Archive for September, 2008

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Bailout Envy

September 25, 2008

One game that I often play with executive clients at The Darden School is called the Pepulator Simulation. In this game, participants can do better for themselves by being cooperative rather than aggresively competitive. Sometimes early on in the game that is exactly the behavior I observe, cooperation. But later in the game things often change, tough situations lure participants into an “us versus them” mentality. At the end of the game some executives will take actions which are demonstrably and obviously not in their best interest just so that they can keep another player from doing well.  During the debrief of the game, when strategies are discussed openly, they struggle to construct cogent explanations for their self-defeating behavior. The actual explanation is quite simple. They let envy, jealousy and pride cloud their thinking in what amounts to a very low-stakes class exercise. I’ve also run it with run it with non-executive participants and the result is the same.

U.S. Representatives and Senators now find their email and voicemail boxes full of vitriolic opposition to any government bailout package for the financial services industry.  There can be no doubt that the vast majority of these individuals who are so adamant in their views have a very thin understanding of what is actually being proposed (This is my profession, and there are parts I don’t understand). There are legitimate areas to be concerned about here, questions of power and oversight. Whether this ends up being good or bad for U.S. taxpayers is debatable, with much of the uncertainty tied to what the government pays for the assets it is buying and what it will receive for those assets when it sells them. But I deeply suspect that the details of the plan are completely beside the point for many Americans.

The strong public outcry against the bailout is about envy, envy of financial services executives who for many years have made incomes that are hard for many of us to comprehend. We would rather see them made low, humiliated and trotted about with scarlet letters than accept policies which might help ourselves but spare them their comeuppance. And some of them deserve just that, but many of them are probably guilty of nothing more than being successful and making a lot of money.  Right now that seems to make little difference to a lot of people. As does the fact that many of these individuals, both in firms that are the targets of government actions and those that are not, have seen their own equity positions pummeled of late. The market isn’t capable of throwing them in jail, but it has already exacted a heavy penalty on their wealth and future earnings prospects. But reason has no place when envy and jealousy instruct our thoughts. Get them all!!  Get them now!! And to hell with using any taxpayer money to help them out —- no matter how badly it hurts us.  We will go down with them, but at least they will go down. Bring on the Great Depression!

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Saving in Turbulent Times

September 21, 2008

I got a call from one of my relatives this week. She was concerned about all the gyrations in the markets, talk of government bailouts, and the near-constant premonitions of market soothsayers that say the sky really is falling — that the financial markets are a very dangerous place right now. Her concern was completely understandable. She holds some assets the proceeds of which are used to care for her elderly mother. If those assets suddenly disappeared or shrank considerably the consequences to her family would be severe.

I don’t have any advice to offer you if your goal is to make a lot of money in the market right now. My belief is that there are only two types of people who claim to be able to predict short-term movements in the stock market, fools and liars. But there are some things you can do to storm-proof your savings, to minimize the chance that you will experience the kinds of huge losses that some investors inevitably suffer when companies collapse and markets respond. Nothing you can do with your money is perfectly safe. Even if you stuff it under your bed it might be stolen. Here are four steps that I take with my own money to reduce its overall exposure to risk.

  1.  Do not hold any money in equities (stock market) if there is a reasonable chance you will need to use that money in the next three years. If you are very risk averse, push that period out to five years.
  2.  Don’t hold all of your savings assets, retirement and non-retirement, with a single financial services provider. In general, money that you have invested in mutual funds with a given financial service provider (Fidelity, Vanguard etc.) is highly insulated from the financial fortunes of that company. For example, even if Fidelity loses money as a company they cannot touch your investment assets. Short of outright fraud of the most egregious sort, you are not at risk if your mutual fund company goes broke. With that said, strange things do happen and outright fraud, while in my view very unlikely, cannot be completely eliminated as a possibility. I have most of my retirement savings with TIAA-CREF, and I think the risks associated with having them manage most of my retirement assets is very small. Yet, for the reasons I mention above I don’t hold all of my retirement money with them. If you hold money with a life insurance company, for example an annuity, you do have some small exposure to risk if their financials suddenly take a turn for the worse. The same advice applies. 
  3. Check to make sure that you have not inadvertently concentrated your assets in one asset class. Many people mistakenly believe they have a diversified portfolio because they hold several different mutual funds. These mutual funds may hold many of the same types of securities, and in this case diversification is just an illusion. For an example, if you hold 50% of your assets in a stock mutual fund and 50% of your assets in a “balanced” fund which itself holds half of its assets in stocks then you really have 75% of your money in equities (stocks). Make sure you understand what your mutual funds invest in and what your overall exposure is to different asset classes.
  4. You might consider holding some of your money in Treasury Inflation Protected bonds (TIPS). I do. The interest rate is lousy, but if inflation suddenly goes crazy these bonds interest rates adjust for inflation in a way that provides a nice hedge (risk reduction) for your overall savings.
I hope the helps, at least a little. And we can all hope for better days for our country and our economic well-being. 
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Teaching Reckless Spending By Example

September 16, 2008

When you go to Las Vegas you enter a surreal world of fake Eiffel Towers and Venetian gondolas that wander through shopping malls. After a couple of days, you walk right past Elvis without bothering to ogle. Vegas is a temple to faux-culture. Yet, there is something distinctly honest about what happens there. When you play black jack at the Rio you know that management is not terribly concerned about your financial well-being. They are out to make a buck on you, as many bucks as they can. Their motives are pure and well understood.

State run lotteries are the real sham. They put Las Vegas to shame. If I feel like I’m ready to “Go for the Gold” Virginia has a lottery ticket for me.  If I’m nostalgic for my old Who albums “Pinball Wizard” might be my ticket that day. But, the lottery cloaks itself in moral goodness. Go to the Virginia Lottery web site and you will see proudly displayed  “More than $3 billion for public education.”  For most people, playing the lottery is an act in financial irresponsibility….in reckless spending. But, more than just allowing this kind of behavior, the State supports it.

Depending on your particular political persuasion you probably believe that:

  1. Financial decisions are strictly personal. Federal and state governments should not seek to influence personal financial decisions by constructing policies aimed at encouraging thrift — or
  2. Federal and state governments should seek to encourage citizens to save more through active policy measures.

Short of deep cynicism, “I think the lottery is a tax on stupidity and stupid people should be taxed,” no reasonable political philosophy would advocate the state encouraging financially reckless behavior. And make no mistake, lotteries are successful not because some of us spend a buck once in awhile to have a good time, but rather because many people who have very little spend a lot of their bucks. If you doubt this for a minute, you can look to the recent uptick in lottery sales driven by the financial downturn to convince yourself. The worse off some people are, the more likely they are to buy lottery tickets. Lottery money is like crack cocaine for the State. It is wrong, and we all know it is wrong, but we just keep on shooting up.

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Interview: The Financial Sense Newshour

September 8, 2008

Here is a longish interview I did for The Financial Sense Newshour with Jim Puplava. It was released over this past weekend.  It contains links to the audio in several formats.

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Erratum: Obama on Vouchers

September 5, 2008

After my most recent blog posting, which excoriated the Democratic Party and Mr. Obama for not considering school vouchers as a remedy for increasing the educational access of underprivileged children, a friend of mine sent me the this article.  It contains parts of an interview Mr. Obama did for the Milwaukee Journal-Sentinel several months ago. The article suggests that while Mr. Obama is skeptical of vouchers, he might be open to them if some ongoing research ends up suggesting that they have substantial benefits.