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November 27, 2006

Continuing Credit Card Arbitrage

I've been doing the credit card arbitrage thing for almost two years and estimate I've made somewhere along the lines of $2,500 in totally free money.

In the beginning I wasn't very aggressive about it and didn't carry large balances. When I got serious — and my credit card balances rose to over $47,000 (!) in February — I also destroyed my credit rating and the new 0% offers dried up. I also got a glimpse of the rotten underbelly of the credit business.

Since that time I've had to pay off credit cards as their introductory periods expired and my balances have fallen to about $13,000. Still somewhat high, but approaching "normal" levels. Correspondingly, my credit score has improved, and the 0% offers have resumed. And now I'm going to dive in again for a second helping.

My original 0% card was a Bank of America Visa with a $16,000 credit limit. I never closed this account even though I haven't used it in almost a year because I expected it to become my primary credit card once I was finished with this arbitrage stuff. (My checking account is with Bank of America, and their online banking integrates everything very nicely — this would be the most convenient arrangement for me.) In my mailbox today I learn they're offering a promotion on this card: 0% on balance transfers and credit card access checks until July '07, with a 4% fee (maximum $90). The letter was nice enough to include several such credit card access checks.

A couple weeks ago I got an offer for a Chase Visa offering 0% on balance transfers and purchases until March '08, with no fees. I didn't bite on that offer immediately because I didn't have large balances to transfer and I already have a 0% purchases card good for a couple more months. (One of my balances is on another Chase card, which could not transfer, so less than $9,000 was available.)

These are two great things that go great together. What am I going to do? Write myself a credit card access check for $15,900 and then apply for the new Chase card, transferring balances from my other credit cards (except the existing Chase one) in order of their 0% expiration dates. I can't predict how high my credit limit might be on the new card, but if it's more than $9,000 I do better by waiting until the Bank of America charge posts to the account so I can include that balance in the transfer, too.

Even if no part of the Bank of America charge can transfer, I estimate I'll still come out about $150 ahead, after taxes, by paying it off in July. If I'm lucky and can transfer some large portion of that to the new card, the extra seven months are pure profit.

If you're trying to figure out how much you might make with credit card arbitrage, there are several things to keep in mind:

  • Fees related to the introductory offer.
  • The precise length of time the introductory period lasts.
  • The interest rate you expect to earn on the money.
  • Taxes you'll pay on interest earned.
  • The effect on your cashflow of paying the large monthly credit card bills.
  • The effect on your credit rating.

November 26, 2006

I Have Returned

Like everybody else in the country, I was visiting family over Thanksgiving. I had planned to remain in touch through the week and maybe even do a bit of blogging, but just a couple days into my trip I lost contact with my computer in Oregon.

The reason was simple: my IP address changed. This is Verizon's way of making it difficult to run servers on a residential connection. Although I did port scans for my computer I was only checking addresses ranges nearby the old one and it turns out my new address was very far away, in a range I wasn't scanning. (Time to write a little tool so I never lose track of my computers again…)

Anyway, that's why I was completely out of touch. I'm getting caught up on everything and should be back to normal soon.

November 16, 2006

Book Review: The Great Risk Shift (part 1)

Yale political science professor Jacob S. Hacker's The Great Risk Shift describes the general decline in financial security over the past few decades and proposes programs to address it. I was not persuaded by this book, but as I hoped, I have learned things about the motivations of "well-intentioned" advocates of the welfare state. And as promised, I'll provide the individualist counterpoint to Hacker's major themes.

The book opens with the topic of increasing income volatility. It was apparent by the second page that this book would have significant gaps in balance, as Hacker focuses only on the down-side possibilities of volatility and omits the up-side. This prediction was accurate; a longer treatment of income volatility on pp30-34 only discussed drops in income, with no treatment of increases.

Contrary to Hacker's explanation on p30 that "we aren't confusing instability with income growth", I offer myself as an example. My income has been highly volatile, but not because I've lost my job or had my pay reduced. My income is volatile because a large part of my compensation is tied to the financial performance of my employer, in the form of bonuses that are high when the company is very profitable and low when the company is less profitable. I looked at all my tax returns since I started working for Intel and the year-over-year volatility is clear. Between my first and second internships my income increased +123%. Between my second internship and first full year of work my income increased +239%. My first three years of full-time work were stable (-1%, 0%, +1%) but followed by large increases (+15%, +21%) and I expect this year's income to be lower than last year's — due to a stock option exercise last year, not a pay reduction. I have been happy working under a variable-compensation pay structure emphasizing bonuses over salary and happy with the resulting high volatility in my income. My income has been volatile but rising. There are no anecdotes of people like me in the book.

Hacker's book is heavy on anecdotes intended to evoke an emotional reaction, as in the case of "middle-class but chronically ill parents [who] couldn't find a company that would even sell them a health care policy" (p3). While their plight may be tragic, the anecdote encourages confusing insurance with charity. The function of insurance is to pool resources against risks that are unpredictable individually, but predictable in the aggregate. Chronic conditions aren't covered by (new) insurance policies because they're no longer unpredictable risks — they're certainties. Real insurance is not widely-understood; what most people call health insurance today is closer to payment insulation than to risk protection. Real health insurance would pay no claims to most people but would cover the expected lifetime cost (not just the immediate treatments) of a major unpredictable illness.

The book also contains some cherry-picked data, such as the following alarming note:

Personal bankruptcy has gone from a rare occurrence to a routine one, with the number of households filing for bankruptcy rising from fewer than 290,000 in 1980 to more than two million in 2005. (p13)

A major change in bankruptcy law went into effect in 2005, causing a one-time spike in the number of filings — almost a half-million more in 2005 than in 2004. This change in the law was well-publicized and Hacker even mentions it later in the book (p37). It is poor scholarship to cite an exceptional year in support of a trend.

There's another numerical puzzle on pp23-24, in a discussion of how income swings have increased. Hacker cites the statistics that in the 1970s, Americans aged 25-61 had low income swings: over a 10-year period, the worst year would bring about 43% the income of the best year. In contrast, by the 1990s the worst year would have an income only about 25% of the best year. These numbers are clear by themselves, but Hacker gives an example of "an average Betty who had $60,000 in her best year" and contrasts her worst-year $15,000 in the '90s to her worst-year $30,000 in the '70s. (He interprets 43% as "just shy of 50 percent" and uses $30,000 — I would have used $25,000, also a nice round number, but closer to the truth.) The primary problem here is that while $60,000 may be a reasonable "best year" income in the '90s, it wouldn't be for the '70s. Even adjusted for inflation, the median income has risen about 15% from 1975 to 1995 (Census report, Apendix A, table A-1) so a reasonable "best year" in the '70s would be closer to $50,000, making the "worst year" in the '70s about $22,000 — not $30,000. The difference between the "worst years" of the '70s and the '90s is closer to $7,000 than to $15,000, cutting Hacker's fear-inspiring income drop comparison in half.

It was good of Hacker to mention that a two-worker household is more likely to experience an income shock than a single-earner household (although not until page 92) but unfortunately he does not explore how much of the increase in family income volatility is due to rising workforce participation of women.

Beyond quibbling over numbers, I have a larger point to make. I believe the increase in income volatility is a natural and even desirable feature of today's economy. It is a reflection of the economy's more rapid responses to changing conditions; evidence that the economy is healthier, not sicker. We should favor the volatility of today over the stability of the past because today's economy is more productive. Indeed, the volatility has contributed to productivity. As I discussed at length in my essay about globalization, it's not surprising that "the long-term unemployed are older, better educated, and more likely to be professionals than the unemployed as a whole" (p71) — this is expected in an advanced economy.

Hacker blames the "Personal Responsibility Crusade" for the erosion of traditional pensions and health insurance (p38):

The core assertion embodied in the Personal Responsibility Crusade is that Americans are best off dealing with economic risks on their own, without the overweening interference or expense of wider systems or risk sharing. Insurance, by protecting us from the full consequences of our choices, takes away our incentives to be economically productive and personally prudent.

I was originally uncertain whether Hacker misspoke in describing the Personal Responsibility Crusade as anti-insurance. But later statements convinced me that he believes this (p56, emphasis added):

By encouraging Americans to rely on themselves, tax-favored accounts would also make people more deeply invested in the market, more distrustful of direct government programs, more reluctant to join broader risk pools—and more likely to vote for conservative politicians.

Additionally (p57, emphasis added):

To pursue their attack on insurance, adherents of the Personal Responsibility Crusade have largely adopted strategies of stealth, seeking to transform existing arrangements beneath the radar screen of public awareness.

Most explicitly (p58):

In the ideology that guides the Personal Responsibility Crusade, the abandonment of insurance is liberating. Freed from the shackles of old-style risk protections, we can plan for our own future, make our own decisions about how much risk to bear in the market, and enjoy the financial rewards of our newfound freedom as we alone wish.

As a self-identified member and advocate of the Personal Responsibility Crusade, I declare this a straw man. We are not against insurance. In fact I think pooling is an excellent way to manage risk. However, I am hostile to welfare that masquerades as insurance. The two are very different, but equivocation on the meaning of "insurance" causes them to often be packaged together. Risk pooling is genuine insurance; but a program that is "generous" to low-income people is risk shifting, not risk pooling, and has more to do with political goals than with risk management. The irony of Hacker's title is that he's not at all opposed to shifting risk; he advocates shifting it to the wealthy.

(More to come…)

November 15, 2006

Gold Mine Pirates!

Gold! Pirates! … Mine!

JOHANNESBURG, South Africa (Reuters) — In a dangerous cat-and-mouse game, South African police are battling armed gangs of gold pirates through dark mine shafts deep underground to stop an illicit gold trade worth more than $700 million a year. [source]


November 13, 2006

I'm Still Here...

Don't worry. I've just been busier than usual with little time to write. I hoped to publish my book review this weekend but as of late Sunday it's only half done. I'm going on vacation in a week, so I'll try to finish it before then.

November 05, 2006

In The Mail...

I received a complimentary copy of The Great Risk Shift by Jacob S. Hacker, a political science professor at Yale. I'll be reading this book over the next several days and will be blogging my thoughts about it. Here's a short introduction to the book, from its promotional material:

The currently favored response to rising insecurity is to throw more tax breaks and individual accounts at Americans to encourage them to save and invest on their own. This may help the privileged, but it won't provide strong guarantees of economic security to ordinary Americans, who are just barely staying afloat. Nor will it stop the huge shift or risk onto these hardworking families as jobs, health care, and retirement all become less secure. Quite the opposite: "The Ownership Society" is akin to throwing a lead weight to a drowning man, on the assumption that now he will really have an incentive to swim.

If you're familiar with my attitude toward topics like social security, you should have a fairly good idea how I'll respond to this book. My interest in reading it is to have a better understanding of the motivations of "well-intentioned" advocates of the welfare state. I will share what I learn, and present the individualist counterpoint.

I do not expect to be convinced by this book. I welcome the "great risk shift" because I believe it increases my freedom and my opportunities. (For example, globalization.) I am distrustful of people who want to control my actions or my pocketbook "for my own good" or (especially) "for the common good". I think I am a better judge of what is good for me and what actions I should take than any third party.

November 04, 2006

Net Worth Report - End of 10/06

Apologies for the late report this month. I've had unusually little time available for blogging over the past couple weeks.

Net Worth Figures

October was an extraordinarily good month for me. No particular item stands out as responsible for the increase; it was broadly based. I had expected to pay my property taxes in October, but due to a printing error at the tax office I didn't receive my statement until November 1st. I collected data for this report on Oct. 31st, so the taxes are not included.

Recall that I'm defining "Adjusted Net Worth" as net worth excluding the value of autos and unvested stock. The "Estimated Contribution" is how much money I believe I'll need to invest in order to meet the following month's ANW target. A declining EC indicates that I'm ahead of plan, and an increasing EC indicates that I need to save more in order to reach my long-term goal.

This month is a major milestone: my EC has gone negative. What does this mean? According to my ridiculously simple model of earning a 7% annual return on investments, paying 30% taxes on gains in taxable accounts, and a 2% annual appreciation on my home, I'm "on autopilot". I don't have to do any additional saving besides contributing to my Roth IRA and 401(k). (Those contributions are baked into my model.) I'm thinking about adjusting my methodology to consider the after-tax value of my 401(k) instead of its pre-tax value. I'll have more to say about that next month.

Goal-Tracking Figures
Adjusted Net Worth$440,172.41$450,256.74
Next Month's Target$442,746.41$452,769.52
Estimated Contribution$101.60-$10.86

Of course, I have no plan to stop making new investments. I've actually been too cash-heavy for the past several months. My implicit idea has been to keep short term investments in the $15,000-$20,000 range and move the excess to longer-range investments, but I haven't done so for the past couple months.

Alternately, it might be time to splurge on something. I'm not too excited about something like buying an HDTV, but maybe I could decorate my house or something. (I've been living here for five years and frankly you wouldn't know it by looking around. The place is empty.)

As I mentioned last month, I had another credit card conclude its 0% period and I paid it off. My credit rating has improved substantially as my balances have fallen, and perhaps in December I'll start looking for new 0% balance transfer opportunities. Most companies have raised their balance transfer fees, however, making it less profitable. I've been amused by the strong correlation between their fees and the amount of profit I could expect to make by arbitrage if they didn't have any fees. Perhaps the industry has figured this little trick out.

My credit card balances are 100% backed by time deposits and/or savings accounts earning interest at a higher rate than I'm being charged by the credit card companies. The monthly payment is estimated as 2% of the balance. (Most credit cards are now using a 2% minimum payment, and due to this it is important to have a strong cash flow and/or pay with funds from your credit card arbitrage savings account.)

Credit Card Arbitrage Figures
Balances @ 0% APR$26,748.53$12,622.19
Monthly Payment$534.97$252.44

You can keep track of other personal finance bloggers at NetWorthIQ. I've updated my entry there.

Tiny Island