Saudi Arabia Is The Stock Market

That old, way over-quoted saying, attributed to Keynes, keeps reverberating in my head lately. “The market can stay irrational longer than you can stay solvent”.

Almost three years ago, I put out a video mocking Saudi Arabia’s investing strategy, calling it plainly irrational and irresponsible, and destined to end in tears. Well, so far it looks like my prediction is a failure. In fact, this investing strategy may be the most successful thing that MBS has done, staving off financial disaster for his country, and in the process making himself just as valuable to US politicians as Saudi Arabia was back in the 20th century when we needed their oil.

This one was interesting. The fact that I need to produce longer videos kind of ambushed me here. I intended to focus on how the MBS-Khashoggi issue is a side-show to what our true priorities should be, but the need to correct my older video on Saudi investing kind of swallowed my scripting process, drawing in Gamestop and some media critique.

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Video Transcript after the jump…

Hey there. Today we are going to talk about Muhammad Bin Salman, or MBS the crown prince of Saudi Arabia, who just received the lightest of slaps on the wrist from Joe Biden the new president of the United States.

A lot of people are outraged about this, but I’m just kind of mildly disappointed. To cover this we are going to have to rampage through a ton of stuff today. We are going to talk about MBS’s shockingly failed foreign policy, but we’re also going to talk about the shockingly undercovered way that MBS has used Wall Street to make Saudi Arabia almost as indispensable to US policy makers as the country was back in the 20th century when we actually needed their oil. We are going to talk about what Joe Biden’s policy towards MBS should have been, and why it doesn’t really make a lot of sense to flip out over this lame decision that happened last Friday. Because at the end of the day, MBS does not matter. He is a doomed man running a doomed system. What matters is the suffering of the people of Yemen and the Iran Nuclear deal that could help us avert another trillion dollar war. Flipping out about Joe Biden’s lame policy decision this past Friday does not move either of those policy issues forward a single inch.

Muhammad Bin Salman came to power with his father King Salman in January 2015. It took two and a half years of court politics to officially make MBS next in line for the throne, but he’s been calling shots since 2015, and most of those shots have been terrible. There’s the three week invasion of Yemen that has lasted six years, leaving Saudi Arabia’s enemies more solidly in power in Yemen with every passing year. There was the bizarre kidnapping of Lebanon’s Prime Minister in 2017. 2017 also saw Saudi Arabia threaten to invade Qatar over a TV channel. In Libya Saudi Arabia has been a loud and splashy backer of failed strongman Khalifa Haftar. And of course there was the assassination of Washington Post columnist Jamal Khashoggi, something that was supposed to be a quick intimidation move, that somehow ended up as the world’s most widely lamented death since JFK.

The main throughline of Saudi foreign policy under MBS has been loud embarrassing failure. His record in domestic politics is more mixed, and debatably even successful in some ways, but that will have to be covered in a future video. What we need to discuss today is the unique new way that MBS has taken Saudi Arabia in to the world’s investment markets. I have made a lot of fun of this in the past.

“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 and the valuations of private tech companies 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”

“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.“

“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 now Saudi Aramco are now taking on massive amounts of debt to make investments outside of Saudi Arabia. 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.”

Well, I made that video about two and a half years ago,and for those of you who are not that familiar with investing, it’s incumbent upon me to mention that it is not MBS that looks stupid here. I am the one that looks stupid. Because over the past two and a half years we have seen an unprecedented boom in the US stock market that has mostly been driven by tech stocks. The valuations of these have not just reached insane levels, they have also spun off all kinds of wealth throughout the country and throughout the world. It is a bonanza, a lot of people have done very well through this, and Saudi Arabia has, so far, done very well through this. The wealthy of course have been the prime beneficiaries here, but I think it’s important to mention that every retirement account and pension fund in the United States, and probably across the developed world, almost certainly across the developed world has benefitted from this as well. If you own investments, especially if you own certain investments, the past two and a half years have been a bonanza. And what strikes me as insane about all this is that nobody’s really talking, beyond a few news stories here and there, about how central Saudi Arabia is to all of this. And to explain how crazy that is, I’m going to finally talk about Gamestop. Yes, Gamestop, a month late, I know.

So About a month ago, the investing world was absolutely fixated by meme stocks. Most famously Gamestop, but a bunch of other companies that should have been worthless were driven up to absurdly high prices by a few thousand investors who coordinated their actions through a reddit thread. These guys didn’t just buy and hold and convince others to do so, they also famously manipulated the market through the strategic purchases of options. Well, in a barely noticed news story last year, it was revealed that Saudi Arabia and SoftBank have been doing the exact same thing on an massively larger scale. The Gamestop bubble was ignited by a few thousand retail investors on a reddit thread. It was then amplified by a week long media frenzy. The tech bubble we’ve been enjoying so much for most of the past decade was ignited by Saudi Arabia it’s sovereign wealth fund, and the opaque holdings of its vast royal family, one of the largest pools of investment capital in the world, and it has been amplified by a five year media frenzy as well as the trillions managed institutional investor, pension fund and random rich guy all across the planet.

This amplification is why the stories about Softbank and Saudi Arabia’s amplification of the tech bubble don’t get the traction that they should. The media is in on it. They are invested in the idea that this tech bubble is some magic thing that’s actually sustainable. They don’t want you to know that this tech bubble is just as reliant on guys with distinctive head gear as the game stop bubble is.

Now I am not saying that Saudi Arabia is the only reason this stock market bubble has been as large and long lasting as it has been. There are a million reasons for that. But what I am saying is that when MBS and the Saudi royal family fall, which I still believe to be inevitable, It’s likely that it will bring with it a 2008 or 1929 style stock market crash with it. And if that happens it will take most US retirement savings down with it as well. Do you now get a sense of why Joe Biden is reluctant to sanction the head of the Saudi Arabian Public Investment Fund?

Hey, I just wanted to emphasize something a little more strongly. The current US stock market bubble will not be able to survive the fall of MBS and the current Saudi ruling system, but the flip side of that is also true. MBS and the current Saudi ruling system will not be able to survive the next stock market crash for very long. And the next stock market crash is, well, inevitable. So I was wrong, Saudi Arabia and MBS did figure out a new way to make themselves essential to the US ruling system. Wall Street and baby boomer retirement funds are the new oil. This approach has the added benefit of making Saudi Arabia’s impossible budget math work for a few more years. This is working, but wow is it a high stakes, high risk strategy, for everybody. Stock markets go down, stock markets crash, that’s what stock markets do. I don’t know if it’s gonna be this year or five years from now, but it will happen before 2030.

This brings us to this past Friday when Joe Biden declassified some aspects of a CIA report that made it clear that the position of the Biden administration and the US government is that crown prince MBS is a liar and a murderer. That in and of itself has some real consequences. It is deeply embarrassing to MBS and the Saudi government, that’s not nothing, but the actual consequences for MBS?

Bupkus, Nada, like nothing. There were some half-assed sanctions on some of his underlings, and a bit of finger wagging and a suggestion that he do better. I am not at all surprised that there were no consequences for MBS, I predicted this in fact, but I am disappointed. I had much higher expectations as I laid out in a video this past November.

“Biden probably knows better. A US president that is openly friendly and calm can actually accomplish a whole lot more. As satisfying as it would be to see a big public blow up over Khashoggi, or an arms embargo against all of the Gulf countries, I am far more interested in what’s going to happen on the ground in Yemen, or how quickly we get back to the US Iran nuclear deal or what happens to the Saudi dissidents who are still alive. The disgusting Trump-Saudi relationship has given Biden some very effective threats to hold over Saudi Arabia’s head. Biden would be wiser to do so quietly. At least at first. This has worked before.“

It seems like the folks in the Biden administration aren’t as smart as I thought they were, or perhaps they just don’t care as much as I do about actually fixing things in the Middle East. You see the embarrassment to Saudi Arabia was actually a pretty powerful thing as a threat. It was something that MBS and the Saudis really didn’t want to happen. It was an amazing threat. It was honestly one of the best cards that the Biden administration had to play against Saudi Arabia. They could have held this report and the threat of sanctions in reserve for like four years or ten years. It could have been there helping to control Saudi Arabia for the entire Biden administration and they’ve just thrown it away.

I guess they decided that it was more important to get the quick sugar rush of looking tough on Saudi Arabia, and well it seems like not even that has worked out, the reaction to this has been pretty, pretty negative.

Biden’s action has been disappointing, but the reaction of the media has been disappointing in a different way. I think it’s great that the mainstream has turned against Saudi Arabia, and I think that this channel and its supporters might even have had a little to do with it. But it seems like the media is kind of missing the point. They are running with their standard rogue state script, demanding sanctions and punishment, and even suggesting that Biden play Saudi Arabian politics and bring about some kind of regime change. You can see almost visceral glee that we might have a new country to demonize and destabilize.

All of this misses the point almost entirely. MBS is a bad man. The Saudi system is gross. And you know what? They are both doomed. They’re not going to be here ten years from now. What matters is not MBS. What matters is Yemen. What matters is the JCPOA and the opportunity to avoid a trillion dollar war with Iran. That’s the point of my videos on Saudi Arabia. Not to have a big new enemy, a new monster to go abroad and slay. No the point is to disengage. To start treating Iran and Saudi Arabia similarly. Not to victimize them similarly, but to step back from them similarly. Stop playing favorites. Stop looking for people to bomb. The point is to get less involved in the Middle East, not more.

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