8/7/11: August and the Economy Part 1 – Macro Market Perspectives from Two Mega Players

The aftermath of the debt ceiling vote and the subsequent S&P downgrade just adds to the drama surrounding the U.S. economy.

When you add the European debt crisis, talk of a QE3 on the heels of QE2, plus gold prices hitting record highs – it’s certain August 2011 will be remembered as a time when the entire world focused on economics.

Real estate investors from Mom and Pop to REITs are watching carefully to see what will happen with interest rates, taxes and job creation. The difference is that the mega players have huge research departments and access to the best information and analysis.

Wouldn’t you like to know what the big players are thinking? The Real Estate Guys™ are here to help!

We travel the world to capture the interviews you won’t hear anywhere else. We’re dedicating the entire month of August to bringing you insights and perspectives from economists, scholars, fund managers – and even a few politicians!

At the microphones for this exciting first installment of August and the Economy:

  • Your hot August host, Robert Helms
  • Your not so cool co-host, Russell Gray
  • Special guest; U.S. Global Investors CEO and Chief Investment Officer, Frank Holmes
  • Special guest, Renowned Market Analyst and Editor of The Wellington Letter, Bert Dohmen

This is an episode you’ll want to listen to more than once – and probably with a note pad.

Frank Holmes oversees over $3 billion (with a “b”) of assets and 4 of his funds are in the top 25 best performing.  We think that means he’s qualified to have an opinion about economic issues.  Of course, his focus is stocks and bonds, but we’ve learned that the stock, bond, commodities and real estate markets are all interrelated. The mortgage meltdown and subsequent (and unprecedented) decline in U.S. real estate values was directly tied to what was happening in the bond market.

Bert Dohmen is a renowned market analyst with over three decades of experience.  More importantly, he boasts an impressive track record of having accurately predicted the start of every recession over the last 33 years.  We asked him his secret and he answered, “Technical analysis”.

Really?  Our friend Robert Kiyosaki (who’s agreed to join us live and in person for the entire week for our 2012 Investor Summit at Sea™) has been talking about the importance of technical analysis for real estate investors.  So it’s something we’ve become very interested in.   Watch for more on this topic in the weeks and months ahead.

For now, listen in and discover what some of the biggest brains in the business of managing money think about where we are, where we’re headed and what’s likely to happen next.

Listen Now:

The Real Estate Guys™ radio show and podcast provides real estate investing news, education, training and resources to help real estate investors succeed.

The Mortgage Meltdown and Healthcare

What do these two topics have to do with each other?  Well, certainly after the mortgage meltdown the US economy is in need of health care.  Not reform.  Just getting healthy!  But that’s not the topic of this post.  Instead the question is: What lessons from the mortgage meltdown can be applied to the health care debate?  And, as a real estate investor, why should you care?

Without going into an extensive history lesson, here’s a quick recap of the mortgage meltdown:

  1. Government decides to “help” the free market for mortgages by establishing Fannie and Freddie to buy mortgages in the secondary market.
  2. Assured of a buyer for their mortgages, mortgage originators aggressively market them.  They sell it silly.  People buy houses. Values go up and more people buy. Equity happens and life is good.
  3. Private industry sees opportunity and wants to play, but find themselves competing against the “Government Sponsored Enterprises” (GSE’s) Fannie and Freddie.  Mortgage rates are dictated by risk and the implied government guarantee of Fannie and Freddie means mortgages that “conform) (i.e., conforming loans) are cheaper than private industry.  Of course, the consumer will buy the cheaper loan.
  4. Private industry expands into “non-conforming” (i.e. Jumbo, sub-prime, etc) in order to be in the mortgage business without having to compete directly with the GSE’s.  They make money.
  5. In 1999, the Clinton Administration says, “Fannie and Freddie, you need to make it even easier for people to get home loans”, which is code for “lower your standards”.  Fannie and Freddie comply.
  6. Home ownership surges under George W. Bush.  He’s an economic genius.  Home values soar.  Private industry says, “I want some more!” and recruits foreign investors to plow money into “super safe” mortgage backed securities.  The money is directed at sub-prime, alt-a, investors, jumbo, etc.  Now equity is REALLY happening!
  7. Reality sets in.  People who shouldn’t have gotten loans do what people who shouldn’t have gotten loans do: they default.  The sub-prime crisis sets off a chain reaction of well chronicled events that set off The Great Recession.  As a result, the private mortgage business is almost wiped out.  Fannie and Freddie survive on the backs of the taxpayers (the working private sector).

Obviously, there’s a lot more to the story, but what are the lessons?  Here are two of the most important ones:

1. In a capitalistic society, the objective of enterprise is to make a profit.    It’s what motivates the brightest people to work hard and sacrifice to create solutions to society’s problems – solutions that can be sold for a profit.  Profits are what allow people to pay taxes, give to charity, invest in product development and new enterprises that create jobs and enrich society. Profits are not evil, they are essential.

2. When the government, though well intentioned (giving it the benefit of the doubt) enters into competition with private industry, with the goal of making a product or service “more affordable”  (code for reducing or eliminating those evil profits), the result is a) private industry is crushed, taking its jobs with it; or b) private industry is forced to compromise sound business practice in order to survive (like loaning money to people who can’t afford to pay it back) and eventually those unsound business practices result in failure – and the loss of jobs.

And the correlation to healthcare?

The President of the United States has gone on record as stating that one of the “benefits” of a public option is to create a health care insurance program “without a profit motive” to compete with private industry.  When you follow that thought track to its logical conclusion, does anyone see a train wreck?

When you think about how big the health care industry is, you can imagine how many private sector jobs would be lost if it were to melt down too.  And since the private sector economy is the one that pays 100% of the taxes, the smaller it gets, the larger the tax burden will be on those who remain.

Loss of private sector jobs and higher taxes have a DIRECT impact on your real estate investments. When more private sector capital is sucked into government, there is less of it available for private purposes. And what is available becomes more expensive (higher interest rates).

So even though “homes and healthcare for all” are noble and compassionate causes that everyone can support, the methodology of undermining the private sector to accomplish them is counterproductive in the long term IF one is operating in a CAPITALISTIC society.

There is no debate about whether we all want people to have homes, healthcare and abundance.  We all want that.  The debate is whether or not we are committed to capitalism.  If we are (and you should be as a real estate investor), then the solution will be found in the private sector as entrepreneurs work every day in their “enlightened self-interest” to invent, build and sell homes, health insurance, health services and whatever other products or services enhance the human experience.

Diesel engines run great on diesel fuel. Regular gas engines run great on regular gas.  But when you put diesel fuel in a regular gas engine or vice versa, it might run for a little while, but it won’t run well.  Eventually, it will break down and not work at all.

Until someone re-writes the Constitution of the United States, the US is a capitalistic society.  Let’s be careful about injecting incompatible “fuel” no matter how noble the motive.