Mad Hedge Fund Trader

Dubai Has Another Little $20 Billion Problem

itgb Who did Dubai’s emir, Mohammed bin Rashid Al Maktoum, think he was kidding? He launched one of the biggest construction booms in history, erecting the Burj Dubai, which at 161 stories is the world’s tallest building. He built artificial islands in the Persian Gulf with lofty names like “The World” that are so big they are visible from space. He bought the legendary Queen Elizabeth II, a ship that holds many fond memories of transatlantic crossings for me, to convert into a floating hotel at unimaginable expense. The spending didn’t stop there. His spending binge went global, taking a partnership role in the Las Vegas City Center, which become the worst commercial real estate project since the Tower of Babel. The problem is that all of these acquisitions were done on credit, with only a fig leaf of equity, and the wind is now blowing with hurricane force. Dubai property values have slid 50% in a year, and the plunge shows no sign of abating. No surprise then that development arm Dubai World has defaulted on $59 billion in debt. The spendthrift emir spent way too much time on horse racing and not enough on research. Sure, turning Dubai into the next Hong Kong was a laudable goal, but did anyone think this through? While the former crown colony is backed by the sweating masses of China, tiny Emirate is surrounded on two sides by 2,000 miles of sand and on the other two by the not so friendly maritime neighbors of Iran and Iraq. Oil, you may ask? My Caesar salad has more oil than Dubai. Haven’t they heard of peak oil? I always thought Dubai would revert to a ghost town once the neighborhood ran out of Texas tea. Now that Dubai’s debt has been correctly marked down to junk the big question is who else this hubris gone wild is going to take down. The shareholders of the UK’s Standard Chartered Bank and HKSB, the lead lenders, are going to take a body blow, and a rash of hickies will spread among the many syndicate members. Greece and Ireland could be next, as the premiums for their credit default swaps have skyrocketed. Things could get ugly in Dubai when the country’s 360,000 migrant Indian workers find out they aren’t going to get paid. How do you say “domino theory” in Arabic?

World Stock Market Rally Continues

wwn It’s all about the dollar, which I have hated all year (click here for my call ). The assured onslaught of federal debt issuance headed our way will be the overriding investment consideration for traders and portfolio managers for the next decade. That will knock the stuffing out of the greenback against every currency except the Zimbabwean dollar, and even that will rally when you get a regime change. There was once an argument that foreigners piled into these currencies to capture a huge yield pickup, but even that advantage is now gone. The soggy buck also explains a lot of what is going on in our stock market, with companies earning most of their from increasingly wealthy foreigners, like those in technology, energy, and commodities. As I write this, I am looking at new one year highs for my favorite picks of the former British crown colony currencies of the Canadian (up 14% YTD), Australian (up 26% YTD), and New Zealand (up 23% YTD) dollars (for my C$report click here ). There bounteous resources, Anglo-Saxon contract law, an almost common language, and vibrant ports make them the safe bet of choice. It’s just a matter of time before the loony hits parity, to be followed by the Aussie dollar, and then the kiwi.

Green Shoots Are Here: World Economic Indicators Are Improving

Maybe in your world. Welcome to the square root shaped recovery. That is the likely shape of the recovery curve we can expect over the coming years. If you back out what I call the “2000’s fluff” of excess car production, liar loans, using the home ATM for serial, annual refinancings, excess consumption, unneeded home construction to account for the new frugality, US GDP growth drops by 1%. Chop off another 1% for deleveraging in all its forms, including lower leverage ratios, the end of the collaterized debt markets and credit default swaps, ultra high junk yields, bond ratings for sale, and the new conservatism of CFO’s and auditors. That leaves you with a 1% growth rate that Japan has seen for the last 20 years. That means falling standard of livings, an unemployment rate permanently stuck at German style double digits, endemic deflation, a collapsing dollar, a comatose real estate market and moribund stock markets. Where are the 37 million jobs going to come from that American needs over the next decade? If your kid is going to graduate from college soon, or cash out from the army, he better start learning Mandarin.

3% Average US GDP growth rate 2002-2007
-1% Bank deleveraging
-1% 2000’s fluff-liar loans, excess home construction, excess car production
-1% real GDP growth 2010-2020

Country Market Performance Since the March 9 Low

Nice work, guys. Anyone who had any doubts about where the future of equity investment lies should check out international index moves since March 9. Although the US enjoyed a 26% leap, the best in 70 years, it ranked only 25th globally. The top performers list is dominated by emerging markets. The Ukrainian stock market was up 67%, followed by Puerto Rico, 53%, Romania, 49% and Peru, 49%. Next are Russia, Vietnam, Hong Kong, Pakistan, Egypt, Greece, India, the Czech Republic, Saudi Arabia, Spain, Singapore, Taiwan, Argentina, Mexico, Turkey, Israel, and Croatia. Granted, many of these markets moved so much because they are illiquid. But looking at the list I get a strong whiff of commodities, energy, and international trade, themes I believe will dominate for the next decade. The new big trend has shown its hand. Smart investors will use this rally to lighten up on the US and increase holdings in higher growth emerging markets. Or you can buy the iShares MSCI Emerging Markets ETF (EEM). I wonder if Rosetta Stone (RST) offers a learning program in Ukrainian?

Stock Market Performance: BRICs Leading Current 'Recovery'

Don't count on Japan to bail us out. Japan’s closely watched tankan report was released today, a quarterly report of business sentiment, showing its sharpest drop in history, cliff diving from -24 to -58. Japan is the one nation that has profited the most from globalization, and is therefore the most severely punished now that it is in retreat. Exports have dropped by half, industrial production plunged 9% in a month, and unemployment is soaring. Q4 GDP shrunk an unimaginable 3.2%, double the fall seen in the US. The last time the numbers were this bad, two atomic bombs had just been dropped on Japan and it lost WWII. Prime Minister Taro Aso’s government is embroiled in multiple scandals, taking his approval rating down to 23%, so the ruling Liberal Democratic Party’s half century long hold on power is in doubt. Elections are due in September. Perversely, a hurried unwind of a decade long accumulation of yen carry trades has pushed the yen up just short of a 20 year high of ¥87 in January, making the country’s essential exports even less competitive, and vaporizing the foreign earnings of Japanese companies. Toyota Motors (TM) has been reduced to begging for bail out money from the government, GM style. The government has passed four bailout packages in the past year totaling 13% of GPD, none of which have so far been spent. Japan has little choice but to wait for a US economic recovery, and then grab hold of its coat tails for dear life.