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Jon Talton

Analysis and commentary on economic news, trends and issues, with an emphasis on Seattle and the Northwest.

November 30, 2009 at 9:45 AM

Why Dubai is spooking the markets

Top of the News: Dubai’s real-estate collapse and de facto default on its bank debt may or may not signal a potent new downdraft in the Great Disruption. According to the Wall Street Journal, the cross-border exposure to banks is $123 billion, 72 percent held by European banks and 9 percent by U.S. institutions.

But we know from our own experience that these bubble pops are the gifts that keep on giving, thanks to the interconnected deals of huge banks. Thirty such behemoths are on a watch list of international regulators because of their risk to the global financial system. Among the, according to Financial Times, are Bank of America, Citigroup, Goldman Sachs and JPMorgan Chase.

Dubai does show the shoes waiting to fall out of the closet, an avalanche that may have been only temporarily stopped by Ben Bernanke’s Fed late last year in its “whatever it takes” strategy.

For example, those so-called toxic assets didn’t go away ($5 trillion in bad debt). They have been concealed by a dishonest change to accounting rules along with vague and ineffective federal promises. Commercial real estate and the reset of mortgages in 2010 are more shoes.

The boost to many big-bank earnings lately have been more about profiting from cheap money and trading than the economic fundamentals. Many other banks are sick. And all institutions still face the reckoning of working out the distortions and bad loans of the past — just the ones we know about. The markets are worried about Dubai for a reason.

Back to Dubai. In 2006, Chris Sheldon director of investment strategy for BNY Mellon, wrote about how building frenzies such as was happening in the emirate can signal economic drops. Using the “skyscraper indicator” developed by economist Andrew Lawrence in 1999, he wrote, that while “the building of skyscrapers typically coincides with business cycle momentum, the building of the world’s tallest building is a good proxy for dating the onset of a major economic downturn.” (E.g., the Empire State Building and the Great Depression; in this case, it’s the 2,800-foot Burj Dubai).

Today’s Econ Haiku:

What is mere money

Compared to the thin blue line?

Priceless bravery

Comments | More in Banking, Macro/Big picture

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