This is one of those articles I have not wanted to write, but I believe it is important. Today there are approximately 27 million Americans who are either unemployed or working less than full time because the hours are just not available. The number is probably higher because unemployed Americans who have just given up and are not actively looking for work by normal government measures are no longer considered unemployed.
Thankfully, it has been almost 25 years since I last went through the job search process. It wasn’t very pleasant or productive back then, but I was blessed and found a job in research & development. I believe I sent out something on the order of 125 resumes, probably had 10 or more interviews at the University of South Carolina where I was attending engineering school, and three “traveling” interviews where I was poked, prodded, and examined on the prospective employer’s home turf.
From what I am reading, everything I ever thought I knew about searching for a job is obsolete. Sending out large numbers of general two page resumes with an individually crafted cover letter is nothing more than a waste of time and money. In fact, I read about one bank executive who lost his job. He sent out something like 1,500 resumes without so much as a nibble. From what I have read, Internet methods are not much more productive, however at least such searches do not kill trees. Something called Zoom Info got a least one good review, evidently people who actually do the hiring use this service.
So what works?
Who you know is more important than what you know.
Surprise, surprise, if your name is Rockefeller or Kennedy you will not need to be reading this article or one like it. Someone will be given the task of finding you an appropriate position in the family business. What is true of the fortunate few also seems to be true for the rest of us. It appears that a recommendation from a mutual friend to a prospective employer is worth more than 100 two page resumes with well crafted cover letters. One of the recommendations I happened upon suggested using your network to “go viral.” Find four or ten friends who are close enough that you could ask them to write letters or make phone calls on your behalf. Let them send out four or ten letters or contacts on your behalf to others who will do them the favor of passing it on, sort of a chain letter job search. I don’t know how well this might work, but a friend who knows someone in an organization where you would like to work is gold.
Cute gets mixed reviews. On a previous job search in the late seventies, I packaged a handwritten cover letter with a professionally printed resume. This was before the days of word processors and laser printers. I used a calligraphy pen and scripted the letters in Chancery Cursive. It worked, again as I recall, I sent out something like 35 resumes to get two traveling interviews and the job I wanted. Generally, delivering resumes as a singing telegram, putting your cover letters on pink stationary and other such nonsense seems to be counterproductive. One cute trick that worked; a job seeker targeted a half a dozen specific individuals, bought a cheap ad from Google that would appear if the prospective employer happened to do a Google search on his own name. Weird, but OK, but how often do people go Google searches on their own names? The aforementioned bank executive gave up the normal process. He packaged his resume with a Starbuck’s coffee mug and mailed it to specific individuals at a limited number of banks where he really wanted a job. He used a mail service, like special delivery, that required recipient’s signature. It worked.
I will close with a list I have used before from Seth Godin, http://sethgodin.typepad.com/, an author, marketing guru, self made internet millionaire, and currently a vice president of Yahoo. Although it was specifically targeted at new college graduates, I believe it is of value to others who seek employment. Here is the list (directly from Seth’s blog) of activities that he believes will turn an unemployed college graduate into the kind of prospective employee corporate recruiters dream about in a year or less.
• Spend twenty hours a week running a project for a non-profit.
• Teach yourself Java, HTML, Flash, PHP and SQL. Not a little, but mastery. [Clarification: I know you can't become a master programmer of all these in a year. I used the word mastery to distinguish it from 'familiarity' which is what you get from one of those Dummies type books. I would hope you could write code that solves problems, works and is reasonably clear, not that you can program well enough to work for Joel Spolsky. Sorry if I ruffled feathers.]
• Volunteer to coach or assistant coach a kids sports team.
• Start, run and grow an online community.
• Give a speech a week to local organizations.
• Write a regular newsletter or blog about an industry you care about.
• Learn a foreign language fluently.
• Write three detailed business plans for projects in the industry you care about.
• Self-publish a book.
• Run a marathon.
Good luck, my prayers are with you.
Saturday, June 26, 2010
Saturday, June 19, 2010
The Jack of Diamonds and His Queen of Hearts
No secrets. If you or your spouse spend more than the cost of a CD or a paperback book on something, decide on that expense together, as a couple. There are exceptions. My wife does not want to know about the power bill, tires on her car, or specialized tools she does not understand. Set your own rules and limits for your own marriage and stick to them.
Number 6 on my list of 10 basic financial rules for young couples is no secrets. At the time I came up with this list, I was particularly pleased with myself because I hadn’t heard such advice in any similar list. Since then I have found it in other places, but sadly it seems to be overlooked by many financial advisors. It is critical. Hiding expenses from your spouse is a recipe for disaster. Whether your secret vice is shoes or tools you will be found out.
This rule also applies to activities that are an expense in both time and money. Golf, for example, can become an expensive hobby. $75 in green fees, $200 titanium drivers, a half a dozen lost balls, five hours for a round on a public course, an hour to drive to and from the course, and a couple of hours drinking with your friends in the club house constitute a major expense in both time and money. Your wife might have other ideas on how to better invest your time and money.
Over the years I have listened on and off to a local radio show featuring four men, now moving into their forties. They talk about sports and their lives, just like any four guys sitting around a table. I guess they have been on and off the air for close to 20 years. I have heard their problems with first women in general, then their wives, and now their children. Occasionally, their wives react to their hobbies with anger or amazement. One told a story of a video game he would play for hours, always to get killed at the same spot in the game. His wife could not understand how in the world he could keep doing something so stupid and futile. Another admitted his wife was right about his video game addiction. She was dealing with an angry toddler, screaming and grabbing her leg at a time when she needed to breast feed their newborn. Her husband, hypnotized by his video game, did not come to her rescue until she walked into the game room on the verge of tears, demanding his assistance. Now they are worried about their sons, who don’t like to study but will spend hours playing on line video games with total strangers. They just don’t understand how their progeny could waste so much time in such a futile pursuit.
As the Chinese say, “Young pigs grunt like old pigs grunted before.”
Their current obsession is poker, a pastime popular with the under forty crowd. It is a game in which skill plays a greater role than luck. A player must both understand the mathematics of their hands and possess the psychological ability to both read and manipulate their opponents. They play it all the time, with friends, at an occasional tournament in Atlantic City, or sometimes for hours on the computer. As one of the more popular drive time radio shows in the Baltimore Washington metropolitan area, they are pretty well off today and probably can afford what they lose.
As long as their wives understand how much this is costing the family in time and money and are comfortable with such expenditures it will be OK. I would suggest a separate poker account containing a finite amount of money and perhaps a finite number of hours per month. Husbands and wives need to cut each other some slack in these matters, but if one of these guys starting hiding his losses or spending more time with the jack of diamonds than his queen of hearts can handle, look out.
Number 6 on my list of 10 basic financial rules for young couples is no secrets. At the time I came up with this list, I was particularly pleased with myself because I hadn’t heard such advice in any similar list. Since then I have found it in other places, but sadly it seems to be overlooked by many financial advisors. It is critical. Hiding expenses from your spouse is a recipe for disaster. Whether your secret vice is shoes or tools you will be found out.
This rule also applies to activities that are an expense in both time and money. Golf, for example, can become an expensive hobby. $75 in green fees, $200 titanium drivers, a half a dozen lost balls, five hours for a round on a public course, an hour to drive to and from the course, and a couple of hours drinking with your friends in the club house constitute a major expense in both time and money. Your wife might have other ideas on how to better invest your time and money.
Over the years I have listened on and off to a local radio show featuring four men, now moving into their forties. They talk about sports and their lives, just like any four guys sitting around a table. I guess they have been on and off the air for close to 20 years. I have heard their problems with first women in general, then their wives, and now their children. Occasionally, their wives react to their hobbies with anger or amazement. One told a story of a video game he would play for hours, always to get killed at the same spot in the game. His wife could not understand how in the world he could keep doing something so stupid and futile. Another admitted his wife was right about his video game addiction. She was dealing with an angry toddler, screaming and grabbing her leg at a time when she needed to breast feed their newborn. Her husband, hypnotized by his video game, did not come to her rescue until she walked into the game room on the verge of tears, demanding his assistance. Now they are worried about their sons, who don’t like to study but will spend hours playing on line video games with total strangers. They just don’t understand how their progeny could waste so much time in such a futile pursuit.
As the Chinese say, “Young pigs grunt like old pigs grunted before.”
Their current obsession is poker, a pastime popular with the under forty crowd. It is a game in which skill plays a greater role than luck. A player must both understand the mathematics of their hands and possess the psychological ability to both read and manipulate their opponents. They play it all the time, with friends, at an occasional tournament in Atlantic City, or sometimes for hours on the computer. As one of the more popular drive time radio shows in the Baltimore Washington metropolitan area, they are pretty well off today and probably can afford what they lose.
As long as their wives understand how much this is costing the family in time and money and are comfortable with such expenditures it will be OK. I would suggest a separate poker account containing a finite amount of money and perhaps a finite number of hours per month. Husbands and wives need to cut each other some slack in these matters, but if one of these guys starting hiding his losses or spending more time with the jack of diamonds than his queen of hearts can handle, look out.
Sunday, June 13, 2010
“Après moi le déluge”
This famous quote has been attributed to Louis XV, King of France or some believe it was first said by his mistress, Madame de Pompadour. It can be translated as, “After me the flood,” or, “After me the end.”
The spirit of Louis is alive and well in the halls of American government. David Paterson, the Governor of New York has agreed to allow the State and municipalities to borrow $6 Billion dollars from the state pension fund to make payments, required by law, to---the state pension fund. (Really!)
Due to the market crash combined with a significant drop in tax revenue, pension costs are soaring. The State and its municipalities can not meet their payments without further cuts to services or increases in tax rates, neither are politically acceptable solutions. The scheme calls for the debt to be repaid by 2013 with up to an additional $1.85 Billion in interest. The politicians, as the song says, are “wishing, and hoping, and thinking, and praying,” that a large run up in the market that would exceed their expected return of 8% per year. For the most recent decade the stock market has provided a slightly negative return on investment. Curiously, the State while expecting returns of 8% on its other investments will only be charging itself 4.5% to 5.5% for this loan.
New York State currently faces a $9.2 Billion deficit for this fiscal year. Their governor and representatives have still not figured out how to close this gap, although they are considering more borrowing.
An even more egregious example of King Louis’s behavior can be found in the State of Arizona where politicians plan to mortgage their Supreme Court Building, the Schools for the Deaf and the Blind, and a number of other properties for $300 Million to meet current operating expenses. The notes are scheduled to be repaid between 2012 and 2029.
When an individual begins to use borrowed money (credit cards) to meet current operating expenses, be assured, the end is near. These are the actions of a State or an individual headed for bankruptcy.
Oh, by the way.
Louis XVI, the successor of the aforementioned Louis XV, was removed from office and arrested during the Insurrection of August 10, 1792. He was tried by the Revolution, found guilty of treason, and executed on the guillotine on January 21, 1793.
The spirit of Louis is alive and well in the halls of American government. David Paterson, the Governor of New York has agreed to allow the State and municipalities to borrow $6 Billion dollars from the state pension fund to make payments, required by law, to---the state pension fund. (Really!)
Due to the market crash combined with a significant drop in tax revenue, pension costs are soaring. The State and its municipalities can not meet their payments without further cuts to services or increases in tax rates, neither are politically acceptable solutions. The scheme calls for the debt to be repaid by 2013 with up to an additional $1.85 Billion in interest. The politicians, as the song says, are “wishing, and hoping, and thinking, and praying,” that a large run up in the market that would exceed their expected return of 8% per year. For the most recent decade the stock market has provided a slightly negative return on investment. Curiously, the State while expecting returns of 8% on its other investments will only be charging itself 4.5% to 5.5% for this loan.
New York State currently faces a $9.2 Billion deficit for this fiscal year. Their governor and representatives have still not figured out how to close this gap, although they are considering more borrowing.
An even more egregious example of King Louis’s behavior can be found in the State of Arizona where politicians plan to mortgage their Supreme Court Building, the Schools for the Deaf and the Blind, and a number of other properties for $300 Million to meet current operating expenses. The notes are scheduled to be repaid between 2012 and 2029.
When an individual begins to use borrowed money (credit cards) to meet current operating expenses, be assured, the end is near. These are the actions of a State or an individual headed for bankruptcy.
Oh, by the way.
Louis XVI, the successor of the aforementioned Louis XV, was removed from office and arrested during the Insurrection of August 10, 1792. He was tried by the Revolution, found guilty of treason, and executed on the guillotine on January 21, 1793.
Friday, June 11, 2010
Panic Sufficiently Before Everyone Else Does
“panic sufficiently before everyone else does”
John Hussman
I have been asked to translate “Extraordinarily Large Band-Aids,” an article written by the very erudite fund manager, John Hussman into English. This will not be an easy task. In a sentence, Hussman believes that in the remainder of 2010 there is an 80% chance for a major drop in all stock market indices and a double dip in the recession. His worries stem from an exceedingly rare combination of negative indicators. He recommends that even buy and hold investors should consider altering their strategy by lowering their exposure to market risk in small steps. In other words, he advises the individual investor to start moving out of stocks and into bonds and cash. The exception to this rule would be precious metals. Here he recommends building a small position. He is not recommending short selling or other forms of “bearish speculation” even though he is limiting risk to his own fund by a option strategy that is somewhat similar to short selling with a small guaranteed return (similar to interest from a bond) no matter how the market actually moves.
Hussman is frightened by what he perceives as an unreasonable overvaluation of stocks by the markets, combined with very bad technical indicators, persistently high unemployment, irresponsible behavior by the world’s governments, and a large unaddressed overhang of bad debt that needs to be repudiated or restructured since it will never be repaid.
Currently the Government’s four week moving average is reporting about 468,000 new unemployment claims. Hussman believes this to be the single most useful unemployment statistic. In a “flat” condition in which no net new jobs were either created or destroyed, the four week moving average would be expected to run between 400,000 and 425,000. Therefore, even with a significant spike due to the creation of a large number of temporary census jobs, the country is experiencing a net loss of more than 40,000 jobs per week. Remember, due to an increasing population, the U.S. requires a growth of approximately 120,000 new jobs a month just to stay even.
Hussman considers the rescue of Greece, bad banks, Hungary, Spain, General Motors, Fannie Mae, and Freddie Mac by the governments of the developed world to be reckless and irresponsible. At these levels (multiple trillions of dollars), he views using more debt to cover existing bad debt as simple, unsustainable insanity. Also, he considers the moral hazard associated with rescuing rich irresponsible bankers and nations with tax revenue taken from hard working, responsible citizens to be morally repugnant.
He points out that while hope generated by government stimulus packages are the only possible reason the markets have been on a tear from March 2009 until May 2010, they are not producing the desired increase in the Gross Domestic Product. In fact the current level of GDP growth excluding Federal Deficit Expenditures, although improved since the depths of the current Great Recession is still at the second lowest level since 1961.
To better understand Hussman’s technical concerns, I read his article from May 24 as he does not detail these factors in his current post. In mid-May Hussman observed a rare collapse in market internals. The number of declining stocks compared with the number of advancing stocks was at a historically high ratio. This was combined with a “leadership reversal” in which the number of new 52 week lows exceeded the number of new 52 week highs. These two events have only simultaneously occurred 19 times in the last 50 years. Following such an event, on average, the S&P lost another 7% within 12 weeks and 20% within the next year.
To protect himself and his investors from these potential risks, Hussman indicates his largest single position is in 3 to 4 year treasuries. As mentioned earlier he is building a 4% position in precious metals and a similar position in foreign currency (although he does not state which foreign currencies). Given his opinion of European policy, I believe we can safely assume he is not buying Euros. In addition, Hussman is “hedging” his fund’s positions in the S&P and similar indices by writing calls and buying puts.
Hussman states, “The Strategic Growth Fund remains fully hedged. A few side notes - when the long put / short call combinations we use to hedge have the same strike price and expiration, as our S&P 500 combinations do, the combination behaves as an interest bearing short sale on the underlying index, regardless of the level of implied volatility.”
I will not pretend I understand what he is doing, as I am still working up the nerve to write some covered calls on my own portfolio. However, let me add this basic information courtesy of liffe.optioneasy.com.
Writing a call or what is sometimes called a short call assumes:
1. belief that stock will fall (bearish outlook);
2. maximum reward limited to premium received;
3. risk potentially unlimited (as stock price rises); My note: this is only true if the option is not covered.
4. can be combined with another position to limit the risk.
Buying a put or what is sometimes called a long put
1. belief that stock will fall (bearish outlook);
2. risk limited to premium paid;
3. unlimited maximum reward up to the Strike Price less the premium paid.
And, Please! Please! Please! Let’s be careful out there.
John Hussman
I have been asked to translate “Extraordinarily Large Band-Aids,” an article written by the very erudite fund manager, John Hussman into English. This will not be an easy task. In a sentence, Hussman believes that in the remainder of 2010 there is an 80% chance for a major drop in all stock market indices and a double dip in the recession. His worries stem from an exceedingly rare combination of negative indicators. He recommends that even buy and hold investors should consider altering their strategy by lowering their exposure to market risk in small steps. In other words, he advises the individual investor to start moving out of stocks and into bonds and cash. The exception to this rule would be precious metals. Here he recommends building a small position. He is not recommending short selling or other forms of “bearish speculation” even though he is limiting risk to his own fund by a option strategy that is somewhat similar to short selling with a small guaranteed return (similar to interest from a bond) no matter how the market actually moves.
Hussman is frightened by what he perceives as an unreasonable overvaluation of stocks by the markets, combined with very bad technical indicators, persistently high unemployment, irresponsible behavior by the world’s governments, and a large unaddressed overhang of bad debt that needs to be repudiated or restructured since it will never be repaid.
Currently the Government’s four week moving average is reporting about 468,000 new unemployment claims. Hussman believes this to be the single most useful unemployment statistic. In a “flat” condition in which no net new jobs were either created or destroyed, the four week moving average would be expected to run between 400,000 and 425,000. Therefore, even with a significant spike due to the creation of a large number of temporary census jobs, the country is experiencing a net loss of more than 40,000 jobs per week. Remember, due to an increasing population, the U.S. requires a growth of approximately 120,000 new jobs a month just to stay even.
Hussman considers the rescue of Greece, bad banks, Hungary, Spain, General Motors, Fannie Mae, and Freddie Mac by the governments of the developed world to be reckless and irresponsible. At these levels (multiple trillions of dollars), he views using more debt to cover existing bad debt as simple, unsustainable insanity. Also, he considers the moral hazard associated with rescuing rich irresponsible bankers and nations with tax revenue taken from hard working, responsible citizens to be morally repugnant.
He points out that while hope generated by government stimulus packages are the only possible reason the markets have been on a tear from March 2009 until May 2010, they are not producing the desired increase in the Gross Domestic Product. In fact the current level of GDP growth excluding Federal Deficit Expenditures, although improved since the depths of the current Great Recession is still at the second lowest level since 1961.
To better understand Hussman’s technical concerns, I read his article from May 24 as he does not detail these factors in his current post. In mid-May Hussman observed a rare collapse in market internals. The number of declining stocks compared with the number of advancing stocks was at a historically high ratio. This was combined with a “leadership reversal” in which the number of new 52 week lows exceeded the number of new 52 week highs. These two events have only simultaneously occurred 19 times in the last 50 years. Following such an event, on average, the S&P lost another 7% within 12 weeks and 20% within the next year.
To protect himself and his investors from these potential risks, Hussman indicates his largest single position is in 3 to 4 year treasuries. As mentioned earlier he is building a 4% position in precious metals and a similar position in foreign currency (although he does not state which foreign currencies). Given his opinion of European policy, I believe we can safely assume he is not buying Euros. In addition, Hussman is “hedging” his fund’s positions in the S&P and similar indices by writing calls and buying puts.
Hussman states, “The Strategic Growth Fund remains fully hedged. A few side notes - when the long put / short call combinations we use to hedge have the same strike price and expiration, as our S&P 500 combinations do, the combination behaves as an interest bearing short sale on the underlying index, regardless of the level of implied volatility.”
I will not pretend I understand what he is doing, as I am still working up the nerve to write some covered calls on my own portfolio. However, let me add this basic information courtesy of liffe.optioneasy.com.
Writing a call or what is sometimes called a short call assumes:
1. belief that stock will fall (bearish outlook);
2. maximum reward limited to premium received;
3. risk potentially unlimited (as stock price rises); My note: this is only true if the option is not covered.
4. can be combined with another position to limit the risk.
Buying a put or what is sometimes called a long put
1. belief that stock will fall (bearish outlook);
2. risk limited to premium paid;
3. unlimited maximum reward up to the Strike Price less the premium paid.
And, Please! Please! Please! Let’s be careful out there.
Sunday, June 6, 2010
Cycled,Recycled,and Super Cycled
“The essential truth of the Super Cycle does not vary: Booms in one sector are built on the strength of busts in another”
This week, while on work related travel, I read Super Cycles by Arun Motianey, formerly managing director of macro research and strategy at Citigroup. His ideas are to a degree a repudiation of those things he has believed for most of his career. In order to better explain recent events he has proposed a phenomenon he describes as Super Cycles. It is not a mystically or psychologically deterministic cycle such as Kondratieff Seasons or Elliot Waves seem to be, but conclusions based on an analysis of a little over a century of data. The author’s treatment of this data seems a bit Procrustean but less so than much of economic theory that tries to force irrational behavior into mathematical equations that pretend human economic activity is as predictable as the motion of the moon and the stars.
Here then is my simplistic and perhaps a little ridiculous effort to explain a very complex theory.
Once upon a time 80% of the world’s acorn production came from Bugblonian oak trees. Then the Mongol general, Arful invaded Bugblonia, burned down the forests and planted grass for his horses.
The shortages in the acorn market sent the prices for this essential component of hog feed through the roof. Every person with an oak tree in his yard started collecting and selling acorns. Industrious and courageous entrepreneurs bought forest land with borrowed money and began large scale production of acorns. They knew that the price for acorns was accelerating so rapidly they could not help but make money. As this trend continued, these businessmen bought more land and planted more oak trees. After a few years, the price of acorns stabilized and in order to meet payments on their debt, the acorn producers were forced to increase production and lower price. Finally, overcapacity and excess debt on land only marginally capable of producing acorns led to the great acorn panic of 1422. All over the known world business, faced with bankruptcy, dropped the price of acorns and the value of their underlying currencies to almost nothing.
Then a curious thing occurred. The drop in acorn prices fueled an enormous boom in the manufactured hog feed industry. The price of hog feed was still high but acorns, the base component in hog feed, had dropped to a fraction of its former cost. Once again ambitious industrious men saw an opportunity for profit, borrowed money, increased the size of their factories, bought expensive new technologically advanced equipment to process hog feed and made a ton of money. Corporations in other businesses saw that huge fortunes were being made in this industry, and so opened their own hog food processing divisions. Guess what happened. The availability of processed hog feed increased and the price dropped, leading to the catastrophic great depression of 1434 to 1450 and the collapse of over 1,000 banks all over the worlds.
Then the same phenomenon repeated itself as the producers of hog meat took advantage of the collapse in the cost of hog food and increased the production of ham, bacon, and baby back ribs. Once again there was a price to pay for excessive exuberance and overproduction of hog meat and the price dropped. This presented a wonderful opportunity for the consumers of bacon and the bacon restaurants that serviced their gluttony. The consumers took out second mortgages on their homes so they could bring home more bacon. The restaurant business took off as fortunes were made in spiral cut ham, BLT sandwiches, and all you can eat barbeque businesses.
Then the collapse of 1478 took down the large advanced economies of the world based on bacon consumption and the pork service industry.
We are the bacon consumers and owners of the restaurants and food service businesses in this little story. In 2010, the United States finds itself drowning in an ocean of consumer debt. Our service industries including the ultra-critical financial service industry are overwhelmed with their own bad debt. Finally, our governments both local and Federal have made too many promises that can not be honored, both to our creditors such as China and to our own people who expect to collect Social Security some day.
The author sees no way out until this excess of bad debt is repaid or repudiated. He believes there is nothing the governments of the advanced world can do to make the situation any better. They can only postpone the inevitable which, by the way, will make the final cataclysm that much worse. The author contends we can only choose our own means of execution, a quick violent death in the electric chair of inflation, a longer suffocating death in gas chamber of another Great Depression, or most likely given political realities, a prolonged death by strangulation on the gallows of stagflation.
The author favors a short violent inflation that would cause American household income in the service sector to drop 20% in real terms when compared to the value of commodities. He offers investment advice for all of these three eventualities, but I save that for another day.
This week, while on work related travel, I read Super Cycles by Arun Motianey, formerly managing director of macro research and strategy at Citigroup. His ideas are to a degree a repudiation of those things he has believed for most of his career. In order to better explain recent events he has proposed a phenomenon he describes as Super Cycles. It is not a mystically or psychologically deterministic cycle such as Kondratieff Seasons or Elliot Waves seem to be, but conclusions based on an analysis of a little over a century of data. The author’s treatment of this data seems a bit Procrustean but less so than much of economic theory that tries to force irrational behavior into mathematical equations that pretend human economic activity is as predictable as the motion of the moon and the stars.
Here then is my simplistic and perhaps a little ridiculous effort to explain a very complex theory.
Once upon a time 80% of the world’s acorn production came from Bugblonian oak trees. Then the Mongol general, Arful invaded Bugblonia, burned down the forests and planted grass for his horses.
The shortages in the acorn market sent the prices for this essential component of hog feed through the roof. Every person with an oak tree in his yard started collecting and selling acorns. Industrious and courageous entrepreneurs bought forest land with borrowed money and began large scale production of acorns. They knew that the price for acorns was accelerating so rapidly they could not help but make money. As this trend continued, these businessmen bought more land and planted more oak trees. After a few years, the price of acorns stabilized and in order to meet payments on their debt, the acorn producers were forced to increase production and lower price. Finally, overcapacity and excess debt on land only marginally capable of producing acorns led to the great acorn panic of 1422. All over the known world business, faced with bankruptcy, dropped the price of acorns and the value of their underlying currencies to almost nothing.
Then a curious thing occurred. The drop in acorn prices fueled an enormous boom in the manufactured hog feed industry. The price of hog feed was still high but acorns, the base component in hog feed, had dropped to a fraction of its former cost. Once again ambitious industrious men saw an opportunity for profit, borrowed money, increased the size of their factories, bought expensive new technologically advanced equipment to process hog feed and made a ton of money. Corporations in other businesses saw that huge fortunes were being made in this industry, and so opened their own hog food processing divisions. Guess what happened. The availability of processed hog feed increased and the price dropped, leading to the catastrophic great depression of 1434 to 1450 and the collapse of over 1,000 banks all over the worlds.
Then the same phenomenon repeated itself as the producers of hog meat took advantage of the collapse in the cost of hog food and increased the production of ham, bacon, and baby back ribs. Once again there was a price to pay for excessive exuberance and overproduction of hog meat and the price dropped. This presented a wonderful opportunity for the consumers of bacon and the bacon restaurants that serviced their gluttony. The consumers took out second mortgages on their homes so they could bring home more bacon. The restaurant business took off as fortunes were made in spiral cut ham, BLT sandwiches, and all you can eat barbeque businesses.
Then the collapse of 1478 took down the large advanced economies of the world based on bacon consumption and the pork service industry.
We are the bacon consumers and owners of the restaurants and food service businesses in this little story. In 2010, the United States finds itself drowning in an ocean of consumer debt. Our service industries including the ultra-critical financial service industry are overwhelmed with their own bad debt. Finally, our governments both local and Federal have made too many promises that can not be honored, both to our creditors such as China and to our own people who expect to collect Social Security some day.
The author sees no way out until this excess of bad debt is repaid or repudiated. He believes there is nothing the governments of the advanced world can do to make the situation any better. They can only postpone the inevitable which, by the way, will make the final cataclysm that much worse. The author contends we can only choose our own means of execution, a quick violent death in the electric chair of inflation, a longer suffocating death in gas chamber of another Great Depression, or most likely given political realities, a prolonged death by strangulation on the gallows of stagflation.
The author favors a short violent inflation that would cause American household income in the service sector to drop 20% in real terms when compared to the value of commodities. He offers investment advice for all of these three eventualities, but I save that for another day.
Saturday, June 5, 2010
The Friends and Family Plan
Recently while exploring a pastoral blog, I saw an interesting comment on money. This pastor claimed that money could be spent, given away, saved, invested, or loaned out. He claimed these were the only five options. I thought this odd as loans are a form of investment. For example, I give you $100,000 to buy a house. You give me a mortgage that pays 5.5% interest on the outstanding balance for the next 30 years, guaranteeing me an income in my old age. I speculate that the pastor was thinking in terms of no interest loans made to friends and family, a subject I have never covered in this blog.
My advice is very simple.
Do not loan any money to a friend or a family member that you can not afford to lose.
On the day you give such a person any money, consider it lost or given to God. Otherwise, you are risking the destruction of that friendship or the alienation of the family member.
That said, one of the costs of human relationships is sharing your bounty with less fortunate friends and family members. Knowing when to lend and how much to lend should be a subject of prayer and serious reflection. Often lending or giving money to the wrong person at the wrong time will actually exacerbate already bad situations. Credit card junkies and drug addicts will not be made whole with your money.
I do not consider the small loans we give one another at lunchtime or at the coffee machine a part of this discussion. That is just something we do. Different people have different feelings about the nature of these small gifts of fellowship. Some will repay every penny. Some will consider it a gift they will repay by showing similar generosity to another in a similar situation. In either case they are not worth worrying about unless your office contains one of those people who are always taking and never giving. Such people cause these informal systems of good will to break down.
What I am discussing is sizable loans made to friends or family members. Sizable, of course, is a function of your wealth at any given point in time. I have made a number of such loans. I have always considered such money lost until proven otherwise. Generally, my results have been pretty good.
Only once did the recipient of such a loan fail to repay anything. I knew that would happen and told my wife, “You know that money is gone.” As a condition of this loan, I required my wife to promise if that loan was not repaid, we would never loan another penny to the person in question. This is probably a good rule of thumb in such situations. Throwing good money after bad seldom accomplishes anything positive.
On two occasions with two different individuals, I made loans to folks who had no real means of repaying those loans at any time in the foreseeable future. When they asked me for money, they were honest about their situation and promised to repay when they could. And they did. One repaid me in small amounts over an extended period of time. It was not money he could easily afford, but he repaid every penny. The other didn’t pay me anything for a couple of years, then repaid it all over several months once his situation improved. Actually, he paid a little more than he borrowed. Both showed themselves to be honorable in my eyes and I believe also in the eyes of God. May their reward be great.
One such loan was something of a disappointment. The individual in question borrowed money under well defined terms (so much a month for so many months payable on the first of each month). This person was capable of meeting these payments. I was just offering a better rate (0%) than the finance company. Over the term of the loan, this person was late on a number of the payments. When this occurred, I simply told them, as scripture suggests, to consider that payment forgiven. Although this person accepted my generosity, I don’t think they liked it very much. In the course of time, I discovered I did not really have a friendship with this person, rather they considered me an acquaintance.
Don’t be guilt manipulated by irresponsible friends or family members, but from time to time, after prayerful consideration, don’t be afraid to lend money to others who find themselves in an unfortunate bind or are just in need of a little help to greatly improve their situation. Such loans are gifts made to God. Trust him to repay.
Exodus 22:25-26 (NIV)
If you lend money to one of my people among you who is needy, do not be like a moneylender; charge him no interest. If you take your neighbour's cloak as a pledge, return it to him by sunset.
Psalm 37:21 (NIV)
The wicked borrow and do not repay, but the righteous give generously.
Psalm 112:5 (NLT)
Good comes to those who lend money generously and conduct their business fairly.
My advice is very simple.
Do not loan any money to a friend or a family member that you can not afford to lose.
On the day you give such a person any money, consider it lost or given to God. Otherwise, you are risking the destruction of that friendship or the alienation of the family member.
That said, one of the costs of human relationships is sharing your bounty with less fortunate friends and family members. Knowing when to lend and how much to lend should be a subject of prayer and serious reflection. Often lending or giving money to the wrong person at the wrong time will actually exacerbate already bad situations. Credit card junkies and drug addicts will not be made whole with your money.
I do not consider the small loans we give one another at lunchtime or at the coffee machine a part of this discussion. That is just something we do. Different people have different feelings about the nature of these small gifts of fellowship. Some will repay every penny. Some will consider it a gift they will repay by showing similar generosity to another in a similar situation. In either case they are not worth worrying about unless your office contains one of those people who are always taking and never giving. Such people cause these informal systems of good will to break down.
What I am discussing is sizable loans made to friends or family members. Sizable, of course, is a function of your wealth at any given point in time. I have made a number of such loans. I have always considered such money lost until proven otherwise. Generally, my results have been pretty good.
Only once did the recipient of such a loan fail to repay anything. I knew that would happen and told my wife, “You know that money is gone.” As a condition of this loan, I required my wife to promise if that loan was not repaid, we would never loan another penny to the person in question. This is probably a good rule of thumb in such situations. Throwing good money after bad seldom accomplishes anything positive.
On two occasions with two different individuals, I made loans to folks who had no real means of repaying those loans at any time in the foreseeable future. When they asked me for money, they were honest about their situation and promised to repay when they could. And they did. One repaid me in small amounts over an extended period of time. It was not money he could easily afford, but he repaid every penny. The other didn’t pay me anything for a couple of years, then repaid it all over several months once his situation improved. Actually, he paid a little more than he borrowed. Both showed themselves to be honorable in my eyes and I believe also in the eyes of God. May their reward be great.
One such loan was something of a disappointment. The individual in question borrowed money under well defined terms (so much a month for so many months payable on the first of each month). This person was capable of meeting these payments. I was just offering a better rate (0%) than the finance company. Over the term of the loan, this person was late on a number of the payments. When this occurred, I simply told them, as scripture suggests, to consider that payment forgiven. Although this person accepted my generosity, I don’t think they liked it very much. In the course of time, I discovered I did not really have a friendship with this person, rather they considered me an acquaintance.
Don’t be guilt manipulated by irresponsible friends or family members, but from time to time, after prayerful consideration, don’t be afraid to lend money to others who find themselves in an unfortunate bind or are just in need of a little help to greatly improve their situation. Such loans are gifts made to God. Trust him to repay.
Exodus 22:25-26 (NIV)
If you lend money to one of my people among you who is needy, do not be like a moneylender; charge him no interest. If you take your neighbour's cloak as a pledge, return it to him by sunset.
Psalm 37:21 (NIV)
The wicked borrow and do not repay, but the righteous give generously.
Psalm 112:5 (NLT)
Good comes to those who lend money generously and conduct their business fairly.
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