100% Profit on Small Investments

Some of the best investments are not stocks or bonds. In the spirit of the holidays, here are some investments for $15 and under that promise great returns in convenience, time saved, and value. All of these these ideas are from Reddit users in response to the question

Reddit, what are some not well known products, $15 or less, that have made your life incredibly more enjoyable/easier?


Magic Eraser
Rain-X
Zip-It
Styptic Pencils
gaffers tape
A headlamp.
knife honing steel
Bodyglide
Gold bond powder
Dr. Bronner's soap, especially the lavender kind.
Mattress sheet clips.
Noise and light blocking curtains
Bengay
SOS tuner
Magic hair remover
Goo Gone
head massager
A meat thermometer!
F.lux
Vaseline
Jar Opener Rubber
A roll of Glad "Press n' Seal".
small cast iron skillet
little pen-shaped, battery-powered hair trimmers
Bagel guillotine
10mW green laser pointer
Tongue Scraper
rice cooker
Kitchen scale
Drop Stop
Staedtler Mars Plastic Eraser
Utili-Key 6-in-1 Tool
Oxo can opener
Baby wipes
DivaCup
Distilled white vinegar
Body Pillows
hard drive enclosure
HDMI cords
Grandma's Lye Soap
flask

There are even more in the Reddit thread. More than half the fun is in reading the dialog commenting on these suggestions, so go check it out.

Separated by Miles

U.S. consumers are ebullient.
http://www.conference-board.org/data/consumerconfidence.cfm

Paul Krugman is depressed.
http://www.nytimes.com/2011/12/12/opinion/krugman-depression-and-democracy.html?_r=3&pagewanted=all

Millions of people, vs. Krugman. Hmmm, who is right?

(9:07amET edit: This could also have been titled:  "Harbinger:  economists trying to set normative policy" because writing political articles like Krugman's is a sign of desperation and the need to control.)

Harbingers: Financial Engines

I recently received free advice from Financial Engines that implied strongly I should re-balance my portfolio to decrease my weighting of equities and increase my weighting of bonds. Considering coming inflationary pressures from a U.S. expansion and continuing high oil prices, the need to raise U.S. interest rates, and the incentive for the Federal Reserve to inflate domestic real estate prices, we think that Financial Engines' advice is dead wrong.

We suggest taking a contrary position and decreasing holdings of safe debt securities and increasing your weighting of small- and mid-cap stocks. This is not a short-term suggestion. Gains will occur over the next 24 to 36 months.

A Short List of New Trends

I will try to keep this short, sweet, and therefore highly informed by subconscious perception.

Germany is the new, unstoppable economic leader of Europe. Harbingers: Michael Lewis envious shit article in Vanity Fair, hand-wringing by France and United Kingdom over the 1990 unification, Germany's low unemployment despite Europe's fragile economics in 2011, Poland's and Russia's stated interest in seeing Germany continue to lead, Greece's need for German cash handouts to fill in their deficits*, and of course the burgeoning of articles like this one where the authors point out Germany's recent economic success.

China's undeclared global cyber war is about to become reciprocal. U.S. government and industry leaders, both Republican and Democrat, civil and military, are in 100% agreement about the need to stop deep infiltration of U.S. information technology infrastructure by China state-sponsored hacking. This rare unanimous agreement will make for some very interesting counterattacks. Side effect: sales of computer parts made in countries other than China will increase at the expense of China-made parts; or prices of China-made parts will decrease.

The U.S. economy is poised for a surprising upturn. Growth in tax receipts is above reported income growth, indicating that strong retail sales are not coming at the expense of savings. EU angst over Greek, Italian, Spanish, and even French deficits, sovereign credit ratings, and the resulting spikes in sovereign borrowing rates has cast a pall over the world economy for much of 2011, holding U.S. growth back as well. Despite this and the lingering issues from the bursting of the housing bubble and consequential banking crises in 2008 and 2009, negative forces are being used up. U.S. corporate cash hordes are the largest they have ever been. Even a small increase in capital spending by U.S. business would result in an economic resurgence.

U.S. manufacturing growth will begin to come at the expense of China. Already there are small signs of manufacturing coming back to the U.S. As wage inflation in China and "probity loss" weighs on the China cost advantage, some kinds of manufacturing will become more efficient in the U.S. than China. The waves and waves of consumer products from China are widely perceived as sold by Wal-Mart, made of cheap plastic, and don't last. In contrast, the consumer product reputations of U.S., Japan, and German-made products is top-notch. Consumers have experienced austerity in 2009-2011 and want to spend precious dollars on products that last. They are willing to skip cheap "plasticky" products that have been proven to contain poor quality control and design.

Beating Your Plants to Death

...or How to Avoid Stranding Your Capital

As we said before, recent poor U.S. economic results have been strongly driven by stranded capital in the housing sector. What can this idea tell us about practical management of future investments, such as investing in M&M-making machines?

Clearly, the primary lesson is avoid investments in which you bear a high risk of stranding your capital. If the future is very uncertain, then the promised return had better be high or occur quickly. Other techniques for reducing the risk include all of the classic lessons of investment finance theory, such as diversification across assets and asset classes. These lessons are taught many places; pick up a finance or investment textbook to learn more there.

Going further, the truly significant returns on capital occur when we're investing in real assets, not paper like equity and debt securities. Even if we are investing in paper assets, our best returns will occur when we investigate the company as though we were considering managing or owning the whole thing ourselves. Hence, whether we are an actual manager or a passive one, we still have the task of evaluating the best way of making real investments.

By "real investments" I mean primarily purchase of capital goods. This also includes long-lived supplies, if we are required by circumstances to hold supplies over some long period of time, or if some risk outcomes would involve our holding supplies unintentionally for a long period.

On the surface, it seems like an easy job: Buy only equipment you need. Don't pay too much. Think about it first so that you don't buy the wrong thing.

In full, however, this task is one of the more difficult tasks in business. It can be used to show why certain investors are better than others, why certain national growth rates arise because of different political systems, why some industrial sectors are more productive than others, and of course why some managers are better than others. It might also be useful in analyzing sources of inequality of economic outcome in a population.

Making a real investment requires estimating the future course of events. The better you are predicting the utility of your capital good, the more likely you will get the expected return.

The quality of your investment will also depend on the number of choices you have. Awareness of more options and the availability of multiple options will increase the likelihood of finding an excellent investment. If you have only a few choices, the probability of finding an excellent return is diminished.

What may be more surprising to most of us is that operational execution has a large influence on the investment return as well. Money well spent can be lost through poor use of the capital good. Excellent employment of a marginal piece of equipment can generate impressive rates of return. Most importantly, the actual use of the capital good must drive the original decision to buy it.

The best illustration that comes to mind is an article on M&M/Mars written 17 years ago and which appeared in Fortune magazine. The passage:

"The reason most often cited for Mars's distribution problem is its long-held policy of maximum asset utilization or, as some put it, beating its plants to death. The company is obsessed with asset utilization..."

The phrase "beating its plants to death" speaks volumes. One can imagine senior management carefully watching to make sure that every production line, every machine, every bit of signage, and the capitalized labor effort required to establish production is amortized over as many billions of M&Ms and candy bars as possible. If a machine can be used to make a billion M&Ms, then can we run it out even more and get it to make two billion? And then three, and ten billion? When someone suggests that we reconfigure a line, has it been too soon since the last rearrangement (capital injection) and did we get our money's worth from that last arrangement?

Measurements of asset utilization in this case are so far ahead of "winging it" that it's not funny. Any competitor making a decision about equipment that doesn't consider capital return rates will be at a severe disadvantage. The candy-making business is marked by fairly consistent predictions of future demand and steady supplies, so the future is much more predictable. When the future is predictable, quantification of the investment analysis is an excellent choice.

There is power and beauty in that phrase "beating its plants to death." This is the path to follow to avoid stranding your capital: Can you use the candidate item so much and so often and so profitably that you will have figuratively beaten your capital good to death by the end of its useful life? This is what you seek. You want the result to be equipment that is so well-used, so worn at the end, cycled so many times that it is like a member of the family. Every investment needs to be compared to this standard. Those that pass are much less likely to become stranded. Those that don't, you may not want.

Students Put Into Debt by Government Aid Part 2

Here is more evidence that gains of a college education are captured by the college itself, not its graduates, and therefore students loans from the Government causes a net transfer of money from students to the universities.

Trapped by $50K Degree in Low-Paying Job

Some of the motivation for the Occupy Wall Street protesters is the phenomenon where society and the university promise a good job upon graduation, and an even better job upon finishing graduate school, then don't deliver.

http://www.bloomberg.com/news/2011-12-07/trapped-by-50-000-degree-in-low-paying-job-is-increasing-lament.html

What? You say that better jobs aren't promised? Yes, they do promise. I'll quote the article:

Debra Stewart, president of the Washington-based Council of Graduate Schools, said advanced schooling is still the “pathway to success in the modern economy.”

“The more education you have, the more highly regarded you are going to be in the workplace,” she said.

There isn't a single person on this planet who doesn't translate "highly regarded" as "better pay."

College Costs Are Rising Faster Than Cost Of Living, Medical Expenses

This article features several graphs of prices relative to 1978 levels for medical care, college costs, and the general cost of living.

http://www.huffingtonpost.com/2011/10/28/college-costs-are-rising-_n_1063617.html

Rent-Seeking

I've put this link in not because it pertains specifically to tuition, but as general background education in the economics of rent-seeking behavior:

http://en.wikipedia.org/wiki/Rent-seeking

Some useful passages from the Wikipedia article on rent-seeking:

"From a theoretical standpoint, the moral hazard of rent-seeking can be considerable."

"Rent-seeking may be initiated by...firms that stand to gain from having special economic privileges, which opens up the possibility of exploitation of the consumer."

More on that "Austerity" Thing

Several days before I wrote yesterday's article, I sent Mr. Livingston an email in hopes that I'd have a chance at a dialog on the subject of his article against austerity. When he didn't respond, I decided that the only way to carry the dialog forward was to write and post my article, and also post a comment on the Bloomberg excerpt.

The comments on Bloomberg seem to go heavily against Livingston. I'll cite some of the comments you can find on Livingston's excerpt:

"This is outright wrong...."

"The logic here is horribly flawed...."

"Austerity is bad??? Badly-wrong sentence...."

"...the idea that work is a function of what is wrong with the human condition flies in the face of not only some of the most enlightened thinkers throughout history but also most people's own feelings...."

"The more I read this the less sense it makes..."

Another Bloomberg columnist, Caroline Baum, posted a different viewpoint that also tilts against Livingston's thesis. Her piece, Mall Rats Can’t Bring About the Wealth of Nations, starts out as a comment on Black Friday and retail sales as an indicator of economic health, but necessarily turns deeper and more analytic, concluding with a definition of consumption from Webster:

"the utilization of economic goods in the satisfaction of wants ... resulting chiefly in their destruction, deterioration, or transformation."

Why harp on this? Over-spending is a bad idea, but although some people think it might be bad for the individual, I don't get the sense that they feel that it hurts society. There is the underlying assumption that an over-spender slightly hurts themselves while benefiting the rest of us by making the economy go faster. And this is absolutely incorrect. A unnecessary purchase is the opposite of a vorpal trade. Poor purchase decisions harm the economy for everyone.

I am not against spending or consumption. Several articles in Vorpal Trade have described what a good purchase might look like. This might be a good time to write down some of the characteristics of a purchase that fits the definition of a vorpal trade:

- it costs less than you budgeted

- the purchase comes at exactly the right time for the seller

- it arrives just in the nick of time

- it generates cash shortly thereafter, or significant time or cost savings

- the payback period (moment at which net benefits exceed the price) is very short

- it is elegant, beautiful, or has character in its form or function

- it lasts

- it is a good candidate for using it up, wearing it out, making it do

- it greatly empowers you professionally, artistically, or personally

- it fits in your budget

You know a vorpal trade when you see it. When you think about the all-star products you have owned in the past, or present, it is quite clear that some things were simply vastly better investments than others. Couldn't we all use a few more things like those?

Where did all of the "who ate my privacy?" posts go?

For those of you who enjoyed reading my occasional article about Facebook, Google, and invasions of privacy, don't worry, I haven't stopped writing them. What I have done is started a new blog, called, rather modestly, "I Own All Information." The name of it is intended to correct any misconceptions that Facebook's Zuckerberg and the Google crowd might have. I think they have been misinformed about the legal status of information gathered using Facebook and Google searches, as they don't own that information, I do, of course.

Me and Al Franken, we have a lot in common.

You can find the new blog here. Actually, I'm not moving any of the posts that have appeared in Vorpal Trade. There are a bunch of the "I Own All Information" stripe that have appeared here, and since they are part of the Vorpal Trade history, they will stay here. New articles that are mainly about outrages over misappropriation of information, spying, surveillance, and all that juicy, gossipy stuff will show up in I Own All Information, while all of the articles on economics, investing, business, finance, psychology, and the peculiar blind spots that people live with will continue to appear here.

For those who are curious about what the heck a "privacy outrage" is, here is a short list of the articles appearing in Vorpal Trade that were more about information and privacy than economics or business:

Accelerometers in Smart Phones Might Be Useful for Spying

JSTOR Prosecutes User for Downloading Too Much

Social Media Websites are Designed to Spill

Strauss-Kahn and Reputation Shredding, Brought to You by the Internet

Eric Schmidt out, but we still want updates on BMs

All Your Informations Are Belong to Me

Zuckerberg's Rights to the Privacy of Chinese Activists

More on Google's Rights to Your Privacy

On Stranded Capital

There are significant differences between what the current economy feels like, especially as reported by the media, and its underlying strengths and weaknesses.

The cause of the current malaise is the necessary adjustment period after a boom. The current recession was not caused by the financial crisis of 2008. The financial crisis was driven by the boom of 2003 to 2006. During the boom years, optimism for increasing housing prices caused people to spend and invest more than they otherwise would have. As a result, they stranded their capital on a deserted island.

When you over-invest, you take a risk of stranding your capital in an unproductive place. A classic example of an investment is a house: You need a house, so buying one might be a good investment, as it may reduce your costs of housing yourself over rent. Suppose that you are so impressed by the good returns on your first house that you buy a second one. Whether this second investment pays off depends on the external market. If no one wants to buy your second house from you, then all the money you poured into it is stranded until such future time as the market comes back and decides once again that it wants to buy your house. In the meantime, all of that money is tied up in concrete, wood, nails, flooring, roofing, electrical cabling, appliances, and all of the labor that was required to put those items into the shape of a house. You can do nothing with that money because it has been converted into goods. It is stranded. Presuming that the rental market too is down along with the housing market, the house is a stranded investment, providing no payback.

If the entire economy contains a significant amount of stranded capital, then the economy will show the same signs of stress that the owner of the second house is under. Of course, this example is extremely close to what actually did happen in the mid-2000s, and our current situation continues to reflect stranded capital sitting in houses that are not returning any value to their owners or society.

The solution to the current recession is then quite clear: Wait long enough for there to be enough people that those houses can be useful and occupied, or long enough that the capital that was stranded is small compared to the new capital generated by all of the country's other useful pursuits. Any other attempted solution potentially ignores the fundamental problem of the stranded capital, and therefore will not repair the problem.

Austerity Is Good for You and It Makes More Fun

The nature of economic cycles is that it produces excesses and then teaches us how we erred so we can fix those excesses during recessions. The details are not always easy to understand or track. They exist in a multitude of small decisions. Everything from working too little to spending too much on cars and houses to over-investing in new factories that make more than the market will absorb contribute. I've written in the past (Everything is an Investment) that poor decisions help cause the recession, and it is the austerity of the recession itself that helps people figure out how to better allocate their money.

The problem is that some people think this is bitter medicine, and don't like the taste. James Livingston of Rutgers sets a distinctly contrary tone to the Puritan work ethic in an excerpt published last week in Bloomberg (Austerity Is Bad for You and It’s No Fun).

So let's go over it again: In a boom cycle, people believe things that aren't true, or they are too aggressive. For example, they may believe houses will rise in price 50% in the next 3 years. Or they may believe this hamburger is $6 which is twice as much as the $3 hamburger but it doesn't matter if I overpay because it is better. If money were tighter, they would allocate it differently. By rewarding the maker of $6 hamburgers rather than the more efficient $3 eatery, they temporarily subsidize inefficient producers. They put more money into a house than they should, because there aren't enough people to live in it. But because they believe it will be worth more later, they move their stored time (savings, aka capital) into the additional house purchase.

Austerity acts as a catalyst for better thinking. When you don't have enough, all your money goes further because you will tend to make better decisions. Typically, media stories on this topic go for the most dramatic example they can. They write things like "Last year we bought a BMW back when we both had jobs. Now that we're both disabled, penniless, and having to darn other people's socks to earn pocket change, we eat ramen noodles six times a day, with extra salt to give it volume." Horse puckey! The vast majority of austere decisions are not so dramatic. They involve cents, not dollars, deferral, and deletion of stuff you didn't need in the first place. It's things like shopping at two grocery stores instead of one, and watching more of the prices more carefully so that you don't get snookered by fancy "profit-oriented" pricing of certain specialty items.

Let's get to the "no fun" claim. Having more money is certainly better than having less. Which leads directly to the contention that if being austere puts money in your pocket, then you are wealthier when you are not spending money! What could be simpler? Having money is a heck of a lot better than having none.

Austerity is more fun because saving resources is part of a game, and you can keep score with money. The higher your score, the wealthier you get. It is better for the vendors too, because now they get honest feedback. When their prices are too high, and stupid, they get whacked with inactivity and low sales. With fast feedback they can tune their own operations to be more efficient. Unless of course they are fat and lazy and feel entitled, in which case they can just throw a temper tantrum and whine about the need for new Keynesian spending by the government.

Austerity is more fun because when you cut spending, you cut marginal purchases that had low payoffs anyway. Whenever a business invests in new products, it gets worse results if it invests in all of the ideas than if it weeds out the bottom 90%. The same applies to consumer spending. If you buy everything on your wish list, your results will be worse than if you ruthlessly stick to only the top 10%.

Here is a trick comes from my own personal experience: Deferral of spending can save money by reducing purchases of things you stop wanting. If you have a wish list of things, and you wait six months, a number of items will drop from that list because you simply won't want them anymore. Imagine what this says about the payoffs from "I want it" types of spending: If 30% of what you buy ceases to be of interest or utility within 12 months, that is like losing 30% on your investments in a year. Certainly we can and should do better than that, and if austerity helps create discipline that allows us to weed out that 30%, then it is an incredibly useful tool indeed.

Naturally, part of the motivation for writing such an article as Livingston did could be political. It seems clear to me, at least, that setting aside any normative arguments, Keynesian spending that depends on this aversion to austerity is unlikely to create the desired outcome of improving the economy. As I have written before (Consumer Spending Will Not Save You), the outcome from Keynesian expansion government spending depends very strongly on the individual decisions of the recipients of the spending. Even worse, reinforcing the notion that austerity can be avoided by sugar-daddy spending by Uncle Sam will cause many small bad decisions to be perpetuated.

It has been said that virtue is its own reward. This is not just a hard-bitten saying. It is literally correct. When you save instead of spending, you have more money to spend later. When the requirement is that some types of fun avoid expenses, you find more of the free things in life that are excellent to experience. When you have the habits of thrift, you will go farther, see farther, enjoy more, get more from life, and appreciate your leisure pursuits more. In Shakespeare's As You Like It:

Sweet are the uses of adversity,

Which, like the toad, ugly and venomous,

Wears yet a precious jewel in his head;

And this our life, exempt from public haunt,

Finds tongues in trees, books in the running brooks,

Sermons in stones, and good in every thing.

Best to heed the bard.

Students Put Into Debt by Government Aid

Judith Lynn Clayton reports in the NY Times piece Student Loan Debt: Who Are the 1%? on the state of student loans.

http://finance.yahoo.com/news/student-loan-debt-1-130033806.html

Along the way, she mentions a New Yorker article by James Surowiecki about student debt. Upon reading this, it struck me that some people ascribe too much credit to the "rational human" model of economics. The way Surowiecki puts it, you would think that students were making their own choices about how much tuition to pay:

"...the college wage premium—how much more a college graduate makes than someone without a degree—is at an all-time high. In fact, the spiralling cost of education has to some degree tracked the rising wage premium; as college has, in relative terms, become more valuable economically, people have become willing to pay more for it."

http://www.newyorker.com/talk/financial/2011/11/21/111121ta_talk_surowiecki

What Surowiecki is glossing over is that college tuition in this case isn't behaving like a commodity good. It is acting like a monopoly good. Colleges determine the advantages a degree will currently confer, then they carefully set their prices to capture most of that advantage. The student must take it or leave it. Loyalty and brand name count for more among universities than almost any product on the planet. If you have your heart set on getting into Princeton, you pay what they ask, and there are no discount holiday sales or outlet stores for a Princeton degree or a Princeton undergraduate experience.

The intent of Government aid is obvious: Make it easier to pay these onerous bills. But the net effect of Government aid is to cause an offset increase in tuition rates, since the universities will charge what the market will bear, and with Government aid in place the market is suddenly able to pay more, in total, than before.

The effect of Government aid for college is therefore to raise tuition and increase the number of students with outrageous student loans. There may be some studies that show that aid causes a shift of costs from less affluent to more affluent students, but along the way there will be some students who simply wind up paying more money overall.

What's Wrong with Banks

Nearly every Yahoo! Finance article has dozens of reader comments castigating bankers for the damage they have done to the U.S. economy. If this is the common wisdom, and the common wisdom is wrong, then what is the truth?

Theoretically, debit cards save consumers money by reducing their costs of holding cash. At least, this is what the bankers associations believe. But in order to feed their top and bottom lines, over the years bankers got themselves addicted to two kinds of fees: those they would levy on customers who were "bad", which is to say, those who overdrew their accounts; and fees charged to the merchant at the point of sale. Now that the U.S. has regulations curtailing both types of fees, the banks are finding themselves short of many billions of dollars of fees. So they have tried to make up the missing revenue through other fees. Bank of America, for example, is famous for saying that it would levy a $5 monthly fee on debit card users, only to rescind its plans when popular outrage made it clear that the fee would cost them too many accounts.

Let's start counting up the mistakes.

First, a debit card is not an asset, for most customers. Unlike paper cash, which provides a clear signal when it is being expended, debit cards make it much more difficult for the customer to track the drain on their bank balance. It makes overspending much easier. This benefits the merchant, because they can sell more goods, and it benefits the bank, which collects higher fees on the transaction, and which gets a small probability of collecting a penalty fee in the event the customer's account is overdrawn. The banker's theory that a debit card saves money for the customer makes the incorrect assumption that the customer's spending will be the same as when the same customer uses cash. Academic studies show that even savvy credit card holders spend more money when using a credit card than they do when using cash.

Debit cards were introduced as massive trickery in which retailers and banks colluded to induce consumers to overspend while shopping. They reduce time at the register, but by disconnecting the customer's budget sense during the payment process, they cause the customer to lose hundreds and thousands of dollars per year in spending that is unnecessary.

If you have $100 in your wallet and are about to buy an item that costs $40, if you have to use two of the five 20s in your wallet, you might decide to cancel the transaction and not buy at all. If you use a check, you might still compare the amount you are writing on the check with the cash in your wallet, but you will also think "I still have $100 in my wallet," making it feel like you aren't spending of your cash. If you use a debit card, you might not even notice that the total is $40. Hence it is very easy to let the transaction go through, because it barely feels like you are spending money at all.

A number of banking services that evolved between 1995 and 2010 are based on psychological tricks of this type. Customers believe they are rational, and are not. The banks get their services and fee structures approved because everyone, including regulators, assume that customers are rational, and they are not. The services are perhaps designed by the bank with full knowledge of the irrational behavior of customers, or perhaps it is just that some of them get lucky when they try random services, and they keep the profitable combinations, which just happen to have unpleasant side effects on customers.

Now, when I say irrational, I don't mean customers who act against their own best interest, or who are random or perverse. I mean that they act in ways that are chronicled in the psychology literature, things like helping their friends to do worse than they do on critical tests. Also, by not doing arithmetic when considering whether a purchase is in their budget. That's hardly a case of insanity or not. It is simply that rounding off numbers and doing the arithmetic in your head is much harder when using debit cards than it is when using cash. It isn't the bank's "fault" that you don't do this arithmetic. It just happens to be the beneficiary of your laziness.

You could also say that cash is like an automatic computer, because the supply of bills remaining in your wallet always matches the amount of money you have left (!!).

So if the bankers are evil, it is because they have marketeers that use the same tricks that Neiman Marcus, Saks, Wal-Mart, Nordstrom's, Sears, Dollar Tree, Kohl's, Bon Ton, Abercrombie, Safeway, Kroger, and thousands of other retailers and hucksters use to take your money and make you overspend your budget every day.

I've picked on debit cards here, but you can probably make the same case for other financial products, especially mortgages, that permit the customer to make a mistake.

You could go further, and discover that the existence of conservative banks doesn't help, because there will be banks that play at the margins. If the conservative bank turns down a mortgage applicant for a loan, but the bank of marginal behavior offers the same applicant a loan, who is the hero and who is the victim? Many, many community activists at one time or another, and perhaps now, would have castigated the conservative bank for failing to agree to the loan, and praised the marginal player. Where were these activists in the era of 100% loan-to-value? Shouldn't they have been out there trying to stop individuals and families from taking these loans from overly generous banks?

The same thinking applies to all risk-based banking products. Risky bankers ruin it for those with better values. Aggressive and marginal consumers are either taken advantage of by the bank, or taking advantage of the bank (and I don't see that you can make a definite case that one is more true than the other), and they ruin it for the rest of the customers who don't partake of the foolish banks nor present such banks with unusual risks.

Historically, banks have exploded over and over. The system tends to be unstable, with each success at systematizing any part of the process, reducing costs, and making things normal instead causing instabilities that tend to make the industry implode and sometimes take the economy with it. Government regulation has been tried repeatedly, but since this is just another attempt at systematization, it isn't clear that regulation will prevent the problem.

Since I try to write an objective blog, not a normative one, I will not prescribe a "fix" to the banking system or to specific elements, like debit cards. My task, as I see it, is to discover the hidden truths that self-interest and conventional thinking tend to obscure. Hence, my only recommendation is to be very open-minded about future events. Regulation of debit cards could result in their disappearance entirely, or in enormous shrinkage of their distribution. And maybe that would be a good thing for people, who cannot afford a payment mechanism that makes overspending so much easier than cash.

Vorpal Trade: A Dramatization

Alice looked on with great interest as the King took an enormous memorandum-book out of his pocket, and began writing. A sudden thought struck her, and she took hold of the end of the pencil, which came some way over his shoulder, and began writing for him.

The poor King looked puzzled and unhappy, and struggled with the pencil for some time without saying anything; but Alice was too strong for him, and at last he panted out, 'My dear! I really must get a thinner pencil. I can't manage this one a bit; it writes all manner of things that I don't intend--'

'What manner of things?' said the Queen, looking over the book (in which Alice had put 'The white knight is sliding down the poker. He balances very badly') 'That's not a memorandum of your feelings!'

There was a book lying near Alice on the table, and while she sat watching the White King (for she was still a little anxious about him, and had the ink all ready to throw over him, in case he fainted again), she turned over the leaves, to find some part that she could read, '--for it's all in some language I don't know,' she said to herself.

It was like this.

YKCOWREBBAJ

sevot yhtils eht dna ,gillirb sawT'

ebaw eht ni elbmig dna eryg diD

,sevogorob eht erew ysmim llA

.ebargtuo shtar emom eht dnA

She puzzled over this for some time, but at last a bright thought struck her. 'Why, it's a Looking-glass book, of course! And if I hold it up to a glass, the words will all go the right way again.'

This was the poem that Alice read.

JABBERWOCKY

'Twas brillig, and the slithy toves

Did gyre and gimble in the wabe;

All mimsy were the borogoves,

And the mome raths outgrabe.

'Beware the Jabberwock, my son!

The jaws that bite, the claws that catch!

Beware the Jubjub bird, and shun

The frumious Bandersnatch!'

He took his vorpal sword in hand:

Long time the manxome foe he sought--

So rested he by the Tumtum tree,

And stood awhile in thought.

And as in uffish thought he stood,

The Jabberwock, with eyes of flame,

Came whiffling through the tulgey wood,

And burbled as it came!

One, two! One, two! And through and through

The vorpal blade went snicker-snack!

He left it dead, and with its head

He went galumphing back.

'And has thou slain the Jabberwock?

Come to my arms, my beamish boy!

O frabjous day! Callooh! Callay!'

He chortled in his joy.

'Twas brillig, and the slithy toves

Did gyre and gimble in the wabe;

All mimsy were the borogoves,

And the mome raths outgrabe.

'It seems very pretty,' she said when she had finished it, 'but it's rather hard to understand!' (You see she didn't like to confess, even to herself, that she couldn't make it out at all.) 'Somehow it seems to fill my head with ideas--only I don't exactly know what they are! However, somebody killed something: that's clear, at any rate--'

'But oh!' thought Alice, suddenly jumping up, 'if I don't make haste I shall have to go back through the Looking-glass, before I've seen what the rest of the house is like! Let's have a look at the garden first!' She was out of the room in a moment, and ran down stairs--or, at least, it wasn't exactly running, but a new invention of hers for getting down stairs quickly and easily, as Alice said to herself. She just kept the tips of her fingers on the hand-rail, and floated gently down without even touching the stairs with her feet; then she floated on through the hall, and would have gone straight out at the door in the same way, if she hadn't caught hold of the door-post. She was getting a little giddy with so much floating in the air, and was rather glad to find herself walking again in the natural way.

Why Common Wisdom is Wrong

It is implicitly assumed in a number of the articles posted here that the common view is wrong. That is why the blog exists: To find uncommon knowledge about the markets and uncover it. Take any popular, and especially political, belief about the economy, and I contend that the odds are highly likely that it is incorrect. Since that statement implies that you and I will be among a few voices speaking into the wind, it's worth examining the basis for our contrary perspective.

For background I will be using Stumbling on Happiness by Daniel Gilbert, a professor of psychology at Harvard University. Although the theme of this book is understanding happiness, it necessarily draws in many conclusions from the academic literature on psychology, much of which is, of course, based on hundreds or thousands of careful experiments on genuine human beings.

The first evidence is that people are inaccurate observers of themselves. Their ego-defense mechanisms create information that isn't true, by selecting carefully new information that is designed to support a pre-existing thesis that they are above average. This belief, that they are above average, is supported by having friends who aren't as skilled by comparison. Gilbert writes:

"If we can't find people who are doing more poorly than we are, we go out and create them. Volunteers in one study took a test and then were given an opportunity to provide hints that would either help or hinder a friend's performance on the same test. Although volunteers helped their friends when the test was described as a game, they actively hindered their friends when the test was described as an important measure of intellectual ability."

If you don't believe Gilbert, get his references list and look at the studies he is citing. For example, there is Some effects of task relevance and friendship on helping: You don't always help the one you like. For a broader survey, take a looks at Selective Exposure by Freedman and Sears. Or you can go to Lake Woebegone, where all of the children are above average.

Of course, this just scratches the surface of all the things people do to their own belief systems. Rationalization, scape-goating, selective exposure and many other subtle effects do enormous damage to the ability of people to see social and economic worlds accurately.

Even the Federal Reserve and its celebrated theoreticians may be reality-challenged. Friday, Caroline Baum wrote "Fed Theoreticians Need Some Real-World Feedback" for Bloomberg, citing an informal but enlightening survey she had done that proved that people have very strange and inaccurate perceptions of inflation ("Nobel Laureate Bob Lucas, Meet Randa the Psychic: Caroline Baum"). Unfortunately for the Fed, they have the double problem of measuring the inflation expectations of the market, which is, perhaps hopelessly wrong, at least among people asked for an opinion on the street.

How do address this, as investors trying to discover reality? Do we accept the results of Baum's survey at face value, that a woman business owner of 20 years believes that inflation is 20 percent? Perhaps some skepticism is in order. The response could be exaggerated because the woman recognizes that her response will be influential, and she is going for the dramatic lie to show her point. Perhaps she really believes that inflation is exactly at the government-measured level, but that prices of certain highly visible commodities have recently and only for a short time exhibited a 20 percent annual rate of inflation. That is, people may say crazy things to informal survey-takers, because the process of sampling their opinion distorts their communications, or gives them an incentive to distort. Perhaps they lie because it is suddenly in their interest to do so.

Or maybe lying is too strong a word. People have beliefs, and they stick to them. It takes an avalanche of new information to change their minds. The recent Nobel Prize in Chemistry was awarded to a Daniel Shechtman for his work in the discovery of quasicrystals, the same work that was ridiculed by colleagues for many years. Major advances in science regularly meet with disbelief and ridicule. The take up of plate tectonics theory in the geology community in the 1950s is frequently cited as an example of this phenomenon.

But back to this result that shows that people "help" their friends to be below average. Could this mean that:

• Political policy designed to help disadvantaged groups actually causes them to be at a permanent disadvantage, so that advocates of political change can retain their superior starting position?
• Institutional investors working in an office where they are graded by their performance tend to "un-help" their colleagues by giving them information that reduces their investment performance?
• Everything you read on Seeking Alpha is a clever misdirection?
• It is any mystery at all that the message boards on Yahoo! Finance contain very little of any utility?
• Sell-side research from the large securities brokers has zero value, especially considering the order in which clients are exposed to it?

More on "Harbingers" of U.S. Doom

In the Lewis Vanity Fair article I reported on last week, a key topic was spending on public employee pensions. In the area of pension reforms, California seems to be lagging the rest of the U.S. Vauhini Vara writes in the Wall Street Journal (10/28/11, "California Moves to Ratchet Down Worker Pensions"):

"So far in 2011, 27 state legislatures have enacted significant retirement-system changes, following 21 states in 2010, according to the National Conference of State Legislatures."

If true, it seems that 48 states have already enacted retirement system changes, while California is still at a proposal stage and has yet to pass legislation. In its present form Jerry Brown's ideas are unlikely to garner enough support to pass the California legislature. This result, which seems to match the rest of Brown's experience since being elected, is very similar to the events of Schwarzenegger's administration.

Curious, I searched out the NCSL web site. Within a few minutes, I was able to find these two reports:

2011 Pension and Retirement Enacted Legislation

2010 Pension and Retirement Enacted Legislation

The first NCSL report, dated 9/29/11 contains within its Findings section the statement that was cited by Vara:

"Even more state legislatures enacted significant retirement system changes in 2011 than did so in 2010: 27 in 2011, compared with 21 in 2010. Since some states revisited the topic, in all, 40 states enacted significant revisions to at least one state retirement plan in 2010 or 2011. At the end of August, pending legislation on pension reform remained before the Massachusetts and Ohio legislatures, and the governors of California and New York had proposed changes that are likely to be considered later in 2011 or in 2012."

So the picture that emerges is that California is behind the rest of the country in reforming its public employee retirement system. Clearly, you cannot treat actions there as a leading indicator. Regardless of the outcome, whether good for taxpayers or public employees, the key point is that other states have already been there and done that.

Inflation Coming, Don't Worry

According to Forbes, Bernanke is saying "It's Jobs, Not Inflation, Stupid." With one party in the U.S. concerned that the Fed's quantitative easing will go too far and result in inflation, Bernanke is clearly signaling that the problem is jobs, not inflation. Dummies.

This sounds like what we wrote a little over two weeks ago ('Twist'counting the Future). If the Fed is going to err, they will have more margin on the inflation side. Therefore, they will err, we will get inflation, and those holding U.S. currency will find that their buying power has been eroded.

Although inflation is not fun, we haven't really had any in a long time. Everyone who had direct experience with real inflation, last seen circa 1981, is now 30 years older. Average annual inflation has averaged just 2% for about 15 years now, as measured using the U.S. Government's standard definitions. People in their 20s and 30s have never lived through an inflationary period. Few of us have any recent painful memories to dissuade us from policies that might cause it. And if you were to take the position that we should use an alternative definition that results in a higher rate, then since we're already in that kind of inflation, why not set monetary policy so that all of the measures of inflation are posting serious numbers, and get some jobs started in time for the 2012 Presidential election? (Forbes columnist Kenneth Fisher should be all over this one, as historical equities market records show that monetary policy is typically goosed to create jobs and inflation just prior to elections in Presidential years.)

To illustrate how inflation hasn't been around for a long time, I went Googling for an image of inflation rates since 1970. It was a hard chart to find. Most inflation charts stop at 2000, or 1990, or show some irrelevant inflation measure in healthcare (different topic, must skip for now) or other noise. I finally found this one (scroll down to see it) which shows the peak around 1980 and subsequent "collapse" in inflation rates.

Overall, inflation is bad for lenders, good for debtors. If you have to make a normative judgment, then you might say that at the present time a little inflation would be good for U.S. consumers, who on average hold too much debt. Inflation works wonders on real assets that are highly leveraged, like, say, houses, as the value rises but the amount owed remains fixed. If we were to get 1970s inflation again, with 7 to 10 years of rapidly increasing prices, then everyone who owns a house now and holds onto it will be wealthy by 2020.

Floods in Thailand Impact Street Prices for Western Digital Drives

For a quick check on the health of the computer market, take a look at hard disk prices at your favorite retailer. In the past month quoted prices for certain Western Digital hard drives moved from near $90 to over $180, a very unusual price pattern. The cause, of course, has been flooding in Thailand, which will shut a major Western Digital plant for many months. Take a look:

Inside WD's flooded Thai Factory (Forbes)

PC shortages 'inevitable' says Gartner (Channel Register)

Inside WD's flooded Thai factory [photos] (Channel Register)

Flood-hit WD could lose HDD leadership

[2TB "Elements" drive, now scarce and expensive]

Seagate has been less affected, and its prices seem to be lower.

Shortages of hard drives are expected to impact supplies of personal computers in the fourth quarter. If you are in the market for other components, however, the shortage of hard drives may create temporary surpluses of non-hard drive devices for personal computers. Could lower prices of RAM, CPUs, mother boards, and video displays emerge?

Surging Tax Receipts Bode Well for Government Budgets in Coming Years

Recent tax receipts in the U.S. have been below the historic trend of 18% of GDP, as shown in this chart at the Heritage Foundation site. Projections show tax revenues rebounding from a recent low below 14.9% to above 19% of GDP by 2015.

Confirming this predicated trend, Conor Dougherty reported in the Wall Street Journal on 10/27/11 that state tax revenues jumped 10.8% in the second quarter this year, a remarkable rebound. Among the largest increases were taxes paid by corporations to the states, which rose 19.1% in the second quarter.

Dougherty's article cites a number of sources who downplay the gain in tax receipts as unsustainable, citing various special levies that will soon expire. Certainly, there is no reason to expect such year-over-year gains to be sustained indefinitely, but these numbers indicate a much greater probability of a snapback to normalcy than has been expected during the recent market correction.

Vanity Fair: Will California Sink the United States?

Michael Lewis has an insightful article in the November 2011 Vanity Fair analyzing the health of U.S. state and local governments. Although the article never answers the question posed at the top of the cover, Lewis unearths some interesting tidbits we can use to predict the future economy.

Because there are so many moving parts to this analysis, I will go directly to the main points.

State governments are not informed about the financial health of their municipalities.

Lesson: State and local governments don't communicate. They don't have time, and they don't care.

California has perhaps the worst finances of any U.S. state, according to Meredith Whitney.

Lesson: Lewis' implied point is that the rest of the U.S. will suffer the same fate. I disagree with this thesis, as we will see below.

Meredith Whitney's prognostication about municipal bankruptcies was far off the mark.

Lesson: She wasn't actually interested in making that prediction at the time, she was interested in identifying states that would survive the financial crisis best. The publicity was, perhaps, accidental.

Arnold Schwarzenegger doesn't look where he is going, even in traffic, on a bicycle, without a helmet. Is that the way he tried to run California?

Lesson: No, it wasn't. His attitude may have seemed classically Californian--bold and direct, while irresponsible and rash--but his tenure in office was directed by voters who refused to vote for better government. The legistators that opposed his attempts at reform were following the dictates of their constituents.

Lewis see a kind of "vicious cycle of contempt" for politicians, in which failure to make progress causes voters to be more disgusted with them.

Lesson: Mixed. Although there may be contempt from various corners, the voters continued to vote for specific policies that their public officials carried out. Both may be irresponsible, but they are in harmony. The debt and finances of the State mirrors that of the people, with average incomes of $43,000 and debt of $78,000 per capita.

San Jose, a city in Silicon Valley that should be well-off financially, is nevertheless in dire straits.

Lesson: Municipalities in California acceded to demands that public sector workers share in the "boon" generated by California's high tech workers. The promises made greatly exceed the cities' ability to pay.

Even worse off is Vallejo. The city manager there sees the problem as one of attitude, not finance.

Lesson: Municipalities in California have poor finances because of values among their citizens and city workers. This cause is barely recognized among citizens in California, and is barely elaborated on by Lewis.

Discussion

If you read enough internet articles about California's financial crisis, eventually you will find comments from readers saying things like "we're the 8th largest economy, so pay attention" and "what happens to us will happen to you." Why is this?

In 1982 John Naisbitt published a bestselling book titled "Megatrends" in which he claimed that trends occuring in a few states, of which California featured prominently, seemed to presage national trends. His method, based on content analysis of major newspapers, seemed sound, and mostly matched our intuition about trends. Nearly 30 years later, it seems that the California collective subconscious is still stuck with this conclusion. How can a voter in California mess up their vote when whatever they do will be a harbinger for the rest of the U.S.?

But California is no longer a harbinger. The attitudes and decisions made there don't reflect the values of the rest of the country, don't supply leadership, and the rest of the U.S. recognizes it. Hence, to understand the state of the world as an investor you can no longer use California trends quite the same way, and that includes the data in this article.

U.S. Housing Prices Have Bottomed

Here's an indicator that we've seen the bottom of the U.S. housing market: Companies are beginning to sell insurance against price declines. Home Value Insurance, licensed just last month in Ohio, sells insurance against a decline in value of the customer's home. If the customer sells the house below its purchase price and the S&P Case-Shiller indices show a decline, then the customer may make a claim against the policy, subject to a deductible and other conditions.

If the housing market were clearly headed for further losses, companies wouldn't begin offering this insurance now. Therefore, this seems to be a strong indicator that in most U.S. metropolitan areas the decline in housing values is at an end.

Will Steve Jobs' final vendetta tarnish his legacy and hurt Apple?

After not copying anything from Xerox PARC for the Macintosh, was Jobs right to start a vendetta against the creators of Android, the most open and developer-friendly cell phone operating system? NDTV quotes Jobs as saying "I will spend every penny of Apple's $40 billion in the bank, to right this wrong."

Uh oh. It sounds like Jobs was willing to violate his fiduciary to Apple shareholders, since Apple's $40 billion of cash is company and shareholder money, not Job's.

In the long term, purveyors of closed systems, such as Apple's, must innovate continuously, relentlessly, and for the benefit of their future buyers if they want to stay ahead of obsolescence. It is a very tough job, and history shows that eventually even the best will slip up. Look at Microsoft: Its proprietary Windows platform is no longer innovating fast enough to present a compelling value over Linux. Windows evolution plateaued with Windows XP, and although there are a few technical innovations in Windows 7, most of the changes are internal, where end users can't see them.

And trees don't grow to the sky. Market penetration of the iPhone and iPod is already quite deep. Are there any compelling reasons to buy shares of AAPL now? I can't see any, but the downside risk of a flat market and richly-priced stock shows that there may be reasons to take some money off the table, if you do own AAPL. You might keep some for sentimental reasons.

What I am Reading Now

Recently, I seem to have a lot of books that I'm reading in parallel. Some fiction, some non-fiction, some for programming, some art and design.

Starbound by Joe Haldeman

Shadow and Claw by Gene Wolfe

It Is What It Is by 2 x 4 (http://2x4.org/work/)

Game Theory by Drew Fudenberg and Jean Tirole

The Tipping Point by Malcolm Gladwell

Programming Python by Mark Lutz

Books I recently finished:

Chesapeake by James Michener

Forever Peace by Joe Haldeman

Destroyer of Worlds by Larry Niven and Edward Lerner

I also have a "near future" queue. These are books on my nightstand, literally or figuratively, awaiting their turn to be read:

The Python Standard Library by Example by Doug Hellmann

Juggler of Worlds by Larry Niven and Edward Lerner

The Doomsday Book by Connie Willis

Self-Portrait Photography by Natalie Dybisz

Four Dragons (Stargate SG-1) by Diana Dru Botsford

Still deeper in the queue are these books waiting for me to buy them:

Moving Mars by Greg Bear

Coming Out of the Ice: An Unexpected Life by Victor Herman

Juggler of Worlds by Larry Niven and Edward Lerner

Spin by Robert Charles Wilson

Pro C# 2010 and the .NET 4 Platform by Andrew Troelsen

A Fire Upon The Deep by Vernor Vinge

Accelerometers in Smart Phones Might Be Useful for Spying

Georgia Tech researchers have paved the way for spy agencies and dark world hackers to obtain keystroke information from smart phones lying on user's desks next to their computers. As the user types the phone bounces on the desk just enough to be detected by the smart phone's accelerometers. This information is then used to deduce keystrokes. The system isn't perfect, but under certain conditions about 80% of keystrokes are deduced correctly. With repeated data collection, passwords can then be obtained.

Obviously, the phone must first be compromised, but any downloaded app could contain the key logging code.

Steve Jobs Thought He Owned Ideas

A biography of Steve Jobs will be out next week, and journalists with advance copies are punching out blog entries and news stories about some of the contents. In one newsworthy bit at Ars Technica, Ken Fisher reports that Steve Jobs said at a meeting with Eric Schmidt about Google's Android operating system for smart phones, "I want you to stop using our ideas in Android, that's all I want."

Well, now, we'd all like for our competitors to stop using our ideas, and leave us with a monopoly. But I think that would leave Apple with problems of its own, because a lot of the ideas used in their devices have been used by others, and invented or conceived of by others, even though those ideas may not have appeared in a smart phone. It is highly unlikely that the iphone component ideas were not thought of by someone, somewhere else. So to be fair Apple would have to stop using most of the ideas embedded in the iPhone.

For example, I am reminded of the hand-held computers used by the characters in Larry Niven and Jerry Pournelle's classic science fiction novel The Mote in God's Eye. If we were to use this principle of Job's, the their phone should be called the Niven-Pournelle phone, and Apple would be paying royalties.

JSTOR Prosecutes User for Downloading Too Much

This tidbit is from Ars Technica. Aaron Swartz, a former co-owner of Reddit, was arrested on computer fraud charges for overusing his JSTOR account.

Emergence of the Real Chronoscope

In 1956 a story by Isaac Asimov was published in Astounding Science Fiction, titled "The Dead Past". The story, ostensibly about Government control of acadamic research, is also a horror piece in which privacy is effectively destroyed through the invention of the chronoscope, a device that can look into the past. And since five minutes ago is the past, that means the chronoscope can see everything.

We are quickly headed toward that future, in which there is no privacy because all of the details of anyone's life, actions, beliefs, acquaintances, and shortcomings can be known by anyone else, anywhere in the world, at any time. Exhibit #1 is Facebook, which is suspected of or has been discovered keeping "shadow profiles" on pretty much everyone on the planet. It doesn't matter whether you have a Facebook account or not. They have a file on you anyway.

And it is a very, very deep file indeed. People who have used a legal option to obtain copies of the data Facebook maintains on them have received 1000-page documents, and that is after redaction of data that Facebook claims is trade secret. Typically, when these Facebook-is-up-to-no-good stories appear, there is a rash of people who defend Facebook, saying that it was the fault of the Facebook users for using the service, but this time the tenor of the dialog is different.

While internet stalking, by neighbors, ISPs, criminals, police, or whoever, is creepy, there have been proposals in the United Kingdom to make the contents of all computer subject to police inspection at any time. Separately, EU MEP Tiziano Motti of Italy has proposed that black boxes be installed on all computers so that police can detect criminal activity automatically. Clearly, given the nature of computers that means that each hard drive would be an open book. And given the nature of mankind, that means the contents of each hard drive would then be available for sale on the black market.

Exhibit #2 is the evolution of face recognition algorithms that can attach names to faces in a photo of a crowd. Depending on which software, company, interest group, or programmer you speak to the current rate of success is anywhere from poor to scary. Google has built facial recognition into Picasa, and claims to have backed off on some uses of the technology on the web because it was scary. The Carnegie Mellon lab that developed PittPatt has been acquired by Google. Facebook has put facial recognition into its software to help people tag others in their photographs. Governments use face recognition at customs to save time spotting terrorists and miscreants. With the proliferation of cameras on city streets, the low price of cameras, and the rapidly declining cost of processors to perform facial recognition on video streams, it is conceivable that real-time citywide monitoring of citizen locations is not very far off.

So whether you are an introverted stay-at-home computer user, or an extroverted on-the-go social butterfly, the future is clearly heading in the direction of keeping close tabs on everything you are doing, whatever its religious or political leaning.

In July, my comment about reputation shredding mentioned a reliance on anonymity for bad actors to cause damage to people falsely accused. With sufficient surveillance and the preponderance of public opinion on your side, however, you wouldn't need to be anonymous at all, because you would have the approval of the majority, and being mean to people isn't against the law.

-------------

For those who are interested, here are some links to materials about The Dead Past.

Wikipedia article on The Dead Past

IMDB entry about the BBC dramatization of the short story (part 1 of 7):

The Role of Personal Knowledge in National Growth

It is a well-established fact, known at least to economists, that long-term growth of an economy depends on new technology rather than changes in labor or capital. Robert Solow was awarded the Nobel Prize in Economics in 1987 for showing this.

Technology is knowledge. Newer machines and more efficient business processes are the result of active, practical knowledge. Therefore, U.S. national growth is directly influenced by how much each of us participates in increasing our practical knowledge.

By practical knowledge, I mean understanding of things that result in changes of efficiency. Reading literature may make you feel smarter, but unless it reduces fuel consumption, increases solar energy collection, reduces material usage, and streamlines or simplifies the business of living in this world, it has no value. As Mark Twain said, never let schooling get in the way of your education. Knowing proper use of the English language may make you a more effective communicator, and that is efficient. But knowing what a particular author wrote, for the sake of knowing it, will not change the U.S. GDP one cent.

But you already knew this, right? When we go to college, or high school, or graduate school, only part of what we learn is the material described in the syllabus. Some of the most valuable lessons are about managing time and money, meeting people, and exploration of new ways of thinking and new ideas. It is the same after college. In addition to getting your work done, it remains important to continue exploring new things, learning, changing and adapting yourself. Because the world changes, and it offers new deals all the time. If you are not paying attention, important customer profits may pass you by.

Of course, I am not talking about indulgences. I am referring to investments. If you can spend $10 now to save $30 later, and the $30 savings is real and not just a fictitious discount "off list price," then you need to strongly consider that investment. As I wrote last year, consumer spending doesn't save the economy, but savvy decisions by each and every one of us can and will impact the economy significantly.

An "investment" doesn't have to be a stock, bond, or real property. We're almost indoctrinated into thinking that investments must be big and complex, but in reality your highest returning investments are small and firmly in the realm of your personal life. Here are some examples:

You buy an air pump and tire gauge and keep your tires inflated about two to three psi above their formerly under-inflated state. Your gas mileage increases by 0.5 miles per gallon, from 20 to 20.5 mpg, and you save 15 gallons of gas each year.

You put new insulation in your attic, doubling the amount of effective insulation. Your heating and cooling costs drop by $150 per year.

Instead of buying your lunch out each day, you make salads the night before and take them to work. You save $20 and two hours of time per week, and you feel better because your calorie intake is down while you are eating healthier food.

You buy an inexpensive GPS for your car. In the first 12 months it saves you from driving 200 unnecessary miles; helps you recover from almost being lost four times, saving 4 hours in the process; and allows you to refine a route that your formerly thought was the shortest. In short, it paid for itself twice, just in the first year.

After watching a friend use a paint program you've never seen before, you realize that you don't like the paint software on your computer. You test out a half dozen new paint applications and find a new one that saves you 10 hours of time on your Christmas card mailing.

I'm taking a risk on sounding like Hints from Heloise, but I hope that you see the difference. I am suggesting policy changes, not activities. Using coupons is an activity, and depending on the way you approach it, it may save you money, or it might waste your time. Once you have invested time in finding new software, you will then use the more efficient package over and over, and the return on your original investment of time is automatic.

Another example: Replacing incandescent bulbs with fluorescent, if you can stand the light, will provide a profit on your investment over time, because fluorescent bulbs use about 25% of the electricity that incandescent bulbs use for the equivalent amount of light output.

These are just the simple examples involving cash savings. Many small investments you could make impact your skills and your impact as a person, hence your future income. The more your expand your exploration, learning, and personal technology, the greater your personal growth rate.

More:

Gas mileage tips

Light bulb savings calculator

'Twist'counting the Future

Today's Wall Street Journal Cynthia Lin writes Debt Does a 'Reverse Twist'. Fed Chairman Ben Bernanke explained earlier this month that the Fed's goal with Operation Twist was to narrow the gap between short term and long term interest rates, bringing long rates down by about 0.2%, thereby giving a boost to business by reducing long-term borrowing costs. As Lin points out, however, long-term rates have risen 45 basis points (an increment of 0.45%) rather than fallen.

So what is going on? Let's go back to basics. Interest rates exist because people prefer present consumption over future consumption. We don't live forever, so if you wait too long you might not get to enjoy the benefits of that dollar. So, you'd rather have a dollar today, say, than two dollars ten years from now. The greater your uncertainty about your future, the higher the interest rate you need to receive to compensate for the risk you are taking of dying before you get your money back.

The credit markets are saying that either inflation will increase or that uncertainty has increased. I see both happening. The spread between 2-year and 10-year rates has increased as well, indicating that the market is anticipating a stronger economy looking forward. A stronger economy will increase inflation pressures, so bond markets need more yield to be persuaded to hold debt.

Although it is tempting to think the Fed had something to do with the reverse twist effect, I don't see any reason for assigning causation there. The Fed was attempting to flatten the yield curve, which in my opinion, if it had happened, would be more likely to reflect contractionary tendencies already occurring in the market. Instead, the market has done what it wanted to, regardless of the Fed's plans. If the Fed has had any role, it could be said that tending to depress the markets in the short term (with a flatter yield curve) would then set up the economy for an inflationary bounce back later.

So far, the moves are slight. Some of the experts Lin quotes are convinced that 2-year Treasuries will eventually rally from here, sending yields as low as 1.5%. My contention is that Operation Twist would have triggered a move in that direction if such events were going in that direction, and therefore that Treasury yields will rise.

PIMCO has had a rough year because it bet heavily against Treasuries in March, around the time that market expectations and economic activity was peaking. Since April, equities have fallen, bond yields have fallen, and bond prices risen as the markets digest Greece's slow, agonizing fall into default. I think PIMCO mistimed its bet, but mainly it was too early. 2012 could see very significant inflation as pent-up demand and economic activity roar back to life.

I am not predicting that any gains in equities or general economic activity will be sustained. It will be characterized more by fits and starts of high demand, accompanied by shortages of raw materials, high oil prices, and inflationary pressures.

The mood in markets is fairly gloomy. Articles are beginning to appear saying that both bulls and bears see stocks as highly priced. With so much pessimism already in the market, the most contrary event would be a sudden rise in stock prices.

Another factor: If the Fed were to err and cause deflation or inflation, which event would be excusable? Before you answer, consider that general inflation would hit the housing market and increase prices. That wouldn't be so bad, would it? The Fed would get a lot more sympathy for "accidentally" causing inflation than it would for a deflation. Housing would recover, homeowners would be above water again, and new buyers would view the housing market with a differnt perspective. Clearly, Bernanke's incentives are to create a little inflation. Even better, if he does so in 2012, and the resulting economic boost occurs as would be expected, then he tends to cause his boss to be re-elected President. (Now that's never happened before, right?)

All in all, I look for increases in 2-year and 10-year yields that will anticipate and maybe keep pace with inflation occurring in 2012 and 2013. It isn't too late to sell your 2-year Treasuries, as some stocks will do much better than Treasures of any duration in the coming 12 to 18 months.

Social Media Websites are Designed to Spill

And when they spill, what they spill is their users. As in, dumped on the sidewalk, dumped in the street. Because what people really want from a social network is dirt on other people. And who better to supply than the individual to be dirted upon?

Now, Facebook and Google+ realize that if you believe that your dirt will be publicized, then you might hold back your dirt. So they go to some length to make you believe that your information is in control. Yes! You control your information! Just move the magic slider or click the magic button, and your dirt will be carefully contained where only your friends and acquaintances out to two degrees of separation will see it.

Ah, so when I spotted this item, I knew I had to make the point here at Vorpal Trade that social media is a complex beast and that it will burn a great many people, such as those who develop it.

Whoops. Google Engineer Accidentally Makes His 'Plus Sucks' Rant Public.

If a Google engineer can't keep his settings straight, then why would all the rest of us be able to?

Software is complex. Unlike physical reality, the landscape in a software application, and especially web-based applications that Google prefers, changes at the whim of the developer. A "user" of the physical world gets used to things: gravity, light, physical obstacles, the need to eat. Adults are experts at knowing how things work. They aren't surprised when rocks are heavy, trees block your view, or wood rots when exposed to water.

But place mortal humans inside the shifting landscape of a social medium, and they aren't quite so capable. And since it is a matter of competitive advantage to continually evolve the social media applications, to add to them and rewrite them to make them more capable, more complex, richer, better, happier and cleverer, it is unlikely that their users will be able to stay on top of the settings changes and small rules they need to master to keep their dirt in the places they last put it.

Even if Facebook and Google+ really do intent to help you keep your dirt straight, the deck is stacked against them. And since they really don't have any incentive to keep your dirt straight, the probability is zero that it will be.

There are defenses against dirt-spilling social media sites. That is a topic for another post later.

Richard Stallman's War on Software Users

It can be argued that advocating GNU products is tantamount to advocating poor user interfaces. The adoption rate of open source software under the GPL license is very poor among new and novice computer users, as the primary focus on FSF-philosophy software has never been about user satisfaction. It has been about programmer satisfaction.

When this problem collides head-on with memories of one of the greatest user interface advocates on the planet, Steve Jobs, then it isn't surprising that Richard Stallman would have nothing good to say about his competitor. Aside from Richard Stallman's poor sportsmanship, juvenile thinking, and poor attitude towards Jobs, which has caught a lot of peoples' attention, what is really galling is that Richard Stallman expects all the rest of us to discard our "impure" commercial and not-so-free software and take up GNU products.

In short, Richard Stallman wants to be dictator, and Steve Jobs was in his way. No wonder he wrote what he did.

http://www.stallman.org/archives/2011-jul-oct.html

This business of wanting to be king of all software by poisoning the well for everyone else has been a Stallman agenda for a long time. I've often wondered if he would still be an advocate for free software if the world were to require that his name be removed from everything in the FSF and GNU projects, and from all past news articles, so that he got no credit for any GNU or GPL work. Considering the massive efforts by other developers, and lack of much useful software written by Stallman, if he were to erase himself from the history books it would be a recognition of true reality, which is that being an a##h### is not something that should result in credit. But then, Joseph Stalin is still famous for his small role in Soviet Russia, so I guess that sometimes a##h###s get their notoriety whether or not they deserve it.

I really really doubt that Stallman would be willing to give up his fame. After all, what he wants is to ruin all the other software developers financially, then claim most of the fame (a kind of payment, after all) for himself.

End users deserve good software, and sometimes the shortest path to that reality is commercial software that winds up being closed source. It may stick in Stallman's craw, but, hey, I'm willing to live with that.

(Oh, and Richard, that OS is called "Linux", not that other thing you claim but which is a prevarication.)

---

Some of the articles posted about Stallman's disrespectful, parting dig at Jobs:

http://www.readwriteweb.com/enterprise/2011/10/why-fsf-founder-richard-stallm.php

http://www.forbes.com/sites/briancaulfield/2011/10/10/leave-it-to-richard-stallman-to-go-there/

http://latimesblogs.latimes.com/technology/2011/10/steve-jobs-stallman-dissenting-view.html

http://tech.slashdot.org/story/11/10/10/1227229/Richard-Stallmans-Dissenting-View-of-Steve-Jobs?utm_source=rss1.0mainlinkanon&utm_medium=feed

http://gizmodo.com/richard-stallman-steve-jobs/

http://www.neowin.net/news/richard-stallman-says-he-is-glad-steve-jobs-is-gone

http://www.itbusinessedge.com/cm/blogs/tennant/what-richard-stallman-s-hateful-eulogy-to-steve-jobs-really-means/?cs=48799

http://www.macgasm.net/2011/10/07/richard-stallman-steve-jobs-glad/

http://www.zdnet.com/blog/hardware/richard-m-stallman-on-steve-jobs-im-not-glad-hes-dead-but-im-glad-hes-gone/15275

In Hayek vs Keynes Debate, No One Advocates the Investment Process

Over at Bloomberg Nicholas Wapshott is stirring up things among the micro vs. macro dismal scientists. (Keynes and Hayek, the Great Debate (Part 4))

In order for Keynes to be right, he would have to be lucky. Only if the increment in Government spending is a true investment (with continuing payoffs that in total exceed the expense) would there be a lasting impact on the economy. In many cases, including the 2009 surge in U.S. spending, the investments are poorly selected and will not return a surplus. Fast spending, desperation spending, indirect spending, and spending by the Government on behalf of the rest of us are highly likely to fail to be effective or have investment returns, for the same reason that fast spending, desperation spending, indirect spending, and spending by an individual on behalf of another person is likely to fail to be effective.

It is necessary that the spending be an investment for a Keynesian expansion to work. Otherwise, the money is wasted, and the economy may even shrink afterward.

What happens in real life is that politicians spend money because it looks like they are doing something. It doesn't mean that Keynes was right when Bush or Obama request spending. It only means that the entire country is making a mistake, which the entire country will pay for later. It reminds me of the story about the fellow looking for a lost object at night under a lamppost because the light is better there.

Hayek also made the mistake of failing to indicate more directly the problem with mis-investing. Although he did correctly describe that individuals knew where to put the money better than government, he was not active enough in suggesting ways that the investment decisions that citizens make could be improved or increased in their efficacy.

An Introduction to Nanoeconomics

Many years ago I had a heated discussion with a person who lamented the high profits made by some businesses. The implicit assumption made by my opponent was that the seller's profit was at the expense of the buyer, and that it should be curtailed, perhaps even by legislation.

That got me thinking, and I countered with this proposition: That the buyer made a profit as well, and that instead of the seller gouging the buyer, the buyer might even be making so much profit that they were gouging the seller instead.

That conversation eventually became an academic paper and a fairly straightforward formulation of the dynamics of single transactions. It was easily proved that the buyer profits. The buyer has an opportunity cost, which establishes the value of the transaction to the buyer. The three numbers cost, value, and price are different and the differences between them establish the social surplus, seller profit, and customer profit for the transaction. The existence of the profits for both parties makes intuitive sense; if either party were no better off after the transaction, then they would have no incentive to engage in it.

If you draw a picture of the transaction, it looks something like the diagram at left. The seller profit is price minus cost, the buyer profit is value minus price.

For those readers who have been exposed to supply and demand curves in microeconomics, this single transaction diagram will match up fairly well to what you might see if you take a vertical slice from a supply/demand diagram. The customer profit is part of the consumer surplus. The advantage to putting this on a single transaction diagram is that you can see the real profits in the transaction, whereas the supply/demand curve aggregates many buyers and sellers together in one vast undifferentiated mass.

Nanoeconomics diagrams become very useful when analyzing monopoly, monopsony (single buyer), and monopoly/monopsony situations.