This is a presentation I did, but never got to deliver. The audience was a group of credit managers and I think they were all running for cover causing the event organizer to cancel the event. Now, I provide it free to you.
6. consumers at 70% of GDP, need to go shopping again
Friday, March 13, 2009
7. A “bailout” explained
AIG insured losses with global financial institutions
The headline derivative is called a Credit Default Swap (CDS)
An entity would buy a CDS to insure against a loss on a bond or the default of a counter-party or for speculation :)
Since AIG was at the nexus of many of these transactions, if we didnʼt “bailout” AIG, there would have been failure everywhere
I mean everywhere - Spain, London, France, here
Much of the money being put into AIG is going to satisfy collateral obligations to their counter-parties - the worldʼs financial institutions
Friday, March 13, 2009
8. What’s going to get us out of this mess?
Friday, March 13, 2009
9. restore capital markets health
prime the pump re-price risk capital investment
Friday, March 13, 2009
21. houses
cars
commutes
technology
and...
Friday, March 13, 2009
22. more affordable real-estate means
we can move back to the city
technology can crush
We are investing in high-speed rail again
transaction costs
Friday, March 13, 2009
23. houses
cars
commutes
technology
and...
Friday, March 13, 2009
24. Netbook sales are estimated to double from 10mm in 2008 to 20mm in 2009
Friday, March 13, 2009
25. houses
cars
commutes
technology
and...
Friday, March 13, 2009
27. just kidding...
the world-wide economy
Once we get to a new GDP level and
resources, jobs, etc. are reallocated, it will
just be smaller and ready to grow again
Friday, March 13, 2009
How did it get so bad?
- Think about what happens if you have hundreds of glasses and you fill each one up a little at a time.
- Now think of risk as water and the glasses as hedge funds, sovergein funds, your 401K, banks.
Some risk evaporates - loans are payed-offs, swaps and derivatives are novated
- But eventually every glass is almost full and there are no more glasses left.
- As more risk gets poured into each glass, at some point it is going to overflow and that is what happened.
- There was too much risk being poured into glasses around the world and at some point it overflowed
- and firms like AIG, who wrote insurance against risk, couldn’t sip it out of the cups fast enough.
- In order to be able to walk around with a glass of water without spilling it, you need some empty space for air or “tangible equity”
- That is what we are doing now, figuring out where to pour risk water in order to keep these glasses from spilling - although many, many have
- not just a US problem - all over the world: granted some economies were growing faster than the US.
- real = adj. for inflation
- Although it is not the government’s job to prop-up asset values, it is their job to help restore confidence with the american people and it is definitely an uphill battle.
- We will probably keep trying until either we get it right or it happens on its own - it will probably be hard to tell.
- At this point, there is a new announcement every week.
- Many are designed to plug holes in demand - stimulus (American Recovery and Reinvestment Act)
- Other are designed to prop-up asset prices - the original goal of TARP and now TALF and the mortgage relief orders
- but what we need most is to....
- restore confidence and get shopping again
- The January U.S. personal savings rate hit 5%, according to the BEA. That’s up from 3.9% savings rate last month and 0.1% a year ago. We’re now at levels last seen in the U.S. in 1993.
- Although this somes good and prudent, it is not a good thing for our economy today. We had an economy that was driven by consumer spending and we need a little to get going again
- Over the weekend, Obama did the Bush thing - \"What I don’t think people should do is suddenly stuff money in their mattresses and pull back completely from spending,\" Obama told The New York Time
- AIG insured losses with banks around the world
- The headline derivative is called a Credit Default Swap (CDS)
- An entity would buy a CDS to insure against a loss on a bond or the default of a counter-party
- Since AIG was at the nexus of many of these transactions, if we didn’t “bailout” AIG, there would have been failure everywhere.
- I mean everywhere - Spain, London, France, here.
- Much of the money being put into AIG is going to satisfy collateral obligations to their counter-parties - the world’s financial institutions
- prime the pump - government stimulus around the world
- re-pricing and re-evaluating the cost of risk > if risk was priced right in the first place we probably wouldn’t have gotten into this mess
> mis-priced risk led to artificially low and funky mortgage structures (ARMs, balloons) the creation of SIVs and an explosion of mortgage backed securities
> if risk was properly priced, this wouldn’t have happened and asset prices wouldn’t have inflated
- we have to get to a level were the fundamental rates of return are calculated using proper cost of capital
- once we do that, and have available projects, the economy will rebound
- They are raising marginal tax rates while hopefully not discouraging investment
- China continued to buy U.S. debt amid a 27 percent increase in its holdings of foreign currencies in 2008. JP Morgan Chase predicted in a Feb. 6 report that China will keep buying Treasuries “not only for the near-term stability of the global financial system, but also because there is no viable and liquid alternative market in which to invest China’s massive and still growing reserves.”
- resulting in
- consumption again
- and some other asset price bubble
> because the world has a history of asset bubbles
> the same thing that causes bubbles, also causes innovation and growth
> you just want to make sure when it pops, there is something left over
- and we will have byproducts
- potentially inflation - although Bernake thinks this is less of a problem (but the commodity prices (sans oil) are preparing for it
- and national debt. If we do this right, there is a shot we wil have a return on our bailout investment.
- If we do this right, there is a shot we wil have a return on our bailout investment.
- transitioning to the future
- suburbs like in Riverside, Tracy or Stockton may change as house remain vacant. Maybe the associations and banks will give back the land, and lower density and build more open space.
- cars will be smaller and more fuel efficient even though SUV sales have rebounded a little. I think there is something more than the cost of gas driving these decisions. It is getting trendy to be conscious and keep it simple. I still hear stories from my grandparents generation about the depression.
- technology is a great thing - it can crush transactions costs.
- google is a case in point (crushed the cost of getting ads in front of you and the margins of those that did it another way)
- Things like webex do cut down on travel and boost productivity
- netbook sales are on fire - they are $200-$400 and are laptop replacements
- once we get to that level and resources, jobs, etc are reallocated, it will just be smaller and hopefully more profitable.
-
- lets just hope we don’t all go broke by then.
- overview of onionomics
- debtor/creditor negotiations (on both sides)
- “story” liquidations and distressed M&A
- I advise companies through board positions as well
