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Generational Dynamics Web Log for 27-Nov-2009
World markets plunge 3-5% as Dubai bombshell sinks in

Web Log - November, 2009

World markets plunge 3-5% as Dubai bombshell sinks in

The most extravagant real estate project since the ancient Pyramids is finally faltering.

Palm Jumeirah Islands, one of several groups of man-made islands developed off the coast of Dubai

Palm Jumeirah Islands, one of several groups of man-made islands developed off the coast of Dubai

During the halcyon days the real estate bubble, there was extravagance around the world, but nowhere was the extravagance greater than in the Dubai, one of the United Arab Emirates.

The Burj Dubai hotel, the tallest skyscraper in the world, dominates the Dubai skyline.

The Burj Dubai hotel, the tallest skyscraper in the world, dominates the Dubai skyline.

The picture above depicts the Palm Islands, one of several groups of man-made islands that Dubai built in the Persian Gulf.

The picture on the right is the Dubai skyline, including the Burj Dubai hotel, the tallest building in the world.

No expense was spared in these development projects. Even the opening night parties for the hotels cost millions of dollars apiece.

That was until about a year ago. Little is known about Dubai's finances outside of Dubai itself, but it appears that around November 2008, Dubai started laying off people and cutting back on previously committed projects. By February of this year, projects worth $582 billion, or 45% of the value of all developments, had been put on hold. Dubai property values have crashed 50% in 2009.

Still, it seemed there was little cause for alarm. Dubai had been hit by the worldwide financial crisis, and as of a few weeks ago, seemed to be showing signs of recovery. Furthermore, the Dubai government has repeatedly said that all debts would be repaid. Finally, everyone assumed that if Dubai was in trouble, they would be bailed out by oil-rich Abu Dhabi.

It's pretty obvious in retrospect that Dubai financial and political officials had been lying. This should be no surprise, however, since scamming and lying have become the norm these days. In fact, as I've pointed out many times on this web site, Washington regulators have repeatedly told financial institutions to lie about the market value of their "toxic assets." One of the worst offenders has been New York Insurance Superintendent Eric Dinallo who spent several months in 2008 helping the banks and "monoline" bond insurance companies to collude to commit fraud.

So investors in Dubai are said to be "furious" today because they feel they were misled by the Dubai government. Well, why should they be surprised, when there's so much fraud going on openly around the world? I guess they were all taken in by the giddy airhead optimism that I keep complaining about in Washington and CNBC.

One example of an airhead analysis is the following from Barclays Bank on November 4:

"We expect several developments to act as positive catalysts for Dubai’s sovereign spreads. First, the likely repayment of the Nakheel sukuk in December. Second, Dubai’s ability to raise the second USD10bn tranche with the support of Abu Dhabi. Third, a successful conclusion of the merger between Emaar and Dubai Holding, as well as a solution allowing mortgage providers Amlak and Tamweel to resume lending.

On that basis, we recommend a long position in Dubai sovereign credit and see today’s negative price actions as an opportunity to buy. While the newly issued sukuk is our preferred instrument, we also feel comfortable in a recommendation to sell 5y CDS outright or against the CDX EM Index in a relative value trade."

(Note: A sukuk is a bond issued under Islamic Sharia law.)

Anyone who followed Barclay's airhead advice on November 4 is in deep trouble today.

At any rate, investors, creditors and financial institutions around the world were shocked and surprised by the bombshell that was set off on Wednesday. Dubai World, the major government-owned investment company, announced that they would be unable to meet their $3.5 billion loan payments due next month, and they requested a six month delay. They claimed that all debts ($60 billion) would be repaid, but they just needed a little more time. (If anyone believes that, then I've got a bridge in Brooklyn that I'd like to sell you.)

The bombshell announcement was apparently timed to cause as few market effects as possible. It occurred after Wall Street had closed on Wednesday for the Thanksgiving holiday, and at a time when markets in the Mideast are closed for the Muslim religious celebrations in Mecca.

Nonetheless, investors were shocked by the news. Many banks in Europe, Asia and the Middle East have invested billions of dollars in Dubai, and are now faced with the possibility of losing their investments. On Thursday and Friday, markets in Europe and Asia were down 3-5%. On Friday morning, Wall Street futures were down 2%.

Abu Dhabi is now facing world wide pressure to bail out its neighbor, Dubai. They've already said that they won't do that, but whether they change their minds remains to be seen.

From the point of view of Generational Dynamics, nothing has changed from what this web site has been saying for almost seven years. We're entering a new 1930s style Great Depression, and nothing has happened to change that. That forecast was based on a long-term analysis of stock market trends. (See: "How to compute the 'real value' of the stock market.") Those conclusions are just as valid today as they were in 2002, despite several huge bubbles that have occurred since then.

The only issue is the question of what will trigger the coming stock market crash. Perhaps it will be the Dubai default, or perhaps it will be something else. But it's coming with absolute certainty.

(Comments: For reader comments, questions and discussion, see the Financial Topics thread of the Generational Dynamics forum. Read the entire thread for discussions on how to protect your money.) (27-Nov-2009) Permanent Link
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Generational Dynamics Web Log for 27-Nov-2009 World markets plunge 3-5% as Dubai bombshell sinks in

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Generational Dynamics Web Log for 27-Nov-2009
World markets plunge 3-5% as Dubai bombshell sinks in