It may no longer be true that when America sneezes, the rest of the world catches a cold. But America is still the biggest economic kid on the block and its economic actions still affect the world.
The lax lending standards in the American mortgage market (not exclusively subprime); its on-loading to other holders through derivatives (CDOs, etc.) and its liberal funding by the imprudent leverage taken by un-hedged hedge funds, has percolated around the world.
Today, Bloomberg reported that, "Macquarie [Bank Ltd.], Australia's largest securities firm, fell the most in five years after saying investors in some of its funds may lose as much as 25 percent of their money. Bear Stearns Cos. blocked investors from pulling money out of a fund, sending U.S. share futures lower."
[Editor's Note:12 Ways to Recession Proof Your Portfolio]
Another Bloomberg article describes how, "Stocks dropped worldwide" on the above news from Bear Stearns and Macquarie.
The first Bloomberg article continues by quoting Hans Kunnen of Colonial First State Global Asset Management as saying, "Issues once specific to America are now flowing through to the rest of the world."
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Bloomberg goes on to describe how, "Mizuho Financial Group Inc., Japan's second-biggest lender by assets, tumbled after saying first-quarter profits fell by half."
Meanwhile, back home in America, the S&P broke through an important price-support level of 1,454. This will likely trigger certain computer-driven sales programs. It has already triggered some nervous volatility. As we write it stands at 1,448.3.
In the past half hour the shares of many homebuilders, particularly Beazer (-40 percent), have fallen by between 21 percent and 37 percent.
Meanwhile, Bloomberg reports that in Europe, "the risk of owning European corporate bonds soared."
Only 12 days ago (July 20), the U.S. Treasury Department said, "The recent woes in the subprime market appear to be contained and do not now threaten the broader financial system."
Who were they advising? The answer, of course, is no one. They are merely trying to bolster confidence as they can foresee the implication of a loss of confidence.
In our view, the snippets of news of a serious problem are not evidence of a domestic matter, restricted to a very small part of an insignificant sector of the American real estate market.
[Editor's Note:The Mother of All Financial Disasters]
As we have pointed out before and in our sister publication, Financial Intelligence Report, this is part of a massive problem and is not restricted to the United States.
In short, the laxity of lending, use of derivatives (some sources say now a total of some $493 trillion), and the abuse of leverage around the world led to the creation of massive worldwide liquidity and a boom in worldwide growth and in asset prices.
Today, we are witnessing a struggle between world growth and world credit and a growing crisis of confidence.
If confidence is shaken, it risks a serious contraction in world credit and then in world growth. If that were to happen, we will see a major fall in world stock markets.
Editor's note:
12 Ways to Recession Proof Your Portfolio
The Mother of All Financial Disasters
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