Item trading becomes real money

Soon, an economy sprung up around the game. Different found items had different values, the more rare the item, the more valuable the item. You would have to trade a lot of gold or other gear in order to get the best items for your character. People started to capitalize on the demand for higher end gear, and a real world economy was also formed around the game. You could go to the rather new eBay.com and purchase items for your character with real money. Once the auction was complete you’d meet the character in game and get the item you purchased – hopefully, anyways.

Not long after it was discovered that there was actual money to be made from the game, overseas companies started farming the game for higher end items, selling them in mass quantities on foreign websites. Soon you could purchase characters as well, so that you wouldn’t have to spend the time levelling up a character in order to take advantage of that shiny new axe or ring. Blizzard, the company that made the game, tried to stop the transactions, saying that these items and characters are not for the players to be bought or sold, as they are all the property of Blizzard. That shut down most eBay auctions, as they’re hosted in the US, but foreign websites still were able to make real world money off of the game.

What about selling items in Diablo 3?

With Diablo 3, Blizzard is not only seeking to control the real world economy of Diablo 3 items, they are looking to make a profit. They’ve created an auction house, similar to the World of Warcraft auction house, that will allow players to sell their unwanted items for in-game gold, or real world money. Blizzard will charge a small fee to the seller of the item, either a percentage or a flat fee depending on the type of item being sold. The upside being that there will now be a legitimate way to make some real world money off of the game.

So is there money to be made from the game? Should we all quit our jobs, buy Diablo 3, and get ready to play video games for a living? No. We should not. The problem is that there is no way to control the economy, and it will take a lot of time and investment in order to make any sort of profit from the game. Most lower tier items will sell for very little real money, so the rush will be for the highest tier, rarest item. Even if you do find one, it’s value is constantly going to plummet, as there’s no limited supply of that item. It’s just going to keep getting found by more and more people, and its rarity will simply decrease over time. Even if you do spend a ton of time on the game, farming the highest level items, getting tons of gold and selling it all through the auction house, you have to remember that Blizzard is going to be taking a cut on each item that you sell, and when you attempt to withdraw the money into your PayPal account, they’ll take another 15% as a transaction fee.

In Diablo 2, the best way to make money, at the time, was to sell character accounts. In Diablo 3, there will be no legitimate way of doing this. Each player character is tied to a battle.net account, so you’d have to purchase the game and create a battle.net account for each character that you wanted to sell. So they would start at $60, plus the value of the character(s) on the account. I expect to see some accounts pop up on Ebay or various foreign sites, but I definitely do not recommend trying to purchase from them.

Will there be crazy success stories? Yes, of course. The first person to find a particular lusted after item will probably be able to sell it on the auction house for $20 or $30, creating a frenzy of activity while people try to find that item and get similar results. As more and more people play the game, and as more and more items are discovered and sold, their value will plummet down to a buck or two. Personally, I doubt I will be spending much money on the auction house. I’d rather play through the game with the items that I’ve found rather than pay $5 and breeze through the game. If I am able to find and sell some items I don’t want or need, I may re-invest that money into the game in order to get an item that I may never otherwise find. I’m probably amongst the majority there, and I believe that this is Blizzard’s intention – simply provide a legal way of being able to make the game a little bit more fun, or a little bit easier, at a fairly small price. Which, to be honest, is a much better way of introducing an income stream to a game after it’s launch than forcing customer to purchase DLC to unlock the rest of the game they already purchased.

Are you playing Diablo 3 right now?

Related Posts:

• The Cost of Online Gaming: Free to Play
• The Economy of Doubt
• Does EI Inhibit the Overall Economy?

The Economy of Diablo 3 originally appeared on Canadian Finance Blog on May 16, 2012.

Just Another Brick In The Wall

Premier Wall concisely stated his problems with the current version of EI when he said, “In some regions, a person can work just over 10 weeks and receive almost a year’s worth of EI benefits.  A worker in Regina will work roughly twice as long for significantly less; yet, employees and employers pay identical premiums into this $22-billion a year program.”  He went on to claim that EI works to, “discourage labour mobility in a way that hurts the national economy and ultimately individual Canadians.”  It’s pretty tough to argue with this logic.  Saskatchewan workers are in effect, paying Canadians (through equalization payments and EI payments) to sit at home in provinces that really don’t need the labour right now and not come to Saskatchewan.  I would be much more excitable than Mr. Wall is on the subject if I were in his shoes!

Not All Handouts Are Created Equal

For those of you that are not familiar with the Canadian EI program, what it seeks to do is apply different standards to every part of the country.  For a place like Alberta that has a very low unemployment rate, it is much harder to collect EI.  For other places where jobs are hard to come by, you can work a very short part of the year and then collect unemployment insurance for the rest of it.  In this manner, the government basically subsidizes thousands of workers across the country in many different industries every year.  Just from personal experience, I can give three specific abuses that illustrate the systemic problems with the system:

1) The local peat moss factory where I grew up needed a larger labour force in the summer than in the winter.  They offered fairly high wages during the summer months, and then when winter came every year they would downsize substantially and lay off employees (probably about 80% of the overall workforce).  These workers would usually get near the maximum EI payment for the other half of the year which was $485 a week.  When you consider that there are hardly any deductions at all on that money, that is an insanely high pay rate.  The government was paying perfectly healthy people NOT to work year after year.

2) Very similar circumstances to the first example.  My brother fights forest fires during the summers (yes this does impress the ladies), and the men (generally it is an all-male group) are some of the fittest men in the general workforce.  Many of these guys earn 30-35K working 5 months or so in the summer, and then apply for the same maximum EI rate of $485 a week.  Since most of these dudes are not lazy, they simply work under the table a few days a week at a garage, for farmers, or in the construction industry in order to supplement their income.  This isn’t abuse of the system by 2 or 3 people, this is a systemic built-in model that is widely used to soak up government dollars.  As a student, my brother is not allowed to collect a fraction of the payments these guys pay for sitting on their butts or working under the table.  What incentive is that providing him with!

3) The final example that I’m familiar with is the common use of EI to supplement the income received by educational assistants across Canada.  These EAs (also referred to as Teacher Assistants, or Para-professionals) don’t earn a yearly salary like teachers do, and so every winter and summer vacation they are technically laid off.  This is a great example of an instance when government tax dollars are essentially part of a compensation package that makes no sense.  Obviously these people should either be paid more during their school year, or they should easily be able to fine work during their consistent time off every year.  It certainly makes little sense the way it is set up now, and Premier Wall is right in stating that it is a disproportionate tax on his constituents.

I’m Fine With A Safety Net, But Does It Have To Be Made Of Silk

I’m not anti-employment insurance.  I think EI is a necessary safety net for many people, and used properly, it can actually increase the labour mobility that we need.  I think some form of bonuses should be included for people to find work sooner, or even better, for people to go back to school and take vocational training, or get better educated in an area that is “in-need.”  I do think the current system of EI is ridiculous, and it is actually a great example of why big government policies simply don’t work.  How do you create a system that can be fair to a single mom that loses her only source of income and has obvious problems moving to a new area, relative to a young 20-something who is perfectly capable of work, but would rather only work half of the year.  We need to substantially trim EI benefits, offer better incentives (instead of harmful disincentives) and provide extra support on a case-by-case basis instead of having huge loopholes for high-earning seasonal employees to jump through (I’m still frustrated by the idea that people in seasonal industries want government assistance at all.  I mean you knew going into the job that it was seasonal, so why should the government supplement your compensation package?).  With high tax rates from earned income and generous EI benefits, we are creating huge disincentives to actually find work.  This will continue to be a problem until we develop the political will that Mr. Wall and North Dakota/Montana politicians are advocating for.

Related Posts:

• Four Reasons The Economy Isn’t THAT Bad
• The Economy of Doubt
• The Economy of Diablo 3

Does EI Inhibit the Overall Economy? originally appeared on Canadian Finance Blog on February 28, 2012.

Pooled Registered Pension Plans (PRPP)

In January 2011, Finance Minister Jim Flaherty introduced the concept of a new PRPP as a means of trying to address the big retirement gap in Canada.

Later on November 17, 2011, the Harper government introduced the Pooled Registered Pension Plans Act(Proposed Act) legislation as the next step to the process of implement the federal portion of the PRPP.  The government describes the PRPP as a change to Canada’s pension landscape that will make saving for retirement easier for millions of Canadians.

Being a strong advocate of workplace savings programs and financial education in the workplace, I have followed this story closely and written some articles:

• The Key to Success of the new PRPP
• A year end PRPP update
• How the new PRPP should work?
• PRPPs are the future of pension reform
• Benefits of Pooled Registered Pension Plans

The next steps for the PRPP is the Federal Government needs to pass this Proposed Act and adopt regulations. At the same time, work on provincial legislation and the multilateral agreements will need to be undertaken.

Task force on Financial Literacy in Canada releases their findings report

In the 2009 budget, the federal Minister of Finance announced his intention to establish a national task force dedicated to the issue of financial literacy. The Task Force would provide advice and recommendations to the Minister of Finance on a national strategy to strengthen the financial literacy of Canadians. Appointed in June 2009, the Task Force on Financial Literacy is comprised of 13 members, drawn from the business and education sectors, community organizations and academia.

On February 9, 2011, Canada’s Task Force on Financial Literacy today made public its report to the federal Minister of Finance, recommending urgent action on a national strategy to strengthen Canadians’ financial literacy.  I am watching this story to see if this whole process makes an impact on the future financial literacy in Canada.

Vanguard comes to Canada

Back in June, US mutual fund giant Vanguard announced it’s intention to come to Canada with a series of Exchange Traded Funds (ETFs).  In December they actually launched 6 ETFs  with very low management fees.  The management fee for all six Vanguard ETFs averages 0.24 per cent and the Canadian Equity Fund is reported to be 0.09 per cent.

I’m especially interested to see if the Vanguard Canada is able to create more awareness about the high fees being charged by the mutual fund industry.  Canada has been reported as having some of the higher mutual fund fees around the world but despite that it remains the investment of choice for Canadians with $775 billion dollars of assets under management.  ETFs have significantly less assets with less than $40 billion in assets under management.

Vanguard is targeting their ETFs to investment dealers and fee based advisors because the do-it-yourself market is too small (only 5% of all investors in Canada).  Here’s a few articles I wrote on the topic:

• Will Vanguard start the mutual fund price war?
• Investors need to pay attention to their investment fees
• The Ongoing Mutual Fund Fee Debate
• Mutual Fund Fees do matter

Another year of Market Volatility

The last hot topic of 2011 was another tough year with more volatility.  The TSX finished the year in negative territory (-8.89%) despite some hopes for a Santa Claus rally.  The TSX hit a high of 14,329.50 and a low of 10,848.20 with 8 of 12 months with negative returns.  September was the worst month of the year where the TSX lost 8.66% in a single month.  October followed with the best month rebounding a 5.61% return.

In my line of work, I see a lot of investors who have accepted the volatility as normal and others who are just sick and tired of all the ups and downs and the market taking away any gains they make the previous weeks, months or years.

To help investors, here’s a few articles I wrote about dealing with market volatility:

• Three consequences of selling in a bear market
• Has the stock market changed your day to day life?
• Strategies to deal with market volatility
• The Five Realities of the Stock Market
• Market Volatility creates opportunity to rebalance

Are there any interesting stories you are watching for 2012?

Best wishes to everyone in 2012.

Related Posts:

• The Halftime Report 2011 – Diversification is important to every portfolio
• Benefits of the Pooled Registered Pension Plan (PRPP)
• I Should Have Bought An Index Fund

Four Interesting Stories From 2011 originally appeared on Canadian Finance Blog on January 10, 2012.

Still foremost on our minds is the economy. We don’t feel like we have what we once did but is that entirely true? According to a recent bankrate survey, 17% of Americans believe that they are better off this year than they were last year, and I’m thinking the mindset of Canadians is pretty similar. But to be fair to the 21^st century, if we were to compare what we have now to the economies of old, what might we see?

It’s Easier to Get Stuff

We’re used to Amazon sending us anything we want nearly overnight but that wasn’t the case a few hundred years ago. In those days infrastructure wasn’t such that it was cost effective for the average working class citizen to buy “imports”.

We Aren’t Slaves to the Weather

From Mesopotamia to the Maya, thriving economies have been brought down by the weather. Droughts, floods, and other natural disasters still affect us today and they can have lasting effects but when was the last time you heard of a civilization going extinct because of the weather? A more diversified economic engine can be thanked for that.

Better System of Money

Inflation, deflation and stagflation are now controlled by typing money in to existence on a computer. We can debate the merits of such a system but in earlier times, when coins were used to pay for goods, inflation could be caused by not enough money being made—literally. If the silver supply was disrupted, because of war, weather, or anything else, the value of that currency was affected.

Globalization

Let’s steer clear of debates over NAFTA and foreign produced goods for now. From a purely economic perspective, as more people compete for your money, they’re going to look for ways to give you more for less. Drug companies will compete for the best remedies for diseases that we hope to see eradicated. Globalization brings competition and products to us that weren’t possible hundreds of years ago.

The Best Time?

According to the author, the best time to live was 17^th Century London. This was a time when the stock market was being conceived in a coffee house, the insurance industry was born from mathematic principals of probability, and you could walk through the streets and peek in on some of the greatest artists of human history painting their next piece of brilliance.

Even with the romanticism that comes from The Economist’s portrayal of such a time, I’ve witnessed a company called Apple innovate the world with a hand held computer called an iPhone. I remember the first time I saw the picture of an HDTV, and I remember the great musical artists of my era who, often driven by the pursuit of money, have left their mark on art history.

The economy kind of stinks right now but I don’t know that it’s that bad when I look at where we could be.

Related Posts:

• The Economy of Doubt
• 4 Reasons Your Resolutions Fail – And How to Overcome Them
• 5 Reasons You Should Never Buy a Video Game at Launch

Four Reasons The Economy Isn’t THAT Bad originally appeared on Canadian Finance Blog on December 5, 2011.

Stealth Phase

Those who understand the new fundamentals realize an emerging opportunity for substantial future appreciation, but at a substantial risk since their assumptions are so far unproven. So the “smart money” gets in, often quietly and cautiously. This category of investor tends to have better access to information and a higher capacity to understand it. Prices gradually increase, but often completely unnoticed by the general population. Larger and larger positions are established as the smart money start to better understand that the fundamentals are well grounded and that this asset is likely to experience significant future valuations.

Awareness Phase

Many investors start to realize the momentum, bringing additional money in and pushing prices higher. There can be a short-lived sell off phase taking place as a few investors cash in their first profits (there could also be several sell off phases, each beginning at an higher level than the previous one). The smart money takes this opportunity to reinforce its existing positions. In the later stages of this phase the media starts to notice and those getting in are increasingly “unsophisticated”.

Mania Phase

Everyone is noticing that prices are going up and the public jumps in for this “investment opportunity of a lifetime”. The expectation of future appreciation becomes a “no brainer” and a linear inference mentality sets in; future prices are a “guaranteed” extrapolation of past price appreciation, which of course goes against any conventional wisdom. This phase is however not about logic. Floods of money come in creating even greater expectations and pushing prices to stratospheric levels. The higher the price, the more investments pour in. Fairly unnoticed from the general public caught in this new frenzy, the smart money as well as many institutional investors are quietly pulling out and selling their assets to eager future bag holders. Unbiased opinion about the fundamentals becomes increasingly difficult to find as many players are heavily invested and have every interest to keep the appreciation – “the game” – going. The market gradually becomes more exuberant as “paper fortunes” are made and greed sets in. Everyone tries to jump in and new investors have absolutely no understanding of the market, its dynamic and fundamentals. Prices are simply bid up with all financial means possible, particularly leverage and debt. If the bubble is linked with lax sources of credit, then it will endure far longer than many observers would expect. At some point statements are made about entirely new fundamentals implying that a “permanent high plateau” has been reached to justify future price increases; the bubble is about to collapse.

Blow off Phase

A moment of epiphany (a trigger) arrives and everyone roughly at the same time realize that the situation has changed (like the Road Runner Coyote realizing he is about to fall after walking on thin air for a few seconds). Confidence and expectations encounter a paradigm shift, call it a reality check, not without a phase of denial where many try to reassure the public that this is just a temporary setback and that anyone saying otherwise does not know what he is talking about. Some are fooled, but not for long. Like a directionless herd many try to unload their assets to a greater fool, but takers are few; everyone is expecting further price declines. The house of cards collapses under its own weight and late comers (commonly the general public) are left to hold the bag while the smart money has pulled out a long time ago. Prices plummet at a rate much faster than the one that inflated the bubble. Many over-leveraged bag holders go bankrupt, triggering additional waves of sales. There is even the possibility that the valuation undershoots the long term mean, implying a significant buying opportunity. However, the general public at this point considers this sector as “the worst possible investment one can make in his life”. This is the time when the smart money starts acquiring assets at bargain bottom prices.

I asked Dr. Rodrigue for his opinion on whether the current markets are in the “return to normal” phase or the “return to mean” phase.

My assumption concerning the stock market is that we are in the “return to normal”. It is not because that the contraction is taking place at a slower rate that one should declare that “the recession is over”. There is quite a lot of desperation so the market appears to cling to any news that is not horrible with a positive spin.

The next shoe to drop is linked with the commercial sector that has overinvested and malinvested, fooled by the debt fueled consumption binge that was the real estate bubble (if debt is defined as present consumption at the expense of future consumption, then it can be assumed that there will be much less consumption than expected in the future). You should see the blood bath that is currently taking place in the maritime shipping industry; gigantic capacity coming online at the same time the demand is dropping sharply.

Once the “stimulus” will be spent, both financially and politically, and that people will see it for what it was – a macroeconomic fraud – then there should be a another downside until we reach the “return to the mean phase”. One can also wonder about the unfolding pension crisis as the baby boomer generation enters retirement age with limited savings and depleted assets (real estate and 401k/RSSP). A question I am asking myself these days is how all of this will be defaulted on, particularly defined benefits plans?

Thanks to Dr. Jean-Paul Rodrigue for taking the time to share his thoughts and research with The Canadian Finance Blog. His theroies show a possible outcome for the economy that isn’t being discussed much as stock markets move higher.

Related Posts:

• The Kondratieff Wave: Tracking The Past Or Predicting The Future?
• Real and Nominal Rates of Return
• The 1929 Stock Market Crash

Is The Current Market A Return To Normal? originally appeared on Canadian Finance Blog on August 6, 2009.

Kondratieff noted that capitalist economies have long waves of boom and bust, that he described similar to the seasons in a year.  However, for presenting his work to Stalin showing that capitalism will always return, he was imprisoned and then eventually executed.

The four seasons in The Kondratieff Wave are:

• Spring (25 years) – Inflationary phase with rising stock prices and increased employment and wages.
• Summer (3-5 years) – Stagflation phase with rising interest rates, rising debt and stock corrections. Imbalances lead to war.
• Autumn (7-10 years) – Deflation phase where falling interest rates lead to a plateau and stock prices increase sharply.
• Winter (3 year collapse and 15 year readjustment) – Depression phase with stock and debt markets collapsing and commodity prices increasing.

Source: www.chartingstocks.net

So what does all this mean? I found this chart very interesting, especially in today’s economy. I’d like to thank a reader, Dave in Calgary, for emailing this to me. Of course, it’s debateable whether winter is behind us and we’re back into spring… or are we currently in autumn, with winter still to come?

Related Posts:

• Will Future Returns Suck?
• An American’s POV on Our Nations’ Joint Financial Future
• Is The Current Market A Return To Normal?

The Kondratieff Wave: Tracking The Past Or Predicting The Future? originally appeared on Canadian Finance Blog on August 5, 2009.

On Monday, Trade Minister Stockwell Day repeated this claim in the Penticton Western News, writing  “I’m not kidding. The recession is over… Last week, after pouring over all the numbers he was able to declare, not on a whim but based on economic fact that the nasty ‘R’ word no longer applied to Canada.”

But then this Tuesday, when Finance Minister Jim Flaherty was asked if the recession is over he said ”No, I think we will have to look back as we always do and look at this quarter. There are good signs that the economy has stabilized, and there are the beginnings of a recovery. And I wouldn’t put it any stronger than that.”

Transport Minister John Baird had a similar statement on Wednesday, “What we want to make sure of is that we don’t pop out the champagne just yet. There’s a lot of Canadian families that are still feeling the pain of the economic times that are going around the world.”

I prefer Mr. Flaherty and Mr Baird’s cautious statements, especially with the jobless rate at an 11 year high and EI payments at their highest level since Statistics Canada began tracking in 1997.  More importantly, being too much of an economic cheerleader might lead to another crash if, 3 months from now, the projection turns out to be incorrect. Ultimately, these mixed messages will not help a nervous stock market or a fragile consumer confidence.

Related Posts:

• What Should You Do In A Recession? Buy Your Own Island!
• Task Force on Financial Literacy
• How Investing in Gold Can Save You From an Economic Crisis

The Recession Is Over! No Wait, It’s Not originally appeared on Canadian Finance Blog on July 30, 2009.