Double Blind

I dedicate this link to Stephen Rees – Bicycles in Amsterdam.

I particularly find it amusing that they have massive chains and locks to secure bikes that you could clearly get at a second hand auction store for 10 bucks. A few weeks ago I did a social experiment where I parked my (low-valued) bike at a local library and left it there unchained, but sitting in the bike rack. After three hours, it was still there. Although this was a single data point, in the suburbs there is less rampant thievery than one would think by reading the headlines.

I also love how nobody wears a helmet in Amsterdam. There is a law in BC that requires all cyclists to wear helmets, which I think is utterly stupid. While wearing a helmet does save lives if somebody smashes into you, I really like the feeling of having wind go through my hair when I’m on a bike.

Before somebody comments about car seat belts, of course I wear a seatbelt when I get in a car at all times. Driving is significantly different than cycling, and putting on a seat belt is a significantly different activity than putting on a bicycle helmet.

Of course if I was weaving through traffic by cycling in downtown traffic, you’d be insane not to wear a helmet. Likewise if you’re going downhill at 40km/h in some wooded area. But having a law to force people to wear bike helmets if they’re going for a stroll on the Richmond dike is wholly unnecessary. Apparently the people in Amsterdam know more about biking than we do.

Drinks like Red Bull and such apparently are correlated with risky behaviour.

The article makes the clear distinction that energy drinks do not cause risky behaviour, but the implication is clear enough. It wouldn’t surprise me if there is some call to regulate consumption of such drinks.

Of course, caffeine tablets are available off the shelf and you can go into a Starbucks and order a quadruple espresso, but we won’t worry about that now… clearly energy drinks are the cause of teenage risky behaviour.

I found this TED lecture rather interesting. It’s a classic example of taking something that’s annoying and turning it into something beneficial.

Posting will be likely light until the beginning of next week; I’ve been swamped with my to-do list.

A report on CKNW says the following about the RCMP raiding some currency exchange places in Langley (a hub of tourist activity of people exchanging their Euros for Canadian Dollars, I’m sure):

Charges are pending after RCMP officers and Vancouver police raided several currency exchanges in Langley today.

The raids were part of an investigation that started in September.

Search warrants were executed at the Global Tourist Centre currency exchange at #106-20505 Fraser Hwy in Langley city and Capital Forex at 5560 204 St. in Langley as well.

Police say several arrests have been made in relation to money laundering.

I always wonder how these places make their money. There’s a place in Richmond near Minoru and Westminster that I always deal with whenever I need cash currency of foreign countries (other than the USA) – they give reasonable spreads. But when I go and exchange $100 Canadian for Mexican Pesos (or other currencies), the most they can make by arbitraging the exchange rate is about 2-3 dollars on the CAD$100 transaction.

To pay for the lease and their salaries, not to mention a cash float of a whole variety of foreign currencies, they’d need to have hundreds of people coming in daily or be able to do high volumes of cash transactions.

So I always wondered how these places stayed in business. Maybe in Richmond, where you are very close to the international airport, you can make some money doing this. But out in Langley? Very unlikely.

One argument which people like to make is that real estate tends to appreciate in equity so by the time that you sell it you make a killing on the capital gain.

This only works of course when you have capital gains to capture.

So why not test a strategy? How about instead of borrowing $100,000 to spend on real estate, one borrows $100,000 and spreads it across the five Canadian banks (for the record – Bank of Nova Scotia, Bank of Montreal, CIBC, Royal Bank and Toronto Dominion).

Assuming no capital appreciation of the shares, this would result in an after-tax net gain of about $1,860 assuming a middle-income tax bracket. This is due to the taxation preference of Canadian dividends and deductibility of interest expense.

I have attached a spreadsheet which illustrates this calculation (5 Bank Strategy (.xls))

I am not trying this in real life, but it is an interesting paper strategy as you can literally mint cash from nothing providing that the equity does not plummet in the bank stocks – as it might in that or in a real estate investment.

The advantage of this, as far as I can tell, is that you can easily decide to reverse your decision with a few mouse clicks, while it is much harder (and costly) to unload a strip of land. In addition, the typical leverage kicks in – if your bank stocks go up by 10%, on average, you’ll receive $10,000 in capital gains (before taxes) if you decide to sell.

If you were to try this in real life, I would not leverage more than 1:2 (i.e. not borrow more than $1 per $2 of equity in the portfolio) and of course I would thoroughly research all the equities that would go into such a portfolio (not just blindly throwing all five bank stocks in there). The whole concept of this strategy, however, is that the bank stocks would pay a yield that would offset the cost of borrowing. If the interest rates head up (e.g. above 6.1% in this example), then it no longer becomes a cash neutral proposition. But that’s the same case in real estate, right?

With all this hysteria regarding the price of fuel, here are some considerations with respect to car ownership.

1. Fill up at Superstore. They typically give back 5 to 7.5 cents per litre which can be used in-store to purchase items like groceries. This is only relevant if one actually shops at Superstore, but since almost everybody has to purchase grocery commodities this is a good return on investment. Some people might suspect the quality of fuel, but suffice to say it’s the same stuff you’d find in Shell or Chevron or Esso, etc. Most gasoline in the Lower Mainland comes from either North Burnaby (Chevron) or Belcarra/Ioco (Imperial Oil, aka Esso) refineries.

2. Slightly over-inflate your tires over their normal rating. My tires are to be inflated at 35psi, and as long as you keep similar tires at this, they will perform well. I typically keep them at around 40psi since I am too lazy to check my tire pressure and the additional pressure will likely result in a fraction of a percent less drag on the road. The maximum pressure for my tires is 50psi, but I highly recommend not doing this unless if you like a lower tire lifespan. In addition, don’t over-inflate your tires if your tread is running low unless if you only anticipate using your car in non-rainy conditions OR if you like hydroplaning on a patch of wet road.

3. On the freeway, drive slightly slower. Normally my “steady state speed” is about 120km/h but slowing down to 110km/h results in an 8% slower trip but roughly 10% better fuel economy. Ideally 80km/h is the sweet spot for most vehicles, but if you tried this on Highway 1, you’d be causing significant backup and likely do more harm than good.

If media predictions of the oil market going to the stratosphere are true (which may or may not be; I really have no idea whether high prices are going to prevent more people from consuming oil around the world), one thing is utterly true: Go on vacation earlier than later.

Airline tickets are going to become much more expensive in the near and medium term as airlines decide to slash capacity.

Road trips are still relatively reasonable – $1.30 of gasoline can purchase about 16km of freeway driving distance if you are using the right kind of vehicle. This would mean a one-way trip from Vancouver to Calgary would be about $80 with current prices.

This actually isn’t too bad from the previous year where gasoline reached about $1.20 per litre at this time. But the difference is that oil prices are significantly higher and that’s going to hit gas prices – I’d expect about $1.50-$1.60 for the summer season.

The era of cheap fuel is truly over, barring some major technological discovery.

Transportation is still not an “insane” amount of one’s budgets (that line item goes to taxes and housing) but if fuel prices doubled from this point, then it would be significant enough where a lot of people would take radical action to cut consumption. We’re getting to that point on the hysteresis curve where marginal price increases are going to have much more elastic effects on consumption.

Attached is a spreadsheet that outlines the opportunity cost difference between purchasing and renting a place.

Buy vs. Rent Calculator (.XLS)

There may be some variables which I haven’t accounted for so if this is the case please comment on this post.

One of the most obvious ones is that purchasing a place is a net plus when it appreciates 15% a year, but assuming that the capital gain gravy train is over, almost every real estate transaction looks like a net cash flow loser.

You can also see how some people can rationalize a 40-year amortization period using this spreadsheet – in theory this is closer to taking an “interest-only loan”, which is all fine and dandy providing that you can keep up with the cost of capital (the rate of the mortgage).

Still, when you see some people taking on debts that result on their interest coverage being greater than 50% of their after-tax income, you really have to wonder about the sanity of some people involved in the real estate market.

Some of you may have seen the link on my sidebar a couple months ago, but I will officially unveil what will inevitably be a work in progress, BC Election 2009. It is my intention for that site to be a resource for the upcoming provincial election on May 12, 2009.

Most commentary I have on provincial politics will be directed toward that site.

If an activity is rational, it is never a sufficient criteria for it to be considered in the eyes of government.

I’m starting to sound like an opposition critic (mainly because the NDP are doing such an inept job of the entire portfolio), but the BC government continued to confirm its policy on uranium exploration.

In all fairness, this is consistent with BC’s previous policy and the only action they are enacting is a “no registration reserve” to prevent potential abusive mineral claims in conjunction with uranium and thorium reserves.

This can be justified, although you really have to stick on the rose coloured glasses to see it correctly.

New Brunswick allows uranium mining and have been holding information sessions on the matter.

Now we have the environmentalists coming out of the woodwork and saying things such as:

“The important thing here is the risk, in my opinion, is higher because of the material that we’re dealing with here,” said Tim Van Hinte of the Petitcodiac Riverkeeper. “Uranium is not like other materials — it’s not like copper, it’s not like nickel… it has radioactive byproducts.“

Anybody that has done any research on the matter will know the radioactivity risk from uranium is absolutely nothing (unless, of course, you build a nuclear bomb with it). Natural uranium consists of 99.274% of Uranium-238, which has a half-life of 4.5 billion years. The majority of the rest of uranium is Uranium-235 (which is what you use for typical weapons of mass destruction) has a half-life of about 700 million years. Both decay types are alpha, which means the penetrating distance is minimal – don’t keep that slab of uranium next to your skin, but if you wrapped it with a piece of thick paper and then slept next to it you’d be relatively safe.

You can keep this stuff in your bedroom and the radioactivity from it won’t change your survival at all.

Instead the risk is strictly through the chemical interaction of uranium on the human body. This is not unique to mining – other mineral ores have their own chemical risks.

In other words, banning uranium strictly because of the excuse that it is “radioactive” is irrelevant and irrational.

Note this argument has nothing to do with the risk of mining in general to the environment. Mining is a dirty, dangerous and capital intensive business – if you stick a mine upstream to a river that a municipality uses for its water supply, yes, it will be impacted.

But not because that mine is mining radioactive uranium.

You’d think that the environmentalists would know something about what they’re protesting about, but then again, Marxists and Communists hardly know anything about economics.