The economic and business landscape for 2008 is being reshaped as the election campaign approaches its final week and there’s nothing Kevin Rudd or John Howard can say or do to change things.
The head of the big US bank, Wells Fargo, yesterday laid out what he saw happening during 2008 in New York, comments that were later matched by gloomy commentary from two big US retailers: 2008 is going to be worse than 2007.
Wells Fargo CEO John Stumpf said home-equity losses are likely to increase in the fourth quarter and remain “elevated” through 2008. “We have not seen a nationwide decline in housing like this since the Great Depression,” Stumpf said at a banking conference in New York.
Remember groups like Countrywide and Washington Mutual, two other big mortgage lenders, both see the US home loan market contracting by upwards of one third, or close to $US800 billion in business, next year. So where are all the banks and other lenders going to replace that lost business?
The subprime mortgage sector represents around $US1.4 trillion of the $US10 trillion US mortgage market and the big lenders are doing very little, if any business.
Novastar, a shrinking subprime mortgage lender last year, lost almost $600 million in the third quarter and warned it faces possible collapse. It’s only the latest and the ML-Implode website now says 186 US companies in the home lending sector have gone bust or are near failure since late 2006.
Even China has said, for the first time, that there are problems for it from a US slowdown and the credit market concerns.
A Chinese Government Ministry said that a global economic slowdown stemming from problems in the US subprime mortgage market and the resulting credit squeeze “will be the biggest challenge to China’s economy next year.”
The Chinese Commerce Minister’s policy research department report indicated that the Government doesn’t support the idea that the rest of the world is “decoupling” from the US (as the argument goes in Australia)
The report is Beijing’s first public comment on what repercussions it expects from the global credit crisis. “If demand in the US drops further, Chinese exporters will be devastated by a rapid and continuous fall in orders,” the report said.
Exports now make more than a third of China’s economic growth and 10% of overall GDP, which compares to just four years ago when they contributed very little to headline growth which came from domestic activity.
That report will accentuate worries about the world economy next year. The Bank of England has already hinted a rate cut next year because of slowing growth in Britain. Some of that is due to the impact of the credit upheavals which brought down Northern Rock mortgage bank and knocked house prices lower.
US retail stocks are down 15.3% this year, US financials are down 15.6%; internationally, brokers say the falls for both sectors on non-US markets is around 6%, so the impact outside the US is still seen as not as problematic.
But the warning from the Chinese government changes that: they have a big meeting next month with US Treasury Secretary Hank Paulson, who has been leading the attack on China’s undervalued currency. By warning of the impact on China and the world economy from a US slowdown, the Chinese are returning the pressure.
Only the export sector is doing well in the US and that is benefiting from the most visible sign of the crisis: the collapsing value of the US dollar. Just look at what happened overnight and the signals now coming from the US.
Copper prices plunged 6.41%, or 21.40 USc a pound, one of the biggest falls for years, to $US3.12 a pound after it became clear that Chilean mines were not greatly effect by this week’s earthquake. And gold, which is supposed to be a haven in these times of stress, was deserted by the bears overnight, as the futures price plunged $US28.40 an ounce to $US786.30, the lowest price for some weeks. Oil prices also fell as US oil stocks rose.
And, as a sign of the nervousness yield on US interest rates fell to two year lows across the board as the market priced in full a cut of 0.25% at the December 11 meeting of the Fed. This nervousness is pointing to one thing: the outlook for the US economy in 2008 is now so uncertain, and so potentially damaging to some groups (US banks and brokers especially) that the outlook is being painted very darkly indeed.
Some commentators are now wondering if the Fed could cut deeper, such is the gloom surrounding the overall US economy after more disappointing retailing figures, a key barometer of the way consumers think. US consumer inflation hit a 14 month high overnight (remember Producer Price inflation figures the day before were fairly sedate) with October Consumer Price Index numbers out.
After this week’s brief rally caused by the higher earnings from Wal-Mart, two major US retailers, J.C. Penny and Kohl’s blamed the subprime problems and housing crash for impacting sales and the outlook for 2008.
Unlike Wal Mart which markets to lower income groups, Pennys and Kohl concentrate on the middle class and sell mostly softgoods and non-food items.
Barclays, Britain’s third-biggest bank, revealed $US2.7 billion on credit-related securities tied to the US subprime-mortgage market collapse but because of higher revenues and earnings from other parts of the bank, lifted its result and is confident about the outlook.
Barclays shares had fallen 12% this month as investors criticized it for not disclosing the extent of losses following the five-month rout in the $US6 trillion market for US home-loan bonds. The company said it would not update shareholders until later this month.
UBS, the Swiss financial services giant, will take a multibillion write-down due to risky debt holdings linked to the deteriorating housing market. The Wall Street Journal reported on Wednesday that “expectations are growing” that UBS will take a charge of as much as $7.1 billion (eight billion Swiss francs) in the fourth quarter. The losses stem from complex investment vehicles that are tied to the home mortgage crisis and have fallen sharply in value in recent months. UBS has already taken a similar charge of 4 billion Swiss francs
Three of Japan’s biggest banks have also revealed sharp falls in first-half results and cut their full-year profit forecasts because of losses related to subprime mortgages. The announcements from Mizuho Financial Group, Shinsei Bank and Aozora Bank caught Japanese investors by surprise.
And, Citigroup, America’s largest bank by assets, has paid a high price for its current woes with investors forcing it to lift interest rates sharply on a big bond offering.
The bank sold $US4 billion of 10-year notes at the highest yield relative to benchmark interest rates in the bank’s history. According to US market reports the bank sold the bonds to yield 1.90% more than the equivalent US Treasury bond, compared to a margin on a similar offering three months ago of 1.18%. Bloomberg said it had not been able to find any evidence of Citigroup paying a risk margin that high before.
That’s why investors are so worried about what is going on in US markets. When a bank as big and as important as Citigroup has to pay a margin of close to 2%, or one third more than the equivalent US Government security, there’s an awful lot of nervousness in the air.
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