Thursday, December 31, 2009

Nothin' Up My Sleeve

I remember how fascinating it was to discover that Las Vegas sports books do not bet their money on anything as stupid and unpredictable as football games. Las Vegas bookmakers try to set the line so that exactly the same number of dollars are bet on each team. The casinos are quite content with the 9% or 10% they take from the winners’ share. If too much action is falling to one team, they will change the line to attract money to the other team. Back in the old days, handicappers who messed up the line and lost too much of their casino’s money were given one way rides into the desert in the trunk of a Lincoln Continental. The casinos are not gambling with their money. They are letting you gamble with your money.

It is fun to watch stage magicians practice their craft. You know it is a trick but you can’t quite figure out how it is done. My wife and I went to see Criss Angel’s Cirque du Soleil show when we visited Las Vegas in October 2008. It was pretty amazing. At one point Criss was flying over the audience on a wire. I could see the wire in the spotlights. Then the wire broke and Criss started to fall, out of control, into the audience. People screamed, the lights went out, and a second later when the lights came back on, Criss appeared safely back on the stage. How did he do that?

Penn & Teller, a pair of famous magicians, claim that there are seven principles of sleight of hand.

The Seven Principles are:

1.Palm - To hold an object in an apparently empty hand.
2.Ditch - To secretly dispose of an unneeded object.
3.Steal - To secretly obtain a needed object.
4.Load - To secretly move an object to where it is needed.
5.Simulation - To give the impression that something that has not happened, has.
6.Misdirection - To lead attention away from a secret move.
7.Switch - To secretly exchange one object for another.

It is interesting that some of theses principles are at work in Las Vegas casinos and various investment pitches, especially misdirection. The two silver coins that began this ministry resulted in a number of phone calls from an enthusiastic but ultimately unsuccessful salesman.

His pitch began with what Penn & Teller term “Simulation.” He attempted to convince me that the value of the dollar had already collapsed to nothing and that the price of silver was artificially depressed by the Sith Lords of Scotiabank short selling the commodity. He emphasized how important it was that I buy silver at that very moment. Even I know that for every short position their must be a long position.

Before the call, his company had done what Penn & Teller term “steal,” “load,” and “palm.” They had purchased silver on the open market and were now offering to sell it to me at 16% more than they paid for it.

The whole experience was an exercise in “misdirection,” an attempt to distract my attention from what was actually happening. What they are doing is neither illegal nor is it unethical. They are living on what is called the spread. In markets, there are two prices, bid and ask. The bid price is what the market maker is willing to pay for an item. Ask is the price at which he is willing to sell the same item. For example, if an item to be sold at $21.00 is purchased at $20.00, the spread is $1.00 or 5%. In currency trades the spread is 1/100 of 1%. In thinly traded exotic small cap stocks the spread is in the neighborhood of 1% to 2%. In most stock transactions the spread is at most pennies and is invisible to the retail customer.

These companies are quite happy to sell you silver for 16% more than they paid for it. As long as they have customers who willing buy their product and a supplier (the U.S. Mint), they can make a lot of money with very little risk. I imagine they try and keep their inventory in silver at somewhere around a 30 days supply, maybe less if they practice some just in time inventory scheme.

Silver can be purchased in the form of an exchange traded fund, I Shares Silver Trust ticker symbol (SLV), with essentially no spread and a brokerage fee of $12.95 per transaction at Schwab, less than that at the on line brokerage houses. So why, Mr. Salesman, would I pay you 16% plus another 2% in shipping and handling? Silver would have to increase by 18% before I would break even. Except for the inflation years of the late 1970s, I would be pretty happy to get an 18% increase on anything over a two year period.

I always believe that it is more important to watch what people do than it is to listen to their pitch. Just for grins, I asked the salesman how much silver he owned. The answer he gave was a very low figure, much less than he was attempting to sell to me. He told me he put most of his money into rare coins. Isn’t that interesting? Zig Ziglar, the famous motivational speaker, famously observed that with one question he could determine if an insurance salesman was successful or a failure. The question, “How much insurance do you own?” He believed that if a salesman was not willing to buy his own product he would never be a success. At least Ziglar’s maxim was correct in this particular instance.

If you must buy retail silver, check out the Gaithersburg Coin Exchange. The spread there was 6%. At least that is what it was back when all this started in 2007.

If you have never seen Penn & Teller perform the cigarette trick, check it out. It is a hoot.

Monday, December 28, 2009

What the Oldest Live Oaks Have Seen

Jekyll Island is a small sea island located off the Georgia coast not far from the Florida state line. In the winter it is a sleepy place, the windswept beaches largely deserted except for a few hardy souls often accompanied by happy dogs. The parking lots of the five surviving beach front motels are pretty empty at this time of the year. The island has approximately 1,000 permanent residents who live in about 900 private homes and a couple of unobtrusive condominium developments. Most of the homes look to be three bedroom brick ranch style homes, the quintessence of 1960s suburbia.

In the shallow sheltered waters off the South end of the island, Atlantic dolphin search for their dinner. In the center of the island, the golf courses are all open and in use, but to call them busy would be an exaggeration. The sunlight softly filters through the Spanish moss, mature Southern pines, and the twisted branches of ancient and noble live oaks. On the lawn in front of the Clubhouse, a few bored patrons play at croquet on an immaculately trimmed lawn. In a collection of small out buildings behind the Clubhouse that once housed servants and equipment to pamper the wealthy club members, the wives and daughters of the current patrons shop for expensive geegaws.

The clubhouse, a beautifully restored, modestly sized Victorian hotel has a history. In 1886 the island was purchased for the private use of the wealthiest Americans. By 1888 the clubhouse was complete. A few especially wealthy members built their own personal 15 to 25 room “cottages.” None of these cottages were equipped with kitchens. It was expected that all members would take their meals together in the clubhouse dining room. I find it interesting that the wealthy choose the river side of the island for their clubhouse and cottages rather than on the beach where we would expect to see such a building. At one time the club members controlled 1/6 of the wealth of the entire world.

In 1910 a private rail car pulled up to an infrequently used platform in New York City. Under the cover of darkness, a powerful senator, an Assistant Secretary of the Treasury, and the nations most powerful bankers and financiers, escaped the city without attracting the attention of the newspapers. They were headed for Jekyll Island to discuss the creation of a new central bank to control the nation’s banks, money supply, and interest rates. A few years later, President Woodrow Wilson, signed the act born on Jekyll Island, establishing the Federal Reserve System and an American financial empire built upon a currency backed by debt.

I too have a history with this island. In January of 1975, we first went to Jekyll on our honeymoon. It was the only place near South Carolina that looked half way interesting where we could actually afford to stay. Since then we have returned on every tenth anniversary. On our 20th anniversary, we stayed at the clubhouse and ate at the same dining room that once served the world’s wealthiest families. Some where along the line, we started meeting my parents at Jekyll for a few days around Christmas. It is now firmly rooted as one of our most pleasant family traditions.

But everything beautiful, delightful, and dear to us is destined to change and pass away. Jekyll Island is owned by the state of Georgia and managed by the Jekyll Island Authority, one of those quasigovernmental corporations that are expected to earn a profit, but as Fannie Mae, Freddie Mac, and the U.S. Post Office has proven such entities are seldom successful. Back during the real estate boom, in 2006, the Authority planned to knock down three of the older motels and replace them with a large ambitious condo and hotel development, forever changing the character of the island. So far the three motels slated for destruction have been demolished but due to the collapse of the commercial real estate market, only one small luxury hotel has actually been constructed. It is scheduled to open in a few days. One small strip mall has serviced the basic needs of the island for 38 years. It is slated for destruction in 2010 even though the developers have dropped out of the project, due to a lack of available financing. The merchants have been told they will be provided with trailers until the new mall is complete, but they have not been promised space in the new mall. After 38 years the pharmacy containing one of my wife’s favorite selections of souvenirs, gifts, and trinkets is closing its doors forever. The pharmacist is 65 years old and can’t continue his business under these conditions. He hoped that one day he could sell his business at retirement, but now it is worthless. The effected merchants believe that this is part of a scheme to replace them with businesses favored by the developers and their political allies. This sounds about right to me.

But something does need to be done. Even before the stock market crashed, the number of visitors to the island has been declining. One of the restaurant owners told me that the number of visitors was down about 15% in 2008. This year, he expects the decline to be about 30%. He proudly noted that his numbers were much better. His restaurant is one of the few routinely patronized by the full time residents. The island’s only gas station is gone. At least 4 restaurants have been demolished. Most of the survivors have changed hands and names many times over the years. Obviously the Authority has to do something to bring in more and wealthier visitors if they are to remain a self sustaining corporation.

On the South end of the island, the sea is gradually eroding the land. The roots of the Southern pines nearest the ocean have been exposed and bleached white by the sun. As the trees slowly die and fall onto the beach, I find there is both sorrow in my heart for loss and an appreciation of what is becoming the abstract twisted beauty of nature’s driftwood sculptures. My parents are very old. Every year it is a little harder for them to make the trip from Vero Beach to Jekyll. I don’t know how many years are left before our family tradition joins the pines in the sea of forgetfulness. I hope to return to Jekyll in five years for our 40th anniversary, but no man knows how many years he is given to labor and strive under the sun.

Ecclesiastes Chapter 3

[1] To every thing there is a season, and a time to every purpose under the heaven:
[2] A time to be born, and a time to die; a time to plant, and a time to pluck up that which is planted;
[3] A time to kill, and a time to heal; a time to break down, and a time to build up;
[4] A time to weep, and a time to laugh; a time to mourn, and a time to dance;
[5] A time to cast away stones, and a time to gather stones together; a time to embrace, and a time to refrain from embracing;
[6] A time to get, and a time to lose; a time to keep, and a time to cast away;
[7] A time to rend, and a time to sew; a time to keep silence, and a time to speak;
[8] A time to love, and a time to hate; a time of war, and a time of peace.
[9] What profit hath he that worketh in that wherein he laboureth?
[10] I have seen the travail, which God hath given to the sons of men to be exercised in it.
[11] He hath made every thing beautiful in his time: also he hath set the world in their heart, so that no man can find out the work that God maketh from the beginning to the end.

Friday, December 18, 2009

Future World (Part II)

When given the choice between closed or open systems, consumers show a fierce enthusiasm for open architecture. They choose the open again and again because an open system has more potential upside than a closed one. There are more sources from which to recruit members and more nodes with which to intersect.

Kevin Kelly

There are enormous cultural, political, and economic forces pulling us together and pushing us apart in altogether new ways. I have touched on some of these ideas in previous posts such as “Future World” and “Swarm Theory.” Kevin Kelly in his seminal book, New Rules for the New Economy, observes that, “Individual allegiance moves away from firms and toward networks and network platforms.”

The implications are enormous.

Tim O’Reilly, an Internet media expert, compares our current government to a vending machine. The metaphor would equally apply to old line corporations providing goods and services, and even to churches. We look in the vending machine and make a decision if we want something offered and then a second decision as to price. If the machine offers undesirable products or if it costs too much, we just walk away. If the machine fails to spit out the desired product, we kick it or rock it into the wall in an attempt to get what we want. What if, our government, businesses, and churches could be more like the I-Phone, a platform that allows anyone to develop and offer new services and options? What if our churches could find a way to become more like Facebook or Craig’s List, or ebay or some sort of node in a new web of service, commitment, caring, and connection?

Consumers, including Americans searching for spiritual meaning, are not playing by the old rules any more unless there are no alternatives. The new loyalties are to the network not to the organization.

From a recent USA Today article by Lynn Grossman “Going to Church this Sunday? Look Around.”

Of the 72% of Americans who attend religious services at least once a year (excluding holidays, weddings and funerals), 35% say they attend in multiple places, often hop-scotching across denominations.

Among the findings: (from Pew Reseach)

•26% of those who attend religious services say they do so at more than one place occasionally, and an additional 9% roam regularly from their home church for services.

•28% of people who attend church at least weekly say they visit multiple churches outside their own tradition.

•59% of less frequent church attendees say they attend worship at multiple places.
Pew says two in three adults believe in or cite an experience with at least one supernatural phenomenon, including:

•26% find "spiritual energy" in physical things.

•25% believe in astrology.

•24% say people will be reborn in this world again and again.

•23% say yoga is a "spiritual practice."

•Forty-seven percent to 59% of Americans have changed religions at least once, a Pew survey in April found. The top reasons for most: Their spiritual needs weren't being met, or they liked another faith more or changed religious or moral beliefs.

•The percentage of people who call themselves Christian has dropped more than 11% in a generation, and so many people declined any religious label that the "Nones," now 15% of the USA, are the third-largest "religious" group after Catholics and Baptists, according to the American Religious Identification Survey last March."

It really doesn’t matter if we like these trends or we do not like these trends. With us or without us, they are happening. How can we make our churches nodes in the new net, accepting the fact that the folks with whom we want to connect believe in astrology, reincarnation, and other heterodox notions without compromising our own believes or values?

I have a friend who is considered a rather successful church builder within his own denomination. At a recent church conference, one of his peers asked him, “What evangelistic program do you use?”

The question caught my friend off guard. The only answer that came to mind was, “I answer my phone?” an unbelievable insight in only four words.

Do I answer my phone? The answer is sometimes. If I have to answer the phone at work, I always try to polite and professional or relaxed and entertaining as the situation dictates. At home sometimes I try to avoid answering the phone. Fear of telephone solicitors and other sorts of energy vampires make me thankful for answering machines. Sometimes I feel just too tired and beat up to deal with the demands or needs of other human beings.

Do companies answer their phones? Unfortunately, the answer is rarely. After spending time in “listen to the following message as our options have changed,” hell, we might, if we are very, very lucky actually get to talk to an uniformed employee who speaks English only slightly better than I speak Hindi (that would be not at all).

Do churches answer their phones? The answer is sometimes, but too often our churches are too busy off planning the next evangelical program to answer the phone.

May God have mercy on my soul.

Matthew 18:

[12] How think ye? if a man have an hundred sheep, and one of them be gone astray, doth he not leave the ninety and nine, and goeth into the mountains, and seeketh that which is gone astray?
[13] And if so be that he find it, verily I say unto you, he rejoiceth more of that sheep, than of the ninety and nine which went not astray.
[14] Even so it is not the will of your Father which is in heaven, that one of these little ones should perish.

Rumpelstiltskin Revisited

It turns out the Rumpelstiltskin is not the only strange demented creature who wants to take possession of your first born child. A recent article posted on MSN Money by Jeff Schnepper reminds us that the greedy dwarves at the IRS want a portion of your gold. Turns out that gold, silver, rare coins, works of art, antiques, and similar items are considered collectibles by the Federal Tax Statutes. This would include my holdings in GLD. Who would think that a fund bought and sold on the New York Stock Exchange would be considered a collectible?

Collectibles are taxed at a different rate than normal investments. If you purchase shares of stock and hold them for at least a year, any profit you might make is taxed at the capital gains rate of 15%. If you hold your gold shares for at least a year, it is taxed at a rate of 28%. Ouch! An asset held for less than a year and sold for a profit is considered a short term gain by the tax code. It will be taxed at your regular income rate, as much as 35%.

Because of this discrepancy in the tax code, over the last year, you would have ended up with more money in your pocket buying and selling a NASDAQ index fund rather than gold even though gold dramatically outperformed the index fund.

I don’t worry as much about taxes as I should. I am conscious enough to keep my tax free bonds in my taxable account, but beyond that I don’t spend a lot of time considering the tax consequences of my actions. I plan on doing most of my selling after I retire. Then my income and my tax rate will be lower than it is today. If I sell something today, it will be because I have made a lot of money and don’t want to get too greedy or because I have lost money on an investment and want to call it quits. I think it a good idea to first focus on ways to make some money that can be taxed. Then just be thankful that your increase has given Rumpelstiltskin and his relatives at the IRS something to tax.

Lyrics from Taxman, a song by the Beatles

Let me tell you how it will be
There's one for you, nineteen for me
Cos I'm the taxman, yeah, I'm the taxman

Should five per cent appear too small
Be thankful I don't take it all
Cos I'm the taxman, yeah I'm the taxman

If you drive a car, I'll tax the street
If you try to sit, I'll tax your seat
If you get too cold I'll tax the heat
If you take a walk, I'll tax your feet

Taxman! Cos I'm the taxman, yeah I'm the taxman

Saturday, December 12, 2009

Aren't You at Least a Bit Suspicious?

Once, shortly after we had graduated from college, I saw a friend’s younger brother, who was still in high school at the time, hit up his older sibling for some money using blatant guilt manipulation. I will always remember my friend’s reply, “Don’t call me brother with your hand in my pocket.” I constantly see similar attempts to grab my money or limit my freedom as an individual by institutions, politicians, and salesmen of all sorts. Whenever some great emergency or unbelievable opportunity is presented by an outrageous hypocrite or someone who wants you to act without critical thought, be suspicious, be very suspicious. Somehow, I believe that if I were an Islamic youth, I would be somewhat skeptical of a fat, balding, 60 year old Imam who told me of the great opportunities for dead suicide bombers in paradise. “If it is all that great,” I would think, “Why are you still alive?” I am a Christian and when I hear a preacher telling how I can become rich by giving him money, I wonder, “If you get rich by giving away your money, why don’t we have a reverse offering? I’ll let you give me some money.”

Some of the comments that might give you pause follow, but it certainly is not an inclusive list.

This time it’s different.
We have to do this for the children.
It is a crisis of global proportions.
We must act today.
We must kill the (fill in the blank) to keep them from destroying our way of life.
It's an issue of national security.

There are also lines of reasoning that should make you nervous, such as the infamous yes set.

Do you love your children?
Do you love your country?
Do you love Jesus?
Then support my efforts to (fill in the blank).

Politicians, salesmen, religious leaders, and ambitious rascals intent on separating you from some combination of your money and your freedom make their living with this sort of pitch. If you hear any of this nonsense from politicians of whatever persuasion, don’t bite the hook. Take the time to examine their claims in the light of reason and the evidence.

Recently we have witnessed the spectacle of the United Nations Climate Change Conference in Copenhagen. 20,000 international bureaucrats met with the intention on stripping the developed nations of their wealth, shutting down their industry forever, and leaving us shivering in the dark. With climategate we now know beyond a shadow of a doubt that at least a fair amount of global warming is somewhere between junk science and outright fraud. Finally the conference itself with limousines and private jets had a larger carbon footprint than the combined carbon footprint of the poorest 60 nations for an entire year (or so an article listed on the Drudge Report contends). When Obama attends such conferences it requires the use of at least two 747 aircraft, about five C5A transports, helicopters, limousines etc. Al Gore's mansion in TN (not his only property) uses more energy than 19 average American family homes. His private jet consumes gallons per mile for one person and he gripes about my 28 mpg Honda. If Al Gore really believes we are on the edge of an environmental precipice, I would expect him to be living in a tree house in Maui, wearing a hand woven loin cloth, and riding a bicycle.

Too often, political economy, supposedly based on science, leads to horrific atrocities. How many children, particularly girl children, have been murdered by China’s one child policy? What are the potential social repercussions of millions of young men who will never have a wife of their own? Zero population growth was suggested as a possible solution to global warming during this meeting. That’s interesting. Who will decide who can reproduce? Who will decide who shall be sterilized? Who will decide which children to abort or kill? How will this all be enforced?

Hitler’s science produced 6 million dead Jews. Stalin killed approximately 12 million inconvenient kulaks in the interest of scientific socialism.

We all (including this author) view the world through our mental, philosophical, and religious filters. You have yours. I have mine. As an undergraduate in U.S. History we were not taught history as much as we were taught how to read the work of historians. We were taught to ask questions like, “Who is this person and why did he present these events from this point of view?” We were taught that complex issues, such as the American Civil War could be examined from any number of viewpoints. A Marxist historian might well choose to study the shifting economic power of Northern industry as it eclipsed the monetary clout of Southern agriculture. A sociologist might choose to examine the effects of the shifting political demographics driven by immigration from Ireland, Germany, and Scandinavia. A Southern apologist might focus on the States Rights issue. An American Black historian of my generation who lived through the civil rights movement would likely see the war in terms of slavery and race. Try to become aware of your own blind spots and remember politics is about power and who is going to control that power.

According to Ryan Lizza of The New Republic, “When Alinsky would ask new students why they wanted to organize, they would invariably respond with selfless bromides about wanting to help others. Alinsky would then scream back at them that there was a one-word answer: ‘You want to organize for power!”

Now let’s take a moment and consider the case of a man whose belief, actions, money, and words were perfectly congruent.

Luke 19: 1-10

[1] And Jesus entered and passed through Jericho.
[2] And, behold, there was a man named Zacchaeus, which was the chief among the publicans, and he was rich.
[3] And he sought to see Jesus who he was; and could not for the press, because he was little of stature.
[4] And he ran before, and climbed up into a sycomore tree to see him: for he was to pass that way.
[5] And when Jesus came to the place, he looked up, and saw him, and said unto him, Zacchaeus, make haste, and come down; for to day I must abide at thy house.
[6] And he made haste, and came down, and received him joyfully.
[7] And when they saw it, they all murmured, saying, That he was gone to be guest with a man that is a sinner.
[8] And Zacchaeus stood, and said unto the Lord; Behold, Lord, the half of my goods I give to the poor; and if I have taken any thing from any man by false accusation, I restore him fourfold.
[9] And Jesus said unto him, This day is salvation come to this house, forsomuch as he also is a son of Abraham.
[10] For the Son of man is come to seek and to save that which was lost.

Rumpelstiltskin! I Know Your Name

Recently I received an emailed article from a friend of this blog championing a return to the gold standard and embracing the principles of the Austrian school of economics to limit the abuses, excesses, and follies of our current government, fiat currency wherever it can be found and government power in general. It was a fine emotional rant. I was at least somewhat sympathetic to its spirit and content. Of course, run out and buy gold was an underlying assumption of the article.

There is no reason gold should be money anymore than oil or large rocks, but for over 5,000 years people have believed gold is money, so gold is money. Even if gold is the king of commodities, it is still just another commodity, a commodity I might add, that has few real productive uses. Its true value is ultimately its perceived value. Gold is often thought of as a hedge against inflation but that is not completely accurate. The price of gold peaked at something over $1,000 an ounce in 1980 and then over the next 20 years collapsed to about $250 an ounce. All those years we had inflation but no run up on the price of gold. More recent studies have found a close correlation between the price of gold and fears of an economic upheaval. In the years following the election of Ronald Regan, the economy in general and the stock market in particular enjoyed an unprecedented bull run. Even in the months following the Y2K technology bust in 2000 these were good times. People were happy and optimistic, employment was high, and real estate prices only went up. Today, by contrast, the stock market is down, real estate is a bust, unemployment is high, and the value of the American dollar is threatened by our horrific deficits and the bailouts of the financial and automotive industries. People are frightened, angry, and pessimistic. Historically, these are good times for gold.

Gold is one of the few or perhaps the only commodity that over the course of history has been manipulated by great nation states for their own purposes. The price of gold can be driven up or down significantly when a country, for its own reasons, buys or dumps gold by THE TON rather than by the ounce. This is one of the driving factors for the current run up in the price of gold. Lately, China has become a little nervous about the enormous amount of questionable American debt they hold in their portfolio. They can’t dump it without destroying the value of their holdings and ending their plans to become an industrial superpower at our expense. Therefore, like me, the Chinese government is hedging their position in US Treasuries with the purchase of gold, copper, and other commodities. In a recent article found of Yahoo Financial, the author reports, “Last month, for example, India's Central Bank bought 200 metric tons of gold from the International Monetary Fund. India's gold spending spree cost the country $6.7 billion. While the exact price per ounce they paid isn't known, India's purchases were made between October 19-30, suggesting a purchase price between $1,000 to $1,040 per ounce.”

Will this bull run last forever? The values of all commodities rise and fall over time. Gold is no different. The aforementioned article by Ron DeLegge observes, “The creation of the first gold Exchange Traded Fund (NYSEArca: GLD) back in 2004 was a true turning point in gold's modern history. Before that time obtaining market exposure to gold was limited to owning the asset in some physical form or owning gold stocks. GLD changed everything by making gold an easily accessible asset. Today, with the click of a button, a person can buy 'paper gold' in the form of a gold ETF.

Even though gold soared, not much actual trading of physical gold has been taking place. In contrast, with $35 billion plus of assets and growing, the SPDR Gold Shares ETF dominates the market in paper gold trading. Could its success also become its downfall?

While GLD has converted millions of investors into goldbugs, its intraday liquidity can easily convert them into gold sellers. Once the number of new gold buyers dries up, who will be left to keep the gold market heading higher? Like any market, the contagious effect of selling pressure can quickly turn gold into an unwanted asset.”

I have something on the order of 3.7% of my investments (excluding my house) in gold and silver, mostly in gold equivalent shares (GLD) and another 1.5% or so in a Canadian gold mining stock. I am shooting for about 5% in gold. When inflation kicks in (and it will) I just can’t say when, gold will skyrocket. Right now gold is experiencing a technical correction (short term drop). If it goes low enough, I will buy some more.

The problem with looking to gold for your salvation is the United States government confiscated all privately owned gold in the 1930s, at a price lower than its true value. They did it once they can do it again. Having a few gold and silver coins buried under the hog trough is comforting but in a real Road Warrior scenario, you want to own shotgun shells, gasoline, and cigarettes and bar soap for trading purposes.

If our currency was completely backed by gold there would be too few dollars to fund the follies of our government but there would also be too little money to fund legitimate business expansion or even the purchase of family homes. Maintaining the balance has been a problem for capitalism since Bumpus stored his two gold pieces in Vincenzo’s vault.

Buying gold and silver systematically in small quantities is probably a good plan even if there is a short term drop, but then I am not a registered professional advisor and if I was all that smart, I would be rich.

A good meditation for all of us, from the twelfth chapter of the Gospel according to Luke:

[15] And he said unto them, Take heed, and beware of covetousness: for a man's life consisteth not in the abundance of the things which he possesseth.
[16] And he spake a parable unto them, saying, The ground of a certain rich man brought forth plentifully:
[17] And he thought within himself, saying, What shall I do, because I have no room where to bestow my fruits?
[18] And he said, This will I do: I will pull down my barns, and build greater; and there will I bestow all my fruits and my goods.
[19] And I will say to my soul, Soul, thou hast much goods laid up for many years; take thine ease, eat, drink, and be merry.
[20] But God said unto him, Thou fool, this night thy soul shall be required of thee: then whose shall those things be, which thou hast provided?
[21] So is he that layeth up treasure for himself, and is not rich toward God.

Sunday, December 6, 2009

The 800 Pound Gorilla and You

Just thinking a little about the 800 pound gorilla and you. Of course compound interest is the 800 pound gorilla in our financial life. Do you want to fight him or do you want him to fight for you? There are some great free calculators on the Web. I was playing with a few of them this morning. I encourage you to check out your own numbers.

Some loan numbers

$10,000 in credit card debt, no additional purchases,
3 years pay off 16% interest
$351.57 a month Total payoff $12,656.52

$10,000 in credit card debt, no additional purchases,
5 years pay off 16% interest
$243.18 a month Total payoff $14,590.80

Here is something scary to think about. If you want to pay $100 a month on that credit card, you will never pay off the debt. The number of payments is infinite. $200 a month pays off in 83 months. Total payoff $16,600

$300,000 mortgage 30 years 5% interest
$1,610.46 a month Total payoff $579,765.60

$300,000 mortgage 30 years 6% interest
$1,798.65 a month Total payoff $647,514.00

Now let’s put the gorilla to work for you

Some annuity numbers

$100,000 assume conservative 5% growth and a 30 year payoff
Pays you $6,505.14 a year Total payout $195,154.20

$100,000 assume the usual 8% growth and a 30 year payoff
Pays you $8,882.74 a year Total payout $266,482.20

Some systematic savings numbers

$10,000 initial investment, add $100 a month,
Assume the standard 8% growth for 30 years Total $254,129.08

Now the same calculation with a reasonable 401K type contribution

$10,000 initial investment, add $500 a month,
Assume the standard 8% growth for 30 years Total $840,038.86

Now we are talking real money

Saturday, December 5, 2009

The Value Trap

"In the short-term, the markets are like voting machines, but over the long-term they are like weighing machines."
Benjamin Graham

As readers of this blog know, I am trying to learn how to practice what is generally called value investing. I try to buy stocks the same way I buy anything else, the best quality and the lowest cost. Sometimes my schemes work, sometimes they don’t. Today I would like to discuss one of the traps that is a danger to value investors. I have stepped into this particular trap on two occasions.

As is recommended on the Motley Fool website and many other places, I like to see three attributes in a company

1)Sustainable competitive advantage – Some story line that makes this company special. Coca Cola’s brand name, Chevron’s size and global reach, Hong Kong and Shanghai Bank’s penetration of China without the corruption common in that country.

2)Free cash flow – Almost all of my stocks pay dividends. I like it when companies pay me to own their stock. I don’t quite trust companies that want to keep everything for their own greedy managers. I know. I know. Start up technology stocks need to reinvest profits into new products, but when does it end? Apple has been around for about 30 years and they are still not paying a dividend, unacceptable.

3)Great management – A visionary leader and competent employees is the ideal but I would accept a high level of competence and energy in the workforce, anything but a bored bureaucratic management and a hostile workforce, GM comes to mind.

Then, of course, I look at the stock. My eyes are immediately drawn to three numbers on the financial Web page for that stock. These are somewhat related to the first list.

1)Price Earnings Ratio – Generally, I want this number to be 20 or lower. It is the price of a share of stock divided by the earnings for a share of stock. Historically, the PE ratio for the New York Stock Exchange averages around 16. A high PE number could indicate a stock that is overvalued. Again, this is not true for new companies, particularly in the pharmaceutical or technology areas. In such a case people are paying a premium for future earnings. Sometimes a company is losing money. Then it has no PE ratio. That is not a good thing.

2)Dividend and Yield – The dividend is simply how much the company gives you in a year for owning their stock. Let’s say the dividend or a particular company is $1.00per share. Now divide that number by the cost of a share, let’s say $25.00. The yield on this imaginary stock is 4%, a pretty good return. I tend to believe that a sustainable dividend kind of puts a floor under the value of a stock. This generally but not always true.

3)Free Cash Flow – Basically, FCF is the net profits minus the capital expenses, something like your take home salary minus the mortgage payment. I really like FCF because it pays dividends. It is nice to get 3% or more for my money without too much risk. These days I am barely paid anything for leaving money in the Credit Union. Another nice thing that companies do with FCF is stock buybacks. When the company is buying shares in its own stock that generally indicates the mangers think it is a bargain. When they are buying millions of shares this makes the price go up. Be careful, sometimes managers do this to hide some weaknesses that will ultimate doom the share price. (Note the quote at the beginning of this article.)

The knowledgeable reader will notice a glaring weakness in the last list, one that bites me from time to time. I tend to ignore growth. There is another ratio that should be in any quick look at a stock.

Price Earnings Growth – The PEG ratio is the PE ratio divided by the company’s growth percentage. Let’s say a company has a PE ratio of 20 and it has been growing at 10% per year and you expect it to continue to grow at that rate. The company has a PEG of 2. The lower the PEG ratio the more likely the stock is a bargain. As an engineer and an embittered old cynic, I have a problem with this number. I am very comfortable with interpolation, the art of taking two know points on a graph and estimating the value of an unknown point between the two known points. I am not so happy with extrapolation. A trend is a trend until it is no longer a trend. The line on a graph may be linear up to some point and then take a wicked curve in the opposite direction. When I plug a number into the denominator of the PEG ratio, do I use history and extrapolate, or do I just make a guess after looking into my crystal ball? Neither option appeals to me.

Back when I started learning how to invest, I bought a small amount or Merck, the drug company, at a little over $70 a share. Merck had a competitive advantage (valuable drug patents), plenty of free cash, and at the time it was considered the best managed company in the country if not the world. Merck had a low PE ratio and paid a righteous dividend. The knock on Merck at the time was growth was expected to be flat, as they did not have any new potential blockbuster drugs in their pipeline. I thought great management and scientists would take care of that problem. I was wrong. Merck continued to drop and I continued to hold. I thought it would come back but then the Vioxx class action lawsuits started and Merck fell from the sky like a wounded duck. Finally in disgust, I sold at a little over $30 a share. Merck paid a dividend every year I owned it. Just guessing, something like $1,000 or more over those years. During the time I owned the stock, Merck sold one of its divisions and I made something over $500 on that sale. So in reality I only lost a little over $2,000 and I got something like $500 back from Uncle Sam in the form of lower taxes, so my actual loss was something like $1,500 (plus the taxes I paid on the dividends).

The morals of this story? Dividends are like an umbrella. When the rains come they will help keep you dry but when Hurricane Katrina (the Vioxx lawsuits) hits a company, your little umbrella is going to be blown away. If you ignore growth and what the collective wisdom of the market believes about growth you better be very good or very lucky.

Lord Maynard Keynes once gave some advice to people like me who tend to be buy and hold investors. “In the long run, we are all dead.”

Hey! Let’s be careful out there.

Sunday, November 29, 2009

A Prayer for Those Who Seek Employment

This is the first time I have ever attemped to write a formal prayer. It will be obvious I have been checking out Anglican and Catholic web sites. It seems like we Protestants are lacking in this area.

Lord God, Judge of our nation, we your people have sinned in thought, word, and deed. We have pursued our own desires, we have ignored your holy laws, and we have engaged in wickedness before your throne. Now, as our country and the world faces a time of great economic distress, we come before you in prayer, knowing you to be a merciful God who forgives sins and who restores those who repent of their sins.

Heavenly Father, there are many in our midst who suffer want and anxiety from a lack of work. Unable to provide for their families, their children suffer. Lord God, we would ask you to provide reasonable, meaningful, and appropriate jobs to those who seek honest employment. We would ask you to grant to them who suffer in this time, a just wage for their labors that they might care for their families in the manner that you have established in your Holy Word.

Merciful Father, we would ask that you guide and strengthen the hearts of all those who seek employment. We would ask you to grant them a special measure of strength, patience, and trust in your Goodness as they seek to best use their abilities in honest labor.

We pray for our political leaders and for those who command corporations both great and small. We would ask you to fill them with your wisdom and a spirit of mercy, so that mindful of your righteous judgment, they would make good decisions for the use of both public and private wealth. Lord God, touch their hearts, so that those who are able, would be willing to provide opportunities to their unemployed brothers and sisters to use their skills, abilities, and energy in a manner that would truly bring blessings upon us all.

Almighty God, we would ask that you speak to your Church and to the people who are named by your name. Teach us how to best share your bounty with others in a manner that would glorify your name and bring your blessings to many.

Holy Father, we confess that you are our great refuge in times of trouble. We confess that in your Holy Word you have both directed us to offer our prayers for sustenance and you have promised to provide for our daily needs. We ask that all people, those who walk in your light and those who walk in darkness, those who have suffered loss in this time and those who have been blessed would turn to you and call out your name so that we might be forgiven and once again see your blessings fall upon this nation.

We ask these things in the Holy name of Jesus our Savior. Amen

Thursday, November 26, 2009

The Latest Internet Scam

On this past Monday I bought a door gasket for my dishwasher from an Internet parts house. They had an excellent web site. I put in the brand and model number of my dishwasher and it spit back several exploded drawings. I clicked on the drawing containing the door assembly, then clicked on the gasket, and went to checkout. There was nothing unusual until I completed the order. Then a new window opened asking me to take a survey. The hook was $100 in free gifts. I assumed this would be discount coupons on future purchases. I was in a good mood and happy with the service so I went ahead with the survey. I began to get suspicious when I noticed a number of the questions did not apply to an appliance parts house. I then noticed the window was from a third party, not the vendor. I thought, “I guess they are just using a generic survey service.” I finished the survey and was given the opportunity to get some magazine subscriptions. This was supposedly free but there were some prices on the magazines. I have a house full of magazines, books, and catalogues. The last thing in the world I want is another magazine adding to this clutter. At this point my fraud antennae started waggling around a bit and I exited the window. This action returned me to the appliance parts house page for a next action.

The following day a friend of this blog gave me some information on a new Internet scam. I had just about stepped into it.

The following information comes from an article by Lolita Baldor (AP). A week before, the Senate Commerce Committee blasted the unethical business practices of three Internet companies Affinion, Vertrue, and Webloyalty for using aggressive sales tactics to scam millions of customers. Just before the sales confirmation appears on a legitimate Web purchase, the customer is offered a cash back coupon, a movie ticket, or some other reward. When the consumer clicks on the offer, believing it to be a part of their purchase and that company’s website, the vendor sends ALL OF THEIR CREDIT CARD AND PERSONAL INFORMATION from the legitimate purchase to the third party. If the customer accepts the offer, they have just joined one or more subscription services. These services charge monthly fees for bogus offers. The customer never notices it until mystery charges begin appearing on their credit card statements.

What is really despicable about this practice is that reputable companies are taking kickbacks from Affinion, Vertrue, and Webloyalty. The following information comes from Senator John D. Rockefeller report dated November 17, 2009. It concerns a Senate investigation of the aforementioned three companies.

“First of all, we expect the merchants we do business with on the Internet to treat us honestly and fairly. We expect online merchants to clearly explain their prices and terms to us, so we know what exactly we’re getting if we decide to spend our money at their websites. And when we agree to buy something from them, we expect merchants to protect our credit card and other financial information that we share with them. That’s why it’s so disturbing to me to learn through investigation what’s happening to millions of American consumers every day who are shopping on the Internet.”

Here is a list of reputable Web vendors who have all received more than $10,000,000 in kickbacks from these disreputable companies. (Exhibit 4 from the Senate’s Investigation)
Redcats USA
US Airways

Here is a partial list of vendors who received between $1,000,000 and $10,000,000 in kickbacks.

Airtran Airways
American Greetings
Barnes and Noble
Continental Airlines
J.C. Whitney
Lillian Vernon
Miles Kimball
Pizza Hut
Time Life
Victoria’s Secret

If what I was offered was something I really wanted, I might have bitten the hook. I am still nervous that something might get charged to my card by these scoundrels. I will call my credit card service every few days over the next couple of weeks and listen to the nice robot man recite my last five transactions until I am satisfied that I am completely in the clear. May God protect us and deliver us from such snares.

Two from Proverbs

Proverbs 13:11 (NIV)

Dishonest money dwindles away, but he who gathers money little by little makes it grow.

Proverbs 21:6 (NIV)

A fortune made by a lying tongue is a fleeting vapor and a deadly snare.

Saturday, November 21, 2009

Playin' Small Ball

Playing small ball, Larry Hite managed to turn a $2 million managed account into $800million in eight years. Here is a quote from Larry Hite worth your consideration.

“Never risk more than 1% of your total equity in any one trade. By risking 1%, I am indifferent to any individual trade. Keeping your risk small and constant is absolutely critical. I have two basic rules about winning in trading as well as in life:

1.If you don't bet, you can't win.
2.If you lose all your chips, you can't bet.”

Small ball is the traditional offensive strategy in baseball. It is based on the assumptions that it easier to score a run with a man on base than with no men on base and that it easier to score from third base than it is from first base. Therefore, small ball concentrates on getting men on base. Managers using this strategy are perfectly willing to make sacrifice plays in order to advance a runner who is already on base. In recent years, innovations such as the designated hitter in the American League, smaller parks designed to increase the number of homeruns, the “juiced” ball that comes off the bat at a higher rate of speed, and steroids have made the long ball more important, but Major League Baseball teams are still playing small ball. In Japan small ball is the only way to play the game.

People like to watch homeruns both in life and in baseball. Small ball can be soooo boring. I want to hear about the man who bet his life savings on the initial public offering of Cisco, sold before the crash in 2000, and retired to Maui. The story about a man who bought shares in Coca Cola and 20 other blue chip stocks over a 20 year time frame with about ½ of his savings and then retired in North Carolina is boring by comparison.

I am trying to play small ball with my savings. I am willing to make sacrifices, such a driving a 13 year old car when I can afford to pay cash for a new vehicle, in order to get some money invested my Schwab Money Market account. Once I get that money on base, I look for opportunities and buy a little of this or a little of that in order to advance that money to second base. Sometimes I get lucky. I am able “steal” a base, as in a matter a months I watch one of my investments jump 50% or more. When I get nervous because the market seems too high or my investments are getting out of balance I bring some of the money on home and put it into an investment grade bond fund or treasuries.

During the recent unpleasantness I was buying all the way down. I was buying 70% stocks for my retirement account at work and adding small amounts to the core holdings in my self directed account. It is very scary to buy some stock, loose some money, then buy some more stock, and loose some more money. I was trying to increase the numbers of shares I owned, lower the cost of an average share, and buy dividends for the future. Dividends, by the way, are where it is at. In a perfect world, it would be wonderful to be able to live on just the interest and dividends from your investments. Imagine, never worrying about touching your principal. This strategy seems to working pretty well even in a disastrous economy. I took a beating on General Electric, but generally small ball is working as advertised.

I have watched the market jump something like 60% since the lows of this past March. During the past month or two I have started pulling some of my winnings off the table both because I believe the market to be overvalued and because my stock holdings are exceeding 55%* of my investments. This is small ball. If I was playing long ball I would be pulling all my winnings off the table. Unfortunately, my crystal ball did not come with an instruction manual so I can not state with certainty what the future might hold.

I wish I was younger, smarter, and richer. Unfortunately, I did not start a serious effort to learn about investments until I was about 50 years old. If you are young, start today. Time is your friend, particularly if you choose to play small ball.

And, Hey! Let’s be extra careful out there.

* The old conventional wisdom stated that an individual investor should hold his age in bonds, certificates of deposit, and cash. Hence, at 58 I should have 58% in fixed income investments and 42% in stocks. The new conventional wisdom states that these figures are too conservative given the risk of inflation. The new rule of thumb states that the individual investor should have either 110 or 115 minus their age in stocks. Hence, I should be holding 52% or 57% in stocks at any given time. I have decided keeping my stock holdings (including gold) under 55% sounds about right. I am shooting for 5% in gold but I have not yet reached this goal.

Friday, November 20, 2009

The Confucian Work Ethic?

There are principles that God has placed in the universe. They work for Christians. They work for non-Christians. There are no guarantees in life but there are principles and there are probabilities. If you choose to act in harmony with those principles you increase the probability of success and happiness no mater who you might be or what you believe. This was true in Solomon’s time and it is proving true in this recession.

In a recent article in USA Today Haya El Nasser observes that cultural factors help limit the recessions impact. Currently unemployment in the United States is running at 10.2%, but Asian unemployment is running at about 7.5%, a significant statistical difference. In fact Asians have the lowest unemployment rate of any American racial group. The reasons can be found in cultural strengths imbedded in family structure and values. Our parents destroyed the extended family in America with the social and geographic mobility we experienced in the years following World War II. My prayer is that the Church in America finds a way to reinvent the extended family.

Education is a family value in many Asian cultures. I have read that homework is sometimes a family affair. The entire family sits around the table. If the parents can’t speak English very well they expect their children to teach them the language even as they are helping them do their homework. Older siblings are expected to help their younger brothers and sisters. Learning is a family affair and those with advanced degrees are reverenced especially if they are teachers.

From the article:

"Asians in the United States, both native born Asians and Asian immigrants, have higher educational levels than other groups," says Alan Berube, senior fellow and research director of the Brookings Institution's Metropolitan Policy Program. A recent Labor Department report on the work force shows a greater proportion of Asians than other racial or ethnic groups in management, professional and related occupations — jobs that require more schooling and are high-paying. About 47% work in management or professional jobs compared with 35% for the U.S. work force as a whole.”

Asian unemployment is also low because their work ethic is extremely strong, so strong that it is now being termed the Confucian work ethic by sociologists. John Calvin, eat your heart out. The article points out that there is significant evidence that if Asian Americans loose their jobs they are quick to take lower paying work, even if they are grossly over qualified. Sometimes they take jobs within their family’s business.

The Chinese have a history of family enterprise that predates this nation by thousands of years. In one article Peter Drucker discusses the Offshore Chinese family corporation. He claims such organizations are run more like a highland clan than any normal business. In various other articles, the author mentions family owned and operated entities such as the Rothchild banking empire, the Dupont Chemical Corporation, and the traditional Mafia family. All these organizations have at least some similarities to the Chinese clan corporation. I checked out these observations with a Chinese coworker. It turns out his wife is a distant cousin related to one of these combines.

Such corporations are based on Confucian concepts of duty, loyalty, and mutual obligations and operated for the good of the clan, the entire clan. In Chinese history the government was often so corrupt that the only trust was between family members. If a mandarin had a problem with a family business, they had no legal recourse. Therefore, it was important that a businessman could give a bag of diamonds to a cousin for safekeeping and then reasonably expect to have them returned intact in a year or so after the crisis abated. In such organizations the clan chieftain controls all the assets of the corporation. He is also responsible for all the family members even cousins, nieces, and nephews removed by several generations. The chieftain is not however, a dictator. His actions are reviewed by senior family members and younger family members who have been given positions of great responsibility.

In a nutshell, education (particularly in a technical or health care field), plus a strong work ethic, plus a supportive extended family equals a high probability of survival or even success. Solomon and Confucius both understood these truths. Maybe it is time for the Church in America to relearn what first made us strong. Phyllis Tickle in her commentaries on the state of the Church in America, observes that we lost something when adult children and grandchildren no longer eat Sunday dinner at grandmother’s house. During these dinners grandmother might ask one of her grandchildren what they learned in Sunday school. God help the son or daughter if the grandchild’s response was, “We didn’t go to church today.”

Ecclesiastes Chapter 4

[5] The fool foldeth his hands together, and eateth his own flesh.
[6] Better is an handful with quietness, than both the hands full with travail and vexation of spirit.
[7] Then I returned, and I saw vanity under the sun.
[8] There is one alone, and there is not a second; yea, he hath neither child nor brother: yet is there no end of all his labour; neither is his eye satisfied with riches; neither saith he, For whom do I labour, and bereave my soul of good? This is also vanity, yea, it is a sore travail.
[9] Two are better than one; because they have a good reward for their labour.
[10] For if they fall, the one will lift up his fellow: but woe to him that is alone when he falleth; for he hath not another to help him up.
[11] Again, if two lie together, then they have heat: but how can one be warm alone?
[12] And if one prevail against him, two shall withstand him; and a threefold cord is not quickly broken.

Saturday, November 14, 2009

Walk Like an Egyptian

“Investors should remember that excitement and expenses are their enemies. And if they insist on trying to time their participation in equities, they should try to be fearful when others are greedy and greedy when others are fearful.”
Warren Buffett

You know the story. One night the Pharaoh of Egypt dreamed that he was standing by a river. He saw seven fine healthy cows climb out of the river. They were followed by seven ugly sick looking cows. The sick looking cows then ate the healthy animals, but they didn’t get any better. Then Pharaoh dreamed a second dream. Seven ears of perfect grain grew up out of the ground. They were followed by a plant with seven ears of grain that looked to be blighted by the desert winds. Then the bad ears of grain ate the good ears. Pretty weird, huh? This dream made no sense to either Pharaoh or his priests or his magicians.

However, his chief butler remembered a guy he met in prison, a Jew who could interpret dreams and predict the future. Most likely, the chief butler also remembered his promise to this Jew who told him he would live and return to Pharaoh’s favor. As the butler promised, he told Pharaoh about the man, Joseph, who claimed to be innocent of the rape charges that sent him to prison, the man who could see into the future.

Joseph was dragged out of prison, cleaned up a bit, and presented to Pharaoh. Interestingly, Joseph did not claim credit for his abilities but gave the glory to God, a little different than when he was that bratty little brother who told his siblings they would bow down before him. He then told Pharaoh the meaning of the dream. Egypt would have seven flush years followed by seven years of famine. Joseph also presented a solution. He encouraged Pharaoh to put aside 20% of the nation’s harvest for the coming years of famine.

Pharaoh knew a good thing when he heard it. He put Joseph in charge of the project, in fact he put Joseph in charge of the kingdom as his Chief Operating Office. Joseph managed to save and store so much grain, the Egyptian quit trying to keep track of it. The numbers were just too large. Then the predicted famine hit the Middle East. Since Egypt was the only country that had a grain supply, the entire world beat a path to Joseph’s door and he made his boss the richest man in the world.

What a concept! Save money during the good years so that it is available during the bad years. In America, we do just the opposite. During the 1970s, those wretched years of stagflation, Americans saved about 10% of their disposable incomes. As the economy boomed during the last half of the 1980s that rate began to drop and continued to drop until in 2005 the number went negative. The consumers of an entire nation were spending more than they were making, complete insanity. This was all being fueled by the real estate bubble. Boosted by favorable legislation and easy credit, the homeowner watched his house, his biggest expense, turn into his best investment. Flush with this new equity, the homeowner turned his new found store of wealth into an ATM by means of second mortgages and Home Equity Lines of Credit (HELOC). Then it was October 2008 and the skinny sickly cows of financial catastrophe gobbled up our fat healthy looking economy. Now the savings rate is climbing. It reached 5% in the second quarter but it is starting to slip again, probably as a result of the cash for clunkers program and the government bonus for first time home buyers. Generally, Americans are paying down their debts, saving for a rainy day, and learning that frugality is the new cool. No more are we saying, “Mastercard, I’m bored.” It is a little late, the fat cow is gone, but a little too late is much better than nothing.

What if Americans learned to save money when times were good? What if the government put aside a surplus for years of pain? What if corporations and even churches built a store of wealth during boom times. Think of the opportunities. Corporations could pick up valuable assets for pennies on the dollar. During times of distress, the Church could become the center of benevolence that God intended.

Let’s end with one more quote from Warren Buffett.

“You only find out who is swimming naked when the tide goes out.”

Note: I do not particularly recommend Robert Kiyosaki. However, the idea for this post came from his latest article on Yahoo Financial.

Wednesday, November 11, 2009

Perfect Knowledge? Perfect Peace?

People are moving back and rebuilding New Orleans, even after Katrina. It is a certainty New Orleans will suffer another catastrophic flood. The only question is when. Civil engineers have been sounding the warnings for decades. A class 4 or 5 hurricane could cause massive breaches in the levees surrounding New Orleans. A major flood on the Mississippi could cause the same sort of disaster or wipe out the dam system that keeps the Mississippi from heading down the Atchafalaya river basin. This would isolate New Orleans from the Gulf of Mexico thus ending its reason for existence. Any kind of flood could cause the failure of the system of levees that protects the city from Lake Pontchartrain. A system of levees and dams that could guarantee the safety of New Orleans is a technological impossibility. The city is built on a sea of mud. There is no bedrock. Therefore, the higher and heavier the levee, the faster it will sink into the mud. The American Society of Civil Engineers observes, “Large portions of Orleans, St. Bernard, and Jefferson parishes are currently below sea level — and continue to sink. New Orleans is built on thousands of feet of soft sand, silt, and clay. Subsidence, or settling of the ground surface, occurs naturally due to the consolidation and oxidation of organic soils (called “marsh” in New Orleans) and local groundwater pumping. In the past, flooding and deposition of sediments from the Mississippi River counterbalanced the natural subsidence, leaving southeast Louisiana at or above sea level. However, due to major flood control structures being built upstream on the Mississippi River and levees being built around New Orleans, fresh layers of sediment are not replenishing the ground lost by subsidence.” Substantial portions of the city are below sea level and they continue to sink. Technology can not change this fact. Yet, people live in New Orleans. Much to my amazement they consider it an acceptable risk.

As we recover from the collapse of the stock and real estate markets, there seems to be a renewed interest in risk analysis. Richard Young’s sustainable Portfolio Income chart shows the value of a portfolio invested 50% in fixed income and 50% in stocks rebalanced annually. Distributions are assumed to grow at the annual rate of inflation. A portfolio invested 50–50 in 1946 with a 4% withdrawal rate would have lasted for 53 years, a 5% withdraw rate would have lasted 34 years, a 6% withdraw rate would have lasted 26 years, but the past is not the future. Likewise, Schwab came up with the same 4% withdraw rule of thumb, not based on past performance but based on running sophisticated Monte Carlo simulations in order to develop a 90% confidence level in their results. In an email message to their customers, Schwab admitted that years like 2008, a once in a lifetime event (we hope), could not be covered by a 90% confidence level. If I had been an average investor and if I retired in 2008, I would be in extremely serious trouble. When the market withdraws 18% of your holdings (50% bonds 50% stocks) in a single year, the 4% rule obviously goes out the window.

Most of the predictive tools available to folks like you and me are termed deterministic. That means, as I plan my retirement, I pick a life expectancy, an average rate of inflation (often 5% is recommended), and an average rate of return (often 8% is recommended) on investments. I plug the numbers into the website and read the results. Since I can not predict my life expectancy, inflation for the next 30 years, or what the stocks I buy and sell might do or not do, these results are really not worth too much, but they are better than nothing.

A Monte Carlo simulation is more sophisticated. Most Sunday mornings I drive approximately 17 miles from Poolesville to Derwood. I make one stop to buy cheap gas at the 7-11 store. On average this odyssey takes about 35 minutes but it can take 7 or 8 minutes more or less than average based primarily on how I hit the traffic lights. I do not always start at the exact same minute. If I am running late, I drive a little faster. If I am running early, I slow down. I could develop a Monte Carlo simulation that would model my behavior and mathematically verify an average time for the Sunday morning commute. A random number generator would give a starting time, information from the computer system that controls traffic lights in Montgomery County would run a subroutine providing stop/go information to the main program, and the computer could spit out the results of 10,000 commutes in a matter of minutes. But did the program account for deer hits, accidents, and construction projects? Probably not. If get stuck in a once in 100 year event, like the time a truck flipped on I-95 releasing scores of pigs from their cages, my simulation results go out the window. In that case the road was shut down for hours while emergency personnel recaptured the surviving animals.

Systems engineering obsesses about catastrophic single point failures. If the failure of a single part can result in the complete destruction of a massively complex system, this is considered a serious design flaw. Redundant subsystems are often added to prevent an entire systems failure, like the O ring seals on the booster motors of the space shuttle. The failure of one piece of plastic destroyed a system worth tens of millions of dollars and killed 7 astronauts. These unlikely events keep system engineers awake at night. To locate these problems and correct them before they can occur, thousands of simulations involving all sorts of unlikely, “what if?” scenarios are considered and designs are modified based on the frequency of the event, the consequences of the event, and the cost of preventing the failure.

Probably 4% withdraw is about as good a model as I can hope for, as I plan my retirement. How does this work? Let us say a couple has traditional pensions totaling $20,000 a year and expects an inflation adjusted income of $25,000 a year from Social Security. If this couple wishes to retire on an income of $70,000 a year, they will need an additional $25,000 a year generated by their investments. $25,000 ÷ 0.04 = $625,000. To avoid a single point failure, diversify. At one point in time putting all your money into Enron stock looked like a pretty good idea. However, the bankruptcy of that wicked company destroyed thousands of innocent investors. A portfolio with 10% in Enron stock would have been hurt but would survive. A portfolio with 5% in Enron stock would be embarrassed but would not have suffered any grievous, irreparable harm.

Of course the problem is that we humans, the machines we construct, and the computer simulations we write all lack perfect knowledge. Chess is a game in which both players know the position of every piece on the board and the complete history of the game. Chess computers can and have been programmed so well that one of them, Deep Blue, defeated the World’s Champion in an exhibition match. Poker is a game in which no player has perfect knowledge of either the opponents’ cards or the motivations behind their betting strategies. For this reason, attempts to program a computer to play poker with human adversaries have been failures.

I bet you know by now where I am going to end this essay, with the author of perfect knowledge and perfect peace.

Psalms 23

[1] The LORD is my shepherd; I shall not want.
[2] He maketh me to lie down in green pastures: he leadeth me beside the still waters.
[3] He restoreth my soul: he leadeth me in the paths of righteousness for his name's sake.
[4] Yea, though I walk through the valley of the shadow of death, I will fear no evil: for thou art with me; thy rod and thy staff they comfort me.
[5] Thou preparest a table before me in the presence of mine enemies: thou anointest my head with oil; my cup runneth over.
[6] Surely goodness and mercy shall follow me all the days of my life: and I will dwell in the house of the LORD for ever.

Sunday, November 8, 2009

But Only Speak The Word and We Will be Healed

Back on Labor Day U3, the official unemployment rate stood at 9.7% and U6, the more accurate measure that includes marginally attached and those forced to work less than full time, stood at 16.8%. The latest measures released on this past Friday are U3 at 10.2% and today U6 stands at 17.5%. Some economists consider an official unemployment rate in excess of 10% to be the difference between a recession and a depression. More importantly, our monetary institutions have built safeguards into our financial system to cover up to 10% unemployment. A sustained unemployment rate beyond 10% will result in more bankruptcies, foreclosures, and credit card defaults than the banks can cover. This might require another massive public bail out we can not afford.

Long term unemployment has other costs including suicides, divorces, spousal abuse, alcoholism, and depression. Unemployment has not topped 10% since 1983. Back then Americans were carrying much less debt and were unemployed for fewer weeks than has been the case in this recession. In addition, in 1983 the automobile companies covered most of their employees’ salary even during layoffs. Those days are gone forever.

I do not see a source for new wealth creating jobs. We have sent our factory jobs to China, we are sending our white collar and some of our professional jobs such as computer programming to India, and in the past 5 years we have overbuilt both residential and commercial real estate. Some estimate that even without considering future commercial bankruptcies or residential foreclosures it will take 15 years to absorb the oversupply in the construction trades.

As a nation, we really need to seek God’s wisdom and his mercy. More than ever, today is a day for prayer.

A Confession of Sin from the Book of Common Prayer

Almighty and most merciful Father; we have erred and strayed from thy ways like lost sheep. We have followed too much the devices and desires of our own hearts. We have offended against thy holy laws. We have left undone those things which we ought to have done; and we have done those things which we ought not to have done; and there is no health in us.

But thou O Lord, have mercy upon us, miserable offenders. Spare thou those, O God, who confess their faults. Restore thou those who are penitent; according to thy promises declared unto mankind in Christ Jesus our Lord. And grant, O most merciful Father for his sake; that we may hereafter live a godly, righteous, and sober life, to the glory of thy holy Name.


Saturday, November 7, 2009

The Nature of Money (Part II)

It started innocently enough, at least in Western Europe. I can’t speak to the Caliphate, China, or India. Vincenzo, a goldsmith living somewhere, most likely in Italy, built a vault to hold his stock of precious metal and perhaps even hired a solider or two to guard his stash. Bumpus, his neighbor, had two gold coins buried under the hog trough. Bumpus, while suffering from insomnia one night, thought, “Perhaps my gold might be safer in the goldsmith’s vault.” He offered Vincenzo three chickens and two dozen eggs to store his gold coins in the vault. Vincenzo accepted the offer, took the coins, issued Bumpus a signed receipt for his gold, and locked it up in the vault.

Time passes. Bumpus prospers and wants to buy a small piece of land adjacent to his pathetic farm. After the negotiations are complete, the landowner wants Bumpus to pay the agreed upon price, two pieces of gold. The peasant shows the landowner his receipt from Vincenzo. The landowner, knowing Vincenzo to be a man of his word, accepts the paper, goes down to the vault, verifies its validity, and walks home happy to leave his gold right where it sits. Two peasants and a goldsmith have just invented paper money.

Time passes. Vincenzo’s son, Ludovico now runs the family business. The Count of Bahjoria, the local bigwig, has a wife who wants to build an addition to their castle but he can’t get enough money out of tax revenues. He calls Ludovico to his office and offers a portion of his tax revenues plus a return of principal if the goldsmith would kindly lend him enough of his gold stash to complete the project. This is going to take more money than Ludovico personally owns, but being a more sophisticated businessman than his father, Ludovico writes the Count a bill for more gold than he owns but less than is held in his vault. They have just invented fractional reserve banking.

Time passes. The agreement with the Count worked so well Ludovico bought a grand estate just outside of town and sent his son to the University of Paris. His neighbors eyed the goldsmith’s change in lifestyle and grew suspicious. They thought, “What is that rascal, Ludovico, doing with my gold.” They all marched down to the vault and demanded to see their coins. Of course they weren’t there. Not wishing to be lynched, Ludovico explained what was going on and offered to cut his customers in on his profits. Ludovico and the lynch mob have just invented the savings account.

Time passes. Alessandro, Ludovico’s son, now wealthier than the Count, has left the goldsmith business and owns what has become the First Bank of Bahjoria. Wishing to become a nobleman himself, he offers a bribe to the Pope that exceeds his entire stock of gold. He gets away with this for a while, but the Pope wants to field an army against the Baron of Badburg. On the way to the crusades, the Baron decided looting Italy was more rewarding and safer than fighting the Arabs in the Holy Lands. The Italian soldiers want gold. Count Alessandro the Magnificent doesn’t have enough to cover his promissory notes. Word gets out and the lynch mob hangs Alessandro. The Pope, the lynch mob, and Alessandro have just invented a run on the bank.

This sad story has been repeated thousands of times in the last 500 years in locations all over the world. It is pretty much what happened at Citibank and Bear Sterns last year. Although the sons and daughters of Vincenzo are far more sophisticated and are dealing with sums so vast, Galileo himself probably couldn’t comprehend such numbers, nothing has really changed but the faces and the names of the financial instruments. If we return to the original model, a customer paying a banker to store his gold in the banker’s vault, there will not be any money to fuel economic growth. Capitalism needs good debt to survive. The money to create a new industry, like the automobile at the start of the Twentieth Century, simply does not exist. It must be created through some combination of bonds, common or preferred stock, or outright loans. All of these are debt instruments of some sort. As long as everybody behaves ethically everything works just fine. However, history has proven again and again that always some sharp character is going to get a little too greedy and issue bad debt, most recently Collateralized Debt Obligations on bad mortgages and Structured Investment Vehicles that function as banks while avoiding regulations. Eventually this bad debt is discovered, lives are ruined, fortunes are destroyed, and real people like you and me suffer.

Psalm 73

[1] Truly God is good to Israel, even to such as are of a clean heart.
[2] But as for me, my feet were almost gone; my steps had well nigh slipped.
[3] For I was envious at the foolish, when I saw the prosperity of the wicked.
[4] For there are no bands in their death: but their strength is firm.
[5] They are not in trouble as other men; neither are they plagued like other men.
[6] Therefore pride compasseth them about as a chain; violence covereth them as a garment.
[7] Their eyes stand out with fatness: they have more than heart could wish.
[8] They are corrupt, and speak wickedly concerning oppression: they speak loftily.
[9] They set their mouth against the heavens, and their tongue walketh through the earth.
[10] Therefore his people return hither: and waters of a full cup are wrung out to them.
[11] And they say, How doth God know? and is there knowledge in the most High?
[12] Behold, these are the ungodly, who prosper in the world; they increase in riches.
[13] Verily I have cleansed my heart in vain, and washed my hands in innocency.
[14] For all the day long have I been plagued, and chastened every morning.
[15] If I say, I will speak thus; behold, I should offend against the generation of thy children.
[16] When I thought to know this, it was too painful for me;
[17] Until I went into the sanctuary of God; then understood I their end.
[18] Surely thou didst set them in slippery places: thou castedst them down into destruction.
[19] How are they brought into desolation, as in a moment! they are utterly consumed with terrors.
[20] As a dream when one awaketh; so, O Lord, when thou awakest, thou shalt despise their image.
[21] Thus my heart was grieved, and I was pricked in my reins.
[22] So foolish was I, and ignorant: I was as a beast before thee.
[23] Nevertheless I am continually with thee: thou hast holden me by my right hand.
[24] Thou shalt guide me with thy counsel, and afterward receive me to glory.
[25] Whom have I in heaven but thee? and there is none upon earth that I desire beside thee.
[26] My flesh and my heart faileth: but God is the strength of my heart, and my portion for ever.
[27] For, lo, they that are far from thee shall perish: thou hast destroyed all them that go a whoring from thee.
[28] But it is good for me to draw near to God: I have put my trust in the Lord GOD, that I may declare all thy works.

Friday, November 6, 2009

The Nature of Money

For some reason there seems to be a lot of chatter on the Internet financial pages about the nature of money. What is it? Here is my take on what I have read. Money is anything you want it to be. Money is just a device created by a society to facilitate transactions. It can be Yap stones, wampum beads, clam shells, pieces of paper, or even something as ethereal as electrons lighting the pixels on video screen. The key is belief. Everyone has to agree that Yap stones or a particular piece of paper is a window. As a member of this society, as I look through the particular window called American Dollars I see a new BMW, a vacation in Hawaii, or lunch at McDonalds. Money is ultimately based on something, most often gold or silver. Nixon cut us loose from the gold standard back in 1971. If I remember correctly, the French made a run at the American gold reserve with their stack of dollars. It was dangerously destabilizing. Nixon cut off that nonsense at the knees.

So what is the base of the American dollar? It is nothing but debt. The reality is probably more complex than can be contained in a 500 page book but here is the essence. The American government creates money by creating a debt when the Treasury Department issues a bond. This bond is sold through the Federal Reserve Bank to “primary dealers” who must make bids on this debt through an auction process. Who are these guys? “For example, Daiwa Securities and Mizuho Securities distribute the debt to Japanese buyers. BNP Paribas, Barclays, Deutsche Bank, and RBS Greenwich Capital (a division of the Royal Bank of Scotland) distribute the debt to European buyers. Goldman Sachs, and Citigroup account for many American buyers. Nevertheless, most of these firms compete internationally and in all major financial centers.” (From Wikipedia) Check into high ranking political appointees from both parties and compare their resumes to the list in the last sentence.

Then through the magic of fractional reserve banking, a dollar of debt becomes the basis of a loan that creates more debt. There are mathematical formulas that predict the outcome of such activities based on the amount of money the regulators require the banks to hold. A 10% reserve turns one dollar into nine dollars. If this was being done by someone other than the government it would constitute fraud.

Money is also a commodity that is traded for other commodities. Its value rises and falls over time depending on the supply of money compared to the supply of the goods and services. If the Federal Reserve System and the Government create too much money, its value relative to a gallon of gas drops. It pleases us to call this inflation. In the worst case scenario, the value of the currency drops to zero since it based on nothing but a government promise to pay its debt with interest. This happens fairly often, most recently in Zimbabwe. If the Federal Reserve System creates too few dollars (an unlikely scenario) the value of the dollar increases relative to the supply of goods and services causing deflation. In a worst case scenario this leads to an economic collapse as wages, prices, and profits all decline to nothing. That is happening in this country, today. Trillions and trillions of bad derivative debt has disappeared. The government is doing everything it possibly can to replace that bad debt with new debt that ultimately owed by the American taxpayer to the bond holders, such as the Chinese.

Always, even before there were the economic philosophies we call capitalism and socialism, at some point too many promises to repay some debt or obligations (such as my pension) were made by the powers that be. There simply was not enough gold or potential tax revenue to redeem all these promises, people no longer believed, and the whole edifice came crashing down. Today we live in a castle of debt built on a foundation of thin air. It will unravel in some manner at some point in time. I am just not smart enough to know how or when. Capitalism is based on greed. Socialism is based on envy. Greed and envy are two of the seven deadly sins, but Jesus transcends economic systems. There are wheels within wheels both in the earth and in the powers of the aire, but there are also wheels within wheels in Heavenly places.

Ezekiel 1

[14] And the living creatures ran and returned as the appearance of a flash of lightning.
[15] Now as I beheld the living creatures, behold one wheel upon the earth by the living creatures, with his four faces.
[16] The appearance of the wheels and their work was like unto the colour of a beryl: and they four had one likeness: and their appearance and their work was as it were a wheel in the middle of a wheel.
[17] When they went, they went upon their four sides: and they turned not when they went.
[18] As for their rings, they were so high that they were dreadful; and their rings were full of eyes round about them four.
[19] And when the living creatures went, the wheels went by them: and when the living creatures were lifted up from the earth, the wheels were lifted up.
[20] Whithersoever the spirit was to go, they went, thither was their spirit to go; and the wheels were lifted up over against them: for the spirit of the living creature was in the wheels.
[21] When those went, these went; and when those stood, these stood; and when those were lifted up from the earth, the wheels were lifted up over against them: for the spirit of the living creature was in the wheels.
[22] And the likeness of the firmament upon the heads of the living creature was as the colour of the terrible crystal, stretched forth over their heads above.
[23] And under the firmament were their wings straight, the one toward the other: every one had two, which covered on this side, and every one had two, which covered on that side, their bodies.
[24] And when they went, I heard the noise of their wings, like the noise of great waters, as the voice of the Almighty, the voice of speech, as the noise of an host: when they stood, they let down their wings.

Saturday, October 31, 2009

Debt Settlement

Those of you who follow this blog must realize that I am a suspicious soul. I have read about debt settlement companies and have even talked with one of them. I must admit my bias. One of my friends tells me from time to time that skepticism is not a spiritual gift. That said how does debt settlement work?

A company will offer to lower your credit card debt and your monthly payment. If, for example, you have $10,000 on a credit card, you have missed a couple of payments, and debt collection agencies are harassing you daily, you can call up one of these companies and they will make the following offer. We guarantee we can lower your monthly payment to $180 a month and in 36 months your debt will be completely repaid. In other words, you will settle a $10,000 debt for $6,480. Unpacking this offer a little further, I discovered that this one particular company has a relationship with some of the major credit card issuers but not with others. If you have a credit card from one of the companies in their network and they take you on as a client, they will immediately negotiate a $5,000 settlement (or maybe less, you’ll never know) with the credit card company and charge you a 15% fee on the original balance, in this case $1,500. Not surprisingly, their fee is the first thing they collect from your payments.

Sounds too good to be true, well, first of all this is something you can do yourself. Right now, the card companies are looking to clean their books and get rid of customers like you before the new law takes effect in February. This week Citibank raised the interest rates on millions of their card holders, even those with excellent payment records, apparently just to get ahead of the law. Today, companies will settle for as little as 25% of your balance, if you can pay that amount off in a lump sum, although 40%-60% is more common.

I would personally recommend that if you are in really bad trouble, seek the help of a certified credit counselor at a nonprofit agency. They will develop a personal debt management plan for your particular situation. This service should never cost more than $50 a month and frequently $30 a month or less. Know who is working with you. Research them thoroughly with the Better Business Bureau. There are a lot of dubious characters and outright criminals working in the debt relief business. Make sure you get everything in writing and make sure you understand it. Some of these companies will actually pay off the original creditor, then sell the balance of your debt to another collection agency!

If you decide to use a debt settlement service, you will no longer be threatened by collection agencies, your credit report will no longer show a current delinquency, and you will really save yourself some money. However, you will not save as much money as the pitch would lead you to believe. All of that forgiven debt is considered taxable income by the Internal Revenue Service. They will send Uncle Sam a 1099-C form indicating the amount of your windfall and you will have another debt to worry about. Please talk to a qualified tax accountant before signing anything. Finally, utilizing this service will wreck your credit score. A debt settlement rather than a debt payment will be placed on your record.

And, Hey! Let’s be very careful out there.

Monday, October 26, 2009

Paradise 2009

I am back from paradise and as before I would like to take a little time and reflect on the experience and how what I saw relates to the spiritual and financial world around me. We rented a beach house in the tiny village of Milolii (pronounced Me-Lo-Le-E), located at the foot of a 1,500 foot cliff on a black lava flow. The North section of the village is a small, scattered, development of weekend getaway cottages and vacation rentals. The South end is a rural native Hawaiian hamlet that styles itself, “The last fishing village in Hawaii.” This place is really at the end of the road or perhaps at the end of the rainbow. They did not even have electricity until 2004. There are no wells or city water. Homes have catch water tanks that capture the rain that falls on the roof of the house and main water tanks that are filled by water trucks. Our little house is a bungalow located on a lava shelf about 100 feet from the ocean. It is about a 12 foot drop from the lava to the water. Since the house uses post and beam construction the entire wall facing the Ocean is either glass or screens. Every morning I would rise before sunrise and sit in a very comfortable chair facing the ocean and drink my morning cup of coffee as the light of the sun came over the mountain behind me; nothing but the sound of the ocean, the spray from the waves hitting the rocks, and the endless expanse of the Pacific. There were usually no boats or swimmers to be seen, especially at that hour. It is a wonderful place to unpack the mind and heal the soul and the body, but there is nothing there but the rocks and the ocean. It is the kind of place Hawaiians go to get away from it all. I heard this from both a native Hawaiian camper and an Anglo-Hawaiian artist with a gallery in Kailua town (the local tourist trap). If you are looking to be entertained, or if you are afraid of spending time with yourself you would probably be happier somewhere else.

Hawaii’s economy is really a two legged stool. By far the largest component of the economy is government. Most of that is the military presence on O’ahu (Pearl Harbor). The second big component is the tourist business. Since the land is so valuable and the labor rates are high, agriculture (traditionally the third leg of the stool) has shrunk to a very small shadow of its former position. I picked up a hitch hiker who looked like a homeless guy. He turned out to be a farmer who owned a small coffee and macadamia nut holding. He is working to return 20,000 acres of the Big Island to agriculture. Currently, he informed me, the Big Island imports 85% of its foodstuffs. The island could easily be self sufficient and he is working towards that end. It is a goal that he will likely never reach, barring some world catastrophe, since it makes no economic sense. I really enjoyed this ride with an interesting, intelligent, and articulate man. He came back to Hawaii from a very bad experience in Vietnam. At first, he told me, he didn’t do so well but eventually he found the healing he needed.

I think the average Hawaiian is doing better than the small businesses that service the tourists or the state government. The unemployment rate in the state of Hawaii stands at 7.5%, about 2% below the national average. This is not good, but not a disaster. The tourist trade has dropped measurably. Since the profitability of the hotels is based on occupancy and room rate some of them are in a bit of trouble or even chapter 11 bankruptcy, but they appear to all be still in operation. I saw one large resort development that was abandoned after the foundation was poured, but only one. Want to buy a prime commercial site zoned for a resort hotel in Kailua cheap? Talk to me. Real Estate in general and commercial real estate in particular has dropped in value. Anyone could see this coming. Property was appreciating at rates of 13% per year. In our last visit to the island a local business man told me this was unsustainable. He was right.

There are a lot of empty store fronts in the big strip malls. The chain stores and franchise businesses are doing OK. The high end shops at Waikaloa Village are doing OK. The rate of growth out there is noticeably slower but everybody seems to be surviving. The rich Japanese tourist still must have money to spend. Waikaloa Village must be seen to be believed. It is a completely over the top Hawaiian version of a Las Vegas hotel complete with a canal and motor boats to take you from building to building (really). Every day at the local Walmart (save money live better) looks like the height of the Christmas rush. It is the small businessman who has taken it on the chin. The tourists aren’t coming in past numbers and those that are, including yours truly, are not spending as much money on discretionary extras. How bad is it? Last year United Airlines was running a daily Boeing 777 flight (about 370 passengers) from Chicago to Kailua Kona. Now that flight runs only two days a week. One very unhappy employee of Hilo Hattie’s, the ultimate mid level Hawaiian gift store now in Chapter 11 bankruptcy, told me the number of cruise ships visiting Kailua by mid October in 2008 was about 220. This year the number has dropped to slightly over 70. The hotel occupancy rates are down from a tradition level approaching 80% to something closer to 55%. An empty room earns nothing but still costs to maintain. Room rates are dropping but the rooms are still empty.

The loss in revenue is killing the state government. Friday public school furloughs were the big news item when we were out there. Parents were jumping up and down in rage. However, the children playing in the surf did not seem to mind the extra days of vacation. Hawaiians, as a group, are still remarkably laid back, although perhaps not quite as laid back as in years past. There are growing but not yet serious stresses between the ethnic communities. Some native Hawaiians have bought into the Hawaiian sovereignty movement and look to return to the time of the kings. Haole (white) businessmen grumble about native Hawaiians and illegal Pilipino immigration. The folks in Waiohinu, a small farming town near the South end of the island complain about the poverty, trailer trash, drug addicts, and criminals from Ocean View, the next town up the road. The folks in Ocean View blame the latest house robberies on the drug addicts from Milolii.

The economy has stressed everybody a bit, but the crime rates and stress levels in Hawaii are still so far below those of the mainland they really can’t be compared. Hawaii has had a methamphetamine drug epidemic that seems to be running its unfortunate course, as these things do. It is a particularly addictive destructive drug. As such drugs spread their victims tend to end up dead or in prison and the word gets out that the drug is every bit as dangerous as your parents are telling you. Demand decreases and the epidemic contracts, leaving the dead, ruined lives, and misery in its wake. I spoke with a psychologist who works with at risk children and abused women. She says you have to be careful asking a Hawaiian if they use drugs. They do not consider Paca Lolo (marijuana) a drug. Dat’s just the herb, brudder.

I find that Hawaii, particularly the Big Island, is a special place of healing, at least for me. I always feel better, eat better, exercise more, and find time for mindfulness when I am in the islands. On our first day in Milolii I saw a rainbow, not an unusual event in Hawaii, but this rainbow looked to end just about 20 feet out in the ocean near our house. I never before found myself literally at the end of the rainbow. I think that is symbolic of something.

John 14

[27] Peace I leave with you, my peace I give unto you: not as the world giveth, give I unto you. Let not your heart be troubled, neither let it be afraid.