how bad is the global financial crisis?

Friday 5 June, 2009

I attended this event hosted by DePaul University’s Center for Financial Services. James Pressler of the country risk unit @ Northern Trust Bank sent over his presentation: China Presentation 0509 I requested presentations from the other presenters, but haven’t heard back from them.

K. Pakravan of DePaul opened by setting the stage.  Tighter integration throughout the world has opened up new opportunities in the last 15 years, such as new products/investment classes like ETF’s, commodities, currencies, & derivatives.

J. Pressler came next with his presentation on China.  China’s growth, although it’s fallen from 11% to 6%,  can help mitigate the world recession, but not by itself.  China holds $2 trillion reserves, more than twice as much as the next closest country, Japan & $1.5 trillion in US Treasuries.  If the Chinese choose to sell these, the $ will fall into a free fall.  In 1997, China’s export led economy led it to fiscal health.  Now that exports comprise 40% of the Chinese economy, China needs to develop more of its domestic economy.  Since loosening its currency in 2005, it appreciated steadily until 2008, when it stabilized.  Beijing needs to address its financial imbalances.

P. Christopher of Eclipse Capital Management suggested we need to deleverage our debt by separating our credit worthiness from our credit capacity, noting Japan in the 1990’s & US in the 1930’s needed 10 years to return to normal leverage ratios.  Rogoff & Reinhart found that home prices have fallen 35% in 6 years, equity has fallen 55% in 3 1/2 years, & government debt is @ 86% & will be @ 100% for 2010-2019.  He also pointed out, that business cycles in Japan in the 1990’s accelerated so that each cycle had 1/2 the length & 1/2 the amplitude of normal business cycles, which led to much more volatility.  Thus the current outlook is negative-to-neutral.  Managed futures in currencies & commodities can allow you to take advantage of volatility.

R. Gernstetter of Mastholm Asset Mgt. admitted the world is flat…broke.  He maintained that our short-term policies are undermining our long-term outlook.  The smart money is on the sidelines because sectors are rotating, & moving sideways.  People no longer believe in long-term investing.  As institutional investors, pension funds & endowments are decimated.  Alternative investments have not reduced risk.  Liquidity is low due to funding needs & prior commitments.  As for individual investors, baby boomers are dead from unsustainable spending patterns.  Hitting the bottom of residential real estate is the key to expansion & sustainable equity markets.  Many banks are already @ the maximum stress levels.  Prime mortgages & commercial real estate are next to fall.  The US will go from a AAA credit rating to AA.  There will be no innovation for 10 years.  Winners will simply be survivors.

My take-these guys paint a pretty ugly picture, but it is reality.  The situation is bad & prospects for getting better are not good.  It’s going to take a lot of readjustment & pain to recover from this economic mess  Big changes may be difficult to stomach, but they are necessary for the world to move forward.


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