View Full Version : The Dubai Financial Nuke

Colonel Clink
9th December 2009, 21:02
For those of you that thought that this was over, I offer this article. Not meant to keep you awake tonight, fraught with worry; but forewarned IS forearmed. (Graphs, photos and chats available at link for the TA types among us)

It also explains the dump PM's have taken over the last few days. It seems that for most folks, seeking refuge in the crappy dollar is preferable to stacking shiny metal. Who knew that the tallest pygmy of the fiat tribe still looks good in the race to the bottom?


The Dubai Financial Nuke

By Clive Maund
06 December 2009 @ 04:48 pm AEST

We got the heavy reaction in gold that we had been expecting for some days on Friday. The problem is that we also got a big important breakout in the dollar, which we had acknowledged as a significant possibility for some time. This is not good news for commodities and not good news for the stockmarket either as it signifies the onset of a flight to cash such as we witnessed last year.

What was really odd about yesterday was that we saw a big dollar breakout, but Treasuries fell heavily. We are now believed to be on the verge of another massive deflationary downwave, similar to last year, but worse. However, this time it is very possible that while we will see a flight to cash, we will not witness a stampede into Treasuries, or at least not on anywhere near the same scale. So what is going on here? - what are the principal underlying dynamics? Anyone who has had the misfortune to watch a nuke exploding, misfortune because you get irradiated, knows that first you see a very bright flash, then there is a period of tranquillity as the flash dies down and the mushroom cloud starts to rise, before the shockwave hits, when things get pretty rough to say the least.

You’ve seen the flash - now get ready for the shockwave...

What happened in Dubai just over a week ago was the bright flash, and the media have used the intervening period before the shockwave hits to reassure everyone that everything is going to be just fine - "You just relax, nothing will come of it, it's only $60 billion down the drain or whatever - have a cup of tea". The trouble is that it's not $60 billion at all - the reality is that this is a default on a massively larger scale. Dubai was a vast sinkhole into which western banks and governments unquestioningly poured not just billions but trillions of dollars which was then leveraged enormously by means of derivatives enabling Dubai to build itself up into a latter day Rome, with a level of opulence and extravagance that would have made Caesar green with envy.

When people think of Dubai the things that come to mind are the massively extravagant 7-star hotels, the towering record breaking skyscraper, palm-shaped island resort complexes etc and forests of new office buildings and apartments etc. What the vast majority don't realize is that the stupendous leverage afforded by derivatives has in addition enabled Dubai to create an immense global empire of businesses, most of the elements of which are broke, having racked up staggering levels of debt. Dubai is the nexus of the derivatives pyramid and it is flat, stony broke. Where did all the money come from to pay for all these things? - why from taxpayers and pension fund contributors the world over of course, but especially in the US, with Wall St acting as a giant conduit sluicing a torrent of cash into Dubai. The interesting thing is that there was never any accountability - countries and companies vied with each other for the privelege of pumping money into the exalted kingdom, seduced by its supposedly limitless oil wealth, and requesting or requiring guarantees was regarded as impolite. Now that Dubai is broke, the Dubai government has suddenly distanced itself from Dubai World, and the attitude towards the Western banks and governments who have poured trillions into Dubai is "Tough luck - you lose, suckers". What this means is that trillions of dollars which are now counted as assets on the balance sheets of banks worldwide and especially in the US are actually liabilities. So what do you think is going to happen to the stock prices of these banks - and stockmarkets generally, when the world wakes up and acknowledges this reality - when the shockwave hits?? Small wonder that the charts for Goldman Sachs and J P Morgan look very like the market charts before the '87 crash, but that was "small potatoes" compared to what is coming down the pipe this time.

If money panics out of commodities and stocks it has to go somewhere. Last year, as we know, it took refuge in US Treasuries, especially short-term Treasuries and it drove the dollar up as massive across the board liquidation went first into cash which was then used to buy Treasuries. While we can expect a similar dynamic to be in play this time round, largely because most investors simply don't have the imagination to think of an alternative to US Treasuries, there is a complicating factor, as highlighted repeatedly by Karl Denninger in his recent highly pertinent articles, which is that the US has been making a mockery of foreign Treasury buyers on an ever increasing scale with its endless monetization and ramping of the money supply - in effect treating them as morons by paying them zilch interest rates and undermining the dollar at the same time. They are right - they are morons, who are one way or another are going to get what's coming to them - after all, who but an imbecile buys the debt of a bankrupt country? However, there is a saying that "you can't fool all of the people all of the time" and foreign Treasury buyers and holders are getting increasingly fed up with their cavalier treatment at the hands of the US, and, in the absence of another deflationary implosion causing a renewed flight into the dollar and Treasuries, they look set to start dumping them, which as Denninger points out would set in train a "death spiral" of rising interest rates one consequence of which would obviously be a crashing stockmarket. So whether we see a rising dollar or a falling dollar it`s "Zugzwang" for the US stockmarket and economy - any move made loses, as does no move.

The rate of advance of the broad stockmarket has been slowing for months. On the 6-month chart for the S&P500 index we can see that it appears to have arrived at the top point of a large "Distribution Dome". If this Dome is valid - and it appears to be so - then we can expect the market to turn seriously lower soon, and we should remain aware that markets generally drop twice as fast as they go up, so it will not have to contact the Dome boundary on the way down - on the contrary, given the parlous fundamentals outlined above it will probably drop like a rock.

Bank stocks look set to be particularly hard hit in the event of a second downwave. This is apparent from their deteriorating relative strength in recent months - they are already very close to crashing key support as is clear on the charts for Mordorwebsite�- Goldman Sachs and J P Morgan. These 2 elite companies have had the richest of pickings during the financial crisis - being at the front of the line for everything, which is why their stock prices recovered so well - and because of this they are widely assumed to be invulnerable. They are not expected to be spared during the second downwave however, and their current lofty valuations make them a good candidate for shorting or Put options.


of one mine
9th December 2009, 21:43
Your post makes the same point I reported on earlier when I first heared of the debockle. A few others had the same report. TO say the least they were playing it down. They were initially saying its not going to default cause they had set up an emergency fund. What hogwash they knew all along. Now the price for arrogance will be paid by the big banks.

Of one mine

10th December 2009, 00:34
Dec. 10 (Bloomberg) -- Ask Japanese why their economy plunged in 2008 and most will blame the “Lehman shock.”

A year from now, the “Dubai shock” may crop up in discussions about why Japan is shrinking anew. Dubai’s debt crisis accelerated an export-killing yen surge and showed that the world economy remains sick without an easy cure.

The collapse of Lehman Brothers Holdings Inc. and Dubai World’s bust bookend Japan’s recent experience quite neatly. If Lehman’s fall pulled the rug out from under Japan, Dubai’s coincided with a day of reckoning many in Tokyo have yet to discern.

Japan was the first major economy to go into freefall in 2008, a dynamic that accelerated after Lehman’s collapse that September. It also was perhaps the first to climb out of recession, growing for the last two quarters on an annualized basis. Now, the odds favor it being the first double-dip economy. Far from being a cyclical phenomenon, this one may be secular.

You’re free to read optimism into Japan’s latest stimulus package. Sure, 7.2 trillion yen ($81 billion) of fresh spending helps. And waiving the 15 percent tax for overseas investors on interest from corporate bonds is a step in the right direction that will attract more global demand.

The trouble is, the longer-term consequences of short- termism are catching up with Japan. And the economy is simply out of obvious options to restore growth in the long run.

Zero-Rate Addiction

For a decade and a half, Japan lived from fiscal hit to monetary high. It worked well while the effects lasted. Now Japan is shackled with the largest public debt among industrialized nations and a corporate sector that’s addicted to zero interest rates. As much of the world mulls an exit strategy from massive stimulus, Japan is going the other way.

Look at how Japan has decoupled from different regions. On the one hand, it isn’t hobbled by the financial-system problems undermining the U.S. and Europe -- and should be recovering. On the other, Japan can’t latch on to the benefits of solid growth in China and the rest of East Asia.

A mature economy with an aging population that lives and dies by exports has no choice but to go backward in this global environment. A weak return on capital and a strong yen is prompting manufacturers to cut costs. That means lower salaries, less employment and, in turn, more deflation.

How did Japan get here? Look no further than Japan Airlines Corp., which is becoming even more of a zombie company as we speak, and Japan Post Holdings Co.

Japanese Microcosm

Debt-laden JAL, which may be getting a public loan guarantee of as much as 700 billion yen, lives from bailout to bailout. Japan Post was supposed to have been privatized, getting the nation’s largest pool of savings away from politicians’ pet projects. Cronyism is getting a new lease on life as the government pulls it back into the public sector.

Neither JAL nor the postal system has incentives to become more competitive or profitable. They are a microcosm of what ails the entire economy. By standing by to pump fresh money into the economy year after year, the government deadened the forces of “creative destruction” championed by Joseph Schumpeter.

Welcome to the zombie economy. Constant handouts to the private sector breed complacency. We tend to focus on the public debt, which is almost 200 percent of gross domestic product. An equally big problem is how unproductive Japan is amid the rise of China, India and South Korea.

All those Bank of Japan rescues, fiscal packages, loan guarantees and bailouts keep labor concentrated in inefficient areas and starve more productive and lucrative ones of talent. The efforts staved off unemployment, yet led to entrenched stagnation.

No ‘Black Swan’

The return of Japanese deflation is being treated like a “Black Swan,” or a highly unexpected event with great impact. Anyone who didn’t see deflation coming back wasn’t looking in the right places. It also had as much to do with Japan’s rigidities as chaos in markets.

Japan had two decades to reduce costs and overcapacity, and it didn’t. It relied on stimulus and a weak yen -- two things on which officials in Tokyo can no longer rely. Japan used to get by on strong global demand for its high-end cars and gadgets and advantageous exchange rates. Not anymore.

The nation has a major competitor in the name of Ben Bernanke. The U.S. Federal Reserve chairman hasn’t only co-opted the BOJ’s zero-rate policies, but seen to it that the “carry trade” that used to hold down the yen shifted to the dollar. Even more than recent quality problems and recalls, the strong yen is hammering Toyota Motor Corp.

The global crisis caused a shift away from top-end products to cheaper Asian goods. The risk is that corporate Japan decides this is a typical cycle. It’s not, and there’s no hunkering down until demand returns. It’s time for a rethink of the nation’s entire industrial system.

The process won’t take months, but years. The sooner we get on with it, the less susceptible the second-biggest economy will be to the Lehmans and Dubais of the world.

(William Pesek is a Bloomberg News columnist. The opinions expressed are his own.)

10th December 2009, 01:22

How novel and inventive.


wow wee, how interesting, who says Arabs are not artistic.

red snapper
10th December 2009, 01:25

How novel and inventive.


wow wee, how interesting, who says Arabs are not artistic.

Oh yeah.. Now those ones are problematic.

10th December 2009, 01:35

Look skiing in the Arab Alps


fresh coat of dust?


Dubious Doobye, deep doodoo.