Saturday, November 28, 2009

Dissecting the Dubai Debt Crisis and Its Deeper Meaning

The first item to keep in mind is that the Dubai debt crisis is the result of the continued lack of liquidity in the financial system. The system as it stands can not support the old capital goods structure that was created by past money printing (Led by the Federal Reserve). As I have exhaustively pointed out, despite a supposed Federal Reserve policy stance of "quantitative easing", the money supply for all practical purposes has been flat since February. A flat money supply after years of money printing is simply going to continue to result in the liquidation of past investments where the money is simply not around to complete and maintain various projects based on the old capital structure.

Dubai is nothing but the latest evidence of this. These things don't happen during a central bank induced money growth period. Thus, the first lesson to take home, and to take home NOW, is that the recent stock market run is extremely vulnerable to collapse. The market run must continue to be viewed as knee-jerk dead cat bounce (with a Fed money printing kicker from Sept. 08 to Feb. 09) from the panic period during the Summer of 08, nothing more. The noted lack of strong volume in the current stock market climb is further evidence that this is not a strong market move. Any downside action could thus be fast and furious.

Of further note, is the activity of gold on first word of a halt in Dubai payments. Gold dropped nearly $45 per ounce. As I have consistently said, gold generally does not perform well during a period of slow money printing. The belief that gold always goes up in every crisis is a myth. The climb in gold during the Great Depression was a manipulated climb implemented by FDR at the instigation of John Maynard Keynes and Bernard Baruch, for their personal profit. Gold will go up during an inflationary crisis and will also go up in a panic if there is expectation that this will lead to government money printing. But it is extremely dangerous to be trading gold from the upside during a general period of panic. (Long term gold holdings are another topic--those positions should, in most cases, not be sold).

As for the Dubai crisis itself, speculation is rampant as to whether Abu Dhabi will step in to help out Dubai, and why Abu Dhabi didn't do so to prevent the crisis in the first place. Chief reasons as to why Abu Dhabi didn't step in initially range from (1)Abu Dhabi wanting to teach Dubai a lesson re: its free spending ways to (2)the problem is much deeper than the $60 billion that has surfaced.

Will Abu Dhabi step up to the plate now to bail out Dubai? That's a question only insiders know. If they don't step up, then the question becomes who is stuck with the $60 billion?

At most, HSBC And Standard Chartered control roughly $16 billion of the debt. That leaves $44 billion buried elsewhere. With that amount out there, the possibility of an entity or two taking a sizable hit is real, but in the grand scheme of the global economy, not something that is going to collapse the financial system. That said, the subsidiary with the current problem, Nakeehl, is only one tentacle of Dubai World. If DB itself had cash floating around, it is likely they would have floated it to Nakeehl, that they didn't indicates that DB overall is strapped for cash.

In addition to Nakheel, DB is

DP World, which is the Global Ports operation--not likely doing well in this period of slowed international trade.

Economic Zones World which is the global provider of sustainable industrial and logistics infrastructure solutions including the development and operation of economic zones, technology, logistics and industrial park--again not likely doing well at present

Dubai Maritime City still being constructed was planned to be the first ever purpose-built hub for maritime business and commerce.

Drydocks World is the leading and expanding international player in ship repair--again, likley sloed by less international trade.

Limitless is a global, integrated real estate master developer. Uh, real estate developer?

Leisurecorp an emerging golf company.

Istithmar is an investment company. Its investment portfolio comprises over 50 compaies.

Dubai Multi Commodities Trading brings commodity trading to Dubai.

Dubai Natural Resources World was established as a new business unit of Dubai World in September 2008. Its mandate is to build a diversified portfolio of strategic long-term investments in natural resources. Areas of interest include energy, mining and metals, and agriculture.

So there you have it, it is more disturbing that DB itself couldn't step up to the plate and fund any shortfall at Nakheel from these other operations. Does this mean there are cash flow problems through out DB that will surface at a later date? Or is DB simply trying to protect the remainder of its portfolio by letting Nakheel take a hit? Time will tell.

But, I repeat, the lesson to be taken out of the Dubai Incident is that liquidity remains tight through out most of the world (perhaps not China). The Dubai incident, may or may not morph into something bigger, but there are likely to be other minefields around the globe. This is not the time to be long the stock market. Dubai could be the first domino that starts the descent into a double-dip recession.

1 comment:

  1. Your repeated predictions of a stock market downturn may eventually become true but identifying precise cause and effect relationships in the economy on a real-time basis is simply not possible...nor is it necessary.