Dubai: One giant disclaimer
Of late, three things have affected markets:
- last week, Fitch Ratings downgraded Greece;
- last week, S&P downgraded Spain, and
- today, Abu Dhabi has bailed-out Dubai World's Nakheel real estate subsidiary
Any connection between all three events? Yes: that risk is out and disclaimers are in. In the case of Greece and Spain, expect the Germans to have to bail them out in order to avoid bond market collisions; in the case of Dubai, one commentator expects that we can expect such bail-outs "on an on-going basis."
The "disclaimer", then, is simply that instead of the investor assuming any risk, he can pan this risk off to a third entity. This makes markets one giant casino, begging the question of when the music will stop?
Of late, we have seen yields at the long end of the curve rise for the likes of the UK, Spain and Greece. That has to slow growth down somewhat, particularly where mortgages are priced off the long end of the curve. Add to this brake another one: Central Banks will lessen their quantitative easing (QE). thereby throttling the excess supply of money in the system.
If this excess supply of money is throttled at the short end, then expect the overall yield curve to move up in parallel, thereby intensifying unemployment. This intensification, in turn, will exacerbate the current excess supply of goods, thereby depressing the revenues side of the profits equation. Clearly, the Economic Time®, therefore, must worsen.
None of this can bode well for stock markets. But then, perhaps with the US government having bailed-out its favourite banks, and Abu Dhabi just having bailed out Dubai, we need not worry? Or, perhaps, we need to worry about something else...?
