Forex Market Updates & Commentary |  |
| Posted: 28 Nov 2009 09:47 AM PST The Dubai debt crisis is once again a reminder of fragility of the global credit market and also how what may seem like an isolated problem can have far reaching tenticles. Dubai is part of the United Arab Emerate. The capital is Abu Dhabi. Although one would think it would garner its wealth from oil, its economy is driven by tourism, real estate and financial services. According to Wikipedia the economies wealth from oil is only about 6%. Real Estate and construction contributed 22.6%. Abu Dhabi, the capital of the UAE does have large oil revenues however and it is them who Dubai is looking for for help. Dubai World has been the center of the investment focus largely catering to the rich of the world. The state owned entity has been responsible for the creation of the Burj al Arab hotel which is the sail shaped ediface that charges a cool $1,000 a night, an indoor ski resort, the tallest building in the world, the world largest shopping mall and the man made palm shaped islands of largely private residences. All of which have been created with excess in mind and the hopes of attracting tourists and the world’s elites to its adult Disney World. The building boom led to prices rising sharply with inflation running well above 10% through the 2000s, and with it the price of real estate soared with the frenzy atmosphere of “nothing can go wrong here” emerged. OF course there is no such thing as a sure thing with no “excepts”…. The “except” was a global meltdown that reversed the whole up, up and away juggernaut. The problem with real estate of such grand porportion is how do you stop a 160 story building construction before conclusion, or the creation of man made cities in the form of palm trees. The answer is you can’t. So who pays? Of course, some might think that with the oil wealth in the region the bank account of the Emirates would be the funder of such projects but we live in a capitalistic global economy where even the most wealthy of nations use the global capital markets to finance projects. Dubai World was the borrower. Global banks were the lenders. This week the delay of a debt payment of 59 billion US rocked the financial markets and raised the prospects that other emerging nations would likewise suffer. Credit default insurance rose dramatically for countries like Bulgaria, Hungary, Brazil and Russia. The Credit Default Swap market which some feel forced the likes of Lehman to go under and Merrill to merge with Bank of America could pressure other riskier debt entities. All of which makes banks less willing to lend and with less lending, cash continues to be king. Debtors? Well they suffer and suffer and suffer. What about China and the US? In China, ambitious expansion plans are fine and well but they must be done prudently. They also need funding and that funding has to be supported by economic growth, tax revenues, some sort of income stream that offsets the cost. In the US, a blank check only works to some extent. Printing money has its limits. It has to paid back some way and I am not sure that lessen is being heard. Debt upon debt is not the answer to all things whether they be economic infrastructure expansion or the likes of the debt expansion that is going on in the USA. Abu Dhabi can come in and write a check that would satisfy the problem of its emirate member, but is it the answer to the problem? Does the prospects of a 160 story building yet to be completed or countless other commercial and housing real estate developments make sense for the region in a world which is losing wealth, losing its Richie Rich swagger. Is there any upside or is it a write off? That is the answer the world will be looking to hear. I am not sure it will be a simple sweep it under the rug or ignore the pink elephant in the room issue. As a result we could/should see some additional dollar buying as that seems to be the thing that gets done when things go bad. For those who follow my analysis, you of course know by now that the technicals will tell the market sentiment and paint the fundamental story line. So continue to follow your technical chart levels and make sure the bias from the clues the prices tell us, dictate your trading positions. The global economic story continues with a new chapter being written all the time. |
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