How Trade Tariffs Hurt The Economy

Posted on July 6, 2007 by Nirav

Since I’m not smart enough to explain how trade tariffs work (or even spell tarrifs), I’ll just shameless quote Christopher Hancock from The Penny Sleuth.

We believe trading partners are better off specializing in the good in which they are the low-opportunity cost producer. We believe restrictions on trade decrease the wealth of our country.

We believe tariffs benefit the select few at the expense of the entire economy and its citizens.

Think of it this way…simple example…China produces widgets for Wal-Mart at $20 a widget. American producers can’t do the job for less than $25. So American widget makers may lose their jobs. They plead to Washington, and Washington comes to the rescue. Congress slaps a $10 tariff (tax) on all Chinese imports. Wal-Mart now turns to the American widget producer.

But the retail giant must now pay $25 for each widget they stock. Consequently, they raise the shelf-price for widgets by 25%. Unfortunately, many American consumers simply can’t afford the price increase. Wal-Mart sales drop. The company is forced to cut costs. They lay off 10% of their work force.

The point: The number of jobs protected by import restrictions will be offset by jobs lost in other industries. And to top that, widgets are now more expensive for everyone in the American economy.

It gets better: In response, China decides to slap tariffs on American exports. Now American semiconductor makers can’t sell their products to Chinese computer makers. Sales drop. More jobs are lost.

And here’s where it gets worse: China cleverly cedes to America’s demands. The yuan appreciates 40%. Now every good we consume sporting the “made in China” labels gets noticeably more expensive. And just try buying something that’s not made in China.

Furthermore, China no longer has to keep the yuan from appreciating relative to the dollar. Meaning, China’s dollar demand drops. The fundamental need to buy U.S. Treasuries no longer exists. The dollar falls even further. Investors around the globe now requrire a higher rate of return to hold U.S. dollars. Interest rates rise. The economy slows…and so on…and so on.

There really isn’t anything left for me to say (except buy foreign-currency denominated investments)!

How Capitalism Really Works

Posted on June 25, 2007 by Nirav

I was talking to another investor about the BlackStone IPO. He was planning on investing and wanted to know my opinion. My only opinion is that the ticker should have been BS instead of BX!

Why is that? Because its a fraud. The only reason Stephen Schwarzman is taking the company public is because the market is willing to pay much more than the company is worth. The company doesn’t make any nor does it really provide any services. Here’s an interesting story about what these private-equity firms really do.

The “New Capitalism” is not only more global than the older form, it is also more focused on finance. Imagine a man who makes his living digging ditches. He may hire himself out at a daily rate of, say, $25. The old capitalists would have paid no attention to him – he is just one of millions of small entrepreneurs getting by in life.But today’s financial hustlers will spot the opportunity. Let’s take him public, they will say. We’ll raise his daily rate to $30…pay him his $25…and the rest will be our “profit.” We’ll sell shares to the public at a P/E of 20…let’s see, 20 x $5 x 250 days per year = $25,000. All of a sudden, the ditch digger has a capital value of $25,000. Then, they borrow $20,000 from a hedge fund…and pay it to themselves for structuring the deal. Now, the hustler has $20,000 in his pocket, the hedge fund has a high-yield bond worth $20,000; the shareholders have $25,000 worth of stock; and the poor man is still digging his ditches.

Then, an even more ambitious wheeler-dealer will come along and decide to “roll up” the whole industry – bringing the ditch diggers together into a multi-national consortium. Now they can all do cross-border transactions…including derivatives. And now ditch-digging is a major business, suitable for large investors…with more investment coverage and a higher P/E ratio. Soon all the world’s banks, pension funds, insurance companies, and hedge funds have some of the ditch digging paper – debt or equity – and billions in fees and commissions have been squeezed out of
ditches by the financial industry.

That, patient reader, is the way (the world-over) that industries and assets are now being bought, sold, refinanced, leveraged, re-jigged and resold. In the old days, companies went to investors or to banks for capital and cultivated a relationship with them that was long and fruitful. Now, it’s all wham-bam-thank-you-ma’am capitalism. Inquiring capitalists now only want to know one thing – how fast can we do this deal? How many points can we get out of it and how much leverage can we get? And whom can we dump it on, when we’re done?

Taxes Suck! (And so does Aurora Loan Services)

Posted on June 8, 2007 by Nirav

I hate taxes. And I hate filing them

For one I feel the government doesn’t know how to properly utilize the money it gets. Unlike Australia, where the budget is in a state of constant surplus, our illiterate politicians can’t add and are always running a deficit. And as a result, they always begging for more money.

Another issue is with the reporting of taxes due. As the owner of several rental properties, I get to claim the interest on the mortgage payments and the taxes I pay. The mortgage companies send out a 1098 form every year. Unfortunately they do 3 things that piss me off.

1. They keep selling the mortgages to other companies.
This means I not only have to keep track of the payments(which I automate through online bill pay), but now I get several 1098s for the same property.

2. They don’t print addresses on the 1098 statements.
This means I have no fricking clue which property the statement belongs to and I have to waste time matching up the statements with the properties based on 9 digit account numbers. (really irritating when you have 6 times as many statements as you do properties!)

3. They make stupid mistakes.
Occasionally, they’ll forget to include the amount of taxes paid or insurance paid. If you overlook that, you’re out that deduction. Yes, it looks like you made more money but thats a BAD thing at tax time!

If my Adjusted Gross Income[thats income after deductions) isnt’ under the federal guidelines for the poverty level, I’m pretty upset. And now the wife had to go get a job which totally pushed us out of the poverty level! I told her if our tax bracket went too high, I’d quit my job in protest! (Of course, that didn’t go down too well).

And whats up with the schedule D filling. The government wants me to file every single damn trade I placed??? Well ok, they don’t trust us to accurately report it, whcih is fine since we don’t trust the government to tell us the truth either. But why the hell can’t the brokerage firms provide a simple spreadsheet of the transactions? (without charging for it?). Its all computer-based trading and they all have the records in their databases.

I actually found out that Interactive Brokers (the company with the worst interface and lousiest customer service, but cheapest commissions) actually provides a prepared schedule D!!! Thats awfully nice of them.

Especially since ~~Datek~~, ~~Ameritrade~~, TDAmeritrade charges 10 times the commission and won’t provide it. Infact they got the 1099 wrong the first 3 times!

Anyway, I was up until 4:30 am doing my taxes. One of the mortgage companies fraudulently decided that my 5 year ARM was a 2 year ARM just because the date printed on the loan docs was wrong. The fact that they never offered a 2/1 ARM doesn’t matter. Aurora Loans got to screw me and the truth can be damned! Anyway, my new rate is now 10.3% on the 1st loan, and 9.5% on the 2nd loan!

Aurora also wanted nearly $10,000 to refinance a $250,000 loan! I went to Countrywide instead but they need to see my 2006 tax returns to fund the loan. Hence the rush to get the paperwork all done so my CPA can file it.

Anyway, thats it for this friday’s edition of The Weekly Rant!

Learning From The Frogs

Posted on June 4, 2007 by Nirav

Here’s a riddle:

How many Frenchmen does it take to defend Paris ?

Don’t know, its never been done!

Well, Bill Maher is in a more generous mood than I am. Check out his very accurate and very funny commentary on what our politicians could learn from the French.

Is the US Bankrupt?

Posted on June 4, 2007 by Nirav

According to the USA TODAY, dated 6/1/07,

The federal government recorded a $1.3 trillion loss last year – far more than the official $248 billion deficit – when corporate-style accounting standards are used, a USA TODAY analysis shows.

The loss reflects a continued deterioration in the finances of Social Security and government retirement programs for civil servants and military personnel. The loss – equal to $11,434 per household – is more than Americans paid in income taxes in 2006.

“We’re on an unsustainable path and doing a great disservice to future generations,” says Chris Chocola, a former Republican member of Congress from Indiana and corporate chief executive who is pushing for more accurate federal accounting.

Modern accounting requires that corporations, state governments and local governments count expenses immediately when a transaction occurs, even if the payment will be made later.

The federal government does not follow the rule, so promises for Social Security and Medicare don’t show up when the government reports its financial condition.

Definitely sounds like the government is already bankrupt. Of course, it can always print more money, so it’ll never really be bankrupt. The only disadvantage is that the US Dollar will fall in value against other currencies and against gold and other global commodities. Its already fallen signficantly against european currencies and also other currencies like the Indian Rupee and Australian Dollar. And the Canadian Loonie is the strongest its been in 30 years! Not a very comforting trend!

Food And Drug Chief Gets Death

Posted on May 30, 2007 by Nirav

China sentenced its ex-food and drug chief to death for accepting bribes.

Quite a harsh punishment for accepting $800,000 in bribes. Pity the US doesn’t have laws like that. It would do wonders for the integrity of system. Here we’ve become conditioned to accept that politicians will lie and accept bribes and grant favors to people who grease their palms.

I’m against capital punishment because the cost of error is too high. However, in the case of politicians, I’m willing to make an exception. Corrupt politicians should be given the death penalty or reduced sentences for lesser crimes.

Some of the other possible sentences could be
1. Asset confiscation and a life as a social worker on a $24,000 salary. No other income or jobs permitted.
2. Public flogging
3. Exile to a deserted island.
4. Neutering

What do you guys think?

Why High Gas Prices Don’t Matter

Posted on May 25, 2007 by Nirav

A lot of poeple have been complaining about the price of gas at the pump. In fact, Congress has enacted an anti-gouging law that provides upto 10 years in jail and upto $150 million in penalties.

But my contention is that high gas prices don’t make any difference.

Gas isn’t expensive
People are willing to pay $4 for a cup of $tarbucks coffee. That works out to about $1,250 per barrel. Compared to that, $65 for a barrel of light sweet crude sounds pretty cheap!

Besides this, compared to what 93% of the rest of the world pays at the pump, its still cheaper in the US.

High gas prices do not cause inflation
Some of you might think that since we use oil and gas in almost every aspect of our lives from commuting and transporting products to making plastics and profilatics that an increase in the price of oil would lead to inflation.

Well in theory thats true, but we’re experiencing a much higher rate of inflation through the devaluation of the dollar and mindless government spending (through never-ending government expansion, ill-thought out entitlement programs and a very expensive war). The inflation caused by higher oil prices doesn’t compare to this.

The higher oil prices don’t affect our lifestyle
The only people who really feel the pinch at the pump are the people who drive SUVs and SAVs (Suburban Assalt Vehicles). Of course, if they couldn’t afford the gas they wouldn’t have bought them in the first place.

And if they really couldn’t afford them to begin with, they should sell them and buy a Honda Fit, a Toyota Yaris or a Nissan Versa. They could also cut down on the number of miles they drive and walk a little bit too. (66% of US adults are overweight or obese).

Before you start complaining about poor people having to spend an extra $1,000/year because of higher gas prices, I know a lot of poor people who drive $25,000 cars. If they spent $15,000 on one of the cheaper cars mentioned about, the $10,000 they’d save would pay for nearly 100,000 miles worth of gas. Yet another reason to sell your car if you can’t afford it.

Funny how some of these “poor” people I know can afford a $1,000 Plasma TV and $100/month for every single cable tv.

What about the really poor people?
There are probably a lot of poor people living below the poverty level for whom even a $200/year increase will break their budget. Sadly, these people have bigger problems. I can only suggest two things.
Buy a bicycle and read this article on how to live off $12,000 a year.

Gas prices are going to go even higher. Most of the oil’s producers are at maximum capacity and the demand from India and China is growing exponentially. If you’re feeling the pain now, imagine what it’ll be like in a couple of years when oil is $100/barrel and you’re paying $5.50 at the pump?

Paris Hilton Gets A Nude Sculpture

Posted on May 10, 2007 by Nirav

Shock scupltor Daniel Edwards just released a Paris Hilton Autopsy Sculpture. She’s naked, wearing a prom-queen tiara, here legs spread open and has a cellphone in her hand. Her lovable doggie, tinkerbell is also featured. Its in pretty poor taste but he trys to put a positive spin on it by saying it’ll deter teenage drinking. (yeah, just like trailer-trash barbie deters promiscuity)
Anway, you can check out the picture and decide for yourself.

Daniel Edwards is most famous for his god-awful nude Britney Spears giving birth sculpture.

Picked Up A George W. Dollar Coin

Posted on March 6, 2007 by Nirav

I stopped by the bank and picked up half a dozen new presidential $1 coins. Don’t know why some people are selling them on ebay for more than they’re worth but I guess someone’s stupid enough to pay that. They’re not all that impressive, except the “In God We Trust” part is along the rim of the coin, which I thought was pretty neat.

What I don’t understand why the government is wasting money minting coins when we’re moving more and more to a cashless electronic society.

What use is a new dollar coin? Most people don’t like carrying around a pocket full of coins, which was why paper notes were invented in the first place. Notes are lighter, easier to carry and don’t roll under heavy appliances when you drop them. Most vending machines don’t even accept the old Sacagawea coins so I doubt they’ll be modified for the new ones. And has anyone ever tried to tip a stripper with a dollar coin?

Walmart Rant

Posted on December 3, 2006 by Nirav

In a previous post about Walmart, someone complained that Walmart was the evil corporation that needed to be kept out of town by the local government due it is unfair employment practices.

I don’t know why people are anti-business. We saw the same thing with the oil companies recently. Policitians are also quick to bash a profitable company and give hand-outs to companies that should be allowed to go under. “Walmart sucks because it doesn’t pay its employees $30/hr and give them a ferrari or lamborghini for christmas. Of course I don’t shop there and so I don’t care about their prices. All I care is that Walmart takes care of my constituents and get me re-elected.”

Walmart’s job as a public company is to increase shareholder value. It does this by reducing all costs across the board. If you don’t like this, don’t shop there or work there.

Complaints about Walmart putting mom & pop stores out of business aren’t valid. If you can’t compete on pricing then compete on service. If you can’t do that, move into another business. That’s how capitalism works. If you don’t like that, there are several socialist/communist countries which would welcome you.

Complaining that Walmart puts people out of work is equally stupid. Henry Ford put horse and buggy drivers out of business. John Deere put thousands of farm hands out of business. Maybe we close down all the factories and go back to the stone-age?

Having the government keep Walmart out of town is not the solution. We’re currently in a cycle where its cheaper for us to buy Chinese goods than it is to make them here. That’s the real problem. And because of it millions of manufacturing jobs have been lost and are continuing to be lost. But the government is fixing this problem by devaluing our currency as fast as it can! Eventually our currency will be worthless and a lot of manufacturing jobs will come back!

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