This may be a little odd, but I had a dream last night that is slightly related to economics.
I was in Iowa and participating in the presidential caucuses. A moderator was at the front of a room (most likely in a school) and he was asking the audience to give ideas for issues that this particular district could present to the national party (I don't know if was Republican or Democrat). Certain "hot button" issues were raised, the moderator would write them down on the chalkboard at the front of the room and then ask for other ideas. The discussion continued that way for awhile. Then I saw myself raise my hand and the moderator called on me. I said, "We should get rid of farm subsidization."
I was immediately booed and yelled at to sit down. The moderator was trying to bring the proceedings to order. I yelled above the crowd, "It would help people in poorer nations and allow them to sell their crops in the US. It will help all of us, as our food would be less expensive and we could use the money we save to find more efficient ways to use our land and time."
Obviously that didn't make things better. The proceedings were quickly broken up as the group (I'm guessing they were mostly farmers) started a riot. Then I woke up.
I did have a couple of martinis last night while watching James Bond in "Octopussy," but I don't think that explains why I was thinking about Free Trade. I might watch The Sound of Music tonight. I shudder to think of what my dreams will bring.
Thursday, December 29, 2005
Wednesday, December 28, 2005
Gurus Predict Recession Ahead: What do Gurus Know?
Burton Malkiel (whom I wrote about a few weeks ago) always laughs at those people who try to describe what the market is doing today. Articles describing "taking profits" or making assumptions such as "the Dow fell today on bad economic news" seem to be a way for we humans to make sense or even ascribe patterns to fairly random movements in stocks.
In his book, A Random Walk Down Wall Street, he talks about how gurus through the last few decades have made predictions and such descriptions of the stock market in order to reinforce whatever it is that they believe. One such guru "predicted" the stock market crash (actually tech bubble) of 2001. Why? Mostly because she had been predicting such things for the previous few years. But she was right and now people believe everything she says.
Do you believe gurus? Look at any article from Yahoo! Finance, the Motley Fool, CNBC, etc. and you have gurus up the whazoo telling you why the market is responding the way it is or what to make of such market changes. If you believe in the efficient market theory, then you know these gurus are just making stabs in the dark.
An article in the LA Times (and other places today) predicts doom and gloom because for the first time in a while, short-term and long-term bond yields have converged. This, according to the article, means that long-term bond investors are trying to "lock in interest rates for the long run" as a hedge against a bad economy. They think that the economy will tank, interest rates will drop, and they'll make money off of the long-term bonds.
They could be right. But then again, they could be wrong. This article seems to be an example of a "guru" writing about what is bound to happen because of a market indicator. The problem is that growth is good, interest rates are rising because of this, inflation is low, and businesses are expanding. All good news for the economy and bad news for long-term bond buyers locking in low interest rates.
Believe who you will but be skeptical of what you read and make sure if makes sense in the "grand scheme" of things.
In his book, A Random Walk Down Wall Street, he talks about how gurus through the last few decades have made predictions and such descriptions of the stock market in order to reinforce whatever it is that they believe. One such guru "predicted" the stock market crash (actually tech bubble) of 2001. Why? Mostly because she had been predicting such things for the previous few years. But she was right and now people believe everything she says.
Do you believe gurus? Look at any article from Yahoo! Finance, the Motley Fool, CNBC, etc. and you have gurus up the whazoo telling you why the market is responding the way it is or what to make of such market changes. If you believe in the efficient market theory, then you know these gurus are just making stabs in the dark.
An article in the LA Times (and other places today) predicts doom and gloom because for the first time in a while, short-term and long-term bond yields have converged. This, according to the article, means that long-term bond investors are trying to "lock in interest rates for the long run" as a hedge against a bad economy. They think that the economy will tank, interest rates will drop, and they'll make money off of the long-term bonds.
They could be right. But then again, they could be wrong. This article seems to be an example of a "guru" writing about what is bound to happen because of a market indicator. The problem is that growth is good, interest rates are rising because of this, inflation is low, and businesses are expanding. All good news for the economy and bad news for long-term bond buyers locking in low interest rates.
Believe who you will but be skeptical of what you read and make sure if makes sense in the "grand scheme" of things.
Wednesday, December 21, 2005
Price Fixing: Statutory Minimum Prices
Walter Williams writes here in response to accusations toward the oil industry for supposedly fixing prices. He points out that a number of our agricultural products including sugar and milk have "fixed prices."
Groups have more to lose if there are not fixed prices than we, as consumers, have to gain by fighting against them. Williams uses easy to follow examples to demonstrate how the government is in collusion with powerful farm lobbies to charge more for products than what they would fetch on the market.
We here at Cashtalk are no strangers to free trade, but this isn't tariffs to keep out more efficient producers. It is the government supporting "price-gouging" and even fining those producers that lower their prices.
Groups have more to lose if there are not fixed prices than we, as consumers, have to gain by fighting against them. Williams uses easy to follow examples to demonstrate how the government is in collusion with powerful farm lobbies to charge more for products than what they would fetch on the market.
We here at Cashtalk are no strangers to free trade, but this isn't tariffs to keep out more efficient producers. It is the government supporting "price-gouging" and even fining those producers that lower their prices.
The Federal Deficit Grows
Imagine Medicare costs in the year 2050 being 21.9% of our nation's GDP. Imagine if Social Security were around the same percentage of the GDP. A study here suggests that these numbers are a very real possibility if spending is not brought under control.
Since 2001, when George W Bush took office, the United States' debt has risen $2 trillion. The same article projects that by 2050, the interest payments alone on this debt will be between 12.4 and 21.4% of GDP.
These are fairly outstanding numbers. What I'm unsure about is whether they take into account the growth of our economy. Our economy is growing about 3% a year. If the above numbers do not take growth into consideration, then they might not be as bad as the article suggests.
However, if growth is taken into consideration, then these numbers are quite depressing. Some might suggest that if we raise taxes, we'll be able to cover the combined payments of debt, Medicare and Social Security. The problem with that theory, is that it assumes the growth rate would be the same if there were higher taxes. When taxes are increased, they tend to depress the overall economy (what is the use of starting a business, if I have to pay a higher share to the government?).
Spending the present value of your projected future earnings now is not necessarily a wise decision (unless you're spending it on things that stimulate growth and add to the economy; such as a business would to increase their return on capital). Socialism has caused other countries to continue spending long after the money supply has run out. Look at Argentina.
The spending of the Congress needs to cease before we get ourselves into big trouble. Bush needs to curb his and his Congress' need to appease just about every special interest and pet project that comes along. The future of our country depends on it.
Since 2001, when George W Bush took office, the United States' debt has risen $2 trillion. The same article projects that by 2050, the interest payments alone on this debt will be between 12.4 and 21.4% of GDP.
These are fairly outstanding numbers. What I'm unsure about is whether they take into account the growth of our economy. Our economy is growing about 3% a year. If the above numbers do not take growth into consideration, then they might not be as bad as the article suggests.
However, if growth is taken into consideration, then these numbers are quite depressing. Some might suggest that if we raise taxes, we'll be able to cover the combined payments of debt, Medicare and Social Security. The problem with that theory, is that it assumes the growth rate would be the same if there were higher taxes. When taxes are increased, they tend to depress the overall economy (what is the use of starting a business, if I have to pay a higher share to the government?).
Spending the present value of your projected future earnings now is not necessarily a wise decision (unless you're spending it on things that stimulate growth and add to the economy; such as a business would to increase their return on capital). Socialism has caused other countries to continue spending long after the money supply has run out. Look at Argentina.
The spending of the Congress needs to cease before we get ourselves into big trouble. Bush needs to curb his and his Congress' need to appease just about every special interest and pet project that comes along. The future of our country depends on it.
Get the Best Price on Computer Parts
This may sound like an advertisement, but the purpose of this site is to talk about money, and I thought I would pass along information about a site that passes on its own information. The site I'm talking about is called Pricewatch.com. They keep track of prices of various computers, computer related hardware, software, and other peripherals and display the lowest price for the very specific item you are looking for. Another thing I like about the site is that it has news related to these particular items that the customer might find useful. Just scroll down toward the bottom of their site's page to see what I'm talking about.
Other websites sometimes do this, too. Yahoo! Shopping is one such example. Before the use of the internet became so widespread, most people weren't as price conscious or knew the best places to buy the same good at a cheaper price. Now all it takes is a click of the mouse to find locations that strive to offer you, the consumer, the best price for something. Check out the sites and let me know of others you may have come across.
Other websites sometimes do this, too. Yahoo! Shopping is one such example. Before the use of the internet became so widespread, most people weren't as price conscious or knew the best places to buy the same good at a cheaper price. Now all it takes is a click of the mouse to find locations that strive to offer you, the consumer, the best price for something. Check out the sites and let me know of others you may have come across.
The Economics of Cable TV
Two articles I've run across deal with cable TV.
The the first is an idea that people want to pay for cable channels "a la carte" instead of in packages. Groups of advocates believe this will lower the cost, especially if customers don't want the channels offered in a typical package. This article explains why this logic is flawed.
The second article talks about lowering the barriers to entry into the cable television market. It cites the telecommunications act of 1996 which deregulated long-distance and other telecom companies. The result of which was greater choice to consumers at lower costs. Currently, a startup company like Internet TV has to negotiate with individual communities (over 33,000 in the US) for the right to compete with the local cable monopoly. A proposed law in Texas aims to eliminate some of this redundancy by giving the state the authority to negotiate the contracts for the state, thus eliminating the need to waste time and money talking with every community.
The the first is an idea that people want to pay for cable channels "a la carte" instead of in packages. Groups of advocates believe this will lower the cost, especially if customers don't want the channels offered in a typical package. This article explains why this logic is flawed.
The second article talks about lowering the barriers to entry into the cable television market. It cites the telecommunications act of 1996 which deregulated long-distance and other telecom companies. The result of which was greater choice to consumers at lower costs. Currently, a startup company like Internet TV has to negotiate with individual communities (over 33,000 in the US) for the right to compete with the local cable monopoly. A proposed law in Texas aims to eliminate some of this redundancy by giving the state the authority to negotiate the contracts for the state, thus eliminating the need to waste time and money talking with every community.
The Undercover Economist
An interview with Tim Harford, and economist at the World Bank, a columnist with the Financial Times, and author of "The Undercover Economist: Exposing Why the Rich Are Rich, the Poor Are Poor--and Why You Can Never Buy a Decent Used Car!" talks about his experience in economics and how bringing down trade barriers can help the world's poor and help you the consumer.
It really is a fascinating interview. I'm not sure if I agree with his emphasis on environmental implications of trade barriers nor his assumption that bureaucracies can be successful, but he does make some excellent observations on basic economics and ways that can affect you and the third world producer.
One particularly interesting bit is about what Tim calls, "Price Targeting," but what economists call third Degree Price discrimination:
Another interesting facet he talks about is his work with the World Bank and a project called "Doing Business." This program ranks countries on how easy it is to do business within them. They count how many signatures it takes to sell or move goods, or how easy it is to seek capital, or sell good abroad. Their website is here.
The article is fascinating and goes into a number of economic areas. I might have to check into this book further. Read the inteview and let me know what you think.
It really is a fascinating interview. I'm not sure if I agree with his emphasis on environmental implications of trade barriers nor his assumption that bureaucracies can be successful, but he does make some excellent observations on basic economics and ways that can affect you and the third world producer.
One particularly interesting bit is about what Tim calls, "Price Targeting," but what economists call third Degree Price discrimination:
There are some coffee chains in the U.K. who are charging markups of about 20 cents on a fair trade cappuccino. And the natural assumption of the customer is that that 20 cents is going to go to some poor farmer in Guatemala.
But actually hardly any of it does. It's not because the company is stealing the money. It'’s because there is just not that much coffee in a cappuccino. And while the farmer is getting much more money for his coffee, most of that 20 cents is markup. Just pure extra profit that goes to the cappuccino seller.
So I'm not saying don'’t buy fair trade coffee. I'’m just saying the reason they offer fair trade coffee is not because they support fair trade. It is because it maximizes their profits.
And it is a similar thing with organic food. A lot of people like to buy organic food for various reasons. Some people say it is better for the environment. And some people say it is better for their health. Some people say it tastes better. I don'’t have a strong opinion on any of this. I have not studied the evidence. What I do know is that the markup is higher on organic food. Substantially higher.
Organic food is more expensive to produce. But most of the costs of getting something on the supermarket shelves -- staff time, electricity, rent, distribution costs -- they are not actually the raw cost of the produce. And I argue that in many supermarkets you will see organic food priced with much more substantial markup. And it is deliberately separated away from the conventional food because that would make the price comparison too obvious, too sobering.
And so I went to my local health foods store with a clipboard taking all kinds of notes. And one of the things I noticed was you can get your conventional bananas and you can get your organic bananas. You get your conventional apples and you get your organic apples. You'’ll never see them next to each other.
You might see the organic garlic next to the conventional onions and the organic bananas next to the conventional apples. You won't see the organic apples next to the conventional apples.
Another interesting facet he talks about is his work with the World Bank and a project called "Doing Business." This program ranks countries on how easy it is to do business within them. They count how many signatures it takes to sell or move goods, or how easy it is to seek capital, or sell good abroad. Their website is here.
The article is fascinating and goes into a number of economic areas. I might have to check into this book further. Read the inteview and let me know what you think.
Monday, December 19, 2005
Debunking the "Overpaid CEO" Myth
I came across this interesting article about CEO's not really making a substantially different wage than their employees. Apparently, the AFL-CIO has produced a pamphlet charging CEOs with making more than 431 times the average worker. Alan Reynolds dissects this charge and explains why it simply isn't true.
Wednesday, December 14, 2005
Managing Personal Wealth Quiz Part 3 (Final)
The last quiz of the class.
1. With regard to REITs,
a. Why do their dividends typically exceed their reported income?
REITs invest in real estate and then trade on the stock market like stocks. However, their business is real estate. The cause of dividends that exceed income is based on depreciation. Real Estate for the most part "appreciates" in value. REITs can restate the value of the real estate and capitalize on the appreciation. This coupled with rents received as income can allow a REIT to have a higher dividend than the "income" from rents.
Because part of the dividend is based on the appreciation of the assets, there are no taxes on this appreciation until the asset is sold. This can have the effect of lowering the overall tax burden of the investor or at least deferring it to a future time.
An advantage of converting wealth to an annuity when retirement comes around, is that the annuity will pay you a "wage" and that is an easy way to manage money. In retirement, people normally don't want to hassle with figuring out how much they have to withdraw from their funds. The annuity simplifies things so that the retiree can enjoy their retirement.
There are currently different ways to avoid probate when one passes away. The easiest is to give a lot of your money away before you die. You do pay gift taxes, but it might not be as much a hassle as probate. You can also create trusts that have rules in the way they handle money and are independent of your will and thus avoid probate.
In order to avoid estate taxes, again gifts are a way to not pay estate taxes, you just pay gift tax. Life insurance can also avoid estate taxes if it is set up in a Irrevocable Life Insurance trust. A joint account with the beneficiary will avoid taxes on everything the beneficiary has a claim to (usually half).
1. With regard to REITs,
a. Why do their dividends typically exceed their reported income?
REITs invest in real estate and then trade on the stock market like stocks. However, their business is real estate. The cause of dividends that exceed income is based on depreciation. Real Estate for the most part "appreciates" in value. REITs can restate the value of the real estate and capitalize on the appreciation. This coupled with rents received as income can allow a REIT to have a higher dividend than the "income" from rents.
b. Why is this useful to investors?
Because part of the dividend is based on the appreciation of the assets, there are no taxes on this appreciation until the asset is sold. This can have the effect of lowering the overall tax burden of the investor or at least deferring it to a future time.
2. What is an advantage of converting some of your wealth at retirement
into an immediate or deferred annuity?
An advantage of converting wealth to an annuity when retirement comes around, is that the annuity will pay you a "wage" and that is an easy way to manage money. In retirement, people normally don't want to hassle with figuring out how much they have to withdraw from their funds. The annuity simplifies things so that the retiree can enjoy their retirement.
3. How can one avoid probate?
There are currently different ways to avoid probate when one passes away. The easiest is to give a lot of your money away before you die. You do pay gift taxes, but it might not be as much a hassle as probate. You can also create trusts that have rules in the way they handle money and are independent of your will and thus avoid probate.
4. How can one avoid estate taxes?
In order to avoid estate taxes, again gifts are a way to not pay estate taxes, you just pay gift tax. Life insurance can also avoid estate taxes if it is set up in a Irrevocable Life Insurance trust. A joint account with the beneficiary will avoid taxes on everything the beneficiary has a claim to (usually half).
Monday, December 12, 2005
University of Iowa Henry Fund
This past weekend during my managing personal wealth class, we heard from Todd Houge, who teaches the Applied Securities Management class at the University of Iowa. In that class the students manage a fund called the Henry Fund.
The students put a lot of work into the class and have to research companies in order to make buy and sell decisions (following the firm foundation theory of stocks). The best part about this is that the research reports are posted online. These are well written and extremely in-depth reports that consider a lot of economic factors in order to come to their conclusions. Check out their reports here.
The fund is also quite successful. They have beaten the S&P500 by 2.5% since the fund started. Dr. Houge attributes this to the high turnover of students (they take the class for one year). This might contribute to a lesser bias towards stocks, because the students weren't the ones who bought them. None of them can say, "But I don't want to sell that one! It's going places!"
Check it out and let me know what you think.
The students put a lot of work into the class and have to research companies in order to make buy and sell decisions (following the firm foundation theory of stocks). The best part about this is that the research reports are posted online. These are well written and extremely in-depth reports that consider a lot of economic factors in order to come to their conclusions. Check out their reports here.
The fund is also quite successful. They have beaten the S&P500 by 2.5% since the fund started. Dr. Houge attributes this to the high turnover of students (they take the class for one year). This might contribute to a lesser bias towards stocks, because the students weren't the ones who bought them. None of them can say, "But I don't want to sell that one! It's going places!"
Check it out and let me know what you think.
Two Opposing Theories of Stocks
According to the book, A Random Walk Down Wall Street, by Burton Malkiel, there are two philosophies when it comes to ways to view the stock market and individual stock value. These are labeled "The Firm-Foundation Theory" and "The Castle-In-the-Air Theory." Let's look at them individually.
The firm foundation theory believes that a share in a company (a stock) has an inherent value. More importantly, you can discover that inherent value by inputting some numbers from the company's financial statements and calculating it. This is called fundamental analysis and includes the techniques of looking at the future cashflows of the company, calculating the present value of those cash flows and then dividing by the number of shares. The value you get, should be what the stock should be worth.
This is useful, because you if the stock price is actually higher, than you can guess it will fall back to its "inherent" value; conversely if it is lower, than you should buy, because the stock will rise to its inherent value. This sounds pretty good, but according to Malkiel, if we examine it closely, we start to see that it might not work.
First of all, you have to make hundreds of assumptions in order to calculate the future cashflows of the company. You have to make economic assumptions, such as where will interest rates be in the future? How about other economic variables like fuel prices, inflation, etc? Do these things affect the company you are looking at?
Another factor that is disheartening is normally, the final value you arrive at is never right. If you realize that, you will be farther than most. Now, what you have to do is determine if the market price is really the inherent value or if your assumptions are correct. Sensitivity analysis helps with this a little, but even then does this help you pick winning stocks? Malkiel says, "no."
The second theory is the "Castle-in-the-air" theory. The basis of this theory is that stock prices are not based on a rational number such as inherent value, but more on what people believe the stock should be worth. The theory speculates that investors' emotions and other personal issues can strongly affect their buying and selling decisions, and this is what really has an effect on the market price. If you can figure out their psychology, then you can beat the market. An implied belief also means that every time a stock is sold, it is being sold to a "sucker." The seller is just trying to sell the stock to someone who is willing to buy it at a higher price, not because of inherent value, but because the that buyer thinks the stock will go higher, while the seller does not.
Technical analysis uses this philosophy. These are people that study charts to find patterns in a stocks movement in the past, in order to predict the future. Rather than assume that stocks have inherent value and that their cashflows predict the value, they believe that indicators such as volume traded and the direction of the price charted can predict the future price. These people have patterns that they rely on and look for when analyzing a company. Malkiel shows that with different studies conducted, this doesn't hold much water.
So what does Malkiel think? He believes that the stock market is a "random walk" and that there is no way to predict individual prices into the future. He thinks that you can hold a broad portfolio (such as an index fund) and do better than people trying to beat the market. Why? Because the market in general, is moving up and providing a return. Each of the individual stocks are in the market and "you will not be compensated for risk you take that you can diversify away." That's true in the long run and most of us invest in stocks to plan for retirement.
This is a great book, not specifically for these opinions but because even though Malkiel believes that an index fund is the way to go, he still surveys every other product out there from futures to REITs to fine art investment and gives his opinion on it in simple to understand prose. If you're interested in stocks, you should check it out.
The firm foundation theory believes that a share in a company (a stock) has an inherent value. More importantly, you can discover that inherent value by inputting some numbers from the company's financial statements and calculating it. This is called fundamental analysis and includes the techniques of looking at the future cashflows of the company, calculating the present value of those cash flows and then dividing by the number of shares. The value you get, should be what the stock should be worth.
This is useful, because you if the stock price is actually higher, than you can guess it will fall back to its "inherent" value; conversely if it is lower, than you should buy, because the stock will rise to its inherent value. This sounds pretty good, but according to Malkiel, if we examine it closely, we start to see that it might not work.
First of all, you have to make hundreds of assumptions in order to calculate the future cashflows of the company. You have to make economic assumptions, such as where will interest rates be in the future? How about other economic variables like fuel prices, inflation, etc? Do these things affect the company you are looking at?
Another factor that is disheartening is normally, the final value you arrive at is never right. If you realize that, you will be farther than most. Now, what you have to do is determine if the market price is really the inherent value or if your assumptions are correct. Sensitivity analysis helps with this a little, but even then does this help you pick winning stocks? Malkiel says, "no."
The second theory is the "Castle-in-the-air" theory. The basis of this theory is that stock prices are not based on a rational number such as inherent value, but more on what people believe the stock should be worth. The theory speculates that investors' emotions and other personal issues can strongly affect their buying and selling decisions, and this is what really has an effect on the market price. If you can figure out their psychology, then you can beat the market. An implied belief also means that every time a stock is sold, it is being sold to a "sucker." The seller is just trying to sell the stock to someone who is willing to buy it at a higher price, not because of inherent value, but because the that buyer thinks the stock will go higher, while the seller does not.
Technical analysis uses this philosophy. These are people that study charts to find patterns in a stocks movement in the past, in order to predict the future. Rather than assume that stocks have inherent value and that their cashflows predict the value, they believe that indicators such as volume traded and the direction of the price charted can predict the future price. These people have patterns that they rely on and look for when analyzing a company. Malkiel shows that with different studies conducted, this doesn't hold much water.
So what does Malkiel think? He believes that the stock market is a "random walk" and that there is no way to predict individual prices into the future. He thinks that you can hold a broad portfolio (such as an index fund) and do better than people trying to beat the market. Why? Because the market in general, is moving up and providing a return. Each of the individual stocks are in the market and "you will not be compensated for risk you take that you can diversify away." That's true in the long run and most of us invest in stocks to plan for retirement.
This is a great book, not specifically for these opinions but because even though Malkiel believes that an index fund is the way to go, he still surveys every other product out there from futures to REITs to fine art investment and gives his opinion on it in simple to understand prose. If you're interested in stocks, you should check it out.
Friday, December 09, 2005
1000 Hits
Well, it looks like we're approaching 1,000 hits to Cashtalk.
There are 134 posts and you can view other statistics about the site here.
We are always looking for new people to contribute to the conversation so if you have a passion to learn about money and especially are willing to share what you learn, let me know!
On this occasion, too, I'm linking to the first post at Cashtalk here. Have a good weekend, enjoy and prosper!
There are 134 posts and you can view other statistics about the site here.
We are always looking for new people to contribute to the conversation so if you have a passion to learn about money and especially are willing to share what you learn, let me know!
On this occasion, too, I'm linking to the first post at Cashtalk here. Have a good weekend, enjoy and prosper!
Thursday, December 08, 2005
Some Tax Cuts Passed by House; Need to Extend Capital Gains Tax Decrease
According to the Washington Post, the U.S. Congress passed 3 consecutive bills creating tax cuts for different groups of constituents. The tax bills are:
- Create an economic zone in the Gulf Coast area affected by the hurricanes. This would allow businesses to deduct almost everything from their taxes, in order to provide incentive to start businesses in the region. Certain businesses are exempt such as gambling, hot tubs (?), country clubs, etc. Also, the bill would allow the states of Louisiana, Mississippi and Alabama to be granted tax exempt Bond status for bonds related to rebuilding.
- Allow members of the military to claim their combat pay for an income credit.
- Increase the lower limit of the AMT, so less "middle class" people will be burdened by this alternative to the Income Tax.
Worst CEO in 2005
Take Two Interactive's CEO, Paul Eibler has just won the worst CEO of 2005 award as written up in Marketwatch. I am particularly interested in this stock because it was a part of my purchases when we did the stock market game. I also include video games among my hobbies.
Of note, specifically to Brett, is that Krispy Kreme's CEO, Stephen Cooper, was one of the CEO's in the running.
Why did Paul Eibler win this dubious honor? Under his leadership, Take Two has not made earnings projections for the last 4 quarters and has had to cut earnings by 60%!
Of note, specifically to Brett, is that Krispy Kreme's CEO, Stephen Cooper, was one of the CEO's in the running.
Why did Paul Eibler win this dubious honor? Under his leadership, Take Two has not made earnings projections for the last 4 quarters and has had to cut earnings by 60%!
Foreigner Tax
In August of 2000, I arrived at my new job in Shanghai, China. I was hired to teach English, Business and Communication at Shanghai University. My Chinese language skills were extremely poor and the only thing I knew about their culture was what I had read in travel logs or watched on National Geographic.
Fortunately, when I went over, I wasn't alone. My friend Jake went with me and together we tackled the task of learning about our new home (in addition to writing lesson plans and conducting classes). What we soon discovered, in going about our daily lives, was the presence of what we called, "Foreigner Tax."
This was the premium that sellers would immediately add to the thing we were trying to obtain (food, transportation, etc.) as soon as they saw our blue eyes and our "non-Chinese-y-ness." Normally the tax ranged from 20% to 150% higher than what the locals would pay for the exact same thing. It didn't help that we could barely speak Chinese and most of our communication was either sign language or with long pauses as we looked up the correct words in the phrase book.
One particularly heinous use of the foreigner tax was during a trip to Qingdao (Americans could probably readily identify it by the British spelling of Tsingtao and the fact that the Chinese beer with the same name comes from there) in Shandong province. Jake and I went out to eat at a street stall, which had a variety of fresh seafood and vegetables that they were willing to cook into whatever dish you could imagine. Jake and I picked a few we recognized and said the Chinese words for the dishes we expected. Nothing too exotic.
The dishes arrived and they were pretty tasty. We each had a beer, too. Finally we said the Chinese words, "Mai dan," which means "Bring the bill." We were expecting maybe 40 to 60 yuan for the meal (based on what we had been paying elsewhere for similar dishes). The cook came over and said, "350 yuan."
As some of you may know, that is the yearly wage of some Chinese and the monthly wage of most. We were shocked. We looked at each other trying to figure out what to do. We didn't have that much money on us at the time, plus we knew the "Foreigner tax" was coming into play in a major way. By this time our Chinese had improved somewhat, so we turned to the people next to us and asked them how much they thought we should pay. They whispered, "40 yuan maybe a little more." The cook saw this and she started screaming at them in Chinese. They quickly turned back to their food and ignored us.
The cook kept pestering us and a small crowd was beginning to gather as we were arguing that 350 yuan was ridiculous. At least I think that's what we were saying. Finally, Jake pulled out a 100 yuan note, threw it on the table and said, "Run!" So we ran. And ran. I don't think they chased us that far, but we were determined to get away.
That was an extreme example, but typical of the "tax" I often had to endure. I was charged foreigner tax less and less as I learned more and more Chinese and more about the culture, especially the fair cost of things. If the vendor tried to raise the price, I would say that it was too high and I could go around the corner and get if for a better price. This type of bargaining usually brought the price down quickly to a more reasonable level.
As I learned to listen more, too, I heard that the Chinese often talk with each other about what a fair price is for something. It was not uncommon to hear two classmates chatting about what one of them paid for a shirt, or what the other paid for a new handbag. They were constantly sharing information about where to get the best deals and what a good deal was. If I ever told them I bought something, they would immediately ask me for the price and then when I told them, they informed me I paid too much and I should have gone to so and so.
We all pay foreigner tax no matter where we live. Having returned to the U.S. from China, I think I would now call the foreigner tax the "Ignorance Tax." The less we know about something, the more likely we are to get "ripped off" or pay too much for it. The purpose of this website is to learn more about money and the best ways to spend it (or save or invest it) without getting "ripped off." So let's all continue to share our experiences with each other here, just like the Chinese, so that we can stop paying "Foreigner Tax" and erase our ignorance about money.
Fortunately, when I went over, I wasn't alone. My friend Jake went with me and together we tackled the task of learning about our new home (in addition to writing lesson plans and conducting classes). What we soon discovered, in going about our daily lives, was the presence of what we called, "Foreigner Tax."
This was the premium that sellers would immediately add to the thing we were trying to obtain (food, transportation, etc.) as soon as they saw our blue eyes and our "non-Chinese-y-ness." Normally the tax ranged from 20% to 150% higher than what the locals would pay for the exact same thing. It didn't help that we could barely speak Chinese and most of our communication was either sign language or with long pauses as we looked up the correct words in the phrase book.
One particularly heinous use of the foreigner tax was during a trip to Qingdao (Americans could probably readily identify it by the British spelling of Tsingtao and the fact that the Chinese beer with the same name comes from there) in Shandong province. Jake and I went out to eat at a street stall, which had a variety of fresh seafood and vegetables that they were willing to cook into whatever dish you could imagine. Jake and I picked a few we recognized and said the Chinese words for the dishes we expected. Nothing too exotic.
The dishes arrived and they were pretty tasty. We each had a beer, too. Finally we said the Chinese words, "Mai dan," which means "Bring the bill." We were expecting maybe 40 to 60 yuan for the meal (based on what we had been paying elsewhere for similar dishes). The cook came over and said, "350 yuan."
As some of you may know, that is the yearly wage of some Chinese and the monthly wage of most. We were shocked. We looked at each other trying to figure out what to do. We didn't have that much money on us at the time, plus we knew the "Foreigner tax" was coming into play in a major way. By this time our Chinese had improved somewhat, so we turned to the people next to us and asked them how much they thought we should pay. They whispered, "40 yuan maybe a little more." The cook saw this and she started screaming at them in Chinese. They quickly turned back to their food and ignored us.
The cook kept pestering us and a small crowd was beginning to gather as we were arguing that 350 yuan was ridiculous. At least I think that's what we were saying. Finally, Jake pulled out a 100 yuan note, threw it on the table and said, "Run!" So we ran. And ran. I don't think they chased us that far, but we were determined to get away.
That was an extreme example, but typical of the "tax" I often had to endure. I was charged foreigner tax less and less as I learned more and more Chinese and more about the culture, especially the fair cost of things. If the vendor tried to raise the price, I would say that it was too high and I could go around the corner and get if for a better price. This type of bargaining usually brought the price down quickly to a more reasonable level.
As I learned to listen more, too, I heard that the Chinese often talk with each other about what a fair price is for something. It was not uncommon to hear two classmates chatting about what one of them paid for a shirt, or what the other paid for a new handbag. They were constantly sharing information about where to get the best deals and what a good deal was. If I ever told them I bought something, they would immediately ask me for the price and then when I told them, they informed me I paid too much and I should have gone to so and so.
We all pay foreigner tax no matter where we live. Having returned to the U.S. from China, I think I would now call the foreigner tax the "Ignorance Tax." The less we know about something, the more likely we are to get "ripped off" or pay too much for it. The purpose of this website is to learn more about money and the best ways to spend it (or save or invest it) without getting "ripped off." So let's all continue to share our experiences with each other here, just like the Chinese, so that we can stop paying "Foreigner Tax" and erase our ignorance about money.
Wednesday, December 07, 2005
Managing Personal Wealth Quiz Part 2
1. Historically, what has been the impact (positive or negative) of inflation on stock returns:
a. In the short run? In the short term, stocks might be eroded by high inflation, but the definition of short can change this. During the late 70's and early 80's high inflation eroded a lot of the gains from stocks, but had people held those stocks, they would have come out ahead. How did this happen? Inflation causes higher interest rates, which in turn, drive down the prices of stocks (and bonds).
b. In the long run? In the long run, stocks have held up very well against inflation, meaning they have returned a higher return than what inflation would erode. In general, portfolio values have doubled every 10 years.
2. What does the Capital Asset Pricing Model (CAPM) say that tells us we should NOT buy individual stocks for our don't be poor objective?
CAPM is a way to determine the return necessary for a company to be seen as a worthy investment (or if a project is worth investing in). What it does, is measure the overall risk of the investment (this works because higher risk should equal higher returns and vice versa). It takes the "risk free" rate (usually a treasury bill rate) and the beta (the risk of the stock) and adds the market risk. By buying an individual stock, we are taking on a portion of risk that can be "diversified away" by holding a higher number of stocks with low correlation of movement to each other. If you don't want to be poor, than don't take on risk that can be diversified away (you won't be paid for it anyway).
3. If the P/E ratio for the stock market is 20, what would Siegel's reasoning tell us to expect (approximately) for the long-term rate of return for stocks?
Jeremy Siegel, in his book Stocks for the Long Run, believes that the P/E ratio is not a good indicator of longterm performance. At a multiple of 20, that would equal about a 5% (1/20) growth in stocks. He believes that a low 20's number for the entire market is justified based on historical data.
4. How can I be assured that an exchange traded fund (ETF) will trade at a price that is very close to the value of the index it tracks?
ETFs are similar to mutual funds in that they try to buy all of the stocks in the index they track. Because the authorized participant (AP) has the financial capital to buy these stocks, they are also in charge of making sure the price of the ETF shares match the equivalent fraction of the all of the stocks. If the price of the ETF rises, the AP sells more shares, bringing the price down. If the price falls, the ETF buys back the shares to keep the price the same. Either way the AP is making money.
a. In the short run? In the short term, stocks might be eroded by high inflation, but the definition of short can change this. During the late 70's and early 80's high inflation eroded a lot of the gains from stocks, but had people held those stocks, they would have come out ahead. How did this happen? Inflation causes higher interest rates, which in turn, drive down the prices of stocks (and bonds).
b. In the long run? In the long run, stocks have held up very well against inflation, meaning they have returned a higher return than what inflation would erode. In general, portfolio values have doubled every 10 years.
2. What does the Capital Asset Pricing Model (CAPM) say that tells us we should NOT buy individual stocks for our don't be poor objective?
CAPM is a way to determine the return necessary for a company to be seen as a worthy investment (or if a project is worth investing in). What it does, is measure the overall risk of the investment (this works because higher risk should equal higher returns and vice versa). It takes the "risk free" rate (usually a treasury bill rate) and the beta (the risk of the stock) and adds the market risk. By buying an individual stock, we are taking on a portion of risk that can be "diversified away" by holding a higher number of stocks with low correlation of movement to each other. If you don't want to be poor, than don't take on risk that can be diversified away (you won't be paid for it anyway).
3. If the P/E ratio for the stock market is 20, what would Siegel's reasoning tell us to expect (approximately) for the long-term rate of return for stocks?
Jeremy Siegel, in his book Stocks for the Long Run, believes that the P/E ratio is not a good indicator of longterm performance. At a multiple of 20, that would equal about a 5% (1/20) growth in stocks. He believes that a low 20's number for the entire market is justified based on historical data.
4. How can I be assured that an exchange traded fund (ETF) will trade at a price that is very close to the value of the index it tracks?
ETFs are similar to mutual funds in that they try to buy all of the stocks in the index they track. Because the authorized participant (AP) has the financial capital to buy these stocks, they are also in charge of making sure the price of the ETF shares match the equivalent fraction of the all of the stocks. If the price of the ETF rises, the AP sells more shares, bringing the price down. If the price falls, the ETF buys back the shares to keep the price the same. Either way the AP is making money.
India, China and the Coming "White Collar" Apocalypse
Last spring I read a book by Tom Peters called Re-Imagine! where he asks his readers to think about business and their own jobs differently. In the book he is excited that in the near future, people will be hired on a temporary basis for their talents and what they can accomplish, not because of where they live or who they know. He "imagines" a world where traditional businesses are no longer relevant. His vision of business in the very near future is that of independent contractors coming together for a "project" and when the project is done, moving on to the next one.
He writes that businesses stockpiling people and using a "brick and mortar" approach is a thing of the past. He foresees a White-Collar apocalypse similar to the blue-collar apocalypse that happened in the 80's, when machines and technology eliminated a lot of redundant or inefficient "line jobs." He foresees the same thing happening to middle class, office staff of most companies and has many examples to show that he might be on to something.
Someone sent me an article (posted in the comments section) by Gary North, an investor, who has a similar view to that of Tom Peters. He sees the development of China and India as some of the causes for this inevitable cataclysm. He cites that 300,000 computer engineers graduate school every year within India. Not only is there an abundant supply, but they are willing to work for $400 a month. Bill Gates spoke to a graduating class of Indian professionals this week. Gary North mentions that Bill Gates doesn't speak much in public, and when he does, you know that he sees value in it. He sees the future.
To me, this perfectly illustrates the idea of the potential implementation of comparative advantage. The U.S. can no longer compete with software engineers from India, so why not use less resources to have an Indian national program software and take the money you save and invest it into a technology or specialization that we can then turn around and sell to India? With the new tech or specialty, you train the Americans who lost their jobs to the Indian. Free trade is a wonderful thing.
I have to confess that I am slightly worried about my own white-collar job, but I am also excited about the potential of a society where people are hired for their talent and the merit of their work is what they are worth. As Tom Peters would say, "You are a 'rock star' in the world of business. You can make deals, continue learning your trade, and sell your trade on a completely open market." Scary, yet exciting.
He writes that businesses stockpiling people and using a "brick and mortar" approach is a thing of the past. He foresees a White-Collar apocalypse similar to the blue-collar apocalypse that happened in the 80's, when machines and technology eliminated a lot of redundant or inefficient "line jobs." He foresees the same thing happening to middle class, office staff of most companies and has many examples to show that he might be on to something.
Someone sent me an article (posted in the comments section) by Gary North, an investor, who has a similar view to that of Tom Peters. He sees the development of China and India as some of the causes for this inevitable cataclysm. He cites that 300,000 computer engineers graduate school every year within India. Not only is there an abundant supply, but they are willing to work for $400 a month. Bill Gates spoke to a graduating class of Indian professionals this week. Gary North mentions that Bill Gates doesn't speak much in public, and when he does, you know that he sees value in it. He sees the future.
To me, this perfectly illustrates the idea of the potential implementation of comparative advantage. The U.S. can no longer compete with software engineers from India, so why not use less resources to have an Indian national program software and take the money you save and invest it into a technology or specialization that we can then turn around and sell to India? With the new tech or specialty, you train the Americans who lost their jobs to the Indian. Free trade is a wonderful thing.
I have to confess that I am slightly worried about my own white-collar job, but I am also excited about the potential of a society where people are hired for their talent and the merit of their work is what they are worth. As Tom Peters would say, "You are a 'rock star' in the world of business. You can make deals, continue learning your trade, and sell your trade on a completely open market." Scary, yet exciting.
Tuesday, December 06, 2005
Productivity Up 4.7% in the U.S.
It looks like Americans are doing more with their time than originally expected. This is certainly good news for the economy as it makes it more likely that people will use their dollars (or Euros or Pounds) to hire Americans to do jobs, as their dollars will go further than in other countries.
The Tragedy of the Commons: Illustrated through the Ivory Trade
What is the "tradgedy of the commons?" An interesting article illustrates this economic idea through examples in the ivory trade (or lack thereof). A game involving rabbits also tries to illustrate the idea.
Why is this idea important to you? It opens up ideas for ways of protecting the environment using capitalistic ways and means. I'm not sure if I'm sold on it yet, but read about it and let me know what you think about it.
Why is this idea important to you? It opens up ideas for ways of protecting the environment using capitalistic ways and means. I'm not sure if I'm sold on it yet, but read about it and let me know what you think about it.
Monday, December 05, 2005
Comparative Advantage Game
I stumbled across this game when reading about Avocados in Mexico. In a simple manner, it explains and demonstrates comparative advantage, a key basis for the argument for Free Trade. Play the game (it takes about 5 minutes) and see how compartive advantage can work even for someone who is disadvantaged when it comes to trading.
When you come to the conclusion of the game, you will see a link that explains more about comparative advantage and recomends readings on the topic.
When you come to the conclusion of the game, you will see a link that explains more about comparative advantage and recomends readings on the topic.
Mexican Avocados and Chinese Shoes
Wow! The example in this article from A World Connected is very similar to my example in the Free Trade/Fair Trade post. Peter Mork, an economist, who is writing a book about how economics effects people on a day-to-day basis, writes a charming and real account of his experience in Uruapan, Mexico, where Avocados are the primary crop and economy. He calls attention to the limits the U.S. used to have on Mexican Avocados and how that hurt the people of Uruapan. Today, Mexican Avocado trade in the U.S. is less restricted (they can now be sold in 47 states year-round).
This quote sums it up quite nicely:
Mr. Mork talks about conversations he has with some of the locals in seeing if they understand the irony in their situation:
This quote sums it up quite nicely:
"...couldn'’t all this theory be summed up into one simple question: Where was the justice in the fact that I was allowed to buy an avocado from someone named Richard in Fallbrook, California, but not from Ricardo simply because he lived in Uruapan, Mexico? Should the random chance of being born on the opposite side of a border restrict our association in that way?"
"I, living in San Diego, want guacamole and Ricardo, living in Uruapan, wants to sell me his avocados. Why should anyone have the power to stop this peaceful exchange?"What I appreciate about the article, and Mr. Mork highlights it, is that the Mexicans are dealing with their own protectionist issues with China, specifically concerning shoes. They ban Chinese shoes in order to protect their own shoe industry. Obviously this is quite ironic, as the people of Uruapan try to gain entry to the markets of the U.S., the people of China are shut out of Mexico.
Mr. Mork talks about conversations he has with some of the locals in seeing if they understand the irony in their situation:
"When I explained that I wanted to write about how economics affects real people and gave the example of how avocados from Uruapan cannot be sold in my home state of California, not only did the confused looks leave their faces but it generally changed into one of enthusiasm. Residents from Sonora to Chiapas would say 'That'’s a great thing to write about. Why aren'’t Mexicans allowed to sell their avocados in California?'” It was easy for many to relate with growers in Michoacan and see the injustice in our laws.Mr. Mork rightfully points out that if free trade is allowed across these borders (U.S., China, and Mexico, and every other border for that matter) then people will be better off. Goods will be produced cheaper and therefore cost less. This allows consumers to spend less and use the excess money to invest in their own economy. The slow and inefficient industries will wither and die and the stronger, specialized industries will grow. As Mr. Mork alludes to, it is a "win win" situation for everybody.
Alas, I did not receive a similar reaction when talking about Chinese shoes. Even after pointing out the similarities between California growers lobbying politicians to ban the import of Mexican avocados and shoe makers in Leon lobbying politicians to ban the import of Chinese shoes, many were not convinced. '“It'’s different though,'” I would hear people say, '“We need those laws. The Chinese can make everything so cheap.'"
Is the Media Creating a Housing Bubble Myth?
An interesting article here from the Free Market Project discusses the media's attempts at painting a picture of a national housing bubble. What is striking to me is the way the media (as cited by the article) ignores comments from the Federal Reserve Chairman and other sources like the Commerce Department.
Here's the summary of points the article makes:
Here's the summary of points the article makes:
A Bubble?: Fed Chairman Alan Greenspan has denied the existence of a national housing bubble for several years, but the media have used the term repeatedly.
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Strong Gains: The increase in real estate values the past five years has not resembled the rapid rise typically seen in a bubble. In 2000, the national median existing-home value was $139,000. This grew to $215,900 by the third quarter of 2005 – a 55-percent nominal increase but a 34-percent inflation-adjusted gain.
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Home Sales Still Going Up: New home sales jumped another 13 percent in October. While sales of existing homes were down 2.7 percent from September, the median national price rose to $218,000, a 16.6 percent increase since October 2004.
Most Americans Hold an "Unfavorable" Opinion of Wal-Mart
Agent Disco pointed out to me that a poll released last week conducted by Zogby International, shows that an amazingly high 55% of people feel they have an "unfavorable" view of Wal-Mart.
Rather than chalking this up to everybody hating Wal-mart, I'd like to propose that what this really demonstrates is an obvious bias against Wal-mart in the media. The question that got people to answer "unfavorably" is "In general, thinking back on what you have recently seen, heard or read about Wal-Mart [bold is my emphasis] in the last few months, does it make you much more favorable, somewhat more favorable, somewhat less favorable, or much less favorable toward Wal-Mart?"
While it is fairly obvious that there is a group of people in the world who hate Wal-mart and everything it stands for and believe that it is one of the signs of the coming apocalypse, most people in America do their shopping there. An article in Variety today broadcast that over a half-million Garth Brooks CDs were sold at Wal-mart online through pre-orders and one day of sales (Nov 25th). That's right. One day.
We've had our own debates here on the site about the virtues and vices of Wal-mart. Some of the criticisms are valid. They used to treat their suppliers like trash. They'd sign one up for an order of 1 million units a month, then when the supplier geared his or her production line to produce that many, they'd come back and say, "We've found another supplier that will beat your price. Can you match or beat them?" That sounds like cold-hearted business to me. But they've also done a lot of beneficial things for our whole country. There has been talk that Wal-mart has had an enormous effect on keeping inflation low in the last decade. Just under half the people in the US visit Wal-mart every week (138 million).
So why do people, the media and special interest groups pick on them? I think it is because they are successful. They demonstrate what happens when someone (Sam Walton) has a good idea and the perseverance to realize that idea. And I think that the media resents that such a large company can do so many good things for people. The result of this is more negative coverage which, in turn stirs up people into believing that Wal-mart is a "big, bad giant" that needs to be reined in. What they may not realize is that by punishing Wal-mart (or other similar service and goods companies) they are really punishing themselves, by giving themselves less choice and forcing them to pay more and thus have less money.
I'd love to hear your disagreements.
Rather than chalking this up to everybody hating Wal-mart, I'd like to propose that what this really demonstrates is an obvious bias against Wal-mart in the media. The question that got people to answer "unfavorably" is "In general, thinking back on what you have recently seen, heard or read about Wal-Mart [bold is my emphasis] in the last few months, does it make you much more favorable, somewhat more favorable, somewhat less favorable, or much less favorable toward Wal-Mart?"
While it is fairly obvious that there is a group of people in the world who hate Wal-mart and everything it stands for and believe that it is one of the signs of the coming apocalypse, most people in America do their shopping there. An article in Variety today broadcast that over a half-million Garth Brooks CDs were sold at Wal-mart online through pre-orders and one day of sales (Nov 25th). That's right. One day.
We've had our own debates here on the site about the virtues and vices of Wal-mart. Some of the criticisms are valid. They used to treat their suppliers like trash. They'd sign one up for an order of 1 million units a month, then when the supplier geared his or her production line to produce that many, they'd come back and say, "We've found another supplier that will beat your price. Can you match or beat them?" That sounds like cold-hearted business to me. But they've also done a lot of beneficial things for our whole country. There has been talk that Wal-mart has had an enormous effect on keeping inflation low in the last decade. Just under half the people in the US visit Wal-mart every week (138 million).
So why do people, the media and special interest groups pick on them? I think it is because they are successful. They demonstrate what happens when someone (Sam Walton) has a good idea and the perseverance to realize that idea. And I think that the media resents that such a large company can do so many good things for people. The result of this is more negative coverage which, in turn stirs up people into believing that Wal-mart is a "big, bad giant" that needs to be reined in. What they may not realize is that by punishing Wal-mart (or other similar service and goods companies) they are really punishing themselves, by giving themselves less choice and forcing them to pay more and thus have less money.
I'd love to hear your disagreements.
Should You Buy a Warranty on that Purchase?
I came across this interesting article on CNET.com about whether or not to buy an extended warranty or service contract when you purchase an electronic item. The article has some good considerations, but ultimately, the answer is "no."
The main reason is because the warranty is seen by the retailer as pure profit. Often times the warranty only covers a period where the good in question has a low probability of breaking down. Even if you extend the warranty on your car, the amount of money you pay could be placed in a savings account or investment and when the machine or electronic good does break, you could withdraw it to pay for the repairs or buy a new one.
The article does mention that you should take into considerationt the price of the thing you are buying. A plasma screen TV costs a couple thousand dollars and a fraction of that for peace of mind is worth it, according to the article. The problem I see, is that often times the warranty on something like that isn't "$10 or $20 more." It could be $500 dollars for a 2 year extdended warranty. Placed in a good interest producing account, and you would probably have enough money to cover any repairs, if they in fact need to occur. The odds are against there even being a need, in which case, you keep the money.
The article also points out that manufacturers often times offer a warranty that is sufficient to find out if there are no inherent flaws or errors in the purchase. If I buy a TV and get it home and it doesn't work, then I can usually (almost always) take it right back for a replacement or a refund. Most problems occur well within this short time, normally a month.
So when you are out shopping this "holiday" season, think twice about accepting the warranty push from that sales clerk. It may just be wasted money.
The main reason is because the warranty is seen by the retailer as pure profit. Often times the warranty only covers a period where the good in question has a low probability of breaking down. Even if you extend the warranty on your car, the amount of money you pay could be placed in a savings account or investment and when the machine or electronic good does break, you could withdraw it to pay for the repairs or buy a new one.
The article does mention that you should take into considerationt the price of the thing you are buying. A plasma screen TV costs a couple thousand dollars and a fraction of that for peace of mind is worth it, according to the article. The problem I see, is that often times the warranty on something like that isn't "$10 or $20 more." It could be $500 dollars for a 2 year extdended warranty. Placed in a good interest producing account, and you would probably have enough money to cover any repairs, if they in fact need to occur. The odds are against there even being a need, in which case, you keep the money.
The article also points out that manufacturers often times offer a warranty that is sufficient to find out if there are no inherent flaws or errors in the purchase. If I buy a TV and get it home and it doesn't work, then I can usually (almost always) take it right back for a replacement or a refund. Most problems occur well within this short time, normally a month.
So when you are out shopping this "holiday" season, think twice about accepting the warranty push from that sales clerk. It may just be wasted money.
More on Checking Accounts
Another article here from Bankrate.com that compares checking accounts across banks. The nice thing with the MMAs I talked about in the last post is that you can often link these to your checking account, so you can move money from the MMA into your checking account, often by visiting the website and clicking your mouse a few times.
The article comes up with some astonishing facts given the previous post: the average amount to open a checking account is $445.54 and the average minimum balance for an account is $2,296.
I understand that you may have grown attached to your bank, but some of these requirements are downright ridiculous. Take control of your money and find the best deal.
The article comes up with some astonishing facts given the previous post: the average amount to open a checking account is $445.54 and the average minimum balance for an account is $2,296.
I understand that you may have grown attached to your bank, but some of these requirements are downright ridiculous. Take control of your money and find the best deal.
Get a High Interest Savings/Checking Account and Let Your Liquidity Work for You
A friend of mine pointed out to me that some banks are beginning to raise their savings/checking/MMA (money market account) rates. Right now, I belong to a credit union, that until this weekend, I thought had a fairly competitive rate of 2.45% a year on its money market savings account, with a minimum required balance of $2,500.
The friend of mine pointed out the site, Bankrate.com, which compares savings rates, mortgage rates and other liquid investment tool rates across financial institutions. He also told me about GMAC (A division of GM) which is offering a MMA with an annual rate of 4.10% a year! Also, in this particular case, the minimum balance is $500.
If we compare the interest on a balance of $5,000 in each of the institutions, the credit union would provide me with $123.89 of interest in a year (compounded monthly). If the $5,000 were deposited with GM, then I would earn $205.08 (compounded daily!!!). By keeping the money in the credit union, I am losing $81.19 a year!
Now, because of the higher interest rates that MMAs often provide, there are restrictions that apply. Notably that you may only make 6 withdrawls a month. Using it to pay your bills or as a checking account would incur penalties and fees, but if you have some money, and you aren't sure what to do with it, or you want to keep it in case of an emergency, I highly recommend placing it into a MMA. I know I will.
The friend of mine pointed out the site, Bankrate.com, which compares savings rates, mortgage rates and other liquid investment tool rates across financial institutions. He also told me about GMAC (A division of GM) which is offering a MMA with an annual rate of 4.10% a year! Also, in this particular case, the minimum balance is $500.
If we compare the interest on a balance of $5,000 in each of the institutions, the credit union would provide me with $123.89 of interest in a year (compounded monthly). If the $5,000 were deposited with GM, then I would earn $205.08 (compounded daily!!!). By keeping the money in the credit union, I am losing $81.19 a year!
Now, because of the higher interest rates that MMAs often provide, there are restrictions that apply. Notably that you may only make 6 withdrawls a month. Using it to pay your bills or as a checking account would incur penalties and fees, but if you have some money, and you aren't sure what to do with it, or you want to keep it in case of an emergency, I highly recommend placing it into a MMA. I know I will.
Thursday, December 01, 2005
Fair Trade or Free Trade?
You may have encountered the idea of "Fair Trade" or "Free Trade" in your daily life. Perhaps you were in the local grocery store looking for some herbal tea and noticed a sticker on the box or bag that said "Fair Trade Certified," or something along those lines. Perhaps you've read the newspaper about the WTO and "Globalization" and "Free Trade." Maybe you have a preference for one or the other. Or maybe, like me you're not quite sure of the difference between them, nor their importance to our lives as citizens in a prosperous country or as consumers.
Let's start with some definitions. Free Trade is the idea that trade should be unimpeded by excessive rules and regulations, usually established by governments. These governments create tariffs on goods they see as a threat to their own, domestic industries. The high tariffs prevent or at least make it harder for other countries' goods to be sold in the particular country. This of course makes it easier for domestic industries to compete amongst themselves (they don't have to compete on the world market for domestic customers).
Fair Trade takes the idea of free trade a bit further. Proponents of fair trade believe that free trade doesn't quite cut it. They think that trade should also be "fair." This might mean that rather than eliminating a tariff as a solution to helping a poorer trading partner, they would advocate paying more for the good, to ensure the producer gets a "fair" price. The problem (as the Economist points out) is that the definition of "Fair" is often quite subjective. Frederic Bastiat, a 19th-century French satirist, once observed that the sun offered unfair competition to candle makers. If windows could be boarded up during the day, he argued, more jobs could be created making candles. You can see where this line of thinking might take you.
Most Free Trade agreements were facilitated by meetings with richer countries and agreements that they would lower tariff rates from around 40% down to 4% on manufactured goods. This has been a boon for consumers. Think of cars, for example. Imagine not being able to purchase a Toyota, Honda, Mercedes, etc. Even though these cars tend to have an arguably higher quality rating than domestic brands, with high tariffs in place, you would have to pay a higher premium for them, most of which is used to pay the import taxes to the government. Think of how happy Ford or GM might be at higher tariffs on foreign cars. They wouldn't have to try very hard to produce a competitive car, because they know the consumer might consider price a major factor in their purchasing decision.
While manufacturing has benefited around the world due to the lessening of restrictions, world-wide agriculture has been severely retarded by high tariffs, mostly from developed countries. This hurts developing and third-world economies as farming is usually one of the only ways they can make money (textiles and clothing are also other markets they are often shut out of). An example from an article here (also posted in the comments section) cites the sugar industry as having a particularly nasty lobby that contributes money to politicians in order to ensure that tariffs on sugar in America and Europe remain quite high. As a result, consumers (you and me) pay quite a high premium on sugar, that if we had access to the world market price, sugar would be 90% cheaper. You might be thinking that you don't buy sugar very often and that it doesn't really affect you, but think again. The sugar that goes into candy, bread, sauces, etc. is all being bought at higher prices. Lower these prices, by buying sugar on the world market (and thus supporting poorer farmers from Africa, South America and Asia), and you would naturally decrease the price of a lot of consumer consumables made with sugar. You can help people and still be selfish!
You may have pegged me as a free-trade advocate or as a pro-globalization nut, but I would say that I'm a consumer advocate above all. And with that in mind, I'm not totally opposed to fair-trade, as long as I (and other consumers) have a choice in the matter.
Common advocacy for Fair-trade might be identified closely with the coffee and tea industries of the world. According to the International Coffee Organization, there are over 25 million coffee growers/producers in the world. A lot of times coffee can account for over 75% of a country's export income. Companies like Cafe Direct work with farmers from countries that don't have access to the richer markets and help advertise their coffee. This newly branded "Fair Trade Coffee" sells at a premium compared to other coffees, because the consumer is paying for the price of producing the coffee, plus a "social premium" that covers the cost of living in the country where the coffee was produced, a measure preventing the producer from taking on too much debt, and enough to help the farmer/co-op to improve their operation.
If a consumer wants to help poorer people who are trying to make a living in a world where tariffs and unfair rules are preventing them from getting a fair price, then I applaud them. One of the nice things about living in a free, capitalist society, is that the choice to buy fair-trade goods is available.
However, I think that when it gets right down to it, I would prefer the "Free-trade" approach and have governments lower their barriers to entry and have a truly global market available for all types of goods and services. This would allow countries to specialize in the types of manufacturing or agriculture (or services) that their talents, geography, and culture would best support. This idea is called comparative advantage (a great practical example concerning Country Alpha and Country Omega is highlighted in the link). This idea is extremely important when it comes to understanding the benefits of Free-trade.
I was talking with two different friends at two different times. One had recently returned from Peru on a humanitarian mission and the other had lived in Mexico during her years in college. The friend who had been to Peru lamented the encroaching presence of Wal-mart and McDonalds and the friend who lived in Mexico thought that globalization was destroying their simple way of life; their "culture," as she put it.
Both arguments, to me seem quite selfish, and are based on the idea that the people of these different countries want to continue to live in the poverty they currently find themselves in. The people in Mexico (where she lived) had to live in mud huts and electricity was a luxury. Their major crop was corn of which they mostly grew enough to survive on. She said they couldn't sell it because they wouldn't be paid much. Imagine if trade barriers in the United States for corn were erased. Those people in Mexico might be able to sell their corn on the open market for less than what it costs an American farmer to grow it.
The consumer benefits because now they have more money to buy other things with, the Mexican farmer benefits because they have income to which they can buy electricity, more land to farm, or what they deem necessary. The loser is the American farmer. Currently the source of the most opposition (or fill in whatever industry worker you want: textiles, furniture, cars, anything). They are the ones that want tariffs. They are the ones complaining about losing their jobs to the Chinese or Indians (or Mexicans in the above case). What people need to understand is that because the farmer can't produce the corn at a value to the consumer, they can now do something else. They can learn how to program computers or work in sales. Or maybe they can find jobs as consultants to the farmers in Mexico. The point is that the economy is dynamic and that because both economies have gained from the loss of the inefficiency there is now more resources, money, time to hire that unemployed farmer to do something more productive or relevant to the comparative advantage of the United States.
Free-trade, in my opinion, is the way to end world-wide poverty (or at least come pretty close). Allow people to produce goods at a truly fair price and begin to specialize their economies for the benefit of the whole world. Let consumers spend less on goods that can be produced by those specialized economies and then use the money saved to increase the specialization of their own country.
Two articles here talk about Fair Trade and Free Trade from differing perspectives. Read them and let me know what you think of the whole affair.
Let's start with some definitions. Free Trade is the idea that trade should be unimpeded by excessive rules and regulations, usually established by governments. These governments create tariffs on goods they see as a threat to their own, domestic industries. The high tariffs prevent or at least make it harder for other countries' goods to be sold in the particular country. This of course makes it easier for domestic industries to compete amongst themselves (they don't have to compete on the world market for domestic customers).
Fair Trade takes the idea of free trade a bit further. Proponents of fair trade believe that free trade doesn't quite cut it. They think that trade should also be "fair." This might mean that rather than eliminating a tariff as a solution to helping a poorer trading partner, they would advocate paying more for the good, to ensure the producer gets a "fair" price. The problem (as the Economist points out) is that the definition of "Fair" is often quite subjective. Frederic Bastiat, a 19th-century French satirist, once observed that the sun offered unfair competition to candle makers. If windows could be boarded up during the day, he argued, more jobs could be created making candles. You can see where this line of thinking might take you.
Most Free Trade agreements were facilitated by meetings with richer countries and agreements that they would lower tariff rates from around 40% down to 4% on manufactured goods. This has been a boon for consumers. Think of cars, for example. Imagine not being able to purchase a Toyota, Honda, Mercedes, etc. Even though these cars tend to have an arguably higher quality rating than domestic brands, with high tariffs in place, you would have to pay a higher premium for them, most of which is used to pay the import taxes to the government. Think of how happy Ford or GM might be at higher tariffs on foreign cars. They wouldn't have to try very hard to produce a competitive car, because they know the consumer might consider price a major factor in their purchasing decision.
While manufacturing has benefited around the world due to the lessening of restrictions, world-wide agriculture has been severely retarded by high tariffs, mostly from developed countries. This hurts developing and third-world economies as farming is usually one of the only ways they can make money (textiles and clothing are also other markets they are often shut out of). An example from an article here (also posted in the comments section) cites the sugar industry as having a particularly nasty lobby that contributes money to politicians in order to ensure that tariffs on sugar in America and Europe remain quite high. As a result, consumers (you and me) pay quite a high premium on sugar, that if we had access to the world market price, sugar would be 90% cheaper. You might be thinking that you don't buy sugar very often and that it doesn't really affect you, but think again. The sugar that goes into candy, bread, sauces, etc. is all being bought at higher prices. Lower these prices, by buying sugar on the world market (and thus supporting poorer farmers from Africa, South America and Asia), and you would naturally decrease the price of a lot of consumer consumables made with sugar. You can help people and still be selfish!
You may have pegged me as a free-trade advocate or as a pro-globalization nut, but I would say that I'm a consumer advocate above all. And with that in mind, I'm not totally opposed to fair-trade, as long as I (and other consumers) have a choice in the matter.
Common advocacy for Fair-trade might be identified closely with the coffee and tea industries of the world. According to the International Coffee Organization, there are over 25 million coffee growers/producers in the world. A lot of times coffee can account for over 75% of a country's export income. Companies like Cafe Direct work with farmers from countries that don't have access to the richer markets and help advertise their coffee. This newly branded "Fair Trade Coffee" sells at a premium compared to other coffees, because the consumer is paying for the price of producing the coffee, plus a "social premium" that covers the cost of living in the country where the coffee was produced, a measure preventing the producer from taking on too much debt, and enough to help the farmer/co-op to improve their operation.
If a consumer wants to help poorer people who are trying to make a living in a world where tariffs and unfair rules are preventing them from getting a fair price, then I applaud them. One of the nice things about living in a free, capitalist society, is that the choice to buy fair-trade goods is available.
However, I think that when it gets right down to it, I would prefer the "Free-trade" approach and have governments lower their barriers to entry and have a truly global market available for all types of goods and services. This would allow countries to specialize in the types of manufacturing or agriculture (or services) that their talents, geography, and culture would best support. This idea is called comparative advantage (a great practical example concerning Country Alpha and Country Omega is highlighted in the link). This idea is extremely important when it comes to understanding the benefits of Free-trade.
I was talking with two different friends at two different times. One had recently returned from Peru on a humanitarian mission and the other had lived in Mexico during her years in college. The friend who had been to Peru lamented the encroaching presence of Wal-mart and McDonalds and the friend who lived in Mexico thought that globalization was destroying their simple way of life; their "culture," as she put it.
Both arguments, to me seem quite selfish, and are based on the idea that the people of these different countries want to continue to live in the poverty they currently find themselves in. The people in Mexico (where she lived) had to live in mud huts and electricity was a luxury. Their major crop was corn of which they mostly grew enough to survive on. She said they couldn't sell it because they wouldn't be paid much. Imagine if trade barriers in the United States for corn were erased. Those people in Mexico might be able to sell their corn on the open market for less than what it costs an American farmer to grow it.
The consumer benefits because now they have more money to buy other things with, the Mexican farmer benefits because they have income to which they can buy electricity, more land to farm, or what they deem necessary. The loser is the American farmer. Currently the source of the most opposition (or fill in whatever industry worker you want: textiles, furniture, cars, anything). They are the ones that want tariffs. They are the ones complaining about losing their jobs to the Chinese or Indians (or Mexicans in the above case). What people need to understand is that because the farmer can't produce the corn at a value to the consumer, they can now do something else. They can learn how to program computers or work in sales. Or maybe they can find jobs as consultants to the farmers in Mexico. The point is that the economy is dynamic and that because both economies have gained from the loss of the inefficiency there is now more resources, money, time to hire that unemployed farmer to do something more productive or relevant to the comparative advantage of the United States.
Free-trade, in my opinion, is the way to end world-wide poverty (or at least come pretty close). Allow people to produce goods at a truly fair price and begin to specialize their economies for the benefit of the whole world. Let consumers spend less on goods that can be produced by those specialized economies and then use the money saved to increase the specialization of their own country.
Two articles here talk about Fair Trade and Free Trade from differing perspectives. Read them and let me know what you think of the whole affair.
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