Europe can’t cope with USD

Sarkozy came out with comments criticizing the weak dollar policies of the US. Of course Europe can’t cope with a relatively strong USD (http://www.hihifrds.com/hihifrds/news-and-content-updates/sarkozy-says-europe-cannot-cope-with-weak-dlr). Europe is facing it’s own debt deflation spiral and with individual countries unable to control their monetary policy, the results are a broken system. As we posted before, Dubai is just the first taste. Look out for Greece and Spain.

Some additional thoughts on Dubai World

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.