Tutelage

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Who doesn’t want to lose some weight (even those that don’t need to will still complain about how “fat” they are)? Some need to more than others, and I was definitely in the “some” category at the beginning of this year. As motivation, I decided to join a weight loss challenge with 18 other people where the winner would be determined by the % of total body weight lost. Long story short, I ended up dropping close to 18% of my body weight in 10 weeks and took home some extra dough for first place. Since then, I’ve had some people ask for my secret, which is what prompted this post. 

My favorite meal at my work cafeteria is the mid-week taco salad special. Utilizing a well thought out strategy, this tasty treat can be one of the best deals in town.

The cafeteria at work operates on a unique system known as “lunch lady arithmetic.” Unlike regular arithmetic (or math if you will), lunch lady arithmetic varies from day to day. The price of any given item in the cafeteria is determined by an unknown baseline value (very few prices are actually posted) plus or minus some variation from the mean. The variation is largely driven by the type of item and the lady that is ringing you up. Prepared food like eggs and oatmeal have a much wider distribution than packaged items like chips or milk. So one day you go in and pay $2.44 for some scrambled eggs and an English muffin while the next day it may ring up at $3.21 or potentially something with a one handle if you’re lucky. This kind of risk/reward makes the simple act of eating at the cafeteria an exciting adventure.

I would like to introduce a new friend of mine and guest writer to Frugal Franco who goes by Macro Marco. As his name suggests, he is all about macro economics and has written the following article to explain the role credit rating agencies play in the market.

Franco

Many investors are feeling the pain of being left with close to nothing after putting their money in previously believed to be “safe” investments. They feel betrayed, lied to, and cheated. After all, they were told by the credit rating agencies (CRA) that their investment was of the highest grade possible with only an infinitesimally small chance of ever losing money. So what went wrong? Are the CRAs broken?

I would like to officially introduce Frugal Franco’s first guest post. A friend of mine, who goes by many names but we’ll call him the Bargain Burro, recently submitted a diary esk dictation of a memorable Black Friday. Enjoy!

Franco

Tuesday
I went over to my friend’s house and had to listen to him brag about his new flat screen TV all night. I sure would love to steal his thunder by getting a bigger one for less money. Fortunately, black Friday is right around the corner.

The final episode of this series opens in summer of 2006 at the peak of the US housing markets. Consumers have been leaning on their home equity to finance their spending and drive economic growth. In addition, the advent of the credit default swaps have made risk a transferable and tradeable product. The perception that risk can be stripped out of an investment vehicle and transferred to another counter party has driven credit spreads (the difference between the cost of risky, corporate debt and the risk free US government debt) to historically low levels. Tight credit spreads have made it very cheap to borrow money and create leverage to amplify returns. But all that is about to change as the era of easy money and excessive leverage comes to a screeching halt.

In the first two parts of this series, we covered the rise of securitized loans and birth of credit default swaps. We left off in the throngs of a raging bull market being driven by a new era of technology companies. With the exception of a few hiccups, Wall Street has perpetuated almost 20 years of wealth creating, bull market returns on the backs of financial leverage, innovation, and good ol’ fashion greed.

We last left off with a red hot financial market in the mid 1980’s being led by the fancy MBS (mortgage backed security) and CMO (collateralized mortgage obligation) securities running in tandem with a leveraged paradise known as the junk bond market. The easy money and lavish lifestyles of the 1980’s were not isolated to Wall Street. Savings and loan (S&L or “thrifts”) institutions across the nation were taking advantage of the newly implemented Tax Reform Act of 1986. The new act was passed to update “old banking standards” and allow thrifts to take on more risk in order to better compete in the “complex financial markets” of the 1980’s. Thrifts ran with their new found freedom and grew like wild fire. Some of the more aggressive ones were doubling in size every year with less than ethical lending practices. All this easy money was making thrift executives very rich and further compounded the greed running rampant through the markets of the 80’s.

Falling home values, growing unemployment, plunging stock prices; how did we get into this mess? Well, in order to fully understand our current economic funk, we need to go back and examine the roots of what has now been coined the credit crisis. So take a walk with me down memory lane while we explore the origins of securitized loans and unregulated swap contracts in a fascinating tail of innovation, riches, stupidity, and good ol’ fashion greed.

To my chagrin, I was watching a recorded episode of the Oprah show with Mrs. Franco the other night, which was dedicated to being frugal (I know what your thinking…why didn’t they ask Franco to be on the show…invite must have gotten lost in the mail). Other than coming up with some painfully obvious money saving tips (don’t buy new furniture and trade with a friend instead; camp in your backyard instead of going on vacation, etc…), they managed to villianize credit cards as if they had been forged in the fires of Hades and given to us by the Prince of Darkness himself. One very frugal couple was sent to help a not-so-frugal couple come up with money saving ideas (most of which were very useful), which climaxed with the ceremonious cutting of the credit cards. The not-so-frugal husband was even shown on camera saying something to the sort of “I really like this idea of getting rid of our credit cards and only using debit cards to pay as we go.”

I am constantly plagued by the need to “get a good deal” on everything. Overpaying for things is only slightly higher than “a sharp stick in the eye” on my list of fun things to do. With that in mind, I still realize that it is impossible to get a bargain on everything in life and when these times present themselves it’s best to just roll with the punches. To best illustrate this point, let me tell you a story that happened to me last weekend.