Financial Crisis - Hollywood Style

Ironically enough, Hollywood doesn´t seem to have had any problems raising the cash needed to produce a slew of new movies and documentaries relating to the financial crisis. Some of them are actually very good. The best I´ve seen are:

 

Margin Call: Thriller focusing on 24 hour period before a fictional Wall St firm goes under

Too Big to Fail: Drama featuring key Wall St and Washington players at the start of the credit crunch

Inside Job: Oscar winning documentary analyzing the origins of the financial crisis

 

Thousands of books on these topics have also been published, and although the most authoritative titles are generally written many years after the events happened, the best books I´ve read on the financial crisis so far are:

 

The Big Short by Michael Lewis 

Depression Economics and the Crisis of 2008 by Paul Krugman 

Reckless Endangerment by Gretchen Mortensen & Joshua Rosner 

 

(If books on the financial crisis are the last thing you want to read, then you could do worse than pick up a copy of Walter Isaacson´s terrific biography of Steve Jobs). 

 

What does 2012 have in store for us?

There has been no shortage of somber faced pundits and politicians competing against each other to make the direst predictions for the coming year. It is a bit like watching the Monty Python Four Yorkshiremen sketch in reverse. Thankfully, these people are hardly ever right about anything, and if they are all so gloomy, then perhaps we have significant grounds for optimism after all.

 

However, it does seem safe to assume that the sovereign debt crisis in Europe will get worse in 2012. I read somewhere that it´s not the debt that gets you, but your ability to service it. That strikes me as being very true.

 

Just look at the UK & USA: their debts are equally (if not more) scary than those of Spain & Italy and yet it is safe to assume that the markets will happily lend to both in 2012. Spain & Italy on the other hand, have to raise at least €500 billion between them this year, and I´m not convinced they´re going to get it from the private sector.

 

If that happens, then much bigger rescues than the ones handed out to Ireland, Greece and Portugal will be required. Between Germany, the IMF and the ECB, the economic firepower is certainly there to do it, but politically, it will very difficult.  

 

Banking Vs Sovereign Debt Crisis

In 2008, governments spent billions bailing out banks that couldn´t borrow the money they needed on the open market. In 2011, the sovereign and banking crisis became one and the same because if a small country like Greece defaults, then banks in many countries could go under. 

 

As has happened many times before, EU institutions can perform all manner of contortions to avoid crossing a line they´ve drawn for themselves. At the moment, one of those lines is that the European Central Bank will not directly purchase eurozone government bonds. 

 

With a wink and a nod, the ECB is therefore lending huge amounts of money to eurozone banks, who then buy eurozone government bonds. These eurozone bonds are then used as collateral to borrow even more ECB money. Very clever isn´t it? Everyone´s a winner and we all live to survive another weekend, except that these multi billion euro shenanigans do not address the true underlying problems. 

 

The major issue facing so many western economies is that too much debt has been accumulated and they will need to spend less than they earn for many years in order to reduce it. That´s logic a five year could follow, but life is never that simple. If you reduce spending too fast, then an economy can grind to a halt.

 

What makes sense from a personal perspective (cut down debt, don´t buy things you don´t need) is very bad for economies balanced towards consumption rather than production. You can´t export consumerism and you can´t easily transform a country into a net producer.

 

Getting China to Import More

If the Chinese can be persuaded to spend more and save less, that might provide the opportunities western economies need to grow and pay down their excessive debts. Try to imagine the sheer quantity of products and services that hundreds of millions of emerging middle class Chinese will need for the first time during the next decade. It´s mind boggling. The rub is that this rosy scenario would require a huge transformation on both sides. 

 

Germany is often touted as the model to follow and while there is certainly much to admire and learn from Germany´s manufacturing and exporting prowess, it is not easy to replicate.

 

For example, telling Greece that it should be more like Germany is a bit like telling me to repay my mortgage by becoming a professional golfer - possible in theory, but not very practical for a high handicapper.  

 

These are all huge macro economic issues that will take decades to play out. There is no politician or banker alive today who has previously faced a situation like this and no matter how overpaid they might be, I would not want to be saddled with their responsibilities. 

 

However, it is equally true that the majority of people reading this, who still have a steady job and savings, have never faced an investment environment so ripe with opportunities. 

 

Opportunities

It is often said that the Chinese use the same word for "crisis" and "opportunity". While the unemployment and suffering that has occurred should never be taken lightly or disrespected, one of the biggest beneficiaries of the economic turmoil is the distressed assets industry. 

 

A huge range of companies, developments and individual properties have been bought by liquid buyers at prices that could scarcely have been imagined just four years ago. 

 

For several years, Torcana has been at the forefront of the distressed property industry in Florida sourcing hundreds of deals for buyers all over the world. In 2012, we will continue to work in this incredibly dynamic market. 

 

We will also be expanding our focus to other real estate markets which are finally showing the 50-60% discounts and high rental yields that have been available for years in the USA. 

 

If you´d like to learn more, just stay tuned to our newsletter, blog, twitter and facebook pages for more details in the coming weeks and months. Also, please feel free to email or telephone me for an informal chat anytime.