Wednesday, August 29, 2007

Video of the Day: CAUTION Stupidity may be Contagious!

If you haven't watched Ms Teen South Carolina, where have you been? God, it is the most amazing video ever! I first thought she froze under pressure, but after catching her on the 'Today' show (no, I don't usually watch the show, thank heavens, just collateral damage from channel-surfing!), I decided this was the real deal!

I never understood why paegents even care to ask these silly questions, which expose participants as stupid brainless bimbos! Does anyone really believe one of these good-looking clowns is going to solve world hunger?

Sunday, August 26, 2007

American Wars: Death Tolls

Death Toll of US Troops in Major Wars of the Last 100 Years

World War I116,708
World War II131,028,000
Iraq3,278 and counting

This is not to underplay the dealth of over 3,000 of our finest. But it is worth putting that toll in perspective - American troop casualties are still a lot smaller than in previous wars, and indeed despite the negativism of the media, the mission's in better shape. Iraq has a democratically elected government, as inept as Washington, for starters, and a people who seem committed to democracy, judging by the turnout at the last election. That's more than we could say about Korea or Vietnam.

Tuesday, August 21, 2007

The Abuse of Math

Economist magazine had a wonderful series of stories on the recent financial crisis. Wall Street forgot the lessons of Long-Term Capital Management and embraced math in a big way. Unfortunately, they forgot that all models are based on something called assumptions, and any model is only as good as its assumptions. How way off base were the models?
Goldman Sachs admitted as much when it said that its funds had been hit by moves that its models suggested were 25 standard deviations away from normal. In terms of probability (where 1 is a certainty and 0 an impossibility), that translates into a likelihood of 0.000...0006, where there are 138 zeros before the six. That is silly.

Friday, August 17, 2007

"The Fed Rescues the Market, It's Safe to Play Again"

If you believed the hype in the media and the much of the financial world, the Fed has saved the world. By cutting the discount rate by 1 percent, financial Armageddon has been saved, and we can all go back to how well stocks will do. The media's largely been pushing this idea, the idea that somehow everyone got a little excited, so there was a correction, but now the Fed has acted and all's well.

It's easy to forget what started this in the first place. Financial institutions have a ridiculous amount of risky financial assets that have been blessed as risk-free, and the realization that the blessing was from a charlatan might mean at some point we have to realize the reality. In a classic problem of game theory, everyone's ok as long as no one brings the system down, but if the system were to collapse, it's best to be the first out of the building. So institutions and brokers and the press try to play down the CDO scam (for more on CDOs, read my previous postings, here and here)

And yet it's worth asking what indeed a Fed discount rate cut means (mind you, this is not a Fed Funds rate cut which would lower the rate consumers pay). If anything, it's cause for concern that the Fed, uptil now so concerned with inflation, suddenly perceives threats so great that it could substantially affect growth. And if the US and the world is indeed so robust, why should changes in a discount rate affect markets so radically? I would argue it's because investors today are asked to place their faith on a string on tenous assumptions, the failure of any one of which could produce severe consequences.

But ignore the killjoys like me. Believe the fantasy - the Fed has rescued the world. We can all go back to watching Cramer now. Thank you.

Tuesday, August 14, 2007

Sickened by the Xenophobes: Fact Check!

Suddenly, a bankrupt Republican party is trying to capitalize on immigrant-hating to drum up a base that feels defeated without a single vote being cast. Just today, political architect Newt Gingrich, a potential candidate for the 2008 Presidency, said he is "sickened with Bush and Congress" for going on vacation while "young Americans are massacred" by illegal immigrants. Presidential hopefuls Guilani and Romney weighed in too, with the former referring to an invasion, all alluding to the high crime these immigrants bring along.

Unfortunately for them, it's a myth! The Immigration Policy Center at the American Immigration Law Foundation reviewed 2000 Census data and came up with some pretty interesting (and inconvenient, for the xenophobes) findings:

  • A native-born man, ages 18-39, is 5 times more likely to be incarcerated.
  • Foreign born incarceration rates are 2.5x less than the native white man and 17x less than the native black man.
  • Across ethnic groups, the incarceration rates for the foreign-born men are less than those for the native-born men.

But then it gets even more interesting...

  • Incarceration rates of foreign-born men, as well as other issues like family disintegration and drug and alcohol addiction, increase with duration of stay in the US, although still less than comparable rates for native-born men.
  • Immigrants, especially from Latin America, give birth to fewer underweight babies and have lower rates of adult and child mortality despite poverty and barriers to proper health care.

Wow! That stunned me, and it should serve as a wake-up call to the populace that hate is not the answer. Their positions on immigration are a large part of why Guilani, Romney, Gingrich and others won't get my symbolic vote this election cycle. (Symbolic because I'm not a US citizen)

Sunday, August 12, 2007

Go Diego Go

Turns out all those kids' "educational" programs aren't that great after all. Time magazine reports on a latest study that programs like "Baby Einstein" cause more harm than good. Turns out that video learning is overstimulation, and doesn't affect a kids' learning in the same ways as personal interaction. This is consistent with an earlier study on the detrimental effects of outsourcing child learning to Sesame Street. The good news? Turns out reading to your kids helps them develop language skills far superior to the control group.

This raises an interesting question, one I discussed at some length with the friend who sent me the story. Does this story basically call you to re-visit the stay-at-home parent concept? It isn't simply about the quality of daycare. After all, the explosion in educational TV is partly because two parents tired from a days' work don't have the mental strength to engage a baby.

If you have views on the subject, I encourage you to use the comment feature of this blog to let them be known. As with so many things, I'm weighing the pros and cons, and I always love hearing other points of view.

Let the Foreclosures Begin!

Many politicians are complaining about the rising wave of foreclosures, and insisting that government needs to step in and stem the crisis. Thankfully, President Bush has decided to do so such thing. Why not, you ask? Well, it simply isn't the government's place in a free-market system to insulate individuals from risk; such a practice simply encourages greater risk-taking and creates ever-greater bubbles until the protector is no longer able to be a hero.

Housing prices must correct! I hope to be financially in a position to benefit from a substantial correction down the road, but this isn't simply about the value investor in me who's hoping in asset price corrections to give me goods at bargain prices. We have frequently heard complaints that housing in most big cities is unaffordable. The Housing Affordability Index put out by the National Association of Realtors declined from a high of 133.2 in 1998 to 113.9 in March 2007, thanks to the housing boom. But even that understates the problem because it considers home prices across the US - the median price, for example, is $215,300 - good luck finding a home for that price in almost any decent-sized American city.

A real estate correction then is appropriate, and may be desirable in the long-term. Despite all the huey, one could argue that indeed price appreciation in excess of wages is rather undesirable, and if anything, government should consider tweaking tax policy to dissuade rampant speculation, including measures such as limiting the number of times you can flip a house before you lose capital tax gains.

This is hardly a popular position. We tend to get really excited when stocks or houses skyrocket in price, even if it means that the early buyers are being rewarded, while younger entrants are forced to pony up. But unlike stocks, housing affects livability, and government support of speculative efforts would be rather undesirable.

A side note You may have read that the Fed Reserve has been using something called repo agreements to purchase mortgage securities. Lest you think of it as a bail-out, here's a clarification I needed, from John Hussman of Hussman Funds:
Contrary to the apparent belief of investors, the Fed did not shift its policy, nor did it “bail out” the mortgage-backed securities market by “buying” them from banks. What actually happened is that the Federal Funds rate shot to about 6% on Friday morning, and the FOMC brought it down to its target rate by entering into 3-day repurchase agreements . The banks sold securities to the Fed on Friday, and are obligated to buy them back from the Fed on Monday at the sale price, plus interest. Such open market operations are designed to ease the immediate demand for liquidity, and to give the banks and dealers more time to find buyers in the open market for the securities they are trying to liquidate.

Friday, August 03, 2007

The Giant Insurance Fraud!

Bloomberg had a story about how insurance companies have been defrauding policyholders by underpaying on their claims, even when the claims are within coverage limits for their homeowners' insurance. Here's an excerpt:
Kevin Hazlett, a lawyer, sued Farmers Group after an April 2006 tornado struck his home in O'Fallon, Illinois. Farmers had offered to pay him $470,000 to rebuild the house. Royal Construction Inc., based in Collinsville, Illinois, estimated the cost at $1.1 million. Hazlett, 52, accepted a settlement for an undisclosed amount.

Bo Chessor, owner of Royal Construction, says he sees insurers refusing to pay coverage limits all the time. ``Most people just roll over and take it because they don't have the money to fight it,'' Chessor says. ``What the insurance companies are doing is purely robbery.''

It may be robbery, but it's rarely a crime. State insurance departments don't prosecute insurance companies, and the federal government has no oversight. The insurance industry wants to keep it that way.

I'm all for making a buck, but this is not capitalism, it's fraud! The only reason insurance companies get away with it is the $98 million they spent on lobbying last year. Hopefully, Sen Trent Lott (R-MO) will succeed in getting legislation passed to regulate the industry - he's pursuing this after the insurance companies tried to screw him over after Hurricane Katrina (he eventually settled his personal claim, but has seen first-hand the unscrupulous attitude the industry takes)