After the world’s experience with sub-prime lending, probably the worst call a prognosticator can make about a debt crisis is that it will remain “contained.” So here goes nothing: Chances that thewould-be deadbeats in Dubai will set off a series of defaults among emerging market countries seem very, very remote.
When Dubai World, the investment arm of the Disney World city-state, said it would miss a $3.5 billion bond payment (a fraction of its $60 billion to $100 billion in liabilities), emerging market stocks swooned and the U.S. dollar soared — pretty much the opposite of the global reflation trade that has done so much to repair our battered 401(k)s. In other words, things were looking ugly.
Cut to Monday — and with the exception of shares in Europe, whose banks own 70% of Dubai World’s debt — the dollar is once again falling and our beloved emerging markets are trudging hesitantly upward. From Wednesday’s to Friday’s close, EEM, the iShares MSCI Emerging Markets exchange-traded fund (EEM), coughed up 4%, while the dollar spiked on a global flight to safety. Give investors a weekend to digest the news and voila: EEM is posting some fractional gains and the dollar has resumed its slide.