FT has provided forecasts for 2009 on various pertinent questions, answers to which are concise and succint, from its top correspondents and editors from various fields such as foreign affairs and science among other specialities. The forecasts are insightful and quite useful for businessmen and advisers alike.
Some excerpts:
Q: "Will oil end the year above $40 a barrel?
Ans: But my best guess is that oil is more likely to end the year below $40 than above it. Ed Crooks"
Q: "Will the recession end in 2009?
Ans" " No, as far as the US, the UK, Spain and Ireland are concerned; possibly Yes for other European economies and Japan. Whatever happens, 2009 will not be pleasant.
.......But even if we experience genuine green shoots of recovery, as I expect, 2009 will be a year to forget. Chris Giles"
Read on...the video is interesting too.
Recession, recovery, trade war and artificial life – welcome to 2009
Wednesday, December 31, 2008
Downturn in Home prices, Banks, Retailers: What's next?
There are headlines for almost 2 years now, that home prices in US and worldwide have been falling dramatically. If we consider the fact that these same prices when they were rising with interest rates at their lowest in 2004 and 2005, allowed the US consumers to splurge in consumerism and keep on buying, has all but come to end and is declining, and fast!
First the home prices went downhill, then the banks who made them easy for the consumers went downhill, then the consumer who could not use his house as an ATM (by refinancing) stopped buying retail goods. Lack of retail consumer spending on new goods and services has spread far and wide and now includes declining car sales, declining hotel average room rates, declining air fares and declining business for any country to do anything with tourism inlcuding places as varied as Thailand, India and Dubai among others.
Mumbai terror attacks, Thailand protests, Israeli attacks, Greece protests certainly did not help the global downturn. Most currencies have plummeted taking the foreign investments of various countries along with it.
Additionally, oil prices have gone down from the average price of 2008 estimated ot be at USD 100. This will help inflationary pressures to reduce dramatically in 2009 but because the consumer is not willing and unable to buy more goods and services, this has therefore caused the scenario set for a global recession or a depression, mainly due to lack of demand. The G-7 countries are expected to have a hard time in 2009 due to thier free wheeling rules and lack of supervision allowing financial institutions to gamble with consumers's money and will pay a very hefty price (the toll has already started with the demise of Lehman, Washington Mutual, Fannie, Freddie, Bear Stearns, AIG, Madoff etc.). Wealth of the richest people in the world has almost evaporated since most of it was tied to stocks.
Emerging Markets are expected to take the lead and provide relief with growth of at least 4-6% of GDP in 2009. Investors would be wise to make some investments, despite the foreign exchange risks in emerging markets as a whole and spread their investments carefully. With stocks on 'a sale of the century', now is a good time to slowly tread into waters over the course of next few months for whosoever has the cash. If we take cues from the private equity firms and soveriegn wealth funds, they have been making some excellent deals as the market has turned into a buyers market with a desperate need of cash/investment, instead of a sellers market.
Housing
Home prices fall as on 30th Oct 2008
October Home Prices in 20 U.S. Metro Areas Fall 18% (Update3)
US home prices fall at record rate of 18%
Retailers
25% of US Retailers could face closure in coming months, already Woolworths and others in Europe are in great difficulty
US retailers face grim outlook
U.S. Weekly Retail Sales Fall Most in Almost 6 Years (Update3)
First the home prices went downhill, then the banks who made them easy for the consumers went downhill, then the consumer who could not use his house as an ATM (by refinancing) stopped buying retail goods. Lack of retail consumer spending on new goods and services has spread far and wide and now includes declining car sales, declining hotel average room rates, declining air fares and declining business for any country to do anything with tourism inlcuding places as varied as Thailand, India and Dubai among others.
Mumbai terror attacks, Thailand protests, Israeli attacks, Greece protests certainly did not help the global downturn. Most currencies have plummeted taking the foreign investments of various countries along with it.
Additionally, oil prices have gone down from the average price of 2008 estimated ot be at USD 100. This will help inflationary pressures to reduce dramatically in 2009 but because the consumer is not willing and unable to buy more goods and services, this has therefore caused the scenario set for a global recession or a depression, mainly due to lack of demand. The G-7 countries are expected to have a hard time in 2009 due to thier free wheeling rules and lack of supervision allowing financial institutions to gamble with consumers's money and will pay a very hefty price (the toll has already started with the demise of Lehman, Washington Mutual, Fannie, Freddie, Bear Stearns, AIG, Madoff etc.). Wealth of the richest people in the world has almost evaporated since most of it was tied to stocks.
Emerging Markets are expected to take the lead and provide relief with growth of at least 4-6% of GDP in 2009. Investors would be wise to make some investments, despite the foreign exchange risks in emerging markets as a whole and spread their investments carefully. With stocks on 'a sale of the century', now is a good time to slowly tread into waters over the course of next few months for whosoever has the cash. If we take cues from the private equity firms and soveriegn wealth funds, they have been making some excellent deals as the market has turned into a buyers market with a desperate need of cash/investment, instead of a sellers market.
Housing
Home prices fall as on 30th Oct 2008
October Home Prices in 20 U.S. Metro Areas Fall 18% (Update3)
US home prices fall at record rate of 18%
Retailers
25% of US Retailers could face closure in coming months, already Woolworths and others in Europe are in great difficulty
US retailers face grim outlook
U.S. Weekly Retail Sales Fall Most in Almost 6 Years (Update3)
Sunday, December 28, 2008
Iceland: Rise and Fall of a finance based economy
Tiny Iceland Created a Vast Bubble, Leaving Wreckage Everywhere When It Popped
Many things come to mind, upon reading this very interesting article on how and why the banking system and the country of Iceland collapsed.
Firstly, high interest rates does not usually mean that everything is fine in any country's banking system. If anything, it correctly predicts that there 'may' be some underlying issues that normal investors are unaware of at a time of crisis. Usually, interest rates always rise AFTER a crisis but in case of Iceland, it was prior to the event.
Excerpt:
To a degree, the wealth Iceland enjoyed during the boom years was a mirage. It was conjured by high interest rates, which attracted vast sums of foreign money.
Secondly, pegging a currency to a stronger is usually always beneficial if the country or economy is small or does not have the international clout to raise funds when a crisis hits. Case in point, Iceland. It did not peg its currency nor did it join the Euro but decided to go alone, just like UK. and when the crisis hit, Iceland was totally unable to raise any funds (nor had sufficient reserves) to pay off any of its maturing bonds issued by the Govt or corporates. They also could not stop the foreigners, like Britishers, who had kept too much deposits with Icelandic banks due to high interest rates, from withdrawing. The last straw hit the camel's back, when the British Govt decided to protect its citizens/residents by taking over the local branch/subsidiary of the Kaupthing bank in the UK thus making the crisis in Iceland even worse while doing what it needed to do to protect its own citizens/residents as per its local banking regulations under which the UK branches of Kaupthing bank from Iceland had to adhere to.
Something that connects Middle East is the pegging of their currencies to the USD due to their individually small economic size on a global scale. This is what protected all of them and let them 'hold the value' of their USD assets in the worst financial crisis. I am glad the various Govts in Middle East including UAE held on to their views firmly despite 'advice' and reports from various 'smart' banks/economists and did not depeg their currencies, because if they had, their economies and the currency may have faced the same fate as that of Iceland. I wonder where these economists are these days and what does their analysis says? How come they are not reported in the media any longer?
Excerpt:
What makes Iceland different: It tried to build a global banking center on top of a tiny currency. So when foreign investors tried to pull out -- converting kronur back into dollars or euros en masse -- its currency fell like a rock, spurring more withdrawals.
Thirdly, any economy which rises based on just one industry and that too extremely rapidly, for example, Icelandic banks grew out of nowhere into financial giants in Europe and even other parts of the world since 2000. Due to inexperience of local regulators, bankers themselves, Govt, and high interest rates, a bubble of incoming money - just like US - got created and Icelandic banks thought that this would continue forever. However, that projection turned out be DEAD wrong. As soon as the crisis hit, not only foreigners withdrew all the money but the Central bank of Iceland or any of the banks could not raise even one penny.
One thing that comes out, that whoever - whether a company or a Govt or an individual- if they borrow more and more to keep themselves afloat, it is just a matter of time before they fall down miserably. The whole pack of cards will certainly fall, when no one wants to loan more money or the rating goes down.
Read more from the WSJ:
The Isle That Rattled the World
Many things come to mind, upon reading this very interesting article on how and why the banking system and the country of Iceland collapsed.
Firstly, high interest rates does not usually mean that everything is fine in any country's banking system. If anything, it correctly predicts that there 'may' be some underlying issues that normal investors are unaware of at a time of crisis. Usually, interest rates always rise AFTER a crisis but in case of Iceland, it was prior to the event.
Excerpt:
To a degree, the wealth Iceland enjoyed during the boom years was a mirage. It was conjured by high interest rates, which attracted vast sums of foreign money.
Secondly, pegging a currency to a stronger is usually always beneficial if the country or economy is small or does not have the international clout to raise funds when a crisis hits. Case in point, Iceland. It did not peg its currency nor did it join the Euro but decided to go alone, just like UK. and when the crisis hit, Iceland was totally unable to raise any funds (nor had sufficient reserves) to pay off any of its maturing bonds issued by the Govt or corporates. They also could not stop the foreigners, like Britishers, who had kept too much deposits with Icelandic banks due to high interest rates, from withdrawing. The last straw hit the camel's back, when the British Govt decided to protect its citizens/residents by taking over the local branch/subsidiary of the Kaupthing bank in the UK thus making the crisis in Iceland even worse while doing what it needed to do to protect its own citizens/residents as per its local banking regulations under which the UK branches of Kaupthing bank from Iceland had to adhere to.
Something that connects Middle East is the pegging of their currencies to the USD due to their individually small economic size on a global scale. This is what protected all of them and let them 'hold the value' of their USD assets in the worst financial crisis. I am glad the various Govts in Middle East including UAE held on to their views firmly despite 'advice' and reports from various 'smart' banks/economists and did not depeg their currencies, because if they had, their economies and the currency may have faced the same fate as that of Iceland. I wonder where these economists are these days and what does their analysis says? How come they are not reported in the media any longer?
Excerpt:
What makes Iceland different: It tried to build a global banking center on top of a tiny currency. So when foreign investors tried to pull out -- converting kronur back into dollars or euros en masse -- its currency fell like a rock, spurring more withdrawals.
Thirdly, any economy which rises based on just one industry and that too extremely rapidly, for example, Icelandic banks grew out of nowhere into financial giants in Europe and even other parts of the world since 2000. Due to inexperience of local regulators, bankers themselves, Govt, and high interest rates, a bubble of incoming money - just like US - got created and Icelandic banks thought that this would continue forever. However, that projection turned out be DEAD wrong. As soon as the crisis hit, not only foreigners withdrew all the money but the Central bank of Iceland or any of the banks could not raise even one penny.
One thing that comes out, that whoever - whether a company or a Govt or an individual- if they borrow more and more to keep themselves afloat, it is just a matter of time before they fall down miserably. The whole pack of cards will certainly fall, when no one wants to loan more money or the rating goes down.
Read more from the WSJ:
The Isle That Rattled the World
Friday, December 26, 2008
Thursday, December 25, 2008
Another one bites the dust: US finance giant GMAC receives Govt funding
GMAC went from being an independent company under GM control to being owned by a Private Equity - Cerebrus - and now into the arms of the Govt.
It is sadly true that American companies, the largest in the world, part of the Fortune 500 Global largest companies, are slowly falling apart, one by one.
I do not think there were "unusual and exigent circumstances" to bail out GMAC. Hardly! We all knew the financial system of US has been broken for last several months with more such circusmtances occuring over the next few months. GMAC is just one of the many that have been bailed out.
Last night, on X'mas eve, it was announced that another Finance company, GMAC, one of the largest finance providers for car loans was allowed to convert into bank so as to be allowed to tap into Govt funds (aka bail out).
Recently, American Express (Credit Cards) and CIT Group also asked to become banks in order to receive Govt funding. Private bank of American Express was already sold off last year to Standard Chartered Private Bank. Also, Goldman Sachs and Morgan Stanley fell on their knees and accepted bail out from the US Treasury and agreed to become commercial banks and agreed for greater accountability and regulation.
All in all, I strongly believe that American corporations are falling apart and there were 153 Fortune 500 companies who were based in America last year in 2008. I would be keenly watching the new list of 2009 and be anxious to find out how many American companies remain on the Global Fortuen 500 list, after the market turmoil of 2008, especially the independent ones and not supported, owned or bailed out by the US Govt.
Source: Bloomberg
GMAC Will Become a Bank as Fed Bolsters U.S. Plan to Save GM
US & UK Housing Prices: getting worse
Housing prices in US have been declining very rapidly as compared to prices over the last couple of years. In fact, as on date, the average home price according to this chart, from National Association of Realtors is at a 8 year low, almost close to prices back in 2000. Have a look at the latest chart below.
With millions of homes as unsold inventory, another million or so in foreclosures, job losses, slowing retail sales, rising USD (hurting export prices), increasing debt, continued international wars, rising terrorism, things have never looked so bleak for the United States. The Fed interest rates at close to zero, are a shocker too. If things were so rosy, then the million dollar question (pun intended) is: Why are the interest rates so low?
Even the pace of decline in home prices has increased.
Distressed property buyers had provided some solace last month, however, even they have found other avenues or are looking at better ways to protect their money, given deteriorating sales and margins across industries.
Rising debt levels in USA and the false sense of security shown by USD over last few months will shatter the dreams of many investors in the future, with the economic situation worsening.
However, this is a global trend and not restricted to US. Even in UK, home prices have dropped and home sales are declining. The latest news coming out of UK, mentions that further price declines of upto 10% are to be expected over the next few months in 2009, inspite of the worst housing market in 2008.
Source: http://www.chartoftheday.com/20081224.htm?T
Published: Dec 24, 2008
Source: New York Times
November Home Sales Fell Faster Than Expected
Excerpts:
That trend is especially pronounced in regions of the country hit hardest by housing’s boom and bust. In parts of Southern California, more than half of all houses sold in November had gone through foreclosure at some point in the last 12 months, according to MDA DataQuick, a real-estate research firm.
Still, some economists said that home prices will fall even farther before they dip low enough to entice potential home buyers. Joshua Shapiro, chief United States economist at MFR, said that some parts of the country may only be halfway through such a retrenchment.
Source: BBC
House prices 'will fall further'
Excerpt:
"The numbers are going to get worse before they get better", warned the trade body's chief economist Simon Rubinsohn.
With millions of homes as unsold inventory, another million or so in foreclosures, job losses, slowing retail sales, rising USD (hurting export prices), increasing debt, continued international wars, rising terrorism, things have never looked so bleak for the United States. The Fed interest rates at close to zero, are a shocker too. If things were so rosy, then the million dollar question (pun intended) is: Why are the interest rates so low?
Even the pace of decline in home prices has increased.
Distressed property buyers had provided some solace last month, however, even they have found other avenues or are looking at better ways to protect their money, given deteriorating sales and margins across industries.
Rising debt levels in USA and the false sense of security shown by USD over last few months will shatter the dreams of many investors in the future, with the economic situation worsening.
However, this is a global trend and not restricted to US. Even in UK, home prices have dropped and home sales are declining. The latest news coming out of UK, mentions that further price declines of upto 10% are to be expected over the next few months in 2009, inspite of the worst housing market in 2008.
Source: http://www.chartoftheday.com/20081224.htm?T
Published: Dec 24, 2008
Source: New York Times
November Home Sales Fell Faster Than Expected
Excerpts:
That trend is especially pronounced in regions of the country hit hardest by housing’s boom and bust. In parts of Southern California, more than half of all houses sold in November had gone through foreclosure at some point in the last 12 months, according to MDA DataQuick, a real-estate research firm.
Still, some economists said that home prices will fall even farther before they dip low enough to entice potential home buyers. Joshua Shapiro, chief United States economist at MFR, said that some parts of the country may only be halfway through such a retrenchment.
Source: BBC
House prices 'will fall further'
Excerpt:
"The numbers are going to get worse before they get better", warned the trade body's chief economist Simon Rubinsohn.
Monday, December 22, 2008
NYT: How Indian banks avoided a crisis?
This article explains concisely how and why the Indian banking system remains robust despite the growing crisis.
India is a highly regulated system and all applications for new foreign banks or expansion of local banks are given out very carefully and slowly, without any discrimination. One of the mainstays of giving out licences for branch expansion or of entry into the Indian banking system by foreign banks is the condition to open branches in rural and/or semi urban areas (of which there are many, India still has over 60% of it's population, out of 1.3 billion, designated as poor and living mostly in rural areas).
The Central Bank of India, named RBI or Reserve Bank of India, also has a political and social mandate, i.e. mainly not to allow the banks to fail due to the political ramifications on the poor.
The article explains very well, as to what the Indian bankers think, after the crisis and what they thought prior to the crisis. Actually, they are very happy since the regulators did their jobs well and did not allow banks to expand so much that they could not manage themselves, all in the pursuit of profits, which have evaporated as quickly as they came and many international banks have been embarassed by their lack of external and internal controls.
It appears that the western model of banking is failing due to its sole focus on profitability at the cost of everything else including political and social costs. A new model just like in Spain, where loans cannot be securitized easily just like India's regulatory system may be the answer to future stability of the global financial system.
How India Avoided a Crisis
Published in New York Times, Dec 19, 2008
P.S. Nudge, nudge, wink, wink: I work for an Indian bank these days.
India is a highly regulated system and all applications for new foreign banks or expansion of local banks are given out very carefully and slowly, without any discrimination. One of the mainstays of giving out licences for branch expansion or of entry into the Indian banking system by foreign banks is the condition to open branches in rural and/or semi urban areas (of which there are many, India still has over 60% of it's population, out of 1.3 billion, designated as poor and living mostly in rural areas).
The Central Bank of India, named RBI or Reserve Bank of India, also has a political and social mandate, i.e. mainly not to allow the banks to fail due to the political ramifications on the poor.
The article explains very well, as to what the Indian bankers think, after the crisis and what they thought prior to the crisis. Actually, they are very happy since the regulators did their jobs well and did not allow banks to expand so much that they could not manage themselves, all in the pursuit of profits, which have evaporated as quickly as they came and many international banks have been embarassed by their lack of external and internal controls.
It appears that the western model of banking is failing due to its sole focus on profitability at the cost of everything else including political and social costs. A new model just like in Spain, where loans cannot be securitized easily just like India's regulatory system may be the answer to future stability of the global financial system.
How India Avoided a Crisis
Published in New York Times, Dec 19, 2008
P.S. Nudge, nudge, wink, wink: I work for an Indian bank these days.
Saturday, December 20, 2008
Many banks across Middle East downgraded; Dubai Entities suffer the same fate
In line with the deteriorating liquidity and profitability conditions in banks around the world over the coming year, S&P and Fitch reduced their outlook on variety of Middle Eastern financial and Govt institutions on Thursday.
S&P revises Dubai GREs’ outlook
Fitch cuts ratings on 15 Gulf banks
Banks are supported by Governments in this region and hence have almost no chance of going down. Additionally, for example, countries such as UAE, Kuwait and Saudi Arabia have added liquidity into their banking systems since Sep 2008 and some Governments have even guaranteed deposits for all national banks and some foreign banks. It is interesting to note that, in UAE, for example, 85% of fixed deposits in the banking system belong to UAE nationals.
S&P revises Dubai GREs’ outlook
Fitch cuts ratings on 15 Gulf banks
Banks are supported by Governments in this region and hence have almost no chance of going down. Additionally, for example, countries such as UAE, Kuwait and Saudi Arabia have added liquidity into their banking systems since Sep 2008 and some Governments have even guaranteed deposits for all national banks and some foreign banks. It is interesting to note that, in UAE, for example, 85% of fixed deposits in the banking system belong to UAE nationals.
12 major banks downgraded
In a swiftly changing financial landscape, it was only a matter of time before the ratings agencies started downgrading banks.
Well, they did that today.
CNBC Link: Twelve Major Banks Have Credit Ratings Cut by S&P
Bloomberg Link: Goldman, UBS, Deutsche, Morgan Stanley Lowered by S&P (Update2)
After the various events that have unfolded over the last year or so beginning with subprime crisis, Bear Stearns and Lehman collapse, interest rate cuts, falling oil price, plummeting stock indexes, Fannie Mae and Freddie Mac collapse, Merrill Lynch acquisition by Bank of America, Goldman and Morgan Stanley turning into commercial banks, bank bailouts and most recently the Madoff securities fraud, the list does not seem to end. Also included in this long list of events is the Auto Bailout passed today for USD 17.4 billion.
If such large scale state intervention occurs across US, then other countries will also have a serious impact on trade, inflation and growth of their economies besides preparing to support their own large banks.
However, with declining interest rates, lower economic growth forecast, lack of buyers for either real estate or stocks, complete rout in liquidity markets, stoppage of bank’s lending activity has now impaired the profitability and stability of large banks. Various small banks (about 25) have already closed in USA till date in 2008. More mergers and closures of smaller banks are to be expected globally in such testing times besides decline in profitability.
Well, they did that today.
CNBC Link: Twelve Major Banks Have Credit Ratings Cut by S&P
Bloomberg Link: Goldman, UBS, Deutsche, Morgan Stanley Lowered by S&P (Update2)
After the various events that have unfolded over the last year or so beginning with subprime crisis, Bear Stearns and Lehman collapse, interest rate cuts, falling oil price, plummeting stock indexes, Fannie Mae and Freddie Mac collapse, Merrill Lynch acquisition by Bank of America, Goldman and Morgan Stanley turning into commercial banks, bank bailouts and most recently the Madoff securities fraud, the list does not seem to end. Also included in this long list of events is the Auto Bailout passed today for USD 17.4 billion.
If such large scale state intervention occurs across US, then other countries will also have a serious impact on trade, inflation and growth of their economies besides preparing to support their own large banks.
However, with declining interest rates, lower economic growth forecast, lack of buyers for either real estate or stocks, complete rout in liquidity markets, stoppage of bank’s lending activity has now impaired the profitability and stability of large banks. Various small banks (about 25) have already closed in USA till date in 2008. More mergers and closures of smaller banks are to be expected globally in such testing times besides decline in profitability.
Wednesday, December 10, 2008
US market analysis and predictions by Barry Ritholtz
One of the most widely read and followed commentators on the web and widely interviewed on variety of television programs: Bloomberg, CNBC, Fox etc, is one of my daily must read sites. His blog site has been named the No. 1 site on the internet on financial matters.
This interview was conducted in Nov and published early this week. It has now become the most widely read article on Barrons online site.
An excerpt:
Barron's: What's your global outlook?
Ritholtz: In 2006, I was probably the most bearish guy on the Street; now at a table of industry people, I'm the bullish guy. We've cut this market in half; that doesn't mean it can't go lower. We're in a medium recession. If this turns into a deeper, more prolonged recession, all bets are off.
Please read it to get a view on what to expect and analyze where to invest based on the comments of Mr. Ritholtz.
http://online.barrons.com/article/SB122852213723784245.html?page=sp
Tuesday, December 9, 2008
Revaluing the dirham
Economists, banks, business magazines and investment banks speculated from Dec 2005 until 2008 on the possibility of revaluing the dirham (currency of the UAE). The UAE dirham is pegged to the USD at a fixed rate of 3.6730 since the 1980’s.
My stance for the longest time has been that revaluation is highly unlikely and mostly will not happen.
Banks such as Standard Chartered, EFG Hermes, Morgan Stanley and a leading business magazine-Arabian Business amongst others, all contributed to the speculation and claimed the revaluation is just days away. This despite the fact that H.H. Sheikh Mohammed bin Rashid Al Maktoum, Vice-President and Prime Minister of the UAE and Ruler of Dubai along with the Governor of the Central bank, H.E. Sultan Nasser Al-Suwaidi, came out in favour of the dirham and stated that there was no such measure to be expected. They, however, did form a committee to evaluate the revaluation in April 2008. Regardless, the rumours would not go away. Banks speculated and so did people causing a lot of pressure on the interest rates in Dirham.
Under normal circumstances there would be no major difference between interest rates of UAE dirham or the US dollar in the UAE. However, due to the speculation, the interest rates on UAE dirham kept on declining, forecasting a revaluation of the currency. Residents were keen to convert their USD and other currency holdings into AED in order to benefit from the revaluation (and willing to accept a lower interest rate), should the fixed exchange rate be altered by the Govt. But, alas, it was not to be!
My comparison of revaluation has always been to the social institution of marriage. UAE was having a rough time due to high inflation because of low USD interest rates and high commodity prices and the going was rough. Just like a marriage, if the going goes tough, it does not mean that the solution is to dissolve the marriage or change its terms and conditions. You have to take the good with the bad. In good times, for almost 3 decades, the USD pegged exchange rate helped the UAE, so why should it revalue when the going got bad for a few months or in one year. In any long term strategy, you cannot alter your course due to some short term hiccups.
Additionally, I also believe that revaluation would have caused the sudden increase in the prices of real estate in UAE over night by waiving of a pen. This may have caused sellers and speculators to sell for a quick profit leading to volatility in property prices. Especially if revaluation was made for more than 15%, as many observers were expecting. This would have meant that prices of real estate would have risen by 15% since all real estate is dominated in dirhams.
The volatility in the currency and its interest rates had become so high that at least 2-3 times over a period of 3 years the foreign exchange departments of various banks in UAE had to shut trading between UAE dirham and USD, to ease off pressure on the dirham (over a weekend).
The interest rates and forward swaps also fluctuated. Many clients booked forwards on their dirham currency exposures.
Everyone thought that if the dirham price went up, they would make a profit over night. Estimates of revaluation fluctuated from 2-3% up to 20%. Neither was to happen.
In my opinion, had the revaluation occurred, the maximum would have been 2-3% but most of the market makers and many clients disagreed.
Now, we have the example of various European countries who have not joined Euro and hence their currencies have fallen apart. Best example is Icleand whose currency went downhill. Apparently other countries are happy that they joined the European monetary union and accordingly have not suffered much.
This reconfirms the faith of smaller currencies that if they are pegged or aligned with some of the stronger currencies, they will continue to be safe even if the bad times roll.
Read here:
Published: Dec 6, 2008
theglobeandmail.com
Euro's lustre shines bright in hard times
Monday, December 8, 2008
Moody's Rating Agency:Moderators of the crisis
My opinion of rating agencies has been doubtful for past several years ever since they became a listed company and received payments for issuing their ratings, which is a total conflict of interest. This started somewhere in the 70's according to the NYT article and by the 90's Moody's was raising billions in revenues from the companies whom they were rating (mostly from structured notes) and hence jeopardising their own future! Today, no one truly believes in thier ratings.
They announced subprime crisis when the housing collapse had already started in USA and suddently downgraded billions of dollars worth of structured notes causing a steeper decline. They usually always announce the demise of any corporation, after the fact, be it Enron, Lehman or any other major catastrophe. They have access to senior management and have the best brains working for them, then why do they never pronounce their risk ratings prior to the occurence?
I just fail to understand.
I also believe that ratings agencies are only able to advise on the stability of past income and no more! What I mean by this is that they usually never give ratings to top companies of any of the emerging markets. Why? Because these companies may not have had a 'stability of past income" hence rating agencies cannot analyse them or rate them. Rating agencies cannot predict or even claim to predict future income or growth strategies keeping in mind the most recent trend or growth potential. In fairness, this is not their role. However, due to their inability to guide on future income or stability of any company or country, some of the best investment opportunities cannot be made by just looking at the available ratings.
Some of the main reasons for failures of rating agencies are outlined in this article in the New York Times.
Some Excerpts:
“These errors make us look either incompetent at credit analysis or like we sold our soul to the devil for revenue, or a little bit of both.” — A Moody’s managing director responding anonymously to an internal management survey, September 2007.
“Moody’s was like a good watchdog that had regarded the financial markets as its turf and barked and growled when anybody it didn’t know came near it,” said Thomas J. McGuire, a former director of corporate development at the company who left in 1996. “But in the ’90s, that watchdog got muzzled and gelded. It was told to turn into a lapdog.”
Edmund Vogelius, a Moody’s vice president, explained the company’s business model in a 1957 article in The Christian Science Monitor.
“We obviously cannot ask payment for rating a bond,” he wrote. “To do so would attach a price to the process, and we could not escape the charge, which would undoubtedly come, that our ratings are for sale.”
In the early 1970s, Moody’s and other rating agencies began charging issuers for opinions. The numbers of securities — and their complexity — had increased and the agencies could no longer finance their operations on revenue from investors who bought Moody’s publications.
Interesting read:
http://www.nytimes.com/2008/12/07/business/07rating.html?em=&pagewanted=all
Tuesday, December 2, 2008
Dubai Troubles: Is it real?
Many people in any social setting are talking about the Dubai bubble (some call it the balloon) too!
I beg to differ just as I differ in my opinion, once again, with the Economist. The Economist printed another article without much facts in it. Here is the article:
http://www.economist.com/world/mideast-africa/displaystory.cfm?story_id=12684897
The article claims property prices have declined upto 80% without elaborating and providing details such as which location, is the property completed, used by resident or was it an off plan property to be delivered in 2012 or beyond? Speculator frenzy has indeed led to some decline of the 'over the top' pricing as speculative buying interest along with the buyer has simply disappeared so whoever is left holding the bag is in trouble, because he/she was a speculator in the first place. I don't have much sympathy with people losing values in speculative frenzies because they make a lot of money in booms by speculating and also lose a lot of money by speculating, so it all evens out in the end.
Coming back to the article and some commenters, I wonder why people talk about many laborers in their statistics. These laborers are unable to afford any form of housing ANYWHERE in the world? Then why will they be included in any number crunching here? Do we ever say that in USA or India or London that there are so many laborers or tailors or low income people, hence property prices in USA, India or London will not rise!
Nowhere in the world, we consider low income wage earners when evaluating home prices etc, so why do people get carried away here in Dubai?
Additionally, Dubai is run like a company and please tell me one company (or any Govt?) where the CEO or the management (or the PM or President) will not try to manage or navigate when a company (or a country) hits a rough patch. Due to this maneouvering some 'future' projects have been delayed and new developers are having a very hard time.
Dubai has been expanding and increasing its official GDP around 12-18% pa, unofficial numbers are greater as inputs of various types of people and industries in the best Govts of the world also cannot be captured.
The tourism is rising too and expected visitors are currently at over 7m people in UAE p.a. These folks spend thousands of dollars in hotels, visas, airfares, cabs, restaurants, children's rides, shopping malls, airport taxes etc. This is additional rising income for the Govt that did not exist just 10 years ago, besides property taxes, maintenance fees and the famous city toll gates.
Govt has also placed rigid plans for security and surveillance and hence is considered one of the safest cities in the world. Business capital has a tendency to gravitate towards a country/city that tends to provide the safest climate for employees, company and travel among other things.
Unfortunately, anywhere that you look, in this wide world of ours, especially in Africa, Middle East and Asia, we see calamity, wars and terror! This simply does not exist here in the oasis of calm in UAE hence attracting more and more rich business people that are a natural market segment for the country of UAE for both business as well as leisure. Being a central point for Africa, Middle East and Asia is also a plus point.
UAE also wants biggest and best of everything. There is nothing wrong with it unless you are a jealous kind of individual (or country). Because when America or Britain built its biggest and best armies, biggest and best bombs (remember Hiroshima), even biggest and best banks and insurance companies and beverage companies, internet companies and .....the list goes and on......how come the same people who are now getting jealous of Dubai did not previously or have never said America is building bigger so it will go down. No one ever said America is building the San Francsiso bridge which is the most beautiful and biggest bridge so America will fall. Or Canada is building the CN Tower which is the biggest in the world so Canada will inevitably fall.
We must compare and see the future, the trend, everything. We must have substance in our thoughts and provide facts.
I have lived here in UAE for over 14 years and have only seen progress and development. Neither NYC, London or China or Africa or any country can claim that they provided safety for their citizens and travellers alike as much as UAE. There has been no major crime here EVER! This is one major social factor for the growth here.
Aside from that, the country provides no taxes and no foreign exchange restrictions or 'protection of its economy' style legislations, except for banks (where it does not allow more than 1 bank from each country), which is fair as per WTO ground rules similar to ALL other countries.
Unless, you wish to do local retail sales in UAE, they do not want anyone to require a local partner. Hence if you a large trading or a manufacturing company, they do not even insist for you to create local employment which almost every other country wants you to do.
As far as labour rights are concerned, I say, if these labourers were so happy in their home countries, then why did they even think of paying large amounts of fees to their agents and arrive here!!! Even high income professionals are willing to take a trip to UAE in search of employment just like back in the 1960's people used to go to USA or UK in search of employment. Just ask any headhunter how many unsolicited resumes/CV's they receive on a weekly basis. The most recent number is approx 3,000 per week per headhunter (up from 500 last year)!!
I am sure there is a reason for the daily dose of job advertisements in the local dailies and international markets such as UK and India and Philippines from where hundreds of job agencies are supplying employment opportunities to people looking for work and sending them here.
The economy of UAE and GCC has been gradually diversifying into non oil and gas industries thus providing lot of stability for the future.
Since 1985, this country has been on a path to glory. Emirates airlines was created in 1985 which is today one of the finest airlines in the world.
A port company DP World (1991) and Jebel Ali Port (1970's) was created which today is the 4th largest port operator company in the world.
For such a small country of UAE (4m pop.), Etihad, Emirates, Air Arabia, Fly Dubai, Gulf Air - now sold were created along with 3 airports just in Dubai (4th is under construction) and all of them have been successful, not only in the region but globally!
The entire GCC is investing heavily into infrastructure and manufacturing facilities. Over USD 18bn will be invested in making 10 of the largest steel plants in GCC including 3 here in the UAE creating employment for many in the plant and ancillary industries and hence also attracting future residents and businessmen from across the world to buy/trade/supply to these plants.
Have a look here
http://www.eyeofdubai.com/v1/news/newsdetail-22050.htm
Dubai already has one of the largest alumnium plants in the world, named DUBAL. However, Abu Dhabi have now ventured into creating the single largest aluminium plant in the world:
http://www.iht.com/articles/2006/02/19/bloomberg/bxabu.php
Thousands of jobs in the plant and ancillary industries will be created and more business travelers will arrive being suppliers/buyers and traders.
Last week, in Abu Dhabi at the MEMEX exhibition it was announced by an independent research company, Proleads, that over USD 115bn will be spent in GCC in the manufacturing sector. Even if this number is high, assuming even a 50% actual investment of approx USD 50bn in the manufacturing sector, this investment will create hundreds and thousands of jobs spearheading the growth of the Middle East.
The growth strategies due to Govt spending and attracting business capital for diversification of various countries in the region are having a serious impact to circumvent the end of the oil era. But oil is not finishing in at least a 100 years (maybe 50 years) and until then, Dubai and UAE and the GCC would have reinvented into a manufacturing and tourism base besides just a glitzy and glamorous city.
Dubai and GCC is not only about real estate but about the entire spectrum of any economy. Every economy goes through a different path of success. Dubai’s success has been due to various reasons outlined above and is just a different path that has not been used by any other country just because no one has ever been in the same trajectory.
When it comes to number of units of real estate being constructed, there is no confirmation of the information that over 200,000 units will be available in any 1 year or 2 year period. If we do the math, i.e. if 1 tower has an average of 400 units, then we need 50 towers to be delivered every year (or two) for just 20,000 units. This means an average of one tower or 400 villas to be delivered every week (or two). This is an unrealistic assumption, in my opinion. No country can build or deliver so many units in one city week after week.
Due to lack of power supply, sewerage and other amenities, the Govt is practically constrained to release units and give certificates to enable people to move in.
By my most generous estimate (sorry, have no facts here), is that only about 10-12,000 units at most get delivered every year. This is nothing compared to the number of people who visit here, come on employment here or are just visitors using short term rentals and create new demand each year.
When I speak with some apartment owners who make their properties available for short term rentals, they are quite happy because the returns on short term rentals cover the annual long term rent in less than 6 months and still leave a chance to use it for your personal consumption.
Yes, there is a severe correction in the Dubai real estate market. However, it is not impacting any users who have steady jobs and income (or are rich businessmen, of which there are many) and nor the short term apartment owners and nor the cash rich people who own properties in cash outright.
The major impact of this crisis has been on new developers or on new projects on which construction has yet to start mainly due to lack of bank finance and lack of speculators. also, many buyers are adopting a wait and watch attitude which is normal and to be expected in a falling price market.
I estimate ratios of various type of property owners in Dubai as follows:
Actual self owned users: 30-35%
Short term rentals: 10-15%
Cash owned property users/people with capacity to hold: 30-35%
Speculators: 30-35%
Based on above estimates, I believe only about 30% speculators who have gained tremendously in previous years by flipping the properties and had become mega rich will get a shock. They will revert to their original sources of income outside of real estate or get totally wiped out. Negative equity has started hurting some of them and they are the ones causing all the distress sales.
I believe it will remain a buyers market for another 6 months and then things should stabilize and continue their rise once again towards making Dubai the most expensive place in the world!
As I sometimes mention, Dubai needs only about 1,000 NEW rich people every year from somewhere on this planet for it to continue its growth. With a population of millionaires reaching millions itself globally, I don’t think it should be a problem for Dubai. It never has been and it never should be! Investors need to place their money in a safe country providing the maximum opportunity. With the economies of the developed world nose diving due to their self destruction due to easy availability of cheap money at low rates, high gearing by various banks (not here in UAE) and lack of new money supply for variety of reasons, Dubai has everything to gain, if you think of 10 years from now.
I beg to differ just as I differ in my opinion, once again, with the Economist. The Economist printed another article without much facts in it. Here is the article:
http://www.economist.com/world/mideast-africa/displaystory.cfm?story_id=12684897
The article claims property prices have declined upto 80% without elaborating and providing details such as which location, is the property completed, used by resident or was it an off plan property to be delivered in 2012 or beyond? Speculator frenzy has indeed led to some decline of the 'over the top' pricing as speculative buying interest along with the buyer has simply disappeared so whoever is left holding the bag is in trouble, because he/she was a speculator in the first place. I don't have much sympathy with people losing values in speculative frenzies because they make a lot of money in booms by speculating and also lose a lot of money by speculating, so it all evens out in the end.
Coming back to the article and some commenters, I wonder why people talk about many laborers in their statistics. These laborers are unable to afford any form of housing ANYWHERE in the world? Then why will they be included in any number crunching here? Do we ever say that in USA or India or London that there are so many laborers or tailors or low income people, hence property prices in USA, India or London will not rise!
Nowhere in the world, we consider low income wage earners when evaluating home prices etc, so why do people get carried away here in Dubai?
Additionally, Dubai is run like a company and please tell me one company (or any Govt?) where the CEO or the management (or the PM or President) will not try to manage or navigate when a company (or a country) hits a rough patch. Due to this maneouvering some 'future' projects have been delayed and new developers are having a very hard time.
Dubai has been expanding and increasing its official GDP around 12-18% pa, unofficial numbers are greater as inputs of various types of people and industries in the best Govts of the world also cannot be captured.
The tourism is rising too and expected visitors are currently at over 7m people in UAE p.a. These folks spend thousands of dollars in hotels, visas, airfares, cabs, restaurants, children's rides, shopping malls, airport taxes etc. This is additional rising income for the Govt that did not exist just 10 years ago, besides property taxes, maintenance fees and the famous city toll gates.
Govt has also placed rigid plans for security and surveillance and hence is considered one of the safest cities in the world. Business capital has a tendency to gravitate towards a country/city that tends to provide the safest climate for employees, company and travel among other things.
Unfortunately, anywhere that you look, in this wide world of ours, especially in Africa, Middle East and Asia, we see calamity, wars and terror! This simply does not exist here in the oasis of calm in UAE hence attracting more and more rich business people that are a natural market segment for the country of UAE for both business as well as leisure. Being a central point for Africa, Middle East and Asia is also a plus point.
UAE also wants biggest and best of everything. There is nothing wrong with it unless you are a jealous kind of individual (or country). Because when America or Britain built its biggest and best armies, biggest and best bombs (remember Hiroshima), even biggest and best banks and insurance companies and beverage companies, internet companies and .....the list goes and on......how come the same people who are now getting jealous of Dubai did not previously or have never said America is building bigger so it will go down. No one ever said America is building the San Francsiso bridge which is the most beautiful and biggest bridge so America will fall. Or Canada is building the CN Tower which is the biggest in the world so Canada will inevitably fall.
We must compare and see the future, the trend, everything. We must have substance in our thoughts and provide facts.
I have lived here in UAE for over 14 years and have only seen progress and development. Neither NYC, London or China or Africa or any country can claim that they provided safety for their citizens and travellers alike as much as UAE. There has been no major crime here EVER! This is one major social factor for the growth here.
Aside from that, the country provides no taxes and no foreign exchange restrictions or 'protection of its economy' style legislations, except for banks (where it does not allow more than 1 bank from each country), which is fair as per WTO ground rules similar to ALL other countries.
Unless, you wish to do local retail sales in UAE, they do not want anyone to require a local partner. Hence if you a large trading or a manufacturing company, they do not even insist for you to create local employment which almost every other country wants you to do.
As far as labour rights are concerned, I say, if these labourers were so happy in their home countries, then why did they even think of paying large amounts of fees to their agents and arrive here!!! Even high income professionals are willing to take a trip to UAE in search of employment just like back in the 1960's people used to go to USA or UK in search of employment. Just ask any headhunter how many unsolicited resumes/CV's they receive on a weekly basis. The most recent number is approx 3,000 per week per headhunter (up from 500 last year)!!
I am sure there is a reason for the daily dose of job advertisements in the local dailies and international markets such as UK and India and Philippines from where hundreds of job agencies are supplying employment opportunities to people looking for work and sending them here.
The economy of UAE and GCC has been gradually diversifying into non oil and gas industries thus providing lot of stability for the future.
Since 1985, this country has been on a path to glory. Emirates airlines was created in 1985 which is today one of the finest airlines in the world.
A port company DP World (1991) and Jebel Ali Port (1970's) was created which today is the 4th largest port operator company in the world.
For such a small country of UAE (4m pop.), Etihad, Emirates, Air Arabia, Fly Dubai, Gulf Air - now sold were created along with 3 airports just in Dubai (4th is under construction) and all of them have been successful, not only in the region but globally!
The entire GCC is investing heavily into infrastructure and manufacturing facilities. Over USD 18bn will be invested in making 10 of the largest steel plants in GCC including 3 here in the UAE creating employment for many in the plant and ancillary industries and hence also attracting future residents and businessmen from across the world to buy/trade/supply to these plants.
Have a look here
http://www.eyeofdubai.com/v1/news/newsdetail-22050.htm
Dubai already has one of the largest alumnium plants in the world, named DUBAL. However, Abu Dhabi have now ventured into creating the single largest aluminium plant in the world:
http://www.iht.com/articles/2006/02/19/bloomberg/bxabu.php
Thousands of jobs in the plant and ancillary industries will be created and more business travelers will arrive being suppliers/buyers and traders.
Last week, in Abu Dhabi at the MEMEX exhibition it was announced by an independent research company, Proleads, that over USD 115bn will be spent in GCC in the manufacturing sector. Even if this number is high, assuming even a 50% actual investment of approx USD 50bn in the manufacturing sector, this investment will create hundreds and thousands of jobs spearheading the growth of the Middle East.
The growth strategies due to Govt spending and attracting business capital for diversification of various countries in the region are having a serious impact to circumvent the end of the oil era. But oil is not finishing in at least a 100 years (maybe 50 years) and until then, Dubai and UAE and the GCC would have reinvented into a manufacturing and tourism base besides just a glitzy and glamorous city.
Dubai and GCC is not only about real estate but about the entire spectrum of any economy. Every economy goes through a different path of success. Dubai’s success has been due to various reasons outlined above and is just a different path that has not been used by any other country just because no one has ever been in the same trajectory.
When it comes to number of units of real estate being constructed, there is no confirmation of the information that over 200,000 units will be available in any 1 year or 2 year period. If we do the math, i.e. if 1 tower has an average of 400 units, then we need 50 towers to be delivered every year (or two) for just 20,000 units. This means an average of one tower or 400 villas to be delivered every week (or two). This is an unrealistic assumption, in my opinion. No country can build or deliver so many units in one city week after week.
Due to lack of power supply, sewerage and other amenities, the Govt is practically constrained to release units and give certificates to enable people to move in.
By my most generous estimate (sorry, have no facts here), is that only about 10-12,000 units at most get delivered every year. This is nothing compared to the number of people who visit here, come on employment here or are just visitors using short term rentals and create new demand each year.
When I speak with some apartment owners who make their properties available for short term rentals, they are quite happy because the returns on short term rentals cover the annual long term rent in less than 6 months and still leave a chance to use it for your personal consumption.
Yes, there is a severe correction in the Dubai real estate market. However, it is not impacting any users who have steady jobs and income (or are rich businessmen, of which there are many) and nor the short term apartment owners and nor the cash rich people who own properties in cash outright.
The major impact of this crisis has been on new developers or on new projects on which construction has yet to start mainly due to lack of bank finance and lack of speculators. also, many buyers are adopting a wait and watch attitude which is normal and to be expected in a falling price market.
I estimate ratios of various type of property owners in Dubai as follows:
Actual self owned users: 30-35%
Short term rentals: 10-15%
Cash owned property users/people with capacity to hold: 30-35%
Speculators: 30-35%
Based on above estimates, I believe only about 30% speculators who have gained tremendously in previous years by flipping the properties and had become mega rich will get a shock. They will revert to their original sources of income outside of real estate or get totally wiped out. Negative equity has started hurting some of them and they are the ones causing all the distress sales.
I believe it will remain a buyers market for another 6 months and then things should stabilize and continue their rise once again towards making Dubai the most expensive place in the world!
As I sometimes mention, Dubai needs only about 1,000 NEW rich people every year from somewhere on this planet for it to continue its growth. With a population of millionaires reaching millions itself globally, I don’t think it should be a problem for Dubai. It never has been and it never should be! Investors need to place their money in a safe country providing the maximum opportunity. With the economies of the developed world nose diving due to their self destruction due to easy availability of cheap money at low rates, high gearing by various banks (not here in UAE) and lack of new money supply for variety of reasons, Dubai has everything to gain, if you think of 10 years from now.
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