Hot Hot Hot

Admit it, it’s hot…
It’s hot…hot hot hot..seriously, searingly, blazingly hot. We’re not talking hot like when you burn your tongue on that pizza slice you left for too long in the oven, we’re talking white-man-turning-into-Mediterranean-tanned-looking-lothario in the seconds it takes to cross the road to your car when leaving a restaurant. Official figures have put the temperature at above 50 degrees Celsius in the UAE sun in the last 24 hours. It surpassed 52 degrees on Wednesday in Riyadh – and we’re still in May – the best part?...the real heat doesn’t arrive until the end-of-June.
What’s the heat got to do with the economic situation in the UAE and the region I hear you ask? Well, it’s not so much the heat itself as much the admittance and official recognition of the chart-topping record by the Dubai authorities. This time last year, there were several occasions where it was easily above 50 degrees but the official mercury recorder never seemed to go above 49 degrees. Funny that, considering the law stipulates that all work on construction sites must come to a halt to protect the health (and sanity) of exhausted labourers working outside in the steaming elements.

Thing is, quite a lot was different this time last year within the UAE. Abu Dhabi had not come in and bailed-out much of Dubai’s credit-starved entities and projects. Construction sites were heaving with workers day-and-night, 24/7 and the pace of development was still deemed an absolute necessity to the future growth prospects of the emirate. Indeed, the belief that when the cranes stopped the economy would falter was still tightly held to, and the cranes were moving even as the rest of the world started to reel under the financial mess created in the US – in some famously portentous words, some Dubai officials declared that “they would remain immune to the global-crisis”. Heat and its measurement were shrouded in controversy, and when the rest-of-the-city could barely move without dripping in sweat, the cranes continued. Along with excuses such as “it’s not above 50 degrees in the shade”, the mercury stubbornly remained at 49 degrees far too often.

So the official recognition in the last 48hrs is significant for one of two reasons – depending on how cynical and conspiratorial you like to be (i.e. how much of Michael Moore’s movies do you believe?). One might view it as another example of Abu Dhabi’s influence across all corridors of power within Dubai, ensuring the way the emirate does business and conducts itself in the eyes-of-the-world is deemed fair and responsible –something Abu Dhabi has consistently touted as one of its major aims, not so much Dubai in the past. This would be in keeping with the recent “Federalisation” of the UAE as a whole – Abu Dhabi reigning back-in some of the more questionable tactics employed by its neighbour at the height of the giddy-days. Stopping work to protect the labourers (and the UAE’s reputation) would be a good reflection of this.

The other angle is the dramatic change in strategy amongst Dubai’s real-estate developers, with a current noticeable trend in delaying projects and payments as much as possible. This is to help Dubai get through the most difficult period of the global crisis and help preserve the precious funds it is receiving for entities such as Nakheel and Emaar. One might surmise that any excuse to stop-work on a construction site is now extremely welcome and desirable – how things change. Workers’ and architects’ wages can be pushed back, citing a “delay in delivery”. Admittedly, a rather cynical outlook as mentioned above, but still one that falls nicely into the immediate needs of Dubai’s stricken developers.

Either way, and whatever the sudden admission of the sun’s power, God help you if you are wearing shorts and place your bare flesh on that leather-car seat that’s been baking in the sun for too long.

T-risk-easury
10-yr Treasury yields are causing some consternation – the rapid increase in yields this week has caught some observers by surprise. How could it have? There have been increasing rumbles of discontent with the continued spending by the US administration for at least a month now, with some warning signs having rippled through when China started talking about “concern” over the future of the US$ as a reserve currency. The US$ is on its way to end the month weaker, dramatically so vs Euro (a little less vs the very-much-in-trouble itself GBP).
Oil and Gold have both continued to rise, with oil now resuming the rise towards $70/brl (above $65/brl right now). As for Gold, it continues to display both its inflation/deflation hedge properties – making its way slowly back towards the psychologically important $1,000/oz barrier. As per yesterday’s message though, could we be witnessing the formation of a number of false-dawn factors that will only end in tears when the economic macro-environment (continued rising unemployment for example) does not play-ball in September?

The main reason for the selling-off of Treasuries appears attributed to increased risk-appetite, especially for returns in those “decoupling v2” economies of Asia and other emerging markets. Just take a look at how even Japan’s Nikkei has appreciated almost 12% since the end of April, shrugging off the news that the economy was contracting faster than ever last week, and now this week buoyed by the highest industrial production increase in 56years (+5.2% from March – albeit from a very low base). Every major index in Asia (ex Japan) is now returning more than +25% YTD. China, Taiwan, India are north of +50%. Middle Eastern markets have had an (oil story backed of course) return-to-form, with Abu Dhabi now returning 11% for ’09 but having come back 26% since its low in early January. Dubai is also up 27% from its low in mid-Jan. Latin American markets are all rocking, with Argentina and Brazil both up 40% YTD. Peru, the world’s best-performing market, is riding extremely high at +84%! These are all signs that investors are parking capital in higher-yielding assets. This requires a move away from the safety of the US$.
Return-starved, cash-rich pension fund managers and other players that feel they have missed out on the last 3-mth rally are all scrambling to get into the laggards and touch upon a bit of the magic return themselves – let’s hope this doesn’t all come crashing to a sudden halt when the realisation is that the fundamental floor beneath a lot of this renewed desire to branch-out and deploy overly-static capital was never there.