Dubai Debt default, Malaysian companies with exposure to Dubai

From Finance Yahoo(AP):

Sentiment in stocks has been dented by the news that Dubai World, which is thought to have debts totaling around $60 billion, has asked creditors if it can postpone its forthcoming payments until May. That has stoked fears of a potential default and contagion around the global financial system, particularly in emerging markets.

"Certainly the Dubai debt debacle and the uncertainty that it has created has had a severe knock on effect," said David Buik, markets analyst at BGC Partners.

Kit Juckes, chief economist at ECU Group, said the developments in Dubai and in the currency markets are related as the fall in risk appetite has pushed money into government bonds and into safe haven currencies such as the Swiss franc and the yen.

This, he said, is "testing the tolerance of central banks to see their currencies cause further damage to their economies."

Even if Dubai were to get a bailout from the UAE, the Dubai CDS would be paid in full. Malaysia is majorly affected by this debacle. A big part of the Nusajaya development is with Dubai World! Whoever said islamic debt was safe, weren't affected by the crisis must be really smoking something.

In addition to direct effect, Malaysia is the top country for Islamic Finance. The financial industry will surely be affected.

Who's going to buy the US government debt?

One of the biggest questions that deflationists have to answer versus the inflationists is:

who will buy all the debt issued by the government to keep interest rates down?

Inflaionists say that no one will buy this government debt and thus rates will go up and we will have inflation.

Deflationists have had trouble giving a credible sounding answer to this one. But it is important to address as low government rates are a basic tenant of the deflationist camp. I've had difficulty coming up with a reasonable answer to this myself and I'm skeptical of all ideas on deflation as well as inflation. I'm concluding that the debt issued by the government will be financed by savers.

The next question is when will this happen as it hasn't happened yet? Well, we have to consider China and foreign buyers of US debt. From Barrons:

the real question isn't whether the U.S. will pay back what it's borrowed from abroad. In essence, can foreign purchases of Treasuries keep up with the widening deficit? That's the question posed by Greg Blaha and Ryan K. Malo of Bianco Research in a note to clients.

Back in September 2007, foreign purchases of Treasuries equaled 270% of new issuance, they note, as they sucked up the available supply of U.S. government securities in sight. That was before the budget deficit exploded last year owing to the economic collapse and the cost of the federal bailouts. By September 2009, foreign investors were taking down only 16% of Treasury issuance.

Obviously, foreign purchase of debt is way down and will not be enough. Next, we consider the consumers/savers. The main reason why they have not been putting their money in treasuries is that some of them have been compelled to spend on cars and houses. They've been liquidating what little they have saved. Q3 GDP showed consumers saved 3.3% of personal income as opposed to 4.9% of income in Q2. [1] (Personal savings as a percent of income on line 34)

Anyhow, now we look at the other buyer, the Federal reserve.

The 10 year treasury rates have been going higher as the fed slows their treasury purchases. The Fed ended their treasury purchase in August. The fed's balance sheet also reflects this action. An inflationist would say once the Fed stop purchases, the rates will go up and inflation will soar. This has been happening as of late, probably why gold is up and proving inflationists right so far. But this is only somewhat true for a short period while the consumer transitions to saving again. This is an inflation "head fake."

Fed Balance Sheet (notice the treasury purchase portion of assets has flattened)

Coincidentally, gold has gone a lot higher during this void where the fed ended their buying and the thrifty part of the consumer is spending. Make no mistake, though that consumers will soon return to their saving ways. Of course not all savers turned to consumers at the government's incentive. They are probably the ones to thank for keeping the rates as low as they have been. I imagine after all these stimulus measures have taken effect, the consumer will revert back to saving and de-leveraging and buying treasuries. When the consumer/saver returns to increasing their savings rate, the treasuries will once again increase increase in value.

While I'm not too sure when this will happen, I can't imagine it will take too long, maybe a couple of months. When we see people stop buying into stimulus programs, saving more in the BEA personal income and outlays reports, and the prices of treasuries start to firm up is when we will have the treasury asset class strengthen again for quite a while unless of course the government manages to whip out another carrot. Even then the US government has only so many bullets before people start to lose patience.

Steve Keens, an original look into the financial crisis

Recently, Zerohedge wrote and article on an Australian professor, Steve Keen. The professor did correctly predict the financial crisis and is vocal that the US and Australia is still not in the clear.

One of the key points I got from his talk is that the current model of money supply is flawed. We should think of it like reservoirs and dams, with the dam controlling the flow of money to other reservoirs.

His idea is that dumping trillions of dollars in the reservoirs of banks will just make the water level higher and the rate of flow will not increase to the debt holders. The current economic posture of all this easing of monetary policy to the banks with tarp and asset buying with the fed is basically having little effect.

So, in the end, his conclusion is to actually give the money to the debtors, who have increased their flow the the creditors. This is the most simplest method of debt reduction. Basically he is saying, no pain, no gain. At some point when banks and restrict their flow of money, conventional monetary policy of increasing banks reserves do not work.

Intuitively, this probably explains why government programs like the cash for clunkers and home buyer tax credit had a major bang for your buck effect (money went to debtors), while the TARP program (money went to banks) looks like a failure.

There are some spillover effects of the current government monetary easing in that it does put extra income into consumer's pockets but not that much as many homeowners are on fixed loans. Generally, though the effects are not enough.

This idea does confirm the deflationists' point of view in that if the money is not flowing any faster to the debtors, you will still have the debtors de-leveraging. We should give the money to the debtors and wait to see if the economy will start leveraging up again, then we will have more sustainable growth. But again, this kicks the bucket down the road until another debt crisis hits us.

Takeaways from Lee Heng Guie, CIMB head of economics.

Two presenters: Head of economics, Malaysia and Equity Strategist

Key items:

• The RPGT will be enacted on the opening date. As long as the property sold is before end of this year, you will not get taxed.
• They see a higher chance for a slow recovery than a w or v shaped one.
• Foreign investing in Malaysia is basically a small portion for big fund managers. Despite the insignificant FDI, we still tend to trade in line with other asian economies.
• They see the economic recovery slow but equities are in a bull market but take some profits at this time.
• Malaysia will decouple from the US and world economy at sometime in the future.
• Credit Card service fees will likely stick: service tax of RM50 per card.
  

From my view, they are somewhat inconsistent at times. For instance, they are a buyer of equities but conclude that economic recovery will still be slow. They predict a decoupling from the world economy at sometime in the future, but I imagine they don't have a time frame on that.

My view is that we are in bear market rally and will bounce between highs and lows much like Japan did after their bubble burst. The decoupling will take a long time to happen, and will not happen for years, at least not as quickly as they are predicting. In the mean time, there is still money to be made or lost for a medium term investor.