Kaulapi World

According to the National Association for Legal Professionals in a report on the 2009 placements for summer associates.  Of course a lot of people are buzzing about it, especially since there was somewhat of a debate just how bad the recent economic downturn would have on the 2009 graduating class.  One of the first signs that I came across that something was up were the rumors that several of my classmates who had secured offers from law firms had been deferred, and almost all of them were later had their offers rescinded outright. What was next was that they were left scrambling to find another legal job at first, and then eventually, any job.

In retrospect I was pretty naive to think that I would be in a good shape coming out of law school purely on the basis that I was never interested in the six-figure salary, private law firm job right out of law school.  Instead, I was pretty much set on a public interest position, either in a government agency or a non-profit.  I was willing to take a much lower pay provided that the work would be more personally fulfilling to me, and in the meantime I would get valuable legal experience.  I was more than willing to let my classmates and other graduates from higher ranked law schools compete for the coveted law firm jobs.  The more I heard about the insane hours and debilitating lifestyle of the big firm associate the more it affirmed my decision to say no thanks.

There was also this idea that I had a leg up on the game in a way that others didn’t, in occasional conversations with classmates I noticed that my previous legal experience provides additional context of the real world that put the theoretical aspects of law school more into perspective.  Maybe more of a sign of overstating personal ability or uniqueness, in my mind, the law degree would open doors for me in ways that it would not to others. After the first 2 years when the class ranks came out, I wasn’t totally discouraged, because in my mind because being the very top of the top, wasn’t necessary for my particular legal career path.

As it turns out, I was never on a safe track due to forces that are mostly beyond my control.  The last year has been an eye-opening experience reading and hearing about the horror stories of folks applying for work in a very tough job market to which attorneys have no advantage whatsoever.  A friend of mine recently applied for an entry level government attorney position at which 620 applicants were competing for 3 spots.  I ran into another friend that mentioned that there is a deferred associate working for her non-profit on some law firm’s dime.  In a cruel twist of fate, the other employees at the non-profit, many of whom are MPP/MPAs, have to compete with free labor.  Mr. Market is an influential fellow, we were foolish to ignore him all this time.

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.

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.

Gotta love capitalism, especially gray and black markets.  Of course I’m referring to the underground market that has sprung up, mostly online for tickets to witness history in the making, the for the inauguration Barack Obama.  Craigslist is pretty busy with people with all kinds of tickets for sale, scalpers lucky enough to get their hands on some tickets will make a decent amount of change.  The prices themselves range from $100, $250 for seats along the ticketed mall viewing area, $500 for the standing area, and as much as $3500 for seated tickets.  That’s a hefty chunk of change for being a witness to history.

But what are the tickets really worth?  On the demand side there are ample numbers of potential buyers that price being part of this event as very high, in the hundreds and thousands of dollars.  Also driving the demand side is the emotional stakes that are attached to this event, I notice often that discussion goes from being a “witness” to history as to “being a part” of history.  For the faithful, saying that they were in the crowd on a cold January morning is in itself a priceless experience for which no price is too high.  On the supply side, there are a limited, finite number of tickets in various levels of grading, that is closer to the steps of the capitol.  Also these tickets are not for sale, they are in available only through the congressional offices, which each member having the full discretion to allocate them in the way that he or she sees fit.  All of these factors have all the makings of an interesting economic case study of price discrimination.

The disconnect between the relative value of the good is easily exploited by potential buyers coming from out of town that have never seen the capitol, the national mall, or the distances that are involved.  This also goes to the disconnect that people place on the value of the tickets themselves, to a certain extent, the value is more to the allure of them being a hard to come by commodity, and a symbol of the ticket holder’s savvy or connection to some high political office.  Maybe its that ultimately like any other material good, there is a certain amount of value associated with social status symbols.  That is people want to feel that they are special or elite through what they have.  Another disconnect are those that have never attended an inauguration in person either, so they don’t have any experience to gauge an appropriate price.  I really hope that in trying to get tickets, people would just calm down and save their money, especially in these tough economic times.

I went to the 2005 inauguration, and remember how far away the seats were from the actual podium, I ended up watching the whole thing on the jumbotron.  Of course I wasn’t too thrilled at the time about the results of the election, but I was more or less interested in just going for the sake of going.  This time around I’m happier about the overall results, I’m not as sold yet on the bigger picture and long term direction that the new administration is proposing.  But its still a big event, and I’m still intrigued that I’ll be in town to witness the event.  As for me, I think I’ll stick to some taking some pictures of the crowd, and collecting some commemorative metro tickets instead.  Maybe buy a T-shirt.

The fall season is progressing along, been busy at work and at school. For the most part I’m enjoying my classes, my unincorporated business organizations course is giving me more perspectives on the operations of small businesses and partnerships. Definitely opens your eyes to what kind of responsibilities, legal and financial headaches, really, owning your own business has. In my Remedies class we’re covering the bottom line of a lot of cases that we flew over in con law, property, and contracts, mostly going to the most central question of all, that is after all is said and done, after the plaintiff wins his case, how does the court proscribe the appropriate remedy to make the plaintiff whole again? And more tricky, when, if at all does the Defendant need additional punishment for the wrong?

Been keeping a wary eye on the market, it’s getting pretty depressing watching it rocket up and down. Since the brutal crashes from a few weeks ago, the market has seen drastic ups and downs, close to 9% swings, heavy volatility all around. It’s become a sick ritual getting up at 4am, getting ready for work, only to see the London stock exchange futures way down, and the Asian markets wrapping up another down day of trading. Been spending a lot of time it seems, sitting in my cubicle at work and getting distracted by the DOW and S&P way down in the red, highly caffeinated talking heads talking about investment strategies, screaming at times, for calm in the markets. Meanwhile a lot of small investors are quickly taking their life savings out of the market, apparently deciding its too dangerous to play at all.

Then a few days later, a crazy rally, usually as a result of some optimistically spun economic report, or announcement from the government that there will be another bailout. It’s really hard to tell what is up and what is down, what and who to believe really.

Whatever gains I had preserved about a year ago due to some luckily placed re-allocations in my stock holdings are quickly dwindling, percentage-wise. For the time being I’m glad that I’m gainfully employed, and not involved in any variable rate debt or consumer debt. Due to this insane housing market we’ve been seeing for the past few years, I held off on saddling down a mortgage, a decision that I’ve come to appreciate again and again. There is a matter of some student loans, but I was able to lock about half of it at a very low interest rate through consolidation about a year ago. I have been keeping a wary eye on our finances, planning out different scenarios and what we would do. For now there doesn’t really seem like there’s anything we can do. Just sit and suffer.

In the meantime I’ve been keeping an unofficial log of spare change I’ve been coming across walking around the city. I’ve been tracking it down loosely on my paper calendar at work. It’s pretty surprising how much change people leave lying around. So far in the past month I’ve found at least a few pennies a day, with the occasional dime or quarter. I’ve also found a $5 bill, and a metrocard with $20 on it. I guess when times are tough, you try to do what you can.

More turmoil in the markets, it’s becoming like a bad dream, the US market takes a hit, and then at 9:00pm the Asian markets take a hit, and then the European markets take a hit in time for the US again. Something like 21% drop in the DOW over the last 10 days, despite the talk of this not being a crash, it’s looking pretty ugly.

All of this has been a big distraction from the election, especially since it seems like neither leading candidates are offering anything by means of a realistic solution. I suspect that neither of their campaigns anticipated any of this to blow up in their faces, especially not right before November. I still maintain that some understanding of finances and economics should be a quality that we look for in a presidential candidate. Whoever wins will have his work cut out for him, that’s for sure.

Been a few crazy weeks in the financial world and the markets what not. Discussing the bailout has been a nervously recurring conversation topic around the office ever since the news first broke that the America is well, headed towards bankruptcy? Yet somehow we continue to think that borrowing or printing another $850 Billion dollars to bail out the troubled financial corporations on wall street is the best solution. Depending on who you talk to, it seems like the conventional wisdom is that the bailout or “rescue” bill although it sucks, is a necessary evil. The scary thing is that nobody in support of the bailout has any clue on how this is all going to play out, let alone where we are headed. I can’t help but wonder if people had the benefit of additional information and stopped to digest the recent turn of events and really question them that maybe they wouldn’t be too quick to capitulate to what might be a historic change in the structure of our constitutional republic. That is, whatever is left of it.

And now with the bailout signed into law, the American taxpayers and middle-class are left holding the bag.

The markets have been in turmoil this week, the two biggest drops in the DOW since 9-11 for the most part coinciding with massive, unprecedented bailouts of major investment banks and companies tied to mortgages and other debt securities. You know its bad when you can hear the water cooler talk, especially the older co-workers talk about huge losses on the year to their retirement accounts. There is a somber, anomic mood overall, a sort of helplessness, much like there is nothing that can be done. The younger folks on the other hand, so far have been largely silent, maybe due to the confidence that they all have many years ahead to make up for the losses. Maybe because many of us don’t have much of a stake in the market yet, or another possibility is that much like the rest of the country right now, we have no assets at all and are drowning in debt.

Been having a a recurring dream lately about riding a train, I’m headed either to or from work. Sometimes the train is crowded, other times there is an old friend, often its someone that I was once close with but lost touch over the years. The one recurring detail however has been that I overshoot my destination and get off onto the platform and have to double back and wait for the train going in the opposite direction. The most recent one I run into a friend on the platform who convinces me to go to a nearby izakaya instead of heading to my original destination. It’s a refreshing change of pace, whenI realize that despite passing through the station on the train many times before, I’ve never actually stopped to get off and look around. The izakaya itself is located on the side of a busy street, inside a sort of shopping arcade near the station. When we get there my friend starts talking to the waitress in Japanese, and despite my limited proficiency, for some reason I am able to understand almost all of it. The dream ends there after we’ve placed our order.