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Forget most of what you may have heard or read in the financial press about the post-Katrina recovery. This is an unprecedented U.S. disaster that will be felt most acutely by the domestic U.S. economy, but it will have far-reaching global repercussions also.

As both Chicago Fed President Michael H. Moskow and CBO Director Douglas Holtz-Eakin make clear, the macroeconomic impact of this storm will be far greater than any prior hurricane on record.

To put the destruction into context, consider that the costs for rebuilding New Orleans and the surrounding areas will likely exceed those of rebuilding Chicago after the great fire; San Francisco after the 1906 earthquake; and New York and Washington D.C. after the Sept. 11 attacks -- combined. The economic costs are greater than the four worst metropolitan disasters in U.S. history, added together, and that's after adjusting for inflation.

I must admit I do not understand the thought process of those who downplay the significance of the loss of a major American city. Even worse from an economic standpoint, New Orleans is not only the nation's largest port -- it exports more than 52 million tons a year, while importing nearly 57 million tons -- but it is also its most important.

Several misinformed persons have even mentioned the disaster as a net economic positive. Despite what these bullish pundits are saying, the stimulus of rebuilding New Orleans will not outweigh the overall loss to the economy. As the parable of the broken window makes clear, any dollars spent rebuilding after Katrina are monies that would have otherwise been spent elsewhere. If not, we would simply level a different city each year and rebuild it from the ground up, all shiny and new. But it doesn't, and so we don't.

The repercussions of the Gulf tragedy will have effects beyond the economic damage: It will affect the markets, trade, national security, and the country's political agenda as well.

Katrina's Timing Mixed Blessing

The Gulf catastrophe came at a time when the consumer was already starting to look haggard: Pressured by high energy prices, squeezed by inflation and no gains in real wages for five years, and increasingly less able to convert home equity into spending cash, the consumer was beginning to look shopped out. (For an extensive look at the state of the consumer, see last week's discussion between Andrew Samwick, the former Chief Economist of the President's Council of Economic Advisors and myself).

The spike in gas prices last week saw fuel consumption drop 4%. That provides some insight into both the consumer and the cost of gasoline. $3 seems to be the tipping point that significantly affects consumer behavior. It also reveals that there is less room in family budgets than many had previously believed.

About 70% of the U.S. economy is consumer-based. If the corporate sector were more actively hiring or spending, perhaps this would matter less. Until that mix changes, my economic outlook remains guarded.

Yet at the same time, the market's internals and technicals have been quite healthy. This explains in part why the markets have proven so resilient lately. In the weeks leading up to Katrina, both the Dow and Nasdaq were making higher lows. The Nasdaq held critical support recently and bounced off of it. Redwood Technimentals Chief Strategist Kevin Lane notes, "It is hard to envision a harsh sell-off while the NYSE Composite Index is making new highs. All this recent activity suggests to us that we may be able to challenge the upper end of the range again." This despite the long-term economic damage Katrina has wrought.

How do we reconcile these two apparently opposed factors? Consider them over differing timelines: There is an increasing danger of economic deterioration over the longer term (12-24 months). In the shorter term (one to three months), the markets have enough strength to power higher.

Historical Comparisons

Many commentators have noted the market's impressive resilience in the face of adversity. This is not historically unprecedented. When the great San Francisco earthquake hit in April 18, 1906, it took the markets a few weeks to register the costs and economic impact. By May, the markets had fallen 10%. But the full impact was not well understood until the following year, leading to the Panic of 1907, and the Dow took a nearly 50% hit during that period. History buffs will recall the Panic and its aftermath were the impetus for the creation of the Federal Reserve System. ( This paper details the economic impact of 1906 Earthquake.)

For those who note that communications in 1906 were somewhat slower than they are in modern times, consider a more recent example: The 1973 OPEC oil embargo. For several weeks, markets all but ignored the issue, as U.S. stock markets traded sideways. Investors eventually recognized the enormity of what the embargo meant to the U.S., and stocks sold off.

The key to each of these events was not the speed of communications. Rather, it was the gradual comprehension by investors of the enormity of what occurred. Investors are emotional creatures who often react to visceral evidence, rather than relying on contemplative analysis. That may be why an act of nature like Katrina is perceived so differently than a man-made disaster, such as the Sept. 11 terrorist attacks.

The immediate reaction to what amounted to a declaration of war was a fierce selloff once the markets re-opened post Sept. 11. Katrina, while an extraordinarily strong hurricane, was merely part of the ordinary course of weather events. Comprehending the differing economic impacts -- and shifting one's viewpoint accordingly -- is hardly an easy task.

Expectations for the Future

The impact of Katrina for investors will be felt broadly -- eventually. I expect earnings will take a hit in the fourth quarter of this year. But as the enormity of this tragedy seeps into investors' consciousness, some of the enthusiasm for risk may wane.

So for the second time this year, I am changing my expectations for the market for the calendar year. Back in June, I had stated that I thought the markets would rally in the second half of the year before topping out in the November/December timeframe.

That perspective remains unchanged, but my expectations of what the top might look like has shifted. What we've seen since then was a low set in May, followed by a sizable rally. The endgame for this cyclical bull now looks less and less like a blow-off top. In its stead, a more rounded top -- a grinding affair, slower, and far less dramatic than previously expected -- is increasingly likely. The markets may still reach their highs about the same time (let's call it December), but it will be a more subdued and subtle event, as the impact of Katrina makes its way into the equity markets.

This bull is now less likely to end with a bang, and more likely a whimper.
Barry Ritholtz is chief market strategist for Maxim Group, where his research and market analysis are used by the firm's portfolio managers and clients in the U.S., Europe and Japan. He also publishes The Big Picture, his macro perspectives on the economy and geopolitics, entertainment and technology industries, and is a member of the board of directors of Burst.com, a streaming media software company. At the time of publication, Ritholtz had no position in any securities mentioned in this column, although holdings can change at any time. Under no circumstances does the information in this column represent a recommendation to buy or sell stocks. Ritholtz appreciates your feedback; click here to send him an email.

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