A load of crap from an idle brain

Bill Bonner of the Daily Reckoning has for long had a bone to pick with Thomas Friedman of the New York Times. It all first started with legendary short seller James Chanos calling China “Dubai times 1,000 – or worse.” To which Thomas Friedman wrote that James Chanos should be careful about trying to “short a country that has $2 trillion in cash” in this article titled “Is China the next Enron?”

Thomas Friedman & Bill Bonner

In his article, The Long and Short of China, Bonner goes hammer and tongs at Thomas Friedman saying…

Oh happy days are here again. Obama is going to get our money back from the banks. Jeffrey Sachs is telling Haiti how it can get its economy back in order (with other people’s money, naturally). And Thomas Friedman is offering investment advice.

This should be fun. We’re all on the bus…and it’s driven by the blind, the deaf and the very dumb. Oh, sorry, we meant the visually impaired…the hearing impaired…and the mentally deficient.

Friedman is, as we all know, full of advice on just about everything. He advises finance ministers on how to soup-up their economies. He advises the Arab world on how to update its religious institutions. He advises whole nations on how to improve the future before it happens.

And here he is now counseling Mr. James Chanos, noted short seller, on how to make money

Big egos are at play here.  But its not to discount the value of the words being spoken here.  Bill Bonner, Thomas Friedman and James Chanos are all good at what they do.  They have built up a career full of backing their claims with the work they have done.

Last word on whether China is a bubble or not is yet to be spoken.  Meanwhile, Thomas Friedman finds another supporter in Keith Fitz-Gerald of Money Morning.

Above pictures courtesy: Theteemingbrain, Cityfile & Stockopedia

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Was it expected?  Well, it depends on the people you are asking.  If you ask the rulers of the kingdom, then everything is and was hunky dory.  If you ask the economists and people tracking the business of Dubai, it was always sitting on a debt bubble, ever willing to burst.

The tallest building, the biggest man made island, the biggest snow world in the midst of a desert, the largest mall in the world, the glitziest and grandest hotels in the world…the list of biggest, largest, tallest was never enough for Dubai to conquer.  And in this context, the tiny city state of Dubai over leveraged itself and built an empire of debt.  A debt that is bigger than its GDP now.

For a country that hardly has any oil, it had to build its future on something else than oil.  So, the charismatic ruler of Dubai, Sheik Mohammed bin Rashid Al-Maktoum decided to move to finance, tourism to hedge its economy.  Good vision no doubt, but its the execution where the fault lay.  Mindless borrowing was fun and fine till the economic collapse happened in the USA.  With the collapse of Lehman, Merrill Lynch and a host of big banks, the easy money dried up.  And it was just a matter of time before which this was to happen.

Just three days before Eid, the Dubai government’s announced a six-month reprieve on debt repayments. This  sent shockwaves through the world markets, as it raised doubts over the Gulf emirate’s ability to meet its financial obligations.

Dubai is being crushed under a mountain of debt. The emirate has a debt in excess of $80 billion which it incurred by expanding in banking, real estate and transportation. Dubai World with $60 billion liabilities has sought a six-month standstill on its debt repayment to all its lenders.

The Dubai government requested the creditors of Dubai World (one of three conglomerates that are backed by the emirate), to agree to a ’standstill’ on repayments until May 30 2010.

On one hand the Finance ministers and bankers are saying that the markets are behaving erratically.  But believe them at their own peril.  These are the same people who just days before the collapse of the American banks proclaimed that all was well.

For most of this decade Dubai has been the Victoria Beckham of the Arab world–the biggest, glitziest, most heedless spender. It’s been the sort of place that invests $7.6 billion subway system few of its 1.6 million people are likely to use, the sort of place that builds artificial islands in the shape of palm trees, the sort of place that builds the world’s tallest skyscraper, the sort of place that sells designer seat-belts to encourage drivers to be safer in the very cars it wants them to trade in for a subway ride, and the sort of place where office buildings have been the Gulf’s most copious crop of the decade.

Dubai hasn’t limited its excesses to its corner of the United Arab Emirates. Through Dubai World, the Emirate’s investment arm, it partnered with MGM Mirage and invested in such projects as Las Vegas’ City Center, a 67-acre development that includes a 4,004-room hotel-casino, 2,400 high-rise residential condos, dining and entertainment venues and its own retail district. At $8.5 billion, it’s the most expensive privately financed construction project in the United States.

Now the bad news.

The Dubai subway has been running since September, albeit to empty quarters. A quarter of Dubai’s office space is vacant. Workers have taken salary cuts of up to 30%. The Emirati government is in debt to the tune of $80 billion to $120 billion. CityCenter? It’s “worth about half of what it cost MGM Mirage and Dubai World to build the massive Strip development,” the Las Vegas Review-Journal reported in October. lost half its value. MGM Mirage took a $1 billion write-down already, Dubai World ate a $348 million loss (so far).

Read rest of the article here

So, does that mean that the Dubai dream is all over?  Not really.  Am sure the more conservative cousin of Dubai, Abu Dhabi will come in with its oil money to rescue it.  But Abu Dhabi has conveyed that the help will on a case to case basis.

That would mean that we would see lesser flamboyance from everyone associated with Dubai, at least for some time now.

More articles on the Dubai mayhem

Recession and debt dissolve Dubai’s mirage in the desert
Dubai’s Debt Troubles: Beginning of the Next Leg Down?
Dubai: an emirate in crisis
Sober ruler of Dubai whose vision is crumbling in the face of the storm

Time changes, people change, economies change and the powers wielded by countries change.  There was a time when Britain ruled half the world, today its nowhere.  There was a time when the US was the undisputed economic champion, today that aura is on the wane.

Its in these changing times we wonder if a group that consists of countries like Italy, Canada etc wield any power when the world is going throught the worst recession (courtesy the developed countries).  Of course the US, Japan and Germany are also a part of the G-7 group of countries, but do they really have any clout?  The G-7 as usual came out with a statement asking China to re-value it currency and hardly anyone cared a hoot.

After decades in charge, the club of rich, industrialised nations is fast losing sway as a share of global economic power shifts towards big developing countries. That was a lesson of the Group of Seven’s meeting in Istanbul at the weekend, when the absence of China showed the G7 could no longer tackle the world’s economic problems on its own.

Finance ministers and central bank chiefs from the G7 implored China in a diplomatically worded statement to let the Chinese currency rise, as they have done for several years. But China showed no sign of complying, and the G7 spent much of its time to discussing whether it should meet less often, with less pomp and perhaps with fewer public statements.

G7 statements have all too often “interested nobody because there’s no follow-up most of the time”, said Dominique Strauss-Kahn, the head of the International Monetary Fund.

Read the full article here

The G-7 or the group of Industrialized countries comprise

Canada, France, Germany, Italy, Japan, United Kingdom, United States

The G-20 comprises of

Argentina, Australia, Brazil, Canada, China, France, Germany, India, Indonesia, Italy, Japan, Mexico, Russia, Saudi Arabia, South Africa,  South Korea, Turkey, United Kingdom, United States, European Union

A G-7 official hit the nail on the head when he mentioned

“The moment you have to tell people you are still relevant, it’s because you are not relevant,”

Above picture source: Astrocrush

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Eventhough the government has been harping that inflation has dipped into negative levels, does it mean that the prices of all essential goods have gone down?  Vegetables still cost high, fuel prices are still high, housing and rentals are still beyond the reach of the common man.  What is the data based on which the government claims that the inflation has been steadily decreasing ever since it reached double figures around 6 months ago?

This is because the Indian government is one of the very few governments in the world that calculates inflation based on Wholesale Price Index (WPI) and not Consumer Price Index (CPI) as the rest of the world does.

According to Wikipedia, Wholesale Price Index (WPI) is the price of a representative basket of wholesale goods. Some countries (like India and The Philippines) use WPI changes as a central measure of inflation.

Whereas, Consumer Price Index (CPI) is a measure of the average price of consumer goods and services purchased by households.

This is the reason why inspite of the govt’s claims that the inflation has entered negative territory, you dont see any decrease in the prices of goods when you go shopping. The figures that the govt trots out is wholesale prices.  The common finds no relief as the reduction in the wholesale prices take a long time to trickle down to his level.

According to the Reserve Bank of India website, CPI at the All-India level as on 11 June 2009 is 4.63%.  Anything else that the government tells you is simply hogwash.

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In February, Marc Faber in an interview with CNBC-TV18 predicted that the Indian market (BSE) was on a bubble and that it would fall to 14000 – 12000 (the market was around 18000 then).  What a fall it has been since.  We have already touched 8000, though the markets have slowly inched upto 9500, we are still not out of the woods.  With the US and other major economies into a recession, we are indeed looking at some tough months ahead.

I had made light of Marc Faber’s predictions then.  Now i have ended up with my foot in the mouth

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