Top Gun FP Client Note: Is Dubai The Canary In The Coal Mine?

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NOTE: Every week I write a Client Note for my clients.  For a limited time, I am allowing non-clients to sign up and receive the Client Note.  You can sign up at the top right hand corner of the website.  I will also be posting the notes on my blog with a 24-48 hour delay from time to time.  Here is this week’s.


I could argue that Dubai World, with its profligate borrowing, bad timing and extravagant ambitions, is uniquely at risk of default.  That may be why many world markets, after initial jitters, bounced back early this week.  But can we be sure that Dubai is really such an extreme or isolated example, given lending standards around the world during the easy-credit years that led to the financial crisis?
– James Stewart, “Dubai Spotlights Possible Bond Bubble”, The Wall Street Journal, December 2 
Even a doomsday scenario for Dubai – complete default – wouldn’t be a global disaster.  While $80 billion is a lot of money, it is still $100 billion shy of what the U.S. government paid to keep American International Group afloat, and it is a pittance in the pool of tens of trillions in bonds worldwide.
– Zachary Karabell, “Much Ado About Dubai”, The Wall Street Journal, November 30
Its[Dubai’s] architectural style may best be described as Modern Hubris: a ski resort was opened inside a shopping mall, and a network of islands were built to resemble a map of the world.
– David Leonardt, “Economic Scene: A Quaking Brings No Collapse”, The New York Times, December 2
I certainly didn’t expect last Friday, the day after Thanksgiving, to be such an eventful day.  It was a half day with many Wall Streeters still on vacation for the holiday and all signs suggested a yawner of a session.
But a surprise announcement of a delay in debt payments by Dubai World, a conglomerate controlled by Dubai’s government, reverberated from international markets to Wall Street on Friday sending US stock markets tumbling. 
So far, as far as financial markets are concerned, it seems to be Much Ado About Dubai, as Zachary Karabell cleverly titled his Monday WSJ editorial on the episode.  Others, however, suggest Dubai could be the canary in the coal mine.  James Stewart evoked this point of view in his editorial in today’s WSJ. 
The debate hinges over how to interpret Dubai’s troubles: Is it an isolated case or representative of troubles from many other corners of the world we will be hearing about in the months ahead?
Coincidentally, I had an interesting conversation with my Dad last Tuesday night before flying down to LA for Thanksgiving with my Mom and Sister.  The conversation took place before Dubai’s announcement and three days before my own awareness of what was going on with Dubai.
Dad mentioned New Century Financial, the fast growing mortgage broker from Irvine, CA which went bust in February 2007.  I added to the discussion by recalling that around the same time HSBC, the large British bank, reported problems in its Household International division, an American subprime mortgage lender it had acquired a few years earlier. 
Markets continued higher for another five months before peaking in July 2007.  In retrospect, it is obvious that HSBC and New Century were a warning of what was to come.  Whether Dubai’s surprise announcement is as well, only time will tell.
Greg Feirman
Founder & CEO
Top Gun Financial (  
A Registered Investment Advisor
9700 Village Center Dr. #50H
Granite Bay, CA 95746
(916) 224-0113

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