Dr. Woertz’s gold report out of Dubai and the United Arab Emirates took me back to my favorite posting ever at the Café. My friend Frank Veneroso wrote the piece and I never tire of reading it. It surely will be right up Dan Norcini’s alley:
Recollections of the Greatest Market Bubble Ever…
Memories of the Souk al Manakh
How large can a bubble grow before it bursts? Farther than you think. And there need not be a fatal pinprick that makes it burst. And when it bursts, the crash that ensues can be deeper and more discontinuous than you could ever imagine.
In May of 1982, while the bear market in US stocks was in its deepest throes, and the epic bear market in US bonds was still completing its base, I was called to advise on the greatest stock market bubble of all time---the Souk al Manakh in the Persian Gulf. Kuwait had had an organized stock market for some time. The great wealth created in Kuwait by the rise in the oil price in the 1970's led to seemingly endless appreciation in Kuwaiti stocks. In the Arab states in those days, only sheiks could grant corporate charters, and only corporations could become publicly traded companies. The royal family of Kuwait did not freely grant corporate charters for companies that might become vehicles for stock speculation, so there was a shortage of stocks to trade. This shortage and the new unparalleled wealth that was looking for vehicles of speculation gave rise to an over the counter market in Kuwait city where shares in companies domiciled elsewhere in the Gulf---principally Bahrain and the United Arab Emirates---were traded. Housed in a converted air-conditioned parking garage, this market was known as the Souk al Manakh---the camel market.
I was asked at the time by the government of the United Arab Emirates to advise on the creation of a stock exchange in the Emirates. Great fortunes were being made in shares of companies domiciled in the Emirates at the time. Why not bring all this wonderful new stock market activity home?
For six weeks I worked out of an office in the UAE central bank in Abu Dhabi. The city was modern, laid out along a crescent beach at the end of a promontory into the Gulf. The central bank was a modern glass building behind severe cement columns that met in graceful Moorish arches. From a great glass window of this modern building, I could see along a turquoise backwater old tanned fisherman working on brightly painted ancient fishing dhows that were beached on the blinding sands. The Sheik of Abu Dhabi was the richest man in the world then. Only a few decades earlier his brother, the former ruler, was afraid to walk the streets of what was then a small sandy seaside fishing village for fear of his creditors.
Being a macro oriented, top-down man, I set about to see how great a supply of stocks had been made available for trading on a formal market in the UAE. The results were simply unbelievable. The market capitalization of the Kuwait exchange and the Souk al Manakh combined ranked third in the world, behind the US and Japan. It was greater than that of the UK with all its foreign listed companies. How could this be? I asked, for both geographically and economically speaking, these few countries---Kuwait, Bahrain, and the Emirates (the former Trucial States under British domination)---were only postage stamps of sand on the globe. Oil had brought wealth to these small countries but their combined economies were still very small compared to those of the US or Japan or the UK. More striking was the fact that most of the visible wealth was not reflected in these companies. The rulers of these sheikdoms owned the oil wealth. The hugely expensive real estate was privately held, as were the extremely lucrative import franchises. What assets and income underpinned these multi-billion dollar market caps?
We did a bottoms up study to find out. In Bahrain, a financial center, there were banks, seemingly of substance. There was a raft of companies that made cement and clinker. These companies were domiciled in five former Trucial states whose names you never heard of that, alas, had no oil. There was a company or two that imported sheep and goats for slaughter. And then there was a handful of other companies whose principal activities were not at all obvious.
The Sheik of Abu Dubai was the richest man in the world at the time and the Ruler of Dubai was also quite well to do. The five other sheiks who had no oil were poor cousins. For founders shares these oil poor sheiks granted charters for corporations that could be traded on the Souk al Manakh. I can remember driving one day to a small derelict town that was the capital of one of these oil poor sheikdoms to analyze a company with a high flying stock on Kuwait's OTC market. For the life of me, on the balance sheet of this company I could find no assets of any kind. It dawned on me that, behind most of this third ranking stock market cap in the world, there were only a few cement and clinker plants, a slaughter house or two, and quite a few shell games.
How do you tell your host government that the stock market they want to bring home is a shell game? I pondered this diplomatic quandary for weeks as I looked out my office window at those ancient painted dhows in the desert sun. In the end I mustered the courage to tell the truth. "It is all a bubble," I told my client-. "And it will burst." To my relief and amazement, I was greeted, not with displeasure, but with laughter. "You Westerners have been coming here for five years", they told me, "and to a man you all have predicted a crash. Don't you understand, there has never been a place on earth like the Gulf with such unprecedented wealth? You will never understand that the Gulf market cannot crash."
I had a long time friend in London. His name was Ali. He was one of several Anglo Arab investment bankers that flourished in London in those years. When I passed through London on my way back to the US I stopped to tell him about my trip. Speculation on the Souk al Manakh was financed with a curious type of informal margin financing by way of post dated checks. So rapid was the rise in the Gulf market that post dated checks paid an interest rate of 100% per annum. Ali was financing speculators in this market. He listened and he smiled.
At the beginning of August I had completed my report for the government of the UAE. I told them that the market they wanted to organize was a bubble and that it would crash. Some weeks later I heard from Ali. He called to thank me for my advice on my recent visit. He had called in all his post dated checks. "Did you hear what happened to the Souk?", he asked. "No", I replied. "Well, it topped quietly at mid summer after you left, with no provocation. One can't quite say it declined or it crashed; it has just stopped trading."
The Souk al Manakh was the greatest speculative mania of all time. One could not even speak of valuation. Margin financing reached unimaginable extremes; one speculator, who had been a customs clerk two years earlier, had at the peak $14 billion in stocks financed with $14 billion of margin debt. The people involved believed that the oil rich Gulf was truly a "New Era". It did not take a trigger to burst this bubble; it simply crested sometime in the dreadful heat of the Middle East's summer. Its decline was so discontinuous it cannot be called a crash. There were simply no bids. ¨
Frank Veneroso
Veneroso Associates
November 19, 1999
Speaking of the Arabs, time for some of my old war stories to surface again. When my brother Tim and I were commodity brokers, we had a few Arabs for clients. Remember the disgraced BCCI. That was one of them.
Then, there was Ahmed Sarakbi, an Egyptian who built the roads in Saudi Arabia way back when they needed them. Was he one rich guy and a HUGE account! However, a real pain. Called so much and was on the phone so much, I used to have to run to the men’s room and back. My elbow used to get sores from me leaning on it with the phone in my hand. He was always on the phone. Until one day.
He was long something like 1260 gold (remember that one), 750 silver and like 400 to 500 yen and swiss franc contracts (each). The markets were fading badly and Ahmed had a margin call. Then they began to tank. Gold was down about $20. Everything was going wrong. All of a sudden I couldn’t find him … anywhere. No phone calls either.
I smelled trouble. My manager was in an office meeting in Chicago and I couldn’t find him either as I wanted to liquidate the account and needed permission to do so. I knew Ahmed would go berserk, so I wanted approval. That is some position to sell without an OK from somebody. I knew if it went badly, I would be fired AND sued.
I also knew if the floor smelled a problem, they would make life a nightmare for me by taking the markets down even further. Once they smell blood down there, you are finished. When the day started there was $6 million left in the account. I went into action, selling the biggest problem, silver (due to liquidity), first. My first 100 lot took the silver price from $11.50 down to $10.75, limit down. Uh-oh! This was not good. Fortunately, you could trade the spot contract (no limits) and arb out. I used every trick I knew, including using other brokers. Was I sweating and praying there would not be a deficit. Didn’t even have time to work that out as we were concentrating on selling, going back and forth between the Merc in Chicago and the Comex. Nothing we could do about it anyway.
By the end of this harrowing day, the account was emptied. Ahmed called two minutes after gold and silver closed like nothing was going on. Said his daughter had a toothache and he was at the dentist’s office with her. Yep, he went bananas when I told him what I did. The swearing was in Arabic so that didn’t bother me. His lawyer called a half hour later saying he would sue. Right on cue.
Around 6 at night, we figured out there was still $60,000 in equity left. Phew. A close call. On Monday the markets opened up sharply lower across the board. The deficit would have been $4 million and I would have taken down the small firm I was with at the time. The manager sent Tim and I a case of champagne that afternoon.
As for Ahmed, did he thank me? Nope. Just swore some more on Monday and still said he would sue. One thing about the Arabs, at least the ones I came across. They NEVER would admit they were wrong.
Then there was Talib Al-Nakib, a very wealthy Kuwaiti who also had homes in London and Geneva. Visited him once in Switzerland. My girlfriend was not allowed to walk with us. She had to stay behind with his wife. When he rode in the car with his animals, they had higher seating priority than his wife, or other women. Those were the dark days for Arab women.
Anyway, he liked his cocktails here and there. One early evening after a few toots in Geneva, he decided to put on a limit position in cocoa. The problem was it was the Friday before Labor Day weekend in the US and the market was thin. We drove it limit up. By next Tuesday the London traders had taken the market back to around limit down. A sobered up Talib chucked his position.
Another funny one was the time he had on a huge pork belly position, I think another limit position. This one a nice winner. The problem was his wife found one of his statements. He was not supposed to be trading bellies because it was pork. He felt obliged to blow out of that one also.
What a time those days were.
Have a great weekend and remember:
GATA BE IN IT TO WIN IT!
MIDAS
