My 1st Million At 33 – yes, you can do it too

Yesterday was red everywhere. To those who believe in buy when there is blood on the street, I can only say good luck to you. Markets are still trading way above its fundamental. Another 20% from the level at Wednesday is properly more fairly valued. Falling knife is no fun at all. Especially when a stock goes to near zero, it doesn’t matter whether you buy it at 30% “discount” from the peak, or 50%, or 70%, or 90%. In every case, your loss is close to 100%, and the only thing that matters is how much in total you have invested in that stock. Putting $20K at 70% discount is much worse than putting $5K at 30% discount from the peak. Asset allocation almost always is more important than stock picking.

Lately, it appears that after Fed’s meeting, the first reaction seems to be always a fake. I was itching to short into Wednesday’s higher close, but I decided that I should not get too greedy. Sometimes, it’s really hard to tell the difference between your own emotion and intuition. Emotion is usually wrong, while intuition is more right. Anyway, market reactions to Fed’s talk were certainly very bad. It was the worst of the both worlds for controlling inflation and stock market confidence. Because Fed seems to be or will not be fighting inflation hard enough. First dollar tanked, and then oil price broke new high, and then a high oil price will cause even more economic slowdown. Yeah, and stock markets certainly figured out all four steps of reasoning in a single day. Well, actually there may be one more step of reasoning, but it will require stock markets to plunge, for Fed to reverse themselves, and possibly easing further. It could make a full circle, but when stocks plunge thru the roller-coaster ride, it sure won’t feel good for most.

At other places of headlines, news continue to be more weird and wild. Bank of America is really closing the transaction with Countrywide without re-negotiation on July 1st. I personally think that deserves a shareholder lawsuit. Countrywide business has certainly materially worsen. My only guess is that there may be lots of help from Fed reserve and Federal home loan bank. Will Fed runs out of treasury bonds to exchange for toxic mortgages, and will the federal bank goes belly-up? With so many cover-ups in financial companies, maybe no news can be surprising anymore.

My best guess is that some of the banks out there probably really worth a negative value. If you assume that a 10X leverage under regular franctional reserve banking system, lending out 10X money using 1X of the depositors’ money. If your average loan loss is 15% on 10X, you will end up with 1X deposits -1.5X loss = -0.5X. Is that the reason for the negative 130 billions of banking reserves in the US (see below directly from Fed, second column is the non-borrowed reserve)?

I’m not sure if you notice the pattern. Stock markets seem to be in sync with the fall in reserve. The only time that is not in sync is when Fed had an emergency cut, and markets rebounded from March low. The rest of the time, it’s pretty much uni-directional, or down.

Really, it’s simply unthinkable that having my money deposited in the bank, while the bank’s got nothing to back it up. Where is my money? The modern technologies have transformed the financial industries. Your total asset at a bank is only as good as an electronic record. With the barbaric gold going up more than $20 an ounce during the big sell-off of the market, maybe it’s time to re-think what really constitute as the real wealth.