US Economic Problems on the Horizon
Today’s big news is that Fannie Mae and Freddie Mac stocks are crashing down. Fannie Mae and Freddie Mac are the largest lenders of home mortgages in the country. As home owners fail to pay their mortgages, lenders lose money.
As I write this, Fannie Mae is down 30% today. The image below is the stock price over the last year. It went from 70 to 7. That is a loss of 90%.
This stock chart teaches many lessons. The most obvious is that the future is not difficult to predict. The US housing market has been in trouble for years. It is common knowledge that lenders were selling loans that they knew their customers could not pay. That is why they gave them teaser rates that would readjust after a year or two. And, the customer knew they couldn’t pay as well, but they didn’t care. The consequences of not being able to pay their mortgage were in the distant future, and the pleasure of having a new house were in the present.
Another lesson is the lag in the chart. It has been clear that the US housing market has been in a bubble for years, but it the above stock only went down in the last year. Why did it take so long to see the results? Because the stock is a representation of the value of a company in the near term future. It does not represent the value of the company in 6 months, a year, or more.
For the executive team of most public companies, their top concern is hitting their numbers for the next quarter. This means they want to make their sales and profit projections for the next three months. Three months! This causes most public companies to make their decisions based on what will generate the greatest short term profit.
The catch is that what is good in the short term is often detrimental in the long term. This applies to both large companies and individuals. We all know that the apple is better to eat for our bodies in the long term, but we usually choose the chocolate because it tastes much better now! Its the same story for the home owner that leaves their future problems unsolved because they can get a new house now.
And, there is a final, more powerful and interesting lesson to be learned. I believe that the US housing market problems are just beginning. Things are going to get much worse for our economy, before they get better. More lenders will either declare bankruptcy or be saved by the US government. But the government is only spending the taxpayers’ money, so this merely pushes the problem further into the future. More people will fail to make their house payments.
The lessons of both history and the future are available for all to see. The question is, who will see the lesson and learn.
Related posts:
- US Economic Problems on the Horizon: Part 2
- Are the Country’s Economic Problems too Big?
- Is the Economic Crisis Over?
- Don’t Believe the (Economic) Hype
- Housing Market Continues Decline
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