Defenestrating Thoughts from the Bivouac

I just wrote about everything that that has happened in the past month and thought I’d blah — I mean, blog — about this:

We checked out of the apartment. I’d lived there for just about 6 years. My rough estimate is that I gave Avalon Redmond Place around $68,000 in rent over that time (plus all the money Chris and Andrew gave them while we were roomies). In return they kindly gave me back my entire deposit of $250 (oh, and a place to live).

$68,000 in rent. Wow. It’s scary when you think about it. The obvious observation is, “shouldn’t you have brought a condo/house instead?” With 20/20 hindsight, sure, that would have been the right thing to do, but only because of a Fed-induced housing bubble.

When I first moved to Seattle, I didn’t have plans to stay that long. Specifically, I had to see if I liked my job and the area before committing. Common sense indicates that you should expect to own an house for 5 years before you recoup closing costs and turn the corner on paying mostly interest.

Of course, the housing bubble artificially caused a lot of temporary house value increases; if I’d bought something when I moved there and then sold it when I left, I could have made some decent money. On the other hand, the bubble could have popped earlier and I could have lost all my appreciation. And you also have to keep in mind that rent/buy ratios are way out of whack in the Puget Sound.

But, of course, the move back to the Boulder area was always in the cards and I did end up changing jobs much sooner than I would have guessed when I moved to Seattle, so who knows. :-)

Update (7/30/08): I just realized I calculated the rent total wrong. It should be ~68K over 6 years (corrected above).

After I posted this morning, I remembered the buzz a while back about how airlines would start weighing passengers and charge based on their weight. This is something that seems like it would never happen.

My guess is that some “expert” sarcastically said, “Next thing you know, they will charge passengers by weight.” And then the talking heads took the story and ran with it. And kept running.

There’s a huge overhead and headache of weighing all the customers and then charging them. Check-in times would be longer and more staff would be need. Plus, there would be all sorts of privacy concerns and lawyers would have a field day with discrimination lawsuits.

It’s much, much easier to “socialize” it and just spread out the cost across all the passengers. Which is what airlines do today anyway.

If you’re not convinced, think of this: who are the airlines’ most profitable customers? They are the guys in first and business class. And let’s be honest, most of those business guys are pretty big. How do you think they would feel about being weighed at the airport in front of everyone?

Charge for luggage? Sure, the business traveler is annoyed, but not that much; after all, he just expenses it. But you start weighing him, and you just lost a really valuable customer. Unless all the airlines start this at the same time, you’ll see a significant amount of people that go to the airline that doesn’t completely treat them like cattle.

Everyone is all abuzz about airfares. Not only are they going up, but suddenly we have additional fees for checked bags. And now some airlines are charging for things like sodas and snacks while on the flight.

The big airlines have consistently been backing themselves into a corner, by signing untenable contracts with unions, having an unnecessary diversity of equipment, and using the hub/spoke model in order to get subsidies and, in many cases, be granted a near monopoly from hub cities.

Add in rising fuel costs and the airlines can’t adjust. So they need to raise fares. This completely makes sense, if the price of one of your “raw materials” go up, sure, end-consumer prices will go up to compensate. There’s no mystery there.

What I don’t understand is adopting an a la carte pricing model while prices are going up. (A la carte pricing is when the customer purchases only individual items instead of a fixed group of offerings.) I’m not debating the merits of a la carte pricing, just the timing.

Of course, It’s very likely that if the luggage wasn’t charged extra, the basic fare would go up more to compensate. But that’s not the point. The consumer see prices going up and quality of product going down; so we have to pay more to get less.

Now if just prices went up and quality was the same, the consumer would “pay more for the same” and the consumer anger could be easily deflected to the rising oil prices.

And I don’t understand the reasoning behind charging for soda. The justification is the weight. Well, if I’m not going to get a drink on the plane, I’m going to bring my own with me. So the weight is the same. The only difference is instead of the airline paying wholesale for the soda, I pay retail in the airport. And the airline wasn’t giving me that soda for free, you can count on that being a piece of the total airline fare.

Maybe, the airline can now staff the place with fewer stewardesses? Unlikely, those are union employees. So where’s the savings? The airline at most dropped the wholesale cost of soda on the fare. Wow, 15 cents cheaper fare. Probably not worth the PR hit in the first place.

Consider one of the orthogonal cases: suppose that airline fares were steady (or dropping). An airline could introduce a la carte pricing on rarely used things like the 2nd bag of checked luggage. Then they could drop the price and get some more business.

Alternatively, the airline could do a refund based system. When you check in and don’t have any checked luggage, the customer gets a $25 voucher for his next flight.

Both of these approaches would give you a la carte pricing with good to neutral PR.

So why did just about everyone do a la carte pricing? Because one airline did it first and was able to raise its base fares a little less than everyone. So everyone scrambled so their base fares would be inline. Stupid first mover.

Of course, every first year business student’s favorite airline, Southwest, is still doing fine and expects to make a modest profit despite the economic climate. And guess what, they don’t charge for checked luggage. Way to be a rebel Southwest! :-)

(I read this book a little over a year ago and am now finally getting around to reviewing it.)

Shortly after it came out, I read Tim Ferriss’ widely popular book, The 4-Hour Workweek: Escape 9-5, Live Anywhere, and Join the New Rich. And then I felt slightly ill. Suffice to say, I didn’t care for the book at all. I’m really happy I got the book from the library, instead of paying money on it.

The first part of the book is reminder that life is short, so don’t worry so much and have some fun. Not a very original thought, but I suppose lots of people always forget this. He also tells us to read Thoreau, doing which would essentially makes this whole section of the book incredibly redundant.

And yes, “live your life now, don’t wait until later” is great advice, but just about every philosopher and good parent has been saying this for years upon years.

The rest of the book is basically a get rich quick type plan sprinkled into self-promotion and tips on how to eliminate wasteful time-consuming activities from your life. Basically he says, working a job is stupid, you should just sell something online and outsource every piece of the business so you can do whatever you want.

It’s good strategy, but let’s be honest; it’s not at all original. “Absentee ownership” is a tried and true income making method. The trick is that you need some income producing property or product. And that’s the tough part. Anyone can profit from an income generating asset. But how do you get one? Ferriss doesn’t really talk about how to do this.

Ferriss’ product (aside from the book) is some unregulated dietary supplement that body builder types use. So far, he’s a one hit wonder. Lots of of people hit it big once. I want to hear from the guys that do it more than once; those guys have real experience, skills and knowledge; they weren’t just lucky once.

A lot of the book is about how to use outsourced personal assistants to do your busywork for you. Generally this is a reasonable idea, but Ferriss takes it way too far. He basically says, “Why send your mom a birthday card like a sucker? I just have my assistants sign a card and send it with flowers.”

Sadly, I’m only barely exaggerating.

The other concept of the book I wanted to discuss is the idea of a “low-information” diet. Ferriss talks about having “selective ignorance” so that you ignore and don’t seek out information. For voting for president, for example, he ignores everything and then a week before asks some of his friends who to support, reads some news for an hour and then decides.

I’m really disappointed in this. This is basically voting for whoever is more popular. Instead of using your god-given ability to learn, reason, and be an intellectually curious individual, you’ll just go with whatever most people think.

What about learning, self-exploration, development of a value system and then acting on it? Nah… it’s easier to hang out at the beach. That’s just sad. If there’s ever a time to listen to Mark Twain, it’s in today’s world:

Whenever you find yourself on the side of the majority, it is time to pause and reflect.

Lastly, Ferriss’ own auto-biographical elements make him seem like, well, a jerk. He brags about winning a big kick-boxing championship with basically 4 weeks of training. He explains that he lost nearly 30 pounds for the weigh-in and gained it back before the tournament. This way he was able to compete three levels below his weight bracket and got to beat up on those “poor little guys”.

Also, he exploited a loophole in the rules that said, if his opponent “falls off the elevated platform three times in a single round”, he loses. So Ferriss just basically shoved guys 3 weight divisions below him out of the ring and won the championship.

I’m not sure I’d brag about that.

So if you want to get rich quick, Tim’s got a great book for you. All you need are some affiliate marketers, a drop shipper, and a website. It’s so easy! And if you call now, he’ll even throw in an AbTronic!

In summary, don’t read this book. I think I lost 10 IQ points in the course of reading it. :-P

Hulu is an online video-on-demand service that offers streaming video of lots of popular shows. Since Hulu is joint venture between NBC-Universal and NewsCorp (parent of Fox), it’s not surprising that the site is dominated by their content.

Hulu seems to be designed to make money on the ads that are inserted into the shows. Each “commercial break” has one 15 to 30 second ad. Though they also have a syndication model, presumably the bulk of their money does (or should) come from the in-show ads.

Hulu has a large selection of shows and until recently they would post new episodes the morning after they originally aired. I alway thought this was a great idea, they can pick up a viewers that they wouldn’t have otherwise.

People who watch the broadcast either watch it live or Tivo it . People who’d watch Hulu either missed the episode on TV, don’t have a TV (or access to one), want to watch it again, or were watching something else. So Hulu picks up audience that the live broadcast can’t get.

So the services are complementary. And since the content is paid for by the broadcast, Hulu just needs to make back operating expenses. It’s a pretty good plan.

Now let’s go back to who the target audience of Hulu is: people who missed the episode on TV, don’t have a TV, want to watch it again, or were watching something else. What did these people do in the past? A lot of them downloaded it illegally.

So Hulu also cuts down on illegal downloads and recovers some of that “lost revenue”.

Now, Hulu did something I can’t understand. The only show I watched regularly on Hulu is Battlestar Galactica. Crissy and I just get limited cable, so I can’t see the broadcasts on the SciFi network (which is owned by NBC). So, for me to see it, I have to watch at a friend’s place or rent/borrow the DVDs when they come out.

Since the show is on Friday night (seriously, what’s up with that?), I miss episodes frequently. Since the show is a serial, it’s tough to miss episodes and really annoying to watch out of order.

Now with Hulu, if I miss an episode, I can watch it online the next day. Everything is great: I get to see my show and Hulu gets to show me ads.

Just recently though, Hulu changed their policy. New episodes are now posted 8 days after the broadcast. I’m fine with a delay before the show is online, but 8 days just seems stupid: by the time an episode is posted online, the next episode has aired.

So I can never catch up! It seems like it’s in NBC’s better interest if people are watching the broadcast version, so why would they prevent me from doing this? It’s a serial! I don’t want to watch it out of order. So now I’m stuck watching it on Hulu.

Aside from being annoyed about the delay in watching my show, I don’t understand the business model.

Let’s assume that Hulu viewers are less profitable than broadcast viewers. Why 8 days instead of 1 day? Let’s look at our use cases again:

• People who missed the episode on TV - now they are going to miss all the episode broadcasts, unless they watch episodes out of order
• People who don’t have a TV - doesn’t matter what the delay is, they will never see the broadcast
• People who want to watch it again - they already watched the broadcast, so you made your money already
• People who were watching something else - still not going to get them

Now the major downside, people will start downloading it illegally again! In fact, that’s exactly what the comments on the Battlestar page on Hulu say.

What if our assumption is wrong and Hulu viewers are more profitable than broadcast viewers. If that were so, NBC would try to put content on as soon as possible following the broadcast, if not earlier. They certainly wouldn’t posted it later!

Last, let’s consider DVD sales. If NBC was worried about losing DVD sales, the time gap doesn’t make a difference. It’s solely the availability that matters. Currently, NBC only has 4 episodes posted, so that shouldn’t affect future DVD sales.

I wish I knew that the reasoning was here. My guess is that someone thinks that Hulu is cannibalizing broadcast viewership. I think this assumption is wrong; plus it’s really tough to measure, for example, how do you know that a Hulu hit isn’t someone who also saw the broadcast? After all, broadcast viewership is really tough to measure for medium- and long-tail programming.

And what about conversions? Someone may see the episode on Hulu and then start watching the broadcast.

Oh well… and please remember, I haven’t see last week’s episode yet. Don’t tell me what happened. :-)

I came across this really good video that explains how banks, money, and debt work.

You should take some time to watch it, it’s one of the most eye-opening things you’ll ever see. And you’ll begin to understand what this “credit crisis” really is and how we got here.

The latest Fed action to inject “liquidity” of $200 billion via a Term Auction Facility (TAF) is really, really stupid. And the fact that the market went up is a sign that stock investors are not just irrational, they really don’t think for themselves.

Basically, the Fed is lending the banks US Treasuries, and taking some of the banks’ assets as a collateral. Given all the bond rating mess that’s happening, it shouldn’t be a surprise that the bank assets the Fed is picking up are at least partially bad. It’s possible that most of the assets are bad.

So two important things follow from this:

1. The banks are in big trouble. The bank couldn’t use its own assets to get liquidity on the open market. Or in other words, the open market wouldn’t touch their assets, because they are over-valued and possibly worthless. So the Fed has to “buy it”.
2. If the banks owe the Fed this much money ($200 billion is a lot), the Fed now owns a significant amount of the banks. This is like a home loan: the bank owns the home until you pay off the debt. Basically now, the Fed is nationalizing the banks.

So if the banks can’t repay the loan, the Fed has to eat the cost. And that means the taxpayers have to eat it. Basically, we’re looking at a taxpayer bailout of the banks.

But yesterday the market shot straight up. How is the Fed action good news? If the headline read, “$200 billion taxpayer bailout for the banks”, would the market go up? Probably not. Even the dumbest investor wouldn’t say, “Woohoo! The taxpayers had to give the banks $200 billion to kept them solvent temporarily! Buy, buy, buy!”

Keep in mind, this $200 billion is inflationary. The Fed just printed this money out of thin air. That’s massive inflationary pressure.

Unfortunately, this is a losing battle. The problem isn’t liquidity. It’s much more fundamental than that. The banks struggling to remain solvent. They don’t have the assets to cover their liabilities. Liquidity is a short term fix, but only delays the inevitable.

Keep in mind, the average recession has a 30% decrease in equities. So far, we’ll only seen 15%. You think that this recession will be “easier” than the rest? I doubt it.

Update

I just realized that isn’t a TAF, but something new: Term Securities Lending Facility (TSLF). This is an exchange program with a holding period of 28 days. It’s not strictly a cash influsion; rather the banks can take the treasuries that the Fed gives them and then sell them on the open market.

And in 28 days, this action will be repeated. And again and again. And so the banks never have to repay their loans, until they have the assets to do it. This could only work if the banks’ mortgage backed securities become worth their face value again. This seems unlikely. I think we’re just delaying the inevitable. At some point the banks are going to have to face the music.

A while ago, I wrote about inflation and thought it was be interesting (or depressing) to revisit it. Though the Bureau of Labor Statistics (BLS) Inflation Calculator is most likely understating real inflation, it’s still alarming data. Crissy and I plan to have our first child in one to two years. For us to have the same real income my parents at the same point in their life (two years before their first child was born was born), we need to make over 4 times than my parents did.

Why? Because $1 from 1974 is worth $4.21 today according to the BLS.

And that’s just cash flow. Inflation is eating away at our savings as well, since money in the bank is losing value via the inflation tax.

The current recession is interesting. From my limited understanding of economics, economic downturns can be inflationary or deflationary. And, of course, as we learned from the 70’s it can be the dreaded stagflation. Not one seems to agree on what we’ll see this time around. My hunch is that we’ll see substantial deflation as “paper assets” disappear.

The Fed will continuing trying to print our way out of trouble and will keep lowering rates. I think, at best, this will do nothing and at worst, we’ll see stagflation.

Why do I say deflation is likely?

First, the downturn in housing is likely just starting. As house prices drop, more people have negative equity on their house: they will be “underwater”, since they owe more than the house is worth. When this happens there is an economic incentive to “walk away”. The lendor takes a loss since the original asset (the loan) is replaced with a repossessed house worth less than loan value. That lost worth is a deflationary event — the money is now gone.

This should follow in losses in unsecured debt like student loans, car loans, and credit card debt. If people can’t make their mortgage payments, they probably can’t make these payments. So again, the lendor takes a loss on their original investment; another deflationary event.

I expect the same thing to happen to commercial real estate. If money is tight, the market can support less stores. What will happen to all the new strip malls? They will likely sit vacant. So the builders lose money and at best can sell these for a loss.

This same analysis applies to the monoline insurers, banks, and hedge funds — basically anyone that touches SIVs.

Alternatively, the Fed could keep printing dollars and saddle us with stagflation. I really hope that doesn’t happen.

Yesterday, Warren Buffett offered to “buy” the municipal bond portfolio off some monoline insurers. And for some reason that I can’t figure out, the market saw this as a positive sign and went up.

Some background: monoline insurers cover bonds (principal and interest) when an issuer defaults. Municipal bonds are considered to be a low risk bonds and thus more profitable to insure. Usually bond insurers offer insurance mainly to muni bonds, but with the credit bubble, a lot of monolines took on riskier debt to make a profit.

Now, as the monolines are forced to cover bad bonds, they no longer have the capital to maintain a high rating (”AAA”). Without a AAA rating, the monolines can’t attract new business. And without new business, the monoline has no cash flow and will collapse. That, of course, is bad.

Buffett’s offer was to pick up the coverage of only the muni bonds; not any of the subprime mortgage debt. And, of course, subprime debt is the cause of the problems. So Buffett is basically saying, “Let me take your profitable business and you keep the garbage.”

Insuring muni bonds is the only profitable part of the monoline business. And if Buffett takes that over, he will basically get all the future contracts. Why? He’d be the only one with a AAA rating, because he’d have a nice portfolio of safe muni bonds.

Also consider this: for bonds, the insurance premium is paid when the bond is issued. So the monolines would have to pay Buffett to take over the muni bond liability.

Buffett himself said that he’s not being altruistic: “”When I go to St. Peter I will not present this as some act that will entitle me to get in. We’re doing this to make money.”

So why would a monoline accept this offer? Only if they were very desperate. Desperate enough to “sell off” their most valuable asset in the hope of delaying rating downgrades until they to fix up their asset to liability ratio. It would be unlikely to work, so this is really the last resort “nuclear” option to save themselves.

Buffett knows that the monolines are in bad enough shape that they would consider the nuclear option. So he made the offer.

So given this, why did the market go up?

The other day I wrote about some bad service I had at Honda of Kirkland. Someone mentioned to me that if the dealership was smart they would be watching the internet for unhappy customers and try to make them happy. But could they even find my stupid blog? Surprisingly, yes they could. Using Google to search for “Kirkland Honda bad” returns my previous post (though at the bottom of the page).

But I definitely don’t expect this to happen. First of all, the Internet is full of whining people. Is it worth chasing down each of them? And second, the same guy owns both Honda dealerships on the Eastside (Kirkland and Bellevue). He has the market wrapped up and is probably doing quite well.

In that last post, I also mentioned good customer service I got at Enterprise Rent a Car a while ago. And if you look in the comments, you’ll see that not only did an Enterprise rep find my post 24 hours (and 6 minutes) after it was published, she even read it. And since she read that we will be buying a new car soon, she referred me to Enterprise’s car sales department.

I must say, I’m impressed. This is how to run a business.