What Happened?

Posted by T.W. Hanson - Mar 11th, 2008 at 20:03

buy

The Dow finished the day up 416.66 points or 3.5%. The rally began before the market opened and continued through the day. These moves weren’t echoed in the larger credit market, but we will get to that in a later post. What did happen was that the Federal Reserve decided to make available $200 billion to banks, and what is unique is what the banks can post as collateral.

The banks can now borrow that $200 billion using the highest rated pools of defaulting mortgages as collateral. This is intended to free up capital to help the markets function properly.

Many analysts were pointing to a negative feedback loop in the credit markets last weeks as cause for real concern. Hedge funds like Carlyle and Peloton and institutions holding mortgages like Thornburg were receiving margin calls from banks. This forced them to liquidate securities for which there wasn’t a robust market. This depressed prices in those markets. Other holders of the these securities were facing margin calls, and these events threatened a serious melt down in the capital markets. This infusion by the Fed should help ameliorate some of these issues.

That being said Bear Stearns was down approximately 10% at times during today’s trade on fears that it doesn’t have adequate liquidity to operate. And, it cannot be stated enough, the credit markets moved in a very muted fashion compared to equities today.

The question is what has the Fed done. Have they lanced the boil, provided adequate antiseptic and bandaged the wound properly or given the wound a third shot of cortisone and left the rest to the audacity of hope?

A penny saved

Posted by Tad Johnson - Mar 11th, 2008 at 19:03

I believe it was Benjamin Franklin who coined the phrase “a penny saved is a penny earned”. In today’s economy, this isn’t quite true. A more accurate version is “a penny saved is a little more than a penny earned”. This extra, of course, is interest.

penny savedCompound interest is a pretty magical thing–it turns a little bit of money into a lot of money over a long period of time. This is why we all save money in Roth IRAs, 401(k)s, and the like. There’s just one little problem–saving money is no fun.

Sadly, I don’t have anything to offer that somehow makes saving as much fun as, say, a weekend in Vegas. What I do have is human psychology that affirms spending money isn’t nearly as fun as we think. I read about this most recently in the books Stumbling on Happiness and Deep Economy.

The thesis goes like this : we think that buying that new car, or new computer, or new pair of jeans will make us happy. More so, we think that the really expensive car/computer/jeans will make us really happy. But once we buy them and the initial glow has worn off, we discover that even a Porshe is just another car. And that brand new iMac is just a vehicle to the same old internet. And those designer jeans feel about the same as the less expensive pair.

For the vicenarian, understanding this psychology can be a powerful tool in happily saving money. Since you know (once you’ve read the above books) that buying stuff doesn’t make you as happy as you expect, you can more comfortably choose not to spend. Or, to be more precise, you’ll spend your money on the things that really make you happy (dinner with friends) and less on the stuff that won’t (expensive gadgets).

Work = Force * Distance

Posted by T.W. Hanson - Mar 10th, 2008 at 20:03

Hopefully physics class in high school didn’t keep you awake at night like it did for me. One puzzle that always bothered me was the formula work = force * distance. Lying in bed, it was very clear that I was in the same spot where I began the day. My net displacement was zero meters. Therefore, the amount of work I accomplished was zero. How much work has the stock market done since January 14, 2000?

INDU

The Dow Jones Industrial Average closed today March 10, 2008 at 11,740.15. It closed on January 14, 2000 at 11,722.98. 0.1% price appreciation! This is not adjusted for inflation. In purchasing power, the January 2000 value is significantly higher.

Over the past 8 years, we haven’t moved very far. I’ll leave it to you to figure out how much work we have accomplished.

The Power of Advertising

Posted by Tad Johnson - Mar 10th, 2008 at 5:03

Since my college days, I’ve been decreasing the amount of regular broadcast television I consume. For my favorite shows that I can’t live without, I view or download online. This system has been a great money saver, since 1) I don’t own a TV and 2) I don’t pay for cable television.

What I’ve discovered is that there’s a third financial benefit : less consumer spending, which I attribute to less advertisements.

The average 30 minute television program has 6 minutes of ads (generally 30 seconds per). Each of those 12 advertisements is created by exceptionally well trained professionals who are paid to do one thing : convince you to spend your money on product X. Regardless of how “immune” you think you are to advertisements, decades of research (and multi-billion dollar ad budgets) would suggest otherwise.

Contrast this with online viewing, where you get between 0 and 90 seconds of advertising per 30 minute segment. Already you’ve cut out at least 75% of your TV ad exposure. Think your consumer spending might drop as well? You bet!

I’m making some tall claims here, and I admittedly lack empirical data to back them up. Even so, conceptually this makes sense. As a vicenarian, you would do yourself a favor by cutting back on regular TV and the ads that come along with it. Services like Hulu, iTunes, or less-than-legal sites like PirateBay are waiting with open arms for your view-share. Give it a try and see if your spending changes as a result.

The dollars and cents of saving energy

Posted by Tad Johnson - Mar 6th, 2008 at 21:03

The green movement is [finally] gaining traction in the U.S. Driven in part by $100 oil and climate change science, companies are actively marketing to a green conscious consumer. In turn, the consumer is starting to prefer products that require less energy. In a moment of sublime corporate cliche, this is a true “win win”.

Most of us pay between $0.12 and $0.15 per KWh (killowatt hour) of electricity. This is a somewhat abstract figure; let’s see how it relates to real life.

Above is a graph comparing standard incandescent and compact fluorescent (CFL) bulbs. You can see that the dollars and cents really start to add up; over a month a CFL bulb will save you over $4 in electricity costs. (In the interest of full disclosure, this is assuming the bulb is on 24 hours a day; hopefully this is not the case. Even so, you get the idea.)

green-basics-cfl-white.jpgThe savings above reflects the energy savings of one bulb. Chances are, you have at least 15 light bulbs in your apartment/condo/house that could be swapped for CFLs. Not only are you reducing the environmental impact by cutting energy usage, you’re saving money as well. Excellent!

Of course, the savings don’t stop there. Turning down the thermostat by a degree or two in the winter (and up in the summer) will yield more savings. Reducing your hot water usage will likewise save money in the cost of heating that water. It’s surprising how easily you can save money on energy costs with a minimal effort.

Not only will you be saving money, but you’ll feel good about yourself for doing your part to cut energy usage. Fantastic!

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