The Falling Capital by ~Latuff2

My friend sent me a funny link about CNBC that brought forward a few thoughts about assets. What I am about to write you can and should safely ignore as it is likely to have little to no impact on your life. If you know me, you already know I don’t know anything and carry my cross like everyone else in the world. If you don’t even know me, how can you take what I say as anything of value, anything to use as basis for even a simple decision. Please apply this test to all the noise that comes at you at hundred miles per hour from all the sources of your information. It is actually fun to find the hidden assumptions, the flaws in arguments, the hard-to-notice issues with the opinions given out so freely by everyone. Find issues with what I say, and I’ll thank you.

I only watch CNBC, keep an eye on the papers, and the Internet to gather clues about public feelings. Don Chu’s eloquent points about the fractal nature of humanity come to mind here because just as we have good days and bad days, so does the society. Our aggregate public feelings appear in media. As an example, jokes are only funny because we can relate to them. These feelings in today’s complex and constantly changing world cannot be internalized without one keeping both eyes and ears open and watching and listening on all frequencies. Often the clues are subtle, insignificant and sometimes I cannot even verbalize what I’m “hearing” but I don’t stop listening. My only limitation is time. CNBC plays its vital role in filling in the picture of public sentiment. All of the networks cater to their audiences so well, that we can easily approximate the mood of the audience by simply keeping an eye on the media catering to that audience.

Why did I think about assets? Actually, I don’t like that word at all. The reason is debt. Assets can be acquired with debt. It is not difficult to have significant assets balanced by significant debt. I like the word capital much better. Much of the media, your neighbors, everything you see screams “assets.” Assets are visible and quantifiable. Debt is a hidden, private matter. Of the various definitions of capital, I like this one “any form of wealth employed or capable of being employed in the production of more wealth.” This concept is too basic, I agree. However, often the very basic and simple ones contain more energy than complexities (who would have thought tiny atoms could produce so much energy).

The first challenge is the preservation of capital which encompasses everything we do to make sure that whatever capital we have does not turn into nothing as a result of everything that happens around us. Public sentiment is critical for this because after all the vehicles for storage of capital only work if someone out there is willing to accept them in exchange for something we need. I lived through a period when currency turned into nothing after the collapse of the Soviet Union. Every day I would take the money I earned with my friend and buy something, anything I could buy (cheese, butter, dollars, etc.) because the next day that money would buy less. To contrast that, I was speechless when I visited the Vatican and realized how the Roman Catholic Church had preserved its wealth throughout centuries, changing regimes, wars, and changes in public sentiment. It is a superb lesson in wealth preservation which even includes sovereignty. Contrast that with someone trying to hold on to their property during the gold rush. Keeping in touch with the world and public sentiments is critical for taking the necessary measures ahead of time to protect one’s capital.

The second challenge is employing the capital to produce more wealth. I actually consider this an easier challenge than the preservation of capital but there is nothing easy about this. CNBC and millions of “advisers” are ready to give us that one perfect method that will surely increase our capital. They (referring to the money machine) even convinced a lot of people to borrow someone else’s capital (mortgage or margin put into stock market). They “help us” with enormous amounts of data (real-time quotes, hundreds of statistics, derived metrics, research reports, derivative instruments, etc.), with “education” contrasting investors with speculators (no real difference here), with language (buy and hold, dead cat bounce, MBS, ABS, CDS, etc.), and everything else one would ever “need” to turn capital. The US government wants constant turnover of capital because at every turn increases can be taxed. If capital is not turned (artwork passed from one generation to another), no worries as there are laws to tax the transfer. I still cannot understand how the capital gains are taxed fully but capital losses are only used to offset gains (+$3,000 break). People unfortunately do not often understand what capital is because we sometimes start out with negative capital (student loans, mortgages, etc.). By the time we create enough value to pay off these loans by helping someone else turn their capital, time (our most valuable resource) becomes depleted. CNBC, the mutual fund companies, the government, our friends, this blog, and nothing else in the world can tell you how to preserve and increase your capital. Once this became clear to me, CNBC and all forms of media and information took their proper place in my mind.

fairytale house by ~Siska92

I bought a house for $150,000 eight years ago and had a loan of $120,000. The value of my house increased to $350,000. I took advantage of the situation and refinanced, being a conservative person, only borrowing $280,000 at a favorable 5.5% rate fixed for 30 years paying $1,600 per month for the mortgage and another $400 per month for real estate taxes and insurance. I was conservative and spent the $135,000 of home equity that I took out on improvement to my home (new kitchen, new bathrooms, hardwood floors, finished basement, and a small swimming pool for the little ones). This caused my tax bill to increase by $200 per month due to higher assessments. After a few years, the real estate market crashed and my house is unfortunately now only worth $180,000. I still owe $270,000 and have to pay $2,200 per month to live in “my” house. My choices are a) continue paying the high monthly payment with a giant negative balance sheet or b) rent a place for $1,200 per month, let the bank have the house and start from a clean slate.

I wish the situation was as nice as the above description. Here are a few additional realities:

• All my neighbors got foreclosed and my whole neighborhood has been downgraded whereas before I thought I lived in a decent part of town.
• My town is unable to meet budget demands and has to increase taxes to pay its bills.
• I actually spent the money on Made in China products worth $0 today and a GM vehicle that’s lost a lot of its value instead of home improvements.
• My bank let me borrow up to 100% of equity so I borrowed the full $350,000.
• The loan I got had a variable interest rate and my payments are more than $2,200.
• The $30,000 stock portfolio cushion that I had is now only worth $15,000.
• I am about to lose my job even though I work hard. They say that the company has to cut back because of the economy.
• I also had a credit card balance of $38,000 and student loans of $24,000.
• Even though my wife really loves to shop, we just cannot afford to buy anything any more.
• I had never signed any contracts before buying this house, let alone the sixty thousand mortgage documents they made me sign at the closings.
• I’ve called the bank every month for the last six months asking for help or a way to get me out of this pickle.

What are my choices? I think I better let the bank have the keys, declare bankruptcy if I have to, move out into the $1,200 a month apartment and hope I can find another job so I can pay the rent before the economy gets any worse. How is any of this bull shit they talk about on TV going to help me this month? I voted for Obama to make a change but so far I see more of the same. There is little they can do to make me stay in this house given the reality I am facing.

NYSE by ~liquidsunshine1024

While reading a post from Daily Speculations, I thought of many reasons why the markets are so fascinating. I think it important to be fascinated for the right reasons. Here’s the partial list for me:

1. Markets offer a unique perspective on life and events. This perspective cannot be appreciated by those who do not follow the markets. Here I mean the stock, bond, commodity, currency, real estate and other financial and investment markets. At a basic level, these provide the vital signs (blood pressure, temperature, weight, etc.) for the state of affairs in the world. I believe everyone follows a few markets whether they know it or not. For example, people may follow the clothing or shoe markets, the grocery market, the cell phone market, the job market for a particular profession, etc. I find that these folks miss out on the unique perspective gained from seeing the interrelated cycles in the various financial markets across the globe.
2. One cannot know everything about every market which makes it very exciting to never run out of new knowledge to discover and learn. Time is the only limiting factor. I believe that “What has been will be again, what has been done will be done again; there is nothing new under the sun. (Ecclesiastes 1:9)” but it is our own discovery that makes the journey so exciting. Newton did not create the forces in mechanics, he simply explained them. Copernicus did not move the earth from the center of the universe, he discovered that was not the case. Similarly, in the markets there is always something new to discover, something that is obvious to another person or something that has been explained incorrectly in the past. The one difference is that the new discoveries, large or small, allow us all to affect the functioning of the markets. Imagine a long book where the sentences you have not read change as you read each new sentence.
3. Markets force the issues that people are otherwise unable to force through political, commercial, or not-for-profit means. I believe this is one of the reasons Soviet Union did not have such markets. They provide the environment for natural selection of the healthy from the unhealthy.
4. Markets provide the means for a very large and powerful industry capable of shifting massive amounts of wealth around the ecosystem. The mechanisms are so large and so complex that I think of these as not too dissimilar to the building of the pyramids. Millions of people go to work each day making infinite improvements to these modern day pyramids.
5. Markets provide the means to diversify and preserve purchasing power in the absence of an alternate method or mechanism to store and transfer purchasing power. Soviet Union could not afford to store purchasing power because of the overall inefficiency of the machine. What is amazing is that even those of us with little wealth, no stocks or bonds, participate in the markets in one way or another.
6. Markets provide the means to examine, learn and better understand ourselves. Some of us learn who we are. Some of us learn who we want to be. Some want to get ahead at all cost, others simply want want to preserve capital. I continue to learn a great deal about myself by examining my thoughts, actions, and results in the context of the never ending stimuli from the markets.

If your reasons for being fascinated with the markets are not listed above, feel free to mention them. I would encourage everyone at any age to pick up this subject. You never know… it might help you make or save a dollar or two in the process.

Unless you are working on an antique car that appreciates in value over time or fix cars for a living, I think any time you spend on the car is worth only the present value of your time. On the other hand, let’s say you spend time on your business, career, or investments, this time can and will certainly pay dividends later in life.

Almost weekly I cut the grass and every time I feel I’m completely wasting two hours because the future value of this time is about as close to zero as it gets. To have someone else cut the grass would unfortunately cost more than we can afford now. So, my challenge is to continue investing in activities that pay dividends in the future, so I don’t have to waste time on this every week. Time spent learning something new, on the other hand, can have huge benefits (often unforeseen) later and usually when least expected.

Next time you’re working on something consider if the object will appreciate or depreciate over time. That’ll help determine the amount of time investment you should make. Appreciation includes both financial appreciation as well as non-tangible appreciation such as physical, emotional, and spiritual appreciation. One lesson I’ve learned while writing this blog is how much of our days are spent on “noise” and how little of what we do truly deserves to be retold. I hope you make it your challenge as I have made it mine to fill up your life with what really matters and leave the rest to everyone else.