Archive for September, 2007

I’ve written about my intrigue with prophetic books before and I own and have read a large collection of works from all over the world regarding the birth and death of man kind from many different cultures perspective.

I enjoy reading these books because they give credence to things like Chaos Theory and Interconnectedness when put into the proper context.

I came across a headline which reminded me of something I had read in Revelations 6:6 in the Bible which reads,

“I heard what sounded like a voice from among the four living creatures, saying, “A quart of wheat for a day’s pay or three quarts of barley for a day’s pay. But do not damage the oil and the wine.”

With the Federal Reserve rate cut pretty much guaranteeing rampant inflation over the next few years, I found this quote rather appropriate. It was affirmed when I read this article in the Wall Street Journal,

Rising prices and surging demand for the crops that supply half of the world’s calories are producing the biggest changes in global food markets in 30 years, altering the economic landscape for everyone from consumers and farmers to corporate giants and the world’s poor.

“The days of cheap grain are gone,” says Dan Basse, president of AgResource Co., a Chicago commodity forecasting concern.

This year the prices of Illinois corn and soybeans are up 40% and 75%, respectively, from a year ago. Kansas wheat is up 70% or more. And a growing number of economists and agribusiness executives think the run-ups could last as long as a decade, raising the cost of all kinds of food.

Others in the media are actually beginning to notice that the government inflation statistics are pure lies as well as written about here,

“Sept. 24 (Bloomberg) — The U.S. consumer price index continues to be a testament to the art of economic spin.

Since wages, Social Security cost-of-living increases and some agency budgets are tied to it, the government has a vested interest in keeping it as low as possible.

Yet your real cost of living — what you keep after taxes, medical bills, college expenses and other household costs — is probably much higher than the 2 percent annual rate the government reported in July, showing a slight decline.

Millions are falling behind inflation because wage increases aren’t keeping pace with the cost of medical care, lost employment benefits, homeownership expenses, energy and transportation.”

When I wrote about my concerns with inflation a few weeks ago in a post appropriately entitled, “Hell Hath No Fury Like Inflation Scorned“, a few readers shrugged it off as “it doesn’t pertain to me, food is such a small expense of my overall income” and no one really seem to see the real implications: higher food costs begets higher demand for wages which begets higher costs of items which begets higher demand for higher wages which begets higher food costs…..you know where I’m going with this right?

Which brings us all back to Revelation 6:6 prophecy about needing a day’s worth of labor to pay for a quart of wheat. Think about inflation and this prophecy very carefully, there is an interconnectedness here that fits snugly into chaos theory.

 

 

As the month of September closes this week, I expect the stock market to dip over the next week or two.   I’ve always gotten the sense that the end of the third quarter brings a brief rally and then an immediate market drop the week or two after.  I suspect that mutual fund managers want to justify their expensive fees and holiday bonus so they push to drive up stock prices so all those quarterly statements  go out making bold claims, “We made xx% return for you this/these quarter(s)!”

As you excitedly read your statements, the mutual funds manager starts dumping stocks the following weeks.   I plan on buying any of the following tomorrow or Friday:  DXD (Double Short Dow), SDS (Double Short S&P), DOG (Short Dow 30), FXY (Japanese Yen).  FXY may seem like the odd man out but I’ve noticed that when the Dow rallies, FXY drops and vice versa.  There is a long complicated explanation for this but let’s just keep it simple:  I’m bullish on the Japanese Yen.

Keep in mind that it’s a short term play.  I’m looking to capture 2% to 3% return on these ETFs in the immediacy of the next few weeks.

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As always, this isn’t advice for you to do anything, it’s just my way of getting rich slick.

One of my side hobbies is TOE & quantum physics in addition to finance. Albert Einstein has been quoted as saying, “The most powerful force in the universe is compound interest” and I’ve always been fascinated by WHY he said such a thing. As I study some formulae in both the finance world and the nuclear world I can see some inverse parallels and it gives me some pause to think about the unifying theory of everything.

Let’s take a look at a quick example. First from finance, I’ve borrowed this example from Wikipedia.

Solving for the period needed to double money

Consider a deposit of $100 placed at 10% (annual). How many years are needed for the value of the deposit to double to $200?

Using the algrebraic identity that if:

 x \ = \ b^y

then

 y \ = \ {\ln (x) \over \ln(b)}

The present value formula can be rearranged such that:

 y \ = \ {\ln ({FV \over PV}) \over \ln(1+r)} \ = \  {\ln ({200 \over 100}) \over \ln(1.10)} \ =\ {0.693 \over 0.0953} \ =\ 7.27

Pretty simple right?

But now let’s take a look at the exponential decay of radioactive material from a half-life perspective from Wikipedia.

Half-life

A more intuitive characteristic of exponential decay for many people is the time required for the decaying quantity to fall to one half of its initial value. This time is called the half-life, and often denoted by the symbol t1 / 2. The half-life can be written in terms of the decay constant, or the mean lifetime, as:

t_{1/2} = \frac{\ln 2}{\lambda} = \tau \ln 2.

When this expression is inserted for Ï„ in the exponential equation above, and ln2 is absorbed into the base, this equation becomes:

N(t) = N_0 2^{-t/t_{1/2}}. \,

Thus, the amount of material left is 2 − 1 = 1 / 2 raised to the (whole or fractional) number of half-lives that have passed. Thus, after 3 half-lives there will be 1 / 23 = 1 / 8 of the original material left.

Do you see any similarities between the equations? In the world of finance, starting out with something small, over a period of a time, will grow into something very large. In the world of nuclear mass (e.g. everything), starting out with something large, over a period of time, will grow into something infinitesimally small as it decays.

The whole things become intriguing for me when you consider entropy and the possible link of all finite matter engulfed by an infinite universe.

No, I haven’t stumbled upon some great insight into the theory of everything but I do try to make observations of all the things I read and there is something here that I can’t quite wrap my head around, unfortunately I have to work on a few other things today.

The UAW strike got me thinking about what a really strange world we live in these days.  On the one hand, Americans have been trying to get the world to embrace capitalism and it’s some what surprising that the real change in China these days is largely due in part because of pressure put on the Chinese government by American consumers.   There is a great article here about the China capitalist model.

Inversely, American companies like the big three auto manufactures simply can’t seem to survive without subsidized (i.e. socialized) health care as described in this article here.

High health care costs are at the heart of Detroit’s problems. General Motors, Ford and Chrysler are pushing hard for an overhaul, having long argued that the nearly $100 billion that union contracts require them to pay out for active workers, retirees and their families’ health care add some $1,500 to the cost of building each car. This puts them at a disadvantage with their rivals from Asia, where the government is mostly responsible for workers’ health care.

I’m not certain where the equilibrium will end up in these “adjustments” but they create interesting ideas where a quasi-socio-capitalistic global society might be the remains of the day.

As a side note, my wife and I decided to get out of the city over the weekend and we stopped at a small rustic town in the middle of nowhere.  We stopped at an antique shop to pick up some local crafts.   As my wife looked around she pointed out a few things she liked.  She picked one of the items up, it looked like an old 18th century candle holder, flipped it over and read out loud, “Made in China.”   We looked at each other and giggled.  It turns out the only local craft actually made in the small rustic town were scented candles and almost everything else was made in China: quilts, arts, towelettes, etc.

No, that’s no a typo headline, I came across a website here which allows you to buy contracts on weather to hedge against rain, cold, hot, etc. In theory, you could arbitrage the weather as well. I was fascinated and captivated by the possibilities. If you think you’re going to have a harsh winter, why not buy a contract that pays you money if it gets too cold? If the summer is going to be scorching hot, why not buy a contract that pays you $100 for every degree above 97 F to help pay your AC bill?

As I dug a little deeper though, I discovered that these contracts were only available to large clients (e.g. 5 million or more) which disappoints me a bit. I would love to buy some contracts on the weather during the winter and summer. I can easily see myself start a business around this but it’s just not ready for retail clients yet I guess.

Check it out and I think you’ll be fascinated it’s called www.WeatherBill.com

I paid back my last 25k of arbitrage a while ago but it took nearly two months for my score to pop. It went from 757 to 825 after (I’m assuming) paying off that last 25k. Of course, I’ve now taken a 40k auto loan and plan on swapping that back over to credit card at 0% (thank you Helicopter Ben) so I wonder what my score will be in October or November.

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But I want to reiterate as I did in this post, as to why I think FICO has some very serious flaws. My score has bounced from a low of 725 to 825 simply because I was playing credit card arbitrage. My ability to repay that credit card debt was never in doubt so why did my score fluctuate so wildly? I’m not even sure how raising my credit limits impacted my score.

In a month or two, my 40k auto loan and 30k in new credit card arbitrage will show up on my credit reports and I plan on buying another new car so that might end up being an additional 40k on top of all that. I suspect that my score will drop down to 725 again which is ironic because I could easily pay all of that debt off from reserves.

Is the whole purpose of FICO to give banks a legitimate reason to jack up interest rates on none-to-wise consumers? Over the past years I’ve held and paid off upwards of 60k to 70k in debt and paid it off, does this count for anything?

Quite simply, my FICO score shouldn’t get trashed because I chose to take advantage of 0% APR offers from credit cards or car manufacturers. I’m still waiting on that class action lawsuit against the credit bureaus….

The Fed’s decision a couple of days ago has pretty much validated the moral hazard syndrome.   Everyone will be encouraged to speculate all over again.  There’s plenty been written about the financial moral hazard over the past few weeks so instead I’m going to write about all the other moral hazards found or soon to be found in America.

First, there’s the health insurance moral hazard. Hillary Clinton has just unveiled her health care plan which entails mandating every American get health insurance. I won’t debate the pros or cons of such a mandate but I will write about the possible moral hazard here.

If all Americans are mandated to carry insurance via tax subsidized plans and programs then I can only imagine that it will become pointless for most people to even attempt to live a healthy lifestyle. Why should I go to the gym every morning to stay fit when the government sponsored health plan will pay for my heart surgery? Why shouldn’t I go to the bar and get drunk today after work if my government sponsored health plan will help grow a stem cell liver somewhere for me when I need my own replaced after cirrhosis.

While I’m at it, I should go out and practice promiscuous sex with as many people as I want because I now have unlimited health coverage! STD? No problem, give me a shot or two – they’re free! AIDS? No problem, give me some free medicine to suppress the disease so it doesn’t look like I have it then I can infect others. Don’t worry, they get free medicine too!

Pregnancy? Free abortions and/or RU486 for everyone!

Second, we have government flood insurance (yet another moral hazard) which encourages building homes near dangerous areas prone to flooding: beaches, rivers, deltas, etc. New Orleans gets flooded again, no problem – government will rebuild everything for free!

Third, we have war for energy program sponsored by the US military! Why bother driving fuel efficient cars when we can have Uncle Sam tap energy reserves all over the world with a big billy club. Alan Greenspan admitted to the program but then backpedaled like all politicians when someone put some pressure on him a few days ago. Yet another moral hazard, don’t worry about energy because the government will find it for you and give it to you at reduced cost!

Many of the moral hazards can be expressed in a funny yet sad quote from the movie Good Will Hunting,

“Why shouldn’t I work for the N.S.A.? That’s a tough one, but I’ll take a shot. Say I’m working at N.S.A. Somebody puts a code on my desk, something nobody else can break. Maybe I take a shot at it and maybe I break it. And I’m real happy with myself, ’cause I did my job well. But maybe that code was the location of some rebel army in North Africa or the Middle East. Once they have that location, they bomb the village where the rebels were hiding and fifteen hundred people I never met, never had a no problem with get killed. Now the politicians are sayin’, “Oh, Send in the marines to secure the area” ’cause they don’t give a shit. It won’t be their kid over there, gettin’ shot. Just like it wasn’t them when their number got called, ’cause they were pullin’ a tour in the National Guard. It’ll be some kid from Southie takin’ shrapnel in the ass. And he comes back to find that the plant he used to work at got exported to the country he just got back from. And the guy who put the shrapnel in his ass got his old job, ’cause he’ll work for fifteen cents a day and no bathroom breaks. Meanwhile he realizes the only reason he was over there in the first place was so we could install a government that would sell us oil at a good price. And of course the oil companies used the skirmish over there to scare up domestic oil prices. A cute little ancillary benefit for them, but it ain’t helping my buddy at two-fifty a gallon. And they’re takin’ their sweet time bringin’ the oil back of course, and maybe even took the liberty of hiring an alcoholic skipper who likes to drink martinis and f###in’ play slalom with the icebergs, and it ain’t too long ’til he hits one, spills the oil and kills all the sea life in the North Atlantic. So now my buddy’s out of work and he can’t afford to drive, so he’s got to walk to the f###in’ job interviews, which sucks ’cause the shrapnel in his ass is givin’ him chronic hemorrhoids. And meanwhile he’s starvin’ ’cause every time he tries to get a bite to eat the only blue plate special they’re servin’ is North Atlantic scrod with Quaker State. So what did I think? I’m holdin’ out for somethin’ better. I figure f### it, while I’m at it why not just shoot my buddy, take his job, give it to his sworn enemy, hike up gas prices, bomb a village, club a baby seal, hit the hash pipe and join the National Guard? I could be elected president. “

Everyone is doing their part to create moral hazards.  The Fed works the credit & speculators moral hazard, Democrats work on the health insurance moral hazard, Republicans enthralled with energy moral hazards, and everyone else chips in to make it all happen.  Unfortunately, these hazards are not really sustainable in the long run, it’ll all come crashing down at some point in the near future.

What’s up with the US Mint?  I was considering buying some gold coins direct from the US mint over at USMint.gov and they’re not selling anything other than the Gold Buffalo!

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Gold hoarding so soon after Fed rate cut?

Who are the big winners with the Feds move yesterday? Borrowers. Who are the big losers? Savers. A few readers questioned my motive a month ago why I went to all my credit card companies and requested credit line increases in this post. I by no means foresaw the Fed cutting rates by 1/2 point but I did suspect the easy money would be flowing again which is why I wanted to get more juice that I could tap.

If you’re an avid reader of Get Rich Slick, you know I like to play it both ways. I’ll borrow heavily at 0% and invest that money into higher yield savings. Heck, I’ll borrow at 0% so I won’t have to pay even a low rate on a secured loan on a car!

So this Fed rate cut will be a boon for my extra curricular investment activities. Unfortunately, the Fed rate cuts and money dumping will mean inflation will spike higher which is why I’ve added a new category called “Basket of Goods” which I will use to periodically post the cost of a basket of goods at the grocery store to track real inflation.

Last night, I stopped at the grocery store to buy a “basket of goods” which included the following items:

Item Unit Cost Total Cost
1 Dozen Eggs $2.09 $2.09
Horizon Milk – 1 Gallon $5.99 $5.99
16 oz Box Cereal $2.39 $2.39
1 Loaf of Bread $2.19 $2.19
12 oz Bacon Pkg $2.68 $2.68
Rib eye Steaks 2.32 lbs $7.98/lb $18.59
2.5 Gallon Ozarka Spring $2.69 $2.69
Total $36.62

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I’ll follow on December 18th with another basket of goods to see how much the cost have gone up.

The Fed has gone and done did it. With Fed rates lowered by a whopping 1/2 point, we’ll see that hell hath no fury like inflation scorned. I’m heading out to the grocery store today to buy the following items: a loaf of bread, a dozen eggs, a couple of rib eye steaks, a gallon of milk and a package of bacon. I will scan the receipt and post it here or I might create a new website called “real inflation tracker” or something like it.

Each quarter, I will buy the exact same items and in one year, you’ll be able to see exactly what inflation means for you. You might be happy to see your stock portfolio rally a bit but you’ll be paying dearly every month at the grocery store!