Use access key #2 to skip to page content.

The Glory of Ignorance



December 20, 2007 – Comments (9)

We ought to be able to go about our lives blissfully ignorant about many things.  For example, I was blissfully ignorant about serious home design problems which in Vancouver led to what we called our "condo rot" problems. 

I would look at a development and never see the design issues that scream you have to be moron to put this design feature in homes being built in a rain shadow.  You would think that the people trained and educated in home design would hear the screams, but they did not and we had serious water seepage design built into many of our new homes in the 90s.  We had thousand of home owners that had rot in their building envelope due to water seepage.  My new home had rot in 3 years.  I was not bless with being able to remain ignorant about key features of home design to prevent water seepage.  We had thousands of home owners hit with assessments of $30-60k to fix rot in their relatively new homes.  I was fortunate as my assessment was only about $5k and the rot was limited to balconies, not in the building envelope.  I was very lucky, the rot had spread to one inch from the building envelope and that $5k bill almost became $20-25k.  And with blessful ignorance, we had homeowners in our complex rallying other owners to vote to delay to fix the problem.  

You ought to be able to trust the so called experts and remain ignorant.  But in Vancouver, being normal cost homeowners millions of dollars in the 1990s and Vancouver was sprinkle with new homes covered in tarps for years.

The same thing ought to be said of understanding investments.  You ought to be able to trust a financial advisor, or trust the so called experts.  If an investment has a AAA rating you ought to be able to trust that the investment has a high level of safety, as defined by the rating criteria. 

A year and a half ago I had never heard of a credit bubble, economic bubble, stagflation, asset inflation, Austrian economics, monetarist, Keynesian, Ponzi, credit swaps, discount window and well today, "Term Auction Facilities."  I read this article, but I didn't quite understand it.  I would like to remain ignorant about what it is saying, but powerful people have been grossly incompetent at all of our peril and the way you best protect yourself from what they have done is to study it and keep on top of what they are doing. 

Powerful people have been doing things to change the "rules" for the past twenty years, things that have gradually built up enormous fundamental problems in the economy.  I guess it was about 13 months ago that I was first steered towards looking a fundamental problems in the economy and started assessing how they gave the appearance of getting around the disaster they were creating in the past but were instead increasing the fundamental problems.  I started to assess what these problems would mean to me once the problems started to surface.

These are things we ought to remain ignorant about, but unfortunately, we are seeing the consequence of being normal being played out throughout the world.  Yukon has $1200/person of tax payers money "frozen."  They might get back their 30-day investment over the next 10 years, at par, if they are lucky.  Small towns in northern Norway have lost half their municipal savings.  A few Australian municipalities are now suing from losing 70% of their municipal funds to AAA rated mortgage bonds.  Countless municipalities and counties across the US are finding their liquid, safe, short-term investments are not.

We ought to be able to trust financial advisors and analysts, but their behaviour is more in line with the snake oil swindlers of the past.  This article, "Analysts in fantasyland" points out the degree to which they get it wrong.  

My conclusions that I came up with around last February was that banking stocks would be a disaster, and I have been encouraging my friends to sell them. 

I also concluded that pension funds would be hard hit and most likely our pensions as we believe them to exist do not.  By my assessment, a realistic assessment not built on 30 years forwarding of fantasy beliefs, I only pay for about 40% of what my pension promises me.  I suspect I shall see even less than what I currently pay for as people who are collecting are collecting 2.5 times what they paid for and I am 19 years down the pyramid.  Most people live in this glory of ignorance and so we continue with this ponzi pyramid scheme of pensions. 

I know nothing of US law, but interesting, in my assessment, our pension systems are in gross violation of Canadian pyramid laws.

What is further interesting is that I come up with that we are currently only paying for 40% of the promise, yet the "experts" say that those currently collecting will get about 1.25 times what they paid and they say my age group will break even and that those in their 20s will get about 0.8 of what they've paid in.  That 1.25 figure leaves me absolutely dumbstruck as to how they came up with it.  It is based on what is being paid out now and this figure can be calculated and it is beyond me how they came up with such nonsense.

I did not foresee the degree to which local governments are being hit.  Every hit they take means we pay the taxes twice.

 We ought to be able to remain ignorant about things that ought to not concern us.

9 Comments – Post Your Own

#1) On December 20, 2007 at 10:53 AM, GS751 (26.71) wrote:

most of these fundamental problems come out of conflict of interest among the rating services and investment banks.  It would be nice to remain ignorant and there are a lot of people who do but there is to much conflict of interest to do.  I say eliminate the federal reserve and their printing presses.

Report this comment
#2) On December 20, 2007 at 2:35 PM, dwot (28.84) wrote:

The printing press isn't really the problem.  The money supply growth due to printing is ultra tiny as compared to violating the nature of the reserve laws for banking by the mortgage back investment bond inventions and by lower interest rates. 

You have money supply that has increase about 2.5 times without the fed printing a cent and that in itself is enormously scary.  I believe that is just from the interest rates going down, and then being able to skirt around reserve requirements that were there to protect us by selling off the debt rated by the rating services has further leveraged the problem.

Report this comment
#3) On December 20, 2007 at 9:45 PM, dog1350 (71.13) wrote:

Unfortunately. I think you are right.I hope your pension weathers this storm. Now there are real possibilities that some banks will fail.

Report this comment
#4) On December 21, 2007 at 12:19 AM, dwot (28.84) wrote:

There are also possibilities that brokers will fail as well.  I checked out the quality of the insurance on brokers in Canada.  It looked about as good as the insurance on mortgages. 

Report this comment
#5) On December 24, 2007 at 3:46 PM, zygnoda (< 20) wrote:

Do you know anything about the condition of us brokers?

Report this comment
#6) On December 25, 2007 at 11:23 AM, dwot (28.84) wrote:

Didn't Merrill Lynch just get a $4.4 billion equity infusion and E-Trade required a $2.5 billion equity infusion?

I decided to spread out my risk with a plan to move about 75% away from my broker account into two other accounts.  I was so busy with my move to the NWT I did not get it done before I left Vancouver in early October.  The first day I was able to get to a bank to arrange a transfer to a new bank was November 9th.  I get home to find out that E-Trade totally messed up with investor's money by putting deposits into the mortgage backed assets.  Brokers getting themselves in trouble was happening way sooner than I expected, and in ways I never anticipated.  I did an online transfer with my bank later that week.

Three weeks went by and nothing happened and I got the bank manager to find out the status of my transfer.  The brokerage I deal with would not respond to her at all.  When I contacted them they had no record what-so-ever.  Meanwhile, I had the bank manager send it in three times.  I wrote the brokerage and I told I expected my money to be transferred and that they were in violation of the securities commission which required them to do the transfer within 5 business days.  I got no response.  I filed a complaint with the securities commission about 3 weeks ago and copied them the letter and I saw one transfer finally processed on Dec 17th and the other one just yesterday, Dec 24th.  And I got a phone call in response to my letter of complaint to the securities commission, but it certainly did not light a fire under their feet.  Dec 17th and they still claim they don't know about my second transfer and it is part of the letter of complaint I filed.

I think it is really sad that people think if there is a problem they will have time to exit.  To have had each of my banks send this in three times and to be told on the phone they had no record and to be basically hitting against a wall until I filed a complaint with the regulatory authority scared me a lot. 

I have proven myself to be a super bear if you've been reading my blogs and having worked in the banking industry in the past, this freaked me out big time.  It could be just grossly incompetent workers and management systems, which in itself is another serious problem, but I am relieved that I finally have my funds moved to where they are protected by government insurance, not the untested brokerage insurance model.  I supposed government insurance is untested as well, but I can't see the government letting the economy fall into the chaos it would if they did not honor their insurance should there be problems.  I also figure those who have not spread their risk and have left an imprudent amount with brokers will take the brunt of an economic correction. 

I also figure funds will take the brunt of an economic hit.  By the nature of their size, they are somewhat illiquid and not able to respond quickly without their own actions hurting their equity value.  

Report this comment
#7) On December 25, 2007 at 3:39 PM, zygnoda (< 20) wrote:

Sounds like they gave you a nice run-around.    Thanks for the info. 

Report this comment
#8) On December 26, 2007 at 6:50 PM, dwot (28.84) wrote:

Here is an article on Merrill today.

Report this comment
#9) On December 26, 2007 at 10:59 PM, zygnoda (< 20) wrote:

thanks again

Report this comment

Featured Broker Partners