The ‘Gift’

Loans to friends don’t have the same urgency as bank loans.  Since they are generally more informal, it’s easier to have a friendly loan walked away from than other loans, such as from the bank.  How do you avoid your loan become an expensive, unplanned gift?

Tread Lightly with Friendly Loans (Daniel Lobo)

If you are willing to give up some money in order to make a loan official, you can do it through any one of many internet lending sites.  Prosper allows your friend to bid for the loan services of others, and you can kick in money as well (in fact, this may help your friend get more lenders).  If you want to keep the loan to just you two, check out Virgin Money US.

Avoiding the Fee

Of course, when using a middleman, you are paying some of the value to a third party.  This money you won’t see again, and both you and your friend are missing out on some of the pool of money.  This is where the CNN article comes into play.  If you work it out on your own, you may want to have some collateral.  Although you don’t want to secure the loan with something that is a necessity (like the car mentioned in the article), a hobby item or a prize possession works fine.  It’s all about managing incentives… if someone had my Les Paul, I would certainly be more motivated to pay them back than if they didn’t.

Remember that gifts also have tax consequences.  Check out the IRS’s gift guidelines before going through with a loan.  Check out this article for a checklist of loan making steps.

Better yet?  Avoid the loan altogether.  If you want to give a gift, do it.  Friendships crossed with loans can become awkward, so tread lightly, and consider all angles.  Good luck out there.

What are you waiting for?

• “A Nightmare on Wall Street” – ready for the Financial Services Oversight Council?
• “The Teen Job Scene in October 2009” – teenagers make up a disproportionate amount of the new unemployed in the current recession. Political Calculations breaks down the numbers and shows the depressing trends.
• “Why Dollar Cost Averaging Makes Sense and Works for Investors” – as you know, I come down in the lump sum investing category, but here’s an article about the other side.
• “Credit Card Rewards- Buyer Beware?  I Don’t Think So.” – Darwin is spot on in his analysis of rewards card holders- even if they use their cards more, it doesn’t mean they are irresponsible.  I’d imagine that people who are spending more money would be drawn to rewards cards, if only to get something back for all the spending they do.

Carnivals

• “Funds or Physical Metal?” was featured in the 230th Carnival of Personal Finance, and the always interesting site The Canadian Finance Blog.
• “California… What…?” was hosted in this week’s Carnival of Money Hacks at True Adventures in Money Hacking.  Check it out!

Dollar vs. S&P 500

One sign of trouble is the S&P 500 has recently very closely tracked the dollar – inversely.  When the dollar sneezes, the stock market jumps.  When the stock market sneezes, you know it caught the flu from a surging dollar.  Many places have detailed this correlation, here is an especially good post from The Crow’s Nest.

Both this section and the following are scarier than they actually first appear.  Since residents of the United States purchase things (generally) using dollars, it’s likely we are somewhat insulated from the pain.  The more relevant ‘pain’ gauge, of course, is the inflation measure, put out by the BLS.  The stats in this article are better used to understand our position versus the rest of the world.  Similarly, these graphs ignore dividends.

S&P 500 in Real, Weighted Dollars

Recently there was a post over at FT Alphaville comparing the dollar to the dollar trade weighted index.  As expected from the previous discussion, the index has never reclaimed its highs from the technology bubble.

FT Alphaville Chart of S&P 500 vs. Trade Weighted Dollar

Thoughts?

Increased Rates

One of the paths to profits for the credit card companies is to charge higher fees on balances.  The problem with this strategy is it only applies on unpaid balances.  If you don’t ever float a balance on your credit card, you won’t have to worry about paying these penalties.  It is annoying to have higher rate cards, but if you plan it correctly, it won’t hurt you.

Time to cancel some of these? (Andres Rueda)

Increased Fees

In another annoying practice, credit card companies can increase fees.  Fees range from over-the-limit fees to late fees.  Again, these fees are annoying.  However, they aren’t mandatory.  This is another category where proper card usage won’t hurt your bottom line.

Annual Fees

Another possibility is increased annual fees.  Credit card companies could increase the annual fees on credit cards, or even initiate annual fees on others.  This one requires more thinking.  As these fees generally are unavoidable, you’ll need to take into consideration expected rewards and convenience.  If you think you are getting the raw end of the deal, this one is a deal breaker.

So… what would put you over the edge?

Death and Taxes

California, according to the Tax Foundation, has the 6th highest tax burden in the nation.  With the highest rate of taxes at a whopping 10.55% (for earners over $1 million) and 9.55% (the bracket below) for all wages earned over $46,309.  California doesn’t have an exemption for capital gains (long or short), and even taxes Health Savings Accounts.  Not even the Feds are that brazen…

What’s got me writing today is this nugget: California is increasing its withholding rates as a condition of closing the budget gap.    Yes, California is going to take out 10% more than they currently do from California worker paychecks.  This tax adds up to a whopping $1.7 billion short term loan for the state.  If you file your taxes at the end of the year, you’ll find that you paid at a rate 10% higher than even with the higher brackets.  Of course, California is betting some people who pay their fair share of taxes either won’t file returns, or won’t increase their allowances.

I know, I know, it works out to a few dollars a paycheck… plus you’ll get it back at the end of the year.  Still, why does this feel like boiling frogs?  As a condition of the stimulus, we were told that a few extra bucks a month would make a difference.  What about a few less?

The Case for the Metal

In a truly worst case global economic meltdown scenario, gold might become the currency of first resort.  Gold has a natural limit on the amount that exists: the amount of gold in the earth, plus the amount already mined.  This makes the price of gold less susceptible to government interventions.

Physical gold itself is somewhat tedious to store.  Storing gold coins at home leads to a security concern, and you have to pay for the privilege to store your gold elsewhere.  Paying for storage in the form of a physical gold fund (such as GLD) is most likely worth the risk in all but the absolute worst scenarios (some form of martial law, I assume).  The risks of that remain (extremely) low, so it’s (most likely) fine to trade for some safety.

Flash Player 9 or higher is required to view the chart Click here to download Flash Player now

The Case for the Funds

Generally, funds will invest in gold miners, refiners, and other stocks with a link to the gold metal.  Continuing the advantages of storing your gold off-site (mainly to prevent theft), gold related stock funds are a decent place to get some gold exposure.  To boot: some small mining stocks may even be undervalued.

While gold stocks do tend to track the price of gold, they do so imperfectly.  Gold stocks have captured about half of the movement of gold (the metal) in recent years.  Gold funds also rely on the stock picking abilities of a fund manager as well as the price of the underlying gold, an interesting caveat which you have to be aware of.  Finally, note that gold stocks are often more volatile than the underlying metal, moving up and down with the whims of the broader market.

The Right Cholice?

I’ve told you before, and I’ll state it again:  I am not a financial planner.  Take my recommendations with a grain of salt, but here it is: I prefer the gold miner stocks.  They have the potential to pay dividends, grow (in the form of opening new mines and an increasing share price) and are easier to invest in (sorry Gold ETFs!) than physical metal.  That said, in full disclosure, I invest in a gold fund which holds both physical gold and gold stocks.  How do you invest in gold?

The Myth of Perfect Knowledge

As Richard Korman of Miller-McCune Research points out, the main thrust of the argument against Big Bank CEOs is in error.  The first assumption, which is a fair one, is that the opportunity for bonuses drove CEOs to attempt to capture said bonuses.  The second assumption is where reality distances itself from sentiment.  Banks did not know that mortgage backed securities were as dangerous as they turned out to be.

If you don’t believe me, look at a few points.  First off, this mortgage backed paper was garnering high ratings from the ratings agencies.  If this is an “aha!” moment for you, don’t automatically blame those agencies.  Remember that there was political pressure to expand the types of loans available, and Government Sponsored Enterprises Fannie Mae and Freddie Mac were buying the loans once they were packaged by the banks.  The political pressure isn’t off, however, as now the FHA is doing the exact same thing.  Still even more puzzling, politicians are looking to continue recent ‘temporary’ measures to allow more loans to conform to GSE limits.

The point is: it’s hard to buck the trend when all signs point to safety.  Perhaps Jamie Dimon was clairvoyant when he avoided heavy MBS purchases with JP Morgan, or perhaps he was lucky.  Still, many banks lost money both on their balance sheets and in their market capitalization.  Since a large amount of compensation at banks is tied to share prices, many bank CEOs actually lost money in the crisis.  It isn’t as cut and dry as it first appeared.

Who to Blame?

Blaming one party is disingenuous.  The complexity of the crisis makes it impossible to blame one entity: Government regulations and unintended consequences, investor ignorance in security purchases, Alan Greenspan, the GSEs, banks with shoddy mortgage requirements, scheming buyers, even bank CEOs.  All of those parties likely contributed to one of the dominoes falling, so don’t let the others get off free by picking a scapegoat.  Politically, it’s best to direct popular anger at on subset of the causes.  Don’t let it happen.  Talk to me with some comments!

Stuff we read, and stuff we suggest you read…

• “Does the U.S. Congress Cost Jobs?” – We’ve covered the effects of the Minimum wage on unemployment, but here’s an article that runs the numbers post-WW2.  Check it out, it’s another great article from Political Calculations!
• “Protect your Shriveling Assets” – Retirement Savior shows the S&P 500 naked- linked to the value of various currencies.  A must read.
• “Green Speak from Companies – What’s in it For Consumers?” – Darwin of Darwin’s Finance notes that not many places have (monetary- this isn’t the place for me to discuss morals) incentives for users to switch to green options.  Of note- one of my banks charges me to receive paper statements, but sticks aren’t the same as carrots.  One place I have seen rewarding customers is my local Trader Joe’s, which enters reusable bag users into a weekly lottery.
• “The Economy?  There is Hope!” – Steve Forbes likes what he sees in California, with the potential restructuring of the tax code.  So do I, but I live here so I guess I’m biased…

Carnivals

Back in the saddle again!  Check out these carnivals we were featured in:

• “The Finish Wall?” was hosted in the 88th edition of the Money Hacks Carnival over at Amateur Asset Allocator.
• “Generation Y Surprises” was hosted in the Carnival of Twenty Something Finances at How I Save Money.net!
• “Retirement Saving is Not Gambling” was hosted in the Carnival of Financial Planning at Zach Stocks.  He used the SEO optimized name of the article, so the title looks interesting!
• “Predicting Recession” was hosted in the Halloween edition of the Carnival of Personal Finance at Money Crashers.
• “Are You Ready to Subsidize Reporters?” I hope not.  How can a government paycheck ensure a neutral reporter?  You got me…

Worse than Normal

The problems with the current Federal Reserve policy for savers are mostly unprecedented.  The Fed has its hands on so many levers it’s impossible to pinpoint exactly what’s responsible for low rates.  Fortune’s Allan Sloan takes a shot however – and very good one, at that.

Allan explains that recessions usually lead to short term interest rates, as the Federal Reserve has established a history of loose monetary policy during economic downturns.  In response to reduced spending, the Fed often cuts rates to encourage spending, a so-called ‘easy-money policy‘.  This recession is different.  The Federal Reserve is attempting to drive down other longer term rates, including mortgage rates and 10-year interest rates.  The result?  Low mortgage rates and low returns.  As Allan points out, money market mutual funds now yield an average of .06%… a whopping 4.6% point reduction from their yield of just two years ago.

Is it Sustainable?

Flash Player 9 or higher is required to view the chart Click here to download Flash Player now

No, all of this tinkering is wholly unsustainable.  A country can only fund it’s own deficits and debt for so long; eventually easy money policy leads to inflation and a devaluation of the currency.  Recently, the Euro crossed the $1.50 mark in the foreign exchange markets- a possibly ominous sign that overseas investors are growing weary of United States policy (and are happier with the European Union’s policy).  The currency devaluation does prop up stocks – low yield in other areas leads to investments in riskier assets. However, the government needs investors in its debt to continue to finance things when running a budget deficit… let’s see how long it continues.

What do you think?

KaChing!

Daniel Carrol started the company KaChing last year, but just yesterday this new mirroring feature started.  KaChing lets investors manage a virtual portfolio; trades are strictly for pride and education, and not for money.  However, the ‘expert’ investors are certified based upon their own linked brokerage account (according to the NYT article).

Why is it important the investors have real money on the line?  Simple: virtual portfolios don’t accurately capture the investing style of investors.  When there is no money on the line, there is no risk; only upside.  If there is a virtual portfolio contest, the ideal strategy is to go for broke and take the riskiest trades possible.  Not so in real life investing; risk has to be considered since there is downside potential in risky trades.

Potential Problems

The experts sign all sorts of regulatory documents I’m sure, including as the article states, documents on front running.  However, insider trading cases are rare in general, and the ones that are prosecuted tend to be on the larger side.  It’s true; for any significant insider trading profits, an investor would have to have a very significant following.  Experts frontrunning stocks with other brokerage accounts would probably be too obvious, but that wouldn’t prevent information from being passed to cohorts who could profit.

Again, problems with this style of investing are largely theoretical.  Large followings for certain experts will change things, but if experts have only a few followers, there won’t be too much price distortion.  If the concept catches on, expect expert following to go the way of mutual funds: avoidance of smaller capitalization stocks due to insufficient daily volume.  Obviously that’s a long way off, but it’s worth stating now.

Worth It?

That’s a personal decision.  Personally, I may want to follow the insights of a certain elite crew, but I wouldn’t put my money in their hands.  I enjoy the thrill of investing my own money, and I can only blame myself if a trade turns on me.  This program will shift blame to the expert, even though you chose to ‘invest’ in their investing intelligence.  I feel like, yes, this may have some value.  If fees are low and performance is there (a huge if!), this could even undercut mutual funds at some point (but then again, ETFs were supposed to do that- and haven’t yet).

Remember, I’m not a financial adviser, so make your own choices.  My choice?  I’m sticking with my gut and doing my investing on my own.  You?