Saudi Arabia is Awful At Investing | Markets Are Dumb 4

So why am I the only guy talking about this? In today’s video I connect a bunch of dots to point out that Saudi Arabia’s investment program isn’t going to help them out of their current mess. In fact that investment program is more than a bit nuts. Funds that are desperately needed to reinvent the country are being sent to some of silicon valley’s riskiest money pits. It’s possible that these investments will make some money eventually, but it isn’t what I’d call likely.

The truth is that all of this information is out there. Today’s video wouldn’t be possible without some great financial journalism done by folks at Bloomberg and the Financial Times. The FT’s “Saudi Sovereign Wealth Fund Scrambles For Resources” in particular was very useful. But this stuff is often behind paywalls, and only read by nerds like myself. This information is all out there, and it’s being acted on by serious investors. That’s why that magical city, NEOM, isn’t going anywhere, and its German CEO has already been shuffled off to another job. That’s why the Saudi-Blackstone infrastructure fund announced at the Saudi-Trump orb fest last year can’t find any other investors. The broader situation really is dire, far beyond the headline grabbing problems with Tesla and Uber.

This is a slow motion catastrophe. But it hasn’t made much of an impact on the broader consciousness yet. That’s because the Saudi PR machine is still working in high gear. Bloomberg, FT, and occasionally the New York Times will follow up on all these projects and their failings, in articles that are only read by a few tens of thousands of people. But when a new project is announced it’s in ALL the outlets, with videos, puff pieces, and endless social media placements. The more disturbing facts are all out there, and I’m proud that I got to bring them to you with today’s video.

Full disclosure: I own some Tesla stock and I’m actually pretty bullish on the company’s long-term chances. If Elon Musk can get his head on straight that is. That doesn’t mean it’s a good investment for Saudi Arabia…

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Video Transcript after the jump…

Oh those sexy tech companies. They’re in the financial news and they’re on our phones. The fact that they’re on our phones might be the most important thing about them. In a year where the prices of stocks in most sectors have gone down, the tech stocks have kept going up up up. The “Hey I use that everyday!” factor has kept the dumb money flowing towards these companies, even though most people now think a price correction is inevitable. It’s not that they are bad companies, it’s just that they are super over-valued according to all traditional measures… But the dumb money keeps flowing so the party continues, and the dumbest money of all is coming from Saudi Arabia, and its crown prince Muhammad Bin Salman, popularly known as MBS…

As I’ve emphasized before Saudi Arabia is in pretty dire straits. It’s not an immediate crisis, but the long term fall in oil prices since 2014 has made its model unsustainable. I’m pretty sure that we’re now in Saudi Arabia’s last ten years under the current regime. To their credit, the Saudis realize this and they’ve been making some drastic changes to try to deal with it, under the title of Vision 2030. They’re trying to diversify their economy away from oil. There are new taxes, new cities, new entertainment destinations, and a not entirely fake shift away from religious fanaticism. It’s not enough.

I’ve dealt with the problems of Vision 2030 in detail before on this channel. I’ve talked about the fantasy of the Aramco IPO. I’ve talked in great detail about Saudi Arabia’s horrifying and ruinously expensive foreign policy. Much of the rest of the world has been catching up on these topics. The chorus against the Saudi war on Yemen is getting stronger, and everybody is finally beginning to concede that the Aramco IPO is never happening. But one aspect nobody is focusing on is just how dumb Saudi Arabia’s signature investments are…

This simple fact is being obscured by two of the world’s most effective bullshit factories, working hard to fool all of us, and even to fool each other. On one side you’ve got the tens of millions of dollars that the Saudi government pours into public relations. On the other you’ve got the hype machine of the maturing tech investment bubble. What’s fascinating is the way that these two hype machines fool each other. Tesla’s Elon Musk seems to think that Saudi Arabia is going to fund a 72 billion dollar move to take Tesla private. This is money Saudi Arabia doesn’t have. 72 Billion dollars would be almost all the money from that Saudi Aramco IPO that isn’t actually happening. Saudi Arabia is also being fooled. It keeps buying into the tech industry just as it is peaking, helping to inflate what is already a super-massive bubble. Saudi Arabia did buy 5% of Tesla earlier this year. Thats an investment that lost 15% of its value just last week.

You can see why Elon got confused. Every month brings a new headline talking about incredible sums. A 500 billion city! 80 Billion dollars of Nuclear plants! 200 Billion dollars of Solar power! There is very little real money committed here. It’s all just fairy tales and unicorn farts, and very likely to remain that way. All these plans are reliant on massive outside investments that probably aren’t coming.

Saudi Arabia does have vast sums of money, the problem is that it’s all already over committed. The Saudi government expects to spend 260-billion dollars or so in 2018, but expects to take in 52 billion dollars less than that. So they are now taking on large amounts of debt. They’ve got a sizeable cushion, including foreign reserves of 506 billion and a less liquid Public Investment Fund worth maybe 230 billion dollars. But Saudi Aramco, the State oil company, is a golden goose they are in the process of killing. All of Aramco’s profits are already committed to keeping the country funded. Instead of the IPO, which would have actually drawn in outside money, it’s looking likely that the Saudi government will force Aramco to buy assets from the Public Investment Fund to generate cash.

This is the very definition of robbing peter to pay paul. Or would that be robbing Omar to pay Abu-Bakr? The Saudi government and Aramco are now taking on massive amounts of debt to pay for these outside investments. And most of the investments that are actually happening are in tech companies that any sane analyst can see are over-valued.

Through Softbank’s 100 billion dollar vision fund, run by a Japanese tech mogul, Saudi Arabia and the UAE, among other investors, are actively inflating the tech bubble. They are keeping the party going, but it’s very likely that Saudi Arabia will lose money on most of this stuff. Take Uber for example. Back in 2016 Saudi Arabia paid 3.5 Billion dollars for a stake that valued the company at 65 billion dollars. Valuation of tech companies before IPOs is largely voodoo, but in 2018, with mounting legal problems, and after the firing of their founder, Uber is now only reckoned to be worth around 48 Billion. There’s a chance that Saudi Arabia will make its money back in an IPO, but there’s also a very good chance that Uber will end up as the Myspace of ride-sharing and be worth nothing. This is not what Saudi Arabia should be doing with the few spare billions it has left…

The SoftBank Vision Fund is built around an assumption. One or two of its investments will do amazingly well, and the rest will probably be worthless. It’s a sound investment strategy, but it’s one that can take decades to reach fruition. Saudi Arabia doesn’t have decades. These tech investments are very unlikely to help Saudi Arabia’s economy in the slightest. Saudi Arabia’s all-powerful Crown Prince Muhammad Bin Salman seems to be doing this because it looks cool. MBS is a very dumb investor. And Saudi Arabia is going to suffer for it.

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