In These New Times

Jim Willie

Market Oracle

2nd December, 2009

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On October 8th, the Jackass gave you a “TOLD YA SO” on the announced previewed end of the Petro-Dollar. The Saudis, with Chinese and Russians on their left and right arms, heralded the end of the sale of crude oil in US$ terms, with French and Japanese in tow. The Germans secretly were in charge of counseling toward the forged deal, but preferred the shadows. The new crude oil transaction settlement system will take time, but surely not to require eight years until 2018 as announced. That stated target date was intended to deflect and distract from US retaliation. The mere announcement should be regarded as a schematic diagram for architects and investors alike to follow. New systems must be constructed. Investors ahead of the curve will be the primary beneficiaries. The changes that result from the announcement itself will assure the completion date to be just 2 or 3 years, not 8 years.

In just two short months, it is time to say “TOLD YA SO” again, this time on the story that came out of the United Arab Emirates. Or should they be also called the Untied Arab Emirates, after their squabbles between city states? The Dubai World debt default and restructure has caused shock waves the world over. IT WAS FORECASTED IN AUGUST BY THE HAT TRICK LETTER. The vast construction bust has caused anticipated ripples. The threat to London banks is acute. Time will tell whether its ripples will cause sufficient damage to London and New York bankers to topple them and to force lost control in other banking functions like gold management, as my forecast indicated. It seems that worsened big London bank solvency from underwritten Dubai losses, rather than Arab USTreasury Bond dumping, will be the principal cause of any imminent breakdown, if it occurs. See the article entitled “US Bank Enemies at the Gates” from late August (CLICK HERE).

For the record, here is what was written over three months ago by the Jackass pen. “The regional construction boom in the Arab world has an epicenter in Dubai. Unfortunately, it has gone bust, and loudly so. If not for the prompt aid by Abu Dhabi bankers, a vast liquidation of Dubai would have embarrassed them in front of the world. Instead, a new threat comes. The Abu Dhabi rescue next must contend with an indigestion problem, as USTreasurys and likely other US$-based bonds are flooding their banking system. They might own a considerable batch of US bank stocks, soon to be dumped. Ambition led to a whiff of hubris, as fantastic architectural design led to large scope, seen in the skyscrapers and bridges. Not shown are the spectacular communities designed as trees with branches and leaf petals, many empty, busted, and without investment income. But they overdid it, and now must deal with corporate failures and liquidation challenges. The Persian Gulf bank failures represent the clear and present threat. The outsized projects have yielded to outsized rescues and next outsized indigestion to handle the funds in ways so as to avoid a string of national bank failures. Vast liquidations come, word comes from contacts.

A bank panic in the Persian Gulf could ensue very soon, a back door threat. It would clearly have origins in the United Arab Emirates, spread to the entire Persian Gulf like to Saudi Arabia, Kuwait, and elsewhere. From this global toehold, the bank panic could then spread to London, New York, and points in Europe. The UAE bankers must manage their situation. They are loaded to the gills with USTreasurys, the main currency used in the liquidations and rescues local to the UAE. They also have pet stock accounts in big US banks. As further liquidations occur, avoidance of bank failures seems a remote prospect. Watch the enemies at the gates, outside looking in, in urgent need of dumping USTreasury Bonds and other US$-denominated securities.”

Much can be told about hidden developments, like family squabbles between the UAE emirate rulers, bitterness over shame brought to the region, anger from unheeded counsel, sudden departures of people in key posts, and a desire to punish (even exploit) the decline in fortunes. The biggest question in my book is how much Abu Dhabi bankers wish to permit London bankers to absorb losses, before Abu Dhabi cleans up and grabs liquidated properties in Dubai at deeply distressed prices? Negotiations are underway, heated, and of vital importance in London between all the bankers involved. What can London offer Abu Dhabi? That is the question. The Arab world takes a dim view of debt to begin with. They abhor home and property mortgages generally, and thus never invest in mortgage bonds. To prove the point, hundreds of Dubai Prisoners languish in their hotels and apartments. They are British, American, and European engineers, financial cogs, analysts, and other workers whose employers from the parent Western firms defaulted on very large loans. These people will remain prisoners, and will likely become pawns in the game during negotiations. Conditions grew so desperate that hundreds of cars lie abandoned at airports, from workers who fled the region before trapped in homes.

Expert analysts warn of continued shock waves, as almost nothing has been resolved, very little asset or corporate liquidation has occurred, fallout has not yet been permitted, bank losses have not been declared, and resolution prices have not been posted. The internal battle between UAE city states, one rich in oil and a banking center, the other recovering from a construction bust amidst great hubris and displayed magnificent follies, will play itself out in the coming several months or years. The internal families are locked in a power struggle. In Dubai, 30% of their economy is derived from real estate, construction, and other property development. They have some truly braindead concepts and ideas at work, like indoor snow skiing, like cooled beaches with underground pipes, and golf courses that require much output from the desalinization plants to water the green landscape against sandy backgrounds. These are like plebeian versions of marble palaces in the desert. To be sure, a great awakening comes as a load of debt is dumped on the big bankers, just when they might have thought the worst was over.

One friend calls the Dubai construction array the greatest property folly in a century. Maybe so! Next come shock waves to London banks. The follies must be liquidated, with great losses dumped upon balance sheets. The banks must take much more lumps and losses. The original $10 billion in debt loss is more like $80 billion. Details on the story appear in the upcoming December Hat Trick Letter reports, which are streaming in on a daily basis. European banks have some exposure too, but not as much as London. The Abu Dhabi rulers must complete bargains with London bankers, who have conspired to suppress the gold price for two decades. The UAE leaders hold a huge amount of gold, and have demanded its return from London custodial accounts. Resentment seethes beneath the surface, the basis for Arab vengeance. The fallout will be wreckage of Royal Bank of Scotland, and maybe HSBC too.

In the process, watch power shift to Abu Dhabi as concessions are made by London under extreme pressures. Parts of Dubai are ghost towns, almost totally unoccupied vast projects. The biggest question in my book is whether RBS can go bust and be liquidated while still operating under the British Govt aegis? Lloyds will take large blows as well. The shock waves have not yet fully reverberated. They will continue for months. The Dubai property prices have not yet bottomed, and might settle at 20 cents per dollar on original basis. The legion of Western wonks in the financial sector stupidly expected Abu Dhabi to rescue all Dubai loans, without benefit of much knowledge of resentment, family conflicts, banker ambitions, and ramifications that extend to the new Gulf Dinar currency that shifted planning rooms (Saudi to Russian). My August article implied the Dubai bust would result since Abu Dhabi would not step in and bail out their UAE brethren. The inner conflicts and agendas were well known all along here.

The next shoe for the condemned Caucasian crowd is mortgage losses from Eastern Europe. For several years, the Swiss provided the funds as a result of their 1.5% steady official rate. At the time, it was 3% below the rest of the continent. The combination of home loan default, and sharply lower Eastern Europe currency basis has resulted in near total losses to Swiss banks on such mortgage portfolios. Also, watch Greece, which could be the next Dubai crush zone. It is a construction bust center also, like Spain. The socialist roots in Southern Europe have enabled a denial of property price declines from Spain to Italy to Greece. Instead of vast arrays of homes being sold at distressed lower prices, they sit in inventory at elevated absurd high prices. The bust impact comes soon, as these assets cannot be carried much longer on the books.