Global Financial Crisis 2008
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The Global Financial Crisis originated in the USA. It was
the most serious financial crisis since The Great
Depression of 1929. Greed by the managers of the financial
institutions led to easy loans with little to no down
payments. Greed by the homeowners led to purchases of
houses they could not afford. Greed on Wall Street that led
to the creation of clever new financial instruments like
mortgage-backed securities and credit swaps.
The Great Financial Crisis, 2008 was primarily caused by
deregulation in the banking industry that permitted
banks to engage in hedge fund trading with derivatives.
Banks demanded more profitable mortgages, which
caused a housing bubble. They created interest only loans
which became affordable to subprime borrowers. With
rising inflation, the Federal Reserve raised interest rates at
the same time as the mortgage rates were being reset.
Housing prices began to fall in 2007, as supply outpaced
demand. That trapped homeowners, who could not afford
the interest or sell their property. Borrowers defaulted on
their mortgages, and the derivatives and all other
investments tied to them lost value. When the values of
the derivatives crumbled, banks stopped lending to each
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other, Lehman Brothers collapsed, and the resultant
financial crisis led to the Great Recession.
This was the beginning of the lowering of interest rates
and Quantitative easing. Real GDP bottomed out in the
2nd quarter of 2009 and fully recovered by 2011.
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Current Inflation Crisis and Banks Failure 2022-23
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In 2008, the Fed slashed rates to zero in an attempt to help
the US economy cope with the fallout of the 2008 global
financial crisis. Seven years later, the central bank began
to gingerly raise interest rates as the economy recovered
gradually. Over 3 years the rates had reached a little over
2%. In 2019 the Federal Reserve admitted they were wrong
in their short and long-term outlook for the US economy,
This year of humility at the Fed led to a dramatic reversal
in policy from hiking interest rates to cutting them in 2019
- putting the economy on solid footing heading into 2020.
When Covid hit the interest rates dropped back to zero
and the total of the Federal Reserve's balance sheet due to
Covid Costs + 4 tranches of Quantitative Easing +
infrastructure spending amounted to US $ 13 tn.
When this ultra loose fiscal/monetary policy inevitably
resulted in inflation rising in 2021, the Fed first termed it as
"transitory". The supply side shortages during the covid
lockdowns did not help. In early 2022, the Fed expected
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inflation to be "higher for longer" and raised interest rates
at the fastest pace in its history to curtail inflation, though
it did not cut its Balance Sheet at the same pace so as to
ensure liquidity - hoping that would support growth and
hence it would work smoothly.
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SVB Bank catered mainly to startups in Silicon Valley and
was the 16th largest bank in the US. 97% of their deposits
were not insured as they were over US$ 250,000. When
the Startups got venture funds it was deposited with this
bank. SVB invested 45% in Mortgage backed long
duration securities in its search of yield as they had to pay
the deposit holders and interest rates were near zero. As
the interest rates were hiked by the Fed, these bonds
made losses. However it was not reflected in the bank's
accounts as the bonds were to be held till maturity - and
hence mark-to-market losses were not reflected. As the
Start-ups were having difficulty in raising fresh funds, they
started drawing down on their deposits. Due to Fractional
Reserve Banking (only a small portion of banks deposit to
be kept in cash), the bank could not meet the deposit
holders requirement and had to sell the Mortgage backed
securities at a loss - until finally the regulator FDIC had to
take SVB into receivership.
Silvergate Bank, First Republic Bank and Signature Banks
also needed assistance. Credit Suisse was taken over by
UBS. US banks are in a very fragile position. In this digital
age it is so easy to withdraw with a click of a button. The
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total capital buffer in the US banking system $ 2.2 tn. Total
unrealized losses (due to held to maturity securities) in the
system is between $ 1.7 tn and $ 2 tn. With the Western
banking system resting on fragile foundations, monetary
easing is all but assured. They will have to stop hiking rates
and quietly flood the system with backstops and liquidity,
to live to fight another day. However, it is different from
the 2008 crisis because banks are still lending to each
other and there is not a total freeze on credit.
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India's Central Bank Actions
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RBI's actions has won Shaktikanta Das the global
"Governor of the Year" award.
- Revised bankruptcy code and liquidity rules for
non-banks in the wake of the IL&FS collapse.
and basic bank accounts. alongside the success of the
- Reduced Gross NPA at public sector banks from 15% in
2018 to 6.5% by September 2022.
- RBI had taken steps to demand higher standards of
governance and risk management from financial
firms.
- Despite intense political pressure, Das managed the
covid crisis by implementing policies with a sunset
clause, which had a date and conditions for ending.
- Used reserves to cushion the impact of major shocks
and prevent disorderly market conditions.
- Maintained a pragmatic and communicative
approach, allowing for direct press briefings and
public awareness campaigns.
- The Indian government's implementation of Aadhaar
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RBI's Unified Payments Interface (UPI) has led to a
revolutionary growth in electronic payments in India.
UPI has enabled instant electronic payments to
millions of people, making it one of the world's most
advanced payment platforms.
- India is one of the first country's for trial for central
bank digital currency (CBDC).
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The equity markets are back to the same level as they
were since 2021. Currently there are 59 stocks at 52 week
highs and 716 stocks at 52 week lows.
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Oct-21 |
Feb-23 |
Change |
Price/Earnings |
31.02 |
22.60 |
-27% |
Price/Book Value |
3.83 |
3.29 |
-14% |
Market Cap to GDP |
117 |
93 |
-21% |
Although the Sentiment is not positive, earnings have
continued to grow and as the market has not gone
anywhere, the valuations are beginning to become
attractive. "Price is what you pay, value is what you get"
according to Warren Buffet. Hence even though you are
paying the same price in equity as you did in 2021, the
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valuations are over 20% cheaper. Investors with 3-5 year
outlooks can look at adding to existing portfolios at this
level.
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The Government made an unexpected change to the tax
structure of debt funds. Fresh investment from 1st April
2023 will be now taxed at the personal income tax rate.
However debt funds still do have advantages over fixed
deposits;
- Absolute liquidity, with the funds being received the next working day.
- Part redemption, of the amount that you actually need.
- Have a diversified portfolio instead of insteading in a single fixed deposit.
- Can get regular income (Systematic Withdrawal Plan) where the tax rate would be much lower - about 2-3% in the initial years.
- Depending upon where you are in the interest rate cycle you can get capital gains as well as the accrued
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interest. Currently we are near the high of the interest
rate cycle, and hence there is scope for capital gains
over the next few years.
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Gold and silver prices are mostly dependent on the
international market. Yields are down and bond prices are
up, which is positive for Gold and Silver. Further the Dollar
index has weakened, which is also positive for gold/silver.
Gold has gone up over 5% and Silver up about 7% over just
one month.
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WAKAD |
WANOWRIE |
MAGARPATTA |
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