Double Blind

Let’s pretend you run a corporation and have a bunch of cash lying around it, but you can’t find anything better than a 1% GIC to invest in. You then come up with the brilliant idea of loaning yourself money (which is not a taxable transaction), investing the proceeds, and then paying back the corporation after you’ve made a bazillion dollars.

You’ve conveniently avoided incurring taxation on the money you take out of the corp (i.e. dividend or employment income).

The CRA thought of this and requires you to charge interest. If you do not charge interest, it deems a prescribed interest rate that must be charged – the question is then whether the corporation or the individual receives the interest income.

Right now, CRA prescribed interest rates for loans is at 1%, and this is the first time ever I can remember the rates being so low.

I decided to stimulate the economy, in addition to cashing in on the limited-time opportunity to claim 100% capital cost allowance on eligible computer purchases. The cost of the Asus 1000HE was CAD$450 at NCIX, plus shipping, taxes, and the environmental disposal fee. I purchased the blue version. The screen was 10 inches.

Inside the box also came a nylon carrying case, a nice touch.

Positives:

1. Very compact and light.
2. The “Blue” looks better and more ‘professional’ than the blue colour on the internet (which makes it like more childish). Generally the blue colour looks darker than it seems over the web.
3. Windows XP home is installed, not Vista. Stripped down of all the graphical garbage, it runs very, very fast. 1GB of RAM is more than sufficient, although apparently it can be easily upgraded to 2GB if necessary. I don’t think I will take that option.
4. USB slots on the left and right hand side of the notebook.
5. Mousepad is responsive, the “two finger scroll” works surprisingly well.
6. 160 GB HDD is huge for such a small notebook.

Negatives:
1. The mouse pad clicker takes about 20% more force to press than what I would be used to.
2. The power button is a pain to press properly.

I haven’t tested the 9.5 hours of battery life, but the 6-cell lithium battery on paper should allow the computer to run a very long time without recharging. The notebook is surprisingly good in terms of how “snappy” it operates, the webcam works fine; the microphone is OK, but not the greatest. This is a perfect computer to take on the road, or to take to meetings to take notes and such. I’m happy with the purchase.

I’ve gone through my entire stack of applications and I can more or less run all of them on the subnotebook, so it will be a good backup as well. I’ll have to solve the problem of keeping data in certain files synchronized but I’ll figure this out later.

Imagine being paid to borrow somebody else’s money.

This is what the Federal Reserve is facing – there is a formula that all macroeconomists know, and this is the Taylor Rule.

Right now the rule says to drop interest rates to negative amounts – approximately -5% is what the rule is currently telling the US Federal Reserve.

It is impossible to lower interest rates below zero, for obvious reasons. So when they hit the zero threshold (which they currently have), the next step is quantitative easing – the direct purchase of debt securities on the open market with cash created from thin air.

If you do enough quantitative easing, it is the functional equivalent of negative interest rates, as your money is purchasing less because there is more money out there.

So even though your ING Direct account might say you are being paid 1.5% a year, you are really receiving a hugely negative return because far more money is being created from thin air, which will compete against your savings.

In theory, this will encourage people to get rid of their cash, since it is rapidly depreciating. In practice, it takes more than interest rates to stimulate consumption in the economy – Japan has been like this for more than a decade, and it is likely that North America may be entering into the same phase where people become much more fiscally conservative (except for governments, who are doing all the spending).

Once people do start spending, however, your purchasing power will drop like a stone. The trick is making sure that you invest cash in return-bearing assets, or that you have spent the money before this happens. Whether it happens tomorrow, next year or next decade is the question.

I noticed the market maker is no longer making a market on the Fed Funds Rates futures contracts beyond June 2010.

This likely means that my November and December 2010 positions are going to be impossible to liquidate until likely half a year from now – which is fine. Illiquidity does not mean that the contracts are not profitable, it just means I will collect (or pay!) later in time.

My average for the November 2010 contracts is 98.77 (1.23%), while the December 2010 contracts are 98.71 (1.29%). While I do not think short term rates will change in 2009, in 2010 my anticipation is that the federal reserve will start putting bullets back in the interest rate gun, in the form of quarter-point rate increases, assuming an “orderly economic recovery scenario”. The real payoff will occur if the economic recovery is not orderly and causes a huge amount of inflation, which in that case interest rates would be increased much higher. I would have preferred to pay a little more for more time (i.e. the contracts that were trading as far out as 2011) but this will have to do.

Great Britain is increasing their top marginal tax rate to 50% on income earned above 150,000 GBP (about $272,000 Canadian). This is from a 40% rate.

My guess is anybody making this level of income was long ago plotting to move their income sources out of the country to avoid such taxation. When people also take their capital out of the country and invest it in jurisdictions that don’t offer such punitive taxation regimes, it hurts the country much more. This is ironic because the tax increase was to “pay for the support of the people”.

It is easy to look at an economic map and look at the top percent of wealth holders and try to grab some of that money, but what happens as a result is that you just end up taking them off the map. The economic pie cannot grow with a flat capital distribution – somebody in that economic pie needs to create wealth which will bring that individual above the rest – by flattening his/her efforts to the rest of the distribution (which is what heavy taxation effectively does), the incentive for that individual to create such wealth will diminish.

Wow, I think this is the first time in living memory that this has happened.

I can imagine the owners thinking the following:

“Did they have to win so quickly? If they just blew this game and won it on game five, that would have been another couple million in revenues for us!”

That said, by virtue of going to the next round, the Canucks will be able to play at least two more games at home. I’ll only get on the bandwagon on game 7 of the Stanley Cup. :)

I received a phone call from them today after mailing them the following letter on Monday. I will be receiving my shirt!

These guys clearly know how to run an event, so full complements to them.

To the Vancouver Sun Run,

I picked up my race package on Saturday, April 18, 2009, at 3:45pm. The process was fast until I reached the station where it was time to pick up my shirt. At the shirt collection tables, there was a collection of people, and the volunteers that were distributing the shirts explained that “We are out of shirts – there is a truck arriving with more shirts.” After being asked if they knew when the truck was arriving they replied they didn’t know.

As I was not in a position to wait an indeterminate amount of time, I decided to take my race bib and chip, and leave BC Place to go on with my business for the day, without my Sun Run shirt.

On Sunday, April 19, I finished the race, and the rest of the logistics were excellently planned out and executed.

I am writing to request my shirt that was not available on April 18. Attached is my race bib (Green #9909). In the event that the Sun Run shirts are no longer available, a shirt from Canwest (or the Vancouver Sun) would be acceptable.

I can be reached by postal mail, E-Mail (sacha.peter@gmail.com) or via telephone (778-878-9223).

Apparently the Virginia State department of transportation, as a “road safety measure” deemed that painting zig-zag lines in the middle of the road (within the lane) will cause drivers to slow down.

This is so absurd that I am surprised that somebody will admit they came up with the idea other than an April Fools’ day joke.

Other than the fact that people that commonly go through that area will be desensitized to such paintings and just get on with their business at normal speed, could you imagine somebody driving through this thing at night? Finally, as other jurisdictions start using the same measure, desensitization will become much more prevalent and soon people will ignore such markings, just as speed limit signs are ignored now by 98% of the driving public.

For example, when driving up the hill just north of the Knight Street Bridge, does anybody care about the “50 km/h” painted on the road? The Vancouver police department typically spend a hundred man hours (or two) each year radar gunning people up the hill on Knight Street that have the audacity of taking it at 70km/h, but has this accomplished anything at all?

Speed on the road is a politically correct measurement of safety. Unfortunately, the real measure of safety is counting bad drivers, but since bad driving is much more difficult to measure, reducing speed becomes the be-all-and-end-all objective of governments. It’s nearly as ineffective as the “war on drugs” in removing illegal drugs from society.

Here’s the link back to my predictions for 2009, made in December 2008.

15. (m) The new Star Trek movie will “suck”. Let’s define “suck” as “not as bad as Star Trek 5, but in or around Star Trek 3, or the last three next generation Star Trek movies”.

Uh-oh!

I’m going to see this one on the big screen no matter what, but initial indications seem to say that this is going to be the best Trek movie since the Wrath of Khan (and that’s going back a far, far way). I’m looking vulnerable here.

Right now about 35% of my portfolio is in US-denominated securities. Although I don’t anticipate the Canadian currency deviating from its current level (around 80-82 cents), if it does make a move, it will be up. This is primarily linked to the commodities market – whenever they make their comeback it will be inevitable that the Canadian dollar rises, especially if the US determines it is in their best interests to devalue. The Canadian government has an incentive to devalue as well (especially since our economy is so driven by exports) but fiscally we are in less worse shape than America, so it likely won’t be as dramatic.

I’m not too concerned about interest rate differentials – the Bank of Canada usually lags the US by a couple months with interest rate changes.