Arbitrage

#552

Arbitrage

Arbitrage is the simultaneous purchase and sale or business transaction which creates a profit in difference of price. It is a trade that profits by exploiting price differences of identical or similar financial instruments, on different markets or in different forms. Arbitrage exists as a result of market inefficiencies; it provides a mechanism to ensure prices do not deviate substantially from fair value for long periods of time.

This is a sophisticated method of fooling regulators, buyers and sellers and bringing general confusion to a market built on trading. In most cases, no one knows who is being robbed. It is unfortunate that securities and other dealers do not, like the Western cowboys, wear black and white hats.

Lewis Carroll wrote the book Alice in Wonderland in 1865. Alice asked the Cheshire cat, at the fork of two roads, which road she should take. The Cheshire cat said, “where do you want to go?” Alice said, “it does not matter”. The Cheshire cat said, “then it does not matter which road you take”.

In my lifetime, American's and America has lost all direction...so eager to go somewhere without sense of destination...willing to depend on directions from just anyone. People with good common sense just believe anything thrown their way from the many sources of news. Recently, some bones were discovered in California which the archaeologist immediately said were human bones dating back 75,000 years. Another smart paleontologist digging around in the same area, hoping to find some more historic bones, unearthed the button from a military coat. Truth is, the bones were from an American soldier buried in the area.

In Japan, a cave was found with some drawings. Some of the smart historic artists immediately proclaimed the discovery of ancient art dating back thousands, or perhaps millions of years. An elderly Japanese man later admitted that as a child, he had gone into the cave and made some drawings with charcoal. One of my history professors, sent out Christmas cards one year with drawings from some caves in France which he assessed to be some of the first art known to man. These have been identified as recent artwork no more than several hundred years old.

For many years, I have been a member of the America Association for the Advancement of Science (AAAS). Our motto is “advancing science, serving society”. What has happened to the integrity of science, financial transactions, healthcare passion, academic credibility, pastoral-church responsibility? Most of all, what has happened to political leadership...the bases of patriotism?

The best example of excesses and abuses in the financial world is this matter of sub-prime borrowing, trying to put everyone in their own home, whether they could afford it or not...some with no previous home owning experience...no money down, no borrowing history...in many cases not even a job. Through Freddie and Fanny and other such government decadence we have seen a “wipe-out” of the construction market such as the most belligerent surfer has never known.

In one of my office buildings, one mortgage company had 14 rooms filled with people typing feverishly on computers. I was over checking on something, I asked the manager, “what are all these people doing?” He said, “they are typing up mortgages, houses all over the country we have never seen. It is a big scam that someone is going to pay for, sometime”.

It seems that in this “arbitrage” in the mortgage market, there were none of the usual precautions...businesses practices that defy logic. Where were the writers of business practice textbooks, professors in our University's schools of business, just investors who know the most basic knowledge that, “you don't get something for nothing”...that “money does not grow on trees”. More important, for politicians, the 50% population of the country who work, pay the taxes, own most of the real estate, cannot be comatosed by excessive taxation. It has become popular to strangle the goose that laid this nation's golden egg.

Your model is only as good as the information that is fed into it. Do we really believe that we do not repay debt, that it is resourceful for us to use borrowed money, that American's should not be scared of entitlements and other debts...all taken together, making a total of 100 trillion dollars. Now for most of us, accustomed to thinking in thousands, that is the figure 100, with 12 zeros. The average income of the American family is 60,000 dollars...mother, father, everyone working as hard as possible to bring home a paycheck. When I graduated from health-care school, Medical Economics was a new magazine, advertising for new doctors for a salary of 1000 dollars a month. Everyone working in the doctor's office now makes over 1000 dollars a month.

Tax payers, struggling to survive, do not have the time to give oversight to government. One of my father's friends was a Senator in the NC Legislature. The Legislature met in the Capitol building. He would invite me over from Chapel Hill to watch law making. Strange, all my family were Republican. There was not one Republican, one woman, one minority in the legislature. For over 100 years, Democrats have been in full control of North Carolina...even appointing white, well heeled Democrats to the boards of predominantly black colleges. I knew two of the first black Democrats to serve on the Democrat Executive Committee, a dentist from Charlotte, and Levi Hamilton, a black undertaker from Goldsboro.

In New Hanover County, where I have lived most of my life, Democrats and rhinos have run things my entire life. I am a member of the country's largest minority (disabled, 32% population), a totally blind, 100% disabled, service connected, medical officer, veteran. The county had the money to buy Airlie Gardens (poor whites, blacks, disabled have no need for these county financed gardens any more than we were welcomed when the gardens were in private hands). The county gave away the law enforcement building, prime real estate in the downtown area, to a church that could well afford to pay a decent price for the building (I was a log time member of First Baptist Church, knew the pastors and assistant pastors very well, I know 25 years ago they had 13 million in reserves. I well remember how long 4th Street was closed for the construction of the tunnel.) I blame commissioners,city council people, town aldermen, for not staying on top of salaries paid to ABC officials. Don't tell me that the county manager did not know about the excesses, the degradation of the ALE and ABC systems. I knew about such long ago, from Lawrence Rose and others involved. Don't tell me that the county manager, city managers etc. did not know about the craziness at the tax office. When were these tax exempt government and religious properties appraised? It took about three days for the tax office to come to my house when VA finally finished the adaptation process for my house...raising the appraisal of my house by more than the VA adaptation (8,000 dollars) when that amount according to state statute and federal law should have been deducted from my house appraisal. This has been totally exposed to VA, BVA, DA (American with Disabilities Act) and in many magazines. One government official asked me this question, “is there no law enforcement in your area?”

The keeping of books by federal, state and local tax officials should be very simple, two sheets, one marked assets, one marked liabilities. Even children recognize fairness. Disabled, handicapped, do not use your parks, your jails, your libraries, and many other things that you “normal” people use. We are just expected to work and pay taxes like everyone else. There is no “arbitrage” in our lives...particularly, if you are a military veteran.

There are some crisis that no one can foresee. Those 97 politicians on that plane in Russia could not foresee their plight. Most Americans could foresee the present financial plight affecting federal, state and local government. It amounts to this, when you are in a hole you stop digging...you stop promoting bonds for the community college, you stop promoting sales taxes.

Seeing the recent crisis in Mexico, Thailand, even this nation's S&L debacle, we should know that it is easy to get personally and collectively destroyed. I like steak, but it has been many years since I ate a steak. I live as frugally as I know how to live...demonstrating conservatism in everything I do.

If you are not willing to control risks, you should not be involved in living and certainly not in leadership. It is the unexpecteds...earthquakes, hurricanes, medical disasters...which test our faith and our survival skills.

There seems to be a total lack of risk management and risk assessment at the federal level, the state level, and certainly at the local level. In 1987, President Reagan instituted a plunge protector against unforeseen plunges in the economy. I had real estate in Wayne county where, a percentage was deducted for early payment of taxes. Timeless, checks and balances, timeless, protecting the public in any garden of good and evil.

CEOs on Wall Street, politicians and bureaucrats lived real well and made much money on the way up and it has not cost them one penny on the rapid way down. They still think that just a simple apology allows them to maintain their profile of incompetence.