Confessions of a Union Free Rider

“We believe that the American workers employed in the American way are unbeatable”
- Thomas Watson, Jr. to Nikita Khrushchev (The Spokesman, September 22, 1959)

On September 21, 1959, Nikita Khrushchev toured an IBM plant in San Jose, California. In Nikita Khrushchev and the Creation of a Superpower, Nikita’s son Sergei remembered how his father wasn’t particularly impressed with the state-of-the-art computers. Nikita was, however, enthralled by the company cafeteria.

Then, and decades later when I was an IBM employee, there were no executive lunchrooms. Manufacturing operators, engineers — up to the plant manager broke bread together. The food was sold at cost and served by cafeteria workers, who were also company employees. Nikita noted that through the cafeteria’s design, “management was deliberatively trying to make a demonstration of democracy.”

Of course there was another thing management was trying to do: discourage unionization.

The Threat/Game Theory Union Wage Model

Back in the day, many of IBM’s peers and competitors were unionized. IBM didn’t want to go down that path. As I was to learn in my nine years of management, the company felt the best way to avoid unionization was to offer everything a union offered — and more. Hourly workers’ pay grids were set locally, to account for different geographical living standards, but always set above local union scale. Pension and health benefit plans were top shelf.

IBM management school taught managers about Maslow’s hierarchy of needs to hammer home the importance of a living wage.

IBM wasn’t the only non-union shop to mimic union employers. When the cable television industry began, it knew their employees would be working alongside unionized telecom and power company employees. Before it was acquired by Time Warner, NewChannels (a division of Newhouse Broadcasting)  paid better than union scale for precisely that reason.

This behavior is well documented in academic literature.

“The results suggest, inter alia, that an increase in the extent of unionization in an industry has substantial positive effects on the wages of nonunion as well as union workers.” - William Moore, Robert Newman and James Cunningham, “The Effect of the Extent of Unionism on Union and Nonunion Wages” in the Journal of Labor Research, Winter 1985, Vol. 6, Issue 1, p.21.

Like all institutions, unions can be inefficient. The power base can fight hard to preserve the status quo that put them there instead of striving for more meaningful change. That being said, I personally benefited from unions without ever being a union member. Sadly, I am something of a relic.

When unionization in an industry declines, so do the wage and benefit premiums for free riders. When IBM’s peers became less and less unionized, it no longer felt compelled to offer union-equivalent pay and benefits.

And when a minimum-wage company comes into town, look out below.

“Our research finds that Wal-Mart Store openings lead to the replacement of better paying jobs with jobs that pay less. Wal-Mart’s entry also drives wages down for workers in competing industry segments such as grocery stores.”  - Arinjarit Dube, T. William Lester and Barry Eidlin, A Downward Push: The Impact of Wal-Mart Stores on Retail Wages and Benefits

Costco, a key competitor pays its employees roughly double what Wal-Mart pays. But as this article entitled The High Cost of Low Wages in the Harvard Business Review, you get what you pay for:

“In return for its generous wages and benefits, Costco gets one of the most loyal and productive workforces in all of retailing, and, probably not coincidentally, the lowest shrinkage (employee theft) figures in the industry.”

In 2012, Costco made roughly $10,000 profit per employee while Wal-Mart netted about $7,500 per employee.

But paying a good wage is a tried and true business model, as demonstrated by Henry Ford.

In 1914, Henry Ford raised the amount his workers could earn from roughly $2.25 per day to $5 per day — far above other employers. Years later he recounted:

“The payment of five dollars a day for an eight-hour day was one of the finest cost-cutting moves we ever made,”

“Cutting wages is the easiest and most slovenly way to [boost business performance], not to speak of its being an inhuman way. It is, in effect, throwing upon labour the incompetency of the managers of the business.”

One of my favorite passages from Henry Ford’s book,  My Life And Work, speaks to the stewardship of business owners:

“[The manufacturer] is an instrument of society and he can serve society only as he manages his enterprises so as to turn over to the public an increasingly better product at an ever-decreasing price, and at the same time to pay all those who have a hand in his business an ever-increasing wage, based upon the work they do. In this way and in this way alone can a manufacturer or any one in business justify his existence.”

Although not documented anywhere that I could find, IBMers remember another thing Khrushchev was impressed with the day he toured the San Jose plant. He couldn’t believe that the workers owned the cars in the company parking lot. He thought the lot had been staged for his visit. Later that week, Nikita insisted on an unscheduled stop at a San Francisco grocery store. According to one account “The mere sight of the car-filled parking lot was enough for Khrushchev to admit that “we were ahead” of the USSR.”

In every respect, the financial stability of workers was “the American way” that Thomas Watson, Jr. professed — and Nikita Khrushchev coveted during the height of the Cold War.

Fun and Not-So-Fun Facts

In 1979, Thomas Watson Jr. was appointed the 16th United States Ambassador to the Soviet Union.

Thomas Watson Jr. was the principal benefactor of Brown University’s Watson Institute for International Studies. Sergei Khrushchev, who became a naturalized U.S. citizen in 1999, still teaches there.

In 2012, 26.9% of fast food workers received food stamps. In the last ten years, the number of fast food employees grew 21.3%. The rest of the economy only added 3.2% more employees. In 2000, the average age of a fast food worker was 22. Today the average age of a fast food worker is 29.5.

JP Morgan’s contribution to House and Senate Agriculture Committees more than doubled once JP Morgan got into the food stamp business. JP Morgan is one of only three companies to administer EBT cards (the new food stamps), overseen by the Ag. Committees.(Profits from Poverty: How Food Stamps Benefit Corporations)

One Wal-Mart Supercenter in Wisconsin could cost taxpayers $904,542 a year if all the employees who qualified for food stamps, low cost housing and Medicaid applied.

In 2012, the CEO of Wal-Mart made a base salary of $1.3 million, received a $4.4 million bonus and $13.6 million in stock options.

In 2012, 284,000 college graduates worked in minimum wage jobs. (Number of the Week: College Grads in Minimum Wage Jobs)

IBM no longer offers pensions. The company only matches its 401(K) contribution once a year. If you get laid off on December 10th, you not only lose your job, you lose your 401(K) matching contributions for the year.

IBM’s first basic belief was “respect for the individual.” The only place you can find that now is on the company’s “history” subdirectory. It makes a great nostalgic Labor Day read. (IBM Management Principles and Practice)

Dry Powder is an Asset Not a Failing

In 1998 Long-Term Capital Management (LTCM) lost $4.6 billion in less than four months. Although the hedge fund was led by Nobel Prize winners (Myron Scholes and Robert Merton), noted professors, a Federal Reserve vice chairman and well-known Wall Street arbitrage experts, it made one of the most basic — but costly — investment mistakes.

LTCM ran out of cash at the wrong time. The hedge fund’s managers got caught in one bad investment. To get themselves right again, they had to sell off sound investments. In the end, they turned one loss into many.

As investors, we’ve been made to believe that to maximize our returns we need to have every penny of our portfolio actively working for us. Either you’re fully invested or you’re a wuss. LTCM’s shortsightedness probably had more to do with greed, however, than courage.  In its heyday, it had the chance to take on more investors and turned them down. After all, high leverage and a small number of investors had generated a fortune. When the shit hit the fan, LTCM couldn’t find the cash, and new investors were no where to be found. You can read about LTCM’s spectacular failure in two compelling books, When Genius Failed: The Rise and Fall of Long-Term Capital Management and Inventing Money: The Story of Long-Term Capital Management and the Legends Behind It.

Powder Power

On October 19, 1987, the Dow Jones Industrial Average dropped 23%. Most hedge funds were crippled in the wake of “Black Monday,” but not Princeton/Newport Partners. Founded by mathematics professor Edward Thorp, the hedge fund did sustain some minor losses that day. But Princeton/Newport had enough dry powder to go in and by some distressed, but valuable, securities in the days that followed. In 1987, the S&P 500 managed to eke out a 5% gain. Thorpe’s hedge fund returned 27% that year.


Thorpe’s hedge funds and his personal portfolio have been profitable for 42 consecutive years. But Edward Thorp is probably more famous for his work outside of the investment world. In 1962, Thorp wrote Beat the Dealer: A Winning Strategy for the Game of Twenty-One (Vintage). The book introduced the technique of card counting and revolutionized blackjack strategy. Decades later, it was used as a training manual for the famous MIT blackjack team.

While many people understand the playing strategy in Thorp’s book, few understand the significance of its betting strategy. Thorp used a strategy devised by the physicist John Kelly Jr. in 1956. The Kelly criterion is a mathematical system of betting whereby a player increases the size of their bets when the odds are in his or her favor. Bets are decreased when the odds of winning are lower. Using Kelly’s formula, there is NEVER a time when it is appropriate to have an entire bankroll in play — no matter how good the odds.

Thorp understood that to win at blackjack — and investing — you had to be able to withstand a losing streak. He didn’t want to be strapped for cash when the odds turn in his favor.

Selling into a Rally Isn’t Folly; It’s the Plan

In 2009, my company generously donated $100,000 to my Stock of the Month portfolio for me to manage. I don’t get monthly inflows like a 401(k) account and I don’t make annual contributions like an IRA account. And I sincerely doubt my company would give me more money if I were to lose what it has already given me. As a result, I tend to carry a larger cash balance than most.

That said, I’ve added to my cash balance throughout the rally of 2013. I believe in the wisdom of buying low and selling high. To achieve this, however, one actually has to sell. In April, I sold off half my Yahoo (YHOO) holdings for a 50.2% return. While I was comfortable that it had some run left, I was ready to take some off the table. I sold the balance at the end of July for a return of 78.8%.

My editor asked me if I regretted selling half of my position when I had. Was he shitting me? Hell, I’ll do a victory dance dedicated to that trade until my ashes are scattered. The day I regret beating the market by 39 percentage points is the last day I invest.

If you’re an investor that cries every time you miss the tippy-top, you’re going to die of dehydration.

The “powers that be” have also been concerned about my recent trend of buying smaller positions — as I sold off larger positions. For me, this is my imperfect  application of the Kelly criteria, I believe that the odds in the market are a bit weak and I want to be sure I have enough dry powder to take advantage of better odds in the near future.

Apparently, I am not alone. In a recent post on The Reformed Broker (a must-read blog for anyone who has a dime in the market), Josh Brown commented on a Bloomberg article that discussed the growing hoard of cash on the balance sheet of value managers.

I don’t consider myself a value investor per se. (Although if you’ve read #53 on the 50-Plus Things About Amy page, you know I hate to pay retail for anything)  I’m only an OK blackjack player — certainly nothing like Edward Thorp. But I am a poker player and an investor. Those two activities have taught me to get my money in when the odds are in my favor. They’ve also taught me to take some money off the table when the odds are weak.

(For all my old PokerSchoolOnline buddies, you probably learned Bankroll 101 from the master, Debonair. His 2004 post “How I Never Go Broke” still lives. And after all these years, I can attest that Debonair is flush — and has still yet to go broke.)

Missing Lou Krieger

On December 3, the noted poker author and my friend Lou Krieger died of cancer. There are so many things to be said about Lou’s contributions to the poker world and how he nurtured a new generation of poker writers. But this is what I said on Hold’em Radio’s tribute show to Lou. I want to thank Dan and Shari for letting me share my memories of Lou. Read More »

Gasoline Prices: The Good, the Bad, and the Ugly

Today crude oil prices turned lower on speculation that the U.K. and U.S. might coordinate a release from of their strategic oil reserves. If true, it is probably motivated by a desire to shake out speculators. (I wrote about this strategy in a previous post here.) In the short-term, it may even tamp down gasoline prices. Unfortunately, it will do little to stop the well-meaning, but misguided, flow of energy policy rhetoric.

Some people are sure the answer is “Drill Baby Drill.” Others are convinced the answer can be found in conservation. Both camps believe their approach would result in lower gasoline prices in the U.S.

I’ve got some good news and some bad news for y’all.

In the last five years, the U.S. has ramped up crude oil production. And whether its because of the flagging economy, higher unemployment, more fuel efficient cars, or the mainstream adoption of GPS (reducing the number of lost drivers unwilling to embarrass themselves by asking for directions) — the consumption of gasoline has dropped dramatically in the U.S.

We’re relatively awash in gasoline. So much so, the U.S. became a net exporter of gasoline in December 2011 — the first time in 50 years. Some analysts believe this trend will continue.

With this double whammy of increased supply and decreased demand, gasoline should practically be free. But of course it’s not. Gasoline prices are running about 8% higher than last year’s already-lofty levels. That’s because gasoline prices aren’t determined by domestic supply and demand. Gasoline prices are, by and large, set in a world market — and the world is worried about tensions in Iran and what that could potentially do to world oil and gasoline supplies.

(Pipeline map. Full size image available here)

Have you seen the commercials that portray the Keystone XL pipeline as a magical cure for unemployment and domestic energy supply. It probably would result in jobs. Folks would find some nice short-term work building the pipeline. The Keystone extension could boost refinery jobs on the Gulf Coast. And oil exporters — they’ll get some business — ’cause that Canadian oil isn’t planning on staying here.

There is adequate pipeline capacity to get that gooey tar sands oil from Canada to the U.S. market in Cushing, OK. But that’s not what Canada needs. Over 95% of Canadian crude exports end up in the U.S. market, and Canada wants to diversify its trading portfolio. At least that’s what Canada’s Minster of natural Resources said in this open letter. Canada wants its oil piped to a port (as in export).

Canada isn’t alone. Even the US producers want to escape the glut in the US market. Based on this increased demand to export, Magellan Midstream Partners just announced it would expand its pipeline capacity to the Gulf Coast — moving more West Texas oil to the port.

I’m all for a comprehensive domestic energy policy. We’ve basically been winging it for the last few decades. But its goals have to be grounded on the realities of a world market — not an appealing populist argument built on the fantasy of domestic price setting.

Home = A Place You Can Scratch What Itches

It’s like going home again. And by home, I don’t mean to invoke a Rockwellian ideal, baked in nostalgic fantasy. On the scale of dysfunction, it’s probably closer to Shameless than it is to Ozzie and Harriet. But by every measure, Dan Michalski and Pokerati are family.

This January, I started contributing to Pokerati, providing a few posts a month about the poker and gaming business. I still have my investment day job. And I’ll still navel gaze here on Aimlessly. But Dan made me an offer I couldn’t refuse: an outlet to write about the wildest and whackiest sector in the world, bar none. (And an opportunity, once again, to write-off my trips to Vegas as a business expense)

I first met Dan in the summer of 2004. He and Jay Greenspan were at my starting table of the Mid-America Poker Classic media event in Tunica, Mississippi. As I recall, Dan and Jay were both ex-editors of the now-defunct All-In Magazine. (At that point in time, All-In may have burned through more editors than it had released issues.) Read More »

With Apologies to Douglas Adams, Nassim Taleb and Every Major Religion: Why Investors Should Learn Poker in 2012

“It is not that there are no certainties, it is that it is an absolute certainty that there are no certainties.” Christopher Hitchens (1949-2011) from Hitch-22: A Memoir

In Douglas Adams’ book Life, the Universe and Everything, the computer Deep Thought comes up with the Ultimate Answer to the Ultimate Question of Life, The Universe and Everything. The answer is 42. Unfortunately, the actual question is not known.

In the planet we inhabit, the reverse is often the case. We have questions for which there are no constant, neat and tidy, answers. We fall back on political ideologies, religious tenets, anecdotal experience, artistic genres and/or academic disciplines to give us a belief structure that we sometimes confound with fixed truths. Even when we are confronted with evidence that we aren’t wholly right — because something has changed, more information becomes available or the possible, but improbable, has occurred — it’s hard to let go of our constructed answer.

In the recent past, we’ve struggled to let go of these treasured “truths.”

Pluto is a planet

A house is a good investment

The stock market is a rational determinant of prices and a productive use of capital

Sometimes the Insignificant Isn’t

When I first started at IBM as a chemical engineer, I was responsible for a manufacturing process that was part of our semiconductor packaging line. It was a good place for a new engineer to start. The process to dispense and cure a polymer over the top of a chip and ceramic package was a mature and stable process. But one day, the polymer stopped curing. Read More »

Open Letter to Herb Greenberg: The Problem is Unemployment, not Unemployment Insurance

I like CNBC’s senior stock analyst Herb Greenberg. I generally count on him for his solid and thorough research. But last week, he wandered off into an anecdotal wilderness. So this is to Herb, in honor of Labor Day.

Dear Herb,

I watched some of your CNBC “coverage” on unemployment insurance, where you implied that people would rather collect unemployment insurance than work. I do believe there are some people who go through the motions of a job search just to collect unemployment insurance. There is even evidence to suggest that unemployment insurance can delay workforce participation. But in this economy, your broad-brush proposition bordered on the absurd.

Had you researched this half as well as you research stocks, you might have realized that countries like Germany have much more generous unemployment benefits, yet much higher labor participations rates, than we do right now. Or maybe you would have reviewed the latest Help Wanted Index from The Conference Board and realized that a dearth of labor supply was hardly the issue.

Or maybe you would have investigated the studies that concluded workers were more willing to rejoin the workforce only after their unemployment benefits ran out — just as carefully as you investigate a company’s balance sheet. Some of them studied time periods when labor markets were tight and the penalty for delaying a job search was minimal. But we don’t have a tight labor market today. Few people assume they can just go out and get a job tomorrow. Read More »

Complicit Regulators: The US Federal Reserve and the Alderney Gambling Control Commission


Thirteen years ago today, James G. Rickards received a phone call: “Jim, we just lost 500 million; you’d better get back to Greenwich.” Soon after, he would be called upon to broker a $3.6 billion bailout of the hedge fund Long Term Capital Management (LTCM). It was paid for by big banks and orchestrated by the NY Federal Reserve.

Rickards said, “What strikes me now, looking back, is how nothing was changed: no lessons were applied. Even though the lessons were obvious, in 1998. […] Regulatory oversight needed to be ramped up […] The government did just the opposite. Glass-Steagall was repealed in 1999, so that banks could become hedge funds. The U.S., in effect stared near-catastrophe in the eye, with LTCM, and decided to double down.”

One bias of our capitalist system is that we believe profit is the mark of a functioning system. As a result, regulation is seldom sought to control money-making enterprises. There is an implied message: If it ain’t broke, don’t fix it.

On the flip side, losses are frequently pinned on needless and overly aggressive regulation. No one ever wants to kick an industry while it’s down. As a result, squeaky losers generally get rewarded with deregulation.

Even when a regulatory weakness or failure leads to disaster — a la Enron, Madoff, LTCM, Lehman Brothers, and Full Tilt Poker — anti-regulatory bias, fueled by industry lobbying coffers, eventually trumps temporary populist outrage and public risk.

I’m no Ron Paul. But I’m not a member of the U.S. Federal Reserve’s fan club either. While it may have helped the financial system from collapsing in 2008, the Fed was instrumental in removing key foundation blocks that had held it in place since the Depression.

One of the Fed’s primary tasks is to regulate the banks. But as is often the case, the regulators forged a cozy bond with the regulated — and the Fed became one of the early and powerful champions of bank deregulation.

When early attempts by Congress to weaken the Glass-Steagall Act failed, the Federal Reserve unilaterally “reinterpreted” the section of the law that had restricted commercial banks from dealing in securities. Starting in the mid-1980s, the Fed voted to allow bank holding companies to derive up to five percent of their revenues from trading in a narrow range of securities. By the mid-1990s, following a series of “reinterpretations,” the Fed allowed 45 percent of bank revenues to come from dealing in a wide range of securities.

The proposed merger of Citi Bank and Travelers in 1998 — and $300 million of bank lobby money — finally enticed Congress to pass the Graham-Leach-Bliley Act in 1999, codifying the Federal Reserve’s wishes and the banking industry’s wet dream.

With a clean license to deal, the primary growth engine for banks became securitization — or the repackaging of debt, like mortgages. Fostered by both loose and unenforced regulation, the securitization market ballooned to roughly $10 trillion in the US by 2008.

I liked online poker. But I was never a fan of an unregulated or self-regulated poker industry. For one thing, its infancy was marked by a notable regulatory disaster. When the fledgling online company PokerSpot run by Dutch Boyd suffered financial difficulties, it raided players’ accounts in an attempt to stay afloat. It eventually wiped out every deposit on its journey into the abyss.

PokerSpot’s early failure was written off as a rogue fraud — but it was a regulatory harbinger.

In the early 2000s, new online poker companies blossomed and thrived. They made so much money a few of them even launched successful IPOs. With billions on the line, the new companies aligned themselves with agencies that promised regulatory cover.

Alderney, the third largest of the Channel Islands, played host to one of these regulatory bodies. In “licensing” Full Tilt Poker (FTP), the Alderney Gambling Control Commission scored a big fish. Since FTP was so profitable and big, Alderney allowed it some regulatory slack. Instead of requiring the company to segregate or “ring fence” player accounts, it allowed the company to co-mingle player accounts with the company’s business accounts.

In December 2010, it was widely known (as F-Train documents here) that the Department of Justice was investigating online poker’s payment processors. Even then, neither FTP nor Alderney did anything to insure the safety of player funds. On April 15, 2011 (Black Friday) FTP’s business accounts were seized by the Department of Justice. FTP stated it was unable to reimburse players’ money due to the seizure. Even today, it is unknown whether there are adequate funds to cover the player accounts and there are rumors of a $60 million shortfall.

On June 29, Alderney suspended Full Tilt’s gaming licenses, well after the horses had left the barn.

Michele Davis: “And what do I say when they ask me why it wasn’t regulated?”
Hank Paulson: “No one wanted to; they were making too much money.”
From the 2011 HBO movie “Too Big to Fail”

Pokerboyz Minus One: RIP rggator

When we all met 10 years ago - first on the internet, soon after in “real life” - it was clear we collectively had fewer years ahead of us than behind us. We weren’t young. And poker, after all, wasn’t the only vice we shared. But in an unofficial poll, Randy didn’t make anyone’s top pick in the pokerboyz’ dead pool. As someone who loved the ponies, however, Randy may have preferred to go off on long odds. Read More »

The IEA Beaned the Mascot and the Anatomy of a Bluff

“I wouldn’t dig in if I was you. Next one might be at your head. I don’t know where it’s gonna go. Swear to God “- Crash Davis

In the movie Bull Durham, veteran catcher Crash Davis advises rookie Nuke LaLoosh to bean the team’s mascot. This bluffed lack of control convinces the batter to stop crowding the plate.

Last week, the International Energy Association (IEA) announced that it would be releasing 60 million barrels of oil from the world’s strategic oil reserves. On the face of it, it was an odd move. Oil prices were already starting to move down from their spring highs. Although Libya has put less oil in the market, global oil supplies appear adequate to fuel the world’s muting economies. And 60 million barrels is not that sizeable an outflow, equating to less than one day of global demand. Yet oil prices swooned on the news.

Financial talking heads, confounded by the move, came up with the following theses: a) the IEA is stupid as all government and quasi-government agencies are, b) the economy must be in bigger trouble than we know if the IEA had to pull this kind of desperation move, or c) it was an Obama-inspired political move to marginally help the US economy and placate voters.

Someone from work stepped into my office and started spewing the “stupid” theory. I looked up and said,

“You got it wrong. The IEA beaned the mascot. They’re bluffing. And every oil trader either knows it or will figure it out in the next ten minutes.”

“If everyone knows it’s a bluff, it won’t work. They’ll just drive the price back up.”

“You’ve never played poker, apparently,” I replied. Read More »