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What It Means When Dubai Can Spook the Markets


When something that small can upset everything, it should serve as a warning sign.

I admit that of late, my writings have had a rather dark tone. There are certainly a number of severe long-term problems that we must deal with, and they're going to serve up a lot of economic pain. But the Thanksgiving weekend with the kids has me in a reflective mood, and one that has only served to underscore my long-term optimism. This week we look at why 2007 won't be the good old days we'll yearn for in 20 years, after we briefly visit Dubai and the latest unemployment numbers.

Subprime Dubai

While we in the US spent our Thursday eating turkey and watching football, the rest of the world's markets went into a downward spiral as Dubai announced it wanted its lenders to give the country a six-month moratorium on some $80-90 billion in debt. This has the potential to be the largest sovereign debt default since Argentina. Somehow this was a shocking development. (How can too much debt and real estate be a problem?) And by markets I mean gold, commodities, oil, stocks, and risk assets everywhere. They all went down. The US markets experienced their own sell-off, though not as deeply as the rest of the world. See also Dubai Debt Issues Send Markets Into a State of Flux.

As I wrote last Friday, the world is now negatively correlated with the dollar, and as money went into the dollar and US Treasuries, everything else went down. Vietnam devalues, Greece is looking increasingly risky, Russia wants to devalue some more, the world is still deleveraging, etc. Is this another repeat of 1998, when Russia and the Asian debt crisis tanked the markets?

To get an answer, let's look at some facts about Dubai. It's one of the Arab Emirates, but unlike its neighbor Abu Dhabi, oil is only about 6% of the economy. While the foundations of the country were built with oil, the country has diversified into finance, real estate, tourism, trading, and manufacturing. It's a small country, with a little under 1.5 million residents, but with less than 20% being natural citizens -- the rest are expatriates. The gross domestic product is around US $50 billion.

(Note this website: I found the numbers on various websites and services strangely at wide discrepancies. This seems close to a median number. I think the discrepancy is mostly people confusing the GDP for the United Arab Emirates as a whole, which includes Abu Dhabi, rather than just Dubai.)

Dubai has become a byword for thinking large. The world's tallest building, underwater hotels, the largest man-made islands (plural), indoor snow skiing in the desert… the list goes on and on.
No positions in stocks mentioned.

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