Gold, Real Estate, Stocks and My Cynicism

A look at the history of the government's role in the real estate bubble and credit crisis and Michael's opinion on how it affects taxpayers, the economy and the stock market. Way back in 1938, Congress established Fannie Mae with the big idea of helping homebuyers get mortgages. The government followed up the act with the establishment of Freddie Mac in 1970.

The idea behind Fannie Mae and Freddie Mac was simple: increase the amount of money available for mortgages by packaging home loans into bonds and then selling those bonds to investors. Fannie and Freddie basically insured the buyers of the bonds against losses.

With very little government oversight, as time went buy, Fannie and Freddie increased the size of the loans they could guarantee on a single property to $729,750. In time, these two government-sponsored companies came to own or guarantee more than half of all the residential mortgage debt in the U.S.

The government unwittingly brought interest rates to record lows in the summer of 2004, when a real estate bubble the size of which America had never seen was created. When it burst in 2006 and 2007, Fannie Mae and Freddie Mac fell to their knees. In fact, the government took both into what is called “conservatorship” in 2008.

Today, we have different parts of the government giving us different estimates on how much Fannie Mae and Freddie Mac have cost taxpayers since the credit crisis began. The U.S. Treasury says $169 billion. The Federal Housing Finance Agency says that the number will be between $142 billion and $259 billion. All I know, from what I see from their most recent financial reports, is that Fannie and Freddie continue to bleed red ink.

So, as a taxpayer, the taxes I pay the government from my hard-earned money could theoretically go to pay the mortgage on my neighbor’s house, because he defaulted on his mortgage and it was a Fannie-Mae-insured mortgage. You see, somewhere along the line, the Constitution was changed so that I have no right to say what our politicians can or cannot do with the taxes I pay.

Hence, how can I not be a cynic? How can I not help but be a contrarian in the stock market? Most importantly, how can I not be a gold bug?

Michael’s Personal Notes:

I have a problem with idea of the New York Stock Exchange (NYSE) falling into foreign hands. The NYSE is an American institution that has for years been the marketplace where stocks of the world’s biggest companies could be bought and sold. To me, the NYSE is the epitome of entrepreneurialism in America.

While I doubt it will be opposed, I hope either the U.S. Justice Department or the SEC, which needs to give its blessing for the deal, say no to the takeover of the NYSE by Deutsche Boerse AG. Foreigners own about 50% of all our debt securities. The Chinese have been increasingly heavy investors in American corporations, most recently moving into our banking system.

Now we will have a German-based company taking control of the NYSE. Little by little, America is being eaten away at by foreigners and we are just letting them get away with it. At the rate of foreign acquisitions in this country, as China becomes more powerful as the years pass, our most important assets will be owned by foreign interests…and our politicians just sit by and let it happen.

In Canada, the government has opposed many proposed foreign acquisitions of assets, because they are not in the best interest of the country. Foreign acquisitions of companies engaged in industries ranging from telecommunications to natural resources have been vetoed by the Canadian federal government…and the country is no worse for wear because of it. In fact, it is one of the strongest economies of the G7.

Where the Market Stands; Where it’s Headed:

The Dow Jones Industrial Average opens this morning up 6.1% for 2011. The bear market rally that started in March of 2009 continues riding the wall of worry higher. I still expect stock prices to rise in the immediate term, but remain very concerned about the short- to longer-term outlook for stocks, with long-term interest rising and investor optimism returning.

What He Said:

“I personally expect the next couple of years to be terrible for U.S. housing sales, foreclosures and the construction market. These events will dampen the U.S economic picture significantly in the months ahead, leading to the recession I am predicting for the U.S. economy later this year.” Michael Lombardi in PROFIT CONFIDENTIAL, August 23, 2007. Michael was one of the first to predict a U.S. recession, long before Wall Street analysts and economists even thought it a possibility.