Wednesday, February 4, 2009

A Year Later

Its unbelievable how much this world has changed in twelve months.

Last February we lived in a world where no major investment bank had failed and many were still believed to be solid businesses and excellent long term investments.

Last February Bank of America was trading at $40 a share, and Wachovia was trading at $35 per share. These are two of the largest employers in the city I currently live; Charlotte, NC. People I know here own a tremendous amount of stock in both companies.

Today both stocks trade for around $5 per share. The value of both of these stocks would currently be $0, if not for the life support they are currently on from the Federal government. They are zombie banks being kept alive to protect a financial meltdown in the derivatives market.

The people I talk to are shocked to this day at the amount these stocks have fallen. Many of them have lost a tremendous amount of their retirement money based on the fall in the share prices.

Ironically, I look at what has happened over the past 12 months with Bank of America and Wachovia as exactly what is about to happen with our country as a whole.

A bank's value is represented by its stock price. Its stock price is determined by supply and demand in the free market. People believed in the long term value of these two banks stocks only 1 year ago, thus creating prices around $40 per share. Their portfolio was not much worse than it is today, the pubilc just mistakenly believed in its value.

The value of a country is represented by the strength of its currency. Its currency value is determined by supply and demand in the free market. People today believe in the long term value of our currency. Why? Because today it is in strong demand.

I remember getting laughed at last year when I told people that I thought the investment bank's share prices would plunge in value. That they would be worthless.

I get the same reaction today when I talk about the dollar. People think it is a ridiculous concept to say that our currency is going to plunge in value. Why? Because today it is in strong demand. I believe that will change in the next 24 months.

Many of these people I speak to had 40-50% of their retirement in Bank of America or Wachovia stock. What percentage of American's wealth do they keep in dollars? What protection do they have if the perception of our currency changes in the mind of investors around the world?

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