Mesa Redonda sobre la crisis financiera internacional y las perspectivas de inversion :monedas, activos , bonos , acciones

1. Global Economic Connectivity and Economic Crisis Global Business Forum 15TH January ,2009 University of Miami Ricardo Lago Economist and Consultant Former Senior of the EBRD, The World Bank , IADB Former Director of Economic Policy of the Treasury of Mexico 1

2. Global Connectivity and Economic CrisisDescription: The global economic crisis has precipitated rapidly and has spread across the world due to increased connectivity of global markets. This session will explore the background and the current state of affairs of the global economic crisis. The session will also explore possible solutions and directions of global markets. Senior executives from major financial institutions across the globe will provide their wisdom and predictions – Manuel Santos, Professor and James L. Knight Chair, Department of Economics, School of Business Administration, University of Miami – Roberto Higuera, Vice Chairman & Chief Executive Officer, Member of the Board of Directors, Banco Popular Español – Ricardo V Lago , Economist . Adviser to business and governments – Richard Dorfman, President and CEO, Federal Home Loan Bank of Atlanta Location: Frost School of Music, Gusman Hall

3. Santos , Higuera , Dorfman, Lago 3

4. 4

5. BAIL OUTS

6. MONETARY STIMULUS

7. FISCAL STIMULUS

8. THREE GENERAL REFLECTIONS THE TALE THAT SUB-PRIME MORTGAGES WERE THE CAUSE OF THE CRISIS IS SIMPLISTIC AND FLAWED . SUB-PRIME WAS THE FIRST MANIFESTATION OF A DEEPER PROBLEM IN THE 1990s and 2000s LIKE IN THE 1920s : WE HAD ENTERED AN ERA OF innovation and fast productivity growth Great expectations : prosperity was here to stay! Easy money and excessive consumer spending in US and Europe High leverage ratios Regulators : too many , too uncoordinated , looking at the wrong thing in the wrong places, and red-taping everyone with costs FREE MARKETS WORK .THE PROBLEM IS THAT USA AND EUROPE ARE DEPARTING FROM THE RULES AND ETHICS OF FREE MARKETS

9. Look at Peru with free markets : departing from chaos in 1990 (Average anual GDP growth 2002- 2008) 9

10. STRONG INNOVATIONS ,PROSPERITY BOOMS, AND EVENTUAL BUSTS

11. TWO ERAS OF UNPRECEDENTED PROSPERITY IN THE 1920s Innovations : radio , electrification , and telephone Market expansion : the resumption of multilateral trade after World War I IN THE 1990s and 2000s Innovations : PCs , Cellphones , and Internet Market expansion : incorporation of China , India and Eastern Europe to world trade

12. NOW I TURN TO THE FOUR CENTRAL QUESTIONS ASKED BY PROFESSOR SANTOS : QUESTION 1 : Monetary and fiscal policies in US and EU, Will they work ? QUESTION 2: When will the banking system be operating smoothly QUESTION 3 :How long will the recession last? QUESTON 4 How do you foresee the evolution of the stock market, the dollar, and stock markets overseas?

13. When will the banking system be operating smoothly?

14. QUESTION 1 Monetary and fiscal policies in US and EU, Will they work ?

15. MONETARY POLICY

16. TRIVIA QUESTION What is the cost of producing a US$100 dollar note ?

17. ANSWER During Fiscal Year 2008 the Bureau of Engraving and Printing delivered 7.7 billion notes at an average cost of 6.4 cents per note.

18. Vernon Smith , Nobel Laureate to WSJ “Why is this crash a classic? In every market, there is ultimately only one source of liquidity: buyers. And this is what central bankers hope to see return when they speak euphemistically of restoring confidence.All other sources of liquidity are stop gaps,bridges, band aids, and now a duct-tape bailout. Everyseller in dire need of a buyer is in a liquidity crisis”

19. MACROECONOMICS 101 – MONEY SUPPLY MONETARY BASE (MB) The Fed lends to banks , to the government ( buys TBs or Bonds) , others , or buys foreign currencies How ? : by printing money MONEY SUPPLY MULTIPLIER (k) That money ends in people pockets , part they keep it in the pocket and part they deposit in the banks Banks invest the deposits either in loans to business or people or else leave it in Reserves (in TBs or at the Fed) MONEY SUPPLY (M) M =MB x K

20. WHAT IS HAPPENING NOW WITH MONEY SUPPLY GROWTH ? Monetary Base (MB) is growing at a huge 144% p.a. Monetary Supply (M2) is growing at 7.6% p.a Hence , the Multiplier (k) has declined by 56% p.a CONCLUSION : Fed is printing to much money Individuals are keeping much of it in cash Banks are accumulating reserves rather than lending

22. but V is dropping at 10% to 15%

23. Inflation may be zero or even negative

25. MACROECONOMICS 101-FISCAL POLICY PEOPLE DO NOT CONSUME MUCH , AND BUSINESS DO NOT INVEST ENOUGH WHY NOT HAVE THE GOVERNMENT SPEND MORE TO MAKE UP FOR IT ! PRESIDENT OBAMA’S 800 -Billion DOLLAR STIMULUS PLAN AND OTHERS WILL IT WORK ?

26. DOES IT MEAN THAT THERE HAS BEEN NO STIMULUS SO FAR ? BUT SO FAR THERE HAVE BEEN ALREADY A MYRIAD OF VERY EXPENSIVE PUBLIC INTERVENTIONS . RESCUE AND /OR STIMULUS HOWEVER WE WANT TO CALL THEM BAIL OUTS : TARP , BEAR STERNS , AIG , FANNIE , FREDDY , AUTO INDUSTRY , SEVERAL FED SCHEMES ETC ETC FORBES MAGAZINE HAS MADE AN ESTIMATE AT US$ 6 Trillion IN BAIL OUTS IN 2008 THERE WAS A TAX REDUCTION STIMULUS PACKAGE FO US$150 billion .

27. THE DOWNSIDE OF MORE BUDGET DEFICITS IS THE LONG RUN SOLVENCY PROBLEM THE PEOPLE WANT TO SAVE TO IMPROVE THEIR BALANCE SHEETS , THE GOVERNMENT IS DIS-SAVING AND FRUSTRATING IT WHAT IS GOOD FOR THE SHORT RUN IS BAD FOR THE LONG RUN HIGH DEBT AND LOW SAVINGS ARE A PROBLEM

28. THE PROBLEM IS THE DEBT

30. THE WAY OUT OF THE RECESSION : THE RAZOR BLADE PATH PROBLEM DEFLATION MOOD SCENARIO : JAPAN ( 1991 to PRESENT ) LOW GROWTH PERPETUATION OF INSOLVENT BANKS TOO MUCH FISCAL ACTIVISME AND EXPLODING PUBLIC DEBT HIGH INFLATION SCENARIO ORDERLY REWINDING OF THE BALANCE SHEET OF THE FED–ONCE MULTIPLIER AND VELOCITY PICK UP – AND BALANCING THE BUDGET MAY BE DIFFICULT TO STAGE RISK OF FALLING INTO HIGH INFLATION OR EVEN HYPERINFLATION

31. FISCAL STIMULUS INTERNATIONAL COORDINATION IDEAL SCENARIO ( US$ 3 TRILLION OR 6% of World GDP) THE CREDITOR COUNTRIES ( CHINA ,GULF COUNTRIES , ETC ) SHOULD TAKE MORE OF THE BURDEN THAT THE DEBTOR NATIONS , UK , US AND OTHERS PILE UP MORE DEBT IS A PROBLEM

32. Question 2 When will the banking system be operating smoothly?

33. WILL IT WORK ?

34. WHEN INSOLVENT BANKS ARE WOUND UP OR PROPERLY CAPITALIZED WHEN BANKING INTERMEDIATION SHRINKS TO THE REAL VALUE OF THE ASSETS : MALINVESTMENTS ARE WRITTEN OFF WHEN LEVERAGE RATIOS ARE BROUGHT DOWN TO REASONABLE LEVELS AS STOCK MARKETS SEE THE LIGHT AT THE END OF THE TUNNEL

35. QUESTION 3 How long will the recession last?

36. DURATION OF LONGEST RECESSIONS SINCE 1900 GREAT DEPRESSION (1929-33) : 43 months OIL –GOLD RECESSION (1973-75) : 16 months VOLKER RECESSION (1981-83 ) : 16 months

37. Willis Hawley, a congressman from Oregon, and Reed Smoot, a senator from Utah

38. 1929 -1933 Collapse of Word Trade

40. Better coordination on fiscal –monetary policy THEN CURRENT RECESSION WOULD LAST ABOUT 30 MONTHS THAT IS THE AVERAGE BETWEEN THE 43 OF THE GREAT DEPRESSION AND THE 16 OF THE TWO OTHER LONGEST In March (2009 ) we will be in the 16th month -How much longer ? : 12 to 16 months longer -We are half the way down - We will be out by the 1st or 2nd quarter of 2010

41. QUESTION 4 How do you foresee the evolution of the stock market, the dollar, and stock markets overseas?

42. Ranking of currencies with better to lower perspectives Gold Some emerging countries currencies : Yuan, Real , Chilean Peso , Peruvian Sol Euro Dollar Yen Sterling Pound

43. Best Stock markets BRICs and some other emerging markets They will be leading the recovery US : Technology Stocks (Nasdaq 100) They are global companies with lots of cash and no debt They are growth-stocks now discounted to price multiples of value-stocks

44. Treasury Bills If you have any bonds ( maturities 2 years of longer ) of the US , UK , and many European countries , dump them as quickly as you can

45. US and other stock markets are massively undervalued by any standard The problem is not figuring out the prospects of the stocks themselves , the problem is the value of the dollar and the Euro , and the other currencies

47. -50% in a extreme Bear market But has not exceeded those levels on a year average basis Note , though, that the range of deviation is a huge : if being right on the line the value is 100 , the upper bound can be as high as 200 and the lower bound as low as 50 ! That is the upper bound is 4 times the lower bound

48. EXAMPLE

49. IF WE PLOT THE CHART IN LOGARITHMIC PAPER : IT FLATTENS THE VERTICAL AXIS HENCE , CONVERTING : 10 into 1 100 into 2 1000 into 3 10000 into 4 And so on

50. THEN WE GET ….

55. SO WHY ARE US AND OTHER STOCKS MASSIVELY UNDERVALUED ? Because at the lowest point on November 21st ,2008 , stocks prices were precisely below the line by exactly - 50% Today , January 15th , stocks prices are below the line -42%

57. What is Benjamin Franklin telling me?

58. Franklin’s most famous quote ! “We must, indeed, all hang together or, most assuredly, we shall all hang separately”