Many people have asked the question what happens to an economy after a financial crisis?

18-Oct-2010

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An eternal optimist, Liu-Yue built two social enterprises to help make the world a better place. Liu-Yue co-founded Oxstones Investment Club a searchable content platform and business tools for knowledge sharing and financial education. Oxstones.com also provides investors with direct access to U.S. commercial real estate opportunities and other alternative investments. In addition, Liu-Yue also co-founded Cute Brands a cause-oriented character brand management and brand licensing company that creates social awareness on global issues and societal challenges through character creations. Prior to his entrepreneurial endeavors, Liu-Yue worked as an Executive Associate at M&T Bank in the Structured Real Estate Finance Group where he worked with senior management on multiple bank-wide risk management projects. He also had a dual role as a commercial banker advising UHNWIs and family offices on investments, credit, and banking needs while focused on residential CRE, infrastructure development, and affordable housing projects. Prior to M&T, he held a number of positions in Latin American equities and bonds investment groups at SBC Warburg Dillon Read (Swiss Bank), OFFITBANK (the wealth management division of Wachovia Bank), and in small cap equities at Steinberg Priest Capital Management (family office). Liu-Yue has an MBA specializing in investment management and strategy from Georgetown University and a Bachelor of Science in Finance and Marketing from Stern School of Business at NYU. He also completed graduate studies in international management at the University of Oxford, Trinity College.







Many people have asked the question what happens to an economy after a financial crisis?

Although there is no definitive answer to the question, we can use historical data on countries that have experienced similar financial crises as a guide to what may or may not occur to our economy in the near future.

An academic paper was published by two professors (Carmen Reinhart and Kenneth Rogoff) who studied the aftermath of financial crises on countries around the world.  Their conclusions were the following:

Asset classes across the spectrum will decline.

  • Real Estate prices declines on average -35% over 6 years.
  • Stock market declines on average –55% over 3 ½ years.

Output and employment decline dramatically.

  • Output falls an average –9% from peak to trough and average 2 years.
  • Unemployment rate rise an additional 5% over the down cycle trough over an average 4 years.

Government debt increases an average of 86%.  Surprisingly, the key driver in the dramatic increase in government debt is not due to stimulus packages but due to the significant decline in the consumer and corporate tax revenue base.

Using these averages as a guideline we can potentially estimate the following:

  • US GDP should have declined for two years at –5% in 2009 and a little less in 2010.
  • Unemployment was expected to rise to 9%-10% (4%+5%) over the 4 years period (to 2011).
  • US housing should decline an additional  -15% over the next 2 years       (2011-2012).
  • US Equity Market declines may have been reached on March 9, 2009

Although past performance is no exact predictor of future performance.  We can use these averages to help gauge the direction and potential impact of this continue crisis on our economy and where we are today.  Based on the estimated averages as a benchmark relative to current reality we are exactly where we should be in terms of unemployment rates and in terms of overall equity market declines which did reach over -51% before bottoming in March 2009.   Although there’s always a potential to re-test that bottom I believe a bottom has already been reached in the equity markets and we are now range bound for an extended period of time.  However, I am not so optimistic in term of real estate. The only area where the average benchmark were not met was in real estate.  Therefore, I still expect real estate to eventually decline at least another -15% over the next few years.

Thank you.

Kindest Regards,

Liu-Yue (Louie) Lam, Co-Founder, CEO, Oxstone Capital Management

Please download here for a copy of the full research paper by the two professors.

1 The Aftermath of Financial Crises


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