On Bluebirds and Wolves

The first principle is that I must think about something new every day, and write something new every day and post something new everyday.

The complicating factor is that I’m at a hotel in Medford Oregon tonight getting ready for a talk tomorrow.

So this post will be less structured Than normal. Mea culpa.

I was talking with the excellent Becky Legrande today. She was asking good questions about my post entitled Money Laundry.

It seems I did a pretty bad job of laying out the groundwork for that post. I may have gotten a bit lost in the weeds, forgetting my audience.

So let me try again.

At it’s simplest level the Bluebird angle is all about transferring credit card spending into checks to pay your bills.

Each step in the process serves a function:

Step one: you buy a bunch of gift cards with your credit card.

The purpose of this step is to put a large charge on your credit card without actually spending much money.

But now you have to figure out a way to get your gift cards value transformed into a check, useful for paying bills you have to pay anyway. Which brings us to step two:

Step two: load the gift card balance on to your bluebird card.

This is where the alchemy happens. Where credit card spend is magically transformed into a checking account balance. (Which is the whole purpose of the bluebird card.)

This can be done one of two ways, depending on the type of gift card that you bought.

If you bought a so called “reload” card you can load the balance directly onto your bluebird card over the Internet. Very convenient.

If you bought a Visa gift card you must load the value of the gift card onto your bluebird card at the dreaded Walmart using a pin code.

Now the money is on your bluebird card. Which brings us to step three.

Step three:

Log onto bluebird.com and write a check through their bill pay service to whomever you choose. Or you can actually write a paper bluebird check for in person payments.

So it’s a buy card/load card onto bluebird/liquidate bluebird balance via check scheme.

The alchemy is turning credit card spending into the spend you couldn’t execute with a credit card before, without paying high fees.

Other random thoughts:

I ‘m Reading a terrific book called The Big Short, by Michael Lewis.

It chronicles the financial crisis of 2008 by profiling all of the eccentric geniuses who shorted the mortgage-backed security market by realizing a priori that the whole housing market doomed to go bust.

It gives tremendous insight into the nastiness of Wall Street. It also incinerates The ridiculous premise that the financial crisis was caused by borrowers who took out subprime loans. They were the lambs, the marks, the victims, who were floated easy credit that was doomed from the start so they could keep up spending despite their stagnant wages. All to create a gigantic speculative bubble, With the Wall Street banks acting as middleman taking a 2% cut of each transaction and getting filthy rich transferring risk from one player to another.

I realize how preachy and pedantic that sounds. But Lewis’ gift is that he does it all by profiling the freaks who were somehow separated enough from the herd to see that the emperor had no clothes. In doing so he paints likable pictures of all of the odd actors.

It seems relevant to this in blog a number of ways:

1. We should all buy low-cost passively invested index funds. This is the area of the stock market with the most sunlight. The least complexity. The fewest corners for wolves to hide in. The teeth are in the expense ratios so always look at those first when picking investments. Don’t feed the wolves.

2. The victims in this story are all of the faceless borrowers who borrowed loans they could not understand in order to spend beyond their means.

Building up a nice healthy savings percentage is like insulation against becoming such a victim. It’s almost a revolutionary act. We should all add 5% towards our savings rate tonight!

3. The whole Modern Portfolio Theory that says you should invest in well diversified low-cost index funds is predicated on an idea that the market is efficient. The Big Short is all about people who made billions of dollars by identifying inefficiencies. So is the efficient market theory doomed?

I don’t think so. I think the people who recognize inefficiencies and exploit them are actually acting as arbitrageurs. Taking big inefficiencies and making them smaller.

If I could bet on these geniuses beforehand, I would. The problem is it’s very difficult to identify them before hand. And afterwards it’s hard to know if they’re smart, or just lucky.

Which is why it’s probably better to just bet on the whole market over time.