As all of you would have known by now, news of a likely default by Dubai World, a sovereign wealth fund of Dubai, had the effect of a screaming “BOO!” to the global financial markets. After the near-death experience from the Lehman Chainsaw Massacre lunatic in 2008/2009, the ensuing post-traumatic stress disorder suffered by the financial markets made them more susceptible to panic attacks like this one.
Despite what the mainstream media said that this incident is “out of the blue” incident, it doesn’t take a genius to notice the warning signs. At the Contrarian Investors’ News, you can do a search on “Dubai” and see for yourself.
In terms of scale, Dubai World’s debt is around the order of 10 times smaller than the debts of Lehman Brothers. Some commentators have dubbed this incident as a storm in a teacup. Incidentally, Australia’s Michael Pascoe had also called the 2007 sub-prime mortgage crisis as a storm in a teacup too.
But make no mistake about this. A default of US$60 billion will definitely have a contagion effect. Although Australia’s Big 4 banks may claim that they have no (or very little) direct exposure to Dubai World, the issue is not how exposed they are to Dubai World. Rather, the issue is how much exposure they have to entities that have exposure to Dubai World. Or how much exposure they have to entities that are exposed to entities that are exposed to Dubai World.
As long as there’s no news of bailouts and money-printing exercise, the financial markets are going to assume the worst and continue the sell-off. In fact, this is likely to be the trigger for a major correction that we were anticipating for months (see Aborted correction?). The question is, will this be the trigger for another round of deflation that will bring the markets past the March 2009 lows? Followers of Pretcher’s Elliot Wave will hope this will vindicate their views on deflation.
Our view is that there’ll be some form of bailouts eventually, either in the form of a rescue by Abu Dhabi or money-printing led by Ben Bernanke. Some speculators will see this as an opportunity to buy more stocks.