An imminent debt default in Dubai looks unlikely at this time. Expect stock and commodity market rallies to continue through end of year. Use all rallies to sell into–liquidate securities and commodities as markets rally. Signs of deflation–where prices go down rather than up– should be much more prevalent in 2010. Commercial real estate refinancing should be more difficult as real estate pricing and defaults are feared. Credit contraction–less lending by financial institutions–should continue and make an economic recovery more difficult.
From the monthly archives:
November 2009
The U.S. dollar continues to be the key to most investment markets. A weak dollar policy by the U.S. government (where the value of the dollar goes down) accomplishes the following:
- It makes our real estate and stocks cheaper for foreign investors.
- It makes our goods cheaper for export.
- It helps our large multi-national companies increase their sales and earnings.
- It increases the value of commodity prices as a substitute for dollars; investors would rather own tangible assets such as gold instead of a depreciating dollar.
The negative side of a falling dollar is that it eventually leads to higher inflation because a cheaper dollar is the result of printing more money that chases fewer goods; thus the price of goods will rise–inflation.
Eventually a falling dollar will force world investors to defer purchasing our U.S. bonds because bonds go down during inflationary times. If foreign buyers purchase a U.S. bond that gets a 3% return on their money, and the dollar depreciates 8% like it has done this year (because the government has been printing more money to fund its deficit spending), then the value of the investment has decreased 5%–that’s a negative return. This will eventually drive away foreign buyers of our debt. With fewer buyers, interest rates will rise.
