There is a saying on Wall Street that even a dead cat will bounce. How high, then, should the market bounce on the death of Osama bin Laden?
As of mid-day on Monday, the stock market was up a bit. The price of a barrel of oil had dropped on Sunday night, but I wasn’t sure why. Osama bin Laden, at least since he was kicked out of Saudi Arabia, has never been a big influence in any of the countries that produce a lot of oil in the Middle East. So I didn’t get why his death would change anything. And the market seems to be realizing that as well. Oil quickly recovered and now is up, and again slightly. (More on Time.com: See photos of the crowds, chaos and some closure at Ground Zero)
Nobel Prize winning economist Paul Krugman had this to say on his blog:
Good, and good riddance. But it’s hard to see how it changes anything important.
Warren Buffett told Fox News this morning that while “the American people feel wonderful today,” bin Laden’s death would not be a “big factor in the market” and that “the big factor in insurance will be the number of catastrophes we’ve had this year.”
I generally agree with both Krugman and Buffett. We are still enduring one painfully slow recovery. And the death of Bin Laden is not going to make more companies run out and hire workers. That doesn’t mean bin Laden’s death will have no effect on the market. And it is generally good news. The question, for investors, is how good?
The market in general trades on the value of corporate earnings. When companies earn more, their stock generally tends to climb, and visa versa. But on top of that it is widely believed that the chances of so-called negative events are priced into the market. And that goes for anything. Natural disasters. A government debt default. Higher taxes. So if traders and investors think there is a big chance of a terrorist attack, you would expect the market to trade lower than it would otherwise be. In the 1990s, it was believed the market traded higher because of a peace dividend after the fall of the Soviet Union. That is clearly gone now and in large part because of bin Laden. (More on Time.com: See pictures of Osama bin Laden’s Pakistan hideout)
So that should make the market a buy? Right. Not so fast. First of all, you would have to know how much the market had priced in the threat of terrorism to know how much it should trade up. What’s more, you would think the death of bin Laden makes us safer, perhaps from large-scale attacks. But there is now the increased threat that there could be some smaller retaliatory attacks over the next six months. Or what about in a year from now on the anniversary of his killing? How much should the market price in that threat?
There is one cost we can calculate: The cost of protecting ourselves from bin Laden and other terrorists. That has certainly gone up in the past decade. Just last month two political science professors did a study that concluded that government spending on terrorism protection in the wake of 9/11 had increased by an $470 billion. And, as Ezra Klein points out, that’s before you factor in what the government spend on fighting the two wars in Iraq and Afghanistan.
Even a very partial, very haphazard, tallying of the costs from 9/11 reaches swiftly into the trillions of dollars. The Afghanistan and Iraq wars, neither of which would’ve been launched without bin Laden’s provocation, will cost us a few trillion on their own, actually. But before such reprisals were even on the table, there was the attack itself, which largely shut down the American economy for a matter of days, and then slowed it for weeks. There was a long period in which Americans avoided the airlines, which pushed them so close to bankruptcy that Congress passed a $15 billion federal bailout, but the costs of that intervention pale in comparison to the price of the endless security theater Americans undergo each time they need to fly, which some experts peg at $8 billion a year — and there’s a good argument that they’re being conservative.
Looked at it that way, bin Laden has been a major contributor to booming federal deficit, much more so than the federal bank bailout or the $800 billion in stimulus spending. But the problem is, unlike bin Laden, now that he is dead we can’t just dump our debt in the sea. In fact, it’s not clear, particularly in the next year, that we would spend any less on security or on the war in Afghanistan. Perhaps not ever. Once you have been robbed, you never stop locking the door. So I’m not sure I see a real budget benefit to the fact that bin Laden is not with us anymore. (More on Time.com: See a photo album of the bin Laden family)
The one thing that may benefit the market is the killing of bin Laden does somewhat boost the chances that President Obama will win another term. That reduces some political uncertainty. How much should the market trade up on that? As you can tell, it’s hard to know.
More on Time.com: