DILLIGAF?

No fluff today. Let's get straight to the point.

What we know...

-The Emergency Economic Stabilization Act of 2008 authorized the spending of $700 billion dollars.

-The American Recovery and Reinvestment Act of 2009 authorized the spending of $780 billion dollars.

-AIG has received $170 billion dollars in taxpayer funds.

-AIG is set to receive another $30 billion dollars.

-AIG is paying out $165 million dollars in bonuses.

To put things into perspective...

-$200 billion dollars (the amount going to AIG) is 13.5% of the total $1.48 trillion dollars that the US Government is shelling out.

-Of that $200 billion dollars going to AIG, .08% or $165 million is being paid out in bonuses. That's roughly 1/12th of ONE percent.

-Looking at the bigger picture, $165 million is .01% (1/100th of ONE percent) of the $1.48 trillion dollars being spent.

My thoughts...

-People that are shitting their pants over the AIG bonuses that are being paid out would be much better off if they spent their time asking where the other 99.99% (or 99.92% depending on which example you want to look at) of the money is going.

- What does one TRILLION dollars look like?

-For the vast majority of us, $165 million is a lot more then we will earn or see in a lifetime. If our gripe is over the fact that someone else is getting paid more then us for doing a crappy job, then that is on thing. But for the people who are getting riled up because of the amount? Seriously people, in the large scheme of things, we are taking about pennies here.

-Politicians will be happy to take up this banner and run with it, as it will redirect any criticism from the spending that they support. Take a look at :

http://en.wikipedia.org/wiki/American_Recovery_and_Reinvestment_Act_of_2009

Tell me that once you dig down into those that you aren't going to find numerous "pennies" being thrown around. Why aren't we concerned about those too?

-To use a scaled down example, this is basically what people are shitting their pants over:

After a long week, you decide to do something fun and throw a party. Being the good party host that you are, you decide to spend $148 dollars on booze. Since you have a lot of other things to take care of, you give your friend $17 dollars and ask him to go pick up an 18 pack of Budweiser bottles with it. Being the good friend that he is, he goes to the store for you and returns shortly after with the 18 pack and receipt in hand. Looking at the receipt you see that the total is for $16.99.

What do you do next?

a) Poop your pants because because your friend pocketed the extra penny.
b) Demand that your friend return the penny and spend the next month trying to get that penny back.
c) Ask your friend to go get some red cups for the party, but tell him that you want your penny back before you give him another $3 dollars to go buy the cups. Also, you tell him that if the total comes to $2.99, that he better not try to pocket your penny again.
c) Nothing. You don't give a damn. It's only a penny. In fact, you probably wouldn't even have cared if he came back with a 17 pack of Bud Light instead.

-Obviously, when it comes to money, scale does make a significant difference. Wasting a penny isn't the same as wasting $165 million dollars, even if that $165 million dollars is contractually owed to the people receiving it.

However, when it comes to time and energy, do I really care about the $165 million dollars in bonuses that AIG is paying out? No. I don't. Which begs to ask the question why I am writing this post? Back to work...

-dunkie

A Whole lot of Nothing.

As the saying goes, “no news, is good news.” Sadly, this doesn’t really apply to what happened today in the United States. Instead of receiving no news, what we got was a whole lot of news that really didn’t tell us much. What do I mean by that?

First, we received news that the Senate voted and approved an $838 billion economic stimulus package. Yippy skippy. The only problem is that the Senate approved stimulus plan is different from the House approved stimulus plan. Because of this, we still don’t know what the bill will look like once President Obama signs it into law. In other words, nothing has changed on this front, yet…

Secondly, Treasury Secretary Geithner came out today and announced the “details” of a $2 trillion dollar rescue plan. While he outlined the plan, he neglected to provide the details of how things would really work. The result of this was somewhat reminiscent of when we first heard about The Bailout (i.e. very few details at first) and the markets did not react favorably.

So despite all of this news, we are pretty much left with knowing as much as we did a week ago. As a result, the stock markets are pretty much back to where they were, a week ago (i.e. the DJIA was down 381.99 points and closed at 7,888.88).

Really, the only point of today’s news(and this post for that matter) is to report that eventually, we are going to hear something, at which point I’ll hopefully write something about the US Economy again.

-dunkie

Bar Stool Economics

This has been circulating the internet lately and has shown up in my e-mail box a number of times. If you haven't seen it yet, I hope you will take the time to read and think about it for a bit...

Bar Stool Economics

By David R. Kamerschen, Ph.D. Professor of Economics, University of Georgia

Suppose that every day, ten men go out for beer and the bill for all ten comes to $100. If they paid their bill the way we pay our taxes, it would go something like this:

The first four men (the poorest) would pay nothing.
The fifth would pay $1.
The sixth would pay $3.
The seventh would pay $7.
The eighth would pay $12.
The ninth would pay $18.
The tenth man (the richest) would pay $59.

So, that’s what they decided to do. The ten men drank in the bar every day and seemed quite happy with the arrangement, until one day, the owner threw them a curve. ‘Since you are all such good customers, he said, ‘I’m going to reduce the cost of your daily beer by $20. Drinks for the ten now cost just $80.

The group still wanted to pay their bill the way we pay our taxes so the first four men were unaffected. They would still drink for free. But what about the other six men - the paying customers? How could they divide the $20 windfall so that everyone would get his ‘fair share?’

They realized that $20 divided by six is $3.33. But if they subtracted that from everybody’s share, then the fifth man and the sixth man would each end up being paid to drink his beer. So, the bar owner suggested that it would be fair to reduce each man’s bill by roughly the same amount, and he proceeded to work out the amounts each should pay.!

And so:

The fifth man, like the first four, now paid nothing (100% savings).
The sixth now paid $2 instead of $3 (33%savings).
The seventh now pay $5 instead of $7 (28%savings).
The eighth now paid $9 instead of $12 (25% savings).
The ninth now paid $14 instead of $18 (22% savings).
The tenth now paid $49 instead of $59 (16% savings).

Each of the six was better off than before. And the first four continued to drink for free. But once outside the restaurant, the men began to compare their savings.

‘I only got a dollar out of the $20,’declared the sixth man. He pointed to the tenth man,’ but he got $10!’

‘Yeah, that’s right,’ exclaimed the fifth man. ‘I only saved a dollar, too. It’s unfair that he got ten times more than I!’

‘That’s true!!’ shouted the seventh man. ‘Why should he get $10 back when I got only two? The wealthy get all the breaks!’

‘Wait a minute,’ yelled the first four men in unison. ‘We didn’t get anything at all. The system exploits the poor!’

The nine men surrounded the tenth and beat him up.

The next night the tenth man didn’t show up for drinks, so the nine sat down and had beers without him. But when it came time to pay the bill, they discovered something important. They didn’t have enough money between all of them for even half of the bill!

And that, boys and girls, journalists and college professors, is how our tax system works. The people who pay the highest taxes get the most benefit from a tax reduction. Tax them too much, attack them for being wealthy, and they just may not show up anymore. In fact, they might start drinking overseas where the atmosphere is somewhat friendlier.

For those who understand, no explanation is needed.

For those who do not understand, no explanation is possible.

Restore the Uptick Rule, Restore Confidence

The following article was taken from the The Wall Street Journal...

Restore the Uptick Rule, Restore Confidence
Short sales of stocks are fine given one tried and tested regulation.

By CHARLES R. SCHWAB

The last time the stock market suffered from extreme volatility and risk of market manipulation as severe as we are experiencing today, our grandparents' generation stepped up to the plate and instituted the uptick rule. That was 1938. For nearly 70 years average investors benefited immensely from that one simple stabilizing act.

Unfortunately, in a shortsighted move, the Securities and Exchange Commission (SEC) eliminated the rule in July 2007, just as we were about to need it most. Investors have now been whipsawed by what appears to be manipulative trading, what we used to call "bear raids," which drive stock prices down without warning and at breakneck speed. Average investors feel the deck is stacked against them and are losing confidence in the markets.

For the sake of our children and grandchildren, and to avoid a needless future repeat of a bad situation, it is time to restore the uptick rule.

The uptick rule may seem far from a kitchen-table issue, but it is critically important to ordinary investors. With more than half of all U.S. households invested in the stock market, either directly or through a retirement plan, it matters a great deal. The average 401(k) retirement account has lost 20%-30% of its value over the last 18 months -- more than $2 trillion in retirement savings has been wiped out. Behind those numbers are real people who planned and saved, and who are suddenly facing an uncertain retirement and the prospect of working longer.

In the wake of the Great Depression, the uptick rule was established to eliminate manipulation and boost investor confidence. The rule said that short sales could be made only after the price of a stock had moved up (an "uptick") over the prior sale. This slowed the short selling process making it more expensive and limiting the ability of short sellers to manipulate stocks lower by piling on, driving the share price quickly down and quickly profiting from the downdraft they created. In July 2007, however, the SEC repealed the uptick rule after a brief study. Manipulative short sellers couldn't believe their luck.

The SEC's study took place during a period of low volatility and overall rising stock prices in 2005 through part of 2007 and didn't anticipate the kind of market we are experiencing today. We live in an environment now where 200 point drops or more in the Dow Jones Industrial Average are increasingly common, where a stock losing 20%, 30% or even more of its value in a single day barely warrants a second glance at the ticker. Ironically, it was just this sort of volatility that inspired the regulators of the 1930s to implement the uptick rule in the first place. Without this vital control mechanism, short sellers have been having a field day, betting heavily on lower prices and triggering panicked investors to sell even more.

Don't get me wrong. Legitimate short selling where a trader has borrowed shares for future delivery and believes those shares will lose value over time plays an important and stabilizing role in our markets. It provides a check on overexuberant prices on the upside, and provides natural buyers on the downside. The uptick rule, however, prevents short selling from turning into manipulative activity. Reinstating it will help smooth out the markets and reduce the speed of price drops. It will limit the ability of a small number of professional investors to trigger fast dramatic price drops that create panic among investors.

The SEC has an opportunity to make a real difference in helping to control future market stability and restore confidence in the fairness of our capital markets. But the SEC has been strangely silent as the crisis has worsened. It did step in earlier this fall to implement short stock borrowing restrictions and a temporary ban on short selling, first on 19 stocks in the financial services sector, and later in a broader swath of 900 stocks across several sectors. But these steps were a temporary half-measure and didn't fix the problem for the long term. Clearly, the SEC will need to work on some of the mechanics of reinstating the uptick rule. Regulators should act quickly to establish a framework and solicit public comment, then reinstate the rule and remain flexible and willing to fine tune it if necessary.

Ordinary investors' expectations for investing are reasonable. They want a fair playing field. They want to be successful. They want to provide for their families, support their children's education, have a comfortable retirement, and maybe even leave a little bit for future generations. But they can't succeed when the markets are gripped by fear and manipulated by those who want to profit from that fear, at the expense of everyone else.

It may be too late for the restoration of the uptick rule to have much impact on where we are today. But there is no reason to wait and we need the protection in place for the future. It is time to restore it. It's what our grandparents did for us in 1938, and it worked for nearly 70 years. With that kind of track record, we should tip our hats to the regulators of yesteryear and acknowledge that they had it right all along.

Mr. Schwab is the founder and chairman of the financial services firm that bears his name.

Economic Ramblings

First off...

The picture to the right is of my parent’s dog, Sophie Alice Duncan, and has nothing to do with this post. I just thought I’d use it because I thought it was funny. The picture is taken at her “graduation” from obedience school.

My parents must have paid off the school to let her graduate because she has a muzzle on. To her credit, I think she is starting to calm down a bit, but that isn’t saying much given how much of a little hell hound she is/was.

Also, I’d like to apologize to the young lady that I got into an economic/political debate with about 9 months ago. Despite not knowing the definition of a recession, it turns out that she was correct when she stated that we were currently in one.

Moving on…

The other day the National Bureau of Economic Research (NBER) announced that the United States is officially in a recession (two consecutive quarters of declining Gross Domestic Product) that dates back to December 2007. Why are they only now announcing this? Well, since the economic data used to calculate GDP is released after the fact, a recession can’t really be made official until you’ve actually been in one for 6 months.

A quick macroeconomic refresher…

GDP is “the total market value of all final goods and services produced within a country in a given period of time.” It is commonly calculated using the following method:

GDP = consumption + gross investment + government spending + (exports – imports)

To summarize these parts…

Consumption: Personal expenditures like food, clothing, and booze.

Investment: Investments in capital by business or households such as a house, machinery, or equipment.

Note: financial products (i.e. stocks, bonds, mortgage backed securities…) are not considered “investments” in economics; rather, they are considered “savings.”

Government Spending: Spending by the government on things like infrastructure, research, and weapons of mass destruction.

Imports/Exports: Good that we bring into the country and goods that we ship out. When we import goods we send money out of the country, meaning we decrease our GDP. When we export goods we bring money into the country, which increases our GDP.

Refreshed? Let’s continue…
GDP is down. We are in a recession. While this doesn’t necessarily mean each component of GDP is down, in this case, well… it does.

If you turn on the news you will no doubt see something about decreased spending by holiday shoppers this year. Reduced consumption? Check.

Drive around town a bit and you will probably see a fair number of “for sale” signs. Reduced investment? Got it.

Anyone see any weapons of mass destruction lying about? No? So much for Government spending.

I wonder how many American cars are being driven around in Japan/South Korea? Not a lot I’m guessing. Imports > Exports.

Okay, so maybe the whole WMD thing is a joke and I’m sure many people will argue that Government spending is actually up (see: $700 billion dollar bailout), but that money isn’t exactly going to “final goods and services” and won’t directly affect GDP.

Questions… Questions… Questions…

Q: Okay, so how does the bailout affect GDP?
A: One of the major affects of the bailout is that financial institutions are still able to operate and lend money. These loans allow people and companies to make investments, such as buy homes or business equipment. Investments by businesses hopefully assist in the growth of companies, which leads to more job opportunities. As these new jobs are created and filled and paychecks start to come in, consumption will also increase.

However, even with lending available, there are not many companies out there who are looking to expand. It isn’t exactly a great time to stick your neck out there and grow in hopes that your income will grow proportionally.

Q: So, in other words, the bailout “ain’t doin’ s***” for our GDP?
A: Not exactly. Let’s take a look at what happens to GDP if the bailout never passed. Without a bailout there is no question that many of the financial institutions out there go under and are forced to close shop. This creates unemployment. In turn, unemployment leads to lower consumption and lower investment.

For instance, let’s say the Russell Investment Group had to close shop. That’s 1,100 people in Tacoma who would be looking for jobs, which does not include other businesses in the area who would suffer from the loss of business from Russell employees. On top of that, imagine how many MORE homes in the North Tacoma area would go on the market.

Granted, Russell realistically won’t be going out of business, but there is a strong possibility that they will leave Tacoma. Why? Because a new building in Seattle just opened up as the result of WaMu shedding 3,400 employees. Speaking of which, even with the bailout, WaMu is firing 3,400 people. Luckily, these layoffs do not include layoffs to any of the WaMu branches. If the bailout never went through, you can imagine how many of those people would have lost their jobs also.

Q: Who cares? If a company fails it is probably because they suck and screwed up. Let them have what they deserve.
A: This is certainly a prevalent argument and I can certainly see the logic behind it. Why are we bailing out greedy corporate CEO’s for their mistakes? Sadly, it isn’t that simple. For every CEO out there that made bad decisions and deserve the boot, there are thousands of hard working people that will lose their jobs as a result of no one stepping in to help the situation. These hard working people have families to support and to a large degree; play a significant role in supporting our economy as a whole.

For instance, take a look at the current situation with the Big 3 Detroit auto makers (Ford, GM, and Chrysler). Right now they are asking for a combined total of $34 billion dollars to bail them out. If no one steps up to help (i.e. the Government, since there aren’t many people with $34 billion dollars lying around) they will move into bankruptcy.

It is estimated that 10% of all US employees are either directly employed by the auto industry, or work for one of their suppliers/dealers. Out of this 10%, the Big 3 employs roughly 20%, or 2% of the total US workforce. That’s about 2.5 million people. Look how bad things are with a 6% unemployment rate. Now imagine if that number jumped to 8% just because of the US auto industry.

Another report that I read estimated that the US auto industry accounts for 4% of our country’s GDP. On top of that, is the amount of consumption that the employees of the US auto industry account for. Like it or not, if the US auto industry goes under, expect this recession to go deeper and last even longer.

Note: If I was not trying to be a mature adult, I’d probably make a joke here.

Q: If they file chapter 11 bankruptcy they could still restructure and continue to operate…
A: This is true. Still, there would be a lot of layoffs. On top of this, who wants to buy a car from a company that just went into bankruptcy? I sure as hell wouldn’t. Unless there is government support, bankruptcy for the Big 3 = death.

Q: Let’s say they did disappear. Wouldn’t other car manufactures just take their place?
A: Yes, except these would most likely be foreign auto manufactures. Going back to the economic refresher, imports subtract from GDP, not add. Eventually, this could lead to additional US jobs if foreign auto makers decided to add plants in the US, however they are having enough problems of their own right now and new investments don’t seem likely.

Q: The WSJ’s headline today is “U.S. Job Losses are the Worst in 30 Years.” Your thoughts?
A: Ouch… according to the article 533,000 jobs were lost in November alone. That’s over double the population of Tacoma, and roughly the same number of people who live in the city of Seattle. Something needs to happen. And soon.

Q: What needs to happen? How do we get out of this recession?
A: The typical answers are to increase government spending (to make up for lower investment spending) or to enact monetary policy and lower interest rates as to encourage more investment spending. Here is the problem as I see it.

The country is already running a huge deficit. Recession = less tax revenue, which makes this deficit even larger. Throw on the war in Iraq and the bailout and we aren’t looking at a whole lot left (Of note, is that in the report by the WSJ today, the government was just about the only sector that added jobs recently).

As for monetary policy and interest rates, they are already extremely low and lowering them further probably won’t do much. So far, monetary policy, combined with the bailout, has only been able to do just enough to keep lending options open. Even with these options open, the outlook for our economy is so bleak that people are avoiding borrowing money like the plague (unless they already have the plague, in which case they are trying to borrow as much money as possible, except who wants to lend to people with the plague?).

Borrowing money is only really smart when you have a form of repayment that is certain. Many businesses have no idea what their revenues will be like in the future so they make the smart decision to avoid borrowing. On the other hand, borrowing money if you are about to go under isn’t such a bad idea, after all, what do you have to lose? Lending to someone like that however, is what put us here in the first place.

Q: Hold up. Are you saying that the government lending to the Big 3 auto makers is a bad idea? Flip-flop much?
A: It may sound like that, but in truth, none of the available options are really ideal. Looking at the Big 3 and their situation is getting back to this whole idea of “too big to fail.” Honestly, I don’t have all the information on what the proposals are for the Big 3. I’m just hopeful that if they are viable plans that have a good chance to succeed, that politics won’t get in the way of making them happen. If it’s the case that it is only delaying the inevitable, then I guess we might as well not delay it…

Q: Back to the “How do we get out of this” question…
A: Recap: Government spending and monetary policy, probably not going to work to well right now.

So what then? Well, another option (which we saw last year) is to give tax-rebates. In theory, this will encourage people to spend and consume more, thus stimulating the economy. This sounds great and all, and I’m definitely for receiving a $600 check in the mail, except my feeling are that most of this money wouldn’t go towards increasing consumption.

People who are struggling will most likely either save the money or put it towards paying down bills that are already past due. Neither of which, will increase consumption. At the same time, giving a tax-rebate might only hinder government spending even more.

What it comes down to (yet again) is this silly little thing called confidence. Companies won’t invest until they are confident of growth. The government won’t be handing out money until they are confident that it will help. People won’t spend until they are confident that they are confident that they will have a paycheck coming in the next week. Take away any once piece of this and it will cause a ripple effect.

No government help to the US auto makers? That will lead to people not being confident about their jobs, which will reduce their spending. This leads to companies that depend on those consumers to slow their growth and investments.

People not being confident that they will have their jobs next month? Again, this leads to reduced spending and slower growth of companies. Think a bailout will help the Big 3 if no one buys their cars? Probably not.

Companies unwilling to invest in order to grow? Unemployment will remain high. Make no mistake, we are in a mess here. Somewhere we need to find a little bit of confidence and eventually we might be able to grow on it and dig ourselves out of this hole. I think the hope is that our new President Elect, Barack Obama, will help bring this confidence.

Q: Let’s say you had $34 billion dollars lying around. What would you do?
A: The two options I see are save it, or spend it. When I say save it, I’m using the economic definition of save, i.e. invest it.

As the saying goes, “buy low, sell high.” Invest that cash and watch that money roll in… right? Not so fast. Here is the problem with that. Let’s say everyone does this. Instead of spending their money they just invest it all hoping to make a quick buck. Well, the companies that they invest in will see lower consumption as a result of everyone “saving” and that will lead to many not-so-great investments.

On the other, spending $34 billion dollars sounds pretty fun. I’m sure I could buy a lot of pretty sweet things with that amount of money, and at the same time I’d be helping the economy out by increasing consumption and investments. Great idea, except I’d much rather see my money grow, than diminish.

Ideally, everyone out there would spend half the money they have, and invest the other half. That way everyone would help and everyone would benefit. Obviously, this isn’t going to happen, nor am I actually suggesting that it should happen.

What I am suggesting is that everyone should spend their money and I should invest the $34 billion dollars that I don’t have and becoming a trillionaire. Obviously, I’d give some money back to all the chumps out there for helping make me rich.

Q: Seriously?
A: Seriously, I don’t know what the hell I’d do with $34 billion dollars. Maybe I’d buy up a large amount of land somewhere and try and make my own little utopia. Obviously, you all would be invited.

To be quite honest, I don’t even know what makes sense for bringing us out of this recession right now. As you can probably tell this entire blog, all I have is a bundle of thoughts about how things aren’t working like they should, but at the same time knowing that something needs to happen.

In all my ramblings I guess my best answer to these economic issues is confidence. Hopefully, that’s something Barack Obama will instill when he comes into office. At least, that’s why I voted for him…

p.s. Usually I try to do a through job of proof reading my blogs before I post them. This one was just to long and jumbled up that I decided to not put anymore time into it. My apologies.

-dunkie

The Day After Tomorrow...

Markets around the globe, from Japan to Germany, fell dramatically this week.  While Iceland was going about nationalizing it's largest bank and suspending all trading in their stock market, Russia was busy formulating a bailout plan of their own.  Faced with the possibility of the global credit markets coming to a standstill, central banks around the world simultaneously lowered their interest rates in an attempt to provide emergency relief.

At home, the DJIA fell over 18% and the FDIC added two small banks located in the midwest to their growing list of bank failures. Meanwhile, the SEC continued investigations into possible fraud by large financial institutions, and even positive earnings reports for a small number of companies was met with trepidation by investors.

Q: I get it already.  How long until the world explodes/implodes?

A: While it is pretty certain that the world is not about to end, we are certainty looking at a global climate change in the financial markets.  Speaking of which...

I almost feel as if I'm watching the movie The Day After Tomorrow right now.  First, we had a number of major (financial) disasters across the United States.  Then, almost overnight, we found ourselves engulfed in not only a countrywide (no pun intended) crisis, but a worldwide ice age (frozen credit markets) as well.  Now, we are witnessing unprecedented co-operation with countries around the world to try and preserve as many lives (financial markets) as possible.  

To complete the story line, I'm sure there is some math genius out there that has been accepted to an Ivy League school, but due to the frozen credit markets, is unable to obtain the student loans he needs to pay for tuition.  As a result, he is being forced to live in the New York Public library while his dad searches for a way to send him to college.  Throw in a romantic subplot just for good measure and I'm certain that this could turn into a successful made for TV movie that rivals likes of The Odyssey, Sabrina: The Teenage Witch, and The Stand.

Q: First the Titanic and now The Day After Tomorrow.  What's next?

A: Well, the presidential elections are coming up... how about Dumb and Dumber?

Q: Really now?

A: Just kidding... 

Q: Right.

A: Anyways...

Q: Okay, moving on.  Have we bottomed out yet?

A: What we saw on Friday of last week was that when the DJIA briefly dropped below 8,000 investors seemed to view that as a bottoming out point and the index stayed above that point for the rest of the day.

If the drops in the stock market is the result of a lack of investor confidence, it is very hard to imagine that confidence can go any lower right now.  That could indicate that 8,000 is indeed the bottoming out point.  Then again, it might not be...

Q: Assuming this is the bottom?

A: We could see investors start coming back into the market, but it is highly doubtful that the markets will recover to anywhere near the levels we saw a year ago when the DJIA topped out just above 14,000.  Best case scenario, we are probably looking around 10,000 over the next year.

Q: Worse case scenario?

A: We continue to drop...

Q: Those don't seem like very great alternatives.  Why not stay out of the market?

A: Agreed, those are not great alternatives.  Still, that doesn't necessarily mean that you should not continue to follow an existing long-term investment strategy if you are already invested. 

What we do know, is that markets recover.  If you examine all of the recessions that the US went through over the last 100 years, most of them recovered to the same level they were at prior to the recession in under 12 months.  There were a few cases where it took longer than this, but in all cases, the markets recovered eventually.

To take a slightly different perspective, there are a few ways you can loose money right now. One is if you own stock in a company that goes under, such as Washington Mutual.  If this happens, you are left with nothing and have no chance of recouping your losses.  

A second way you can lose money is if you have money in a money market mutual fund that is unable to hold it's value of $1 per share.  If this is the case you might lose some of your investment, but not all of it.

Third, if your bank fails and you have depository accounts that exceed the $250,000 insurance (per account) provided by the FDIC, you could lose any amount that you hold above that level.

Lastly, you can lose money if you sell an investment at a loss.  By doing so you eliminate the possibility of the investment recovering it's value. 

To sum this up, if you have a long-term investment strategy that is well diversified, you do your research on any money market funds you are in, don't keep over $250,000 in cash in any one depository account, and don't sell everything in a panic to cut your losses, you will eventually recover from this.

Q: Is that it?  

A: Of course there are some cases in which you may want to sell things...

1) To harvest losses in order to offset future gains and avoid paying capital gains taxes.

2) Rebalance a portfolio to target allocations in order to better reposition your portfolio.

3) If your current investment strategy is not one that suits your long-term goals and/or risk tolerance.  In this case you may need to change your target asset allocations.  Still, this isn't necessarily a great time to make a change in an investment strategy...

Also, if you are not currently invested and have a large amount of cash sitting around, the bottom is never a bad time to buy... that is, if you think we have reached the bottom.

Q: Thanks for the...

A: Did I mention that this should not be taken as financial advice and you should consult your financial advisor before making investment decisions?

-dunkie

Economic Crisis: Which Simpsons Character are You?

I think this is somewhat self-explanatory... Enjoy!

Bart Simpson - While it is obvious to you that something bad is going on, you will most likely never see the direct effects of this economic downturn. If someone talks to you about the current state of the economy, your reply will probably be something along the lines of “Bummer, dude.”  

Lisa Simpson - You are concerned about the current state of the economy and work hard to educate yourself about what is going on. Now is not the time to… “AHHHHHHHH… BART!!!” As you were saying, now is not the time to panic.

Marge Simpson - You keep your money in a cookie jar and try not to spend much. The economy worries you and you are starting to think that finding a job would not be a bad idea… Perhaps the police department is hiring?

Homer Simpson - You have no idea why everyone is so worried about the US economy. The only question that pops into your head when someone mentions the stock market is “what kind of food you can buy there?"

Maggie Simpson - You don't speak, much less read.  Chances are that you are not this character...

Grampa Simspon - You are panicked and depressed. No one will explain to you what is really going on. Your assumption is that you are about to relive the Great Depression and that you will be forced to move in with your son.

Apu Nahasapeemapetilon - In times like these, business isn’t great. Lucky for you, "you are most happily married and have eight amazing children..." all of which you are still responsible for feeding. While life is stressful, you remain cheerful and continue to go about your job. "Thank you, come again!"

Mr. Burns - A month ago you ordered Smithers to sell everything. Now, you are sitting on a hoard of cash, watching the market fall, and muttering yourself "Excellent..." The only question you have is “when will be the right time to buy back into the US economy?”

Moe Szylak - You own your own business and have two main concerns. That Duffman will stop delivering the beer you need to serve your customers and that your customers (Barney, Homer, Lenny, Carl, ect...) will run out of money to pay for… hold on a second, phone call. "Someone’s looking for Mike Rotch. Has anyone seen MIKE ROTCH?"

Barney Gumble - The economy is tanking. The only question on your mind is “What does this mean for beer prices?” Despite the fact that you probably have nothing invested in the stock market, you decide to turn towards drinking to deal with the current state of things. Chances are that you are still in college and never make it to your Friday morning classes.  That, or you are an alcoholic and currently going nowhere with your life.  Let's hope you're the first...

Ned Flanders - Times like these are testing, but your faith in God (and the US economy) remains steadfast. If ever you need re-assurance, you can always call Reverend Lovejoy...

Reverend Lovejoy - Once a faithful believer in the US economy, you are now convinced that the world is about to end. The wrath of God is upon us. Run for the hills.

Milhouse Van Houten - You are extremely nearsighted and cannot see beyond the current economic crisis. Needless to say, your current state is one of complete panic.

Nelson Muntz - You aren't invested in the stock market and are currently laughing/pointing your finger at the people who are. However, chances are that you aren't saving money and in reality, the joke is on you.

Ralph Wiggum - Phrases such as “It tastes like burning!” and “I found a moon rock in my nose!” are the norm for you. However stupid people may think you are, even you realize that these are not good times for the US economy.  You have dreams of one day becoming the President of the United States of America...

Principal Seymour Skinner - You job is funded by the US Government. An economic crisis only means one thing... your funding is about to take another hit. Things were much simpler back in Vietnam...

Krusty the Clown - The current state of the US economy makes you miserable, and every time you look at the DJIA, it only gets worse. Still, you manage to continue on with your life, relying on a large number of cigarettes to get you through your day.

Otto Mann - Between drugs, sleeping in strange places, and driving a school bus, you are pretty used to crashing. The current stock market crash is no different.

Comic Book Guy - According to you this is the "Worst crash ever." Luckily, all of your money is invested in your vast comic book collection.

Chief Wiggum - You eat your coffee and donut every morning and remain completely ignorant to what is going on in the US economy. If something goes wrong, it isn't your fault. This crisis won't affect you, unless of course… Springfield has to cut the budget and you lose your job.

Note: You will only realize this last part a month after being laid off.

Mayor Quimby - Straight from Wikipedia... you are "a slick, opportunistic politician whose chief priorities seem to be keeping [yourself] in office, womanizing, and various forms of corruption." There is a significant chance that you are also a member of the United States Congress and are up for re-election in a month.

Santa's Little Helper - All you do is eat, sleep, poop, and chew things. The global economy, much less the US economy, is of no concern to you.

Blinky - You have three eyes... and you're a fish. You are the byproduct of this whole economic mess.  You are completely innocent when it comes to everything.

Groundskeeper Willie - You're angry.  You're angry at everyone from the the mortgage borrowers to the US government.  This mess wouldn't have happened if Mel Gibson were President.

Troy McClure - You may remember yourself from such educational firms as "How to get Rich Quick" and "Money Money Money."  Much like the economy, your career is going through somewhat of a downtown...

Martin Prince - The stereotypical nerd, you are extremely brilliant. You will come out of this economic crisis extremely rich. Watch out for Nelson... you are his personal retirement fund.

Hans Moleman - You are heavily invested in the US financial sector and had an extremely large holding in Washington Mutual. This is not your lucky day, month, or year...

Dr. Hibbert - *Chuckle* You believe that the cure for this economic crisis is to simply remove the troubled mortgage backed securities from the market in the form of a $700 billion bailout by the US Government. *Chuckle*

-dunkie

...a.k.a. Dr. Lisa Hibbert Simpson

Buy or Sell: The Perfect Analogy

The First Word:

Once or twice a week I like to take a late lunch break and head over to my parents house to eat and watch my favorite sports talk show, Around the Horn (no, I don't still live with my parents and yes, I am 24 years old and my mom still keeps my favorite lunch foods stocked for me… thanks Suzie). Anyways, for those of you who have never watched the show, the format is basically this:

Tony Reali, the show’s host, sits at a desk in front of four large screens. Each screen has a panelist that writes a sports column for one of the many newspapers around the US. The show is split into rounds in which the four columnists debate various sports topics of the day and are awarded (or penalized) points based on their arguments. After each round the panelist with the lowest point score is cut, and by the end of the show the last man (or woman) standing is awarded 30 seconds of facetime in which to talk about whatever he or she likes.

One of the show’s rounds is called Buy or Sell. In this segment Tony Reali reads off various sports news headlines from around the country and each panelist is given a chance to buy (agree) or sell (disagree) the headline. The columnist’s reasons for buying or selling a headline range from asinine, to well thought-out arguments. In the end, the scoring is completely subjective, and it is up to Reali whether or not to award points.

Buy or Sell:

Everyday there are dozens of headlines in the news about which way the US economy is going, or what company is about to make it or break it. From an investment standpoint, you can literally choose to buy or sell each headline if you like. In the investment world this is considered active portfolio management, and each columnist is an active manager trying to beat the market.

Much like the show, less than 1 out of every 4 managers who actively buys and sells headlines will beat the market. On top of that, chances are that the same manager won’t outperform the market year after year. While you can certainly watch the show and always root for the same columnist to win every day, you are essentially "putting all of your chips in one basket” and you will live and die on that columnist’s performance.

On the flip side, you can choose to watch Around the Horn because you think it is a good show and believe that it provides some value to your afternoon. While you might agree or disagree with each of the columnist’s opinions, they don’t change the fact that you enjoy the show and will continue to watch day after day. In the investment world this is equivalent to passive portfolio management. Although the performance of each show many vary, you remain confident in what the show has to offer.

1st Cut - Out of Bounds:

If I haven’t completely lost you yet, hopefully you are now thinking to yourself “okay, so how should I watch the show to get the most out of it (i.e. which is better, active or passive portfolio management)?" Short of giving out any investment advice (this is my non-disclaimer, you know, since I’m not giving out any advice)...

Watch the show because you like it and because you think it is good. If you come to the conclusion that out of the 4 panelists, you value the opinions of two of them and you think the other two are complete idiots, then start watching the show not only because you like it, but because you like two of the columnists.

If you do that, then for the most part you will ride the performance of the show. If it is a good show like you think it is, you will reap the benefits in the long run.

As for the part of you that watches the show in order to root for the two columnists that seem to actually know what they are talking about... If they collectively win more than the other two, than you will be ahead of the game in that regard. If not, at least there is still a large part of you that enjoys the show.

2nd Cut - Showdown:

To translate into english/investment talk (again, short of giving out any investment advice)...

A typical investment portfolio is made up of multiple asset classes. Most often, managers are chosen to to manage one specific asset class. If you know that one active manager will always outperform the market index for an asset class, then it would make sense to put all of your money there. Sadly, there is no way to determine this with absolutely certainly. As a result, a logical decision is to pick multiple active managers that you feel are better than the rest.

Still, this situation exposes you to the risk that both of these managers might make the same bad bets and under perform the market. In order to combat this, by allocating a portion of your portfolio to passive management, you ensure that some of your portfolio will follow the performance of the asset class.

By combining these two investment management philosophies, you are able to lower your exposure to risk through the passively managed portion of your portfolio, and still benefit from the possibility that the actively managed portion will outperform the market.

Facetime:

If this entire post is still confusing, you can try buying a few boxes of crackerjacks in hopes that they still put decoder rings in them or post a comment and I’ll try to clarify things as best I can. Chances are however, that I have also confused myself in an attempt to make this analogy work and I’ll just pretend to have never seen your comment...

Also, you can always just chalk me up as some idiot columnist who doesn’t know what he is talking about. Either way, I hope you continue to watch the show.

Goodbye:

"We're on a 23 ½ hour break!"

*Paper Toss*

-dunkie

p.s. you know that you've made a great analogy when you have to spend an equal amount of time explaining your analogy using non-analogies... good job me.

Emergency Titanic Stabilization Act of 2008

Earlier this afternoon the Emergency Economic Stabilization Act of 2008 passed through the House (263-171) and was signed into law by G-Dub shortly after. While there are many provisions within the 450 page bill that are aimed to help stabilize the economy (I'd like to think so at least...), I'd like to focus mainly on topics relating directly to the $700 billion dollar bailout provisions in the bill.

Q: The bailout passed.... now what?

A: There is still a significant amount of work done. The Treasury and Federal Reserve have been given the tools and authority they need to start tackling this economic crisis head on. While we know that the $700 billion will go towards removing the mortgage backed securities from the market, it is still to be seen how exactly this process will take place, and how the securities will be priced when the government purchases them.

Q: Isn't all of that included in the bill?

A: Not quite. The bill set guidelines, much like a manager delegates a task to an employee, but at the same time gives them boundaries to work within. In comparison, this is opposed to having your boss micromanage everything you do, when in fact he is a complete moron who has no clue what is going on.  

Q: You said previously that passing the bailout would instill confidence back into the economy, yet today the DJIA fell 157.47 points...

A: Part of this is due to questions that investors still have about how the Treasury and Fed will go about buying/pricing the mortgage backed securities in the market. When those questions are answered in the coming weeks investors should finally start to exhale.

The other part of this is that over the last few weeks the main economic focus has been the bailout, and people have somewhat forgotten the other economic indicators that, across the board, are in the red right now. 

While many of these poorly performing economic indicators can be traced back to the US financial crisis, many have reached the point where they have become so significant that going back and removing the mortgage backed securities from the equation won't just fix them overnight.

Q: Could you give an example of an economic indicator?

A: Unemployment is a big one.  In September alone, over 159,000 jobs were lost in the US due to business trying to cut back on expenses and tighten their belts.  

If you follow the footsteps... the mortgage backed security fiasco resulted in bank failures, which caused lending to slow down, meaning businesses found it harder to borrow and consumers were finding it more difficult to buy things on credit.  This chain of events led to many businesses not reaching their revenue targets, causing them to lay people off.

Q: When is the Economy going to start moving forward again?

A: It could take a while.  In the example above, even if all of the mortgage backed securities were removed from the equation overnight, the people who lost their jobs due to the economic slowdown wouldn't just magically be rehired at the snap of a finger.

Removing the mortgage backed securities from the situation will help stabilize many financial institutions.  Slowly, banks will then start to lend money again, and as confidence improves, consumers will start to feel more comfortable borrowing money to buy things.  Eventually, with consumer spending increasing, business will start to hit their revenue goals and they will start to grow.  In order to do so, they will need to borrow money and hire more employees. Those people, who now have jobs, will then spend then their money and the whole cycle will continue, eventually putting our economy back on the growth track.

Q: Oh, so it's like a domino effect and the government buying the mortgage backed securities is just the first of many dominoes. Right?

A:  Kinda... except that in the Economic World, gravity does not cause things to fall at 9.8 meters/second².  Instead, things in the Economic World fall at 9.8 meters/month².  

Disclaimer: All other applications relating to gravity are the same in the Economic World as they are on planet Earth.

Q: So... are you saying that it will just take a few months to get the Economy back to where it was a year ago?

A: Not really.  How about this... Imagine that the economy is large seagoing vessel.  For fun, lets just call it the Titanic.  Also, lets rename mortgage backed securities icebergs, mainly because I'm tired of typing out mortgage backed securities so many times.

One day the Titanic is cruising along when suddenly it hits an iceberg.  This puts a huge hole in the Titanic and it starts to sink.  Luckily, the Coast Guard (i.e. US Government) is in the area and is able to come to the Titanic's aid in the form of 700 billion mini pumps to help bailout the water that is pouring into the ship and causing it to sink.

Seeing as how there are only a handful of people who know how to setup the mini pumps, they can only turn on 50 billion pumps every hour.  As a result, the Titanic continues to sink, even though water is being pumped out.

Eventually, enough pumps will be turned on to a point where the Titanic will stop sinking, and the Titanic will start to float again.  At that point, the hole in ships hull will be patched up, the mini pumps can be returned, and the Titanic can continue on its merry way.

Q: Ok, I think I get your drift.

A:  Good, because I don't think I have the energy to explain...

Q: Wait a second... what happens to the people on this imaginary vessel called the Titanic?

A: ...zzz...ZZZ...zzz...

-dunkie

Just another day by the pool...

The University of Redlands, a private liberal arts and sciences university located in the beauty of sunny suburban Redlands, has a total enrollment of roughly 4,500 students (graduate and undergraduate). According to the U of R website, the operating budget for University exceeds $100 million annually.

Imagine that you are in charge of that $100 million. Aside from creating a budget, your responsibilities include a) putting the money in a safe spot and b) making sure the Universities bills are paid on time (i.e. salaries, utilities, taxes, ect...)

After looking at all of your options, you decide that storing this money at a bank would be much more secure than stacking $100 bills in your office safe. Responsibility a), check!

As for your second task, well that is easy. The bank you chose also has automatic bill pay. Man, this job is a cinch. Responsibility b), check!

Being the smart individual that you are, you know that the $100 million that you put in the bank is earning interest. Let's say that interest rate is set at 4%. Using your superior math skills, you calculate that you are making $4 million in interest every year. Sweet! They should really pay you more for this job...

One day, you find yourself bored at work and decide to take a break from Facebooking your BFF. You update your status to "...is stackin' chedda" and start looking into how you can earn more than 4% on the $100 million you are responsible for, while still upholding your two responsibilities (i.e. keeping the money safe, and keeping it liquid).

First, you think about investing it all in Google. After all, everyone uses Google and they are growing much faster than 4% a year... maybe even 10, or 20%! Thinking back on those economic classes you took your freshman year, you vaguely recall that the "promise" of higher return is the always the result of taking more risk. Smartly, you decide that risking the $100 million dollars that is needed to keep the University running would probably get you fired, and you certainly don't want to have to find a job where you wouldn't be able to Facebook all day. Scratch that idea.

Next, you think about buying some bonds. Bonds are currently earning 5% and are AAA rated, so they are pretty safe. Sadly, after doing some Wikipedia research, you realize that bonds aren't very liquid and you wouldn't have access to the cash you need to keep the University doors open. Damn... there goes your plan to spend that additional million dollars on an Olympic high dive platform for the pool.

While pondering what option to consider next, you get a phone call from your banker/former college roommate...

"Hey, I saw your Facebook status and hear you are looking to earn a slightly higher return on all that cash you have sitting here, while still keeping it safe and liquid. I have the perfect solution for you, it's called The Short Term Fund."

"Sweet. How does that work?"

"Basically, it's a fund that is made up of 80% commercial paper and 20% of this other stuff that will help earn a slightly higher return. It is just like cash and is very liquid. You just have to call me up and I can sell whatever amount you need from the fund and have the money to you the next day. All that and you earn a 4.5% return on it."

"Oh, so it's just like a money market fund?"

"Yeah, something like that..."

"Sweet! Let's move all $100 million over into The Short Term Fund. I'll give you a call every month or so and you can transfer the cash over that the University needs to pay salaries and stuff."

"Ok. Talk to you then. Holler at playa!"

"Peace out, cub scout."

Man, you think to yourself, you are indeed a genius. No wonder the University hired you. You just banked an additional $500,000 for the University.

Feeling like you are on top of the world, you decide to skip out of work early and go hang by the University of Redlands outdoor pool. Obviously, you are there to enjoy the sun after a hard day's work, and not scope out all of the hot freshmen co-eds... err students. Putting on your shades, you start to draw up plans in your head for a new $500,000 outdoor hot tub, and wonder how many co-eds could fit in such a facility at one time, as you drift off to sleep in the warm so-cal sun...

A month goes by and it is time to pay bills. Leaning back in your chair, you press the speed dial button for your banker and wait for him to pick up...

"Uhhh... hello?"

"Hey, I need you to free up $10 millie from The Short Term Fund so I can pay these bills.

"Umm... I can't exactly do that... the fund has been frozen."

"FROZEN?!?! WTF DOES THAT MEAN YOU @!$#%^"

"It turns out that the other 20% of the fund was invested in mortgage backed securities, and when people found that out, they started selling out of the fund. Since we didn't want the fund to close we had to freeze the fund. Don't worry, the University will get their money back, but it might take a while..."

"What the hell are we supposed to do until then? The University needs that cash now to pay their bills."

"Umm... well YOU might want to start looking for another job..."

"Go F*** yourself."

"Haha ok... we still on for the pool this afternoon?

"Yeah, but you better bring the booze."

Back to reality... Over 1,000 colleges and private schools are currently dealing with this sort of problem due to a freeze on over $9.3 billion that is held in The Short Term Fund (which is managed by CommonFund, for which Wachovia served as trustee). This is one of the many ways in which the crisis in the US economy is starting to trickle down to the point where it effects more than just the people that are directly involved. The bailout package would remove the mortgage backed securities from the market, and eliminate the underlying issue that causes problems such as this. In the words of Forest Gump...

"That's all I have to say about that."

Ok, I lied... one more thing I need to mention. I don't know if the University of Redlands actually uses this fund, and I was unable to find a list of which Universities do. Also, for sake of understanding, this example has been simplified to some degree. Obviously, the University of Redlands pool has more than just freshmen hotties hanging out there...

-dunkie

Don't Drop the Soap...

Lots of things to do today so I am going to try and make this update on the bailout quick...

- It is expected that the Senate will later vote on a revised version of the bailout bill.

- The new bill has been revised in two main ways:

1) Increase FDIC deposit insurance from $100,000 to $250,000.
2) Authorizes the FDIC to borrow as much money as needed from the Treasury for one year.

- The DJIA is currently trading at -26.36 (i.e. investors are waiting for more information on whether or not the bill will pass).

- Obama and McCain have both come out in support of the changes.

Bailout Revisions...

In regards to raising the FDIC deposit insurance, that is great. It will increase consumer confidence and help small banks stay in business as depositors won't run to larger banks in such large herds.

As far as authorizing the FDIC access to unlimited Treasury funds in the case that banks continue to fail...

The current $30 billion authorization that the FDIC has access to is basically a pre-approved loan. If they needed more than that, they would get it, although it would have to be approved by congress most likely. In taking off the limit for one year, all that changes is that instead of making them go through an approval process down the line, we are just increasing the limit of the pre-approved loan.

And now for some quick Q & A...

Q: Will these revisions be enough for the bailout to pass?
A: I really, really, hope so.

Q: Will these revisions do any good?
A: Yes. By increasing consumer confidence and increasing coverage of depository accounts from $100,000 to $250,000.

Q: I don't have $250,000, let alone $100,000...
A: Either do I, but hey, at least we can all walk a bit taller now!

Q: Will these revisions address the concerns that opponents of the bailout have?
A: Not really, unless we are talking about...

Q: Will these revisions help current House members seek re-election?
A: Yes.

Q: What will happen if this bill fails yet again?
A: The United States economy is collectively holding a big bar of soap right now. If something doesn't happen soon, we are eventually going to drop that bar of soap. While we might survive, it won't be pretty, and the effects will be with us for a long, long time...

Update: The bill has gone from 2 pages in length, to 110 pages over the weekend, and now stands at 451 pages. I almost don't even want to know what else has been snuck in there. Amazing...

-dunkie