The Age of Balance Sheet Recessions

This afternoon I received a twitter asked us to check out the presentatdion by Nomura Chief Economist Richard Koo. He compared the situation USA is in now with the situation Japan has been through for the past twenty years. He concluded that USA is indeed in the same boat. This recession is a balance sheet recession instead of an inventory recession (We are all familiar with inventory recession, sort of, Karl Marx pointed out the inventory recession more than a hundred years ago). 

Richard Koo's presentation

New Economic Thinking

A balance sheet recession happened when the private sectors are paying down the debt even in a zero interest rate environment combined with saving/paying down debt by house hold. Zero interest rate won't have much affect when facing a balance sheet recession, i.e., monetary policy itself is not enough. We need fiscal policy, i.e., the government needs to come in and borrow money and stimulus the economy. So said Richard Koo. 

The recession cause Richcard Koo presented is very convincing. The zero interest policy was introduced more than 18 months ago, and $800B stimulus later (no doubt that Krugman argued many times in his NY Times Column that the stimulus is too small) the unemployment is still around 10 percent. It is maybe why in the second quarter earning reports season that Wall Street punished any company that dares to mention any expansion plan.

I am just not sure about the solution. Should the government borrow more and throw more money at random direction to hope some would stick? Or could the government just cut the tax -- both personal income tax and corporate tax -- so private sectors would have more money at hand and be able to pay down the debt quick and start to spend and expand out quickly. I remember I read somewhere someone mentioned the tax holiday. It is share the FinReg bill didn't mention anything like what Richard Koo presented.

Your 401k portfolio

So most of us have a 401K plan. The 401K portfolio maybe our largest investment besides house. Yet after two brutal downturns from 2002 to 2003 and from 2008 to 2009 401K plan is under serious doubt/attack. I just don't know what could be an alternative (please don't say pension plan. Pension plan, which is kind of like social security, is a ponzi scheme.)

This brings us back to yesterday's entry, there is no need to replace 401K plan, instead there should be low cost ETFs or their peer mutual funds available for 401K investors to select. I haven't done a thorough study on the 401K investment option but I believe the low cost ETF portfolio we constructed in last blog provides a better option than what are available today on majority on the 401K plans out there. It's a shame  the FinReg bill doesn't address this issue.

What can you do then? Well, first you could still construct a portfolio with the similar asset allocation as the low cost ETF portfolio has, albeit suffering higher expense cost, with the selection that you have been dealt in your 401K plan. Second you should call your Senator and Congressman to ask them to do something about it, to force employer/401K plan provide to provide the lost cost option.

An essential portfolio building block

In the last blog I talked about the ETF traps that we should be aware of, i hope that message is getting through and you would avoid those traps in your coming investments. In today's entry I want to mention building an essential core portfolio with appropriate low cost and diversified ETFs.

Here is an excellent article that covers it in details. It is a long article but it covers not only just ETFs but also touches many general investment practices and ideas. It is really a must read if you are going to read just one investment guide (or whatever it might be called).

http://seekingalpha.com/article/15134-the-seeking-alpha-etf-investing-guide

Now It is only human nature that we sometimes (or most of times for some people) think we could do better than others do. Since we are small investors we might/tend to think we could be much nimble than the big guys such as hedge funds and mutual funds "monsters", that we could beat them with a quick movement. Your adrenaline will run high when your pick outperforms. That is all fine but whatever you do you do want to diversify it out. When it comes to diversify you should diversify not just on the assets but also on fund managers, you have to consider yourself as a fund manager since you are handling your own investment. So do yourself a favor, open two broker accounts, one you would be the fund manager in charge, the other one, please let this ETF core portfolio be in charge. After a year you could do a comparison yourself which fund manager delivers (don't forget the tax man effect when doing the comparison).

Beware of Short term ETF trap

I always suspect ETF like USO is for short term investors, I.e., traders but cannot figure out exactly why. Then I came across this article and it explained the issue in a details.

http://seekingalpha.com/article/123577-is-the-uso-etf-a-piece-of-junk

This probably applies to other commodities ETF as well since normally the fund would not hold the real stuff in inventory, unlike the GLD, which means those ETFs would have to use future instruments as their trading strategy which suffers the same contango as USO does.  Even though not exactly the same for comparing purpose, but you could get a good idea how a short term focused ETF would perform by looking at uyg (short term) and xlf (ling yerm) at 5 year horizon.

I hope SEC could force ETF vendors to make this short term/long term distinction more clear.

Not all index based ETF are pass investments. Buyers warned.

Apple should be more arrogant

When Steve Jobs came out on the iPhone 4 press conference and only offered a free bumper case I was furious. At that time I am a iPhone 3G user, have iMac, iPad, extreme base station and extreme express. So you could say I am an apple loyal. And I am waiting to see how the antenna issue would be solved. And I am kind of angry after the press conference.
Then I got an email from the local apple store that my iPhone is waiting for me to pick up. At one point I was thinking that I am going to just let it go. But somehow somewhere deep down a voice just told me to just give it a try and I could always bring it back to Apple within 30 days. I am glad I followed that voice.

After 4 days of usage, I wish Apple and Steve Jobs could offer a better defense and actually say this: folks, look, we think we have in iPhone 4 is the best balance of function and form factor. It is a result of hundred human years of research, design, feedback, testing to get to what we have today. It is beautiful and miracle. We do our best to be perfect but sometimes we found we are restricted by the law of physics. We are digging deeper and trying harder. Hopefully in the next version, or the next next one we could do better and have another break through. But folks, at the mean time, can I have a show of hands, from people who have used iPhone 4, iPhone 3G/3GS for more than two weeks, given what we know now, that you prefer a 3GS form factor? I know what my answer would be. I love the iPhone 4 and there is no way I would trade for a 3GS form factor. Not in a million year. I would not mind to hold it in a right way.

Rich can be arranged

"If you've got an area of excellence - you're good at something; you're the best at something; Anything; Then, rich can be arranged. I mean rich can come fairly easy."


from which movie? You should pause here and read these quotes again. We could replace the rich with success, or power, or anything. The point is that we need to find an area that we are really good at it, and we need to slow, pause and ponder this idea.