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VOODOO ECONOMICS By Mike Gasior For whatever reason, in the past month or so I've gotten a multitude of emails with questions about things where I was surprised they were being asked by people that I would expect to "know better". Having spent pretty much my entire adult life around economics, finance and the investment markets, I've become accustomed to statistics being used (mangled actually) to prove any possible outcome and prediction. What one must keep in mind is that there is no such thing as "bad news" for Wall Street. All news is good news because it might cause the customers of a brokerage firm or investment bank to act. And when customers act, commissions and fees roll in. Data mining is the primary technique used by brokers and there is no theory that cannot ultimately be supported with statistics. History has proven, however, that statistics will almost always confess if tortured sufficiently. I have decided to spend the next couple of months dismissing some of my favorite economic myths, thus the title of, "Voodoo Economics". But first a wee bit of housekeeping. WEBSITE UPDATES AND IMPROVEMENTS I am proud to announce that we are now able to process registrations for all our sessions on the website with the ability of using credit cards. Also, if you'd prefer to submit an invoice for payment by check, you will immediately receive one via email after registering online. It's our hope to make the entire process more streamlined and easier than ever. Should you prefer, you can also still call us at (860)347-6568 and we will sign you up via the phone. You can start the process by viewing the 2006 schedule at the following link: http://www.afs-seminars.com/schedule.html We have gotten many emails asking when the glossary would be operation again and it is now ready for prime time once more. You should bookmark this page and use it as the wonderful resource of information that it is for getting definitions for financial industry terms and acronyms. It has been completely and totally revamped for 2006 and as far as I am concerned, it is the finest glossary of its kind available on the Internet. Visit the glossary at this link: http://www.afs-seminars.com/glossary.html There are also three very popular programs to be held in New York during March should you or colleagues like to attend. They are: Introduction To Securities & Markets Swaps & Swap Derivatives Sarbanes-Oxley for Investment Departments So please give the site a visit. I hope to see many of you in person this year. THE FIRST VIDEO COMMENTARY OF 2006 IS UP I have decided to keep up the theme of last year where I dedicate the video commentary to specific investment topics. The subject matter for my January 2006 video is to give viewers an introductory understanding of Mortgage Backed Securities. My goal was to not only break the ice of the MBS markets, but to also prepare everyone for next month when we will move into the topic of CMO's (Collateralized Mortgage Obligations) and other "structured" securities. Please view this month's and all past video clips at the following link: http://www.afs-seminars.com/v-commentary.html FAN MAIL One last thing before I start knocking off the economic myths, and that is to share with you a little reader mail that showed up after my year-end newsletter. Now please understand that I was a pretty serious athlete as a child and younger man, and have spent the past 17 years as a public speaker, and am now going on seven years of writing this newsletter. One quickly learns when you place yourself in front of people to make your living that you'd better not have thin skin or a delicate psyche, or you'll soon be sitting in a corner rocking back and forth and shaking like a third-world child whose never been held. What I do isn't for everyone, but like anyone who holds themselves out for public consumption (actors, athletes, artists and seminar guys) there will always be that particular someone who goes just a tad bit too far, which brings me to me sharing this particular "fan mail" with you. The note below was sent to me by a gentleman by the name of Ken who is a vice president of something-or-other at an investment services company in Bermuda (a client of mine actually). I mention this for my friends in Bermuda who may know Ken and who should immediately recognize his pompous, gasbag traits that are beautifully displayed in this condescending email, but I'll let you read it for yourself. ------------------------------------------------ Mike, I normally don't send in "letters to the Editor" but I feel compelled given the less than reasonable 2005 Predictions review included in your December newsletter. Please let me provide a simple, objective assessment of your 2005 prediction results - PREDICTION - Dow Jones - Unchanged at, or below
10,500. Definitely not higher. PREDICTION - NASDAQ - Unchanged at, or below 2,175.
Definitely not higher. PREDICTION - Ten-Year Treasury Note - Unchanged
at 4.25%% or lower. Not higher. PREDICTION - Fed Funds Rate - 2.75% with the Fed
tightening two more times in 2005. PREDICTION - Yield Curve - Becoming even more flat. PREDICTION - 30-Year Mortgage Rates - 5.50% or
below. Definitely not higher. PREDICTION - The Economy - Slowing gradually with
no more than 3.0% to 3.25% growth. PREDICTION - Real Estate - Both commercial and
residential real estate experiencing continued softening with potential
for melting down. PREDICTION - Oil Prices - Should drop to the $35
per barrel range. PREDICTION - U.S. Unemployment - Largely unchanged
at 5.5%. PREDICTION - U.S. Inflation - Low, with no more
than 2.0% CPI. Mike - Come clean for goodness sake. Two out of twelve - You were way way way way off with your 2005 predictions. I still enjoy the newsletter though. Regards, ken ------------------------------------------------ Well I'm sure glad he still enjoys the newsletter though. Don't get me wrong. I think everyone is entitled to have their own opinions, and I don't even mind people writing to me expressing them, and it happens all the time. It just becomes way, way, way, way too difficult for me to avoid rising to the bait when someone exhibits the amazing set of brass b***s that my friend Ken does by grading me as if I'm some sort third grade student of his. If you truly seek to pee in the tall grass with the big dogs, be sure to include evidence of where your fabulous predictions appeared in some substantial publication or was emailed to over 300,000 people globally. Then you can write me a snotty email like the one above. And I'll move to somewhere with shorter grass with the other cowards and losers. ECONOMIC MYTH #1 - TRAFFIC JAMS ARE CAUSED BY OUR EXPLODING POPULATION Fact: The traffic jams where many of us find ourselves stuck everyday are due to the cost of driving being far too cheap. If you want to decrease traffic we have to start making driving more expensive, especially at peak driving times. As much as common sense would dictate that the current traffic situation could be explained by population growth, and thus more cars on the road, the truth is that this is a very straightforward economic situation. One of the most basic tenets of economics is that if you underprice something relative to its true cost, people will use too much of it. Some of you might remember that a few years ago Red Lobster ran a special where for $20 you could eat as much crab as you could eat, or until they closed the restaurant. It was named the "endless crab promotion". Well Red Lobster lost buckets of money and their president got fired. During a conference call with Wall Street analysts, the chairman and new president actually engaged the analysts in a cerebral conversation about whether it was the third or fourth helping of crab that busted them. No kidding. Basically our whole transportation system is set up almost exactly like the Red Lobster promotion and it is failing pretty badly too. The best analogy I ever heard to compare this to is if we were to operate our public golf courses just like we operate our public roads. First we would charge all taxpayers to help build and operate the golf courses, regardless of whether or not or how often they played golf. Then, we charge very little, or better still nothing at all, to play and anyone can tee off any time they showed up at the course. I would surmise to predict (although I don't know if Ken would agree with me) that you'd likely have hundreds of people on the first tee on Sunday mornings at 8:00 a.m. ready to fire away. Without doubt the media would soon be reporting the latest violence to erupt in our ever-deteriorating society, "golf rage". Luckily, golf courses have a decent grasp on economics and charge the highest prices at the most desirable times, and offer discounted fees during the "off peak" periods. Many of you already know I'm against most taxes or government fees of any type, but there is currently no reason for me to not drive my Hummer 65 miles each way between work and my 6,000 square foot McMansion out in the boonies. Luckily all the other people who don't drive as much as me are helping to subsidize my lifestyle. (Please understand that while I do live in the boonies, I don't drive a Hummer or technically have a job. I was just painting a picture in your head of someone you likely know.) There are certainly plenty of toll roads throughout the U.S., but modern technology can revolutionize the collection of tolls as well as alter the pricing at different times of the day. Economists and traffic engineers refer to this as "congestion pricing". In most locations there is some version of "EZ Pass" or "Speed Pass" where you buzz through the booth at moderate speed and the toll is simply deducted electronically from your balance. One other idea is what is already happening in San Diego on the I-15 FastTrak. This freeway does have actual free lanes, but also "HOT" lanes (High Occupancy/Toll) lanes that run parallel to the free ones. Carpoolers are welcome to use the HOT or free lanes at anytime, and people willing to pay the toll can use them also. The toll varies from $.50 to $4.00 depending upon TRAFFIC CONDITIONS. Pretty cool, huh? There are digital signs along the road that flash the current toll at any moment and the cost will vary as the HOT lane gets more congested. The downside (and some of you were already thinking of this) is that people will think this is some swipe at poorer citizens, or an attempt to give rich people their own lane on the freeway. The HOT lanes are referred to as the "Lexus lanes" out there already. But consider the painter making $14 an hour who is looking like they may be 30 minutes late for work. Well they're going to get docked $7 if they don't spring for the four bucks. You can do the arithmetic. Besides, lower level workers get fired or fined if they show up late for work or to pick up the kids from daycare. CEO's don't. Yet another upside of making peak driving more expensive is that employers and employees may work to implement a more diverse and flexible work schedule, which could benefit many workers. Plus, anything that reduces our appetite for an increasingly expensive commodity like oil can't hurt either. The Federal gas tax is not indexed to inflation and has been dropping in inflation adjusted terms for over a decade now. If politicians could be trusted at all (they can't be) they could start by increasing the Federal gas tax of 18.4 cents to discourage something like driving too much, and use that revenue to reduce taxes on something we'd like to encourage like working or saving. Needless to say, that won't ever happen. I know this whole conversation has probably gone over like a ton of bricks with few people liking the idea at all. But it would work. ECONOMIC MYTH #2 - THE COST OF LIVING HAS RISEN STEADILY DURING THE 20TH CENTURY AND HAS GOTTEN EVEN WORSE IN THE PAST FEW DECADES This one people tend to bite into hook, line and sinker, but it's almost completely untrue. On the surface it certainly appears that the price of almost everything you look at is more expensive then you remember, so it follows that the cost of living must be higher then it has ever been. But a much more practical and applicable way to measure the true cost of anything is to consider how long an average worker has to work to pay for a variety of life's expenses. Too often people focus strictly on the expense side of their life's balance sheet without considering the earnings side. Let me do it for you right here. These are the amounts of time an average worker has to labor to afford the following items: Half Gallon of Milk One Pound Loaf of Bread One Gallon of Gasoline 100 Mile of Air Travel Three Minutes of Coast-to-Coast Long Distance Phone
Call Pair of Levis Three Pounds of Chicken 100 Kilowatts of Electricity Computing Power of 1 MIPS This continuous cheapening is thanks to years and years of research and development as well as constant increases in efficiency and productivity. Never mind the fact that the universe of products and services available to enjoy with your money has grown enormously during the previous 90 years too. This could be something that contributes to the feeling by many people that life is much more expensive today then ever before. But keep in mind that even your parents probably didn't worry about the cable TV, cell phone, Internet access, daycare and Starbucks bills as part of their "cost of living" like you might. NEXT MONTH I plan to keep up with these economic myths next month too and try to answer whether illegal and legal immigrants really are stealing jobs from hard working Americans. We'll also look into whether or not the Federal Reserve really had JFK assassinated back in 1963 along with a few other surprises. TWO REALLY TERRIFIC BOOKS The first book I'd really like to recommend is one that I bought at O'Hare late last year after I'd had a flight get delayed, and just finished over the holiday season. The book is titled "Freakonomics" and was written by Steven Levitt and Stephen Dubner. Mr. Levitt is a professor of economics at the University of Chicago and was awarded the John Bates Clark Medal not long ago, which is awarded every two years to the best American economist under forty. I'll confess that I'd heard the title of the book, but honestly had no idea what topics were tackled in it. All I have to tell you is that there is a chapter called "How is the Klu Klux Klan Like a Group of Real Estate Agents" to explain what the tone of the book is throughout. And by the way, the minute you finish reading that chapter you will agree that real estate agents and the Klu Klux Klan are exactly the same in certain regards. The second book is just recently published and titled "Strapped" authored by Tamara Draut. I had seen a rash of news articles referencing some of the things Ms. Draut had written in her book, and I'd found an excerpt that I read that I'd found fascinating. Her subject is how America's 20 and 30-somethings just can't seem to get ahead economically due to a host of factors. These range from being unable to afford to go to college at all and getting stuck in low paying jobs, or going to college and graduating with thousands and thousands of dollars of debt afterward. She also focuses on the trend in recent years of the credit card companies recruiting college students to apply for cards, and how this easy credit often saddles these young people with onerous loads of debt. I mentioned last month that I've been working on a very large consulting project, and it has had me living in Boston for the most part since last December. I was surprised a week ago to walk into my hotel and find Ms. Draut right there in the lobby bar promoting her book and chatting with people. I introduced myself and had the chance to chat with her for a bit and congratulate her on covering a subject that I'd been hearing a lot about myself from the younger people who attend my seminars. I have just begun the book, but I can already tell you that it will give readers of all ages and situations important insights into the "Strapped" condition many of this generation find themselves in. Tamara endorsed my copy of the book by writing "Mike. Thanks for your support." It is an important book for people to read, and I most certainly support everyone to give it a try. YOUR JANUARY BRAINTEASER The only advice I have for you this month is to try and not over think this one. That was the mistake I made when I first tried it and then I kicked myself for missing one that could have been easy. See what you think: "I have five letters and five addressed envelopes. If I place the letters in the envelopes at random, what are the chances that only four letters are in their correct envelopes?" Good luck, and when you finally surrender you will find the answer at the following link: http://www.afs-seminars.com/brainteaser_Jan2006.html The answer to last month's brainteaser was listed on the website as the following: "The only vowel they contain, when written as words, is E." Many of you did write me to let me know that the number 17 would also qualify, and those of you who brought this to my attention were totally correct. Others tried to argue that there were also numbers that contained the vowel E as well as Y and wondered if those should be included too, but I pulled out my whistle and striped shirt and ruled that the letter Y in those cases was not being used as a vowel. Good try though. Copyright 2006, Michael Gasior. All Rights Reserved Copyright 2006, Michael Gasior. All Rights Reserved. |
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January
2006 Newsletter
