What Has Changed Since Lehman and What Lessons Have Been Learned?

Posted on September 19, 2018 by Gemmer Asset

Last week saw the 10-year anniversary of Lehman’s failure. In a way Lehman going under marked the point where the recession of 2008 turned into the Global Financial Crisis (GFC). For a moment everything stopped – would the system survive? Reputable figures were pulling hard cash out of the bank on Friday just in case it didn’t open on Monday. This was depression era type of stuff.

 

What Has Changed?

 

But it almost seems like a lifetime ago now. How times have changed. The global economy is humming along, unemployment rates are pushing to multi-decade lows, and the net-worth of American households is significantly above the 2007 high (albeit the distribution has become even more skewed).

 

 

What else has changed since the GFC?.

Well, one big change has been the distribution of debt. The chart from BlackRock below shows debt levels for four groups at the end of 2007 and the most recent 2018 numbers.

 

 

As you can see, household debt has fallen since the GFC as has financial debt levels. Corporate debt is up slightly, but government debt has soared. The government became the spender of last resort in 2009, and despite a dalliance with austerity in 2010 and 2011 (remember the government shutdown/default debate?), has done nothing but grow spending since then.

 

The chart from DoubleLine below shows the federal debt in the U.S. held by the public as a percent of GDP. Since the GFC is has moved from roughly 40% to 75% of GDP, with the CBO projecting that it hits 125% by 2050.

 

 

The chart above shows the total amount of debt. The chart below shows the annual deficit (a flow). It is currently running at a deficit of -3.68% of GDP and is probably on its way to -4.90%.

 

 

Annual deficits at this level have historically been run only during recessions, not when unemployment is below 4%.

 

So basically the balance sheets of both households and financial companies are in much better shape, but the government has leveraged their balance sheet over the last 10-years. Is this sustainable? There are opinions on either side, but you can’t help glancing at Japan’s debt overhang and wonder if things can go on much longer than many think.

 

 

What Lessons Have Been Learned

 

Probably the best retrospective for individual investors on the GFC comes from Cullen Roche. He jotted down 10 lessons from the financial crisis. The key ones are:

 

1. Fear wins in the short-term and loses in the long-term.

 

2. Politics in investing is poison.

 

3. Behavioral biases kill portfolios.

 

4. Short-termism kills portfolios.

 

5. The financial system matters.

 

His entire piece is well worth a read here.

 

 

 

 

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