Adventures in Money Making

The Little Old Lady School Of Applied Economics

2009-06-22T00:36:00.000-07:00

Someone sent me a very interesting letter from Bedlam Asset Management, quite an apt name given the economic situation over the past 2 years. Read it and you'll want to go out and buy gold coins!

Depending on where you live and how much you earn, so in the last five weeks you have seen a significant seasonal event, un-remarked as usual. This was the day when employees and employers alike have been allowed to earn some money. For until that day, everything you have earned this year has gone to the government by way of taxes. Now, and for the rest of the year, what you earn you can keep. It is odd that in modern times even the poorest members of society must, for at least the first 20 weeks of each year, work whilst all the income from their labour is appropriated by their rulers. Delightfully it’s even more backwards than the feudal Middle Ages, because then at least the serfs were fed and housed for free - but apparently, this is progress.

Today’s modern feudal treasurers have different problems. For in the small hours of the night, tucked up in their silk covered beds and away from the prying eyes of subservient apparatchiks, chancellors and central bankers writhe in their sleep with recurring night terrors. Occasionally murmuring of forbidden love, their ecstasy is crushed by more frequent groans of utter despair. For their subconscious reminds them that what they most crave they can never have and they are doomed to failure.

The history of money

Pre-history, when homo cave-potato decided he’d rather buy a club than make one, he needed a medium of exchange, and thus experimented with various forms of money including furs, cowrie shells, very large stones with holes in the middle, iron bars and blocks of salt. Each was unsuccessful; so early society soon settled on gold as the most practical medium of exchange, substituting it where supplies were limited, or when paying junior staff, with cheaper metals such as silver and copper. Although paper money has a long history, it was always explicitly understood that banknotes could be exchanged for something more tangible.

Since 1855 the Bank of England has been writing a now historically ironic promise “to pay the bearer on demand….. [in gold]”, even though any payment ceased in 1931. (This confusion is compounded by the fact that the ‘pound sterling’ refers to a weight in silver.)

Almost all countries produce coins which look as if they are made from silver and copper to give them credibility. Early bankers soon worked out that not everyone would want to cash in these IOUs at the same time, so began issuing more notes than were actually backed by physical gold.

Occasionally these ruses were found out, hence bank crashes; but as a global system it worked pretty well until 1913, when restrictions were imposed. Rather than cause a savings panic amongst the newly-monied middle classes, the system was replaced with a “let’s pretend” gold standard, which allowed for intra-government transfers of gold between debtor and creditor nations. This scheme limped along between major nations until July 1944 when, as a result of record wartime paper money printing, it too collapsed, to be replaced by the Bretton Woods Agreement. Now all currencies would be fixed, forever, at an agreed exchange rate to the dollar, which in turn was initially backed by physical gold held in Fort Knox, Kentucky and valued at $35 an ounce.

There is an excess of turgid financial books on this. The facts are really pretty simple.

This scheme survived for an even shorter period, collapsing in 1971 when France’s Général de Gaulle, again in wartime (Vietnam) decided to cash in the excess dollars France had accumulated, in return for America’s gold. This did not run at all well in Washington.

America decided to renege on the agreement (in practice a form of sovereign default).
The next permanent solution was ‘fiat money’, i.e. paper backed by nothing at all. At the core of this structure were the beliefs that (largely elected) politicians would be prudent economic stewards and if necessary could pay any financial obligations through taxing their local populations. The immutable fact about fiat money is that, over time, all paper currencies become worthless. Hence the mighty dollar today buys the same as 3.8 cents in 1900. Sterling is worse, the Swiss franc best, losing only four-fifths of its value in the same period.

The history of gold

Up until 1913, gold could be owned by anyone. Credit availability then was far more limited than now and inflation was self-correcting. So there were few reasons why its price should have varied much, and it didn’t, even when supply surged from new gold fields in the Americas, South Africa and Australia. It was a true store of value – a key purpose of money.

From 1913 onwards, private ownership became more and more difficult. The price was increasingly controlled by various arrangements fixed by a handful of central banks. The collapse of Bretton Woods removed the old $35 per oz. price cap which was then largely set by the free market. As a consequence, central bankers suffered a decade of near panic; for their populations immediately and very rudely showed an utter contempt for their politicians and financial authorities by increasingly referring to own gold rather than the local funny money. Naked emperors do not like being figures of fun, so quietly agreed to regain control of the price. These various changes included taxing gold purchases, making its ownership illegal and, most important of all, prolonged and increasingly co-ordinated attempts to force the price down.

Thus, leaving aside ancient history, unlike all other commodities and currencies gold has only had one full cycle. Once freed in 1971, the price soared to a peak of $832 in 1980 and was then slowly brought back under central control at the turn of the century. A return to suppressing the price worked in part because of unprecedented international co-operation, and more because “new” forms of credit creation seemingly made gold’s monetary role as irrelevant. The collapse of this new credit paradigm in 2008 means it too has become history. Funny money has joined the cowrie shell and large rock with a hole in the middle as socially interesting but failed experiments.

A new cycle begins

May 7th 1999 is a day that Britain’s current “Prime Minister” (the real power is a recent appointee to the House of Lords) would choose to forget. As a truly awful market trader, he widely broadcast his intentions to sell over half Britain’s gold reserves. In the next three years, 400 tonnes were sold between $256 and $296, leaving a mere 315 tonnes. The money raised was about $3.5 billion; its value today would be $12 billion.

Less-widely publicized than his astonishing naivety is that heavy selling of gold by central banks was also a fashionable, pan-European phenomenon. They have dumped nearly 4,000 tonnes in the last decade. Countries as diverse as France, Spain, Netherlands, Portugal and Italy also bought into a novel theory that central banks could be great currency traders and investors. This new idea was not led by Mr Brown at all but surprisingly, the Swiss National Bank. Since 1999 it has sold 1,550 tonnes. In each case it is impossible to prove whether the proceeds of gold
sales actually produced a better return than continuing to hold its reserves against a crisis. In the case of the Swiss, the difference between sales proceeds and today’s price is about $22bn (a ‘loss’ of over $3,000 per yodeller); or to put it into another context, the amount received is about half the direct cash injections, write downs and capital raised by the single Swiss Bank UBS in the last 18 months. So empirically the money has not been well used.

The implication is that, in Switzerland and across Europe, there has been a very high opportunity cost. Slowly realising in 2004 how dumb they were all looking, fourteen of Europe’s central banks agreed a structure to limit how much of their gold reserves each could sell annually (the Central Bank Gold Agreement). With the usual clarity of hindsight, these sales signalled the last hurrah and the failure of a prolonged period of deliberately trying to distort the gold market.

Do as I say, not as I do

Even so, gold still accounts for 60% of Europe’s reserves. Yet the developing world -
suffering a post colonial inferiority complex - saw what their one-time masters were doing, so also eschewed gold. Thus it accounts for only 11% of their reserves. Meanwhile America (which years earlier had already given a strong hint of what it really believed about gold, by reneging on its IOUs to Général de Gaulle), still has 8,133 tonnes. This accounts for 79% of its reserves. For all the central bank learned papers and propaganda¹ that gold should play no meaningful part in national reserves policy, most developed western countries have steadfastly maintained gold at the core of their reserve systems, but the absolute and relative size of these reserves has shrunk considerably. In contrast, the size of reserves in Asian countries has grown like smoke, to the extent that just six ‘countries’² – China, Japan, Taiwan,
South Korea, Hong Kong and Singapore - now account for over half of the world’s estimated $7 trillion of reserves. Of these, 66% is held in dollars, about three times greater than that held in euros; the yen and sterling each account for less than 1.5%.

Given that the US remains by far the world’s largest economy and trading partner, and as most commodities are priced in dollars, there is logic to this. Yet there are two flaws to a fiat money, dollar-based reserve system. The first is that, whatever American leaders may occasionally say to placate their allies, both the government and population have almost no interest in the dollar exchange rate against any other currency. As an economy which at a pinch could (apart from oil) be almost entirely self-contained, this too is logical. The second flaw is that, also at a pinch, America could longer term be entirely self funding.

The recent implosion of the international banking system has led to all governments printing money at a record rate. The balance sheet of America’s Federal Reserve has increased by over a trillion dollars since the end of 2007. The target for this year’s budget deficit is $1.2 trillion. The Congressional Budget Office is forecasting a return to a budget surplus in 2019 (one underlying assumption is there will be no further recessions) and that by then, Federal debt will have increased from the current $11 trillion to $21 trillion. This excludes worrisome state (i.e. California) and local (such as school boards) budget deficits. The money printing is by any standard off the scale; one way to put this in context perhaps is that in ten years time, on official - thus optimistic - forecasts, America’s Federal debt will be $3,000 for every person
alive in the world today. Not that America is the worst, it’s just the biggest. That whacky Silvio in Italy has a far greater problem, as does the UK.

Central bankers know of course that all currencies eventually become worthless – it is one of their night terrors - but they prefer it does not happen too visibly or quickly on their watch. Moreover, as most had bought into the mantra of Europe’s industrialised countries that “gold is for girls and wimps” (despite ensuring most of their own reserves remain in that metal), they are embarrassingly naked. Of China’s vast, nearly $2 trillion, foreign exchange reserves, a mere 2% is in gold. China is now in a dollar trap of its own making.

If it seeks to reduce its estimated $1.5 trillion of reserves in dollars (mostly in government bonds) the price will collapse. Worse still, unless it picks up its ‘share’ of newly minted American bonds the price will also collapse.

This explains China’s sudden interest in, and many pronouncements on the international financial system, as well as the lifting of the veil of secrecy over its own reserves. Until this year, it had not commented on these in detail for the previous six. Now its Premier and central bank Governor have become almost garrulous; suggestions have included that the world should establish a new financial order, including perhaps the use of SDRs, lecturing US administration on fiscal prudence and curiously, threatening America that it might diversify and thus collapse the American bond market. (The equivalent of trying to mug someone with a stick of damp spaghetti). This threat included the sudden announcement that its gold reserves – last reported at 600 tonnes in 2003 - have since increased to 1,054 tonnes making it
no. 5 in the world after Italy, and showing it could diversify if America refuses to listen. (There may also be a sub-plot; as the new kid on the block, it could be expected that China wants to be close to the US over time in the absolute level of its gold reserves.)

The dollar dummies

Yet for all the current uncertainty and noise, China and the other large, and largely Asian, holders of foreign currency reserves (or ‘dollar suckers’) have already worked out that they must diversify away from their giant dollar holdings, although they remain uncertain as to how. Their problem is size. Supposing China was to buy all this year’s new mine supply, estimated at 2,500 tonnes. Leaving aside that such action would cause the price to soar, one tonne is worth approximately $30 million at $950 per ounce - so this would ‘only’ cost $75 billion, less than 5% of China’s reserves. It could buy all its oil requirements for the next six months. That would only absorb 8% of reserves. Other Asian countries suffering a similar squeeze have tried other routes: South Korea attempted to buy an area of farm land in Madagascar larger than Wales, until international political and ecological shrieks forced it to withdraw; Singapore’s Temasek (not officially part of the country’s reserve system) made such disastrous forays into buying large blocks of shares, that last year the value of its funds fell by 47% (although it has since clawed some back).

On a much smaller scale, China has also been trying foreign investment and larger political/infrastructure development in Africa, Sri Lanka and Bangladesh. For all the lack of success with these various experiments, the diversification urge will not stop. Moreover, some new policies are becoming clearer. It appears China will look to buy almost all its domestically produced gold production, a pattern which others may follow. From recently being a minnow in the sector, China is now the world’s largest gold producer, outstripping South Africa, Australia or Brazil.

Last year, the world’s central banks sold a mere 246 tonnes of gold, the smallest quantity in over a decade. These sellers were mostly Europeans, for the rest of the world’s central banks were net buyers of gold for the first time in 15 years. Under the various central selling agreements, the latest of which will probably commence in September this year, it is becoming clear that, as these banks watch their own paper money being printed at a breakneck speed and observe their neighbours doing the same, they have become keener to hang onto what gold they still have. Given that, since 1977, Europe’s central banks have been eager to hold the gold price down, their absence as the price fixer is a major change.

An absence of sellers?

There are an estimated 30,000 tonnes of gold above the ground in reserves. No-one has any serious notion of how much else there is elsewhere, on fingers, in teeth, in jewellery or coins and bars. Estimates for the total amount of gold ever mined vary between 250,000 to 350,000 tonnes, of which a significant portion will have been lost (buried hoards, at sea etc.). More recently, individuals have been the net accumulators, central banks the sellers. What exists above the ground is far more important than mine supply, which is likely to remain in a gradual downtrend. Current annual production of around 2,500 tonnes is down by over a third on peak levels of the 1970s and unlikely to rise much. Perhaps new giant deposits will one
day be found but meanwhile, gold mining is becoming more expensive, deeper and more difficult. Thus the only realistic sources of new supply can be America, the IMF or the ECB.

For the US, policy has long been blindingly clear: do nothing. Hence reserves (America has the largest gold backed reserves in the world, albeit small in relation to the size of the economy) have remained unchanged. It is unlikely Congress will allow any change. The IMF has notional control of 3,412 tonnes, of which 400 tonnes is due to be sold this year. Of all major international bodies, the IMF has the greatest, almost visceral loathing of gold, preferring its own whacky SDRs instead. These are the ultimate funny money, being a fiat currency based on a basket of other fiat currencies.

Yet the IMF too may be chary of significant official sales because of its earlier failure.
Between 1976 and 1980 “in a bid to reduce the role of gold in the international monetary system” it sold 1,600 tonnes. About half of this was at the official SDR35 price (about $58) back to underlying central bank owners. (This is so dumb: the ‘Brownian notion’ of prudent finances to an absurd extreme; the market price varied between two and 24 times greater).

The other half was sold through a series of public auctions, initially 150,000 ounces per month rising to a peak of over 850,000. The policy of turning up supply was a poker game, trying to scare the market into believing that demand would be crushed. Yet as supply increased arithmetically, the amount bid for increased geometrically. It actually created a fire storm in the gold market, moving the price from $103 to $832. As abject failures in market interventions go, the IMF was the clear winner. Thus it would be loath to do so again; and it has another problem. The IMF does not own all the gold it holds; it belongs to its member states, which have pledged it to the IMF and could unpledge or replace with paper money. As already mentioned, most members are developing a marked propensity not to sell any more gold. The third potential source is the ECB or its member countries; many are the same nations with egg all over their faces which have been the vanguard of selling a substantial proportion of their reserves at much lower prices. That leaves only Germany (No. 2 gold owner in the world with 3,412 tonnes, 72% of reserves), noticeable only for the government’s inability to agree how much to sell, or what to do with the proceeds. As important, the Bundesbank has always been a reluctant seller of significant quantities of the nation’s gold because of its Weimar hyperinflation history.

Conclusions

Four decades on from a financial experiment with fiat money, the evidence suggests it is failing. Although governments will continue with the current system, relying on their ability to tax future generations, poor demographics alone in all advanced nations mean the odds that the current fiat money regime will survive unchanged for long are worsening. As suggested in previous reports, change may be driven by this recession, followed by years of stop-go economic activity and a series of sovereign defaults – which are normal. The largest central banks have doubled or tripled their balance sheets in the last 15 months. This is an explosion in fiat money. Giant budget deficits and rising unemployment ensure that government money creation will remain explosive for the foreseeable future. These problems are exacerbated by a variety of new events, for instance Asia’s reserve diversification programmes and the marked reluctance of historic sellers to reduce their holdings further. It is simple school economics that a very finite supply of one form of money will respond to an
almost fission-like increase in the supply of other forms of money, such as the amount of dollars, yen or euros in circulation.

It is very easy to make a case that the gold price could enjoy or suffer (depending on your point of view) an explosive run. Given all economies (and businesses) are cyclical, then it is axiomatic that over time they will also revert to the mean. Therefore it can be expected that not just central banks, but also commercial banks and other financial institutions will revert to earlier policies of the 1970s and ‘80s – of holding a proportion of their ‘core’ capital in gold. (Bedlam has 10% of its balance sheet there already, and 10% -12% of all client portfolios are in gold shares.) Governments could try to prevent wider gold ownership as before, but new
forms of ownership - such as gold ETFs - make it difficult to do so unless all leading nations agree simultaneously.

We have commenced only the second gold cycle under fiat money. Whether it has actually peaked already, or will shortly double, we can only divine by looking at chickens’ entrails or throwing our rune-sticks. We use an average price of $850 per ounce in 2010 when valuing gold shares, as that is prudent, yet our damp rabbit’s foot hints at a much higher price before the end of 2010 because the triggers are already in place: the absence of meaningful new mine supply, the cessation of central bank sales, explosive growth in money supply and of course, rising political uncertainty, which is the Siamese twin of recessions. Top economic schools used to train their pupils to sneer at little old ladies who kept their savings in gold coins in a
sock rather than trusting national banks. Today it is clear which group are the financial dimwits; perhaps an inherent understanding of cycles can only be learned through longevity. We subscribe to the little old lady school of applied economics. We are therefore certain that central bankers’ nightmares will worsen as their paper currencies devalue against the most trusted store of value, and in bed, the thing they secretly lust after.

Regards
Bedlam Asset Management plc

This is buy far one of the most interesting emails I've received in a long time. Please keep them coming!

The Biggest Crashes In History

2009-06-13T19:28:00.000-07:00

According Bill Bonner:

We've seen the biggest stock crash in history...
..the biggest property crash in history...
..the biggest deficits in history (four times the previous record!)...
..the biggest bailouts in history (we can't even count that high)...
..the biggest bankruptcies in history...
..the auto industry and the finance industry have been largely nationalized...
..the president of the United States of America is now making financial decisions for formerly private industries...
What's left to see?
Oh yes...the depression...and hyperinflation.

Hope you guys are protecting yourself by buying real assets, shorting long-term bonds and buy gold coins.

Bond Prices Spike

2009-05-29T14:51:00.000-07:00

I entered a paired trade in February where I went long short-term corporate bonds and shorted long-term government bonds. This has been doing pretty well so far. Over the past two days however, Treasuries have spiked. Ouch! Check out this interesting article about treasury prices in the latest issue of Barrons.

Treasury Yields Leap to Fair Value
By RANDALL W. FORSYTH

THIS HAS BEEN THE WORST TREASURY bond market ever, at least by some measures. Yet, the reasons aren't what you hear from the Howard Beale-style rants from Chicago futures pits.

While there are legitimate reasons for concern about the Treasury's trillion-dollar borrowing needs, the reluctance of creditor nations to accommodate them and the Federal Reserve's money printing, the recent back-up in yields largely reflects other, less fundamental reasons.

From a hair over 2% at the beginning of the year, the benchmark 10-year Treasury yield surged to a high of 3.70% Wednesday. And the 30-year long bond vaulted more than two full percentage points from their December lows to 4.63% Wednesday.

That doesn't sound like much except to bond geeks, but in price terms, the iShares Barclays 20+ Year Treasury Bond exchange-traded fund (ticker: TLT) lost 25% of its value over that time. That was nearly as big as the plunge in Dow Jones Industrial Average from the turn of the year to its early March lows.

What's extraordinary is that this jump in long-term bond yields came as the Fed pinned its federal-funds rate target at close to zero. Other back-ups in bond yields came when the market anticipated future hikes in the overnight rate, but the Fed has made it clear it will hold its funds rate target at virtually nil for as long as it takes to jump-start the economy.

Moreover, on March 18, the central bank said it would buy an additional $1 trillion of U.S. agency debt, agency mortgage-backed securities and Treasuries to push longer-term rates down to lower borrowing costs, in particular on mortgages.

That clearly hasn't happened; just the opposite. The Treasury yield curve (typically described as the difference between the two- and 10-year note) steepened to a record 2.77 percentage points Wednesday, according to Stone & McCarthy Research Associates.

Part of the back-up reflects the low absolute level of rates earlier this year. Indeed, 10-year Treasury notes yielding only 2% -- as they were around the turn of the year—were attractive only relative to other assets that were collapsing under fear of an economic apocalypse.

With disaster averted and the sighting of the so-called green shoots of growth, stocks had a bungee-jump rebound from their previous nosedive. And low-yielding Treasury notes, which were clutched as life preservers in the storm, were cast off.

But, contends Lacy Hunt, chief economist of Hoisington Investment Management, an Austin, Texas, manager of $4 billion in assets, "The sharp rise in Treasury yields is not a result of an economic recovery. That occurs when income, production, employment and sales, simultaneously, turn higher. Presently, these indicators merely show a lessened rate of decline."

Nor can the burgeoning Treasury borrowing needs fully account for the rise in yield. The ratio of government debt to gross domestic product showed massive increases in the U.S. during the 1930s and 1940s and in Japan since the 1990s, yet yields continued to decline. Indeed, Hunt argues, the shift in productive resources to the government sector from the private sector doesn't stimulate but stymies economic growth.

Finally, the Fed's expansion of its balance sheet doesn't translate into monetary stimulus if the liquidity merely increases excess reserves in the banking system or increases sterile holdings of money balances. Bank credit continues to contract sharply, Hunt points out.

So, what's to account for the sharp rise in Treasury bond yields? Blame it on the intricacies of the mortgage market.

There's a reason that Wall Street hired "rocket scientists" with math PhDs to analyze mortgages. The ability of homeowners to pay off home loans with little or no penalty makes them devilishly difficult to figure out, unlike bonds that commit the borrower to a fixed repayment schedule. Obviously, homeowners will repay or refinance when it's most advantageous for them, which is the worst time for investors in mortgages.

To offset this problem, they hedge with noncallable Treasuries -- buying when they brace for a wave of refinancings and selling when rates rise. Refinancings leave investors with short-term securities when rates fall—exactly what they don't want. Conversely, rising rates encourage homeowners to hang onto their low-cost loans, resulting in the lengthening of the maturity for investors -- again, the last thing they want..

While mortgage investors previously had bought non-callable Treasuries to offset the risk of their mortgages, mortgage investors have unwound that hedge, selling their Treasuries.

This sounds like so much inside baseball but it amounts to huge sums. According to an estimate by mortgage-securities-market veteran Alan Boyce, writing for Drobny Global Advisors, these hedge sales are equivalent to issuance of $1.1 trillion (with a "T") of 10-year Treasury notes, compared to expected sales of $250 billion of that maturity this year.

Clearly, Treasuries were in a bubble when they yielded just 2% for 10 years. Technical factors have nearly doubled that yield from the lows, but not fundamentals -- which still reflect a recessionary economy and debt deflation. As a result, Treasuries are back to fair value for these conditions.

Must Read: You Should Be Petrified

2009-05-15T12:18:00.000-07:00

Great video from Howard Davidowitz. He doesn't hold back any punches. If you can't check out the video, which I highly recommend, then here's a brief summary:

The green shoots story took a bit of hit this week between data on April retail sales, weekly jobless claims and foreclosures. But the whole concept of the economy finding its footing was "preposterous" to begin with, says Howard Davidowitz, chairman of Davidowitz & Associates.

"We're in a complete mess and the consumer is smart enough to know it," says Davidowitz, whose firm does consulting for the retail industry. "If the consumer isn't petrified, he or she is a damn fool."

Davidowitz, who is nothing if not opinionated (and colorful), paints a very grim picture: "The worst is yet to come with consumers and banks," he says. "This country is going into a 10-year decline. Living standards will never be the same."

This outlook is based on the following main points:

With the unemployment rate rising into double digits - and that's not counting the millions of "underemployed" Americans - consumers are hitting the breaks, which is having a huge impact, given consumer spending accounts for about 70% of economic activity.
Rising unemployment and the $8 trillion negative wealth effect of housing mean more Americans will default on not just mortgages but student loans and auto loans and credit card debt.
More consumer loan defaults will hit banks, which are also threatened by what Davidowitz calls a "depression" in commercial real estate, noting the recent bankruptcy of General Growth Properties and distressed sales by Developers Diversified and other REITs.

As for all the hullabaloo about the stress tests, he says they were a sham and part of a "con game to get private money to finance these institutions because [Treasury] can't get more money from Congress. It's the ‘greater fool' theory."

"We're now in Barack Obama's world where money goes into the most inefficient parts of the economy and we're bailing everyone out," says Daviowitz, who opposes bailouts for financials and automakers alike. "The bailout money is in the sewer and gone."

The Story of TARP Wife

2009-04-25T16:20:00.000-07:00

In sharp contrast to the post of on Toxic Wives, is a story about a TARP wife.

Confessions of a TARP Wife

Forget the opera. Cancel dinner at Bouley. How life has changed since my CEO husband went on the government dole.

I am a TARP wife.

In keeping with the unwritten code of this new sisterhood, I have taken a vow of financial abstinence. I returned the presents my husband gave me for Christmas (but didn't tell him, since he's already awash in gloom) and am using my credit balances at all the major department stores for important gifts and other necessities.

I haven't even looked at spring clothes; God forbid someone catches me out in something new. Keeping up with fashion seems somehow decadent in this new era, like getting Botox injections or catered dinners. Like so many others, I'm shopping in my closet. I've bought exactly two things this year -- makeup and panty hose. If I buy a present for someone, I have the package sent to their home. I don't want to be spotted climbing into a taxi, laden with Bergdorf Goodman shopping bags.

As you can see, being a TARP wife means, in short, making decisions according to a complex algorithm: balancing the need to look like your world hasn't crumbled beneath you -- let's not alarm the investors! -- with the need to appear duly repentant for your subprime sins. It also means we're part of the community of more than 400 companies that have received government bailout funds, whose fall from grace has been swifter and harsher than any since Mao frog-marched intellectuals into China's countryside.

Hitting the perfect note isn't always easy. For instance, for the past 15 years or so, I have thrown my husband a birthday party. We traditionally celebrate with about 30 friends, mostly New York pals we've known for decades. We're not talking an end-of-an-era Stephen Schwarzman-type $10 million blowout. Ours is a pretty sedate affair.

This year, of course, entertaining our crowd at our usual multi-star Michelin hotspots would simply not do. Extravagant is out; conservative is in. But not hosting a birthday dinner would have spurred rumors that we were broke, not a welcome thought either. Juggling these conflicting impulses, I decided on a slimmed-down party. Choosing Versailles to host World War I peace negotiations could not have been more complicated than my attempt to select the perfect spot for our annual dinner. Naturally, every restaurant I contacted was willing to meet my reduced budget; now that Wall Street firms are no longer entertaining clients or hosting events, New York eateries are struggling.

At the end of the day, it came down to a choice between an especially accommodating (and well-known) high-end restaurant and a less expensive, clubbier spot. We ultimately picked the cozier restaurant -- even though it ended up costing us more, so eager was the more chic outfit to host the party. Why spend the extra bucks? Because our chosen place is distinctly low-profile and rarely mentioned in the press. We did not need a snarky story about a "Wall Street bigwig living it up while taxpayers wonder where their money went." Really, not even President Obama spends this much time looking after his image.

It wasn't long ago that America celebrated successful companies and the people who run them. My husband, CEO of one of the biggest TARP recipients, has received more than his share of accolades (in my opinion, well deserved). But because of a few tin-eared nitwits who failed to notice that their industry was under siege, the entire country now thinks that TARP bankers are greedy incompetents dedicated to ripping off taxpayers. Fancy wastebaskets, under-the-rug bonuses, lavish junkets -- these are Exhibits A, B, and C in the people's case against Wall Street. Even the Octomom gets better press.

Here is the reality: TARP managers are scared to death. The executives of these companies are desperately trying to hold their businesses together while complying with a slew of damaging bills flooding out of Congress. My husband has battled the shutdown of the credit markets and a deteriorating business environment for two endless years without respite. He's exhausted, terrified of losing the company, and beaten down by the constant criticism hurled at him.

I'm trying to buck him up and not complicate his life. The last thing he needs is unpleasant publicity, so I'm learning to fly so far below the radar that I have perpetually skinned knees. We've picked up new habits, like making donations anonymously and sneaking in late to black-tie galas after society photographer Patrick McMullan has packed up his camera and gone home. We now regularly turn down the invitations we receive from museums and arts organizations that will inevitably be followed by a request for funds. No point in getting their hopes up.

I get it that I may not win much sympathy. Why should I? I'm not pleading poverty. We still live in relative luxury, we can afford almost everything we need, and we aren't facing the prospect of losing our home or having to turn to our families to support us. But we are getting squeezed.

Like most Americans, we are worried about money. Our net worth is tied up in stock that is down 95 percent. Last year, before it became fashionable to do so, my husband refused a bonus. Because of the new restrictions, his pay this year will be a fraction of what it was. The combined swoon in our income has caused us to cut spending drastically, in hopes that we can hang on to some remnant of our former lifestyle.

In an effort to conserve cash, we are eating out less frequently, meaning that I've been turning out some pretty dreadful lasagna. Actually, staying home and watching Law & Order reruns has become our new guilty pleasure. It's a far cry from opening night at the Metropolitan Opera, but it's not bad. I drive the family crazy by switching off the lights every time we leave a room. Needless to say, we fly commercial. Using the company plane is now out of bounds; we've heard there are reporters staking out the private airports.

I have become oddly superstitious. On some level, I feel I'm being punished for too many thoughtless years of assuming that the trappings of success were earned and not given. I'm constantly knocking on wood or offering little good-citizen sacrifices, like manically recycling or chatting with telemarketers.

I'm struggling with how to communicate all this to our children. We're thankful that they're intent on making their own way in the world, but at the same time, they confidently rely on us for help. One daughter recently mused about going back to business school. I hope she didn't notice my instantly negative reaction, stemming completely from concern about the cost. I cannot bring myself to shake her foundation. The collapse of the world economy has already crushed the confidence of young people just starting out. Meanwhile, retirement is like a rainbow, a beautiful mirage that we'll probably never reach. To some people, these may seem like luxury problems, but to us they are painful.

I've watched the skin under my husband's eyes take on a yellowish hue, and his hair turn from gray to grayer, as he tries to lead his company through this mess. He's up every night for hours at a stretch, and for the first time, he has health issues. For a person whose life has been punctuated mainly by success -- from perennial class president and high-school sports star to Ivy League MBA -- failure is the worst of all nightmares. He seems off balance, as though self-confidence were a physical ballast that he is slowly losing. It's heartbreaking how often he apologizes to me for losing so much of our money, for making so many mistakes.

I know people are angry at those they view as responsible for the subprime crisis and the subsequent economic meltdown. I don't blame them. I'm angry too. But my fury extends to any number of culprits: to Alan Greenspan, who encouraged the loose-money policies that undermined the pricing of risk; to Barney Frank, who cudgeled Fannie Mae into supporting loans to unfit homebuyers; to the rating agencies that were ethically compromised; to the subprime-mortgage brokers who chased fees and ignored any accountability; to the investors who didn't do their homework and absurdly leveraged up their balance sheets. I'm an equal-opportunity blamer.

And yes, I blame those who were in charge of the big banks -- including my husband -- for not seeing the default tsunami coming. But almost no one did. Everyone knows this, yet financial CEOs have replaced the Mob as the most despised group in the country.

The good news is that Americans have short attention spans. Before long, some other group will come along to absorb all the frustration and anger.

Meanwhile, I'm off to the tailors to get some clothes altered. Shopping your closet is great unless you've put on a few pounds over the years. I've been holding out hope that fewer nights out could shrink me to fit back into some of the past warhorses of my wardrobe. Unfortunately, our appetite for comfort food has risen in proportion to the Dow's decline; the selloff this past month has upped our mac-and-cheese intake and created a sinecure for my seamstress.

What Determines Your Credit Score?

2009-02-06T00:30:00.001-08:00

The New York Times had a recent article about credit scoring. Your credit score is a score that is determined by a company called Fair Issacs. The exact algorithm is a closely guarded secret but its a good indicator of your credit worthiness.

¶ 35 percent is determined by your payment history. Do you regularly pay your bills or fines on time to any creditor that submits your information to the credit bureau? Even unpaid library fines, medical bills or parking tickets may appear here.

¶ 30 percent is based on the amounts you owe each of your creditors, and how that compares with the total credit available to you or the total loan amount you took out. If you’re maxing out your credit cards, your score may suffer.

¶ 15 percent is based on the length of your credit history, both how long you’ve had each account and how long it’s been since you had any activity on those accounts. The fewer and older the accounts, the better (assuming you’ve made timely payments).

¶ 10 percent is based on how many accounts you’ve recently opened compared with the total number of your accounts, as well as the number of recent inquiries on your report made by lenders to whom you’ve applied for credit. Your score can drop if it looks as if you’re seeking several new sources of credit — a sign that you may be in financial trouble. (If a lender initiates an inquiry about your credit report without your knowledge, though, it should not affect your score.) Shopping around for an auto loan or mortgage shouldn’t hurt, if you keep your search to six weeks or less. But every inquiry you trigger when you apply for a credit card can affect your score, says Craig Watts, a spokesman for Fair Isaac. So be selective.

¶ The final 10 percent is determined by the types of credit used. Having installment debt — like a mortgage, in which you pay a fixed amount each month — demonstrates that you can manage a large loan. But how you handle revolving debt, like credit cards, tends to carry more weight since it’s seen as more predictive of future behavior. (You can pay off the balance each month or just the minimum, for example, charge to the limit of your cards or rarely use them.)

For the best rates on a loan or credit card, you want a score that’s above 700, at least. To achieve that, make sure to pay all your bills on time. It’s also a good idea to have at least one credit card you plan to use for a long time, but not too many. Keep a low balance — generally less than one-third of your total credit limit. Of course, it’s best to pay off your balance entirely each month. And stay on top of the information in your reports.

From what I've heard over the years, you should ideally have 4 lines of credit (credit cards, store cards or other loans) with less than 50% utilization for a better score. Also if you've had a credit card for years that you don't use and doesn't have a balance on it, don't close it. It just might lower your score. (Of course if you signed up for a gazillion cards in college and can't keep track of them, by all means close a few).

Will World Trade Come To A Halt?

2009-01-30T12:52:00.000-08:00

Here's an interesting email I received today. It's from Chris Mayer, a newsletter editor. He thinks that the Buy American Mantra might cause global trade to stop as countries everywhere erect trade barriers. Not a pleasant thought.

I’ve come to calling what we’re going through the “The Great Suppression.” It reflects the efforts of nearly every government everywhere to stem the unfolding depression -- even if it means nationalizing the banking system and destroying the currency in the process.

(A short digression on the word “depression”: Time was people called every economic bust a depression. The word “recession” came along later as a euphemism for “depression.” Politicians didn’t want to scare people, you know. In fact, the Oxford English Dictionary says that the word “recession” in this sense first appeared in an edition of The Economist in 1929. I like the old term better. Forget the technical jargon of today’s stuffed shirts.)

The most insidious effort of the Great Suppression is the clampdown on trade, which I’ve noted as a possible risk in prior alerts. It seems a natural turn of events. Economy gets bad. People lose their jobs. Workers clamor for help. Government blocks foreign competitors. Trade wars ensue.

The stimulus plan includes a “Buy American” provision. This means that any money toward infrastructure spending must use American-made iron and steel, equipment, etc. Sound good?

Well, funny thing is the companies that would benefit the most oppose the idea. Here is a quote from a Caterpillar spokesman:

“There is no company that is going to benefit more from the stimulus package than Caterpillar, but I am telling you that by embracing Buy American, you are undermining our ability to export U.S.-produced products overseas. Any student of history will tell you that one of the most significant mistakes of the 1930s is when the U.S. embraced protectionism. It had a cascading effect that ground world trade almost to a halt, and turned a one-year recession into the Great Depression.”

He overstates his case when he says the Great Depression would’ve been a one-year recession otherwise. Who is to say what might’ve happened? But it is clear that trade did grind to a halt. It is clear on the historical record that countries raised tariffs everywhere. It is clear that this did not help, and it took decades to unwind the damage to world trade.

As you know, I’ve been spending some time studying the Great Depression and the markets of the time. It’s like reading a realistic horror story. I am chilled by the spooky similarities between then and now. In fact, America in 1933 did implement a “Buy American” provision.

Whatever your political leanings on this question, you better think clearly when you invest your money. This provision is a big potential negative for investors. We own several American companies that have significant export businesses.

These are things I will watch carefully. A freeze in global trade will definitely have an impact on how we invest, should such a freeze materialize.

One thing I learned in Economics class was that trade tariffs have a net loss effect on the consumer. Of course, politicians never learn anything about economics. They're just interested in power and being relected!

Time To Short US Treasuries?

2009-01-28T01:36:00.000-08:00

Barrons thinks that the yields US Treasuries are too low and are due to bounce this year, causing a major correction in the bond prices.

Amongst the reasons cited are strong gold prices:

One sign of trouble for Treasuries is the resilient price of gold, which has risen $150 an ounce since late October, to $880 an ounce, despite weakness in most commodity prices. Investors rightly see gold as an appealing alternative to low-yielding Treasuries and virtually nonexistent yields on short-term debt as the government cranks up its printing presses. Gold was up $45 an ounce last year, while oil was down 50%. Another worrisome indicator: The dollar has weakened recently, losing 10% of its value against the euro in the past month.

Chief investment officer at PIMPCO advised to get out of treasuries, stating that they're very expensive and offer no margin of safety.

Check out this post to see a way to profit from a potential decline in Treasuries.

When Will China Be The World's Largest Economy

2009-01-16T12:41:00.000-08:00

Very recently there was a news article that China officially passed Germany as the third largest economy in the world, behind the U.S. and Japan. Most people shrugged, it was inevitable.

But it shows that China’s role in the global economy is bigger than ever. Even amid a global depression, China’s potential is mind-bogglingly vast. What follows are some thoughts on China’s potential:

China Will Be No. 1 When?

If China’s economy continues to grow at its current rate, it will pass the U.S. as the world’s largest economy in 18 years. Of course, it won’t grow at its current rate for 18 years -- not continuously, anyway. It will grow somewhat slower in spots and sometimes faster. What growth rate comes out in the end is anybody’s guess, but the 18-year guess will probably be off.

Then again, the guess also assumes the U.S. stays where it is. And that is also unlikely. The U.S. economy shrank last year and looks to shrink again in 2009. Meanwhile, China is one of the few big economies still growing, though at a slower pace. The result is that China will actually make up ground faster in 2009. As Ting Lu, a Merrill Lynch economist based in Hong Kong, notes: “In 2007, the gap between the growth rates of China and other big countries was huge. Actually, in 2009, the gap between will be even bigger.”

As the Great Depression II continues to lay siege to the world’s economies, China remains a coiled spring of growth. Even though China is now the world’s second- or third-largest economy, it still is a relatively poor country. And its resources are barely tapped.

The vast potential of China is hard to grapple with. Already, China has built the world’s largest building (Beijing’s airport terminal) and its longest transoceanic bridge. It has the world’s fastest train and the biggest dam. As John Pomfret, former bureau chief for The Washington Post in Beijing, observes: “It is a nation of builders, of grand schemes, of gigantism.” He calls China’s engineers “some of the world’s biggest risk-takers. Geeks with guts.”

Don't underestimate China's potential!

How To Spot A Toxic Wife

2008-12-17T18:35:00.001-08:00

The UK Telegraph had an interesting article on a new breed of Toxic Wives. Their sole aim in life is to find a rich husband, had a kid and then get a divorce and milk him for half of his wealth.

According to Susie Ambrose, who runs a ''gold-digger-vetting'' agency there are

increasing amounts of women who are desperately materialistic and who have learnt the art of ''faking love''. They don't want to marry for emotional support, intimacy or companionship; they are driven by monetary rewards.

Unfortunately, with the global financial meltdown, TWs are having a rough time with their rich husbands suddenly going broke overnight. The result is to try and take 100% of whatever is left.

Well, in order to save yourself the heartbreak and financial ruin, here's some tips on How to spot a Toxic Wife:

1 Women who are secure in themselves and have a more developed emotional intelligence and personal depth do not feel the need to show off. Check whether or not she is festooned with 'designer' accessories. Listen carefully to what she says. How often does she name-drop?

2 On first acquaintance, she will want to find out if you're rich or not. If you find yourself discussing your assets within the first 10 minutes you know her agenda. She is not going to waste time on you if you don't have serious money.

3 She will flirt without first finding out if you're married or involved with someone else. She has no scruples about stealing another woman's man.

4 Even though she may have an impressive job, her main asset is sex. She will come on in a highly provocative manner, be wearing lots of make-up and revealing clothes. Potential toxic wives are extremely clever. Do not equate intelligence with emotional values and worth.

5 Often she will use the FSFM tactic (feel sorry for me). This will manifest itself on the second or third date. She wants to assess how generous you can be and will tell you how ''naïve" she is and how "misled'' by some nasty people she owes money to. As a chivalrous male, you get out your chequebook.

6 You must find out how motivated she is. Ask her what her future goals, dreams and aspirations are.

7 Toxic gold-diggers tend to target older men. And your level of physical attractiveness makes no difference. Do you genuinely wildly arouse her or is this all an act?

8 She will choose the most expensive item on the menu or the most expensive drink.

9 Men, who have been recently widowed or divorced are great prey. You are at your most vulnerable.

10 Before you marry, go on holiday together or spend at least some time co-habiting. Remember, if you make a mistake you will pay for it for the rest of your life.

Here's a funny email from Bill Bonner author of Mobs, Messiahs, and Markets: Surviving the Public Spectacle in Finance and Politics, a wildly entertaining book on history of manias, investing and finance that I'm currently reading right now.

“Don’t you know there’s a worldwide financial meltdown?” we asked Elizabeth last night. “This is no time to be buying new furniture.”

“Well, I needed a new desk. But I’m not buying anything else.”

“Aren’t you picking up a new horse trailer tomorrow?”

“Yes, but I ordered that before the crisis hit. When I thought you had some money...before you started worrying about going broke.”

The phone rang.

“Who was that?” we asked a few minutes later.

“That was the curtain man. I need to get new drapes for the living room.”

“What’s wrong with the old drapes?”

“They’re just not right.”

“They’ve been okay for the last 13 years...what’s suddenly not right about them?”

“They’ve never been right...and I’ve finally realized what it is...so I’m going to change them.”

“Don’t you realize that there’s a global financial crisis? This is no time to be spending money.”

“Yes, but the crisis is likely to go on for 10 years...and I don’t want to live with drapes that aren’t right for a whole decade...and then buy them after we’re too old to enjoy them.”

“You’re not one of those ‘toxic wives,’ are you? You know, those women who leave their husbands after they lose their money.”

“Don’t be silly. You didn’t have any money when I married you. And I’ll stick with you even if you go broke. We may not have any money. But at least we’ll have nice curtains to look at. That’s why I’m getting them now...while you’ve still got some money left.”

Government Guaranteed Depression

2008-11-16T14:30:00.000-08:00

Here's a very interesting article by Dan Amoss:

The American people voted for change…and now they’re going to get it. But the change they get may not be the change they expect Obama to deliver. Something more sinister may be coming our way.

After an historic election and inauguration, president-elect Obama will enter office with a huge list of challenges. These challenges — from a contracting economy to large-scale corporate bankruptcies to soaring national indebtedness — will undoubtedly restrict his agenda.

Let’s hope Obama recognizes the need for incentives, profits, and capital investments in the economy. The economy cannot be taxed and regulated without potentially severe consequences. Former Fed Chairman Paul Volcker (and the last Fed chairman to provide adult supervision for the banking community) is an Obama adviser. So Obama should be apprised of the consequences of Carter-era deficit spending and money printing.

At the very least, Obama must act as a check on the potential for a Democrat-dominated Congress to turn a recession into a depression.

For example, some in Congress are floating a proposal to steal your 401(k), sell the proceeds, and invest in “government-guaranteed” retirement accounts. The only thing this Marxist idea would guarantee is a depression. Call or write your congressman if you feel that your 401(k) is in danger. We shouldn’t allow them to steal more from prudent savers than they already have.

Keep in mind that presidencies rarely resemble campaigns. President Bush campaigned on limited government and a humble foreign policy, and we got the opposite. To top it off, we had the illusion of real growth, with credit and housing bubbles that led to the greatest misallocation of resources in history.

The free market has been falsely accused for this financial crisis. But the free market didn’t get us here; a combination of government spending and crony capitalism did. Much ink is wasted on how we need to re-regulate Wall Street, but the fact is that the problem would never have grown so large without agency conflicts.

The agency conflict on Wall Street is the mentality of “heads I win, tails you lose.” CEOs, traders, and mortgage-backed security factories were paid more for taking more risk. So it shouldn’t surprise us that they overdosed on leverage to magnify returns, without considering risk.

Performance pay should be based on creating long-term shareholder value, not on meeting next quarter’s earnings estimate. A good place to start would be bonuses in the form of restricted stock that does not vest for 10 years. I doubt Lehman would have blown up if employees were paid modest salaries with the potential for sizeable ownership stakes in the future.

Much of our current mess resulted from totally complacent, incompetent boards of directors. Carl Icahn has good ideas for how this can be addressed without excessive regulation. Icahn explains how most corporate boards behave like government bureaucrats in this post . In my view, we need an economy in which everyone acts like owners, rather than CEO-pillagers.

A banking system built upon on a foundation of paper money also contributed to this crisis. The Treasury and Fed allowed institutions to grow “too big to fail.” Without taxpayer subsidies (i.e., Fannie and Freddie — two of the worst crony capitalist institutions in history) and the subsidy of Fed rate cuts, housing prices would have kept growing in step with household income. Instead, house prices went to the moon. Precious capital was thrown into a black hole when mortgage-underwriting discipline went out the window and homebuyers deluded themselves with bubble psychology.

When the current deflation fears are finally slain by widespread recognition that paper money is limitless, we’ll probably see a return to inflation and higher long-term interest rates.

For now, though, demand for bonds remains strong (rates remain low). So the government will likely keep issuing record amounts of new Treasuries and use the proceeds for bailout after bailout, instead of for productive uses. In other words, the government will toss billions of dollars at walking corpses like AIG – a company that produces nothing but spectacular losses and embarrassing headlines – instead of tossing billions of dollars at companies that produce essential items like barrels of oil or bushels of wheat. When governments toss easy credit toward non-productive industries, the supply of currency soars relative to the supply of goods and services. We call this phenomenon, “Inflation.”

The U.S. government’s massive borrowing requirements over the next several months will absorb a lot of the private capital that would otherwise fund various productive enterprises. So that means that farmers and miners and manufacturers will struggle to secure the credit and investment they need to finance their production. And if farmers can’t get credit, they can’t plant crops, which means that grain supplies are likely to fall…and prices to rise.

As Albert Einstein observed, “The significant problems we face cannot be solved by the same level of thinking that created them.” If the federal government proposes “solutions” to this crisis with the same type of thinking that got us here, we could be in for a very long period of economic pain. America’s status as a destination for foreign capital is at stake.

If the new government fails to act wisely and understand how we got here, the only “government guarantee” we’ll have is depression.

I think this scenario will play out. The only question is when it will happen. When it eventually does, real assets like gold and real estate will soar. Right now you can buy both of these assets relatively cheaply.

Who's To Blame For AIG's Failure?

2008-10-25T17:51:00.000-07:00

Here's an interesting synopsis about why AIG failed so quickly.

When Lehman Brothers still existed, the bank had around $150 billion in debt. And the Securities and Exchange Commission let hedge funds and other investment vehicles take $365 billion of insurance out on that debt through the use of credit default swaps. It was like buying life insurance on someone you knew was going to die soon.

Now the sellers of these swaps are on the hook for $365 billion. And guess who sold most of the Lehman swaps? AIG.

When the history of this debacle is finally written, AIG will be at the center of the story. AIG sold insurance on hundreds of billions of dollars of assets, with almost no collateral. It, along with Fannie and Freddie, was the primary reason so much credit was created and the primary reason so much credit has been destroyed.

So where was AIG's risk management? Isn't that insurance companies do, manage risk?

Super Rare Ferrari For Sale

2008-10-14T15:12:00.000-07:00

One of the world’s fastest modified sportscars is on sale at Trader – an 800bhp Ferrari F50 supercar.

The incredibly rare Ferrari F50 was made in the mid 1990s and came standard with a 520bhp 4.7-litre engine.

But this Ferrari F50 has been boosted to produce a whopping 800bhp – making it one of the fastest cars in the world.

The convertible F50’s trademark V12 engine has had two turbochargers with adjustable boost pressures bolted on, and is fitted with an upgraded exhaust, electrics and inter-coolers to stop it from melting.

And this engine work has meant the drop-top Ferrari – widely considered to be the finest driver’s Ferrari ever built – can accelerate from 0-60mph in just 3 seconds.

This makes it nearly a second faster than the standard F50 and half a second faster than the Ferrari Enzo.

And the car’s 800bhp makes it more powerful than Paris Hilton's Mercedes-Benz SLR McLaren and Porsche Carrera GT, and puts it on a par with the 806bhp Koenigsegg CCX.

The Ferrari F50 was built to celebrate the company’s 50th anniversary, and just 349 models were built between 1995 and 1997. Apparently the company just announced that in order to maintain the ferrari brand's exclusivity, it will produce one less car this year! Or maybe they're just using that as an excuse to cover up the drop in sales due to a recession!

If you're wealthy enough, you can pick up this sweet Ferrari for a whopping $800,000. But if you're like rest of us poor people, you'll have to make do with cheap Ferrari Clothing!

The Gold/Oil Ratio

2008-10-12T10:25:00.001-07:00

I subscribe to a lot of investment newsletters. One of them had a reader who asked an interesting question:

You have previously shown us charts indicating that gold was cheap compared to oil. With gold now moving inversely to oil, will you make the comparison again for us?
The key to the gold/oil ratio is the number 10. An ounce of gold ought to cost more than 10 barrels of oil. When gold is less than 10 barrels of oil, something is badly wrong. Either oil is too expensive or gold is too cheap... or both.

When oil was at $140 and gold was below $800, the ratio was absurdly low – 5.7. Extremes like this are rare and they never last. Today the gold/oil ratio, at $900/$90, is back to around 10. We expect it will continue to trend higher. It typically peaks above 20. Assuming oil remains around $90, that gives you a $1,800 target for gold.

Not sure how accurate this is, but its pretty interesting nonetheless. And if you've read the latest Forbes magazine, there's an article predicting $500 oil by 2015! Would that mean gold would hit $10,000/oz?

Regardless of what happens, I'm sure golad I bought gold coins at $500/oz.

Shortage of American Gold Buffalo Coins

2008-09-29T17:40:00.000-07:00

The market dropped a stunning 777 points today, the worst drop in years. Not surprisingly, gold held it's ground today.In fact, it even popped $20 this morning as the market plummeted. The same way oil is reverting to a thought process of old, gold seems to be regaining its role as a “flight to safety.” It's currently selling for just over $900/oz.

But gold is still down 10% from it's highs this year of $1030/oz. Funnily enough,as the market for gold ramps up, the U.S. government has suspended sales of its most popular 24-karat gold coin.

The 24-karat American Buffalo is in such high demand that the US Mint has simply run out. The U.S. Mint sang the same tune for the 1-ounce American Eagle coins back in August. After running out of Eagles, the Mint suspended sales and later reopened the market to only “designated dealers.”

As of last week, the Mint had sold over 164,000 American Buffalo coins in 2008, up 54% from the same time last year.

Isn't it odd that there is a shortage of physical gold and yet the prices are lower than they were several months ago? Am I the only one wondering about this supply-demand anomaly? Or maybe it's a new economy, just like the stock market in 1999 when revenue and profits didn't matter, but esoteric new criteria like "number of eyeballs" were developed.

If you want to buy gold coins and are having a tough time finding them, check out this store which aggregates my favorite set of gold coin collectibles.

Are Hedge Funds Worth It?

2008-08-23T20:46:00.000-07:00

Hedge funds have been receiving a bad rep over the past few years. Funds like those of Bear Sterns lost Billions in investor capital by making bad, overleveraged bets. And they charge a whopping 2% front-end load and 20% of the profits. Compared to many other well performing funds, this is outrageously high.

Is this enormous fee worth it? Here's a very interesting email I received today:

This could be the worst hedge fund in the world... Jonathan Wood, a former UBS trader, founded hedge fund SRM Global Master Fund two years ago. Now he's bust. Wood took positions in Bear Stearns, the defunct investment bank; Countrywide Financial, the posterboy of the mortgage debacle; and Northern Rock, the U.K. bank that experienced a run on its assets.
SRM Global Master Fund raised $3 billion in 2006 and is down 85% through July. Investors agreed to a five-year lockup, so they haven't been able to redeem. See what you get for "2 and 20"?

Makes the -15% year to date return of the US stock market look pretty stellar in comparison! I guess sometimes simpler investments are better!

Getting Out Of Medical Debt

2008-08-11T23:09:00.000-07:00

There are a lot of people who file bankruptcy each year due to huge medical bills that they just cannot pay.

The Wall Street Journal recently had a good article on getting out of Medical Debt. It seems that there are 77 million Americans struggling with medical debt, despite the fact that 62% carry health insurance.

Anyone who's financially struggling with medical debt should do the following:

1. Check for errors
By some estimates, 90% of hospital bills contain errors.

2. Stay on Top of the Insurance Company
If there is some dispute between the hospital and the insurance company, the easiest route is to just kick the bill to the patient. Make sure that the insurance company pays their fair share.

3. Negotiate
Everything in life is negotiable! However, its easier for patients without insurance to negotiate.

4. Ask For Help
Many hospitals have a financial aid center with access to government programs that can help pay for your treatment.

5. Ask for a Payment Plan
With treatment running into hundreds of thousands of dollars, all hospitals offer some sort of payment plan.

6. Don't Ignore The Collection Agencies

Ignoring letters from collection agencies will only ruin your credit. Instead try and settle for 25 or 50 cents on the dollar.

Which Would You Choose Life Experience or "Stuff"?

2008-07-29T21:38:00.000-07:00

by Steve Sjuggerud.

This month is my 10th wedding anniversary. So I thought I'd share a story of one of the many "little-but-big" things I learned from my wife. I am lucky to share my life with her...

I couldn't believe it...

A friend of my wife's wanted yet another purse... that cost thousands of dollars. She already has a closet full of them! What's the point of another?

My wife asked her a simple question: "Which would you prefer... Life experience or stuff like another purse?"

The friend thought about it, and she actually said she preferred the stuff. Hey, to each her own.

My wife and I try to focus on the experience over the stuff... For example, our kids (ages seven and five) are probably the only kids they know that don't have a PlayStation, or an Xbox, or a Nintendo Wii. They don't have a ton of stuff. But they're oozing with life experience...

Our kids have seen the world... They've been as far north as Iceland, and we toured much of it. And they've been as far south as New Zealand, traveling much of the North and South Islands by car as well.

Yet we don't have big flat-screen TVs in our living room or den. I can understand why big movie fans and big sports fans want 'em. They're just not important to us. (Are we the last Americans to actually have regular TVs?)

The great thing is, life experiences don't have to cost much at all (particularly if you can use some frequent flyer miles)... Our family just went to visit my folks for a week in Wisconsin, and I came back with most of the money in my wallet. Playing in the lake, riding ponies at the State Fair, and unbeatable home-cooked breakfasts from Mom. Everyone had a great time. And it sure didn't cost much.

If you're caught up in "stuff" if you "need" another thousand-dollar handbag then you've got to realize, the acquisition of stuff never ends. That flat screen won't be worth more than you paid for it. And neither will that handbag. You'll never get ahead. You'll never really "have money."

I define living well as 1) having time with friends and family, 2) pursuing my passions, and 3) well, not worrying about money. The nice thing is, you don't need a fortune to live well by that definition.

So which is it for you? Do you value life experiences or "stuff?" Which do you put a premium on? Remember, you can't take the stuff with you and you'll be busy working for the rest of your life to pay for the stuff.

By the way, my wife's friend thought about it, and later she called and said, "You know, I thought about what you said... I think you're right. It really is about the experiences, not the stuff."

New Passive Income Stream: RevResponse

2008-07-14T11:59:00.000-07:00

June was a record breaking month for me. I made $3,354.41 last month from various different sources, of which $2254.93 was online revenues. You can read about the compelete breakdown at Living Off Dividends & Passive Income.

Last month I introduced yet another source of online income, a company called RevResponse. I only made $17.50, but I didn't do anything to promote it either so I can't really complain. Making an extra $200-250 a year for an hour's worth of work isn't too bad! Plus when you combine it with the other sources of income, they all add up to a significant amount.

RevResponse gives away free magazines and white papers on a slew of topics ranging from Global Finance and Banking, to Autmobiles and Internet Marketing.

They also offer free trials to popular magazines like free trial to the the Economist. Old School programmers might remember Dr. Dobb’s Journal. Well, it’s available for free too.

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Jim Rogers: The American Dollar Is A Flawed Currency

2008-06-29T16:23:00.000-07:00

Legendary investor Jim Rogers thinks the US economy & dollar is on sever decline. Check out this great article in the UK's Guardian newspaper:

Indiana Jones and the China crusade
by Nils Pratley

Jim Rogers, investment guru; co-founder of Quantum Fund with George Soros

The American dollar is a flawed currency and will collapse in value before the end of the decade, taking with it the prosperity of the American nation. Investors should be buying commodities - platinum, lead, wheat, sugar, oil, the sort of assets that haven't been fashionable for a quarter of a century or more. While you're at it, teach your children to speak Mandarin, the coming language of the 21st century. And don't encourage them to do an MBA: "Tell them to be a farmer and do a real job."

Such advice, if given by your regular financial adviser, would probably provoke a complaint to the ombudsman. The speaker, though, is Jim Rogers, a legendary Wall Street name. The Indiana Jones of finance - a nickname earned by virtue of two round the world trips in the name of grass-roots investment research - has become a multimillionaire by backing such views with hard cash.

In 1973, Rogers and George Soros founded Quantum, one of the first and most successful hedge funds. In Britain, the Quantum Fund is best known for making £1bn by selling sterling ahead of Britain's exit from the exchange rate mechanism on Black Wednesday in 1992, but Rogers' contribution came before then. He helped Quantum to return a 4,000% gain in its first 10 years and departed in 1980, staying a year longer than he had intended only because 1979 had been so profitable - he predicted the stock market crash of that year.

The "poor boy from Alabama" whose first job was picking up bottles at baseball games at the age of five, retired at the age of 37 a very wealthy man. He set about managing his own fortune and travelling the world, projects that have become virtually indistinguishable over the years. In the early 90s, Rogers travelled 65,000 miles roving the world by motorbike and related the tale in his first book, Investment Biker. Last year, he completed a second, Adventure Capitalist, which was the result of an even more ambitious journey: a three-year, 150,000 mile journey by custom- built Mercedes across 116 countries with his girlfriend, who became his wife along the way - in Henley-on-Thames, of all places.

Snake burger

Like the earlier book, it is part anecdote - what it's like to eat snake; what happened when he forgot about the bottle of vodka in the boot when trying to enter Saudi Arabia - but the heart is commonsense investment analysis built on firsthand observations. His philosophy is that you learn about a country from talking to brothel owners and black marketeers rather than government ministers.

In conversation, Rogers rattles along in similar style. He punctuates everything with American-style full disclosure of his personal holdings - "I'm short Citibank, incidentally," he will interject into a dissection of the rotten heart of the American stock market - and delights in challenging received wisdom. His central argument is that a new bull market has started that will match the fireworks seen in the dotcom-fuelled stock markets of the late 90s. This time, though, the bull market will be in commodities not shares. Rogers' reasoning is straightforward: raw materials are running out.

"There has been no great oil discovery in the past 35 years," he argues. "The North Sea has peaked. Alaska is in decline. Mexico is in decline. All these great oilfields are in decline. To anybody who thinks I am lying about this, I would ask: where is the oil going to come from?

China bull

"Mines deplete. Wells deplete. It's supply. In the 1970s, we had horrible economies around the world, but commodities skyrocketed despite those horrible economies because there was no supply. That is happening again."

How high is high? The nature of all bull markets, he argues, is that prices go higher than anybody would have imagined possible. "Nobody could ever have thought that Cisco could go to $75 [it had been $5 a few years earlier]. Who would have thought in the 1970s that oil could go to $40 a barrel - it was $2 a barrel in the 1960s," he says.

"Sugar in 1966 was 1.4 cents per pound. In 1972 - six years later - sugar was 66 cents. Who could have conceived that? For decades, it had done between one and five cents. If you had said in 1966 that it would go up 47 times they would have made you certifiably insane. But it happened."

Hand in hand with this faith in the value of commodities is a long-term confidence in China, whose appetite for raw materials has already fuelled a strong rise in commodity prices in the past 18 months. All the best capitalists live in communist China, he argues, and overseas Chinese are returning with their capital and expertise. He has employed a Chinese nanny for his one-year-old daughter. Mandarin will be the most important language in his child's lifetime, he thinks.

But even this China bull predicts a major economic slowdown there, with accompanying political unrest, very soon. In this, he is not wholly out of the line with the consensus thinking - City economists are currently debating whether China's landing, after a decade of extraordinary growth, will be hard or soft. Rogers' view is that it will be very hard, but will also represent a golden investment opportunity.

"I remind you of the last two times that China had to cut back an overheated economy," he says. "In the late 80s, it led to Tiananmen Square when things got out of control and the second time was in the mid-90s, when they had to devalue their currency. Sometime this year or next you will see headlines in the Guardian, 'Turmoil in China'. At that point, you buy all the China you can and all the commodities you can because that will be bottom of the consolidation in commodities and consolidation in China."

Buying in the face of prevailing hysteria is a principle that has served Rogers well over the years. Crisis in China - however serious it looks at the time - will merely mark the end of the first leg of this new bull market, he thinks.

"Remember," he enthuses, "that the second leg is wonderful, and the third leg is spectacular. In the fourth leg, there is dancing in the streets and in the fifth leg people are hysterical and everything is skyrocketing every day. We are nowhere near the second leg, much less the third, fourth and fifth legs."

His bearishness on the US dollar is predicated on economic fundamentals, notably the balance of payments. Alan Greenspan, the chairman of the Federal Reserve and Rogers' bogeyman-in-chief, has been printing money on an unprecedented scale and President George Bush has been spending it just as rapidly.

"The US owes the world $8 trillion," he argues. "We are the world's largest debtor nation by a factor of many times and our foreign debts are increasing by $1 trillion every 21 months. That's terrifying.

Dollar demise

"People need to understand about this major change in the world and about the demise of the US dollar. The US dollar is going the way that sterling went as it lost its place as the world's reserve currency. I suspect there will be exchange controls in the US in the foreseeable future. It will be a complicated and difficult currency."

Not that Rogers is a fan of many currencies. He says he has stakes in a dozen but has "no confidence in any of them". He expects the euro to fail eventually but holds some anyway because he judges it to be less flawed than the dollar. For the record, his daughter's assets are held in Swiss francs and gold, silver and platinum coins.

Unlike his old partner, Soros, who has devoted part of his vast fortune to opposing Bush's election campaign, Rogers stands wholly outside the political fray. He calls the US-led invasion of Iraq a "horrible, horrendous, unbelievable mistake", but thinks the Democratic candidate, John Kerry, would make his own mistakes. "They wouldn't be politicians if they knew what they were doing," he says, far from flippantly.

The balance of payments, and the looming dollar crisis, make the election result irrelevant, he argues: "Whoever is elected president is going to have serious problems in 2005-06. We Americans are going to suffer."

The CV

Born 1942, Alabama

Education Yale; Balliol College, Oxford

Career US army; co-founder, Quantum Fund; professor of finance, Columbia University Graduate School of Business

Family Married to Parker Paige with a daughter

Interests Henley royal regatta

I've Pulled My Cash Out Of The Banky

2008-06-09T14:42:00.000-07:00

Not having much faith in the US Dollar, I've put a lot of my cash savings & investments into FXA (Australian currency shares ETF), gold and Canadian Income Funds (AAV, HTE, PGH, etc).

The financial sector is in meltdown and the market isn't doing so well these days.
The dollar's been crushed, and oil prices have spiked, so I thought you could do with some humor.

"Americans love to live swanky,
so we don't really like Ben Bernanke.
He's tough on the dollar,
makes me want to holler,
‘What is up with your rate hanky-panky?’

When I read about Mr. Bernanke,
I tend to end up kind of cranky.
He may be a scholar,
but he's breaking the dollar.
I've pulled my cash out of the banky".

Why I Never Hire Brilliant Men

2008-06-06T06:59:00.000-07:00

The article below appeared in the February 1924 issue of The American Magazine. The American Magazine was one of those general-purpose mass-circulation magazines which transmitted the popular culture of the day to the households of America. The magazine boasted on its cover "More than 2,000,000 Circulation," quite impressive in a nation which numbered 106 million as of the 1920 census. Though attributed to an anonymous author, Why I Never Hire Brilliant Men was the cover story of that issue, though the cover illustration was unrelated as was the practice of the day. (The New Yorker, one of the few survivors from that era, still carries on this tradition in its offbeat covers).

The article explains all the faults that the author found endemic among brilliant men. They start well but never finish, they get excited over revolutionary developments but grow weary at repetitive small tasks. This was so exasperating to the author that, after experiencing several such brilliant men in his business, he gives up on them in the sense of the title. Relatively interesting reading, full of pithy quotes and life lessons learned from individual experiences, the article could almost be freshened up for a modern-day issue of Reader's Digest, with its prescriptions of hard work and assurances of success for those who keep trudging away. A Times article on Google's hiring practices contrasted its legions of Ph.D. holders with the more traditional view that excessive education makes one overqualified:

Until recently, when computer science students completed their long Ph.D. training and stepped into daylight, they were treated warily by industry employers. American business has had to overcome its longtime suspicion of intellect. "Why I Never Hire Brilliant Men," an article published in the 1920's in the American magazine, is a typical specimen of an earlier era. In modern times, computer scientists are hired, but a doctorate can still be viewed as the sign of a character defect, its holder best isolated in an aerie.
— "What Is Google's Secret Weapon? An Army of Ph.D.'s" by Randall Stross.
The New York Times, Sunday, June 6, 2004, Late Edition - Final,
Section 3, Page 3, Column 1.

Why I Never Hire Brilliant Men

SITTING in my office last week, facing the man whom I had just fired, I thought of the contrast between that interview and our first one, nearly two years ago! Then he did almost all the talking, while I listened with eager interest. Last week it was I who talked, while he sulked like a petulant child.

"Your contract has sixteen months to run," I said. "My proposition is that we cancel it at once, and that I hand you this check for ten thousand dollars."

With a show of bravado he waved the check aside. He would hold me to the letter of the contract if it were the last thing he ever did.

I told him he had that privilege, but I was sure he would see the futility of exercising it.

"Let me review the situation for a moment," I continued: "You came to us as general sales manager on January 1st, 1922, at a salary of twenty-five thousand dollars. It was by far the largest salary we had ever paid in any executive position; but your record seemed to justify it.

"The letters you brought spoke in the highest terms of your sales genius. The only question which they did not answer to my satisfaction was why companies which had valued you so highly should ever have allowed you to get away! When I voiced this, you stated that they merely had been outbid by their competitors -- and I accepted your statement. It wasn't until you had been here a year that I learned the truth. You are a quick starter, but a poor finisher -- no finisher at all, in fact."

"Who told you that?" he demanded.

"Nobody needed to tell me. I found it out from your effect on our own organization."

"Organization!" he sneered. "You haven't got an organization."

"So you have remarked to me frequently," I answered; "and you may be right. Our folks have mostly grown up in our own business; they know comparatively little of the way in which things are done in other lines. That's what we wanted you to teach us, and you were very sure that you could . . . We were all receptive."

"Yes, you were!" he exclaimed scornfully. "Your folks were jealous from the day I arrived. They sat back and dared me to show results. I told you that six months ago."

"I remember you did," I replied, "and my answer is just what it was then. You claim to be a brilliant salesman, and yey you failed in the first essential. You never sold yourself to the people with whom and through whom you had to work. You say they were jealous, but a man of your intelligence ought to know that the answer to jealousy is modesty, hard work -- and results. The would have jumped on your band wagon fast enough if you had made them see the advantage of it. But after waiting around for the band wagon to start, they concluded that it wasn't going to start, and it never has.

"You brought your own assistants, and we paid them high salaries," I went on. "You moved our offices away from the plant and took these expensive quarters in the center of town. You were given a sales and advertising budget more than twice as large as any we have ever had before. Every request you made I granted as whole-heartedly as I knew how, because I believed that your fresh ideas were what this business needed. But twenty months have passed, and the sales simply have not grown.

"That's the stubborn fact which can't be blinked; and now it's come to a point where I must choose between you and my good old wheel horses who, in spite of their mediocrity, have somehow managed to build a very profitable business.

"You can stay here until your contract expires, but you will have no further responsibilites. The news will get around that you are merely hanging on; and when the end comes you will step out, discredited, to look for another job. Or you can leave now with ten thousand dollars, which is the additional penalty I am willing to pay for my mistake in judgment. If you go in the proper spirit, you are still young enough to profit by your failure."

HE MADE a little further show of protest, but he took the check.

I wonder what old-line company will next be dazzled by his sales talk; and what I ought to say when the president writes to ask me why we were willing to let him go. If I tell the entire truth it may end his business career. And there is always the hope that, next time, he may enter modestly upon his opportunity and produce real results. For he has the talent; there is no doubt about that. He is undeniably a very brilliant man.

When I was a small boy my father bought me two pairs of shoes; one at two and one-half dollars and the other at five dollars.

"My son," he said, "I want you to wear these two pairs of shoes on alternate days, and watch them carefully. Later on I will ask you to tell me about them."

Without understanding at all what he had in mind I wore the two-and-one-half-dollar pair on Monday, the five-dollar pair on Tuesday, and continued to give them equal service for about six months. At the end of that period I reported that the cheaper shoes were worn out.

"How about the other pair?" he asked.

"Here they are," I answered; "I've had them half-soled and they are as good as new."

He nodded his head, as if he had expected this information.

"I bought those shoes for a special purpose," he told me; "and I want them to be a lifelong lesson to you. There are just two grades of commodities in the world: the best -- and the others. My experience is that it pays to buy the best; and what applies to things applies equally to men. Pick out the best men for employers; and when you get along in life pick out the best men for employees. never mind what the price mark may be; the question is, what service will they deliver, and how long will they wear?"

I NEVER forgot that homely incident; but not until years later did I understand its full significance. The five-dollar shoe has a lot more wear in it because there was a lot more work in it. Even fine material, carelessly put together, will not make a fine shoe; but if material which is of just average quality is fashioned with special care and attention, it will result in a quite superior article.

What my father was trying to teach me was this: God Almighty, in fashioning his most useful men, often works slowly with quite common stuff. Now and then He turns out a quick job of superfine materials -- a genius who really delivers the goods. But most of His better grade line is ordinary in everything except the extra effort, and dogged determination, which have given it a finer texture and finish.

This knowledge, as I say, came much later. When I set out in life, it was with the idea that if I could attach myself to exceptional men, and exceptional men to me, my advancement would be assured.

In my sophomore year in college my father died. One of his insurance policies of twenty thousand dollars was paid to me; the balance of his estate went to my mother. It would have been far wiser if I had completed my college course; but I was ambitious to make an immediate record.

As it happened, I had come under the influence of the first of my costly collection of brilliant men. I will call him Carroll. He was five years older than I was and a member of my college fraternity. But he had dropped out at the end of his freshman year and was supposed to be making a great record with a wholesale grocery house in New York. We undergraduates were dazzled by the splendor of his visits. He wore fine clothes, smoked the best cigars, and talked with the assurance of a successful man of the world.

One night, following the initiation ceremonies at the fraternity house, he drew me into a corner and asked me about my plans. I had no plan, I answered, except to finish my course and to take the best job that came along.

"You'll just be wasting two years," he said decidedly. "You've got everything that college can give you, except a diploma. Look at me. I'm just as much a college man as though I had hung around here four years; and compared with my classmates I've got a three-years start in business. I've been watching you ever since you entered, and I think you have the stuff.

"I'll make you a proposition," he went on confidentially. "The big future in the grocery business is in chain stores." (In which he was right, as has subsequently been proved.) "I know the business; you have twenty thousand dollars. I know a city where we can buy two good little stores for that amount in cash, and pay off the balance out of the profits. When we get those two going right, we'll buy another, and another, until we have a big chain. It's a sure-fire fortune. You think it over for a few days, and if you want to hook up with me, let me know."

I was flattered by his interest, so I thought it over. That is, I indulged in what young men frequently mistake for thought. In imagination, I saw my name over the door and myself in a fine glass office looking out and watching clerks taking in money. I had, in anticipation, the thrill of buying one store after another and going from town to town on tours of inspection. I tickled my fancy with the idea of coming back to college and letting the boys consult me as an experienced man of affairs. And having finished this process of "thinking" I wired Carroll that I was ready to join him.

WE BOUGHT our two stores; there was no trouble about that. We hung out the signs which my imagination had pictured, washed the windows, rearranged the goods, painted the delivery wagons a bright red and worked like Trojans. We made progress -- quite encouraging progress. One of the fine traits in human nature is the desire which almost every decent man has to help young men do well. The second month we broke even. The third month we began to show a small profit.

Everything might have gone well for us if it hadn't been for Carroll's brilliance. He walked into the office one night and sat down with an air of immense satisfaction.

"We're on our way, Jimmy!" he exclaimed. "I've just been over to Booneville and got an option on the best store there."

"How are we going to finance it?" I gasped. "We're short of working capital as it is, and I don't see how we can spread out our time any thinner."

"Leave that to your Uncle Dudley," he cried, with a wave of his hand. "I've been over to the bank, and they're willing to take a chance on us. It will be a tight squeeze for a few months; but we'll make it. And as for spreading ourselves too thin, don't you ever make the mistake of tying yourself down to this desk. Nobody gets anywhere by doing all the work himself. We'll take Ferguson" (referring to one of our clerks) "and make him manager here, while we step over to Booneville and breathe the breath of life into that dear old town."

His enthusiasm was contagious. We sat up half the night figuring and planning, and by one o'clock we had already moved on, in imagination, from Booneville to the two adjoining towns.

For another six months the sun seemed to be shining in at all our windows. We put on more delivery wagons, took an option on more stores, laid in lines of goods which had never been carried before, and reveled in the joys of big business.

Then the thing happened which was inevitable; we came smash up against inventory time and found that we had been insolvent for weeks without knowing it. Plenty of money was passing through our hands; but not enough stuck.

We made an assignment, turned over every cent we had in the world and trailed sadly back to New York, where I found a job as a clerk for one of the jobbers from whom we had bought goods.

Carroll, crushed to earth, rose brilliantly again. I heard of him next as one of the promoters of a new process for treating rubber. It lasted a few months, and exploded. Various enterprises followed, and my latest information about him is that he is practicing the profession of "Industrial Management." I should think it might be a good profession for Carroll. He is a bad employer for himself, but he could put a lot of ginger into somebody else's business, if the other man knew the trick of handling and properly discounting brilliant men.

Well, I went to work behind a high desk copying orders. After a while I was given a chance to sell; and ten years later, at the age of thirty-five, I was general sales manager. At this time the owner of the business died and was succeeded by his son, a man about my own age. I will call him Adams. He announced immediately that I was to be vice president and general manager, and made a private arrangement with me by which I was able to purchase some of the stock.

"I don't want to be tied down by details," he explained. "You know that end of things. I want to be free to work on big deals and think out plans for the future of the business. Father was a darned good man in his day, but he got pretty conservative toward the end. You and I together will do big things."

I OUGHT to have been warned; for while the voice was the voice of my new boss, the words were the words of my old partner, Carroll. Indeed, the two men were curiously alike -- both handsome, magnetic chaps with a facility for making quick friendships.

I was still young in experience, however, and I entered into the new arrangement whole-heartedly. But disillusionment came swiftly. Our principal customer walked into the office one afternoon and asked for Mr. Adams.

"He hasn't been in today," I said. "He may come later."

"May come," repeated the big fellow with unpleasant emphasis. "He had a definite appointment with me, and I've traveled a hundred miles to keep it."

I lied as nimbly as I could: Mr. Adams had been called away unexpectedly, I said. He told me about the appointment and would make every effort to get back. Probably he would come within the next half-hour.

But the customer refused to be mollified. He waited in Adams's office for exactly thirty minutes; then he stalked out.

At five-thirty that evening Adams burst in and began to unfold some new and splendid plan. It was dramatic -- a stroke of genius. But for two men in our circumstances it was impossible. When he had finished I poured the bad news of the Big Customer's call over him like a bucket of cold water. At once, all his enthusiasm died out; he was so contrite that I couldn't possibly be angry with him.

"That's a rotten shame," he exclaimed. "I forgot all about it. I'll write the old bear a letter and lay myself humbly in the dust."

And write a letter he did -- a masterpiece -- with delicate reference to the Big Customer's years of dealings with his father, and a profound apology. Better than that, he took a train and arrived in the Customer's office a half-hour after the letter, coming back with the best order we had ever shipped out.

He was brilliant, there was no denying it, and so lovable that I value his friendship to-day more than that of almost any other man in the world. But I couldn't stand him in the business; I decided that within the first year, and we had a showdown.

"One of us should go," I said in the course of the hardest interview of my life. "Either I'll sell my interest, or you sell me yours."

"I don't see why," he answered; and he had the look of a favorite puppy who has been scolded. "I thought you liked me."

"Like isn't a strong enough word," I said. "I love you, and you're brilliant. But I'm a commonplace plodder, and so are all our employees. Moreover, this is a plodding kind of business, where the money is made by pinching pennies. You're about as much at home in it as J. P. Morgan would be running a barber shop.

"You conceive a big idea, get the whole organization on tiptoes to carry it out, and then you lose interest and go off on a new tangent. You think everybody else's mind ought to function as swiftly as your own, so you are alternately overenthusiastic and over-depressed. One day you carry some poor devil up into a high mountain and make him think he has a chance to become general manager. The next day you blow him up for not doing something which you think you told him, but which you actually forgot. You are always living, in imagination, about six jumps ahead.

WITH Adams out of our business, it gradually settled down. That is a terrible phrase, I know, but it describes our situation. We no longer had the brilliant emotional moments which he had inspired; we didn't attempt any very daring exploits; but at the end of every year we had more money in the bank than we had while he ran things.

After that, I never hired a brilliant man from one of our competitors, nor listened to the siren-tones of "experts" who promised to double our volume -- until I encountered the twenty-five-thousand-dollar beauty I have mentioned at the start of this story. Every year I picked up a half-dozen live young fellows who seemed to have a capacity for hard work, and shoved them in at the bottom of the pile, letting them make their way up to the better air and sunlight at the top -- if they had it in them to do it.

For a time I tried picking these youngsters out of the colleges. But my experience with college men was not fortunate. If I selected good students, I found too often that their leadership had been won by doing very well what their teachers had laid out for them. They had developed a fine capacity for taking orders, but not much initiative. If I hired athletes, too many of them seemed to feel that their life work was done; that the world owed them a living in exchange for what they had achieved for the grand old school. Also, there is not much social distinction in the grocery business. Young ladies -- and their mothers -- are much more thrilled by bonds than by butter and eggs.

So I took most of my raw material from our delivery wagons, or other places right at hand. Out of this hard-muscled, hard-headed stuff I have built a business that has made me rich according to the standards of our locality, and has built modest fortunes for at least twenty other men. More important than that, it has stood for clean dealing and a faithful adherence to the best business ethics. Even our hottest competitors, I think, are willing to grant us that.

READING back over what I have written I am quite conscious that it is an indictment of myself, as well as of the brilliant men with whom I have been associated. Any reader might fairly say, "He was too mediocre to appreciate anything better than mediocrity."

That criticism may be justifiable, fo I am mediocre. But the point I have in mind is this: Business and life are built upon successful mediocrity; and victory comes to companies, not through the employment of brilliant men, but through knowing how to get the most out of ordinary folks.

I was talking not long ago with the president of one of the big insurance companies.

"There is not a single brilliant man in our organization," he said. "I am not brilliant myself. I am just an average chap who started in peddling policies, and -- knowing my own limitations -- felt that I must put in a couple of hours' extra work every day in order to hold my own against my competitors."

In one of our largest cities is a newspaper which is said to earn nearly a million dollars a year. It was on the verge of bankruptcy when the present owner purchased it. He has made it practically a daily necessity to the business men of his city -- complete, accurate, dependable.

One day a very talented journalist joined the staff in a position of considerable responsibility. He had been editor of a smaller newspaper noted for the brightness of its style; and in the first editorial counsel he volunteered a suggestion.

"You have made a marvelous success of this property," he said to the proprietor. "Nobody would think of suggesting any change in the news policies. But won't you let me hire two or three really brilliant editorial writers whom I have in mind? Even you must admit that there is room for improvement on your editorial page."

"What's the matter with the editorial page?" the proprietor demanded.

"Why, it's so -- so commonplace."

The proprietor was silent for a moment. Then he said:

"My dear sir, the average business man is commonplace."

There is a great deal of encouragement to me in that statement, and I find the same sort of encouragement in reading biography. Who have been the doers of important deeds? . . . Geniuses? . . . Yes, some of them. But not a majority, by any means.

No man contributed more to the winning of the World War than Lord Kitchener, who was one of the dullest boys that ever entered a school. All studies were hard for him, with one exception: he was remarkably good in arithmetic. Capitalizing that one point of strength, he learned to handle men in large numbers and to make accurate estimates of the strength of his own forces and those opposed to him. When brilliant men were talking about a six-months war, he bluntly prophesied a three-years war, and forced the Allies to prepare for it.

Charles Darwin, who revolutionized scientific thought, was so unpromising as a boy that his father predicted he would be a disgrace to the family. James Russell Lowell was suspended by Harvard for "continued neglect of his college duties." Neither of them showed any youthful brilliance; they matured gradually into eminence by the slow process of diligent effort.

SIR ISSAC NEWTON sat one night at dinner beside a very attractive and voluble young lady.

"My dear Sir Isaac," she exclaimed, "how did you ever happen to discover the law of graviation?"

"By constantly thinking about it, madam," her "dear Sir Isaac" muttered.

In that blunt answer lies the substance of my experience, and what I believe to be the real secret of business achievement.

So sure am I of the soundness of this philosophy that I have five very simple rules for hiring men, which are the outgrowth of it!

1. Has he good health? Some months ago a newspaper collected from a hundred young men a list of the qualifications they would seek in the girls they hoped to marry. The list differed widely, as may be imagined. But at the top of almost every one was written the asset which I put first in men -- good health. Without it the best man in the world is likely to become pessimistic in his outlook, and to break when he is needed most. With it, even mediocrity can force itself by unusual effort into something fine and useful. Generally speaking, I would rather have a man who was born frail, and has overcome his frailty by careful living, than take one whose natural strength has never known its limits. The athlete, like the genius, frequently disappoints; while the man who has had to fight for his health knows how to value and preserve it.

2. Has he saved some money? I don't care how much, or how little, but he must have saved something. At times, this demand may seem harsh. A man will say, "I have had parents to look after," or "I have had bad luck with an investment," or, "I trusted a friend who failed me." To all such excuses I am sympathetic, but I do not relent. I answer, "That is too bad, but think what it means. You have lived twenty-five or thirty years without making a profit on your life; how can I expect that you will be a profit-maker for me?"

3. Does he talk and write effectively? This may seem a strange requirement, but it has been a very useful one. If we could unscrew the top of men's heads and look in, many of our problems would be eliminated, for we could see what sort of thinking goes on there. Lacking that privilege however, we have to judge by what comes out of the mind through the tongue and fingers. If a man writes and speaks "neatly" it is because his thinking is orderly; if his expression is forceful, the thought back of it must be forceful. But if he blunders for words, and uses phrases which express his meaning clumsily, I believe his mind is cluttered and ill-disciplined.

4. Does he finish what he starts? Geniuses almost never do. I look very critically into little things respecting the men I hire; the details of their dress, their handwriting, their record of tying up a job and leaving no loose ends. The biggest men of my acquaintance in business are "detail men" to an amazing degree. Often the president of a company is the only man in it who knows the little things about every department.

5. Finally, of course, I look for courage. General Grant was a rather slow-witted man, and a failure in middle life. But he won the Civil War; and the principle on which he proceeded was that the enemy was probably just as much scared as he was. Napoleon's motto was "When in doubt, attack." I like to throw something rather hard at a young man, and see how squarely he meets it. For with courage and the habit of going forward he can travel a long way. He will pass many men more brilliant than he is. Their active minds can always see two sides to every question; and they stand still while the debate goes on inside.

THESE are quite simple rules. They eliminate the genius quite as surely as they eliminate the unfit. No Edison could ever qualify; no Lincoln, either, with his soiled linen duster and his habit of interrupting important business with funny stories. I am sorry to forego the companionship of such men in my rather dingy building here in the wholesale grocery district. But I comfort myself with the thought that Cromwell built the finest army in Europe out of dull but enthusiastic yeomen; and that the greatest organization in human history was twelve humble men, picked up along the shores of an inland lake.

Million Dollar Ideas

2008-06-02T09:45:00.002-07:00

Some people have ideas that make them millions. A lot of ideas are really dumb but still seem to work, like the Million Dollar Home Page where some kid sold a million pixels for a $1 each.

The first million dollar idea was probably the Pet Rock, which generated $5 million for its creater. Here's the interesting story.

The Beginning

In 1975, Gary Dahl working as an advertising executive at the time, launched the sale of the pet rock which quickly transformed him into a multi-millionaire. This enormous profit is much more impressive considering it only took him six months to achieve his multi-millionaire status and the extremely low cost of the product.

The pet rock sold for $3.95 and estimates state Dahl sold over 5 million of his pet rocks in a six month period. Even more, each pet rock was purchased for a few pennies and Dahl estimated that the packaging and accompanying manual cost him under 30 cents per rock in bulk to produce. Therefore, assuming incidentals and delivery cost Dahl another 65 cents per rock, then Dahl was profiting 3 dollars per rock. With these totals Dahl earned over 15 million dollars during a six month period in 1975 which would be estimated at $56,166,419.02 today.

Gary Dahl, Pet Rock Inventor

Dahl’s somewhat innovative marketing involved commonplace gray pebbles, purchased from a construction supplier, which were then sold to the public as live pets. The idea Dahl stated, was inspired by the hassle, mess, and money that pets such as dogs, cats and fish require.

The Marketing
Teaching Pet Rock To Attack

Dahl began by creating the company called "Rock Bottom Productions." He imported the rocks from Rosarito Beach in Baja, California, Mexico. Packaging for the rock included a "Pet Training Manual" and a card board box, designed like a pet carrier. The pet training manual contained instructions on how to properly care for one's pet, including how to house train a pet rock by placing it on a piece of newspaper and other commands including sit, stay, roll over, play dead, and come.

The Consumers

Part of Dahl's marketing strategy was to state that pet rocks give us more pleasure than we know. He convinced the consumer that these pet rocks support this argument through their very existence, and clearly display that it is not an actual item that brings joy to the child in the human mind, but merely the idea of the item. The pet sits in a niche in the mind, created by the power of the owners’ imaginations. It is in the actual exercise of the mind that such pleasure is found.

It is quite a valid point that finding such productive and effective uses of recreation time can be more preventative and beneficial to the health of our minds than even the most advanced psychological treatments. People who purchased these unusual "pets" often gave them names, talked to them, petted them, and attempted to teach them to perform simple "tricks".

Pet Rocks Live On

Like most fads, the pet rock continues to live on and has seen a resurgence on the internet especially ebay. There are memorial pages, spin-offs, and one can still purchase such a pet, though new manufacturers have given their rocks new features and looks. For instance, not many plain gray pebbles are sold any more. One can buy rocks that are inscribed, painted, and decorated in many a manner, lending the rock much more personality than afforded Dahl’s creation. One can purchase a rock with an agenda, or one can buy a rock that is individually painted in memory of any dearly loved pet, or one can still purchase that rock that is completely void of previous perception, and let its idea grow in the mind.
Largest Collection of Pet Rocks

Pet Rock Breeds

Lesley O'Doherty currently has the worlds largest pet rock collection. She began her collection at the age of 6 when she received her first pet rock as a birthday gift from her mother. "I remember the exact day when I first got it. I had just unwrapped all of my presents and I thought there was no more to open. Then all of a sudden, mother handed me a small box and when I opened it, there was my first pet rock." Lesley said in an interview with Rock Collection Magazine in 2005. "I named him Pickles."

Lesley keeps her collection of rocks locked in a safe because she is said to believe the pet rock business is going to boom soon and she has several "special editions" which she hopes will be of value.

The Multi-Millionaire Idea

Dahl's idea was simple, effective and highly successful similar to other fads such as the Hula Hoop and Cabbage Patch Kids. With the pet rocks resurgence comes inspiration to create the next multi-million dollar opportunity. As indicated by Dahl all that is needed is a good idea, a thorough plan, hard work, and good marketing

More Ways That Airlines Can Charge Passengers

2008-05-26T11:41:00.000-07:00

American Airlines has just announced that it will begin charging passengers $15 to check in their baggage. I think a better system would be to charge by weight. You stand on the scale with all your baggage and pay a standard rate based on total weight and distance traveling.

According to Romesh Chander of Bellingham, WA, here are some ideas for
More ways that airlines can make money off passengers:

Toilet usage on the plane -- $5
Issung Ticket -- $5
Issuing Boarding Pass -- $5
Checking Boarding Pass at Gate -- $5

Piolts charge for flying plane -- $20
Copilot's charge for flying plane -- $15

Charge for leaving on time -- $5
Charge for arriving on time -- $5
Charge for arriving in correct city -- $5
Charge for arriving safely -- $5

Unscheduled stop -- $50

Bumpy ride -- $10
Lost luggage -- $10
Finding lost luggage -- $10

Clean plane -- $5

COMPLAINTS/questions (Any kind) -- $20

Fuel surcharge varies
Base ticket rate varies

Tip for Stewards $20% of final bill

Pension plan for executives $10% of final bill

Anybody got any other ideas?

Trading Lessons From Nicolas Darvas

2008-05-18T11:12:00.000-07:00

Nicolas Darvas, who studied to be an economist, was an infamous stock trader during the fifties and sixties. He wrote a book called How I Made $2 Million in the Stock Market that was widely discredited because the US attorney general said he actually didn't make that much money. The case was eventually dropped. Regardless of whether Darvis actually made as much money as he claimed, there was still some good trading tips that we can learn from him.

Darvis's Trading Lessons:

* There are no good or bad stocks. There are only stocks that rise in price and stocks that decline in price, and that price is based on the laws of supply and demand in the marketplace

* "You can never go broke taking a profit" is bad advice that will result in overtrading and cutting winners short. Selling winners and holding losers is to be avoided at all times

* There is a "follow-the-leader" style in the market. You will find success by selecting the most active and strongest industry group and trading its top leader

* The combination of price and increased volume is key to stock selection. Focus your time on new leaders emerging with a new market cycle

* It is the anticipation of growth rather than the growth itself that leads to great profits in growth stocks. "You have to find out what the public wants and go along with it. You can't fight the tape, or the public."

* One of the quickest ways to lose money in the market is to listen to others and all of their so-called expert opinions. To succeed, you must ignore all outside opinions and predictions. Follow your own strategy!

* Losses are tuition on Wall Street. Learn from them.

* You should expect to be wrong half of the time. Your goal is to lose as little as possible when you are. "I have no ego in the stock market. If I make a mistake I admit it immediately and get out fast. If you could play roulette with the assurance that whenever you bet $100 you could get out for $98 if you lost your bet, wouldn't you call that good odds?"

* Most of your big failures will come from three things: 1) when you abandon your rules, 2) you become overconfident, and 3) trade in despair when unsuccessful

* The best speculators search only for the very best opportunities. To be truly successful, you must wait for the right opportunities to present themselves and this often means doing nothing for long periods of time

* The market behaves the way it does due to participants behaving the way they do. No one knows what they will do until they actually do it

* Long-term investors are the real gamblers in the market due to their eternal hope that losing stocks will come back in price

* It is difficult to be profitable on the short side of the market versus the long side - trading in rising or bull markets will give you the best chance for success

* Most, if not all stocks, will follow the general trend of the market

* To train your emotions, write down the reasons for making every trade. When you lose, write down what you thought contributed to the loss. Then study and set new rules to avoid making those same mistakes

* Concentrate your trades. At the peak of his success, Darvas would hold only 5 to 8 stocks at one time which was in contrast to his earlier days when he was overtrading and would hold up to 30 stocks at a time

* Avoid fallen leaders. Overhead resistance will keep upside potential limited due to supply from previous buyers who had not cut short their losses. According to Darvas, the only sound reason for a stock is one that is rising in price. If that is not happening, then there is "no other reason worth considering."

* Darvas used his "box theory" to trade using boxes to time his entries (on breaking out to a new higher box) and exits (breaking below the current trading box). For more info on using Darvas boxes, visit these two websites: GerryCo & Sethi

* For new trades, Darvas used "pilot buys" which basically were starter positions in stocks he liked. Only if the stock continued to move higher would he then pyramid and increase his position. He learned never to buy more of a losing position

* He thought many unsuccessful investors made the mistake of looking at the same familiar names that might have worked well for them in the past instead of focusing on the next stock with the right elements for the new market cycle. "I am only in infant industries where earnings could double or triple. The biggest factor in stock prices is the lure of future earnings. The dream of the future is what excites people, not the reality."

* Perfection has no role in successful trading. No one can buy at the absolute lowest price and sell at the highest price. No time or effort should be devoted to that goal. "I never bought a stock at the low or sold one at the high in my life. I am satisfied to be along for most of the ride."

* Trade only when the environment is in your favor. Darvas' strategy kept him out of poor and bear markets because he wouldn't trade stocks that didn't fit his requirements which were only found in raging bull markets

* Be aggressive when warranted. Darvas believed in making aggressive trades when his system pointed to a great trade. In fact, sometimes 50% of his capital was devoted to just one stock

* While his trading approach was very technical, after studying the market's winners he understood the relevance of finding stocks also with good fundamentals. Namely, Darvas thought that earnings and the future estimate of increased earnings were very important

* Be a student of the market. Darvas learned by reading more than 200 books about speculators and the market and devoted studying the market for many hours a day. In fact, Gerald Loeb's books & approach served as key inspiration

* No one can completely master the market. After millions of dollars and best selling books, Darvas was still learning and tweaking his system until he passed away