From 2004 to 2008 the credit-fueled oil and real estate bubble billowed and burst in Dubai. In the midst of building the tallest and most expensive tower (of hubris) in the world, global oil prices crashed 70% and the emirate’s home prices fell 50% through 2008. In December 2009, the country received an emergency bail out package that extended it’s line of credit for a further 5 years to December 2014. The due date for that “emergency loan” is now approaching once more and the country remains more indebted today than ever before. According to the IMF, Dubai today owes about $142 billion or 102% of its GDP. About $60 billion of that debt is due for repayment over the next 3 years.
All of which coincides with expanding global debt trends since 2008: the world’s total debt now the highest ever in human history at 430% of global GDP. Our fiscal future is still going hard in the wrong direction to date. Of course we should not be surprised by any of this: bail-outs have a familiar effect pretty much everywhere. They stall necessary restructuring and bad debt write-offs buying a further period of bad fiscal habits and reckless management until the emergency funding expires and crisis resumes.
Dubai has been no exception. Over the past couple of years of QE-mania, the Dubai stock market was soaring in a dream where central banks were magic and debts would never have to be paid nor income statements reconciled ever again. But dreams of this nature always end in nightmare and over the past month, the Dubai stock market has fallen more than 27% (so far), prompting ongoing liquidation of highly levered participants all across the region.
All of which brings me back to this big picture reminder of where we are at with financial leverage and asset valuations in other global markets today. Margin use that peaked previously in March 2000 and July 2007, has been contracting again recently since February (red line below), even as the S&P 500 has pressed further into dream land the past month to fresh nominal highs (back to the March 2000 level in real terms).
We are wise to remember that although no one can know exactly when the trigger finally flips, decades of data attest that highly-levered, over-valued asset markets often do rise like a jet-fueled escalator; before plunging like an elevator on broken pulleys before participants can exit. All par for the speculative course.