HALLOWEEN TALES

THE AUTHOR AS SPONGEBOB, NEW CITIZEN OF NEW MEXICO, ECONOMIC ANALYST, AND AS A FELLOW HUMAN BEING

As the Author’s profile states, he is currently working as a computer security consultant. His current client is the New Mexico Children, Youth and Families Department. It is a state agency that deals with abused, neglected, children, foster children, and juvenile offenders. And New Mexico has a lot of them, more than its share. The Author’s work is done in the Information Technology Services Division, so he only sees the Department’s work through the efforts of others.

NEW MEXICO. LAND OF ENCHANTMENT. OR LAND OF EXTREMES?

New Mexico is a state of stark beauty, stark contrasts, and some stark realities. On many measures of social problems, it ranks near the bottom. High poverty rates. High rates of teenage motherhood. Low per capita income. Low education levels. But New Mexico also has many working adults with very high levels of graduate and post-graduate levels of education. (Like the Author.)

And is a state with a relatively high cost of living. It has a modest supply of good jobs and it is a “second-career” location for people from the east and west coasts. And a good number of military retirees pulling down government pensions.

It is a recipient of lots of government largesse. It has many military bases, Los Alamos (the home of the atom bomb and some of its barbarous descendants) and Sandia Laboratory.

New Mexico is one of the oldest settled areas in the country, although it was the 47th state to be admitted to the Union. Most of New Mexico was taken from Mexico by the United States in the Mexican War of 1848.

Santa Fe, in its role as the Capitol City, is an historical anomaly. It is mainly a backwater of “old family” elitism and a bastion of political cronyism and low-level corruption.

Albuquerque is the largest city and the commercial center of the state. It is home to the University of New Mexico. Taos is an art center surrounded by lavish ranches and luxury homes of east and west coast elites, served by the minimum wage locals.

LITTLE FACES OF THE EXTREMES

Earlier today, the foster children and the recently adopted kids that the Department places were trick-or-treating in the CYFD Information Technology Services office. Some were with their foster parents, some with their adoptive parents, and some were escorted by Department caseworkers.

The Author, always a sucker for a holiday, wore a Spongebob Squarepants costume. He almost went as a pirate, an alter ego closer to his stock-trading persona. But the kids like Spongebob much more and the Author can imitate his voice and laugh. So the Author suffered through a morning of good-natured ridicule by coworkers. But it was worth it. The Author as Spongebob was a hit with the kids.

HALLOWEEN IS JUST ONE SCARY DAY. FOR THE POOR AND DISADVANTAGED, EVERY DAY CAN BE SCARY

Many people see economic markets as harsh places that enrich the wealthy at the expense of the poor and middle class, as corrupt cesspools of unbridled greed, and the root of all that is bad in the world. And these people are not entirely wrong.

DON’T BLAME THE ECONOMISTS

Markets are instruments of economic exchange that can be as fair or as corrupt as its political system demands or permits. Their harsh effects can be magnified or ameliorated by political actions. Poverty can be expanded, contracted, or virtually eliminated through a nation’s tax system, welfare system, and general economic conditions a nation fosters.

AND DON’T BLAME THE KIDS. AND MAYBE WE SHOULD JUST STOP BLAMING AND START HELPING

It is not the markets nor the economists that make the political choices that cause these social pathologies. Economists only observe, quantify and advise. It is the citizens of a nation and the elected officials that make these choices. Choices that the disenfranchised and the politically powerless must live, or merely subsist, with.

HAPPY HALLOWEEN FROM THE DESERT OF THE REAL!

The Intelligent Designer, as a Television Character, is 40 Years Old today. The Great Gazoo debuted on the Flintstones on October 29, 1965. The Author only remembers Gazoo from reruns. His real age is known only by himself and the "Discovery Institute".

WE HAVE LONG MEMORIES BUT BEAR NO GRUDGES IN THE DESERT OF THE REAL!

A Dark Day in Market History. 

MORE OPTION BASICS

MORE OPTION BASICS

PUTS

In the post from October 25th, we looked at Calls. Calls are options that give someone the right to buy a stock at the strike price on or before the expiration date. Calls also obligate someone to sell a stock at the strike price on or before the expiration date.

In this post, we will look at Puts, the other type of option. Like a Call, a Put is a contract. A Put gives someone the right to sell a stock at the strike price (fixed price) on or before the expiration date. For review, lets go through the basics of the option terms again. If you saw this information in the prior post, review it or skip past it.

Common Option Features:

a. Fixed Number of Shares. Nearly all option contracts are traded on options exchanges. These exchanges fix the number of shares covered by an option contract at 100 per contract. If you want an option on more shares, you buy more contracts.
b. Fixed Price. This price is called the Strike price. The strike prices are also defined by the exchanges. For most stocks, they are broken out at $5 increments. But low priced stocks and high priced stocks have different increments. So a stock currently trading at $62 per share may have option prices of $50, $55, $60, $65, $70 and $75 available from the options exchange.
c. Fixed Date. This is the expiration date of the option. All stock options sold in the US are “American Style” options and they can be exercised on or before the expiration date. The expiration dates are fixed and are the third Friday of the month. If the third Friday of the month falls on a Holiday, the Thursday before becomes the expiration date. If a person is the holder or owner of an option, he can exercise the option at anytime up to and including the expiration date. Or he can close out the option position, selling or buying back the option.


The Put. Conceptually, there are two parties to a Put. The Put Seller and the Put Buyer. The Put seller (or writer) obligates himself to buy the stock at the strike price on or before expiration. In return for undertaking this obligation, the Put seller is paid a premium. The Put Buyer, in exchange for paying a premium, obtains the right to sell the stock at the strike price on or before expiration. Let’s look at an example. We will check back with Tarzan and Jane.

Tarzan and Jane. Jane has 100 shares of ICBM. ICBM is currently trading at $55 and Jane is worried that ICBM will fall in price. To protect herself from a fall in the price of ICBM, she buys a Put. She buys a Put with a strike price of $50. The premium on this Put is $1.00, so Jane pays $100 for the Put contract. ($1.00 per share * 100 shares per contract). But Jane is protected. If ICBM falls to $50 or lower, she can exercise the Put and sell her ICBM stock for $50.

Tarzan is a gambler. He needs to pick up some fast money for Boy’s new shoes. He is willing to sell a Put contract on ICBM with a strike price of $50 for $100.[i] If ICBM falls to $50 per share or lower, Tarzan can be exercised and must buy the shares at $50.00 per share.

a. Tarzan Win. If ICBM stays at $55 or goes higher, Tarzan can keep the $100 premium and will not have to buy the stock. Tarzan has some other more advanced option strategies, but we will stay with this straightforward example.

b. Jane Wins. ICBM stock falls on bad earnings warnings to $48. Jane is faced with two choices. If a lot of time remains between now and the Put expiration date, she could wait and see if ICBM rises again. Or she could inform the Options exchange that she wishes to exercise the Put and her shares will be sold for $50.00, despite the fact that ICBM is trading at $48.

Tarzan receives notice that his Put has been exercised. He must buy 100 shares of ICBM for $50 per share, despite the fact that ICBM is trading at $48. Tarzan is out $100. Why not $200, if the difference between the strike price that Tarzan pays is $50 per share and the market price of ICBM is $48? The reason is that Tarzan has already received a premium of $1 per share for the Put he sold. ($50 strike price paid - $48 market price + $1.00 premium received = $1.00 loss per share.)

If all of this sounds confusing, don’t feel alone. Options are difficult for many people to understand in the abstract. But in the next few weeks and months, we will set out some simple option strategies that will aid in their understanding.

NO ELECTRONS WERE HARMED (ALTHOUGH A FEW QUANTUM TUNNELED OUT) IN THE MAKING OF THIS POST FOR THE DESERT OF THE REAL!

[i] This is a risky strategy and Tarzan’s broker will require him to have the money in the account to buy the ICBM shares ($50 per share * 100 shares = $5,000) in case Tarzan’s Put is exercised.

PARODY IS A CONSTITUTIONAL RIGHT IN THE DESERT OF THE REAL AND IN AMERICA!  

PARODY AND POLITICAL COMMENT IS A CONSTITUTIONAL RIGHT IN THE DESERT OF THE REAL!

THIS FROM CNN. NOTE TO READERS: THIS IS NOT A POLITICAL SITE. BUT WHEN OUR ELECTED OFFICIALS TRY TO RESTRAIN FIRST AMENDMENT RIGHTS OF BLOGGERS AND PARODISTS, THIS AUTHOR STANDS SHOULDER TO SHOULDER WITH THE ONION WRITERS AND PUBLISHERS!



White House to Onion: Stop using seal
Manage Alerts What Is This?
Bottom of Form
WASHINGTON (Reuters) -- The White House is not amused by The Onion, a newspaper that often spoofs the Bush administration, and has asked it to stop using the presidential seal on its Web site.
The seal was still on the Web site www.theonion.com on Tuesday at the spot where President George W. Bush's weekly radio address is parodied.
With headlines like "Bush To Appoint Someone To Be In Charge Of Country" and "Bush Subconsciously Sizes Up Spain For Invasion," The Onion is popular with readers looking for a little laughter with their politics.
White House spokesman Trent Duffy said people who work in the executive mansion do have a sense of humor, but not when it comes to breaking regulations.
"When any official sign or seal is being used inappropriately the party is notified," Duffy said.
"You cannot pick and choose where to enforce that rule. It's important that the seal or any White House insignia not be used inappropriately," he said.
Duffy said while he does not personally read The Onion, he admitted knowing others in the White House who do. "Like everyone else, we like a good laugh."
Scott Dikkers, editor-in-chief of the satirical newspaper, said its lawyer disagrees with the White House assessment.
"I've been seeing the presidential seal used in comedy programs most of my life and to my knowledge none of them have been asked not to use it by the White House," Dikkers said.
"I would advise them to look for that other guy Osama (bin Laden) ... rather than comedians. I don't think we pose much of a threat," Dikkers said.
Copyright 2005 Reuters. All rights reserved.This material may not be published, broadcast, rewritten, or redistributed.

WEALTHY BOURBON ENTHUSIAST CHANGES NAME OF “INCONSIDERATE HAND” THEORY. IN OTHER NEWS, THE GREAT GAZOO FINGERED AS THE “INTELLIGENT DESIGNER”

BOURBON ENTHUSIAST CLAIMS AUTHOR “MISQUOTED” INCONSIDERATE HAND THEORIST, SAYS HE TOLD AUTHOR “INDIVISIBLE HAND” WAS NAME OF THEORY.
AUTHOR CALLS B******T, THEN CALLS HIS LAWYER.

In the Author’s October 20th post entitled “Economic Theory of ‘Inconsiderate Hand’ Refutes Free Market Theory of Invisible Hand”, the Author scooped the mainstream media on this breakout story. But in a letter from the attorney for Milburn J. “Sonny” Drysdale III, the Author was “politely” informed that the title of the theory was the “Indivisible Hand”, not the “Inconsiderate Hand”[i].

In the letter, the Author was told to limit his interviews with Sonny Drysdale, the leading “Inconsiderate Hand” proponent, to the hours between 2 and 4 pm PDST, before the Author has switched from drinking Kentucky Stump Breaker bourbon to Makers Mark. But more importantly, the Author was told that the theory that an unidentified economic overlord surreptiously controls ostensibly free financial markets is the theory of the “Indivisible Hand”, not the theory of the “Inconsiderate Hand”.

Mr. Drysdale’s Attorney, J. Elgar Caskdrayner, told the Author that the term “Inconsiderate” Hand” was used in the first drafts of the book that Mr. Drysdale will publish on his economic theory. The term “Indivisible Hand” sounded better in front of focus groups, so the name of the theory was changed for sales and marketing reasons. Caskdrayner went on to describe the theory of the Indivisible Hand in terms not unlike those used by Intelligent Design proponents to shill for their creation.

Mainstream scientists, and all non-catatonic biologists, have blasted the so-called theory of “Intelligent Design” as biblical creationism shrouded in pseudo-scientific jargon. This Author has ridiculed intelligent design as “creationism with a K Street Lobbying Firm”. [ii] Intelligent Design claims that since the fossil record does not reveal on what day and time that placental mammals diverged from marsupials, an unnamed and indeterminable “intelligent designer” must have made the whole world up.

WHO OR WHAT IS THE "INTELLIGENT DESIGNER"?

Speculation on whom this “intelligent designer” is ranges from God, Allah, Krishna, Jehovah, assorted cult leaders yet-to-be-deified, and Thomas Twyford.[iii]

Speculation on the identity of the “economic overlord” in the recently “word-searched and replaced” Indivisible Hand theory manuscript tracks similar lines. Candidates range from the God of “Election” as described by John Wesley, “The Interminably Tardy Sky King of America the Theocracy” as described by Pat Robertson and Tom DeLay, to Thomas Twyford. Support for the title of “economic overlord(s)” is also building for five tweakers named Moe that meet in the basement of the New York Federal Reserve Bank and direct stock market rewards to 1.714699678% of investors and drain the accounts of the other poor schlubs.

Drysdale’s attorney, Caskdrayner, also told the Author that the theory’s re-spun title bears other analogies to “intelligent design”. Since the economic theory of the “Indivisible Hand” implies indivisibility, the theory cannot be broken down into its component elements. It cannot be tested or examined by economic analytical methods.

“The beauty of the theory of the Indivisible Hand,” said attorney Caskdrayner, ”is that it is unified and complete. Just the name ‘indivisible’ leads people to believe that this is the anointed answer and they need not look further. And if they are not getting the kind of financial returns they think they are entitled to, then they just need to get right with the economic overlord.’

“The theory is not capable of being tested, so no one can prove it wrong and confuse its followers. The identity of the economic overlord is incapable of being known, so there is no point in even questioning His identity,” continued Caskdrayner in his letter to the Author.

In a follow-up phone call, the Author shared his idea that the economic overlord could be Thomas Twyford or five tweakers named Moe. Caskdrayner, sounding apoplectic, called the Author a “commonist” heathen blasphemer and directed him to the website of www.PrayersforProfit/MessiahMutualFunds.org.

AUTHORS FOLLOWUP NOTE: The Author later called the Revealers Institute, the main support group for “intelligent design”. He spoke with the Director of Communications, “Chip” Wedgwood. The Author told Mr. Wedgwood that he believes that The Great Gazoo could be the intelligent designer. Mr. Wedgwood politely told that Author that The Great Gazoo was not the intelligent designer. When the Author stated that nobody, not even the Revealers Institute, could prove to the Author that The Great Gazoo was NOT the intelligent designer, Mr. Wedgwood gave the Author the phone number to another organization. The Author dialed the number, and to his surprise, the voicemail said it was the offices of “Prayers for Profit/Messiah Mutual Funds.org”.

THE DESERT OF THE REAL IS AN ALCOHOL-FREE ZONE!

[i] The concept of the “Inconsiderate Hand” was first addressed by Fluffbinder J. Windfall, heir to the Windfall whalebone empire. Windfall, one of the richest Americans at the turn of the 20th century and a bourbon enthusiast, ascribed his great wealth to “the lack of a Federal Estate and Graft Tax, no income tax on capital games, and the ‘Inconsiderate Hand’ of the Market”. “Economic Theory of “Inconsiderate Hand “ Refutes Free Market Theory of Invisible Hand”, October 20th, 2005, http://desertoftherealecononomicanalysis.blogspot.com
/2005_10_03_desertoftherealecononomicanalysis
_archive.html
[ii] Endnote 1, above.
[iii] In the Author’s opinion, the most credible candidate posited for the “Intelligent Designer” is the Great Gazoo. The Great Gazoo first appeared on Episode 145 of the Flintstones cartoon show on October 29, 1965. Gazoo is a likely candidate for the intelligent designer, more so than the Flying Spaghetti Monster or Mortie the Trilobite from Cambrian-o-Rama. Gazoo hails from the planet Zaitox.

Gazoo is smart, at least smarter than Fred or Barney. He has magical powers, or at least technological skills that sub-morons Fred and Barney confuse with magical powers. He is invisible to everyone but Fred and Barney and he only communicates with Fred and Barney

Gazoo also appears in the right era, the 6000 BC[E] Cuddly Cartoon Dinosaur Creationist-era, as presented by the creationist theme parks in Florida and Kentucky. This is the mythical “era” where Fred and Barney use pterodactyls to play stone records, woolly mammoths to water the lawn and wash cars, and where the Patriarchs play Dinosaur polo on the Plain of Abraham with the severed heads of the leaders of other nomadic, Bronze-Age, non-monotheistic desert tribes.

Gazoo is smart, at least smarter than Fred or Barney. He has magical powers, or at least technological skills that sub-morons Fred and Barney confuse for magical powers. He is invisible to everyone but Fred and Barney. And he comes from the right era, the 6000 BC[E]Cuddly Cartoon Dinosaur Creationist-era as presented by the creation theme parks in Florida and Kentucky. . The era where Fred and Barney use Pterodactyls to play stone records, wolly mammoths to water the lawn, and where the Patriarchs play Dinosaur polo on the Plain of Abraham with the severed heads of leaders from other nomadic, non-montheistic Bronze-Age Middle Eastern Tribes.
 

THE INTELLIGENT DESIGNER?
In the Author’s opinion, the most credible candidate posited for the “Intelligent Designer” is the Great Gazoo. The Great Gazoo first appeared on Episode 145 of the Flintstone cartoon show on October 29, 1965. Gazoo is a likely candidate for the Intelligent Designer, more so than the Flying Spaghetti Monster or Rex the Trilobyte from Cambrian-o-Rama. Gazoo hails from the planet Zaitox.

OPTIONS BASICS

OPTIONS BASICS

WHAT IS AN OPTION?

An option is a contract that gives the option holder a right or an obligation to buy or sell a certain stock, commodity or other investment at a fixed price by some date in the future. There is a lot of information in that sentence. Let’s take things apart. And for consistency’s sake, we will talk in terms of stock options. However, there are also options on commodities and indexes.

1. Common Option Features.

a. Fixed Number of Shares. Nearly all option contracts are traded on options exchanges. These exchanges fix the number of shares covered by an option contract at 100 per contract. If you want an option on more shares, you buy more contracts.
b. Fixed Price. This price is called the Strike price. The strike prices are also defined by the exchanges. For most stocks, they are broken out $5 increments. But low priced stocks and high priced stocks have different intervals. So a stock currently trading at $62 per share may have option prices of $50, $55, $60, $65, $70 and $75 available from the options exchange.
c. Fixed Date. This is the expiration date of the option. All stock options sold in the US are “American Style” options and they can be exercised on or before the expiration date. The expiration dates are fixed and are the third Friday of the month. If the third Friday of the month falls on a Holiday, the Thursday before becomes the expiration date. If a person is the holder or owner of an option, he can exercise the option at anytime up to and including the expiration date. Or he can close out the option position, selling or buying back the option.

2. Option Types and Option Positions. An option is a contract. And like nearly all contracts, there are two parties to an option. So there are two types of options, Puts and Calls, and two parties to both a Put and a Call. Calls are the right or obligation to buy a stock at the strike price. Puts are the right or obligation to sell a stock at the strike price. Let’s stick to just Calls this Post and place the names and some faces together:

Calls. Conceptually, there are two parties to a Call. The seller and the buyer.[i] The seller of a Call enters into the option contract and obligates herself to sell her stock if it reaches the strike price before expiration. In return for obligating herself to sell her stock, she is paid a premium. The Call buyer, in exchange for paying a premium, obtains the right to buy the stock at the strike price before expiration. Let’s look at an example:

Tarzan and Jane. Jane has 100 shares of ICBM. ICBM is currently trading at $52 per share and Jane doesn’t think that ICBM will go up in the near future. So she sells a Call on her IBM stock. The Call has a strike price of $55 and in return for selling the Call, she receives a premium of 2$, or $200. ($2 * 100 shares per contract).

Tarzan believes that IBM will go up in the near future. He thinks that it could hit $65. He could buy some ICBM but instead thinks buying a Call is a more effective way of playing IBM. So Tarzan buys a Call on IBM with a strike price of $55. He pays a $2 premium for this Call.

At this point, it would look like Jane and Tarzan are each parties to the option contract. They are not, however. The Options exchange is a party to both Jane and Tarzan, both sides of the Call. But for this example, we can think of it as if Jane and Tarzan are at each side of the option. It will make the explanation clearer.

a. Tarzan Win[ii]. What can happen? If ICBM goes up to $65, Tarzan will come out ahead. Tarzan can do two things. He can exercise the option, meaning that Tarzan tells the options exchange he wants to buy his IBM shares (which are now worth $65 per share) at $55. Tarzan gets his 100 CIBM shares and he is up $8.00. Why not $10? Remember, Tarzan paid $2 for the Call, so we must consider that when he figure out his gain. ($65 ICBM market price-$55 ICBM strike price = $10. $10 ICBM proceeds - $2 Call Premium = $8.)

But Tarzan has another choice. He can sell back the option that he bought. This is called closing out the position and actually happens more often than exercise. If IBM stock rises to $65, then the value of the Call that Tarzan paid $2 for will rise. Let’s assume that the $55 dollar strike Call now sells for $10. Tarzan can sell the Call for $10 and make $8. ($10 Call Close Price - $2 Call Premium = $8.)

What happens to Jane when Tarzan wins? Two things can happen aside from tree-house abstinence. Jane can get exercised. The options exchange can tell Jane that she has been randomly selected to have her stock exercised and she must deliver her 100 ICBM shares to the options exchange. This is a result Jane may try to avoid, however. Call sellers may have large unrealized capital gains in their stock that they do not want to realize. So Jane, smart investor that she is[iii], will recognize that she was wrong on the price direction of ICBM and cut her losses. She can close out her call by buying back the call that she sold. Unfortunately, however, her $2.00 Call now sells for $.50. So she sells it back for $5 per share (.50 * 100 shares per contract) and loses $150.

b. Jane Wins[iv]. It is one month before the expiration date and so far, Jane’s belief about ICBM’s price is correct and ICBM is holding at $52. Tarzan cannot exercise his shares because his strike price is $55 and the ICBM stock is selling at $52. Tarzan can do two things. He can close out his Call by selling it or he can wait it out, hoping that ICBM will quickly rise before expiration. This is where it gets interesting. Really interesting.

Tarzan has two things working against him. First and most obvious is that fact that ICBM has not gone up in price. Second, the time left on his option is fast expiring. In the language of options, it is losing “time value”. We will go into time value more extensively in a future post, but in Tarzan’s case, his Call is running out of time to make him any money.

If Tarzan chooses to cut his losses he can close his position and sell his call. He paid $2 for the call but it now sells for $.50. So he loses $150. Or he can wait it out and hope that ICBM will shoot up on price before the Call expires in a month. But if he chooses this path, his call will fall in price as the expiration date approaches. Only an ICBM rally can bail out his losing position. If ICBM does not rally, his Call will expire worthless and he will lose the entire $200 premium he paid for the Call.

In another post we will look at Puts and how they work out.

ALL SPECIES HAVE RIGHTS IN THE DESERT OF THE REAL!




[i] Call Sellers are often Called Call Writers and Call Buyers are often Called Call Holders. But let’s stick with the definitions above for learning purposes.
[ii] Accompanied by chest beating, a jungle call, and frolicking with Cheetah.
[iii] She has to be smarter than Tarzan. That dude can’t use first-person pronouns correctly and thinks that the jungle animals understand what he yells.
[iv] Accompanied by vulgar jungle yells and a swift kick by Tarzan to Cheetah.

GLOBAL SUPER-HIGHWAY OR TOXIC WASTE BACK ALLEY?

Someone Should Have Their Market Externalities in a Scrunchie Over This

The Author had intended to continue writing about stock options this week, but a disturbing article in the New York Times, “Poor Nations Are Littered With Old PC's, Report Says”, October 24, 2005, caused the Author to write a piece on market externalities[i]. The textbook definition of an externality is where an economic activity has costs or benefits that are not incurred by the people involved in the economic activity. Externalities are used in many modes of analysis, but the two that everyone would recognize are negative externalities and positive externalities. Check out these examples:

Negative Externality. Pollution is the poster child of a negative externality. Let’s use the example of a steel plant from the 1950s. A steel plant produces soot and polluting gases in the process of making steel. The gas causes lung problems and the soot is deposited in the areas adjacent to the plant. People get sick from the fouled air and the soot requires frequent cleanup. The steel plant has created market externalities. What the steel plant has done is shifted part of the cost of steel production onto its neighbors. In an efficient market, all of the costs of steel production would be borne by the steel producer.

Environmental laws and regulations are attempts to reallocate the costs of production and make producers pay the full cost of production. So when environmental regulations are scaled back, what is really happening is politically powerful producers are shifting their costs of production to others.

Positive Externality. A positive externality occurs when people that did not participate in the economic activity gain some benefit. Commonly-used examples from the Author’s healthcare economic days are vaccinations. Many, but not all, people get vaccinations from common contagious diseases such as polio, small pox, and measles. Usually children are vaccinated and the parents or health insurers pay the costs. But sometimes adults get booster vaccinations when they travel overseas. From an economic perspective, the economic actor in the transaction pays some money for the medical services.

The unvaccinated individuals also benefit when others are vaccinated. This is because the unvaccinated are less likely to be infected with the disease if a large number of the population is vaccinated. Consider that if you are unvaccinated and everyone else in your area is vaccinated, then there are few if any people who could carry the disease to you.

A POSITIVE MARKET EXTERNALITY, BY ANY OTHER NAME, WOULD STILL SMELL AS SWEET

When doing research for this post, the Author found a couple fun examples of positive market externalities. [ii] Perfume was cited as one example of a product that can have both positive and negative market externalities. Perfume manufacturing can have negative externalities such as pollution. But perfume use may also have positive externalities if people near the perfume wearer smell the perfume and find pleasure in the wafting perfume. Similarly, a person who plants a flower garden will probably provide positive market externalities to those who view the garden and find pleasure in the visual delight.[iii]

TAKE MY EXTERNALITES, PLEASE

It is difficult for the Author to understand why many conservatives are so rigidly opposed to strong environmental regulation. Pollution, greenhouse gas emissions, other nuisances result from negative market externalities. Producers or service providers, intentionally or unintentionally, are outsourcing their costs of production onto somebody else. Paying the full bill should be a matter of financial responsibility, good citizenship, a matter of presenting one's self as a supporter of law and order.

Economists look at externalities in terms of economic inefficiency. Would it cost more to clean up the pollution than prevent it? The more efficient solution would be the one that costs less AND allocates all costs onto the producer. But history and analysis shows us that it is almost always less costly to prevent rather than clean up pollution. Regrettably, many dirty industries have discovered it is even cheaper to bribe, uh, uh, make large contributions to the campaigns of, congressmen, senators and administration officials to weaken pollution rules rather than prevent pollution.

NEGATIVE MARKET EXTERNALITIES ARE DESSICATED IN THE DESERT OF THE REAL!


[i]http://www.nytimes.com/2005/10/24/technology/24junk.html. Subscription may be required. PCs and monitors are toxic waste. Monitors contain as much as 8 pounds of lead. Chips, motherboards, cards and other components also contain toxic metals. See also the Basel Action Network, http://www.ban.org/. This group monitors compliance with the Basel Agreement that seeks to limit “trade” in toxic waste.
[ii] The Author does some research for his posts so he will be apprised of the latest issues on the respective topic. The Author believes that his readers are entitled to the best product he can produce. If you are taking time to read this, the Author believes your time should be well spent.
[iii] Locker room check. Perfume and flowers are okay for chicks and stuff, but real he-men, thug type healthcare economists don’t care about such sissy stuff.

MORE OF THE DUCATI, LESS OF THE AUTHOR.

INFLATION AND FUN WITH HEDONIC PRICE REGRESSION

INFLATION AND FUN WITH HEDONIC PRICE REGRESSION[i]

SAYING “HEDONIC” IS AS MUCH FUN AS SAYING “BUTTAFUCO”

The Author’s October 16th post, “Cry Havoc and Let Slip the Dogs of Inflation”[ii], discussed the Consumer Price Index (CPI) and how it may understate inflation. Recent information the Author has read discusses this CPI weakness and offers some alternative measures.

Peter Bernstein, one of the top economic writers, discusses the distortive effect that durable goods have in the CPI. The CPI, as you may recall, is a market basket of goods and services. Housing, appliances, energy, food and the like are all components of this “basket”. Bernstein believes that durable goods have a distortive effect on the CPI[iii] He cites two reasons for this distortive effects. And both of these effects offer a good review of some basic economic principles:

A. Quality Improvement and Hedonic Price Regression. Technological improvements in products increases product quality and can also lower the price of a product. Let’s use the examples of calculators, cars and clothes dryers[iv].

Calculators. Electronic calculators have been around since the early-to mid-1970s. The first models approached $100 dollars. But with in just a few years, technological improvements lowered the price to just a few dollars. Today, you can probably get one for $.99. The quality of calculators has improved and many inexpensive models have more functions. But most folks use calculators for basic arithmetic and the cost of doing that basic arithmetic has plummeted since the introduction of the electronic calculator.

Automobiles. Automobile quality has increased dramatically over time. American cars from the 1960s and 1970s were usually worn out well before 100,000 miles. They required frequent oil changes and tune-ups. Tires had to be changed more frequently.

Compare that to the quality of today. Vehicles can last for more than 200,000 miles. They require far less maintenance due to fuel injection, electronic ignition and improvements in internal engine components. Automobiles have increased in price over time, but the vehicles today are better machines with far more features and comfort measures.

Clothes Dryers. This is a real example culled from the CPI and the Bureau of Labor Statistics. [v] One of the components of the CPI market basket is appliances. In the year 2000, the Bureau of Labor Statistics made an Hedonic Price Regression adjustment on the price of clothes dryers. Basically, they considered the fact that clothes dryers of the year 2000 contained many consumer features that were not present in dryers from 20-30 years ago. The Bureau then adjusted the price weighting of the dryer because it had more features that consumers could use. So if the price of dryers had remained the same over the past few years but more features have been added, a hedonic pricing regression could be made to reflect that fact that the new features has actually “reduced” the price of the dryer

Bernstein’s issue with hedonic price regression is that even though the product may have more features that the consumer could use, the consumer may not WANT, these features. The consumers may still want only a basic product. So in the mind of the consumer, the price of the good has still gone up, despite its augmented features. For this reason, Bernstein believes that durable goods should be dropped from the CPI. Section B, below addresses another reason for the deletion of durable goods from the CPI.

B. Consumers Buy Nondurables and Services Every Day. Durables are infrequently purchased, states Bernstein. Food, energy, clothing and housing are purchased on a daily basis. These are the items where inflation bites consumers and erodes purchasing power. And there is another economic phenomena going on. This is the Substitution effect. An example the Author learned in economic classes in the 1970s is instructive and also reflects those times. If the price of butter goes up, people substitute butter with margarine. Today, many people (like the Author) substitute margarine for butter because of the high fact content of butter. But nonetheless, the Substitution effect is still operable.

Substitutive effects are also possible with consumer durables. People can ride the bus or commuter train instead of buying a car. Or they can buy a scooter or peddle a bike. The laundry mat is a substitute for a washer and dryer.

Bernstein offers in place of the CPI an inflation index called the CPI/DX. This index includes all consumer nondurable items and services from the CPI, but not the durables. Since 1999 the CPI/DX has risen at an annual rate of 3.1%, while the CPI has risen by 2.5% and Core CPI by 2.1% (Core Inflation does not include the volatile food and energy components).

It is doubtful that any index will soon supplant the venerable CPI. The CPI is ingrained in our finance system and is the standard for inflation measurement. Labor contracts, government regulations, contracts and other financial relationships use the CPI to adjust prices and costs. But it is worthwhile to note the potential inaccuracies of the CPI and recognize there are other metrics that may be more accurate or appropriate in certain scenarios.

WE ARE ALWAYS KEEPING SCORE IN THE DESERT OF THE REAL!

[i] The Author, despite having a graduate and post-gradute education, still retains his inner “Beavis and Butthead”. He snickers when he reads or writes the phrase “Hedonic Pricing” It just sounds R-rated. “Uh, huh. huh, he said Hedonic”.
[ii] This quote is a paraphrase of a line from William Shakespeare’s Julius Caesar. The footnote that attributed the title of the earlier post fell out of the text in the final edit. The Author apologizes for this oversight. Be assured that despite the poor quality of writing and analysis in this Newsletter, the Author strives to obey the basic norms of journalistic standards.
[iii] Bernstein, quoted in John Mauldin’s newsletter, “Inflation and Fed Policy”, www.frontlinethoughts.com, October 21, 2005.
[iv] http://www.bls.gov/cpi/cpidryer.htm,
[v] See BLS article in endnote iv.

FINANCIAL GENUIS IS LEVERAGE IN A RISING MARKET

“FINANCIAL GENUIS IS LEVERAGE IN A RISING MARKET”, John Kenneth Galbraith

Who can argue with that statement? But how can we make leverage work?

There are many ways to leverage investments. Margin trading accounts, Rydex index leveraged funds, and options, for example. Some readers have seen examples of how options can leverage an investment and provide a greater return than ownership of the underlying stock. Let’s review how options can make leverage work:

We have $8,000 to invest. Our research shows that DUK stock is likely to rise in price after its good earnings report is released in next week. DUK is currently selling for $80 per share and we predict it will rise to $84 after the earnings report comes out. To profit from this increase in price, we have a couple of choices:

Buy 100 shares of DUK at $80 per share. If DUC rises to $84 next week, we will do well, making a $400 gain, or a 5% return in a week. ($84 per share-$80 per share = $4 per share * 100 shares = 400. 4/80 = 5% return.)

Buy 40 option call contracts at $200 per 100 share contract. These call options on DUC have a strike price[i] of $80. Our research into this DUC call option tells us that with each increase of $1.00 in the price of DUC stock, the call option will also rise $1.00, or $100 per 100 share contract.[ii]

So when DUC stock rises to $84 per share, each call option contract will rise from $200 per contract to $600 per contact. ($4 per share call * 100 share per contract = $400.) But it gets better, much better. Since we bought 40 contracts with our $8,000, our contracts are worth $16,000, for a return of 100%.

This is an extreme example, to be sure. Over the next few weeks the Author will examine uses of options and option strategies. They have many uses in a portfolio and we will explore some ways that you can make options work for you.

YOUR CHOICES ARE YOUR OWN IN THE DESERT OF THE REAL!


[i] There are three major features to an options contract. The underlying stock, the strike price and the expiration date. DUC is the underlying stock. The strike price is the exercise price of the option. In this case, the call gives us the right to buy $ DUC at $80, regardless of the market price. Finally, all option contracts are limited in time. They expire on a fixed date.
[ii] Because this call rises $1.00 per call as the underlying stock rises $1.00 per share, the stock is said to have a delta of 1.00. Delta is a measure of the rate of change. In the option universe, delta compares movement in an option to movement of the underlying stock. If the call moved $.75 for each $1.00 movement of the underlying DUC stock, then the delta would be .75. .75/1.00 = .75. If the call moved 2.00 for each $1.00 movement of the DUC stock, then the option would have a delta of 2.00.

ECONOMIC THEORY OF “INCONSIDERATE HAND” REFUTES FREE MARKET THEORY OF THE INVISIBLE HAND!

"INCONSIDERATE HAND" THEORY PROVIDES THAT UNIDENTIFIED ECONOMIC OVERLORD CHANNELS PROFITS TO
GENETICALLY FAVORED, ADVERSELLY SELECTS LOSSES
FOR GENETIC FLOTSAM
“INCONSIDERATE HAND’ WILL MAKE GRAND UNIFIED THEORY LOOK
LIKE BUMPER STICKER SLOGAN, SAYS PROPONENT
ADAM SMITH TO BE ON NEXT MONTHS WIRED MAGAZINE’S EXPIRED LIST

President and CEO of Drysdale Emirates, Milburn J. “Sonny” Drysdale, III, took an extended leave from his family-owned company to promote his theory of the “Inconsiderate Hand”. The theory of the “Inconsiderate Hand” posits that an unidentified economic overlord surreptiously controls ostensibly free financial markets. This economic overlord, under the theory of the Inconsiderate Hand, selects rewards in favor of those whose genetic material is descended from wealthy ancestors. This same economic overlord heaps losses on individuals with lesser genomes.

Drysdale told this Author in an exclusive interview that with proper promotion and frequent appeals to the uninformed, the theory of the Inconsiderate Hand will gain equal time in the popular media and in congressional hearings. The theory of the Inconsiderate Hand, says Drysdale, will eventually render established economics uninteresting and therefore irrelevant.

Drysdale is not the first proponent of the theory of the Inconsiderate Hand. The first proponent of this doctrine was Fluffbinder J. Windfall, heir to his family's whalebone industrial empire of the 1890s. Windfall, a phrenologist, anthrophagist and bourbon enthusiast, reportedly attributed his great wealth to “the lack of a Federal Estate and Graft Tax, no income tax on capital games, and the Inconsiderate Hand of the Market”. The theory of the Inconsiderate Hand was soon forgotten in the Wall Street Crash of 1929 and the Great Depression that followed. But Drysdale, emboldened by personal revelation, is on a crusade to resurrect the Inconsiderate Hand theory.

Drysdale, a man of colorful phraseology and unwitting malapropisms, stated in his interview with the Author that the theory of the Inconsiderate Hand finally “devolved” in his mind when he heard about “Intelligent Design”. “Intelligent Design”, said Drysdale, is the more logical explanation of life’s diversity and should replace the theory of evolution. Since he cannot understand the rigorously documented theory of evolution, said Drysdale, Intelligent Design just sounded “more logical”.

CELLS RUN OUTBOARD MOTORS

“I was watching an infomercial on Pat Robertson’s CBN network one night. The infomercial was about Intelligent Design. It said that Intelligent Design had proved that tiny little cells flagellate themselves with little outboard motors. That was impressive”, said Drysdale, who like Windfall, is a bourbon enthusiast.

“Now look at those teeny weenie cells. Little cells like that don’t have brains, so how would they know about outboard motors unless God, uh, I mean, the Intelligent Designer, made them that way.”

Drysdale went on to say that the infomercial revealed that evolution could not explain how anything good could come from a gene mutilation or how an heiress could just suddenly be born from Prohibition-era Boston Catholic rumrunners and political grafters.

But the ultimate impetus behind Drysdale’s elucidation of the theory of the “Inconsiderate Hand” came when he read the Author’s well-researched post of October 3rd, 2005, “Intelligent Design’ is Creationism with its own K Street Lobbying Firm.” In that semenal post, the Author compared the process of evolution to the spontaneous and emergent actions of the free market. Renowned mathematician John Allen Paulos is quoted in the article as stating:

“What would you think of someone who studied economic entities and their interactions in a modern free market economy and insisted that they were, despite a perfectly reasonable and empirically supported account of their development, the consequence of some all-powerful, detail-obsessed economic law-giver? You might deem such a person a conspiracy theorist.”[i]

“I took offense at that,” said Drysdale, “Just because someone is good at math, and I cannot figure out how to do functions on an Excel Spreadsheet, doesn’t mean that he is smarter than me. When you are in nine figures, numbers don’t matter anymore.’

THE PROOF OF THE INCONSIDERATE HAND IS IN THE PROGENY

“We Drysdale’s come from an aristocratic family in England. Our oldest ancestor was the Duke of Drysdale on Farthingless Bottom Bend. My ancestors were among the first to plant tobacco in Virginia and were leaders in bullwhip technology.’

“Success is just part of our heritage. We always owned the land that the railroads were rerouted across. And we own nearly every inch of land at the bottom of water control projects created by the Federal government.’

Drysdale’s financial success is inarguable. But in response to a question about challenging the finest economic minds in the world with the Inconsiderate Hand theory and the concept of the unidentified economic overlord, Drysdale stated that his research into Intelligent Design had prepared him for this challenge from established economics.

“Right now there is a trial going on where Intelligent Design is being kept away from high school kids. A guy named Michael Boohoo (sic) is a scientist and is testifying for Intelligent Design.' [ii]

“The professor explained to the court that under his definition of a ‘theory’, a ‘scientific theory is a proposed explanation which points to fiscal data and logical interferences (sic)."[iii]

Under Behe’s analysis, Drysdale said, the Inconsiderate Hand and the economic overlord is a theory as strong as the claim that there are free and spontaneously developed markets.

“There you have it,” said Drysdale, “I propose that the Inconsiderate Hand and the economic overlord control markets. I have the data. Hell, I was born rich. Most everybody else out there isn’t. Who can argue with that? ‘

“And as far as logic, goes, I don’t know. I just know that two out of three ain’t bad.”


[i] Http://desertoftherealecononomicanalysis.blogspot.com/2005_10_03
_desertoftherealecononomicanalysis_archive.html
Link to Paulos Article: http://abcnews.go.com/Technology/WhosCounting/story?id=1077586&page=1
[ii] Author’s note: The witness is named Michael Behe and he is a professor of biology.
[iii] Author’s note: Behe said “physical data” and “logical interferences”.

REVENGE OF THE NERD, or UNIX IS THE LANGUAGE OF "LOVE"

According to a post on the website http://www.boreme.com/ , this is a true letter of resignation. Bore-me is a funny sight. A post from a few days ago was a British newscast of Americans interviwed as to which country should America invade next in the "War against Terror". One hopes this is parody. But The Author fears it is not.

BELOW IS THE TEXT OF THE LETTER

Mr Baker,

As an employee of an institution of higher education, I have a few very basic expectations. Chief among these is that my direct superiors have an intellect that ranges above the common ground squirrel. After your consistent and annoying harassment of myself and my co-workers during the commission of our duties, I can only surmise that you are one of the few true genetic wastes of our time. Asking me, a network administrator, to explain every little nuance of everything I do each time you happen to stroll into my office is not only a waste of time, but also a waste of precious oxygen. I was hired because I know about Unix, and you were apparently hired to provide amusement to myself and other employees, who watch you vainly attempt to understand the concept of "cut and paste" for the hundredth time.You will never understand computers. Something as incredibly simple as binary still gives you too many options. You will also never understand why people hate you, but I am going to try and explain it to you, even though I am sure this will be just as effective as telling you what an IP is. Your shiny new iMac has more personality than you ever will. You walk around the building all day, shiftlessly looking for fault in others. You have a sharp dressed useless look about you that may have worked for your interview, but now that you actually have responsibility, you pawn it off on overworked staff, hoping their talent will cover for your glaring ineptitude. In a world of managerial evolution, you are the blue-green algae that everyone else eats and laughs at. Managers like you are a sad proof of the Dilbert principle.Seeing as this situation is unlikely to change without you getting a full frontal lobotomy reversal, I am forced to tender my resignation, however I have a few parting thoughts.

1. When someone calls you in reference to employment, it is illegal to give me a bad recommendation. The most you can say to hurt me is "I prefer not to comment." I will have friends randomly call you over the next couple of years to keep you honest, because I know you would be unable to do it on your own.

2. I have all the passwords to every account on the system, and I know every password you have used for the last five years. If you decide to get cute, I am going to publish your "favourites list", which I conveniently saved when you made me "back up" your useless files. I do believe that terms like "Lolita" are not usually viewed favourably by the administration.

3. When you borrowed the digital camera to "take pictures of your mothers b-day", you neglected to mention that you were going to take pictures of yourself in the mirror nude. Then you forgot to erase them like the techno-moron you really are. Suffice it to say I have never seen such odd acts with a ketchup bottle, but I assure you that those have been copied and kept in safe places pending the authoring of a glowing letter of recommendation. (Try to use a spell check please, I hate having to correct your mistakes.)Thank you for your time, and I expect the letter of recommendation on my desk by 8:00 am tomorrow.One word of this to anybody, and all of your little twisted repugnant obsessions will be open to the public. Never f-- k with your systems administrators, because they know what you do with all your free time.

Sincerely,

Ted Brewer

TED CAN DRINK FROM THE AUTHOR'S CANTEEN ANYTIME IN THE DESERT OF THE REAL!

OIL DEMAND DOWN/SUPPLIES UP

OIL SLIDES AS MARKETS ADJUST, PER CNN and YAHOO FINANCIAL SITES

The price of oil has fallen to about $51.50 per barrel as surprising supply figures show that American oil supplies are up about 5.6 billions barrels. Gasoline inventories have also risen, according to these articles.

Demand for gasoline also fell by 2.2% and overall demand for petroleum products fell by about 3% from the same period last year.

The average nationwide price for a gallon of regular unleaded gasoline dipped to $2.742 a gallon from $2.752. Gas prices peaked at $3.057 on Labor Day in the wake of Hurricane Katrina, according to these same sources. A year ago, the average cost of a gallon of regular unleaded gasoline was $2.005
Oil and oil services technical indicators have slid recently and are approaching a point where a reversal is possible. However, all market indices are negative, so equity investments in these sectors would warrant great caution.

DRIVE AS IF YOUR WALLET DEPENDED UPON IT IN THE DESERT OF THE REAL!

BLACK MONDAY (10.19.1987) ANNIVERSARY

TODAY IS THE 18TH ANNIVERSARY OF BLACK MONDAY. SEEMS LIKE ONLY YESTERDAY IN THE DESERT OF THE REAL!

THE AUTHOR AND THE DUCATI. POST RIDE THROUGH THE JEMEZ MOUNTAINS AND OLD SANTA FE 

TAKING BEN STEIN’S MONEY

TAKING BEN STEIN’S MONEY

Ben Stein, deadpan “actor” and former Nixon speechwriter, used to have a television show where he was challenged by contestants to “Win Ben Stein’s Money.” In today’s (10.17.05) Yahoo Finance web page, Stein pen’s an article entitled “A Model Portfolio for Weathering Retirement”. [i]

In the article Stein combines the worst of two common investment tactics. “Buy and Hold” and formulaic portfolio diversification. Stein begins with the statement that:

[T]here have been long periods when they [stocks] have languished, as in the Great Depression and some time afterwards. But in the past 50 years their returns have been superb. While those perfect, balmy days are probably past, common stocks' returns will beat anything else even if they are only half as good as they have been in the past [ii]

HOLD, MOLD AND FOLD

Few, if any real people have a 50-year investment time frame. The stock market is currently in a Secular Bear Market where returns will generally be flat. A 3-4% current money market return will blow away the year-to-date major market indices. As of today, the Major Market Indices are down as follows:

DJIA down 4.03% Year-to-Date.

S&P 500 down 1.80% Year-to-Date.

NASDAQ down 4.85% Year-to-Date.

DIVERSIFY AND DARE TO BE MEDIOCRE

As the Author wrote in the August 2005 Newsletter,

Diversification is a mantra in the financial services industry. Talk to nearly any broker or financial planner and they will tell you to just buy and hold a basket of stocks, bonds, cash instruments and maybe throw in a few alternative investments like managed futures, REITS (Real Estate Investment Trusts) and foreign equities. Some will do well sometimes, some will do poorly sometimes. But if you hang on long enough, we can guarantee that your investments will regress to the mean.[iii]

Rather than diversify and dilute your winners with losers, select investments with the strongest relative strength against the market, other sectors, and against their peers.

These relative strength concepts were addressed at length in the Author’s August 2005 newsletter. Drop the Author an Email if you would like a copy of this free newsletter.

SORRY BEN, YOUR MONEY IS MINE IN THE DESERT OF THE REAL!

[i] http://biz.yahoo.com/special/yourlife.html
[ii] http://biz.yahoo.com/special/yourlife.html
[iii] This strategy causes me to recall a line from a Marx Brothers’ movie. The frenetic fraternals were selling a product below its cost. Groucho quipped, “If we don’t sell too many of these, we just might break even.”

CRY HAVOC AND LET SLIP THE DOGS OF INFLATION

CRY HAVOC AND LET SLIP THE DOGS OF INFLATION

That headline sure sounds ominous. September’s inflation rate was a shock, frequently described as the greatest increase in inflation since March of 1980. And depending on how you measure inflation, the dogs of inflation are:

1. Rampaging through the streets of major cities.
2. Only chewing up the carpet.
3. Just tugging on their leashes and howling a bit.

Measuring inflation is not as simple as it looks. If one follows the financial press, two measures are commonly referenced. The Consumer Price Index and the Wholesale Price Index. And subsets of these indices. If one reads the newspaper or watches the television network news, the Consumer Price Index is the usual topic. Let’s check out the Consumer Price Index, commonly abbreviated as the CPI.

The CPI is a “market basket of goods and services” measured monthly by the Bureau of Labor Statistics. Common categories of expenditures, such as food, housing, energy, healthcare, apparel, major appliances, airfares, and new car prices are given a percentage of the total market basket of goods. For example, housing is given about 23% of the basket and healthcare is given about 6%.

Each month changes in the costs of the goods and services in these market basket categories are measured and plugged into their respective percentage composition of the market basket. So if housing prices go up 1% in a month, then the 23% housing allocation in the CPI will go ups by 1%. This change, and categories are totaled and a monthly CPI increase is tallied. Sounds simple, right?[i]

One often hears about two measures of the CPI. The CPI, and the Core CPI, the CPI without the “volatile food and energy sectors”. These “volatile” sectors are excluded to maintain a longer term perspective in the CPI figures. So if we only look at core inflation for September 2005, the CPI was up by 0.1%, in line with the last few months of CPI increases. By this measure, the dogs of inflation are just tightening their chains a little

The CPI including energy and food is a little more ratcheting. All Americans are paying more for food and fuel. But for many Americans, the poor, and the working poor, increases in food and energy costs tear at the core of their budgets and work substantial hardships. Inflation by this measure was up 1.2% last month.

RELEASE THE HOUNDS

In 1982, the Bureau of Labor Statistics changed the way it calculated the housing component of the CPI. Prior to1982, the housing piece of the CPI actually reflected the price of houses and mortgage costs. But in 1982, the CPI began using a figure called the “owner’s equivalent rent of a primary residence.” [ii] In other words, the CPI swapped the cost of house ownership to the cost of renting. By carving out the cost of home ownership, this change had the effect of lowering the CPI. If you popped the actual costs of home ownership back into the equation, the CPI would be running at 5.6%.

Most people would believe that the reported CPI, core or non-core, understates the costs of what they buy. And the Author believes that the CPI does somewhat understate the price increase Americans pay.

Hedonic Regression and the American Clothes Dryer

Hedonic regression is less pleasureful than one could imagine. It is an adjustment in the CPI to reflect quality increases in the underlying market basket goods. But it is a Sunday morning after church and the Author’s brain is not up to explaining this concept. In fact, he barely understands it. A recent paper put out by the Bureau of Labor Statistics discusses hoe hedonic regression was used to weighting of clothes dryers in the Major Appliance component of the CPI.

CLOTHES DRY IN THE OPEN AIR IN THE DESERT OF THE REAL!

[i] Even the semi-comatose readers of this Blog should realize that the phrase “Sounds simple, right?” is a trite attempt by the Author to tell you it is not simple. The Author should really read Ashlee Simpson’s autobiography to get more literary device ideas.
[ii]“Smoothing Out Inflation”, John Mauldin, http://www.frontlinethoughts.com/. The reasoning behind this change is based upon the theory that home owners are “buying an asset and leasing it back to themselves.”

OLD SCHOOL-NEW RIDE

Old School. Like father, like Son. When my dad was as a kid, Whizzer motorbikes were the hot ride for kids and teenagers. Cheap, fun. They are making these bikes again and my dad will pick his up in a couple of weeks. Not as fast as a Ducati, but just as much fun! I cannot wait to get back to Indiana to ride it!

RIDE FOREVER IN THE DESERT OF THE REAL!

AN ECONOMIST WALKS INTO A BAR.

AN ECONOMIST WALKS INTO A BAR.
HE HITS ON AN ACTUARY AND TELLS HER SHE HAS A GREAT PERSONALITY. AND HE MEANS IT.

PHISHING, ANYONE?

Identity theft is a big problem. It is a vexing problem for individuals who have their identities swiped[i] and can cause both financial loss and personal disruption. There are lots of ways for thieves to steal a person’s credit information. A common, but easily avoidable method, is “phishing”.

Phishing works like this. A phisher will send a broadcast email from a fake server address to a large group of email addresses. The phisher doe not care who they are. The phisher will represent himself as a large and trusted organization or business. The Author was recently phished, so he will use the particulars of this phishing attempt to explain the scam.

The email will state that it is from a bank, from a credit card company or other organization. (Currently, there are hurricane relief scams, and probably a few phishs working.) The phishing email will ask you to go to a website link contained in the email. These links are to fake sites that appear to be legitimate. They will even contain the web address of the legitimate organization.

The email or the website will say that they need your bank account and credit card information for some legitimate sounding reason. They might say that some data was lost and they need to confirm your information. In the Author’s case, the phish pretended to be from Microsoft Outlook and said that if he did not provide the requested information, his email service would be terminated. Of course the Author “smelled” a phish and knew that Microsoft Hotmail was a free service. But the Author went to the site out of curiosity.

The site looked legitimate. It had text boxes for your bank account numbers and PINs, credit cards and PINs, and even asked for the number on the back of the credit card. The site said that the information was required to continue Hotmail service. The Author typed in some vulgar number[ii] strings (there are a few, if you are really warped) and sent the information back to the phisher. He then emailed Microsoft about the scam.

EMV CARDS BECOMING THE EUROPEAN STANDARD

Europe and the UK tend to lead America in consumer IT privacy and security. Europe is moving to the EMV(Europay, MasterCard, Visa) Smart Card. Current magnetic strip cards have only two levels of authentication, user name and password. These are static pieces of data. They do not change unless a person gets a new card or changes their password.

The EMV card combines with a card reader to generate a session, or one-time passcode. This passcode can also be linked to the transaction, so even if a criminal intercepted the passcode, it would only be useful for that single transaction. This reader would operate similar to the reader at the supermarket checkout.

The EMV card might also find home use. Card readers might operate as computer peripherals (mouse, keyboard, USB Device) and an online purchaser would only have to swipe their card on this reader for on-line purchases. More security, less time, lower transaction costs. Works for the Author.

THERE ARE ONLY 10 KINDS OF PEOPLE IN THE DESERT OF THE REAL. THOSE WHO UNDERSTAND BINARY AND THOSE WHO DO NOT!



[i] No pun intended. This post rafts more down the consumer economic river, but it is important information for newer internet users and is a way to weave in the Author’s IT security gig.
[ii] Integers, to you fellow geeks.

LAST YEAR IT WAS THE D WORD.

Last Year it was the D Word.
Could it be the S or the I Word Next Year?

2004 was the year of the D, word. Deflation. The Fed Funds rate was 1%, inflation was bopping in at around 2%, and interest rate monitoring dudes and dudettes were raising the ugly prospect of deflation, or negative inflation.

Deflation is not a good word. Profits fall, growth stalls, and monetary authorities have no real tools left. It would be left to the spending authority, the US government, to induce stimulus through more deficit spending.

Then there is another other word. The S word.[i] Stagflation, that confounding condition of the 1970s. Stagflation was the somewhat conumdrous condition of both high inflation AND slow economic growth. Many economists, prior to stagflation, believed high inflation and slow economic growth were incompatible. The then-current Keynesian economic belief was that inflation was a condition of a well-managed stimulated economy and that only a well-managed stimulated economy could produce inflation. If the economy was growing too slowly, just stimulate it. If the economy was overheated, withdraw the stimulus. Stimulus, or lack of it, was the switch that ran the economy. Growth was the product. Inflation the byproduct. Simple. Or so it seemed until the 1970s.

THE MONETARIST MEN TO THE RESCUE[ii]

Then came the 1980s and the monetarists. Paul Vohlker, Milton Friedman, and the other intellectual descendants of Friedrich Hayek. They correctly saw inflation as a generally monetary event, or, in the language of economists, an endogenous event. (“Endogenous” means from inside the system), as opposed to an exogenous event. (“Exogenous” means from outside the system.) The monetarists determined that there was too much liquidity in the economy. This inflation-causing liquidity could only be checked by constricting the monetary supply. Monetarist constrictions worked and inflation has generally been contained since the early 1980s.

INFLATION, DEFLATION AND THE “CHINA SYNDROME”[iii]

The Author is an inveterate internationalist. He will not collude with the Nativist[iv] chorus that China (and WalMart?) are draining the American economy. But he does recognize the immense economic power that China exercises. The Author recently read an article entitled “Are we at the start of a trend rise in global interest rates?” by Rodney Dickens, Head of Research for ASB Bank, New Zealand. Dickens states in the article that the Chinese economy had important effects upon both deflationary pressures in the first few years of this century and the current commodity price increases. [v]

Dickens states that from mid-2001 to mid-2004, low levels of global capacity utilization brought fears of global deflation. At that time, booming Chinese production and associated cheap Chinese costs of production played a part in this spare capacity and deflation story”[vi]

CHINA GIRL BECOMES A MATERIAL GIRL

Global commodity prices are currently at high levels. Dickens notes that global utilization is behind this increase in commodity prices. Greater demand for commodities produces higher prices. And growth in Chinese output and increases in consumer spending in China help fuel the increase in commodity prices. So in effect, notes Dickens, the Chinese economy has “been playing a part in keeping down global inflation by increasing supply, especially increasing the stock of productive capacity around the world, [and] it is now starting to play an important part in fueling world demand.”[vii]

Dickens concludes with this troubling assertion. “The extent of the rise in commodity prices in recent years rings warning bells about the more general inflationary implications of the stronger demand.”[viii]

In an upcoming post the Author will address some ways to profit from rising commodity prices.

NOT EVEN YOUR CLONE WILL KEEP YOU COMPANY IN THE DESERT OF THE REAL!


[i] No, not the S**t word, although Stagflation sure felt like S**t. The Author does not use vulgar words in this blog and his Newsletter. Of course he will make sly references to them, but vulgarity is a line of decorum the Author does not wish to cross in his non-fiction writing. The Desert of the Real is a discursive space and a PG rated space. And the Author’s dad has a PC and reads the Desert of the Real Post.
[ii] The first monetarist leader in a western democracy was not a man, but Margaret Thatcher, the Tory Prime Minister of Great Britain. Thatcher, also called “The Iron Lady” and “Mag the Hag”, was the Prime Minister from 1979 to 1990. In 1990 she was dumped by her own party for John Major. In 1979 Thatcher embarked upon a policy of privatization of public industries, tax cuts, deregulation, and a monetarist central banking policy. She turns 80 on today, on October 13th. Happy Birthday.
[iii] As the Author states in the Header, 1970s cinema is always fair game in the Desert of the Real.
[iv] American Nativism is a crude and perpetual feature of the political landscape. In the excellent but violent film “The Gangs of New York”, the Nativists were led by Daniel Day Lewis’ character, Bill ”The Butcher” Cutting. Cutting was based on a real historical figure, William “Bill the Butcher” Poole. These Nativists resented Irish Immigrants and opposed the Civil War Draft on racist grounds.

And yesterday the Author saw an interesting factoid in the “On this Day in History” section of the newspaper. On October 11, 1890, the Daughters of the American Revolution was founded (DAR). The Author, in a more naïve time in his life, believed that the DAR was formed to honor the sacrifices of their ancestors in the American Revolution. Instead, the DAR was probably formed in 1890 to differentiate Nativists from the waves of immigrants from Italy and Eastern Europe, those “huddled masses” that only a decade earlier had been welcomed with a message on the Statue of Liberty. We must never forget that it is the diversity and energy of immigrants that makes this country vibrant. See the Author’s post of September 24, 2005, “Americans on Dopamine”.
[v] Mr. Dickens article is reprinted in the “Out of the Box” newsletter from John Mauldin of Investors Insights. The link to Mr. Mauldin’s site is www.investorinsights.com.
[vi] Dickens, “Are we at the start of a trend rise in global interest rates?”
[vii] Dickens.
[viii] Dickens. This statement conflicts with the Author’s position that inflation is mainly a monetary event. There is no doubt that higher commodity prices will raise the cost of value-added goods that contain those commodities. The real inflationary question is whether the government will fuel liquidity or contain it. If the profligate US Congress and the President throw more deficit spending at hurricane recovery (and everything else) and continue their tax-cutting policy, then inflation WILL result. But if Washington can employ fiscal discipline (the Author is really trying to say this with a straight face), then the means-reverting mechanism of the commodity markets will take effect, lowering demand and in turn, commodity prices.

Case closer to home. New Mexico politicians are lining up in front of the news cameras pitching gasoline tax rebates or suspensions in gas taxes to “ease the pain” of high fuel prices. The Author recognizes that the pain is real for some people, just a hangnail for others. But this pain is the market in operation. It must hurt. It is the pain of learning a good lesson. Americans must respond to these prices by changing their behavior and entrepreneurs must be incentivized to find alternatives to high fuel consumption. (And the environment must be protected!) If there were another way, the Author would like to hear it. Really. The Author welcomes well-reasoned and constructive criticism. But no ranting. The Desert of the Real is hot enough. No flames needed.

Tax Panel Says Popular Breaks Should Be Cut.

Tax Panel Says Popular Breaks Should Be Cut.
Author Agrees and is Equally Unpopular.
Author’s Dog and Cats Still Like Him.

There is a story about Harry Truman and a one-handed economist. The story is probably apocryphal. And it could apply equally well to a lawyer or an honest policy advisor.

Truman was reported to have said he wanted to hire a one-handed economist. When asked why, he responded, “An economist will explain something to you and you will find yourself understanding what he says and being in complete agreement. But in the next breath, the economist will say ‘but on the other hand . . .”

THERE ARE ONLY THE BLEACHED BONES OF SACRED COWS IN THE DESERT OF THE REAL.

Sometimes being a credible and accurate analyst requires bucking conventional wisdom and cutting “sacred cows”[i] down to size. The Author was not the first to jump on these sacred cows, but will eagerly dogpile upon them.

Yesterday, President Bush’s tax advisory commission proposed cuts in the popular home mortgage interest deductions and employer-paid health insurance. These ideas will never see the light of legislation, but they do have merit and should be considered. Here is why:

Tax treatment of a transaction alters the cost of a transaction. These altered costs affect the conduct of individuals. And what is the effect of this conduct? Socially or economically good, bad, or merely indifferent? Let’s look at some extreme examples to winnow down the analysis:

1. Imagine that the US Tax Court issued a decision that computer hackers could deduct the “ordinary and reasonable costs” of hacking networks, OBDCing databases looking for credit card information, the cost of their T-1 lines, development costs of viruses, ECT. Such a tax policy would encourage more hackers to get into the “business”. A tax deduction would have the effect of lowering their cost of hacking activity by 20-40%, the value of their new business tax deduction. Most everyone would agree, with the possible exception of computer security consultants[ii], that encouraging hackers is a bad thing.

2. Congress passes, and the president signs, a tax law that gives taxpayers a tax deduction for putting up bat boxes. Bats are voracious insect eaters and rarely fly into women’s hair.[iii] They have lost a good deal of habitat and bat boxes are the bat version of birdhouses. So this tax policy reduces the cost of bat boxes by 20-40%, encourages natural insect reduction and ensures better Halloweens.

These examples are extreme, of course, and would not have broad effect. But two proposals from the tax commission would have massive affects upon American taxpayers.

First, this commission proposes capping the home mortgage deduction at the maximum mortgage amount that the Federal Housing Administration (FHA) will insure. This amount varies from county to county. The high is $312,895 and the average is about $244,000. Thus, you could only deduct the amount of mortgage interest paid on the principal amount up the FHA limit. Any interest paid beyond that is nondeductible.

IF YOU DON”T LIKE THE HOUSE PRICES HERE, MOVE!

The effect of such a tax move would be to raise the interest expense on larger home loans 20-40% (again, the lost deduction). House prices would fall and building activity would slow. In the Author’s opinion, this would have a salutary effect. It would deflate the housing asset bubble, decrease the building pressure on infrastructure and open land, and slow suburban sprawl. Tough arguments to overcome, unless one step outside one’s self and one’s private interests. Or work in the tax-favored housing industry.

The next proposal is to limit the employer-paid healthcare tax deduction to the average cost of the premium that the federal government pays for federal workers. That is currently about $11,000 per year.[iv] Between a third and one-half more than the cost of a comparable family's healthcare in other developed world countries. And these countries provide universal healthcare, unlike the US.

Since the cost of an American worker’s healthcare is not taxable, the cost paid by the worker through employee premiums and wages they would otherwise receive if their employer did not pay healthcare premiums is reduced by the tax benefit. Americans consume more healthcare because the tax code encourages the consumption. This nondeductibility would slow that consumption.

Healthcare economics was the Author’s driving interest through the 1990s. But having spent at least five years away from healthcare, the Author fears to slip back into the abyss that is American healthcare finance and delivery. So he will stop here.

STAY HEALTHY AND HEAL FAST IN THE DESERT OF THE REAL!

[i] Most readers are probably unaware that the Author is a vegetarian. So take this as extremely metaphorical.
[ii] Read the Author’s Profile, if you have not already.
[iii] Except perhaps in Texas, where “big har” is the ubiquitous female equivalent of the mullet.
[iv] To put this average healthcare premium cost figure of $11,000 into some Dickensian perspective, the yearly wage for a minimum wage worker is $10, 712.00. “Are there no workhouses? Are there no prisons? And the Union workhouses are they still in full operation?”

November Newsletter

Welcome to the Desert of the Real—
Real Investment Returns in a Dry Season
November 2005 Copyright Robert C. Feightner

Welcome to the Desert of the Real.[1] This issue of the newsletter is the sixth in an ongoing series. It is free of charge and directed to anyone who wants better investment results.

The Only Thing Inevitable is the Author’ s Use of the Trite Aphorism: “The Only Things that are Inevitable are Death and Taxes?”

Only one subject will figure prominently in this newsletter. The topic will be the Roth IRA and how to employ it effectively in your retirement planning. The other topic, currently on hold, would have been death. Well, death only for the uber-wealthy, as the topic was to have been the Federal Estate and Gift Tax.[2]

Before we take up the Roth IRA, let’s do a review of the Traditional IRA. A Traditional IRA, around since the 1970s, allows an income earner to put $4,000 into a tax-deferred account in 2005. ($4,500 if you are age 50 or over.) Subject to certain restrictions, the IRA account holder then has his adjusted gross income reduced by the amount of his IRA contribution. Basically, the Traditional IRA contribution goes in tax-free. The returns on the IRA account grow tax-free until the account holder withdraws funds from the account. When she withdraws funds, the withdrawals are then taxed at her ordinary income tax rate.

A Traditional IRA holder cannot, subject to certain exceptions, make withdrawals prior to age 59-1/2. A Traditional IRA holder must begin withdrawals at age 70-1/2. Further, the beneficiary of the IRA, upon the account holder’s death, must begin to make withdrawals. In short, a Traditional IRA holder defers, but does not eliminate taxes on the account returns. Sounds good so far, so what’s the catch?

Here are the catches. The intervening years between the 1970s and today have seen huge changes in the tax code that have reduced the anticipated benefits of the Traditional IRA. Also, a key assumption that underlay the rationale for the Traditional IRA was apparently incorrect. Let’s take a look at what went wrong:

1. Tax Bracket Compression. When the IRA law was enacted, individual tax rates were high. Marginal rates could be very high[3]. And there were numerous tax brackets. If you were in a high tax bracket before retirement, you could generally assume you would fall into a lower tax bracket after retirement and pay lower taxes on your IRA withdrawals. Your Traditional IRA would not eliminate taxes, but it would reduce them.

Congress, in the intervening years, has cut top rates and reduced the number of tax brackets. There are now six federal tax brackets, four of which apply to married filers earning between $7,300 to $163, 225, the great majority of taxpayers. These rates are 15, 25, 28 and 33%. And if you listen to the political rhetoric, the intent is to compress these rates further and continue to chip away at deductions and exemptions. As tax rates compress, there are less tax savings available for your traditional IRA withdrawals. And if the flat-tax advocates get their way, there would be no bracket reductions to lower your IRA withdrawals.[4]

2. What Cut in Retirement Income? In the 1970s it was generally assumed that nearly all Americans would have reduced income in retirement. Few Americans had amassed large retirement savings. Most folks relied on Social Security and a pension. Although the data is somewhat scant, economists are finding that retirees with Traditional IRAs are not taking substantial cuts in income in at least their first few years of retirement. This could be a confluence of two factors, however. One is the result of tax bracket compression set out in 1, above. The other factor could be that individuals who took advantage of Traditional IRAs and are now retiring are high-net worth individuals that initially saw the value of Traditional IRAs in the 1970s and 1980s.

And it should additionally be considered that people who began investing in the late 1970s and early 1980s rode the strongest Secular Bull Market in history to unprecedented gains. When it rains, says the versatile aphorism, it pours.

If there are so many things wrong with the Traditional IRA, what is right with the Roth IRA?

The Author is Temporarily out of Alliterative Allusions and Terrific Tropes

The first and foremost advantage of the Roth IRA is that the proceeds are tax-free. All of the returns will be tax-free. The account holder’s contributions are after-tax, so there is not upfront savings. But the long-term benefit far outweighs up front taxability. The only other concern with the Roth IRA is that high-income individuals cannot take advantage of a ROTH. Below are the income limitations:

Single Filer: Complete IRA contributions up to $95,000 Adjusted Gross Income (AGI). Partial Contribitions to $110,000 AGI.

Married Filers: Complete IRA Contributions up to $150,000 AGI. Partial Contributions up to $160,000.

Some Examples

Josh and Jenna White are 35 years old. They plan to retire at 35, so they have 30 years until retirement. They do not have a pension plan at work. They can either contribute $8,000 to a Traditional IRA or $8,000 to a Roth IRA. We will assume that when they retire they will be in the 25% tax bracket. If they take a lump-sum distribution when they retire the lump-sum amount will push them into the 35% tax bracket. We will also assume they will get an 8% annualized return.

When Josh and Jenna retire, their IRA balance, Roth or Traditional, will be:

$264, 711 If they have a Traditional IRA and take out the entire lump sum, the amount, after taxes at the 35% rate is:

$172, 062. If they withdraw an equal amount of the proceeds over ten years, taxed at 25%, their annual withdrawal will be: $19, 853 per year.

Here is where the Roth IRA advantage becomes clear. If Josh and Jenna have a Roth, there are no taxes. They keep the ENTIRE $264, 711.

Tim and Trina Brown are 30 years old. They plan to retire at 70, so they have 40 years until retirement. They have 401(k) plans at their work and each employer matches 401(k) contributions up to 3%. They currently contribute $10,000 to their 401(k)s. Should Tim and Trina max out their 401(k) contributions? Or should they contribute to their 401(k)s only to the extent of the company match and put the rest into a Roth IRA? (The gentle readers should already know the answer, but here comes that math.)

If Tim and Trina continue putting $10,000 into their 401(k)s, they will have $296, 839, as a lump-sum (after tax) 401(k) withdrawal. If they take the proceeds over 10 years, they will get $34,251 per year.

However, if Tim and Trina limit their 401(k) contributions to only the company-matching amount, they will retire with $379,041. If they take it out over 10 years, they will get $38,817 per year. (These amounts include the taxes on the taxable 401(k) proceeds.)

$82, 202! That is the difference. 27% more than the 401(k) strategy. Put another way, 2.4 more years of income than the 401(k) strategy. A simple strategy that anyone can take advantage of.

The Author has an Excel Spreadsheet that calculates the relative advantages of the Roth/401(k) strategy. And if a 401(k) participant takes advantage of the company-match amount, and then reaches the Roth limit, he can still put more funds in his 401(k) up to his 401(k) limit.

The Author Has Just Shown You The Elephant[5]

The purpose of this newsletter is to dispense financial and investment advice, to help readers understand the investment and financial environment we face, and to entertain. Nothing the Author has said to date about Secular and Cyclical markets, interest rates, high price/earnings ratios, sector and market relative strength is as important as the foregoing discussion of the Roth IRA, the Traditional IRA, and the 401(k) max strategy. No investment strategy can even approach the wealth building effect that the proper deployment of these strategies can deliver. By using good tax avoidance strategies, you get a 25-35% return out of the gate.

Rumors of the Demise of the Federal Estate and Gift Tax Appear to be Somewhat Exaggerated (Well, just One Last Terrific Trope)

The Federal Estate and Gift Tax is scheduled to expire in 2010, but be reinstated in 2011. Seriously, this is what our elected representatives passed in 2002. (Imagine being an estate planner trying to address this bizarre situation.). Senate Majority Leader Bill Frist, heir to a huge healthcare fortune, had promised to bring up the repeal of the Estate and Gift Tax when Congress returned from its August recess. But in the wake of hurricane Katrina, he has stated he will delay consideration of repeal. Whether this delay is due to a glint of fiscal restraint in face of the staggering costs of rebuilding in Katrina’s wake and the crippling federal budget deficits, or a political move to appear less venal in the public eye, is difficult to determine. But the repeal measure will probably come up again. When the repeal of the Estate and Gift Tax comes up again, the Author will visit the issue. And he will drown its opponents in Grover Norquist’s bathtub.

Welcome to the Desert of the Real!

IMPORANT DISCLAIMER: This newsletter is offered for informational purposes only. Sources of information provided are believed to be reliable, but are not guaranteed to be complete or without error. Opinions and suggestions are provided with the understanding that readers acting on information contained herein assume all risks involved. The Author may or may not buy or sell securities discussed in this newsletter.


About the Author: The Author is a former corporate healthcare attorney, computer software company executive and stockbroker for a major wire house. He currently lives in Albuquerque, New Mexico. He trades for a living, works as a computer security consultant, and writes this newsletter to assist others in their investing activities and to keep abreast of important issues in the equity and financial markets.

He has a weblog where he writes on these topics. The link is:

http://desertoftherealecononomicanalysis.blogspot.com/

He may be reached by email at desertoftherealeconomics@hotmail.com.

[1] The title of this Newsletter, “Welcome to the Desert of the Real”, comes from the 1998 film “The Matrix”. The world in the Matrix is a Simulacrum, a computer–generated illusion. It only “looks” and “feels” like the late 20th century. Instead, human beings are enslaved in tanks of fluid, wired to the Matrix. Also, readers steeped in post-structuralist philosophy may recognize the title as a paraphrase of a quote in Jean Baudrilliard’s 1981 book, “Simulacra and Simulacrum”.

On the subject of films, the Guild Cinema is an art house movie theatre in Albuquerque. In September it screened a mockumentary entitled “Never Been Thawed”. Caustic and witty. The mockumentary is becoming a cinematic genre of its own. The first feature-length mockumentary the Author recalls is the 1983 send-up of rock bands, “Spinal Tap”. Spinal Tap still remains the benchmark, but the author believes that “Never Been Thawed” is funnier and more socially scathing.

Christopher Guest, who did Spinal Tap, has produced “Best in Show”, “Waiting for Guffman” and a “Mighty Wind”. And the Author has seen a couple other mockumentaries. A precursor of Spinal Tap was “The Ruttles”, a mockumentary by the Monty Python crew about for mop-topped rockers from Liverpool.

But perhaps the ultimate mockumentarians were two laboratory mice, one a genius, the other insane. “Pinky and the Brain” was one of the funniest and well-written cartoon series that the Author has ever seen. Some of the cartoons were parodies of famous movies, stage plays or television shows. Others were mockumentaries of social phenomena with the enduring subtext of Brain’s unchecked desire to “take over the world”. A particularly endearing character was Brain’s nemesis, an Orson Wellian hamster named Snowball. Narf! Zort!
[2] The misleading appellation for this tax adopted by estate and gift tax opponents “Death Tax” will not be dignified in this newsletter. As a still-licensed lawyer, the Author will refer to the tax by its proper citation. If he didn’t cite it properly, his Estate and Gift Tax professor, His Bloviateness, Lawrence Jegen, would hunt him down and grill him socratically for several hours.
[3] Tax deductions were more generous, however.
[4]A concern of Roth IRA holders is that the federal government may decide at some point in the future to tax Roth IRA withdrawals, limit the amount of Roth IRA withdrawals that are tax-exempt, or phase-out the exemption for high-income earners. This seems unlikely given the original promise of the Roth IRA that the proceeds be tax-free and the political power of retirees making Roth IRA withdrawals.
However, by non-direct means, the federal government has “raised” the taxes on traditional IRA withdrawals by compressing the tax brackets. And the trend toward tax bracket compression will probably continue under the pretense of “tax simplification”.
“Tax simplification” is a Washington canard, a glittering generality that has no meaning outside of a politician’s lexicon of trickery, or “Chumpery”. Chumpery (no relation to champerty) is when a politician addresses a hot-button issue with no intent (or real ability) to actually do anything about the issue. Prominent examples of Chumpery would include “Balanced Budget Amendment”, “Term Limits”, Flag Burning Amendment”, “Defense of Marriage Amendment”, or “Health Care Reform”. From the foregoing one could conclude that anytime a politician proposes something that would require a Constitutional amendment they are automatically engaging in Chumpery.
[5] “Seeing the Elephant” was a 19th century term for seeing or doing something unique or valuable. However, Civil War soldiers would also say that new men who first experienced combat had “seen the elephant.”