Logical Eccentricity

I am a registered Democrat, but lately I’ve been unhappy with the policies and decisions made by the party. I think the seeds were planted during the primaries with the conduct of the Clintons. It seemed as if they were 100% confident that they would get the nomination that they didn’t need to bother with this whole process. And then later on, when it was clear that there was no way she could get the nomination without a major coup by the super delegates, instead of allowing the party to solidify behind one candidate she choose to continue fighting. While I admire her perseverance, I think it was misplaced and caused more harm to the party than good.

But this post is not about the Clintons. I’m disappointed with the handling of the credit crunch and the related housing crisis. The amount of taxpayer money that has been devoted to bailing out people and companies is insane. Instead of teaching people a lesson and hoping the understand that they can’t over extend themselves the government is just bailing them out. It is setting an unhealthy precedent that the government will rescue the common man; the common man who got a mortgage he can’t afford with no money down, and has a huge credit card bill and continues to buy big screen TVs. What obligation do I have to bail out stupid people that can’t manage their own finances?

Whatever party wins, taxes will go up. Why is my hard earned money going to go to help someone else? What benefit will u get out of helping someone stay in their house a little longer? I’m looking to buy a house I want the prices to crash.

Beyond this whole thing is everyone’s wonderful approach to social security. We all know that it won’t be around forever. But instead of dealing with it, everyone continues to turn a blind eye to it. I know, for a fact, that every penny I am paying in social security tax I will never see again. No candidate is willing to deal with this problem. I hate to say this, because I hate all of his other policies, but the only person to actually come up with a workable idea was President Bush. His plan was to privatize social security and allows us to invest our own money how we saw fit. Unfortunately too many people were against it and it did not happen.

I digress. The point of this post is that I am unhappy as a democrat. As a result I have to start searching for a political affiliation more in line with my ideas. Beyond that, I’ve for nothing else for now.

So, I’m supposed to be getting a $600 direct deposit from the government as a part of the economic stimulus package. We’re supposed to get it tomorrow, so hopefully my bank account gets a nice bump at midnight. My basic plan is to buy the new 3G iPhone, when it gets released that is. But hopefully, I’ll be able to raise money through other ventures so I don’t need to spend the whole $600 on the iPhone. Basically, I’m eligible to upgrade my cell phone in July with AT&T. So, I’m going to upgrade my phone, renew my contract for 2 more years. Once I get the new phone, I’ll unlock it, and then sell it on eBay (or Craigslist or something else).  This should give me a good amount of money, and I have some money for other eBay sales. So, all in all, I should hopefully, only need to spend a couple of hundred on the iPhone. The beauty of it, I have a 20% discount with AT&T, and if I can hack the iPhone, I should be able to keep that discount. Hopefully it will all work out.

So, I finally got my NY State tax refund this morning. For some reason it took New York state almost two months to give me my money back. The federal government gave me my money much faster; it only took them a week or so.

As a part of my pay package at work, I get to participate in a pension and retirement plan. This is basically free retirement money for us, since the company is contributing to it, and we don’t need to do anything. The money gets put into Vanguard Funds, a max of four funds. I’ve made my selections, and it should get put in soon. Hopefully, I’ll be able to figure out a way to get a tracker set up so I can easily keep an eye on them.

The risk free rate is one of the most basic concepts that you need to know. This rate is the theoretical return of an investment with no risk. In theory, it is easy to define, but in practice it becomes slightly harder. Since all companies have default risk associated with them, we can’t use any of their bonds as a risk-free measure. This leaves with government debt. Typical practice is to use the yield from a ten-year US treasury note as the risk-free rate.

This works fine and dandy as long as you are valuing something in the United States. But with emerging markets such a hot topic now, what rate should you use in those cases? The best way to approach this scenario, is to apply a premium to a risk free rate. This premium is the default risk of the country as a whole. For example, you take the 10 year treasury yield and add to it the default risk of the country, and that would be the risk free rate for that country.

H ow do you figure out what premium to add? That is also straightforward to figure out. Almost every country is going to have some sort of bonds/debt outstanding. The yield on a ten year bond (same maturity as the risk free rate), or what ever the closest bond is to ten year, is your premium. This yield signifies how risky the country’s government is; this yield is the rate you need to achieve to invest in that country. By adding it to the US risk free rate you get the risk free rate for the country.

The risk free rate is very important. It is the lowest rate you should demand for any investment you make. Since all investments carry some risk with them, your investment return has to be greater than the risk free rate. The amount it has to be greater than is the topic for the next post.