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Generational Dynamics Web Log for 28-Nov-07
Will the United Arab Emirates save the world?

Web Log - November, 2007

Will the United Arab Emirates save the world?

Markets soar after Abu Dhabi oil sheiks give Citibank $7.6 billion, in return for a stake in the company.

I've been wondering the last few days whether the Fed or the Dept. of Treasury would come up with some spectacular move to attempt to resolve the revived credit crunch crisis, and return the investment community back to a state of euphoria.

Well, it was neither the Fed, nor the Treasury Dept.

It was the Abu Dhabi Investment Authority (AIDA), the secretive association that invests the enormous oil profits of Abu Dhabi in the United Arab Emirates (UAE).

Actually, I should have thought of something like that. When I wrote the article, "The bubble that broke the world," I suggested that China might try to save the American economy, for its own well-being, in the same way that the US tried to save the German economy in 1931. Then and now it should have occurred to me that the Gulf oil sheiks might try to do exactly the same thing.

AIDA will invest $7.5 billion in Citibank (actually, Citigroup) in return for a stake in the company.

Rumors have been spreading for several days that Citibank was planning thousands of layoffs, and some people were speculating that Citibank would become insolvent. The rumors spread because Citibank has had to take $16.9 billion in writedowns in recent weeks. These writedowns have become common among many financial institutions recently. They come about because financial institutions create credit derivatives and CDOs, backed by subprime mortgage loans, priced according to computerized models that compute notional values far above what anyone would really be willing to pay for them. One firm after another has been forced to go through the "mark to market" process recently, revealing the true market value of these securities. Quite a few, nominally worth billions of dollars, have turned out to be almost worthless.

Citibank has been hit so hard by these writedowns that the future existence of the institution was in doubt. The injection of funds from Abu Dhabi gives new life to Citibank, at a time when it was most desperate to receive it.

However, Citibank, which has 320,000 employees globally, is still expected to lay off tens of thousands of employees.

It'll be interesting to see what kind of political backlash, if any, this provokes. In the past, Washington has gotten all bent out of shape after Arabs or Chinese or Japanese have made large investments in the U.S. This time, however, the Citibank situation is so desperate that it's not likely that we'll hear more than a few peeps.

Investors were thrilled, and quickly became drunk with euphoria. The Dow Industrials quickly rose over 100 points on Tuesday morning, and closed 215 points up.

The "bad news is good news" mentality returned to investors throughout the day. The reasoning was as follows: The market has fallen 10% from its high -- an amount that would qualify as a market "correction." Since the market has now had its "correction," according to this reasoning, it's time for the market to go up again.

Here's how CNBC anchor Joe Kernen put it on Tuesday morning:

"We're down 10%. This is a script that I'm writing. If I produce a movie.

Market hits a 10% correction. All these things that have gone too far -- where we may have quasi- or pseudo-bubbles -- they start to reverse. The markets finish - got the 10% out of the way -- oil starts reversing. The dollar starts reversing. Interest rates stop dropping. All these things start happening, and we all live happily ever after."

It's a nice fairy tale, and maybe some day it'll make a great movie.

But unfortunately the latest news doesn't justify this kind of euphoria. Housing prices have fallen 1.7% in the last three months alone -- the largest tumble in the 21 year history of the Home Price Index. And the US Consumer Confidence Survey index fell much more sharply than expected, indicating that consumer spending will be reduced.

Several paragraphs ago I mentioned the article, "The bubble that broke the world." If you haven't read that, then now would be a good time to do so. It uses a book written in 1931 to inform us of what's happening today -- how one desperate measure after another is being used to avoid the inevitable result.

From the point of view of Generational Dynamics, the stock market is overpriced by a large factor, currently almost 250%, same as in 1929. A full-scale generational panic and crash must come before too much longer. (28-Nov-07) Permanent Link
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Generational Dynamics Web Log for 28-Nov-07 Will the United Arab Emirates save the world?

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Generational Dynamics Web Log for 28-Nov-07
Will the United Arab Emirates save the world?