Double Blind

I love a good political scandal – the Mulroney stuff is ancient history and wasn’t worth writing about. The best lie is a half-truth, and the alleged Chuck Cadman bribe scandal has all the elements of half-truths.

So the story is that an author, Tom Zytaruk, is about to publish a book (Like A Rock: The Chuck Cadman Story) that alleges that two Conservative party top officials offered a $1 million life insurance policy on Cadman if Cadman would vote against the Liberals in the 2005 federal budget. Cadman eventually voted for the Liberals and then he died two months after the vote, due to melanoma.

The book hasn’t been published yet, so these allegations came out when an excerpt of the book was “leaked” and then it all hit the fan. Confusing things even more, the source of this information was Dona Cadman, who is Chuck Cadman’s surviving wife. Dona Cadman is the Conservative party’s nominee for Surrey North. So it was definitely not in her best political interest to reveal this information – unless if she was told to by the Conservatives.

The speculation has been rampant, but the analysis is simple: If Dona Cadman has her nomination removed by the Conservative party’s national council, then the nature of this news is likely more real than not. If Cadman remains the nominee, then chances are the leak was actually a Conservative one to distract attention away from some other on-goings of the government or perhaps create some negative, but temporary, news in order to goad Dion into a motion of non-confidence (thus spawning an election). This is a classic Stephen Harper play if it is indeed the case. The probability of this case is unlikely but I would not discount it completely.

I knew nothing of Zytaruk, but Jordan Bateman apparently thinks that he doesn’t succumb to sensationalism in reporting – so if this is the case then one can rule out the “I want to drive up book sales” excuse for this leak, although the nature of the leak itself is suspicious.

Finally, no insurance company would give a $1 million policy on a person due to due of cancer in two months unless if you paid over a million dollars of premiums in exchange. So I highly suspect the amount of the alleged bribe was misunderstood or not transcribed properly – perhaps Chuck or Dona did not understand what the attempted “bribe” (legal or otherwise) would be.

Watch the opposition try to condemn the Conservatives on this one, but miss the mark on some other critical issues of government operations.

History in retrospect tells the entire story – the Conservatives were able to smash the Liberals in the 2006 election, which certainly would have not happened if the 2005 budget vote was rejected. Also, getting MPs on board seems to be easy for both parties – the Liberals acquired Belinda Stronach and “bribed” her with a cabinet position, and the Conservatives took David Emerson a few days after the election results were known. You can be sure that this type of wheeling and dealing will be happening in any minority government situation in the thirst for more power.

Gary Carson writes an interesting post about credentialism and the education system. While what he writes applies to the US, in Canada things are trending toward this direction, so the article has applicability in Canada.

Our educational system, both in K-12 and college programs, has taken the position that education equals certification and that everybody has the right to be certified. We’ve decided that it’s morally wrong to deny someone a degree.

… and …

I think we reached that spot by putting too many mushy headed pretentious twits in charge of the system. They confused correlation with causation, probably because they were so busy learning big words that they never learned fundemental concepts. Of course, now educated people don’t even have to learn big words, although it helps.

People with degrees, high school degrees, college degrees, graduate degrees, made more money than those without. So the solution our politicos and educational gurus came up with to solve our social and economic problems was to make sure everybody got a degree. But in order to accomplish that they had to structure it so that no one gets an education.

The “correlation vs. causation” is an especially astute point as it’s a three word way of describing what is wrong with the current educational strategy – it makes the mistake of assuming “if we get these people degrees, they must be able to perform better”. If you make the degrees easier to get (as has been happening extensively in universities and other institutions) then the value of them become worthless and it will be even less likely that a person holding such a credential will have any extra capability that a non-credentialed holder will possess.

I really get skeptical when people try to back their arguments with “I have a XYZ and ABC designation from DEF institution, so what I say must absolutely be correct”.

Do not misunderstand this argument – it is a value-added activity to go to an educational institution to further one’s self. But it becomes troublesome when standards of graduation become so low that everybody is virtually guaranteed to get a degree. This is the case for most high school and bachelor’s degrees these days.

Also as another example, given from what I hear on the radio every day, I think an MBA designation is worthless. Essentially the only value is that the MBA designation brings is the ability to socialize with peers that are able to afford (or have their companies afford) the $40,000+ price tag. The actual educational content of the MBA is best summarized by this book, which would be $39,985 cheaper.

Whenever I travel outside the country for an extended length of time I purchase some emergency medical insurance. I do not require anything for routine medical stuff – I would do that in Canada. While it is unlikely that I would require emergency medical work, my primary concern/risk is that some idiot would hit me with a car or I’d otherwise be involved in some automobile accident and end up in hospital – once I end up in hospital, then the bills start coming in. The other most likely risk incident is if I got my mouth bashed in and require emergency dental work – both cases would end up being covered by emergency medical insurance and save a ton of money compared to a relatively small premium.

I have typically found that the aggregation service Kanetix is fairly good at generating respectable quotations and they typically use Group Medical Services (a Saskatchewan corporation) as their primary provider. For example, you can get one weeks’ worth of medical coverage for $15. For a month of insurance, the lowest cost provider is currently travel underwriters and they cost $31 for a $250 deductible or $37.20 for zero deductible. The benefits are up to $2 million which is sufficient even for the ridiculously expensive US healthcare system.

Now my question – I’ve been trying to use Google to get instances of cases where people bought this insurance and did encounter some travel issues that required them to claim medical benefits. The lack of information from either the “I used the insurance and they paid the claim” or “I bought the insurance but the scammers rejected my claims” sides of the argument has been rather lacking. I can also picture that if you got knocked into a coma for a week that it would be relatively difficult to abide by the policies of most of the travel insurance providers, mainly that you have to call some 1-800 number before getting approval for any medical procedures.

There wasn’t a heck of a lot in the 2008 Budget. The spending measures were very targeted.

I will cover three issues – the Tax Free Savings account and the Dividend Tax credit reduction and the Guaranteed Income Supplement threshold increase.

The Tax Free Savings account is the inverse of an RRSP – Canadians 18 years or older can start up the TFSA. How it works is you put money into the plan (up to $5,000 per year starting in 2009) and any money you make within the plan is tax free. You can take the money out (including gains) at any time, tax free. Any money you take out can be replaced into the plan in future years. It’s this reversible aspect which makes the TFSA really, really attractive to park savings – right now interest through savings is taxed at the marginal rate. The TFSA will guarantee that most people will stick their liquid savings into a tax sheltered plan. The tax savings on a $5,000 GIC invested at 4% would be roughly $40 (assuming you’re in the lowest tax bracket), but the compounding effect of year-over-year savings within the TFSA could be significant.

The Dividend Tax Credit is being decreased as a result of the decrease in corporate business taxes. This is under the theory of integration – that income derived from a corporation and then streamed to an individual should be equivalent to income taken by an individual directly. The marginal tax rate for people in the Federal marginal rates are as follows:

As you can see, Canadian dividends is still a tax-preferred income stream, but significantly less when they implement the dividend tax credit decrease. The provincial government is also doing the same thing.

Finally, the last note is on the Guaranteed Income Supplement (for people over 65) – they have increased the income threshold before you get your GIS clawbacked from $500 to $3,500. This will affect a lot of old age pensioners out there – the clawback is effectively a 50% marginal tax rate on any income (RRSP, savings or otherwise) earned on income up to $15,234.

Stephen Rees made some comments a few weeks ago on my weblog that I’ve been keeping in my inbox for response. They deal with the topic of speeding and the Gateway project. Stephen writes extensively on transportation policy on his weblog and I always enjoy reading him, although I tend to disagree with most of what he has to say.

I’ll try to respond in first person form. On the issue of speed:

I am one of the few people on the road in BC who obeys speed limits.

If you do not drive above the speed limit, it implies that you are “comfortable” with the enacted speed limits. This is absolutely your right to drive on the roads in this fashion, but do you think the other 99% of people that tend to drive 60km/h or even 51km/h on the road (e.g. heading eastbound on Railway from No. 2 Road to Gilbert) are making errors in judgement when they choose to go above the legal speed limit? This of course commits the fallacy of appeal, but my argument is – if laws are enacted for the people, what good is the motor vehicle act if it turns us all into road criminals?

I even drive at below the speed limit when conditions require it.

When travelling on Highway 1 with winter conditions (i.e. ice on the road), it stuns me to see people going at speed limit. Ideally you won’t see me on the road then, but if I am, then I won’t be going the speed limit either. I didn’t need a sign saying “When you see snow, go slow” on the road to tell me to do this.

I also think that spending money to make roads “safer” by widening and straightening is counterproductive. It results in higher speeds and thus worse collision severities.

So you’re trading off the efficiency of the road (to clear traffic) with safety. If you are optimizing for safety, why not put massive speed bumps on every surface road every 5 meters? What’s your threshold between road capacity and safety?

The police have even been asking for photo radar on the Patullo Bridge, which is one location where speeds have to be reduced now – and we cannot afford to wait years for “upgrades”.

Can you tell me why the Queensborough Bridge, in many respects similar to the Pattullo, hasn’t had this problem?

Choosing to speed is a a bad decision – and one that should have consequences. Photo radar is a way of making those consequences hurt the driver who makes the bad decision rather than the rest of us.

You’re arguing that 99% of the road should be “hurt” for driving the way they do currently when it’s perfectly clear that when they do so they’re not killing themselves, let alone other people.

And on Gateway:

“Out to lunch” on Gateway? Really? Can you name any highway expansion scheme in an urban area that had not induced traffic growth?

No, mainly because urban freeways are designed to attract extra traffic when you get the subsequent flood of denser zonings in areas that benefit from such road expansion.

Using your line of reasoning, a highway expansion is doomed to failure for two possible reasons:

1. If people use it, it will congest and thus was a bad decision.
2. If people do not use it, it was money wasted and the land could have been better used for a different use.

So thus, road expansion is always a bad decision? Or is there a Goldilocks zone where there is “not too much and not too little traffic” on the roads?

The car is such an efficient method of transport in low density areas that it makes the Port Mann expansion an easy decision – the market (as in individual drivers) already have signalled that they will use the new bridge simply by being willing to wait ridiculously large amounts of time to head westbound in the weekday mornings. Suburban rail isn’t even close to being a reality south of the Fraser, so what else would you expect people to do?

The South Fraser Perimeter Road is also needed to put a freeway link between Highway 99 and Highway 1 – this is probably the last leg in the lower mainland road network. It will also get rid of a good portion of truck traffic from Columbia / Brunette Street in New Westminster, currently an utter joke for 8 hours of the day.

I’m guessing you look at induced traffic growth as a negative feature – I look at it as a sign that you spent the money well.

This post is about Elite FX, Horizon FX and Razor FX. Elite and Horizon were set up in Vancouver to be marketing fronts for Razor FX. Razor FX claimed to engage in foreign currency exchange transactions (using futures) and be able to make profitable trades for insane returns.

In Horizon FX Offering Memorandum (1.6 MB .PDF file) dated September 2006, you can read about the nature of the limited partnership. Essentially you were investing in a firm that gave your money away (to Razor FX) where they could trade foreign currency contracts – the “management expense” that you would pay would be $30 per contract traded and the residual value would be the profit available to partners.

Ordinarily this would be a very unusual compensation scheme – it is not linked to performance or assets under management at all – the management would strictly be rewarded by the volume of trading (and depending on how ethical they were, could abuse it at will).

That said, on their internet site (which now has most of the promotional content stripped out), they had a chart of their 2007 performance:

If anybody pitches an investment to you and shows you this chart for past performance, run away. Run away very quickly and hold your wallet. Potential investors in anything should recognize that such a performance curve (a straight line) is only possible with low-risk, short maturity fixed income investments and certainly not in hedge-fund type vehicles performing futures trading.

The fund at one time even posted their Horizon FX Trade History, August 2004 to December 2006 (85kB) that lead them to the outsized gains. According to the trading records, these guys were nearly clairvoyant with their currency trading, racking up gains of about 60% a year.

I think you’ll be able to figure out the rest of the story. It turned out that Razor FX (who was run by two people – one named Michael Richard MacCaull, indicted for conspiracy to commit fraud in January 2008, and Bradley Eisner, the other ‘witness’ who ratted out on him to the prosecution) did not do any trading at all and responded to customer requests for withdrawals with other investors’ money. They took the proceeds and spent it on personal items. It was only until there was a significantly large withdrawal request that Razor FX could not fulfil and then the excrement hit the proverbial fan.

Not surprisingly, the investors also filed against Razor FX in a civil lawsuit (520kB, .PDF) on January 22, 2008.

The lessons here for people should be that returns for most investment funds over time will be volatile and not “straight line” like Elite FX and Horizon FX was advertising.

It is also not entirely clear whether the people running Horizon FX or Elite FX (Gem Ali or Cem Ali, depending on which documents you read) were complicit in this fraud or whether they were defrauded by Razor FX. Publicly they will say they were defrauded by Razor, but somebody should subpoena Horizon/Elite’s bank records to see whether they were on the dole from Razor.

The only reason why I am posting this is because a friend of mine asked me about the validity of this investment a year ago when one of his co-workers mentioned it to him. I told him back then it seems very, very, very suspicious and that he would likely lose his money if he invested in the product. I kept track of it, waiting for the inevitable news. Unfortunately for other people, they invested $68 million in this scam and will be unlikely to see much of a recovery on their investment. To be perfectly clear, neither me nor my friend invested in any of this.

On a related tangent, a limited partnership offering is exactly the method I will be employing for Divestor, but idiots like the ones that run Elite, Horizon and Razor ruin it for honest people like me that are planning on offering legitimate securities. The people running Razor FX should be thrown in jail for a long, long time.

Links:
BC Securities Commission halting trading of Horizon FX securities, October 18, 2007
New York Man arrested in alleged $68 million foreign-exchange scam
Yahoo Groups FX Victims
… and Google for “Razor FX” and you will find no shortage of other information and forums filled with scammed investors.

50 pence into 1 million pounds. He won the “pick 8″ bet.

I think Hastings Park has something like this, except it’s the “Super 7″ – predicting the winner of 7 races in a row. Jackpots go up to some ridiculously high level like $250,000 for a $1 bet since it carries over between days and a winner is very infrequent.

Hot water (the kind that you take a shower with) is usually boiled by natural gas boilers. The price of heating water will increase due to the carbon tax. This would also imply that maintenance expenses for people living in condominiums and townhouses will also increase as hot water is typically taken care of by the strata. For people renting, costs will be carried over in the form of rent increases.

One obvious workaround is to implement some form of electric heating system, but when you get BC Hydro complaining that people are using too much peak time electricity for them to trade down south for huge profits, they will put an end to this by increasing their own electricity rates (which are not encumbered with carbon taxation).

Declan writes about microeconomics and the implications of the carbon tax on his post, “Because People on The Internet Are Wrong“. With this, he takes point at people that claim that the new carbon tax will have no effect on consumer behaviour due to the price/consumption curves of products. One argument he quoted was mine:

Sacha (who does include the weasel-word materially, on which he might mount a weak defense): “I do not believe that 7.23 cents per litre of gasoline will materially change people’s behaviours toward consuming gasoline (presumably through driving).

I originally was going to post a comment on his site, but my post became so ridiculously long that it’s probably easier if I addressed it in a post on my own here.

Allow me to clarify my “weasel word”, “material”. The one reason why frequently litter my sentences with weasel words is simply because black-and-white sentences are quite easy to attack and it’s essentially a reservation of privilege to clarify what I meant later, especially on controversial issues. In this case, I will be mounting a strong defence with that one word!

This entire carbon tax was predicated on the belief that it would curb greenhouse emissions (I won’t talk about whether this is a ‘correct’ metric or not, that is another debate of which my views are fairly well known).

“Material reduction” in this case refers to the objective of reducing the net amount of GHG emissions through these carbon taxes.

Your argument is right in that some form of higher price will incrementally reduce demand in a very small proportion of people. Where I think your line of reasoning is incorrect is that there is likely a huge threshold effect – e.g. if you jack up gas taxes from 0 to 2.4 cents per litre, you’ll get people that will grumble but continue on with life (i.e. no GHG reduction). If you raise from 0 to 7.8 cents, then you’ll likely get a microscopic response. Eventually there will be a point where the impact of an incremental one cent increase in carbon taxes will have a disproportionate effect compared to the initial tax increase. I would suspect the curve is very nonlinear and would have correlation with the income curve. The shape of the curve reminds me of a hysteresis curve.

There are also the obvious ‘unintended consequences’ of getting people off the roads with carbon taxes – as more people get off the roads, it will increase the value of roads for those that can still afford to travel on them.

But here’s the thought experiment: Let’s pretend the province implemented a $1,000/ton GHG carbon tax and made the “revenue neutral” component a direct cheque per person every year of carbon taxes collected. Surely GHG emissions would decrease, but would this be due to efficiencies that people discover, or would it be because everybody has already moved out of the province due to unaffordable costs?

14 degrees outside right now in Vancouver. Time to take a walk outside and enjoy the climate change!