Is Dubai Default the Canary in the Coal Mine?

The Dow recovered over 100 points today as the city-state of Dubai announced only $25 billion, not $60 billion, in debt would need to be restructured. On November 25, Dubai World, the business owned by the Dubai government, announced a six-month moratorium on interest payments, which triggered fears of a default. The Dubai government said it would not guarantee the debt, sending world markets into panic.

However, four concerns remain, all of which increase uncertainty and therefore costs of doing business.

1. Most investors assumed Dubai World was backed by its owner, the government of Dubai. They also assumed Dubai was backed by its country, the United Arab Emirates, or U.A.E., which is governed by its strongest and oil-rich city-state, Abu Dhabi. If these assumptions are incorrect, then many other government-backed investments throughout the world are also at risk.
2. It raises fears that other countries, like Greece, may be allowed to go bankrupt. If the U.A.E. doesn't support Dubai, will the EU support Greece and other members?
3. It shifts the balance of power in the Middle East. Dubai promoted itself to tourists in Iran. This displeased Sunni-led Abu Dhabi, which may increase control over Dubai.
4. Many of Dubai World's loans were under Shariah finance, which conformed to Islamic laws and were considered safe from the recession. This may dampen enthusiasm for Islamic shariah finance, which grew 30% in 2008.

What This Means for You

Increased uncertainty in global financial markets will continue to affect you in the next few years in unexpected ways. Many people are turning to gold, since it has given safe refuge in the past. In fact, gold has hit a new high of $1,200 an ounce. However, like every other bubble, gold will drop unexpectedly and quickly.

One of the best hedges against uncertainty is flexibility. For your investments, stay diversified, and avoid putting too much of your investments in any one asset class. For your job, it means having more than one stream of income. For more on how to do this, see The Freelance Economy.

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