Carl from Chicago – Page 122

Negative Net Worth

March 15, 2009 by Carl from Chicago

The Chicago Tribune business section has a series where readers write in with their financial issues and the columnists seek professional help and recommendations and publish the results. This column is titled “Law Degree on Her Side” and shows the plight of a woman under 30 who is a lawyer but is struggling under a mound of student debt and is considering bankruptcy.

BALANCE SHEET VS. INCOME STATEMENT

A big element in our economy’s struggle is the fact that the analysts and “experts” were focused on the income statement and not the balance sheet. An income statement view focuses on profits, or the difference between earnings (in her case, salaries) and expenses (rent, living expenses, etc…) and what remains each year. Companies often report earnings EBITA which stands for “Earnings Before Interest, Taxes and (depreciation) and Amortization”. In this model, you become a lawyer because you can make a lot of money (top line revenue) and use it to support the rest of your living expenses.

However, this “income statement” model ignores the debt needed to finance education and expenses related to education. This debt keeps piling up and is a negative item on your balance sheet, which is the long term debt that you owe others, along with the annual interest that you need to pay to service this debt. In an analogy to the stock market, it is the debt payments, along with the fact that companies can’t come up with the cash to pay off principal (or roll-over debt) that is causing the liquidation of companies like Circuit City, Linens & Things, Mervyns, and soon to be many others.

In this lawyer’s case, her balance sheet is “negative” meaning that she is insolvent or has a negative net worth. She has a tiny amount of assets (a bit of retirement savings, some cash on hand, and maybe equity in a car or something) which is all she can show to offset a mountain of debt.

I don’t have exact statistics but I would venture that most Americans have a negative net worth nowadays. By this I mean that the value of their debts exceeds the value of their assets. I also run a site called “trust funds for kids” and I often tell my nephews and nieces that even the relatively small amounts that we put aside ($10,000 or so), as long as they don’t accrue debt, will make them better off than most Americans who have worked their entire lives, since they will have a positive net worth. Obviously some of this is tongue-in-cheek since you need a steady stream of income to pay minimal living expenses but there is much fundamental truth in that analysis in that if you pile up debt you will never accrue enough assets to offset this debt. And if you have a negative net worth, you can never stop working (retire) unless you have a guaranteed string of income high enough to offset your living expenses, interest costs and principal repayments.

Money (Basket) Ball

March 14, 2009 by Carl from Chicago

Michael Lewis is a great journalist and author of several books that are highly recommended by Dan and I. “Moneyball” tells the story of the Oakland A’s, and how they used statistics and a novel view of baseball to win a lot of games on a small budget, as well as the story of Billy Beane, who went from a can’t miss, 4 tool prospect to an MLB bust, and then on to revolutionize baseball as manager of the A’s. “The Blind Side” explained the evolution of the left tackle in the NFL from an also-ran to one of the most important positions on the field, along with a lucid an excellent description of the evolution of passing offense, which sadly enough has apparently never been read by our beloved Chicago Bears. The book also featured Michael Oher, who was plucked from total obscurity to starting on Ole Miss, the only team that knocked off eventual NCAA champion Florida last season. For non-sports related items, Michael Lewis also wrote the famous book “Liars Poker” which explained the rise of bond trading at Salomon Brothers and is a Wall Street classic.

Recently Michael Lewis wrote an article on basketball that appeared in the NY Times magazine – to find the article go to the NY Times site and type in the title of the article in the search engine – “The No-Stats All-Star”.

In this article, Michael Lewis takes on basketball the same way he took on baseball and football, above. He is attempting to do what the best journalists do – tie in the “human element” with an original analysis of a complex topic. The key to Michael Lewis’ writing is that his human element actually matters and isn’t just fluff to glue the story together.

Chicago Parking Meters

March 12, 2009 by Carl from Chicago

The City of Chicago, in order to close their yawning budget deficit without cutting any spending, resorted to a one-time sale of their parking meters to a third party.

Here is a link to a Chicago Tribune article about the lease. The City received $1.2 billion in cash, immediately, but forfeits the revenue from the meters for the term of the 75 year lease.

In practical terms, the meter rates have increased drastically. All week long they are basically $2 / hour, where ever there are meters (most side streets don’t have meters). From 8am to 9pm this would work out to $26 / day. You can see the rates on the meter. Note also the sign that you can’t put in money for more than 30 minutes at a time (on this particular meter) – probably that’s left over from its prior incarnation. I assume that there is some sort of credit card way to pay else you need to walk around with 100+ quarters (a roll?) just to pay for parking.

Costa Rica Economy

March 10, 2009March 9, 2009 by Carl from Chicago

Recently I had an opportunity to travel to Costa Rica. Being a rather boring blogger / analyst type, I thought a lot about the Costa Rica economy.

The Costa Rican dollar is known as the “colon“. Being the finance type, I went out to exchange money into local currency prior to entering the country. Most big local banks like JP Morgan didn’t have colones on hand – although they said that they could order the money and I’d have it in a few days – so they sent me to a specialized currency exchange. At this currency exchange there was a pretty wide “bid / ask” spread, or the difference at which they would purchase currency back from you against what they’d sell it to you for, indicating a rather thinly traded currency. I gave them 300 USD and received a big wad of Costa Rican currency – the common denomination I used was the 2,000 note which was a bit over 4 USD. This is a rate of about 500 colones to the dollar, or each one is worth about 2/10 of a cent.

I spoke to a settler from the US who was a Quaker who opened a cheese factory in Monteverde in the 1950s – he said that the colon was worth about 5 to 6 to the dollar in the 1950s. Thus even while the US dollar has depreciated against other major currencies, such as the Yen, the colon has plummeted from 20 cents on the dollar to .2 cents on the dollar, or to 1% of its “relative” value from the 1950s.

“Shovel Ready” stimulus

February 26, 2009 by Carl from Chicago

Recently I went to the Chicago Dog show and then down to Hyde Park, where our president used to live, to eat at a restaurant I saw on the show “Check Please” called Calypso. The restaurant was a Caribbean restaurant and the food was excellent. It seemed nice to get some sun and imagine I was in the tropics, if only for a minute.

While driving home on East Hyde Park Boulevard, a major street in Hyde Park, I was driving with a car right beside me and I came up to a monstrous pothole. Since there was someone right next to me I tried to swerve and slow down but still ended up in the hole. The depression was very large and the edges were completely jagged – it was more like a construction site than a pothole.

My tire was flat in a matter of seconds. I pulled over in a residential neighborhood and with the help of some friends along for the ride (I am not a particularly handy guy, although I was game to get out there and do the work) we changed the tire and put on the little spare.

Later I heard that the City of Chicago will reimburse you for pothole damage but I wasn’t able to find the link on their site. I will look into it a bit more but I am not too hopeful that our maze of bureaucracy would be paying me out in my lifetime.

I was looking to get new tires for my car, anyways, since the damn Altima will live forever (it is going on 10 years) so I wasn’t really out much. Glad I didn’t replace the tires FIRST because there was no way any tire could have survived that ditch.

The ironic part of this is that city mayors are scrambling to figure out what to do with the windfall of cash and they can’t even bother to plan to fix a major pothole right near the President’s house.

Cross posted at LITGM