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
Lower risk encouraged many investors to utilize leverage
• 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.
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
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
Why is this NOT a Depression?
AlphabetSoup:• FDIC• SEC• GATT
Major difference:• Fiat money / No gold standard
Dow Jones 1919-1949
What happens next?
• 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:
But the recession will likely be shorter and shallower than expected
• Energy prices have fallen dramatically:
Technological innovation continues to accelerate.
• 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
The world is a safer and more peaceful place than it has been at least since the
12th 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.
So what do we do?• 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.
Different rules apply
• 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
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
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
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
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
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.”
How can I contact you?
• Call Charter Trust at (603) 224-1350, or send an email to [email protected].