a hotel because of unrest or attacks in Europe.

That could change if something major were to happen domestically, but until and if it does, the risk to the industry would be in line with the amount of exposure to Europe.
Destinations like theme parks in Europe will also be slower, which could hurt a company like Disney (DIS) in France, but any theme park in Europe in general.

In the tourism industry in general it couldn't have happened at a worse time, as consumer spending appears to be in the early stage of decline, and this could increase the pace of the downward trend if it's the beginning of an austerity trend because of high debt levels among U.S. consumers.

Add to all of this the businesses that serve the industry, including those providing travel supplies, food, drinks and the many other elements included with the experience.

Fragile economy

I've never believed there has been much in the way of an economic recovery, and have stated it numerous times. There are too many major risks that could bring it down quickly if something were to go wrong and create a domino effect.

A couple of those is the performance of a few major tech companies that have created the illusion of a robust S&P 500. Of course they count in the performance, but it masks the weaknesses of he remaining companies, which haven't done that well.

The other and more important area is with consumer spending, which while doing decently recently, has been fairly subdued for some time, and the primary impetus there has been debt-fueled auto sales.

Consumer debt is at all time highs, and this puts consumers in a difficult situation if anything disrupts the slow-growing U.S. economy. Taking out these auto sales, and the remaining real sales are actually down.

Just these two areas on their own point to the overall weakness of the U.S. economy, which if either of them decline in growth, will have a devastating impact on the economy.

Anything that creates an atmosphere of economic fear, which always produces austerity, will be a catalyst that will finally reveal the many cracks in the U.S. economy. When it reaches the masses the momentum will already be in motion. All we can do at that time is hold on and wait it out.


The attacks in Paris can't be considered some type of event that can be disassociated from the economy. That's because it is one part of many that are in play, and with the fragility of the global economy, anything at this time could be a trigger that causes all of it to slow down.

This is already happening in Asia and Western countries with a heavy reliance on commodities or raw materials to generate revenue.

A hit to consumer spending, which may already be showing signs of slowing down, would be the final catalyst that may result in a global recession.

We are not operating under the same economic conditions when some of the prior terrorist attacks happened, and are much more vulnerable to disruption if it results in consumers staying out of Europe.

Terrorism may not, in and of itself, be the major event or series of events that bring the economy down, but they could be one of several, which when combined, cause some serious economic damage.

That's how I assess the threat, and it's only a matter of time until more than one crumble, which is when I see the next recession arriving.

1 comment:

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