Blueberry Girl

August 29th, 2012 by Potato

When we told Wayfare’s parents we were expecting, the fetus was roughly the size of a blueberry. The name stuck.

When the ultrasound later told us we were going to have a baby girl, Wayfare ran out and bought a half dozen copies of Blueberry Girl by Neil Gaiman. Wrapping one up and placing it into the hands of our parents was our way of sharing the news: Blueberry is a girl.

When she started kicking around inside Wayfare and we wanted her to know her daddy’s voice, when it was bedtime and everybody needed to settle down to sleep, I read Blueberry Girl to them both.

When the delivery was complicated and she came out as blue as her namesake and the doctors were working on her, Wayfare was whispering. The words weren’t for me, she was away in some other place. If we were religious, I would have said it was a prayer… and in a way it was. She told me later: she was reciting Blueberry Girl.

To the ladies of light, darkness and never-you-mind, the ladies of grace, favour and merciful night, and those ladies of paradox, measure, and ladies of shadows that fall: thank you for our Blueberry.

To Neil Gaiman, thank you for the lovely words.

Our blueberry girl. Click to embiggen.

Drinking in Pregnancy

August 20th, 2012 by Potato

A friend linked to an article on drinking while pregnant, which sparked a spirited discussion on Facebook. I thought I’d go off on a bit of a tangent here, where the discussion is a bit more open (and where I can add in graphs).

I don’t have the free time these days to dig around in the literature to get fully up-to-speed, but basically here’s the science as I know it on drinking in pregnancy: it’s bad. We know that completely abstaining is our baseline: most moms-to-be are cautious and do this. And, we know that drinking a lot is bad. In-between, there isn’t a lot of good data: it may be a little bit bad to drink a little bit, or it may have no effect until some threshold has been hit, or it may even be slightly beneficial (as this recent article suggested). So there are some big error bars in the middle there.

To pick on this study in particular, it was a retrospective study that asked women what they drank during pregnancy many months after they had given birth. Though this kind of study can be insightful and guide further research, I wouldn’t be overturning a cautious, conservative hypothesis on that kind of data. I would caution moms-to-be out there to not go out and have a drink or two on the basis of a study like this.

This is how science works, generally: you get a weak-ass study that nonetheless is cheap to do and suggests something interesting, so you get some funding and ethics approval, and do a better study, and change your ideas of how the world works as the data comes in. But real-world considerations do get in the way sometimes.

A stronger study would be one with randomization, controlled variables, etc. The thing is, it’s unethical to run that kind of study, and I don’t know if there are good animal models for the more subtle forms of alcohol-related damage, due to the unique nature of frontal cortex development in humans. Plus, there isn’t really a demand for such a study: it’s not hard to abstain from drinking for 9 months. No serious scientist wants to spend time trying to find out what the safe limit is for alcohol in pregnancy when there are so many more pressing problems to address. Nobody would want to fund it: even the brewing companies wouldn’t touch it since even if you did show beyond a doubt that drinking some amount was safe (nay, beneficial), there would be a negligible effect on alcohol sales (if it found 1 drink/week was safe, that’s not even two cases of beer for the whole 9-month pregnancy). And it could be an expensive study if you were to follow a cohort of several thousand kids to age 10 or something in order to detect potentially subtle changes in IQ and social development.

So we’re stuck with imperfect information. We know the two ends of the curve fairly well, but have imperfect information for what lies in the middle. Our simple linear assumption may not be correct, but guessing wrong has consequences. In that case, the conservative thing to do is to assume that there is no safe level, and abstain completely. Which is what the current recommendations are.

An analogy would be radioactive materials: we know that a large amount of ionizing radiation is bad: it causes cancer, radiation sickness, necrosis, and death. We’ve seen it in accident victims and those near the WWII-era bombings and tests. But even with good animal models it’s hard to study the in-between doses. Once again we have a case with really good data at the extremes of the chart, but gaps and poor data in the middle leaving open the question of what the response looks like at intermediate doses. There is a hypothesis (called radiation hormesis) that small amounts of radiation are actually good for you, and there are some people testing that out… but there isn’t really a market for that study, either. So the principle of keeping the dose As Low As Reasonable Achievable (ALARA) is employed for those working with radioisotopes. For drinking, ALARA is zero: there is no “background level” of alcohol exposure; being pregnant is very unlike being a nuclear medicine technologist. It is very easy/achievable to just not drink while pregnant. I have no sympathies for someone who can’t abstain when presented with a good reason to do so (e.g.: someone who needs to drive somewhere, is pregnant, or is on call for some demanding job).

Now the point was raised in that long Facebook back-and-forth that women suffer a lot of second-guessing and judgment by people for what they put in or do with their bodies while pregnant. It can be harsh and unfair. For many things, yes, yes I think it is, especially since there are so many little things you’re supposed to do these days, and no one can ever be perfect (not even a pregnant woman).

One person suggested it was a double-standard to criticize a woman for drinking but not for a midnight ice cream pig-out. To that I say: there isn’t fetal mochaccino syndrome, or infant chocolate disorder (indeed, chocolate consumption seems to be beneficial), while there is fetal alcohol syndrome (and just as importantly, widespread knowledge thereof). So it’s a totally different thing to look down on someone drinking, smoking, or shooting heroin than it is to judge someone for pigging out, drinking caffeine, using a cell phone, or skipping the seafood portion — I wouldn’t consider it a double-standard at all.

As much time as I spend here turning over conventional wisdom with evidence, in this case I think the evidence is not definitive and the best course of action is to continue to abstain from drinking while pregnant.

Freddie Mac: Political Risk

August 18th, 2012 by Potato

When I first talked about Freddie Mac, political risk was one of the things I highlighted that might undermine what otherwise looked like an attractive long-shot bet. The US government has been requiring that Freddie Mac (and its sibling GSE, Fannie Mae) borrow more money than they need, and pay a punitive 10% interest rate on that — a worse deal than the TBTF banks who arguably had more to do with the cause of the global financial crisis. Part of what lead to the excess borrowing was the fact that Freddie’s been over-reserving for years now. It looks as though they’re getting to the point where even the most conservative accountants realize that those excess reserves will start unwinding, which will enable Freddie to start paying back the government — and after that, the preferred shareholders.

So it looks like the main investing thesis was playing out.

Unfortunately that political risk reared it’s head this week as the government announced it would change the deal to instead confiscate all future profits. I have no idea why the government decided to nationalize the GSEs but not AIG or the TBTF banks, or why they decided to change the deal at this late stage, just as the profitability was re-emerging. I suppose I’ll just have to pray they don’t decide to alter the deal any further.

I’m not quite sure what that means in terms of the preferreds being paid back, but my first take on it is that they’ll be worthless. The market seems to be equally panicked, as most issues were down about 60% on Friday.

Blueberry Portfolio Month 3: Capital Gains

August 13th, 2012 by Potato

This is a monthly update from the Blueberry Portfolio. The events I mention below happened approx 8 months ago.

I started this update by providing a spreadsheet to the investors with the capital gains laid out. [Specifics redacted] It’s important to remember that realized gains in a non-registered account are taxable. Add the information from the spreadsheet to your schedule 3 for taxes (if you don’t ordinarily have gains to put in schedule 3, I can show you how, it’s really easy). In addition, you’ll be receiving some tax slips (T3s) in the mail around the beginning of March for the dividends that you enter into the appropriate boxes in your tax software.

Otherwise there hasn’t been much to say.

After spending some time without (m)any bright ideas, I put more cash into the ideas I did have. That broke an unwritten rule that I’d try to stay diversified with no more than 10-15% in any one stock (Chemtrade is close to 20% of the portfolio, and Canexus over 10% — and both are in disturbingly similar businesses). As soon as I do have a bright idea, these will be the first positions I look to trim to get cash to move around.

One bright idea was Poseidon: a high-risk, high-reward play on “fraccing” in the oil business, which also pays a lucrative dividend. Our timing there couldn’t have been much better: as of this message, we’re already up about 15%. I don’t know yet how much further I’ll let this one run before locking in the profits, but I imagine I’ll wait for at least double that return over the next year before getting out (unless something changes).

Since the last monthly update, the market has been more-or-less flat, while we’ve added a few percentage points. After the first day of trading in the new year, we’re up almost exactly 10%, vs the market at just about 1%.

The Mythical Soft Landing

August 10th, 2012 by Potato

I haven’t posted much on the housing bubble lately because there hasn’t been much to say: I’ve been more of a bottom-up than top-down person, so each monthly release of building starts, sales numbers, or immigration figures doesn’t affect what I’ve already said about the individual decision of whether to rent your shelter or rent the money for one from the bank. I think I may have exhausted the limits of what a spreadsheet can do.

Plus, the story is all over the news now, it’s not like you really need me to keep digging up nuggets of information for you. The correction looks like it’s started in Vancouver, with both sales volumes and prices plunging over the past few months – though I’d wait a bit longer before lighting the ceremonial bonfire and starting the dance of the bear, as the typical summer seasonality is probably distorting things. I don’t have to stick to any kind of short-term news cycle, so I’d prefer to wait at least a year before calling it.

Hey, these things move slowly.

That torpid pace and the tendency for volumes to dry up as the correction starts also means that for many, it’s too late to cross over to the bear camp. The time to consider long-term implications was over the past few years — when I was most heavily posting on the matter — when it was easy to sell for a profit if you had bought, when you had the luxury of time to locate a high-quality rental. Not now that the cracks are starting to show. For most, by the time the procrastinating and hand-wringing is done there’s little to do but watch as it unfolds, particularly if they’re paralyzed at the prospect of taking even minor losses (preferring instead, as many do, to wait for major losses).

Toronto isn’t looking as strained yet: volumes are down something like 10% while prices hold steady… but there are anecdotal signs out there of realtors talking of slow-downs, buyers holding off and refusing to enter bidding wars, and new condos that aren’t sold out within minutes of the presale doors opening. But by this time next year I expect the correction to have (finally!) begun.

Meanwhile, the talking heads speak of soft landings and single-digit corrections. Many are quoting verbatim the things the US vested-interests said before the bubble collapsed there, like “it’s not a bubble, it’s a balloon, the air will come out slowly.” Kind of ridiculous.

The bank economists keep revising their forecasts down, and this by the way is a feature of bank economist predictions — for stocks as well as real estate. First they’ll predict that prices will be flat. Then maybe a 5% correction. Then 10%. As house prices fall and approach that 10% mark, the forecast will be revised again to 15%, and so on. The expectations are “walked” down. They don’t suddenly awake to the over-valued state one day and turn bearish (or at least, their writing doesn’t) which is why I’ve never put much stock in their predictions. Plus many like Scotia’s this week will talk about modest numbers for the country as a whole, leaving unsaid what happens to the particular cities driving the action.

The same is not true of home buyers: they can and do suddenly turn bearish. When prices are rising rapidly, people build rising prices into their assumptions and plans to buy (e.g., in their mental version of my rent-vs-buy spreadsheet, they’ll put in a high value for expected appreciation, skewing the decision towards buying). They don’t see a higher house price as a bad thing – the house being more expensive and shelter costing more – they see it as something positive. The opposite happens as prices fall: buyers don’t suddenly turn into value-hunters, glad to see that the house they were lusting after the year before can now be had for 10% less. Instead they put a lower number into that mental (or actual) rent-vs-buy spreadsheet, and hold off further. Why buy now if it will be even cheaper next year?

This psychology drives bubbles and crashes. It is inherently unstable, which is why all the calls for a soft landing are so misguided. There are very few examples in history of soft landings happening.

One example is recent though: Alberta. Going into the GFS, Calgary & Edmonton real estate was arguably even more over-valued than Toronto real estate. In late 2008, the market there seized as it did in Toronto and Vancouver, falling 10-15% in just a few months. Then, interest rates cratered, credit began to flow, and Toronto and Vancouver recovered and rocketed ahead to new heights in the years since while Alberta flattened out.

Alberta then has shown that a so-called soft landing is possible: a snappy 15% nominal price decline followed by a few years of stagnation while inflation helps the fundamentals catch up.

The thing is, there’s a pretty exceptional set of circumstances that lead to that soft landing: namely an incredible drop in mortgage rates that cannot now be repeated in Toronto and Vancouver – where those same rates were insanely stimulative. Without that factor, who knows? Alberta real estate might have fallen another 15% by now.

Even with that unlikely soft-landing, it was not a good time to be invested in Alberta real estate: if you had bought in the few years before 2008 without much of a downpayment, you’d still be underwater now; those who chose to rent can be proud of that decision. The soft-landing, also known as correction by stagnation, will likely continue for a few more years yet while fundamentals creep their way upwards to meet the nominal prices.

And so it is in Toronto: though they didn’t explicitly say so, Scotia implied a forecast of 9 years of stagnation ahead by comparing the previous two corrections in the city. Plug that in to the rent vs buy calculator and you’ll almost certainly decide to rent, yet this is a report that is more positive than many out there right now.