In a New Republic posting today we learn that a previously unknown photographer "secretly took some of the most moving photos of the twentieth century." I was quite excited to finally be discovered when I realized that they were talking about Vivian Maier. She is heralded now, but not when she was alive, because it was only after she had passed on that she had acquired notoriety.
The story is illustrative for what it contributes to our understanding of how things acquire value. Mystery, scarcity, aloofness, weirdness, and a backstory. That's what it takes. These are things one must master to understand valuation in its fullest measure.
More on Maier:
http://www.nytimes.com/2014/03/23/movies/a-documentary-looks-at-the-photographer-vivian-maier.html
http://www.newyorker.com/culture/culture-desk/vivian-maier-and-the-problem-of-difficult-women
http://www.nytimes.com/2014/09/06/arts/design/a-legal-battle-over-vivian-maiers-work.html
Warning: visiting the official web (www dot vivianmaier dot com) site may expose you to malware, according to Google.
I write about this in part because this blog always promises to be about "Art, science, and economics of the human condition" and yet it is so often more about the straight economics, without mentioning the art or the science. Where is the connection here? It is quite simple: Artists are so frequently worth nothing during their lifetimes, and fortunes when they are gone. It is the mystery, scarcity, and weirdness that brings value, and most artists in their 20s and 30s are merely embarrassments to their families and hapless rivals (and losers) to their peers and members of the opposite sex. After the passage of 40 years, none of the lost possible mates are thinking about the old mating game anymore, and what's left of the artist are his renderings of world and its emotions. Or, in this case, the photographs, many of them black and white and of a lost lost time. One can't help but feel nostalgic for such ancient times, especially as the brain has a tendency to remember the good, and omit the bad memories. Result? High valuation for older things that are at least a little bit well done.
Tuesday, October 28, 2014
Monday, September 29, 2014
In 2013, Gross Recanted Equity Slight; Renewed His Commitment to Bonds
In August 2013, Pimco's Bill Gross declared that Pimco would win the war on bonds. His choice of metaphor said more than he intended, I think, and indicates the state of mind he had been working with for some time.
In the same Reuters article, he was also quoted as admitting that he was wrong about equities. Since I had pointed out his mistake a year earlier in Vorpal Trade, this caught my attention:
Gross, in an interview with cable television network CNBC on Thursday, said investors can still expect returns of 2 to 4 percent from bonds. But he said Pimco "made a mistake" in suggesting that returns from stocks will be limited to between 3 and 5 percent. The S&P 500 has risen more than 19 percent this year.
By the end of 2013 some small- and mid-cap mutual funds had, in fact, returned more than 38 percent for calendar 2013, and even more since Gross' declaration in August 2012 that investment returns of more than three percent was theft by equity holders. (Actually, he called it "skimming", but the intent of his statement was to say that it was a purloined gain, taken from bond holders.)
Perhaps someone was not changing their mind. The pressure and stress resulting from his recent departure from Pimco indicate that he generally has stuck to the same beliefs he held in August 2012. In the interim, there was a lot of pain for holders of the Pimco Total Return Fund, especially when measured against broader investment benchmarks.
In the same Reuters article, he was also quoted as admitting that he was wrong about equities. Since I had pointed out his mistake a year earlier in Vorpal Trade, this caught my attention:
Gross, in an interview with cable television network CNBC on Thursday, said investors can still expect returns of 2 to 4 percent from bonds. But he said Pimco "made a mistake" in suggesting that returns from stocks will be limited to between 3 and 5 percent. The S&P 500 has risen more than 19 percent this year.
By the end of 2013 some small- and mid-cap mutual funds had, in fact, returned more than 38 percent for calendar 2013, and even more since Gross' declaration in August 2012 that investment returns of more than three percent was theft by equity holders. (Actually, he called it "skimming", but the intent of his statement was to say that it was a purloined gain, taken from bond holders.)
Perhaps someone was not changing their mind. The pressure and stress resulting from his recent departure from Pimco indicate that he generally has stuck to the same beliefs he held in August 2012. In the interim, there was a lot of pain for holders of the Pimco Total Return Fund, especially when measured against broader investment benchmarks.
Bill Gross' 3:00 a.m. Nightmare
Anyone who read our August 2012 article about the early morning nightmare awakening of a certain legendary investor would not be surprised. Once bond yields hit bottom, the resulting temper tantrums and disassembling of the PIMCO investor's reputation were inevitable. You can read about it at WSJ, Bloomberg, or Reuters, among other places.
Bill Gross, after being a jerk to a number of fellow employees, both in person over an extended period, and more recently in a widely read internal email, quit PIMCO before he could be fired by the board of directors. He is headed to competing investment management company Janus Capital Group Inc., which is perhaps 10% of the size of PIMCO as measured by assets under management. The media has been running warm, fuzzy nostalgic retrospectives of his history in founding and running PIMCO, highlighting his past successes, and some failures. If you are a PIMCO investor, you have some choices to make. Some investors have already been moving funds from PIMCO to Janus, following Gross' move.
Here is our take on what an investor with funds in PIMCO should do:
Q: Should equity investors move funds from PIMCO to Janus?
A: No, performance of equity investments at either firm will not be affected by Gross' presence or absence at either firm. Gross has little skill in equity investing, and as his strange, earlier comments indicated and we reported in August 2012, he may not understand the equity investment business very well. If anything, equity investors with funds in Janus accounts may want to watch carefully to see if Gross is added to any of those funds, and remove money from any funds that he is handed to manage.
Q: Should debt investors move funds from PIMCO to Janus?
A: No. As we wrote in August 2012, PIMCO's long-term bond investment performance has been driven by secular long-term declines in yields, and now that interest rates are stable or rising, the prospects of out-sized gains are slim, and there is nothing Gross can do about this. This is true regardless of Gross' presence of absence, at either firm. Our point was that his "3:00 a.m. moment" is caused by an inescapable turn of the tide that he can do nothing about. Although he has apparently always been a character of some color, my take is that he is more lucky than skillful, and the colorfulness has nothing to do with PIMCO's debt investment performance.
Following Gross to PIMCO will cost you transaction fees and some degree of inconvenience in changing accounting, account numbers, and work patterns.
Even worse, Gross will be under even more pressure to perform at Janus, and therefore will have an incentive to "gun" his investing by taking on excess risk. If he wins he will look like a genius, and if he doesn't, then he won't be much worse off than he is now. On balance you will be taking excess risk in a rising interest rate environment, where junk bonds are at abnormally low yields that may not compensate for the risk of upcoming downturns in the business cycle.
Q: Doesn't PIMCO outperform its peers now, because of Gross' investment proficiency?
A: From the data I have examined, no. Recent performance has been poor. I looked at Morningstar's compilation of short-term bond funds and found that year-to-date performance for all PIMCO funds was below the average and below the median.
I would expect that Gross will take this level of performance to any new fund he manages.
PIMCO will also be challenged in many ways that will distract them from performance at their best. Large outflows will raise transaction costs by a disproportional amount, and the media attention and turmoil will distract investment managers from performing at their best in investment management.
Bill Gross, after being a jerk to a number of fellow employees, both in person over an extended period, and more recently in a widely read internal email, quit PIMCO before he could be fired by the board of directors. He is headed to competing investment management company Janus Capital Group Inc., which is perhaps 10% of the size of PIMCO as measured by assets under management. The media has been running warm, fuzzy nostalgic retrospectives of his history in founding and running PIMCO, highlighting his past successes, and some failures. If you are a PIMCO investor, you have some choices to make. Some investors have already been moving funds from PIMCO to Janus, following Gross' move.
Here is our take on what an investor with funds in PIMCO should do:
Q: Should equity investors move funds from PIMCO to Janus?
A: No, performance of equity investments at either firm will not be affected by Gross' presence or absence at either firm. Gross has little skill in equity investing, and as his strange, earlier comments indicated and we reported in August 2012, he may not understand the equity investment business very well. If anything, equity investors with funds in Janus accounts may want to watch carefully to see if Gross is added to any of those funds, and remove money from any funds that he is handed to manage.
Q: Should debt investors move funds from PIMCO to Janus?
A: No. As we wrote in August 2012, PIMCO's long-term bond investment performance has been driven by secular long-term declines in yields, and now that interest rates are stable or rising, the prospects of out-sized gains are slim, and there is nothing Gross can do about this. This is true regardless of Gross' presence of absence, at either firm. Our point was that his "3:00 a.m. moment" is caused by an inescapable turn of the tide that he can do nothing about. Although he has apparently always been a character of some color, my take is that he is more lucky than skillful, and the colorfulness has nothing to do with PIMCO's debt investment performance.
Following Gross to PIMCO will cost you transaction fees and some degree of inconvenience in changing accounting, account numbers, and work patterns.
Even worse, Gross will be under even more pressure to perform at Janus, and therefore will have an incentive to "gun" his investing by taking on excess risk. If he wins he will look like a genius, and if he doesn't, then he won't be much worse off than he is now. On balance you will be taking excess risk in a rising interest rate environment, where junk bonds are at abnormally low yields that may not compensate for the risk of upcoming downturns in the business cycle.
Q: Doesn't PIMCO outperform its peers now, because of Gross' investment proficiency?
A: From the data I have examined, no. Recent performance has been poor. I looked at Morningstar's compilation of short-term bond funds and found that year-to-date performance for all PIMCO funds was below the average and below the median.
I would expect that Gross will take this level of performance to any new fund he manages.
PIMCO will also be challenged in many ways that will distract them from performance at their best. Large outflows will raise transaction costs by a disproportional amount, and the media attention and turmoil will distract investment managers from performing at their best in investment management.
Tuesday, February 12, 2013
Salary Price-Fixing in Silicon Valley
A lawsuit alleging price fixing among some of Silicon Valley's largest companies will proceed to trial, says U.S. District Judge Lucy H. Koh in San Jose, California. The defendants include Google (GOOG), Apple Inc. (AAPL), Intel Corp. (INTC), Adobe Systems Inc. (ADBE), Walt Disney Co. (DIS)’s Pixar animation unit, Intuit Inc. (INTU) and Lucasfilm Ltd. There was collusion in Silicon Valley to hold down salaries paid to technical employees. Apple was a prominent promoter of "no recruit" agreements, and Steve Jobs himself threatened Palm with unrelated patent litigation in order to bully Palm into complying.
The Verge: The no-hire paper trail Steve Jobs and Eric Schmidt didn't want you to see
Slashdot: Steve Jobs Threatened Palm To Stop Poaching Employees
Techcrunch: Apple, Google, 5 Others To Be Denied Dismissal Of “No Poach” Conspiracy Case
Bloomberg: Apple, Google Must Face Employee-Poaching Ban Antitrust Lawsuit
The lawsuit uses some of the evidence uncovered by a Department of Justice settlement in 2010 with the same companies, as reported by Vorpal Trade earlier (High tech hiring runs afoul of RICO?). So far, no compensation has been paid to employees who were the supposed victims of the collusion to hold down salaries, though a fine was paid to the U.S. Government.
More on the settlement:
Wall Street Journal, 9/17/10: DOJ, TechFirms Near Deal in Hiring Probe
AllThingsD, 9/24/10: DOJ, Tech Companies Settle Hiring Probe
BizJournals, 9/24/10: Tech giants settle hiring probe; Microsoft says it wasn't targeted
Sort of in the same category, but not nearly as real, and smacking greatly of wishful thinking, was AngelGate, in which it was alleged that a small group of angel investors in high-tech conspired to hold down the valuations of start-up companies they would fund.
The Verge: The no-hire paper trail Steve Jobs and Eric Schmidt didn't want you to see
Slashdot: Steve Jobs Threatened Palm To Stop Poaching Employees
Techcrunch: Apple, Google, 5 Others To Be Denied Dismissal Of “No Poach” Conspiracy Case
Bloomberg: Apple, Google Must Face Employee-Poaching Ban Antitrust Lawsuit
The lawsuit uses some of the evidence uncovered by a Department of Justice settlement in 2010 with the same companies, as reported by Vorpal Trade earlier (High tech hiring runs afoul of RICO?). So far, no compensation has been paid to employees who were the supposed victims of the collusion to hold down salaries, though a fine was paid to the U.S. Government.
More on the settlement:
Wall Street Journal, 9/17/10: DOJ, TechFirms Near Deal in Hiring Probe
AllThingsD, 9/24/10: DOJ, Tech Companies Settle Hiring Probe
BizJournals, 9/24/10: Tech giants settle hiring probe; Microsoft says it wasn't targeted
Sort of in the same category, but not nearly as real, and smacking greatly of wishful thinking, was AngelGate, in which it was alleged that a small group of angel investors in high-tech conspired to hold down the valuations of start-up companies they would fund.
Saturday, February 9, 2013
NY Times, Fooled, Says Mortgage Rates Elevated
The markets send clear signals about their condition. Last fall Peter Eavis wrote a Dealbook analysis piece that seemed to show that banks and mortgage companies were overcharging for 30-year mortgages.
But there was another explanation: Perhaps a 30-year mortgage rate of 2.8% is too low on an absolute level. Perhaps banks refuse to go that low because they predict they will lose large amounts of money when interest rates go back up. If banks lend at 2.8% and short term rates are 4%, they would lose 1.2% just on the interest rate difference alone, not to mention costs of servicing the loan. Short term funding rates obviously aren't 4% now, they are closer to 0.25%. What if you were making the loan from your own funds, to a stranger who needed to take 30 years to pay it back to you? Would you lend your money at 2.8% for that long? What if you were able to borrow at short term rates and were making 2.8% mortgages to friends, family, and random strangers. Would you feel comfortable making 2.8% loans? Wouldn't you be worried that 0.25% short term rates won’t last forever, especially with oil at $100/barrel?
Rather than ascribing evil motives to lenders, it makes much more sense that the entire mortgage industry is very leery of low rates, and predicts that funding costs will increase in the coming years. Mortgage lenders are signaling higher rates to come. To dive down to extremely low mortgage rates would be going out on a limb, betting aggressively on a long-term moribund economy that never sees inflation or higher, boom-market interest rates again. Short- and long-term rates for Treasury bills, bonds, corporate bonds, mortgages, CDs, savings accounts, and other debt are at record or historic lows, at least for the last several generations. High and growing levels of U.S. Federal debt indicate significant potential for future inflation and higher rates of interest across all debt classes.
This leads rather directly to the conclusion that you should not be buying bonds, investing in long-term CDs, and lending at fixed rates for long periods. As we've written before, large bond investors like PIMCO are in for lean times, and even investors as storied as Bill Gross are having difficulty in coming to terms with the coming shift, as we wrote in August 2012.
This leads rather directly to the conclusion that you should not be buying bonds, investing in long-term CDs, and lending at fixed rates for long periods. As we've written before, large bond investors like PIMCO are in for lean times, and even investors as storied as Bill Gross are having difficulty in coming to terms with the coming shift, as we wrote in August 2012.
Thursday, February 7, 2013
The Desperate Yearning to Fade the Other Guy
The equities market is like Lake Woebegone, where everyone is above average. Every day brings the opportunity to find out what the other guy is doing, and if your opinion of him is low enough, to do the opposite. But that brings a new problem: How do you find out what the other guy is doing?
Recently there has a been a rash of articles on this perpetual problem. Ameritrade recently created an index of investor sentiment based on their own customers' equity positions, a kind of giant, anonymized disclosure of your secret portfolio holdings. Fidelity Investments has one too. Yahoo Finance reported on the both of them in The Struggle to Profit From Investor Emotion.
The American Association of Individual Investors publishes its own survey, but this is based on freely given opinions, not taken from private portfolios. It is updated frequently.
If you want to pay for emotion measurements, you could try www.sentimentrader.com, a newsletter that covers broad ground, with over 20 different indicators that they track.
Then there are the social media-based funds. A supposedly Twitter-based hedge fund, which never attracted enough money to be a profitable enterprise, was Derwent Capital Markets, but it folded. Picking up the idea, and repackaging so that other people might make the same mistake, is DCM Dealer (advertising at the company website here), where the idea is that retail investors can buy access to the aggregated tweet flow data indicating market sentiment.
Recently there has a been a rash of articles on this perpetual problem. Ameritrade recently created an index of investor sentiment based on their own customers' equity positions, a kind of giant, anonymized disclosure of your secret portfolio holdings. Fidelity Investments has one too. Yahoo Finance reported on the both of them in The Struggle to Profit From Investor Emotion.
The American Association of Individual Investors publishes its own survey, but this is based on freely given opinions, not taken from private portfolios. It is updated frequently.
If you want to pay for emotion measurements, you could try www.sentimentrader.com, a newsletter that covers broad ground, with over 20 different indicators that they track.
Then there are the social media-based funds. A supposedly Twitter-based hedge fund, which never attracted enough money to be a profitable enterprise, was Derwent Capital Markets, but it folded. Picking up the idea, and repackaging so that other people might make the same mistake, is DCM Dealer (advertising at the company website here), where the idea is that retail investors can buy access to the aggregated tweet flow data indicating market sentiment.
Wednesday, February 6, 2013
New Legal Conditions for Reading Vorpal Trade
Back in 1985 the Securities and Exchange Commission lost a legal case against a newsletter publisher. The SEC insisted that the publisher was a financial advisor. The publisher insisted that they were exercising their First Amendment rights. The U.S. courts ruled in favor of the publisher against the SEC.
I don't know whether that seems unfair to you not, but consider another situation: A publisher of information doesn't know what the reader will do with it. The reader could invest $1000, nothing, or $100,000,000. Suppose the reader invests $100 million, loses half of it, and sues the publisher to make them whole, even though they paid the publisher just $100 for an annual subscription. Do you think the publisher is liable for the losses? Let's suppose you do, and take the tentative position that the publisher really does owe the reader some compensation for the bad advice.
So let's back up, then, to the moment just before the reader placed their subscription order. These thoughts occurred to them:
1. "If I invest $100 million, and lose half, then I'm out a bunch of money, and its my fault."
2. "But if I can invest $100 million, lose half, and sue the publisher, then maybe I won't lose anything because the publisher has to reimburse me!"
3. "On the other hand, if I invest $100 million and my investment goes up by $50 million, then I keep the whole thing and don't have to share the profits. I keep the whole thing."
4. "There's no way to lose! If I make money, I keep it, and if I lose money, I blame it on the publisher and I break even. Yahoo!"
5. "Boy, that newsletter publisher sure is stupid!"
In other words, if you assign strict liability to the publisher for bad calls, then they take on unlimited liability for trillions of dollars of losses, without any possible sharing of gains. Were this to become legal precedent, then no advice would ever be given to anyone ever again. And that would include medical and legal advice, not just financial advice, or even just a few comments in a blog about financial matters.
So, in response, we have posted our legal page with our terms and conditions for reading Vorpal Trade. We think it highlights just how absurd, in an artistic sort of way, many legal contracts can be when they are trying to remove obstacles from the path of truth.
(P.S.: There is no resemblance whatsoever between the DOJ legal case against S&P and our contract. None whatsoever.)
2/9/13 Update:
Various materials regarding the First Amendment and the SEC's regulatory operations that have come into opposition with the Constitution:
Wall Street Journal, 9/5/12: The SEC and the First Amendment
The New Capitalist, 3/11/11: The SEC’s Problem With the First Amendment
Forbes (warning: many advertisements), 9/18/12: Under Congressional Mandate, SEC Slowly Moves Towards Recognition of First Amendment
Restrictions on securities solicitations are a response to abuses of the 1920s and 1930s. SEC rules about solicitations are intended to curtail activity that could result in the sale of inappropriate securities to unsophisticated investors. Forbes' Glenn G. Lammi: "SEC Chairman Schapiro seems sympathetic to the concerns voiced in letters from various activist groups that freer speech will unleash a flood of fraudulent activity."
I don't know whether that seems unfair to you not, but consider another situation: A publisher of information doesn't know what the reader will do with it. The reader could invest $1000, nothing, or $100,000,000. Suppose the reader invests $100 million, loses half of it, and sues the publisher to make them whole, even though they paid the publisher just $100 for an annual subscription. Do you think the publisher is liable for the losses? Let's suppose you do, and take the tentative position that the publisher really does owe the reader some compensation for the bad advice.
So let's back up, then, to the moment just before the reader placed their subscription order. These thoughts occurred to them:
1. "If I invest $100 million, and lose half, then I'm out a bunch of money, and its my fault."
2. "But if I can invest $100 million, lose half, and sue the publisher, then maybe I won't lose anything because the publisher has to reimburse me!"
3. "On the other hand, if I invest $100 million and my investment goes up by $50 million, then I keep the whole thing and don't have to share the profits. I keep the whole thing."
4. "There's no way to lose! If I make money, I keep it, and if I lose money, I blame it on the publisher and I break even. Yahoo!"
5. "Boy, that newsletter publisher sure is stupid!"
In other words, if you assign strict liability to the publisher for bad calls, then they take on unlimited liability for trillions of dollars of losses, without any possible sharing of gains. Were this to become legal precedent, then no advice would ever be given to anyone ever again. And that would include medical and legal advice, not just financial advice, or even just a few comments in a blog about financial matters.
So, in response, we have posted our legal page with our terms and conditions for reading Vorpal Trade. We think it highlights just how absurd, in an artistic sort of way, many legal contracts can be when they are trying to remove obstacles from the path of truth.
(P.S.: There is no resemblance whatsoever between the DOJ legal case against S&P and our contract. None whatsoever.)
2/9/13 Update:
Various materials regarding the First Amendment and the SEC's regulatory operations that have come into opposition with the Constitution:
Wall Street Journal, 9/5/12: The SEC and the First Amendment
The New Capitalist, 3/11/11: The SEC’s Problem With the First Amendment
Forbes (warning: many advertisements), 9/18/12: Under Congressional Mandate, SEC Slowly Moves Towards Recognition of First Amendment
Restrictions on securities solicitations are a response to abuses of the 1920s and 1930s. SEC rules about solicitations are intended to curtail activity that could result in the sale of inappropriate securities to unsophisticated investors. Forbes' Glenn G. Lammi: "SEC Chairman Schapiro seems sympathetic to the concerns voiced in letters from various activist groups that freer speech will unleash a flood of fraudulent activity."
Monday, November 19, 2012
The One Thing that CFPB Must Do
The Consumer Financial Protection Bureau (CFPB) was created in 2011 to, according to the US Treasury Department, "promote fairness and transparency for mortgages, credit cards, and other consumer financial products and services." If you look at the underlying motivation for the CFPB's creation, however, its origin lies in the perceived deception of consumers by financial companies. Finance is really psychology, and the most successful finance companies understand the psychological pitfalls that consumer don't. Consumers make the same mistakes over and over, and the CFPB now exists in the hopes of preventing finance companies from allowing consumers to fall into those traps.
A great example of this is use of credit cards. Because there is no physically representative counter involved, spending money with a credit card tends to be too easy; there is no feedback, such as a diminished weight in your pocket, or thinness of your wallet, that would signal to you that you might be spending too much money. Even relatively sophisticated consumers spend more money when they use a credit card instead of cash. This is exactly the kind of "trick" that consumers fall prey to every day.
So if the CFPB exists to help consumers avoid such tricks, then they really need to go after retail pricing. For decades retailers have discovered that they can sell more products if they mark the price down by a penny or two. Instead of charging two dollars, they charge $1.99, and sales magically rise. Although you might argue that sales rise because the customer is getting a one penny discount, most of the rest of us would think you were pretty stupid to buy that line. No. Instead, when a product is priced at $1.99, a huge majority of consumers think, on some level, that it costs one dollar, not two dollars, even though simple third-grade math tells you that you really ought to round it up to two dollars.
The proof is in the prevalence of the practice. When JCPenney recently decided to price goods "honestly" in whole dollar amounts, investment analysts roundly criticized their new strategy as naive. Perhaps 99% of all retailers use this pricing strategy.
Clearly, using prices based on nines (.99, .98, .97, .95) works, and it is tricky. It is a psychological trick designed to make consumers think that things cost less than they do, and as a result, consumers overspend.
The CFPB is starting in the wrong place. They really need to be out there setting rules for pricing of retail goods. The rule to be imposed is simple: Goods must be priced so that when rounded to the nearest five percent, there is no change in the price. With this formula in play, items could cost $1.90 or $2.00, but not in between. No consumer is going to lose any sleep over the difference. The retailer, faces a much tougher choice. If they price at $1.90, they keep most of the "trick", but at a loss of 9 cents (4.5%) on every sale. Or they can post the "honest price" of $2.00, and stop tricking the customer into spending money they don't really have.
A great example of this is use of credit cards. Because there is no physically representative counter involved, spending money with a credit card tends to be too easy; there is no feedback, such as a diminished weight in your pocket, or thinness of your wallet, that would signal to you that you might be spending too much money. Even relatively sophisticated consumers spend more money when they use a credit card instead of cash. This is exactly the kind of "trick" that consumers fall prey to every day.
So if the CFPB exists to help consumers avoid such tricks, then they really need to go after retail pricing. For decades retailers have discovered that they can sell more products if they mark the price down by a penny or two. Instead of charging two dollars, they charge $1.99, and sales magically rise. Although you might argue that sales rise because the customer is getting a one penny discount, most of the rest of us would think you were pretty stupid to buy that line. No. Instead, when a product is priced at $1.99, a huge majority of consumers think, on some level, that it costs one dollar, not two dollars, even though simple third-grade math tells you that you really ought to round it up to two dollars.
The proof is in the prevalence of the practice. When JCPenney recently decided to price goods "honestly" in whole dollar amounts, investment analysts roundly criticized their new strategy as naive. Perhaps 99% of all retailers use this pricing strategy.
Clearly, using prices based on nines (.99, .98, .97, .95) works, and it is tricky. It is a psychological trick designed to make consumers think that things cost less than they do, and as a result, consumers overspend.
The CFPB is starting in the wrong place. They really need to be out there setting rules for pricing of retail goods. The rule to be imposed is simple: Goods must be priced so that when rounded to the nearest five percent, there is no change in the price. With this formula in play, items could cost $1.90 or $2.00, but not in between. No consumer is going to lose any sleep over the difference. The retailer, faces a much tougher choice. If they price at $1.90, they keep most of the "trick", but at a loss of 9 cents (4.5%) on every sale. Or they can post the "honest price" of $2.00, and stop tricking the customer into spending money they don't really have.
Wednesday, September 26, 2012
Go to School, Get a Loan, Risk Enslavement
I've written twice before about how Government student aid raises tuition rates and increases the debt carried by students. Those articles didn't cover some of the more pernicious dangers of such government help, which was made vivid by a recent movie (Default: The Student Loan Documentary) and Business Insider article about Nick Keith (This Bright-Eyed Young Man Was Utterly Demolished By Student Loans). In short, kids like Nick Keith have been promised a bright future if they spend heavily on education, are loaned the money to fund their tuition, then find that the jobs that result from their education don't cover the bills. Hence, the students are tricked into spending too much money on classes that have no effect on their employability. The schools have an incentive to lie about the effect of their classes, with little downside when they are caught.
Even worse, the funding for the overpriced classes comes from government-sponsored student loans, with high interest rates. Because the government is involved, these loans cannot be discharged in bankruptcy. The combination of high rates and lack of forgiveness means that students that get ripped off by schools that lie can find themselves permanently enslaved to their creditors and to the U.S. Government. Said Kieth: "My life has become a daily swim in a tar pit with very little hope of ever getting out."
Most types of consumer loans are far less risky. Credit card loans, auto loans, home mortgages, and even payday loans can be discharged by bankruptcy. You can get a second chance, and a clean start. It is not painless, but it does end and let's you try again. In contrast, education loans that are entangled by government involvement are permanent. A loan from a loanshark is permanent too. Same thing.
I keep seeing more and more articles about this problem. Here's another: Indentured Students Rise as Loans Corrode College Ticket
Obviously, education is an investment in yourself, not to be taken lightly as it commits a great deal of time and capital. Now that the government is involved, you risk your liberty as well. Here's how to make education investment decisions the vorpal way.
First, insist that all promises the school makes about your education are in writing. If you cannot get it in writing, then assume that the claim is false. If you can make audio or video recordings legally in your state, do so when the school salesman makes his or her pitch. Let them know that you are making the recording, and that you consider the claims they are making part of a contract.
Second, turn down all government offers of assistance. This means voting against laws, policies, and politicians that make offers of government assistance with tuition. These measures tend to cause huge increases in tuition prices that erase the effect of the supposed financial assistance. Also, if the tuition isn't affordable without assistance, you should be leery that the price is already too steep to be a prudent investment.
Third, if the school has made documented claims about your education that turn out to be false or are substantially misrepresented, file a tort lawsuit alleging that the school committed fraud. You may also file a criminal complaint with your state, as fraud is both a crime and a civil tort.
Fourth, look around and investigate other methods of getting the same education and training. There are very few fields where the only way to learn is via schoolroom training. This is especially true of skilled trades. Our forefathers tended to pass knowledge to junior workers via apprenticeships. If you have a good work ethic, are truly eager and committed to learning a profession, and have even a moderate amount of aptitude for a field, you will be able to find a similar type of paid apprenticeship or entry level training position that will be a much better use of your time and will actually pay you for it.
Even worse, the funding for the overpriced classes comes from government-sponsored student loans, with high interest rates. Because the government is involved, these loans cannot be discharged in bankruptcy. The combination of high rates and lack of forgiveness means that students that get ripped off by schools that lie can find themselves permanently enslaved to their creditors and to the U.S. Government. Said Kieth: "My life has become a daily swim in a tar pit with very little hope of ever getting out."
Most types of consumer loans are far less risky. Credit card loans, auto loans, home mortgages, and even payday loans can be discharged by bankruptcy. You can get a second chance, and a clean start. It is not painless, but it does end and let's you try again. In contrast, education loans that are entangled by government involvement are permanent. A loan from a loanshark is permanent too. Same thing.
I keep seeing more and more articles about this problem. Here's another: Indentured Students Rise as Loans Corrode College Ticket
Obviously, education is an investment in yourself, not to be taken lightly as it commits a great deal of time and capital. Now that the government is involved, you risk your liberty as well. Here's how to make education investment decisions the vorpal way.
First, insist that all promises the school makes about your education are in writing. If you cannot get it in writing, then assume that the claim is false. If you can make audio or video recordings legally in your state, do so when the school salesman makes his or her pitch. Let them know that you are making the recording, and that you consider the claims they are making part of a contract.
Second, turn down all government offers of assistance. This means voting against laws, policies, and politicians that make offers of government assistance with tuition. These measures tend to cause huge increases in tuition prices that erase the effect of the supposed financial assistance. Also, if the tuition isn't affordable without assistance, you should be leery that the price is already too steep to be a prudent investment.
Third, if the school has made documented claims about your education that turn out to be false or are substantially misrepresented, file a tort lawsuit alleging that the school committed fraud. You may also file a criminal complaint with your state, as fraud is both a crime and a civil tort.
Fourth, look around and investigate other methods of getting the same education and training. There are very few fields where the only way to learn is via schoolroom training. This is especially true of skilled trades. Our forefathers tended to pass knowledge to junior workers via apprenticeships. If you have a good work ethic, are truly eager and committed to learning a profession, and have even a moderate amount of aptitude for a field, you will be able to find a similar type of paid apprenticeship or entry level training position that will be a much better use of your time and will actually pay you for it.
Thursday, August 23, 2012
National Overspending Policy
Why does the U.S. overspend? It is domestic fiscal and tax policy to over-tax the young and give the proceeds to the old. Although Laurence Kotlikoff's article "Economists Risk Labeling as Political Hacks" is in the opinion section at Bloomberg, it contains an excellent overview of the last 60 years of U.S. economic policies and incentives. Try to read it without applying any political filters, if you can. Ultimately, the point is that the country has been overspending for the last 60 years under all administrations, and that real growth in GDP won't come back unless the country as a whole stops overspending. Although he doesn't say it directly, some of the reduction of that overspending would have to come from entitlements, which now consume well over half of the federal budget, and will soon consume 80% if current trends continue.
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