Wednesday, September 12, 2012

Continued Rise of Evils identified as Culprits of the 2008 Crash

  1. In 2008, in the wake of the financial crisis, assets under management in so-called "retail alternative funds" in the US [a.k.a. alternative investments, and defined to include absolute return, commodities, currency trading, dedicated short bias, equity energy, leveraged strategies (both long and inverse), managed futures, market neutral, multi-strategy alternatives, natural resources, options arbitrage, precious metals, real estate and volatility strategies; but to exclude distressed debt] crashed in the US from $368Bn to $275Bn. However, as a percentage of "all long term retail fund AUM" [defined to include mutual funds, closed-end funds, ETFs and UCITs (Undertakings for Collective Investments in Securities) structures, and excludes limited partnerships and separately managed accounts], it never fell - indeed, the figure of $275Bn in 2008 was 5% of LT Retail Fund AUM in 2008 whereas the bigger figure of $368Bn was 4% of the same figure in 2007. 
  2. From 2009, the share of alternative investments as a percentage of the all long term retail fund AUM started rising once again, boht, in the US, and globally excluding the USand they have been growing @21% CAGR in absolute terms in the US, and at 11% globally excluding the US;  till 2011.
  3. At the same time, several other disturbing parameters have been heading in the "wrong" direction. See the table below, which shows these statistics as they stood  at three different times I have tracked them in my blog. 
  4. Reading this table closely shows that the average American is on the right path (reduced personal debt per citizen; higher GDP per citizen) but the US Government has continued its profligacy with a vengeance (rise in National Debt as % of GDP; Total Debt per Citizen; and US Debt held by Foreign Countries). Just look at the US Total Liabilities and US Interest Burden per citizen from April, 2010 to September, 2011 to see what havoc the US fiscal and monetary policies are wreaking.   
  5. What is worse, the investment bankers are back with a vengeance: as paras 1. and 2. above indicate, and as the figure of Currency and Credit Derivatives in the Table below confirm, what Warren Buffett famously termed as Weapons of Financial Mass Destruction are growing in value at an uncomfortable pace.  Derivative exposures have risen by as much as $91 Trillion (or 6.37 times the US GDP in just 30 months), when they should have been falling
  6. It is time that the US Investment bankers are stopped from selling "innovative" risk-masking derivative products - for the sake of the financial health of the entire world.

Table 1
Parameter 8 Apr 10 26 Jul 11 11 Sep 12
US National Debt as % of US GDP 89% 98% 104%
US National Debt per citizen ($): 41,381 46,619 50,959
US GDP per citizen ($): 46,381 47,488 48,805
US Total Debt per citizen ($): 1,80,484 1,76,113 1,81,307
US Personal Debt per citizen ($): 53,787 51,441 50,132
US Interest Burden per citizen ($): 1,493 11,664 12,343
US Total Assets per citizen ($): 2,34,181 2,43,086 2,96,124
US Total Liabilities per citizen ($): 3,50,054 10,26,974 10,54,522
US Gross Domestic Product ($): 14.333 Tr 14.809 Tr 15.342 Tr
US Debt held by Foreign Countries ($): 3.875 Tr 4.584 Tr 5.376 Tr
Currency and Credit Derivatives ($): 648.975 Tr 611.499 Tr 740.277 Tr

Sources of data: 
Para 1 and 2 above: from "The Mainstreaming of Alternative Investments - Fueling the Next Wave of Growth in Asset Management", a Report by the Financial Services Practice of McKinsey & Co, Sep 2012.
Para 3 : extracted on 11 Sep, 2012 from,
Table 1 above: extracted on dates mentioned in cols 2-4 of table 1 from,