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Donkeys, Elephants and US Private Markets: 2001 - 2008

How the political color in the United States has helped shape the investment landscape

Part II: Red Elephant: 2001-2008, George W. Bush

After eight years of a Democratic White House, George W. Bush took the helm in January 2001, in the midst of the post-dot-com crash recession. Less than 9 months later after Bush took office, New York City, the global financial capital, was devastated on 9/11, which then led to war. First, a reprisal in Afghanistan, and then a prolonged engagement in Iraq. Markets continued their slide in 2001 and did not hit rock bottom until September 2002. The start of the Iraq War in March 2003 was at a time when the public markets were near their valley.

On the back of the conflict and with the fact that aerospace, military equipment and weaponry, and defense consulting are large and important industries which translated into increased jobs in these sectors and supported stronger consumer spending. Coupled with the Federal Reserve’s easing of monetary policy after the market crash of 2000-01 and average interest rates decreasing from 3.89% in 2001 down to 1.13% in 2003 as shown in Figure 1, this low cost of capital increased liquidity flows and stimulated the economy, markets, and investor sentiment. The Dow Jones Industrial Average valleyed in March 2003 and then regained ground for the rest of that year, increasing by over 30% by the end of 2003, and continued to rise throughout 2004. The dot com bubble burst was starting to fade into memory and things were looking up for markets, investors, and the economy, both on Wall Street and Main Street.

With ample liquidity supply in the financial system and borrowing costs low, leverage was permeating across all levels of the economy, and in particular, the mortgage market where subprime borrowers were able to access debt, and lenders were repackaging and reselling debt in the form of collateralized debt instruments.

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