As we have been noting, with the Obama administration failing to make a strong stand on any international issue, and with Europe as weak as ever, there is room for Ahmadinejad to maneuver. And now with Dubai World scaring Europe (especially) even more of any instability in the region, the game theorists in Iran figured it was time to make some bold statements. Iran vowed to develop 10 new enrichment sites: http://www.washingtonpost.com/wp-dyn/content/article/2009/11/29/AR2009112900992.html.
We are now left with the prospect of a nuclear Iran, which will lead to a nuclear region as Saudi Arabia, Egypt, etc. will be forced to go nuclear, or have Israel make a move against US public officials (although probably favored behind the closed doors). Either way, there’s a base for oil prices here.
Readers of this newsletter will not be surprised by The Privateer’s (http://www.the-privateer.com) views that the current funding situation is precarious, at best. One quote summarizes most of it:
According to the US Debt Clock (http://www.usdebtclock.org), the current US population is 308 million. Of that total population, just over 35 percent (108.7 million) are taxpayers. The rest are those who pay no net tax, government employees, dependents and those who are unemployed and/or on welfare. These percentages would be similar in any nation with a mature welfare state. If you subtract Americans under 18 from the almost 200 million Americans who do not pay tax, the US is in a situation where many more people vote for a living than work for one. This too is an inevitable end result of any mature welfare state. The fact remains that in the US, 108 million productive people are supporting almost 200 million drones. Those same 108 million people are paying the ever increasing interest bill on the so-called “public debt”. And finally, those same 108 million people are the only REAL source of the wherewithal to eventually repay the debt. At current levels of US federal government spending, it would take a cut of more than 50 percent just to balance it – especially after the servicing costs on the existing debt are taken into account. To actually BEGIN to pay the debt would take budget cuts even bigger than that. As long as more people vote for a living than work for one in the US, that simply is NOT going to happen. A productive minority CANNOT support a non productive majority.
The idea riseth again: tax financial transactions. Why am I not surprised that Krugman supports the idea (proposed by Keynes but never implements 80 years ago)? Pretty much, if Krugman supports it, you can pretty much bet it will lead us in the wrong direction. Increasing taxes to fund government monetary easing? Lower private sector activity to increase government activity? Are these guys serious? Instead, we should encourage trade, encourage private activity, lower taxes (instead of quantitative easing), and do exactly the opposite of what is being proposed: http://www.bloomberg.com/apps/news?pid=20601109&sid=aZxk6z7R4V5I&pos=10
From a note by Paul Schulte at Nomura:
Our basic view for the past few years has been to run (not walk) away from leverage. Dubai is property-related leverage headquarters. The one leveraged entity in Asia which is connected to the Middle East is Korean banks. We have had reservations about the Korean banks all year, mostly for this reason. HSBC and Stand Chart have insignificant exposure to Dubai. Chinese banks have nothing to do with Dubai and nor do the Hong Kong banks. If investors feel they need to sell something because of the problems in Dubai, then Korea is the place, Woori Financial in particular, in our view. Our core view is to buy the underleveraged and sell the leveraged. China, Hong Kong, Indonesia and Singapore have among the lowest leverage globally. Leveraged property in Dubai will need a wholesale re-negotiation. Investors have known this for many months.
We open tonight’s notes with the sage words of Rudyard Kipling from the poem IF.
If you can keep your head when all about you
are losing theirs and blaming it on you;
If you can trust yourself when all men doubt you
but make allowance for their doubting too;
These words we believe sum up the action that took place over the two days of Thanksgiving. We were contemplating writing a piece Thursday evening, but we just couldn’t get enough info to substantiate what was taking place. As traders we are aware of the impact of rumor and innuendo and we always view these twin sisters of havoc as a blessing and a curse. Rumors give rise to volatility and thus create opportunity but if we are in a position we know the pain of being stopped out on unsubstantiated info. Now that we have had a few days to measure the Dubai news we can begin to understand its impact on the global financial markets. We were interviewed on CNBC and Bloomberg television on Friday and opined that the DUBAI situation was a continuation of the global credit crisis and very much similar to the commercial real estate problems that overhang the U.S. credit markets. Being that DUBAI is one of the seven Emirates and the one with the least amount of energy production, the authorities had to find another source of economic growth. The ROYALS that administer DUBAI thought to turn their principality into the financial and tourist center of the GULF region. All was well so long as money flowed free and easy and the building boom went on, but as frequently happens over-building occurred and prices began to drop. Vacancies began to grow and the rents declined and debts couldn’t be met. Many of the creditors believed that ABU DHABI, the wealthiest of the Emirates would make good on the debt even though there are no covenants to that effect. Bond prices dropped from par to forty cents on the dollar as the threat of default continued to grow; that was where the markets were with Friday’s early close. To make matters worse there was also an Islamic holiday which meant there was to be no official announcement until today. It now appears that the central banks of the U.A.E. are going to provide a funding facility to insure against default of DUBAI debt. The sovereign wealth fund of ABU DHABI has a purported net worth of 650 billon dollars so there is certainty enough liquidity to support the entire Gulf region as the debtors and bondholders meet to do some type of work out on the debt.
As we caution to keep your head you must look at the immediate impact. First, we find it hard to believe that Abu Dhabi and some others didn’t step in to buy the DUBAI bonds on the very cheap knowing some action would take place to support the little brother DUBAI. Secondly, it is not in the interest of oil producers to see new stress in the global economy as the drop in oil would be far more costly than any type of bailout. Thirdly, we are going to have to see the impact on the nascent Islamic bond market that was created for Muslim investors and borrowers to be able to be part of the modern financial world and still adhere to the stricture of Sharia. Fourthly, this event will put the inflation hawks at the FED on hold as they wait to see the fallout on the lending patterns of the global banks. U.S. banks have a small exposure as most of the credit appears to have been extended by European consortiums and Islamic institutions–but again we don’t know for sure because of the lack of transparency. We will be watching, as will the world central banks, to see the impact on lending patterns after this hit is taken. The banks are cautious as they fear that more commercial real estate hits are coming. We now have a good sense of why global debt and U.S. treasuries have performed so well: the lending institutions are so fearful of more such DUBAIs and thus lock their money in sovereign debt.
Another story out this weekend came from China as the Politburo met Friday and decided it will “maintain the continuity and stability of economic policies, and continue to implement the proactive fiscal policy and loose monetary policy.” Thus we have some insight into what the Chinese are bringing to the global arena. Pressure will be brought to bear on the Chinese for YUAN appreciation but the pressure will be minimized by Chinese promises to lift domestic consumption by continued efforts to maintain growth at a bubble like level. Even the Europeans were rebuffed this weekend by the Chinese. Trichet and Juncker came away empty handed in their efforts to get the Chinese to provide any give on YUAN revaluation. Next time they should send that financial giant Lady Ashton! So with the Asian giant set to maintain domestic growth and the Dubai debt situation set to work out we can begin to think about Monday’s Australian Bank meeting and of course Friday’s unemployment report.
As Fred Flinstone might have said—-Yaba daba DUBAI—–as the cost of emerging from the stone age has been costly indeed.
Tags: Abu Dhabi, China, Currency, currency trading, debt, dubai, UAE, unemployment, yra harris, Yuan
Commodities/Futures, Currency, Fixed Income/Bonds | yharris | 
November 29, 2009 6:55 pm | 
Comments (0)
Assuming UAE has $600-$700 bilion SWF (controlled by AD b/c most of contributions are from AD). $80 Billion total nominal, buyout at 50% = $40Billion = ~7%.
$40 billion in one position is very big and I don’t think anyone wants to make it except because of pressure from their neighbors.
I see 2 options:
Option 1: this is a big deal. That means middle eastern debt becomes cheaper, CDS spreads go through the roof for all the neighbors, including Saudis. Some hedge funds and real estate funds must be blowing up right now. Next up, European banks get hosed. Can these guys do anything right? Madoff, private equity gone awry, CDO’s, etc. Swiss banks can’t even give you privacy any more. Money starts going home and this becomes a battle of flows. Anyone who is levered on the carry trade gets “FUBAR”ed. Beneficiaries: yen, dollar, gold. Biggest losers: emerging markets, anyone levered, European banks, and more. Marginal EU players start getting kicked out, like Greece. Euro begs Turkey to come in, and Turkey blesses Alah for unanswered prayers. Geopolitics start getting dicy: watch for Greece putting the heat on Cyprus to use it as a bargaining chip in its negotiation to stay in the EU. Turkey talks bigger and stronger against northern Iraqi kurds in hopes of US concessions and no fear of repercussions from EU.
Option 2: this is not a big deal. LTCM style, some back door deals brush it under the rug, with a global concerted effort. Fed is afraid of strengthening dollar undermining their inflationary push. In 2 weeks, no one remembers it, relevering goes exponential and the final stages of an asset re-bubbling are in place. China goes in and puts in a bunch of unwanted dollars to secure oil rights from UAE and neighbors for the next 20 years at $55/b. Buffett buys a piece of the debt at 30 cents on the dollar. Equity markets shoot higher, along with commodities. This could last for another 6 months to a year, at which point, we go where we need to go anyway, but a lot more people and money gets hurt.
The strategists and game theoreticians are going nuts right now, trying to figure out how to use this to put pressure on everything from Iran nukes, China, Afghanistan/Iraq, and umpteen others.
Tags: China, Currency, currency trading, dubai world, EU, Euro, Greece, Turkey, UAE, USD, yen
Currency, Fixed Income/Bonds, General, Politics, Strategy/Allocation | Yaron Sadan | 6:47 pm | Comments (0)
We are still not experiencing the stabilization of real estate, partially because there is no stabilization in rents. With owners equivalent rent (OER) the largest component of the CPI, there will not be significant upward pressure on CPI (at least headline CPI) until we see rents bottoming out. http://www.calculatedriskblog.com/2009/11/apartment-rents-fall-49-in-socal.html?utm_source=feedburner&utm_medium=feed&utm_campaign=Feed%3A+CalculatedRisk+%28Calculated+Risk%29&utm_content=Google+Reader
Martin Spring’s new On Target is out. Always interesting reading, although I sometimes disagree with his political bent. Read it here: On Target
So Dubai World, the government investment vehicle (is that sovereign wealth fund?) is unable to make payments on $59 billion of debt. Please tell me you are not surprised! Command economies run by bureaucrats are always doomed. Investment vehicles run by same governments are doomed. I have no problem taking the other side of a trade from any SWF. Why? Because they are usually wrong. Some in the media are calling this a black swan event. Having kamikaze planes hit buildings in New York and DC is a black swan event. Having a debt laden government default is not.
For the past few weeks, I have been pointing out to readers my logic behind buying dollars. I did not know when or what would happen that would cause a flight to the dollar, but when so many people agreed that the dollar was going down, and when so many governments were discussing selling their dollar holdings, and when the dollar was down against every currency imaginable, there just didn’t seem to be anyone left to buy it: so I had to take that trade. I really dislike being on the same side of the trade as everyone else.
So what now? Well, the deterioration of the Euro will continue and GBP will be right alongside, maybe even beating it on the way down. China: I never liked China, and I still don’t like China (http://dyn.politico.com/printstory.cfm?uuid=DAB3DF2E-18FE-70B2-A8C736A21C10553A). If you want to play the space, go with Korea or Taiwan instead. I continue to favor India and Brazil (as long as they don’t get too involved in currency controls) long, long term over most other emerging countries. Japanese Yen: this is a tough one. Money will be flowing in as risk trades are unwound, but the government doesn’t want a rising currency, so they’ll have to step in. Overall, I believe they’ll be able to sell it faster than the US government can devalue the dollar, so that’s where I stand. What about the Fed and Treasury? They are in panic mode. All their efforts at quantitative easing have been for naught. People don’t want to spend. Banks can’t lend. The dollar will go up (at least for now) and that means deflationary forces with no tools left to pump money into the system. Krugman was wrong and I now wish we had the money we spent so hastily to support non-sensical businesses, like GM and AIG. Housing, contrary to popular opinion, is not going up. This is the time where the people who have cash will want to keep it for the really good deals that will be coming, but they’re not here yet.
In May, I wrote about what will be the signs that the worse is over (http://thehardtrade.com/archives/3150): employment, real estate, tough words and actions on the foreign policy side, and addressing transfer payments. With this as our rubric, employment not stabilizing yet, real estate not stabilizing yet, no tough words or actions to stand up to Europe or China (can Obama please say something tough to Hu just once??), and transfer payments are not only NOT being addressed, they are being exacerbated with misguided bills on healthcare. So we wait.
Tags: brazil, BRIC, China, Currency, currency trading, default, dubai, dubai world, Euro, fiat currencies, gold, india, signs of rebound, swf, yen
Commodities/Futures, Connect The Dots, Currency, Fixed Income/Bonds, Strategy/Allocation | Yaron Sadan | 12:44 pm | Comments (0)
For those interested in more signs of the coming infrastructure upgrade that will be necessary, this article is one of many that is and will be coming out. Water continues to be a tough play on multiple fronts, though. For one, it is difficult to gain direct exposure. Then there is the issue of worse case scenario – which is to say, in a worst case scenario, any water or water rights you own can be nationalized and taken away from you. Certain utilities, engineering firms, and technology companies continue to be the most direct route. http://blogs.telegraph.co.uk/finance/rowenamason/100002265/would-you-pay-more-for-water-to-replace-our-victorian-pipes/
“There is no means of avoiding a final collapse of a boom brought about by credit expansion. The alternative is only whether the crisis should come sooner as the result of a voluntary abandonment of further credit expansion, or later as a final and total catastrophe of the currency system”
- Ludwig von Mises
The FDIC released the Q3 Quarterly Banking Profile on 11/24/2009. It certainly looks like the current assets do not support the risk on their books. The FDIC listed 552 banks with $345.9 billion in assets as “problem” banks in Q3, up from 416 banks with $299.8 billion in assets in Q2, and 252 and $159.4 billion in assets in Q4 2008. What needs to happen to fix this? Well, increase fees to member banks, have the federal government pump in more money, raise margin requirements for lending institutions…all are quantitative tightening. A quandary indeed.
If you get a chance, check out Niall Ferguson’s PBS special called The Ascent of Money…Good stuff: http://www.pbs.org/wnet/ascentofmoney/featured/watch-full-program-the-ascent-of-money/24/
Holiday markets are in full swing and the lack of liquidity makes the financial arena treacherous to say the least. If you must trade be patient and wait for your levels as many opportunities arise in these types of markets. Most of the responses that we get on a daily basis are in reference to the DEBT markets. Most traders want to play the short side as they fail to see the logic of investors wanting to buy the LONG END of the curve. We always stress that as a trader one should not confuse Ought with IS. When a market won’t break on neutral to bad news it is telling you not to sell it no matter what you think ought to take place. Some group of investors see value in ten year notes at 3.4% or lower so just let the market find its next level of resistance. Everything in the world points to higher BOND yields except the daily action. No matter how bad the fundamentals, prices continue higher and that is to be respected. Remember, “markets can remain irrational much longer then you and I can remain solvent.”
Gold,equities, and currencies all rally–while the bond follows; and not just U.S. bonds but DEBT worldwide. Yes indeed, 2+2=5. Today we saw the release of the FOMC minutes and there was no great surprise. The monetary hawks were thrown a bone by the FED saying there was some concern that low interest rates could possibly cause an asset bubble and they would be vigilant. This is a meaningless statement as from Bernanke on down there has been constant reprise that monetary policy is too broad an approach to halt an asset bubble. So we pass this off as no great concern. Tonight the commerce reported that they were cutting the average duties on CHINESE STEEL PIPE [$3 billion worth] from 21.3% to 13.2%–throwing the CHINESE running dogs a bone–we will watch to see if there is any response from HU JINTAO and company. Also today we received word that WEST LANDESBANK had in fact been bailed out by the German government. They will infuse 3-5 billion euros and set up a good bank, bad bank format to offload the stressed debt. Short term effect has been to give some short term rally to the EURO but this is still a work in progress.
As we give thanks for all the good health and prosperity we have been blessed with, we will offer our thanks to all our readers and the high quality of discourse these NOTES have started to generate. Thank you everyone! One last thing we want to put on everyone’s radar screen. Two years ago we heard the constant drumbeat of how Sovereign Wealth Funds were going to be the scourge of America. The holders of U.S. dollars were going to come a calling as their depreciating asset [the DOLLAR] was going to return to its source for that is the only place it truly has any real value. Well the early movers into the U.S. markets were either blocked under the guise of strategic interests or else were badly burned on the assets they were able to acquire. If the DOLLAR continues lower and commercial real estate and other assets continue to decline in value these sovereign wealth funds will return in search of hard assets with a high return in mind. The question is not if but when–this well may the biggest story of 2010.
This is some of the stuff out there these days. Yes they’ll buy a little CDN and yes the dollar continues to be under pressure, but isn’t it a bit a a leverage play for Russia, after all, it’s one resource currency buying another. If anything, they might want to hedge with an increase in dollars. As readers already know, I’m on the other side of the Russian traders holding on to my small short Yen and Euro position. It’s small, and it’s the holidays, so the thin markets can go all over without me losing too much of my tofurkey.
http://bloomberg.com/apps/news?pid=20601087&sid=at5XsdLU.68w&pos=6