Friday, March 31, 2006

Integral Accidents

Icelanders have their knickers in a twist (see here(pdf) and  here(pdf)) over a Danish piece of research(pdf) by Danske Bank, which claims that their economy is the most overheated in the OECD. Unsurprisingly, Icelanders disagree - but investors are fleeing like rats a sinking ship (the metaphor would hold better if ships were powered by rats pedalling, but anyway).
Brad Setser has remarked on how much this reminds him of the Asian crash. All this reminds me, rather, of Paul Virilio 's concept of the 'integral accident' - that is, the idea that every technology has its own accident: "To invent the train is to invent derailment; to invent the ship is to invent the shipwreck".
Do 'information accidents' happen in our new 'knowledge economy'? Are we witnessing a ripple of lost confidence spread through emerging markets after the Great Arabian Bubble finally burst? I have no real way of knowing, but I wonder.

Friday, March 24, 2006

Morgan Stanley's chief economist on US protectionism

Steve Roach is on the money, again:
From Beijing to Dubai, there is a growing undercurrent of economic anti-Americanism.  The irony of it all is truly extraordinary: The US has the greatest external deficit in the history of the world, and is now sending increasingly negative signals to two of its most generous providers of foreign capital -- China and the Middle East.  The United States has been extraordinarily lucky to finance its massive current account deficit on extremely attractive terms.  If its lenders now start to push back, those terms could change quickly -- with adverse consequences for the dollar, real long-term US interest rates, and overly indebted American consumers.  The slope is getting slipperier, and Washington could care less.

Welcome to Dubai, twinned with Gdansk

After workers downed tools at Dubai International Airport in solidarity with workers on the Burj Dubai, the authorities are taking measures to browbeat them into giving up the main activists amongst them, while mollifying them with token gestures.
Lieutenant Colonel Rashid Bakhit told Khaleej Times:
 "In my opinion, the workers do not know what exactly they want. The company has increased their salaries with ratio active affect, from the month of February; even this was not one of their demands."
Isn't that sweet. What is the quantum of the change? Will it improve their working conditions? Will it restore their passports?
Before moving on to standard divide-and-rule tactics:
"We have intervened immediately and asked workers who are willing to continue working with the company to sit a certain place and those who does not want or have demands. Unexpectedly, all of the workers and not even a single one revealed intention of not working," he said adding, "What could be the cause behind this protest and making up a mess except that there was some who are motivating these workers to do that."
Yes, those dastardly trouble-makers. Obviously they're to blame.
At the Lenin Shipyard in Gdańsk, workers were outraged and the sacking of Anna Walentynowicz, a popular crane operator and well-known activist, became a spark that pushed them into action[3].

On 14 August, the shipyard workers began their strike, organized by the Free Trade Unions of the Coast (Wolne Związki Zawodowe Wybrzeża). The workers were led by electrician Lech Wałęsa, a former shipyard worker who had been dismissed in 1976 for stirring up trouble and demanding higher pay, and who arrived at the shipyard on 1100 of the 14th August. The strike committee demanded rehiring of Anna Walentynowicz and Lech Wałęsa, raising a monument to the casualties of 1970, respecting of worker's rights and additional social demands.

Although government censorship spoke little about sporadic disturbances in work in Gdańsk, the transmissions of Radio Free Europe penetrating the Iron Curtain and spreading grapevine gossip ensured that the ideas of the Solidarity movement spread very quickly throughout Poland.

Though the authorities in Dubai have been bright and not allowed the workers back onto the sites, thus preventing them from occupying them. And of course, were Lech Walesa a young Keralan working in Dubai today, he would have been put on a flight home long ago...

Thursday, March 23, 2006

Power to the poor sods who build it all

Workers on the Burj Dubai are striking for better pay, conditions, and medical care. For the first time, it seems that the protests have got destructive: AP is reporting that a riot on Wednesday caused an estimated US$1m of damage. Workers at the airport have laid down their tools in solidarity.

To its credit, the government appears to be taking their demands seriously. "They are asking for small things," Interior Ministry official Lt. Col. Rashid Bakhit al-Jumairi told AP. "I promised them I would sit with them until everything is settled."

The abolition of slavery never really caught on amongst Gulfis: the British Political Agents would manumit those slaves who came to them, but the exploitation often continued even after the slaves became free men.

It's about bloody time they did away with it for good, instead of hiding behind the rhetoric of freedom of contract. Freedom of contract means an agreement freely entered into, not one entered into because of the deception of another and perpetuated because the other controls all channels for redress and confiscates your passport to make sure you can't just up and leave.

What al-Jumairi is doing is laudable - but reacting to problems when they arise is no longer enough.

Quote of the day

"The market has gone berserk. Forget about rational valuations, price-earning ratios and growth fundamentals, we have turned into a frenzied mob in front of a roulette wheel," said Bassim Arida, director of international sales at Commercial International Brokerage Company two weeks ago, as the stock market continued to spiral upwards.

From Al Ahram Weekly

America bombing Dubai's Doncasters

Back in December 2005, Dubai International Capital, a subsidiary of Dubai Holding, the investment vehicle that owns most of everything that's anything in Dubai, signed an agreement to buy Doncaster Group, an engineering firm, from Royal Bank of Scotland Equity Finance for AED4.5bn.

Doncasters, according to its website, "manufactures precision components and assemblies for the aerospace, industrial gas turbines, specialist automotive, medical orthopaedic and petrochemical markets."

For 'aerospace', read the 'A380 '(pdf); for 'specialist automotive', read ' Formula 1'(pdf).

So why the Doncasters deal? Dubai seems keen to move up the added value food chain, particularly in lucrative, knowledge-intensive industries like biotechnology and IT. February saw the launch of Dubai Aerospace, a company that will, alongside aircraft leasing and airport management operations, is intended to be a major player in aerospace maintenance, manufacturing and research.

Doncaster's contracts with Airbus are a significant bonus in that regard. Dubai's 'global transport hub' strategy is a perfect match with Airbus' hub-and-spoke vision for the future of air travel, and the emirate has bet US$19bn that they have got it right. With 45 A380s on order, Dubai has gone a long way towards helping Airbus' ambitious super-jumbo break even; in return, Airbus has been talking of setting up an aircraft maintenance centre in the Jebel Ali Airport City that, when finished, will be the centrepiece of Dubai's hub vision. Under a long-term contract with the Airbus, Doncasters is providing core components for the A380's brakes and engines. With that kind of know-how, the company is an ideal partner in the development of Dubai's aerospace industry.

But Doncasters has a darker side. For 'aerospace', also read 'Joint Strike Fighter', and for 'specialist automotive', also read ' M1A1 Abrams main battle tank'.

Unsurprisingly, the military contracts have US politicians all agog. American opinions towards the UAE have been poisoned by allegations that the country has been involved in terrorism. True, the UAE was one of the few countries to recognise the Taliban government in Afghanistan during the 1990s - the continuation of a US-encouraged policy to support the mujaheddin against the Soviet Union in the 1980s. And in 2004, George Tenet, former CIA chief, told the 9/11 Commission(pdf) that the organisation had declined to order a missile strike on a hunting camp south of Kandahar due to fears that a high-ranking Emirati official or member of the royal family might be present. "Clarke told us", the Commission wrote, that "the strike was called off after consultations with Director Tenet because the intelligence was dubious, and it seemed to Clarke as if the CIA was presenting an option to attack America's best counterterrorism ally in the Gulf" (9/11 Commission report, at page 138). Not that the story is told that way these days: 'Dubai officials, Osama cozy before 9/11, CIA says", reads one headline; "UAE royals, bin Laden's saviours" reads another.

But underneath the emotive 'anti-terrorism' saw is a more fundamental American concern: maintaining the country's technological edge. The US has long been loth to share high technologies with its development partners, regardless of how much money they put up for the R&D programmes. Despite ploughing US$1.3bn into the development of advanced radar and electronic war systems for the US F-22 Raptor, currently under development, the US has refused to share the source code for the systems with the UAE, which has the systems installed on the fleet of Block 60 F-16s currently being delivered.

So far as the Block 60s are concerned, the decision may be justifiable on the grounds that the UAE might not abide by undertakings not to pass on the technology - after all, howitzers bought by the UAE from the Swiss in 2004 mysteriously ended up in Morocco, despite clear undertakings that they would not pass them on to that country. But American possessiveness over its technology is not all that discriminating: the United Kingdom has been engaged in an ongoing scrap with the US over technology tied up in the Joint Strike Fighter project. The UK has invested US$2bn in R&D for the plane, and has committed to buy 150 of them once they reach production (Doncasters is also involved). In March, the UK threatened to pull out of the project if the Pentagon continued to refuse to share technologies that would allow the British to adapt the aircraft to their own requirements. Meanwhile, the other five project members - Norway, Italy, Turkey, Denmark and the Netherlands - have been planning a common negotiating strategy to persuade the US to reveal more of the technology involved in the JSF.

After Dubai's humiliating cllimbdown over P&O's American port management contracts, the emirate has little desire to be caught out again. While business leaders have expressed their shock and political leaders are reputed to be furious, they have been doing all they can to persuade US politicians not to block the Doncaster deal. Sheikha Lubna al Qassimi, the economy and planning minister and the UAE's first female cabinet member, went to Washington DC in March to launch a charm offensive supporting the deal.She has her work cut out for her.

Cross-posted at

Wednesday, March 22, 2006

Lemmings, trilobites and GCC stocks

Okay, I'm in full financial pundit mode.

Yaser Nawar at the catchily-titled 'Equity Investment Ideas has quite a nice graph here. His post lays out the conventional wisdom on the boom and bust. As he points out, share prices were running at pretty large ratios to earnings, while a lack of liquidity meant that investors were clearing their portfolios to free up cash for yet more IPOs. Greed, speculation and naivete are the drivers of the cycle, he implies: the standard 'lemming' theory.

Zimran at Winterspeak also supports the lemming theory.

Evan at The Future Uncertain has an interesting and quite different take on the crash. Bubbles, he argues, are necessary mechanisms in rapidly developing markets. Investors know that changes are afoot, but are unable to tell beforehand which industries, technologies or companies will succeed. So they spread their bets across the lot of them. When the inevitable crash occurs, those that are left standing are the ones that are worthwhile.

It reminds me of the Cambrian Explosion, when evolution threw out a massive number of crazy-looking beasties that roiled and multiplied and evolved and then died off in huge numbers with the extinction event at the end of the Ordovician period. The worse adapted creatures died; the best adapted survived, and, millions of years later, evolved into us. I rather like that story, so I'll dub Evan's argument the Cambrian theory.

There is a problem with the theory, though. As Evan notes: "Egypt, a non-exporter of oil, is admittedly harder to explain using this approach, although the economy is perhaps tremendously dependent on remittances from the Gulf states."

Which suggests that it is too soon to start writing off the role of psychology in investment decisions.

In any case, the investor psychology angle implies one thing quite clearly: the crash will have political ramifications. In Saudi Arabia in particular, the bull run has been linked to the accession of King Abdullah to the throne and the benefits of his economic reform programme. Many are likely to take the crash as an indication that his reforms are ill-conceived.Problem is, it is still far too early for his reforms to have had much effect on the economy: most of them are long-term, structural reforms, not quick fixes. So inferring that the reforms are bad because the stocks have gone bad would be fallacious. Not that that ever stopped anyone.

The Cambrian Bubble theory, on the other hand, suggests that, if the reform initiative survives this downturn, there may be a strong basis for sustainable future growth. Those companies that survive will have proven themselves, and will feast upon the carcasses of those companies that failed - that is to say, they'll buy up their assets and cherry-pick their best ex-employees. Which should, if all goes well, make them stronger.

Edward Chancellor wrote an amusing piece on the subscription-only BreakingViews site last Friday which ended with the line 'Given the Kingdom's anti-boozing laws, foreign residents should be sober enough to resist the temptation [to invest in the stock market].' He's right that opening up the market to them only once the song is over is too little, too late, and doesn't say many nice things about Saudi attitudes to foreigners.

He has also written an interesting piece in the WSJ called 'The Seven Pillars of Folly'.

HIs seven pillars are: liquidity economic diversification stock market boom IPO boom property boom market inefficiency herd mentality

Which is a fair assessment of the situation.

Chancellor then goes on to say that the region's rulers have encouraged the boom, hoping to distract them from religious fundamentalism, and suggests that the day traders of today could be the terrorists of tomorrow.

That may be a little hyperbolic. Arab rulers have taken a great gamble on economic diversification, knowing that only through providing employment and opportunities to their populations can they stem the spreading malaise that feeds revolutionary sentiment. If the stock market crash means that they have lost that gamble, making glib comments about it being their own fault really isn't perhaps the most mature response.

But it is a risk. The crisis of confidence could lead to a retreat from some of the more ambitious reforms - which, circuitously, could lead to increased unrest - though linking it directly to terrorism is a little too tenuous. Which could explain why local governments are falling over themselves to intervene and try to hold off the inevitable. WaPo 15.3.06

Mohammed Ramady, a Finance and Economics professor at King Fahd Uni, points out that some may have compromised their futures by dropping out of education or neglecting their jobs to concentrate on the stock market. Those that stayed the course may well find their gamble paid off; those who abandoned it for easy riches are those most vocal that the government should bail them out.

Souhail Karam and Dayan Candappa or Reuters argue differently. ( Reuters, 21.3.06) "The popular notion that Saudi speculators were exclusively retail investors, leveraged to the teeth, buying stocks at outrageously high prices is misleading", they say: rather, massive hedge funds played the markets, often, they imply, making transactions that would move the market to their advantage. Those funds are now prowling for alternative investments, Europe and Asia may be the most likely targets.

So what next? Are we looking for lemmings or trilobites? Will the crash lead to a massive crisis of confidence, retrenchment and retreat, or will it bolster and strengthen the most viable Gulfi companies? Obviously, we'll see a bit of both. The question is which will outweigh the other.

Tuesday, March 14, 2006

Gravity's Rainbow

What goes up, Isaac Newton might have remarked, must come down. Particularly if it's driven by rampant, hype-fueled exuberance completely unsupported by the fundamentals.

The Saudi stock market has dropped what looks to be about a quarter of its value. Naive speculators have been suffering heart attacks at the prospect of losing their dishdashes.

In Kuwait, the market also seems to have dropped by 25%. Disgruntled traders, evidently annoyed that taking risks is not entirely risk-free, have been protesting the fall in stock prices. The Kuwaiti government, ever helpful, has bowed to popular pressure and plans to swoop in and save them from their own stupidity by injecting money into the market.

The correction to Dubai's stock market is even more severe: the index has dropped down almost to where it was a eyar ago, before all the excitement really got going - almost a 50% loss in value. Amusingly, analysts are suggesting that over-confidence was actually the trigger: investors were divesting in preparation for yet another bout of over-subscribed IPOs.