Dubai the canary

The world markets are shaking off Dubai and the current workout is being hailed globally with the resumption of the short dollar, long risky assets trade. I am not convinced. In fact, I think Dubai is a low impact signal of what is to come. With real estate continuing to tumble and developers facing default globally, the underlying asset bubble will come down and domino. Here’s one scenario now coming to light:

1. Dubai gets the workout at what will seem like harsh terms, but Abu Dhabi will still be left a loser.
2. Greece is toast, spreads become so expensive that even the Chinese won’t want to touch it. Euro becomes the loser. Germany, as the only real economic power in the region becomes a net (long-term) gainer, France and Spain losers in the equation.
3. Britain can’t sustain it’s 60%+ debt to GDP (which has risen from 40% and will continue to climb). Look for Canary Wharf default stories. http://www.dailymail.co.uk/news/article-1231563/Is-Britain-brink-financial-armageddon.html
4. Treasuries will NOT go the way of Japan. Yields will rise, even as the dollar losses reverse as the dollar catches a bid as investors flee Europe.

In 1999-2000, Nasdaq continued up, being driven by fewer and fewer companies’ stocks. With low volume driving a tenuous rally, which depends on record profit margins and declining revenue, the equation is set for a serious pullback (on the order of 40-60%) in equity markets. Dubai always wanted to be a financial leader – be careful what you wish for, because here it is leading the way.

Last 5 posts by Yaron Sadan

• GS catching up on our conversations on demographics - August 12th, 2010
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• Starting the day off - August 11th, 2010
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• From the Fed: Future Recession Risks - August 9th, 2010

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