Primer on Balance Sheet Recessions

The value of Fortune runs far deeper than money and financial returns. On kaChing.Com, I was, and continue to be, fortunate to have acquired a large network of influential contacts. This includes hedge fund managers.

Most recently, Bluecut Capital brought to my attention, economist Richard Koo. Bluecut Capital was also interviewed on BTS. The fund management team currently manages assets via the kaChing product offering (total assets under management is collectively $4 million).

Many investors would not spend an extra moment reading on unrealistic economic models that are consistently proven to be more theoretical than practical.

This viewpoint is short-sighted.

Koo implemented various economic models during both the Latin American crisis in the 1980's and the problems of Japan between 1990 - 2005. Koo is currently the Chief Economist, Nomura Research Institute.

The current economic problems, and its current "solutions," have many similarities to that which occurred in Japan. The presentation below will give an idea of what end-game of "de-leveraging" will be like and the consequences for the U.S. if it continues to follow its economic policies.

A Primer (and a slide presentation) was provided here on Zero Hedge:
http://www.zerohedge.com/article/primer-balance-sheet-recessions

Here is an audio presentation from Koo (November 2008):
http://csis.org/multimedia/audio​-great-recessions-lessons-learne​d-japan

Notes on a 0.01% Returns

Bill Gross of PIMCO wrote about the malaise of holding cash that earns next to nothing. In his December newsletter 'Anything but 0.01%,' Gross stated the desire to earn more than 0.01% also meant the potential return for investors in accepting higher risks:

That 0% yield is not a joke. Almost all money market accounts – totaling over $4 trillion dollars (...) – yield close to nothing, so close to nothing that I mistakenly did a double take when reviewing my monthly portfolio statement. “Yield on cash,” read the buried line on page 15 of the report, “.01%.”

Remember: one component for arriving at the market value of company will depend on whether to assign an optimistic or pessimistic P/E multiple. When there is an appetite for risk, this multiple expands and therefore stock prices rise (if justified by the accompanying earnings growth rates). The stock market's return is a function of these three variables: earnings growth/decline plus change in P/E + dividend yield.

My point is to recognize, and to hope that you recognize, that an effective zero percent interest rate, as a price for hiding in a foxhole, is prohibitive. Like the American doughboys near France’s future Maginot line in WWI – slumping day after day in a muddy, rat-infested pit – when the battalion commander finally blew his whistle to charge the enemy lines, it probably was accompanied by some sense of relief; anything, anything but this! Anything but .01%!

Gross makes a very important point here:

The Fed is trying to reflate the U.S. economy. The process of reflation involves lowering short-term rates to such a painful level that investors are forced or enticed to term out their short-term cash into higher-risk bonds or stocks. Once your cash has recapitalized and revitalized corporate America and homeowners, well, then the Fed will start to be concerned about inflation – not until.

h/t marketfolly. Full original newsletter may be downloaded here.

SNL Video: China Cold Open - China Would Like Their Money Back

If It Looks like a Bear, Smells like a Bear, and Acts like a Bear

...It is not a bear.

Before reading on, know that any pattern may exist if you look long enough to find one.


In the chart of the S&P 500 from mid-June 2009 to present, above (click for full image), I labeled the uptrend days (D,E,F) against the sell-off days (A,B,C).

Uptrend Days (%, rounded)
D - +8.0%
E +8.7%
F + 3.4%

Downtrend Days (%, rounded)
A – -2.0%
B - -3.8%
C - -6.4%

The pattern that emerges is that on the downtrend days, volume is higher than average, and on the uptrend days, volume is on the decline. With exception, only the rally in D had rising volume, and was followed by the market still rising in E's rally.

With the trading activity this month, volume decline continues to be even more pronounced with each passing day.

The PPO (percentage price oscillator) compares two different moving averages. Its 3 peaks against the absolute price changes were also on the decline, a negative short-term sign.

About Me
I was interviewed by Behindthespread.com this past week. Here is the link:
http://www.behindthespread.com/chris-lau

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