Tuesday, January 11, 2011

The Ten PM Tutorial

Hey guys—

Reader Joe M. wrote to The Hourly G, asking a few questions that he thought might be too basic. As he wrote, “I feel many are shy or ashamed to ask the simple stuff. ”

A lot of non-finance, non-economics people are reading up on finance and economics because they’re not blind—they see that things are going badly. They want to know more, so as to understand what’s going on—but they often don’t have the tools or the language to quite get what’s going on. So they need help.

Here at THG Command Central, we gave it some thought, commissioned a year-long study, and concluded that yes, this was do-able: The Ten PM Tutorial.

We’ll be explaining basic stuff for newbies. Any newbie who has a question—or oldie, who wants a clarification of some particular point—feel free to post it in the comment section of these tutorials, and they’ll be answered in the next iteration. Since reader Joe M. asked first, here are the answers to his two questions:

Basis points: Those are literally percentage points of percentage points. Say the yield on a bond is 5%, and then rises to 5.25%: You would say, “The yield on the bond rose 25 basis points.” It sounds so much smarter than saying, “The yield on the bond rose 25% of 1%.”

Bond spread: That’s the difference in yields between two bonds. This helps to gauge relative risk in bonds. For instance, in Europe, the German 10-year bond is considered the safest there is. So relative risk of other sovereign bonds is measured against it. Thus French 10-years had a spread of 0.470 (that is, 0.47%, or in other words “The yield spread on the French 10-year over the German bond is 47 basis points.”) The spread is quite low for the French bond, signaling how the markets consider the French 10-year very safe. However, the Greek 10-year has a spread (as of this morning, I’m not kidding) of 10.99%—so clearly, Greek bonds are extremely risky, when compared to German bonds.

(BTW: You do not say “Greek bonds have a yield spread of 1,099 basis points”—that’s the surest way to sound stupid. Anything at or below 0.50%, you use “basis points”. Above that, you say “percentage”; for instance, for 0.75%, you say “three-quarters of a percent”.)

Helped? Hope so.

There’s nothing wrong with wanting to know something, or understand something better—and there is no such thing as a too-basic question. Any newbie (or oldie) who has a question, no matter how mundane or complex, I’ll be sure and try to answer it on the next issue of The Ten PM Tutorial. Just leave the question in the comment section.




  1. 5 stars. Tess of Kansas asks this very boring and basic question (boring to everyone else): Which is best for investment purposes, bullion, numis coin, or rare coins? Those with opinions seem to have very strong ones. They all seem convincing to me. So how do I decide what is best for the money longterm? Thanks.

  2. What is the price of a bond? I understand the yield/coupon/interest bit. Basically, if I wave a bond/IOU in the air for say $1m, and someone agrees to take the IUO in exchange for giving me $1m in greenbacks, isn't the price of the bond/iou $1m?

    How can the price of a bond change? Isn't it always simply the amount borrowed?


  3. Here is another question: I have been hearing the word, austerity, often in relation to Greece and other countries within the European Union. What is the U.S. word for this sort of action, thus yielding a similar effect? For example the U.S. uses the expression Q.E. 1, and Q.E. 2 for meaning they are running the printing presses to flood the world with more FRNs.

    With the word austerity,"raiding" comes to mind. What is the buzz word to look out for here in the USA? Hope that question is clear enough. Thanks, from Tess of Kansas. (Also isn't it unconstitutional in most countries for a government to monkey with a countryman's retirement fund?

  4. Tess from Kansas has a lot of questions tonight......
    I am in a mutual fund that utilizes TIPS as collateral for their investment activity into real asset types of securities (land, commodity, gold, etc). Are TIPS somewhat safe if the dollar keeps sinking? What are the main risks with TIPS in today's economic environment?

  5. I don't know if my question fits in the category of newbie but I always wondered what would imply a dollar collapse? Washington would emit new dollars and and the old ones could be exchanged (e.g. 1000 old dollar = 1 new dollar)? Do you believe a collapse could trigger a radical political change (aka Revolution)? In case of economical collapse how the powerful people (e.g. Warren, Gates, Jobs, etc) protect their patrimony?

  6. GL

    Do you think that gold and silver will be confiscated in the U.S.?

  7. I hope I'm not breaking the rules by posting an answer here. Tess of Kansas asked, "Which is best for investment purposes, bullion, numis coin, or rare coins?"

    Numismatic coins are coins collected by coin collectors, and by their very nature are rare coins (to one degree or another).

    So, the question really breaks down to the best investment: something {relatively} common (bullion precious metal) or something rare (coins considered valuable by numismatists). I am not a professional investment adviser, but I do collect old coins.

    If one wishes to invest in rare coins, I suggest the following criteria:
    1. knowledge and experience in numismatics
    2. love of the artistic component of coins
    3. plan on buying and holding

    If one wishes to invest in bullion:
    1. satisfactory knowledge of the products offered
    2. motive to make a profit and/or control investment risk
    3. plan to buy (and possibly sell) when the right opportunity presents itself

    Above all, become knowledgeable of what you are doing. It is very easy to get burned in either situation.

    By the way, you can do both and see if the coin collecting grows on you.


  8. GL, looks like Kansas will keep you in content for several Ten PMs to come. From the headline I thought this was going to be about Ten Precious Metals... sometimes getting too familiar with the lingo is a hindrance.
    To 10:51 PM Anonymous, I don't know what it will look like in the US but I was in Belarus in the mid-90's when the currency collapsed. Amazing times. They couldn't print fast enough or large enough denominations to keep up with the fluctuations. That meant that from time to time a government spokesperson would go on air and announce that an imaginary zero was now at the end of bill. Got a 100 ruble bill, now it's 1,000 rubles! Oh and bread just went from 100 rubles to 1,000. Then the larger denominations started to circulate.
    People on the street were buying US dollars from the "mafia" guy standing on the corner with a big shopping bag because the banks were black holes.
    Now granted this was a time that was seeing 1000% inflation in 6 months time. Nothing like the paltry "hyperinflation" that GL talks about for the US. But if the dollar honest and truly collapses you better believe they'll be radical political change. Likely a military takeover to restore order and then 15+ years of hardline policies. Belarus still has the communist party thug that rose to power during the 1994 crisis and he'll likely be in for life.

  9. What a great idea! I;ll check back on a regular basis and just learn from others questions for a while. Thanks for taking the time to educate folks!

  10. To ANON 10:48 asked what are the main risks with TIPS in today's economic environment?

    The main risk I foresee is that the government CPI index under-reports true inflation.
    Hence while TIPS will provide nominal protection up to the CPI level, anything beyond will become loss in real terms to you.

  11. GL, love this idea and admit I was wrong about discouraging the Hourly G. As a matter of fact I check it regularly like a web junkie. I would like to get to the heart of the matter and get a point blank answer to something that's probably on everyone's mind:

    With the coming realignment of wealth in the US and possibly the world - what the hell should we be doing to prepare to come out on the winning end of the other side?

    Where the FUCK do I put my money man ??

  12. Hi I'm Joe M. LOL, wow thanks GL for the answers and the credit, LOL. I used to forget the basis points explanation. Now, I won't because it is quite easy to remember your definition that it's a percentage of a percentage. Great and the bond spread explanation was perfect. Here goes another bond question:

    I hear it all the time on CNBC the term YIELD CURVE. Could you go into that? Thanks, and also that an inverted curve is somehow dangerous.

    Thanks once again.

  13. igal, where you put your money depends on how screwed up things get. You need to get a realistic perception of your status, how much risk you are in and what you need to do to protect yourself.

    At the bare minimum, I expect high price inflation combined with a bad economy and high unemployment. That is, we could see a repeat of Jimmy Carter’s Stagflation. Paul Volcker was appointed by Carter to be FED chairman and he slammed the brakes on the economy with a 21% interest rate.

    That seems very unlikely this time because the debt service on the national debt would exceed tax revenues. Some kind of default is reasonable. The only question is what kind. The Fed could devalue the dollar or allow it to hyper-inflate. The inclination of the government, due to its ignorance of real economics, leads toward hyperinflation.

    I can’t tell you where to invest your money. All I can do is tell you how I address my concerns. The first thing I want to be able to do is eat when the price of food goes up by 50 to 10000%. So I suggest a food storage program. Twelve hundred dollars would feed a man ($800 for a woman) for a year on a very boring diet. Dehydrated food is cheaper, but not as pleasant to eat. You can always pay more and get less boring freeze dried food. There are plenty of places to shop, but look at this one.


    Then, there are the means of living a comfortable life when everything goes to hell. It is like becoming a survivalist; how far to you want to take it? Are you willing to kill to protect your property? It may get that desperate.

    It also depends on where you live. Some people will try to ride out the rough times in one of the big cites, but those will become hell holes when the government checks stop or the dollar goes to hell. Small towns are better because you are closer to farms where you can barter. Also, the small towns are naturally defensive against outsiders and more likely to police troublemakers and looters. The privation we will experience depends on the severity of the hyperinflation and how long it lasts.

    Next, How do you protect your savings? The traditional method is to buy and take physical possession of precious metals: Gold, Silver and copper. I’m betting on Silver because Silver has been manipulated down. The form that the Silver takes matters, too. Big bars are convenient, but hard to use in barter. This is why I prefer bags of pre 1965 dimes and quarters. Many people have some stuck away in their sock drawer, so you don’t, necessarily, look rich when you try to buy small items.

    If you google “hyperinflation” you will find many forums to tell you how people survived and prospered during one. It is anyone’s guess when the dollar falls apart. You can give yourself the willies over this, but I suspect that we still have much of this coming year before 50% annual price increases are experienced. But, I’m mostly positioned, and quite cash poor, and you have yet to begin.


Knock yourself out!

The cult of stability is a culture of death.