We make decisions daily in our investing life to make money knowing that there is a potential to lose money. Seldom do we anticipate the possibility of losing the entire investment, and when we do consider this possibility, generally we think of it as gambling (wagering what we can afford to lose). What we don't necessarily view as gambling may appear to have been that after disasters decimate one or more investments in our portfolio. Three such disasters (at least three) occurred over the past twelve months: Costra Concordia (just the past week), Fukishima (over ten months ago) and the European sovereign debt mess which continued to build over the entire period and threatens to invoke further fall-out in banking. Let's discuss some general characteristics of these three one at a time - and develop a common thread.
Costa Concordia has been the headlines for the past week. Public opinion (and the operating company Costa Crociere S.p.A, an operating unit of Carnival - NYSE:CCL) has focused its blame on a sea captain's violating convention and his subsequent dereliction of duty. Yet the determining event for this disaster occurred many years ago - in the design process the modern cruise ship.
A significant hull ripping event (ala Titantic) was discounted - the primary design consideration became fire. Designers knew they could not quickly disembark all passengers and crew in an emergency simply because of the greatly expanded size of the population aboard cruise ships. Instead, it was decided to create a cruise ship fortress with defensive systems - where the cruise ship itself was the lifeboat. Modern ships are reliant on ballast and systems to maintain zero list. Modern ballast systems require active measures - no power, no available measures. Any moderate list will make the lifeboats on the high side of the vessel unusable.
Again we are reminded that the natural position of any ship is at the bottom of the sea, and the primary design consideration is that design cannot be completely relied upon to prevent a ship from sinking quickly. Quick disembarkation of crew and passengers must remain a primary design consideration.
The meltdown of the Fukushima Nuclear Power Plant suffers from the same type of design consideration errors. While the media pumps out managed news vilifying Tokyo Power for not anticipating a tsunami, the determining event happened 50 years ago. Man designed something that needed active measures to shutdown. The design basis should have been that the plant safely shuts itself down in a failure - with or without power, with or without man's intervention.
We are reminded that no matter how hard man tries to anticipate potential failures, it must be assumed the worst postulated failure is possible, and that it is likely the failure tree is not correctly described. Design must not only be based on safe failure, but the realization that no matter the precautions - a complete failure could eventually occur.
Yet Europe and its monetary union:
- is designed with little consideration of a failure event,
- lacking even rudimentary safety systems,
- has no real captain (with the crew members arguing about what to do), and
- enough noises coming from below decks to make even an idiot understand all is not well.
Europe appears to be walking along a precipice without a safety net - a sure formula for an uncontrollable event. Are we properly understanding the failure tree, and all the European contagion risks involved.
Are we about to get another reminder that improper design can trigger an explosive failure?
Economic News this Week:
The Econintersect economic forecast for January 2012 (first article under author's photo) continues to predict slowly improving economic growth.
ECRI has called a recession. Their data looks ahead 6 months and the bottom line for them is that a recession is a certainty. The size and depth is unknown but the recession was to hit before the end of 1Q2012. Although Econintersect's January forecast is not recessionary (one month look-ahead) - we take this recession call seriously. This week ECRI's WLI index value of -7.5 returned to the range channel between -7.4 and -7.8 it has been in for eight of the last ten weeks. This index is indicating the economy six months from today will be weaker.
Initial unemployment claims fell a massive 50,000 (from 402,000 which was revised up from a preliminary 399,000 last week) to 352,000. Historically, claims exceeding 400,000 per week usually occur when employment gains are less than the workforce growth, resulting in an increasing unemployment rate (background here and here). The real gauge – the 4 week moving average – fell slightly to 379,000. Because of the noise (week-to-week movements from abnormal events), the 4-week average remains the reliable gauge.
Overall the data this week continued to confirm a weakly improving economy. The data releases seem to go in waves - good weeks, less good weeks. The data this week was less good. No data released this week has any economically intuitive capability (forward looking) - all are rear view looks at the economy.
Bankruptcies this Week: Buffet Restaurants, John D. Oil & Gas, Eastman-Kodak
Click here for an interactive version of the following table with active links.