Repaying the Debt with Alchemy/Science

John Hodgman has quite a gig going with his “You’re Welcome” series on The Daily Show. This one’s terrific — our debt ceiling is now a “debt convertible.”

“Also like a convertible our economy is expensive, impractical and only seats a couple of wealthy jerks.”

Stewart asks Hodgman what we should do about the $800b we owe China and, following on my commentary on gold, Hodgman suggests turning the lead from the children’s toys and pet food China sends us into gold (as the two are just a couple of electrons apart).

Alchemy? Heck no, science!

One minor problem: the US isn’t churning out the math and science minds it used to.

Because You Can’t Spell Gold without G-O-D

The goddess Juno Moneto from whose name "mint" and "money" are derived

In our current frenzy for certainty in an uncertain world, gold is back in the news. Time for a little context on the current gold rush, starting with a tale from antiquity:

A man who wanted riches dutifully installed a money god in his home altar. He prayed to it for hours every day. His knees ached and his forehead bore a bruise from his repeated prostrations.  He persisted in the fanatical belief that he was on the true path to prosperity despite the daily worsening of his situation.  One day he flew into a rage with the god for all the time he’d wasted, picked up the little clay god and smashed it on the altar board, revealing a cache of gold coins.

The moral? I’ve heard a few including:

• We must slay our conceptions to achieve a breakthrough
• Praying for money brings us to rage and despair
• Money can be hidden in plain sight
• Go deep inside religion/a spiritual path to find true prosperity

The Wizard of Oz: an American tale of gold?

The last time I gave gold any thought was business school ten years ago when my micro-economics prof told us that some people considered The Wizard of Oz to be an allegorical story about America and the gold standard.  BBC News summed up this story, reminding us that Judy Garland’s ruby slippers were a departure from the silver slippers of Baum’s original tale, which some believe represented the promise of a dual gold-silver standard.

Baum published the book in 1900, just after the US emerged from a period of deflation and depression. Prices had fallen by about 22% over the previous 16 years, causing huge debt.

Farmers were among those badly affected, and the Populist political party was set up to represent their interests and those of industrial labourers.

The US was then operating on the gold standard – a monetary system which valued the dollar according to the quantity of gold. The Populists wanted silver, along with gold, to be used for money. This would have increased the US money supply, raised price levels and reduced farmers’ debt burdens.

CHARACTER SYMBOLISM

Dorothy: Everyman American

Scarecrow: Farmer

Tin Woodman: Industrial worker

Lion: William Jennings Bryan, politician who backed silver cause

Wizard of Oz: US presidents of late 19th Century

Wicked Witch: A malign Nature, destroyed by the farmers’ most precious commodity, water. Or simply the American West

Winged Monkeys: Native Americans or Chinese railroad workers, exploited by West

Oz: An abbreviation of ‘ounce’ or, as Baum claimed, taken from the O-Z of a filing cabinet?

Emerald City: Greenback paper money, exposed as fraud

Munchkins: Ordinary citizens

A post-Depression history of gold prices

With a new gold rush in the news I wanted some historical context, which I plucked selectively from USAGold.

April 5, 1933: President Roosevelt, acting under the sweeping authority passed to him by Congress on March 9, invoked his authority to make it unlawful to own or hold gold coins, gold bullion, or gold certificates. The export of Gold for purposes of payment was also outlawed, except under license from the Treasury.

January 31, 1934: President Roosevelt fixed the weight of the Dollar at 15.715 grains of Gold “nine-tenths fine”. The Dollar was thereby devalued from $20.67 to one troy ounce of Gold to $35.00 to one troy ounce of Gold – or 40.94%. The Treasury, which had become the possessors of all the nation’s Gold on the previous day, saw the value of their Gold holdings increase by $US 2.81 Billion. The Treasury now “owned” the Gold, and no one else inside the U.S. was allowed to own any Gold except by the express permission of the Treasury.

Bretton Woods in July 1944: The new ratio of $US 35 was adopted and the U.S. Dollar was made the world’s Reserve Currency.  The now international ratio of 35 U.S. Dollars to one troy ounce of Gold lasted until August 15, 1971.

January 1961: Shortly after President Kennedy was Inaugurated and  newly-appointed Undersecretary of the Treasury Robert Roosa suggested that the U.S. and Europe should pool their Gold resources to prevent the private market price of Gold from exceeding the mandated rate of $US 35 per ounce. Acting on this suggestion, the Central Banks of the U.S., Britain, West Germany, France, Switzerland, Italy, Belgium, the Netherlands, and Luxembourg set up the “London Gold Pool” in early 1961.

The Pool came unstuck when the French, under Charles de Gaulle, reneged and began to send the Dollars earned by exporting to the U.S. back and demanding Gold rather than Treasury debt paper in return. Under the terms of the Bretton Woods Agreement signed in 1944, France was legally entitled to do this. The drain on U.S. Gold became acute, and the London Gold Pool folded in spring of 1968.

January 1975: After 42 years, it again became “legal” for individual Americans to own Gold. Anticipating the demand, the U.S. Treasury in particular and many other Central Banks sold large quantities of Gold, taking large paper profits in the process.

July 1979: Paul Volcker was appointed as Fed Chairman while  gold continued to surge, hitting $400 in October. While this was happening, Mr Volcker was attending a conference in Belgrade. There the assessment was made that the global financial system was on the verge of collapse. When Mr Volcker returned to the U.S. from Belgrade, he took a momentous step. He announced that the Fed was swiching its policy from controlling interest rates to controlling the money supply.

I worked at a jewelry store in 1980 and learned how to spot-price our gold merchandise because it was a waste of time to affix labels to the inventory.  U.S. interest rates skyrocketed. As they rose, the dollar first slowed it’s descent, then stopped falling, and then began to rise. Both the public and the investment community which had stampeded into Gold was lured back into paper by this huge rise in interest rates – and by the prospect of a higher U.S. Dollar. The threat of financial meltdown was averted, but at a cost. The U.S. Prime rate hit 20% in April 1980 and stayed there (with a brief dive in mid-1980) until the end of 1981. There was a rush out of Gold and back to Dollars.

Once interest rates began to come down, in early/mid 1982, the choice of where to put the Dollars faced investors once more. The initial solution was just as it had been in the 1970s. The Dow took off – rising from 776 to almost 1100 between mid August 1982 and late January 1983. Gold fell $105 in the last four trading days of February 1983. As it fell, the Dow broke above the 1100 point level for the first time. The long bull market in stocks, and the long stagnation of Gold, had begun.

Post-meltdown gold rush

Fast forward to 2010 with stories about home parties where a jeweler brings in scales to buy party goers’ jewelery.  What gives? As investor Jim Gobetz said to me, “Gold is traditionally (at least in the age of fiat currencies) a hedge against inflation.” Problem is, in certain circles, the fear mongering is unavoidable, deafening and self-serving.  Take Glenn Beck’s hucksterism, as exposed on The Daily Show:

If you prefer something more buttoned down, PBS’s NewsHour did a thorough job examining the current gold rush.

Gold as a sure thing

Gold investor Bob Chapman recently said “Gold and silver are the only real way to protect against financial calamity and offer possibilities for profit simultaneously.”

Really? If so, why are gold promoters letting the rest of us in on the security? Because they want to sell us something and make money on our insecurities. If gold really offered true protection, guys like Beck and Chapman would be hoarding — not promoting.

In The Secret Life of Money, I learned a lot about the history of money, including its many forms, from seashells and porpoise teeth to tobacco and beaver skins, to, of course, gold.  Author Tad Crawford tells stories of how belief in the value of something transcends rationality, and sometimes, practicality.

For example, the Yap people of Micronesia used giant limestone discs for currency.  These discs were so difficult to transport that eventually people left them in place with the communal understanding of who truly possessed the “wealth.”  So isn’t gold similarly “accepted” as valuable despite its impracticalities as a currency?  Do we really expect to carry bullion around? And do we want to carry a beaker of acid with us every day to test the purity of coins and bullion exchanged for goods and services? If we all believe gold is the only ultimate thing with intrinsic and everlasting value, then it is. It’s our belief that matters.

Crawford’s book discusses at great length the connection between money and the divine, from the ancients who minted coins with faces of divinities (see Juno Moneta at the top of the post) to the practice of stamping “In God We Trust” on American currencies since 1864.  ”If the phrase means nothing, perhaps we should put ‘In the Federal Reserve We Trust’…In times of recession and depression, this slogan offers a way to understand why money fails us. Money, although a secular tool, requires our belief in the richness of a divine power.”

I think times like these serve the purpose of reminding us of how uncertain life really is. We middle-class Americans thought we’d somehow transcended subsistence issues like food and shelter, but the meltdown has driven record numbers of Americans onto food stamps and out of their homes. We thrash about for something certain and land on gold — the modern analog of a Micronesian Yap’s limestone.

Security is a head game — as JM Keynes reminded us, “In the long run, we’re all dead.”

Weighing in on the gold rush with some spiritual advice is Baha’u'llah, the Prophet-Founder of the Baha’i Faith:

Busy not thyself with this world, for with fire We test the gold, and with gold We test Our servants.

December Book Lust

On a sad reading note, I opened this month’s “Fortune Small Business” to learn it was the last.  RIP to a great publication I’ve been reading on dead trees for years. Maybe earlier adaptation of e-readers would have saved it. On that e-reader note, which do you prefer, Nook or Kindle? With my birthday coming up in January I’ll graciously accept either — and you don’t even have to wrap it. Making it easy for you, dear readers!

This month’s selections reflect facets of my wide range of interests. A real hodgepodge.

Dan Pink’s Drive

If Dan Pink wrote a cookbook I’d buy it. Lucky for me, instead he’s written Drive: The Surprising Truth About What Motivates Us. Due out 12/29/09 I pre-ordered it.

Publishers Weekly: According to Pink (A Whole New Mind), everything we think we know about what motivates us is wrong. He pits the latest scientific discoveries about the mind against the outmoded wisdom that claims people can only be motivated by the hope of gain and the fear of loss. Pink cites a dizzying number of studies revealing that “carrot and stick” can actually significantly reduce the ability of workers to produce creative solutions to problems. What motivates us once our basic survival needs are met is the ability to grow and develop, to realize our fullest potential. Case studies of Google’s “20 percent time” (in which employees work on projects of their choosing one full day each week) and Best Buy’s “Results Only Work Environment” (in which employees can work whenever and however they choose—as long as they meet specific goals) demonstrate growing endorsement for this approach. A series of appendixes include further reading and tips on applying this method to businesses, fitness and child-rearing. Drawing on research in psychology, economics and sociology, Pink’s analysis—and new model—of motivation offers tremendous insight into our deepest nature.

Technical Analysis Using Multiple Timeframes

With so much paper wealth lost in this recession, it’s probably high time investors learned the fundamentals — even if (or perhaps especially if) they’re hiring a professional to advise them. Thanks to fellow Charlottean and Stocktwits blogger Derek Hernquist for introducing us to Technical Analysis Using Multiple Timeframes.

Derek: Brian Shannon carries a reputation for integrity through his work at www.Alphatrends.net, and I was fortunate enough to stumble upon his insights after joining Twitter. A must-follow of the StockTwits crowd, he is a master at laying out ideas that conform to his style of trading with the trend. His book gives traders at all levels the chance to learn more about the concepts he rattles off with each day’s market analysis.

Published in 2008 by an independent, the first sight of the book sets the tone with its old school look. I felt like a kid at the library checking out a book on dribbling by Bob Cousy or skating by Gordie Howe. Basic writing, rich diagrams, and no fluff. This style lends perfectly to the simply elegant way he describes concepts such as market structure, trend alignment, and risk management.

As much as these concepts are native to market players, they may be foreign to those interested in learning the game. Brian has a rare ability to break these concepts into digestible but hard-hitting lessons that are hard to forget. I’ve journaled my trades and thoughts for nearly 20 years, yet I pulled lines out of this book that were a great wake-up call. “Anyone can recognize an existing trend, but finding the low-risk areas to enter the trend and knowing when to exit is what separates the sheep from the wolves” shouted to me right from the beginning.

I’m a little biased here, because his approach to markets parallels mine regarding the impact of human behavior on market prices. Investors with a purely fundamental approach may not embrace his philosophy that the reaction to news matters as much the news itself. In addition, those looking for a secret formula are rightly told early on to look elsewhere. That said, I believe ALL investors could learn from his disciplined approach to managing financial and psychological risk.

Most of the books I recommend to newbies and veterans alike were written decades ago, but this one joins that group offering timeless lessons to traders on all levels. It’s my belief that this book would have been appropriate in 1950, and will still be relevant in 2050. Knowing what to say is a critical skill, but also knowing how to say it is a rare combo that Brian has achieved. Anyone looking to improve how they think about trading will be happy they read this budding classic.

By the way, you can follow Derek on Twitter @derekhernquist and read his StockTwits blog.

Beyond Blue: Surviving Depression & Anxiety and Making the Most of Bad Genes

I hope someday we won’t call someone “brave” for talking about life with mental illness; after all, we don’t say a cardiac patient is “brave” for discussing stints and Plavix.

Publishers Weekly: After compiling several books of essays featuring other people’s voices (I Like Being Catholic), popular Beliefnet.com blogger Borchard lifts her own voice to tell her story. She’s a mental health train wreck—recovering alcoholic, bipolar, a touch of obsessive-compulsive, highly sensitive and therefore easily overstimulated in places like Toys R Us, where mothers of young children are sentenced to go. Fortunately for Borchard’s family and herself, too, this is a funny book that she lived to write, after six psychiatrists, 23 medication combinations and hospitalization. Borchard’s gift and distinction is her humor, the golden rope out of the pit of despair and a tool for transforming hysteria into hysterical laughter. She does a good job of countering the you-are-what-you-think crowd who blame the mentally ill for their own illness. Some readers might find there’s TMI (too much information), but the author’s desire to be helpful is boundless. This self-help memoir offers hope, particularly for those with intractable depression. Even better, it offers levity.

Talking About Detective Fiction

I got hooked on English drawing room mysteries in high school thanks to Agatha Christie.  I have a nice leather-bound set of everything she ever wrote. The author of this book, PD James, is a titan of the genre — author of twenty books, most of which have been filmed and broadcast on television in the United States and other countries. James spent thirty years in various departments of the British Civil Service, including the Police and Criminal Law Department of Great Britain’s Home Office. She has served as a magistrate and as a governor of the BBC. The recipient of many prizes and honors, she was created Baroness James of Holland Park in 1991.

Publishers Weekly: One of the most widely read and respected writers of detective fiction, James (The Private Patient) explores the genre’s origins (focusing primarily on Britain) and its lasting appeal. James cites Wilkie Collins’s The Moonstone, published in 1868, as the first detective novel and its hero, Sergeant Cuff, as one of the first literary examples of the professional detective (modeled after a real-life Scotland Yard inspector). As for Conan Doyle’s Sherlock Holmes stories, James argues that their staying power has as much to do with the gloomy London atmosphere, “the enveloping miasma of mystery and terror,” as with the iconic sleuth. Devoting much of her time to writers in the Golden Age of British detective fiction (essentially between the two world wars), James dissects the work of four heavyweights: Agatha Christie, Dorothy L. Sayers, Margery Allingham and Ngaio Marsh. Though she’s more appreciative of Marsh and Allingham (declaring them “novelists, not merely fabricators of ingenious puzzles”), James acknowledges not only the undeniable boost these women gave to the genre but their continuing appeal. For crime fiction fans, this master class from one of the leading practitioners of the art will be a real treat. 9 illustations.

The Harvard Psychedelic Club: How Timothy Leary, Ram Dass, Huston Smith, and Andrew Weil Killed the Fifties and Ushered in a New Age for America

I was born in the ’60′s but am not a student of them. Dennis McNally is a scholar of the time, having written books on the Grateful Dead and Jack Kerouac. McNally says “I suspect I’m not the only person who thought the psychedelics-at-Harvard story had been pretty well settled, but Lattin’s work has widened my perspective considerably. By focusing on Huston Smith and Andrew Weil as well as Leary and Alpert, he’s created a stimulating and thoroughly engrossing read.”

Amazon: This book is the story of how three brilliant scholars and one ambitious freshman crossed paths in the early sixties at a Harvard-sponsored psychedelic-drug research project, transforming their lives and American culture and launching the mind/body/spirit movement that inspired the explosion of yoga classes, organic produce, and alternative medicine.

The four men came together in a time of upheaval and experimentation, and their exploration of an expanded consciousness set the stage for the social, spiritual, sexual, and psychological revolution of the 1960s. Timothy Leary would be the rebellious trickster, the premier proponent of the therapeutic and spiritual benefits of LSD, advising a generation to “turn on, tune in, and drop out.” Richard Alpert would be the seeker, traveling to India and returning to America as Ram Dass, reborn as a spiritual leader with his “Be Here Now” mantra, inspiring a restless army of spiritual pilgrims. Huston Smith would be the teacher, practicing every world religion, introducing the Dalai Lama to the West, and educating generations of Americans to adopt a more tolerant, inclusive attitude toward other cultures’ beliefs. And young Andrew Weil would be the healer, becoming the undisputed leader of alternative medicine, devoting his life to the holistic reformation of the American health care system.

It was meant to be a time of joy, of peace, and of love, but behind the scenes lurked backstabbing, jealousy, and outright betrayal. In spite of their personal conflicts, the members of the Harvard Psychedelic Club would forever change the way Americans view religion and practice medicine, and the very way we look at body and soul.

Editing the Fed

I’ve been so bold as to edit Prince Charles and the pope, so why not the Cleveland Federal Reserve Bank?

Consider the Fed’s analysis of Canadian vs. American housing and lending trends.

Why Canada might be “a country that got things right”

The report led off well enough:

Housing markets in the United States and Canada are similar in many respects, but each has fared quite differently since the onset of the financial crisis. A comparison of the two markets suggests that relaxed lending standards likely played a critical role in the U.S. housing bust.

It’s written in easily-understood prose and comes to a succinct conclusion. But if you read the report (and re-read once or twice), you’ll agree that my re-write would have been a better approach, not just by virtue of the writing, but also by virtue of the more comprehensive (and candid) conclusion:

Unlike the U.S., Canada has not experienced a dramatic increase in mortgage defaults, nor has any Canadian bank required a government bailout. This article explores the differences between the two countries’ monetary policies, financial services structure and regulation, and the kinds of mortgage products offered. While the primary culprit behind the American financial services crisis was the rise in subprime loans,  those products, and indeed the housing bubble itself, were enabled by monetary policy and financial services regulation.

Conclusions drive structure

An introduction like this would have led to an entirely different STRUCTURE of the paper, as well.  As written, the Fed meandered through data on housing prices, loan-to-value stats, delinquency rates, central bank target rates, and benchmark mortgage interest rates before getting around to contextualizing them. Most readers’ eyes were glazed over by then.

I would have taken the inverse approach, noting the differences in subprime booms between the countries (and the American bust) and then comparing and contrasting the factors that DROVE those differences, including monetary policy and regulation.  I would also have quoted sociologists on the differences in risk tolerance between us and our “neighbors to the north” as we so often call them.

The Fed is not apolitical, so I guess I should give a nod to the possibility that it was motivated to obfuscate.  Alas, these are the times in which we live.

Private Equity and the Next Credit Crisis

My September Book Lust column included a preview of Josh Kosman’s book, The Buyout of America: How Private Equity Will Cause the Next Great Credit Crisis, which was released this month.

Monday I heard Kosman interviewed by Fresh Air’s Terry Gross (on NPR affiliates everywhere).

FASCINATING STUFF, including:

• How interest tax deductibility allows private equity (PE)  firms to dodge about $70b in federal taxes
• Why you can’t buy a two-sided mattress any longer
• Why PE  likes the hospital industry (and what it could mean to you if your local provider is bought by PE)
• PE firms (including the companies they own) are the largest employers in the country; even larger than Walmart (by a mile)
• Four of eight former treasury secretaries now in PE.  John Snow (under G. W.  Bush) is now at Cerberus which finagled bailout funds for its company, GMAC, by turning it into a bank (even though it didn’t have capital reserve requirements of “real” banks)
• Buyouts are facilitated by Collateralized Loan Obligations  (CLOs), the private equity version of the mortgage industry’s Collaterelized Debt Obligations (CDOs)
• Returns to PE  investors are below that of the S&P 500

SCARY STUFF, including:

• The conservative Boston Consulting Group estimates that half the companies owned by PE will default on their loans or go into bankruptcy
• If these companies lay off half their employees (which is reasonable) another 1.9m people will be out of work, which will ripple through the economy in consumer spending, mortgage foreclosures and so forth
• The trillion in bad debt will freeze lending everywhere
• Of the current 11% corporate loan default rate, 50% has PE involvement. Tsunami of defaults has begun

Prescription

Kosman would like to eliminate interest tax deductibility for corporate takeovers. This would make LBOs unprofitable and end the industry.

Why is the end of private equity considered a good thing?  Don’t buyout firms improve companies? According to Kosman,  PE firms only put down about 20% of the purchase price, then use CLOs to fund the remaining 80%. The acquired company has to service the debt out of profits instead of spending that money on R&D and other capital expenditures. PE has a 4-5 year horizon on its exit, so they’re not running companies for the long haul.  Theoretically, everyone’s supposed to win with PE, but the record shows that few do.

The Obama administration is reportedly looking into this.  Paul Volker is charged with considering the whole tax code, including tax deductibility of interest for buyouts.

Writing Prompts for Blogs and Newsletters:

• Here’s your chance to defend PE, and the enabling triumvirate of i-bankers,  hedge funds and ratings agencies!
• Do you work for a pension fund that invested in CLOs? How will you assure participants that YOUR CLOs will perform in spite of the 11% corporate loan default rate Kosman cites?
• GMAC fired its CEO this week. Do you regret giving TARP money to this non-diversified auto lender-cum-bank?
• Do you have a better idea for recouping the estimated $70b in federal taxes lost to PE deals than dis-allowing interest deductibility? Are we in for a national value-added tax or sales tax?

Die Broke Blogger

Follow your bliss and the universe will open doors where there were only walls ~Joseph Campbell

This month I began blogging on small business and the meltdown on the Die Broke blog, part of the StockTwits network.  My focus is helping small business owners deal with creditors, the IRS, family members and their own inner demons.

What qualifies me for this assignment? Personal experience.

Since shuttering the industrial cleaning businesses in 2007 I’ve continued to deal with creditors (including friends and family), the IRS and a loss of face.  I’ve learned a great deal about financial law, pondered business ethics and done a lot of navel gazing.

It is by going down into the abyss that we recover the treasures of life. Where you stumble, there lies your treasure ~Joseph Campbell

I won’t chronicle the whole debacle here…it will unfold over time over on Die Broke. But I will say that my entrepreneurial “failure” freed me to pursue the writing career I was always told would never be mine.  How?  Janis Joplin’s raspy lyric explains it best: Freedom’s just another word for nothing left to lose.

In 2008, with no money to invest in a different company, a dismal job market and absolute loathing of corporate America anyway, I gave myself permission to hang out my shingle as a business writer.

The privilege of a lifetime is being who you are ~ Joseph Campbell

Fortunately my husband still has a job. The best off-balance-sheet asset an entrepreneur has is someone who lets them bunk in rent free.  Thanks, Matt.

More Joseph Campbell bon mots:

• We must let go of the life we have planned, so as to accept the one that is waiting for us

• Your life is the fruit of your own doing. You have no one to blame but yourself

• I think the person who takes a job in order to live – that is to say, for the money – has turned himself into a slave

• Is the system going to flatten you out and deny you your humanity, or are you going to be able to make use of the system to the attainment of human purposes?

• Opportunities to find deeper powers within ourselves come when life seems most challenging

• The big question is whether you are going to be able to say a hearty yes to your adventure

• The goal of life is to make your heartbeat match the beat of the universe, to match your nature with Nature

High Frequency Trading in Jobless Recovery

I follow an outstanding lineup of financial professionals and traders on Twitter. I learned about some of them through Stocktwits, which describes itself as “a social, stock microblogging service.” Stocktwits now offers a free desktop with more functionality than TweetDeck.

StockTwits is an open, community-powered idea and information service for investments. Users can eavesdrop on traders and investors, or contribute to the conversation and build their reputation as savvy market wizards. The service takes financial related data – using Twitter as the content production platform – and structures it by stock, user, reputation, etc.

While I’m not a trader or active investor, I enjoy the intelligent conversation of Stocktwits gurus like @aiki14 @Dasan @iron100 @ekanters @gregormacdonald @nelderini and others from around the world.  They’re quick to extrapolate from a world event to its effects on global economies, individual sectors and stocks.  (Note: follow Charlotte hometown favorite @kevinmhughes as he gains national notoriety).

Truckers and retirees now stock jockeys?

I thought my world view was skewed by my Stocktwits exposure to trading, where lots of folks new to trading and investing subscribe to the charts and advice of experts.  But then I saw an article on un-employed and un-retired people going into trading for the lack of other employment opportunities.   The next day The Daily Show ran a segment on the topic. Hmmm, something’s afoot.

I appreciate that there’s money to be made trading. But all the trading in the world doesn’t feed people, clean the environment or find a cure for cancer. And, as Samantha Bee points out in this piece, it’s not as easy as promoters would have us believe.

Writing prompts for financial professionals

• What tax considerations to high frequency traders & rookies overlook?
• If you’re a financial advisor, how do you advise would-be traders to allocate their overall portfolio in consideration of high frequency trade risks and returns?
• Review the different software products needed to pursue a career as a trader.
• How long does it take and how much do you need to lose before you figure out whether this career is a good fit for you? What’s the total investment, considering hardware, software and mentoring services?

Dan Ariely 3 of 3: Trust and Healthcare Reform

In the first of this three-post series I offered a sound file of Dan talking about the limits of rationality when devising and regulating public services.

In the second, we explored how  Treasury’s un-trustworthiness dealing with TARP and the financial meltdown has led to social anxiety and depression.

While writing that second post it occurred to me if our elected and appointed officials been truthful and upfront in their dealings with $700b bailout, we’d already have a healthcare reform bill.

It also occurred to me that we hold public servants to a higher standard than CEOs of healthcare. When healthcare execs earn blood money by standing between us and our doctors, we shrug it off by saying “Hey, that’s just capitalism,” or “Oh well, cost of doing business,” but when our elected officials stand between us and our doctors we get nuts because that’s rationing.

What Ariely has to say about our beloved invisible hand of the market

In the updated version of Predictably Irrational, Ariely observes about his own profession:

Rational economics has always been the basis for setting up policies and designing our institutions. What’s wrong with that? Neoclassical economics is built on very strong assumptions that, over time, have become ‘established facts.’   Most famous among these are that all economic agents (consumers, companies, etc., are fully rational, and that the so-called invisible hand works to create market efficiency). To rational economists, these assumptions seem so basic, logical, and self-evident that they do not need any empirical scrutiny.

Building on these basic assumptions, rational economists make recommendations regarding the ideal way to design health insurance, retirement funds, and operating principles for financial institutions. This is, of course, the source of the basic belief in the wisdom of deregulation: if people always make the right decisions, and if the “invisible hand” and market forces always lead to efficiency, shouldn’t we just let go of any regulations and allow the financial markets to operate at their full potential?

On the other hand, scientists in fields ranging from chemistry to physics to psychology are trained to be suspicious of ‘established facts.’ In these fields, assumptions and theories are tested empirically and repeatedly. In testing them, scientists have learned over and over that many ideas accepted as true can end up being wrong; this is the natural progression of science. Accordingly, nearly all scientists have a stronger belief in data than in their own theories. If empirical observation is incompatible with a model, the model must be trashed or amended, even if it is conceptually beautiful, logically appealing, or mathematically convenient.

Unfortunately, such healthy scientific skepticism and empiricism have not yet taken hold in rational economics, where initial assumptions about human nature have solidified into dogma. Blind faith in human rationality and the forces of the market would not be so bad if they were limited to a few university professors and the students taking their classes. The real problem, however, is that economists have been very successful in convincing the world, including politicians, business people, and everyday Joes not only that economics has something important to say about how the world around us functions (which it does), but that economics is a sufficient explanation of everything around us (which it is not). In essence, the economic dogma is that once we take rational economics into account, nothing else is needed (emphasis added).

In sum, we trust theories more than facts.  No wonder we’re in such a quandry.

Dan Ariely 2of 3: Trust and the Meltdown

Last week I set the foundation for today’s installment, complete with a sound file of bestselling author Dan Ariely’s talk to our Business School Alliance in Charlotte. This post will make the most sense to those who read that first.

New insights on the meltdown

The 2nd edition of Ariely’s book,  Predictably Irrational, includes a full chapter on the 2008 meltdown.  In it, he emphasized trust (and the breach thereof), saying that no matter the long list of expensive “heroic measures” the central banks take, they’re unlikely to achieve the desired effect without taking measures to restore trust.” After all, trust is the foundation of paper money to start with.

“Imagine how different things would have looked if the banks and the government had understood the importance of trust from the get-go. Had that been the case, they would have worked harder to explain more clearly what went wrong and how the bailout would be used to clean up the mess. They would not have ignored the public’s sentiment; they would have used it for guidance. They would have included some trust-building elements in the bailout legislation itself thoughts about the subprime mortgage crisis for example, they could have guaranteed that every bank bailed out with taxpayers’ money would have to commit to transparency, limit top managers’ salaries, and eliminate conflicts of interest.”

Trust and “learned helplessness”

Ariely says outright that Paulson’s behavior told us clearly that no one really understood what was going on. “One question we might ask is whether the general (psychological) depression that followed might have been mitigated if Paulson had been able to explain what went wrong in the first place, what his proposed measures were going to achieve, why he changed his decision to buy toxic securities, and what his plan was for the rest of the bailout money.

“As it turns out, even some answers could have made a difference. All creatures (including humans) respond negatively in situations where things don’t seem to make sense. When the world gives us unpredictable punishments without rhyme or reason, and when we don’t have any explanation for what is happening, we become prone to something psychologists call ‘learned helplessness.’” In a nutshell, those who’ve learned helplessness simply stop trying to help themselves because they believe such attempts are futile.

He suggested we help ourselves by changing “the way we consume news, from passive receptivity to actively thinking about the information and trying to make sense out of it.”

Amen to that. My prescription?  More NPR and NewsHour; complete abstinence from Fox(so-called) News.

Coming in part 3 of 3: How lack of trust in financial meltdown affected healthcare reform

Writing prompts for bloggers & newsletter writers

• I wrote a post with writing prompts in May based on The Atlantic’s Article “Why I Fired My Broker.”  I quoted Seth Klarman saying “The average person can’t really trust anybody. They can’t trust a broker, because the broker is interested in churning commissions. They can’t trust a mutual fund, because the mutual fund is interested in gathering a lot of assets and keeping them.  And now it’s even worse because even the most sophisticated people have no idea what’s going on.”  What steps is your firm (or are you) taking to communicate to your clients that you are trustworthy?  That your processes are fail safe (or at least properly audited)?
• Do you think more straight talk with your clients on your compensation will engender trust?  If you work for a broker or agency, why not tell your clients why you believe the comp structure you work under is fair to you and to them?
• In a post on compassion fatigue and shared trauma by financial advisors we discovered how and why advisors avoid client contact.  Ariely points out the need for trustbuilding, which can only happen with increased contact.  What steps have you seen advisors take (or have you taken) to step up client communications? Can you point your clients to more trusted information portals?

Dan Ariely 1 of 3: Trust, Revenge & Financial Reform

Bestselling author Dan Ariely, a professor of behavioral economics at  Duke, made a special appearance in Charlotte for our Business School Alliance last week. Ariely’s book, Predictably Irrational, just went into a second edition and — holy cow– is still in hardcover. I’ll write about his visit in this and two other posts this week. Here’s what’s in the new edition:

1.  A New Intro: Why the recent events in the economy make behavioral economics more important than ever before

2.  Reactions and Anecdotes: Expanding on some of the lessons we learned in the earlier chapters with interesting new stories and some more science

3.  Thoughts about the Subprime Mortgage Crisis and Its Consequences: A more in-depth look at how irrationalities played a role in the recent Subprime Mortgage Crisis, along with some of his thoughts on how we can fix those problems

Part One: we trust and seek revenge irrationally

Cliff’s notes: Ariely demonstrates that people aren’t always “selfish economic maximizers.” We will trust when we are rationally unwise to do so.  He also points out that we are, irrationally, “very happy to spend lots of money to make others suffer,”  joking that if you’ve any experience with divorce you’ll understand what he’s talking about. He explained the social utility of revenge in situations where lawlessness prevails.

Interesting factoid: PET scans of brains plotting revenge are quite similar to those experiencing pleasure.

I particularly like the novel way he approaches financial and healthcare reform.  He reminds us that roads and highways have wider lanes than a vehicle width, they have shoulders where people aren’t supposed to drive, they have protective medians and speed limits — none of which a “rational economist” would allow for.  Conclusion: when we devised our transportation system, we allowed that drivers would need room to make mistakes (or get out of the way of others who do).  We should plan ahead for “mistakes” in financial and healthcare reform efforts as well.

I had the foresight to bring my digital recorder, so enjoy what Dan has to say (click the link to play inside this window or download).

Trust-Revenge-Financial Reform

Writing prompts for bloggers & newsletter writers

• This is a time of great mistrust and financial churn. Perhaps you have either benefited professionally or been mistaken for a miscreant (or both). It’s not all in your control, is it? Do you have any anecdotes on how people irrationally trusted you or another advisor?  What about anecdotes where someone wrongly thought you had treated them badly and sought revenge? Does this make more sense now that you’ve heard Dan’s talk? You might offer some straight talk to your clients and prospects on this topic.
• Dan talked about AIG employees being harassed in public after the bailout. Can you relate any episodes of client anger that you handled particularly well or poorly? What lessons did such an episode teach you about yourself? Your profession? Human nature?
• If you’re an advisor, can you see yourself making use of the mango story when dealing with marriage or business partners who are dissolving their relationship? Or perhaps the Dr. Strangelove metaphor works better?
• What do you make of the parallel between how a “rational economist” would design a highway system and how we should revamp our healthcare system or re-regulate our financial system?

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