Credit?

It has been quite some time since I posted a new entry on here. It was to be expected given that I really have this place as a way to vent, and the last couple of months have just been too busy to sit down and write something meaningful. In all honesty, it really still is too busy, but I have gotten to a point where I could use a break from my hectic schedule.

After all the “feel good” entries I did about the Mini and my motorcycle endeavors earlier in the year, it is time to get back to some more down to earth bitching again. Do not fear though, because with the ski season just around the corner I am more than likely to have a number of exciting things to say about that in the near future. Mind you, it is probably a bit too warm here for the time being for proper snow fall, and there has been very little precipitation in the last couple of weeks, so it may just be that I start bitching about a lack of snow…

Today I wanted to talk about loans and excessive personal debt. It is a topic that regularly has me annoyed, but recently there has been a resurgence of the topic in the media. It seems the economic crisis we have been experiencing since 2008 and that does not seem to want to go away is claiming a number of victims. Add to that the approaching consumer feast of Christmas, and we have a recipe for disaster looming.

One important value I was taught growing up was that of money. If you want to buy something you will need to save up until you actually have enough to do so. Borrowing money was something to be avoided, and should be reserved for real estate purchases. Whenever there was something that I really wanted, I would set about saving money over time until I had enough money to buy the coveted article. Many times this would imply foregoing getting the latest and greatest, and certainly avoided many impulse purchases. Later, as I got my first credit card, I used this simply as a means of paying rather than a way to borrow money. Again, if I did not have the money in the bank to pay for the credit card invoice at the end of the month, I would not conclude the purchase. This is particularly important given the prohibitive interest rates credit card companies tend to charge. I often feel credit card companies are nothing but legal loan-sharks when it comes to lending money, and the only real difference is that they will probably not come and break your legs if you don’t reimburse them on time… This approach to purchases is one that I still apply, and although over time my finances have improved and so I often do not need to save up further to buy something I like, the process has instilled a way of taking time to consider any purchase. As a result, more often than not I actually end up not buying that new (insert gadget/object here) because I realize that I actually have no need for it.

Starting out in adult life together with my (future) wife, I had purchased a second hand TV and was renting a VCR. Since we were avid video watchers, we decided that we actually wanted to buy our own VCR. The problem was that at the time the cost of a new VCR was equivalent to something like half a monthly salary. Given that rent, food, insurance etc. was already absorbing pretty much all of the pay check, this was not going to be easy. So we set about saving up for it, and I believe that after 7 months of cutting down on food expenses (this was pretty much the only variable we had in our expenses!), we had finally scraped together enough money to by the VCR we were dreaming about. It was a very proud moment when we brought home and installed it. The effort we had gone through to get it probably made us appreciate it all the more, and we had avoided racking up any sort of debt.

Today, people have gotten used to the idea of always having everything. The consumption society we have become dictates that we must all have what our friends and neighbors have. You simply must have that new giant flat-screen TV, and the new iPhone 6. The fact that you already have a very functional phone that does what you need it to do does not matter anymore, and such purchases have become necessities. Everywhere access to credit is made available, and it is especially around the holidays that this phenomenon becomes the most prevalent. If you happen to have kids, the situation is even more extreme as they must not feel left out from their friends. The fact that year-end often coincides with a number of other major expenses makes it all even worst.

The behavior of buying what you can’t afford concerns really all classes, not just those struggling to get by. An article I was reading today was mentioning how bankers are pawning their expensive cars in December so that they can buy extravagant gifts for the holidays, and then repurchase the cars when they receive their bonuses in March. According to the article, this practice has become quite common in Geneva where expensive cars are the norm. It would seem to me a lot more logical to actually save up that big fat bonus in order to make those big purchases later in the year. Certainly you would save money as you avoid paying any interest on pawning your vehicle. It is just that society today for the most part works in the way that the more we earn the more we must immediately spend. With the spending then quickly out-accelerating the income, that little debt you started in your late teens because you just couldn’t wait a couple of months for your new phone will soon become a mountain.

So, the fact that it seems the recent past has taught us nothing, it is very likely that we are heading for another credit crisis. Yes, interest rates are for the most part low (unless you look at what some credit cards are charging!), but this is not something that is going to last forever. The general public just continues to take up more and more credit, and it then really only takes a very short period of reduced income to quickly become insolvable. Should interest rates just increase a little bit, the impact on all of those that have a large number of small credits will be devastating. It is time we began thinking more carefully about how we buy things, and start to really think about buying that latest gadget before we do it. Unfortunately I doubt this will happen…

Wool

I have just finished reading a new science fiction book, and in view of how much I actually enjoyed it I thought I would provide a review of the book. This book is Wool (Omnibus collection) by Hugh Howey.

For starters, I am not particularly an SF fan. For sure, I have read my share of SF books over the years, mostly the really well known stuff like Asimov’s books, Dune etc., but it was never a genre that really appealed to me. Clearly there are exceptions, and so when I read Hyperion for the first time I was totally blown away. Simmons, in creating that series of books, really achieved a masterpiece. As much as I have enjoyed all of Simmons’ books over the years, it also remains true that his more recent stuff has left me wanting, which is sort why I ended up reading this one. Having exhausted all the works of my favourite authors I have been struggling to find something new that I really like. I have recently gone through a number of lesser known authors, but nothing has really caught on. But, checking on Amazon, a reader’s comment did make a comparison between Wool and Hyperion, and so I thought I would give Howey a chance.

Well, we shall see how the next set of books pan out, but this first collection (Wool Omnibus is a collection of 5 shorter works) is certainly getting close to the same league as did Hyperion. Granted, Wool is far from as ambitious as Hyperion and the subsequent sequels were. The worlds Simmons created were vast and complex, and I think it takes a particularly accomplished author to achieve that level of detail and complexity. In Wool, the world we are looking at is limited to a silo of 134 (or is it 144?) levels. We are cast in a relatively confined space, something that no doubt Stephen King could have excelled at creating. King does like to keep his action very confined, perhaps even more so than Howey if we look at works like The Shining or Gerald’s Game. Seriously, who can write a huge book where most of the action takes place in one room with a girl handcuffed to bed and make it in to something you simply can’t put down? Perhaps something like Under the Dome (and I don’t mean the TV series that is heading way of track!) is more in line when it comes to the size of the space.

What I particularly liked with Wool is the actual quality of Howey’s writing. Far too often I become frustrated by generally poor writing by many authors, even though the story may be particularly good (and no doubt some readers out there are now scrutinizing my writing in order to put this back in my face!) In order to not upset anybody, I will not provide examples of what I consider poor writing but let’s just say that I hated The Da Vinci Code, and I will have to be really desperate to pick up another Dan Brown book. Howey writes very well, and I particularly like how he creates his characters. You quickly take a liking to them (or not), and so you are swept away with the story living the events as they unfold in the pages. Two authors I have already cited, King and Simmons, are exceptionally good at creating characters as well, and I think this is one thing that will always draw me into a book. Looking at SF books of the past, you can’t really say that was one of Asimov’s strong points, and although Herbert was more accomplished in this aspect I never found his characters as spellbinding as those created by King and Simmons.

There will always be readers who must point out certain things that don’t add up in a book. This is not something I do, as I usually let myself go fully when I read. I don’t question things, which is also why I always enjoyed fantasy stories and can lose myself with pleasure in the pages of The Imajica as an example. No doubt if Wool is scrutinized you will point out things that simply don’t work or add up, but I honestly enjoyed it too much to care.

Certainly there is room for improvement in Howey’s writing, and as enthusiastic I am about it, there remains clearly room for more depth to certain aspects. That said, it has been a long time since I came across a book by a young author that I felt had as much potential. For sake of comparison ( and also to throw out there another name that could be worth checking out) I absolutely loved Daemon, the first book by Daniel Suarez. Unfortunately, his follow-up work has been of a lesser quality, and I get the impression that he was snapped up by a publisher who is now pressuring him to come out with new stuff. The ideas are good, and come with much potential, but the writing and the story telling lets him down. I hope Howey will not go down that path.

Chapter 8: The Cabriolet and the Countryman

In the new Mini line-up, I have always lusted after a cabriolet. Sure, I had the best looking one in the Clubman, but a cabriolet for my wife would be perfect. There was a problem with this though since she had at the time a Mercedes A Class, which was extremely practical. To be honest, it was more spacious than my Clubman, and with the four-door design it really provided us with something that we regularly needed. So, changing her A-Class for a Mini Cabriolet wouldn’t work out…

The stunning Cabriolet

Looking at the Countryman...

…Unless I would change my Clubman to something bigger! Since the four years that I had the Clubman, Mini had now brought out a bigger car: the Countryman. This is a proper four-door mini which can also be had with 4-wheel drive, something that I was growing interested in for when I go skiing. The problem was that when I had started looking at the Countryman I really didn’t like it. It was not a Mini! That was when it hit me that I needed to stop considering as a failed Mini, and instead see it for what it really is, a really cool tiny SUV. For sure it has a number of design cues that reminds you of the mini, and inside it also comes with the huge central speedometer and cool switches etc. Furthermore, when you actually get around to driving it, you realize that it even drives like a Mini in spite of being bigger. With the 4x4 transmission, and the powerful Cooper S engine it becomes a hoot to drive! Seriously! The traction is amazing, providing a feel a bit more like a rear-wheel drive when cornering, yet it has the stability of a 4x4. I always thought the standard Minis with the Cooper S engine would be a bit of a handful through corners as the front-wheel drive would pull straight, but here the setup made a huge difference. Seriously, they should build a 4x4 Clubman Cooper S some day…

Surf Blue is nice!

Well, with the realization that the Countryman was actually a pretty cool car, we decided to change both of our current cars. So, we ended up getting a beautiful ice blue Mini Cooper Cabriolet together with a surf blue Mini Cooper S Countryman. These are our current Minis, and as much as I love them, it is not impossible that there will be others in the future. There is already a new version of the Mini that has come out that comes with a number of improvements particularly to the interior. The cabriolet version of this one should be out in a couple of years, and maybe they will end up making an all-wheel drive Clubman some day too..

The current collection

Chapter 7: The New Mini

As luck would have, there would end up being several more Minis in my life.

By the end of the 90’s, the original design of the Mini dating back to the late 50’s was really reaching its limit. There had been some improvements done to the car over the years, such as an increase in the engine size in order to cope with more stringent emissions regulations, considerably improved brakes as well as increased wheel size from 10 to 12 inches. These all had helped extending its life, but clearly a 40 year old design was lacking in some crucial areas that had gained in importance, most notably safety. The Mini could no longer compete with modern cars when it came to protecting its occupants in case of an accident, and ultimately sales had dropped way down. It only made sense then that the production was finally halted in 2000.

However, by this time the car design and the brand name was owned by BMW. They had been looking at what VW had managed to do with the New Beetle, taking basically a modern Golf and designing a modern body that bore an obvious resemblance to the original Beetle. The market loved the cuteness of this car, and since underneath it was a fully modern and practical car, nostalgic buyers were picking it up. BMW however managed to take the concept a little bit further, with the huge success that we now know.

 This is the first BMW Mini, one I never bought

When the first New Mini was released by BMW, it was immediately a huge success. The looks of the original Mini were very well replicated, and the car was dynamically very well done. Appealing again to those (like myself) who were nostalgic of the original Mini, this car also created a whole new segment in the market; the premium small car with an original and individual design. More than just replicating original design elements, the New Mini provided a platform that allowed owners to get something much more original than the mainstream cars. Also, the quality of the car was undeniably BMW, and thus completely set it apart from other super-minis from Ford, Peugeot etc. People not needing a bigger car could finally indulge in a new level of refinement normally only found in much bigger cars. Since then, most European manufacturers have attempted to come out with their own version of this concept, but to date nobody has succeeded to topple the Mini from its pedestal.

BMW really got the Mini look right!

Personally when this new Mini came out, I was very excited and wanted to get one. I had more or less decided this, and so we took our original Mini and went to the dealer. Arriving there, and parking our Mini next to a new one, it suddenly struck me how much bigger the new one actually was. I felt it was a bit too much actually, but nevertheless continued to inspect the car. Well, in my opinion, the actual build quality of these first batches were not really up to what I expected from them. Yes, it was a nice car and the design successful, but since I didn’t really need a new car, it just wasn’t enough to convince me to buy one.

BMW then revisited their design a couple of years later, considerably improving on their first attempt. At this point they also had the intelligence of producing a Clubman version. Now in my opinion this modern Clubman is the best looking Mini that has been made so far. I absolutely love the looks of it, and can’t get enough of some of the design elements such as the dual rear-entry door or the extra ½ door on the passenger side. The interior maintains the huge speedometer, but has taken this to even another level. The extended chassis ensure a more stable ride than the normal Mini, but it still has that “go-kart” feeling to it, especially with the sports suspension package. I think the only thing that I can criticize is the mostly lackluster colours being offered, but then this is a result of the market.

This was shortly before we returned to Switzerland after living abroad for a few years. My employer at the time was offering me the option of getting a company car, but I was limited to selecting a Mercedes, BMW, Audi or a Volvo. Not that these companies don’t make nice cars, but they are just not cars for me. I am not much for luxury, and I hate big cars. Also, VWs and Audis are far too common around here, and I always liked something a bit more original. Then it hit me, Minis are BMWs! So, I asked if that would go, and luckily it did. So, I soon found myself at the dealer configuring my brand new Mini Cooper Clubman!

My Clubman!

I mentioned earlier that the colour choice was a bit limited, and so I ended up going for a blue/black metallic selection. This gave the car a lot of class, but I would have liked a more “fun” colour. I could have gone for the Cooper S version as well in order to have the more powerful engine, but the problem with this one is that it comes with an air-scoop on the hood that I feel totally ruins the look of the car. Given that this car was really for commuting to work with as well, clearly the extra power was not needed and would only result in a higher fuel consumption. I did get the sport chassis together with the largest wheels available, as well as a slew of other cool options. The result was a stunning looking car, that would always bring a smile to my face when I would drive it.

 I still think this is the best looking Mini to date

My Clubman with the Corsaro next to it

Did You Read The Fine Print?

Why do we need fine print on contracts?

Seriously, it has become such a widespread hypocrisy with the various disclaimers we always get in fine print on pretty much any contract or other such agreement. In my domain, the banking world, this has been taken to such levels it is not even funny. The thing about them is that basically nobody reads them, and even if they did they would not understand them for the most part. Yet our legal experts oblige us to have these disclaimers because it has become the law, and should we omit them we are liable for some serious legal trouble that could become very costly.

Here is one that I was looking at today, taken from the term sheet of a structured product somebody was proposing to us this morning:

This document has been prepared for information and discussion purposes only. This indicative termsheet does not constitute an offer to sell or buy any security by Exane based on the indicative information set forth herein. Although no issuer is obligated to issue such securities or financial instruments based on the indicative information set forth herein. It is not construed as and does not form part of an offer, nor an invitation to offer, nor a solicitation to buy or sell such securities or financial instruments, or recommendation to enter into any transaction based on the indicative information set forth herein. You should take steps to ensure that you have made an independent assessment of the opportunity and the appropriateness of such transactions, securities or financial instruments in light of the legal, tax and accounting implications and of your own objectives and circumstances, including the possible risks and benefits of entering into such a transaction. These indicative terms and conditions have been relied on the assumption that such assessments will be made. This information is confidential and proprietary. It is accurate only in light of this proposed transaction and will not be disclosed to anybody (except to your professional advisors directly involved in this proposed transaction) without prior written approval from Exane Group.

Okay, so we have somebody trying to sell his product, and he sends this document to you. How are you to understand his action? For me, he is clearly suggesting that I invest in this structured product. However the disclaimer text is somehow telling me otherwise.

Now let’s say I end up investing a part of my hard earned savings in this, and then it tanks and I lose all my money. My normal and human reaction would be to get seriously pissed off at the guy who suggested that I buy the crap, and typical I will then turn to him to ask for some sort of compensation given how he had informed me that this was a very good investment. However, he will then point to the disclaimer and say that it was entirely my decision and basically he has nothing to do with it.

But, if I then take the case to court, I stand a very good chance of winning the case (at least here in Switzerland) because courts here now almost always side with the client against the big bad banks.

So, basically the law dictates that banks have these disclaimers on their documents to ensure that clients are not fooled into buying something they don’t really want, but then when the client still does the law then tells the banks that those disclaimers don’t really mean anything and you can’t expect somebody to actually read and understand them.

Which brings me then to my opening question, why do we need the fine print on contracts?

Alibaba (and the billion thieves...)

There was yet another interesting IPO that took place the other day, one that will go down in history as being the biggest IPO to date. Well, to honest, I think there are many reasons why this one will go down in history, but perhaps the most noteworthy reason is that this is actually a Chinese company doing an IPO in the US. It is a huge event in that China has now outdone all the previous US tech company IPOs that have created so much wealth over the years, and perhaps the most significant marker to date that China is really becoming the leading global economic power. With investors already complaining that allocations have been far too limited, I can imagine as well that the stock price will spike in a spectacular fashion, and certainly overshadow what GoPro recently did.

I have to provide also some of my more cynical assessments here. For starters, one can question the huge surge in the stock price on the first day of trading, one that I will expect to continue over the coming days. It closed at almost $94, up nearly 40% from the IPO price. But then again, with so many potential investors being disappointed since they were not able to subscribe to any shares this was clearly to be expected. Nevertheless, Alibaba ended up being the biggest IPO in history so far, and I suppose as far as interest in the stock market goes this is positive. No, what really concerns me is that, even though this market valuation is actually based on something more real than what has been the case for GoPro, there is a potential risk that the Chinese Communist Party will expropriate the company and its shareholders.

What probably many BABA investors are not aware of, is that China bans foreigners from owning a majority interest in companies that Beijing calls “strategic and emerging industries”. To get around the law, Chinese Internet companies give shareholders rights to a “variable interest entity” instead of direct ownership. In Alibaba’s case, shareholders own a piece of a shell company in the Cayman Islands with a contractual right to a share of the profits.

The U.S. – China Economic and Security Review Commission, set up by Congress, warned against these arrangements in a June report: “This intricate ruse is a way of making the business appear to be Chinese-owned to Chinese regulators while claiming to be a foreign-owned business to foreign investors. Neither claim is technically true, and the arrangement is highly risky and potentially illegal in China.” Last year, China’s highest court ruled that variable interest entities amounted to “concealing illegal intentions with a lawful form.”

In its IPO disclosures, Alibaba acknowledged that if the Chinese government “deems that the contractual arrangements in relation to our variable interest entities do not comply with PRC governmental restrictions,” the company could “be forced to relinquish our interests in those operations.” Alibaba could also lose its operating license or variable interest entities if either is found to violate “any existing or future” laws. The Communist Party could wipe out that $22 billion by decree.

Most investors, and obviously Alibaba executives, believe there is now so much foreign investment in Chinese Internet companies through variable interest entities that Beijing wouldn’t dare jeopardize these property rights. But then again, one could also argue that if China would never do something like this because there is too much at stake, then why not change their regulations in order to make these structures legal and officially acceptable? As it stands today, there remains a potential risk that simply can’t be ignored.

So, while there have been many IPOs over the years within the tech sector that have raised capital on air, here we have the biggest one so far based on the hope that China will continue to close their eyes on this essentially illegal foreign investment. I suppose given how corrupt things are over there, it does seem likely that nothing major will be done to shake things up. But should the Chinese economy begin to falter, and there are more and more signs of this, I would not be surprised if they decided to take some more treasure from Ali Baba’s cavern…

Chapter 6: The Rare Automatic

As I have mentioned before, Minis have always been a part of my life. After being more or less forced to getting rid of my first Mini, I had moved on to a number of other cars. For sake of security and peace of mind, my next few cars had been new cars, but soon it would be time yet again for another Mini.

I am obviously very much in to cars, and love to drive. My wife, on the other hand, does not really enjoy driving. She tries to avoid it whenever possible, which obviously suits me fine most of the time. Nevertheless, there came a time when I felt she could really use her own car so as to have the freedom to move around whenever and wherever she needed to. Riding a Solex down to the train station was all fine and dandy while she was working in Geneva, but later on getting to other locations became important. Oh, and I thought it would be fun to be able to buy another car!

Her response to this was that she didn’t want a car. When pressured, she finally said that she would want a Mini Automatic. She hates manual gears, and a Mini would be small enough to easily get around. The problem was, and she knew this, that there were hardly any Mini Automatics available.  She actually thought they didn't exist at all. A small number had been imported to Switzerland at the end of the 60’s, but according to registration records there were something like three left on the road. So, pretty much impossible…

Well, one day I came across and ad in a local paper for a Mini Automatic. This was in 1988, and the ad said the Mini was from 1970 with 14’000km on it. I figured that it must have at least 114’000 km, and had simply gone around the counter once. However, when I called the seller he confirmed that it had indeed only done 14’000km, but that it was very old. Obviously we had to go and have a look at the car, but I feared the worst.

We got to the house of the owner, and he explained that he had bought the car new for his wife in 1970, but she never used it due to sickness. He instead would occasionally use it when his regular car was being serviced, and otherwise the Mini was kept in a garage. He mentioned the colour was not very nice, and then proceeded to show us the car.

My jaw dropped to the floor as I saw it. Here was basically a brand new Mini Automatic, in a beautiful mint green paint from the late 60’s. I opened the hood, and for the first time in my life I saw a Mini engine with not a single oil stain on it. The car was incredibly clean and well kept, and I honestly had trouble believing what I was seeing. We went for a drive around the block, and all the mechanics seemed very sound. It was my first time driving a Mini Automatic, and I was quite surprised to find that the ‘box actually allows you to manually select any of the 4 gears you want, which is actually really handy when driving in the mountains. Often auto ‘boxes from the 60’s are very simple 3 gears that really only provide a D or an R option. This was quite more sophisticated and beautiful to drive.

We got back to the owner's house, and I asked him how much he wanted. I was concerned he would be asking too much for me, but that is when we got the next surprise. It turns out he didn’t really know what the car was worth, and so he had asked his mechanic neighbor for a proper price. This neighbor, hoping to get the car at a cheap price, had quoted CHF 3’000 which was quite ridiculous. The thing he did not suspect was that the owner really didn’t like him, and so did not want to sell the car to him. Instead he offered it to us for CHF 2’800. I simply could not believe it, and we wrote him a cheque instantly for a deposit before we could wire the rest.

When we later brought the Mini to a mechanic to prepare it for road testing, it turned out to be the famous neighbor. He was furious that we had gotten the car, but that’s karma!

We still have this Mini today, and I never intend on getting rid of it. We don’t take it out so much anymore, but it still gets to shine from time to time. It is still entirely stock as it was 45 years ago, and almost like new.