My employer and I are parting ways after nine and a half years together. It is an amicable separation, and I wish the [unnamed] technology corporation, and especially my soon-to-be coworkers the very best. I am happy that the severance package is reasonably generous.
I feel a bit bad for my coworkers because they still face the same aggressive schedules but with about 30 fewer engineers. However, the company is actively working to reduce headcount, and those left behind almost always bear greater burdens on their lives. Sixty-hour weeks are not uncommon in the tech industry, and over the years I’ve endured the occasional 100-hour week. When that happens, breakfast, lunch, and dinner is brought in because there is no time to eat otherwise.
There was a time when I didn’t mind fifty- and sixty-hour weeks. But that was when everything was new, exciting, and fun. That was when I worked at the “old HP”, where almost anything was possible. In the beginning I learned something new almost daily, and I love learning.
Here is why this “job separation” feels like a good thing:
- Severance pay is a nice perk.
- I believe my best talents are wasted in my current role.
- There is virtually nothing for me to learn in my current role.
- The is little chance of me moving to a significantly different role (within the corporation).
- I will never get rich working for a large corporation, unless I build it myself.
- Going to work feels like stepping into the Matrix.
- True creativity is treated like the flu… people avoid it as much as possible.
- I am willing to bet on myself and my talents!
I am passionate about creativity and I have largely refused to drink the corporate Kool-Aid. Pretending to be a Kool-Aid drinker is extremely taxing, and feels disingenuous.
Creativity is more habit than raw talent. Creativity can be exercised and developed, or it can be quashed and stifled. Creativity is dangerous to boring people and their boring jobs. In contrast, creativity is energizing to interesting and open-minded people.
I prefer to use my energy to improve the world in my own unique way, and with my own unique, somewhat flamboyant style. I can relate from repeated managerial feedback that my style is not appreciated by former employer. My style is friendly, lively, and centered around humor with a touch of sarcasm. Liveliness, humor, and particularly sarcasm are not appreciated in my former corporate realm. What passes for humor is so sanitized that any pre-existing wit is sublimed into the corporate HEPA filter of political correctness, anxiety, self-censorship and banality. That culture is one reason this [unamed] corporation’s advertisements are so uninspired.
I am managing my own company now. It is a start-up, and it is my passion. It is being built around disruptive technology — technology that will make waves in the world of investing. Technology that few will understand, but which produces results that almost anyone can appreciate. The culture of this new company will be based on a simple idea — be bold.
It’s hard, but I believe that if you can’t find a job then make a job. I have been working or in school (or both) since age 11 or 12. I had a shared a paper route with another paperboy (delivering alternate weeks) for a couple years. I worked odd jobs while in junior high and high school including painting fences, mowing lawns and babysitting. In late high school I had summer jobs doing things like HVAC maintenance (as an assistant/gopher), a surveying assistant, and installing Ethernet cable. I even did freelance work for a small/medium-sized publishing company, producing graphics and slides and sent in over a 2400-baud modem.
I always found a job, because a) I needed the money for college, b) I was willing to take what I could find.
Now that I am a professional I have steady work. I’ve also continued to be an entrepreneur as I worked. If I was laid off and couldn’t find work I’d like to believe that I would continue to pursue my entrepreneurial effort. I’d take part-time work (like I did during my school years) to pay for the basics.
I write this after having returned from an internet entrepreneurial group meetup. I get to meet and reacquaint with other entrepreneurs at varies levels in the entrepreneurial process, from “haven’t a clue, just getting started” to “been self-employed for 20+ years”.
If your are unemployed, I’d encourage you to consider what job you would like to create for yourself. Sure, keep applying for “regular” jobs to, and if a good-enough one comes around, take it. In the mean time apply yourself to developing your own small business. I recommend something with low start-up costs, and something that you have a passion for. You may find yourself developing new and valuable skills in the processes… Discover talents you didn’t know you had.
You may, just may succeed in creating a wonderful business. Even if you don’t, you will learn more about yourself, your talents and what you really like (and don’t like). So when you do land that cushy corporate job, you will have a better idea of how to shape your career. Even after landing that job, you might find yourself dabbling in entrepreneurial enterprises.
As a non-user of marijuana, I find it interesting and unfortunate that many other non-users are opposed to marijuana legalization. My argument starts fiscally. Illegal marijuana is a net cost to society. It finances crime syndicates both in the US and particularly Mexico. Illegal marijuana also poses several direct fiscal burdens:
- Law enforcement costs to arrest and pursue marijuana use and sale cases.
- Expenses to incarcerate marijuana transporters, sellers, buyers and users.
- Cost of taking employed users away from their jobs and family.
Conversely, legalized marijuana provides fiscal benefits:
- Decreased law endorsement expenses. Law enforcement can focus on under-age (under 21) marijuana crimes.
- Decreased incarceration expenses. Freeing non-violent users (and sellers) from prisons will save tremendous sums of money. Further not incarcerating such people in the future saves money.
- Otherwise law-abiding individuals will retain jobs.
- Tax revenue can be collected on legal marijuana.
That is just the beginning of my supporting argument. Think of the other “Freakonomic” effects of marijuana criminalization:
- Drug violence in the form of turf wars and transportation route protection (esp. at border crossings).
- Financial support of other illegal enterprises, such as human smuggling and weapon smuggling.
- Lack of quality controls (regulations) leading to contaminated (with pesticides) and laced marijuana leading to sickness, disease and occasional death of consumers.
Please note that I am NOT advocating the use of marijuana, in the same way (as a non-smoker) that I do NOT advocate the use of tobacco! I avoid both because of their negative health effects.
However, I do use alcohol. I like microbrew beers, fine Scotch, and assorted other libations. I have done some research and have learned that 1-2 alcoholic drinks per day is an overall health-enhancing activity.
I liken marijuana prohibition with alcohol prohibition in a few ways. For example, both have lead to increases in organized crime and related violence. And both reduced sales tax revenues. Further, both moratoriums have lead to poor quality products… such as blindness induced by the lacing of ethanol with methanol during Prohibition.
Now I switch gears to the ethical arguments. I have seen a loved one die of cancer and cancer-induced starvation. Cancer and chemotherapy frequently leads to nausea and vomiting. These are miserable symptoms and lead to weakness and premature death. The 70-something person I refer to was a vital, strong and healthy person before cancer struck. He could do manual labor in his 70s that 30-year-olds would struggle to do. And his mental faculties were also razor sharp. Nonetheless his cancer deprived him of the ability to eat and retain food. This reduced his weight from a trim 165 pound pre-cancer 6’1″ frame to a sad 110 pounds. I personally believe, based on my research, that marijuana would have helped his appetite and nausea, which would have greatly improved his *quality* of life.
There you have it. Financial and ethical arguments for the legalization of marijuana. Note, I don’t couch the arguments in terms of medical marijuana… I speak in general terms. I have had friends and dare I say colleagues who have used marijuana. Some of whom have retained great talents and intellects. On close inspection I have seen their short-term memory impaired in a manner similar to that produced by overindulgence in alcohol. In my college years I have “babysat” many an alcohol overdose “patient” including one time we had to call 911. Conversely, I never had to “babysit” a marijuana OD person. My research confirms that anecdotal evidence. Cliff Notes version: “Alcohol OD bad, marijuana OD… virtually impossible.”
It makes no sense to make marijuana illegal. Tobacco and alcohol are arguably more dangerous… but society has wisely seen clear to regulate rather than prohibit their sale and use. Marijuana should be no exception.
Are you excited about Obama’s
campaign speech, State of the Union Address, jobs speech presentation to a joint session of Congress? If so, tune in to hear platitudes and ineffectual, half-backed rhetoric. Extended unemployment benefits, trivial hiring incentives, infrastructure, stimulus, Keynesian hyperbole and excuses.
I try to stay out of politics on this blog, but I feel compelled to comment about gross fiscal negligence. I accept the argument that US GDP as a percentage of global GDP is susceptible to decline. As an US citizen I see no reason to accelerate the decline. For elected officials to do just that is negligent, naive, or fundamentally hostile to the general welfare of the United States.
The fact that the US has been so successful from 1945 to present is a testament to something unique and special about our whole socioeconomic system. The fact that we have righted or ameliorated our past social mistakes while improving our economic quality of life is remarkable.
Why our President is so hostile to basic economic factors is shocking. Historically massive US National deficits siphon capital from the private sector. Federally-manipulated low interest rate actions (QE1, QE2) sap safe investment opportunities from senior citizens, while fueling speculation in gold, silver, and commodities ranging from oil to corn to aluminum. Putting the hammer down on domestic oil and natural gas production, particularly off-shore, puts another deep bleeding gouge into the US GDP. Presidentially-dictated EPA mandates on coal plants put US electrical production in limbo. Crony-capitalism (or faux capitalism) puts basic free enterprise on notice to be politically correct as a first priority.
I have been silent too long. I avoid social political issues, but I must address fiscal political issues. This is my first salvo.
S&P made the right declaration: AA+. Moody’s and Fitch showed relative weakness. The downgrade of US Treasurys makes complete sense given that US debt loads will easily surpass 100% of GDP within a decade. The US Treasury accuses S&P of negligence for not using their $20T vs $22T figures. I’ve heard stronger arguments from 8th grade debate teams. [Been there. Done that.]
Here I am, Joe investor, watching the markets whipsaw like mad. I braced for impact in my oh-so-slow way and mitigated perhaps 10% of the damage, but my investments have been generally damaged too.
Maximum caution lies not on either side of the coin, but on the edges. 100% “safe” investments are not safe in the same way that 100% aggressive investments are not safe. Safety should be measured in terms of the following risk factors 1) situational 2) statistical (non-monetary) 3) inflationary (monetary).
In the midst of worldwide and US market turmoil there has been similar chaos in the fledgling currency called bitcoin. It is so “new” that my spell checker suggests “bitchiness” or “bit coin” as alternatives. Meanwhile I’m thinking of a very small exposure to bitcoin as an alternative to precious metals or commodities.
I should disclose that I have I have an emotional connection to bitcoin. Bitcoin has aspects of finance, technology, and financial engineering that are intriguing to me. So please consider this factor as I continue to write.
Bitcoin is all that fiat money is not… Bitcoin is finite! The number one rule I am painfully learning about ANY fiat currency is that it is potentially infinite. (Unbounded, if you will.) The fiat currency “presses” are only bounded by the constitution and discipline of the political systems that underlie them. And these very systems have show over historically documented periods to be ultimately undisciplined. Simply put: lack of monetary discipline leads to economic calamity leads to runaway inflation.
That is one factor that is engineered against in the bitcoin ecosystem. The bitcoin “printing presses” are inherently limited to 21,000,000 bitcoins. Further some bitcoins will be forever lost into the digital black hole.
I am not here to say that there are not flaws with bitcoin (BTC). Just that very few have been discovered yet, and those are very minor so far. I am saying that bitcoin also has unprecedented advantages: 1) digital portability, 2) relative anonymity, 3) potentially fee-less transfer, 4) agent-less security, 5) inflation-resistance. I love all of these factors, especially resistance to inflation.
I am here to say that the business cycle is real. There are booms and busts. And there is government meddling with the business cycle that, in the long run, only magnifies booms and busts. And that bitcoin is one possible antidote. That said, I am sticking with stocks, bonds, ETFs, etc in a not-so-contrarian manner. I just happen to be mining a few bitcoins on the side. Not familar with bitcoin mining? Google it!
Kudos the S&P for being the first major debt rating firm to downgrade US debt to AA+. Essentially they warned Congress that $4 trillions in cuts was required in a debt ceiling deal, Congress only ponied up about $2 trillion. Bill Gross of PIMCO saw this coming as did many, many others including this finance blog.
The importance of the credit downgrade is the message it sends to voters and to Washington: The US Treasury is not immune the market realities of global economics. The giant US credit card has terms and conditions ultimately dictated by global bond markets. As debt-to-GDP ratios increase so will borrowing costs. The long-term trajectory of US debt growth, under current law, is staggering. Further the cocktail of massive debt, out-of-control debt growth, and a weak US economy do not bode well for future US debt ratings.
Unfortunately I don’t think this message is being heard or understood by a sufficient number of Americans. Gross and El-Erian get it. The US House of Representatives is starting to understand. The Senate and the White House do not. Neithe does the US Treasury saying “There is no justifiable rationale for the downgrade?” Seriously, what meds do they have to be on to say that with a straight face? The American public has a degree of understanding, but not sufficient concern or attention.
The fallout of the downgrade will be modest but wide-ranging. It will be good news for AAA rated companies and countries like Exxon Mobile, Britain and German. The debt rating will be bad news for adjustable-rate mortgage holders, US bond holders, and entities that are required to hold US Treasuries.
When did I wake up in Europe? I want to go home, to the USA that I remember. 9.2% unemployment is for France and Italy. I’ve been to these countries — nice places to visit — but not to work hard and get ahead. High unemployment is cultural, normal, systematic.
Is Germany the new USA? It’s the only European country doing well. Germany has pride and strength of purpose. Germany has its fiscal house together.
Is the USA becoming the next France? Jobs for government workers, modest jobs security for those with jobs, and very few prospects for the unemployed and for recent college graduates.
The fixes for our current economic mess are not rocket science. I agree with Bill Clinton’s recent comments… the corporate tax rate needs to be reduced. The U.S. government needs to reduce the self-employment tax that is a huge drain on U.S. small businesses. Congress and the Administration need to encourage, rather than stymie, domestic oil and natural gas production. Finally, an intervention is needed to halt Washington’s latest spending bender. Washington has been drunk behind the wheel of a massive M1 tank, trying to drive the economy, whilst drifting lane to lane and taking out the odd car here and there. That tank, fueled by 14+ trillion of debt, is about to find the price of fuel is about to rise.
Now is not the time for platitudes, or experiments. Now is the time for prudent action.
I am sad that the Space Shuttle is being retired. Such action is merely a symbol of where the US Government, en masse, sees the USA heading. This need not be the case. The US, as a whole, has all that we need to succeed. We are are free, independent, creative, and motivated. The US has shown repeatedly the resilience to challenge adversity and thrive. Why so few lawmakers can see this — communicate this — is baffling to me. Are they simply economically ignorant? Or indifferent?
Until some economically sane action emerges from Washington, I am hedging my personal finances. I’m positioning against the real possibility of long-term, government-sponsored inflation. I’m factoring in the likelihood of the government CPI (CPI-U Urban Consumer Price Index) understating true inflation and overstating the real US GDP.
There is a chance, a glimmer of a chance, that the current debt ceiling negotiations will lead to economically sound changes. I think the chances of that are less than 20%. I will watch closely and act accordingly.
Walking to the Rockies game yesterday, I was struck by the bustling entrepreneurial spirit on display. From the myriad pop-up game-day parking lots (ranging from $25 – $40 per spot), to the ticket sellers (“I buy tickets”, means “I sell tickets”), to the independent street vendors outside the ballpark marketing peanuts and beverages for half the in-ballpark price.
I have been an entrepreneur in training for most of my life. For much of that time I didn’t associate the term entrepreneur with what I was doing, nor would I have been able to spell it. Yet there were several entrepreneurial things I did even before graduating from high school.
- Ran a paper-route (at age 12)
- Door-to-door newspaper sales. To get more revenue and “signing bonuses”
- Picked up odd jobs to make a few bucks. Jobs like fence painting, baby sitting & lawn mowing
- Traded collectible cards… for fun and for profit
- Built a “sluice-box” and panned for gold
In college I did even more. I was trading and auctioning collectible cards via Usenet and the Web… in addition to trading face-to-face. I found that trading up (trading several lower-value cards for one or two high-value cards) was my most lucrative strategy for making money. I had to give up my personal collector’s mindset; to be willing to break up my collections when good deals became available. I learned to put together targeted, marketable, ready-to-use (turnkey) sets in order persuade folks to part with one of their rare, sought-after cards. As I got more market savvy, I learned to trade high convenience for high value. This helped hone my fledgling negotiation skills.
I built up a reputation as a trustworthy vendor/trader who represented the quality of my cards honestly, who mailed them promptly, and packaged them carefully so they arrived in good condition. I was doing this before anyone ever heard of eBay.
In college, I developed a software product called Visual Math 3D. Looking through my notes, the proposed company structure was:
EngimaSoft, a division of Paradigm Software, a branch of Millennium Corp.
No shortage of boldness there! I see now that others have grabbed most of these names. Good for them, they are good names.
Visual Math 3D had a logo and marketing pitch for the cover of the box. Unfortunately, I had too much school work (and school play) to bring the software to market. Had I been more business-savvy at the time I would have brought in one or two partners to help market the product. Who knows… it could have grown into a competitor of Mathematica, AutoCAD, or Excel — it had aspects of all three.
I continue to be an entrepreneur in training. I’ve learned a few things.
- Business cards: I have business cards now!
- Smile, listen, and mingle.
- Listen to feedback.
- Keep your sales pitch short, then converse like a real human being, not a sales droid.
- Market both yourself and your company/venture. Online and offline.
- Market to people who are actually interested. Don’t waste time selling ice to Eskimos.
- Advertising. A necessary evil. Yes, you will likely have to part with some capital to grab the right people’s attention in a positive way.
- Branding. Logos, tag lines, style. Done right branding creates a sense of professionalism, familiarity, and trust.
Financially my most successful ventures have not been lofty, swing-for-the-fences efforts. Balhiser LLC’s rental property has earned over $10,000 and prospects remain good. The Sigma1 proprietary-trading group is currently up $2700, but markets are fickle. My card trading activities netted about $1200 over 4 years. My paper route earned about $1100 over 1.5 years.
Except for the rental property business, all my business ventures have been self financed and operated on shoe-string budgets. They have also been part-time, night and weekend activities. I have a full-time career in engineering, and while my employer hasn’t given me the golden handcuffs yet, I do wear a nice silver pair. Thus entrepreneurship will continue to be a part-time activity
My entrepreneurial successes have been modest, yet I am undaunted (at least most of the time). Today I am a minor league entrepreneur. I believe that within the next ten years I am likely to make it to the majors, because I have good ideas, tenacity, and passion. Luckily I know several successful entrepreneurs, and I listen to and learn from them. They encourage and inspire me when I need a little emotional support.
Entrepreneurship is not for everyone. It is difficult, if not impossible, to teach in a classroom; entrepreneurship must be experienced. It can be fraught with setbacks and dead ends. Passion can turn lead to burnout and frustration. Yet entrepreneurship can be exhilarating, stimulating, empowering, fulfilling and fun.
Entrepreneurs continue to drive the US economy. The best, most concise, most creative ideas come from entrepreneurs . Entrepreneurs also deliver mundane, but necessary goods and services ranging from car washes, to restaurants, street-side baseball snacks, and rental properties.
The entrepreneurial spirit is alive and well in the US. Recessions wipe out jobs, and some of the unemployed try out an entrepreneurial path. While many fail, some succeed. Some that succeed thrive, and build the businesses of tomorrow. These people create not only jobs for themselves, they create jobs for others. They drive innovation and keep America competitive.
I am not expert on entrepreneurship, but I am an entrepreneur. I work with other entrepreneurs and admire their spirit. While Washington pays lip-service to entrepreneurs, it seems to be ignoring the obstacles it puts into place, impeding entrepreneurs:
- Self-employment taxes. Small business pays Social Security and Medicare twice on every dollar earned. Even on the very first dollar.
- Employment and payroll rules and regulations. The red tape is one reason I hesitate to hire any employees.
- Regulations. The only reason my hedge fund is not open to the public (at least to select accredited investors) is the mountain of regulatory requirements.
Even against daunting odds and government red tape, entrepreneurs find a way. There are many who let red tape and taxes cause them either not enter the entrepreneurial game or quit it out of frustration. This is a shame, and a loss for the US economy. There are those who give up one entrepreneurial path (their first) choice, to pursue an alternate entrepreneurial path. This, too is a loss, but perhaps not a severe. Finally, there are some small businesses that simply stop growing… not from lack of opportunity, but to avoid the deep, sticky, red tape of employment law.
Right now I’m the category of entrepreneurs who are forgoing (for now) my first venture: the Sigma1 Hedge Fund, and pursuing my secondary venture — financial blogging. I have a couple accredited investors willing to invest with me, but I have told them for now to put that on hold.
It’s not that financial blogging is not enjoyable, it’s simply far more difficult to make reasonable profits from a finance blog. Given a choice, I’d rather make $250,000/year from blogging than managing a hedge fund. It’s much more likely that managing a hedge fund has a greater chance of making that kind of money. That, dear readers, is why blogging is my second choice for a business undertaking.
Entrepreneurs, I’d love to hear your stories. How you succeeded, how you failed, what you learned? Has government (federal, state, local) red tape gotten in your way? Have you found ways to succeed in spite of all that?
Whether it’s Barack Obama releasing 30 million barrels of oil from the Strategic Petroleum Reserve, or Ben Bernanke saying they might buy another $300,000,000 worth of U.S. Treasurys… even after QE2. But, no, it’s not QE3… nah.
The oil gambit was, from a purely stimulative standpoint, an interesting move. It would have been more effective when oil was at $110 and rising rather than in the $90′s and falling. But, perhaps there was some political hay to be made. Short term this was not an inflationary move. However, someday, those 30 million barrels will have to be repurchased… which will have an inflationary effect. It was a short-term political move. From a geopolitical perspective, it also signals a US willingness to manipulate the oil markets… rather than being truly “Strategic” (aka for military and other strategic purposes). Ironically the Obama administration is accusing others of oil price “manipulation” while they just did just that with the SPR oil release.
And for Helicopter Ben, QE and QE2, both unprecedented; it seems that maybe a little more magic juice is called for. He doesn’t understand the current economic problems, other than to call them (mysterious) “headwinds”.
The situation, as I see it, is inflation-triggering non-stimulus. The magic “CPI” may not reflect this right away. In fact I believe inflation is currently outpacing “CPI Index” inflation by 1 to 2 percent.
I’m not fully aware of the whats or whys of QE3, I just know that I’m not supposed to call it QE3.
Take for instance the recent run up in stocks, up ~20% in the last year, and up a total of ~40% in the last two years. This stock run up in the financial economy is in spite of the dismal real economy which was (still is?) in the midst of the Great Recession. The classic explanation for this jump in stock prices is anticipation of strong economic growth that many were guessing was just around the next fiscal quarter or two.
But continued lackluster economic growth, high unemployment, and inflation fears have the stock markets retreating 4% in the last month. QE and QE2 have driven commodity, gold, silver, and oil prices up (and the dollar down to a degree). Low interest rates have also helped fuel the commodity boom. I don’t say commodity bubble, I say boom, because I don’t believe it is a bubble… merely a precursor to higher inflation.
Further the prospects of Congressional legislation past and present loom as large economy and business-dampening prospects.
- Dodd-Frank Act regulating all sorts of financial and non-financial items.
- Obama Care.
- The real possibility of tax increases as part of debt ceiling deal.
The danger of Dodd-Frank, which deals primarily with the financial economy, is that it may spill over into the real economy as well — a form of fiscal contagion. Obama Care hits right in the solar plexus of the real economy soon. Potential tax increases are a kidney shot to the real economy.
Also on the horizon is the debt crisis in Europe, currently centered around Greece, but with dominoes in Portugal, Spain, Italy and Ireland ready to fall.
So, why on earth would I be neutral to mildly bearish (long term) on US equities? The title “Wired on High Finance” sums it up.
- Wired, as is in connected, by wire, cable, fiber optics, or wireless. The continuing computational and connectivity revolution is only accelerating. This helps business productivity, which helps business (the real economy) and inevitably the financial economy (the stock market).
- High Finance. High finance in the US eventually finds a way. Take for instance GE which managed to pay zero income tax last year. Big money always finds a way. Call it industriousness, creativity, or greed… it gets things done.
Without all of the governmental fiscal and regulatory “headwinds” (as Bernanke has called them), my outlook would be bullish. Despite them, I believe that the power of a wired world of high finance will find ways to resist the government onslaught. Either through back-room deals (the new and no-so-new crony capitalism) or the ballot box (voters tired of 9% unemployment), these “headwinds” will be reduced, skirted, or avoided.
And while CPI stands for Consumer Price Index, most commonly, it also stands for Cycles Per Instruction — one measure of computer processing speed. So while the mainstream CPI may understate prices, the other CPI is very favorable to computation power. (In both cases keeping true CPI down is desirable.)
Notice I am neutral to mildly bullish on the US (and global) economy. That is why I, personally, am increasingly invested in investments that reflect that believe — namely covered-call market-index strategies. That is why I have switches some of my ETF investments from SPY (an S&P500 index EFT) to PBP (an S&P500 covered-call ETF). Inflation fears and low interest rates have continued to cause me to shy away from most bonds and bond fund… with the exception of high-yield (junk) bonds.
Disclaimer: These are my personal investing thoughts, opinions, and choices as of today. No one can reliably predict the markets (stock, bond, futures, options) or interest rates, certainly not me.
I consider myself knowledgeable about many things financial: ETFs, stocks, bonds, options, the stock market, for example. I know the difference between an income statement and a balance sheet, and can read financial statements and prospectuses as a matter of course.
I’ve had little luck deciphering bank balance sheets. Income statements yes, balance sheets no. They tend to be very opaque, which is one obstacle. Loans are assets while deposits (other than Federal Reserve deposits) are liabilities. Accurately determining the quantity, quality, type, and duration of loans can be difficult if not impossible… at least to me. Perhaps some of this info can be found in the bank’s 10K statements. Also opaque are details of the bank’s interest rate swaps and other OTC financial contracts.
Historically, the old-style (commercial) bank followed the 3-6-3 rule: Borrow at 3%, lend at 6%, be on the golf course at 3:00. Such a bank would take in deposits and lend out with loans (mortgages, car loans, commercial loans). However, banks could not lend out all the deposits; banks had to keep a fraction of the cash in reserve. This reserve helps to avoid the “run on the bank” problem, where too many depositors ask for their money — all at the same time.
Keeping all of this spare cash at the bank (about 3-10% of assets) is cumbersome, and also encourages bank robberies. Banks can transfer much of this physical cash to the Federal Reserve and sometimes even earn a tiny bit of interest (0% to 0.25%, “the Fed Funds Rate”) on it. Thus the Federal Reserve serves as the bank’s bank. The Federal Reserve System (or “The Fed”) also helps clear checks (remember those?) and move money between banks simply by moving reserve deposit balances between banks. No need to shuttle hard currency to and fro. Deposits are moved with a pencil, or computer transaction in the Fed’s books.
The Fed also lends out money to banks. Banks can borrow from the Fed at 0.75% (the so-called discount rate). This system leaves a 0.5% profit for the Fed on the difference between the Fed Funds rate and the discount rate.
Classically the Fed would try to guide the economy by moving the Fed Funds rate and discount rate. If the Fed thought the economy was overheating (generating excessive inflation) the Fed would raise rates to “cool off the economy”. The Fed tried to adjust the rates so as to give the economy a “soft landing”. If the US economy got too sluggish, with high unemployment, the Fed lowered rates. The interesting thing (no pun intended) about these rates is that they are all short-term rates. So short-term that the Fed funds rate is sometimes called the overnight rate.
I keep saying “classically” and “historically”, is this is how things used to be done by the Fed. What’s new, since Fed Chairman Bernanke, has been the manipulation of long-term rates with “quantitative easing” QE, and QE2. Also new (with the cooperation of US Treasury Sec. Timothy Geithner, Congress, and President Obama) are measures such as the AIG bailout and TARP.
The Fed has shifted into uncharted territory, and in the process neglected one of its two prime mandates: price stability and low inflation. It also seems to have overlooked the concept of real economic growth (GDP growth adjusted for inflation). Instead the Fed seems to be fluttering in a course of wide-ranging, unprecedented, knee-jerk reactions.
Today’s Fed is not my father’s Fed, nor are today’s banks. Today they are increasingly known unknowns. This path is new and the ticket stub is unclear. I don’t see a destination nor ETA, but when I look close, very close, I see a dim watermark. Subtle, like grey on grey, I believe I see in faint yet bold letters INFLATION.
“We’re spending $3.7 trillion. We’re taking in $2.2 trillion,” Sen. Jeff Sessions said, “That’s a stunning number, and one of the reasons it’s so out of control is that we don’t have a budget.”
I couldn’t have said it better. Washington’s overall budgetary condition has gone from ridiculous to shear lunacy. Without a drastic course correction the loons steering the ship are going to take us and our economy down with them. (Since most of them have platinum-plated pensions, they will NOT go down with the ship).
By some strange alchemy of mendacity, arrogance, and deliberate ignorance, the United States Government continues to follow the financial lead of Italy, Portugal, Greece, and Spain…. and I might add Japan. For good examples of fiscal sanity we need only look at countries like Australia, Brazil, China, and South Africa.
US debt trends alarmingly up with no apparent end in sight. Failure to acknowledge these facts is a failure of leadership. The lengths the US Government is willing to go to continue this economic farce would likely be criminal if employed by corporations. (Ever heard of fiduciary responsibility?) Rhetoric like “there’s no problem with Social Security or Medicare… they are solvent”. Wasn’t the same being said about Freddie Mac and Fanny Mae a short few years ago? I wish President Obama and the US Congress would read some of the best investing books.
Every good rant deserves to deliver some solutions. And solutions, I’ve got in spades:
- Cut Federal spending. Start the debate at 2008 spending levels, and look for further cuts. Phase out entire programs. Freeze federal salaries until unemployment drops below 5%.
- Acknowledge that Social Security for people currently under the age of 40 will be aggressively means-tested. Folks under 40 (that includes me) don’t count on much unless you are in poverty during retirement.
- There are only two kinds of infrastructure with real, lasting economic impact. Interstate highways and the US power grid. I’m not talking “Smart Grid”… leave that to local utilities. I’m talking about new, improved, robust, high-voltage, DC power transmission across the United States. If Canada and Mexico want to sell their power, let them participate (via treaty).
- Let US oil and natural gas companies drill. Charge a 10% profit surcharge on new domestic (and offshore) production if you must, but approve the permits and get out of the way. [But raise the liability cap for disasters.]
- Embrace the Canada-to-US oil pipeline.
- Simplify the C-corp (corporate) tax structure by eliminating ALL “loopholes” and reducing the rate from 35% to 21%. Exempt the first $250,000 from C-corp taxes, and charge 10% for earnings of $250,000 to $5 million to encourage small business investment.
- Eliminate the self-employment tax on the first $50,000 of small business earnings.
- Strike down and reverse most provisions of ObamaCare.
- Rein in the EPA on faux “pollutants” like CO2 and modest levels of methane. Instead focus on true pollutants like carcinogens, harmful particulates, and toxins.
- Get out of the way. The private sector is a dynamo on steroids and is ready to roll when the regulatory restrictions are lifted and relaxed. Anti-trust and anti-monopoly rules still serve an important roll. Workplace safety is important too, but measure results as much as adherence to OSHA procedures.
Believe me, I’m writing with kid gloves. Tell me where you think I’m wrong. Please add your suggestions. I look forward to publishing both.
40 years old is still several years off for me, but I it is very likely I will be a millionaire by the time I reach 40. In fact, if you count my contributions to Social Security (including my employer’s half), the current value invested in my personal “Social Security Trust Fund” puts me there already. But I’m certainly not counting on Social Security.
So, I’ll be rich right? Wrong! First there’s inflation. Many economists say US inflation has been about 4% per year over the last century. There’s a handy rule of 72 that says, for example, 72/4 = 18. That means 4% inflation means that a million dollars today is only worth $500,000 in 18 years and $250,000 in 36 years.
Second, there’s taxes. Over $300,000 of my holdings are in tax-deferred accounts such as 401k accounts and IRA accounts. Sure this money is part of my net worth, but when it comes out at retirement I’ll likely be paying something like 30% tax on it. That’s about $90,000 to Uncle Sam. Poof! Gone!
Back to inflation. Inflation works like a stealth tax. According to government CPI figures, US inflation increased just 1.5% in 2010. That simply doesn’t jive with my experience. My HOA fees increased 7%, my electric and water bill increased 8%. Car insurance, home insurance, satellite TV, health-insurance premiums, internet, rooms at my favorite hotel, and meals at my favorite restaurant went up, by 4-10% last year. Even the local sales tax increased almost 1%, making everything that much more expensive on top of everything else. In Balhiser World 2010 inflation was about 4-5%, rather than the 1.5% according to the CPI. Thus I have some new ideas about what CPI stands for…
- Cagey Price Index (Price? What price? Prices are relative.)
- Calming Price Index (Nothing to see here. Relax. Inflation is under control.)
- Clairvoyant Price Index (Far away someone is substituting chuck steak for Filet Mignon. Meat is meat. And prices are low.)
- Creative Price Index (2+2=3 for sufficiently small values of 2)
- Cowardly Price Index (Please don’t be mad, prices aren’t that bad… see?)
Of course CPI officially stands for Consumer Price Index. Let just say that for the next 72 years the official CPI is 4%, but actually inflation is 5%. That handy rule of 72 says that at 4%, one million dollars today will be worth $62,500 of buying power. At 5% buying power is cut in half to $31, 250. Of a long enough time a 1 percent difference in inflation is a big deal.
So what? Well, the CPI is used for a lot of things such as government cost of living adjustments, tax bracket adjustments, Social Security benefit increases, and money paid on Treasury Inflation-Protected Securities, to name a few.
It’s bed time so I’ll cut to the chase.
- One million dollars is not what it used to be, and is certain to be worth much less in the future.
- To try to remain solvent (and avoid unpopular austerity measures) the US Government has a powerful incentive to under-report inflation.
- Many investors and economists are beginning to believe that the CPI significantly under-reports inflation. Examples: “CPI Controversy”, “Bill Gross says so”, “Forbes, pastries, and gold say so too”.
In brief, I say about Dominique Strauss-Kahn’s arrest, innocent until proven guilty. The markets are under no such obligation of assumption. Speculation and rumor are as viable as fact in bond markets, stock markets, commodities markets, options markets… you name it.
The impact of Kahn’s situation has short-term ramifications on the European debt crisis as most loudly exemplified by the Greek debt crisis. Strauss-Kahn’s personal crisis could slow or alter IMF/World Bank actions.
I am not surprised, but I am disturbed by the general media reaction to the allegations against Kahn. “Innocent until proven guilty” should trump “presumed guilty upon allegation”. Recent examples of the Duke Lacrosse Team and Kobe Bryant loom large as examples of premature media reaction. I hope that cooler heads will prevail; that the facts will come out… either way (possibly somewhere in between)… in the slow, laborious, and languid way that the law dictates. Until then I assume innocence.
The current debt ceiling is set at $14.294 trillion, and according to CNN Money we are days away from reaching it. Treasury Secretary Tim Geithner estimates he and his team can keep the US out of default until early August.
I appreciate the increased attention on the US nation debt. My concern is the the US is beginning to flirt with danger: increasing risk of a debt crisis. US debt is a fair ways removed from the debt crises of the PIIGS (Portugal, Italy, Ireland, Greece, and Spain). However, the current trend of debt as a percentage of GDP is ominous.
A US debt crisis would look a bit different from that of the PIIGS because the US is not bound to a multi-country currency like the Euro. Devaluation of the USD is likely to be a component of (or reaction to) a US debt crisis. So are austerity and tax increases.
The danger is that buyers of US debt will demand higher and higher interests rates to compensate them for taking on three key risks, inflation, devaluation, and default. As debt increases so do these risks. As the US refinances debt for expiring Treasurys it does do at greater and greater costs. As the government raises taxes to combat debt (and pay higher borrowing costs) the US economy is increasingly depressed and tax raises do not result in nearly as much federal revenue as hoped. Eventually only austerity and devaluation (via the printing press and increases in money supply).
The way I see it, playing brinksmanship now with the debt ceiling in an effort to but the brakes on the US deficit is a reasonable risk. The current trajectory of the US debt is unsustainable and reckless. With US debt 90% of GDP and closing in fast on 100%, we are in jeopardy. This number puts the US next to the troubled Ireland and not far from Italy as shown in this table.
It is time for Congress to get its fiscal act together. Time is rather short. I hope we can start making some sort of progress.