By Alexander Apostolides on November 27, 2009

Dubai

Three to four years ago I was having a conversation with a bunch of business analysts and financial investors. They were raving about Dubai and the money attached to it, and how happy they were that Marfin did a double take on Laiki using Dubai funds. I tried to point out to them that if one correlated the price of oil with GDP of Dubai (with a lag of one or two years), the correlation is very high - a first indication that Dubai's rise was all about oil. My father pointed the same in his newspaper articles in the Weekly but to no avail. You could see that Dubai was a huge bubble waiting to burst: at one point a quarter of all cranes were in Dubai, with one outladish project chasing another.

Now Dubai is not going to go away - a significant part of its growth was in construction which created capital (even if it devalued) and some of the assets bought across the globe are worthwhile. But people who invested in it will lose a substantial amount of money, and that is what my business analysts and financial investors worry most about.

Another friend of mine who is an investment analyst agreed with me about the bubble in Dubai. After all i was not the only one who saw the bubble coming and its link to the high price of oil. That friend is now in charge of a significant investment fund; his employers could not have picked a better man through these turbulent times.

4 comments:

  1. Indeed. A friend of mine pointed that out several months ago ("people will lose money there"). He is a business consultant and in charge of a large portfolio too.

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  2. Dubai is always the "next best thing" when oil prices are high. People always think that just because it does not have so much oil, its growth is not oil related. Any smart man would have left Dubai investments as soon as the oil price fell below $120.

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  3. I agree with your point indicating the correlation with oil prices -and, from what I hear, Adu Dhabi fundamentals as well....
    I think a question worth asking is-why did MOST analysts and consultants fail to see this coming? It was clear, pretty early on, that Dubai was "suffering" from a liquidity glut, which they transformed into pricey but useless assets that produced high prices but not real worth.

    How do you see this? Was it simple herd behavior, or just excitement beyond reason, like we see sometimes? The fundamentals did look ok, but were clearly full of holes....

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  4. They saw it all right, but it was one of the few places where you could make money in 2007/2009. So they stayed. If anything they also did not have an incentive to go since they were so exposed anyway it would cause a panic. The most shocking is that people believed that Dubai world = government despite no such law... the dangers of sovereign funds are becoming clearer...

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