Popping Bubbles in Saudi Arabia

By Dr. Duru written for One-Twenty

March 30, 2006

It never fails. Just when I get interested in the hot stuff...the sizzle flattens, the air leaks, the beams buckle, the foundation sinks, and the walls implode. Such is the fate of the bubble I finally got hip to in Saudi Arabia and other Middle Eastern stock markets. At least this time I had no ability to airlift my money into the cauldron and was saved from so much as scalding myself. The 3-month chart below of the TASI shows that I wrote about the Saudi market just about at the very tippy top. Since then, the market has fallen a gut-wrenching 25% and has recently tried to rally. I finally had to take a look at some charts because my "peripheral vision" would seem to catch wind of some Middle Eastern market falling 3% in a day, 5% in a day, heck, the Dubai market fell 11% in one day two weeks ago!

Tadawul All Share Index, 3-month

Oddly enough, this pop in the Mideast bubbles is occuring at the same time oil seems to be firming up and ready to tumble over $70 a barrel. Maybe the escalating tensions with Iran are making folks think the Mideast financial markets are less safe. These same tensions continue to put upward pressure on oil prices. We are definitely playing a dangerous end-game with Iran. This country seems determined to flaunt international diplomacy, the Russians and Chinese want to prevent the U.S. from getting another unilateral excuse to invade and conquer another rich source of oil, and the U.S. has spent valuable political capital and destroyed its credibility with the unjustified incursion into Iraq. Now, we are faced with a real danger, and we are less capable than ever of dealing with the situation in a peaceful manner, much less a warlike manner. For the sake of all of us, let us hope all sides can stand down and come to peaceful terms.

Anyway, you can bet that as tensions mount and oil prices increase along with the tensions, the oil-rich countries will get ever richer (including Iran ironically), and this money will look for a home outside of the Mideast. We will have an interesting dynamic where the flood of oil-money will serve as a small cushion to world markets. Even more interesting will be the results if the Mideast sends its money to Europe instead of the U.S. After all, we have now officially declared that we think all Arabs are terrorists by violently rejecting one of our few supposed allies in the region - the U.A.E. This rejection occured when Dubai Ports World bowed to political pressure and sold its new U.S. operations to an American buyer as opponents raised the spectre of terrorists getting access to our ports. Now, I am sure Bush breathed a sigh of relief because his approval rating is already just about as low as it is supposed to get for even a hated President. But one must wonder how in this day and age, his administration could have so casually allowed such a deal to pass and then to drop into the public's conscience seemingly from left field. It left the American public wondering whether this government is really serious. Gaffe after gaffe makes us feel like we are watching our government trip over itself in some twisted movie that must be about some other dysfunctional country. The whole incident revealed yet again how increasingly disconnected the administration is getting from the realities of the American polity. How many more years of this do we have to bear again?

In the meantime, the citizens of these bubblicious countries are wringing their hands over what to do. Kuwaitis protested in the streets and demanded that the government do something. Big man Prince Alwaleed bin Talal has stepped in with funds to try to prop up his home market in Saudi Arabia. I implore investors in the region to just take a quick look at bubbles through the ages. No amount of government intervention is going to save a market that is over-valued and floating on fumes...even if they are oil fumes. I strongly suspect that prices in these markets are high only because cash is looking for a home and not because of any hyper-growth in intrinsic value in the economy. Just like our bubble was blown out of proportion only because the market was awash in cash, and it had to go somewhere. If I am correct, then these interventions will slow the decline and make the inevitable final panic (or panics!) move even more painful. As usual, the folks hurting the most are the late-comers and the late-believers. For those who have invested during the early part of the bubble, they can get out now and be pleased...they might even have the fortitude to buy more when the mood reaches its deepest despair. Regardless, all I can say to everyone with money caught up in the turbulence is...be careful out there...and in more ways than one!

DrDuru, 2006