Links 1/8/09

Apologies for a post or so less than usual the last couple of days, I came back from holiday to some real messes (literally, as in painters who left a path of destruction in their wake), plus made a couple of trades that I am now kicking myself up one side and down the other about. I simply despise trading, it takes a huge amount out of me, and I lose a ton of energy second guessing myself. I should be back to normal soon.

Concern for California’s pelicans BBC

English Hippies Want Local Wi-Fi Network Turned Off Fox News

Bailouts Gone Wild! Porn Chiefs Seek $5 Billion New York Times Dealbook (hat tip reader Leo)

Obama Says He Will Seek Overhaul of Retiree Spending New York Times. This pretty much says Obama does not believe in his health care reform (or more accurately, reflects that it does not solve the problem). The entitlement problem is NOT a Social Security problem (a few tweaks like raising the ceiling on payroll taxes, would do the trick). It is a Medicare problem. And if you look at the data, it is not a demographic problem, but a health care cost escalation problem. And this is with the US already having a health care system that costs nearly two times as much per capita as anywhere else in the world and deliver mediocre to bad outcomes in international rankings.

Leaders must act together to solve the crisis Kevin Rudd, Financial Times

Downgrades Outpacing TARP Funding: Analyst Housing Wire (hat tip Ed Harrison). Meredith Whitney strikes again.

Big Slide in 401(k)s Spurs Calls for Change Wall Street Journal. The article focuses mainly on how 401(k)s force the great unwashed to be portfolio managers, when the real problem is that pretty much every asset category, save Treasuries, and three stockmarkets (Ecuador was one) went south in a very big way. Unless you were in Treasuries, cash, short, or played currencies well, you got hammered. The big problem with 401 (k)s, which the article fails to mention, is large fees (hidden to the investor, often as much as 3% on top of the fees within the fund options), limited and lousy choices, and hugely constrained ability to change funds (usually only once a year with very long lead times). They are a bad product, but the real reasons are given short shrift in the article.

Shanghai’s Office Space Rental on the Edge of a Cliff China Stakes (hat tip reader Michael)

Antidote du jour:

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  1. Anonymous

    “The big problem with 401 (k)s, which the article fails to mention, is large fees (hidden to the investor, often as much as 3% on top of the fees within the fund options), limited and lousy choices, and hugely constrained ability to change funds (usually only once a year with very long lead times). They are a bad product, but the real reasons are given short shrift in the article.”

    I agree that these are the main problems with 401(k) plans. However, Vanguard does a pretty good job administering 401(k) plans for companies. I’ve seen a couple plans run by them that offer investments in most vanguard funds, and those of 1 or 2 other fund families with reasonable fees (eg, t rowe price), and allow people to change investments as easily as they can in an individual account.

  2. Anonymous

    Yves, can you watch your sources please? Anything that has been touched by Rupert Murdoch is more light entertainment than news. Thanks.

  3. Anonymous

    I didn’t vote for him, but if Obama is serious about tackling the rate of Medicare growth, I give him all the credit in the world.

  4. John Rosevear

    A plan from Vanguard or Fidelity or one of the big consulting firms (Hewitt, etc) can have funds from any number of families in it and one can change funds just as one would in a retail account. Be aware that a lot of stupid-looking restrictions are put on plans by the sponsors — eg the individual companies’ benefits departments — generally in a fit of thinking that their participants need to be blocked from various unlikely bad behaviors.

  5. Anonymous

    @ Yves,

    Sorry to hear about the painters. Its hard to find any good ones these days, being a protective coatings Manager when the moneys right, I can feel your pain. One good one out of 40 I find. Hope you didn’t pay the total yet and get them back to fix the dramas.


  6. tenletters

    re English hippys
    “Welcome to the eve of the third decade: a time of chaos characterized by an all-out depression in the space industries. …..More riots in Barcelona, Madrid, Birmingham, and Marseilles also underline a rising problem: the social chaos caused by cheap anti-aging treatments. The zombie exterminators, a backlash of disaffected youth against the formerly graying gerontocracy of Europe, insist that people who predate the supergrid and can’t handle implants aren’t really conscious: Their ferocity is equaled only by the anger of the dynamic septuagenarians of the baby boom, their bodies partially restored to the flush of sixties youth, but their minds adrift in a slower, less contingent century. The faux-young boomers feel betrayed, forced back into the labor pool, but unable to cope with the implant-accelerated culture of the new millennium, their hard-earned experience rendered obsolete by deflationary time.” Charles Stross

  7. Anonymous

    The biggest problem with most corporate 401K’s is that they don’t let you short the market via individual stocks or ETF’s. I allocated all of my 401K to money market funds in Oct. 2007 but, I wanted to put a good chunk into SKF (Ultra Short Financials). Couldn’t do it and I actually lose $20.00 a quarter because of fees having my money in money markets.

    P.S. Nationwide only allows 4 moves per year. Gusess they know how to manage my money better than me.

  8. Anonymous

    How can the US solve its fiscal problems with inflation? The average voter makes their money from wages and has stagnant wages. Inflation would screw them over. Why won’t there be a massive populist backlash if the US government starts running massive inflation?

  9. dd

    The 401k article provides no useful information to plan participants.
    There are alternatives here. Plan administrators have a fiduciary duty to plan participants. Two years ago I agitated for a Treasury MMF but it wasn’t until I wrote a memo detailing the absolute rubbish in the designated money market fund that the request was granted.
    I’d also point out that “diversifying” in stock and bond funds that concentrate “investment” in the same roster of multinational corporations is not diversification it is concentration.

  10. eh

    …it takes a huge amount out of me, and I lose a ton of energy second guessing myself.

    True enough; I find it gives both the good and bad (as you describe) types of energy.

    But today what choice do you have? Right now I just cannot see ‘investing’ in anything, although I have taken a few positions and lessened the anxiety a bit by selling covered calls against them. Mostly in cash, though, waiting.

  11. eh

    You have to manage a 401k just like any other account. I’ve never had one that didn’t allow me to move money between funds/investments or go into cash pretty much whenever I wanted. IMO a SEP/IRA setup is far better — your employer can arrange such accounts at a number of brokers, including discount brokers, and such an account can be completely self-managed, e.g. you can go into short ETFs if you want. Or keep all the money in a sweep or money market account. I wish all my and my employer’s SS contributions had been allowed to flow into such an account all these years.

  12. GloomBoom

    My 201k looks like a cliff dive. The costs are ridiculous but I don’t have the steel in my bones needed to invest it myself. If they had invested in gold it would still at least be a 301k.

  13. Yves Smith


    I may have a biased sample, but to a person, friends and family members report than they can switch funds only once a year, and they have to make the choice at least a month in advance (for one firm, which has over 7000 employees, the choice is made 3 months in advance).

    I know there are good administrators, but companies still quite often pick crappy plans (Cerberus foisted one of the limited choice/limited switching programs on one of its portfolio co’s, for instance).

    And most plans offer very limited choices, maybe a dozen funds, very few international choices, no REITS or commodities (and every study ever done says that being in more asset classes reduces your risk way out of proportion to the reduction in annual return. You get higher returns over time by lowering the lows).

    Anon of 6:01 AM: The WSJ does upon occasion have good stories. And the one I linked to in this case was an example of conventional wisdom of questionable accuracy, as I pointed out. The WSJ often promotes or defends questionable orthodoxies. You’d rather have me not point that out?

  14. Anonymous

    Re 401k plans….Everyone is talking about the losses (for obvious reasons), supposed lack of choice, need for change, finally the odd proposals that “”the government should get involved”.

    The latter may be an imminent danger indeed. Coupled with the overall complacency displayed in the country, plus the dire need for revenue on part of the Federal Government, my antenna is up.

    I would not be surprised at all if 401k”s will be done away with in their current form under the guise of investor protection….when in truth it would be a move to eliminate just about the only tax break and one of the few deductions a tax payer who has no mortgage-related deductions available can take.

    Just my five cents worth.

  15. Bob_in_MA

    My brother wanted to move his 401k to cash last January, and simply didn’t have that option. That’s criminal.

  16. eh


    Thanks for the reply. I agree that many plans offer limited choices — I was never satisfied with my investment choices until I had a self-directed SEP-IRA (at Schwab), which was a much cheaper alternative to a 401k for the small company I worked for at the time. But at the other companies where I did have 401k accounts — three in total — I could change daily with either just a phone call (in the 1990s) or via the internet. I believe the last 401k I had via an employer was with Fidelity, and they have since introduced some measures to discourage frequent trading.

    IMO a SEP-IRA is the way to go. Your employer just funnels the money there and you can invest it — or not — as you wish.

  17. S

    When the US loses its China funding and RoW, look fo it, the US, to thrrow the complex ounder the bus and move to allocate a portion of the 401K contribution into the government complex so strarved for funding.

  18. Anonymous Monetarist

    ‘ made a couple of trades that I am now kicking myself up one side and down the other about.’

    Yves, the mendacity of hope and the urgency of not is probably the best investment advice one can give right now. There will be fat baseballs coming across the plate that you can hit over the fence … but today is not that day. Folks need to take a collective time-out.

  19. asphaltjesus

    Anonymous Monetarist said:
    Folks need to take a collective time-out.

    I am getting the feeling that Yves is of the non-specific opinion that inflation will be the way out of the coming crushing debt and a tactic against deflation.

    I’ve liquidated all of my meager holdings to reallocate anyway. I’d rather bet against the dollar and coming inflation. Does anyone have some recommendations for investment products that would do well in this scenario? Obviously, I’ll do the homework and I’m the one taking the risk but I know very little compared to the insightful comments on this blog.

  20. russell1200

    In my SEP/IRA I do have a lot of flexibility and a fair number of choices. But the fees will kill you. If it were not for the matching funds (so that I am starting at 100% gain on most of it), the money market fund would be a big loser.

    The way that bond-mutual funds act as more of an interest rate bet than a investment also makes for some odd choices.

    I have a base amount in a Roth savings account (4 to 5 %) at the credit union. It has been by far my biggest winner – which of course is the whole point in keeping some of your long term money in cash.

  21. Zeke

    I’ve heard the SSI is ok with minor adjustments thing a bunch of times but I don’t believe it.

    There is a problem with lifting the cap on contributions: that is it changes what has been a (sold as and still somewhat legitimately actually) a invest for YOUR retirement program into yet another WELFARE program.

    Many people are already gaming the system. (IE: WalMart greeters who after 40 years of non-SSI employment work exactly 12 quarters to qualify for benefits and will take far more out of the system then they will get.)

    The problem for a lot of us is that even with the cut-off when you run the numbers our projected lifetime benefit shows that we earned almost exactly zero percent on our “investment”. (0.02% in my case).

    So the Governments “plan” for helping me to retire is to take lots of my money and give most of it back to me, on average 20 years later, paying me nothing for the use of it.

    All the “minor adjustments” I’ve seen drive this number (% return) for me lower, into negative numbers. If you are much younger than me, working continuously it’s alerady negaive, and it would get worse.

    In other words it’s just another welfare program at that point.

    No wonder so many people find stacking gold coins a reasonable alternative these days.

  22. Charles Kiting

    a few tweaks like raising the ceiling on payroll taxes, would do the trick

    Sorry, at best it’s chump change. Too few make above the ceiling to make much a dent.

    I know several people who were making more than the ceiling who have since taken pay cuts and are now below the ceiling. And let’s not forget the 150K Wall Streeters now out of jobs.

  23. Rado

    Instead of 401(k), the government will introduce a new 5% tax.
    Prof. Ghilarducci’s long term solution is to make the GRAs mandatory, in effect turning them into forced savings accounts:

    Going forward, I propose Congress establish universal Guaranteed Retirement Accounts and the federal government deposit $600 (inflation indexed) in those Guaranteed Retirement Accounts every year for every worker.
    Every worker (not in an equivalent defined benefit plan) would save 5% of their pay into their Guaranteed Retirement Account to which the government pays a 3% inflation-indexed guaranteed return. Workers would earn pension credits based on these accumulations.

    … since the “investment” into a GRA would be locked away until retirement and expire at the death of the recipient, it would not be very different from a 5% income tax on top of already existing taxes.

  24. bg

    “Yves, can you watch your sources please? Anything that has been touched by Rupert Murdoch is more light entertainment than news. Thanks.”

    Boy that is offensive. There is plenty of opinion coming from News corp. The fact that you disagree with that opinion is not the same as saying it is not newsworthy. This smacks of the political correct censor police, as opposed to any honest debate.

  25. Anonymous

    Debtitude! Debtitude!
    State of mind, state of finances, state of union!
    Debtitude! Debtitude!

    I repeat: “Deptitude” is word of the year 2009

  26. eh

    I’ve heard the SSI is ok with minor adjustments thing a bunch of times but I don’t believe it.

    I don’t either. Consider this: the census projects that Whites will be less than 50% of the population around the middle of this century. Hispanics are by far the fastest growing group:

    Californians’ per capita income will drop 11 percent over the first two decades of this century unless the state closes the educational gap of its expanding Latino population, a nonpartisan research center forecast in a report released today.

    Substitute muslim for Hispanic in the above and you get approximately what is going on in Europe.

    It’s crazy.

  27. Anonymous

    Obama is following FDR to the letter. Back in the days, FDR turned down veteran entitlements and mass demonstration ensued.

  28. eh

    In my SEP/IRA I do have a lot of flexibility and a fair number of choices. But the fees will kill you.

    I assume you mean account maintenance/service fees — of course for some investments you will pay commission. But for the small company I worked for I established the accounts at Schwab, and there you pay no fees. The company covered the low setup costs.

    Shop around.

  29. john bougearel

    Eh and others,

    If I could wish for one thing for folks with retirement plans is that the fiduciaries would be able to offer investment options that are non-correlated to stock and bonds. Now, that is extremely hard to do on a collective basis, but traditional portfolio asset management does not offer the investors sufficient diversification and ability to hedge risks pertaining to political and economic conditions to reduce risk exposures.

    Managed futures accounts while neither an asset class nor ideal, would offer some sort of diversification.

  30. Chris

    Yves, I assume that by saying “unless you were in Treasuries, cash, short, or played currencies well” you deem GOLD to be a currency… I don’t know what’s the matter: why everybody keeps ignoring the only asset with no scary strings attached? Oh, and by the way it’s the only one up 8 years in a row…

  31. Independent Accountant

    I read the WSJ article about 401(k)s. It stank. Any company can set up its 401(k) with Vanguard, Fidelity or T. Rowe Price for very little cost with plenty of investment choices. Typical cost, 15-75 basis points a year. As for Uncle Sam running your 401(k), who are they kidding? I say leave well or bad enough alone.

  32. doc holiday

    Cat Food?

    This is all new to me, so thought I’d toss it in:

    FACTBOX-The Fed’s evolving liquidity toolkit ma…035988920090107
    The U.S. Federal Reserve said on
    Wednesday it was expanding and tweaking the parameters of its
    money market credit facility to include a wider array of
    investors and keep the program viable even with money market
    yields at rock-bottom levels.
    The Money Market Investor Funding Facility was authorized
    in October as a way to keep credit flowing to mutual funds.
    The program will now be open to other money market
    investors, including certain U.S.-based investment funds,
    government investment pools and common trust funds.
    The Fed continues to create and fine-tune a number of
    programs to support credit availability at a time financial
    market functioning remains impaired.

  33. smozes

    The problem with 401k is that in the name of “choice” administrating intermediaries get involved to put together a menu of funds, and add their own fees on top.

    Vanguard, Fidelity and TRP are fine, but administrating firms will market their “choice” of multiple fund families.

    Often the prospectus simply lists expense ratios already including hidden fees. Employees don’t see any fees, but a cursory check on Morningstar shows the real expense ratios.

    Those fees are often used to subsidize the cost of the plan to the employer, or even profit sharing with the employer, all financed by naive employees.

    It’s a big industry with lobbyists. There have been many congressional hearings and studies with no action taken.

    It would be best to just let IRA’s enjoy the same tax treatment and let employees manage those accounts independently from their employers.

  34. eh

    Yes, that’s a good point about fees hidden inside the expense ratios of offered funds, which could cost you quite a bit over time.

  35. Independent Accountant

    I agree with you. Many 401(k)s have hidden fees. My point is: They don’t have to. I have seen very low cost 401(k)s too. I’ve audited about 70 401(k) plans and seen all types, including those larded with insurance products that don’t belong there.

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