The Little Green Tents

Because I had the opportunity to delve into the family archives yet again, and again read my ancestor's poetry, I have to post this.

My great-great-grandfather, Moses Rheem Wetzel was a "fife boy" in the Civil War at the age of only 14. He was part of the relief contingent that arrived the morning after the battle at Gettysburg, and he lived long enough to be brought back to the site 75 years later for a commemoration.

He wrote this poem about returning to that tragic place:

The Little Green Tents

The little green tents where the soldiers sleep,
And the sunbeams play and the women weep,

Are covered with flowers to-day,
And between the tents walk the weary few,
Who were young and stalwart in sixty-two.
When they went to war away.

The little green tents are built of sod,
And they are not long, and they are not broad,
But the soldiers have lots of room;
And the sod is part of the land they saved,
When the flag of the enemy darkly waved,
The symbol of dole and doom.

The little green tent is a thing divine,
The little gren tent is a country's shrine,
Where patriots kneel and pray;
And the brave men left, so old, so few,
Were young and stalwart in sixty-two,

When they went to war away.

Assets and Counterparty Risk

Over the last few weeks I have been trying to elucidate my understanding of counter-party risk. This is my analysis, and I am interested the thoughts of others on this issue, as I pursue a path of risk management.

Physical Assets

Assets held in physical form, which may include those assets that we currently have not intention of selling (part of the total asset class) which are therefore not held for $FRN value, but for other characteristics we find desirable.

Physical assets have a problem as a store of value to the extent that they have one or more of the following qualities:

1. Lack of widespread demand
2. A high rate of decay (spoilage, rusting)
3. A high maintenance cost
4. Vulnerability to loss of value through market saturation
5. Lack of liquidity
   

Real Estate assets in general have been performing poorly as a store of value for the last few years, particularly when compared to other physical assets.

Physical Tokens of Monetary Exchange Units

Also in physical form is a small cache of printed $FRN which should probably be enlarged to arbitrage any condition in which printed $FRN purchases more real goods than electronic exchange credit. I am also hoarding (rather than dishoarding) physical UST coins that are currently illegal to melt, but whose physicality may have value.

Physical tokens of monetary exchange units perform only nominally under current conditions, and like the smaller-scale physical assets generally, carry a small risk of failure (through loss or theft).

Equity Positions Not Held on Account

An equity position in a business held in one’s own name (sole proprietorship, partnership, whatever) is an exchange of savings (capital) for an expectation of cash flow (dividends, profit sharing, etc.). The investment is a liability of the company, and as such carries no guarantee of performance, either actual or nominal, and the major risk is the actual success or failure of the business in question.

Equity Positions in a business are not a store of value, but an effort to use capital to increase human productivity in exchange for an ongoing cash reward.

Bank Accounts (FDIC Insured)

The Treasury’s intentions to print to support the government’s insatiable appetite can be taken as a given; keeping the FDIC solvent is a relatively cheap process of buying voters through nominal performance on the occasion of bank default, although there may be some time, paperwork and general bureaucracy involved. These accounts are credited in $USD increments and currently insured with no limit for non-interest-bearing accounts.

$USD held “on account” with a bank is stored in a convenient form for exchange, which is the main selling point. However, there are still counterparty-created constraints on access to those theoretical $USD (they are theoretical, as the bank uses fractional reserve processes to generate profit). These constraints may include (depending on account and bank) time and location access (e.g. passbooks accounts), daily limits on certain transactions (e.g. ATM use), and structural limitations based on local conditions (my local branch does not keep much in the way of physical $FRN, and there is therefore a limit on my ability to obtain physical $FRN from them under currently circumstances). There is also the issue of reports to the USG that are generated when transactions meet certain bureaucratic criteria.

Bank accounts perform nominally, and are expected to continue to do so, but are subject to counterparty gating problems to a degree that may limit their usefulness as a store of value; in addition, nominal performance may not be sufficient in conditions declining $USD purchasing power, such as when the USG decides to weaken the $USD through monetization.

Brokerage Accounts

Brokerage accounts, regardless of where they are held, are not FDIC insured. Their performance is not guaranteed, even nominally. Performance of these accounts is driven by the intentions of the company involved to retain and attract customers, both retail and corporate. The measuring stick these companies use is nominal ($USG) and thresholds for performance are generally mean-driven (e.g. “versus the Lipper Average”) and usually not particularly sensitive to small deviations.

Shares or units held “on account” with brokerage houses are theoretical, on the books of the brokerage house as a liability of the corporation. The brokerage house buys shares or units in bulk, and essentially assigns them to holder’s account merely as a bookkeeping formality.

Brokerage accounts are not guaranteed to perform AT ALL, and even under normal conditions are not expected to perform nominally. $USD held on account with a brokerage house is explicitly “at risk” in the pursuit of the returns that accrue with investing in a successful enterprise. Unfortunately for today’s investors, mal-investment has been accruing in the $USD financial universe for such a long time that the near-term chances of making a success of such an investment in real terms is catastrophically low, and the market for financial instruments looks more rickety by the day.

To make matters worse, for those who had some funds on account prior to the run up in stocks over the last 30 years of credibility inflation, there is a kicker to liquidating brokerage accounts in the form of capital gains tax owed on the nominal gains. This up-front pain in additional taxes owed makes liquidating brokerage accounts psychologically daunting. In addition, liquidating a brokerage account involves talking to people whose employment depends on trying to keep funds under management, and that can undermine all but the most firm intentions.

In addition, delays in access to funds are routine, and routes “out” for $USD credits are few. Generally EFT to a bank is preferred, although old-fashioned wire transfer is occasionally available; certainly “cashing out” in $FRN is out of the question.; essentially, funds held in a brokerage account are essentially bank account funds lent out to pursue gains remittable back to a bank, without the nominal performance guarantee: the more counterparties involved, the higher the default risk, and all the time/space/medium constraints of bank credits are involved, only more so.

My Take on Risk

I realize that these descriptions may be overly broad and simplistic, but the exercise has helped me understand why I have made some of the decisions I have made with respect to storing the “excess productivity” that I have been given control over as the financial head of my household. My preference is for physical assets for store of value, and the others only on as as-necessary basis for a variety of reasons, with the exception of Brokerage Accounts. I have no idea why anyone would have that kind of trust after MF Global.

Old News for FOFOA

Although this little rant of mine was prompted by the latest dust-up on FOFOA's blog, it really is applicable everywhere that learning is occurring:

Old News for FOFOA

Reading the current headlines is like sorting through the bets of participants in a giant game of Texas Hold’em: it’s not a question of if any single participant lies (all of them do), it’s only a question of who’s lying when (and the he best lies are only shaded truth); depending on what’s in plain sight, participants in the game estimate odds of claims of concealed resources.

Imagine watching a game with stakes of epic proportions, the consequences of which would make even side-bettors watching the game phenomenally rich, only you are arriving at the venue with the contest already in play. You survey players at the table, and the cards already dealt face-up, quietly listening as each player bets, wondering how you can possibly figure out who will win, when the guy sitting next to you starts to whisper.

The guy next to you says he’s been sitting here for a while, and gives you some perspective from bets before you arrived: about tendencies to fold early, and you’re immediately relieved that you have a testable hypothesis to try and observe the validity of which going forward: trust but verify. Your new-found ally also points out a data stream that the venue posts of prior bets for the information of the audience, which is searchable for data analysis. After another hand you can see that some of what they guy next to you said is working out, so you ask the question: Where did it come from? And he says that he has some observations of some other guys who were watching the game earlier, and even before he himself arrived, and those observations act like a lens through which he has looked at the game for his time in the audience.

Now stop.

Suppose instead you’re the guy sitting behind the guy who’s whispering. You hear everything the whisperer says, and you’re trying to make each newly arrived bet make sense in your head. You desperately wish that the whisperer would explain things more, sometimes, but you’re doing your best to keep up with understanding the here-and-now current bets, in light of the whisperer’s explanation. Maybe you’ve been having a small conversation of your own, trying to exchange understanding of the whisperer’s theories, and maybe spinning your own, but trying your best to keep silent together when he talks, and ask thought provoking questions if you can.

Ask yourself: which would you have the newly-arrived guy sitting next to your de-facto professor do, at this moment: give the assembled group a fresh-eyed observation of current events to evoke the unvarnished opinion of the guy who is right here, right now, answering questions based on his entire observation period AND his interpretations, based on theories espoused by ANOTHER prior observer who had shared his opinions in a similar fashion, in the deeper past, or instead turn away and start reciting old bet sequences without context, directly from the commonly-available searchable database?

What if the noob made the wrong choice? How pissed would you be if he wouldn’t listen when you asked him to stop? How bad would it suck to be that guy?

How much worse would it suck to be the guy who realizes he’s been asked to stop and that dozens of people are staring daggers at him?

Check your ego at the door my friend, The guys staring daggers at you have a point. There’s a guy sitting next to you who has managed to make enough sense that he’s gathered a group of avid listeners; we listen to what he says and we try to extrapolate in a way consistent with the theory as developed by those before us, as we understand them. If you don’t like the theory, fine – find another group to sit with, create your own group, or put together a coherent theory and carefully explain it in a cogent counterargument. If you like the theory and you’re confused, it’s fine: then ask questions based on your current understanding, and try to elicit answers from whoever is willing to consider it. Please refrain from interrupting the flow of discussion with quotations from the record that bear no visible relevance to the issue at hand: if you feel that something from the past casts illumination on the current moment, reference that material with at most a brief quotation, and provide some explanation of what thesis you are trying to defend.

It’s the civilized thing to do.