Broken Window Fallacy: Alberta Flooding

Alberta has recently experienced massive flooding.  If you would like to donate $5 to the Red Cross’ efforts there you can text “ABHELP” to 4664.  It really is an easy way to help out your fellow Canadians in their time of need.

Alberta is one of Canada’s “have” provinces.  What that means, is that they (net) pay money to the federal government rather than receive payments. When the flooding started it was inevitable that people would start talking about how this was going to affect their economy. I thought this would be a good time to talk the Broken Window Fallacy. If you are looking for information on the “broken window syndrome” then you are in the wrong place and you should check out a criminology website instead.

The original idea goes something like this.  A window is broken in a shop and the shop owner needs to call a glazier to replace it. He is, of course, upset that he needs to replace this broken window.  To try and make the shop owner feel better someone points out that if windows were never broken then the glazier would never have any work to do; implying that it is a good thing that the window was broken because it helps money change hands. This ignores the fact that the money would have been better off used on something else rather than on replacing the window.

This is one of the issues with many methods of calculating GDP. If someone remodels their bathroom because they feel like it, then it adds to total GDP as they purchase supplies.  If they need to rebuild their bathroom because it was destroyed by a flood then they are also buying supplies and that too increases the GDP.   In the first case however, the house value is higher overall. Unfortunately, in most cases existing home sales are kept as a separate statistic and it is new home sales that push up GDP. So for this type of GDP calculation it makes no difference that the original bathroom was destroyed.  Flood repair fallacy would seem a more appropriate name in this case.

So the money spent on these repairs is money that would have been spent elsewhere.  That is one downside.  The other thing to keep in mind if you see anyone claiming this will actually boost the GDP of Alberta is that overland flood insurance does not exist in Canada as far as I am aware.  If your drains back up and your basement floods then maybe you would get an insurance payout but if the water comes in through a doorway or window then you will not be covered, this is overland flooding. What this means is that many of the repairs are going to be done with borrowed money.  The money borrowed today is obviously money that cannot be spent tomorrow. So if there is a bump in construction material sales during the rebuilding period you can assume that there will be a slump afterwards as the money that was used to repair everything is being paid back, with interest.

So over the next few weeks or even months keep these things in mind as people talk about the cost of repairs.  Finally, for the $5 donation you made after reading the first paragraph of this post you could also get 5 Wild Rose pink sprinkle doughnuts at Tim Horton’s, the proceeds of which are being donated to the flood recovery. It is unclear where charity doughnuts fall in GDP calculations.


Free Money: Being too Right.

Last post I was looking for gold to drop in price before July 1st.  Well, it has dropped but the problem is that the contracts on the site I use are mostly for ranges of values.  Rather than just paying more or less as Gold goes up and down, the contracts pay $1 or $0 if the price of gold is between two boundaries. As gold was dropping from $1360 to $1180 I had to quickly try to unload my contracts.  It did not work very well and I was forced to settle them at 5-40 cents on the dollar. So a chunk of free money is gone. The lesson of the month is that I would have been much better off in real gold futures where the larger than expected drop would have just paid off better than expected.  In the rush to clear those boundary contracts I was able to short a few others in the other direction to help to offset the losses a bit.

The prices dropped so fast and far that even the August contracts started pricing themselves close to closing values.  To take my gold vengeance I was able to pick up a small amount of shorts on the August 1st price.

I was also able to short a few Microsoft contracts.  Microsoft had lost me some money in the past so this was a good way to make some back.  I shorted their July 1st price closing at $37.50. It was not a huge opportunity because I got in at around 5 cents.  This means that I will make about 5% when it closes.

Finally, the new long shot.  Last time I went with the Syrian chemical weapons and that was my biggest gain so far.  This time I picked up a contract titled “Edward Snowden to enter Ecuador in 2013”.  Ecuador gave asylum to Wikileaks founder Julian Assange in their embassy in the U.K. They also stopped trade talks with the U.S. recently because they said they did not want to allow them to have any leverage over them when it came to Snowden.  Also, Assange recently said that he is helping Snowden.  To me these events are good enough to pick up some contracts.  This was a new contract and there was not much going on with it so I put an order in for 50 contracts at 50 cents.  It sat for a day or so before someone finally picked it up.  This kicked off trading and the price moved up to around 65-70 cents. I was considering selling when the price dropped to somewhere around 2 cents. I am still not entirely sure what happened but I picked up a few more contracts cheap and with slippage the price was pushed back up to around 25 cents.  The nice thing is that it pushed my average price down so if this goes my way then the profits will be larger.

My portfolio as it stands is:

Edward Snowden to enter Ecuador in 2013 +77 (Long) Avg. Cost: $0.3961.
Total Cost: $30.50
London Fix AM Gold price to be greater than or equal to US$1,380 on 1 August 2013 -12 (Short) Avg. Cost $0.0809.  Total Refundable Cost (to cover largest possible loss): $11.03
London Fix AM Gold price to be greater than or equal to US$1,360 and less than US$1,420 on 1 July 2013 -37 (Short) Avg. Cost $0.3069.  Total Refundable Cost (to cover largest possible loss): $25.645
Micrsoft NASDAQ share price to equal or exceed US$37.5 before 1 July 2013 -30 (Short) Avg. Cost $0.0486.  Total Refundable Cost (to cover largest possible loss): $28.542

Total investment: NZD$95.717.  Cash: NZD$ 75.68. Total: 171.397.

Total change from last post: -19.064%.  Overall Free Money gain since start: 185.67%.


Free Money: June 19th

Today Bernanke stated that the Fed may consider scaling back the buying of bonds.  He made it clear that this was a long term plan and for the time being nothing would change.  The markets, of course, draw their own conclusions.  If the Fed stops buying bonds then the interest rate on them will go up making them more attractive to investors.  This means they will drop gold to get bonds.  Gold opened today at US$1365 an ounce.   I have taken a two contract position which in both cases pay off if gold is under $1360 on July 1st.  The reason for the split is, again, the slippage that occurs on this small market.  These were the largest positions I could get within the price range I wanted to pay.

Gold price to be greater than or equal to US$1,300 and less than US$1,360 on 1 July 2013

+70 (Long) Avg. Cost: $0.5554.
Total Cost: $38.878
London Fix AM Gold price to be greater than or equal to US$1,360 and less than US$1,420 on 1 July 2013

-25 (Short) Avg. Cost $0.360.  Total Refundable Cost (to cover largest possible loss): $16.00

Total asset investment: NZD$54.878.  Cash Remaining: NZD$156.89.


Free Money: Portfolio Update

Here we are nearing the end of June and if you have been following the news you know that the U.S. has confirmed that the Syrian government used chemical weapons against the rebels.  You are probably interested to know the state of my portfolio because I have been pretty bad at posting updates.  The main issue was that I got impatient for the contracts to close and started taking contracts in which I had less confidence. There were also a lot of small trades. Here is an excel file so that you can see each of them.  The summary goes like this:

I cashed out my gold contracts and then tried to make money as gold went the other way and it did not bounce the way I had hoped. Also went short on Microsoft breaking 32.50 (a five year high), which it then broke. That cash was all lost.  Then I cashed out some of my Syria stock to try to benefit from the Microsoft surge and it did not quite go high enough, that money was lost as well.  So, all in all, my impatience punished me every time.  I do recommend you look at the excel sheet as you will see where most of the losses occurred.

So now we move to the interesting part.  For the last couple of weeks I have been sitting with nothing in my portfolio other than the Syria stock.  France had said they confirmed it, U.K. had done the same but there still seemed to be some uncertainty.  I had 212 contracts at an average price of about 14 cents each. A few hours after the White House made its announcement today the contract was closed at $1, which means that my current cash level is NZ$212.09.  The nine cents was leftover from before.

This little experiment began April 12th, by the time you read this is will be June 14th.  I started with NZ$60 and now have NZ$212.09, a 253% increase. Free money.

For now my portfolio is empty.  At one point it contained over 300 of the Syrian contracts so that lesson on impatience has been learned.  Also, from now on if there are any purchases made, the update will be posted here within 24 hours.  It is possible that the next purchases may be on a different site but that decision has not yet been made.  iPredict seems fairly well organized so far, perhaps another few contracts before cashing out.

Finally, the hope is that the next purchase need not involve crimes against humanity.