The New Normal - What’s Next? Collective Insight from the World’s Brightest Minds Having recently returned from attending the 2009 Milken Global Conference, this is a summary of my thoughts that most directly affect McLean & Partners. In light of the events during the past year, I was especially keen on getting high level information regarding the greater economic situation, from some of the most world’s most highly respected and influential minds. 1. Fixing The Financial System In the past 9 months, we have collectively witnessed a crisis of the Global Financial System, which has led to a Crisis of Capitalism. Leading up to this most recent crisis, 25 years of ever increasing leverage led to a crescendo of the huge Credit Bubble in late 2006, where trillions of dollars of subprime debt was created. The general consensus is that we are not going back to where we were, and this deleveraging phase we are now in may last at least another 1 or 2 years.
More Cash = Less Risk .6
Commercial Banks: Cash Assets .5
3X
(trillion dollars)
5/6
.4
Large Banks Small Banks
.3
5/6
The Reset Button Has Been Pushed! THE QUESTION THAT MANY NOW ASK IS: W HAT IS OUR “NEW NORMAL”? The deleveraging of the past year has been very tough on asset prices – house prices in some major markets are down 70%, while the median average home price is down 30%. Many senior investment grade corporate bonds, as well as senior corporate bank debt is trading at 40 – 50 cents on the dollar, and stock prices are still down considerably. Cash is king and we are in the age of survival of the thriftiest, as everyone is rightsizing their organizations. WHERE DO WE GO FROM HERE? It is generally agreed that the credit crisis started from the US Banking System. Despite being the root of the problem, this sector is surprisingly well positioned going forward.
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Source: Federal Reserve Board
The average US Bank is healthier than most people think. We now see from the above chart, US banks have as much as three times as much cash as they did previous to last year’s Lehman Brothers bankruptcy – the event which triggered this global financial crisis. Most banks have raised significant capital to take care of their mark-to-market problems, which is mostly attributed to their sub-prime market exposure. Fortunately, that part of the process is mostly behind us. 1
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