The Capitalist Maven

My wife and I made a quick trip to Connecticut this past weekend.  I had a “Free Category 1-5 night” Marriott certificate that I received for my $65 annual fee for holding the Marriott Rewards credit card.  Turned out to be a pretty good deal this year, as the Mystic Marriott and Spa was going for $249 a night this particular weekend.  It was kind of a last minute plan as the certificate expired March 29.  We had various ideas for using the free night but the expected rain late Saturday into Sunday had us looking for something that could keep us occupied in the rain on Sunday.  We explored the idea of a quick trip to Vegas, where the weather was bound to be good, but would have needed to return on Monday instead of Sunday to get the good airfares.

So we settled on Connecticut.  Saturday was beautiful here in New England, so we wanted to do something outdoors.  We discovered the Mystic Seaport Outdoor Museum was perfect for this.  I wasn’t sure what to expect before we went in.  I left very pleased.  They have recreated a 19th century whaling village on the museum property with actual buildings that were brought in on barges.  The various buildings are intriguing to see.  They also have traditional indoor museum type exhibits (the eskimo and figurehead exhibits were particularly good).  But the highlight of the museum is actually boarding the ships they have on display.  The friendly guides posted on the ships have some great information to pass on about the ships and are so passionate about it that even the details don’t seem boring.  It was a great way to spend a Saturday afternoon.

After checking into our hotel and having Mexican food at a particularly crappy local Mexican place we headed up to the Mohegan Sun casino.  My wife wanted to get her nails done at the spa for reasons I assume only a woman can understand.  I settled into a nice $5 craps table.  The table was cold for a good 20 minutes, then the dice were passed to an eccentric drunk woman who had a hard time keeping the dice on the table.  She made about 6 points and hit lots of other numbers in between.  I managed to be up about $125 by the time my wife returned from the nails.  She hung out with me and had a free drink, but I could tell she was getting bored so we left.

The next day I saw a sign on the way in advertising “New $5 Blackjack.”  I asked a casino employee where to find it and eventually worked my way over.  My wife wanted to go shopping so I had some time.   By the time my wife returned I was just about even.  Then I got on a huge run and was up another $100.  My wife knows nothing of Blackjack.  I tried to explain some simple strategy so she could keep the winning going while I went to the bathroom.  So I told her, “the other players will help you, I’ll be back.”  She managed to win 2 hands without me.  When the spot next to me opened up, I convinced her to sit down and play from my stack.  I think she was just enjoying the drink service and talking with people in the peanut gallery, so sitting down involved actually paying some attention to the game.  Sure enough we continued to win, running up yet another $100 and tons more drinks.  5:30 rolled around and I said it was definitely time to get going.

Gambling is seldom a frugal endeavor but with $5 tables and free drinks you aren’t going to lose much.  Worst case it’s a great way to spend a rainy Sunday.

Jon Off topic, Travel

Oil prices are back on the upswing again, having hit $54 a barrel today.  I expect to see a rush to push through an increase in the gas tax while prices are still low.  The National Commission on Surface Transportation Infrastructure Financing has recommended a 10 cent increase in the federal fuel tax to help pay for repairs to deteriorating roads.  $1.89 vs. $1.99 is alot easier to stomach than $3.99 vs. $4.09, so I think we’ll see this happen before prices hit those high levels again.  Here in Massachusetts, the governor has been pushing for a 19 cent increase in the state gas tax and again is trying to push it through while prices are low.  Again $3.99 vs. $4.28 is difficult to stomach.

So we’ve got some new taxes conspiring to push up prices at the pump.  What else is happening?  US commodies markets are predicting a huge jump in inflation of the US dollar.  The fed has been pumping alot of money into the system to replace the money supply lost through decreased lending.  This helps to stabilize the economy and is probably a good thing to do.  The problem however, is when lending picks up again, it’s unlikely they’ll be able to pull that money back out very quickly or easily.  More money in the system = more inflation.

Then we’ve got the stimulus, uh spending, package. While named a stimulus, it’s been widely reported that by the time the money from this bill actually gets spent the recession is likely to be over.  So we’ve got the government spending huge amounts of money in an already growing economy.  It doesn’t take a rocket scientist to figure out this will be inflationary.

Next, we’ve got the post recessionary economy.  When we do pull out of this recession, people will naturally start jumping in their cars, flying on airplanes, and powering around on boats just like 2 years ago.  The world didn’t have enough supply then, it’s unlikely to have enough supply a year from now either.

So we’ve got higher taxes, inflation, and supply constraints, every element of the perfect storm to send fuel prices back through the roof.  Even the cheap gas while it lasts…

Jon Economy

Outrage is the new word of the moment.  Chances are you, right now, you are probably outraged at somebody.  Perhaps you’re outraged that Denise Richards was voted off “Dancing with the Stars” last night.  Perhaps you are outraged that American Idol was preempted for the Presidential primetime press conference last night.  Perhaps you are also outraged about “bailed out” companies paying their employees bonuses.  If that’s the case, perhaps you need to think through this issue a bit more.

We in the US have what is, mostly anyway, a capitalist economy.  Control of business rests with the private sector.  Businesses are supposed to make decisions that are in the best interests of shareholders or investors.  When a company decides to pay a bonus to its employees based on some sort of performance metric, that’s their decision to make.  It is also in the best interest of employee retention to keep the promises made.

So AIG got a large bailout from the government (whether it should get one in the first place is another topic).  It then proceeded to make good on its promises to employees.  In large part due to media attention, the public became outraged that government bailout money was being used to pay bonuses to “employees who ran the company into the ground.”  While I’m sure at least a few employees contributed to AIG’s poor decisions, I’m sure there were many others that were not involved at all.  These employees hit their performance targets for the bonus and were paid accordingly.  What is wrong with that?  The New York Times has published a resignation letter from an AIG employee who received such a bonus.

I am proud of everything I have done for the commodity and equity divisions of A.I.G.-F.P. I was in no way involved in — or responsible for — the credit default swap transactions that have hamstrung A.I.G. Nor were more than a handful of the 400 current employees of A.I.G.-F.P. Most of those responsible have left the company and have conspicuously escaped the public outrage.

If this guy were an auto worker, plumber, or some other union job and had his company promised bonus stolen from him by politicians, he’d be turned into a hero.  Unfortunately for him he is a highly productive and highly compensated executive.  Because his bonus number is in the 6 to 7 figure range, the average American expresses what is actually jealousy, as outrage.  So while those responsible for the mess at AIG have (wisely) disappeared, those that are left and are actually trying salvage something for the American taxpayer are thrown under the bus.  For the average American, knowing the whole story is not necessary, making a stink about it is.

This unwillingness of Americans to actually seek out the whole story before passing judgement outrages me.  Even if you don’t like it, you still have to play by the rules.  These employees were promised bonuses for hitting performance targets.  If they hit their targets, they get paid.  There really isn’t much to understand.  Be jealous if you want, but outraged?  If you really want to be outraged let’s think of some real abuses of the American taxpayer.  At McDonald’s, the person who takes your money and puts it in the register gets paid ~$6.15 an hour.  At the highway tollbooth, the person who takes your money and puts it in the register gets paid ~$30 an hour.  Why is there such a large discrepancy?  In private business, pensions have largely been replaced with 401k’s.  Fulfilling pension obligations is something that’s seen as far too expensive.  Yet for government employees, pensions still reign supreme.  Shouldn’t there be some concern for the American taxpayer that the pension obligations are too expensive?  Yet we never hear about these outrages.

Next time you’re feeling outraged I encourage you to get the whole story first.  You might be surprised what you learn.

Jon Economy

One thing that, I think, makes me unique among Americans is that I’ve never paid a dime of interest charges in my life.  I’ve always rented my housing.  I paid cash for the one car I’ve purchased, the previous junker having been given to me by my parents after I graduated college.  I’ve borrowed 0% money from credit cards, to engage in interest rate arbitrage.  But in all I’ve never paid for the privalege of using somebody else’s money.

I realize I’m the oddball when I hear friends talk about their car payments, virtually everyone either: has one or has recently paid it off and is well on their way to financing yet again.  Why would you use credit to purchase a depreciating asset, that will be worth considerably less than you paid for it by the time you pay it off?  I hear things like “I can’t wait to pay this car off so that I can get a new one” or “hopefully we can get a few more years out of our first car so that we can finish paying off the second first.”  This kind of thinking traps you into financially dangerous situations.  The decision to replace a car should be made when the car is no longer practical.  Situations such as, when it’s no longer able to get you to work reliably or when a significant expensive component fails and it’s no longer economical to repair.

I can understand a salesman’s obsession with credit.  It’s much easier to sell a “$30 a month” Bose sound system than a “$2000″ Bose sound system as optional equipment on a car.  Talking monthly payments also helps him to obscure calculations and do some math trickery to maximize your spending.  The $20 extra per month for you could turn into hundreds for him.

Credit certainly does have a place.  For a person fresh out of college with a job but no car and no money yet, credit allows that person to get the car that enables them to get to work.  For them, they get return on their investment.  The interest payment allows them to go to work to make even more money.  Compare this situation with a person who already has a car coming out of college.  It may not look great but there’s a good chance Dad probably did his research and got you a nice reliable car to take to college.  In this situation you can already get to work and make the big bucks.  What investment return does paying those interest charges get you?  Not a damn thing.

It’s unfortunate that the US has become so reliant on credit. Just look what’s happened to the economy in the past 2 years.  The banks reduce their lending and the proverbial “stuff” hits the fan.  It’s not like they even reduced their lending much.  If you’re the type that pays your bills ontime and aren’t already fully leveraged there’s a good chance banks will lend to you.  Just turn on the TV virtually any time and see the advertisements for cars, along with financing offers.  The money is there to be lent, only now it’s only to the right borrowers.  This small reduction in lending is enough to plunge the stock market thousands of points.

Maybe I’m the crazy unusual one again, but I think when the market hits bottom and starts heading up again I hope it’s based on normal lending patterns, the kind where the good borrowers get credit and others pay cash.  If we start the economy again with constrained credit, we’ll find a way to make it work.  The money will still be there to be lent to people making investments:  in careers, in businesses, and other credit strategies that provide returns.  At the same time, credit will be limited for consumerism.  In other words, provide the credit for production, not consumption.  Sorry “$30 a month” Bose sound system…

Jon Finance

Wow.  Who would have thought it would come to this?  The House has passed a bill to recapture the bonuses paid to AIG employees through taxes.  One small step for taxpayers, one giant leap for socialism.  I’m pretty sure this kind of law is unconstitutional but I don’t sit on the Supreme Court so what do I know?

Don’t get me wrong.  I think it sucks that the people that ran these companies into the ground get paid a bonus.  Unfortunately, though, the bonuses written into the employees’ contract.  I might not like that contract but there are lots of contracts I don’t like.  Remember the Detroit “jobs bank?”  The “jobs bank” was where laid off autoworkers could go to get paid for doing nothing.  So as part of restructuring GM to get get it’s government bailout the “jobs bank” was eliminated.  Did we try to collect back pay for those laid off workers who had utilized the “jobs bank?”  Of course not.  I’m sure it would be equally popular and equally easy to pass a tax on “jobs bank” pay.  But it didn’t happen because it’s unconstitutional.

The tax bill sets a dangerous precedent for “taxing groups we don’t like.”   This idea is nothing new.  We’ve been doing it for years with extra taxes on smokers, drinkers, trans-fat eaters, and other “dirty” classes.  But this time however we are targeting individuals with our taxes.  Can you imagine a “people who got away with murder tax” or “baseball players with fat heads tax” targetting OJ Simpson and Barry Bonds?  Both of these people cost taxpayers alot of money in legal fees, should we not try to recapture that with some taxes?  Perhaps that really loud guy who has those TV commercials: “Billy Mays.”  I and others view him through our government bailout funded DTV converter boxes.  So he made tons of money and annoyed millions of viewers at a huge cost to the American taxpayer.  How about a tax on him too?

It’s a slippery slope.  At the bottom is socialism, I hope we don’t go that far…

Jon Economy

One of our local grocery stores, Shaw’s, has recently started frequently running Catalina promotions again.  Last month it was Conagra products, now this month it’s Kraft products.  I thought I’d mention it because it points out just how much these promotions can save.

Normally Shaw’s is the most expensive grocery store around.  If you go there and buy stuff that is not on sale, you pay top dollar.  These super high prices are what make them work so well for Catalina promotions.  Despite the wording of the deals, they are nearly always based on the pre-sale price of the item.  So the Oscar Meyer Deli Creations that are on sale for $2.50 count as $4.99 (regular price) towards the promo.  So buy 5, plus a filler like Plantar’s Trail Mix for $1.25 and you reach the $25 threshold.  Total spend $13.75, but then the Catalina machine starts printing… drum roll… your $10 catalina.  So for $3.75 net, you have $27 worth of food (not that I would every pay $27 for this stuff).  There are scenarios using coupons to get your net even lower.

Also there is currently a promotion for Heinz products.  Check out Slickdeals.net or hotcouponworld.com to get the full info.  Obviously this is a somewhat advanced form of couponing, since you must do math and buy from a specific list of products.  Get the wrong size or something not on the list and you might not get your $10 back.  But with practice most people can learn it.

Jon Deals

According to an article in the New York Times, many banks have decided they don’t want a bailout any more.

As public outrage swells over the rapidly growing cost of bailing out financial institutions, the Obama administration and lawmakers are attaching more and more strings to rescue funds.

The conditions are necessary to prevent Wall Street executives from paying lavish bonuses and buying corporate jets, some experts say, but others say the conditions go beyondprotecting taxpayers and border on social engineering.

Some bankers say the conditions have become so onerous that they want to return the bailout money.

Surprised?  Not me.  I think alot of banks accepted the bailout “just because everybody else was doing it” and they felt they needed a bailout as well to remain competitive.  Then they found out about all the crap they would have to put up with as a condition of accepting the bailout.  Suddenly it didn’t seem like such a good idea any more…

The banks are still private businesses.  They have to answer to shareholders.  If the right business decision to make is to send bailout money back, that’s what they need to do.  Now if only we could make the bailout uncomfortable enough to get bailed out homeowners to send money back…

Jon Economy

I think that in our current system, the penalties for skipping out on your obligations are not severe enough.  The system should be set up such that it’s a no-brainer that someone with the means to keep paying should do so.  Faced with the prospect of 10 years in debtors prison, I’m sure all but those in the worst financial condition would choose to keep paying.

That said, anybody who is in this situation needs to evaluate the value of their credit rating.  Is your credit rating worth $100,000 or whatever amount you stand to save?  Probably not.  Since that is the only penalty in non-recourse states, why not break your contract?  If you sign a 2 year contract for a cell phone and 2 months later decide you don’t want it, you cancel your contract paying the early termination penalty.  The cell phone companies were wise enough to create this penalty for breaking your contract, such that getting out of the contract hurts.

The banks were foolish.  They loaned money to people they shouldn’t have.  They eliminated downpayment requirements.  They failed to create a system of penalties for non-payment.  Just because the banks were stupid, doesn’t mean you have to be.  If it makes financial sense: walk away.

Now if I were running the banks, this is what my fix would be for this moral hazard.  Create a bank blacklist.  If you have a foreclosure in your past, you won’t get credit for 30 years, period.  No credit cards, car loans, mortgages, margin trading, nothing.  Faced with 30 years of having no access to credit, I think I’d keep paying and I’m sure others would as well.

Jon Economy