PracticalDad’s Guide to Following the Economic Issues

(Writer’s Note:  I apologize that this article was posted half-finished.  Life intruded…and the article is now complete)

What’s happened in the financial sector of the Economy  is a tangled knot of various issues that have come together in what some refer to as a Perfect Storm.  It can appear mind-numbing to the average person who’s looking at it for the first as he or she sifts through the rubble of the 401k statement.  Since much of it arises from the quantitative mathematics of Ph.D mathematicians, mind-numbing is about right.

With a college degree in Administration and a minor in Economics, I started digging in 2005 when basic economic principles no longer seemed to match the reality that I had learned and with which I’d grown up.  With the internet, I encountered dozens of sites – literally hundreds are there – and sifted through them to come to the ones that I go to regularly.  Some are on the wonkish side and others are more visceral in terms of tone.  But the key is to find a few good ones and then not only link the referenced articles, but also read the comments and start to pull your understanding together.

I’ll take a few moments to note my top choices.

If you need a general outline of the Economics/Personal Finance arena, then I would recommend www.kiplingers.com.  It is the digital equivalent of the old Kiplinger Newsletter but the articles are straightforward and written towards the layman.  If you find yourself getting further into investing, then I suggest that you try www.morningstar.com for a wider variety and analysis of investment opportunities.  They even go so far as to provide their own criteria for selection of mutual funds.

An insightful view of the finance and investment developments can be found at www.nakedcapitalism.com and is penned daily by Yves Smith.  She is a retired investment banker who started the site after noting the disconnect between what she was reading in the Main Street Media (hereafter MSM) and what she knew was actually happening.  She explains developments well and remains connected to peers within her former profession.

My personal favorite, and source of great insight, remains www.calculatedrisk.blogspot.com, hosted by CR and Tanta.  CR is apparently an independently wealthy investor who also started the site in 2005 when he noted the growing disconnect between reality and economics/finance.  He was subsequently joined by Tanta, the pseudonym for a retired mortgage banker who posts wonkish or scathing articles, depending  upon her ability to suffer fools gladly.  The key to this site however, apart from CR’s well thought out and executed "chart porn", is the collection of individuals who post regularly.  The commentary is pithy, intelligent and depending upon the subject matter and poster, exceptionally educational and insightful.  Even if you choose not to post – and I lurked for close to a year before posting – the education is superb. 

www.londonbanker.blogspot.com is a new and increasingly favorite blog from an English central banker.  His posts are infrequent as yet but they are beautifully written and provide incisive behind-the-scenes glimpses of the workings of the macro-level economic landscape.  It does presume a certain level of understanding, but even if you have a thin knowledge base, the use of the English language is excellent.

A good look at general economic trends and developments is www.econbrowser.com.  It was created by two Economics professors, James Hamilton of UCSD and Menzie Chinn of University of Wisconsin/Madison.  Their content is topical and provides a grounded overview of the Economics developments.  And while their "chart porn" isn’t always up to CR’s standards, they will readily correct and adapt them if it’s appropriate.

Finally, I tend to wander regularly to www.maxedoutmama.com for a ground level view of the situation.  It’s penned by a woman with an interest in Economics and has a "boots on the ground" feel to what’s occurring.  It’s thoughtful and if some nowadays consider her too political, then I simply acknowledge that everything happening now has political overtones.  Bear that in mind as you read and you’ll still find useful information.

Finally, am I a proponent of Jim Cramer?  Uh, no.  His schtick is good for everyday trading, but the present circumstances are far from everyday and make his approach simply too dangerous.

Next up…so how does a PracticalDad approach today’s environment?

PracticalDad and Fashion Questions

Children certainly grow and their tastes certainly change, and don’t be surprised when the daughter asks the question how does this look?

Now you have to get away from your memories of little girls in cute outfits and consider reality.  First, do you like it as a fashionable look for a young woman?  Do the colors match and flatter her hair, complexion and eyes?  Is it the right match for her body type?  Would you rather see a girlfriend in that outfit instead of your own daughter?  If that’s the case, prepare for a fight.

Second, even if the look is not what you’d like, is it clean and at least well put together?  We’ve reached an understanding in this household that while we will not dress the children in such a fashion that they’ll become targets, we will not permit them to wear clothing that’s suggestive, decrepid or promoting a prison lifestyle.  Read that as low slung pants and the whole bling thing.

Finally, consider how to deliver the message.  While you feel caught in a sling between your daughter in the outside world and your daughter as your little girl, she’s equally torn between wanting to look fashionable and still meeting the code.  And in many instances, she does want your approval.  Mine has come to expect that her PracticalDad will actually look for several seconds and that prolonged silence means that he’s trying out how to gently provide the phrase it doesn’t work.

And as I write this, I’m actually glad that she’s still asking me what I think.  Because the time will come when she’ll be asking another instead of me.

The PracticalDad Guide to the Credit Crunch

The speed of the financial and economic changes in the past decade reached a crescendo this week when the credit system came to a startling and terrifying halt.  The Federal Government, in its infinite wisdom and hope for a miracle, has approved a massive bailout with no clear idea as to whether it will even work.  What exactly has happened and what does it mean?

Let’s start by looking at what the credit market is.  The typical person looks at the Stock Market/Dow Jones Industrial Average as an indicator for the health of the economy.  That’s natural since the large majority of the 401k retirement options pertain to stocks; there might be a single bond option in addition to a money market fund, and these are both members of the credit market.  It’s this credit market – with huge daily flows of money siphoning through the system – that provides the daily operating funds for financial and non-financial firms to operate.  Simply put, firms borrow the everyday/short-term funds for their daily operations – paying vendors, taxes, employees…and it’s this particular item that has everybody spooked.  Firms will have cash on hand, but it’s simply never going to be enough to meet all of the obligations.  Consequently, you could think of credit as the oil that keeps the gears of the grand economic engine turning smoothly, pistons pumping on all cylinders.

And what happens when you don’t check the oil?  Geez, how can the economic pistons wind up thoroughly jammed?

It all comes down to debt.  Debt in and of itself isn’t a bad thing.  The average person would never be able to afford a home without borrowing the principal, and the same goes for cars, and so on.  But in the course of the past several decades, debt has gone from being a useful financial tool to a mechanism to satisfy every consumer’s wildest fantasy.  It has become acceptable and even encouraged – think all those rebate credit cards – to use credit to pay for anything you might want, let alone need.  Mortgage programs were made available that encouraged people to buy beyond what they could reasonably afford by the use of teaser introductory rates; some were even allowed to borrow large sums based solely on what they said they earned.  These were the no-document  NINJA – No Income No Job/Assets – loans.

And at the same time, genius financial engineers with mathematics degrees were learning to create financial instruments for sale, and these instruments were packages of those same mortgages bundled together.  The cumulative payments from the homeowners were the cash flow on which the value of the instrument was based.  These instruments were called MBS for Mortgage Based Securities.  This appeared to work so well at first that other asset classes were constructed on the same premise – credit card payments, auto notes, you name it.  And the collective group was named CDO, for Collateralized Debt Obligations.  These became so popular that they were sold throughout the global economy.  A Chinese bank can conceivably own a bond backed by an apartment building in Poughkeepsie, New York.  It is a small world, after all. 

So they combined a very loose lending policy with a vehicle for spreading this loose policy throughout the global financial system.  This sounds suspiciously like a communicable disease with a virus encapsulated in a vehicle for faster spread.  And this is the point at which people remember that geniuses frequently have a very poor grasp of the real world.

Lax lending, overfed consumerism and a virus-like financial package meant that this chinese bank owned a bond back by an apartment complex that simply didn’t have the cash flow to support the mortgage payments.  Now multiply this by hundreds of thousands, if not millions, of like products.  And in the course of a decade, there isn’t a country which hasn’t had these products flood throughout their system.

So how does this get to a credit crunch?  Remember that all of these banks lend to other banks and also non-financial companies.  The notes of the non-financial firms are the basis for something called commercial paper, or very short-term debt; it is this debt that serves as the bulk of the assets held by the deemed-safe money market funds.  Well known disasters like Bear Stearns, Lehman and AIG simply exposed that many institutions are supported by financial instruments backed by failing assets, like house values.  And with firms not willing to divulge what they have in their books, trust amongst the firms and banks has collapsed.  Over the last week, this was demonstrated by the increasingly higher rates that firms and banks had to pay one another for the commercial paper.  As of yesterday, October 2, the rates were meaningless as banks simply refused to lend to anyone else as they hoarded the money to rebuild their own MBS-depleted books.

So what does this mean?  Simply put, that if this continues for several more days, businesses of all sizes will be unable to obtain the money necessary to meet their obligations.  Vendors aren’t paid and this ripples through the economic fabric, and ultimately, employees are laid off for lack of funds to pay them.  It amounts to a replay of the Depression of 1929.

The Paulson Plan is simple and akin to a plague city worker.  The intent is to remove the dead or dying assets from sick institutions via purchase and replacing them with healthy capital, think Treasury Notes.  If the government purchases the bad assets for more than Fair market value, then the institution can use the excess proceeds to rebuild their assets and hopefully spur lending again.  Will it work?  The scarily interesting part is that no one knows.  There’s simply no guarantee that impaired banks will resume lending instead of just taking the assets onto their books and hunkering down for the duration.

This is economic terra incognita.  And like the old maps said, "here there be monsters."

Next…how does this affect me as a father?

 

Economics for the PracticalDad

As seemingly mundane and academic as it may appear, Economics has taken on a new perspective and importance in the past several weeks.  What is occurring now in our economic system – financial and otherwise – will have huge repercussions for how we live and how we raise and teach our children.

This website is a new experience and for me, a vertical learning curve.  My intent was to post a new article daily and I was starting to get into the swing when the children returned to school.  And then the Wall Street firms went to hell – Lehman Brothers, AIG, et al – and my life was fully taken over by this ability to witness the unprecedented destruction of credit and the financial sector via the internet and CNBC.  Yes, it’s exciting in a morbid way and certainly historic.  But my focus on that led me away from here.

That doesn’t mean that I’ve been playing or slacking, however.  My questions are always, in this order:

  1. What exactly is happening?  What are the real facts of the situation, i.e. how do I parse out the signal from the surrounding noise?
  2. What are effects for me and my family?
  3. What measures do I take to protect them and is some way to turn it to my advantage?  That sounds cynical perhaps, but as my father once said:  cynicism can make you feel dirty, but it can also buy a lot of soap.

There are huge and real changes happening here.  It is, to use the academic term, a paradigm shift in which the old teachings are shown to be outmoded and in need of replacement.  And there are philosophies and practices that need immediate replacement.  More of my time is going to be spent addressing these changes in my own home, and consequently, discussing them here.

Stay tuned…Next up?  How do I figure out what’s going on?