Around the world on a wave of debt
The credit crisis is still working its way around the world, says this U.S. advisory, which also has some Canadian gold stocks to discuss.
If Dubai World wasn’t on your radar a few weeks ago, it probably is now.
It was on the eve of U.S. Thanksgiving that this huge holding corporation turned into a deadbeat.
A group of its subsidiaries, it was announced, could not meet the interest payments on outstanding debt. So while Americans sat down to turkey dinners and football games (with their markets on holiday, too, of course), the world’s financial system shuddered again.
This morning we discover that Abu Dhabi has stepped in with some, but not all, of the money Dubai needs.
This is just one more incident — albeit a big one — in what one U.S. advisory calls the “world de-leveraging tour.” Debt continues to wash up on shores around the globe, proving to us that the credit crisis is not going away in a hurry.
We’ll get a report on the ongoing ripples of the crisis from Review & Outlook, the publishing arm of a Boston money management firm.
Before we do, the advisory has an update on precious metals, which have been “exceedingly strong” in recent weeks. Three Canadian stocks and one from Australia are highlighted.
An alternative currency
While the advisory expects pullbacks in the price of gold, it asserts that it is likely to ascend to $1,250 to $1,300 per ounce. The decision by India to buy up a big chunk of gold from the International Monetary Fund only reinforces this belief.
“As we mentioned before, we believe that gold is acting as an alternative currency and thus will eventually head substantially higher.”
Its largest holding in the sector continues to be the world’s second largest gold mining firm, Newmont Mining (NYSE-NEM; TSX-NMC). The stock trades at $54.03 in Toronto and yields less than 1 per cent on its dividend of $0.43.
On the other hand, it has “peeled back slightly” in its holdings of IAMGOLD (TSX-IMG), which has tailed off after a run-up and now trades at $17.36. It yields 0.4 per cent on its small $0.06 dividend.
The advisory remains optimistic about a pair of mid-cap producers. Canada’s Orvana Minerals Corp. (TSX-ORV) is trading at $1.02 after a steady rise. Australia’s Intrepid Mines (TSX/ASX-IAU) is trading at $0.29 after reaching a high of $0.43. Neither pays a dividend.
The next shoe to drop
Returning to the United Arab Emirates, we cast an eye on the many “overvalued assets” into which Dubai World poured its money — the giant Ferris wheel on the Thames known as the London Eye, 20 per cent of Cirque de Soleil, hundreds of American golf courses, and a stake in Miami’s Fontainebleu Hotel, among others.
The key point to be remembered in all this, the advisory says, is that this is not sovereign debt, but corporate debt. The governments of the Emirates are not responsible for that debt, even though one of those emirates has now seen fit to throw some money into the breach.
“The troubles in Dubai draw attention to a simple and painful truth,” says the advisory. “The process of global de-leveraging is still ongoing.”
No doubt people are “sick and tired of hearing about the laundry list of macroeconomic shocks” that are still out there, the advisory says. It seems the financial world is constantly waiting for “the next shoe to drop.”
And other shoes almost certainly will drop, says this advisory, due to the serious imbalances that exist around the globe.
Is China healthy?
The first worrisome imbalance is that of “emerging Europe.” Across Eastern Europe, the Baltic nations and southeastern Europe, borrowers are at pains to repay loans taken out in euros, yen, Swiss francs and U.S. dollars earlier in the decade.
As those borrowers default, Western and Central European banks can feel their foundations shaking. Adding yet another large straw to the camel’s back, sovereign wealth funds from the Middle East were heavily involved in this debt. All of a sudden, that doesn’t inspire confidence.
Compounding the problem is the fact that in many western European nations — including the U.K., Spain, Switzerland, and the Scandinavian nations — the financial sector is as big as or greater than the entire economy. That is, the governments of those countries don’t really have the resources to pull their banks out of a hole.
But isn’t China healthy, at least? In fact, this advisory tells us, China may have concealed or obscured large books of non-performing loans before the credit crisis. China has been adding debt while the rest of the world has been shedding it, and its bank assets may not be as sound as many were led to believe.
Commodities through the roof
Thanks to that credit-fuelled Chinese boom “commodity prices have shot through the roof,” the advisory observes. Expectations of raised Asian consumption and fears of inflation have pushed them up. This in turn kicks up equity markets in the nations that produce commodities.
“Canadian readers are surely familiar with this phenomenon, while those in Brazil, where the Real and BOVESPA have outperformed all major global currencies and equity markets during 2009, know it even better.”
But expectations for commodities are simply too high now, the advisory cautions. The elevated prices of commodities “represent a mini-bubble created by investors still wary of entrusting their money to de-leveraged companies dependent upon de-leveraged consumers.”
On the other side of the coin we have the embattled consumer in the developed G-7 nations, trying to get out from under a pile of debt. The era of home equity loans and credit card debt extension is over.
This in turn is pulling down revenues from commercial rents, which hurts commercial real estate loans by U.S. banks. It is a vicious circle and a very wide one at that. The ripples of the crisis can empty out stores in a Peoria mall even as they strike down the extravagances of Dubai World.
In the U.S. alone, this advisory concludes, figures suggest at least three to five more quarters of de-leveraging — that is, dealing with impaired loans before getting back to the business of lending money.
It ain’t over ‘til it’s over, said Yogi Berra. And it ain’t over.
|
E-mail this article
Printer-Friendly
