While watching week-old Daily Shows on my Tivo, I caught Jon Stewart interviewing CNN’s Personal Finance editor Gerri Willis. He brought her on ostensibly to explain the housing crisis, which she did well. At the end of the interview he tests her general financial knowledge in the guise of “helping him decipher the gibberish on financial programs”. You can tell from her expression and guarded answers that she realizes what he’s doing.

Can you find the problem? (Fast forward to 5:40 if you don’t want to watch the whole thing.)

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In Matt’s Ron Paul Endorsement, he subtly mentioned that we are printing money. After a conversation with one of my non-finance friends, it occurred to me that most people don’t realize that we keep printing money.  This friend said that he hadn’t heard about us printing money–surely that would have made the news.

In his Tough Times A’ Coming post, Matt pointed out that the Congressional Budget Office says our federal budget is unsustainable.  I think this is a real recipe for disaster, most people don’t understand how we “print” money and we are in terrible shape with our budget.   So, I decided that I should write a post on how the US government prints money and causes inflation.

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America just got rocked with two big announcements that bode poorly for the future. First, Morgan Stanley is predicting a recession; we’re in the early throes of it already.

From the article:

We’re changing our calls for US growth and monetary policy.  Since the shock of tighter financial conditions surfaced in August, we’ve incrementally reduced our outlook for future growth.  But the time for incremental changes is over.  A mild recession is now likely: We expect domestic demand to contract by an average 1% annualized in each of the next three quarters, no growth in overall GDP for the year ending in the third quarter of 2008 and corporate earnings to contract by 5-10% over that longer period.  Three factors have tipped the balance to the downside: Financial conditions continue to tighten, domestic economic weakness is broadening into capital spending, and global growth — for us, long the key bulwark against a downturn — is slowing.

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I just ran across MicroPlace and thought wow, that’s a great concept.  You give them money and member institutions lend it out to emerging market entrepreneurs. You get to see pictures of the people in third-world countries who receive the loans. It’s an eBay Company so it has the air of legitimacy, although I have some doubts after delving deeper into their business model.

MicroPlace is similar to Prosper (which Matt wrote about here and here); Prosper is a general lending program available to everyone in the United States.  These people have many reasons to borrow money: house financing, credit card repayment, boob jobs, etc. After making a loan, you can expect a 6 - 20% return on your money.

With MicroPlace you are investing in entrepreneurs in emerging market countries.  Interesting idea. Looking at a list of the countries on MicroPlace, I found Azerbaijan, Cambodia, Soviet Georgia, Ghana, Kyrgyzstan and many others. You can drill down and see the pictures and profiles of the entrepreneurs. (Don’t worry, I’m sure the guy from Ecuador isn’t actually in a jail cell.)

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Recently, I have been trying to catch up on goings on in our industry and I ran across the concept of a Unified Managed Account.  It’s an interesting concept really, however, I see it as a marketing gimmick. If this one slipped under your radar don’t be alarmed.  It’s a small ($78 billion) but rapidly growing segment of the management market.

I started hearing about UMA’s about 5 years ago and the buzz keeps growing. Basically, a UMA is a SMA or Wrap program with more convenience. The idea is to allow multiple managers with multiple disciplines access to a single account. It’s not so much a new alternative investment, as it is a wrapper for existing investments.

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Something that always confounded me is how wealth managers generally don’t think in terms of “effective value” for their accounts. They restrict their thinking to the reported dollar value of the accounts they’re managing, not taking taxes or fees into consideration. These before-tax and before-fee numbers are deceptive–comparing taxable values against non-taxable values is like comparing apples and oranges.

William Reichenstein, CFA wrote an article in Investment News that illustrates the problem:

I want to make a case for calculating asset allocations in retirement accounts on an after-tax basis. First, consider 55-year-old Peggy, who is single and believes that she will be in the 25% marginal tax rate in retirement.

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Like anyone who follows our industry, I have noticed all the articles on the decline of the US dollar against the Euro and Canadian dollar.  A quick search on Google news shows mostly bad news but is this really the case?

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To distract myself from my rapidly shrinking net worth, I’ve been reading about the credit markets. For me, running what was (from a certain point of view) a dot com company, the tech bubble in 2001 was easy to understand. But I don’t have much experience with the fixed income market and, outside of a general knowledge that sub-prime ARMs are imploding, I’m not familiar with the details.

The problems have been building up for a while. I thought the 5% downturn two weeks ago was a temporary bump but American Home Mortgage’s Thursday announcement caused a new wave of panic, resulting in a new sell-off. Longer-term, there are two main problems that concern me.

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I’ve finally made it through the Prosper.com signup process (thanks to Andrew and Tim!). The root of my problem was with their verification system, which is the same one used by my brokerage firm. When I want to transfer or withdraw money, my broker verifies my identity by asking me personal questions from my past that only I should know. The problem is I’ve got a bad memory for details so when they ask me to, say, name the street I lived on for three months when I was a sophomore in college (actual question), I fail the test. It’s scary, some of the odd personal details they have in their files.

For anybody who hasn’t read my last post, Prosper.com is a way to borrow or lend money that completely bypasses banks. It uses a auctions to establish borrowing rates based on borrower’s credit scores and other personal information they care to provide. Lenders can spread their capital across numerous borrowers, minimizing the impact of a single default.

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There are many people like me that are leery of ETF’s. I can’t really explain why that is, they just seem like an odd investment. I have done research on ETF’s and I do understand them. But it still feels a bit like a sleight of hand. We already have index funds, why do we need ETF’s?

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