Dubai or Not To Buy:

On the Wednesday before Thanksgiving, seemingly after the bell, Dubai World broke the news that it would seek a halt and restructure on somewhere between $20 billion and $120 billion of debt. Given the opaqueness of Dubai World's books, the secrecy of their 'managers' (ultimately the key royal families in the UAE), their complex interconnections throughout global business worlds, their use of advanced derivatives and CDS, along with the fact that the news was initially 'hidden' on the Wed before T-giving, thereby trying to fool the market into ignoring this (which has worked for the moment)… well there just is no telling how this will all ultimately play out.

However, the way this is breaking does seems quite similar to the initial subprime related bond defaults. Fact is, it is absolutely impossible to know what the short, mid, and long-term effects of Dubai Worlds’ debt defaults globally will be, and yet leaders throughout the globe are assuring us that the Dubai problem is ‘small’ and ‘contained’. Sound familiar? It sounds like subprime, but this time the troubled debtors are no longer citizens of nations, they are the governments who have sought to bail their citizens out; nations themselves are now beginning to have trouble servicing debts. Thus, what we are now seeing could very well be the beginning of a crisis in sovereign debt – nations will not be able to service the huge debt burdens taken on in response to the first wave of financial crisis.

If the response to the first wave of financial collapse was to spend spend spend, and that spending itself is now fomenting the next wave of crisis, what will be the solution to the second wave of panic now nascent? Decades and decades of study went into Bernanke’s programs of panaceas applied to halt the Depression 2.0, but what if the Depression 2.0 was not ultimately halted, what if it’s merely been on pause? How do governments stop the next panic if they themselves are the source of the next panic in the first place? There may be no bottom next time.

Uncertainty still abounds regarding Dubai Worlds' total debts, and global institutional exposure to this, along with the uncertainty regarding how to deal with billions of dollars worth of sukkuk (Islamic bonds) that have never before gone into default with these sort of notional values. TSIBR believes it’s only a matter of time before such uncertainties begin effecting global investment in a large way. In fact, the only thing we can be certain about right now is that leadership throughout the globe will not be honest about their exposures to Dubai, whatever contagion falls out from it, and the possibility of similar defaults in the future. Uncertainty is anathema to markets, that much is certain. Uncertainty causes panic, I can certainly guarantee you that. And thus TSIBR believes a new panic storm is beginning to brew. Nevertheless, until TSIBR sees some serious technical damage to the trends in the major indices, gold, oil, and the dollar, the TSIBR portfolio will remain right around 50% cash and 50% commodities stocks and ETFs.

Before we move on, here are the articles on Dubai and sovereign debt more generally that TSIBR found most useful in the last week. We start with a discussion of the fallacies of the Dubai Boom (initiated around 1995):

http://www.slate.com/id/2236959/?from=rss

Here is China’s view on the crisis, with a leading Chinese communist party member speaking some truth: “While the impact of the Dubai crisis on the global economy and on China was not known yet, it would last a while at the very least, Ji Xiaonan, who chairs the supervisory board for big state-owned companies under the State Council's state assets commission, told the Economic Information Daily.”

http://abcnews.go.com/Business/wireStory?id=9202792

Here is an excellent FT article on mounting sovereign debt problems in the developed world:

http://www.ft.com/cms/s/0/f4f9a4f0-d791-11de-b578-00144feabdc0.html

Here is an article detailing the bankruptcy of the FDIC and how the only solution there is more borrowing and printing:

http://www.reuters.com/article/ousivMolt/idUSTRE5AN36P20091124

And here we have a detailed analysis of Japan’s debt problems, which truly dwarf those of the US (although few seem to realize this):

http://www.telegraph.co.uk/finance/comment/ambroseevans_pritchard/6480289/It-is-Japan-we-should-be-worrying-about-not-America.html

Now onto the Dollar. The big news for the dollar over the past couple of weeks has been that no one seems too concerned about its drop. In fact, Obama went hat in hand to China asking them to let the Yuan float, which would put even more downward pressure on the greenback. Floating the Yuan is of course necessary to restoring global economic balance, but before said float restores balance, it may just tank the whole system by initiating a dollar collapse. Regardless, Obama was made to look a bit the fool in China, where he was consistently chastened concerning the US financial order (or lack thereof), and largely ignored on nearly every other pressing issue:

http://online.wsj.com/article/SB10001424052748704431804574540052282519972.html

China is really starting to play hardball here, with financial leaders now labeling US economic policy a threat to Chinese and global economic recovery:

http://abcnews.go.com/Business/wireStory?id=9087854

Meanwhile China’s refusal to let the Yuan float amounts to a daily devaluation policy for the Yuan, which has facilitated China’s recovery, but has created difficulties everywhere else, from Europe to Brazi to Korea. In other words, China is stealthily ‘beggaring its neighbors’ by keeping its currency artificially low so that it recovers quickest and best. The next two articles suggest this is a crucial mounting problem, with no real potential solutions:

http://www.bloomberg.com/apps/news?pid=20601080&sid=a_4PcxlBMzzc

http://www.telegraph.co.uk/finance/economics/6533287/Europes-industry-slams-China-over-currency.html

And of course, Russia certainly isn’t looking to help, as they seek to devalue their currency while moving away from dollars as well:

http://www.ft.com/cms/s/0/d33fcd32-cddf-11de-95e7-00144feabdc0.html

http://www.bloomberg.com/apps/news?pid=20601083&sid=at5XsdLU.68w

Shades of the 1930s indeed:

http://thesystemisblinkingred.blogspot.com/2008/12/shades-of-1930s.html

Just in case you haven’t caught on by now, TSIBR has switched modes from pure market speculation, to looking for the beginning of that ‘double dip.’ The case can be made that recent economic data indicates it may already be starting:

http://www.marketwatch.com/story/its-beginning-to-look-a-lot-like-a-w-2009-11-24

And with the government propped zombies Fannie and Freddie keeping prices artificially inflated in the US housing market, should we expect any different? How can markets be expected to clear if no one will allow them to? As a renter, it disgusts me that my tax money is being spent to keep clueless risk takers in houses they couldn’t afford in the first place (and still can’t) thereby preventing me from buying a house I can afford. Man it really pisses me off:

http://www.minyanville.com/articles/government-homebuyers-tax-credit-fannie-freddie-frank-dodd-housing-market/index/a/25311/from/home

Meanwhile banks are still hiding losses on their ridiculously overly complex and inscrutable balance sheets:

http://www.reuters.com/article/ousivMolt/idUSTRE5AN4QD20091124

http://www.marketwatch.com/story/obama-leading-us-right-to-great-depression-2-2009-12-01

Summation to all the above = the major and well respected French Bank, SG, expects a massive global financial collapse starting sometime next year:

http://www.telegraph.co.uk/finance/economics/6599281/Societe-Generale-tells-clients-how-to-prepare-for-global-collapse.html

How said will interact with the Iranian and Af/Pak situations should prove incredibly interesting. Economists from Greenspan to Roubini to Stiglitz are predicting troubled waters ahead for the US economy, starting around March 2010 as the stimulus runs out. March 2010, sound familiar TSIBR readers? That’s six months from the time Obama’s six month clock on Iran started ticking back in September. Here is Ahmadinejad ridiculously thumbing his nose at the West, claiming Iran will build ten new nuclear reactors in a matter of months (which is impossible):

http://www.bloomberg.com/apps/news?pid=20601087&sid=a.hw9NY6jWkw&pos=8

Does anybody else think war between the West and Iran, in some form or another, is already a fait accompli? Everybody should, I have no idea why anybody wouldn’t. What other outcome is possible here? The global economic downturn is shaking the legitimacy of governments and global institutions everywhere; far better to channel that anger outwards towards enemies than allow it to fester domestically. This is one major reason serious and coordinated global economic downturns tend to morph into war, what TSIBR has previously termed ‘the fleshing out of foreign demons’: economic collapses cause massive civic anger and social dislocation; leaders quickly realize that these angers must be channeled outwards if they are to maintain their power. So for Iran certainly, opting for war would actually make some sense here.

The US will likely be fighting in Pakistan as well soon, for it seems the Pakistani army is already losing its will to pursue the TTP militants as they melt out of S. Waziristan and into the lawless tribal regions that surround it, as the next two articles suggest:

http://online.wsj.com/article/SB125849588108752677.html

http://news.yahoo.com/s/mcclatchy/20091124/wl_mcclatchy/3364464

Meanwhile the TTP has taken to focusing on the Punjab region in Pakistan, which for complex reasons, puts pressure on numerous young Punjabi army members and officers to give up the ghost against the Pakistani Taliban, indeed maybe even join them, as these next two articles explain:

http://www.bloomberg.com/apps/news?pid=newsarchive&sid=a2qCUXznYB8Y

http://blogs.cqpolitics.com/spytalk/2009/05/young-pakistan-army-officers-m.html

And to make matters worse, much worse, the civilian Pakistani government is now under extreme attack from all quarters over decades of hidden corruption. Certain sectors of the Pakistani Army are using this push ‘to root out corruption’ as a cover for pushing out key pro-American leaders, such as Zardari. These sectors of the Pakistani army believe the Pakistani civilian government does not put enough pressure on America regarding its ties with India, and India’s growing presence in Afghanistan; they are, plain and simple, anti-American:

http://www.thedailybeast.com/blogs-and-stories/2009-11-30/gunning-for-zardari/

In a few hours, Obama will make the case for committing further to our presence in Afghanistan. Make little mistake about it, Obama now seems to be on the same page as TSIBR: the main threat to the US from this region remains terror networks and their organizing leadership who use the swirling tribal alliances of the region to both hide and clandestinely promote attacks on the US and its global interests, and the threat is too real and dangerous to ignore or withdraw from:

http://www.foxnews.com/politics/2009/11/16/obama-terror-networks-largest-threat/?test=latestnews

What Obama certainly must now understand, and we’ll see if he hints at this tonight, is that the war in Afghanistan is less about Afghanistan itself, and more about declining American Hegemony amid rising enmity between China and India, the next potential Hegemons. As TSIBR has harped on time and again, Pakistan is the crux where Chinese, Indian, and American interests in global hegemony dangerously dovetail. In fact, here are three articles from the last month each detailing new and growing troubling wrinkles in emerging Chinese/Indian global competition, most involve Pakistan in some way or another:

http://in.reuters.com/article/domesticNews/idINDEL33993420091127

http://abcnews.go.com/WN/india-china-face-off-war-words/story?id=8898062

http://online.wsj.com/article/SB125625173429702481.html

So TSIBR readers, I ask, how is it that humans can be so blind, as to interpret the Dubai debacle as a do buy signal, while the world that once provided so much stability, morphs to swirling sands before our very eyes. Why should reality ever stand in the way of making money? Well, it shouldn’t… but it eventually always does.

Joshua Kane