Although details are still emerging, the Dubai news will prove to be more company specific than Lehman Bros. was. I don’t believe the news is a reason for investors to panic as loan losses from a potential Dubai default would represent a meager portion of total banking assets. Contagion does not appear to be a large concern either, but perhaps more important is the reminder that Dubai sends – these problems of massive global debts are far from being settled despite all the v-shaped economic recovery chatter. Dubai’s standstill is a reminder that real estate markets around the world remain unhealthy and susceptible to sudden and dramatic downturns. Whether this is a minor tremor in commercial real estate (and potentially a sign of impending aftershocks in residential) has yet to be seen, but make no doubt – we are not out of the credit crisis woods.
This does little to change my cautious investment outlook. We have been almost entirely cash since selling into the rally over a month ago at S&P1,100 and remain cautious on markets heading into the year-end. This confirms my belief that the recovery is very fragile and the road ahead is likely to be difficult primarily due to the fact that our cancer (debt) is still very much alive. The governments in the U.S. and abroad have done little to attack this problem. Unfortunately, I believe this is unlikely to be the last of these reminders in the coming years. These debts are likely to plague the economy until we find leaders that are courageous enough to stand up to the banks and the fiscally irresponsible participants of the global economy.
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