Money Talk Guest Lakshman Achuthan of ECRI

This weekend Moneytalk host Lynn Jimenez interviewed Lakshman Achuthan. Lakshman Achuthan is the Co-Founder and Chief Operations Officer of the Economic Cycle Research Institute, or ECRI, a New York-based independent forecasting group. He is also the co-author of  the book "Beating the Business Cycle."  

Lakshman and I have been friends for over a decade.  We met after I wrote about how impressive their US Future Inflation Gauge (US FIG) was as a leading indicator for the direction of the Fed Funds rate changes.   

Summary of the key points:

• We are in an economic recovery now but with the economy flying at a lower altitude where the ups and downs will be more noticeable thus
• We should expect more frequent recessions.
• The economy was smoother in the past that was wrongly attributed to "just in time manufacturing," better policy makers like the Fed and better models. 
• Policy driven by models actually makes things worse since they use lagging indicators.
• ECRI's leading indicators can only look ahead 2 to 4 quarters.
• Central banks use old models that "don't work in the real world" and create bigger boom-bust cycles
• Chance of inflation being above what the Fed is targeting is "pretty good" because we have a recovery now and they are strapping a rocket onto the back of the economy and they are stepping on the gas.

Read my latest article  How to Play Expected Inflation From the TIPS Spread

• Look to take more risk now because we should boom before the next bust.
• Don't give up if you are looking for a job as it will get better first.
• "Get it while it is good" and reassess risk in the summer.
• Watch the Future Inflation Gauge (US FIG) to get a handle on inflation.  (I cover this in both my newsletters.)
• Lakshman says the FIG is going up since before QE2 was announced so he thinks the Fed is behind the curve.
• Protect yourself and "Get while the getting is good"

If you sold stocks in early 2008 when I wrote that ECRI said a recession was inevitable, then you could have gotten out of stocks near 1400.  Then if you bought back on April 3, 2009 just after they said a recovery was ahead, you would have gotten back into the market  near the 800s.  Contrast that to Bob Brinker calling us "Recession Casandras" back in 2008 then not having any money  to buy the lows in 2009.  In fact, Brinker was fully invested at the top with a "gift horse buying opportunity" in the mid 1400s! 

==> 0328/8: ECRI Calls it "A Recession of Choice"
==> 5/31/08: Brinker's Cassandra Bashing

Below are some of ECRI's recent predictions that I posted as articles to help ECRI document their great success.

Click to View full size Bob Brinker Buy Levels

KEY ECRI Articles:

• Nov 30, 2010 "ECRI Calls for Revival of US Economic Growth"
• Oct 28, 2010 "The much-feared double-dip recession is not going to happen"
• Oct. 28, 2010 ECRI Warns of High Inflation Nightmare From QE2
• Sept. 24, 2010 ECRI - Premature to Predict New Recession
• July 01, 2010 ECRI Weekly Leading Indicators Widely Misunderstood
• Dec. 04, 2009: ECRI Warns of Lasting High Unemployment Despite Economic Recovery
• July 31, 2009: ECRI Predicts End of Home Price Downturn
• July 21, 2009:  ECRI Predicts The End of the Recession is Imminent
• April 3, 2009: ECRI Says US Business Cycle Recovery Ahead
• March 28, 2008: ECRI Calls it "A Recession of Choice"

Beating the Business Cycle 
By Lakshman Achuthan and Anirvan Banerji

“This easy-to-read book tells you how the respected ECRI calls turning points, and how you can, too.”

—Jane Bryant Quinn, Newsweek columnist

" The Economic Cycle Research Institute can justify a certain smugness now that business cycles are back in fashion."

--Harvard Business Review

“Shows... how far the state of the art in cycle forecasting has advanced, and how investors can profit from it.”

—Jon Markman, award-winning CNBC/MSN financial columnist 

Lynn Jimenez Fan Club  and her Book:

¿Se Habla Dinero? The Everyday Guide to Financial Success (English and Spanish Edition)

How Beginner Investors Can Get Started

This weekend a 25-year old caller with $200 per month to invest asked Bob Brinker how to get started with an investment program.  Bob Brinker suggested the caller contact "Fidelity" and ask about dollar cost averaging into the "Total Stock Market."

This is great advice from Brinker.  I just checked with Fidelity and they said if a new investor sets up the investment into a ROTH or regular IRA with a $200 per month investment, then they will waive the minimums for the index fund. I would recommend the 25-yr old caller put the money into a ROTH. Of course I'm assuming since they only have $2,400 a year to invest they probably meet the ROTH income requirement for 2011 and have ALREADY invested in their 401K at work to take full advantage of any matching. After that, their funds should go to a ROTH IRA.

I often read others suggest using ETFs (exchange traded funds) but those usually come with transaction fees to buy. Some brokerages waive transaction fees if you buy ETFs they sponsor, but they may have a "small account fee" that cancels your savings. 

Someone just starting out needs to be very careful about hidden expenses.  A "small" $4 transaction fee on a $200 investment adds 2.0% to the expense charged by the ETF.

$4.00 / $200.00 x 100% = 2.00%  !!!

Many of the fund companies will let you into their index funds well below the minimum if you sign up for automatic investment.  I did that with Vanguard years before I heard of Brinker.  I set up an account then to invest $2,000 a year into a regular IRA account using excess taxable funds.  I forget the details but I believe I transferred $100 every two weeks  from my checking account to Vanguard until the IRA was full ($2000 max per back then. I was paid every 2 weeks with direct deposit to my checking account.  After that, the funds went to their money market fund until the clock reset for the next year and I could move money to the IRA again.  Schwab will let you buy their very low expense ETFs with no transaction fees but I'm not sure what their fees are for small accounts.

I'd call Fidelity, Vanguard AND Schwab and ask each of them what would be the total cost in each of the first five years to invest $200 a month into their total stock market index fund or a similar ETF.  Tell them you are willing to set up an automatic monthly transfer from your checking account to get the lowest fees.  After 5 years, you should have the $10,000 minimum to get their lowest cost mutual funds.  There is good competition for this type of saver because smart savers usually turn  into very large accounts in the long run.  (Disclosure, I have large accounts at all three but I am not compensated to recommend them other than they may advertise via Google ads on my web sites and blogs.)  Often you can get some fees waived if you can convince them you will move more money to their accounts in the long term and that you will call their competition and go with whomever offers you the overall lowest cost to invest $10,000 over the next five years.

If you are older and want some in stocks and some in fixed income, then don't pay a fee to someone to do it for you.  Bond funds are risky now with the yields so low.  Fees eat up a significant portion of your return even if rates are flat.  Do what I do.   Build it yourself with the fixed portion in a savings account and the equity portion in the total stock market.

ING Direct has a pretty good rate now for savings accounts (1.10%) so you can electronically link between ING and your brokerage account. Then you can move money back and forth easily. I have accounts (CD & Savings) there. I'd shop around at Best Savings Account Rates to find the best rates because they change. Currently, 1.30% at American Express Bank is the best I'm aware of and is what I recommend people use for new savings accounts.

Really good investments for investors just getting started  are John Bogle's two books: 

• Common Sense on Mutual Funds: Fully Updated 10th Anniversary Edition
  
  
• The Little Book of Common Sense Investing: The Only Way to Guarantee Your Fair Share of Stock Market Returns (Little Books. Big Profits)

These books offer great advice on how to keep expenses low to maximize your returns.

I do not recommend anyone's newsletter, even mine, until you have at least $10,000 put away in a Total Stock Market index fund and have read these books.  Once you have maybe $50,000 to $100,000, then I think it makes sense to try and beat the market with 20% of the money via managed mutual funds or "do it yourself" perhaps with the aid of "Kirk Lindstrom's Investment Letter."

Bogle on Managed Mutual Funds:

“Actively managed mutual funds? Yes. But only if they are run by managers who own their own firms, who follow distinctive philosophies, and who invest for the long term, without benchmark hugging. (Don't be disappointed if the managed fund loses to the index fund in at least one year of every three!)" “The Little Book of Common Sense Investing”, Chapter 18

Bogle on individual stocks for your “Funny Money” account:

“Yes, Pick a few. Listen to the promoters. Listen to your broker or adviser. Listen to your neighbors. Heck, even listen to your brother-in-law.”“The Little Book of Common Sense Investing”, pg 202

Good Luck!