Investing, economics, finance and random thoughts.
Economics
Economics
Fighting Inflation by Making Cheaper Coins
May 18th
From the not-as-witty-as-he-thinks department:
Will Nickel-Free Nickel Make a Dime’s Worth of Difference?
“Making coins from more cost-effective materials could save more than $100 million a year, which isn’t just pocket change,” said Dan Tangherlini, the Treasury Department’s chief financial officer.
That Dan Tangherlini. What a card! Is that the best the PR flaks at the Treasury Department could come up with?
Still, industrial porcelain, embedded with an identification chip, is seen as an outside possibility. A more likely candidate: an aluminum alloy, used by other countries for coins. But any switch is likely to be controversial. (emphasis added)
The aluminum alloy part is concerning enough, but not nearly as bad as an RFID chip inside the money. I analyzed RFID applications and vulnerabilities in the past as an information security researcher. My feeling afterwards is that there would be a big push for RFID in all money to remove the ability to have anonymity in cash transactions. It would first be put out into the public as an “anti-counterfeiting” measure. From there it could be stepped up easily to require banks to scan all money to check for “counterfeits.”
Banks could then refuse to accept money that couldn’t be RFID scanned as a risk control measure. This would then force stores to want to RFID scan money given to them so they are not left holding the bag. Finally, having money dispensed from banks and ATMs linked to the person who took the money out could be done. Why? Well, nobody would want to have non-RFID money because it could be counterfeit and the stores wouldn’t take it. Once this is done the circle of tracking the cash can be closed completely.
What then? No anonymous cash transactions could be accomplished. Links between cash could be made between people. Bills could be tracked from the bank to the ATM to the pocket of a person to a store and back to the bank. All RFID checked along the way. Every purchase could be tracked and, if necessary, a few quick keystrokes could disable the money in someone’s pocket by marking the RFID identifier as invalid in a central database.
Not plausible? No, it’s completely plausible.
The point of the metal in the coins is that it is a commodity value just as gold and silver are. The reason the nickel and penny are worth less is because the dollar is worth less. The markets are not fooled by this kind of rhetoric of saving money. As for RFID in the money? Yikes. I don’t want to consider the implications.
California Bonds Banner Ads
Mar 10th
Obviously, my site features some banner ads from Google. These ads bring in enough revenue to cover the costs of the web hosting (if that). Well lately I’ve been seeing ads encouraging people to buy California Bonds at this site:
I’ve never seen a state so aggressively advertising their bonds in banner ads. I can’t say it would put my mind at ease if I owned California Munis to see this.
EDIT: I’m not the only one who noticed this:
EDIT #2: Here’s the ad that just showed up on my site:
Oh! The offer ends March 10th! Better hurry! I’m sure they’re selling like hotcakes so don’t miss out!
Person to Person Deadbeat Lending
Feb 25th
Over at the Diehards forum a conversation came up about the fad of Person to Person (P2P) lending.
When I first saw this idea years ago, the first word to pop into my head was “foolish.”
The first reason I knew it was foolish is because business magazines thought it was a great idea.
The second reason is why in the world would anyone make an anonymous loan over the Internet to someone they know virtually nothing about? I’d rather just donate the money to charity where it could be better used.
What’s funny though is that these sites got started for reasons of undermining The Man (being the banks) that are so mean by requiring, you know, to prove credit worthiness. How archaic! Clearly we live in a world now where deadbeats, I mean “sub-prime borrowers”, are not risky at all. We’ll just do P2P loans and sing Kum-Ba-Ya and it will all work out and we’ll cut out those greedy middlemen.
But maybe The Man had this figured out long ago as the default rate on these peer to peer loans is abysmal. Check out the graph from this blogger:
http://www.prospers.org/blogs/Fred93
Prosper Default Rates Over Three Years
Since loans that are one month late nearly always default at these sites, that’s a 20% default rate after the first year and keeps going up the longer the loan is. Ugly! Now we know why loan sharks need to charge so much to their clients to turn a profit. No real bank could survive on default rates this high.
But it seems that sites like Prosper.com are trying to clean up their image.
But now Prosper is back in action with a relatively low default rate of 5% among borrowers, according to Barron’s. This service and its competitors are now putting people through their paces to weed out the baddies. The company claims 850,000 members and just a little under $200 million in loans underwriting at this date.
Lending Club has a 3% default rate, meanwhile, and turns down 90% of potential borrowers in an effort to cull the herd and find the most credit worthy.
The article follows up with this salient point:
That, of course, begs the question: Why would anyone go the P2P route if you’re credit worthy?
Yeah that’s pretty much what I think, too. If someone needs a loan from P2P they are probably doing it because nobody else trusts them enough.
But what about the returns?
The returns you might get as a lender can be enticing. Prosper claims the average lender earns 7% on their money, net after expenses and charge-offs. But those who are really into this virtual underwriting boast that they can make a 12% return.
The stock market has averaged around 9-10% a year the past 80 years. And now they’re telling me I’m going to beat the market by 20% a year with 12% returns by making loans to anonymous people that can’t get a real low-interest rate loan from a bank? Sounds like BS to me. If someone claims you are getting above market returns you are taking above market risks. There is no free lunch.
If I wanted to risk a 12% return (and let’s not kid ourselves because it would be quite risky) I’d just put the money I was going to use for P2P loans into a volatile emerging market stock index and let it ride. It may be a bumpy ride, but it could pay off. Yet, I may not get 12% over time but I’m not going to lose -100% either like with a large number of P2P loans. And for 7% returns? For that I’d just put it in the Permanent Portfolio allocation and go do something less stressful with my life while earning more money.
What’s most interesting is that these P2P sites started up to give loans to people that evil banks wouldn’t consider because of the credit risk. Now they are turning into weeding out credit risks just as evil banks do because of the deadbeats ruining it for everyone. In other words they’re turning into….evil banks! The hippies must be choking on their granola at this thought.
From all of this there is a lesson to be learned and that is that banks can seem heartless at times, but they have their reasons. Ultimately, as a depositor giving them my money to help fund loans for others, I want them to be picky. When they’re not picky (or told to not be picky by government rules) we end up with things like real estate bubbles where someone earning $20,000 a year is given $500,000 to buy a house. Also, loaning money to someone who can’t pay it back just makes that person’s situation worse by straddling them with more debt. How is that fair to them? It’s an overall bad deal for everyone involved.
Yeah I know there are some people that are not deadbeats in this P2P thing and could be good loan risks. But mostly I think these loans won’t lead to any additional profits vs. just doing something simpler (and safer) with the money. If you are trying to be charitable, then just donate the money to charity.
Overall, this entire idea of P2P loans reminds me of an Onion article I read a while back.
Does Gold Preserve Purchasing Power?
May 26th
One of the more controversial holdings of the Permanent Portfolio is Gold. Once you understand what gold can and cannot do you may understand a little better why the Permanent Portfolio holds some of it in the allocation.
Gold is a preserver of wealth that is compact and historically viewed as valuable. It’s not an investment in a traditional sense. If you want growth of your capital you should rely on stock investing and bonds. If you want preservation of capital, then gold can help by protecting you from high inflation or other unexpected events.
Gold in a portfolio is a way to take money off the investment gambling table and putting it away so you can’t lose it easily. Further, a couple attributes of gold that are unique is that it is impervious to political shenanigans which can affect a paper currency and it can be owned in a way so that it is nobody’s paper promise to you. As one gold dealer said: “Nobody ever went to the poor house buying gold.”
These are distinct features that stocks, bonds and cash do not have and is why it is important to hold some gold as part of any investment portfolio. Gold by itself will not grow your wealth, but it has an uncanny ability to protect what you do have when your other investments aren’t doing well.
In terms of protecting from inflation, gold is hard to beat and has a very long track record of preserving purchasing power. Let’s look at some historic prices to see how this works.
The Real Estate Boom – In Pictures!
Jan 20th
Remember those heady days of easy real estate cash? Ah yes. Zero down mortgages, fresh paint, new carpet, granite countertops and flipping houses to the next sucker. Making money was so simple and low risk that anyone could do it!
Let’s stroll down memory lane and look back at the time when all it took to make it in real estate was to have a pulse. In 2008 I was in a book store in the finance and economics section (where else!). I walked by a shelf packed to the gills with make money fast real estate books. I stopped, had a flash back to the dot-com boom era, and decided I’m going to photograph these books for posterity.
Clearly the banks had a lot to do with the mess. But they were also encouraged by cheap money from the Fed and politically correct programs like the Community Reinvestment Act to make bad loans. Finally, many of the “victims” in all of this were perfectly willing to participate when they thought they were going to be making a lot of money by buying a home they couldn’t afford. Nobody was forcing these people to take out these large mortgages. There’s plenty of blame to spread around.
Update: I saw a link on the Diehards forum to this article in the WSJ about fad money books. Something to consider when you’re walking the aisles looking for investing advice:
How to Survive The 2009 Boom in Money Books
Just a year or so ago, the personal-finance bookshelf was a happy-go-lucky place where everybody and their neighbor was about to become a millionaire. Now it’s more like a bomb shelter stocked with canned goods for a long battle.
Brilliant!
Now I present to you my tribute to the Real Estate Bubble of Ought Eight. And yes, these are all the real titles of the books with no PhotoShop changes:
Terry Coxon Discusses the Possibility of High Inflation
Dec 21st
Terry Coxon, co-creator of the Permanent Portfolio, discusses the possibility of high inflation as the US economy stagnates. Is it possible? Sure. The Fed is biased towards creating inflation because that’s what they were designed to do. Their worst fear is deflation because their tools are so limited. In my opinion, they will continue to try to inflate the dollar to force people to spend money. They’ll worry about the inflation it causes later.
Will it work? Hard to say. It didn’t work in Japan for the past 20 years and may not work here. Economics is just as much about psychology as anything else. If people don’t want to spend money and take on new debt it’s hard to force them to.
People often wonder why the Permanent Portfolio holds a 25% gold allocation at all times. After all, isn’t gold a zero real return asset? Well, this is the reason. If bad inflation comes the other components of the portfolio will do poorly, but the gold will react so strongly that it’s likely all the other losses will be overcome. But what about a deflationary situation and these predictions of inflation are wrong? Well, the portfolio holds 25% in Long Term Treasury bonds which will do very well under that scenario.