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The Financial Crisis of 2008

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A review of the current financial crisis and how to deal with it.

A review of the current financial crisis and how to deal with it.

Published in Economy & Finance , Business
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  • 1. The Financial Crisis of 2008: Why It Happened, Where It’s Going, How To Respond
  • 2. It started with what was called: “The Great Moderation”
    • After 1984, the volatility of growth moderated.
    Real GDP Year-on-year change 1948-2008
  • 3. Lower risk encouraged many investors to utilize leverage
    • Higher risk, higher returns.
    • But leverage works both ways.
  • 4. Consumers increased their leverage, too
    • Of their primary asset, their home.
    • These were famously known as “NINJA” loans.
  • 5. How did NINJA loans get done? Very cleverly!
  • 6. This led to a residential housing bubble:
  • 7. Which spread across the financial landscape. Due to leverage: Countries affected by the Credit Crisis
  • 8. Where are we going?
    • The “patient”
    • is not dead:
    • The trend
    • is still up:
    S&P 500 1948-present
  • 9. Why is the long-term trend up?
    • Investing is not gambling:
    • Equities = ownership
    • Diversified equity investing represents an ownership stake in the US economy.
    US Real GDP (Log Graph) 1948-2008
  • 10. Why is this NOT a Depression?
    • Alphabet
    • Soup:
    • FDIC
    • SEC
    • GATT
    • Major difference:
    • Fiat money / No gold standard
    Dow Jones 1919-1949
  • 11. What happens next?
    • We are probably in a recession right now.
      • Further home price depreciation and tighter credit will squeeze consumers
  • 12. How long will the recession last?
    • The process of de-leveraging must play out.
    • Fiscal stimulus can help.
    Conventional wisdom: Or at least return to the trend:
  • 13. But the recession will likely be shorter and shallower than expected
    • Energy prices have fallen dramatically:
  • 14. Technological innovation continues to accelerate.
    • Bandwidth, bandwidth, bandwidth
    • Moore’s Law
  • 15. Trade is increasing, especially with and in emerging markets.
    • Billions of new consumers
    • Application of existing technology will be revolutionary
    World Area by population
  • 16. The world is a safer and more peaceful place than it has been at least since the 12 th Century.
    • Black Death, Inquisition, Spanish Armada, Civil Wars, Revolution, Nuclear War bear little resemblance to Asymmetric War.
    • This is not to denigrate the current conflict—but the scale of the struggle is different.
  • 17. So what do we do?
    • Recognize the situation for what it is:
    • We are in a rare period of extreme volatility.
  • 18. Facing the facts allows us to deal honestly with the situation.
    • Investing in the current climate is a lot like whitewater rafting.
  • 19. Different rules apply
    • It’s turbulent
    • It’s dangerous
    • It can be “fun.”
  • 20. Rule #1: Always stay with the boat!
    • Your boat is designed for you.
    • The investment equivalent is staying with your long-term plan
    • Your plan is designed around your:
      • Age
      • Abilities
      • Aspirations
  • 21. Rule #2: Plan for trouble
    • Learn how to roll
      • Instincts can mislead
    • Wear a life vest
    • Investment analogy:
    • Be ready to act
    • Have an emergency fund
  • 22. Rule #3: Work with your team
    • Know your “role”
      • Taxes are trivial if you never sell.
      • Cash and custody were boring details until Lehman and Auction Rate bonds.
    • Listen above the “roar.”
      • Details matter
      • Motivation matters
      • Experience matters
  • 23. Rule #4: Be flexible
    • Read the river
    • Don’t change your strategy, but adjust your tactics
    • Common sense trumps sophistication
    Opportunities: JNJ = 3% dividend TIPS = Inflation + 3% GLW = 5x Cash Flow
  • 24. Rule #5: Enjoy the ride
    • Be long-term but watch the ticks.
    • Sell down to your sleep point.
    • Be bold when others are fearful, and fearful when others are bold
  • 25. Benjamin Graham:
    • “ In the short-run, the market is a voting machine – reflecting a voter-registration test that requires only money, not intelligence or emotional stability – but in the long-run, the market is a weighing machine.”
  • 26. How can I contact you?
    • Call Charter Trust at (603) 224-1350, or send an email to [email_address] .