Kaulapi World

One of the gaps that I noticed from the first day of Econ 101 was the concept of “all things being equal” that applies to every economic model to correctly map out an economic theory to precision. Here is the supply curve and here is the demand curve, the point they meet is the equilibrium, sets the ideal price for an efficient market. In a way, Keynesian theory states that all things being equal, recessions and depressions can be avoided only by increased deficit spending and ever increasing access to credit.

What I took away from day one was that this assumption totally ignores the limitations to any theory that assumes laboratory-like conditions to describe something as subjective and chaotic as human behavior. This is the same criticism that hard science lobs at the soft sciences as being impossible to test empirically. Almost like having an inferiority complex to the hard sciences and overcompensating the quantitative analysis at the expense of the qualitative analysis of human behavioral nuances, economics runs the risk of getting an incomplete conclusions, and at worst, ignoring contrary evidence.

Another gap that I came across almost immediately was the concept of the rational market participant, that is, an individual given a certain amount of information about a market, will only pay a price accordingly to the supply and demand in the market. It goes to the heart of the assumption that people act rationally. I remember having a hard time accepting this theory on its face on the basis that very few people I know of act rationally at all when it comes to personal finance. You only have to take a look at the consumerist society to see how irrational the decisions that all of us make when it comes to buying things. Also, some of even the most established and respected economists have a difficult time maintaining their own personal finances, despite the assumption that they of all people should be in the best position to act rationally in a market.

Again it goes to the oversimplification of human behavior to force an empirical theory with the goal of being able to test it. Rather than just admitting that some systems may be to complex to quantify with a high level of certainty, economics is pushed out as a hard science and backing to many social policies and initiatives. Experimenting with these theories might be ok on a smaller level, given the risks can be assessed, and the decisions can be made on those risks. But really is it worth spending trillions of future taxpayer dollars that we don’t have on betting a soft science theory? Especially when we don’t even have the money to begin with, and are instead mortgaging the financial future of our unborn children, grandchildren and great-grandchildren?

All things being equal, that sounds pretty crazy, at the very least very reckless and irresponsible.

I find it interesting looking back at how I have developed my own views toward economic theory and analysis. I was always most interested in the human interactions to markets and economic policies, such as game theory, diminishing utility, and moral hazards. Over time I’ve come to the conclusion that people cannot be oversimplified into an economic model simply through quantitative analysis, and even more so any model that makes broad assumptions about human behavior is flawed and is vulnerable to the unseen, or black swan event.

Some background: I came to study economics relatively later in my academic training, partly because my first formal class was in high school disappointed me greatly as I thought it would be more of a course on personal finance and investments, instead it was focused on macro level with exercises on international trade and role playing on global markets. I think this course may have turned me away from taking econ in college. It wasn’t until after my undergrad that I took the basic college micro/macro econ as an unclassified graduate student at KCC. Later in grad school for policy analysis I got more robust training of micro and macro econ, along with statistics and econometrics. All of this in retrospect fit very well with the traditional Keynesian theory. In law school I picked up more of the operational understanding of economics through the regulation of financial instruments and commercial transactions, liabilities of creditor and debtors, and resolution of defaults through foreclosure and bankruptcy. Most recently, I’ve been learning about the personal finance side, retirement accounts, pensions, and labor law, all coinciding with most recent economic downturn.

There’s also the life observations, as much of my training has coincided with historically unprecedented economic times. My staple economic classes coincided with the government taking unprecedented steps monetary policy in more than 50 years. It was common for a professor to admit, after giving a lecture on a well established and accepted theory that what we were seeing in the real world at the time had never been seen before, and it immediately gave me cause to be skeptical of the theory I had just learned. In recent years following the dot-com boom and bust I’ve watched as the housing market has taken off and crashed hard, seen how many previously trumpeted assumptions and absolutes about personal finance and investing have been proven to be very very wrong. More than a few people I know have been hurt or crippled by ill-gotten financial advice that was seen as golden just a few years ago.

So it should not be surprising that from early on I started noticing some gaps in the economic theories and models that make up the generally accepted economic standard of today, which is deeply rooted in Keynesian monetary theory. The answer to an credit-induced recession is not to pump more credit into an already over-leveraged credit market. In an era of high volatility and extreme market uncertainty you cannot force consumers to consume and borrow more money than they are willing to take on, no matter how large the monetary incentives are.

Consistent with my other views on life, religion, politics, I refuse to drink the kool-aid and be indoctrinated into one view at the expense of other alternate viewpoints, especially when there is evidence contrary to the status quo. When a theory appears to be on shaky ground, its time to reassess and change course.

Vivid dreams lately. Going to an ancient temple, and was passing through an enormous stone courtyard full of religious statues and gardens. Along the way saw a lot of old friends from way back, some of whom I haven’t seen in years, all sort of hanging out in the courtyard. I recognized a lot of old wrestling buddies, some sparring in a stone lined ring practicing grappling or sumo, others just hanging out with other friends. Didn’t have time to stop and talk, but promised myself that I would stop by and catch up with them on my way back.

I think vivid nature of these dreams have bad something to do with the fact that I’ve been bogged down in bar prep, lots going on on many fronts. Cut down my work hours to about half time, allowing me more time to study and get back into somewhat of a regular work out schedule.

Was thinking about having a deep and insightful post for this entry, but honestly, I’m still recuperating and just chilling out from my last round of finals and readjusting back to work. Enjoying the new apartment, and life after night school. I just went to the school today to pick up my cap and gown, got borderline assaulted by the career center staff seeing what kind of prestigious sounding attorney position I had snagged post graduation.

As for me, I’m going to tough it out and reassess as appropriate, maybe after tha bar exam results come out, then a few months later, no matter what the circumstances may be. In the meantime, I’ve got a degree, and will see how far it’ll take me, either at my current agency or another. In the interim while I’m studying, I’ll be counting on Kina’s songs (as accompanied by her family) to keep me company.

At 3:22pm today I officially graduated, as in: the grade for my my last required class was posted online. The sick thing about law school is that even though in your mind you “get it” already as to how to study and take law school exams, the always lingering voice in the back of your head wonders if you did enough studying to pass muster and get through. One thing for sure, law school makes you respect the material, the curve, and of course your fellow classmates.

Looking back this semester was a bit of a mixed bag, in that it was kind of a throwaway officially, I only had to take one class to graduate, having enough credits from summer school over the past couple of years. On the other hand, one of my courses was a bar-related one, and the other 2 I had a personal interest in the subject matter. I could’ve cruised through this semester, but instead decided to take a full load and learn a few things. Wondering if it’ll be worth the extra tuition that I forked over though. ouch.

Finished my last final a few days ago.  It hasn’t sunk in just yet, but barring some suddenly stringent grading policy, I should be a Juris Doctor officially now.  Part of me hasn’t accepted it just yet, thinking that I’ll believe it when I get that diploma in my hand.  In the meantime, I’m just enjoying not having to read any thick red/green/blue/brown books a t least for the time being.

Not to add to the ton of news stories and blog posts out there about the flu outbreak in Mexico, I thought I’d mention a few observations from my end.  I’ve been keeping an eye on the news reports as things come out, its looking like there’s more and more cases and suspected cases coming to light.  The recent news in the Wapo is that there are a few suspected cases in the DC metro area, kind of makes you feel icky thinking about it.  So far I haven’t seen any hospital masks on the people riding the train into work, I think tomorrow might be a different story.

The sad thing is that whats most likely is that if the government decides to start taking precautionary measures it’ll probably be backward looking, in that it will be only after the city is overrun with new confirmed cases of the flu.  I’m wondering at what point will the decision-makers think that there needs to be a shift in focus and policy.  There has been some talk about this whole thing being overblown out of proportion, given that the seasonal influenza comes through every year and sickens a large number of people and kills a bunch all over the world.  I dunno if I’m really into that analysis, after having a few bad bouts of the flu over the years, I don’t want to get anything like it, not this time, not ever.

At work I remember reading a memo announcement a while back about continuity of operations plans, essentially, setting up people with the ability to telecommute or telework instead of physically coming into work.  It sounded excessive at the time I read the memo, but lately I’ve come to appreciate the extra preparations that could and should be made just in case.  I’ve been working with an episodic telework arrangement to work around my class schedule, its been a real plus to be able to work on things remotely, it saves the hassles of commuting back and forth from class to home to work and back.  I remember going to an external training session sponsored by my workplace that had a speaker focusing on the vulnerabilities of modern society to any kind of health care epidemic.

Last day of classes today as a 4E, that is evening law student.  Kind of a numb perspective really, having gone the part-time route for close to 4 years now.  I ended up taking a lot of summer classes, which makes it almost 4 years straight with no breaks in between.  Wrapping up things for the semester mostly, I’m doing course evaluations and getting ready for my last round of review sessions and finals.  Then it’ll be off to bar prep class for about two months.  Looking forward to being pau for real come August.

Probably  due for an update since my last entry in march.  I’ve actually moved to a new place, a couple of stops along the metro line.  So far still getting used to apartment living.  Its an upgrade in many ways, much bigger space, lots of natural sunlight during the day, and a closer commute to work due to the closer walking distance from my place to the metro station.  The thing is that I still feel like I’m living in a hotel suite or something, and will have to move out in about a week.  I suppose it takes some time to get used to it.

I was able to take advantage of the zipcar fleet to move all of our stuff, used some old boy scout knowledge to pack up and tie down a cargo load in a pickup truck.  I’d say we moved everything in about 6-7 trips total, not bad at all.   Since our last place was furnished, the concept of buying furniture was completely foreign one.  We also got some pretty good deals on furniture given the slowing economy.  IKEA is pretty amazing.

Ides of March, just got through some of my taxes for 2008.  In many ways its been a sign of getting older in that filing has gotten more complicated as opposed to years past.  It seems as the income slowly creeps upward there are additional forms to fill out, calculations to double check, and accepting the fact that some deductions and credits simply don’t apply anymore.  In a strange way I actually enjoy the number crunching part of it, Hana jokes that maybe I should’ve considered accounting instead of law.  The other part of the madness this time around is the nagging issue of the market uncertainty the world has been seeing, and the begging question of how to plan for savings and retirement account contributions with all the market volatility.

Personal finance and overall economic stability has been a major distraction for much of the last 6 months now.  In every angle of analysis I come to the conclusion that we’re in decent shape, and could weather a storm or two, should something happen.  However there is that uncertainty of not being fully prepared for the possible sudden downturn, or major event that turns everything upside down, like a black swan event or something.  I’ve read a bit about personal risk tolerances when it comes to finances, and I’m relatively risk adverse in many aspects.  This could be reflected why I’ve decided to work on my law degree part-time, while working full time, why I purposefully minimized the amount of student loan debt I took on over the past four years, and the fact that I’ve made every effort to live well below my means, even paying off interest and principal while still in school.  Still I worry that even with all the preparations, it might not be enough to survive sometime that comes along and blindsides us.

One conclusion that I’ve come to is that there is really no such thing as a safe asset class, given this uncertain environment, and the unprecedented steps that the government is doing, you can’t pump in Trillions of dollars one way or another without having some kind of unintended consequences, any of which could be disaster to the overall market confidence.  I hear people talking about this environment as being the time to buy, with many blue chip stocks at historic lows, and housing prices plummeting, mortgage rates also very low, especially for those with good credit.  The thing is that all of this stuff is really a form of legalized gambling, and that there is always a form of risk here and there, it all depends on how much you can first of all afford, and can stomach.  There’s also this concept that paper price asset reflects an actual value of a stock, regardless of the production power it may have in the form of the company’s profitability, or fiscal health.  Who cares how much the stock price is relative to the price you purchased it if it doesn’t produce any income as dividends?  After all the only way you can profit from a surge in a stock price is to sell it, and then get whacked with the capital gains taxes. By this rationale, real estate at any price in general is not an investment at all, its just a form of shelter.  I think that the sooner people start to recognize these things, maybe it’ll mark the beginning of the the long road to recovery and stabilization.

Meanwhile in the other March Madness, Wisconsin got in at a low end, 12-seed in the Eastern Division, up against a surging Florida State, hopefully it won’t be a mirror of the bowl game this past football season.  If Bucky can pull off the upset, then they’ll probably have to face a tough road, likely facing Xavier and then Pitt.  Who knows, typically Wisconsin does better when no one is expecting them to go anywhere.  The final four bid from a few years back was an example of that.  I’ve filled out a bracket or two, just for fun, been pretty distracted this year so I can’t say that I know much about the strength of picks.

Keeping an eye on the markets today, as I have been a lot lately, and noted that the DOW checked in just about 50% of the peak we saw this past summer 2008.  That’s a pretty significant statistic, 50% down now if your portfolio tracked the major stock indexes.  Before I shutdown my workstation for the day I took a look at a few of my account balances and cringed the thought of what the latest -3% drop might do for some of my long term accounts already in a sea of red for the year.  I’m sure that I’m not alone in this boat, a lot of people I talk to are talking about painful losses, others just don’t bother to check in since they know that its bad bad bad.

All this got me thinking about a possible breaking point for 401k contributions, and the start of what might just be an overall downward trend, if things were to continue going this way.  In breaking point I mean that at some point I could see a significant number of 401k participants might just fold their cards down and refuse to play.  It goes to the statutory structure of 401k deferred tax retirement plans.  You pay a portion of your paycheck tax free into a retirement account that you can’t touch without penalty, until you are of retirement age.  To sweeten the pot, your employer matches a certain percentage (1%, 5%, 10%, 15%, etc.) as part of a benefit package.  Depending on the setup, you can then invest this money into regular securities on the market, or certain designated index funds proscribed by your employer.  The additional benefit is that any gains you make on your account are tax deferred until retirement, at which every withdrawal from your account is subject to income tax.

Logically, there are several benefits to participating in a 401k program, but most powerful are the tax deferred incentive for contributions, and the tax-deferred status for gains.  However both of these benefits are tied to a single assumption that has been challenged in the recent market trends - an aggregate positive rate of return over time.  Everything is fine when the market is appreciating at an exponential rate in boom time, but in prolonged recessions marked by triple digit losses in almost all sectors on consecutive days, weeks, at some point the incentives for contributing to a 401k, will be canceled out by compounding losses in the stock market.

I’m getting a sense that what might be coming up, could be a breaking point for 401k contributions to zero, or at the very least, to the minimum employer match.  Depending on each company’s set up, and fund allocation, we’re most likely looking at a 10%-15% drop on the year so far across the board, given the drops in the major indexes.  With a SWAG estimate of 20%-25% tax rate, you can see that if the mounting losses continue, at some point in the near future they’ll meet or cancel out any tax benefit from a 401k contribution.  If and when this happens, I could see a shift in behavior for those who are able to scraped by to meet the max ($15,500 for 2008, $16,500 for 2009) for the past few years, even despite all the economic turmoil in the markets, to one of cash savings and liquidity.  In other words, things are so bad that even the most aggressive 401k contributors would conform to 401k deposits of 5% or lower.

One would think that a change in investment strategy of this magnitude would surely have a significant affect the overall market, which would indicate an accelerating or a market sell off.  From a very basic sense, I think this makes a lot of sense.  I’ve been looking at what has been happening lately with the markets, and have been feeling more and more discouraged, thinking “whats the point?”  Why save the money for later when it can just depreciate by double digits in a single day?  I’d be better off putting that money into cash, and then eventually into US treasuries or some kind of short term CD.  This might lose against inflation, but at least it wouldn’t go down in value.  Then again, maybe the best strategy for this market in the short term is to simply not play.

Lame disclaimer: I own some publicly traded stocks, bonds, and other securities in the market, some in regular investment accounts, others in tax deferred accounts and others in retirement accounts none of which are doing particularly well so for in 2008 or 2009.  Therefore, none of this commentary is intended to, or should be taken as investment advice in any shape or form, express or implied.  These are all just random thoughts and observations that a novice could do in these interesting financial times.