Dubai bubble burst?

[Michael]

Has debt freeze exposed Dubai mirage?

(CNN) -- Dubai sent investors reeling Thursday after asking creditors to freeze the debt repayments of one of its biggest holding companies, Dubai World.

The announcement came after the market close on the eve of the Eid holiday and Thanksgiving in the U.S., leaving traders' hands tied over their exposure to investments in the Emirate.

Shares dropped in London and Europe as bankers struggled to gauge the implications of the debt freeze without additional guidance from Wall Street.

With very little information being distributed from Dubai, the market has been left to question the motives of ruler Sheikh Mohammed Bin Rashid Al Maktoum and the financial future of Dubai World and its huge portfolio.

So what happened?

Late Wednesday, the government of Dubai issued a statement saying it had authorised the Dubai Financial Support Fund to "spearhead the restructure of Dubai World with immediate effect."

The first step, it said, was to ask all providers of financing to Dubai World and Nakheel to "standstill" its debt repayments until at least May 30, 2010.

Source (http://edition.cnn.com/2009/BUSINESS/11/26/dubai.world.debt.questions/index.html)

Well, no surprise here. I've figured all along that Dubai was a mirage built on the same kind of financial chicanery that the US housing market was built on.

[Americano]

Be interesting to see if that house of cards is 'too big to fail'. Fixing or unwinding something like that doesn't offer many options in today's economy.

[Michael]

Be interesting to see if that house of cards is 'too big to fail'. Fixing or unwinding something like that doesn't offer many options in today's economy.
From the numbers I'm seeing, it is several big European/British banks that are holding the lion's share on Dubai World. Citibank, ChaseMorgan and BoA of course each have a small chunk as well.

Btw, I was just reading reports of 'bullish' investment reports on the investment quality of Dubai World debt from both Barclays Bank and Citibank, written within the last 90 days.

The incompetence of these financial analysts always amazes me. These guys are hardly better than weather reports. :shrug:

As for bailouts, I'd venture to say that the only thing less popular than bailing out Wall Street billionaires is to bailout Arab billionaires. That's a non-starter unless the bailout is being arranged and financed by the Saudis.

[Americano]

From the numbers I'm seeing, it is several big European/British banks that are holding the lion's share on Dubai World. Citibank, ChaseMorgan and BoA of course each have a small chunk as well.

Btw, I was just reading reports of 'bullish' investment reports on the investment quality of Dubai World debt from both Barclays Bank and Citibank, written within the last 90 days.

The incompetence of these financial analysts always amazes me. These guys are hardly better than weather reports. :shrug:

There's a definite similarity; TV weather people read NWS reports from a teleprompter and house organ financial analysts copy what firms seeking investment cap expansion send them.

As for bailouts, I'd venture to say that the only thing less popular than bailing out Wall Street billionaires is to bailout Arab billionaires. That's a non-starter unless the bailout is being arranged and financed by the Saudis.

I wouldn't rule the Sauds out. Real property at a discount could be an attractive hedge for the ocean of deteriorating USD they're sitting on.

[Zarquon]

I think Dubai blew up a good year ago, with almost all the expats fleeing after the meltdown, and this is a belated repercussion of that.

[Michael]

I think Dubai blew up a good year ago, with almost all the expats fleeing after the meltdown, and this is a belated repercussion of that.

Quite right. Makes you wonder what the financial people have been smoking since us non-financial types all heard about the mass exodus from collapsing Dubai a year ago when the crash hit. Apparently lots of people were abandoning houses and cars and just running away from Dubai back then and there were lots of stories in the media about this.

So are we to assume that the financial people just ignored that evidence and continued to make 'bullish' reports on Dubai debts right up until it collapsed?

I find that really amazing (but not too suprising given the bets they made that the US housing market couldn't possible reverse itself).

For a bunch of brilliant high achievers, these financial guys (and girls) look like a bunch of idiots who haven't got a clue.

[Americano]

Quite right. Makes you wonder what the financial people have been smoking since us non-financial types all heard about the mass exodus from collapsing Dubai a year ago when the crash hit. Apparently lots of people were abandoning houses and cars and just running away from Dubai back then and there were lots of stories in the media about this.

So are we to assume that the financial people just ignored that evidence and continued to make 'bullish' reports on Dubai debts right up until it collapsed?

You know they did. Every business failure of any type takes the stance of 'I just need a little more time and things will turn around'. They needed any increased cash flow they could get their hands on to maintain their own positions while they looted the reserves to service debt. If one is sitting there looking at the books and sophisticated projections one knows the cash position every minute of the day at least a year out.

Outside analysts who pitch that investment crap take the word of company spokesman right up to the point of collapse. Debt holders get quarterly financials that don't mean much as the company can plug away (an accounting term) as long as the cash holds out or the annual is finalized.

I find that really amazing (but not too suprising given the bets they made that the US housing market couldn't possible reverse itself).

For a bunch of brilliant high achievers, these financial guys (and girls) look like a bunch of idiots who haven't got a clue.

[Americano]

Looks like, as predicted, the oil rich neighbor is going to step in. What an opportunity to dictate terms and leave blood on the executive floors without fielding a military.

[wphelan]

An Austrian perspective of Dubai's bubble from someone who spent some time there:



Production and saving cannot keep up with the pace of credit expansion, because production takes time and labor. The creation of additional money out of thin air does not add to the available amount of goods and services in the economy. If more credit is extended to construction companies, it does not mean there will be enough steel, cement, etc. — certainly not at prices that make the developments profitable. As soon as each company starts bidding for the same resource, it will tend to increase in price, rendering some projects unviable.

Resources are scarce. Printing more money can never alter this fact.

The article is a pretty straight forward summation of what went on in Dubai in the last couple decades. I don't think there's much people here would dispute, but I do find it interesting that the US government and the Federal Reserve don't seem to have learned anything from the recent economic troubles. We're continuing to do the same things we've done in the past, especially with regard to housing. One of the primary goals of the US government and the Fed seem to be to prop up the price of real estate and keep interest artificially low. There's no sign this policy will change any time soon.

Another quote from the article:

Psychology clearly plays a role in stimulating a bubble, but only monetary inflation enables it. It is difficult not to succumb to the temptation of profiting astronomic amounts in a short period of time. Resistance is even more difficult if the means to engage in the bubble are easily available at the nearest bank...ubai's false boom, its unreal prosperity, was based on the illusion of cheap money. It was based on the illusion that credit expansion generates wealth — that money is wealth. Following the Austrian Theory of the Business Cycle, one could clearly see that the emirate's boom had to come to an end.

[Michael]

Seems like a whole lot of the world of investment for the last half-dozen years was just due to cheap credit (and lots of hype) and entirely dependent upon a continuous flow of it - without any tangible investment logic. Kinda like a ponzi scheme as it were.

The minute the flow was interrupted, that's enough to crash them.

[Americano]

An Austrian perspective of Dubai's bubble from someone who spent some time there:





The article is a pretty straight forward summation of what went on in Dubai in the last couple decades. I don't think there's much people here would dispute, but I do find it interesting that the US government and the Federal Reserve don't seem to have learned anything from the recent economic troubles. We're continuing to do the same things we've done in the past, especially with regard to housing. One of the primary goals of the US government and the Fed seem to be to prop up the price of real estate and keep interest artificially low. There's no sign this policy will change any time soon.

I haven't decided if the unabashed government desire to create yet another real estate bubble is ignorance or merely the usual desperation associated with US absence of long-range planning.

[Michael]

I haven't decided if the unabashed government desire to create yet another real estate bubble is ignorance or merely the usual desperation associated with US absence of long-range planning.
I don't think it is ignorance - I'd call it "willful cognitive dissonance". They understand the theory, but they just can't believe that it would happen to them.

That in common with the longstanding absence of long-range planning makes for lots of repeat bubbles.

Besides, for the elites, bubbles are very profitable. Especially when they get bailed out by the taxpayer! That's bonus time!

[Americano]

I don't think it is ignorance - I'd call it "willful cognitive dissonance". They understand the theory, but they just can't believe that it would happen to them.

That in common with the longstanding absence of long-range planning makes for lots of repeat bubbles.

Besides, for the elites, bubbles are very profitable. Especially when they get bailed out by the taxpayer! That's bonus time!

Can't argue with that but the financialization of America through targeted asset inflation has been in place since the late 1960s (other countries such as the UK, Dubai, etc. started somewhat later). Each of the past three decades has experienced real estate bubble explosions that became progressively more extreme as we (US) outsourced our industrialized sector and became increasingly dependent on imports for consumer consumption purposes.

The only way I can see another US real estate bubble transpiring over the next decade is through massive government subsidization at all home builder supplier levels, not just the money supply. Considering what that would do to our already failing currency and abnormal debt position, modest starter homes would then be valued in the millions with McMansions and up in the billions.

[Michael]

The weird thing is that endlessly rising house prices don't actually bring any real benefits to anyone except investors.

So what if the house you bought doubled in price. Every other house doubled in price as well so if you are planning to move, you gained nothing.

But rising house prices endlessly push up the property tax base and they require larger and larger supplies of credit.

I just don't see much of an upside to perpetually rising housing prices that has become a mainstay of US economic policy.

I can definitely see how perpetually rising housing prices serves the interest of Wall Street, the banking/finance industry and the government though.

[Americano]

The weird thing is that endlessly rising house prices don't actually bring any real benefits to anyone except investors.

So what if the house you bought doubled in price. Every other house doubled in price as well so if you are planning to move, you gained nothing.

But rising house prices endlessly push up the property tax base and they require larger and larger supplies of credit.

Which was the intent in financial engineering of derivatives. Every political forum I followed from 2002 right into the collapse of 2006 had a preponderance of posters who sincerely believed the game would never end.

I just don't see much of an upside to perpetually rising housing prices that has become a mainstay of US economic policy.

I can definitely see how perpetually rising housing prices serves the interest of Wall Street, the banking/finance industry and the government though.

As was intended.