What Dungeons and Dragons taught me about economics and the free market

Yeah I'm a geek. Okay that said, I noticed something skewed about the economics inherent in Dungeons & Dragons (that is the original AD&D or what you young whipper snappers might call version 1.0). Our party of adventurers, by about 11th or 12th level, were hauling back tens of thousands of gold pieces per adventure. My character, like all the characters in our party, had amassed hundreds of thousands of pieces of gold.

Gambling America's Future

Numeroligists should be very excited today.  The Dow fell 777.68 points today and 777 is definitely an interesting number.  It couldn't be just a coincidence right?  In fact, if you just round off that last digit, you get four 7's.  A client joked with me today "isn't 7 lucky in craps?"  It couldn't have been a better set up since seven is both lucky and unlucky in craps depending on the situation.  Today, the U.S. House of Representatives voted against the Paulson Plan we have discussed here which sent stocks tumbling by that interesting number.  Incidentally, that fall represented 7% of the market's value- a cool $1 Trillion.  Since I did not intend to waste electronic ink espousing why numerology is bunk, I'll go with the gambling analogy. 

Finally, a plan

Each of the past few days I sat down to write about the bailout plan, the details of the plan changed. We can chalk that up to politics, but in this instance, I think the end result was better than the original framework. Details are still sketchy, but reports are that the plan limits compensation and gives the government rights to buy stock in participating firms. These features help contain the moral hazard problem. By limiting pay,

The Sorry Story of the SoftRAM Scam

I got a frantic phone call the other night from my friend Roseanne. Her computer had a virus and her virus scanner kept popping up a warning dialog but wasn't fixing it. That Roseanne was even running a virus scanner came as a surprise to me. I had long ago put her on ignore on MSN Messenger because she had some virus that caused her Messenger to automatically fire me spam URLs. Anyway, since we both live in the same apartment building, I trudged over there and took a look. Sure enough after playing around with her wheezing eight year old computer I got her virus scanner to pop up the warning message about some nasty Trojan that was probably, as we speak, sending all of Roseanne's credit card information to Romanian hackers. The warning message struck me as odd for a couple reasons. One, the scanner software wasn't one I recognized like McAfee's, Norton, or even Avast. Two, the dialog box urged me to click on a link and subscribe to their service and if I clicked now I could be fully protected from this nasty Trojan and others for the biweekly discount rate of $12.99. Of course I quickly realized what it was. It was one of those fake virus scanners that claims you're loaded up with all kinds of viruses and you can make them all go away by simply paying for the software.

Ugg.

Buffett and Bailouts

I always pay attention when Warren Buffett makes a move.  The "Oracle of Omaha" is the world's greatest investor and a stand up guy to boot.  He has been sitting on the sidelines during this crisis, refusing to have any part of AIG even though parts of it would mesh perfectly with Berkshire's insurance operations.  I suspect he is waiting to buy pieces in the fire sale.  Even more interesting to me, is last night's news.

What does it take to get a credit card in America?

When I was living in Seattle (well, technically a suburb called Kirkland) I used to get a lot of pre-approved credit card offers. I don't mind junk mail as long as it is easy to visually sort. I had a wood-burning fireplace and junk mail provided a few extra BTUs of free heat in winter. Most credit card offers came in gaudy envelopes. Whoosh right in the fireplace. Discover Card, however, put their offers in plain white envelopes without anything on the outside of the envelope to identify the mail was coming from Discover Card. The only thing printed on the envelope (besides my address and a nondescript, generic return address) was a small warning that time sensitive information was in the envelope and it should be opened right away. It appeared, for all intents and purposes, like an important notice from the government. Being a foreigner in America post-9/11 and with a green card application in process that appeared to have been shelved following 9/11, I was rather sensitive to making sure I didn't miss anything coming from the government about staying in compliance with my H1B visa or things I might have to do for my green card.

Crisis Update: What We Are Waiting For

So the Treasury announced it's plan last week and Congress must approve it, so why are the markets so volatile?  Shouldn't we be celebrating that the crisis is over and stimulus is coming?  As I mentioned before, the Treasury's plan is amazingly devoid of details and since the announcement little additional detail has come out.  Markets don't like uncertainty and so are volatile while we wait.  But what exactly would be good for the market and the crisis?

Is dumping a bad thing?

Many times Asian nations are accused of "dumping", that is, selling a product in North America for below what it actually costs to produce the product. Dumping seems terribly unfair. Although when you think a moment, this goes on all the time. Microsoft gives away many useful software tools other companies used to charge money for. Outside of the subway station I use every day there are two free daily papers competing with paid dailies. Stores use the "loss leader" strategy to bring in people. In our role as consumers, someone thrusting something into our hands for free that we used to pay for does not offend us.

Las Vegas and Those Evil Short Sellers

It appears one of great villians of last week was the evil doer called the "short seller".  Never a crowd favorite, regulators banned shorting some 799 stocks of financial firms last week.  But what is a "short" and why are they so evil?  Or are they evil at all?

Crisis Averted, For Now

The U.S. Treasury started leaking plans of a game changing solution yesterday.  In essence, the government will buy many of mortgage securities which are depleting the system's capital.  As we have discussed, the writedowns of debt everywhere from community banks to large national banks to investment banks has greatly impaired capital, which reduces lending and starves the economy of funds. 

Crisis Coverage: Not All Banks Are Banks

It has been pointed out to me that nearly everyone discussing this crisis is referring to things like "banks need capital" or "the Fed increased liquidity available to banks" or "the financials are in trouble", yet no one has really explained why Bank of America and JP Morgan have been stable while Lehman and Bear were in trouble. Morgan Stanley is not in merger talks and even the great Goldman Sachs has rumors about it flying. Why are some stable and others disappear overnight?

A Little Wall St Humor In The Face of Disaster

Wall Street is known for a wicked sense of humor, practical jokes being the cornerstone of any trading desk worth its salt.  Despite the crisis, I was forwarded two funny bits I thought worth sharing.

Crisis Coverage: Why AIG?

It appears the Fed has bailed out AIG with an $85 billion loan and an 80% stake in the company plus a bunch of other provisions like replacing management. This is good news in that the feared crisis is back on hold for now.  But why did they save Bear, Fannie/Freddie and AIG, but not Lehman?  AIG is an insurance company and not an investment bank right?  As usual, the true nature of what happened is a bit murkier.

Job Scams

My friend Roseanne is back in the job market and she's been applying for jobs. She's an executive assistant (EA) by trade, which means she works under high powered business executive types who are also highly fickle. Think of Elaine from Seinfeld, think of Elaine's boss Mr. Pitt. Anyway, she necessarily gets fired a lot for picky weird reasons. Skirts are above the knee this fall and she's wearing skirts below the knee. That kind of stuff.

Watching Roseanne's job hunt the last couple weeks reminds me of employment scams. People in need, be it a need for a job or a need for a cancer cure, are always viewed by some as needing to be deprived of their money.

Crisis Update: 3:37pm ET

As of this morning the market had put an 80% probability on a rate cut from the Fed.  The Fed however decided to hold rates steady.  This inaction is not a problem though, as it is the availability of funds at any price, rather than the price of those funds that is the issue. 

Crisis Update: 10:11am

The good news is that there has been no crash.  Neither yesterday nor today did the market open already down 5% or much worse.  That means activity is fairly orderly and true panic has not set in.  That doesn't mean things are good or it won't happen another day, it just means the system continues to function for now.  The LIBOR rate doubled overnight to over 6%.  If you recall from Jon's post Watching The Credit Crisis, LIBOR is the rate at which banks lend to eachother.  The soaring rate means that banks are hoarding cash and not supporting eachother, while those banks in need of funds are willing to pay nearly any price.  The Fed injected $50 billion of liquidity overnight to help stabilize this activity, we will see to what effect.  Speaking of the Fed, their regularly scheduled FOMC meeting is today and their statement (2:15pm ET) will be more interesting than the action.  It may calm markets or upset them.  We'll see.

EDIT 10:50am ET: It turns out the Fed injected another $20 billion last night in a second action, making the total $70 billion.  It appears markets are waiting for news on AIG to decide what to do.

Crisis Coverage: The Most Difficult Decision An Investor Must Make

We here at The Long Run Blog are not here to make predictions, give direct advice or be just another source of news.  However, we are here to add a rational, skeptical perspective at what goes on in our world of economics and finance.  I think it is important and hopefully helpful to add perspective to the recent events.

Investors are notorious for making exactly the wrong decision at exactly the wrong time.  Numerous studies of mutual fund, pension and brokerage accounts all confirm the same thing: people get greedy near the top and fear causes them to sell near the bottom.  The stock market is a gauge of human emotion in the short run, not the capital allocation machine it is in the long run.

Crisis Coverage: FDIC Rumors

It appears today's market activity and the news regarding Merrill, Lehman and AIG has spiked an interest in my earlier post about the safety of financial institutions.  I read on the tape today that one economist was emphasizing bank failures and the possibility of the FDIC running out of the reserves used to insure deposits up to $100,000.  Let us examine this possibility from a rational perspective:

What a day!

1:19pm ET: As you might guess, I am extremely busy monitoring the markets today, but I wanted to drop a quick note to say that so far, action on Wall St. is much more orderly and contained that one would have expected given the news over the weekend and the foreign markets overnight.  Simply put, Wall St. is fearful, but not panicky (yet) over what happened.  What happened?  Lehman Brothers filed Chapter 11 and no longer exists; the rest of Wall St. must sort out the damage from counterparty risk and trade to replace lost or illiquid bets held at Lehman; Merrill Lynch will become part of Bank of America; and AIG is on the ropes.  AIG's situation is the most difficult to assess and also potentially the most impactful given it's $1 trillion balance sheet.  More thoughts on the day's events to come later.

You Know It Is Bad When

Fall brings cooler weather and of course football season. For any overseas readers, that is "American Football" I refer to, not the round ball with 90 minutes of continuous play and very few commercial breaks. Being Sunday, I wanted to see what time the Broncos game started and so headed to the refrigerator. Normally we have several fridge magnets with the Broncos, Rockies and Avalanche schedules posted. You wouldn't be a typical Coloradan without such info ready and handy.

A bit about IRA's

We left off discussing pensions with the concept of using IRA's to save on your own instead of in a 401K. Let me start by reemphasizing the benefits of a 401K over an IRA. Four important things come to mind although there are more.

Sokath, his eyes opened

I recently moved back to Canada after living for four years in Seoul, Korea. Before Seoul, I spent four years in Seattle, WA. For the first time in eight years I'm a Canadian tax payer and soon to be a voter again. We're having a Federal election in October. I'm thinking of voting for the Natural Law Party as a kind of protest vote. The Liberal and Conservative parties look nothing like the versions I knew eight years ago.

One of the interesting things about living abroad is you begin to understand how much internal propaganda your own nation generates and how much you subconsciously swallow. It's not until you live abroad and see Americans or Koreans telling themselves nearly the same kinds of things Canadian tell each other, you realize this.

Economic Idiot of the Week

The Fed doesn't get it, at least not entirely. While I normally don't read the minutes to the Federal Open Market Committee meetings, I thought they might shed light on the Fed's thinking at this critical stage in the economy. Here is a paragraph from the minutes of the August 5th meeting:

Unprecedented Government Bailout

My title is just one way to put it. "Fannie/Freddie Shareholders Wiped Out" is another. Over the weekend, the U.S. Treasury announced it's plan to take over Fannie and Freddie to prevent bankruptcy and shore up the mortgage market. Basically, the government effectively now owns Fannie/Freddie and is using the taxpayer's balance sheet to keep the world's financial system from complete meltdown.

What Disappearing Pensions Mean To You

I remember as a kid hearing older relatives talk about getting their pension as in "Uncle Bob worked for them 35 years and now gets half his salary for the rest of his life". For better or worse, those traditional "pensions" are slowly fading into history. These "pensions" are plans where your benefit is determined by a formula and guaranteed for life. As people live longer, these plans are becoming more expensive for companies to provide. They also have downsides such as the requirement you must work for the same company for 35 years. It is just not terribly common to be a "company man" anymore. In addition, what are the odds that the company you start out in is going to survive and prosper in what becomes a mature industry 35 years later?

Lottery Scams: can you game these games of chance?

First up, a big thanks to Brett for inviting me to be part of this blogging project. When Brett first asked me I was like "Really? You and Jon are both Wall Street types. I'm just some schlub who does a podcast with a $5 microphone. What can I do?" Brett is under the impression I have a good eye for scams and suggested I write about such. Hey, I can do that. Intelligent people not only fall for woo and bad financial advice but they also fall for many, many get-rich-quick schemes. Think how many of those Nigerian bank scam emails you get a week or even a day. What's surprising is how many intelligent people fall for it. I mean, if you were getting two or three similar sounding emails a day or a week, why would you think "sure those other guys are scammers but this guy, Prince Stelco, is the real deal."

Anyway, my inaugural post isn't about Nigerian bank scammers but about the most common "something for (nearly) nothing" offer we encounter every day. The lottery.

The Long Run Update

As you know, Jon will be leaving us to pursue other ventures (a new job!).  I personally thank Jon for starting The Long Run Blog by kick starting something I have wanted to do for a long time.  Originally, Jon wondered if anyone would be interested and I immediately contacted him to affirm the idea and offer to participate.  As it turned out, we shared very similar visions for what we wanted to accomplish and saw eye-to-eye on many of the economic topics of the day.  TLRB was off and running (after a few startup issues).  Jon's reputation springboarded our start.

Russia is for investors?

Sometimes, investors are just blind.  It is not that they don't know better; rather they actively choose to ignore pertinent information to the contrary.  Or perhaps greed takes over and reason goes out the window.  What brings this to mind is a bit of interesting news today. 

Going, But Not Forgetting

Just a couple of weeks in, and already I'm... leaving?  True, unfortunately.  As I said in my farewell post at 'The Rogues Gallery', there are times when circumstances demand that we make choices, and this is one of those times for me.

The short version is that the responsibiliities of my new job are in conflict with my desire to get out and randomly cast my pearls of wisdom before... wait, that's a bad analogy.  The truth is, I love blogging, and I'm grateful to everyone who visited The Long Run Blog in the short time I've been here.  We've had some lively discussion, and I've had tremendous fund and learned an awful lot in a very short space of time.

Behavioral Problems

The word ‘behavior' very often invokes the concept of mis-behavior.  Perhaps it is because we more often hear about a person or organization's poor conduct rather than good conduct?  While this observation may be enlightening, you may by now be snickering ‘what does this have to do with finance?'  Before I answer, let us segue with two questions:  What are the last two digits of your Social Security number?  Next, what is the maximum dollar amount you would pay for an average bottle of wine?

GDP update

Last week I wrote how the upbeat revised GDP number seemed fishy.  At the least, it was an inconsistent data point in an otherwise dour economy.  Today, Barron's had another explanation of why this number was suprisingly optimistic and may also be the reason why the official GDP numbers have been stronger than many of us economy watchers would have thought.