So, this is a recovery?

Unemployment is at its highest level in 26 ½ years at 10.2%, but this understates the fact it has only reached double digits twice since the 1930’s (1982 and today). Housing prices are down, bankruptcies are up and yet commentators keeping yelling “recovery!” at every turn. Is this what a recovery feels like?

TARP update and a few afterthoughts on the crisis of '08

There has been a flurry of activity lately surrounding TARP. You remember "TARP" don't you? The legislation that was passed with great debate and outrage in early October 2008. It was derided as a massive "bank bailout" sure to cost the taxpayers hundreds of billions. Even more important, many politicians, pundits and commentators shouted that in addition to the cost, it wouldn't work. Not only would TARP fail, but the proper course of action was to do nothing. Mostly Republican and free-market purest voices were heard to repeat, to varying degrees, that such intervention was futile- simply letting events unfold as they may is the only truly prudent course of action. No "bailout" was needed, they said; the system would right itself, they said; we aren't really facing a complete financial meltdown they argued.

Raising Taxes on Hedge Fund Managers

Ever wonder how hedge fund managers can become centi-millionaires or even billionaires in relatively short time spans? It isn't uncommon for a hedgie to build such a substantial net worth in less than a decade. Besides the extremely generous fee structure they command (I blame the customers for actually paying it), there is another factor that contributes to their wealth accumulation: a tax break. (In case you forget what a hedge fund is, see our older post on hedge funds.)

Do Ads Like This Really Work?

Over the holiday weekend, I caught a Dodge commercial on TV. It happened to be from one Melloy Dodge in Albuquerque, New Mexico. It was your typical car commercial with a loud announcer's voiceover highlighting the unusual and amazing (always "amazing"!) deals on new cars. You better hurry or you'll miss the special deal.

This particular commercial was advertising a full 80% off MSRP! To be honest, that 80% figure is the only reason the commercial caught my attention as I am thoroughly immune to stupid commercials. How could that be? Was Melloy going out of business? Even if they were, no new car is ever 80% off unless it's a scam, like say a stolen or flooded vehicle.

It didn't take long to hear it was indeed a scam. The particular foul? You may have already guessed- "MSRP" had a special definition just for this commercial. Instead of the standard "manufacturer's suggested retail price" to which everyone is accustomed, they slipped in their fabricated definition of "manufacturer's suggested retail profit". I nearly spit out my coffee at the audacity. Yet one wonders, does such blatant nonsense work as a marketing gimmick? Is there anyone who actually thought this was a real deal?

Personally, I try hard not to do business with people or companies that operate this way.

New Long Run Blog Feature - Favorites

It is "Cyber Monday" and you are probably shopping online at work. If you aren't shopping, your co-workers probably are. Since the office is generally unproductive, why not indulge in some personal reading time? May I suggest checking out our newest feature, a page called "Favorites & Most Popular"? Here you'll find lists of each author's favorite posts along with a list of the most popular posts as measured by views. You can find it near the top right corner of the TLRB page. Enjoy!

Some bearish news for the dollar

Since I wrote the 3-part piece about the dollar (parts I, II, III), some nasty things have occurred in Washington. It was just one-month ago that I made the following warning in "Part III: Can the Dollar Weaken Anyway?"

"Another very bad outcome for the dollar may happen if Congress starts dismantling the Fed’s independence"

Guess what?

Can you afford the subway increase?

Toronto has a subway system. It used to be a pretty decent subway system. Clean, modern, fast, and reasonably priced. These days it's dirty, has not kept pace with Toronto's expansion, break downs are common, and the fare box price has been seeing big jumps in price, well above annual inflation rates. When prices jump way above inflation, that sounds pretty counter intuitive.

[caption id="attachment_1295" align="aligncenter" width="300" caption="The subway only gets you about half way across the city these days"][/caption]

What's going on?

Chinese Effrontery

Monday's WSJ brought a front page article that made me LOL at the hypocrisy. The sub-headline was all it took. The article in question is "China's Blunt Talk for Obama" and the humorous sub-headline "Regulator Says U.S. Policy Puts Global Recovery At Risk as President Arrives in Beijing". What specifically is so funny? Let me quote:

Data Security at Financial Institutions

Would someone please explain the security procedures that banks and other financial institutions implement? I happen to run into a "verification process" quite frequently. This normally entails answering a series of questions. You know, questions like "what city did you get married in?" or "what is the first name of your paternal grandfather?" There seems to be about 15 standard questions used by financial institutions, not all of which are used by each. My problem with these has to do with a lack of understanding exactly how they are supposed to protect me.

How is Vegas treating jugglers?

A few months back The Long Run blog's founder Brett Spurr was in Vegas and observed an interesting economic phenomenon: while hotel room prices were at all-time lows, food was now pricier. So a hotel room at a major hotel might run you $50 a night but the Coke machine on your floor is now charging double. The old "if you can't make it in popcorn, make it in peanuts" strategy.



Brett cautioned his observations were purely anecdotal. I thought I'd follow up on Brett's intriguing observation by wrangling my connection¹ with Vegas local Michael Goudeau (former co-host of the Penn Jillette Radio Show and an occasional panelist for the yearly The Amazing Meeting) and get his observations about how the down economy is affecting what is surely one of the most interesting local economies on earth.

GDP, Truth Twisters and, well, Duh

A couple of noteworthy items made their way to my attention this week and unfortunately both are sad. Let's start with our official paper of record, The Wall Street Journal. Yesterday, the WSJ featured a 6-column article on the top of page 2 about the Fed's "Path to Higher Interest Rates". The article goes to great lengths speculating about how the Fed will raise rates when it ultimately decides to do so. Not only did I waste a few moments of my life reading this useless piece, but my only response was, well, "duh!" More precisely, many many "duhs".

Who’s Afraid for the Dollar? Part III- Can the Dollar Weaken Anyway?

The first two parts of this series dealt with the reasons the dollar is not about to collapse, but could the dollar weaken anyway? The short answer is a resounding ‘yes’. The dollar’s value will fluctuate and it may even decline fairly significantly in value as a result of all the recent monetary policy. However, hyperinflation is not in the cards, nor is an outright dollar crisis.

Who’s afraid for the dollar? Part II- the Chinese and Reserve Currency Status

So what happens if the Chinese stop buying our debt? Let's start with a some perspective: China currently owns about 11% of all the outstanding U.S. Treasury notes and agency debt (Fannie, Freddie, etc). While this is a large, significant and growing proportion, it is hardly enough to consider the Chinese our economic masters. Consider that the UK, Cayman Islands, Luxembourg, Belgium and Canada collectively own twice as much as the Chinese. Indeed, Japan alone is still our largest creditor holding a little more than the Chinese.

Who’s afraid for the dollar? Part I

We hear many prognosticators talk negatively about the dollar (I call them “dollar bears”). Some predict the dollar will get so weak it will crush the economy, cease to be the world’s reserve currency, and drive interest rates to double-digits. Some even talk about Zimbabwe or Weimar Republic style hyperinflation due to the all the money the Federal Reserve is “printing”.  These fears are overblown and unrealistic in my opinion and I’d like to take a moment to explain why this is not something we should fear. Since this is an extensive topic, I will break it into several parts.

Still Worried About All Those Reserves?

Many commentators still seem to be screaming that hyper-inflation is around the corner. The crux of their argument is that the Fed has pumped hundreds of billions into bank reserves. There is a chart circulating, which you may have seen, illustrating this explosion of credit. After all, reserves normally translate directly into fresh lending. I have reproduced the chart for you here:

"Cadbury shareholders stand to lose out massively"

"Cadbury shareholders stand to lose out massively" is the language a shareholder has used in suing Cadbury to reconsider the Kraft offer. More specifically, according to a Reuters story today:

Brett on Conspiracy Skeptic

Brett is probably too shy to toot his own, but I interviewed him about China, money, the gold standard, and trade on my podcast The Conspiracy Skeptic. Not much conspiracy talk, just some econ 101 stuff:

Merger Posturing and Agency Dilemmas

As I watch takeover announcements, something called the principal-agent problem crosses my mind. Also called "the agency dilemma", it can be described as follows (paraphrasing from wikipedia):

"the difficulties that arise under when a principal hires an agent, such as the problem that the two may not have the same interests"

More specifically, the owners of a company hire managers to run the company on their behalf. Those managers, often called "officers" are better known as the CEO, President and other corner office, executive suite titles. The owners or shareholders elect a board of directors who are supposed to find, hire and compensate managers so that owners' interests are aligned with management's interests. Put more simply, if management makes the company more money, the managers earn more money too- at least that is usually the intent.

My Favorite EconTalk podcasts

Russ Roberts, host of EconTalk, occasionally makes the point economics is referred to as the "dismal science". Those who refer to economics that way have never listened to Russ' podcast. Listening to EconTalk always leaves me feeling a little bit better about the world.

The media and politicians like to spin economics in a way that makes you scared and favorable to whatever solution they happen to offer. Russ in his podcast frequently examines these claims and exposes them either as false or highly misleading. For example, Russ many times points out it's a myth America doesn't make anything anymore, that its manufacturing base is being hollowed out. America is the world's largest manufacturer. America just becomes increasingly efficient over time. America can make more with less people. When your economy can make more with fewer resources (be it iron or human resources) that's actually a good thing for your economy.

Lehman Remembered

I don't know about you, but I'm tired of the anniversary of the fall crap lately. Lehman, being the poster child for that fateful week, is always the topic of conversation. As a commentator on the financial world, I suppose it is my duty, accepted when they let me write a blog, to make some sort of acerbic, snide, honorary mention of Lehman. So, I'm going to do just that:

Lake Woebegone part I

Lake Woebegone refers of course to Garrison Keillor's fictional location in Minnesota. Keillor has been in the news lately, apparently recovering from a stroke and providing a reasonable opportunity to highlight the Lake Woebegone Effect (henceforth "LWE"). In fictional Lake Woebegone, "all the women are strong, all the men are good-looking, and all the children are above average."

Tax it out of existence

I was thinking about scotch the other day. My brother recently got married and during the reception my brother came by our table and mentioned to my father and my uncle that the open bar was offering a single malt scotch. My father and uncle seemed to be very much into this beverage, given the rapidity with which they made their way to the bar. If two of my kindred are heading in a direction quickly, as a middle child, I find it hard not to follow. I'm not much of a drinker, enjoying the occasional beer, but I decided in the sprit of the event I would imbibe this spirit along side my father and uncle. That's what the scotch ads tell me to do, in any regard. The bartender immediately handed them a glass with scotch poured over top ice cubes. “Scotch on the rocks” might be the term. My father and uncle were aghast and they requested their scotch with only a bit of water. Since I had no experience with scotch, this scotch-on-the-rocks offering couldn't have offended me so I volunteered to take that glass and not let it go to waste.

SmartMoney Mispeaks

In this post, I am not referring to "smart money" as hedge funds or insiders. Rather, I'm referring to SmartMoney, the magazine. It is a decent publication which seems to straddle the line between sophisticated advice and commentary versus making it palatable, interesting and useful for laymen. It is also a Dow Jones publication and shares some writers with the Wall Street Journal, TLRB's official paper of record. I like to keep on top of what the public reads and hears about financial matters plus it offers one more source of ideas from time to time.

Hockey Fans- help me with this logic

Help me out, because there must be a reason I just don't understand. I play ice hockey two seasons per year and now we've formed a new team, so I'll be playing on two teams each season. Fun! Ever since I started playing ice hockey, I have heard of goalies trying to play for free. That is, they want the league or the team to pick up their league fee. Ice hockey, at least in Colorado, isn't cheap. Something around $475 per player per season.

Keynesian economics wrap up

A few days ago Brett and Julio sparred over Keynesian economics in our Second Great The Long Run Great Debate II. (Not to give a lot away but we're thinking of having the third as a pay-per-view event in Lagos.) Now lest you think my job in this debate was walking into the ring in a bikini with the title card, you stand corrected. Actually, I thought that was my job but Brett and Julio pointed out that in The First Great The Long Run Great Debate 1.0, Brett did a postmortem q&a. Right. So that duty now befalls me.

Keynes was right; then subsequently abused

It is a delight to be with you here today, discussing the policy prescriptions of the great John Maynard Keynes. (I like to pretend like it is an actual, face-to-face Ivy League-style debate.) Though I disagree with my opponent, I do appreciate his view. Unfortunately for him, it is just plain wrong.

Keynes wasn’t all wrong. He just wasn’t all right.

Keynes’ General Theory of Employment, Interest and Money revolutionized economic thought in 1936 and ignited a debate that continues to this day. Prior to Keynes, classical economists correctly believed that economies have self-correcting mechanisms that maintained prosperity and full employment. Keynes argued that the propensity of firms to invest could be too low compared with that of household savings, leading to recurring depressions. Keynes believed that through government fiscal policy, i.e. lower taxes and higher spending, that the government could help the private sector and restore full employment. Politicians seem to have forgotten the part of the policy about lower taxes for the most part.

The Great Long Run Blog Debate #2: Keynesian Economics

Keynes has been a popular topic lately. By Keynes I mean both John Maynard and his economic theory of government intervention into the free market. To quote wiki:

Congress agrees

Way back last December, I wrote about corporate jets where I made the case that they are valuable and justifiable business tools despite Congress being in an uproar given the pending auto industry bailout. Many of you agreed with Congress that such flight privileges were outrageous- especially on the taxpayer's dime. It seems that Congress has had a change of opinion and thinks private flights are just fine, especially when paid for by the taxpayer.

Metric System, Kinda

There's a lot of talk about this cash for clunkers program. Canada had something similar but it wrapped up last year. If you bought a certain fuel efficient new car you got a rebate from Transport Canada. You could get up to $2000. Which ain't bad.

I guess the cash for clunker intent is get older fuel inefficient cars off the road, get people to drive new fuel efficient cars, save the environment, save jobs, save the cheerleader, save the world. You know the drill.

A chicken recovery?

In trying to figure out the state of the economy, we analysts tend to look for lots of data. Not necessarily just systematic data, like figures on employment or housing (those are a given), but also anecdotal data which may provide economic insight or at least food for thought. Yesterday, an odd headline caught me eye. A good place to gauge the economy is by watching food sales- a fairly real time indicator.

Tyson Foods, the giant $27 billion processor of chicken, beef and pork and derivative products released quarterly earnings after which the stock traded down sharply in an otherwise bullish tape. When the economy improves, or at least bottoms out, companies like Tyson normally see improved pricing and demand. This is generally true of most food stuffs. Nonetheless, the CEO said (as always, emphasis is mine)

A quick thought on healthcare reform

I have a quick thought on healthcare reform tonight. One of the many arguments against the Obama/Dems current proposal to cover more people is where will we get the money from? Estimates expect the tab to run near $1 trillion over the next decade. Many extend this idea into something on the order of "why should I pay for someone else's coverage or care?"

What I haven't seen mentioned, is that we are already bearing the cost of their care. Huh? Well, there is no free lunch. That much we know. If uninsured people end up in the hospital, which they inevitably do, who foots the bill? Either the hospital or the taxpayer do, both of which must pass the cost along to the rest of us through higher prices or taxes lest they would be out of business. And we all know that ER visits and emergency care are much more expensive- perhaps an order of magnitude more- than regular care. Those pnemonia cases in the ER, for example, generate bills in the thousands compared to a few doctor visits and some antibiotics. The same goes for most treatments.

Of course, this isn't an endorsement of the current plan. There are plenty of valid arguments against the plan, this just isn't one of them.

Edit- Once you've read this, please be sure to read the comments.

More poor research

As you may know, I get to see a lot of financial research. Sometimes there are brilliant gems worth every moment or penny spent on the research. Then there is the vast majority of research- garbage.  Research is too often just a sales pitch to buy stocks or mutual funds. Show what seems to be a scientific look at why stocks should go up (or down) and you have the makings of a convincing sales piece. If you can make your point in just one powerpoint slide or page, it is even more impactful.

GM: General Misunderstanding about the stock

There shouldn't be anyone left on the planet that doesn't know GM went bankrupt. At least not amongst people who might buy and sell stocks. It came to me as some surprise then, when I checked GM's stock price today, that it was actually up. The stock was up 2.5% today to a whopping $0.52 per share! Lest you think only a few shares traded hands, some 32 million shares traded today and has averaged about this volume since filing chapter 11. That's $16 million of GM stock trading each day. (By the way, the name of the "old" GM was changed to "Motors Liquidation Company" under ticker symbol "MTLQQ").

Who could have been first on the moon?

A few years ago when I was teaching in Seoul, I visited the Seoul science museum. It was mostly geared to kids. Lots of buttons you push that have unexpected results like a bolt of electricity arcs between two wires or you find out what Karen Carpenter's weight would be on the surface of a neutron star. Kids love that sort of thing. There was also a space exhibit. Part of the exhibit was a little diorama model of the moon with your classic LEM and two astronauts exploring the moon. I've included the picture below the fold. Tell me if you see something rather odd in the photo.

Max out your friends, not your credit card

A guy I worked with years ago (circa 1991, a time when a young Victoria Jackson was teaching America to laugh and Sergeant Slaughter finally defeated Ultimate Warrior for the WWF championship belt) told me about how when his father was a young salesman he was part of a "suit financing ring". Each ring would have, say, 10 friends or coworkers. Basically each person put in $5 a month. At the end of each month, one person would get a new business suit (10 people putting in $5 a month would give the fund $50 a month and I guess back then a good business suit would run you about $50). After 10 months, everyone had a new business suit and the cycle would continue.

Anecdotal observations from Las Vegas

I happened to be in Las Vegas for a conference this weekend and noticed something new. No, not another hotel or attraction- those are always springing up. Rather, I noticed that prices have risen on the strip. Not hotel room prices- those have fallen hard.  In fact, a room at the center-strip and recently renovated Mirage are just $63 per night. The Monte Carlo offers rooms from just $38. I have paid double and triple these rates at the same properties in the past.

The Amazon Tax

In these cash-strapped times legislators everywhere are trying to find creative ways to raise revenue. California, for example, is issuing IOUs to help temporarily ease its cash crunch. Lawmakers in both Rhode Island and North Carolina are trying another tactic: they are trying to tax the internet.

Before we pass judgement, however, a little background is in order. Way back in the mid 1990's, when the nascent internet was just developing "ecommerce" in earnest, Congress decided it was best not to tax the internet so as not to nip in the bud the growth engine that ecommerce was deemed to be. State legislatures were and still are very worried about lost sales tax revenue. If a company has no physical presence in your state, the state can not collect sales taxes from it. So when Amazon ships a book from Washington to Colorado, Colorado can not collect sales tax because Amazon has no presence in CO. Washington does not tax Amazon's sales (unless in WA) because the shipment to CO is inter-state commerce, protected from tax by the Constitution.

Idiot Revisited: Fisher

A while back, last September 9th to be exact and right before the world really fell apart, I took some flack for calling the Dallas Fed President Richard Fisher the economic idiot of the week. If you don't recall why, let me help you. As the world was rapidly deflating in a giant credit crunch, Mr. Fisher's position was described in the Fed's meeting minutes as

"While the financial system remained fragile and economic growth was sluggish and could weaken further, he saw a greater risk to the economy from upward pressures on inflation." [Emphasis mine]

A few months later he changed his tune and accepted that the right thing to do during a credit crunch is not tighten credit, but rather expand credit and liquidity. Thankfully, Bernanke already knew this.

I raise this issue again because Mr. Fisher was in the news again today. Bloomberg reported on some of his remarks this week. I'll quote from Bloomberg's article (again, emphasis mine):

Skeptical of Recovery

I admit it. My brain hurts. The financial/economic world isn’t making a whole lot of sense to me right now. Current consensus is that the worst is over, “green shoots” are taking root, and that growth is just around the corner. The stock market goes up on news deemed “less bad” and interest rates have also risen based on the idea that inflation will return with growth- how can it not return with all the stimulus and liquidity put into the system? Yet somehow I can’t help but remain skeptical of this growth story.

Long-Term Bond Funds

I was just working on a review of a new client’s 401K and I noticed a holding called “XYZ Long-Term Bond Fund”. Fine. Nothing terribly special about that. However it occurred to me just how misleading such a fund name can be to the uninitiated.

Many people not versed in financial matters might see this choice and think “I’m investing for the long-term, this is for me.” In their mind, retirement is far off, perhaps twenty years or so, and investing in 20 or 30 year bonds might seem like a perfect fit. Unfortunately, things aren’t so simple and the funds named like this can be very misleading.

Pirates

Anyone notice we're about to go through a whole summer with out a Pirates of the Caribbean movie? I have. But this posting isn't about that. Pirates, of course, are in the news. They're the new big enemy, the crazier-than-Hitler types we love to read about and wish our governments would squash.

As January goes, so goes the year

That's an old, old Wall Street adage. So old, in fact, that I couldn't even track down its origins. What the maxim means is that the direction of January foretells the stock market's direction for the rest of the year (February through December) that is. Financial journalists love to pull this one out every year, particularly since a little quick math is impressive. In the 82 full years since and including 1926, this metric has worked 70% of the time. Considering markets are either up or down, 70% is much better than the coin flip odds would suggest. Or is it?

Poor logic makes for good sales tactics

I happen to be a pretty loyal Toyota customer now. We have two "Toys" and get them both serviced at the dealer. I'm not a do-it-yourselfer and I have had my share of bad service from non-dealer shops. Once upon a time, I tried to save a few bucks by using Midas for brakes. What I saved in dollars paled in comparison to the aggravation of getting it re-done over and over until they got it right. Another time, my non-Toyota vehicle had something wrong, but I didn't know what. The local mechanic couldn't tell me either because they didn't have the scanner/computer/technostic thingy the dealer uses to read the vehicle's computer error codes. So I learned to just build a relationship with my dealer and get all the maintenance done by them. You know what? They give me a discount, don't make up repairs and the work gets done right with genuine parts. Saves me aggravation in the long run. While that is my experience, your mileage may vary, as they say.

The Conspiracy Skeptic Podcast

Want to know the truth behind Roswell and UFOs? You know how I write, but are you curious how I sound? Then listen to Karl's fantastic The Conspiracy Skeptic Unplugged podcast with this episode's guest- me. You can find it on iTunes, the links to the right, or here.

One thing that became obvious to me, is that Karl really knows a lot about conspiracies. Several times right before the recording, I emailed him with a change in the conspiracy I wanted to talk about. Karl's response was always "great, that'll be fun" where I had expected him to need time or preparation to change topics. Nope. Karl knew almost everything he needed off the top of his head. That, my friends, indicates a genuine conspiracy groupie! If you want to wade through conspiracies to find the truth in a fair, logical and fun fashion, you are in good hands with Karl.

If you haven't yet tuned in, I highly recommend it. In fact, I had asked Karl to participate here at TLRB after listening to his double show about the Fed. He gets it!

Is buying bird seed for the birds?

Last week NPR's Planet Money podcast had an interesting piece about how credit card companies judge your ability to pay (whether or not you're a credit risk) based on what you're actually buying. The show noted that a Canadian retailer called Canadian Tire released several examples.

The future is California – without the great weather.

California is the most heavily taxed state by most measures according to a recent L.A. Times story. According to the article, the marginal rate on taxable income over $1 million will rise to 10.55% from 10.3%.  The next-highest tax rate, which starts at $94,110 for a married couple filing jointly, will rise to 9.55% from 9.3%. Sales taxes were just increased a full point from 7.25% to 8.25% plus whatever the local municipality tacks on. Here in Santa Clara County the sales tax is 9.25%.

Obamanomics- Chrysler Style

Republicans haven't been shy about branding Obama a socialist, communist or anti-business liberal. After all, they love labels. That Obama leans left is no secret, but there really hasn't been a evidence for any of those labels to stick. I use "Obamanomics" not to denote any particular philosophy, but to capture the whole of Obama's actions in the economic realm. What I see so far is wildly inconsistent.

Stress Tests

Ever since Geithner announced they would be conducting "stress tests" on the banks a few months ago, people have been speculating on the outcome and what it will mean for the markets. Some argue that the government won't publish negative results because that would spook the markets. Others hypothesize that good results will be viewed skeptically by the markets, owing to the fact we all "know" the banks are in bad shape.

Tax-and-Spend Democrats, Small Government Republicans and other Myths

A few years ago, I attended an industry meeting at which TJ Rogers, CEO of Cypress, gave the keynote speech. Shortly after dessert was served, a color guard complete with blaring bagpipes followed a kilted TJ Rogers up to the podium. That night, TJ turned my beliefs about the fiscal policies of Democrats and Republicans upside down. I dedicate this posting not to TJ though, but to his former corporate controller, who claims he did the work.

Here are a few facts for your amazement and amusement.

"Be Your Own Banker"

Coincidentally, we received several emails asking about a concept called "be your own banker". This has been around for decades, but apparently is now being remarketed as "Infinite Banking", "Bottomless Banking" among other catchy names. Why pay interest to a bank when you can enjoy the "extraordinary benefits of creating your own banking system"? One site claims the method will "make you rich". Does it sound too good to be true? Sound like a scam? Read on.

The Chinese aren't manipulators after all

Or so says Geithner today. The Treasury released its International Economic And Exchange Rate Policies report to Congress today. Very exciting reading, I know. Interestingly, in the very first paragraph of the report, the Treasury says:

Between 1988 and 1994, Treasury cited three economies (China, Korea, and Taiwan) several times each for manipulating their exchange rates...Since July 1994, no economy has been found to have met the standards identified in Section 3004 of the Act.

How to fix the economy

Snopes had a recent expose of this hair brained idea:

For a total cost of 40 Billion you could solve our financial problems. There's about 40 million people over 50 in the work force. Pay them $1 million apiece severance with the following stipulations.

1) They leave their jobs. Forty million job openings
- Unemployment fixed.

2) They buy NEW American cars. Forty million cars ordered
- Auto Industry fixed.

3) They either buy a house or pay off their mortgage
- Housing Crisis fixed.

A Buffett Contest

No, not a buffet eating contest. As many of you may recall, we here are big fans of Warren Buffett. Well, I'm a big fan of Buffett, I can't speak for Karl or Julio. Anyway, each year Buffett holds Berkshire's annual meeting on the first Saturday in May (May 2 this year) in Omaha. The gathering is sometimes called "Woodstock for Capitalists" on account of it being a gathering of some 30,000 [mostly] wealthy Berkshire shareholders who gather to hear the Oracle of Omaha opine on a rich variety of subjects for nearly the whole day.

A Step In The Right Direction Against Counter Party Risk

Bloomberg is reporting this morning that some 2,054 entities have signed up to participate in a group which will oversee the credit default swap (CDS) market. CDS are the instruments (amongst others) that got AIG in trouble. Some of the big criticisms of such derivatives is the lack of standardization, oversight and clearing. CDS are not regulated products like stocks, bonds or options, but are are private contracts instead. There can even be disagreement between parties on whether or not a default of the underlying company really occurred.

What is 'Financial Planning'?

One of our original goals for The Long Run Blog was to explain or examine general misconceptions about money. In my introductory post, I wrote

"financial decisions are becoming more complicated and more important to one's well-being at the same time. Traditional pensions are disappearing while self-directed 401Ks are on the rise. Businesses, salespeople and politicians twist, bend and contort economic statistics to sell you products or ideas. How can we tell fact from fiction?"

AIG Casino and Financial Services Company

My wife and I often argue about whether investing in equities is the same as going to a casino and pumping dimes into a slot machine. Now when it comes to slot machines and dimes, my wife has first hand experience. On our first trip to Las Vegas together we stopped at the first casino we came to, she put a dime into a slot machine and on the first pull collected $100. “That’s a better return than on any equity investment we’ve made,” she’ll point out thirty years later. I’ve given her the business school pitch on markets countless times and have explained that we’re value investors and occasional traders, but that we’re not gambling with our retirement.

Excuse me while I call my bookie, er broker...

According to the Encyclopædia Britannica: "Bookmaking is the gambling practice of determining odds and receiving and paying off bets on the outcome of sporting events (particularly horse racing), political contests, and other competitions." Bookmakers ("bookies") usually don't bet their own money, they try to create a "book" in which betters compete with each other. The bookmaker tries to build the book in such a way that regardless the outcome of the competition, the bookmaker pays out less than collected. In reality, that's easier said than done. To protect themselves, bookies limit their exposure to losses either by limiting the size of the bets or placing an offsetting bet with a larger bookmaker. The article goes on to say that several heavily capitalized bookmakers have emerged that only accept bets from other bookmakers.

This  financial arrangement can also be described as a contract between two counterparties where in exchange for a premium, the seller pays the buyer a sum of money if a specified event occurs to the reference entity. Now it turns out that if the specified event is a credit default instead of beating the spread, and the reference entity is a corporation instead of your favorite team, and you call your broker instead of your bookie to place the order, it's called a hedge. Instead of being gambler, you are an investor. And instead of placing a bet with a bookmaker or "the house," you place a trade with a financial services firm.  These  firms will give you 199 to 1 odds on your bet, er, investment. They'll sell you a contract called a Credit Default Swap for a 50 basis point spread per year. For a $5,000 investment, you can make a million. In comparison, the odds of Freddie Couples winning the Masters this year are 80 to 1.

But wether you are placing a bet at a swanky casino or investing with a bulge bracket Wall Street bank, there is one expectation above all - that the house can and will pay. Only a small time bookie wouldn't pay, right? We all know what happens to bookies who don't pay. Imagine the consequences if a casino didn't pay off a record bet they accepted. All hell would break lose. 

Most of you are probably familiar with the story of the MIT Blackjack Team. Students and former students from MIT and Harvard formed a team of highly skilled card counters. The team offered a prospectus to raise capital ("stake") and reportedly made an annualized return of more than 250%. Most of them were eventually caught and politely barred from playing anymore. Semyon Dukach, one of the members of the MIT team, wrote an interesting piece called The Real Cause of the Financial Crisis: An MIT Blackjack Team Perspective.

Car Czars

We have had vigorous debate about the government's helping of Detroit (see GM: General Mess). I have argued there is no 'saving' of GM and Chrysler except through bankrupcy, at least not through loan programs as proposed by the government. So, I'm reading a WSJ article about Obama's "Auto Task Force" describing their approach.

AIG Revisited- Good Money After Bad?

Back in September, 2008 we discussed why a collapse of AIG would be so detrimental to the entire economy. Not that it wasn't a moral hazard to save them, but rather that the ripple effects would extend well beyond Wall St. Julio recently pointed out that it would incompetent if the Fed did not perform due diligence to know the bonuses were in place. Whether they had enough time to determine that, I don't know (it all happened so fast), but they did decide to save AIG for the larger purpose of preventing an entire economic collapase via a ripple effect of evil.

Who's that greedy?

One of my favorite Internet sparring partners in the evolution debate is a Hare Krishna devotee who teaches English in South Korea¹. I debate with him on a message board for expat English teachers. Unlike most fundamentalist Christians who posit a 6,000 year old universe, Hare Krishnas seem to believe the universe is trillions of years old. What actually brings them into conflict with science is while the best evidence points to modern humans being about 130,000 years old the Hare Krishnas believe modern humans have been around for millions of years. And by modern I mean MODERN. Millions of years ago humans were zipping around the sky in TIE fighters and nuking each other with hydrogen bombs. Since both science and his religious teachings can't both be right, and science doesn't at all seem to support the truth of his religious teachings, science is a closed-minded conspiracy seeking to spread its atheistic views. Hence, it has to go.

Offshoring backlash in high tech

There's nothing like rising unemployment to stoke the debate about offshoring. This EE Times (WSJ for tech) article reports that over one million tech jobs were lost to offshoring in 2008. The question is whether this is a net benefit or cost. Generally, it is agreed that investors and consumers benefit and that dislocated jobs are forever lost. However, offshoring can also mean the difference between having a profitable business or not, or even being able to start a new one.

Are you stupid or have you known this all along?

That's a question my former boss and mentor used to ask when you really screwed up. It was asked half in jest but the staff knew it often signaled the beginning of the end for someone's career at the company. This is the first of what I hope won't be too many semi-irregular posts rhetorically asking this beautifully simple question.  First up are Liddy, Geithner, Bernanke, Frank, and Dodd.

Wal-Mart saves you more, I'll save you the math

This popped up in my Yahoo News:

http://news.yahoo.com/s/nm/20090319/ts_nm/us_walmart_bonus_2

The Chinese Connection To Competitive Devaluations

For at least several months now, Chinese officials have been lobbing sharp tongued critiques toward the U.S. and its policy makers. The Chinese, who mastered proverbs long before the West, should know that people who live in glass houses shouldn't throw stones. Let's back up and recap a bit. During Treasury Secretary Geithner's confirmation hearings, he said that Obama "backed by the conclusions of a broad range of economists - believes that China is manipulating its currency."

The Daily Cramer

Sometimes TV really is worth watching. Case in point: Jon Stewart and the Daily Show. Regardless of what you think of The Daily Show, this week has been spectacular and may just crescendo tonight. Why? What's going on that it bears mention on a financial blog? Well, Stewart began this week by taking a comedic swipe at Jim Cramer and CNBC, which summarily got right out of hand.

Dot Com Week - The Paul Allen Effect effect on post surgical recovery

There is, or was, a thing called the "Paul Allen Effect". Paul Allen is the co-founder of Microsoft and was usually cited as the third or fourth richest man in the world. Allen is barely heard of outside of the Pacific Northwest but in Seattle and Portland he was on par with Rameses II. The guy built great monuments: stadiums, museums, office complexes. Allen, as some might know, got cancer in the early days of Microsoft. He left to fight his cancer. After remission, he never really went back. He was probably only a millionaire a hundred times over back then but even back then he figured he had enough money to last a lifetime, and understood that lifetime could be foreshortened, so why punch a clock? A fan of Jimi Hendrix, he learned to play guitar. He opened a museum in Seattle devoted to rock 'n' roll (originally it was supposed to be a museum devoted to Hendrix but there was a falling out early on between Allen and the Hendrix family). He built a football stadium in downtown Seattle, despite a city plebiscite rejecting it!

Congress denies itself a raise

I'm a posting roll right now, so here is more outrage for you: a headline describing the $410 billion spending bill just passed the Senate caught my eye. Looking into some of the provisions, I see that Congress increased its own budget by 10%. Ten percent is a whopping increase. Last I checked, the number of people and employees in Congress didn't change much, let alone by 10%. You really have to wonder where that money goes.

The Citi Rally

You may have noticed the market rallied some 6.4% today. Why such a big move? An internal memo from Citigroup CEO Vikram Pandit was made public. In the memo, found here, Vikram extols the solid profitability of Citigroup so far this year. In fact, he says "we are profitable through the first two months of 2009 and are having our best quarter-to-date performance since the third quarter of 2007". Well, that's good news indeed. If Citi is on the mend, then the governments fixes may be working and/or perhaps the economy is not deteriorating as fast as feared.

Dot Com Week - a personal history

If you didn't guess from Julio's post, we decided it is "dot com week" here at TLRB. Actually, we are a week early- the true top of the dot com mania was officially March 10, 2000. We used the NASDAQ's all time peak to call the date. More specifically, the index stood at 5,048.62 which is a stunning figure compared to today's 1,321 and 2,000 around Thanksgiving, 1998.

Just one word. Are you listening? Silicon.

“I want to say one word to you. Just one word. Are you listening? Silicon.”  That’s what Benjamin would have heard thirty years later. Forget about the “new economy.” Don’t worry about who’s going to win the processor wars or who will dominate the Internet and the World Wide Web. It doesn’t matter who wins as long as it drives infrastructure. The Silicon machine tool industry seemed like a pretty good place to be in 1995.  And for the most part it was, until the dot.com bubble burst and Sarbanes-Oxley came along.

Concert Madness

A few weeks ago, Ticketmaster and Live Nation agreed to merge in principle. I say in principle because such a deal must pass anti-trust scrutiny before being consummated. And therein lies the rub and focus of this post. If you are a concert goer of any frequency, you will recognize the Ticketmaster name immediately. Live Nation is a more recent name with a storied history. A quick 'how we got here' is in order.

Extended Warranties

At one point I intended to do a post about extended warranties. You know when you walk into Best Buy, Future Shop, or Circuit City (in nómine patris et fílii et spíritus sancti) and finally settle on a DVD player or laptop and then the sales guy does everything but threaten a loved one with grievous injury unless you buy an extended warranty. Yeah. Those things. I've always been highly skeptical of their value. The desperation with which sales people push them and the occasional spiteful service you get when you refuse the warranty further adds to my skepticism.

Not only how to budget, but how to stay on budget

I've not lived in Canada for 8 years (4 in Seattle and 4 in Korea). I returned March 2008. Even though it's coming up on about a year I've been living in my native country, I keep stumbling on new things. The most pleasant discovery was taxes were a lot better in Canada. The GST (Canada's version of the VAT) and Federal and Provincial rates had been lowered in my absence. My take home pay, the percentage I get to keep, was actually pretty close to my take home percentage in Seattle (a state without a state income tax). Canadians are always regaled with stories about how much lower taxes are in the USA but they usually don't realize things like state and even civic taxes take a chunk. And then they don't realize deductions for social security and medicare take a considerable larger bite than our deductions for Canada Pension Plan and Unemployment Insurance.

Fraud Central- Don't invest with skinny dippers

I am fond of quoting Warren Buffett, so get used to it. He once said something you have probably read here in the past that goes "You only find out who is swimming naked when the tide goes out". By this he is referring to business models that can't swim when the water gets rough. It also applies to frauds. As we discussed at length, Madoff's scheme unfolded when too many people wanted their money at the same time.

Moore’s Law: the End Game

A lot of premature predictions have been made about the end of Moore’s Law. Most of them have been proven wrong as the result of clever engineering. But clever engineering can’t defeat the laws of physics and we’re almost there. The economic constraints on Moore’s Law are just as looming although the current technology roadmap takes us past 2022. My purpose here is not to predict when Moore’s Law will end. Instead, I’d like to discuss the technical and economic constraints and their consequences as the end game approaches.

Tipping

Here's the dilemma:

You go to a restaurant. The overall service is terrible. Your food was late or the potatoes in your rappie pie were undercooked. The dishes were poorly washed. The washroom was a disaster. The waiter him/herself did nothing overtly wrong. Your ruined dining experience was not directly attributable to gross waiter negligence.

Best quote today

As longer time readers may remember, I like to read the Wall Street Journal at night. Hey, the news was old since it hit my doorstep, so reading it at night is fine by me. In fact, I consider the WSJ the official paper of record here at the TLRB.

Well, the page one headline today is "Market Pans Bank Rescue Plan", which we discussed yesterday in "Oh Tim". This is where I found the quote of the day. One Ethan Harris, chief U.S. economist at Barclays Capital said

"This is the shock and ugh plan."

I thought that was just about perfect. I suppose it was intended for dry finance types like myself, so don't feel bad if you didn't find it funny. It made my day though.

Oh Tim

I'll be honest here: I spent a good part of today trying to figure out what is going through Tim Geithner's head and I have no idea. To great fanfare he announced the Treasury's new plan of attack against this crisis but the only change I detected was that is should be larger and more transparent. Well thank you Captain Obvious. Really, this is your great plan Mr. Geithner?

According to the speech's text, it is a three-pronged strategy very short on detail. Has Tim learned nothing from watching the crisis unfold: empty speeches make the matter worse. Just ask Hank.

Intern Wanted

Interested in investing?

Want to learn from a master investor?

Curious what an equity "analyst" does?

Ambitious enough to uncover the secrets of great stock investments?

Minimum Wage Followup

I'd like to thank Julio and Karl for putting in the time and effort to make this debate happen. We have received some good questions and I have tried to come up with a few that might represent popular sentiment around the issue.

Madoff News

By now you have probably heard the name Harry Markopolis. Mr. Markopolis is the investor who repeatedly tried to get the SEC to investigate Madoff over at least a ten year period. Obviously, it was a fruitless effort. That didn't stop Harry from telling collegues and associates to steer clear of Madoff though. One such investor who placed $1.5 billion of clients' money with Madoff was Theirry de La Villehuchet, cofounder of Access International Advisors, a French money manager. Mr. de La Villehuchet sadly took his own life days after the Madoff fraud was discovered.

More on Bonuses

This Wall Street bonus debacle has me irked and probably you too. The gist of the issue is twofold: Merrill paid out bonuses in December before it was acquired by Bank of America and total Wall Street bonuses were over $18 billion in 2008 according to New York City's comptroller. Let's take these in order.

The Minimum Wage is not Enough

Karl, you ignorant, coldhearted, Canadian schlub.

Many like you have argued the negative economic consequences of the minimum wage. I suggest those are a pittance and irrelevant. The issue is one of protecting the exploitation of workers by their greedy corporate masters and building on the foundation of our economic system – the middle class. This may sound a little strange coming from someone who describes himself as a free market capitalist, but I am one of those lucky people who have gone from relatively rich to poor and back. How did that happen? Fidel Castro.

Minimum Wage: Much ado about nothing?

It's funny how your thinking changes as you get older. In my younger days, things like rent control and minimum wage were, to me, unquestionably good things. When the minimum wage went up, I got a raise. Rent control meant my top hat wearing capitalist landlord couldn't just jack up my rent at the end of the year so he could afford a better brand of mustache wax.

Wednesday, Wednesday, Wednesday!!!

FOR ONE DAY ONLY (not really)

THE LONG RUN BLOG

WILL BE FEATURING A DEBATE

AND

YOU'RE INVITED.

Sometime Wednesday night, we will be posting opposing opinions on the MINIMUM WAGE issue.  In one corner, we have the spirited and astute Julio from Silicon Valley. In the other corner we have the clever and sharp Karl from Canada. Julio will presenting in favor of the minimum wage and Karl will be against it. I used a state-of-the-art random number generator ($0.25 coin) to assign each a position. Understand that they will do their best to defend their position whether or not they believe it - like O.J. Simpson's lawyers. We'll post both positions, pause for comments and let the rebuttals begin (if necessary). I will moderate. Let the insults debate begin!

Free markets and financial literacy

In a free market, individuals are supposed to patronize companies that provide a fair product at a fair price (value). Produce what the market needs and you have a viable business. Fail to deliver what the market demands and your business is toast. After all, if you bought tire brand A and the tires blew up, you would stop buying them right? Tire brand B would take market share by offering a better product at a price deemed worthy and put tire brand A out of business. Nothing terribly inciteful about that, just common sense right? The result is increased competition to satisfy consumers and healthier businesses.

Better Orgasms or the Illusion of Corporate Governance?

I was going to make my introductory post earlier this week but what with the Obama inauguration and everything I decided to wait a couple of news cycles so as not to steal his thunder. Actually, that’s not true. The real reason is that I’ve been bouncing back and forth about whether to write about the failure of governance in the recent corporate meltdowns or about a survey just published that found that women have better orgasms with rich men. After all, Brett said I could blog about anything as long as it had to do with money.

Getting rid of Lincoln and the Maple Leaf?

In Canada, there is a fair amount of American coinage in circulation. No Canadian retailer would refuse payment that includes American coinage. Of course no exchange is ever given on coin.

When you work in retail and come in contact with a great deal of coinage, you can kind of supplement your income by fishing out American coins, tossing in Canadian coins, and eventually collecting enough American coinage that you can roll the coin. Banks won't give exchange on loose coins but if you have an American funds bank account at your Canadian bank, the bank will accept rolled American coin same as American paper bills.

Hey, neat coincidence

Some of you may have noticed that the market fell over 5% today, the day Obama was inaugurated. This caught someone's attention and Bloomberg reported that from Election Day to Inauguration Day, the market fell 14% waiting for Obama. This was the worst performance for the Election-Inauguration day stretch on record. The second worst, at -13%, was waiting for Roosevelt in 1933. The almost identical loss is coincidental and not based on any fundamental math or econometric reason. FDR experienced such a drop due to the horrible, deteriorating economic conditions at the time (during the Depression). Today, conditions are rapidly deteriorating as well and we fear a depression. Just a coincidental sign of the times, I guess.

Coming Soon

As you know, we have been trying to expand our presence.  In that vein, I am happy to announce that a new blogger, Julio Guardado, will be joining us. Julio is a former tech CEO and semi-retired investment banker. Based in Silicon Valley, Julio will no doubt bring another perspective to our offering. He will be introducing himself shortly.

As always, please continue to challenge us with questions and comments, particularly if you think we missed something or are simply wrong.

And suggestions!  Please email us with suggestions and/or questions.  We can write about what tickles our fancy anytime, but addressing topics of interest to readers is even better.

"Double Taxation"

Inspired by the comments after the Death Taxes post, I checked a couple of sources about "double taxation". Although we use this term rather loosely, it actually refers to a very specific situation occurring when taxes are paid twice on the same source of income. There are only two solid examples of this.

The first example involves the taxation of dividends. A corporation earns profit which is taxed as income. If that corporation decides to pay a dividend to shareholders, the shareholder receiving the dividend must also pay tax on the dividend as income. The profits of the company are thus taxed twice- first as corporate income and secondly when paid to the owner despite being the exact same source of income. This is as if you picked up your paycheck at work net of taxes and then took it to the bank to cash. The bank then withheld even more taxes from your already shrunken check for the privalege of taking the money home from work.

Death Taxes

Yes the dreaded "death tax".  You even have to pay a tax to die, how distasteful! Obama has indicated he wants to keep the tax at current levels rather than letting it expire next year as was intended under the Bush tax cuts. Of course, the "death tax" is really the "estate tax" and is far more complicated than most realize.

Time to Retire Ben and Borden, Grant and King?

One of the problems, post Christmas, is having one or more hundred dollar bills in your wallet. This is the traditional Christmas gift in my family, from elder to younger. My dad hands me a $100 bill. My mother hands me a $100 bill. When my grandparents were alive that meant another couple $100 bills. I have one nephew which means I take one of the $100 bills given to me and simply pass it down to my nephew. I don't even bother anymore to put it in a new Christmas card for my nephew. I simply remove the bill from my mother's card, issue the customary mock surprise and real gratitude, and then put it in my pocket. Next day when I see my nephew, I just take it out of my pocket and hand it to my nephew. My nephew, being 17 years old, does not at all mind the lack of the personal touch.

Mortgages, Congress and Contractual Rights

A number of stories regarding mortgages and Congress have been circling this week. More specifically, Congress has been working on legislation that would allow bankruptcy judges to modify mortgage contracts. In fact, some of the rumored provisions only apply to second homes and investment properties. There are some serious issues with this sort of idea.

Suicide Myths

There have been quite a few unfortunate, high profile suicides lately. Several were directly a result of the Madoff scandal- investors who lost everything or were disgraced by participation. Another just this week, German billionaire Adolf Merckle ,threw himself in front of a train.

Misery Loves Company

I recently happened upon a conversation where people were discussing how much their 401K's lost last year. Down 35, 40, 45%. All stock investments presumably, and no bonds. It was very interesting to hear how they were taking solace in each other's losses. "Misery loves company" goes the old saying, and for good reason.

Obama's Stimulus Plan

Since late November, ideas have been steadily leaked regarding the form of the stimulus package. So far, I have refrained from commenting since the final package will look very different from today's talk. What did prompt this post, however, is just how masterful a politician Obama is from the start. As one would expect from seasoned Washington leaders, Obama's aids have been steadily leaking ideas, no doubt to test the water and see what Wall St and Washington think.

Asset Classes

It occurred to me, for reasons I'll mention shortly, that we haven't specifically discussed the concept of an 'asset class'. There is a universe of assets out there: you can buy stocks, bonds or real estate for example. Some assets trade on exchanges with daily liquidity and pricing while some assets, like direct investments in real estate, have little liquidity and vague estimates of the current value. There are currencies and gold, commodities and collectibles (e.g. art, wine) amongst others.

Where we stand II

First, a very happy New Year to everyone. I hope everyone enjoyed their holiday week(s) and some time off (I did). We are going to try something a little different this week. For the next week or so, I will post everyday about something. Whatever catches my eye will get mention, whether it is in depth or simply an observation.