The Big Picture (apologies to Barry Ritholtz)

The stock markets went up substantially today and yesterday because the Fed cut interest rates to 1%. Interest rate cuts usually cheapen a country's currency, lower the available interest rates for CDs and regular savings accounts, and make commodities, like oil, more expensive. Thus, the joy of seeing your stock market gains should be tempered by the fact that in real terms, if you are a saver, your chances of losing to inflation have increased dramatically. One valuable lesson I've learned from the recent turmoil is to increase exposure to commodities if I know the Fed is going to cut interest rates. I had done so indirectly by investing in a Brazilian fund and it is now paying off handsomely--at least today. Who knows what tomorrow will bring? I had also recently invested a small amount in TIP, which may help as a hedge against core inflation.

As for directly saving, I had hoped to buy an ING 4.25% CD, but apparently Washington Mutual (now JP Morgan) places a five day hold on any transfers. The 4.25% offer still exists, and I am hoping ING maintains it, at least until tomorrow, when my transfer money is available.

Call me a young curmudgeon, but all of this strikes me as folly. The reason we got into this mess is because Greenspan lowered interest rates to 1% and held it there for too long, and now, to correct the problem caused by the lower interest rates, we are going to lower interest rates to 1%--the exact same action that got us in trouble in the first place. I can't help but think of the old saying that insanity is doing the same thing over and over again and expecting different results. We better pray Bernanke is good at timing the economy and will raise interest rates as soon as possible. Otherwise, we might be in for another pop in a new bubble five years from now.

Margaret and Helen on Goldwater

Apparently, Margaret and Helen have taken the blogging world by storm:

I’m old enough to remember the Republican party of Barry Goldwater - when the party stood for fiscal responsibility, small government and personal freedoms. I remember when I could talk with friends about politics and just agree to disagree. And then religious nut cases decided that if you didn’t agree with them you were immoral. So they went and elected George Bush President so he could take the Republican Party from being a party full of respectable people to a party filled with asses, jackasses and yes - [people] like Sarah Palin.

Margaret and Helen

It's nice to have people who remember what real Republicans used to stand for.

Arbitrage Opportunity?

Rohm & Haas Co. (ROH) shareholders approved a deal with Dow Chemical (DOW). The offer is apparently going to be an all-cash deal, although there is some risk that the deal's terms may change. I just bought 40 shares of ROH today. ROH is selling at around $68/per share, and DOW's offer was to buy them at $78/per share.

BUD is another possible arbitrage play, but I have not bought any shares of BUD.

The efficient market hypothesis would say that the lower price is due to the risk that the deal will not get financing and will collapse; however, in a world of 1% interest rates, that kind of risk should not be providing an arbitrage opportunity of 10% or more. Warren Buffett, of course, hates and disagrees with the efficient market hypothesis. These are interesting times.

The information on this site is provided for discussion purposes only and does not constitute investing recommendations. Under no circumstances does this information represent a recommendation to buy or sell securities or make any kind of an investment. You are responsible for your own due diligence.

Steve Forbes on Gold and the Fed

Steve Forbes, in November's Commonwealth Club magazine, says ignore the Fed and look at gold prices:

How do you know whether this thing [market situation] is getting better or not? Don't listen to the Federal Reserve--they speak what sounds like the English language but is designed to leave a fog of confusion. [Instead] Just look at the commodity markets, particularly the gold price. This has worked for 4,000 years; it'll give you a good indication whether they're doing it right or wrong. Right now, gold has come down a little bit, but it's still high, $870 or $880 an ounce. If it stays in that range, expect that more strange things will happen. If it comes down to the $600, $500 range, and they keep it there--don't let it fall below that--we'll be okay; we'll get out of this pretty quickly. Just watch the commodity markets, not what these folks [at the Fed] say.

Snarky. And probably true. As of October 29, 2008, gold was between $740 and $750 an ounce.

Alec Baldwin on Family Court

Behind Alex Baldwin's funnyman persona is a libertarian--at least when it comes to the family court system. In the Commonwealth Club's November 2008 article (pp. 45), The Ex-Files, he talks about "parental alienation" and government corruption. Most citizens think the court system is there to protect them and be fair. Mr. Baldwin's experience should hammer home the reality that court systems are not blessed with any special fairness--they are government agencies, and like all government agencies, have the same incentives and disincentives to work hard and to achieve just results.

The difference in family court, Baldwin argues, is that the incentives are aligned to work against the family and against fairness:

The whole custody evaluation system in Los Angeles is corrupt. It is bankrupt. That is the problem. The judges can do whatever they want to do, which is what you learn about all courtrooms in this country.

In other words, your case is only as good as the judge you (randomly) get. Baldwin points out that state court judges are subject to political pressure, causing an "implied corruption":

These judges are there by appointment, or they run for political office. Either way, there's a mechanism by which they can be punished if they don't get it. If they don't serve the pit boss, you make a call to Sacramento and say, "Get rid of this woman." ... So there is implied corruption in the terms that they work for these law firms.

[J]udges and lawyers are never going to help us. Schmucks like me walk in...and they suck it [your money] out of you. They think it's great. Why change that?

In other words, the incentives for lawyers to work things out are misaligned in civil litigation, and even more so in family court.

I used to work in a family law firm's offices, and the first action they usually took upon being hired was to file for a restraining order and include the worst possible allegations against the opposing side.  Allegations of physical or verbal abuse (no matter how slight) would be submitted to the Court, which expected these kinds of allegations and seemed inclined towards granting a restraining order.  So of course the other side would get one or try to get one, and now you've got these emotionally-charged allegations going back and forth, which required the use of mediators, facilitators, and numerous government employees. If you ever get divorced, look up collaborative divorce--it may be cheaper and, more importantly, easier on your soul.

Update on November 23, 2008: I found a link to Alec Baldwin's speech:

http://weimarworld.blogspot.com/2008/09/alec-baldwin-discusses-la-family-court.html/pres02.htm

Cops and Robbers

In today's SJ Merc (October 27, 2007, page 2B), John Woolfolk talks about police officer pay in San Jose:

Basic pay for a San Jose officer is now $108,167, excluding overtime; with benefits, the total cost comes to $147,614.

Note that the basic salary excludes overtime pay, which can be substantial. The SJ Police Department is now asking for a 4% raise. Each 1% in raises costs San Jose taxpayers 1.9 million dollars each year. If the city is inclined to grant any raise, it should be in the form of a higher salary, which can be more easily tracked than benefits. The costs of increased benefits, such as pensions, are almost impossible to determine until they become due.

Vanguard's John Bogle on Investing

John Bogle on Investing:

http://www.nytimes.com/2008/10/26/business/26bogle.html

“If you were to put your money away and not look at it for many years, until you were ready for retirement,” he said, “when you finally looked at it, you’d probably faint with amazement at how much money is in there.”