Grameen Bank Takeover in Bangladesh: Bad Economics.

I wrote earlier about the great work of the Grameen Bank and the Grameen Foundation, groups I have supported for many years.  Founder M. Yunus invented the concept of “microloans”, a tactic that has been helping the poor for many years.   In 2006 Yunus received the Nobel Peace Prize for this pioneering work.

Unfortunately the Bangladesh Government is now in a power play to take over the bank, jeopardizing the welfare of the millions of women and their families who benefit from the bank.

I’d encourage anybody interested in the well being of poor folks to write the government of Bangladesh here:  , urging them to reconsider this bad takeover move.

Here’s the letter I wrote them in June , feel free to copy from it.    I think more important, however, is to write your Congressperson and your Senators to let them know this issue *matters to you*, and that the USA can stand against unwise bureaucratic power plays that will reduce the effectiveness of the Grameen Bank – perhaps even destroy it.

Here are contacts for your Congressperson:

Your Senator:

You don’t need to be Shakespeare here – just let them know you are concerned about the Grameen Bank Takeover and you’d like to know what they are doing about this.

At my son Ben’s commencement address the speaker did a great job of talking about the difference between “first world problems” and “developing world problems”.    Here, we fret over standing in line or the color of our clothes or the price of a fancy restaurant.    There, people worry mostly about feeding their kids, getting them schooling, or surviving   diseases that are virtually unknown in the USA.    Sure we have real problems too.    Health issues, abuse, education, and more.   But on average our challenges are far less than in most of the rest of the world and we can and should support efforts like Grameen that are building viable micro-economies based on free enterprise and entrepreneurial spirit.  These are super low cost, high ROI approaches to poverty and they deserve our support and our political klout.

… Hey, thanks!

To Prosper or NOT to ?

Last year I began an experiment with PROSPER peer to peer lending.    The concept is great – cut out the banking middlemen and middlewomen, delivering higher returns to lenders and more borrowing power to investors.     Years ago PROSPER struggled with its initial implementation, running into SEC issues which, I think, related to them effectively overreporting the interest PROSPER lenders could reasonably expect to get.   Part of the trick here is that as far as I can tell their are a LOT of borrowers on Prosper who have no plans to ever repay the loans.   They are assuming, perhaps reasonably, that collections on these small, unsecured loans in this wild online environment will be inadequate and they’ll simply default on them without much consequence.
My strategy last year was to start by lending a total of $500 to the  “higher risk, higher return” types of loans.  After noting that the return appeared positive I added $2000 to this amount for a better test of the overall return.
I pretty much forgot about this experiment until last week when I logged in to see what was going on with my PROSPER investment.   Unfortunately  it’s very hard to tell if the return is even positive.  They provide me with several numbers but they are confusing. The 4% return they cite seems like the return I’m getting so far – clearly NOT good enough to hassle with this and take the risks,  even though it appears I also have an extra 2% from “bonuses” that are given for investing in certain loans at certain times.
All that said, it’s possible I’m going to start to make a much higher return now that the “bad loans” appear to have defaulted.   I intentionally picked risky loans that said they’d have a much higher net return  and I’m still not clear if Prosper reflects this in the current stats.     The average “expected” return on my loans per Prosper would have been well over 10%, so if I wind up with 4%  it would seem Prosper could be up to their old trick of under-reporting the risks and/or inflating the expected returns.
Note that with fairly small investments – like my $2,500 in this Prosper Experiment – your TIME starts to  matter more than extra money.    Making an extra 1% on 2500 is only $25 per year, so it’s worth an hour or two of hassle time but NOT WORTH many hours of hassling, extra tax issues, etc.
I’m skeptical that Prosper offers more than a few extra percent if even that much.  THUS thus it would only be worth hassling with if you were investing tens of thousands.   In THAT case there is some serious uninsured risk involved, so I’m leaning against Prosper until I see more results from others who, like me, have tested them out and hopefully, unlike me, can figure out the Prosper reporting.
Prosper loans are often paid early or defaulted, which complicates the earnings calculations a lot.    They also do NOT pay interest on the ‘float’, or time between funds going into your account and getting invested.   Thus you’ll always have some days – perhaps months – where you earn 0% interest.   Not a big deal in the current interest environment but even a few weeks at 0% will trim a total rate down quickly.   I think there are “auto invest” options to lower this float time and I don’t think it’s scandalous – but it’s not a good thing.
Also, the tax issues alone appear like they may be a major hassle with Prosper.  I think one may need to report the total interest and then deduct the “bad loans” as capital losses or gains to avoid overpaying on interest received.  This is NOT a simple deal since one generally funds dozens of notes per year.   I’m still confused by this part of the PROSPER adventure.
Of course if LENDING is a bad idea at Prosper, Borrowing may be a GOOD idea, though I’m wondering if those who simply default immediately are the big beneficiaries here.    The interest rates on borrowing seem incredibly high with Prosper – much higher than a home equity line or even many auto borrowing situations, so if you pay it all off you are going to be paying … a fairly high rate of interest on these small loans.
Overall I’m thinking this may be a “high risk” loan environment and therefore not all that Prosperous one for anybody.
I’ll have more in another post where I’ll show my statement to see if others can figure it out.

USA Debt Rating Downgrade to AA+ is from our failure to cut defense and entitlements

S&P’s decision to downgrade the US debt rating from AAA to AA+ is very unwelcome news but it should not surprise anybody, especially in Washington where neither party has been willing to tackle the deficit or the debt in a responsible manner.

It’s time to cut the only two things in the budget that really matter – the bloated portions of Defense and Entitlements.    Even estimating (and then cutting back) the bloat at 10% – absurdly low given how recklessly this money is spent – we could solve all deficit and debt problems in less than a decade.   DO IT, DAMN IT!

The Tea Party’s was right that debt and deficit are major concerns, but their approach to solving the problem has been almost infantile, lacking in strategy as well as substance.    They won’t cut defense – clearly required to solve this problem unless you raise taxes which as they correctly note brings a host of other problems into the mix.   Defense spending is so high it’s become counterproductive, creating blowback and international tension which is mostly a function of our own reckless big spending in hostile territory.

One does not have to be an isolationist to see that it’s time for a much more strategic spending focus.   Troops can be paid well and protected – these portions need no cuts, but operations and maintenance budgets in each of the services are where the big money lies, and where the big cuts won’t create trouble for policy or troops.

The solution is pretty obvious to many of us out here in the real world, where two things are crystal clear:   1.  Entitlements are out of control.  The prosperity the USA has enjoyed for over a century as the kingpin of the  industrialized world is winding down in favor of spreading the wealth around the globe, especially to the developing countries of China and India.   This prosperity allowed us (and by “us” I mean everybody – from poor to rich) to enjoy health, welfare, education, and retirement benefits the rest of the world could only dream about.      Liberal middle class folks are whining too much about how they might lose benefits they never paid for – much of this in the form of “defined benefits” where their contributions won’t match their benefit so it’ll have to come from future taxpayers.   Social Security has this problem, but it’s easy to solve by lifting retirement age a few years for those who can afford the wait  OR doing a ” means test”  OR taxing higher income beneficiaries.   If we do nothing the Social Security trust fund will run out in under 20 years according to most estimates.      The fund is actually growing now but demographics in the form of fewer workers and more recipients will soon overwhelm the system.   Unlike a well managed system, Social Security has promised more benefits than incoming payments can support.

Summary:   Simple solution is to cut bloat in the two big ticket items of defense and entitlements.    Problem solved, AAA restored.  DO IT.

Financial Planning in Southern California

It’s always fun to do a shout out to friends and family who have great services and/or online resources. I’m sometimes reluctant because this blog has my own quirky views which may not line up with their prospective clients, but I think everybody here is sharp enough to know that a “shout out” and endorsement at a personal blog does not tell you anything about the politics of anybody.

Today I wanted to note my cousin Ginita Wall in Southern California. She’s a CPA who has been writing books and specializing for many years in helping her clients manage their resources effectively. Although I’ve got a good grip on the basics of personal finance it is always impressive to talk with real experts like Ginita who understand many of the specialized tax and legal nuances you encounter when managing the portfolios of clients.

Her website is: Plan for Wealth She also co-manages a project that focuses on helping women learn about financial planning called WIFE for Women’s Institute for Financial Education.    Even today, many women find after a divorce or death of a spouse that they’d left much of the financial management and planning to their husband.   This can have serious negative impact.

Another reason to pay more attention to your personal finances today is that there seem to me to be more scams  around than ever – I think it’s one of the down sides of the rise of online activity.   Even trusted family and friends may lead you astray if they fall into the trap of the many online “get rich quick” schemes which are in my experience *always* a waste of time and money.    Ginita’s books offer common sense approaches that help people protect and build wealth over the long haul and manage their finances into post-retirement.

The best 2008 investment advice was to stuff all of your money into your mattress.

For some time, including presently, investment advisors warned people about losing ground economically by failing to invest their money.    It was and is still argued by many ‘pros’ that only the foolish or insane who feared the integrity of the markets  would stuff their cash in a mattress for a zero percentage return.

But guess what?

Those crazy folks who stuffed their US dollars into their mattresses did well last year compared to the pros.    And not just “pretty well”, the investment crazies had a spectacular year compared to most of the brilliant minds on wall street, the silly financial reporters on CNBC and CNN (yes I’m talking to YOU Ali Velshi and Michelle CB !) and your local financial advisor all of whom took as gospel the idea that you need to invest your money in the markets and – depending on your age – generally weight that investment towards equities.

I’m not saying all those “pros” could have known this was terrible advice for 2008 but I do hold the financial news reporters, TV pundits, SEC, Wall Street, Democrats and Republicans very accountable for failing to at least *discuss * the many smoking guns that probably would have given us enough insight to create a soft landing scenario rather than what was very close to a global financial catastrophe.

Let’s do the math (for the sake of simplicity I’m avoiding currency issues though they’d also very much favor any international mattress stuffers out there if they used dollars which are generally up compared to most other currencies):

Insane mattress stuffer rate of return in 2008:  0%

S&P Index Rate of return:   -37%

Nasdaq   -42%

DOW  -31%

Thus our insane investors outperformed the DOW by 31%, the S&P by 37% and the Nasdaq by a whopping 42%.

Almost universally the “stuff your money” advice would also have thrashed the advice of the “pros” thanks to commissions, Bernie Madoffs, etc.  My understanding is that those factors generally mean that managed yields are below the index averages though obviously there are some exceptions.    However I think the lesson from the meltdown, the generally “trailing the news” TV pundit advice, Madoff, and everything else is that even though 2008  was hardly a typical year, it’s always been true that you are very unlikely to pick an “expert” who will  outperform the averages over time.    There are such people, but the odds are very much against you picking one because there is little reason to believe that past investment records give much indication of future results.   ie it may not even be possible to identify great stock pickers until … after their records are complete.

I’m increasingly convinced that if you examine most success stories you will find moderately clever folks who were lucky enough to be positioned in the path of opportunity rather than brilliant folks who were the architects of their own fortunes.   I’ve noted that most super successful folks acknowledge this luck factor, where most modestly successful folks give themselves quite a bit of credit for lucky guesses or good fortune coming their way.

Unfortunately most studies of “success” tend to look at successful enterprises and then generalize from that information rather than do the far more interesting and relevant  study which would examine a huge number of successes and failures and look for the factors that seemed to drive each one.

Peter Rip writes a great blog about Venture Capital investing and usually I like his take on things but was surprised to hear his pollyanna optimistic assessments for the coming year in the Technology VC world.   He predicts that:

Many good businesses will be left on the beach as the rest are washed out to sea – the remaining VCs will invest in them and both the entrepreneurs and VCs will get rewarded as the survivors gain market share and become successes in the economic recover.

Although Rip’s  right that there will be *some* companies left standing I think “many” is way too optimistic.  Sure there are always at least a few great opportunities with great challenges, but unless we see more stability and less uncertaintly in the global biz climate I can’t be this optimistic about high potential returns, let alone positive returns on most technology business investments in 2009.      I’d predict that 75% or more of  all the VC funded startups alive now will be dead by Jan 1 2010 unless they are currently turning a profit.  Personally I’m more bullish on residential real estate than technology startups, which increasingly face huge problems from increasingly defective ad-funded business models.

Another factor depressing potential returns is that we will have far, far, far more government money in many business equations than at any time in history and one has to wonder how Government sponsored businesses may turn out as their success increasingly will come from  pleasing bureaucrats (who are often very antagonistic to private wealth) more than shareholders.

But hey, thanks to Peter for a dose of hope for 2009 even though I’ll be happy with anything over 0% for this year.   Last year the crazies had the best investment advice and it was *very good* advice in the sense it outperformed the markets handsomely.    For 2009 who is to say the “experts” will fare any better than the crazies?

DIGG Losing Money Despite Huge Traffic

I was floored to see that DIGG, a key darling of Silicon Valley and arguably one of the key forces that has shaped online social media, is losing a lot of money on abysmal revenues.

These numbers are from Silicon Alley Insider quoting a BusinessWeek article:

  • Last year the company lost $2.8 million on $4.8 million of revenue
  • In the first three quarters of 2008, Digg lost $4 million on $6.4 million of revenue.
  • Digg wanted to sell for $300 million last year, but took funding this fall to set its valuation at $167 million

All this when DIGG sees about 23 million unique visits per month according to QuantCast and some 30 million according to DIGG.       Silicon Alley reports that DIGG’s expenses are some 14 million annually and wonders where all that goes.    Me too because unlike, say, YouTube I do not think DIGG’s hosting infrastructure would have to be all that massive, and with content from users one has to wonder where the big money goes at DIGG.

More interesting however is that modest revenue number.   $4.8 million in revenue on some 250-360 million visits.   If we assume only 2.0 page views per visit  and 250 million visits over the year DIGG is making about 5 million total on 500 million page views, or just about a penny per page view or $10 CPM.

This is probably overly generous (DIGG says they have 30 million uniques and they probably have more than 2 pageviews per unique).   However if true that’s actually a fantastic CPM given that the DIGG audience trends very young and presumably is not the key demographic for most advertisers.   Although many prestigious and highly targeted websites tend to charge $30 CPM and up I’m confident that number will decline as advertisers realize how unlikely they are to have positive ROI at that CPM.     DIGG appears to be doing better than other youth focused gaming sites where advertising can often run below $1 CPM, in some cases even challenging sites to even break even on server and bandwidth costs.

Related:  November 2006  – Owen Byrne of DIGG

Microsoft to Aquire Yahoo Search for 20 Billion… or not?

While the Times of London is reporting that Microsoft is close to announcing a Yahoo search aquisition at 20 billion with a slew of details suggesting they have a lot of inside information, Venture Beat is suggesting this might be a bogus report as they’ve been told by a key player in the deal, Ross Levinsohn, that he knows nothing of this.   Although it’s possible Levinsohn is … covering for the deal it seems odd he’d issue a flat denial if there was something to the rumors.

My wild guess is that the Times had a hot tip about one of the dozens of potential deals that are surely percolating around Yahoo as the stock (and thus buyout value) dips to very low levels, and that they ran with it rather than spend much time researching.   This has become a major pitfall of “real time” media, where there is increasing pressure to shoot first and hope your story is correct later.   Another possibility is that this is a carefully contrived rumor to pump and dump the stock on Monday – without more denials this is likely to spike Yahoo a few bucks or even more Monday morning.

Disclosure:  Long on Yahoo

How low can stocks go? DOW drops to 7997. Panic or just … Palindromic?

Answer:  Very low, though I wildly speculate (putting me in the same expert category as any expert you can name) that DOW at 7000 and S&P at 700 will be the bottom of this megabear market, after which we’ll continue to see major trouble with the economy continue for at least 2 years during which many businesses will die, successful ones will consolidate and just keep in the game, and a handful of nimble and clever new businesses will thrive and lead the new “post recession” economy forward, probably based on impressive technological innovations now testing in a handful of big company R&D departments and literally *millions* of small business efforts around the globe.

Thanks to the internet, the rise of highly social media, and the plummeting cost of powerful computing I remain optimistic that technological innovation will pull us out of this crisis and remain for yet another century the key force behind most socioeconomic progress.

What’s pushing things down in stocks?    I think the main factor is simply that the market, which is predictive rather than reactive, overvalued how fast technology would trump other considerations and continue to lift mediocre companies ever higher.    It’s not as if many companies were doing profoundly brilliant stuff out there – on the contrary the auto companies were up to the same old stupid nonsene they’ve been doing for decades.   Financial companies were gambling with Credit Default Swaps and fueling the mortgage crisis with fundamentally irresponsible and misguided profiteering.   Even high tech companies, home to many of the globe’s best and brightest working for Yahoo, Intel, [Google?], and MSN found themselves in huge battles to protect market share and profitability while containing the onslaught of online spam.    Google may be something of an exception here as their profitability and advertising brilliance has – until recently – kept them squarely above much of the fray and on the path to more innovation.

About eight years ago this foolishness led to the bubble of 1990 where the internet company valuations were out of line with their potential for innovation.    The commercial internet revolution was an amazing thing in the 1990s and remains the most profound new development in history, but the companies were not all that inspired and most companies were destroyed by the very markets they had convinced to fund them in the first place.

So a far better question than “why are my stocks dropping?” is “Why were all these companies valued so highly in the first place?”     We needed a contraction to square the values with the prices, and now we are watching that happen.

Why 7000 DOW and 700 S&P?    At that point the markets will have dropped just over 50% from the highs of a few years ago.    I see that as a significant practical and psychological milestone.    “half off” is a very accessible notion as we know from retail, and we already know there’s a lot of money waiting on the sidelines to buy into a “market bottom”.     It’s reasonable to assume that at least some, and probably many of the companies hammered by this have been penalized irrationally by the broader market downturn.  As prices drop to 5 and 10 year lows some of these bargains will be irresistable to those with cash on hand, and this buying should  stabilize the market.

Will it rise quickly from 7000?    I say no – I think the globalized chickens have largely flown the coop and many of the unfair advantages we have enjoyed as Americans … will be no more.      I see no major depression looming and I see the USA as the economic “safe harbor” and leader for at least the next decade, but the days of easy prosperity are probably gone for some time so … buddy …. can you spare …. a dime?

Debate about Joe the Plumber could not get any dumber

Of Plumbers and Presidents

The inane stupidity of the “Joe the Plumber” discussion tells us a lot about how out of touch the campaigns and media are with America, and frankly how little most Americans seem to understand about small business taxes. After listening to CNN’s Lou Dobbs’ take on the situation and hearing McCain say he’s out to help the Joe the Plumbers (implying his tax plan would do more to help plumbers than Obama’s, which is false and almost certainly a campaign lie) I had to challenge the economically senile statements of these two rich guys and chime in with the truth.

My take is that neither left nor right wing seems to be making sense about all this. Joe the Plumber is relevant to the current debate because he is representative of some middle income Americans who make ballpark of 40-80k per year, would actually benefit in the short term from Obama’s tax plans, but don’t share Obama’s sensibilities about how to run country or the idea that even greater levels of deficit spending than McCain is proposing are a good idea.  It’s OK for Joe to be for McCain, but if he thinks that is to his tax advantage he is mistaken.

Here’s a better authority than me – Nobel economist Paul Krugman in NYT writing about the plumbing income issues.

So, with average plumbers making about 47k clearly he’s *currently* better off under Obama’s plan if taxes are what we are talking about. But what if he buys the business?

Details are not all that clear but it appears the business Joe wants to buy has 2 plumbers. Let’s assume they also employ one office person and one helper. Even assuming they can bill those plumbers at $100 per hour, the helpers at $50 and everybody works a full 2000 hours per year (this is very unrealistically high work hours for this type of biz – half this would be closer to normal). But even optimistically the biz probably pulls in about 500k per year.

Assuming that employee benefits and payroll taxes are about *half* the billed rate to the two plumbers employees we have 250k labor expense for workers. Add 30k for the office staff and another 50k for advertising, building, insurance, and more (it’s probably twice that, but I’m being very generous to McCain supporters here).

Revenues 500k – Expenses 330k = Taxable income 170k

So even if he buys the joint Joe the Plumber won’t be making 250k. Sure a few plumbing businesses with several workers might be making that, but the small business guys McCain claims he represents would likely be better off under Obama’s tax plans. Most are are mom and pops making far less than 250k.

Lou Dobbs and some McCain folks have *idiotically* asserted that a lot of *plumbers* make 250k. If you believe this there is only one word for you: Stupid. Plumbers rarely bill at over 100 per hour and there are 2000 hours in a year – do the math because even if they have zero expenses they don’t make 250k and those who think they do are really math and business savvy challenged (e.g. Lou Dobbs who has NO business talking business).

Average plumbing salaries in Ohio are under 50k per year – similar to what teachers, police, fireman make.

To me it is sort of pitiful how folks who will pay *more* under McCain are defending his tax plan because they just don’t understand business taxes. It’s fine for a plumber to support McCain but it’s misinformed to think Obama’s the big bad tax man for the middle class.

Joe is not a small business – in fact he’s not even a plumber. He was (probably wrongly) thinking that if he bought the plumbing place he worked for he’d have trouble paying Obama’s taxes, and Obama foolishly just assumed that was true.

Joe may want to vote for McCain if if NON TAX issues like abortion and gun rights are paramount to him and there are many other reasons Joe the Plumber might want to vote for McCain.

Taxes, however, are NOT one of those reasons.

Caveat: There are some capital gains tax issues that complicate a really good analysis of all the details here since they’d come into play much later and it’s not clear to me how either plan would treat sale of small businesses even assuming the plan was still in effect when they were sold.

Caveat 2: Taxes and prosperity are tricky. Some think that taxing the rich inhibits economic development to the degree it reduces *everybody’s* prosperity. e.g. if his job is lost Joe the Plumber makes nothing.

Newsweek’s Zakaria on the Economy

Fareed Zakaria, one of the best observers of the global landscape, suggests that if we curb some of our bad borrowing and spending habits we may emerge better and stronger from the current fiscal crisis:

If we wanted a bigger house, a better TV or a faster car, and we didn’t actually have the money to pay for it, no problem. We put it on a credit card, took out a massive mortgage and financed our fantasies. As the fantasies grew, so did household debt, from $680 billion in 1974 to $14 trillion today. The total has doubled in just the past seven years.

I’m not as optimistic as Zakaria that after the current crisis ends we’ll return to the what appeared to be a vibrant economy because of the other issue he discusses – failing to address the herd of elephants in our finanacial room – a 10 Trillion and growing budget deficit with an annual deficit that continues to skyrocket after the disasterous spending recklessness of *every administration* since Reagan with the possible exception of Bill Clinton (when we did not borrow nearly as much as we had been, I think largely thanks to the huge increasee in Tax revenues that came from the positive investment climate.)

My take is that our economy has been challenged for some time, with prosperity manufactured to some extent by simply pushing expenses forward to our kids.    McCain’s call for a balanced budget in four years is admirable in this respect, and it is unfortunate that so few truly think that is realistic.    It is actually realistic but would require massive cuts in military spending- the sacred cow of fake conservatives who are (correctly) willing to slash entitlements but (stupidly) think that military money is spent wisely (news alert fake conservatives – it is NOT spent wisely and this is *totally* well documented). Not only have we been living on debt as individuals, but we’ve been living on debt as a society.   This is not sustainable for the long term, and we may be seeing the early signs of the massive challenge we’ll face if the world starts to lose faith in the US economy.

That won’t happen anytime soon, but unless we bring debt and spending into focus both individually and collectively it’s going to happen eventually. It’s easy to predict we won’t change our habits all that dramatically, but hopefully enough for a soft landing as we come down from our lofty heights as the world’s key economic and power player.

Fareed Zakaria in Newsweek