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Fuqua Faculty Conversations

Cam Harvey

Cam Harvey on Confronting Global Risks

March 21, 2012

Cam R. Harvey

Join Cam Harvey as he presents “Confronting Global Risks.” We will discuss implications of and how to manage global risks such as:

  • a complete breakdown in the Eurozone
  • a preemptive strike on Iran’s nuclear installations
  • a U.S. debt-to-GDP ratio that is drifting into European territory
  • the fact that 4 of 19 banks failed the recent stress test—but the bar was only set at 5% Tier 1 capital (roughly 20x leverage); at 6%, 11 of 19 fail

Professor Harvey’s session took place in April 2012.

View Professor Harvey’s Bio (PDF)

 

 

Pre-recorded Video

 

Live Session Recording

13 Comments

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  2. MIchael Hendrick

    Thank you Cam for your engaging and passionate reflection upon our financial health. Time to slay the dragon, eh! MIchael

  3. Nikolay Pavlov

    Hi, Cam! I am sorry I was unable to watch the interview in real time. However, I was wondering what your (relative) optimism on Italy is based on? The way I see it, Italian banks now own most of Italy’s debt, while Spain’s banks are loaded with real estate. The reason people in Spain are not defaulting is because they put in 40% down when they get a mortgage. On the other hand, Italy’s Debt/GDP is 120% and growing. Italy’s interest on the debt is higher than GDP growth. So every year Dept/GDP deteriorates even if they suddenly start running balanced budgets. If they raise taxes, GDP growth will slow. A one time tax sounds nice. The question is why didn’t the Greeks do it? Anything in that regard will be well telegraphed and people will manage to avoid the tax, so it is not feasible. And then there’s the negative demographics. Young people are moving out of Italy and Spain and getting jobs in Germany.

    Regarding the EM vs DM, don’t the EM have high operating leverage? Their industries are competing on price, with low margins, trying to make it up on volume. Should DM contract their Dept/GDP that will hurt EM exports, EM industries will have to be bailed out, and EM GDP will contract. How should we incorporate operating leverage in the total leverage metrics?

  4. Thanks for doing this, Cam. Your presentation packed a high concentration of insight!

  5. Thanks Cam, always good to get your perspective. I agree, it all comes down to price. And my calculator can’t calcuate a good/fair price to take the risks inherent in Europe as they fumble along. Hard enough to calculate the “congressional risk” imposed on our portfolios by elected officials in Washington! Private real estate at a discount to replacement cost is all I can get my head around right now, sticking to my knitting. jeremy

  6. Austin Kairnes

    Thanks Cam! Very interesting!

  7. With the dangers posed by hypothecation and counterparty risk will portfolio insurance provided by managed futures and derivative pay off in the event of a worst case scenario? Are managed futures a practical option to reduce negative skew when the MF Global bankruptcy demonstrated client accounts are not protected in a worst case scenario? What type of portfolio insurance options are available to the individual investor that mitigate hypothecation and counter party risk?

    • As I mentioned in the talk, MF (if done right) is a large portfolio of many futures contracts. Counterparty is not an issue with exchange traded futures (because of the exchange). However, that does not mean it is without risk. MF Global seems to have taken a bet with clients’ money. Interestingly, I don’t know any of the big MF players that had any exposure to MF. Interestingly, the firm I work for, spun off MF — and retained a zero interest in the firm. We run a very large MF program (about $27b), and had no exposure to MF. I think the lesson here is that there is not much difference between OTC and exchange traded. You need to beware of the firm you are using (and ideally you are able to deal with more than one firm).

  8. Thank you Cam for such thoughtful discussion. I lived in England while the Euro was being formulated and was always interested in the resistance to give up the british pound. It seemed to me the channel was enough separation as the atlantic as to why they chose to not participate in the Euro. I love the euro, very convenient when jetting around Europe, but I do think it is fatally flawed. From a pure financial perspective it makes total sense, but I agree that Germany is only so nice. They like to play by the rules, and if Spain then Italy fall we are in for a massive recession in the eurozone, we will all feel it. I want to ask you on the call about outsourcing, especially in high tech. 10 years at IBM, 10 years at Cisco…I have seen a massive shift of jobs and my interest is to understand the productivity shift and effect on GDP.

    • Germany, together with France, was the first to bend the deficit rules. Should have thought about consequences earlier…. And maybe put in the appropriate checks on what was going on in Greece.

      • Agreed. Germany violated the rules that they had pushed for. What kind of example is that?
        Given you are in Italy, let me give my take. I am far less worried about Italy than Spain. Italy can solve their debt problem by a (hopefully) once and for all wealth tax. Of course, people are figuring that out and getting their money out – so it has to happen quickly. However, the basic economics of the country are good. Very productive (especially in the North) and good growth prospects.

    • I agree that Spain is key. Their funding needs are massive. ESM does not have enough capital. All of the banks are zombie. It is a joke that real estate is has only lost 10% of its peak value. Amazing thing is the delinquency rate on mortgages is only 3% (I was told this week by a recently former ECB official). So people are clinging on to property worth a fraction of their loan. Given the loans are in good standing, the banks carrying them at unrealistic values.

  9. Luiz Carlos Lucietto

    I had the glad opportunity to take part on the Advanced Management Program at Fuqua on 2008, and in that opportunity I met Dr. Cam Harvey who I consider one of the most brilliant personalities I met in my whole working life.
    I strongly suggest this event due his participation.

    Luiz Carlos Lucietto
    Sao Paulo, Brazil

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