A system perturbed is a rule-set awakened [updated]

ARTICLE: "Asian Quake's Telecom Disruption Exposes Global Networks Fragility," by Jason Dean, Wall Street Journal, 28 December 2006, p. A1.

Asia is more tied economically and network-wise to North America than can be supported by its telecom connectivity--when quakes strike, that is.

A quake off of Taiwan late Tuesday doesn't seem to kill anyone or destroy anything (at least, no one bothered to mention any such details in this piece), but it does damage as many as eight undersea cables, a good example of a system perturbation whose primary impact is disconnectedness.

And in this day and age, that which would be a tertiary effect in importance is now the primary. International phone service disrupted, financial data flows interrupted, etc., all showing that telecoms in the region are not keeping up with the connectivity growth of recent years:

With more and more multinational companies relying on distant regions of the world for outsourcing and component manufacturing, the stability of communications has become a primary concern.

Asia pulls in tons of FDI, but given its earthquake-prone status, apparently has low-balled the number of undersea cables and back-up systems in comparison to the U.S.-European bonds. Factor in the growth and we have rule sets out of whack, now exposed, with few real costs, by this quake.

The question is, how does Asia respond?

As indicated by the absence of the Asian NATO, we see a region with stunted region-wide cooperation on matters of shared vulnerability. This was exposed by SARS, which led to new cooperation that's handled avian flu far better. But on the quakes/disaster relief & recovery stuff in general, we don't yet see the rule sets on sharing and backing each other up that we see well-established ... say... in the American southeast over the past several decades on hurricanes.

(Update: Steve writes today in Rebuilding the Gulf Coast that coop there is revealed to be weaker than that of Atlantic Ocean-fronting SE states.)

A competitive advantage was seen in this quake for those companies that found workarounds, typically by buying services from telecoms with sufficiently redundant cables and satellite back-ups. As a whole, stock markets were "unfazed."

But scrambling did occur, like what happens with a crash on a major commuter route during rush hour, the side-streets got jammed with activity.

So the crash, as one expert notes, "raises the question of whether there needs to be a new wave of investment" in these cables.

And there you have the money opportunity, as in, go long on telecoms able to meet this expected investment surge.

Increasingly, investors carefully monitor stuff like quakes simply to foresee such investment shifts like the one called for here. This is why the most important function of system perturbations, besides calls for new regulation/reforms/rules to address the rule-set gaps unveiled, is the signalling to markets for where investments should flow next.

I learned this drill in the economic security workshops I ran with Cantor Fitzgerald atop the World Trade Center in 2000-2001: whenever we presented our combined flag-CEO-spooks audience with a scenario of disruption, the national-security types got all spooked by these events, wondering what would happen if some nation or bad actor was able to pull off a similar stunt, but the investor looked at these events primarily as churn, as in, "I make money now on dealing with the revealed deficiency." Locals are incentivized to pay up for the new capabilities. Why? If they don't, they lose the competitive advantage.

In some ways, this gap revealed stems from a previous boom-and-bust investment wave, the telecom boom of the 1990s. So much capacity built in wasn't quickly met by a rising demand, so many companies went belly-up. Meanwhile, though, in Asia the demand skyrocketed over the past decade and the telecoms apparently weren't there to make it happen. So now, apparently, it's time for the Pacific bonds between Asia and North America to catch up to the gold-standard Atlantic bonds between Europe and North America, where, for example, Verizon has a "mesh" of cables so that shifting flows from damaged to undamaged cables is routinely achieved.