Dubai collapse - revisited

While as I wrote a couple of weeks ago, almost all of Dubai's construction remains stopped, Dubai has made some progress at tackling its massive debtload.

Yesterday, Abu Dhabi announced it would provide $10 billion to its sister emirate to help it make some of the $15 billion in interest and principal payments that comes due for Dubai in 2009. Neither side has announced what if anything Dubai has offered Abu Dhabi in exchange for this, but at the very least, Dubai will have to tame some of the social liberties and urban excesses that have emerged over the past few years.

While this bond offering will help provide some short term cash and reduces the chance of a bankruptcy, Dubai is by no means in the clear. The cost of insuring Dubai's debt has surged over the past few weeks, and most estimates I have seen showed the cost of insuring Dubai's debt to have reached nearly 10% over the weekend. That was the world's highest rate.

The stock market, which declined 72% in 2008, rallied nearly 8% today. The cost of debt insurance declined to ~7.5% today on the news.

We'll see what happens next...

Brazil

I have spent a fair amount of time in Brazil but have yet to write about it so I decided it was time to post some impressions.

I spent a couple months living in Sao Paulo in 2002. I traveled around the country some at that time, and then traveled around again in 2007 – I spent a total of a few weeks in Rio de Janeiro, a few days in Iguacu Falls (at the border of Argentina, Paraguay and Brazil) and another week in the Northeast, primarily in a chilled out beach town called Jericoacoara. I also spent another week of work in Sao Paulo in December 2008.

Overall, I am a big fan of Brazil.

It has a very unique, fun vibe. It feels quite different to me than the rest of South America – the Spanish speaking portions of the continent have much more in common with each other than Brazil for sure.

The culture of Rio is amazing. The beach culture was fun and the festive atmosphere was contagious. The physical beauty of Rio is spectacular as well. Rio is a dense city intertwined with crazy mountains, rock formations in the ocean, and stunning white sands beaches. The views from the top of the Sugarloaf Mountain just off the shore (Pao de Acucar) and the Christo statue overlooking downtown are amazing.

I loved the juice shops on every corner (crushing lots of crazy fruits I had never even heard of into amazing juices). The ubiquitous cheesy bread (Pao de Queijo) is amazing. The coffee is world’s better (and stronger) than American coffee. I’ve also had a ton of fantastic (and fun) meals at churrascarias where the meat is served on swords by waiters who season and serve their own cuts of beef (quite similar to the Fogo de Chao chain here in the US).

Soccer in Brazil is worth an entire post in itself, but suffice it to say that seeing a game at Maracana stadium in Rio (which holds 100,000+ screaming dancing firework shooting fans) is an experience in itself. While I went to two relatively unimportant games, both had more than 50,000 people I’d guess, and the fans of each team were separated from each other by big fences and from the field by a huge moat surrounding the playing area.

The few off-the-beaten-path places that I have visited have also been great. Jericoacoara is as remote feeling of a place as I have ever been. You access the town by taking a 4x4 until the highway ends, then drive literally along the beach for an hour until you reach the little town. From there, you can walk the sandy “streets” from restaurant to bar to surf shop or explore the surrounding area by dune buggy. (Locals are happy to ferry you and your dune buggy across various little streams and rivers). There are also great dunes for hiking up, hanging out on, and sand boarding down. Amazing.

Iguacu Falls can also be very cool. I went during a good rainy season and it was fantastic. The falls are set right in the middle of the jungle and have these rickety metal catwalks that you can climb on right over these massive crashing falls. You would never be allowed to get this close to Niagara Falls, and in my opinion the falls are more spectacular than Victoria Falls in Zimbabwe. I do think the experience is very weather dependent though – I have heard that in a very dry season things can slow to a trickle.

There are also a ton of other places I want to go to which I have not made it to. Salvador – an Afro-Brazilian cultural and musical hub in the center of the coast, the Pantanal region deep inland, and some of the white sand beaches in the south of the country are atop my list.

On the downside, however, Brazil definitely feels much more dangerous than probably any other place I have traveled. I generally avoided Copacabana which is the famous beachfront area of Rio which overflows with prostitutes and generally shady characters who cater to American and European partiers. Fortaleza (city in the Northeast) did not seem particularly pleasant or safe. Most of Sao Paulo is not safe to walk around in alone after dark. While I don’t think these safety concerns make Brazil a place to avoid entirely, it is definitely worth having your wits about you at all times and only going out in groups at night.

Also, perhaps more than anywhere else in the world, there is a massive disparity between the very rich and very poor. The urban poor have built favelas or basically ghetto communities that support as many as 1 million people, and generally have their own justice systems, utilities, political organization, and (often gang-controlled) industries. Unlike a lot of the cities in Africa where the poor are relegated to the fringes of town, these favelas are built right into the fabric of the city. In both Sao Paulo and Rio, you can walk across the street from some of the cities nicest most modern skyscrapers and be in the heart of an extremely poor community.

Despite the raging poverty in many parts, Brazil has improved its economic situation over the past 10 years nearly as dramatically as India or China, though with much less press coverage (it is definitely the least talked about “BRIC” country). While corruption and the rich/poor gap remain major issues, the outlook (at least until the past few months) is brighter than it has been in decades. Brazil has become a clean fuel leader, and most cars run on sugar cane ethanol which is 8 times more efficient than the corn-based ethanol that has failed here in the US. There are still other, very serious environmental problems, perhaps the largest being significant deforestation in the Amazon, but this is one of the world’s biggest green success stories.

It is not yet clear how the economic downturn will affect Brazil, but in my view it is an under-appreciated economic and tourist destination, and I hope it will continue to prosper. And I hope to go back and spend even more time there.

China's stock exchange - revisited (updated 2/13)

It has clearly been a very difficult past 18 months for the Chinese stock market. While this is not entirely surprising given the bubble that I discussed in 2007 and the massive overall decline in world stock markets, the correction in China has been particularly harsh.

The chart below shows the SSE over the last two years. The index today is down 62% from its high and at its peak had declined 71%.


Further recent news shows that Chinese exports declined 17.5% YoY through January and imports declined a whopping 43%. While the China Daily calculates that about 1/3 of that import decline is due to the timing of Chinese New Year, the decline is still massive.

Given the decline in world demand for China's good and the rising job losses and deteriorating economy in China, is now the time to get out or get in to the stock market?

While I have less conviction that I would like, over the past month I have started to slowly dollar-cost-average into China's indexes. While I think it may be rough going for the short-term, I think now could be an attractive time to invest. I think a) China's government is much more likely to successfully implement a stimulus than the US government, b) although I don't have this data, I think the higher savings rates of Chinese middle-class consumers vs. American middle-class consumers will help buffer their internal consumption crunch somewhat, and c) the PE multiples of the SSE have declined to a much more reasonable level and at the last data I saw were actually below PE multiples of the US.

I also recently came across this quote from one of the leading global venture capital funds - again, no real data - but captures my sentiment well:

"Our investments in China are better positioned to survive a very prolonged downturn than companies in the U.S. Not only are the cost structures far lower, but the cultural familiarity with the challenge of survival makes the managements of most of these companies more resilient. (Bear in mind that even in good times the average savings rate in China's urban areas for high income earners has been close to 30%). Despite the many challenges that come with operating in different countries, we are relieved that we decided to reduce our overall dependence on the U.S. and can invest in markets that are growing more quickly and where there is a greater thirst for success"

Given the high likelihood that China's long term growth rate is substantially higher than the US, I am hopeful this will prove over the medium term to be an attractive buying opportunity.

Dubai collapse

Not entirely surprising but Dubai has collapsed and spiraled out of control.

Friends who have recently visited told me that the cranes which dotted the tops of nearly every building a year ago still are there, but all of them are stopped. Overpasses and infrastructure development have been halted in process with partially complete projects everywhere.

Finally, since in the UAE, people who are unable to pay their bills can go to Debtor's Prison, expat's whose real estate holdings have plummeted in value are abandoning their cars at the airport and fleeing the country.

This depressing story below is from the Times in London.

"For many expatriate workers in Dubai it was the ultimate symbol of their tax-free wealth: a luxurious car that few could have afforded on the money they earned at home.

Now, faced with crippling debts as a result of their high living and Dubai’s fading fortunes, many expatriates are abandoning their cars at the airport and fleeing home rather than risk jail for defaulting on loans.

Police have found more than 3,000 cars outside Dubai’s international airport in recent months. Most of the cars – four-wheel drives, saloons and “a few” Mercedes – had keys left in the ignition.

Some had used-to-the-limit credit cards in the glove box. Others had notes of apology attached t

“Every day we find more and more cars,” said one senior airport security official, who did not want to be named. “Christmas was the worst – we found more than two dozen on a single day.”

When the market collapsed and the emirate’s once-booming economy started to slow down, many expatriates were left owning several homes and unable to pay the mortgages without credit.

“There were a lot of people living the high life, investing in real estate and a lifestyle they couldn’t afford,” one senior banker said.

Under Sharia, which prevails in Dubai, the punishment for defaulting on a debt is severe. Bouncing a check, for example, is punishable with jail. Those who flee the emirate are known as skips.

The abandoned cars underscore a worrying trend. Five years ago the Emir, Sheikh Mohammed bin Rashid Al Maktoum, embarked on an ambitious plan to transform Dubai into a hub for business and tourism. A building boom fuelled double-digit growth, with thousands of Westerners arriving every day, eager to cash in on the emirate’s promise of easy living and wealth.

Many Westerners invested in Dubai’s skyrocketing real estate market, buying and reselling homes before building was even complete. But, as the recession took effect, property and financial companies made thousands of workers redundant and banks tightened lending. Construction companies have delayed or cancelled projects and tourism is slowing.

There are increasing signs that the foreigners who once flocked to Dubai are leaving. “There is no way of tracking actual numbers, but the anecdotal evidence is overwhelming. Dubai is emptying out,” said a Western diplomat.

International schools are having to be flexible on fees as expatriate parents run out of cash. Louise, a single mother from Britain, said that her son’s school had allowed her to pay a partial fee until she found a new job after her redundancy in December. “According to the headmaster, a lot of people had come into the school saying they had lost their jobs so the school was trying to be a bit more flexible,” she said.

Most of the emirate’s banks are not affiliated with British financial institutions, so those who flee do not have to worry about creditors. Their abandoned cars are eventually sold off by the banks at weekly auctions. Those recently advertised include BMWs, Porsches and Mercedes.

Simon Goldsmith, a spokesman for the British Embassy in Dubai, said that that there were approximately 100,000 Britons living in Dubai last year. However, the embassy has no way of tracking how many have fled back to the UK. “We’ve heard stories, but when somebody makes that kind of decision, they generally keep it to themselves,” he said.

Police have issued warrants against owners of the deserted cars. Those who return risk arrest at the airport.

Heading home

3.62 million expatriates in Dubai

864,000 nationals

8% population decline predicted this year, as expatriates leave

1,500 visas cancelled every day in Dubai

62% of homes occupied by expatriates 60% fall in property values predicted

50% slump in the price of luxury apartments on Palm Jumeirah

25% reduction in luxury spending among UAE expatriates"