Pride before a fall

By Justin Urquhart Stewart 13:45 27- Feb -2009

Pride before a fall – when will we ever learn? Whether it has been puffed up complacent investment bankers who assumed they could stroll across the Sea of Galilee, property developers feeding both the greedy and the gullible, Icelandic politicians who claimed to have found a new economic paradigm, or even a desert mirage of palaces built on sand, eventually the cold light of dawn reveals a dreary pall of chilled reality. All we have to do is to make sure we don’t fall for the next one – and please be assured, there will be more and they will be even more attractive and enticingly plausible.

Thus the news last week that even Dubai has now had to be bailed out by a cash injection from the United Arab Emirates authorities of some $10 billion, has brought a sense of reality to the biggest bet in the Gulf. The support from its oil rich fellow UAE member Abu Dhabi, is obviously welcome but I suspect the rivalry between the two emirates must have led to some wry smiles behind closed doors. Transforming this state from a declining oil producer into a spanking new property, business and tourism based economy was always going to be a tall order, and in the face of a global recession with mounting debts to pay, it was just becoming a problem waiting to explode.

Some have compared the suffering Emirate with Iceland but the differences are far more than just meteorological. Yes the spread on the credit default swaps for Dubai rocketed to levels close to those of Iceland, and yes it has over-borrowed, but it has wealthy allies and friends and assets which do not melt as fast as its glaciers in Summer.

However, no-one should gloat over any such suffering for an area known for its conspicuous consumption. Such expenditure has been very beneficial to suppliers and exporters to the country, and of course any additional support for the Emirate will only reduce the amount of reserves that could be recycled elsewhere in the globe at a later date.

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Well you can’t deny that it’s a big one. President Obama’s package is eye watering but probably it has to be to have the necessary effect. The fiscal deficit for this year will be in the region of $1,750billion, which is 12.3% of GDP and the widest gap between income and expenditure since World War 2.

The aim is to create a stimulus package with all the strength of a defibrillator on the economic heart to try and get the blood flow of economic expenditure going again. The assumptions here are optimistic, with an anticipated return to quite dynamic nominal growth of 5% in 2011 and 6% after that. This is quite heady stuff, but it is this strength that will probably be necessary. However, many will be concerned that if you take the Japanese experience as a precedent, stimulus packages have an effect whilst they last, but tend to falter once the supply of financial incentives and “heroin” is withdrawn. We shall see.

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And finally....

It would appear that the credit crunch has taken its first direct sport victim for 2009. The Swindon Duathlon was due to be held at the quite sizeable and nearby Wroughton airfield. However, it was with much regret that the event has had to be cancelled – why? Honda has had to store 6,000 unsold cars on the airfield, thus blocking the contestants’ course. Still, they could have made for some valuable prizes. I just hope they weren’t the sponsor – oops!

P.S. A short note brought to my attention by my colleague David Ogden who is in charge of our Compliance. Who is the odd one out in this list?

· Lord Stevenson (ex Chairman of HBOS)

· Andy Hornby (ex CEO of HBOS)

· Fred Goodwin (ex CEO of RBS)

· John McFall (MP and Chairman of the Treasury Select Committee)

· Alistair Darling (Chancellor of the Exchequer)

· Sir Terry Wogan (BBC Radio 2 Presenter)

Answer:- Sir Terry Wogan. He is the only one with a banking qualification.

Have a good week.

Justin A. Urquhart Stewart
Director
Seven Investment Management Limited