Sunday, August 31, 2008

Are even the rich changing behaviour?

A couple years ago, I engaged in an rather intense discussion with a friend of mine about the future of oil prices. He holds the view of the classic peak oil theorist . The height of our debate was when I claimed that people will change behaviour and prices would come back down. He disagreed, stating that the world is hooked on oil and there is little room for change.

Now, a few years later, prices have continued to rise more (and much to my surprise). Although I continue to have egg on my face, I remain optimistic.

What is proping up my optimistic view? Well, for one, Sean "Diddy" Combs is even changing behaviour ... WATCH IT HERE (warning: course language)!! Because the artist formally known as "Puff Daddy" can't afford the $250K fuel bill for his private jet, he is once again flying commercial and calling out to "his Saudi Arabian brothers and sisters" to lend him some oil.

Thursday, August 21, 2008

Speculation in the oil market

As a follow-up to my previous posting on speculation (a.k.a betting the farm on a hope and a prayer), the world learned a little bit more about how much oil speculation was driving prices ( See the true story here.)
Today's news came one month after the U.S. Interagency Task Force on Commodity Markets released an interim report saying record oil prices were the result of fundamental supply and demand factors. The Commodity Futures Trading Commission made an unusual request last month for data from Vitol Group, a private Swiss energy company that regulators thought was helping industrial firms get the oil they needed, according to The Washington Post. The commission discovered, however, that the Vitol would be better described as a speculator, trading oil contracts to turn profits rather than assisting companies that actually needed oil delivered for their operations ( CNN Money).

So what is the big deal? Well, think "Dot-Com Bust" or the story of how one natural gas trader lost $3 Billion on price speculation (his punishment: he got fired and had to take his $100+ million he made in the previous year from bonuses because he was such a good speculator ...).

Speculation can create asset bubbles - large run-ups in asset values that quickly fall; taking huge amounts of wealth to the grave in the process. Even if there is never a bubble, it can create wild swings in prices. Most importantly when we are taking about oil or rice, the price acceleration hurts some of the poorest people on the planet and it often wipes-out the wealth (sometimes the cash socked away for retirement) of those who had nothing to do with the decisions that were made (just ask the employees of Bear Stearns).

Comments? Thoughts? Additions? Anything going on up there? Does anyone read this thing?

Friday, August 8, 2008

Til Debt Do Us Part: food for the financial soul

Til Debt Do Us Part is the one and only reality TV show I enjoy. For savers, it is probably does not peak their interest (unless it makes them feel good). But, for everyone else, a weekly "o'no-you-don't, Mr&Mrs-spend-thrift" might help keep you from over spending - it is like watching a horror movie. This show should also be part of every marriage prep-course.

Here is the shtick: (The show claims that) "Money is the number one cause of failed marriages. Rare is the couple that agrees on how the pot should be divided and the bills paid. Most families are in debt, and with debt come family arguments, tears, tantrums and marriages on the verge of divorce. To save families from the doldrums of debt, each episode of Til Debt Do Us Part follows financial wizard Gail Vaz-Oxlade as she helps families go from red to black by getting to the root of their destructive spending habits." The show's website calls Gail a "financial wizard" but she is more like the over consumption destroyer. Although I would love to see if the 50+ couples she has helped have kept their new regimes, my speculation takes nothing away from the show's power.

Why is this show amazing to watch? It gives people easy to follow tips to get their financial house in order. Although Gail does over blow the situation sometimes, I think that she does a good job of scaring everyone within listening range with her classic "if you continue spending this way, you will be in debt by [really-big-number-here] in 5 years" - I get the shakes even thinking about it. So why is this so helpful? It forces couples to add their bills subtract it from their income, and then talk about it. Most couples don't want to talk about their debt, let alone take steps to curb their spending and plan for the future ("I hate saying "no" to Jim = I would rather the bank take our house"). No really, it happens more often than you think. So, how does one get their financial house in order? The show provides some work sheets online ( here ) and a 12 step program ( here ). This 12 step program may seem over simplified to some of you, but if you read the show's comment section, it has helped a lot of people. Personally, I think people fear Gail coming to their house to talk to them about their daily Starbucks and pint of Guinness (Oh wait, might be just me).

Although this show appears on Slice, all four seasons (50+ episodes) can be viewed online ( click here and then click Full Episodes).

Wednesday, August 6, 2008

How to strike it rich in the love market

In honour of the first ever "The Economics of Sex and Love" course that will be taught at Dalhousie University this year, I would like to draw your attention to Lessons in Love, by Way of Economics . Needless to say, like the enrolment number of this Dalhousie class reflects, economists have been very successful at finding ways to popularize our discipline - let's call it: "Freakonomizing". Yes, that's a verb not a noun.

In this NY Times article, Ben Stein's proposes 8 lessons to mastering your return in the love market. I find some of his economics confusing, so I have cut and pasted a few gems and provided a bit of my own interpretation below for my dear readers.

1.) Stein's number #1 rule seems to be: Success in the love market takes smart investing and a long-term view. There are three Stein Love-vestment tips: (a) The returns in love situations are roughly proportional to the amount of time and devotion invested. If you invest caring, patience and unselfishness, you'll get those things back if the person loves you too(and if you don't ...): (b)Once you find that you are in a junk relationship, sell immediately. High-quality bonds consistently yield more return than junk, and so it is with high-quality love;(c)Research pays off. Diversification in love is impossible, so it’s necessary to do a lot of research on the choice you make. Get and give exclusive licensing rights to maximize returns.

2.) The returns on your investment should at least equal the cost of the investment and keep your expectations rational. If you are getting less back than you put in over a considerable period of time, sell-sell-sell. But remember, it is a long-run game. Stein says: The impatient day player will fare poorly without inside information or market-controlling power. He or she will have a few good days but years of agony in the world of love. To coin a phrase: Fall in love in haste, repent at leisure. (Stein's phrase - I will take no credit for that).

As we all know, the love market is a complex beast. I agree with Stein's recommendations to invest conservatively (say no to junk), do your research, take a long-term view, but because we have to put all our eggs in one basket (to make a real run at it), it means that we run the risk of losing it all if we take the plunge. While there is a market for those who believe you can buy happiness , nothing superficial and shallow lasts.

Did this post make you think of David Lee Roth too?