The Perfect Storm

After the latest news from Japan it is quite clear we are entering uncharted territory, the situation at Fukushima is deteriorating by the minute, US government confirmed of lethal radiation spreading and even the Japanese government is openly speaking of nuclear disaster, if and when it will strike Tokyo is going to be a cataclysmic event. Already now the tab for this catastrophe is running on the trillions of US dollars ensuring that regardless of any future escalation Japan will have no choice than repatriating its investments abroad to sustain the internal need for reconstruction or containment.

When that will happen the crisis will be no longer a Japanese issue but a global one, both US and Europe markets will run dry of capital and the lack of buyers in the international sovereign market will wreck havoc on an already frail global economy.

This event together with the unrest in Libya and Bahrain is conjuring a perfect storm which is ready to conflagrate on our heads.

The reality is that too many events are accumulating and merging at the same time for anyone to be able to predict any short term forecast but it is certain at this point we are going for one hell of a ride.

The greatest risks we are facing at this moment and the latest development on the issue:

Nuclear crisis in Japan

Worst cases scenarios:
1) a 5000 degF mass of molten reactor materials could melt it's way through a damaged concrete floor, into a pocket of water or sea water below the plant, or rolling right into the ocean. Purely conjecture, but these are the mostly likely worst case scenarios.
2) Chernobyl type scenario, direct fire on the nuclear materials or, even worse, on the "used" nuclear waste that was being stored at reactors 4, 5, AND 6. Prior to last night, we never even heard of 5 or 6, now we find that rather than store the waste materials underneath a big mountain like in western United States, that they decided last fall to store all the old materials in the facilities next to the working nuclear plants, on the ocean, on the ring of fire.

The chairman of the United States Nuclear Regulatory Commission gave a significantly bleaker appraisal of threat posed by the Japanese nuclear crisis than the Japanese government, saying on Wednesday that the damage at one crippled reactor was much more serious than Japanese officials had acknowledged and advising to Americans to evacuate a wider area around the plant than ordered by the Japanese government.

A derivative-fueled banking crisis

It is still not clear how the derivative market could be affected by the recent interruption of the currency carry trade caused by the sudden spike of the Japanese Yen toward the dollar.
A previous disruption of the currency carry trade in 2008 was one of the main factors in triggering the economical crisis, by comparison the potential for disruption of the derivatives market is many times more serious this time, there is not enough data yet to follow the events on this side but it something I will keep monitoring closely in the following weeks.

Critical shortages

Libya's civil war has cut global crude supply by 1.1m barrels per day (bpd).
Now events in the Gulf have turned dangerous after Saudi Arabia sent troops into Bahrain to help the Sunni monarchy crush largely Shi'ite dissent, risking a showdown with Iran.
Russia's finance minister Alexei Kudrin warned on Wednesday that the confluence of events in Japan and the Mid-East could push oil to $200 a barrel in a "short-lived" spike, which would snuff out global recovery.
The shutdown of 11 reactors in Japan has cut 10 gigawatts (GW) of power, forcing the country to import other fuels to keep its economy going. "We think they will need an extra 200,000 bpd of fuel oil and light crude, as well liquefied natural gas," said Eduardo Lopez from the International Energy Agency.
The closure of seven German pre-1980 reactors will cut energy supply by a further 6.2 GW, according to Daniel Brebner at Deutsche Bank.
US Energy Secretary Steven Chu also asked Congress for $36bn in loan guarantees for a new generation of small modular reactors. He has the backing of Capitol Hill for now but support could evaporate if Japan's containment vessels rupture. The world has 442 reactors, with 65 under construction. They generate 372 GW, covering 13.8pc of global electricity. The share is higher in the rich world: France 75pc, Belgium 52pc, Ukraine 47pc, Korea 35pc, Japan 29pc, the US 20pc, and the UK 18pc. In China it is just 2pc.

Global GDP collapse

A 1989 interesting and forgotten until now report on the consequences of a major earthquake in Tokyo and it far reaching consequences on the global economy can be found HERE
In brief 2/3 of Japanese production is concentrated in the Tokyo area and 1/3 of everything that is sold in Japan is sold in the Tokyo area, it is not difficult to imagine that any radiation contamination in the Tokyo area would cripple the country and by consequence the world economy, furthermore Japan will start retrieving investments from abroad spreading contagion on the world markets.

How an economical tsunami would unfold is described in Michael Lewis report:

Shock 1: earthquake strike Tokyo
Shock 2: foreign exchanges fall as insurance companies start dumping stocks and bonds to cover Japanese claims
Shock 3: Japan start to liquidate its overseas holdings to finance reconstruction at home
Shock 4: Withdrawal of Japanese money causes the bond market to collapse and interest rates to soar.
Shock 5: High rates raises prices while depressing real estate development, savings and loans and GNP.
Shock 6: The world will face year of declining growth and instability

Of course even in his apocalyptic view the author would have never imagined a nuclear crisis on the top and the risk of evacuation of one of the biggest cities in the world, in this case consequences could be much more severe and lasting than those described into the report.

Sovereign crisis in Europe and US

Europe will face the same problem than US in financing its debt, it will struggle to find alternative buyers and a major fire sales of debt by Japan could trigger an escalation of the sovereign crisis.
Needless to add that any interest rate increase will strike the final blow to the battered mortgages and construction bubbles in Spain, Ireland and the USA while precipitating other countries as Italy in the same downward spiral.

Conflict in North Africa/Middle East

The UN has agreed on a draft resolution to implement a no fly zone over Libya, which means the bombing may commence as soon as the vote passes later today. As to what Gaddafi's retaliation will be, and whether he will burn down the oil wells, which previously were in rebel hands, but have since fallen back into his control, we will surely find out in the next 24 hours.
As for Bahrain, the capital, Manama, was under curfew from 4pm to 4am, and the government was using emergency laws to ban public gatherings. The central square known as Pearl Roundabout, which had been a base for the protest movement, was violently cleared by riot police.
The US secretary of state, Hillary Clinton, led diplomatic reaction to the violence, delivering a stern warning to Bahrain's rulers. Clinton said Bahrain, and neighbouring Gulf states that have sent troops to help quell the uprising, were "on the wrong track". She demanded that Bahrain show restraint with demonstrators and keep hospitals open.
She described the situation in Manama as alarming and condemned the use of force against demonstrators.
Saudi Arabia has a restive Shia minority near its border with Bahrain, which accounts for roughly 12% of its population. Saudi's rulers have long viewed the Shia as a potential threat. Commentators say Riyadh was not prepared to tolerate demonstrations that would weaken it by proxy and empower its arch foe, Iran.