elfs | Entries tagged with money

So, something weird happened to me last year. I realized I was rich.

My richness won't last; already, the investment-based income streams that got me to this place are drying up, the last bits of stock option awards that stretch back almost sixteen years. Almost all of the money that I made in that time has gone into savings and I still can't afford to retire, but I'm definitely much, much further along than most people. You know that whole "40% of American families would enter a death-spiral of debt and bankruptcy if they had a $500 financial shock" thing? Omaha and I could survive that. And a lot more. In the long-term, my income is going to go down, a lot, in the next three years, but last year? Last year I made bank.

To celebrate, this Christmas we all got new phones, top-of-the-line iPhones and Pixels. We spent a lot of money. And I barely noticed; it was a line item on a chart, a blip on our liquidity account. A big blip, true, but nothing that won't be recovered in a couple of months, provided Trump doesn't start a nuclear war or financial meltdown.

And that was it. We have a lovely house in a middling suburb that's almost too big for us now that one kid is in college; we have four-year-old car that was bought with insurance money after I was struck by a drunk driver, so the purchase of both cars stretches back almost nine years now.

I mention this because, the more I hang out with rich people the less I understand them. Whenever I read about a company that made millions in shareholder profits but refuses to raise the wages of its workers, I get unbelievably angry. It's just a line item. It's meaningless. Nobody will get hurt by it. Not a single shareholder will have to pull in his or her belt a notch to survive making sure hourly wage workers have enough to eat, and medicine to survive. Stories like "Wall Street punishes Alaska Airlines for increasing pilots' pay are insane. I make more than the highest-paid co-pilots in the US! That doesn't make any sense; lives aren't on the line if I screw up, I'm not second-in-charge of a multi-million dollar piece of machinery. I'm just a guy with some well-trained math skills. If my boss keels over in an emergency, it's not my job to get 300 people down to the ground safely.

I just... I just don't get rich people. I mean, I get some of it. At some point, if you're in charge of a lot of information streams, having a personal assistant and being able to pay them is important. Some people are the lynchpins of industry or society; I can understand them having a 10× or even 20× income stream to pay for their support mechanisms, like a personal assistant or someone else to drive and launder. And I don't begrudge buying nice things; I like nice things, too. But 270× is insane. And fighting to maintain that 270× by screwing your workers out of a living wage and fighting to reduce taxes and eliminate public health services, the very services that keep your underpaid support team from coughing up the Black Plague in your limousine, is madness.

It's tar-and-feather, torches-and-pitchforks territory. And I worry we're getting there very quickly.

Current Mood: cranky

Let's see if I can summarize Yonatan Zunger's article on financial shocks from last week:

The United States is a highly advanced, mature economy which is capable of meeting all the needs and most of the wants of its citizens.

This maturity makes it difficult to establish growth industries. We have enough food, water, warmth, and shelter. Contrary to the press, most of us actually do live in a world of safety and security. Most new business are catering to wants and luxuries.

In a capitalist system, lack of growth leads to difficulty in finding sources of profit.

Despite the evidence of plenitude, these minimal resources are not remotely distributed in a way that resembles equality, or even fairness.

For those at the bottom of the scale, a financial shock of as little as $400, such as an illness, a house fire, a broken leg or an automobile accident will result in a genuine downward spiral into poverty. In the absence of a social safety net, that person and their dependents will lose everything.

That "everything" is still valuable, but the victim can no longer afford it. If that "everything" is land, it ends up in the hands of the creditors.

The net result is that the creditors now own more wealth, and the poor less.

Those who can afford financial shocks will be fine; they can pay the bills and recover. Those who cannot will disappear, possibly forever, from the ledger.

Those who can afford financial shocks can, as mentioned above, profit from the losses of others.

Therefore, those wealthy enough to afford financial shocks can engineer those shocks.

There are two kinds of government: an Imperial government, which is an army that invests in health care and education only insofar as those support the main enterprise of waging conequest; and an Insurance government, which supports its citizens fully, backs them with relief in times of crisis, and maintains an army only insofar as the state has external threats.

The United States is now neither. It is a hollowed-out core in which the oligarchy is routinely "shaking the tree," manufacturing financial shocks that allow it to gather more capital.

The Republican Tax Bill currently before Congress is a blatant attempt to "shake the tree" even harder, creating shocks that couldn't be survived even by those who could survive even a $1,000 shock.

The next step will be to reach futher up, attacking those with two, then five, the ten thousand dollars in savings.

Current Mood: aggravated

In a recent article, Reuters asked the question, "Are the Big Banks Winning?" The article isn't about success; it's about whether or not the banks are avoiding regulation and becoming more powerful, despite the best efforts of the Obama administration, hampered as it has been by the plutocrats' fingers in Congress. It's about short-term "winning" which will ultimately crash the economy for most of us. The plutocrats don't care; they can go live in their gated paradises surrounded by guard labor, and the rest of us can get by in our slums and swamps as best we can, enjoying whatever trickle our masters toss at us.

But what caught my eye was this line: "No country can achieve a high rate of growth without a well-functioning financial system. ... An outsized financial sector expansion can actually reduce economic growth, according to their data. This relationship holds for country after country, and the tipping points are fairly consistent. When private credit grows to between 90 percent and 100 percent of gross domestic product, it is tilting toward too big."

Now that the financial sector is so big, it's only goal is to spiral upwards in pursuit of more and more money, taking with it like a wind funnel all the cash that would otherwise go to servicing the manufacturing and service industries of the United States. These places are being starved for capitol and credit, and there's no promise that anything we small investors do will help them off the ground.

A friend of mine recently went to work for Wall Street. He was a brilliant developer who had worked on a mapping project (not for Google or Apple, so don't blame him!) and I had asked him for help with my own mapping project. (Developers do this all the time, turn to our masters for "where can I learn more about..." tips and tricks). He'd forgetten everything he knew about it because he was now working for a hedge fund, doing what he does. If what he does is mirrored across my industry, then the people who could be solving cancer, or improving internet access, or unravelling the mysteries of fusion, or whatever-- are caught in the financial windfunnel.

So, if the financial industry is "winning," it's winning the way the citizens of Easter Island "won" in placating their gods... by destroying the ecosystem that kept them alive.

Current Mood: tired
Crossposts: http://elfs.livejournal.com/1528292.html

Brad DeLong has what has to be the last word on how modern financial markets operate, and it's a depressing take for anyone worried about their retirement portfolio. This excerpt is fairly long, but worthwhile. Go to Brad's website and Read the whole thing, though, if you dare:

There are three ways in which a financial transaction can be a good deal for both sides. First, people have different time preferences: I have money now that I do not want to spend on some useful commodity until sometime in the future, while you may have no money now and need some but anticipate being flush in the future; then we both benefit if I lend you the money-- at interest. Second, risks distributed and diversified are risks dissipated, and so even though the average customer pays money into the insurance system insurance is still a valuable thing to buy because the insurance company pays you when you really need the cash. Third, economies work best when benefits and losses run with decsion-making: those whose actions create or destroy value pay attention when they have "skin in the game", and financial transactions are a good way to make sure they have that "skin in the game".

Those three sources of value for both sides in financial transactions are powerful.

They motivate net investments and drawdowns, insurance and diversification, and the creation of equity interests for managers, partners, homeowners, and others.

They drive perhaps 1/1000 of the transactions we see on financial markets each day.

...

If I am completely ignorant about any financial asset, I nevertheless know one very very important thing: I know--unless saving or dissaving, insurance or diversification, or skin in the game considerations apply--that you cannot possibly know less than I do, and the fact that you think this is a good price for you to sell to me is a powerful reason for me to conclude that it is a bad price for me to buy at. When economists say that a financial transaction is motivated by "disagreement", what they mean is that there is not in fact value being created for both sides, and that the more ignorant party is being conned

This last factor is necessary to drive the vast majority of trades we see in modern financial markets. Look at any trade, and the odds are that on one side you will find people who know less than their counterparty and yet have not asked themselves the obvious question: "if this is a good price at which to buy, why are these people who know more than I do about the situation selling?"

Current Mood: worried

Mayonnaise

I did the math this weekend and discovered that home-made mayonnaise is pretty darned expensive. A back-of-the-envelope calculation indicates that store-bought mayonnaise, even the relatively good stuff, is about 10.8¢, whereas making it myself with decent olive oil it comes out to about 33.8¢.

Which doesn't mean I'll stop making mayonnaise, especially not since I can herb and mix it myself.

Horseradish

Utterly unsatisfied with any of the offerings from the various stores around my neighborhood, I bought some raw horseradish root and tried preparing my own with a microchopper. It was less than satisfactory. I'm not sure what I'm doing wrong. According to preparation instructions, horseradish releases its burning concoction when the plant cells are crushed, so maybe instead of chopping I should push it through the high-speed grater?

I also tried leaving it out for a long time, as that apparently causes it to get stronger before you add the vinegar to stop the strengthening process.

Ah, well.

Current Mood: hungry
Current Music: The Psychedelic Avengers, In Which The Colony On Penubis 5 Is Being Completely Annihilated By Dec

My favorite coffee has had a sudden spike in price. Dead Man's Reach coffee, from Raven's Brew Roasters here in Washington, is a smooth, slightly sweet roast with WMD levels of caffeination. The most reliable retailer has been Whole Foods, where I've been able to get it for about $11 a pound. That's three bucks more expensive than most name brands-- Torefazione (which is tolerable) bulk is about $8, and Starbucks (which I don't care for) is $9.

As of last week, however, it's now $11 for 12oz. Same price, smaller bag. Suck!

Current Mood: annoyed
Current Music: NPR, Morning Edition

"Whenever my will to live gets too strong, I read Peter Watts." Thus wrote

james_nicoll several months ago while commenting on the book Blindsight. I've been re-reading Blindsight and man, that is truly one of the most depressing, best-written first-contact novels I've ever read, it truly sends shivers up my spine every time I read it.

Because what Blindsight is mostly about is the jury-rigged all-sorta-moving-in-the-same-direction collection of just barely functioning mental parts that is human consciousness, about all the funny hacks and gaps and holes in our consciousness that exist to be exploited or avoided.

I thought of Blindsight and Siri Keeton, the main character, today when Jonah Lehrer wrote:

one of the reasons credit cards are such a popular form of debt is that they take advantage of some innate flaws in the brain. When we buy something with cash, the purchase involves an actual loss - our wallet is literally lighter. Credit cards, however, make the transaction abstract, so that we don't really feel the downside of spending money. Brain imaging experiments suggest that paying with credit cards actually reduces activity in the insula, a brain region associated with negative feelings. As George Loewenstein, a neuroeconomist at Carnegie-Mellon says, "The nature of credit cards ensures that your brain is anaesthetized against the pain of payment." Spending money doesn't feel bad, so you spend more money.

Now, credit cards have some other incentives that justify their use: if you're willing to trade your privacy to corporations for the convenience of your own tracking, you also get the government's promise that you won't be on the hook for more than the first fifty bucks if someone steals your wallet. Which, by the way, allows you to justify using the credit card, and racking up credit charges, instead of using cash.

Which makes me wonder if I should switch to using only cash under almost all circumstances. Or find some way to make using credit hurt. Because, the funny thing is, Omaha insists that I take every receipt, carry it with me, and enter it into our household accounting software. And that's the only pain I face, but it's a pain suffered by someone else, the Elf of next week. I wonder how I could make it more immanent.

I wonder if it would even matter.

Original paper: Neural Predictors of Purchase.

Current Mood: amused

So, being forty, I'm reading through investment and retirement planning packages. I'm learning an awful lot about hedge funds, REIT (real estate investment trusts), exchange traded funds, and so on. Lots of interesting and surprisingly geeky data throughout. Oh, I know I'm bad at this, but I want to at least have a grasp on what my family's new financial adviser has to say when he says it.

My new FA is big on hedge funds. (In fact, the day I met him was the day the Bear Stearns hedge fund, heavily leveraged in sub-prime mortgages, was seriously hitting the fan, and he said he admired my willingness to ask him about that.) He talked about having a diversified collection of hedge funds as one asset allocation class, and I was sitting there trying to figure out what the heck that meant.

I figured it out today. You can have hedge funds in different investment classes: commodities, energy, technology, transportation, etc. The average annual performance over the past decade for all hedge funds is 10.48% return with 7.22% deviation, meaning for any given fund (again, this is all averages, just as an example), there's a 68% chance that your return will be somewhere between 17.7% and 3.26% (10.48%±7.22%) and a 95% chance that the return will be 24.91% to -3.96% (10.48%±(7.22%×2)). That's right, there's a slight risk you could lose some of your investment in a given fund

The idea is to selectively choose a lot of different hedge fund investments, so that the average performance across the portfolio approaches or even exceeds the average of all of them. I mean, this may seem blazingly obvious, but it never quite clicked for me. I suppose the same is true for any investment tool, but I had to be reading about something as esoteric as a hedge fund to figure it out.

Y'know, ever since someone showed me the way standard deviations are used to describe risk in investment tools, I've been much more comfortable with understanding the risks that I might someday take.

If I ever have any money.

Current Mood: thoughtful
Current Music: Heather Alexander, Tomorrow I leave for battle