In his blog Scott Adams, author of Dilbert, provides often quite intelligent and interesting thoughts. In a recent post he wrote on investing and Diversification:
I didn’t own much in the way of stocks for the past several years, thanks to not using professional advisors. A big chunk of my money has been in California Municipal bonds of various types, and all are insured.
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In order to diversify more, I started migrating money over to the stock market during this recent plunge. The market could go a lot lower still, but this is either the beginning of the end of the United States as we know it, in which case it doesn’t matter how I invested, or it is a once-in-a-lifetime stock buying opportunity. It was an easy decision.
Related: Stock Market Decline – Warren Buffett on Diversification – Investment Allocations Make A Big Difference
The USA national debt decreased almost $1 billion yesterday. If it decreased by $1 billion dollars a day in just 10,526 days the USA government would be out of debt. That is just under 29 years, that doesn’t seem so bad. Unfortunately the decrease yesterday is not likely the start of a new trend (it is just daily variation).
In the last month the debt is up over $580 Billion. At that rate, well lets just say if that rate continued long we would be in even more serious trouble than we have been placed in by the amazingly irresponsible behavior of the politicians increasing taxes on our grandchildren (with massive spending they chose to fund by huge tax increases on our grandchildren) have been doing the last 5 years. In the last year they have spent $1.46 Trillion more than they paid for (which will have to be paid for by future taxes – although the recent decision to purchase $125 billion in bank stocks perhaps opens another option for the the government to start buying companies and use profits they make to pay off the debt they are taking on).
The current debt stands at $10,525,823,144,117. That is a bit over $10.5 Trillion.
Related: True Level of USA Federal Deficit – USA Federal Debt Now $516,348 Per Household – Washington Paying Out Money it Doesn’t Have
On Tuesday the United States Treasury department purchased $125 billion of bank stocks becoming one of the largest stockholders in the world instantly.
$25 billion was invested in Citigroup, JPMorgan Chase and Wells Fargo.
$15 billion was invested in Bank of America and $10 billion in Merrill Lynch (which is being acquired by Bank of America).
$10 billion was invested in Goldman Sachs and Morgan Stanley. And the treasury department invested $3 billion in Bank of New York Mellon $2 billion in State Street.
Related: Goldman Sachs Rakes In Profit in Credit Crisis (Nov 2007) – Warren Buffett Webcast on the Credit Crisis – Rodgers on the US and Chinese Economies (Feb 2008) – Credit Crisis
Long term care insurance is an important part of a personal financial portfolio. It provides insurance for for expenses beyond medical and nursing care for chronic illnesses (assisted living expenses). So while looking at your personal finance insurance needs (health insurance, disability insurance, automobile insurance, homeowners [or rental] insurance [with personal liability insurance – or separate personal liability insurance] and life insurance don’t forget to consider long term care insurance.
Can You Afford Long-Term-Care Insurance?
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AARP estimates that a 65-year-old in good health can expect to pay between $2,000 and $3,000 a year for a policy that covers nursing-home and home care.
“About 70 percent of individuals over age 65 will require at least some type of long-term care services during their lifetime. Over 40 percent will need care in a nursing home for some period of time.” – National Clearinghouse for Long-Term Care Information
Advice on buying long term care insurance from AARP, the Department of Health and Human Services and Consumer Reports.
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Farmer in Chief by Michael Pollan
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Spending on health care has risen from 5 percent of national income in 1960 to 16 percent today, putting a significant drag on the economy. The goal of ensuring the health of all Americans depends on getting those costs under control. There are several reasons health care has gotten so expensive, but one of the biggest, and perhaps most tractable, is the cost to the system of preventable chronic diseases. Four of the top 10 killers in America today are chronic diseases linked to diet: heart disease, stroke, Type 2 diabetes and cancer.
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You cannot expect to reform the health care system, much less expand coverage, without confronting the public-health catastrophe that is the modern American diet.
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It must be recognized that the current food system — characterized by monocultures of corn and soy in the field and cheap calories of fat, sugar and feedlot meat on the table — is not simply the product of the free market. Rather, it is the product of a specific set of government policies that sponsored a shift from solar (and human) energy on the farm to fossil-fuel energy.
Read the full, long, interesting article. I have discussed both the failed special interest focused federal spending on farmers and the failed health care system.
Related: Farming Without Subsidies in New Zealand – Eat food. Not too much. Mostly plants. – International Health Care System Performance – USA Paying More for Health Care –
Greenspan Says He Was Wrong On Regulation
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Even Greenspan seemed genuinely perplexed yesterday by all that had happened, hard-pressed to explain how formerly fundamental truths about how markets work could have proved so wrong.
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“When bubbles cause huge problems is when they cause the financial sector to seize up,” said Frederic S. Mishkin, a Columbia University economist and, until recently, Fed governor. “The right way to deal with that kind of bubble is not with monetary policy,” but with bank supervision and other regulatory powers.
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While endorsing some expanded regulation yesterday, such as requiring the companies that combine large numbers of loans into securities to hold on to significant numbers of those securities, he also repeatedly retreated to his libertarian-leaning roots, and warned of the dangers of overreacting.
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“I made a mistake,” Greenspan said, “in presuming that the self-interests of organizations, specifically banks and others, were such as that they were best capable of protecting their own shareholders and their equity in the firms.”
The key is to strive for properly functioning markets. Unfortunately that does not mean allowing those that give large payments to politicians to foist huge risks on the economy by exempting themselves from sensible regulation. I guess some people get confused that the benefits of “free markets” are not the same as standing back and allowing powerful interests to manipulate markets and risk economies. The benefits of a free market are provided to the economy when the market is free not when large, powerful organizations are allowed to exert undue influence on markets.
I don’t really understand how people could think “free markets” are about letting special interests be free to manipulate markets. It is not really something that should be confusing to people that have thought enough to have an opinion on the benefits of free markets. The dangers of monopolies and business people conspiring to extract benefit (for those in the cartel, trust, conspiracy…) by manipulating the market was well know from the initial minds putting together capitalist theory. And the obvious method to allow the benefits of the free market to be maintained was regulation to prevent those that sought to manipulate the market for their benefit.
And the dangers of overly leveraged financial institutions should be obvious to anyone with a modicum of understanding of financial history. Then make those overly leveraged financial institutions large (too be to fail) types and you really are asking for disaster. Add in a extremely large use of debt by the public and private sectors (living beyond your means). Then throw in encouraging reckless short term thinking by providing enormous cash bonuses for paper potential profits and you really have to wonder how anyone could think this was not a perfect design to assure a financial meltdown.
Related: Too Big to Fail, Too Big to Exist – Fed to Loan AIG $85 Billion in Rescue – 2nd Largest Bank Failure in USA History
Treasury Now Favors Creation of Huge Banks, New York Times, 1987:
The Treasury plan, which would permit the acquisition of banks by large industrial companies, was also endorsed by Alan Greenspan, in an interview before President Reagan nominated him this week to be chairman of the Federal Reserve Board.
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Mr. Gould acknowledged that any policy promoting the creation of very large financial institutions encounters deep-seated sentiments that date from the founding of the Republic. But he thinks the nomination of Mr. Greenspan could provide an important stimulus for change. Mr. Greenspan contends that many of the laws restricting commercial banks severely limit their ability to adapt to a changing marketplace.
The Reagan Administration has met frustration in its efforts to lessen regulation of banking, largely because Paul A. Volcker, the current Federal Reserve chairman, has firmly opposed any move that would begin to break down the barriers that prohibit large nonbanking companies from owning banks. Mr. Volcker has also been rather grudging in his support of changes that would allow interstate banking and the underwriting of securities by banks.
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”We have been the beneficiaries of living in a relatively insulated big economy, and only recently have we found out that the Japanese can make automobiles better than we do,” said Hans Angermueller, vice chairman of Citicorp. ”We are discovering that the same thing may apply in the financial services area, and to meet that challenge, we need to get leaner, meaner and stronger. We don’t do this by preserving the heartwarming idea that 14,000 banks are wonderful for our country.”
The New York Times web archive is a great resource for viewing the historical trends to turn away form the capitalist ideas of free market competition and instead move toward large market dominating banks. You get the impression from people talking about “free markets” that they have never actually read Adam Smith, Ricardo, Mills…
Related: Ignorance of What Capitalism Is – Not Understanding Capitalism – Canadian Banks Avoid Failures Common Elsewhere – Monopolies and Oligopolies do not a Free Market Make – Estate Tax Repeal
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Americans need to save much more money. This is true for people’s personal financial health. And it is true for the long term health of the economy. Of course the credit card immediate gratification culture doesn’t put much weight on those factors. And if Americans actually do reduce their consumption to save more that will harm the economy in the short term. But since those reading this are people (the economy can’t read) the smart thing for most readers is to save more to create a stronger financial future for themselves.
Turmoil May Make Americans Savers, Worsening ‘Nasty’ Recession
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From 1960 until 1990, households socked away an average of about 9 percent of their after-tax income, Commerce Department figures show. But Americans got out of the saving habit starting in the 1990s
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“Consumers are starting to realize that they’ve been living in a fantasy world,” says Lyle Gramley, a former Fed governor who is now senior economic adviser at Stanford Group Co. in Washington. “They will have to begin salting away money for retirement, their children’s education and other reasons.”
Americans have a way to go to catch up with their counterparts in other countries. The 0.4 percent of disposable income that U.S. households saved last year compares with 10.9 percent for Germany and 3.1 percent for Japan
Related: Americans are Drowning in Debt – Too Much Stuff – Financial Illiteracy Credit Trap
‘Armageddon’ Prices Fail to Lure Buyers Amid Selling
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The selling is being compounded by hedge funds and mutual funds dumping holdings to meet redemptions, which may push prices even lower, according to analysts at UBS AG.
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Corporate debt has been pressured by “incessant selling by hedge funds and leveraged institutions as they unwind,” Bill Gross, manager of the world’s biggest bond fund at Newport Beach, California-based Pacific Investment Management Co.
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Corporate bond prices plunged to 79.9 cents on the dollar on average from 94 cents at the end of August and 99 cents at the end of 2007, according to index data compiled by New York-based Merrill Lynch & Co.
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“The de-leveraging that we’re witnessing will probably continue,” said Paul Scanlon, team leader for U.S. high yield and bank loans at Boston-based Putnam Investments LLC, which manages $55 billion in fixed income. “My sense is that’s not turning around in the very near term.”
I am not very familiar with the bond market but it does seem like the panic is in full swing but calling the bottom is always hard. I would guess the de-leveraging (and investors pulling money out of bond funds) could well lead things lower over the short term.
Related: Corporate and Government Bond Rates Graph – Municipal Bonds After Tax Return
I have been curious how Kiva deals with currency risk. Kiva is a great resource for providing micro-lending and the opportunity to engage in choosing who you will lend to. But my transactions are all in US$ and the loans in the field are in the local currency. This creates an issue of what happens when currency values fluctuate. I asked a question on the Kiva LinkedIn group (an excerpt is shown here):
A lender takes out a loan of $100 with 10 months to repay. If the loan is in the local currency, what if the value of that currency during the 10 months declines by 20%? Then the bank has received all their money back but they owe Kiva $100 but they only have $80 worth of the local currency (again ignore that the payments are made monthly – since it doesn’t effect the issue at hand – currency rates). Hows does Kiva deal with this currency risk? Do the local partner banks take the risk…?
I was directed to a great slideshow showing Kiva’s lending policies. It turns out Kiva does have the local banks take the currency risk. So they have to pay back $100, if the local currency value is now $80, they would have a loss, of course the local currency value could also have risen, then the local bank has a gain.
They have a chart showing the cost of capital to local Kiva lenders at 0-1% plus currency exchange risk (which they say some banks choose to hedge and others just take the risk), which is about the lowest cost of capital around. Kiva charges no interest on the loans to the local banks. The costs come from the requirements (the cost of adding a profile – the time of staff of the bank to add the information…) of using the Kiva website.
Updates
1) Kiva updated their policy to put any currency loss greater than 20% on the lenders (up to 20% losses are taken by the bank, above 20% are taken by those lending through Kiva). But the banks can chose to take the currency risk, which they could do to encourage lenders to select their loans to fund.
2) They updated it again to make it a decision by the bank, which means often the lenders bear the risk (it is stated on each loan how the risk is assigned)
Curious Cat Kiva connections: Curious Cats Kiva lending team – Curious Cat Kivans – Funding Entrepreneurs in Nicaragua, Ghana, Viet Nam, Togo and Tanzania – Kiva Fellows Blog: Nepalese Entrepreneur Success – Kiva related blog posts