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.
Today’s video is about something that seems quite boring on the surface. The folks who are pushing SPACs, or Special Purpose Acquisition Companies, desperately want you to believe that they are boring. Just another way to structure capital markets! They’re anything but that. They’re exactly the sort of thing that blows up markets and sinks economies. This may not look like geopolitics on the surface, but it’s likely that SPACs will have world-wide significance. I suspect you’ll be getting ahead of the game if you understand them now.
So let’s talk about King Abdullah Economic City. In today’s video, I may give the impression that it doesn’t exist. It totally does! It was established in 2005, and much like NEOM, the mega city the Saudis are currently pushing, it was supposed to revolutionize everything!!! 13 years later only about 15% of the 100 billion dollar city has been built. The other three cities that were meant to be built at the same time are somewhere between 30% and 0% completed. Theirwikipediapages make for some depressing reading. Depressingly familiar reading.
The objective of SAGIA’s “10 x 10” program, which ran from 2005 to 2010, was to place Saudi Arabia among the world’s top ten competitive investment destinations by 2010.
Launched in 2006, the Economic Cities program was designed to drive toward greater competitiveness, job creation, and economic diversification.
In developing economic cities, over a thousand of the world’s free zones were surveyed. The sixty deemed most successful were studied to determine key success factors. The objectives of the Economic Cities were to promote regional development, achieve economic diversification, create jobs, and enhance competitiveness in Saudi Arabia. Four new cities were identified and thus developed: King Abdullah Economic City, Jazan Economic City, Prince Abdulaziz Bin Mousaed Economic City, and the Knowledge Economic City, Medina.
When you read some of this 15 year old public relations copy, you realize just how familiar it all is. It’s the same thing as Vision 2030, but it’s Vision 2010. It’s all very sad. Back in King Abdullah’s time it was possible to imagine that Saudi Arabia could pull it off. Their oil was still one of the most valuable commodities in the world. An Aramco IPO back then would have yielded hundreds of billions of dollars. Instead the economic cities plans just sort of fizzled out during the extraordinary expenditures the government made to bribe the populace out of an Arab Spring. After Abdullah died in 2015, the focus shifted to new projects.
A sensible ruler ca. 2015 would have recommitted to all the plans Abdullah had made, and brought them to fruition. It would have made a lot of sense. But that wasn’t ambitious enough for King Salman, and Crown Prince Muhammad Bin Salman. They are diverting scarcer and scarcer funds to all of their new cities, and losing investments in foreign companies. They’ve gotten a lot of uncritical support in the Western Press, but that’s because they are paying for it. So yes, the King Abdullah Economic city exists, as a shell of what it could be. The bottom third is the only section of this BBC article on King Abdullah Economic City that is worth reading. After repeating the standard public relations texts, it lays out what a disappointment the project has been. NEOM might get there too. But it won’t ever become what was promised. Today’s video lays out why.
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…
One of the most important aspects of development in Saudi Arabia, and in the Gulf more broadly, is the fact that it often doesn’t happen. The Gulf countries are mostly run by monarchs, and they all have pharaonic ambitions. They want to build monuments, cities, and other great works that illustrate their magnificence. If it’s something as simple as a museum or giving a foreign university a local campus it happens. But the great ambitions that mix local development, innovation, or anything else that requires real buy-in from the people of the country, either never happen, or happen in such a small way as to make the initial announcements look ridiculous.
When NEOM, the 500 billion USD sustainable city was announced, I couldn’t help but think of the UAE’s Masdar city. It was announced with similar fanfare back in 2006. It was going to be green, it was going to be amazing, there were going to be tons of people there! Parts of Masdar did end up being built, but most of the plan was scrapped, and the Guardian now describes it as in danger of becoming a ghost town. Masdar isn’t the only hi-tech wonderland city that never was. Saudi Arabia has one too. Anybody remember King Abdullah Technology City? It was the last king’s NEOM. It was still moving along, or at least reported to be so back in 2015.
And that’s the important bit here. All of this constant churn of projects seems to be done more for a foreign press audience than to create real change in Saudi Arabia. I don’t doubt the sincerity of any of the Saudi Royal reformers, I just doubt their ability. The world press gives them a free pass on all of this. Almost none of the articles reporting on NEOM mentioned King Abdullah city or Masdar. Actually, now that Abdullah is dead, his city seems to have disappeared from the news completely. It’s clear that it’s now longer a public relations priority, and I’d guess that the 100 billion that is supposed to build that city is now quickly moving on to MBS’s NEOM. This is not a good way to run anything. But the Saudis get a pass from the world press. Today’s video, on the ridiculousness of the Saudi Aramco IPO is an attempt to push back on that a bit.