Thursday, November 26, 2009

When it seems to good to be true...

Dubai Fantasy World is collapsing. Carry trade bets on emerging markets are rapidly retracting, sending the yen spiraling. European and Asian markets, especially Asian banks, are seeing as much as 5% haircuts. And we're eating turkey.

We may as well be. If everyone could just sit back and reflect on the fact that Dubai was such a bizarre phenomenon perhaps we could put this in perspective. It's not that easy, however, since once again the whole world, bankers almost everywhere, except perhaps the U.S., took big bites of this hook. The media completely bought in with "60 Minutes" leading the way with their adoration coverage. This should be a contained event but if it expands into a "we no longer trust ourselves syndrome" this could be a longer lasting follow on of the global credit crisis. It shouldn't be a major event, but this weekend will be a head scratcher and a shirt sweat in the financial markets.

There is nothing like Dubai anywhere. There are the random magnificent towers in Malaysia or Taiwan and the long built glamorous hotel glut in Thailand but they are not systemic to the region. China of course has overbuilt in maybe a spectacular way but most of it was for a reason, that reason being the expansive growth in the country's economy. If there are, and there will be some, adjustments in China it will be like the see throughs in the U.S. in the '90-'91 U.S. recession, meaning they will all be filled in three or four years.

Dubai is different. It seems to have been built for excess, wealth, pleasure, pride, and grandeur and for no other reason. Of course it aspired to life as a financial and banking center as well. It was built as an oasis for Arab wealth, an alternative from London, Geneva, and Zurich, post-modern splendor, a Las Vegas without gambling or overt sexual attraction, a worldwide travel destination for conspicuous consumption.

The architecture is indeed intriquing and the vision spectactular in some ways. Built on the backs of almost slave labor from throughout southwest Asia and the middle east it still provided "send home" wages that were attractive to the workers, not unlike China and the workers from the provinces. The Chinese, however, are making saleble goods and building offices and factories as well as hotels, and Dubai was building nothing with long term productive power for an entire country. Las Vegas is not the United States, Dubai was becoming the United Arab Emirates.

It is likely that this has been the reason for the continued decline in U.S. Treasury rates in recent weeks. Hands on people in the markets know what's in the works and accepting no interest on short term U.S. treasuries was a fine deal if the credit markets were going to be under attack again. The radar here at ENS was good, the information was not available.

Has some major European or Asian bank written excessive credit default protection against Dubai World debt. Have some powerful and aggressive investors bought that protection as a bet well beyond their holdings. Is there an important financial company - bank, insurance, or investment - that decided to hold significant Dubai debt that accountants will haircut. All of that will be sorted through in the next few weeks, and with a lot of luck the immense wealth of the U.A.E. will somehow come to the rescue while the markets will see Dubai as a unique and relatively contained painful event.


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