Here's the by line from the article in Barron's: "Could a Japanese debt crisis help spur a rally? Perhaps, if it fuels the yen carry trade."
But rather than precipitating a panic, a decline in the overvalued yen would serve as a tonic in two ways.
The most obvious would be to give a lift to Japanese exporters, which have been hampered by the yen's strength, not only against the dollar but even more so against other currencies.
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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.
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)
This is the other article mentioned in Yra’s article from this morning: http://www.ft.com/cms/s/0/86a7ca6a-d794-11de-b578-00144feabdc0.html
Reasons to remain a bear
Buffett taught us that Mr Market is so irrational that only a fool would try to predict his short- and mid-term movements. So I stick to his teachings and continue to pick what I believe are undervalued companies and remain almost fully invested, as I do find interesting opportunities these days. However, given the horrible economic data that keeps pouring in – it’s hard for me to hold back my bearish sentiment. It almost hurts to read headlines these days. How can the press unanimously celebrate 2-3% growth in industrial order intake vs last month if year-on-year numbers are still down 10-20% or more (and we are now comparing to weaker, post-boom numbers)?
Anyways, these links provide fodder for the bears:
US: never before in post-Depression era has consumer credit fallen so dramatically (despite all the government stimulus):
To say that these figures are ugly would be an understatement. In fact, there is simply no way you can spin this – while this contraction in credit has to happen it has horrifying implications if our Washington policymakers don’t get on the stick and deal with the underlying issues here and now instead of pretending that everything is ok or worse, try to “borrow our way to prosperity.”
The important point is that we have never been here before in the post-Depression era. Any and all claims that “The Consumer has reached a bottom”, or “The Recession is over” (based on July data) or any such is pure nonsense. There is not only no sign of a bottom there is no change in the second derivative – that is, the rate of change continues to be essentially straight down!
http://market-ticker.denninger.net/archives/1418-The-Governments-Effort-Has-Failed.html
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Japan’s Debt Mountain
If there is a reason to expect about a prolonged economic winter in Japan, the most likely cause would appear to be an unsustainable level of sovereign debt. Thanks to nearly two decades of “stimulus,” Japan is burdened with debt like few other countries. Debt-to-GDP in Japan is now almost 220%. Netted against the large US dollar cash holdings Japan acquired in efforts to manage the dollar-yen exchange rate in the last decade, Japan’s net debt-to-GDP ratio is “only” 103%. But the ratio will surely grow higher. Japan’s budget deficit which had oscillated between 3% and 7% of GDP over the past five years, is running at nearly 10% in 2009.
It is hardly noteworthy in 2009 that the world’s second largest economy doesn’t meet the criteria to have qualified for European Union membership under the Maastrict treaty. Few of the other major economies do either, these days, least of all the United States. But to the simple-minded such as myself, it does seem odd that a nation with even a couple of credit metrics which rate on par with Weimar Germany and Argentina circa 2001 can hold down a “AA” credit rating. Stranger still are 10 year Japanese Government Bond (JGB) yields of slightly less than 1.3%.
http://www.gurufocus.com/news.php?id=68813
Just when I really started wondering about what would happen to the USD once the Chinese decide to stop buying US treasuries and thus supporting American excesses, Rambo Ben stepped in and announced that he is going to “solve the issue” by printing 1 trillion (!) USD over the next few months.
As Jim Rogers says: “Printing money has never worked. Never ever in history!”. Or: “The idea that you have too much debt, too much borrowing and too much consumption and you’re going to solve that problem with more debt, more consumption and more borrowing? These people are nuts.”
Here a short decription of what happened to Zimbabwe (quoted from Yahoo! Answers): Zimbabwe’s farms were highly productive and the bread basket for much of southern and eastern Africa. Mugabe confiscated the farms and gave the land to his cronies — who knew diddly about farming and destroyed the productivity of the land. No more exports, no more income, no more foreign exchange. Therefore no money to pay his henchmen.
Mugabe started the printing presses rolling full-tilt to pay off govt employees, etc., without any income, foreign exchange, gold, or anything else to back the currency. The currency starts buying less: there’s no food grown so no food in the stores, no forex so no money to pay for imports. Lots and lots of paper chasing fewer and fewer goods.
It’s called hyperinflation and is notorious in economic history. Germany suffered hyperinflation in the early 1920’s. Argentina is another notorious recent case.
Hyperinflation is always caused by issuing excessive amounts of “money” with nothing to back it and no way to exchange it for goods and services due to lack of supply. Hyperinflation always results in economic collapse and a change in govt. In Germany, Hitler took over, you know the impact of that on world history.