Given that over 10,000 people have perished in Japan because of the earthquake and tsunami it seems almost inappropriate to talk about the economic consequences of this human and environmental tragedy.

But in our globally interconnected world these events affect our U.S. stock markets and our investments so it is important to understand how this will all play out.

THE OVERALL ECONOMIC IMPACT OF THIS DISASTER SHOULD BE LIMITED

The earthquake in northeastern Japan, which includes the city of Sendai, is in a relatively rural area limiting the overall long-term economic fallout. The larger area surrounding Sendai represents only about 2% of Japan’s economy and most of the northeastern portion of Japan only accounts for a total of about 5% of Japan’s economy according to government statistics. Still, Toyota and Sony were among manufacturers that shut down plants, most likely as a precaution, and have moved production to other facilities in southern Japan.

On Tuesday evening, Japanese time, I called an old friend of mine who is a stock analyst for a global investment firm in Tokyo and he was at work and he said almost everyone in Tokyo was working, as usual.

He said there was a deep sense of sadness and mourning by almost all Japanese people and that would continue for some time. He likened it to how all Americans felt after 9/11.

He also explained that most people in Japan, outside of the twenty or thirty miles around the tsunami area, were continuing to work while watching the tragedy unfold.

He said everyone seems to be in shock, but he believed it would not create any long-term negative effects on the Japanese economy. ―In fact, the stimulus of the infrastructure rebuilding that will have to take place quickly could be the catalyst to jump start

Japan’s stagnant economy.‖

He also believed the quake could cause the Japanese economy to contract slightly in this first quarter instead of growing slightly as many analysts predicted. A major earth quake in Niigata in October 2004 shrank the economy 0.4% that quarter but then it grew 1% during the next two quarters.

Most economists in Japan believe, the efforts to rebuild homes, businesses and highways should offset any dampening effects and possible even spark economic growth. Those same economists do not expect this to interfere in any significant way with the recovery that is under way in the global economy.

So long as the threat of the nuclear reactor is avoided, some analysts have said, the earthquake and tsunami’s economic and market impact should prove much less severe than the human toll might suggest.

Analysts also believe that other countries may even see some economic benefits from the disaster, including a share in the subsequent reconstruction work. Some Japanese companies will also have to increase production at their overseas facilities, at least temporarily.

Everyone must remember that Japan is a very rich country and individuals and companies have a very high savings rate. This should soften the overall economic impact of this crisis and help pay for the recovery.

NUCLEAR REACTOR MELTDOWN

With regard to the nuclear reactor uncertainties, this should have larger emotional consequences than real economic effects. This is the world's most serious nuclear accident since the Chernobyl disaster in Ukraine in 1986.

While these six nuclear reactors will have to be closed down and replaced, they are ―light-water reactors‖ and, as such, will release nuclear radiation into the atmosphere, but will not produce a Chernobyl-like meltdown.

People forget that no one actually died because of the Three-Mile Island nuclear crisis in the United States. The Nuclear Regulatory Commission now says the effects on those people exposed to radiation who were closest to the reactor at the time was like getting four extra chest x-rays.

Following the major Japanese earthquake in Japan’s Kobe region in January of 1995, U.S. stocks made strong gains that year. Japanese stocks fell during the first half of the year but then recovered and finished the year higher. I suspect the same thing will happen after this crisis.

The Kobe Region was much more economically important to Japan than the rural area that is the epicenter of this disaster.

SHORT-TERM CONSEQUENCES OF THIS JAPANESE DISASTER

In the short-term, Japan will continue to have disruptions in electricity; transportation and disruptions in the manufacturing supply chain could produce shortages and backlogs in manufactured products around the world.

Japanese banks and insurance companies most likely will be hurt by this crisis and the nuclear power industry around the world should be set back for a long time.

But because most people are still working throughout Japan this is all expected to be very short-lived. There may be a small ripple effect across Asia in the coming weeks, further muddling the region’s economic picture and stock markets. This should all be very temporary.

Even with this crisis, analysts still expect Asia to post vigorous growth this year, with overall Asian estimates of about 8%, excluding Japan. China is still expected to post growth over 10%.

Given the recent pull back in Asian stock markets, this may be an excellent time to invest in Asian and emerging markets when they have been slammed by a natural disaster that, in the long run, should have little effect on overall Asian growth estimates.

THE CONTINUING CRISIS IN THE MIDDLE EAST

Japan is the world’s third largest oil importer and oil prices have dropped over the past few days as people believe Japan will be using less oil for the next few months because of the earthquake.

This is only a temporary drop in oil prices.

Analysts expect oil prices to continue to climb just because of the growth of demand over supply due to Asian economic growth and the enormous rise in auto sales in China and India. This should continue despite Japan’s problems.

The second reason oil prices should continue to rise is because uprisings in the Middle East will continue to play out over the next few years. This will likely constrain oil sup-plies for the foreseeable future.

In Libya, Colonel Qaddafi appears to have gained some momentum in battling a rebellion that took over much of the eastern part of the country.

Still, whatever the outcome of the fighting, many specialists contend that there is little chance for a quick resumption of Libyan oil exports, which have been interrupted for a month.

Even if Colonel Qaddafi’s forces were to prevail, it might be a year before the government exports oil again, and even then it will most likely face the prospect of international sanctions.

Tensions have also flared again in the Persian Gulf as Saudi Arabia and the United Arab Emirates sent troops into Bahrain in a move to suppress protests led by the Shiite majority against the Sunni monarchy. This has stoked fears about stability in the Persian Gulf at a time of rising Sunni-Shiite tensions throughout the Muslim world.

With Libyan exports suspended, the world is down to an increasingly slim cushion of spare capacity, estimated at four million barrels a day, to make up for supply shortfalls or meet rising demand. This will probably cause oil prices to increase throughout this coming year.

WHAT CAN WE LEARN FROM THESE RECENT EVENTS?

The global economy is becoming so inter-connected that what happens anywhere in the world immediately affects U.S. stock markets.

We have also been reminded, once again, that no matter how hard you prepare for a natural disaster, our control over these events is largely ephemeral. We really don’t have any control at all!

As the global economy becomes more complex and out of our control, it becomes more important than ever for investors to have reserves and backup systems to insure against breakdowns and unforeseen disasters in their investment portfolios.

Just like a computer or any complex piece of machinery, the more moving parts you have, there is a higher likelihood of something failing on a regular basis.

This is why we regularly make backup copies of our computer files; have extra batteries and keep spare power cords and software stored in some safe place.

We always need to think about a backup system for our personal investments, in order to protect against some unforeseen disaster.

We are now living and investing in a very complex global environment that is often out of our control. Having a fail-safe back up strategy for your investments is now more important than ever.

I believe owning a broad basket of commodities and commodity producers like oil companies and gold and silver mining companies could potentially protect their investment portfolios from both inflation and unforeseen disasters.

Commodities often go up when stock markets go down and they have the potential to offer a strong level of protection in the face of real man-made or natural disasters.

I believe every investor should have a backup plan for their investments by having a significant percentage of their investment held in commodities.

To provide a backup plan for an investment portfolio, an investor should make an inventory of the total value of all their investments and then allocate at least 10% to 20% of their portfolio to a broad basket of commodities and commodity producers.

One of the easiest ways to do this is by adding the FOXHALL GLOBAL COMMODITIES & HARD ASSETS STRATEGY to your investment portfolio.

—Paul Dietrich

dietrich@foxhallcapital.com

800-416-2053

Foxhall Capital Management, Inc. is a registered investment adviser with the U.S. Securities and Ex-change Commission (SEC) under the Investment Advisers Act of 1940. The ―firm‖ is defined as the Fox-hall Capital Global ETF, 401(k) and Stock Series divisions, which manage a variety of ETF, 401(k) and Stock strategies in bundled fee and non-bundled fee accounts for primarily U.S. clients. The firm was redefined as of 12/1/08 due to the creation of the 401(k) Series division. A complete list and description of all firm composites and their compliant presentations are available upon request.

Effective January 1, 2011 the Global Hard Assets Strategy was renamed the Global Commodities & Hard Assets Strategy, and the GHA Blended Benchmark was renamed the GCHA Blended Benchmark.. Please note the composites of the benchmarks did not change.

Foxhall Capital Management, Inc. claims compliance with the Global Investment Performance Standards (GIPS®). Foxhall Capital Management has been GIPS verified for the periods 12/31/99 – 12/31/08 by Beacon Verification Services. The ETF Series composites have received a performance examination for the period since inception through December 31, 2008. A copy of the verification report is available upon request.