11.19.08
Posted in Finance, Will at 6:00 pm by Jim
Will likes bubbles. He always enjoys the bubble portion of his time at Little Gym. I think his favorite part is getting bubbles blown onto his belly. Not sure what the attraction is there, but so far I have resisted the urge to pull up my shirt, expose my hairy belly and ask for my share of bubbles.
My topic however is actually about economic bubbles. We have had the tech bubble and the real estate bubble. What is next? Well, I think we have two bubbles already underway right now.
The first one is pretty simple - US Treasuries. Those are what you buy if you want to effectively loan your money to Uncle Sam. The prices on these are at all-time highs. That means the interest rates or yields on them are at all-time lows. You actually PAY Uncle Sam money right now in some cases on the inflation protected series. You can effectively say that one is at its peak. If you want to put some money on the line betting that it will crash - TBT and PST are your exchange traded funds that are effectively bets on just that.
The other bubble is more complex but still important. That bubble, as I see it, is college education. Tuition and books have shot up much higher than the cost of inflation over the last ten years. To educate your child at a highly ranked private school can cost $50,000 Per Year. That is simply ridiculous when you consider all that is being provided is schooling. Believe it or not, you can actually teach yourself just by reading a book. The problem is ingrained in the endowed chairs, the fancy buildings, the sports teams, the sculpted bushes and the need to attract the most prestigious students and faculty. I believe most courses taught to an undergraduate benefit little from the uber published professor or the retired industry executive. The current economic crisis may very well bring all that crashing down. I expect to see decreased private enrollment over the next few years. Whether or not public schools see a decrease remains to be seen, but they have also been subscribers to all the above policies, so it wouldn’t surprise me. The public schools have the benefit of gaining students that would have previously gone to private schools. The private schools don’t have that luxury. The consequences are hard to foresee at this point, but I think you will see a rise in online schooling, eventually. The type of technology being used today to faciliate online meetings for companies is perfect for teaching classes online. Furthermore, uploading the video to a website means the same professor can teach every single section of every class. In some subject like math, that same video could be used for 100 years.
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11.18.08
Posted in Books at 11:04 am by Jim
Melanie got a library card recently. I think I will finally have to get around to getting my own card. My current reading list is hardly exciting. I am working on The Data Warehouse Toolkit: The Complete Guide to Dimensional Modeling (Second Edition)
. This is one of the industry “bibles” on data warehousing. We are looking at doing a large electronic medical record project at work, and I figured I should start learning about it. For general entertainment, I enjoy sci-fi and fantasy plus the occasional horror or thriller.
On a side note, I had to fill up the Pilot again this morning. The light was on, telling me that it was time to fill up. I could hardly believe it when the entire tank of gas cost me less than $30. I actually heard myself say “Wow!” when it stopped at $29.65.
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11.17.08
Posted in Family at 2:17 pm by Jim
I’m endeavoring to actually keep Will’s wishlist up-to-date for Christmas. It is linked on the right side of the homepage.
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11.10.08
Posted in Family, Finance, Will at 6:44 pm by Jim
I spent much of yesterday assembling a new bed for Will and disassembling his crib. The bed is a fire truck. You can see it here: KidKraft FireTruck Toddler Cot
. I highly recommend the bed. He loves trucks, trains, planes, busses, etc. and He really likes the bed and slept in it without incident last night. Other than that, we went to the Zoo on Saturday morning. It was a little chilly. I think we had underestimated the wind.
If you know of someone looking for a job, there is an opening in my group. We need someone bright that doesn’t want a lot of money. I’m sure most people doing the hiring think that. Anyway, send them my way if you know someone.
Oh, I also started running again. Hooray for me. I figured it was either that or get a bunch of new pants in another month or two when I started popping buttons.
A quick note on the markets and economy - from here it just gets bloodier. Today we have Circuit City filing chapter 11, DHL leaving the delivery business, and the Big Three finally getting realized as the negative value companies they have been for a long time. Meanwhile, our $85 Billion bailout of AIG is now $150 Billion or so, and there has been a total lack of transparency on the guy with the Big Checkbook over at the Treasury, aka Hank Paulson. In case you hadn’t heard, the Treasury’s total money loaned out since the $750 Billion was passed is now well North of $2 Trillion with no end in sight.
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10.22.08
Posted in Family, Running, Will at 11:50 am by Jim
Just some random thoughts, etc, today.
First off, I filled up the Pilot on Monday. While the little light telling me to fillup wasn’t on quite yet - I still managed to get in about 17 gallons. Grand total - $39.78! Wow, nice drop from the $66 fillup I had a few months back.
Your average master limited partnership is up a good 20% or more from when I recommended them. Not bad for a week or two. The market is still in the crapper though, and we might see some more blood before the lull I was expecting.
I had Will all to myself Monday night as Melanie was out of town for business. He gave me a little streak show during the middle of his bath (aka “bubble bap”) - getting out to supposedly “go potty” and then taking off running around his room and hiding behind his bed. He is going to be Spiderman for Halloween. I don’t think we will be taking him Trick-or-Treating this year, but I’m sure we will next year.
And finally, no I’m not running in the Tulsa Run this weekend - or the half marathon coming up. I kinda wimped out on running in mid-summer when we all had to stack our hands on working a full day at work. I hope to get back to it soon.
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10.20.08
Posted in Finance at 2:33 pm by Jim
Well, the market is down 35% or so year-to-date, home prices are off (although mostly just in the markets that got very overheated), job losses are increasing and the average U.S. taxpayer has involuntarily taken on ownership in a bunch of banks. It can’t get worse than this, right? Actually it can. However, I think we are at a momentary pause. Why? Well, in short, I think people want to think it can’t get worse and that in and of itself will lead to a short-term lull. Plus, we have the election coming up and I’m sure the election of Senator Obama will “inspire” some more short-term positivity.
In the long-run, however, we are pretty much screwed. Now you are thinking, “Why?” Right? This graph says it better than I ever could:
You see that graph? You see how the numbers have increased so dramatically in the last few years? That is the United States and its citizens borrowing money. Ratio like this don’t just get bigger and bigger and bigger. At some point, they return to a more normal range. What does that mean? It means we have to pay back the debt or grow GDP. I think we can rule out GDP growing much anytime soon - with one exception which I will address last.
So, if GDP doesn’t go up, debt must come down. That means less borrowing. So, you have to ask yourself, why does one borrow less? The answer is simple - because doing so has too high of a cost. The cost of borrowing is the interest that you pay. So, in brief, that means interest rates will have to go up if we are to borrow less. But interest rates are low, you say. Well, actually, they have started up and up they will continue. You see, at some point, the foreign countries that are currently financing our debt, are going to start realizing that we might not be able to pay it back. Then interest rates will have to go up - this will happen in the form of US Treasuries selling at lower and lower values. Thus, when Uncle Sam goes out to “borrow” money by selling Treasuries, he will get less cash for the same T-Bill he sold the month before. This will happen pretty dramatically, too, because right now the government is mostly selling very short-term bills - meaning they must be resold very frequently because they come due quickly. The is the same thing as if you bought a 30 - Day CD from your bank. You would be very much at the mercy of quick shifts in interest rates. Whereas, if you bought a 2 yr CD, you would suffer less from the month to month vagaries. In this case, the move will be in one direction and one direction only - UP. If you figure the average rate on government debt is probably 2% or less right now - and our INTEREST payments make up about 20% of our federal budget. What do you think a 4% rate will do to us - and that is not a large move in rates. We could easily be looking at rates of 8% or more. Obviously, the US Government cannot afford a rate of 8% or even 4%.
The one way it does become affordable is not pretty. That way is inflation - that is the one sure way out and the ONLY way out if you assume you cannot grow GDP at rates of 5% or more for a good solid decade. Inflation would make the GDP number grow and the debt number would become less of an issue. So, while today we have deflation the likes of which has not been seen since The Great Depression, at some point in the next decade we will have inflation the likes of which has not been seen since at least the 1970’s.
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10.16.08
Posted in Uncategorized at 4:13 pm by Jim
I saw this article on Yahoo.com today. Here are a couple excepts:
autumn air temperatures in the Arctic are at a record 9 degrees Fahrenheit (5 Celsius) above normal
and
The Arctic Ocean continued to warm and freshen due to ice melt. This was accompanied by an “unprecedented” rate of sea level rise of nearly 0.1 inch per year.
• Warming has continued around Greenland in 2007 resulting in a record amount of ice melt. The Greenland ice sheet lost 24 cubic miles of ice, making it the largest single contributor to global sea level rise.
One-tenth of an inch might not sound like much, but previously they talk about that type of rate over a decade or more. At that rate, a noticeable amount of Florida and Louisiana will be gone within Will’s lifetime, if not mine.
Now, I don’t know about you, but I don’t see how there can be anyone left that disputes global warming. The ones I know that used to dispute it, now say, “Well, it exists, but we don’t know why.” Basically, they gave up one line of defense and moved back into the fortified defense of “Yeah, so what!” Really mature.
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10.11.08
Posted in Finance, Will at 10:57 pm by Jim
Figured I’d start with a picture. Not a zoo picture, but one from today at the pumpkin patch in Bixby. Mom is in town, so after Will’s nap, we headed down there to pick up a few pumpkins and take a few snapshots. This will be the first year we carve a Jack O’Lantern together. We got a nice big pumpkin for that along with several others to decorate the front yard.
As for the real topic of the week, what this week is sure to be remembered for well past our lifetimes - the financial markets in crisis - what else can I say? Pretty much at the zenith here. The are several possible eventual outcomes. The least likely, I would say, is that everything gets patched up and in a couple years we think, “Oh yeah, remember that time the markets went nuts? What was that about anyway?” Yeah, not gonna happen. Other possibilities include “The Great Depression II”, the end of civilization as we know it and the emergence of true socialism in the USA. Of those, I’d have to actually say the 3rd one is pretty much well underway but others might take exception to that. The other two, while possible, aren’t as probable. Although the Great Depression II cannot be ruled out - certainly a lot of pain will be visiting both businesses and consumers alike over the next few years.
This is definitely a black swan, but the final effects of it will not be known for quite some time. I think what we are (hopefully) learning is one of the huge drawbacks of a democracy. That is, once the people figure out they can legislate themselves money - be it directly via payments or indirectly via legal loopholes and financial manipulations - the endgame isn’t pretty. In this case, we basically created a system that incented and approved financial irresponsibility - not just in the housing markets and financial markets, but from the ground up, starting with the government that spends more than it plans to ever take in and ending with the consumers that think they are entitled to everything.
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10.09.08
Posted in Finance at 4:03 pm by Jim
I cannot lay claim to that quote. I founded it posted by someone on a messageboard.
The nukes went off this week. Let’s step back and survey the damage.
Last Friday we had the DOW at 10700 (Intraday), the S&P 500 at 1150, and the Nasdaq at 2040.
Today, the DOW closed at 8570, the S&P 500 at 909, and the Nasdaq at 1645.
In a word, OUCH. That’s about 20% off of each one in less than a week. Thanks for the bailout, Congress! Seriously, though, any bailout at this point is just a finger in the dike. We have entire countries (just Iceland - so far), going belly up. So, if you step in and bailout a country do you then get a colony or state or something?
Truthfully, i thought I was being pretty cautious through this and was about 30% in fixed income type stuff, but I cannot say I expected the carnage that has ensued. I thought it would be bad, but this is REAL BAD - and the thing is that currently it looks like it could keep doing this forever. But, let’s be realistic. Four more weeks like this one and you can buy the market with the change in your pocket. So, let’s not be talking about the End of Days and stocking up on can goods in the basement. It needs to look like it can keep getting worse before it can get better.
Just to review, the problem right now is that the whole mortgage thing I started talking about last year has turned into the largest financial snowball ever created. Everyone (including consumers for the first time in many years) is deleveraging. This means they are getting rid of debt. The thing about debt is that when you go borrow money you support someone when you spend it. If, instead of spending money you start paying back money - no one really benefits (except your personal balance sheet and eventual cash flow). That’s ok if only some people are paying back instead of borrowing, but when everyone starts paying back at once bad things can happen - especially if that returned money is then not loaned out again. If you, for example, had to sell something to pay back the funds you borrowed you would be in a world of hurt if everyone else out there was trying to sell the same thing so they could pay off their debt. That is exactly what is happening right now in just about every market on the planet from homes to stocks to munies (which, as I predicted have taken a pounding and they will get worse in time as tax revenues decrease and cities/states start defaulting).
My personal approach has been to watch things go down (including my 401k) and to move part of the fixed incomine investments into stock funds every 5% of the way down. So, today I moved another portion in. I will do this until I run out of the spare funds or the market stops going down. Hopefully, it is the latter we hit first, but either way, I will take the same amount out as we go back up. You really should always have some portion of your retirement savings in fixed income stuff. One recommendation I’ve read is to have your age (as a percent) in bonds. That sounds prudent.
Anyway, so where do we go from here? I think we made the bottom today or at least A bottom, if not we are seriously looking at a depression level event and honestly, I have little advice if that is the case other than DON’T pay down your debts until times are better because you may very well need the cash to survive the bad times. Once you pay those debts back you may find it MUCH harder to borrow again if you need it - so think twice before accelerating your home payments. Sadly, the time to do that was the last 5 years. Your money would’ve returned 5% or so by paying down your home mortgage for example. Instead, if you invested that in your 401k, while you might’ve gotten a one time tax savings of say 15%-28%, you are now most likely down at least that much.
If we did indeed either hit the bottom or come close enough to say we are there (let’s say 8000 on the Dow is the bottom instead), then the smart thing to do is to increase your 401k contributions to whatever level is just short of painful with the intention of decreasing them again once there has been some type of substantial recovery. I would NOT recommend taking any money out of your 401k because never at any time has that money had a higher EXPECTED return than it does right now. That isn’t to say it cannot go down further, but your expected return is much higher now on a dollar in the market than it was last week.
What to invest in with new funds? Master Limited Partnerships would be my first recommendation. These are pipelines and other companies that currently yield over 10% on average due to the market conditions and, unlike banks, you can expect them to keep high yields although they might lower dividends some for further investment if debt remains difficult to obtain. Pfizer and Lilly are both worthy companies yielding over 5% with huge cash balances. This will come in handy in the days ahead as they will likely be able to scoop up small biotechs that cannot survive the bad times. Finally, gold and gold stocks should be in any portfolio at all times, but especially now. The end game to all of this once the dust has finally settled and the fires are put out is inflation. Right now we have deflation of everything from stocks to homes to cars. But that is temporary. The dollar will turn a corner at some point, people will realize our country has little to no hope of ever paying off the debt they hold (and will in fact default) and interest rates will go up…a LOT…the dollar will go down and inflation will really spike. This will actually benefit the treasury in the long run because our debt will go down as a % of GDP. Gold and commodities are the one true insulator for inflation. You can try being long international stocks, but you will need a large swath of them to avoid the risk inherent in any single one of them. Oil and Gas stocks are another hedge on inflation and they are just about as beatup as they have ever been, at this point.
Well, enough depressing stuff for now. Hopefully, this weekend I can post pictures of Will’s first trip to the Zoo. Tulsa has a great zoo and he really loved it.
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09.17.08
Posted in Finance at 10:10 am by Jim
Well, it seems we are reaching the crescendo here. You might think that with Lehman dead, Merril Lynch sold off, and AIG bailed out that it is safe to go back in the water. In truth, I think it is more likely those were the appetizers for the shark. Next up is Washington Mutual and Citigroup. Interestingly, there are new rules or I should say a new verve for enforcing the rules on short selling today. The rules take effect tomorrow and require delivery of shorted stocks within 3 days of the trade or the broker that made the trade is prohibited from all future short trades of that stock from all clients (without having the shares on hand to short). Now, it is possible that this will cause significant upward movement in the markets, as I think just about all the smart money is short right now. However, the risk to WaMu and Citigroup remains.
I find it all pretty fascinating. While the Fed was fighting inflation from an expanded money supply, the real problem is going to turn out to be deflation and a vastly shrunk money supply. What does that mean to you, me and the other average joes? Less money to go around means higher interest rates. Higher rates means lower growth. Less money to go around also means lower price to earnings ratios on stocks - stocks that also have lower and/or negative growth. That means that even if the financial calamaties didn’t have a direct effect on the markets (which they do), the indirect effects would mean lower stock and asset prices. If you want a safe place for your money, Inflation Adjusted Treasuries is about it for now. I think even the municipal funds will get hammered, although they are probably secure in the long run.
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