you may want to reread thursday's post

I edited (i.e., rewrote) Thursday's "Mr. Answer Man" post. I hope it is now clearer as to what I was trying to accomplish.

Be blessed.
RB

bird & fortune on the credit crunch.

Another satirical skit from Brits John Bird and John Fortune.

Note: The City refers to the financial district in London. Punters are people who place bets; sometimes slang for customers.

Bird and Fortune video on the credit crunch

mr. answer man and the financial faqs

No, that is not the name of a rock band.

Today I’m here to answer frequently asked questions (FAQs). Many people seek advice, knowledge and insight from me concerning financial matters. I am a professor of economics who never took a course on financial markets and I am quite often able to play Dave Ramsey DVD’s at 57 Market on Tuesday nights. Despite these credentials, I receive no fees or payments for my advice. Therefore such advice is not only completely unbiased but also unencumbered by any knowledge of how real financial markets actually work.

Let the questions begin.

Q: Before the current meltdown, what was your advice to folks with some savings looking to invest?

A: Very standard stuff: 1) diversify your portfolio between different types of stocks and bonds, 2) if one was over 50, totally investing in stocks was considered aggressive; 3) use indexed mutual funds in different categories of stocks and bonds.

Q: What does aggressive mean in terms of investing?

A: Risky. Highly aggressive means a taking a roll of the dice.

Q: How did these people do who sought the standard advice?

A: Not very well. People tended to take only parts of the standard advice. For example, a couple in their late 50’s put all their money into stocks, going for better returns, rather than mix in some bonds to diversify. They did use indexed mutual funds to diversify among stocks but otherwise felt comfortable pursuing a more aggressive strategy. Then this year the stock market tanked.

Q: What was their reaction?

A: It was my fault.

Q: Do people who are in their 20’s or early 30’s seek advice?

A: Yes, but they tend to totally ignore me. Last year a young man sought my advice. This guy knew nothing absolutely nothing about investing, markets, or anything. I doubt he had ever read anything more sophisticated than Newsweek. He listened politely, thanked me for my advice and then told me, “I feel very comfortable in my ability to judge which companies to invest in.” He sunk his money into a couple of Chinese companies. Within six months the Chinese stock market fell 70%.

Now I don’t mind if people do not take my advice. I even prefer they don’t ask for it in the first place.

Q: What can we learn from these examples?

A: Feeling comfortable is of the utmost importance.

Q: Are you being sarcastic?

A: Yes... No... Well sort of... Sarcasm is the lowest form of humor. I'm shooting somewhat higher. The rest of this post is a ham-fisted attempt at satire. Maybe tongue-in-cheek could describe it? Good satire is like sarcasm only with style and wit, like the Bird & Fortune skit. Bad satire makes the author look like a "I think I'm so much smarter than you but really I'm nowhere near as witty as I think I am" little snot.

Sarcasm, and even the best satire, is often difficult to convey in writing. The tone of voice, facial expression, and body language which help people detect sarcasm or satire is absent.

I'm not that good a writer but I hope I'm achieving more than mere sarcasm.

Q: And what level of achievement might that be?

A: I'm trying to be a smart aleck.

Q: Didn't your mother repeatably tell you that no one likes a smart aleck?

A: Yes. However, I ignored her sage wisdom and now I have no friends.

Let's get back to how to feel comfortable....

Q: So, feeling comfortable is of the utmost importance. Has this conclusion affected how you handle your personal investments?

A: Absolutely. I feel comfortable ignoring the tons of research showing indexed funds beat the returns of the vast majority of funds actively managed by professionals, professionals with teams of highly paid experts whose whole lives are devoted to picking stock winners. I feel comfortable moving around funds, not to pick winners, but to time changes in broad market trends. But then it is easy for me to feel comfortable: I have both a Ph.D., and more importantly, a subscription to the Wall Street Journal.

Q: What is your personal investment strategy?

A: The usual cliché is to “buy low and sell high.” However, I take a very old, often utilized contrarian approach thereby finding opportunities which escape those who follow the conventional wisdom. This approach also allows me to cope and feel comfortable with market volatility.

If one part of the stock market goes down and I lose a lot, I sell so I don’t lose anymore. I then reinvest in parts of the market that have been doing well, parts that have already risen. This contrarian strategy of “sell low and buy high” makes me feel comfortable in that I know I won’t lose anymore in the declining sector and instead I am going with a proven winner. I can then wait until the market goes back up to get back in, feeling comfortable that I have bought quality investments.

I also feel comfortable knowing that I am not being a passive investor. I feel in control rather than a victim of impersonal market forces.

There has been much research showing that over the past one-hundred years this contrarian, sell-low-buy-high approach consistently yields quite stable, although negative, returns. Stable returns are very important since volatility, or instability in the market, makes people feel uncomfortable.

Q: Wouldn’t putting money in a federally insured bank account be stable with better returns?

A: There are pros and cons, and therefore trade-offs that need to be made with any investment decision. On the minus side, returns (interest rates) on bank accounts are very, very low. On the plus side, the returns are positive. This is a difficult trade-off.

However, bank accounts make you a safe, namby-pamby passive investor rather than an aggressive investor. No opportunity for using the brains God gave you. No chance of losing but no chance of lucking out, scoring a big gain.

Not aggressive? No control? Conclusion: No cojones.

Bank accounts are for sissies.

Q: Any suggestions for particular investments given the current market?

A: If you want to feel comfortable, buy gold. Gold has a high price. I was listening to a talk show on AM radio, when during a commercial break Pat Boone was paid to say that now is the best time to buy gold. Gold is the perfect investment trifecta: gold fits the contrarian investment strategy, gold dealers sponsor right-wing nut case radio, and gold is endorsed by Pat Boone.

Q: Thank you RB?

A: You’re welcome. Be blessed.

it 's back: banned snl skit

The scoop on why the video was removed in the first place, according to Courtney Hazlett of MSNBC:

"The issue involved the onscreen text displayed along with two of the characters in the sketch, Herbert Sandler, who’s been affiliated with some of the lending practices that brought down Wachovia Bank, and his wife Marion. The text that showed on screen under their names in the original skit was “People who should be shot.” It’s been removed." (source)

It is now back on nbc.com

banned snl skit: the bailout

The dead-on Saturday Night Live skits poking fun at Sarah Palin are wonderful even if not complimentary. Last weekend there was a great skit about the bailout. It poked fun at Nancy Pelosi and Barney Frank. If you saw any of Pelosi on the news last week you'd recognize what they were making fun of.

This skit has been yanked from nbc.com. The following is from YouTube but who knows for how long it will be available there.



If it disappears, you can go HERE. (If you have trouble, keep trying. Traffic to the site has been heavy.)

It is sad when Saturday Night Live is the most politically even-handed show on a major television network.

Be blessed.
RB

P.S. The skit was apparently pulled because they used the real names of some non-celebrities in the skit and NBC was afraid of legal problems.

roundtable discussion on the financial crisis

The Student Investment Club & the Economics Department present:

A Faculty Roundtable on the Current Financial Crisis

Tuesday October 7 at 7:00pm in Hepburn Auditorium (Room 218)
Click for St. Lawrence University's campus map.

~ Interested in learning about the current financial crisis?

~ Wondering how we got into this mess and how we might get out?

Members of the Economics Department will offer explanations and analysis followed by Q&A.

Speakers: Bob Blewett, Brian Chezum, Peter FitzRandolph, Steve Horwitz

the very first wall street bail out

The first recorded instance of a shady financial dealing on Manhattan was in 1626. The Dutch bought the island from some Indians who lived in Brooklyn rather than from the Weckquaesgeeks who actually lived on Manhattan. The Weckquaesgeeks, not recognizing the validity of this contract, resorted to a certain method of conflict resolution: Kill the Dutch.

The Dutch West India Company, the effective colonial government, decided to bail out the settlers in 1653 from the effects of the earlier questionable financial dealings. Under the direction of Peter Stuyvesant, defenses were strengthened by building a 12-foot-high wall of earth and timber across the southern end of the island.

Surveyors laid out a street along the wall or stockade in 1685. The wall was later dismantled in 1699 after the British took title of Manhattan from the Dutch. (A real estate transaction swapping Manhattan for Suriname in South America.) Of course this path became known as Wall Street.

Thus a bail out by a government led to the creation of Wall Street. It was merely the first, and certainly not the last bail out on Wall Street.

Be blessed.
RB

shakespeare - stark raving sane tour

Beside the fall colors and the geese flying south in formation, a sure sign of fall is the return of the American Shakespeare Center (formerly known as the Shenandoah Shakespeare Express) to the North Country.

"Shamelessly entertaining"
~ The Washington Post

"Blowing the cobwebs out of Elizabethan drama"
~ NPR

Tickets for the SLU performances of the Stark Raving Sane Tour - 2008-2009, October 26th through November 1st, are now on sale at the Brewer Bookstore and Student Center for $5.00 each.

SCHEDULE:

Sunday, October 26 - The Comedy of Errors, matinee 1:30 pm
Monday, October 27 - Hamlet, 7:30 pm
Tuesday, October 28 - Rosencrantz and Guildenstern are Dead, 7:30 pm
Wednesday, October 29 - Comedy of Errors, 7:30 pm
Thursday, October 30 - DAY OFF
Friday, October 31 - Hamlet, 7:30 pm
Saturday, November 1 - Hamlet, 7:30 pm / Rosencrantz and Guildenstern are Dead, 12 midnight

VENUE: Eben Holden (CLICK for campus map)

Be Blessed!
RB

P.S. A BIG Happy Birthday to her!

cause and effect: greed vs. feng shui

"I'm shocked, shocked to find that gambling is going on in here!"

~ Captain Renault, Casablanca (1942)




Last night both vice presidential candidates cited greed as the cause of the current financial crisis. Earlier this week presidential candidate Obama also used greed to explain the crisis. However, I think candidate McCain was the first to use the G-word to help us all understand what was behind the mess.

I'm shocked, shocked to find that there is greed on Wall Street!

When did this start? In the late 18th Century? That is when traders and speculators met informally to trade under a buttonwood tree on Wall Street. In 1792 these traders formalized the market with the Buttonwood Agreement, which is the origin of the New York Stock Exchange.

However, south Manhattan has been home to greed even longer. The first recorded instance of financial fraud there occurred in 1626. That is when the Dutch bought the island Manhattan from the Canarsies for beads and trinkets worth $24. Problem: the Canarsies lived in Brooklyn. The Indians who lived on Manhattan were the Weckquaesgeeks. No wonder the Dutch were able to buy it so cheap!

What is new or different about greed in financial markets? How does greed explain what is different that brought about this financial crisis?

Greed is a constant. A constant can't explain a change.

I have a far, far, better explanation: feng shui.

When the Towers came down on 9-11, this drastically rearranged the physical layout of the south end of Manhattan (i.e., Wall Street). Work on rehabilitating the area has been quite slow. The feng shui changed, the cosmic harmony changed, and soon after the chain of events that led to September 2008's crisis started to play out. What do you expect to happen when you mess with the feng shui?

I didn't say this was a great explanation or even a good one. But it is far superior to greed as an explanation.

Be blessed!
RB

a 21st century run on the bank.

Remember the run on the bank scene in It’s a Wonderful Life? That was a dramatization, with a happy ending, of what happened 75 years ago. However, 75 years ago the happy ending didn't always happen in real life.

Two weeks ago another run almost happened. Before I go on, you may want to refresh your classic-film-scene memory:



The Bailey Building & Loan was not strictly speaking a bank, but it was a middleman between depositors and borrowers. That is what banks and other financial firms generally do. A modern version of this is a Money Market Fund (MMF). With MMF accounts, people deposit cash with an investment company who then buys short-term government bonds and corporate debt. (This deposit is NOT to be confused with a type of deposit with banks. Those are just bank accounts with a deceptive name to make you think it is a MMF account.)

MMFs are an important source of funding for corporations. (Like in the Home Depot example from yesterday’s post.) Two weeks ago there was the beginning of a run on these accounts, accounts that held over 3 trillion dollars.

What happened? Just like in the movie scene, depositors were afraid of losing their money: money that was backed by short-term corporate debt, also known as commercial paper. Going back to yesterday’s post, the price of this debt was falling due to fears of AIG failing and credit swaps in general possibly failing. So, MMF assets were approaching the point where they were worth less than the value of their deposits, to where they did not have the means to back all the deposits. In the case of one fund, it did “break the buck,” meaning a dollar of deposits being worth less than a dollar.

If you had a deposit in a MMF, what would you do? If you were on the ball, you’d try to get your money out while you could. You'd want to be first in line too! Just like in the movie scene above. To pay off deposits, the MMF would have to sell their commercial paper. Who would buy it? The other MMF’s are in the same situation. With everyone selling and no one buying, commercial paper prices will crash. MMF deposits would be paid back at less than a dollar, if at all.

Let’s reimagine the scene from It’s a Wonderful Life. Do you think even Jimmy Stewart would be able convince people to keep their money on deposit if they knew that Joe's house, the Kennedy house, and Mrs. Macklin's house, houses that their money was in, had been hit by a tornado and there was no insurance?

That is why after the AIG deal two weeks ago, the federal government insured MMF accounts for a year. They weren’t bailing out anyone so much as they were stopping a 21st Century run, a present day panic.

What if our government hadn't decided to "bail out" the MMFs with federal guarantees? MMFs are a major source of short-term corporate financing. If that financing dries up, we are back to the big fat hairy recession scenario mentioned yesterday.