Thursday, May 27, 2010

Delay of Gratification Pt 2

This article was published in the NY Times a few days ago. I am dumbfounded that any father would let his kids go without the necessities of life in order to gratify his lusts, but here you go. This is why international aid packages don't work. The problem is individual and cultural, not economic. Our problem is individual and cultural, too.

BTW, you should read the follow up letters printed in the NY Times today. Several letters supported this behavior, and 3/4 of the respondents were women. Astonishing.

Moonshine or the Kids?

MONT-BELO, Congo Republic

There’s an ugly secret of global poverty, one rarely acknowledged by aid groups or U.N. reports. It’s a blunt truth that is politically incorrect, heartbreaking, frustrating and ubiquitous:

It’s that if the poorest families spent as much money educating their children as they do on wine, cigarettes and prostitutes, their children’s prospects would be transformed. Much suffering is caused not only by low incomes, but also by shortsighted private spending decisions by heads of households.

That probably sounds sanctimonious, haughty and callous, but it’s been on my mind while traveling through central Africa with a college student on my annual win-a-trip journey. Here in this Congolese village of Mont-Belo, we met a bright fourth grader, Jovali Obamza, who is about to be expelled from school because his family is three months behind in paying fees. (In theory, public school is free in the Congo Republic. In fact, every single school we visited charges fees.)

We asked to see Jovali’s parents. The dad, Georges Obamza, who weaves straw stools that he sells for $1 each, is unmistakably very poor. He said that the family is eight months behind on its $6-a-month rent and is in danger of being evicted, with nowhere to go.

The Obamzas have no mosquito net, even though they have already lost two of their eight children to malaria. They say they just can’t afford the $6 cost of a net. Nor can they afford the $2.50-a-month tuition for each of their three school-age kids.

“It’s hard to get the money to send the kids to school,” Mr. Obamza explained, a bit embarrassed.

But Mr. Obamza and his wife, Valerie, do have cellphones and say they spend a combined $10 a month on call time.

In addition, Mr. Obamza goes drinking several times a week at a village bar, spending about $1 an evening on moonshine. By his calculation, that adds up to about $12 a month — almost as much as the family rent and school fees combined.

I asked Mr. Obamza why he prioritizes alcohol over educating his kids. He looked pained.

Other villagers said that Mr. Obamza drinks less than the average man in the village (women drink far less). Many other men drink every evening, they said, and also spend money on cigarettes.

“If possible, I drink every day,” Fulbert Mfouna, a 43-year-old whose children have also had to drop out or repeat grades for lack of school fees, said forthrightly. His eldest son, Jude, is still in first grade after repeating for five years because of nonpayment of fees. Meanwhile, Mr. Mfouna acknowledged spending $2 a day on alcohol and cigarettes.

Traditionally, a young man here might have paid his wife’s family a “bride price” of a pair of goats. Now the “bride price” starts with oversized jugs of wine and two bottles of whiskey.

Two M.I.T. economists, Abhijit Banerjee and Esther Duflo, found that the world’s poor typically spend about 2 percent of their income educating their children, and often larger percentages on alcohol and tobacco: 4 percent in rural Papua New Guinea, 6 percent in Indonesia, 8 percent in Mexico. The indigent also spend significant sums on soft drinks, prostitution and extravagant festivals.

Look, I don’t want to be an unctuous party-pooper. But I’ve seen too many children dying of malaria for want of a bed net that the father tells me is unaffordable, even as he spends larger sums on liquor. If we want Mr. Obamza’s children to get an education and sleep under a bed net — well, the simplest option is for their dad to spend fewer evenings in the bar.

Because there’s mounting evidence that mothers are more likely than fathers to spend money educating their kids, one solution is to give women more control over purse strings and more legal title to assets. Some aid groups and U.N. agencies are working on that.

Another approach is microsavings, helping poor people save money when banks aren’t interested in them. It’s becoming increasingly clear that the most powerful part of microfinance isn’t microlending but microsavings.

Microsavings programs, organized by CARE and other organizations, work to turn a consumption culture into a savings culture. The programs often keep household savings in the women’s names, to give mothers more say in spending decisions, and I’ve seen them work in Africa, Latin America and Asia.

Well-meaning humanitarians sometimes burnish suffering to make it seem more virtuous and noble than it often is. If we’re going to make more progress, and get kids like the Obamza children in school and under bed nets, we need to look unflinchingly at uncomfortable truths — and then try to redirect the family money now spent on wine and prostitution.

Monday, May 24, 2010

Muni Bonds Pt. 3

As I mentioned before, two friends of mine who are men of some means had been approached by their investment advisors with offers to buy municipal bonds which were paying fairly nice interest rates by today's standards. I warned both men to stay very far away from these products. Muni's paying high rates of interest are going to be risky debt. Municipalities can and do declare bankruptcy. In this environment these municipalities are borrowing money to pay operating expenses not covered by tax receipts.

Time magazine just came out with an article on the the unfolding Municipal Bond crisis. Los Angeles and Detroit are starting to whisper about bankruptcy. That could panic the market.

If the market panics, then even sound municipalities will have to pay sky-high interest rates on their bond issues just to attract investors. An individual municipality's debt might be, under certain circumstances, an attractive investment in that sort of environment. You might find a creditworthy and growing municipality that has to borrow money, but is paying more in interest than it ought to. That would be a good buy. But you would want to stay away from the sliced, diced, tranched, and repackaged bond vehicles that roll a bunch of different bonds together.

I believe that gold is warming up for another rise. I'd keep a close eye on silver as well. I expect silver to set new highs soon. Silver is the stealth play, in my opinion, and has the most potential for upside. It's also the most volatile.

Two of the three major stock indexes broke marginally below their "flash crash" lows. I expect them to break decisively lower soon. Once there is a decisive break, that should start a lot more technically-driven selling. Then we should know something about the strength of this current downward move. As I wrote before, I expect a retest of the March 2009 lows. Any breach of those lows will lead to panic selling and much lower levels. Dow 3500 wouldn't be impossible.

The economy is not recovering, even though trillions of dollars have been created. Small businesses are not hiring. The recent upticks in the unemployment rate comes almost exclusively from government hiring, much of it temporary employment of census workers. This is not a recovery.

Keep your powder dry. Save money. Buy a little gold and silver.

Thursday, May 20, 2010

Russell Warns of High Risk of Crash

Dow theorist Richard Russell warned of a high probability of a crash in the near future. Russell is the author of the influential "Dow Theory Letters."

The futures look quite ugly as of 7:00 a.m. Mountain Time. Today might be the beginning of Russell's crash.

Sell it All, Risk of 'Major Crash': Dow Theory’s Russell

Published: Wednesday, 19 May 2010 | 5:12 AM ET
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The author of the closely-watched Dow Theory Letters newsletter warned investors to get out of US stocks now in a report published Tuesday.

Richard Russell wrote that there is a risk of a “major crash” if the Dow Jones Industrial Average falls below the May 7 closing price of 10,380.43, according to several media reports.

"If I read the stock market correctly, it's telling me that there is a surprise ahead," Russell wrote. "And that surprise will be a reversal to the downside for the economy, plus a collection of other troubles ahead."

"Do your friends a favor. Tell them to “batten down the hatches” because there’s a hard rain coming," Russell warned.

"Tell them to get out of debt and sell anything they can sell in order to get liquid. Tell them that Richard Russell says that by the end of this year they won’t recognize the country. They’ll retort, ‘How the dickens does Russell know—who told him?’ Tell them the stock market told him."

Russell said he has seen problems with the Dow since April

"If business is even better than expected, then why is the Dow down over 600 points?"