Goodbye, Dubai

12/03/2009 12:02 am EST

Focus: GLOBAL

Igor Greenwald

Chief Investment Strategist, MLP Profits

In the end, Dubai couldn't even cause a proper crisis. The deadbeat emirate should have been the straw that broke the camel's back, the bullet that put the world's big banks out of their misery.
 
One of the few spots in the Middle East not cursed with oil, the duty-free zone fancied itself an international finance and tourism hub, and borrowed wantonly for the mother of all makeovers. Like all such schemes, it boiled down to an "if you build it, they will come," to which the eager lenders silently added, "and if they don't come, the sheiks are good for it."

And so they built an artificial peninsula shaped like a palm, and then an artificial archipelago meant to resemble a world map, only this one's being allowed to sink back into the sea for lack of money to keep up the pretense. If the megalomaniacal Burj Dubai tower opens as promised next month, it will immediately become the world's tallest ghost town. Creditors stiffed as a result will not miss the Burj's resemblance to an upturned digit.

Venal, rash, and contemptuous, Dubai would have been a fitting agent of financial apocalypse. Only it turned out that it hadn't borrowed enough—at least relative to bank balance sheets rebuilt in the wake of last year's heavy losses. It might have been rash, but it was still no Lehman Brothers.

After enduring that root canal, no one was willing to lose more than two nights' sleep over the Dubai lenders' tough luck. Bank losses get cured with easy money. So, after a brief flight to the supposed safety of the US dollar, investors came to their senses and continued converting dollars into gold and other assets of more limited availability.

Is China just a thousand Dubais? It certainly shares the building fetish. As Greg Weldon notes, China now accounts for more than half of global cement consumption, and yet its idled cement-making capacity exceeds the combined annual output of the US, Japan and India. He also notes that Beijing has recently slowed its heretofore enthusiastic money printing. The government—with the US example fresh on its mind—is mindful of the threat of easy credit inflating speculative bubbles, especially given rising inflows from overseas investors betting on eventual appreciation for the Chinese yuan, now artificially pegged to the dollar.

Then again, between the earthquakes, rapid industrialization and the 9% annual growth rate, that spare cement capacity might not stay spare for long. The Chinese do like to gamble, as evidenced by the 59% year-over-year surge in Macau gambling revenue. So while the parallels between Dubai and Shanghai were not lost on some, it came as no surprise that the ruling Politburo has once again come down on the side of economic stimulus and growth.

China's rulers may be worried about their clans' investments, or perhaps their very hold on power unless they continue to deliver jobs. But if all the white elephants built in the name of expedience do one day crash, the tremors will spread far beyond China's shores.

In the meantime, all that growth will require a lot of timber, bet investors who bid up Ryan Irvine pick Sino-Forest. (TSX: TRE) 7% on heavy volume Tuesday in Toronto. And it will ultimately require higher interest rates in the faster-growing countries, a likelihood that recommends emerging-markets currency ETFs over dollar-denominated CDs or savings accounts. Carl Delfeld has done homework on the available alternatives.

China is hardly the world's only growth engine: India's economy has just posted a surprisingly strong 7.9% rate of expansion, and the rest of Asia, along with the Americas, is on an up swing as well. Fast-growing consumer demand in emerging markets (along with notable improvement in developed ones) also creates notable opportunities for technology companies. David Eiswert, whose global tech fund has been on a roll this year, talks about his favorite overseas tech plays in a Q&A.

I interviewed Eiswert during one of the market's periodic swoons, and he was incredulous that the herd was selling stocks with such fundamentally strong prospects. Since then, of course, the herd's rushed back to buy—at a higher price. There was another fleeting dip when Dubai lobbed its bombshell. But all the world heard was, "do buy."   

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