Paulson: sub-prime mortgages
problem is 'containable'
Posted on 07/24/2007 8:38:04 PM PDT by bruinbirdman
The dollar has tumbled to its lowest level ever against the euro and to a 26-year low of $2.06 against the pound as financial turmoil sent US markets tumbling to their worst day’s performance in over four months.
US stocks were left spiralling along with the American currency on fears of broader economic contagion from the sub-prime property slump.
The benchmark Dow Jones Industrial Average plummeted 226.47 points to 13,716.95.
The fall caused London markets to tumble dramatically late in the day. The blue chip FTSE 100 fell 125.7 points to 6498.70, while the FTSE 250, which consists largely of UK-based firms rather than multinationals, plummeted 198.20 points to 11,584.
So deep were the concerns about the fate of the US economy, the biggest single engine of global growth, that markets brushed aside US Treasury Secretary Hank Paulson's attempts to allay fears of a sharp US downturn, and reassurance that a “strong dollar is in our nation’s interest”.
Paulson: sub-prime mortgages
problem is 'containable'
"There has been a very significant housing correction. I think we're at or near a bottom there. I don't deny there's been a problem with sub-prime mortgages but it's quite containable," he said.
The closely watched DXY dollar index broke through a crucial support to fall through 80 for the first time since 1995, raising the risk of a disorderly rout as foreign funds pull their money out of the US.
David Bloom, currency chief at HSBC, said the dollar had fallen victim to growing fears of a US credit crunch, and likely knock-on effects through debt markets. "Foreigners have made a $2 trillion bet on US credit and now they're discovering it's not as good as they thought," he said.
Mr Bloom said hopes of a brisk US recovery after the winter slowdown were "melting away" as the housing slump continued to hinder consumer spending power. "The concern is that this could spread into equities, which have been insulated so far. Then we have a major problem," he said.
The real spark for concern in equity markets was news of a 33pc fall in quarterly profits at Countrywide Financial, the largest US mortgage lender, which also slashed its full-year profits outlook.
USG, the world’s largest seller of gypsum wallboard for home building, gave a similarly gloomy housing outlook.
JP Morgan added to jitters with a warning that US house prices could fall 15pc during the next two years as interest rates on mortgage "teaser" loans adjust sharply upwards, triggering further waves of defaults. It said the damage would continue to spill over into the wider credit markets, where spreads on high-yield debt punched up to two-year highs yesterday.
It usually takes months before widening credit spreads start to infect equities but there were signs yesterday that this may be drawing closer. Daniel Stillit, an economist at UBS, said the squeeze in the loan markets would end the craze for jumbo takeovers by private equity groups armed with debt, which have pushed up stock prices. "Deal sizes are being scaled back, with far-reaching implications for equities," he said.
The pound and the euro have taken the brunt of the dollar's slide since the Chinese yuan is fixed to the greenback by a crawling peg, and the Japanese yen has been held down by rock-bottom interest rates. The failure of Asia to play its full part in the dollar adjustment is causing major imbalances in the global currency system. It has already prompted protests from French president Nicolas Sarkozy. Although sterling touched a high of $2.0650 against the dollar yesterday, it hardly moved against the euro. Roughly 65pc of UK exports go to Europe, which is enjoying a mini-boom. As a result, much of British manufacturing has been sheltered from the strong pound so far.
But the first signs of stress among exporters are starting to appear. The CBI's industrial trends survey released yesterday showed a sharp fall in orders from +8 in May to -6 in June. It said export orders had fallen "noticeably" for the first time in 18 months.
"UK exports had been resolute in the face of a strong pound but a combination of a slower US economy and sharp increases in the price of oil, commodities and freight is beginning to tell for exporters," said Ian McCafferty, the CBI's chief economist.
Heck "bruinbirdman" has more than 16,000.
yitbos
Ambrose is a very reputable reporter, but the sources he quotes don’t make sense to me. The dollar is weak when there is too much liquidity, yet the fear of a credit crunch is stated as the cause. U. S. monetary policy is definitely at fault, and it’s causing a loss of confidence in the dollar IMO.
I don't think "reputable" and "sources ... don't make sense" go together.
He wrote a good book about Clinton. He reports well from Europe. I think "business" is not his forte. Maybe National Enquirer.
yitbos
We’re DOOMED! /sarc
___________________________________________________
That might be so....but my dollar isn’t buying what it use to. I see inflatation.
If the euruble is so strong, why do the Eurostani markets follow US markets? They should lead.
FTSE = UK
DAX = Deutschland
CAC = Frogland
NIKKEI = Japland
Hang Seng = King Kong
7/24/2007
yitbos
Does character count yet?
yitbos
A little inflation is good...keeps people from just stuffing money into their mattresses.
A bad thing would be DEflation. Home prices plummeting, salaries falling, that sort of thing.
In the mean time, enjoy cheaper prices on telephone calls (some phone calls from the U.S. to international destinations were once $12 per minute back in the 1960's!) and lower priced computers, music, and movie DVD's.
Sounds like deflation. A gig of memory cost $50 bucks 15 years ago.
I know one thing. I am better off now than I was 30 years ago.
yitbos
Its amazing to me that this has been going on for two and one half years with no one taking much notice....except for those who have to spend their US dollars internationally.
There’s no endless sales market for a cheap dollar america.
Think about investment goods.
There are goods that come from a single source that now rise in price.
Germany e.g. (i live there, maybe it’s a bad example here but that’s one I know quite well) has an increase in export orders of 9% last 3 month - allthough the dollar is high. BASF is increasing commodity prices for chemicals every month and extending capacity - all a high dollar will cost them is a bit of earning before interests and taxes.
China certainly will change some reserves from euro to dollar and that’s gonna bring down their US exports business - but to what degree ? There’s vast leeward space between the costs for chineese products and american products - if a cheap dollar should cause them trouble then it has to fall more then just 50% against the renminbi.
As opposed to ancient times Europe can sell it’s products against euro in russia and brasil - india and china are to follow.
If I have a glance at the DJ companies many of them are not only selling overseas but mainly produce overseas - so the
production costs will be paid partialy and to a growing degree in non-dollar currencies.
Good example is Boeing - they have long term contracts - but they cannot afford their contractors to go belly up - so what are they going to tell japanese manufacturers of the 787 wings if the dollar tanked against the yen ? They have to raise prices so a fair salery for their contractors can be offered.
Maybe they can shift production inside the US - but they will lose the advantage of binding customers via work packages and loose the buying power for foreign technologies.
Do I interpret wishful thinking there?
yitbos
“Ok, well I give up! You’d probably try to tell me that’s some verbal greeting as part of a secret handshake of NSA guys/gals for special evesdropping corps of the Bush/Cheney administration, or somethin like that.”
It’s a dumb fraternity thing.
see http://www.answerbag.com/q_view/10189
Well I agree in the main, but the sub=prime problem is going to cause some serious damage. We are about two years out on a reconciliation of this sector of the market, I think.
LOL
The Roaring 20s were a depression?
Kind of odd, although not unexpected, to see this headline after the dollar has been sitting a couple weeks at a level and is up slightly against the Euro today.
I’m surprised at Ambrose’s biased reporting on the US economy. Now I have to wonder at the quality of his Whitewater investigation, much as I enjoyed it at the time.
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