In two weeks of time, the bank reserves continue its swan dive. The whole banking system is now held and patched together by Federal Reserve. Without all the bailouts for the bankers, many banks should have gone under.

Here is the data for the current bank reserve (click to go to Federal Reserve data), at negative 100 billion dollars. Since last November which had been holding at above positive 40 billion dollars, the US bank reserves have gone down by 140 billion dollars, or 350%. The rate of deterioration is very fast also, at about 31 billion every month. What’s holding everything together is the increase in the term auction credit. Instead of having a contracting monetary base, everything is temporarily held together at about constant monetary base (but not M3 which is exploding at about 15 to 20% annual rate).

Again, one more emphasis on making sure your bank money is covered by FDIC insurance. Cash is only valid until the bank doesn’t go belly-up.

Looks like banks are not simply done with writing down their assets.

Today is the Fed meeting again. I hope they will cut 1%, because I just don’t want to imagine what might have happened without such a big cut. The financial world is literally falling apart. And bringing down the economy into depression is no fun at all for anyone.

Savers obviously will be hurt by such action. Of course, what hurts the most is the perennial fall in the $US. While the $US should have been rallying, along with gold making a short-term top, it is just nowhere to be seen (yet?). Frankly, I can’t see any fundamental reasons for $US to rally. I wouldn’t want to hold my currency in a country where big brokerage house can go kaput in 24 to 48 hours, and where AAA rated debt skips to CCC without warning, and where practically all banks, brokerage houses, and rating agencies have been lying about the integrity of mortgage debts all along. These are big lies and big losses. USA just cannot repair the trusts from international institutions and wealthy investors quickly.

Yesterday’s markets appeared to be manipulated heavily, and same for the 400 points up day on Dow last Tuesday. The reason that I say that is gold prices are knocked down, while stock markets are supported in the opening, and especially closing hours. No matter though, it’s always the closing prices that matter (at least to the chart technicians).

In any case, I think we could be at least half-way through the bear market. The second half is probably uglier than the first half. But at least, the light at the end of tunnel may be coming. Again, I still wouldn’t buy into this market. But if the sign of hyper-inflation is clear, I will jump in with both feet.

My God! I can’t believe that I got so close to losing my money at NetBank.
Close to the end of September, I closed escrow on my cash-out refinancing, and had some fund wired to NetBank. On September 27th, I realized that I have about $107,500 because of the cash-out refinancing. Since I remembered that NetBank was financially shaky, and was very close to being acquired by EverBank, and I decided to transfer $7600 out to stay just $100 below $100,000 regular FDIC insurance limit. At that time, one voice within me said, “what’s the big deal? I can earn more interest in this account. NetBank will soon be acquired.” But my more conservative voice said, “Oh no, why take the risk? Why do you want to take a risk even if it’s a minor detail.” Fortunately, I still decided to transfer $7600 out. The next day September 28th, NetBank was closed by FDIC, and all deposits were transferred to ING. On September 29th, I was paid with an interest of about $150, which put me over $100K limit again.

I didn’t lose any money, but I was $100 away from FDIC limit, and just 1 day away from losing $7500. I can’t believe I was so close. By the way, if your account was a joint account, it would be insured up to $200,000 if it was owned by two people.

I have never made any efforts in terminating my relationship with NetBank because I’ve got about 10 different ACHs set up that automatically pays all of my credit cards and utility bills, plus my salary payment. I was kind of hooked to NetBank pretty much.

I was so glad that I stayed alert about the financial status of my bank. And I hope no readers here lost money because of NetBank. The good thing is that the whole closing-down went very smoothly in my opinion. I can still access my accounts, and make transfers between accounts. I transferred $2000 out of the same account to stay below $100,000 again after NetBank was transferred to ING. And I made an ACH from an external institution which will draw out most of the money. I believe this transaction should go thru without problems.

If ING can maintain all the ACHs that I’ve setup, I probably will stay with ING. I don’t have much time to mess around with my bills and banks. During my little spare time, I’m too busy watching over the stock markets right now. I will deal with all these later.

I think it is important enough to write a short post on this before you may lose money:

1. Close your non-FDIC money market accounts RIGHT NOW, and move the money to a FDIC-insured account and make sure you have less than $100,000 in each institution. I know wells fargo bank has offered non-FDIC money market accounts since 1997. I don’t know whether they still offer it, but if you have money in those accounts that have a sparingly higher yield than the regular money market account, you should switch them to a FDIC-insured account right away. If you don’t know whether your accounts are FDIC-insured, you should confirm with your bank. Just last Friday, some non-bank money market accounts blew up. You don’t want to be in that situation. Also lots of money market mutual funds hold some mortgage papers that you don’t want to own.

2. If you want to open a bank CD, you should do it RIGHT NOW. Fed is going to cut interest rates, and it won’t just cut once, but multiple times. Lock in your high bank CD rate while you still have a chance. And do me and yourself a big effort, don’t open this bank CD at Countrywide (CFC), Downey Savings (DSL), Fremont Investment (FMT). Just look at those stock performance, and you should know why.

Safety first. You don’t want to lose your hard-earned money after you have been conservatively enough to put the money in a money market account.

It’s interesting to see how media has played the news. And how gold bulls have taken the news in stride. Here is what has taken from Forbes:

The ECB injected a further 61 billion euros ($83.8 billion) Friday morning, while the U.S. Federal Reserve later announced a three-day repurchase agreement to inject liquidity into the market.

The Fed said it would accept $19 billion in mortgage-backed securities after its Fed Funds rate, the rate that banks charge each other for overnight loans, ticked above 6 percent - well above the Fed’s target of 5.25 percent.

You can get the temporary repo market operations from the New York Fed site directly. However, these repo operations are temporary only for 1 to 7 days. The cash needs to be paid back, while the supposedly sold mortgage assets are only serving as collateral during this temporary period.

Regardless, major media plays this as Fed & ECB coming in without stating any of the facts related to the temporary nature of these operations.

So does that mean Fed is not printing money after all? The answer is obviously NO. At the minimum, Fed has printed 0.78 trillion of dollars via its treasury securities holdings. You can get the data at this link. Fed holding these securities is a method of printing money directly for the use of US federal government. It’s one branch issuing IOUs, and then “another branch” taking up the IOUs and giving back and authenticating the new cash as an electronic ledger. These new cash obviously dilute the buying power of the existing $US and create inflation. If US budget deficit continues and foreigners refuse to take more new US debt, the new IOUs will either force the interest rate on treasury bills to go up (which will also make the mortgage rates to go up further) or Federal Reserve can come in and absorb the excessive supplies of treasury bonds via printing of more US dollars which eventually will drag down the currency exchange rate of $US due to more supply versus demands.

So don’t let the orderly liquidation of securities liquidating into your hands via your buy order. Someone needs to take the losses. Don’t partake a portion of it.

Similar deal as Bank of America, Wells Fargo is offering free trades for customers having $25,000 in bank accounts.

I know that $25,000 is probably a lot to keep in cash for many of you, but such offer is quite enticing for me. For the first time, I’m seriously considering consolidating all of my accounts at Bank of America or Wells Fargo. Between the two, I probably prefer Bank of America simply because it has more ATMs near my residence and everywhere else. In fact, this is one of the main reasons that I have not tried out Zecco.com, because I intend to take up the bank offer.

There are still many details that need to be researched and resolved:

1. Can I move my stocks to cash or margin, in a margin account?

   This is very important to me. I really like putting my stocks in cash so that no one else can be shorting against it, and increasing the phantom supplies of stocks by borrowing mine. On the other hand, I may have occasional need to move my stocks to margin so that I can temporarily obtain bigger buying power. I very seldom use margin anyway. In the last 10 years, I only get charged margin interests once, and it was because I was not aware that my “cash” was actually from shorted stocks which I could not be using if I don’t want to be charged margin interest.

2. What’s the bank CD rate, especially 6 month and 1 year terms?

   I normally like to keep about $5000 above the minimum limit before getting charged service fee in the bank. $25,000 is beyond my need. There will be about $20,000 idle cash after my consolidation. The best choice is putting them in CDs up to 1 year. If I do need extra trading cash from these $20,000, I can afford to pay some small trading fee for those period.

3. Can I count the cash balance in brokerage account towards $25,000?

   I believe at Wells Fargo, you can, but not at Bank of America. Having this feature is convenient for me so that I don’t need to transfer cash around between bank and stock accounts.

4. What is the trading fee for mutual funds?

   I have a small need for buying mutual funds. Some ETFs just don’t cover my need. Some of my gold funds are also sitting on a 100+% capital gain, and I would need to take a tax bite when I liquidate them for ETFs. Besides, the only ETF that I can swap into is GDX, and I prefer to keep a variety of ETF/funds in my portfolio instead of loading up in a single symbol. Possibly I will need to keep my gold funds separately in FirsTrade accounts where I can still trade without any fees.

5. What is the trading fee for options & foreign stocks?

   I have my foreign stocks currently in Scottrade account because the fee for foreign stocks is at least $30. Quite expensive, but still cheaper than most of the online stock brokerage.

The biggest hurdle obviously is getting my accounts all set up and paying all the transfer fees. I am using Izone, Scottrade, and FirsTrade currently for trading. If I do consolidate, I would still keep at least another one so that when one account goes down because of computer/network problems at the brokerage house, I can still trade from the other account. Maybe I could consolidate my bank accounts along with this move. Managing all these accounts and my relatives’ accounts is quite a big job.

Let’s assume that you have built a sufficient buffer of emergency cash fund (see Cash Management: How Much For Your Emergency Cash Fund). When you have extra monthly cash, should you pay down the balance of your mortgage or invest them into other things?

There are very opinionated people on both sides of this issue. People who are investment gurus in either real estate or stock markets, or unflinching bulls will always advise not to pay down any of your mortgage balance. The more conservative people will always advise to pay down your mortgage and become debt-free if you can. I’m in the more conservative camp, but in general, I will also advise you NOT to pay down your mortgage.

A mortgage is essentially a SHORT position in bond market. Instead of buying a bond and receiving interests on it, you are paying interests on a bond. In respect to Modern Portfolio Theory, your amount of mortgage should count directly against any of your bond allocation. Let’s say if you have $100K in bond, and you have $100K in mortgage, it’s roughly the same as if you don’t have any position in bonds. What’s different in this scenario from having no mortgage and bond at all is that having a mortgage is a leverage action. It is a leverage using your real estate holding. A leverage expands your total size of portfolio using borrowed money.

Given my economic outlook on a heightened inflation going forward, bonds would not be a very good investment (you could read my bond investing series, and my Reasons for Not Investing in Bonds). Certainly, if I don’t like bonds, then SHORTing bonds should be good by default. Therefore, I would advise you NOT to pay down extra for your mortgage in general. Besides, because of inflation, your home is usually your best investment (mainly due to having a mortgage).

However, one thing is obvious. If you have a lot of cash (or bond) that are earning less than your mortgage interest rate, it is obviously a losing deal not to pay down your mortgage. Supposed that you have a mortgage balance that is at 6.25%, and have side cash or bonds lying around earning 5.00%, you are essentially paying an interest expense of 1.25% for having your money in a much more liquid and accessible form. I do believe in the value of having sufficient cash for your emergency needs. But you definitely don’t want to over do it.

I see many financial sites or articles suggesting that one should pay down their debt so that when the economy goes into recession, or deflationary forces are upon us, the house will not go into foreclosure due to miss of the payments. That seemingly makes sense. Except that why would you want to make payments on something that may have a value less than your loan size if housing value also goes down (let’s forget about money ethics for a moment). In a recession, if you could walk away from your loan without triggering deficiency judgment (especially in the event of a job loss), it is probably better for you not to pay down your mortgage so that you could potentially walk away with less loss (and make sure that your money deposits are not at the same bank/institution who owns your mortgage). NOTE: this is just by number-crunching, without any consideration to your long term credit and your own ethics.

Therefore, in both inflation and deflation scenarios, it is very likely that it is better for you NOT to pay down your mortgage. Of course, there are other reasons not related to economy, such as legal reasons and insurance. I will not discuss them here, since they are more obvious than the debate on inflation/deflation.

Does that mean that there is no value of paying down your mortgage? If you can invest in something that has higher return than your mortgage, certainly you should invest. The tough part is to get such return with less risk & volatility. After all, you could have paid something off your mortgage debt. But when your investments don’t work out, your debt obligation still remains as onerous. What one should do is carefully look at the entire picture of one’s net worth and portfolio composition. I will answer the decision between investing and paying down mortgage in a more quantitative way in my future post on Cash Management: Refinance or Accumulate Home Equity?

Many people only look at the cash for emergency usage. In reality, any liquid assets that you have can be counted towards emergency usage. Real estate assets are obviously not as liquid as cash, bank CD, bond, and then stocks, listed in the order of liquidity consideration.

What kind of emergency you may need more cash than usual? I believe that one should cover accidents, medical and death situations by car, medical, and life insurances. If you have disability insurance, that is even better. Please do remember that the social security tax that you pay covers part of your disability and life insurance needs. But one is still left with one of the most dire and common cause for the need of emergency cash fund: unemployment.

Obviously, when you plan for your emergency need for unemployment, you don’t need include any of the cash drain from income tax bites, since you won’t have any income. I think it’s OKAY to keep cash + bank CD to be just 1 to 2 months of your living expenses excluding income taxes. But you should probably have about 9 months to even 2 years of total liquid asset to prepare your emergency needs. You can count some 100% of your bond, and 50% value of any stocks/mutual funds that are NOT directly related to the sector your job is in. I’m using 100% of the bond value, because I assume that in the situation where you lose your job due to economic reasons, economy should be in a deflationary recession, which is usually good for bond investment. I’m using 50% for your stocks, because I because counting all potential losses and capital gain taxes, 50% is probably a good conservative number. You can substitute with any other percentage number for your stocks, but you should only include stocks that you are willing to sell at all cost. Preferably, you should not include any stocks in your absolute core holdings.

In summary, I will set a goal to have a liquidity of 9 months to 2 years (depending on your comfort level), instead of some 3 to 6 months of emergency “cash” fund. Having lots of spare cash is a convenience that you pay for in terms of loss in the potential investment return and/or paying down towards your mortgage. One should be more flexible in managing the money by NOT sticking to absolute cash.

Here is the advice from the traditional way of looking at emergency cash. There are a couple of good advice, but it further shows that one should consider total liquidity instead of just cash.

I just learned something from a very good personal finance site at It’s Just Money, where lamoneyguy blogs at. What’s worse than having a bad credit? Can’t even open a bank account because of a bad record in the ChexSystems. You cannot even look up your own record like your credit reports. Check out this article: Staying Out of ChexSystems here.

Be sure to look around at his site for more tips!

Better open your Bank CD now rather than later. If you don’t need to use the money, and don’t want to put the money into stock market or any investment, I would suggest you to open a CD that is longer than 1 year. Here is the link for 1-year CD and 2-year CD from BankRate.com. The interest rates in money market accounts will immediately come down once Fed starts to cut short term interest rates.

The current bond yields are indicating a strong possibility of interest rate cut at the end of this year or early next year. 10-year treasury bond yield is down at 4.6%, while 30-year treasury bond yield is at 4.73%. The Fed short term rate however is at 5.25%. Make any sense to you? This is the so called inverted yield curve which is forecasting an economic slowdown and possibly a recession if Fed doesn’t cut rate soon.

It looks like we are back in the goldilocks economy. Everything appears to be great. $US is not falling, but actually rallied. Mortgage rates will be down because of the fall in treasury bond yields. The bond yields can allow the stock market to sport with a higher P/E ratio, relative to the unattractive bonds. Crude oils has fallen big time, and same for gold, while stock market indexes are setting new yearly highs if not all time high. I almost want to say that it’s too good to be true. Assuming that the price for commodity stays down, and Fed can stop housing to slide, we will have a soft landing.

According to Hoenig, one of the Fed officials, inflation has peaked, and will decline going forward. But I am not so sure at all. Yes, Fed wants us to believe that inflation has peaked and is totally under control. With such belief, bond market can stay strong, and Fed doesn’t need to keep increasing interest rates.

I believe all signs are still pointing to greater inflation. That is the only way out for a debtor nation like US. The only game in town is the confidence game. Keeping the confidence up, then US dollar and bond markets will be strong, and therefore stock and housing market will not weaken too much.