The Financial Crisis of 2008

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

Published in: Economy & Finance, Business

The Financial Crisis of 2008

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

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