Wednesday, May 30, 2007

Getting By in New York City

The New York Times is lately running lots of articles about the high cost of living in NYC. A May 10 article by Christine Haughney sums up my situation nicely:

As the apartment-hunting season begins, fueled by college graduates and other new arrivals, real estate brokers say radical solutions among young, well-educated newcomers to the city are becoming more common, because New York’s rental market is the tightest it has been in seven years. High-paid bankers and corporate lawyers snap up the few available apartments, often leading more modestly paid professionals and students to resort to desperate measures to find homes.

I fall into the “modestly paid professional” category. In my observation there are three types of people under 30 who live in “nice” Manhattan apartments:

1. Bankers & Lawyers who easily make more than $200k right out of college or law school

2. People who are subsidized with Daddy’s money

3. Modestly Paid Professionals who squeeze lots of people into apartment. For example: three or four people living in an apartment that was originally designed to be a one-bedroom

For the rest of us who want to live here, we have to fight with each other to live in conditions which would be considered squalor in any other city in this country. Demand is fierce and supply of apartments is severely constrained by too many rent-controlled apartments and lack of new buildings with “affordable” units.

To live in the East Village in a trendy neighborhood, I live in a 5th floor walkup, <500 style=""> We share a bathroom and our bedrooms are big enough for a bed and nothing else... including windows.

But I’m not complaining; I consider myself lucky to have such a great living situation. My roommates are awesome and my rent is less than $1,000 per month. How many people living in Manhattan can say that? Also, it allows me to live below my means and save money – things which are more important to me than living in a doorman building.

Tuesday, May 29, 2007

A Great Run in New York City

My favorite way to experience cities is to run through them. Yesterday I spent a few hours running through the East & West Villages in NYC. Seems like every time I do this I run across something that I can't wait to tell someone about.

Yesterday I found a great bluegrass band (along with their Chevy Rambler) playing on Clarkson Street near the West Side Highway. They setup under an awning of an old meat packing plant.... the acoustics were perfect. I watched for about a half hour before I moved along.

Saturday, May 26, 2007

Base Metals in the Nickel Are Worth More Than a Nickel

We first hit on this subject last summer in my old blog. One year later and the nickel is worth even less. The details are in this week’s Barron’s (Nickels Are the New Dimes – Subscription Required):

According to United States Mint Specifications, the U.S. nickel must weigh five grams, be 21.21 millimeters in diameter and consist 25% nickel and 75% copper. It’s the latter metallic value that’s of most interest. Earlier this month, the nickel reached a value of 9.7 cents as a result of the rising value of its constituent copper and nickel.

But lest you think of collecting bushels of nickel and melting them for a tidy profit, don’t. The Mint introduced interim rules late last year to head off any such shenanigans and profiteering. Violators can be punished with a fine of up to $10,000, five years in prison or both.

The obvious truth is that the USD, as illustrated so perfectly by the nickel, has been “debased.” But let’s look at the flipside of that argument: since the Dollar is a fiat currency, it is not based on anything tangible such as gold or silver. Therefore, it would make sense for the government to create the currency from the cheapest, most readily available materials, provided they met stringent durability requirements. The nickel just so happens to be made of nickel and copper, which today are very pricey. They could just as easily make the nickel out of clay or pig iron… it would be still be worth 5 cents because the US government says so.

Friday, May 25, 2007

May 26 Linkfest

Links to some interesting articles I read this week. My comments are in italics.


A commodities boom makes itself felt in the supermarket: Agricultural commodity prices are often volatile, in part due to weather fluctuations that affect crops. But what is unusual about recent price increases is that so many prices - everything from grains to ground nut oil - are rising simultaneously. Economists worry that the sudden increase in the cost of such a basic good as food will fuel inflation.

Meanwhile, humanitarian agencies are worried that a sustained rise in prices will make it more difficult to feed people in the poorest countries. Greg Barrow, spokesman for the UN's World Food Programme, says rising demand for raw materials from China, as well as a weaker US dollar and higher transportation costs, are making its food purchases more expensive.

Economists worry that the sudden increase in the cost of such a basic good as food will fuel inflation. James Paulsen, chief investment strategist at US financial advisor Wells Capital Management, says the rise in non-energy commodity prices could presage an increase in core consumer inflation later this year. (wsj)

Lots of China Stories this Week:

China to Diversify Foreign Currency Reserves: Authorities have said the country will diversify part of its foreign exchange reserves, which amounted to 1.02 trillion dollars by the end of March and are believed to be invested mainly in dollar bonds. (Xinhua)

Hmm…where to put the money??? Aha! Private Equity!!
China Puts Cash to Work in Deal With Blackstone: The landmark deal signals China's determination to earn higher returns on its reserves and gives Blackstone a potential advantage in doing deals in China. (WSJ)


Marc Faber Says Financial Markets in “Final Stages of a Bubble”: Not if, but when: global markets are in a bubble and will crash one of these days. The only asset he would buy now: farmland in Argentina, Brazil, Africa, New Zealand, Australia (Bloomberg)

Dividends or Share Buybacks?
Essentially, companies have four things they can do with their free cash flow: 1) reinvest in the business; 2) pay back debt; 3) issue dividends; 4) buy back stock.

The relative merits of each option vary widely. Lately, share buybacks are in vogue. While this has undoubtedly (in my opinion) contributed to rising stock prices, I don’t think it’s necessarily a good thing for long-run oriented shareholders.

In a May 8 article, my favorite financial journalist Jim Jubak, makes a compelling argument that cheap debt is the fuel for the share buybacks:

How Cheap Debt Overinflates Stocks: Take the practice of using borrowed money to buy back shares. Bet you thought all those buybacks that companies are announcing were funded out of current cash flow. Think again. Even big players such as IBM Corp. are piling on debt to repurchase their own shares.

Since 2003, IBM has purchased 203 million of its own shares at a total cost of $30.7 billion. That's a huge percentage -- about 52% -- of the company's total operating cash flow of $59.5 billion during the period. It looms even larger if you add in the $17 billion IBM spent during this period on capital expenditures, the $8.8 billion it spent acquiring businesses and the $5.3 billion it spent paying dividends to investors. All that -- added to the spending on buying its own shares -- comes to 104% of operating revenue.

Or look at it another way. In 2006, IBM used the equivalent of 67% of its total net income to buy back shares. In 2005, the percentage was 82%. In the two years before that, 64% and 42%, respectively.

If you add in dividends, 2006 payouts to investors came to 85% of total net income at IBM. (Jubak’s Journal – MSN Money)

As a follow-up article, Jubak lays out sectors where there are fewer and fewer shares available due to share buy backs and buyouts:
3 Sectors Where Shares are Scarce: The supply crunch in the overall market is astounding. First, thanks to buyouts that take public companies private and acquisitions that merge one company with another, the number of publicly traded stocks is shrinking. Second, even when companies stay public, they're buying back their own shares, reducing the number of shares trading in the public markets. Add stock buybacks to buyouts and acquisitions and, Standard & Poor's estimates, a total of $1 trillion in stock will exit the public stock markets in 2007. (Jubak’s Journal – MSN Money)

The Dividend Dearth: Still Too Stingy: The waning importance of dividends in the States reflects the rise in the past two decades of institutional investors, who tend to see stocks as vehicles for capital gains, not income. Historically, however, dividends have been crucial to investors. Since 1928, stocks have returned 10.4% annually, with 40% of that generated by dividends. (WSJ)

Personal Finance:

Get More Miles for Your Money: Tips for reducing gas costs. (Yahoo! Finance)


Supreme Court to Address State Tax Breaks for Bonds: In a case with the potential to rattle, if not reshape, the market for state and municipal bonds, the Supreme Court agreed on Monday to decide whether states can continue to exempt interest on their own bonds from their residents' taxable income, while taxing the interest on bonds issued by other states.

The preferential tax treatment for in-state bonds is longstanding and very common, offered by nearly all the states that have an income tax. State and local governments issued more than $350 billion worth of bonds a year from 2002 to 2006.

Monday, May 21, 2007

Book Review Part I: The Great Wave by David Hackett Fisher

All major price revolutions in modern history began in periods of prosperity. Each ended in shattering world-crises and were followed by periods of recovery and comparative equilibrium. (page 9)

In this fascinating book, Fisher documents four different periods of European history in which prices rose steadily for decades, followed by periods of relative “equilibrium”:

1) Later-Medieval: 1180-1350

2) 16th Century Price Revolution: 1470-1650

3) Industrial Revolution: 1730-1815

4) 20th Century Price Revolution: 1896-present

His primary thesis is that the fundamental cause of inflation is an increase in aggregate demand due to population growth. Once the secular inflation begins, prices rise in a long wave until a crisis of some sort leads to a reduction in population and thus in aggregate demand.

Note: quotes from the book are in maroon italics.

Each wave has similar characteristics:

1. Each wave begins after a period of relative “equilibrium”: After decades of flat prices, population growth begins to put pressure on aggregate supply, especially of food, fuel, land and shelter. Naturally, it is more expensive to bring new supply to market because the “low hanging fruit” has already been picked. As a result, returns on capital begin to increase. If eggs are worth more, it stands to reason that the hen would be more expensive too. Same thing for land, slaves, coal mines, oil wells, real estate, etc.

The rich benefit enormously while everybody else suffers a decline in real wealth. In the beginning of the wave, the secular nature of the price increases is imperceptible. In fact, the price rises might be mistaken for general price volatility. To be sure, in times of price equilibrium, prices fluctuated due to any number of factors – largely supply driven – but they returned to normal once the supply disruption ceased. Instead, this is a demand-driven rise in prices.

2. Money supply begins to increase soon after prices start to rise.
Many forces drive money supplies higher. Velocity of money increases: more money changes hands and more things, such as credit instruments, are used as money. Second, governments try to create more money to mitigate the rise in prices. It makes sense that if there is more money chasing the same number of goods, the prices for those goods should fall. Another method of increasing the money supply is to debase the currency. Fischer describes the money debasement methods of the Medieval price wave:

Metal coins were also systematically debased. In
Italy and France particularly, mint-masters reduced the content of silver in their coins, and increased the quantity of base metal.Individuals acted in other ways to diminish the value of money that passed through their hands. Coins were clipped, filed, scraped, and washed despite ferocious penalties (page 25)

This growth in money supply fuels and aggravates the already-existing inflation. With all the ways – public and private – that the money supply is increasing, the supply of it
invariably rises more and faster than what would have been required to keep prices down.

3. Material decreases in the standard of living for the poor: The economic situation for the poor and middling classes gets steadily worse as they lose purchasing power. By this point, there is widespread understanding that prices are rising. The social order begins to break down – there is more crime, domestic violence, and wars.

4. Eventually, as a result of years of social and economic crisis, populations begin to decline. Since population has declined, so too has aggregate demand. During this period of equilibrium, real wages for the poor and middle class increase and returns on capital fall. The gap in wealth between rich and poor shrinks.

5. After some period of relative equilibrium, which is not surprisingly marked by social and political stability, populations rise again and the cycle starts anew.

I’m sure that many economists would strongly disagree with some of Fischer’s conclusions. In particular, monetarists such as the late Milton Friedman have argued that “inflation is always and everywhere a monetary phenomenon.” Fischer might say “inflation is always and everywhere an aggregate demand phenomenon.”

Before reading this book, I used to subscribe to the monetarist logic because it has a certain intuitive appeal. Essentially, if the supply of money goes up faster than the supply of goods available to purchase them, prices will go higher. Fischer is trying to explain why money supply tends to go up in the first place.

In tracing the roots of the 20th Century Price Revolution (which continues today), Fischer acknowledges the monetarist argument but concludes that the root of the price wave was an increase in aggregate demand, not growth of the money supply (see pages 184 – 186):

Some attributed the increase in price levels to an expansion in the supply of gold and silver. In 1886, the fabulous gold mines of Johannesburg had been discovered, entirely by accident. In 1890, gold was found on Cripple Creek in Colorado.... Canadian gold began to flow from the Klondike in 1896. The Alaskan gold rush began in 1898. But these events were part of a long continuum of gold discoveries that had happened through the nineteenth century without rising prices. The rate of growth in gold production throughout the world was roughly the same before and after 1896. Moreover, the pace of secular increase in silver production actually declined during the 1890’s.

Monetary factors would play a major role in the price-revolution of the twentieth century, but the great wave itself grew mainly from a different root. It was primarily (not exclusively) the result of excess demand, generated by accelerating growth of the world’s population, by rising standards of living, and by limits on the supply of resources, all within an increasingly integrated global economy.

The demand-driven inflation argument does so much to explain today’s inflation. The government pretends that there is practically no inflation through hedonically adjusting the CPI and through its reliance on the "core" number. In other words, there is lots of room for the government to mess with the numbers to arrive at an inflation number favorable to them.

To be continued in Part II

Sunday, May 20, 2007

May 19 Linkfest

Links to a few interesting articles I read this past week:


Too Much Cash Pouring Into Emerging Markets: Overseas investment will flood emerging markets with $469 billion this year, according to the Institute of International Finance in Washington. That will bring the total since 2005 to almost $1.5 trillion, twice as much as in the prior three years. While fueling growth, all that cash is bringing side effects that threaten to turn booms into busts. (Bloomberg)

Want to Measure Actual Inflation? See the Core/Headline CPI Spread: One way to actually measure how absurd the US core inflation measure is to look at what has happened to the spread between headline CPI and Core CPI. If Core CPI is understating inflation, than the spread should be widening. If it is accurate, the overall ratio between the two should be relatively steady. What does the data show? The spread has increased substantially since the US adopted an ultra low rate/easy money policy under Greenspan.

Whenever I hear the phrase "excluding volatile food and energy" I just laugh. Can a pricing group be considered volatile if it merely goes up each month in an orderly fashion -- for years and years? That's not volatility, thats a trend. (The Big Picture)

Insight: Dollar story no thriller, but it’s compelling: Jim O’Neil writes in the FT that the USD, despite its present weakness is not that awful compared to European currencies. Compared to BRIC currencies though, the LT trend is almost certainly down. (Financial Times)


The New Era of Tech Investing: Three great rules of technology investing:

  1. Look for the Hockey Stick: This has nothing to do with sports. Instead, the “hockey stick” describes a highly desirable pattern in a company’s sales growth.
  2. Look for the Killer App: the software program, piece of hardware, product improvement or whatever – that everyone has to have is the key to hockey-stick growth.
  3. Look for a company with sustainable high margins

These days you won’t find many companies in the technology sector which fit into the above-mentioned rules. But in the energy sector, the three rules of technology are still a great fit. Take a look at Color Kinetics (CLRK), Transocean (RIG), Satoil (STO), Tenaris (TS) and Johnson Controls (JCI). (Jubak’s Journal – MSN Money)

Why Investing is Safer Overseas: With U.S. markets growing more risky and global markets looking safer every year, savvy investors need to recalibrate their views. Here’s how to assess the new world order.

I think you need to compare markets one by one to look for those where investors, who tend to stick with the conventional wisdom until something whacks them over the head, have mispriced risk. The countries that I find particularly interesting as investment targets are those that have made the biggest strides in getting their houses in order. Of course, you still need to find good companies in those markets, but when you do, I wouldn't let old prejudices against risk cause you to pass up higher returns because they used to be more risky. (Jubak’s Journal – MSN Money)


Too much of a good thing? Vitamin link with cancer: Men who pop too many vitamins in the hope of improving their health may in fact be raising their risk of the deadliest form of prostate cancer. In men who took too many multivitamins, the risk of aggressive cancer increased by one third, and the risk of fatal prostate cancer doubled compared to those who took no multivitamins, according to the study, published in the Journal of the National Cancer Institute.

No studies have yet found that people benefit from taking multivitamin and mineral supplements, and some studies have found that vitamins like A and iron are toxic at high levels. Beta-carotene has been found to increase the risk of lung cancer in smokers. (Reuters)

Monday, May 14, 2007

SDI Plan

I recently signed up for Supplemental Disability Insurance through my employer. I read through the exclusions section of the policy and found the following:

"we will not pay benefits for: 1) loss caused by war or any act of war, whether war is declared or not."

This is purposely vague wording. I asked the insurance rep and got the following answer:


I went to the insurance carrier and they confirmed that 9/11 and the London Bus Bombings were NOT Acts of War. The most common provision states “your plan will not cover a disability due to war, declared or undeclared, or any act of war.” “War” is generally interpreted to involve hostilities between two or more governments or sovereign nations. So, the war exclusion would generally not apply to acts of violence by individuals or political groups who are not employed by or acting on behalf of a sovereign or currently ruling government.

The war exclusion could apply if a terrorist group is allied with or acting in concert with another nation, sovereign or government in attacking the United States, or should the United States be the aggressor and declare war or attack another nation, sovereign or government.

This doesn't completely answer the question but I am satisfied. It's not a pleasant thought but I guess that's the whole point of having insurance.

Saturday, May 12, 2007

Asset Price Inflation is Not a Good Thing for Most People

What's not to love about rising asset prices? The Fed has oft argued that to the extent they do not cause an increase consumer prices, lofty home values and stock markets do not lead to inflation. Thus, central banks only aim to stop consumer price inflation, not asset price inflation/appreciation. Given that central banks operate in democracies, this is a politically wise move. However, asset price inflation is not benign and is indeed inflationary. The Buttonwood column of this week's Economist, gives a few examples of why this is true.

The victims of rising asset prices:

Rising home prices are great for "middle-class people who started climbing the property ladder 20 years ago. But they make life difficult for young people wanting to buy their first home and for those trying to create affordable housing for low paid, but vital, workers, such as nurses."

For young people starting out in places such as DC, CA, NY/NJ, & Boston, this necessarily means that they have to load up on debt in order to afford an over-valued house. Presumably they will save even less because a large portion of their income goes to pay the mortgage.

High asset prices Now imply lower Future returns:

"The second problem is that, when asset prices are high and yields are low, future returns are likely to be subdued. It thus takes a lot more effort to generate a given lump sum for retirement."

Given today's rich valuations in nearly every single asset class I can think of, perhaps "past performance will not be indicative of future results." Indeed, the best performing asset class for the next ten years is most likely not even on the radar of the ordinary investor in the developed world.

Conclusion: high asset prices are exacerbating the looming retirement crisis

As defined benefit pension plans go the way of the dodo, the rich world will be split into four categories of retirees:

  1. Already wealthy people
  2. Government workers whose retirement is funded by taxpayers

"Have Nots"

  1. Private sector workers who did not save enough
  2. Poor people who rely on government for their subsistence

"The more numerous losers may demand higher taxes to penalize the lucky winners. What the market hath given, investors may find a future government taketh away."

In one way or another, this almost certain to be the outcome in the United States. The first step could be to take away Social Security and Medicare benefits from the "haves." The tax code could be modified to penalize people who have "too much" socked away in tax-advantaged accounts. Or perhaps people with passive incomes might have to start paying some form of payroll taxes.

So if this looming retirement crisis is worsened by asset price inflation, then why doesn't the Fed do something to stop it? Two reasons I can think of. First, there would be blood in the streets if the housing market declined markedly. Same thing if the Fed set out to crash stock & bond markets. The second reason is that, as a nation, we have way, way too much debt. Lower asset prices is deflationary -- there is nothing worse to a heavily indebted person (or government) than deflation. To the contrary, inflation is a gift for debtors because it shrinks the "real" value of the debt and interest payments.

Wednesday, May 9, 2007

Business or Hobby?

An article in today’s WSJ reminds me of an ongoing discussion I am having with a friend who has a website business. Recent legislation is making the distinction between business & hobbies a little grayer. The IRS published a fact sheet in April that is supposed to clarify the rules:

In general, taxpayers may deduct ordinary and necessary expenses for conducting a trade or business…. Generally, an activity qualifies as a business expense if it is carried on with the reasonable expectation of earning a profit.

My friend’s website has reviews and commentary about dining and night life in New York City. For site content, he goes out and spends a lot of money on dining and night life. He wants to write-off all of these expenses on his Schedule C.

The site is actually very good – it contains detailed reviews for each restaurant and night club – and it is updated frequently. It has the prospect of making money because there are Google advertisements on the site.

Would the IRS consider this a business or a hobby?

Assuming everything is well documented, it would probably depend on whether this business has any prospect of ever turning a profit. The IRS will consider it a for-profit enterprise “if it makes a profit during at least three of the last five years, including the current year.”

I won’t venture a guess as to the likelihood this website will ever generate a profit, but the fact that he is trying really hard should be enough to allow the deductions on his Schedule C… at least for a few years. The main advice I gave my friend is that he’d better keep meticulous documentation of every single expense. Since he probably will get audited next year, the only way he stands a chance is if he can produce comprehensive books and records of his “business.”

Thursday, May 3, 2007

Q1 2007 Portfolio Review

At the end of Q1 2007, I performed a comprehensive review of my personal balance sheet. As part of this review, I “realized” that I have an inordinate amount of risk due to the misalignment of my assets and liabilities.

Through a combination of savings and a gift from my grandfather, I have set aside some money to be used for grad school tuition. I expect to need this money in Fall of ’08 or ’09. Up to now, I have had the entire amount invested in the stock market. This has leveraged up my networth and has been a source of excess returns for the past year or so.

Notwithstanding the benefits I have derived thus far, it is not smart to put money in the stock market which you will need in the next 1-3 years. So today I liquidated the stocks and bought a Short Term New York AMT-Free Municipal Bond Fund which pays about 3.1%. I have to completely segregate the money into a separate account so that I’m not tempted to trade with it!

For Q1 ’07, my portfolio returned 1.07% compared to .64% for the S&P 500:

Q1 Portfolio Returns*

My Return

S&P 500 Return

Jan - 07



Feb - 07



Mar - 07





* Includes retirement & non-retirement accounts. Also includes interest earned on cash balances.

Welcome to my new Blog!

Welcome to my new blog! This is my third attempt at blogging. My first blog was a random mixture of my opinions, pictures, personal finance, investing, news & politics. My second blog was written anonymously and contained detailed personal financial information along with lurid details of my life. Blog #1 & Blog #2 are now history.

As I envision it, this will primarily be a personal finance blog. I will talk about details of my personal situation, but only in general terms. It is customary on many blogs of this type to display month-to-month variations in one's networth. Aside from the reality that it's interesting for readers, it's meaningless without more context (such as actually knowing the person).