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 questions@chartertrust.com.