Dubai is Harsh Reminder of Prolonged Global Recovery
Dubai is now the next domino to fall as the fragility of the world's banking system comes under further pressure.
Even as the global financial sector continues to recover from the severe downturn which began late last year, there are still major issues to contend with which become apparent whenever a new challenge emerges.
Dubai is that latest headline and a harsh reminder that getting the global economy back in shape will be a prolonged process.
The IMF said last week that it's possible that a significant portion of banking losses are still hidden from view. We concur with this perspective. Massive amounts of real estate have yet to be correctly valued and write-downs will surely occur when the dust settles. This will further constrain lending and be a drag on global growth.
The United States is often highlighted as the banking system most damaged but it is becoming apparent that this is clearly not the case.
Europe's plunging real estate values and its loans to developing markets in Eastern Europe, have the makings of a major extended crisis. UK banks are nationalized and now undergoing major reforms. Even China faces difficulties -the government is now insisting that banks raise capital levels after a binge in sub-standard lending. Yes, this is a global problem.
While the world banking system has improved significantly (we do not subscribe to the view of total collapse), investing on the assumption that financial institutions are retuning to health is a flawed judgement. There are still more road bumps ahead and your investment strategy should reflect this reality.
Expect slower growth, more surprises, and a rotation to investments that have strong cash flow and solid balance sheets; assets that will prosper when the full extent of the banking crisis becomes apparent.
Be cautious, there are more headlines to come.
Michael A. Yoshikami, Ph.D., CFP®, is Founder, President, and Chief Investment Strategist of YCMNET Advisors, Inc., a registered investment advisory firm (www.ycmnet.com). He oversees all investment and research activities of YCMNET. He is a respected lecturer speaking frequently on market issues, tactical asset allocation, and investment strategy. Michael and YCMNET were ranked as one of the top investment 100 advisors in the United States for 2009 by Barrons. He appears regularly on CNBC and CNBC Asia and can be reached directly at firstname.lastname@example.org.