DUBAI: A STARK REMINDER OF HOW FRAGILE THE ECONOMY IS
Foreign markets are getting hammered overnight and futures in the U.S. are down 3% as news of a potential default at Dubai World reignites fears of the credit crisis. We have been absolutely hammering home the fact that the “solution” to the credit crisis was in fact, not a solution at all. There remain massive debt issues home and abroad and Dubai is only the latest example of such.
Although details are still emerging, the Dubai news will prove to be more company specific than Lehman Bros. was. I don’t believe the news is a reason for investors to panic as loan losses from a potential Dubai default would represent a meager portion of total banking assets. Contagion does not appear to be a large concern either, but perhaps more important is the reminder that Dubai sends – these problems of massive global debts are far from being settled despite all the v-shaped economic recovery chatter. Dubai’s standstill is a reminder that real estate markets around the world remain unhealthy and susceptible to sudden and dramatic downturns. Whether this is a minor tremor in commercial real estate (and potentially a sign of impending aftershocks in residential) has yet to be seen, but make no doubt – we are not out of the credit crisis woods.
This does little to change my cautious investment outlook. We have been almost entirely cash since selling into the rally over a month ago at S&P1,100 and remain cautious on markets heading into the year-end. This confirms my belief that the recovery is very fragile and the road ahead is likely to be difficult primarily due to the fact that our cancer (debt) is still very much alive. The governments in the U.S. and abroad have done little to attack this problem. Unfortunately, I believe this is unlikely to be the last of these reminders in the coming years. These debts are likely to plague the economy until we find leaders that are courageous enough to stand up to the banks and the fiscally irresponsible participants of the global economy.
*Thanks to Zero Hedge for the Barclays piece. It’s worth a quick read.
Futures are tanking another 50 points since you posted this. Would you buy the dip TPC?
Dan,
Keep the macro picture in mind here. Money managers are sitting on great gains for the year. This “buy the dip” mentality could very well change dramatically as “buy the dip” become “protect the gains”. I have a feeling a lot of equity guys are looking at their allocations this morning and realizing that they have far too much exposure to stocks and that the risk of further commercial and residential real estate shocks could pose problems in 2010.
I am not a dip buyer here.
Thanks. I think it could be a near-term dip buying opportunity, but we’ll see.
Eqty mkts have a lot of downside here, I agree many happy longs will now reassess their portfolio risks and try to protect their gains going into end of the year. Risk reward ratio is not appealing on the long side now.
Absolutely amazing, an article referencing Dubai and no gratuitous, scathing remarks about Dubai or our Arab brethren!
In stark contrast to the snide comments posted across at FT Alphaville, the other blog I follow assiduously.
Congratulations on the quality of your readership.
This will be an interesting test of the PPT theory. Now that US banks have raised capital, there is no need to aritificially support their stock. We’ll see next week. Europe on the other hand … poor ING.
This is a BIG problem for the “Brits”
Stiff Upper Lip old chaps!
The limeys take another in the shorts
If you thought the American banking system was Bankrupt(which it is)
You have no idea how bad the damage done to British banking system!!
Agree markets are going to fall down today, with very little trading volume its easy to swing the markets.