Armageddon Scenario

At the macro level, I am quite concerned for our great nation, however, praying and keeping our fingers crossed is the only thing we can do at this moment as we continue to avoid taking bitter medicine and take band-aid approaches and adopt only temporary fixes when in fact what we need is a major surgical procedure.

Federal Reserve's current monetary policy is pretty risky (as it has been for years now) and is only aiding congress to avoid or delay taking tougher medicine. It only exacerbates the situation and adds even more risk to our already precarious condition. We may very well get lucky, but we can push our luck only so much. Avoiding Economic Armageddon is the key here and it does not look too good.

There are two camps at this interesting juncture of our financial lives. One camp is for “Pessimists” or “Gloom and Doom” folks, where I belong to, and the other one is for “Optimists”. Pessimists or folks from Gloom and Doom camp think of themselves as being “realists” and they think of the Optimists as “hopefuls” at best and “day dreamers” at worst. Just to be fair, one of these big “day dreamers” otherwise known as Paul Krugman, a nobel prize winner and a popular economist went to the length of calling these “realists” as zombies.

By any count, the year of 2010 was one heck of a lucky year in addition to a year of 2009. First 8 months of the year 2010 was “back to basics” for the financial markets; come September and the animal spirits were back in vogue with a vengeance fed by big daddy Fed’s shot in the arm.

As 2010 draws to the close, we wonder what happened in late 2010 and what is in the store for 2011. We consider all of 2010 gains, which were all pretty much packed in last few months of the year as one of the biggest Santa’s gift. So, let us consider ourselves lucky for now and smart investors are already getting off the runaway train just to avoid a possible wreck.

Looking forward, we would venture to say that more likely than not, it will be a “back to basics” time in the year 2011 and beyond. We sure are running out of our ammunition now. Further, the magician can pull only so many tricks out his hat anyway. In all, unless our country gets its fiscal house in order, the Armageddon scenario remains likely, no matter how small a probability. Let us fasten our seat belts.

Time to Take Some Profits?

It could not have been a better year for the investors as S&P500 has posted in excess of 20% return for the year with still one month left in 2009. What is an investor supposed to do? I think it is time to reassess the risk, consider blessed by the Market Gods, take some profit and stash it away in little more conservative asset class. That is the beauty of Modern Portfolio Theory and it will be quite timely to put that in practice right now.

Yes, in 2009, financial markets have come out of the crisis (at least for now...), economy has stopped its free-fall along with all types of markets, be it equity, credit markets, commodities, real estate, credit markets have unfroze and thawed well, credit is flowing smooth at least for the corporate markets, if not for individuals, government has started spending like crazy, so, what is to be afraid of. Well.. a lot. The direction U.S. government has taken is surely a short-term fix and ignored a sound long-term solution at the peril of our future financial health.

The end result is that the sick patient has sure gotten a good shot in the arm to start walking again, however, it has not been to a surgery room to free itself of its ailment completely. Only a lengthy surgery and long recovery time would have done the job. Without that, there is no sustainable and healthy recovery. It is more of a facade of a recovery.

Smart investment decision would be to clear some profit and wait for more opportune times.

Have We Reached the Economic Bottom Yet?

It appears that way at least. Does it mean that going forward, it will be an easy ride? Not by any stretch of an imagination. Although, what I am encouraged by is the resiliency of an American soul to rebound from such lows. This resiliency had been so typical for a consumer throughout the 1990s and 2000s that the U.S. consumer seemed insatiable. Businesses obviously had been through their typical highs and lows in terms of their capital spending. It was the U.S. consumer that kept the massive economic engine going. Well, that engine sputtered big time in 2006 through 2008 and now it is going in a more moderate or slow, but predictable fashion.

U.S. consumer has pulled its horns and gone into a hibernation for an indefinite period. That is how far as predictable as it can get. That is not changing anytime soon due to its heavy debt load. What has changed for the better over the last couple quarters is that the American consumers and businesses have steered clear of their extreme pessimism. That is no small feat. I have been really encouraged to see such a massive change in an American psyche. I, always being a contrarian, have been quite cynical about the over-optimism and over-pessimism that we have witnessed in the financial markets.

The year 2008 was certainly a pinnacle in that extreme pessimism just as 1999 and 2000 were the pinnacles of the extreme optimism. So, reverting back to the normalcy and ruling under the law of averages is always a highly desirable thing for folks like me. So, I welcome to more normal environment like this. The mainstream media has been calling this a "New Normal", but this is not a not a new normal. In a way, it is, if you compare to the "Old Normal", which was not normal. Otherwise, this is a real normal. Working hard and earning every penny that you truly deserve. That is a new normal so to speak.

Visit to India, My Native Country

My Mother died on Aug 14, exactly two weeks ago from today, in India due to a heart attack at the age of 66. As a result, I boarded the flight on that day for my sojourn to India to have a glimpse at my beloved mother for one last time and to take care of the necessary rituals per our Hindu religion. I am in India for two weeks now and the feelings are nothing but nostalgic.

It has been little over twenty years since I have called the great United States my home. Yet, the motherland is a motherland. It has been nothing but the mixed feelings. Lots of good memories as well as lots of painful memories as life in India is not really easy, or at least, it was not not when I was growing up, for much of the middle class. I am really glad to see that India has come the long ways since I left the country. Over the years, I have visited India several times and every time, I have come to visit India, the progress I have seen is nothing short of impressive.

For example, the express highways, great many over bridges, number of airports and flights, suburban sprawling, growing wealth among all classes of people, emerging middle class, improving standard of living even for the most disadvantaged folks of the country are classic examples that India is really on the huge upswing since economic liberalization in early 1990s. Yet, a lot of work remains to be done and it will get there one day. That "one day" will whether materialize in 25 years or 50 years is a million dollar questions, nevertheless, it will get there, provided the current reforms continue.

China and India often possess a disproportionate share of the discussions and media coverage regarding their GDP growth and their growing presence in the world economy. One can see why such is the case, when you visit India. Though, India is behind China in creating unparalleled infrastructure as China had more than a decade of the leg up than India in economic liberalization, India can still learn a lot from China and other advanced countries regarding making the best of the investments.

I yearn to see India to be considered as one of the "developed nations". I just am not so sure whether that day will ever come due to the sheer size of its population and the baggage that it carries in the form of current systems in place. Even, if India is fortunate enough to see that day, it is highly unlikely that, I will ever see that day at least in my lifetime

Real Dynamic Asset Allocation

While there has been a great deal of talk about the root causes of the housing debacle and how to avoid the repeats of such bubbles, regulatory fixes, etc., there has been a very little, if at all, a talk of investor's exposure to the equity asset class. A small minority of investors had little or no exposure to the equity asset class, however, most had a meaningful exposure to this risky asset class (with higher potential rewards) and they inadvertently took a big bath in last year's panic driven market meltdown.

According to a conventional school of thought, investor's asset base is divided between various asset classes such as stocks, bonds, cash, etc. depending on one's age and risk tolerance. More sophisticated asset allocation will utilize other asset classes such as real estate, commodities and hedge funds. More often than not, emphasis is not given at all to equity class valuations. That is where the dynamic asset allocation can come into play.

It has been real unfortunate that countless retirees or working population on the verge of retiring have had heavy exposure to the equity asset class in 2008 only to see almost one half of it to evaporate overnight. One cannot predict highly unlikely events like this with an uncanny ability or any consistency. Yes, housing bubble was witnessed by many and they predicted that it was destined to be popped some day. Yes, equity valuations were also quite reasonable or so we were told by all the equity strategists as they were hovering near or approaching their multi-decade average. Nevertheless, extremely small minority even predicted the equity class debacle that ensued following the housing bubble busting. What is one gotta do under such circumstances?

The only real solution I see is either to use the equity class quite sparingly or have a real dynamic asset allocation. There is no other way around it, if someone were to sidestep such catastrophes. The bottom line is it really is not worth it to have it otherwise. If you were to scale down equity exposure meaningfully, then, yes, the portfolio may not gain as it may otherwise, however, at the same time, you may be spared a pain of a lifetime as several families are witnessing at this moment. So, in other words, is that extra three to four percentage points in returns, at best, really worth it to have an outsized exposure to equities? To me, the answer is NO for the great majority of investors. Alternatively speaking, as some investment advisors exclusively focus on, wealth preservation is the key and not the asset growth.

Yes, most investment advisors do the asset allocation which is dynamic in the sense that the percentage of equity allocation among all other asset classes is determined based on the age and risk tolerance. Further more, there is an annual rebalancing done within the portfolio amongst various asset classes based on the set percentages or investment criterion.

However, the "real dynamic" asset allocation as I would like to call it is to add one more criterion to the allocation criterions. And that is the "Valuation" criterion. For example, a regular dynamic asset allocation may say that the investor at the age of 50, should have 50% exposure to the equities. However, there is no consideration or an emphasis given to the equity valuations at all. So, how about using a criterion such as at price to earnings (PE) ratio of 10 or less, one should have a full exposure at 50% (predetermined maximum level), however, rise in PE by each additional point will scale back equities exposure by 5%. That means, if the PE ratio is at 15, equity exposure is only 25% and when the PE ratio is at 20, one is completely out of equities.

This would have spared an investor tremendous amount of grief during the collapse of dotcom bubble as well as 2008 financial markets meltdown. No doubt one needs to stick to more consistent and uniform method to measure the PE ratio of an index such as S&P 500 or Wilshire 5000 Total Market Index . This type of risk management and "real dynamic" asset allocation adds a great deal of value to a conventional asset allocation.

Alternatively, one can always have an outsized exposure to the fixed income with only a minimal exposure to the equities on a permanent basis. As I mentioned earlier, is it really worth it to sacrifice life's worth of savings for few extra percentage points in return during those rare events? Is any meaningful exposure to even seemingly rare events really worth it?

Prime Example of the Sorry State of Nation's Infrastructure & Toll System

I landed in this great country just about twenty years ago on 4th of July, 1989. I am proud to make United States of America my new home since then and even prouder to be American citizen since 1995. One thing that continues to bother me for past few years is that I believe America is traversing towards a path of decline.

There is no better example than the Washington-New York I-95 corridor to illustrate the sorry state of our nation's infrastructure. I just traveled through the hodgepodge of I-95 that consists of New Jersey Turnpike, Delaware Turnpike and I-95 through these namesake states and a state of Maryland on my way from New Jersey to northern Virginia to visit a friend. As I had traveled through this corridor several times in my early years in United States, it brought back some good memories of my early life.

One thing that continues to baffle me is the short-sightedness or rather a lack of vision from the leaders of the current generations. It will be twenty years for me in the United States next weekend and unfortunately I just witnessed that during these twenty years, the most important corridor of our great country has seen no expansion at all. Washington-New York I-95 corridor connects the capital of the world's only superpower to the undisputed financial capital of the world, however, much of the stretch remains two to three lane highway where as only small parts of it are much more than that. It is really a pity for a country like United States that we do nothing in over twenty years to such a critical artery of our country when many emerging countries are rolling out new infrastructure projects like there is no tomorrow.

To make matters worse on this corridor or even a thing that is solely responsible for creating unforgiving congestion is a mere existence of a toll system. It just seems so backward. This is certainly a debatable matter due to issues such as costs and fairness. At a high level, is it really necessary to have such a toll system? It appears that only vision-lacking leaders can create or nurture such a system and selfish or unintelligent people can support such system. Are we really a country made of such people? There still are smart as well as fair ways to recoup the costs of building infrastructure (or even milk that infrastructure as many of our leaders like to) than simply clogging up major arteries by placing tolls at multiple places. Well, a human body takes food only from one place and not multiple places.

The prior generations had a vision to create such great interstate highway system in 1950s where as the later generations have done nothing but use it and abuse it with no respect to preserving and growing its legacy. Population grew meaningfully during the last 50 years, however, our infrastructure did not keep up with it at all. As a result, our nations' infrastructure appears overused and dilapidated, if not crumbling. United States receiving a "D" grade from American Society of Civil Engineers only confirms that fact.

The end result is that we are paying a big price for it in form of a lack of "real" increase in our standard of living. It simply breaks my heart to travel on a same two-lane highway as it was twenty years ago between New York and Washington, a lifeblood of United States of America.
Much of the country still is heavily laden with two lane highways, often heavily congested now, which may have been an ideal solution over 50 years ago. However, is it not a high time to have some vision for the future of United States for the sake of our children and grandchildren as opposed to just be some users of the fruits of labor of past visionaries? At least, we owe that much to our forefathers to leave their legacy behind well intact.

Deficits Deficits Deficits

U.S. Government under President George W. Bush's watch surely deserves the credit for forestalling a literal free fall in the financial markets (stock market as well as credit markets) during fall of 2008. No matter how imperfect measures they may have been deemed, $750 billion TARP program surely served its purpose. It reinstilled the confidence in the U.S. financial institutions as well as the financial markets, at least for the game to continue from a screeching halt.

Fast forward to spring and early summer of 2009. U.S. Government under the new regime of President Barack Obama is taking unprecedented steps of getting into ungodly amounts of deficits as far as the eyes can see. How can this all be justifiable? On the name of helping out the current dire situation, congress made the passage of$780 billion stimulus program. Who really needs all this stimuli? It seems like the government itself does.

So, where is the outrage among common people? Financial markets are already on the mend. Credit markets have been already thawed. They are not operating like a well-oiled machine due to obvious reasons of huge capital holes in the balance sheets of the financial institutions coupled with major economic weakness, though someone expecting them to operate like they did before the bust are having a wishful thinking. Those days are gone for ever. Credit is going to remain scarce for years to come...at least until the de-leveraging has run its course. There is no doubt about it. Stock markets are up significantly from their March 9 lows. So, clearly they have regained some lost footing. As a result, financial markets do not need any additional stimulus.

It appears that the trillion here or trillion there does not matter to the government anymore. It has planned annual deficit in the trillion dollar range for every year for next several years. A talk of trillion is so common these days that we can't even say that it amuses us. Who is going to pay for this? Ultimately, we all will, our children and grandchildren will.

The fact of U.S. being hailed as one of the best nations in the whole world, if not the best, may soon be the history. It was in the making for last three decades. What drove the country to this stage still continues; which is a disregard to a fiscal and monetary discipline. With the financial markets meltdown of 2008, we had a big hope that this may turn out to be a good inflection point for a better and brighter future. From there on, we could embark upon a journey with proper changes, that can lead us back into a solid financial footing. Now, it appears that the Government is squandering one of the biggest opportunities presented in generations. So, our hopes are dashed that the U.S. will regain its superpower status; instead it gradually will relinquish this crown to other nation(s) in the not so distant future.