The Financial Crisis of 2008: Why It Happened, Where It’s Going, How To Respond

It started with what was called: “The Great Moderation” After 1984, the volatility of growth moderated. Real GDP Year-on-year change 1948-2008

After 1984, the volatility of growth moderated.

Lower risk encouraged many investors to utilize leverage Higher risk, higher returns. But leverage works both ways.

Higher risk, higher returns.

But leverage works both ways.

Consumers increased their leverage, too Of their primary asset, their home. These were famously known as “NINJA” loans.

Of their primary asset, their home.

These were famously known as “NINJA” loans.

How did NINJA loans get done? Very cleverly!

This led to a residential housing bubble:

Which spread across the financial landscape. Due to leverage: Countries affected by the Credit Crisis

Where are we going? The “patient” is not dead: The trend is still up: S&P 500 1948-present

The “patient”

is not dead:

The trend

is still up:

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

Investing is not gambling:

Equities = ownership

Diversified equity investing represents an ownership stake in the US economy.

Why is this NOT a Depression? Alphabet Soup: FDIC SEC GATT Major difference: Fiat money / No gold standard Dow Jones 1919-1949

Alphabet

Soup:

FDIC

SEC

GATT

Major difference:

Fiat money / No gold standard

What happens next? We are probably in a recession right now. Further home price depreciation and tighter credit will squeeze consumers

We are probably in a recession right now.

Further home price depreciation and tighter credit will squeeze consumers

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:

The process of de-leveraging must play out.

Fiscal stimulus can help.

But the recession will likely be shorter and shallower than expected Energy prices have fallen dramatically:

Energy prices have fallen dramatically:

Technological innovation continues to accelerate. Bandwidth, bandwidth, bandwidth Moore’s Law

Bandwidth, bandwidth, bandwidth

Moore’s Law

Trade is increasing, especially with and in emerging markets. Billions of new consumers Application of existing technology will be revolutionary World Area by population

Billions of new consumers

Application of existing technology will be revolutionary

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.

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.

So what do we do? Recognize the situation for what it is: We are in a rare period of extreme volatility.

Recognize the situation for what it is:

We are in a rare period of extreme volatility.

Facing the facts allows us to deal honestly with the situation. Investing in the current climate is a lot like whitewater rafting.

Investing in the current climate is a lot like whitewater rafting.

Different rules apply It’s turbulent It’s dangerous It can be “fun.”

It’s turbulent

It’s dangerous

It can be “fun.”

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

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

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

Learn how to roll

Instincts can mislead

Wear a life vest

Investment analogy:

Be ready to act

Have an emergency fund

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

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

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

Read the river

Don’t change your strategy, but adjust your tactics

Common sense trumps sophistication

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

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

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.”

“ 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.”

How can I contact you? Call Charter Trust at (603) 224-1350, or send an email to [email_address] .

Call Charter Trust at (603) 224-1350, or send an email to [email_address] .