The Most Important Event of 2008
Wednesday, July 23, 2008 | Robert (rrmour) Is this Spam?This week has investors talking of a market bottom. I don’t believe we have seen a bottom at all. Fannie Mae and Freddie Mac are the principal drivers of this assumption. Today July 23, 2008 congress will make one of the most important decisions in the history of this country.
If foreign investors who basically finance the US’s toxic deficit do not approve of our housing rescue plan, the results could be catastrophic. Foreigners hold 800 billion and 600 billion in Fannie and Freddie bonds respectively. Fannie and Freddie are leveraged 50 to 1. They have 100 billion in cash for the 5 trillion in assets they have guaranteed. That is astronomical. The Saudis are looking to divest from the dollar. Abu Dhabi wants to remove the dollar peg from their currency. The Chinese are looking to make bond deals in EUROS. The US bond holders and USD holders want answers and solutions.
This will be the single most important event in 2008 and arguably the last 50 years. The current bailout proposed will allow Fannie and Freddie an unlimited line of credit over the next 18 months and will allow the government to purchase stock if necessary to keep the companies afloat. The bill will also allow us to increase our national debt limit to 10.5 trillion dollars. The plan will bailout thousands of homeowners being forced into foreclosure. It will allow 15 billion in tax breaks for home purchasers and property tax deductions for current home owners. This plan sounds wonderful until you ask the question - where will this money actually come from? That important aspect is currently being ignored.
I believe we are just propping up our entire financial system yet again with no real solutions. We are providing cheap money again just as we have over the last 20 years. This will have positive short term affects but negative long term implications on our currency and credibility. It’s very similar to the artificially low interest rates that created the fallacious housing boom over the last 6 years but on a much larger scale. We cannot continue to indebt ourselves and expect to retain the world’s largest economy. We have entirely too many obligations that, at this very moment, will never be repaid.
The only real way for the government to generate revenue is through taxation. Is the country currently able to withstand tax increases on the overleveraged consumer who is struggling to fill their gas tank? We all know the answer to that question. I will address this topic and provide possible solutions at a later time.
I am not trying to scare anyone here. I am presenting facts that all must be aware of. In my opinion this is the most important period of time in U.S. history.
This begs the question, what should one do? I like the healthcare sector or high yield public utilities as a safe haven. I like foreign currency investments such as the Chinese yuan and the Brazilian real. These can be purchased through ETF’s and are great long term plays. I also think buying gold and silver on price dips is a good idea. If you are going to buy U.S. based stocks, the company must have a strong international business base.
