Uber bear investor and Gloom, Boom and Doom Report editor Marc Faber says Dubai World’s debt problems are just the tip of the iceberg, and suggests investors will be better off not buying U.S. government bonds.
“In the context of all the default that will happen in the world, it (Dubai) is not a big thing,” Faber told Bloomberg. “But it’s a reminder that governments can default.”
The 3.3 percent investors currently earn on U.S. bonds will likely be lost to dollar depreciation over time, Faber notes. Moreover, if deflation occurs, “much more money will be printed” and stimulus packages will cause government debt to rise.
“Eventually, I suppose a lot of governments will be bust, including the U.S.,” Faber says. “Nothing has been resolved, it’s just being postponed…The ultimate crisis will not just bankrupt the banking system and financial as happened in 2008, it will bankrupt governments.”
“I think the upside potential for U.S. bonds is extremely limited.”
New York Investing Meetup founder and market trader Daryl Montgomery calls the Dubai default “merely the latest episode in the unwinding of a global real estate glut.”
While the drop in real estate values Dubai might not get as Japan’s — where residential real estate prices dropped by 90 percent and commercial real estate prices by 99 percent for class A office buildings in Tokoyo — the price drops in Dubai could be considerable.
“Local authorities denied there was any problem right up to the end,” Montgomery writes at Seeking Alpha.
“Until the excesses are wrung out of the system, sustainable economic recovery is not possible - and even then it's not guaranteed.”
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