Archives for July 2012

Carnival of Wealth, Pronghorn Edition

July 23, 2012

You can call them “antelope”, and you can call bison “buffalo”. Doesn’t mean you’re right.

No reason, we just think they look incredibly cool. They have a taxonomic family all to themselves. Not quite deer, not quite elk.

And it is a crime that not a single one of the western and central states where the pronghorn lives has chosen to make it its state mammal. The desert bighorn sheep, while impressive, doesn’t captivate us quite like Antilocapra americana, the Western Hemisphere’s fastest land animal.

On with the show. The weekly Carnival of Wealth, a roundup of personal finance blog posts. Some good, some awful, none dull. Away we go…

(First 2 posts out of the gate were garbage. This bodes horribly.)

We usually save this guy to the end, but we needed some early fortification. Mich at Beating the Index returns with a breakdown of Renegade Petroleum, a junior producer that’s recently made some promising finds in the vastnesses of Alberta and Saskatchewan. This post is technical, it’s loaded with visually appealing charts, and like most of Mich’s work, it’s best inhaled in one concentrated sitting. Read it and learn something.

Come on. Seriously? Carol J. Alexander at Christian PF lists, and we quote, “7 Safe Places To Keep Cash Hidden In Your Home.” Yes, cash is technically a personal finance topic, but enough already. All 7 of them are insane, or at least on the list of the first places a thief will look, but nothing beats this one:

4. A package in the freezer.

Save a frozen vegetable bag. Fill it with a few packing peanuts and your cash in a zip shut bag. Twist tie it shut as you would any other half-used bag. Hide it in the back of the freezer—as though it was forgotten. No thief is going to want your half-bag of old broccoli cuts.

There are 115 million households in the United States, and presumably a similar number of freezers. NOBODY is using, or will ever use, Ms. Alexander’s inventive if crazy tactic. Even Trent Hamm would find this to be an egregious waste of a twist tie. BONUS: She refers to “ATM machines (sic)”.

(A post about traveling with your pet.)

(A post about how Warren Buffet [sic] is a genus [sic], and at this point we wonder why the old man doesn’t just elide one of the t’s in his name since most people misspell it anyway.)

(“Documents you need to travel to Canada”, submitted twice. Driver’s license and passport. Go figure.)

(A post on Roth IRAs.)

HEY! Finally, something on-topic! PKamp3 at DQYDJ.net to the rescue. Want to contribute $30,000 to your Roth IRA? You can, and it requires you to jump through only a couple of (wide, non-flaming) hoops.  Unless you’re one of those people who dig paying more taxes than they have to – and apparently, they exist – this post is for you.

Made up your mind that you’re going to college, huh? Nothing’s going to dissuade you? The financial lunacy of doing so* notwithstanding, Teacher Man at My University Money has a list of recommendations for incoming freshmen. He also references the “Freshman 15”, which we assumed Canadians would refer to as the “Freshman 7”. Thirty-five years of metrification and you folks still don’t weigh yourselves in kilograms? What are you waiting for?

Takeaways from Teacher Man’s post:

  • like it or not, GPA is important
  • party as hard as you can, as fast as you can, so you can get it out of your system.

That second one might sound crazy, but then so does playing rugby without padding. Or forcing your kid to smoke the entire carton when you catch him with a cigarette. If you look at the above radical ideas from a distance, they start to make sense. And God knows the routine of killing every Sunday by waking up hungover and swearing that Monday will be different doesn’t work.

Joe Morgan once said that

A lot of star players get booed in opposing stadiums.

His namesake at Simple Debt Free Finance is more profound. He asks if paying off your mortgage early is a good idea. Unless it’s a bad idea.

Wait, it’s more complex than that. Obviously, you want to look at your interest rate, opportunity cost etc. If you can find an investment that pays 5% while your mortgage is 4%, especially when the latter allows you to deduct your mortgage interest, Bob’s your uncle. But on the other hand, paying it off early will give you peace of mind that…

Joe never bothers coming to a conclusion (“Paying off your mortgage early is a personal choice and depends on your financial and emotional situation.”), so we’ll do it for him. Going into debt for an asset like a house makes sense if you’re going to do something with the cash it frees up. At least in today’s economy, with mortgage rates at historic nadirs, you can find something to invest in that’ll make it worth your while to keep your mortgage for its entire term. If this were 1976, and mortgage rates were at 18%, we’d have a different opinion.

We’ve been skeptical of Chris Guillebeau for a while, not because he follows his dreams but because he implores the unprepared and the unserious to join him on this adventure. It’s that whole Tim Ferriss-inspired call to live life on your own terms, screw The Man, drop out of society and see the world at your leisure. Which is fine, if you know what you’re doing. Most people don’t.

Free Money Finance thinks otherwise and has reviewed Guillebeau’s book. At least in this instance, Guillebeau’s talking about the fun ways to make money, rather than to spend it. Free Money Finance is sold, so much so that he took the rare step of reading a hard copy of Guillebeau’s book and making notes in it.

John Kiernan at Wallet Blog has a knack for making even depressing news entertaining.

First, a diatribe. Don’t kid yourself that American politicians, at least the majority of them, care about entrepreneurism. The more oligopolies we have, the happier the politicians are. (After all, who would you rather solicit donations from – 100,000 neighborhood dry goods stores, or one guy at Target?)

This goes triple for banks. Small, community banks are hogtied by the FDIC to an extent that no major bank would ever stand for. And on the last day of 2012, the regulators could stop insuring some business deposits at small banks. They’ll do it at large banks too, but the obvious and intended result is that people will shift their money from First National of Butcher Holler to Citi or Chase. That’s the dystopian future that John foresees, and that neither a Republican nor a Democrat administration will bother to remedy. (Assuming we don’t see the mother of all political comebacks this fall.)

The lovely Liana Arnold at Card Hub warns us against what can happen if you go to binding arbitration against a credit card issuer. The Supreme Court ruled that card issuers can resolve issues via arbitration, rather than granting you the cardholder your day in court. That the arbiters are paid by the card companies is no reason to think that any decisions would be biased, not at all. But there is a way out, and it involves (oh God, here we go again) personal responsibility:

the only way to truly protect yourself from being taken to court or arbitration by a credit card company is to pay your bills.

Devastating concept, isn’t it?

British lenders let you miss a month on your mortgage payment. They just add it to the end of the term, of course with interest. Well, we’ll be dipped. Adam Buller at Money Bulldog center-justifies his way to a shocking conclusion regarding this shocking practice.

Almost there. Dan at ETF Base assesses a new exchange-traded fund, the AdvisorShares Global Alpha & Beta ETF. Mix 3 parts S&P 500 with 2 parts aggregate bond index, mix well. Except right now the proportions are more like 7-to-1. The fund incorporates a “death cross”, whereby its long-term moving average has outpaced the short-term one. Not necessarily portending a bear market, but you can smell one from here.

Finally, Greg Field introduces the new interest rate monitor at Nerd Wallet. It’s a list of deposit accounts that beat inflation by varying margins. It’s basically a bunch of links to some credit unions, but who cares? We’ve got an economy to keep alive here.

We’re on Twitter. We’re on Facebook. We’re in Investopedia, on Yahoo! Finance (in the Philippines, no less!), and on ProBlogger. Tomorrow, a new Anti-Tip of the Day. Wednesday, a new post. Friday, another new post. Monday, another CoW. Repeat as desired. Thanks for coming.

*Unless you’re majoring in the hard sciences, of course.

Filed Under: Carnivals Tagged With:

LIBOR Scandal? Boy, That Sounds Like A Gripping Topic To Read About

July 20, 2012

 

Not again

 

This dwarfs by orders of magnitude any financial scam in the history of markets. 

-Andrew Lo, MIT professor, hedge-fund oracle, and a man who understands that an academic can make the Time 100 list only if he makes outspoken, authoritative pronouncements.

Alright, what the hell is he talking about?

It surfaced about a week ago, a scandal by which we all end up paying a few basis points extra on our mortgages.

LIBOR. The London Interbank Offered Rate, whose acronym incorporates a medial letter and thus avoids being an apt homonym for “liar.” It serves as a starting point for short-term interest rates, and it changes (rarely by more than a basis point) daily.

Every morning at 11:00, the LIBOR is released by the British Bankers’ Association. Which is a consortium – a trade association, if you will – of 199 banks. If your bank is one of the largest in the world, it’s probably on the list. Which is here.

There are actually multiple LIBORs: they’re measured for each of 10 currencies (pound sterling; euro, long may it wave; American, Australian, Canadian and New Zealand dollars; yen, Swiss franc, Danish krone, Swedish krona.)

Each of those is submitted for each of 15 borrowing periods (overnight, 1 week, 2 week, and every number of months from 1 to 12.) That gives us 150 rates, the most widely quoted one being the 3-month rate for the pound sterling.

This morning that rate sat at .79%, the lowest it’s been since last February. They post it on Twitter @BBALIBOR.

How is LIBOR different than the federal funds rate that Ben Bernanke decrees? First, LIBOR is announced daily as opposed to every few weeks. Second, the federal funds rate is more or less mandated artificially. LIBOR is established via the market and then reported, rather than the other (i.e. Soviet) way around.

It’s straightforward, or ought to be. Every morning the BBA (via its vendor, Thomson Reuters) begins with the 199 rates its members charge for overnight loans and lists them in numerical order. It discards the top 50 and the bottom 50, then averages the remaining 99.

With 199 components, how can the LIBOR be subject to skullduggery? One crooked bank, or even 50, can only do so much damage, right?

Here’s the problem. From BBALIBOR.com:

Every contributor bank is asked to base their BBALIBOR submissions on the following question:

“At what rate could you borrow funds, were you to do so by asking for and then accepting inter-bank offers in a reasonable market size just prior to 11 am?”

So take back what we said earlier. The rates aren’t generated via market transactions. They’re generated via whatever’s going through the head of the bank representative who’s tasked with answering the question.

It gets worse. One paragraph later:

BBALIBOR is not necessarily based on actual transactions

Up until a few years ago, college football named its champion by saying to a bunch of coaches and sportswriters, “Forget about determining a champion on the field. Who do you think the champion should be?” BBA is doing the same thing.

Wait, here’s the funniest excerpt of all:

Each morning between 1100 and 1110 a named individual responsible for cash management at each panel bank formulates their own rates for the day and inputs them into this application, which links directly to a rate setting team at Thomson Reuters.  A bank cannot see other contributor rates during the submission window – this is only possible after final publication of the BBA LIBOR data.

  1. (Boldface ours)
  2. HAHAHAHAHAHAHAHAHAHAHAHAHA

You know how you pay lower interest rates the better your credit is? And how all things being equal, you’d prefer to pay lower rates than higher ones, regardless of the strength of your credit? The same applies to big institutions, too. In 2008 Barclays – the 322-year-old British bank whose group chairman just happens to be the chairman emeritus of BBA – started submitting bogus low numbers for the daily calculation. Those numbers were still often as much as 60 basis points higher than the average from the other submitters. Barclays was admitting to being in bad shape, while being in even worse shape.

Then again, why shouldn’t Barclays have submitted fake numbers? There was no penalty for doing so, at least not in the short term, and at least not a huge one. Barclays benefitted by having people think it was rich and liquid. Lying about its numbers was the institutional equivalent of putting chrome rims on your Cadillac while living in the projects.

The then-chairman of the Federal Reserve Bank of New York knew that Barclays was being disingenuous. His emails with his counterpart at the Bank of England say as much. That regional Fed chairman chose to do nothing. A few months later, he became United States Secretary of the Treasury.

And we thought his predecessor was incompetent and crooked

If you have an adjustable-rate mortgage…first of all, why would you subject yourself to market whims like that? Especially when fixed rates are historically low? Oh, you couldn’t get a fixed-rate mortgage? Then maybe you shouldn’t be buying a house.

Or financing college. Student loans are often tied to LIBOR, too. You pay a going rate, plus whatever today’s LIBOR is. Plus a few basis points artificially tacked on by Barclays and its co-conspirators. Across the globe, that’s tens of billions of dollars extra.

But justice has prevailed. Barclays paid a $450 million fine. Or about 3 days’ worth of its revenue.

As with the provision of health care, the fewer intermediaries there are, the better. Some lenders set rates without respect to LIBOR. Those banks’ managers know enough about their own lending practices – what to charge, who’s going to default, how big their overhead is – to name their own prices without relying on an august body an ocean away. Do business with one of those lenders, and you’re exposing yourself to less risk. And saving money.

 

Filed Under: Capitalism, Education, Finance Tagged With: , , , , ,

Be a Free Rider

July 18, 2012

It’s only riding a bike upright that you never forget. Riding one this way requires constant mental application every time.

 

Several years ago, your humble, previously fit blogger was testing only one of his body’s limits – its circumference. Tired of being a corpulent pile, he stumbled across a 2-week free membership at the now-defunct World Gym and proceeded to pay for an annual membership once the free one expired.

Months later, left town for a week. Returned home, and went to the gym only to see the parking lot empty and the doors padlocked. Outside were representatives from a competing chain, Gold’s Gym, selling memberships. They offered literally the deal of a lifetime – $99 a year, forever. The agreement was half a page long. Its only catch, if you can call it that, was that the rate would vanish upon cancellation. Quit and attempt to rejoin, and you’d pay whatever the going rate would then be.

$99 a year to maintain, if not improve, this new lighter and stronger body? They could have quadrupled their bid and it still would have been a bargain. Once you’ve exited the ranks of the disgusting pantloads, it requires little encouragement to remain on the outside.

And Gold’s has had a loyal member ever since, The End.

Yes, but that doesn’t explain the financial benefits of the decision to join Gold’s, which are still accruing.

Gold’s won out over 24 Hour Fitness and some local chains for several reasons. Gold’s has 750 locations around the world, perfect for a hopeless vagabond. Most of them stay open all night.

Paying for the privilege of an organized place in which to lift, stretch and run? Some people will do so for the intended purpose. Others, a number we’ll quantify later, join gyms for a different reason. It’s so they can say they joined a gym. Now, they can employ a new set of pronouns. They can tell friends and acquaintances about “my” gym, as if it’s LA’s Wild Card and they’re Manny Pacquiao.

If you’re going to work out once or twice a week, you might as well not bother. 5 times a week is somewhat standard, and there’s no reason why daily isn’t doable. It’s a habit, no different in form than smoking cigarettes or eating breakfast.

Allow a liberal 30 days a year for traveling and other unavailability, and that means 335 workouts annually. 30¢ a visit. In some jurisdictions, that’s cheaper than one of the aforementioned cigarettes. Subtract the cost of soap and water for a shower and, at least for this member, Gold’s is making negligible money on the deal.

Gold’s has been around for almost 50 years, and we already told you how many locations it has. The company is not run by idiots. How can they afford to lose money on their best customers?

Because this blogger is not one of their best customers, but rather one of their very, very worst. Someone who goes into a standard retail outlet 335 times a year and buys something on each visit is a “good” customer. Someone who pays a flat fee and then gets as much use out of the facility as possible is a different type of consumer, taking advantage of a different business model.

But in the whole, the subscription-based model works. It has to. It would be impractical and unworkable for Gold’s to charge per visit. Doing so would discourage the infrequent visitors, and the frequent ones even more so.

During one year’s reupping of the annual membership, the manager marveled at its low rate. (That original member agreement has since been scanned and preserved for posterity’s sake.) Sensing an opportunity to gain some asymmetrical knowledge, and noticing that there was nobody around, it came time for a discreet question. What ratio of members actually use their memberships? His answer could not have been pithier:

This location has 8000 members, 85% of whom I never see.

Of course it’s a cliché, the fat person who activates a gym membership on January 1 and disappears on January 9, but it’s nevertheless valid. Not only is it a cliché, it’s a demonstration of how easy it is to be a free rider if you’re just the least bit conscientious.

The average membership at said gym is around $300 annually. From the perspective of management (and of the 15% of members who actually use the place), the absent 85% are by far Gold’s’ best customers. They’re pure profit. And for the high-frequency members, pure subsidy.

God bless all 6800 of those negligent members’ rotund posteriors. Without them, in order for Gold’s to generate the same revenue, the gym would have to charge each of the rest of us $2000 a year.

So on some level, we’re not talking about being a free rider. We’re talking about being a +$1901-a-year rider, thanks to a bunch of people who make financial decisions with their emotions:

“I have to get into shape. A gym membership will do the trick.”

 

“I need to shed those holiday* pounds.”

 

“That pregnancy weight just won’t go away.” (Note: complainant’s youngest child is now 11.)

 

“I want to look good for my cousin’s wedding this fall.”

That last one takes the cake, not necessarily literally. If you want to look good for anything other than its own sake, or for the feeling of well-being that accompanies it, save yourself the bother. If your body’s composition needs to change, that change should be permanent. And that should be obvious.

This is a personal finance site, not a fitness one, but the lesson remains. Let other people pay your way, if you can.

It follows that you should never be on the other side of that transaction. A $35,000 golf club membership that you use 4 times a year is ludicrous. Your fellow members, the retirees and men of leisure who play hundreds of rounds a year, appreciate your largesse. Even though they probably don’t know that it’s you who’s being so generous.

Buy assets. Sell liabilities. A fixed cost that you’re never going to use is not an asset. Personal finance is agonizingly simple sometimes. Once again, why isn’t everyone rich?

 

*By the way, you can’t attribute a starting date to a particular pound. If you’re fat around Christmas, you will be fat the following July. And probably the previous one. The very act of seeking a scapegoat, however impersonal (“holiday” pounds, as if Christ’s appearance in a manger is responsible for you swallowing that deep fried onion whole), nullifies your commitment and betrays you as insincere. In a similar vein, you don’t have “wedding” debt nor “vacation” debt nor “furnished the new house” debt. You just have debt. Debt that you chose to incur, and that your creditors are entitled to.

 

Filed Under: Healthy Living, Making Smart Choices Tagged With: , , , ,
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