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Dubai

12/01/2009

In recent years, Americans have grown familiar with Dubai, the most populous state within the United Arab Emirates (UAE). We easily can identify with their free trade, tourism, and open markets. Although situated in the heart of the Middle East, Dubai most resembles California. Remember - California was built on Oil and transitioned, just like Dubai, to a tourism, real estate, and financial services economy. Unfortunately, just like "Cali," debt issues are now prevalent in Dubai. I don't think they enjoy Thanksgiving like we do, given the gloomy Thanksgiving revelations from The Dubai State.

The question for investors is whether the Dubai shock will end the 2009 cyclical rally in global assets. Dubai owes about $80 to $100 billion dollars, mostly to European banks, so their debt is probably equivalent to 90 - 100% of their GDP. An improbable complete default resulting in $80 - $100 billion of losses would make a rather small contribution to the projected $2.5 - $3.5 trillion loss the credit crisis will have recognized by its end. Just like any good American entity, expect Dubai to seek a bailout from Abu Dhabi's (the UAE capital - think D.C.) $425+ billion sovereign wealth fund. I can't believe some assistance from Abu Dhabi isn't coming. We just don't know the terms and conditions yet.

Clearly it will be some time before "happy days are here again" in Dubai. Years of financial prudence will be needed to work off excesses and digest the real estate meltdown. However, fundamentally, my global concerns remain fixated on countries that experience dramatic currency devaluation, think the Vietnamese Dong, as well as the depressed European economies of Portugal, Ireland, Greece, and Spain. Those countries are experiencing sharp spikes in sovereign credit spreads as the "anti-dollar" Euro continues to appreciate and undermine any recovery whatsoever.

All in all, if money managers are looking to close the books on 2009, sure, you have some reasons with the Dubai developments. Market technicians have been looking for an exit on this capital markets rally for months now. However, I do not hold credible the suggestions that "there is always more than one cockroach" and this potential debt crisis will spread globally to other significant global economies. I believe an orderly process for debt restructuring will unfold over the next few months. For investors this does not warrant any dramatic changes to portfolios.

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