An eye opening Six degrees of Separation experience

I meet people in business interactions and from time to time receive invitations to join a social networking network such as Linked-In, FaceBook, Plaxo. I have been kind of casual in accepting these invitations and certainly have not initiated  or passed on these invitations to others. I’ve got my hands full just playing around with websites, digital cameras in anticipation of having grandchildren and getting into blogging and so I did not want to stretch myself too thin with another time consuming interest. But something happened after I accepted an invitation from a person I just met in California. The next day I got an invitation on Linked-In from a fraternity brother from 30+ years ago with whom I had not stayed in contact. Whoa. The new contact must have known someone who knew someone who knew someone …. who knew my fraternity brother. 

It’s the six degrees of separation phenomenon in which supposedly any two people in the country, perhaps the world are connected by six linkages of people who know people. I did a search on ’six degrees of separation’ and found an article describing an email experiment by Duncan Watts, professor of Network Theory at Columbia University, that validated this theory. Check it out.  

There’s also a 1993 movie, named Six Degrees of Separation from the book by John Guare, directed by Fred Schepisi and starring Donald Sutherland, Stockard Channing, Will Smith, Ian McKellen, Mary Beth Hurt. I’m going to have to rent the video or DVD. Check it out.

Anyway I have resolved to perform my own six degrees experiment.  This came about because, my new HP laptop with Vista on it has got locked up with a file in an Outbox that I cannot delete. Now generally I am fairly happy with Vista and Office 2007.  But, I have previously fixed a stuck file in an Inbox by downloading a fix from a community bulletin board. And I have already wasted hours looking up documentation on the Outbox problem and I’m stuck with the virus checker that my office uses that seems to be incompatible with Office 2007 Webmail, which in my experience is exceedingly slow to begin with.  As a matter of principle, I refuse to pay $59 to have Microsoft to help me workaround this problem that should not exist and this has prompted me to move to Mozilla Thunderbird AND to put Firefox on the laptop as well. So as I was exporting my contact list from Webmail I discovered that I have over 2000 email contacts. I wonder how many of these folks would accept an invitation from me to join Linked-In? I wonder which of those contacts would lead me to re-connect with someone that I know from years past? After all, how many Chosen Cheng’s could there be?

So if you are receiving an invitation by email to join my Linked-In network, please consider that scientific nature of this request. I look forward to seeing what happens. I will share the results on this blog. If you are otherwise reading this blog and wish to join in you are welcome. Let me know of your interest.

The shin bone’s connected to the thigh bone …

 

When the FED reduced the overnight FED Funds Rate Rate to 3.5% and the discount rate to 4% it influenced the cost of short term borrowing between the FED and member banks and among member banks. This enhanced liquidity enables banks to have the funds to lend out to business clients at ‘prime plus’ for short term loans and to residential clients for long term mortgage loans. But when banks invest in long term mortgages they generally do not keep the loans in their bank portfolios. Conforming loans have been mortgages up to $417,000 and these are insured by the government through Congress’ creation and implicit backing of the two private companies, Fannie Mae and Freddie Mac. So these conforming loans have a low perceived risk of default and have been readily sold to other investors in the form of mortgage backed securities, bonds that have a price and a yield based on the risk of the pool of mortgages that have been collateralized into the debt obligation (CDO).  So the bank sells the loans and frees up funds to loan out again. The interest rate that the bank charges for long term mortgage money will thus vary daily based on the supply and demand for money and the many factors that enter into that calculation of long term risk and potential profitability of the loan. The bank needs to price the money that it will be committing for up to 30 years.  So the interest rate of long term mortgages is a very different computation than the rate for short term overnight credit from the FED.

When the FED does lower short term rates it is trying to stimulate the economy and while other interest rates such as mortgage rates will trend down it is not a one for one relationship. Banks and markets do anticipate future moves by the FED in its quarterly Open Market Committee meetings. They pay attention to what the menbers of the FED board of governers say in public meetings reported by the press. And they build those future expectations into their interest rate pricing. So if the FED does something expected and economic scenarios meet expectations then rates may not change in response to a FED move. But if the FED raises rates more or less than expected then pricing corrections will happen. 

So, short term rates get connected to long term rates through the inter-relationships of market factors with many investment instruments like stocks, bonds, treasury notes, mortgage backed securities. This discussion is just scratching the surface, I’m sure, but it is fascinating.  Note that the Congress is in the process of raising the limts on conforming loans. That will help spur refinancing activity and more homes will qualify for lower cost loans since the Jumbo loans cost more than the conforming loans. Also note that the banks and investment bankers that have taken reserves for losses due to subprime failures are being ‘rescued’ by international investment funds from soverign investors, countries with surplus cash. So instead of just investing in the bonds which tanked, these funds are taking the opportunity to invest in the US financial companies themselves, owning up to 10% of the companies like Goldman Sachs, Merrill Lynch, etc…
The global market is voting with its dollars in the  long term health of the US marketplace.