AskDong

I was reading Ask the Pilot at Salon, and Patrick Smith the writer used his column to defend against criticsm that Pilots are overpaid. I agree. I don’t think Pilots are overpaid. After reading through the comments, it dawned on me, is anyone paid fairly? Teachers? The Police? Doctors? High School Principals?

While I think most people tend to think CEOs and Hedge Fund Managers are overpaid, plenty of people also think that many a doctor is overpaid. I’ve even met a people who think teachers are overpaid. The person you never meet is the person who thinks he or she is overpaid. Talk to most people, and they’re express the feeling that they’re underpaid. Clearly something isn’t right. How is that we feel others are overpaid and yet somehow we’re all underpaid?

The ugly truth of the matter is that people are paid whatever someone else is willing to pay. I say this not because I think people are paid effciently and economically. I believe the job market is less than efficient. There are many jobs by virtue of being very specialized or artificial barriers of entry are compensated very well. In many way’s it’s a false concept to think of what people are paid as having anything to do with fairness. Fairness implies that’s there some objective measure of work. Should people be paid better if they hate their job? Our labor is more akin to a product that’s being sold. For example, I would never pay more than $100 for a watch, but plenty of people pay not just thousands but tens of thousands for watches from the likes or Rolex, Cartier, and Bvlgari.

Ultimately, we all need to escape the trap of thinking that others overpaid. If we truly believe that then we should be doing what they’re doing. Ultimately people work for one of two reasons. 1) because they love what they do 2) to earn money. Ideally our work satisfied both reasons, but if we’re only doing it for the latter it’s best only to worry about what others make in a way that helps us to get there.

A reader recently wrote,

Dong, Having stood in line at 7:30 a.m last Sunday for a wii I had to wonder if I was just being tooled with via Nintendo’s marketing department or whether or not there truly is a shortage.
-JC

I did JC one better and stood in line at 6 AM in the dead of winter. I’ve had the Wii for over a year now, and there are still shortages. Nintendo’s new “game”, Wii Fit is even harder to find. Recently, I was lucky enough to obtain Wii Fit despite the shortages. I didn’t get it through any effort of my own, but via a good friend who always has his finger on the pulse of the Internet. Circuit City online had the game in stock - for about ten minutes. It seems like all things Nintendo are hard to come by. It’s really quite amazing. The Nintendo ADRs haven’t been too shabby either.

Is the Shortage Real?

I think it is. Recent sales data consistently points to incredible sales of the console. However, that is not to say there isn’t anything going on. Nintendo has not increased production of the Wii as much as demand might warrant. Nintendo is intentionally playing it conservative. Some of this is related to how the company lost it’s mojo in the late 90s. Nintendo of course denies that it’s intentionally creating a shortage. Call me naive, but I believe that Nintendo did not set about creating a shortage when the launched the Wii nearly two years ago. This is not to say that I believe that Nintendo is not contributing to the shortage today. They may not be holding back on supply, but their conservative customer expectations are leading to the shortages. It’s in Nintendo’s interest to make sure as many consoles as possible are in the hand of consumers. Ultimately, Nintendo makes more money from game licenses than it does from hardware sales.

Wii Fit Shortage
Part of the reason for the shortages in the U.S. for Wii Fit, is the weak dollar. Nintendo has chosen to shop 4 times as many products to Europe instead of the U.S. The strong Euro makes it much more profitable to sale there than it does here. It’s still a profitable product in the U.S., and if Nintendo could it would be selling more here.

While shortages may drive demand in the short run by bestowing the “IT” factor on a product, in the long run shortages on a product that requires market penetration hurts console makers. Success breed success. You can have the best game system in the world, but if no one has it, no games will be made. Nintendo is not in this position as the Wii has sold better than the XBox 360 and Play Station 3, but there’s nothing such as excess market domination. The name of the game is to crush your enemies and hear the lamentations of their fanboys.

With the deregulation of the auto insurance industry in Massachusetts, I’ve decided to take a fresh look at my auto and home insurance policies. What dosee as the pros and cons of going through a broker versus a direct carrier? Are the carriers that brokers work with able to offer better rates so that the total cost to the consumer is the same (or less?) when adding in the (undisclosed) broker’s commission? I used to have a negative view of brokers in general (still do for real estate), but recently I had a positive experience with a mortgage broker. I wonder if the same principles of better customer service, flexibility and rates apply to the insurance market as well…

Thanks,
Noah S.

In a perfect world, you should always be able to save money by avoiding a broker. Brokers are in the end just middle men. They take a cut, a cut that could be yours. However, in reality it’s much more complicated. Like Noah, I share his good experience working with a mortgage broker. I ended up getting a much better rate than I could find direct. For that service I indirectly paid $4300, the broker’s cut on the transaction. You would think I should’ve been able to directly talk to the bank and get the same rate. I couldn’t. Most of the time when you talk to the banks directly, they actually give you a fairly non competitive rate. Don’t think just because you’re a good customer, they’ll cut you a break. Banks are often in the business of treating their most loyal customers poorly.

Because the best rates are often not directly available to the average consumer, I’ve found in my own experience that mortgage brokers do often provide a valuable service. This is not to say that one wouldn’t be able to do extra legwork and find a better rate directly from a Bank, but at least sometimes a good broker can uncover rates that you might not be able to dig up. I found this true the last time I shopped for a mortgage. I was recommened a broker, and found he had the best rates I could find. I called half a dozen banks directly, and number of other online mortgage brokers. By far the best rates I found came from the brokers and in particular the broker I was recommened. My broker was great. It wouldn’t suprise me that Noah and I worked with the same guy.

The question is however if this experience can be translated to other brokers, especially in the Insurance world. Given that I have limited experience with insurance brokers, I don’t really know. Complicating the matter is that in the world of insurance is made up to two separate spheres. There is the property and casualty world on one side, and on the other health and life. I would imagine the broker experience really depends on the type of insurance. Given the varied number of insurance providers and products, the competitive landscape is far from clear cut. If a broker truly can shop around amongst many different providers, I would imagine the more useful the broker. If on the other hand there are only a few providers, and or very aggresive direct insurance providers, then it’s likely the cost of the broker does not outweigh the potential savings. That said good insurance brokers (and agents for that matter) are able provide a valuable service not on the basis of just cost, but information. Insurance is a complicated product that people deserve sage advice on.

Recently there’s a been some buzz around what Obama might do with taxes. Obama has basically said he would raise tax rates. While I try not to be too political on this blog, I don’t hide my politics either. I’ve got no problem with higher taxes when we’re running enormous budget deficits which we are. Does this mean I support every government spending program? Hardly, I think the Government is generally inefficient and wasteful. However, I think to balance the budge will require both spending cuts and tax increases. I personally support both.

I do think that one of the best places to raise taxes is on Capital gains. Capital gains rates are at historical lows. The maximum rate is Fifteen percent for long term holdings. According to the IRS 12 months constitutes long term. I know my girlfriend hardly considers 12 months a long term commitment. I’m not sure the IRS should either. Lengthening the holding term is one way of raising taxes as short term holdings are taxed at ordinary income rates. More capital gains would fall under ordinary income rules.

However, I believe raising the long term rates has merit. The fundamental argument for why capital gains should be taxed at lower rate than ordinary income is a good one. Invested capital does more for the economy than incremental labor. I believe this. Venture capital firms have created millions of jobs through their funding of once startups such as Apple, Amazon, and Microsoft. The extra shift I pulled at the Library in 1997 not so much. However the gap between long term capital gains and ordinary income is probably too much right now. There’s no reason for average Americans to pay in excess of 20-30% on their marginal income while only being taxed 15% on capital gains. Keep the rate lower, let’s say 10% lower than the equivalent marginal income rate. So someone in the 35% tax bracket would pay 25% instead of 15% as they do now.

On the other hand there is a real problem in that most Americans are not saving and investing enough. Raising the capital gains rate might potentially discourage middle class Americans from saving and investing. That’s a real problem, but one that the Government has tools to address. The government can giveth and taketh. By raising the capital gain rate, the Government would then be able to pay for additional retirement tax breaks. I love the ROTH IRA, and in 2010 it’s set to be available to everyone regardless of income, but the traditional deductible IRA needs some love as well. The Government should take the opportunity to extend the tax deductible IRA to everyone. It would be perfect opportunity for the Government simplify the code and allow everyone make tax deductible contributions up to some set amount. As things stand now, deductability is a function of how you’re empoyed. You’re in good shape if your company offers a 401K (15k a year of personal contributions and upto 40k including employer contributions), and potentially even better shape if you’re self employed (40k a year). If your company doesn’t retirement plan, and are not self-employed, you’re screwed. The most such person can contribute is the 5k allowed under traditional IRA rules . The government could easily fix all of this by allowing individuals to contribute upto 40k across all tax deductible accounts including tax-deductible IRAs.

Today is the 3rd Friday in June. We all know that means. Or at least those who trade options. Options expire on the third Saturday of each month. However given that markets are closed on Saturday that effectively makes the expiration the Friday the day before.

I’m short two call contracts (controlling a total of 200 shares) on EWZ, the Brazilian iShares ETF, that expire today. These are “covered calls” as I actually own the underlying shares. I sold these calls over 6 months ago with a strike price of 90. Today EWZ has been trading between 90.12 and 91.73. If EWZ closes tonight at $90 or under, I can pocket my profit. However, if EWZ instead closes at anything above $90 I will likely get my shares of EWZ called away. I don’t want this to happen as I would effectively be selling my shares.

EWZ has been a star in my portfolio and a holding that I want to keep for the long haul. The ETF has returned over 100% since I brought it. I would be stuck with a tax bill in excess of $1000 if I were to sell right now, and given that I do want to hold the ETF it’s best not to create incremental tax bills until the day I really want to sell. That said I do believe that fund itself could face substantial downward pressure. Emerging markets have been a hot performer over the last few years, and I for one assume they are in bubble territory. That’s why I sold the calls originally and am likely to do so again. I’m willing to take profits from the volatility along the way if I can.

n.b. As I wrote this post, I ended up buying the calls back for $1. I potentially left $200 on the table if EWZ closes at 90 or below, but I feel better with the certainty that I will not have my shares called.