Dubai Background

Dubai is one of 7 Emirates that make up the United Arab Emirates. Abu Dhabi, with huge energy reserves and a sovereign wealth fund thought to be worth $630 billion, is the richest of them. Its banks are major creditors of Dubai and its companies, but news that they are no longer willing to keep buying or refinancing the debt of Dubai’s major companies shocked the global markets.

Dubai and U.S. Housing Speculators Play the Same Game

Dubai has very few energy resources and raises little money via income tax due to its competitive tax policies. The state has consistently run deficits and the Emirate’s growth has therefore been funded via the money markets.

A huge property-led boom saw money pile into infrastructure and construction projects (sound familiar?). Similiar to being on the cover of Sports Illustrated, building the world’s tallest building has always been viewed by investors as a sign that a local economy is about to head south.

Dubai World, the most indebted of Dubai’s state-sponsored companies, owes $60 billion of which $22 billion must be refinanced by 2011.

Worries About Impact Of Dubai Crisis Generate Substantial Selling Pressure

The U.S. stock market opened sharply lower (down roughly -3%) on Friday, November 27, 2009 in a reaction to the financial crisis in Dubai. The downward momentum comes after Dubai World asked to postpone payment on some of its $60 billion in debt. Worries about a default by the city-state have raised significant concerns about the impact on banks.

The markets closed down roughly -1.5%.

Mark Minervini Comment on Dubai Sell Off

I view short term turmoil in countries and nations outside the U.S. as a long term positive for U.S. stock and bond markets. Similar to the Asia crisis in the late 1990′s, these foreign calamities highlight the relative safety of the U.S. and bolster U.S. credibility. I made this same comment during the Asian crisis, which turned out to have the same effect.

A Counterintuitive Scribe

I will leave you with one counterintuitive comment by James Hillman from his book, Kinds of Power: A Guide to Its Intelligent Uses:

“Wherever we see an increase we feel its weight. All the numbers going up no longer portray the optimistic spirit, but instead indicate monstrosities, epidemics, ugliness, future disaster, extinction. Growth has taken on a cancerous tinge. To use the word now sends a message of potential danger, whether the growth be in debt, the population, the underemployed, the homeless, the dimension of cities, the size of government, the particles in the air, the tax rate, the cost of living, the cholesterol count, even the rising numbers on the bathroom scale. Going up now means decline. What was before the measure of progress has become a sign of
problems.”

You might be thinking that this was written to describe the current economic challenges, however his book was written in 1995. Did the world recover, indeed. Will the U.S. and global growth recover this time around…indeed.