Flirting With Disaster

For people caught up in the catastrophe, circumstances changed instantly and tragically. But what's obvious from a video clip in retrospect is less apparent to the distracted bystanders in harm's way.

Onlookers who waited for more information, pondered their options or trusted in the low statistical probability of a tsunami unwittingly lowered their survival odds.

Those who ran first and asked questions later generally boosted theirs. This group included a 10-year-old British girl who recalled a timely geography lesson and Indonesian islanders who wisely followed ancestral lore.

Financial crises are like a tsunami in this sense: They're hard to spot and harder still to escape through prompt action. Inertia is a powerful force, whether you're staring at a wall of water or a torrent of depreciating dollars. There's never enough information, never quite enough reason to change course, until it's too late. As with a tidal wave, the true dimensions of a financial crisis are hard to gauge except at great remove from the disaster.

But if investors feared every distant tremor, they'd never dip their toes into the market's surf. You've got Iraq, the war on terror and the semiannual interest-rate scare, not to mention budget deficits, the tanking dollar, the Social Security crisis, the health-care crisis, the corporate-pension crisis, the executive-compensation crisis and the good old housing bubble. You could argue that this surplus of crises is itself a crisis worthy of a special on CNN, and you'd probably get no argument from Time Warner (TWX).

In that spirit, here's a brief and highly subjective field guide to the coming year's potential pitfalls. Some are hardly crises in a true sense of the term, more like long-term trends that can pass for a crisis on a slow news day. Other outcomes are so dire that only Dick Cheney has the security clearances needed to discuss them without coming off sounding like an alarmist crank. And he still can't pull it off.

Each entry is ranked according to its media appeal, potential market impact and long-term significance, on a scale of one (piddling) to four (epic). With any luck, this will prove to be an academic exercise. The idea is to assess risks and scan the exit routes, just in case.

Terrorism
Media appeal: * * *
Market impact: * *
Long-term significance: * * * *

The media is starting to feel foolish after crying wolf at John Ashcroft's behest throughout 2004. Al Qaeda now presumed to lack operational muscle in the U.S. given its inability to hit any of this year's high-value targets, such as presidential conventions, international summits and crowded public celebrations.

On the other hand, no one quite believes government claims to have neutralized two-thirds of the group's leadership. These are, after all, the same people who thought WMDs in Iraq were a slam dunk, to be followed by a victory parade. The CIA is engrossed in a management purge under a controversial new director, while his predecessor has just been inexplicably honored by the president he misled.

Add a star to the market impact estimate for a terror attack on U.S. soil. Add two stars for any attack, home or abroad, employing chemicals, germs or radiation. Investors who sold the S&P 500 at the market close of the first trading day after 9/11 dodged an additional 7% decline over the four ensuing trading sessions. They then had four more days to buy their stake back at a lower price.

Weak Dollar
Media appeal: * * *
Market impact: * *
Long-term significance: *

This is one of those trends masquerading as a crisis. We love to force politicians into humiliating contortions, and having Treasury Secretary John Snow regularly swear fealty to a strong dollar certainly qualifies as sport.

The Asian central banks are key, because they still have every incentive to perpetuate a system in which Asian savings subsidize U.S. consumer imports. A crisis might come when they no longer wish to play that game, but there's little reason to expect such daring anytime soon.

This trend gets only two stars for market impact because it's so easy to play it both ways. Stocks up, buck down? All hail export earnings. Stocks up, buck up? Foreigners are buying U.S. stocks. Buck down, stocks down? Foreigners are selling. But go ahead and add an extra star if you don't have a Swiss bank account and yet are partial to overseas travel.

Iraq
Media appeal: * * *
Market impact: * *
Long-term significance: * * * *

Cable news executives dig violence as much as their entertainment-division bosses, but the appeal of regular pyrotechnics is diminished by the fact that they're generally blowing up our troops. After the "mission accomplished" speech proved to be premature, Wall Street looked for help from the June 30 handover of power to a provisional government. After that, the Fallujah campaign was supposed to mark a major milestone in the war. It did, by nearly demolishing that city while intensifying resistance in Mosul and south of Baghdad.

The next milestone is the Jan. 30 election, to be observed by international monitors from the relative safety of Jordan. The outcome of the vote will color the upcoming Congressional debate about a supplemental Iraq appropriation several times larger than Sri Lanka's annual economic output.

Wall Street's main concern remains the reliability of Iraqi oil exports, which have been limited by attacks on pipelines in the north. Add two stars of market impact in the long run if a democratically elected Iraqi government can't muster enough loyalists to defend itself.

Social Security
Media appeal: *
Market impact: *
Long-term significance: * * *

Republicans say it's a crisis. The Democrats retort it's a plot to throw widows at the mercy of Wall Street's wolves. Charts make for bad TV, while the grey panthers don't demonstrate — they just vote. The decisive say may belong to the bond market, which might not like the big near-term rise in public borrowing needed to divert some of the payroll taxes into private accounts, while maintaining benefits at current levels. Add a star to the market impact rating if you believe that private accounts would significantly boost fund inflows into stocks.

Inflation
Media appeal: *
Market impact: * * * *
Long-term significance: * * *

Depending on the Monday morning quarterback you ask, Federal Reserve Chairman Alan Greenspan is either a sage guiding the economy down the path of moderation to prosperity, or a reckless gambler squandering the Fed's hard-won inflation-fighting cred. The consumer price index, which is up 3.2% year-to-date, is on the fence on this one, not to mention under fire by critics claiming it understates inflation's true extent.

The Fed has just signaled its determination to keep raising interest rates, citing in particular the inflationary expectations implicit in the price of inflation-indexed bonds. Higher interest rates, in turn, could crimp corporate earnings and spending. Add one star of media appeal for every 50-cent rise in the price of gasoline.

Nuclear Proliferation
Media appeal: * *
Market impact: *
Long-term significance: * * * *

The good news (sort of) is that there are no weapons of mass destruction in Iraq. The bad news, definitely, is that at least a couple are kicking around North Korea, with Iran not far from joining the no-longer-terribly-exclusive nuclear club.

The U.S. is conducting negotiations with both regimes through allies who think we're taking too hard a line. Add a star to market impact if North Korea tests an intercontinental missile, and two if Israel ends up bombing an Iranian reactor.

Another Tsunami
Media appeal: * * * *
Market impact: ?
Long-term significance: ?

Sometimes, life imitates even bad Hollywood movies. Lisbon was shattered 250 years ago by a quake and a tsunami likely originating in the Atlantic subduction zone. That's a blink of an eye in planetary terms. On the plus side, we've recently dodged an asteroid.