Peter Cooper's  Instablog

An emailed statement early this morning said Dubai will use the money to pay the $4.1 billion Nakheel bond maturing today and ‘trade creditors and contractors as well as to meet interest expenses and company working capital through April 30, 2010, conditioned on the company being successful in negotiating a standstill as previously announced’.

The Dubai Government also said it would be announcing a ‘comprehensive reorganization law, a framework that is based upon internationally accepted standards for transparency and creditor protection. This law will be available should Dubai World and its subsidiaries be unable to achieve an acceptable restructuring of its remaining obligations.’

Quite why it took such extraordinary market brinkmanship before Abu Dhabi decided to step in we will probably never know. The intricacies of inter-tribal politics are usually not revealed outside the inner circle.

That is bound to leave room for speculation about what happened. The immediate debt crisis is, however, averted and Abu Dhabi has after all stood by Dubai and underwritten its debts. Stock markets in both UAE cities rebounded strongly on the news, although GCC stocks recovered by much less from recent sell-offs.

But while $10 billion is clearly enough to plug the hole in Nakheel’s finances, this is not the end of the Dubai debt story. Goldman Sachs estimates the total debt to be around $120 billion, twice the GDP of Dubai for 2009 which it reckons will be $60 billion, down from $80 billion in 2008 due mainly to the collapse of the real estate boom.

It might also strike some observers as odd that while the Dubai Government washed its hands of Nakheel as a limited liability corporation, Abu Dhabi nonetheless ultimately felt obligated to take responsibility for Nakheel’s debt.

The obvious inference is that Abu Dhabi felt that the damage to the collective reputation of the United Arab Emirates was going to be too high. Certainly if you have a $650-700 billion sovereign wealth fund then shelling out $10 billion to keep a reputation intact is a reasonable investment.

Quite what global finance and the international media will make of today’s news will be interesting to watch. The siren voices have clearly been exposed as ridiculous harpies with no knowledge of the UAE economic reality.

As regional HSBC CEO Simon Cooper commented: ‘This support confirms that the UAE is one country and demonstrates the strong support provided by the government of the UAE to the country’s corporate sector’.

Most dramatically the gold price hit $1,226 an ounce as the dollar hit rock bottom, and has since given back $100, prompting renewed pessimism about the future of gold from the same voices that warned about gold at $300 as a ‘barbarous relic’. Oil has also dropped below $70 and could fall much further as the dollar rally continues.

The best way to view the dollar rally is as a contrarian. The dollar rally is the contrary action to the long rally in stock and commodity prices from the March lows of this year. All good rallies eventually come to an end but for every action there is an opposite reaction.

So the dollar bottom is actually calling a major top. The dilemma for analysts has shifted from being split over the dollar outlook to pondering the extent of its recovery, and what might happen after that.

Well taking up the contrarian theme a lot will depend on how far stocks and commodities retrace their record recent rally. Will this be an orderly 20 per cent correction? Or a step down to new market lows as Bob Prechter has just said again?

My own analysis has been stated recently on this website as a part of my review for the outlook in 2010. Basically my case is that we have a monstrous bubble in global stock markets, and that argues for a bigger than average correction.

Logically that ought to make a pretty sensational rally for the US dollar. The notion of $1.35 to the euro, or the $1.30 pound is perfectly possible, a prediction that would have brought calls for the straitjacket back in the summer.

However, before people living in dollar zones go rushing off to buy an extra turkey for Christmas, remember that this will only come with significant damage to asset prices, and to the highly tentative economic recovery. A strong dollar is bad for exports and lowers export earnings exchanged for dollars.

Turkeys do not generally vote for Christmas because it signals their own demise. But then the dollar rally will also contain the stuff of its own destruction.

For the bond rally that accompanies the rising dollar will also be a top to what is arguably the biggest and most dangerous bubble in the world today, US treasuries. If that bubble ever blows then the financial system will be in deep peril again.

That is why the real contrarians like my friends at the Daily Reckoning and Dr. Marc Faber and Bob Prechter warn of an ultimate nemesis in which the US dollar crashes and burns and precious metals soar in value as the only true money in a world of paper currencies.

This final scene in the global financial crisis could be played out over a few months but far more likely a few years as the central bankers grapple with a deteriorating situation. So if you think dollar strength is a sign of economic recovery, think again and do not forget to buy some gold and silver.

Most dramatically the gold price hit $1,226 an ounce as the dollar hit rock bottom, and has since given back $100, prompting renewed pessimism about the future of gold from the same voices that warned about gold at $300 as a ‘barbarous relic’. Oil has also dropped below $70 and could fall much further as the dollar rally continues.

The best way to view the dollar rally is as a contrarian. The dollar rally is the contrary action to the long rally in stock and commodity prices from the March lows of this year. All good rallies eventually come to an end but for every action there is an opposite reaction.

So the dollar bottom is actually calling a major top. The dilemma for analysts has shifted from being split over the dollar outlook to pondering the extent of its recovery, and what might happen after that.

Well taking up the contrarian theme a lot will depend on how far stocks and commodities retrace their record recent rally. Will this be an orderly 20 per cent correction? Or a step down to new market lows as Bob Prechter has just said again?

My own analysis has been stated recently on this website as a part of my review for the outlook in 2010. Basically my case is that we have a monstrous bubble in global stock markets, and that argues for a bigger than average correction.

Logically that ought to make a pretty sensational rally for the US dollar. The notion of $1.35 to the euro, or the $1.30 pound is perfectly possible, a prediction that would have brought calls for the straitjacket back in the summer.

However, before people living in dollar zones go rushing off to buy an extra turkey for Christmas, remember that this will only come with significant damage to asset prices, and to the highly tentative economic recovery. A strong dollar is bad for exports and lowers export earnings exchanged for dollars.

Turkeys do not generally vote for Christmas because it signals their own demise. But then the dollar rally will also contain the stuff of its own destruction.

For the bond rally that accompanies the rising dollar will also be a top to what is arguably the biggest and most dangerous bubble in the world today, US treasuries. If that bubble ever blows then the financial system will be in deep peril again.

That is why the real contrarians like my friends at the Daily Reckoning and Dr. Marc Faber and Bob Prechter warn of an ultimate nemesis in which the US dollar crashes and burns and precious metals soar in value as the only true money in a world of paper currencies.

This final scene in the global financial crisis could be played out over a few months but far more likely a few years as the central bankers grapple with a deteriorating situation. So if you think dollar strength is a sign of economic recovery, think again and do not forget to buy some gold and silver.