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INMAN CONNECTION PRESENTATION
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copyright 2008
Finding a Fix for the Housing Crisis Finding a Fix for the Housing Crisis
1
Finding a Fix for the Housing MarketRobert Shiller, Real Estate Connect, January 7, 2008
Robert J. ShillerRobert J. ShillerChief Economist & CoChief Economist & Co--Founder of MacroMarkets LLCFounder of MacroMarkets LLC
Arthur M. Arthur M. OkunOkun Professor of Economics, Cowles FoundationProfessor of Economics, Cowles FoundationProfessor of Finance, Yale UniversityProfessor of Finance, Yale University
Research Associate, National Bureau of Economic ResearchResearch Associate, National Bureau of Economic Research
Copyright 2009 | MacroMarkets LLC
copyright 2008
Finding a Fix for the Housing Crisis Finding a Fix for the Housing Crisis
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The information contained herein does not constitute either an offer to sell or the solicitation of an offer to buy any security referred to herein. Offers to sell and solicitations to buy securities described herein will be made only pursuant to an offering circular registered with the Securities Exchange Commission or pursuant to private offering memorandum, that is, in each case, delivered to the offeree. Information contained herein does not purport to be complete and is subject to various qualifications and based on various assumptions, not all of which may be set forth fully herein. The information contained herein is subject to change without notice, its accuracy is not guaranteed and it may be incomplete or abbreviated. The MACRO® securities, or other securities referenced herein, will be more fully described in an offering memorandum or prospectus prepared by the issuers of such MACRO securities or other securities when such securities are being offered. The MACRO securities will be offered and sold only pursuant to such an offering document, which will be delivered to any prospective investors and which must be reviewed by them prior to making a purchase of any securities therein offered. Any information set forth herein is subject to change without notice and will be superseded by any amendments to or subsequent versions of these web pages, and any offering document for the MACRO securities or other securities referenced herein. These materials may contain "forward-looking statements," including projections, forecasts and estimates. These forward-looking statements are based upon certain assumptions. Actual events are difficult to predict and may differ from those assumed herein. Accordingly, there can be no assurance that the estimated returns or outcomes described herein can berealized, that the factual assumptions upon which forward-looking statements are based will materialize or that actual results will not be materially different than those presented herein. “Standard & Poor’s” and “S&P” are trademarks of The McGraw-Hill Companies, Inc. and have been licensed for use by MacroMarkets LLC. None of the financial products described herein that are based upon oneor more S&P/Case-Shiller Home Price Indices are sponsored, endorsed, sold or promoted by S&P, and S&P makes no representation regarding the advisability of investing in such products.
Disclaimers
copyright 2008
Finding a Fix for the Housing Crisis Finding a Fix for the Housing Crisis
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“This is another Fine Mess, Stanley”
• Rare events• Complacency• Conventional Wisdom• Respect for sophisticated
methods rather than substantial evidence
• Herd behavior and self censorship
• Irving Janis, Groupthink, 1972
copyright 2008
Finding a Fix for the Housing Crisis Finding a Fix for the Housing Crisis
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Real S&P Composite Stock Price Index and Real Earnings
(Jan 1871-Dec 2008)
0200400600800
100012001400160018002000
1870 1890 1910 1930 1950 1970 1990 2010Year
0
50100
150200
250300
350400
450
Price
Earnings
-51% from 2000 peak
Rea
l S&
P 5
00 S
tock
Pric
e In
dex
Rea
l S&
P C
ompo
site
Ear
ning
s
copyright 2008
Finding a Fix for the Housing Crisis Finding a Fix for the Housing Crisis
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Price Earnings Ratio (10-Year Avg Earnings)
Jan 1881 – Dec 2008
0
5
10
15
20
25
30
35
40
45
50
1860 1880 1900 1920 1940 1960 1980 2000 2020Year
0
2
4
6
8
10
12
14
16
18
20
1901
15.2
1966
2000
Price-Earnings Ratio
Long-Term Interest Rates
1981
1921
Lon
g T
erm
Inte
rest
Rat
es
Pric
e E
arni
ngs R
atio
copyright 2008
Finding a Fix for the Housing Crisis Finding a Fix for the Housing Crisis
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Volatility 1928-2008Stock Market Volatility Daily Jan 13 1928 to Oct 29, 2008
Daily Lagging 30-Day Stdev of One-Day S&P Composite Percent Changes
0.00%
1.00%
2.00%
3.00%
4.00%
5.00%
6.00%
01/1
3/28
08/1
3/30
02/2
5/33
09/1
9/35
04/0
4/38
10/0
9/40
04/2
1/43
11/1
9/45
07/2
7/48
04/0
4/51
02/1
6/54
02/2
1/57
02/2
9/60
03/0
7/63
03/1
4/66
04/3
0/69
05/0
1/72
05/0
7/75
05/1
0/78
05/1
3/81
05/1
4/84
05/1
8/87
05/1
8/90
05/2
0/93
05/2
2/96
05/2
7/99
06/0
7/02
06/1
4/05
06/2
0/08
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US Home Prices 1890 to 2008 Q3With Annual Building Costs,
Population, Ten-Year Treasury Yield
0
50
100
150
200
250
1880 1900 1920 1940 1960 1980 2000 2020
Year
Inde
x or
Inte
rest
Rat
e
0
100
200
300
400
500
600
700
800
900
1000
Popu
latio
n in
Mill
ions
Home Prices
Building CostsPopulation
Interest Rates
copyright 2008
Finding a Fix for the Housing Crisis Finding a Fix for the Housing Crisis
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San Francisco Real Home Prices Jan 1987-Oct 2008 (S&P/Case-Shiller)
0
20
40
60
80
100
120
140
160
180
200
1985 1990 1995 2000 2005 2010
copyright 2008
Finding a Fix for the Housing Crisis Finding a Fix for the Housing Crisis
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San Francisco Real Home Prices For Low, Middle and High-Priced Homes Jan 1987-Oct 2008 (S&P/Case-Shiller)
0
50
100
150
200
250
1985 1990 1995 2000 2005 2010
Low
MiddleHigh
copyright 2008
Finding a Fix for the Housing Crisis Finding a Fix for the Housing Crisis
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New York Commuter Real Home Prices For Low, Middle and High-Priced Homes Jan 1987-Oct 2008 (S&P/Case-Shiller)
0
50
100
150
200
250
1985 1990 1995 2000 2005 2010
Low
Middle
High
copyright 2008
Finding a Fix for the Housing Crisis Finding a Fix for the Housing Crisis
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Miami Real Home Prices For Low, Middle and High-Priced Homes Jan 1987-Oct 2008 (S&P/Case-Shiller)
0
50
100
150
200
250
300
1985 1990 1995 2000 2005 2010
Low
Middle
High
copyright 2008
Finding a Fix for the Housing Crisis Finding a Fix for the Housing Crisis
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Inflation Adjusted Japanese Real Estate Performance
0
20
40
60
80
100
1970
1974
1978
1982
1986
1990
1994
1998
2002
2006
copyright 2008
Finding a Fix for the Housing Crisis Finding a Fix for the Housing Crisis
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Real Home Prices in London and Greater Boston1983-2008
(Halifax & S&P/Case-Shiller with Inflation Correction)
0
100
200
300
400
1980 2000 2020
Date
Rea
l Pric
e In
dex
Boston
London
copyright 2008
Finding a Fix for the Housing Crisis Finding a Fix for the Housing Crisis
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Sources of the Bubbles (R. Shiller Irrational Exuberance 2000, 2005)
• Precipitating factors• Amplification mechanisms• Cultural factors• Psychological factors
copyright 2008
Finding a Fix for the Housing Crisis Finding a Fix for the Housing Crisis
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Short-Run Solutions
• Need to stabilize the economy with twin targets: a fiscal target and a credit target– Expansionary fiscal policy of at least the $775 billion envisioned
by the Obama team– Continuation of Term Auction facility (TAF, Dec 2007), Term
Securities Lending Facility (TSLF, March 2008), Primary Dealers Credit Facility (PDCF, March 2008), Commercial Paper Funding Facility (Oct 2008) Term Asset Backed Securities Loan Facility (TALF, Nov, 2008) at even higher levels
– Possible further government conservatorships like those given Fannie and Freddie
• Reduce the foreclosure problem with plans like that of John Geanakoplos or Sheila Bair
copyright 2008
Finding a Fix for the Housing Crisis Finding a Fix for the Housing Crisis
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Long-Run Solutions
• New information infrastructure
• Comprehensive financial advice
• New financial watchdog
• Default-option financial planning
• Improved financial disclosure
• Improved financial databases
• New system of economic units of measurement
copyright 2008
Finding a Fix for the Housing Crisis Finding a Fix for the Housing Crisis
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Private Sector Solutions • Fundamentally expanding financial markets to cover more risks that
really matter
• Create products that provide the opportunity to hedge or invest in large, important asset classes
• Level the playing field so that both institutions and retail investors alike can participate
copyright 2008
Finding a Fix for the Housing Crisis Finding a Fix for the Housing Crisis
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Jan 6, 2009 Housing Futures Market East Cities(Tradition Financial Services)
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Finding a Fix for the Housing Crisis Finding a Fix for the Housing Crisis
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January 6, 2009 Housing Futures Market West Cities
(Tradition Financial Services)
copyright 2008
Finding a Fix for the Housing Crisis Finding a Fix for the Housing Crisis
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MacroSharesMacroShares were developed to provide hedging or investment opportunities for individuals and institutions for important economic risks (housing, oil, inflation, etc)
MacroShares Currently Trading – $100 Oil Up – $100 Oil Down – (NYSE: UOY and DOY)
MacroShares Recently Filed– Housing – Medical Inflation
Transparent– NYSE listed, allowing for
continuous buying and selling throughout the trading day
No Credit risk– fully backed by U.S. Treasuries
and Cash
copyright 2008
Finding a Fix for the Housing Crisis Finding a Fix for the Housing Crisis
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Accolades
• MacroShares were recently named one of the best inventions of 2008 by Time Magazine
• MacroShares have recently been featured in – US News and World
Report– Bloomberg Magazine
copyright 2008
Finding a Fix for the Housing Crisis Finding a Fix for the Housing Crisis
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Long-Run Solutions-Retail Products
• Continuous Workout Mortgages• Home Equity Insurance• Livelihood Insurance
copyright 2008
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Continuous Workout Mortgages
• Workout of mortgage conditioned on economic events is written into initial mortgage contract
• Workout is continuous, happens every month as economic indicators change
• In response to changes in home prices and to changes in income and employment
• Index-based, reduces moral hazard
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Why Does Innovation Take So Long?Why Does Innovation Take So Long?• Wheeled toys (Mexico Late Classic Period, between 650
and 950 A.D.) but no wheeled vehicles in pre-Columbian Americas
• Wheeled suitcases, Bernard Sadow, 1972, Robert Plath 1991
• Movie subtitles invented in 1920 (Abraham Schomer, The Chamber Mystery) but virtually never used again in silent movies
• Desks over exercise bikes—still not done (Mayo Clinic)(from New Financial Order, 2003)
copyright 2008
Finding a Fix for the Housing Crisis Finding a Fix for the Housing Crisis
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For Additional InformationFor Additional Information
14 Main StreetMadison, NJ 07940United States
1 (888) MACROS-1
www.MacroMarkets.com
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