Dubai is delaying payment on its debts and that has sent stock markets around the world lower. This could be a trigger that reverses the remarkable bear market rally that has taken place since March.
Dubai was also the location of the crisis signal in the Skyscraper Index in August 2007. Things have become increasing less optimistic in what was considered a “magic kingdom” for the success of remarkable construction projects.
==========================
PREVIOUS POST
==========================
Bye-bye Dubai?
September 14, 2009 4:42 PM by Mark Thornton (Archive)
Dubai in the United Arab Emirates is where the last signal was given by the Skyscraper Index. In August of 2007 it gave a “sell signal” for a global economic crisis when the Dubai Tower surpassed the previous record height for a skyscraper. It seems not only the signal but the impact of the crisis is now being felt there. Bloomberg reports that the Dubai Fund which is the city-state’s sovereign wealth fund is in serious financial trouble.
This story relates to Dubai Sovereign Wealth Fund.
My original article on Skyscrapers and Business Cycles is here.
{ 13 comments }
Just wait until Washington DC “delays” payments
I was wondering why the price of gold is falling. This could get ugly.
Sounds like a good reason to buy even more gold.
My guess: Gold plunges because
1: A large part of gold speculation is done to counter money and credit expansion. Deflation reduces that necessity to a certain extent.
2: Many will have to sell some of their gold in order to pay debts
I expect “Western” (ECB, Fed, Swiss, BoE perhaps the Japanese) to rush to the rescue together with the IMF, no matter what. Right now they cannot afford a single country to default on its debt, especially “rich” countries like Dubai. The next in line could be Japan and if Japan defaults its debt even partially… God help us all. Then it could be the US, Spain, Italy, Norway, Sweden… all “rich” countries with enormous debts. The present “recovery” is completely fueled by deficit spending and if investors, be them Asian central banks, funds or individual investors, lose trust in bonds it’s over.
On the issue of gold I would love to get some more, I really hope the price will drop to acceptable levels to get some more coins and bullion soon.
Remember that the dollar is worthless. The only thing “backing” it is people’s confidence (in the State’s ability to steal wealth through legal tender laws and the income tax). A Federal Reserve Note is a share in the State’s ability to do those things.
“Right now they cannot afford a single country to default on its debt, especially “rich” countries like Dubai.”
I’m sorry, but I don’t get it. How are the creditors better off by giving Dubai the money to pay off the money Dubai owes the creditors. That’s the same as just defaulting!
“How are the creditors better off by giving Dubai the money to pay off the money Dubai owes the creditors. That’s the same as just defaulting!”
It’s like giving someone a second (third, fourth, etc.) chance. Instead of you having to face that he’s not going to make good, you can still hold out hope that this time he will make good, he will show that in the end, you were right to trust him.
There’s no question of Dubai defaulting on sovereign debt. Dubai World and so on are state-owned, yes, but they are limited liability, as with all private companies. The government of Dubai has no obligation to pay.
As I remember, Dubai World pays a high margin on these bonds, which bondholders were very happy with. But like any risky investment things can go sour.
DW will likely negotiate a negotiate a deferral on its interest payments.
Investors of the cheap money era are a fickle lot. They do not care where their 2% interest comes from as long as it comes into their bank accounts.
What’s important right now is to “buy time” as Shay said. Governments all over the world are well aware that GDP growth is government expenditure-driven and that is failing to defuse the unemployment time bomb. They just need time to either defer the next crisis or come up with some new scheme that will allow them to spend as much as they need without suffering the consequences.
That’s why Dubai World must be helped out: if they go “bust” they drag far too many companies with them (some of which have already been the recipients of very generous bailouts). Also DW going “bust” would probably force a much needed correction in the commodity and emerging markets pricing department. That cannot be allowed to happen right now.
And everybody knows the US and European taxpayers are the most docile creatures in the world…
Gold has already recovered all that it lost after Dubai World indicated it would default. Another immediate reaction to Dubai’s financial woes was that the dollar reversed its decline and moved sharply higher, because, as one financial-news commentary opined, frightened investors were fleeing to safety.” I wonder if they realize that their flight to safety is on a plane whose pilot, co-pilot and navigator (O, B & G) are all drunk?
Mark: “This could be a trigger that reverses the remarkable bear market rally that has taken place since March.”
I may be assuming too much, but it seems that the attitude of many Austrians toward the stock market rally is based on the idea that the stock market is tied to how well the real economy does. Since the real economy isn’t doing so well, the stock market should not be rising as it has.
However, I think this attitude toward the stock market is close to assuming an intrinsic value to stocks as opposed to a subjective value, the hallmark of Austrian econ. It’s important to remember that stocks have no intrinsic value; they are worth what people will pay for them. Sometimes people pay a lot, sometimes not so much.
The great investor Benjamin Graham understood that and opposed the fad of trying to calculate the value of a stock based on dividends or net present value of forecasted earnings. I fear that many Austrians have fallen under the spell of modern financial economics. The only factor that I can see driving stock prices is the Fed’s monetary pump. When the Feds stop pumping, then stock prices will fall, but not before then. Monetary pumping drives subjective valuation of stocks just as it does, eventually, subjective valuation of goods, as reflected in the cpi.
I think that Graham thought that earnings and dividends were very important factors, but you are right about the Fed’s pumping. However, there are limits to the Fed’s abilities as they are constrained by market forces, or what Graham might call “Mr. Market.”
My reading of Graham says that he looked primarily at price to book value and bought firms that were below book value. Dividends and price increases were icing on the cake. My own conclusion from reading Graham is that stocks in general are rarely below book value except at the bottom of a depression, such as March of this year.
The Fed is constrained by market forces in that credit can contract very quickly in a downturn, faster than the Feds can react and more powerfully than they can control. So yes, you have to keep an eye on the real economy, but not until the boom has grown long in the tooth. Until then, Fed pumping will drive the stock market.
Comments on this entry are closed.