Asian markets are off about 5% today, and European stocks are continuing their downward march from yesterday, on news of Dubai's default on what is essentially sovereign debt. News of the Dubai default caused the ratings agencies to immediately downgrade their credit rating, and it is effecting the credit ratings of other countries considered weak, such as Mexico, Russia, and Greece.
The greenback firmed up a little against the Euro but fell against the Yen, and it looks like the shockwave from the default has investors scrambling to off their riskier assets. Nasdaq futures are off about 3% pre-opening, and it looks like it might be an ugly day in the States, market-wise.
What I'm wondering is how much exposure there is to counter-party risk on the Dubai debt. We're talking about a large amount of money, but not a massive amount of money (about $60 billion). I'm getting the sense that the market fears Dubai may be the tip of the iceberg, and that other high profile sovereign defaults are imminent. If that truly is the case, could it be enough to send the U.S. into the dreaded "double dip" recession?
I think it is safe to say that the majority of the inflationary measures the Fed has taken thus far have found their way into the equity markets. There is no other way to explain how the market is up almost 60% from its March lows while the whole rest of the economy is in the dumper and getting worse. If the market tanks from here, all that fiat capital will go with it, and the American economy will have benefited from the stimulus not a whit. That's a scary thought.