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Tuesday, December 01, 2009

Why the Default in Dubai Didn't Kill the Markets

... in short, the run up in the markets is based on speculators taking advantage of the near-zero interest rates set by the Fed and the mountains of liquidity available in the system.

Over in Dubai, they ran into a debt problem with mortgage loans.
Dubai, the second-biggest of seven emirates that make up the U.A.E., and its state-owned companies borrowed $80 billion to fund a boom in growth and diversify the economy. The global financial turmoil and a decline in property prices hurt companies such as Dubai World as they struggled to raise loans.

The company received financing based on the “viability of its projects, not on government guarantees,” Al Saleh said.

Home prices in Dubai plummeted 47 percent in the second quarter from a year ago, the steepest drop of any market, according to Knight Frank LLC. Property prices may slide further, a survey by Colliers International showed Oct. 14.
Analysts saw this coming for some time and many had warned it would be the start of some kind of chain reaction of doom for the current stock market bubble. That hasn't happened at all.

The collapse of Dubai doesn't change the fundamental reason for the current bull market. It's mostly speculators and gamblers trying to make some money on the run up in prices, fueled by miniscule interest rates and lots and lots of money to borrow. You can see this in the Brazilian stock market and others as well. This rally is not based on economic growth because there is none. Further, if it were based on economic growth, then the recent poor showing by retailers on Black Friday would have punctured it. This bull market is monetary inflation finding a place to inflate. Dubai didn't change that.

So there you have it. I know I said I was enjoying arthropod posts more than money posts, but I figured I could write an analytical one rather than an angry one and that would be fun as well. See, no pictures of politicians or snarky sign-offs!

Yay!
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5 comments:

  1. Kelly the little black dog9:29 AM

    So are you saying that the default didn't kill the market because of speculators? If that is the case its still a bubble waiting to burst.

    ReplyDelete
  2. K T Cat12:16 PM

    Kelly, that's exactly what I'm thinking. There aren't any fundamentals underlying the run up in the markets. The only thing you have are the mountains of cheap money available. That's why the bull market isn't fazed by real-world events.

    At least that's my $0.02.

    ReplyDelete
  3. Anonymous2:15 PM

    Well, there are some better fundamentals including increased exports, spurred by a lower dollar as well as manufacturing gains:

    http://www.bloomberg.com/apps/news?pid=20601087&sid=abxayBv5HEAs&pos=2

    Consumer spending is more or less sideways, but the housing market appears to be bottomed out. And in terms of P/E ratios stock values really aren't that high at around 20:

    http://www.multpl.com/

    I'm not clear on the chances for a double dip recession, but think some of the doomsayers concerns are overblown.

    ReplyDelete
  4. K T Cat2:25 PM

    I'm not sold on a double dip recession, but a PE of 20 is pretty high.

    ReplyDelete
  5. B-Daddy7:13 PM

    KT,
    Concur with the P/E being too high at this point in time. If we were deep into a sustainable recovery that number might be acceptable, but right now it means that share prices aren't justified by earnings. I think we are seeing an asset bubble inflation that may eventually spill into consumer price inflation. When that happens, the Fed will have to raise interest rates; then say hello to W, as in double dip recession.

    ReplyDelete