<p>Somewhere, the OP posted in a frustrated way that she regrets that she ever posted her query here. </p>
<p>I want to thank the OP for posting her query.</p>
<p>I don’t frequent the financial aid section of C.C because I know we will not qualify for need-based aid. But like many others, I see the $200-250K price tag of 4 years of college, and realize that other than a house, this will be the biggest item we will pay for. Like OP’s son, my daughter could also be competitive for merit money at good colleges.</p>
<p>Reading this thread has helped me decide that we will most likely not fill out any forms and not apply for any aid.</p>
<p>I have CDs in other countries. You can get CDs in other countries. You can go overseas with $5K too. Look at the EW* series of ETFs.
[/quote]
</p>
<p>Exchange-traded funds, by definition, scale up for the larger investor, and with lower transaction costs. A 5K investor doesn’t have a lot of room to split up into tiny CDs in several foreign countries, nor will his CDs gain as much interest as the larger ones held by a 5-millionaire.</p>
<p>You raise an interesting point about the FDIC possibly ending coverage of multiple accounts. However, the “advantage” of this to the smaller investor over the larger one is extremely academic. It arises only from the fact that it’s hard to exactly replicate (or deterministically guarantee an improvement upon) the behavior of 5K-guy’s bank CD on a larger scale, for lack of traded liquid instruments that depend in a known way on the state of the FDIC. If the 5M investor were 50M he could negotiate a credit default swap on the FDIC or buy an existing over-the-counter CDS on bonds of the bank issuing his CD. For 5M it may be less practical.</p>
<p>In reality, no replication is necessary, because as you say, an investor who is extremely bearish on US banks, government or FDIC, doesn’t need to hedge, he can express his outlook directly by putting money overseas, or shorting US financials if his perceptions are more pessimistic than those of the market. </p>
<p>
</p>
<p>Hedging means variance reduction, or reducing the variance from particular sources (e.g., “purifying risk”). Diversifying the investment across banks or countries or currencies or commodities is an example. </p>
<p>
</p>
<p>Credit default swaps are helpful here… if you can afford them:</p>
<p>I wasn’t making a point about scalability. You stated that the small
investor can’t invest overseas. I was merely pointing out that you
were wrong here.</p>
<p>We have small CDs in other countries. Some paying as much as 8.3%.</p>
<br>
<br>
<p>You asked specifically about a $5 million CD. I doubt that such an
instrument exists and that a bank manager would strongly discourage
you from purchasing on should it not be against their rules to sell
CDs above the FDIC limit.</p>
<p>One other problem exists with your proposal. The FDIC isn’t in the
best of health. Yes, you could buy a CDS to cover a bank failure. But
the seller of the CDS has the same problem that the FDIC
has. Individuals and institutions lost huge amounts of money on CDS
when Lehman died. Your insurance is only as good as the insurance
company. The guy with the $5K account is going to get back his $5K if
his bank goes bust. The guy with the $5 million is going to get back
$250K. This past week, we had one bank get taken over on Thursday -
things must have been pretty bad to do it on a Thursday as they’ve
only done them on Fridays and Saturdays from my recollections of bank
failures for the past nine years. Then there were two more on Friday.</p>
<br>
<br>
<p>Putting money overseas and shorting the US financials is hedging. And
you can do this but you can get your head handed to you on both your
primary and secondary investments. I’d rather not get into the massive
manipulation of US and foreign markets but I’ll just say that it’s
better to actively trade this stuff than to just let it sit for a long
time. Those betting against the US have had a very rocky ride for the
last couple of decades. The US has had its ups and downs but even the
greatest bears like David Tice have lost a lot of money for a lot of
people in the last 15 years.</p>
<br>
<br>
<p>Sometimes that doesn’t work. In fact sometimes it fails miserably. Or
disasterously. The mantra of diversification reducing risk is a myth
busted in 1998. Yes, the masters of the universe were deeply
humbled. For those that didn’t learn the lessons of 1998, we got a
repeat in 2008.</p>
<br>
<br>
<p>And if your counterparty doesn’t go belly up.</p>
<p>You misquote. What I said is that the guy with 5K can’t go overseas and is far more exposed to a wipeout if US financials tank. The rich guy will (or at least, might) be wiped out more per dollar, but is far, far better able to withstand a financial shock. He can bodily or financially move overseas in ways and to an extent that 5K-guy can’t, purchase food storage or precious metals or weapons — pick as extreme a scenario as you like. For any given threat level the rich guy is better able to withstand it, and for any given level of risk/reward, he can replicate (or close enough) what poor guy can in real terms.</p>
<p>
</p>
<p>5K-guy can’t afford more than a handful of these, due to minimum size requirements. Rich guy can take out the jumbos in as many banks, countries and currencies as he likes.</p>
<p>
</p>
<p>I did not. I discussed whether 5M-guy has scalability, whether in one CD or dozens, of the 5K-guy’s investment options. If you think through the possible FDIC scenarios you are raising, they would need to conspire just so in order to advantage the 5K investor over the rich one. It would be pretty hard to display a concrete example, actually. Banks would have to be failing at rates on the order of 5 percent or more for these probabilities to (relatively) disadvantage the rich guy, i.e. for 5M-investor to be hit two or more times with bank failures on his CD accounts. If that happens and FDIC by that point limits or defaults on its coverage, any 5K-investor’s US bank CD’s are going to pay in dollars that are worthless. The 5M guy would already be largely in precious metals, armored grain silos, or moved to Switzerland. 5K guy will have made a slight interest gain on his CDs while the dollar itself went down by much more, and 5K-guy’s job/housing/food no longer exists.</p>
<p>This may or may not be true but it isn’t what you said and it isn’t
what I was responding to.</p>
<br>
<br>
<p>This may or may not be true but it isn’t what you said and it isn’t
what I was responding to.</p>
<br>
<br>
<p>And then they have the problem of insurance.</p>
<p>You seem to believe that the rich person has an unlimited amount of
time to make all of these purchases and track their returns taking
action when needed. You also seem to have no problem with the rich
person running all over town to buy CDs. Perhaps the idle rich can do
this. The person with 5 million working 80 hours a week isn’t going
to.</p>
<br>
<br>
<p>You wrote:</p>
<br>
<br>
<p>FDIC is an insurance fund and it provides insurance to a degree to
add confidence to the banking system.</p>
<br>
<br>
<p>1929.</p>
<br>
<br>
<p>I’ve been short the US dollar since 2001 via a mutual fund, PSAFX, run
by Doug Noland. The rate of return has been decent but nothing to
write home about. Those that think that the dollar would collapse in
the last decade have had a bumpy ride. Some have been wiped out.</p>
<br>
<br>
<p>Well, the question is whether we will have massive inflation or
massive deflation. We have had massive deflation and anyone that
has actually traded commodities for the last year will know that
commodities got decimated. In a deflationary collapse, commodities
get killed just like everything else.</p>
<p>Colleges bought into the commodity bubble. Energy, got decimated.
Natural Gas went from over $13/mbtu to under $3 today. You don’t
remember Amaranth?</p>
<p>BC, I find your posts difficult to read with all those little crows feet arrows! To quote, just use the [ key , type the word quote, then ]; cut and paste the quote; end with [, then /quote, and ].</p>
<p>What I said is exactly what I continue to say.<br>
Let us know what you think the difference in highlighted versions is. </p>
<p>
</p>
<p>It’s exactly what I said, and as you seem to agree, you haven’t responded.</p>
<p>We were discussing your claim that rich guy (5M) is exposed to FDIC defaulting or limiting its coverage whereas poor guy is not. I pointed out, then and now, that such scenarios disadvantage poor guy (5K) because, even more so than for US domestic investment under good conditions, he has fewer options than the rich guy, both absolutely and per dollar. </p>
<p>
</p>
<p>As I said: you fix (specify and hold constant) the threat level to plan against, and we can see whether rich guy is as disadvantaged as you claim. That your scenario-of-the-moment is 1929 world financial devastation so that foreign banks can’t insure either, would mean that poor guy is toast altogether whereas rich guy can at least pursue the kinds of alternatives I described earlier. It is also clear that per-dollar results are no longer the correct measure in the more extreme scenarios — the rich investor’s advantage is measured in units such as proportional lifespan reduction, not proportional loss of dollars.</p>
<p>
</p>
<p>I assumed no such thing. What I assumed is that if you specify a concrete set of assumptions and apply them equally to poor guy and rich guy, the latter will generally be advantaged. 80 hr/wk workers with 5000 dollars don’t have the time to day-trade, either.</p>
<p>Email Lists and Usenet forums long predated phpBB-style forums and the
right angle bracket convention is a longstanding method of quoting for
those that are used to text-based communications. I generally use
emacs to reply to long posts as it checkpoints your work, has
unmatched power and flexibility in text editing and many other
functions, and has a very wide user and support base.</p>
<p>From Wikipedia:</p>
<p>When Usenet and e-mail users respond to a message, they often want to
include some context for the discussion. This is often accomplished by
quoting a portion of the original message.</p>
<p>Usenet standard quoting refers to the practice of preceding the
original message with the “>” (or right-angle bracket) character at
the beginning of each line, and then inserting one’s responses inline,
using no special designator for the author’s messages.</p>
<p>When a second response is made to the second message, the second
message is again quoting with >, perhaps causing parts of the original
message to now be designated with >>. Such nested quotations can
technically be continued indefinitely, but quickly become cumbersome.</p>
<hr>
<p>Email has been around since the 1960s. I subscribe to many email lists
that use the standard quoting described. Usenet is still around though
it’s less popular because it is more difficult to use and there’s more
of a wild west culture given the lack of moderation common to most
Usenet forums.</p>
<p>You can say that 1+1=2 and I will generally agree unless we’re talking
about different number bases. I don’t see why you toss out strawman
scenarios though.</p>
<br>
<br>
<p>But he is whole.</p>
<p>More options are not a panacea. They require more time to manage and
more time to learn. Here’s a question for you: are you familiar with
Elliott Waves and Point and Figure Charts? Do you know the seasonal
buying patterns of Indians for gold? Do you know about the labor cycle
for South African precious metals companies?</p>
<p>In many ways, having fewer options is much simpler and preserves your
mental capital.</p>
<br>
<br>
<p>I recall rich guys jumping out of windows in 1929; not poor guys.</p>
<br>
<br>
<p>That’s actually an advantage. They can put their money into something
safe and secure in a way that the rich person can’t.</p>
<p>Being paid 4 percent interest in dollars that went down 40 percent in the meantime is very far from whole. Once again:</p>
<p>If you think through the possible FDIC scenarios you are raising, they would need to conspire just so in order to advantage the 5K investor over the rich one. It would be pretty hard to display a concrete example, actually. Banks would have to be failing at rates on the order of 5 percent or more for these probabilities to (relatively) disadvantage the rich guy, i.e. for 5M-investor to be hit two or more times with bank failures on his CD accounts. If that happens and FDIC by that point limits or defaults on its coverage, any 5K-investor’s US bank CD’s are going to pay in dollars that are worthless. The 5M guy would already be largely in precious metals, armored grain silos, or moved to Switzerland. 5K guy will have made a slight interest gain on his CDs while the dollar itself went down by much more, and 5K-guy’s job/housing/food no longer exists.</p>
<p>
</p>
<p>Having more options has financial value. For instance, the option of investing in higher rate jumbo CDs, is worth something. The ability to buy houses in Vienna or farms in Timbuktu, instead of US bank CDs, has value. Not exercising the options is also OK, but it can be useful and valuable to have them. Panaceas don’t exist for anyone.</p>
<p>It is in dollar terms. And it’s a lot better than being down 90%.</p>
<p>That said, there are many asian countries that have been more than
willing to export deflation to the US even as the US dollar has been
weakening thus keeping a basket of goods still cheap to the US
consumer.</p>
<br>
<br>
<p>One-third of banks failed in the Great Depression.</p>
<p>In a deflationary depression, cash is worth more; not less.</p>
<br>
<br>
<p>There are a lot of formerly rich investors to which this is simply
false. Having Bernie Madoff as a choice has financial value? Having
long-term timber investments has financial value? Having a lot of
money paints a big target on your forehead. You get cold calls by
people looking to sell you investments that they can pick up
commissions on. Sure, they flatter you and stroke your eagle or you
can brag about being in tight with Madoff but the successful manager
always watches his back.</p>
<p>One other thing about hedging with gold. It was confiscated in the
1930s. Those with five ounces really had nothing to worry about. It
was those with a lot of bullion that had the most to worry about and
that went to jail when they were caught.</p>
<p>Whole means whole, not “whole in dollar terms”. If the poor guy loses to the rich guy in real terms who cares about the accounting in (at that point worthless) dollars? </p>
<p>
</p>
<p>The scenarios you post keep shifting. If you are able to specify and hold constant one FDIC scenario that somehow advantages the 5K investor in dollar terms, you will find that it disadvantages him in real terms, measured in, say, groceries per erg of his labor. Keep in mind that 5K total assets keeping 60 percent (in dollars or whatever) is wiped out by the economic effect of losing a job or becoming homeless. 5M-guy may not have the same type of problem and has more options for riding out a depression while keeping his natural lifespan. </p>
<p>
</p>
<p>Again: specify the class of threats that you propose to plan or insure against as part of these calculations, and we can compare whether 5K-guy or 5M-guy have the advantage, either absolutely or per dollar.</p>
<p>Your definition has no meaning then. Curruncies fluctuate every second.
The value of a currency may be different on Mars than it is on Saturn.</p>
<br>
<br>
<p>They are simply a response to your shifting. If we get back to the original
question, is there an investment that the $5,000 holder can make that the
$5,000,000 holder can’t make, the clear answer is yes.</p>
<br>
<br>
<p>You are implying that FDIC failure means that one would lose their job
and that it would only apply to the poor person. That may or may not
be true. The problem with the rich person is that a lot of rich people
expand their lifestyles to meet their incomes. In their case, they face
a much bigger loss than the poor person.</p>
<br>
<br>
<p>That doesn’t work. You would need a soverign counterparty. And even
then, you couldn’t protect against threats without breaking reporting
loaws.</p>
<p>No, the clear answer was “5-million investor is advantaged” by the higher interest rates on larger CDs and the ability to use a spectrum of multiple CDs with varied time horizons. For instance, he might seek a similar rate of return in a shorter time (due to the higher rate) to maintain some agility in moving out of a dollar-heavy position should that become necessary.</p>
<p>Not liking this clear answer, you have been attempting to refute it with scenarios where the FDIC might limit or default upon its coverage. However, you have not committed to any specific analyzeable scenario where this might be true and the 5K-investor doesn’t get hosed (much more so than 5M-guy) in real terms.</p>
<p>Yes, it’s a higher rate-of-return (or otherwise superior) investment, not the same investment. What else did you think it means to say that the rich are “advantaged” as investors or have “more options per dollar” or a “higher time value of money” than the poor?</p>