Moving - See the new GregBoop blog

I would like to thank my dedicated readers. I am moving my blog over to: http://gregboop.blogspot.com

The folks (about 1000) who have subscribed via email will continue to get the blog via email. Those who have subscribed via RSS will need to sign up for RSS at the new blog.

The Greg Boop blog will continue to cover your favorite financial information and throw in some engineering and operations topics.

Once again I thank everyone for their support as I transition away from HingeFire.

The Future of the Euro

The fire and brimstone clouding the European sky is not the volcanic ash from Iceland but rather the bleak outlook for a unified currency. To put it mildly the Euro is doomed, it is just a just a question of how the entire scenario unfolds.

Currencies only work for a nation when their own central government has control over the money. A country using a currency while ceding control of the exchange mechanism simply makes the nation a victim of all the other entities using the notes. Germany and other northern European nations recently learned this harsh lesson. The Euro worked while all the economies across the continent were rising, but quickly imploded when a recession occurred. The southern European nations with poor financial controls that that have historically defaulted multiple times are now in a position to collectively drag down the entire collection of economies due to the common currency. Prior the Euro these countries would default and their individual currencies would be devalued.

It is true that the more people that use a currency then the stronger the value. Witness the strength of the deutschemark after the inclusion of East Germany. However a country must have sole control over their currency and not yield power to a central authority in order to be successful. I found that the Germans were very supportive of the merger of East and West Germany despite concerns over the poverty in the East at the time. Today, Germans are outright furious that the country is bailing out Greece and other nations. Most of the people on the street recognize what is going to happen next which is why they are lining up at banks to demand Euro notes with X’s in the serial numbers that are associated with Germany and not other countries.

While the entire situation can play out in multiple scenarios; there are two obvious ones. The first is that the Euro will divide into two segments, the stronger northern European nations with one version of the Euro and the southern European nations with a version of the Euro which is next to worthless. This explains why German citizens are lined up demanding “their national Euro notes”. It is likely that outside notes will soon be devalued.

The second possible scenario involves individual countries withdrawing from the Euro exchange mechanism and reinstituting their own national currencies. A good number of barriers and political negotiations will have to be overcome to allow this type of withdrawal. On the other hand people rioting in the streets generally has the tendency to make central union decision making to move with more haste.

Another likely scenario involving individual nations withdrawing from the Euro focuses on the central union giving countries with debt problems the boot and demanding that they withdraw from the Euro. As the size and scope of the debt issues become more apparent there will be a greater howl across the continent for the offending nations to withdraw.

In the long term where will this leave the Euro? It would be best if it was used as a basket of currencies for international trade as it was originally intended – 23% franc, 34% deutschemark, etc. rather than being used as a universal note in retail trade across the entire EU block. The disbanding of the common Euro is the best solution and the obvious path for continent.

Humor: The Story of the Banks in Iceland

It started with bankers in the U.K. asking 'Where can we find some pansies to sell this CDO crap to?"

UK "We are going to make ourselves rich by selling wothless CDOs dressed up as jewels to your fishermen banks"
Iceland "Yeah we are getting rich.... Big Party."
UK "We will even sell short and bet against the crap we sold you"
Iceland "Hey, this stuff melted down and is worthless."
UK "By the way we expect you to tax all your citizens 3 million dollars each to make up for our 'losses'".
Iceland "FU - stuff it. We voted and ain't paying."
UK "We'll start seizing your international assets till you pay."
Iceland "FU. Enjoy some volcanic ash."
UK "Stop.... you're sinking our economy!"
Iceland "Maybe you should of thought about that before you demanded repayment on the worthless crap you sold us."
UK "Choke....cough.... choke...."

Today's Cartoon

Analysis: SEC vs. Goldman

The civil fraud charges filed by the Securities and Exchange Commission Friday accused Goldman Sachs of "defrauding investors by misstating and omitting key facts". These financial charges also mark a new era of government regulatory enforcement of Wall Street. No longer will the SEC simply come to consent decrees with financial firms where they do not admit guilt and in most cases pay a small fine viewed as a cost of doing illegal business.

One immediate question is how do the SEC charges filed against Goldman Sachs change the playing field? Do these charges even mean anything in a broader regulatory context? In my opinion, the actions from the SEC on Friday defines a new playing field by Washington marked with the following game-changing alterations:

a) A broader effort to get the derivatives market properly regulated to minimize the possibility of future meltdowns.
b) The Goldman Sachs charges are expected to be the first of a lengthy string of government actions against multiple firms that contributed to the financial meltdown. The lack of accountability by firms which accepted bailouts is no longer acceptable to main street and their representatives in Washington.
c) A dismantling by regulation of firms that are "too big to fail"; including the scaling back of previous government legislation that allowed the merger of commercial and investment banks.
d) The teeth of the SEC are back in place. For the last twenty years the SEC has been a toothless enforcement entity; forcing state AGs to take a leading prosecution role in financial malfeasance. This is likely to be the start of a change where the federal government will have deep roots in the policing of problems involving large financial firms.

The roll out of these regulatory reforms are expected to take years; however as noted by an AFP news article "We suspect that after Friday, others on Wall Street may have a harder time sleeping."

Another good clip is Ratigan on MSNBC where he compares Goldman Sachs to an automobile manufacturing company that deliberately took critical component from the inside of cars (CDOs) and then sold the cars as being great investments while betting on the side that the cars they created would all blow up spectacularly. An apt analogy - watch it here.

WaMu Execs dragged before Congress today

There will be excitement in Washington today as former WaMu Execs are dragged before Congress kicking and screaming. Now that a Senate panel has had over 18 months to gather information, hopefully some sharp questions will be asked about Washington Mutual's abusive and illegal practices.

Allow me to urge the Congressional panel headed by Senator Carl Levin to refer the entire situation to the Justice Department for criminal prosecution.

'Washington Mutual "was one of the worst," Levin told reporters Monday. "This was a Main Street bank that got taken in by these Wall Street profits that were offered to it."'

Top ex-WaMu executives come before Congress
http://news.yahoo.com/s/ap/20100413/ap_on_bi_ge/us_washington_mutual_investigation

Worst Management Practices

One interesting point about the recession is that it has generated plenty of articles about bad management practices... right at a time where many managers are telling employees that they are lucky to have a job.

An article from Business Week placed "Forced Ranking" as number 1 on the list of "brainless and injurious" management practices. I have written about failures of forced ranking in the past, it is interesting to see that it is coming in regularly as one of the worst practices. Hopefully it is a practice whose time has come and is now disappearing from the corporate landscape.

10 Management Practices to Axe
http://finance.yahoo.com/career-work/article/108815/ten-management-practices-to-axe

Progress vs. the government

For centuries civilization made progress in the evolution of indoor plumbing, it only took a government act to cause an immediate setback in advancement. In 1992, the clowns in Washington mandated that every toilet in the U.S. use no more than 1.6 gallons per flush rather than the traditional 3.5 to 6 gallons. Of course the average citizen compensated for this by flushing 3 or 4 times when needed. Along with the tragedy of low flow shower heads (which simply forced everyone to take longer showers under a slim trickle of water) and low water washing machines (which increased damage to clothes and failed to clean the outfits of children who were out in the yard); the nonsensical federal acts have simply raised the average number of gallons of water used per person in each household since 1994.

A recent article from Mises spells out the failure of these government acts poignantly...

The Relentless Misery of 1.6 Gallons
http://mises.org/daily/3997

Now on Twitter

I am now on Twitter. I primarily will be posting links to good business and economic articles.

http://twitter.com/GregBoop

Investment Pyramid: Just Wrong

For many years the personal financial industry has pushed an investment pyramid as a model. This pyramid is very similar to the food pyramid that many investors are familiar except that the sections deal with size of your risk-associated investments rather than healthy eating.

The investment pyramid has primarily served as sales tool for investment firms. One promoter is Edward Jones which wraps the pyramid into a pitch for their products. The common pyramid model has several levels with the most risky at the peak and the least risky at the base. The model is supposed to reflect the size of your investments in these type of assets.

It is becoming more apparent that this standard investment pyramid may be hazardous for your financial health. The pyramid does not take into account investment horizons and objectives very well; nor does it account for significant market draw-downs.

A better model effectively turns the investment pyramid on its right side and uses the bottom axis as time horizon. This places the most risky investments further out in time and least risky up close. However there needs to be more refinement to make this model successful than just tipping the pyramid over. Each slice needs to reflect a time period and a mix of investments; furthermore the size (or height) of the slice is driven by dollar amount of the need in the particular period. This means that the pyramid may possibly no longer get narrower in time depending on an individuals need later time periods may be larger.

Take a look at a typical family living in their first home with a couple of children. Their future needs are focused on buying a larger house in five years, saving for their kids' college education in 12 years, and their retirement in 25 years. Each of these time periods represent a slice, and each should be looked at from a perspective of the worst case draw-down and consequences based on the portfolio.

The down payment for the house in five years is probably a lot smaller than the college education bill. The down payment can not afford a large draw-down without the consequence of wiping out the families ability to move to a larger home. This investment slice may be small in size but needs to be placed in an investment portfolio with minimal risk. While the college investment slice is much larger but can support an allocation with increased risk.

A better name for this new model is Time Slice Investing or the TSI model. Each time slice needs to have a size, objective, separate portfolio, and risk modeling for an investor to be successful in the long term.