There are two “failures to communicate” on the bailout bill. The first is that the Washington insiders have not bothered to communicate why a bailout is needed, they’ve just threatened “meltdown” or similar if it is not provided. The other is that the grass roots opposition has not communicated that its objection, as I see it expressed, is mostly to the form of the bailout, not bailouts in principle. While people should object in principle, they’re not doing so, simply because they still don’t understand that it was government interventions just like this one that got us here. What makes the opposition really angry is that the proposal is to buy assets for more than they are worth, and they suspect - rightly - that the excess value will flow right into bankers’ pockets. As has the capital that should be saving the banks right now. Also Secretary Paulson’s continuing close ties to Goldman Sachs, for example the inclusion of Blankfein in the Lehman decision, also represent a conflict of interest that turns many people’s stomachs. Mine included. Even bothers Ben Stein, who of late has been a Pollyanna. Read the whole thing, but:

The people whose conduct got us into this catastrophe have not only taken our money, hopes and peace of mind, but they apparently also want a trillion or so more dollars to put into their Wall Street Buddy System Fund. This may be the most dangerous attack on the law in my lifetime. What anarchists even dared consider this plan? Thank heaven that minds more devoted to the Constitution on Capitol Hill are questioning this shocking request.

Maybe, but not for long. Soon the “bipartisan” agreement will pass the legislation, further deepening the anger that much of the citizenry feels as they realize how impotent they are when the two parties conspire. Just storing up more trouble for the future.

Paulson should resign, and if bailouts are necessary, they should be done by conservatorship like Fannie and Freddie, preserving client accounts but wiping out equity and debt as losses occur and taxpayer money is injected.

Ben Stein writes in his column

“The Securities Industry Association (which, of course, wants us to buy securities) says that retirement saving is so inadequate that about half of us will have to substantially lower our standard of living in our golden years. About 20 percent of us will face genuine poverty in retirement.”

We met a friend for an informal financial chat. She has some stock, a condo, a small business and no time. She is financially conservative. She has friends who have had some hair-raising speculation experiences - penny stocks and Florida condos. Here are the references for topics of conversation.

General reading

Reminiscences of a Stock Operator

The thinly disguised biography of Jesse Livermore, a remarkable character who first started speculating in New England bucket shops at the turn of the century. Livermore, who was banned from these shady operations because of his winning ways, soon moved to Wall Street where he made and lost his fortune several times over. What makes this book so valuable are the observations that Lefèvre records about investing, speculating, and the nature of the market itself.

Fooled by Randomness : The Hidden Role of Chance in Life and in the Markets
by Nassim Nicholas Taleb

In this look at financial luck, hedge fund manager Taleb (Dynamic Hedging) addresses the apparently irrational movement of money markets around the world. Using his own investing experience and examples of others’ successes and disappointments, he discusses theories like Monte Carlo math (easy; considered cheating by purists) and the concept of Russian roulette. Taleb tells interesting, well-wrought stories about individual behavior: “While Nero has succeeded beyond his wildest dreams, both personally and intellectually, he is starting to consider himself as having missed a chance somewhere.” While serious investors and mathematics enthusiasts will be intrigued, readers looking for practical investment strategies will be disappointed by this rambling intellectual discourse.

Market timing

Yes, You Can Time the Market!
by Ben Stein, Phil DeMuth

A smart, commonsense guide to investing. Stein and DeMuth’s primary dispute is with the old adage that one can never tell when the market is going to go up or down, something they attempt to disprove with a wealth of charts showing how to buy stocks cheaply over the long term (as in decades). This is no get-rich-quick scheme, merely a case being made to, in essence, treat the Street like many fans treat baseball: work the numbers. In between the sizable chunks of data, Stein and DeMuth drop in bits of advice, e.g., pay more attention to the S&P 500’s trends than frequently slippery P/E ratios; invest in bonds before stocks-they’re more stable; and always, always buy low. Best of all is a three-page cautionary list that should be required reading for anyone even thinking of investing. Some of the better nuggets: “Does the word `synergy’ appear in the prospectus?… Run!”; “Never accept any unsolicited financial advice”; and “Do not invest in a store because you see a lot of customers there at the mall or because you like the coffee or blue jeans or jelly beans. Sales do not equal profits.”

Beating the Dow with Bonds : A High-Return, Low-Risk Strategy for Outperforming the Pros Even When Stocks Go South
by Michael B. O’Higgins, John McCarty

O’Higgins is no Chicken Little–rather, he’s a market contrarian with a proven and profitable track record. If you think the stock market will go up forever, then look elsewhere for advice. But if you believe in gravity, then get this book and read it soon.

TIPS

Treasury Inflation-Protected Securities (TIPS)

Treasury Inflation-Protected Securities, also known as TIPS, are securities whose principal is tied to the Consumer Price Index. With inflation, the principal increases. With deflation, it decreases. When the security matures, we pay the original or adjusted principal, whichever is greater.
TIPS pay interest every six months, based on a fixed rate applied to the adjusted principal. Specifically, each interest payment is calculated by multiplying the adjusted principal by one-half the interest rate.

Why to sell the condo

Sell Now! : The End of the Housing Bubble
by John R. Talbott

Sell Now! analyses the evidence and offers clear explanations of these perplexing issues. Overly aggressive mortgage lenders have fueled this overheated market by extending too much credit to home buyers and by offering ever-more exotic forms of mortgages. Many home buyers have been caught in a never-ending race to achieve status, often overpaying for homes in the “right” neighborhoods. And people’s pursuit of easy profits has pushed prices to unsustainable levels.

Why to sell stocks

Valuation - Where we are in the stock market cycle. Just a note, when I talk about value changes in the stock market and real estate market, I’m talking about real prices, that is prices adjusted for inflation as against nominal prices, the unadjusted prices.

Schwab strategist sees cash as king ahead of sucker’s rally

Specifically, she recommends investors “underweight” stocks, remain “neutral” on bonds and be “maximum overweight” on cash.
“Keeping some powder dry makes a lot of sense,” the Schwab (NASDAQ: SCHW) strategist said. “There is likely to develop a great buying opportunity at some point this year. We just feel there’s more pain between now and then.

Investment and Speculation

From one of the earliest posts in the blog:

“We often hear the terms “Investment” and “Speculation” used interchangeably and casually. “Speculation” is often used as a derogatory term for activities considered somehow wrong or extreme. But both these words have relatively well-defined meanings. An “Investment” is a transaction which is entered into primarily to yield an ongoing income stream. While in many cases capital gains may also be a hoped-for result, they are secondary. A “Speculation” is a transaction which is entered into for the primary purpose of a capital gain on sale. Income, if it exists at all, is a secondary consideration and often will be negative, a “carrying cost”. So if I buy an apartment building for rental income, believing that the rents will yield a net return on my capital after expenses, then that is an investment. If I buy a house with the intention of “flipping” for a higher price as soon as possible, then that is a speculation. It is important to define the terms because they will be used frequently, but carefully, for their particular meanings.”

Delightful evening! Hope this helps.

From Stuff Ben Wrote by Ben Stein

But for the youngest members of the party, the option of saving like madmen is still open. Only it’s not an option: it’s mandatory. In index funds, annuities, mutual funds, real estate, bonds - but best, in all of these things at once.

Sometimes, a simple actionable item is all it takes to get moving on a big, scary, overwhelming, important task. Thanks, Ben, for sharing that.

From Ben Stein:

“I can summarize the shape of the U.S. economy by telling an anecdote. One of my closest friends is a lovely 45-year-old woman whom I will call Vivian. She has a good job in real estate, a lovely rented apartment in a city in California, a sweet little car, and elegant clothing. She earns about $75,000 a year.

A few days ago, I asked her if she had considered variable annuities, bought with a very sharp eye on fees, for her retirement portfolio. She looked shocked and asked, “What retirement portfolio? Do I look that old?”

“No,” I answered. “You look shockingly youthful. But what are you doing about your retirement?”

“Well, nothing,” she said. “I don’t even have any money in my savings account and barely any in my checking account.”

“Do you have a 401(k)? Or maybe a pension? Or IRAs?”

“No,” she said defiantly.

“Well,” I asked, “with all due respect, how are you going to provide for your retirement?”

“I don’t know,” she said.

“I think you should try to save maybe $500 a month starting right now in a very carefully chosen variable annuity, or else in a broad index fund I will help you choose,” I told her.

“I can’t,” she said. “I don’t have the money. Besides, $500 a month is nothing. It wouldn’t amount to a thing. I might as well spend it at Nordstrom’s.”

I took out my calculator and punched some buttons. “I beg your pardon,” said I, “but if you save $500 a month and earn an average of 8.5 percent on it for the next 20 years, you’ll have $316,000 by the time you’re 65. It’s not a lot, but it’s a lot more than nothing, which is what you have now.”

She stared at me incredulously. “Do you think I’m going to work another 20 years?” she asked. “No way.”

“Well, then what are you going to live on when you stop work?”

“Social Security,” she answered.

“That won’t kick in until you’re 66 or 67,” I said, “and it won’t be more than a pittance by then.”

“I’m leaving,’ she said. “There’s a sale at Nordstrom’s. I have to buy something to distract myself from what you’ve been telling me.”"

Living Hand to Mouth — and Barely Getting By