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Foreign Investors Bail As Paulson States The Obvious

Today we have a case of foreigners pulling the rip cord, and Treasury Secretary Hank Paulson stating the obvious: Housing stinks and it's getting worse.

Foreigner investors in August dumped U.S. stocks at a rate nearly four times greater than in any other one month period. August was the period of peak turbulence for markets. The Treasury International Capital report, an often times overlooked report, shows that investors sold $40.6 billion, the largest monthly outflow from stocks ever.

This compares to an inflow of $21.2 billion into stocks in July. The previous record outflow was $11.5 billion, set in September 2001. The total outflow from U.S. long-term securities was $69.3 billion, the largest amount since 1990.

Why do we care? The decline in the dollar has been accompanied by a lot of parallel chatter about foreigners pulling money from Treasury securities. This report shows that when things go bad, money gets moving.

Asian governments have also threatened to reduce dollar-denominated holdings, particularly China which wants to diversify its holdings. "It shows that foreigners don't have an insatiable appetite for everything that is dollar denominated, These are big negatives," says CNBC's Rick Santelli.

China in August sold $6.8 billion of Treasuries, its fourth sale in five months, says Tony Crescenzi of Miller, Tabak. Its holdings now total $400.2 billion. "Japan's $24.8 billion sale of U.S. Treasuries stands out," he said. Japan has been paring its holdings and now has $585.6 billion in U.S. securities from a peak of $699.4 billion in August, 2004. "It is intriguing amid these figures to note that despite Japan's pullback from the U.S. Treasury market, Treasury yields have stayed relatively low," Crescenzi writes.

Now It's Real
There's nothing new in Treasury Secretary Hank Paulson's comments on housing except for the fact that he said it. Paulson spoke on housing today and his comments right now, lead most news web sites, including this one. Certainly though Paulson was more sober on housing than he's ever been. We certainly remember when he thought the subprime mess was contained.

"Let me be clear, despite strong economic fundamentals, the housing decline is still unfolding and I view it as the most significant current risk to our economy," Paulson said. "The longer housing prices remain stagnant or fall, the greater penalty to our future economic growth."

That seems to be a reasonable comment because certainly the housing slump and its cousin, the credit market's subprime tsunami would be the biggest worries out there. On Monday, Fed Chairman Ben Bernanke said the slumping housing market remains a significant drag on the economy.

You know those home builders are feeling the pain, besides in the stock market today. Home builder sentiment hit a record low this month. The National Association of Home Builders index fell two to 18, the lowest reading since the gauge started in January, 1985.

Questions? Comments? marketinsider@cnbc.com

  • Patti Domm

    Patti Domm is CNBC Executive Editor, News, responsible for news coverage of the markets and economy.

  • A CNBC reporter since 1990, Bob Pisani covers Wall Street from the floor of the New York Stock Exchange.

  • CNBC Senior Commodities Correspondent and Personal Finance Correspondent

  • JeeYeon Park is a writer for CNBC.com. Follow her on Twitter: @JeeYeonParkCNBC

  • Rick Santelli joined CNBC Business News as an on-air editor in 1999, reporting live from the floor of the Chicago Board of Trade.

  • Senior Producer at CNBC's Breaking News Desk.