The Noble Pundit

A Few Quick Links

Here are some of the stories I was looking at today that I didn't post anything on. Maybe you'll find them of some interest.

Why Does No One Like Bush? - typical Left Coast BS

Suspect Quiet On Northern Front - so what exactly is going on in North Korea?

Credit Bubble Bulletin - so just how stong is the current market environment?

Iraqis Showing True Colors - an angry military mom takes ingrate Iraqis to task

Confronting The Enemy - Dave Duffy send a little love note the terrorists way

Revolution and Deflation

A few nights ago I posted a short essay on why the post Civil War era was not a good comparison with today. Robert Prather of the Mind of Man commented that another factor in the deflationary environment after the War Between the States was an overcapacity on the part of the railroads, which was true and a factor that I had overlooked. He drew comparisons to the bandwidth glut that we have today and seems to be implying (I might be wrong here) that overcapacity in bandwidth could allow for deflation today without there necessarily being the terrible effects normally associated it.

Now, as I see it there are really four points in history that we need to look at here. The first is, obviously, the immediate post Civil War era. Next is the period around the Great Depression. Third are the boom years after WWII. And finally we want to look at the boom that began early in the Reagan years.

Mr. Prather is mostly correct in his assertation that there was significant overcapacity in the railroads right after the Civil War. Much of the industry was wracked by bankruptcies and liquidations. And in most markets it did take nearly 30 years for the overcapacity to be soaked up. There was one significant exception though.

Through portions of the Rust Belt - Pennsylvania, Ohio, Western New York - the railroads were actually had capacity constraints. The two railroads best positioned, the Pennsylvania and the New York Central, were rapidly expanding their route structure and their cargo carrying capacity. They were the exceptions, but they were significant ones. They served the area that was being most affected by the booming Industrial Revolution.

Now the immediate post Civil War era wasn't the only one to see a significant overcapacity in the railroads. In the 1930s, a time when rail was still king, there was also a massive overcapacity. Like the late nineteenth century, there were bankruptcies all around in the industry. But there was no downward pressure on shipping rates. Oversupply was eliminated by getting rid of capacity as measured by freight cars and locomotives.

Why the difference? Government regulation.

In 1887 Congress created the Interstate Commerce Commission. In the immediate post Civil War era, shipping rates had significant downward pressure as the brutal free market competition kept pressure on the rates the railroads could charge. Even the Pennsy and the NYC had keep rates under control, otherwise a more nimble competitor might gain inroads into their territory. So natural market competition, along with massive increase in shipping efficiency brought about by the railroads, put shipping costs into a good deflationary (defined by me as falling prices in a growing economy) cycle. And with shipping being such a significant component of a product's cost at the time, it helped to create a good deflationary pressure in the general marketplace.

In the 1930s, by contrast, government regulation prevented the railroads from dropping unprofitable branch lines or from lowering rates to encourage business. Instead, it pressed onerous regulation and rate increases onto the railroads, which were suffering not so much from competition from each other as they were from competition in the short haul markets from trucks. It's interesting to note that most of the railroad bankruptcies from the 1920s on started in the roads that had heavy reliance on short haul routes. The rate inflexibility caused by the ICC led to a massive shift of business from rail to highway - one that was never reversed in many cases.

So overcapacity in a transport industry isn't, by itself, a root cause of good deflation. But I had mentioned the integration of the former slave population into the economy as another factor in the unique situation of the post Civil War economy.

As the slaves were integrated as functioning members of the economy, they would have provided a substantial boost to its growth. They now had to acquire their own goods and services (more spending) and they also contributed a boost to the supply side of the economy as they finally had their efforts recognized separately from those of their former masters. The contributions of the former slave population cannot be overstated.

There has been one other time in our history when a "new" population was permanently integrated into the economy. During WWII and the immediate post war era, women were fully integrated into the economy for the first time. No longer were they just happy homemakers. They were out working, earning, and spending. The addition of women to the workforce allowed an expansion of the economy that was in excess of what the pre-war workforce would have allowed. The boom created by women joining the workforce lasted, also for nearly thirty years - from about 1940 until the end of the 1960s. But the addition of women to the workforce, even for a significant a change as it was, didn't lead to deflation.

So what was it that allowed a good deflationary environment in the post-Civil War era, but hasn't been seen since?

The overcapacity in transportation and the integration of new segment of the workforce were both important in and of themselves. But they, even combined, wouldn't have been enough to create a growth and deflation environment.

It was the Industrial Revolution that was the final kicker to bring about the good deflation of the post-Civil War era. The quantum leap in productivity and economic efficiency was what really put the economy over the top into a "perfect case" scenario.

It was the confluence of two revolutionary events and an unregulated rail industry that helped to create the special circumstances. In the other instances where some of the factors were in place, widespread deflation didn't occur.

But as we look at the early years of the Reagan era, we see the first great revolution in efficiency since the Industrial Revolution. The Computer Revolution (for lack of a better name. It was extremely important and revolutionary, but not Revolutionary. To be explained in a few minutes) brought about a whole new level of productivity.

But it wasn't supported by other significant changes, like the integration of the slaves or women into the workforce. The Computer Revolution helped to pull us out of stagflation. It brought deflation to information-based industries. It helped to create a massive economic boom.

But there wasn't economy wide deflationary pressure. The Computer Revolution marked a major turning point in our economic history, but it proved that even a Revolution alone isn't enough to create the "perfect case" needed for simultaneous deflation and economic growth.

So what about the current situation with bandwidth?

History points towards it being significant in certain industries, but not across the entire economy. We are already seeing it change the face of media distribution. Software that at one time would have been purchased on physical media is now downloaded - at a fraction of the distribution cost. Old line media companies, particularly the music companies, fear the change. They are realizing that the Internet will completely change the face of their industry. As bandwidth gets cheaper and faster, the pressures on the record companies will increase and increase. Only those who figure out how to adapt and compete in this new order will survive.

Deflation of prices in music, movies, literature and any other media will be substantial. But it will be primarily concentrated in those industries.

The bandwidth overcapacity, like the Computer Revolution before it, will cause significant upheaval in some sectors of the economy, but will barely register in other sectors. They were great leaps forward, but in terms of the overall economy, they weren't revolutions of the scale of the Industrial Revolution.

True economic revolutions are based in massive productivity gains in every sector of the economy. The Industrial Revolution achieved that. The Computer Revolution, while being far-reaching and important, has not created the sudden, immediate, and permanent jump in productivity of the Industrial Revolution.

This isn't to minimize the significance of either the Computer Revolution or of the overcapacity in bandwidth. They will be two of the factors most likely to help us to avoid a deflationary environment right now. We are not in a strong economic position at the moment. There isn't a far-reaching Revolution like the Industrial Revolution on the immediate horizon right now. The Information Revolution (the Computer Revolution and the bandwidth growth, combined with other factors) has been producing at best 5-10% productivity growth. That is great and points to the long term strength and viability of our economy, but it isn't the multi-hundred percent growth needed to create a deflationary growth economy.

The author of the original NY Times article was correct in his assertation that it is possible for growth and deflation to co-exist. But the post Civil War environment was an aberration in our economic history. The most powerful Revolution we have ever known really came into its own as two other major economic shifts came into play at the same time.

We don't have that some historic confluence of events happening right now. That's why we need to avoid deflation. We are not in a position to suffer a bout of "bad" deflation. Bandwidth and industry specific deflation along with the boost provided by a weak dollar will help to ward off the specter of an economywide deflation in a weak economic environment.

Let's just hope it's enough.

But We'll Have An Agreement

Oops. Looks like the IAEA isn't thinking too highly of the Iranian nuclear program. They have announced that Iran has failed to comply with safeguards.

They imported nuclear material and processed it without declaring it. They have a uranium enrichment plant that is in an "advanced stage." They have nuclear equipment that is likely stolen.

But they promise not to make a Bomb.

They'll promise to return the spent nuclear fuel.

And Mike Tyson will promise not to rape another woman. Promises from some people just aren't worth a damn.

Are they in violation of the Non-Proliferation Treaty? I don't know. Probably, but let's let the UN guys decide (it'll make them feel important).

But before things go any further, we need more than promises. We need more than assurances.

If Iran can't come completely clean and can't stomach the idea of US or international oversight, then they don't need a reactor.

The power of the atom is different than the power of saltpeter and sulfur. Only the US and Japan truly understand the power and consequences of the unleashing of these weapons. Because we taught the world unequivocally the lessons of the awesome power of the atom, we have a special responsibility to ensure that it doesn't get used in a flippant or irresponsible manner.

Is that atomic imperialism? Maybe. But being the world's sole superpower does entail special responsibility.

It's our responsibility to ensure that, until Iran reforms, they can't have the Bomb.

It's All The Jews Fault

Found these two articles juxtaposed against each other today. Very interesting contrast.

Haaretz - Hamas repeats pledge to continue suicide attacks

JPost: Settlement outpost removals to begin

So, Hamas is going to continue the intifada because they're ticked off at Abu Mazen, but the Israelis are going to begin dismantling settlements.

This is why land for peace or any other plan that requires Israel to make any concessions before the Palestinians make substantial changes will be doomed to failure. The Israelis have tried time and time again to start the process by making unilateral and unreciprocated concessions.

It has got to be becoming painfully clear to even the most diehard peacenik that the Palestinians, as represented by Arafat, Hamas and the other suicide groups, want nothing to do with peace. Peace means the end of their reason for being. Peace means a shift from being blameless revolutionaries to actually having to govern and be accountable.

Peace means no more buying ambulances to transport weapons; it means have to transport patients to hospitals that have real drugs and real doctors.

Peace means no more blowing up roads and bridges; it means having to build and maintain them.

Peace means no more relying on Israel to divert the attention of the malcontents created by years of disinformation and indoctrination; it means having to deal with your own security and education.

Peace means the end of Hamas and Arafat's Fatah organization. They can only tear down that which others have built. They have no purpose in a functional society.

Israel needs to quit playing these games and the US needs to quit organizing them. When the Palestinians want peace, they'll begin by making real and tangible concessions - the first of which will be the real acceptance of a Jewish state in the Middle East.

Is Monty Python In Charge Here?

The last thing that our government needs is to get bigger. Way too much of our tax money is wasted on useless governmental programs. So what are some people proposing? The creation of a new Cabinet level department. The Department of Peace.

This is ludicrous. We do not need another Cabinet level post. Especially not one that is devoted to feel good drivel.

We don't need national acupuncture or a national exercise in visualization. We need to have real leadership, willing to make real, difficult, decisions. We need to have a population willing to stay the course in our fight against the forces that would destroy us.

A Department of Peace now makes as much sense as it would have in June 1942. Hitler and Tojo would have laughed at us. Yamamoto didn't fear the US psychiatric capability; he feared our military might.

I'm going to stick my neck out here and say that no war in history has been won by psychoanalyzing our opponent and convincing him that his anger is all because of repressed childhood memories. If we went to war with psychiatrists instead of soldiers we would get our tails kicked in a heartbeat.

We cannot heal the hatred in others. They must heal it for themselves. Our goal needs to be making the hatred more painful for the patient than the cure. When it comes to healing or reforming, as a nation we are not a doctor, we are a corrections officer.

Liberals like this one complain about American imperialism and colonialism. They complain about our imposition of Western values on other nations. Yet the prescribe their "holistic medicine" without regard as to whether their patient is ready for it or not.

The people they want to "heal" are not diseased patients. They are hardened criminals that live only to harm and terrorize others.

We don't need more New Age healers and feel good remedies. We need more of Warden Rumsfeld and his boys cracking some terrorist heads.

The best way to ensure peace in America is to take the fight to the terrorists.

A Primer On Wahhabi Islam

Excellent article from a few days ago over at Soldiers For The Truth, which really lays out the basis behind the argument that not all Islam is bad, just the extremist forms. The author Robert G. Williscroft explains, in detail, what Wahhabi Islam is and why it is so dangerous to the West.

Mr. Williscroft has laid out the foundations of the two major sects of Islam and of Shari'a, pointing out some details that I wasn't aware of. He also details out Wahhabi Islam in all its gory details. It is one of the harshest (and best supported) condemnations of Saudi Arabia that I've seen in a long, long time.

Wahhabi Islam is the extremist view of Islam. It is the basis on which all the radical movements are based. And it is 100% supported by the House of Saud.

But what is the key element? Education. Wahhabi Islam doesn't have real education (which I define as reading, writing and arithmetic), it only teaches religious absolutism and hatred for anything that is even slightly different. It isn't education; it's indoctrination into a cult of hate.

Until there is a real educational system in place in the Islamic states, there will be problems. At the beginning of the Renaissance in Europe there was a shift from nearly exclusively religious education to a more scientific, secular educational system. The shift from religious dogma to scientific inquiry helped to drag Europe out of the Dark Ages.

Islam is currently in its own version of the Dark Ages. There is virtually no progress in the Islamic world. Like the Church dominated Europe of old, Islam today is ruled by a backwards theocracy. Instead of moving forward, the religious leaders are dragging Islam backwards. Who will be the Islamic Galileo? Who will be the Da Vinci? Will there be an Islamic equivalent of Venice or Florence?

An Islamic Renaissance needs to happen and soon. Europe halted the spread of Islam when the continent was at its weakest intellectually and militarily. Since then, the West has experienced the Renaissance and Enlightenment. Technologically, we can do things that were not even conceived of during the last great incursion of Islam. Islam on the other hand, hasn't really changed. Intellectually, they are at the same point, still fighting the battle against scientific reason. Militarily they have moved from horse-mounted cavalry to steel tank, but there is still the lack of initiative or creativeness that allowed Charles Martel to defeat the Islamists at Poiters.

The House of Saud is the biggest impediment to the needed Islamic Renaissance. Their fanatical support of Wahhabism is repressing the necessary inquiry by denying large portions of the Arab world the tools needed to advance their civilization.

So what I want to know is why do we continue to support the House of Saud?

I know the anti-Bushies will come out and say that it's because of the family business and the family ties. But that can't be the explanation. This has been fermenting for the last few decades. Reagan was the last President who could use the Cold War excuse. Why did Clinton stand fast beside the brutal and repressive regime?

Even protecting our oil supply isn't worth supporting these guys. Was it to protect the military contracts? Was it because of their "support" in the fight against terrorism? Or was it because the US media and citizens chose to look the other way and accepted "blissful" ignorance instead of facing up to the facts?

No matter what the reason, this nation has supported the evil in Riyadh for way too long. Extremist Islam must be stamped out for the good of the world. Dumping the House of Saud is the best start we could make. Let the rest of the extremist wither away after their primary source of resources and recruits to the death cult is ceremoniously relegated to the dustbin of painful history.

Time to introduce them to what Neal Boortz refers to as the Church of the Painful Truth and the sermon on the failure of extremism.

Want To See A Real Crusade?

Some Muslim extremist group has made a threat to kill the head infidel - the Pope - in "the name of Allah."

Now I'm not Catholic and I certainly haven't agreed with many things the John Paul has said. But he is a man who, more than anyone else alive today that I can think of, tries to live his life according to his religion.

John Paul is more than a man, he is a symbol. Despite the times when he is wrong, he is a symbol of all that is right with Christianity. I'm not trying to minimize the faults of the Church or the man, but he does seem to stand just a step above. He seems to suffer his (and the Church's) faults with the stoicism of a man who knows that he's comfortable in meeting his Maker.

John Paul is a good man and one who commands respect, even from non-Catholics. What would the Muslims achieve by his assassination?

They would strike at a symbol. They would kill the man. They would celebrate and sing paeans to Allah. For a few minutes, a few extremists would exalt themselves with the fantasy that they defeated Christianity and proved the supremacy of Mohammed.

But they don't realize that the Church is more than one man. The Vatican would mourn and move on. A new Pope would take the place of John Paul. The Christian religion would survive, easily.

And there would be a unity in the Church that hasn't been seen in years. Catholics and non-Catholics alike would be aghast at the assassination. The "live and let live" moderates of the Christian faith would swing in great numbers to the side of "eliminate Islamic extremism."

The wakeup call for Christianity would be the equivalent of a foreign power assassinating President Bush. The fury unleashed by John Paul's death would be enormous; the effects certain.

The extremists would be hunted down and eliminated. They claim that they are fighting a holy war. They would find out what a real holy war is about.

We, the Christians, would, of course, win. The carnage on the Muslim side would be widespread and terrible. It would almost be a Crusade of medieval proportions.

The cleansing of the Muslim faith would be nearly complete. The extremist elements would be destroyed and they would remember that there is a fear greater than the fear of Allah.

They would remember to fear a united and angry Christianity.

Laurence Simon over at Amish Tech Support has also commented on this.

French Muslims Upset With Rules

There has been a pretty good controversy brewing in France about the "rights" of Muslims to practice their religion in contradiction of the rules and laws of France. The latest round of the battle appears to be becoming the right of Muslim girls to were a veil in the French public schools.

One of the things that the French have done very well is to keep their government secular. There is very little religious influence on governmental decisions. Even on a personal level, the leadership never seems to take their cues from any belief other than pure rationalism. On occasion, their dogmatic adherence to secularism has led them to make poor decisions (Iraq was a prime example. For the French, the rational response was to oppose the overthrow of Saddam because of the commercial ties. However any assessment based on any form of values of right and wrong would have led them to support the US, but this is all a topic for another day).

The French public schools were set up as centers of scientific, secular reasoning and education. They don't teach religion of any type. The French government is so anti-religion-in-schools that it is trying to pass a law banning skullcaps and crosses along with the veil (which is the right thing to do, in my opinion).

The Muslim students do have other options, although the other options do have costs. They can attend private, Islamic schools. They can graduate via correspondence schools, as the first person in the article did. It may not be free, but there are other options.

However, if they are going to take advantage of the state funded educational system, they have to understand that they, like everyone else, must follow the rules. If the dress code says no veils - no veils. If the graduation requirements say that you must take biology and must read Voltaire - you have to do it if you want to graduate. Perhaps being exposed to the ideas of the rest of humanity might not be that bad a thing.

France does allow a great deal of religious freedom. If a Muslim woman wants to wear a burqa while walking down the streets of Paris, that's her right. But as soon as she wants to take advantage of the benefits of a state funded institution, she needs to conform to the rules of the institution.

Freedom of religion is not freedom from rules. Your freedom does not extend to the point of tearing apart the rules that allow protect everyone's freedom. We start with the veils, but what's next? Do we stop school five times a day to allow the Muslim students to pray? Do we close schools for every religious holiday?

Schools have a mission of educating students. France has decided that they want their educational system (when the teachers aren't on strike) to be extremely rational and secular. They attempt to teach their students the skills that they will need to compete and survive in today's global environment.

If banning the veil (or the skullcap or the cross) leads to the establishment of more religious schools, so be it. Those schools still have to achieve the same mission - creating well-rounded, well-educated graduates. If the religious schools fail in that mission, then they will eventually lose support.

At least the French government is thinking clearly on this issue.

OK, 1 post

Actually, I'll post some of the articles I had been looking at tonight. Maybe you'll find a few of the interesting, too.

Is Martha being unfairly persecuted?

Is Bin Laden sub-human? Karzai thinks so.

Does America want to destroy Islam?

Is Intermarriage a problem?

I'll have thoughts and commentary tomorrow.

No posts for tonight

Sorry about the lack of posts tonight. Nothing in the news really grabbed me too hard and I'm working on a bigger post on deflation and economic revolution. I'll have it up tomorrow when I can keep my eyes open.

Another Take On Deflation

I was just over taking a peek around at The Mind Of Man and came across a link that he had to a NY Times article on deflation. The article isn't too bad, but it misses a few key points.

Too much supply is not a good thing. Too much supply actually inflates the prices of items by increasing the costs of carrying inventory (breakage, extra insurance, extra warehousing, etc.). It also impedes a company's ability to react to changing market conditions.

Too much supply also eventually leads to cutbacks in the production. As inventories build up, companies will begin to cut back on production, which means buying fewer raw materials and employing fewer workers. Oversupply of a market is not good at all.

But what made the post-Civil War era different? There were a couple of reasons that are never addressed.

First, very soon after the Civil War was over, the Industrial Revolution began in earnest in the US. We also began to assume our position as one of the largest exporters to the world. We were able to massively increase production (which led to lower prices at home) while still finding overseas outlets for the increased production. So the "too much supply" was really increased production made possible by being able to export our excess production; it was not an increase in inventories.

We also had in the immediate aftermath, an entire subset of the population, the former slaves, that was beginning to add to the economy in ways that they had not before the war. They began to accumulate wealth and to buy and provide products and services in quantities not seen before the war. The addition of the former slaves to the economy was not an insignificant event.

So, the author of the article is right. After the Civil War we were able to increase of production, increase our GDP and reduce prices all at the same time. But it was only because of the unique set of circumstances in play at the time.

It is possible to pull off the same thing today - but it would be politically unacceptable.

To have deflation in a growing economy today, we would have to turn to large-scale specialization - on a national level. That means that whatever is cheaper to buy from overseas sources, we buy from overseas sources. Whatever we can do cheaper than anyone else, that's what we do.

It would mean the wholesale elimination of entire industries and the explosive growth of others. It would also mean the loss of a great many of our national capacities. Our self-sufficiency as a nation could no longer be assured.

Or we could reduce business regulation and excessive marginal taxation. But that's like asking Congress to cut spending (actually it would be asking Congress to quit spending), which means that it won't happen either.

The confluence of beneficial factors that were in place in the late nineteenth century just aren't there today and the political cost of creating a positive deflationary environment is simply too high.

That's why I'm going to keep arguing that deflation would be a bad thing for the US. Our problem is a lack of demand that was caused by layoffs and restructurings that were caused by oversupply.

The NY Times writer does a great job of analyzing why deflation was successful in a very unique time and place. Today, we are in neither the same time or place. The results of deflation today would not be the same.

Also, take a look at Mr. Prather's analysis of the situation. He has pretty much nailed it and also has gone a step further than I have and has looked at what the next step beyond a weak dollar might need to be. It's very well thought out and very well articulated.

I Hate Religous Posts

In my searching for topics to write on this evening, I've come across several articles which have extremely strong religous undertones. One was a discussion of homosexuality, the other was a Jewish extremist position against the Road Map in Israel.

Both articles were posted in close proximity to each other on Free Republic, which allows for comments. The homosexuality story had well over 125 comments when I looked at it. I didn't bother to check out the comments on the other article - I never even finished reading it.

In both cases, there was liberal quotation of both the Old and New Testaments. There was considerable mustering of religious text for both sides.

But what I noticed, was that those using the Bible to promote their position, spoke of the Book as the absolute Word Of God. Those using the Bible more for defensive purposes, used other quotations to try to point out contradictions in the Book, but then tended to dismiss it as "a 3000 year old primitive text."

I don't like that - from either side.

For what it's worth, I am not claiming to speak from a position of authority or a position of religious righteousness. At one point in my life I attended Florida Southern College and was required to take two religion courses (I ended up taking four because I found them interesting). These classes really helped to shape the ideas that I had been forming for several years prior.

I don't believe that the Bible is without some Divine influence, but I also don't believe that it is the absolute Word of God.

The Old Testament is a series of Jewish oral traditions that have been written down. Over time and through translation, there have been slight changes to the stories. Wouldn't the Word of God be unchanging, no matter the time or the medium?

But at the same time, they are more than just mere stories. Never has there been a better basic handbook for life written than that of the Old Testament. The lessons of the Book are timeless. The basic lessons are never changing. Perhaps man could have come up with such a collection on his own, but the perfection of ideas, their very timelessness, points to something a bit greater.

Does the Old Testament (and the New as well) contain contradictions? Sure does. Does it mean that there are mistakes in Bible?

I don't think so. The Bible relates stories. Stories of different situations that man found himself in. Different situations require different solutions. The stories relate that.

But they are the stories of man. Man created the oral traditions and man wrote down the stories. Sometimes the details are imperfect, but the details themselves aren't the important part. The important part is the lesson, which remains constant despite discrepancies in the details.

The New Testament makes no pretensions about being The Word. Instead, you have four stories about the life of Christ, written by four men: Luke, John, Mark and Matthew. The second half of the New Testament consists of letter from Paul. All stories by man. The only book that even claims to be of divine origin is the Book of Revelations.

The stories of the Bible can be divided into a couple of categories: lessons that are timeless and lessons that were a product of their time.

The timeless lessons include those like thou shalt not steal and thou shalt not kill. Others like the kosher laws are products of a specific time and environment (The kosher laws were originally written to be a form of a health code. Their effect was to minimize the spread of disease. In the days before the value of sanitation was realized, simple precautions could have wondrous effects.)

But what about homosexuality and the form of the State of Israel? What kind of lessons are those?

I believe that the homosexuality lesson was closer being a product of the time, than to be a timeless lesson. The State of Israel lesson impresses upon us the need for such a state, but the boundaries weren't consistent even in the Bible. They would change with the ebb and flow of wars and changes of government. The lesson of Israel is closer to being timeless, but it doesn't quite have all the qualities.

These are the stories that really define a religion. No one doubts the timeless lessons; few adhere zealously to the lessons for a different time. It is the position on the middle lessons - the homosexuality, Israel, the institution of marriage - that make the Judeo-Christian religions unique, even amongst themselves.

So what is the right answer to these questions? Is there a right answer to these questions? Maybe, maybe not. I don't know. All I know is that on the day I meet my Maker, I'll be sure to find out (I have a lot of questions for Him. In fact, He'll probably send me to Hell for being a pest.).

In the meantime, I'm going to go on believing that homosexuality is wrong, but not an abomination that damns one to Hell without hope. I'm going to believe that Israel does not absolutely have to have every single territory mentioned in the Old Testament - two people in two states is, I believe, an acceptable solution in the Eyes of God.

The Bible is a book written by man. It has a divine inspiration, but like everything man does, it is open to interpretation. It targeted a certain people at a certain time in history, but many of the lessons it teaches us are timeless.

My views on religion are not orthodox. I know this and as such I never try to force them on someone who doesn't want to listen. I try to live my life everyday following the lessons of the Book. Sometimes, I fail. Some would say that I have failed because I interpreted the book wrong, and that that alone is enough to damn me to an eternity in Hell. I don't believe them. My God is the kind and understanding God - one with a sense of humor (or else I really am screwed).

For those who would berate me for not accepting the Bible as the absolute Word: you live according to your interpretation; I'll live according to mine. I'll bet we'll meet in the same place on the other side.

In fact, I've already bet my soul on it.

My Take On Martha

I've been quiet about the whole Martha Stewart fiasco because I've been wanting to see all the details as they came out.

I know all the allegations against her, insider trading, fraud, etc. But two nights ago, I happened to have on Bill O'Reilly who was interviewing a former SEC investigator. The guest mentioned that Stewart had once been a stockbroker. Since then I have been looking a confirmation (not really diligently looking, but I've been looking).

Today, in an article over at OpinionJournal.com I found it. "[T]he CEO and former stockbroker is also smart about business...."

So now I have my ammunition. If Martha is convicted of the charges against her, she needs to be made an example of. Not because she's Martha Stewart, Mrs. Prissy Perfect, but because she's Martha Stewart, former stockbroker.

She knew what she was doing. She would have known that the information she was given was illegal. She knew that once she got that info, she was barred from trading the stock temporarily. She knew that any trade, previously arranged or not, could be construed as insider trading.

You learn all that when going through the licensing to become a broker. You get the lessons drilled into your head during the annual compliance meetings. As a broker, you know that any appearance of insider trading will bring down the full weight and wrath of the SEC on you.

Yet, she chose to trade anyways. And then, she tries to cover it by claiming that the order was already in place. If so, there is a record of that. Why hasn't the record been produced? The trade would still get her a slap on the wrist, but she probably wouldn't be looking at jail time for it.

Don't let the spin fool you. This is not an attempt to deflect attention from Enron, MCI or any of the other accounting scandals out there. This is an attempt to remind brokers and inside traders that there are serious consequences for illegal trading. Martha is not being treated any differently than other licensed miscreants. The National Association of Securities Dealers publishes monthly a listing of penalties for broker violations. $50,000 fines, lifetime bans from practicing and even jail time are not uncommon - especially in an insider trading case.

If Martha is guilty she needs to pay a big price. She had sophisticated knowledge of securities transactions and securities laws. She had no excuse for taking the action she did.

Should be an interesting trial to follow.

US-Pakistani Relations

Last night I was reading the results of a poll taken in Pakistan by a Saudi News Organziation (I'm at work on a fake internet connection so I can't take the time to track it down now, I'll get a link to it later tonight when I get a chance Here it is.). When I first read it I thought there was some significance, but I couldn't put my finger on exactly what it was, so I didn't blog anything on it.

This morning, I had the epiphany that I had sensed last night.

The results showed among other things that 43% of Pakistanis view the US as a miliatry threat to them. Fully 2/3s of Pakistanis (or maybe it was 75%, I don't remember which exactly) believe that more Islamic law is needed in Pakistan.

Now when I found this over on Free Republic, some of the comments included a warning that the poll was conducted by a Saudi organization (does call the fairness of the poll into question as there is a good possiblity that the organization oculd have introduced some leading questions), but most of the comments were along the lines of "good to see that they're starting to fear us" or "let's use India as the middleman" or "figures they would want more Islamic law."

If these results are accurate and havn't been skewed too much by slanted questions, I see some potential problems here.

Pakistan is supposed to be, at least nominally, our friend. The US has ties with the Islamabad that go back a fairly good ways. They are not a perfect country and sometimes they do things we don't like. Often times they seem to be very opportunistic and more focused on the good of Pakistan than on the good of the region or the world.

And Musharraf is a dictator. He overthrew the government and imposed himself as the top dog. That also runs counter to our desire to see freedom and liberty spread to the far corners of the globe.

They've developed a nuclear capability in opposition to our requests to not do so. They (along with the Indians) have taken the Subcontinent to the brink of convential, and most recently nuclear, war several times. So with all this why does 43% of Pakistanis fearing the US as a military threat worry me?

Again, Pakistan is supposed to be our friend. Despite the dictator and despite the warts we have openly called them a friend.

After 9/11, they were one of the first nations to stand up in the fight against terrorism. Now maybe it was for selfish reasons. Maybe Musharraf felt the pressures of instability being caused by al-Qaida and saw the US War on Terror as a convient excuse to rid himself of those pressures. There have certainly been some very public failures on the part of Pakistan in the war. But also remember that many of the greatest successes in the War on Terror have come courtesy of the Pakistanis.

I think that Musharraf is playing a fairly sophisticated PR game. He knows that the terrorists have popular support, but he also knows that the US is his greatest protector. So he allows very public failings of little true significance to the war effort to play to internal pressure, while making sure that the real targets are nailed.

But what's happening is that some in the US are falling prey to the internal PR spin of Pakistan. Some in the US are calling Pakistan a fair weather friend (despite the fact that they have taken on this battle in the face of enormous internal pressure not to). We're beginning to put the Pakistani population on edge.

They are beginning to fear the US and they are beginning to view Musharraf as a puppet of the US. If the pressure keeps getting greater and greater, there may be an opportunity for another coup. And the results probably won't be as palatable. Another coup will likely lead to an Islamic theocracy in Pakistan.

And then the worst fear of many of the commentors on the original post over at Free Republic would be realized - a nuclear armed Islamic dictatorship.

I think it is time that we reassess our relationship with Pakistan. If they are truly our friend, we need to work towards calming some of the 43% that views us as a threat. If they are not a friend, well then 43% fearing us isn't enough.

If we don't decide soon, I think that they'll be deciding for us.

UPDATE:

I knew that by doing this at work I would miss something. And I did. I kind of missed the main point I wanted to make.

If Pakistan is our enemy, they should fear us. If they are anything but, they have no reason to fear us. We do not attack non-enemies. The British are sitting around wondering when we're going to invade London. The Canadians don't sit around pondering when we're coming for Toronto or Quebec. Even the French know that they only we enter Paris in anger is when we're throwing the Germans out.

43% of Pakistanis view their nation as an enemy of the US. I'm guessing that many of that 43% believes that Pakistan has done nothing that wrong as to become our enemy. And by and large they're correct. Pakistan should not be considered an enemy. Maybe not a friend, but definitely not an enemy.

And so we come back to my original conclusion: if Pakistan is our friend or not our enemy, we need to work on correcting the perceptions among the 43%. We don't want to allow the Islamofacists any opportunity to gain traction in their quest for domination.

Aww. The Palestinians Are Disappointed

The initial reviews are coming in on the summit between Bush, Sharon, and Abu Mazen and they don't look to good for the Palestinians.

Talking to residents of Gaza, most Palestinians were disappointed by the talks. Specifically, they didn't like Abu Mazen calling for an end to the intifada. Instead, they were looking for a call to demilitarize the Jewish settlers.

This is why the peace process is doomed to failure without reeducation. The Palestinian people still seem to be operating under the paradigm of pushing the Jews back into the sea. Disarming the Jews while continuing the intifada plays right into that mentality.

That is why the call to end the intifada has been received so poorly. Ending the intifada means that the dream of a Jew-free Palestine will have to wait a little longer.

Now the Jewish settlers are not without blame here. They have brought many problems on themselves. But that being said, who is more likely to be a serious problem, the settlers or Hamas?

At least with the settlers there is a pretty good chance that Israel will hold them accountable for their actions. With Hamas, there is no accountability. There is no restraint.

The article does point out that there are some Palestinians are rational. Some understand that the intifada is not the way to peace and prosperity.

Too bad the rational ones are overshadowed by the disappointed majority.

Something Postive & French???

It's been a while since we've seen much that was both positive and French. The backstabbing and lunacy of Chirac and de Villepin have given us a bit of an skewed view of France. There are some French people like Sabine Herold who have got a clue.

She is against the disruptive nature of the labor union strikes. She actually wants her tax money to pay for services like public transportation or education or to be spent in ways that the majority, not the tyrannical minority, wants.

She's a very bright young woman, having written an excellent essay in which she takes on the idea that freedom is a western concept. It's very well written and well thought out. For anyone who thinks that there are regions of the world that are incapable of freedom, this should be required reading.

It's kind of hard to believe, given the current anti-French slant in the news that something good could actually come out of France. But Mlle. Herold is living proof that there is hope, even for France.

Media Arrogance Or Military Failure?

The death of two journalists at the Palestine Hotel in Baghdad is back in the news again. Turns out that a group aptly names the Committee to Protect Journalists has issued a report deploring the deaths as "avoidable."

The arrogance displayed by the writer of the article is amazing. She believes that nothing said by the US military could possibly be true. She is willing to jump to conclusions and condemnations without giving the Pentagon an opportunity to conduct their own investigation. And it's not as if the report she's basing her argument on is from an independent organization, it's from the Committee to Protect Journalists.

She basically accuses the officers involved of manslaughter (she admits that the deaths were unintentional). But were their actions really "unreasonable and grossly reckless?"

They suspected they were enemy fire from the direction of the Hotel. They had evidence pointing towards an enemy spotter in the direction of the Hotel (and the Hotel was the tallest structure around. If you're going to perform reconnaissance wouldn't that be where you wanted to be?). They saw a binocular flash (indicative of a spotter maybe?) from the Hotel. They asked for permission to fire and the request went all the way to the battalion commander.

I see nothing unreasonable or reckless about that sequence of events. The tank felt as though it was under fire, recognized the potential problems with firing in that direction, asked for permission, and then after three different levels of command had analyzed the situation, a decision to fire was made. Where is the unreasonableness?

The problem that the writer has with the situation is that journalists died. She hasn't a lick of concern about the safety of lives of anyone other than the journalists.

In a moral universe, there is no excuse for killing journalists under any circumstances.

Not everything in this universe is moral. There are some things that are evil. There are times when innocent people will die in tragic and unfortunate circumstances. The fact that they're journalists doesn't make their deaths are more or any less tragic. To say otherwise is the height of occupational conceit.

Media credibility isn't in the toilet because of the embed program or because some journalist once chose to actually believe something they were told. No, media credibility is down the drain because of the blatant and sickening elitist attitude that many journalists take.

The author is right. The public does need accurate information so that we can make informed decisions.

The problem is not with failing to "defend the rights of the nonembedded media," the problem is with the media not being able to provide unpoliticized coverage of the story.

A Commercial Break

I don't do this often (actually I've never done this), but in this case I'm going to make an exception.

A few months back, I helped a friend to get a life long dream business off the ground. For years he ran a major construction company in central Florida, but he always wanted to be a comedy writer. So when he retired, he decided to pursue that dream.

The result was a product called Hollywood Spoofies. What he has done is to spoof some of the more famous Hollywood productions, both of TV and film, like Frankenstein, Dallas, Star Trek, and the Godfather.

But unlike most spoofs, which are just simply books, he has made these interactive. You get together friends, a TV and DVD player and you actually produce the spoof. He provides the script and sound effects, you provide the booze and the laughs.

These are a great way to do something different at your next get together. No more standing around making idle chit chat, no more sitting around watching some boring home video. This will let you make your next get together fun, exciting and memorable.

For the record, I get nothing out of this. I helped with some of the work on the website, but that's it. I don't make a dime for trying to help Don with this. I am doing it because he's a friend and the product really is unique and exciting.

Go check him out over at hollywoodspoofies.net. If you have questions or want more information, don't be afriad to email him, he's very good about responding and trying to help.

Quit having the same old boring parties. Buy a Hollywood Spoofie and have some fun!

PS: This is one of the few times that I will admit that there is a picture of me floating around somewhere out there on the net. I am actually in two of the pictures. Your mission, should you choose to accept it, is to figure out which two pictures.

Now back to our regular programming.

Investing - Part VIII

Bonds

OK, time for part eight of my four part series (four parts - what was I thinking?) on investing knowledge I learned as a broker. In this episode we'll take on bonds. All kinds of bonds: Government bonds, agency bonds, corporate bonds and munis. It's going to be great fun! Let's get started!

Bonds are actually the one class of investment that I saw misunderstood more than anything else. More people could explain complex option orders than could comprehend bonds. It really wasn't right - bonds aren't that hard. People just don't know much about them for two reasons: stockbrokers hate them and they're generally viewed as being boring old-people investments.

So what is a bond? Simply put, a bond is a debt. When you buy a bond, you are loaning the issuing government, corporation, agency, or whatever money, usually $1000. In return they promise to pay you back your $1000 by a certain date plus interest at regular intervals. Nothing real complex about that.

Why do stockbrokers hate bonds so much? A couple of reasons really. First, when you buy bonds, you tend to hold them for a while. Since the broker gets paid only when you trade, a long-term holding isn't too valuable to him. Second, there are quite a few firms that don't even let their stockbrokers trade bonds. Again the lack of commission is a real turnoff for the guy who needs to make his Porsche payment.

The other reason why bonds aren't real popular is because some people view them as "old people investments." There is a bit of truth to this. Most of the bond investors out there are older. Part of the reason is because it takes money to play in the bond market (unless you're using mutual funds) and part of it is because bonds are a conservative type of investment, not exactly what you want your portfolio to be primarily comprised of when you're in your 20s and 30s.

But why do people buy bonds? What's their advantage?

Bonds are a relatively safe investment. They also generate income in excess of that available through money market funds or bank savings accounts. They also provide opportunity for small capital gains for the patient investor.

Let's look at what a bond consists of. It is really going to be two parts: the principal and the interest. The principal is the $1000 that you originally loaned to the issuer. The bond contract will specify a final date of repayment on which the $1000 principal will be repaid and also will state the rate of interest that will be paid on the issue. The interest payment is known as a coupon (from the days in which you actually had to redeem little coupons clipped from the bottom of the bond in order to collect the interest).

But bonds trade on the bond market and the values may vary depending on the degree of risk that is factored in to that particular issue. So when you think of investing in bonds there will be two numbers that you're most interested in: the Yield to Maturity (YTM) and the price (which you will need to multiply by ten to get to the real price per bond).

The YTM is essentially stating what your return would be, in an annualized percentage, if you held the bond from that day until redemption. The YTM takes into account both the rate of interest and any capital gains or losses that might be incurred due to the current price.

Now there are special bonds known as municipal or muni bonds, in which the YTM will actually be a Tax-Equivalent Yield (TEY). This is because munis are tax free to some extent usually (more on this in a minute). The TEY will always take the tax-free yield and normalize it by assuming that taxes we're paid at the highest tax rate so that you can see how the muni would compare with similar taxable bond issues.

So who exactly issues bonds? Bond issues are primarily made up of four different types: Treasury bonds, muni bonds, Agency bonds and corporate bonds.

Treasuries are the safest investment in the marketplace today. Occasionally, you will hear the phrase "risk free rate of return" thrown around in investing circles. This is referring to the return on a Treasury. These bonds are backed by the full faith and credit of the US government (key phrase there). The Treasury market is one of the most active, with major banks and corporations trading huge blocks back and forth all day long, and is also the most accessible to the individual. The Treasury Department has a wonderful program known as Treasury Direct, which will let you purchase new issue Treasuries in the same auctions and at the same rates as the big players. Treasury Direct has been one of the biggest and most important advances in the bond market in years.

Next on the pecking order of safety are agency bonds. These are the bonds that are issued by the various government and quasi-government agencies like the Federal Home Loan Agency (FHLA), Sallie Mae, or Freddie Mac. These bonds are issued by an agency of the government, but they are not backed by the government. No federal agency has defaulted on a payment on one of these issues, but the possibility is there that it could happen before there would be a default on Treasuries. Hence the agency bonds tend to carry a little higher rate of interest and a higher YTM in general.

After the agency bonds, we get into everyone's favorite - muni bonds. Muni bonds are the most unique, widely held investment out there. Most all munis will be tax-free in the issuing jurisdiction and superior jurisdictions. This means a bond issued by the State of New York will be free of New York State income tax and Federal income tax, but not from city income tax for a resident of New York City. In contrast, a muni issued by the City of New York will be tax free at all three levels: city, state and federal. Munis are also usually insured and depending on the financial standing of the insurer, the muni may be considered to almost as safe as a Treasury. But remember WHOOPS. Munis can and do default sometimes, which is not true for agencies or Treasuries.

And finally at the bottom of the list we have the corporate bonds. Corporates run the gamut of security from General Electric's bonds - which are usually rated as being almost as safe as a Treasury - to the junk bonds made famous by Michael Milken. Smart investing in the corporate debt arena can be very rewarding, but you have got to do your research on the issuing companies.

There are also other variations of bonds such as zero-coupon (they sell at a big discount and pay all the interest in one payment at the end), equipment trusts (popular with railroads and airlines, they're backed by mortgages against the equipment), mortgage bonds (usually against a piece of property somewhere) and many, many other types. Should you ever run across a bond that seems to have an odd caveat to it, I would recommend researching the issue further. There is nothing worse than to find out that you just bought the 3rd junior subordinated 2nd mortgage series bonds backed by a piece of swampland somewhere about 25 miles east of Miami.

So what kind of bond is right for you and your portfolio? Depends on what you're looking for. If you're after safety, go with Treasuries, agencies and maybe some munis and high grade corporates. Looking for income? Go for high yield corporates and munis. Looking for tax sheltered income? Munis are the way to go. The type of bond you buy is usually dictated by your needs at the time.

The other big concern with bonds is the cost. Most bonds are $1000 face value (the principal amount). To create a real, diversified bond portfolio using individual bonds, you're going to be looking at an initial investment of at least $50,000 - and usually more. Mutual funds are a great way to invest in bonds and for high yield issues - funds are the only way to go. The risks to the principal in a high yield bond is really just too great unless you have big money invested in the market and you have just a little, tiny piece in any one junk issue.

Bonds shouldn't be the big scary investment that you know you need, but that you're afraid to learn about. The basic concepts are familiar to most all of us - especially if you've ever gotten a mortgage.

Bonds should be an important part of your overall financial picture. Educate yourself on them. Ask your broker questions about them. And then figure out how they fit into your overall asset allocation model.

This will probably be the last investing topic for a few days (I think I said that four posts ago, though). I am still looking at doing an advanced options post and maybe one or two others (topics still undecided). If this series has been useful or interesting, please let me know by leaving a comment. I would really appreciate it.

To get to the other sections:

Part I - Fundamental Analysis

Part II - Technical Analysis

Part III - Options

Part IV - The Economy and The Market

Part V - Market Mechanics

Part VI - Mutual Funds

Part VII - Asset Allocation

Oh, I Feel Much Safer Now

I wonder if people are really as clueless as they seem sometimes.

Vladimir Putin has decided that the Iranian nuclear program must be subjected to increased scrutiny to make sure that it doesn't become a threat to the world.

That's all well and fine. I'm in total agreement with the idea that there needs to be closer supervision of the Iranian nuke program. I'll even go out on a limb and say that the IAEA might even be an acceptable overseer (although I'm not real confident on that point).

But Russia is the country supplying everything to Iran here. They have, more than anyone else out there, some say in the Iranian nuke program.

So what are the Russians doing to ensure world safety? How are they using this influence?

They want a written agreement from Iran to return the spent fuel when their done with it. 10 years they get to play with it, refine it, do whatever they want with and all they have to do is to sign a piece of paper promising to send it back when they're done.

How must trust do you put in the "word" of an Iranian terrorist government? Would you be willing to bet your future on their "promise to behave?"

I wouldn't.

If this goes through, Iran will have the Bomb before a decade is up. When it comes time to return the fuel, some nutcase in Tehran may very well decide to send it back to Moscow on the tip of a missile.

How long before the concerns about missing fuel start to surface? Think it was scary when Russia was the only one losing nuclear waste? Wait until the Iranians, those paragons of peace in the Middle East, declare that they lost some. Wait until they announce that they have given a couple kilos of nuclear material to al-Qaida scientists to "study."

Giving Tehran a nuclear capability is like giving a drug addict free access to the police evidence rooms. Pretty soon all his friends will be there, everything will be gone and the neighborhood will be a more dangerous place.

Iran just puts it all on a larger scale. The weapons out on the street will be much more lethal. The neighborhood that they're terrorizing will be much, much larger. The concept is the same.

Putin won't stand up to this. Blair, Schroeder and Bush are going to hide behind the IAEA because they don't want to risk the political fallout for making a stand. Chirac, well he can't stand - he's too busy hiding from his own shadow (plus he has no spine).

Looks like once again, we will be forced to count on the Israelis to stand up and do what no one else will - the right thing. For all their faults and warts the Israelis have an uncanny sense of threats to their security. Give Iran the Bomb, first place to get nuked is Tel Aviv.

I hope that someone can stop the madness. Let Iran get the Bomb and we may have the Cold War all over again - this time without a halfway rational foe.

Oh, yeah. Amidst all the doom and gloom here I almost forgot. Read the article. It's actually pretty good. <sarcasm>Chirac provides some wonderful comedic relief at points </sarcasm>.

Two People In Two States?

So, who exactly is really standing in the way of a true peace between Israel and the maybe soon-to-be-state of Palestine? Is it Yassar Arafat as some have theorized? Or is it in facta small group of Palestinian and Arab intellectuals?

The author of the essay makes a pretty good argument for the real problem being that of the intellectuals. Their abject denial of the real cause of their problems (and those of the Arab culture by and large) along with an absolute unwillingness to accept the existence of Israel have been causing them to ignore reality at all costs.

I can't say that I really disagree with that assessment. The Palestinian's problems are largely of their own creation and have been made worse in large part more by the "brotherly" Arab nations that keep them in "refugee camps" and forment hatred and victimhood than by Israel.

And their biggest problem is their fanatical devotion to Arafat. More so than their hatred of women. More so than their anti-Semitism. Yassar Arafat is the prime extant example of poor Palestinian decision-making.

Arafat is what he is. He's a terrorist; unreformed and unrepentant. He has failed with every opportunity that has been granted to him by Israel or forced on Israel by the United States.

He has not made any attempts to curb the violence by the Palestinian zealots. He has broken the promises he made to remove the destruction of Israel as a goal.

He has never pleaded with his people for reason and understanding.

No, instead he has called for Palestinian children to blow themselves up.

The biggest impediment to the Peace Process is not the myopic vision of the Palestinian-Arab intellectuals. It is the hate and insanity preached by their "leader."

For the Palestinians to learn the ideas of self-criticism is within the realm of possibility. They can learn to analyze and learn from their mistakes.

But the dumpy little terrorist at the top has got to go first. He is the "Road Closed" sign on the Road Map.

The World, It's A'Changing

Not a good day to be a tyrannical dictator of your own little Third World slum pit. One of our best friends, Bashar Assad has sold out the dictator occupation by allowing the publication of a letter to him in which his own subjects call for reform.

Now this certainly isn't a modern day Declaration of Independence. It is basically a letter expressing concern about how Syria is going to handle to situation it now finds itself in. Heck, it wasn't even published in Syria.

But the fact that the Syrian government would release to foreign news groups a letter calling for reform in the Syrian government shows that Assad is starting to really feel the heat. Once again, he's reacting to external pressure. It's almost as if he's sensing that pure Ba'athism is no longer an option.

But, of course, he has to save face and show that he's not caving to US or Israeli pressure. So he releases a letter, from his own citizens, calling for exactly many of the reforms he has to make in order to keep power.

So he's no longer the tyrannical nutcase dictator. Now he's the benevolent leader, who through the virtue of his great wisdom has become the sole leader of his nation.

Change is coming in Syria in one form or another. It may be externally applied change in the form of a US regime change; it may be an internal change in which Assad loosens his iron-fisted grip on the country.

More likely, I see it as being a change towards him tightening that grip. I see him cracking down even harder and pushing his nation of the edge into lunacy.

I just hope he doesn't take too many people's lives with him.

Investing - Part VII

Asset Allocation

Part seven of my four part series on investing is going to take a look at the idea of asset allocation. Asset allocation is the idea of dividing your investments between the three major investment categories so as to take advantage of each type of investment that is available to you.

There are really three main classes of investments: stocks, bonds and cash. Stocks represent ownership in a company. Bonds represent a debt that the company owes you. Cash is, of course, cash. So why would you want to have a little of each category in your portfolio?

Stocks, as evidenced by the bubble and its bursting since the late '90s, have great return potential, but also great risks associated with them. An all equity portfolio is really only for the extreme risk-taker, for someone who can stand to use 50% or more of their investment (yes, 50%).

Bonds on the other hand, are very conservative. They are designed to generate income and usually provide little in the way of capital gains. Not all bonds are completely safe, but an all-bond portfolio is one that would generally be considered conservative.

Cash is really a poor choice, as far as investing goes. Interest returns on cash are almost always much less than that available even through government bonds. An all cash portfolio is a great way to lose purchasing power over the long haul.

But what if, like me, you're neither ready for the investing X-Games nor are you ready for the absolute safety of an all T-Bond portfolio? What do you do then?

Most people actually fall somewhere in the middle ground. The first few questions you need to answer are: Why am I investing this money? How long will it be before I need it? How much am I willing to lose in 12 months? How much can I lose before it becomes impossible to sleep at night?

These questions will actually give you a pretty good idea as to your risk tolerance. Risk tolerance is essentially how much risk you are willing to take in order to have a decent return on your money.

People saving for a retirement thirty years out and who can stand losing 40-50% of their portfolio in a 12 month period will generally be able to take on a high degree of risk.

Folks saving for a new house in a few years or an imminent retirement, or that can't bear the idea of losing even 20% in a year, will probably be leaning towards a low risk portfolio.

Someone with immediate expenses on the horizon (in a year or less) will actually want to keep cash or an extremely conservative bond selection in their account.

But how do you adjust the risk of the overall portfolio, given just the choices of very risky stocks, very safe bonds, and rock solid cash? You allocate.

Let's take someone who is moderately aggressive. They're probably looking at 20-25 years before needing the money, but they don't want to take too much risk. Their portfolio, after discussing their wants and goals with their broker, will probably be somewhere between 50-70% stock, 25-40% bonds, and the balance in cash. This will give them the growth potential of the stock, while still maintaining a stabilizing influence from the bonds and also being ready for unforeseen opportunity or problems by keeping a cash position.

Over the long term (measured usually over a span of 15-25 years - this is real long term investing), their portfolio will probably average between 9 and 11% annualized returns.

9 to 11%? After the years in which making 30% or more was impossible not to achieve? Yep. The average return of the stock market since the 1930s has only been running right around 12.5% (and that was a few years ago before the drop in stock prices really happened). 9 to 11% is a realistic number.

The idea behind asset allocation isn't to maximize your return in any one year. The goal is to maximize the overall return by smoothing out the ups and downs of the market.

Stocks and bonds tend to run counter to each other. In other words, when stocks do well, bonds generally don't. When bonds do well, stocks usually slide. The idea of asset allocation is to make sure that you participate in both beneficial movements, while not being fully exposed to the drops in each individual market.

But it really isn't enough to allocate your assets just among stocks, bonds and cash. You also need to allocate within each class. For instance, you would want to have some large-cap stocks, some small-cap stocks, and maybe even some international stocks. In bonds you might want to have some government bonds or some high-yield bonds. Each choice that you make will affect the degree of risk and return for your portfolio.

This is where mutual funds come in to play with asset allocation. They allow you to create a well-rounded portfolio without having to put up a small fortune. If your model calls for $5000 in stocks, rather than investing it all in one stock that could do poorly, you can put some in large-cap stocks and some in small-cap stocks, achieving an additional level of diversification in your account.

But how do you know how to allocate your portfolio or how much you should put into each investment class, category and type?

Most brokerage firm websites have some form of an interactive asset allocation modeling program that will give you some broad overviews of things you might want to do. For instance, they will help you to learn your risk tolerance level and will provide some model allocations (like 60% stocks, 30% bonds, 10% cash) that will get you pointed in the right direction.

If you have an account with some firms, they may have another program for customers only which would take the 60,30,10 model and maybe say of the stocks do 50% large-cap, 30% small-cap and 20% international.

Quicken has an asset allocation modeling program built in, also. It is decent and is certainly as good as most of the free ones you will find on the net.

The best option, and the one that may cost some money - especially now that brokers are looking for anyway to turn a dime - is to sit and talk things over with your broker or financial advisor. All of the computerized models are canned standard responses based on a mathematical formula. Your broker can help you to tailor a real model, just for you, taking into account your wants and desires.

Asset allocation is one of the most powerful tools in investing. The smoothing effect that it can have on a portfolio over the long term can be phenomenally beneficial. It can also do wonders for some folk’s mental health, if the gyrations of the market are too much.

If you're serious about long term investing as opposed to trading, research asset allocation. Figure out what allocation will be best for you.

It is the best help you can give yourself in the market.

To get to the other sections:

Part I - Fundamental Analysis

Part II - Technical Analysis

Part III - Options

Part IV - The Economy and The Market

Part V - Market Mechanics

Part VI - Mutual Funds

Part VIII - Bonds

Investing - Part VI

Mutual Funds

In part six of my four part series on investing, we'll take a look at mutual funds.

Most everyone with a retirement plan of some sort has mutual funds in their account. Many people also invest in mutual funds outside of their 401k or 403b accounts. But what are mutual funds, what kinds of mutual funds are there, and is there anything to watch for with some funds?

People are often surprised when they find out about how funds actually work or the multitudes of differences between them.

So to start, what is a mutual fund? A mutual fund is basically an investment vehicle where you and a bunch of other people pool their money together, hire an investment manager, and then sit back to watch the money roll in. That's basically the simplest description of a mutual fund.

So if the idea is so simple, why does mutual fund investing seem so complex? Why are there so many different variations of the same idea? Why would they bother to make closed-end funds, open-end funds, equity funds, bond funds, balanced funds, income funds, allocation funds, funds of funds - why so many different kinds of funds?

Let's start by look at the two different types of funds: open-end and closed-end. Open-end funds are the type that everyone is familiar with through their 401k plans. Every time that someone invests more money in the fund, more shares are created. Every time someone redeems shares, they are destroyed. But with open-end funds that number of shares is always in flux. Price changes are dictated by the value of the underlying assets only.

With closed end funds, they trade like stocks. They are listed on the exchange (there are quite a few on the NYSE in fact). The price per share is determined not only by the underlying asset value, but also by the expectation of future performance of those assets. So for instance, if the market thinks the Korean economy is going to do well, shares in Korean closed end funds will sell at a premium to their actual asset value. That won't happen with an open-end fund.

Within each of the two major types, you will have different classes of funds. There will be large-cap, mid-cap, small-cap, international, income, high-yield, balanced, asset allocation and many, many other classifications. These mainly become important when looking at portfolio allocation (which will be the next section of this series), but we'll look at them here real quick.

The large-cap, mid-cap, and small-cap funds are all equity or stock funds. They are investing in the owning chunks of corporations. Large-cap stocks tend to focus really on the 300-400 largest companies in America. Mid-cap looks at the up and comers, but even these are usually companies with a track record. Small-cap stocks are really where you start getting more into speculating. These are generally unproven or new companies. Great opportunity can be found in the small-caps, if you know where to look, but so can great risk also.

International funds are a special class of equity funds. Depending on what type of international fund they are, they may invest in both US and overseas corporations or solely in foreign companies. The way to tell which you have is to look for the following words: if it says "global" it invests in both the US and overseas with usually about 30-35% being foreign. If it says "foreign" it will be investing almost exclusively overseas.

Another popular class of funds are the bond or income funds. These are funds that are designed to generate a monthly cash income for the holder. There are several types of bond funds: government bond funds which invest only in government issued bonds (which are not all insured mind you), Treasury funds which invest in only Treasury issues (considered the safest), high-yield or junk bond funds (high risk) and many, many other types of income funds.

Then we have the allocation funds and the funds of funds, which are all attempting to take the mutual fund concept to the next level.

Now that brings me to the question of why would you even want to invest in mutual funds when the potential return from buying individual stocks is much higher?

Most of this discussion will be in the asset allocation section, but simply put it is risk management. If you invest $1000 in a stock that goes belly up, you've lost your $1000. If you invest that same $1000 in a mutual fund, that happens to own that same stock, when the stock goes belly up, you only lose a small portion of your investment. Your money is spread out over more investments, meaning the potential effect of each investment on your overall portfolio is small, which can be both good and bad.

Mutual funds were designed to ease diversification. Most studies that I've seen show that somewhere between 15-20 different stocks is generally a well-rounded portfolio and will allow you to fully participate in the market. Assuming each stock was only $10/share, 100 shares of 20 different stocks would cost you $20,000 to acquire. A mutual fund allows you the same diversification for as little as $1000.

But what's the deal with the A shares, B shares, C shares, X shares, Z shares, and whatever letter shares? And why would I want to buy a load fund over a no-load fund or vice versa?

Taking the second question first, there are times when each fund may be more appropriate. Mutual funds are not free. There are really three costs of ownership: the operating expense, the load, and the return (yes it can be a cost).

The operating expense is the most critical. This is the year-to-year cost of running the fund, expressed in a percentage of the total assets. Most no-load funds will have a slightly higher operating expense than a load fund. Usually, with a load fund it will take 10 years or more to overcome the costs of the load, or until the load fund becomes the more profitable investment. You do have to watch sometimes though, as I have seen funds with some pretty high loads, 4.5-5% (as compared to less than 2% normally). A no-load fund with a high operating expense may be a very, very bad deal.

But what is this load I keep talking about? Essentially, think of it like paying a retainer to the fund manager, or a commission to the broker (it's actually a bit of both). If your investment is intended to be long term, a load will usually allow you to "buy" a lower operating expense. Key thing to remember is that if a fund is a load fund, there is no no-load equal. The B shares (which will have a back end load or contingent deferred sales charge - a percentage that drops as the fund is held until it switched over to an A share usually at the end of seven years), even when touted as "no-load shares" still get their money out of you. Look in the paperwork, the operating expense is almost always 1% per year higher than the A shares.

And now what about these A shares and B shares? A shares will be shares on which the load is paid up front. B shares, sometimes incorrectly called no-loads by less than honest brokers, have a back end fee - and a higher expense ratio, C shares, which most people never buy, are designed for very large purchases and will generally have a small front end fee, a larger back end fee, and other restrictions in return for a lower operating expense.

The biggest thing to watch for is that most brokers will try to steer you towards either load funds or no-load funds without ever looking at the real load-adjusted returns. Get all the numbers. You would not believe how many people I've seen avoid a good fund simply because it had a load. It is also amazing how many people bought load funds without looking at the real return. Be sure to check the Morningstar reports before buying any fund. Giving up a return for lack of knowledge is a cost of ownership and one of the most avoidable.

Mutual funds can seem daunting and even downright scary. There are all different kinds of funds and all kinds of ways of analyzing them.

The most important thing is to not just pick funds at random. Have a purpose for the fund and the selection process becomes much, much more simple - and effective.

In the next section on asset allocation, we'll look at how to figure out what that plan might need to look like.

Resource:

Morningstar.com

To get to the other sections:

Part I - Fundamental Analysis

Part II - Technical Analysis

Part III - Options

Part IV - The Economy and The Market

Part V - Market Mechanics

Part VII - Asset Allocation

Part VIII - Bonds

Obscene, Obscene, Obscene

Today must be a day for stupid news. Really, really stupid news.

Now we have reports coming out of the Territories formerly known as those Territories destined to become Palestine in the mind of Yassar that Arafat himself is celebrating.

Specifically, he is urging a celebration. By the children. For International Children's Day. What's wrong with that?

He wants all the little tykes to celebrate by becoming shahids - suicide bombers.

Encouraging children to blow themselves up in a "celebration." How sick and low can any one person get?

This is wrong. Pure and simple, wrong. No excuse can justify this kind of talk and encouragement. No "war against the oppressor" can justify the call for kids to destroy their lives before they ever get a chance to find out what life is about.

Abu Mazen and the Road Map notwithstanding, if the Palestinians don't remove the cancer that is Arafat, they don't deserve a state. There is no question of moral relevancy. This is wrong. To not remove him from office after something like this is tantamount to agreeing with him.

Arafat stepped way over any line of civil decency. Surely the Palestinian people cannot agree with this abhorrent rhetoric. No sane or reasonable person could.

Someone needs to lay it out now: No Arafat or no state.

I Gotta Become A Scottish Cop

I am definitely in the wrong line of work.

Cops in Scotland are going to be investigating skimpy underwear.

Now maybe it's just the libertarian in me coming out, but why are the cops wasting resources investigating underwear? I know it's Scotland, but surely they have to have more important crimes to investigate. I mean really, what harm is there in a lingerie shop selling "naughties?"

It's not like this is stuff that's being sold in the local department store. Anyone would expect to see underwear in a lingerie shop (and if they don't, they need to be slapped upside the head). Some will be a bit racier than others, but as long as the store doesn't have live models in the window showing off the goods, so what?

I'll bet there will be long line of applicants for the job of Head Inspector of Racy Women's Underwear.

What a waste of taxpayer money and law enforcement's time.

Send In The Surrender Squads!

From the AP Wire today (didn't find a link for it though):

EVIAN, France - In a sign of reconciliation, French President Jacques Chirac told President Bush on Monday that he will send French special forces to operate alongside U.S. troops in Afghanistan.

"This decision taken by France corresponds both to a wish from the United States and a wish fr