- The commies had 5-year economic plans… The Saudis have 15!
- The reckless power behind the Saudi throne… and the coming currency shock
- Will the Bank of Japan accept “an offer it can’t refuse” this week?
- The “innovator’s dilemma” and why Intel is cutting 12,000 people loose
- How it came to be that you could have a Goldman Sachs savings account
- The porn industry and the ethics of investing in virtual reality
To hear the mainstream tell it, the rulers of Saudi Arabia are planning for a long future of relatively cheap oil.
This morning, the kingdom took the wraps off a 15-year plan to make the economy less dependent on crude. “We have developed a case of oil addiction in Saudi Arabia,” says Deputy Crown Prince Mohammed bin Salman.
To remedy that situation, the kingdom plans to “raise the capital of its public investment fund to 7 trillion riyals ($2 trillion) from 600 billion riyals ($160 billion) and would sell up to 5% of shares in state oil giant Aramco,” says a Reuters account.
The goals are ambitious: Growing the private sector’s share of the economy from 40% to 60%… shrinking unemployment from 11% to 7.6% (what, not 7.5%?)… growing nonoil income fivefold.
The details of how to get from here to there, however, appear lacking.
But who needs details? Prince Mohammed — the 30-year-old power behind King Salman’s throne — can just make it up as he goes along.
Why not? That’s what he’s done running Saudi Arabia’s military. Yes, Prince Mohammed’s a busy man — deputy crown prince, second deputy prime minister, chief of the royal court and chairman of the “Council for Economic and Development Affairs.”
Prince Mohammed: Policy by improvisation
[Wikimedia Commons photo by Mazen AlDarrab]
And on top of all that, he’s defense minister — where’s he’s made an absolute hash of things the last 15 months — “bizarre and self-destructive,” is how the veteran Middle East correspondent Patrick Cockburn of the London Independent describes it.
Gone is the kingdom’s traditional caution when advancing its interests in the Middle East. Under Prince Mohammed, Saudi Arabia amped up its involvement in the Syrian civil war, while launching an air war in Yemen.
“Both ventures have failed,” Cockburn writes: “greater support for armed opposition to President Bashar al-Assad in Syria early last year allowed the rebels to advance, but also provoked direct Russian military intervention, making Assad very difficult to displace.
“Bombing Yemen has not forced the Houthi opposition out of the capital Sana’a and, where the Houthis have retreated, there is chaos which al-Qaida in the Arabian Peninsula has used to set up their own mini-state on the south coast of Yemen.
“The Saudi leaders are more or less openly saying that they are waiting for the departure of President Obama from the White House to resume their status of most favored ally of the U.S.,” Mr. Cockburn goes on.
“But the Saudis are making a mistake in imagining that hostility to them will dissipate once Mr. Obama leaves office,” he says — for the same reasons we’ve been talking about here in The 5. There’s bipartisan support for allowing Sept. 11 families and survivors to sue the kingdom for its ties to the attacks. Ditto for the release of the “28 pages” of a Joint Congressional Inquiry detailing those ties.
Elite U.S. opinion is also turning against the kingdom — to wit, Nicholas Kristof in The New York Times: “Saudi Arabia legitimizes Islamic extremism and intolerance around the world.”
Presumably someone in the Saudi hierarchy reads the major U.S. papers. Soon the leaders might see the writing on the wall.
And then what? The kingdom will have even less to lose by devaluing the Saudi riyal. All year, Jim Rickards has been saying it’s inevitable. It’s the surest way the kingdom can hold onto its dwindling foreign exchange reserves while oil prices are low. And it sounds as if Prince Mohammed is planning on oil prices to stay low for the next 15 years.
Jim Rickards calls it “The Great Currency Shock of 2016” — and he says it’s possible to seize on the coming Saudi devaluation for gains of 530%… 848%… even 2,196%. Check out Jim’s plan of attack right here.
Stocks and crude are again moving in sympathy, as they have much of this year: West Texas Intermediate is down more than 1% at last check, to $43.24.
That’s sent energy shares tumbling, dragging down the major U.S. indexes. The S&P 500 is off more than half a percent as we write, at 2,079. Gold, however, is recovering some of Friday’s smackdown; the bid is back to $1,240.
Even merger-and-acquisition news can’t juice the market today — perhaps because the proposed deal is in the dinosaur newspaper industry. Gannett is offering $815 million to buy Tribune Publishing. Yep, the value of storied names like the Los Angeles Times, Chicago Tribune and Baltimore Sun is south of a billion dollars. (Both companies spun off their still-profitable broadcast businesses within the last two years.) Go figure, though: As we write, Tribune shares are up 57%.
Meanwhile, the data gods delivered yet another disappointing housing number; new home sales for March came in lower than expected.
The “Shanghai Accord” thesis faces its biggest test yet this week.
Jim Rickards unveiled the thesis a month ago. He believes that during a meeting of G-20 leaders in Shanghai last February, there was a secret agreement: The Federal Reserve would start weakening the dollar, while the European Central Bank would strengthen the euro and the Bank of Japan would strengthen the yen.
The aim is to weaken the Chinese yuan; because the yuan is loosely pegged to the dollar, a weaker dollar will drag down the yuan without the People’s Bank of China resorting to outright devaluation — an act that tanked the U.S. stock market last August and again in January.
The Federal Reserve holds one of its every-six-weeks meetings this week; no one expects the Fed to raise interest rates.
But the Bank of Japan also meets this week, and the financial punditry is less certain about the outcome there. About half the “experts” polled by Bloomberg expect the BoJ to stand pat on policy, while the other half expects some sort of easing to augment the BoJ’s venture into negative interest rates three months ago.
The pressure for more easing is intense: The yen has surged against the U.S. dollar in recent weeks, putting a hurt on Japanese exports.
But Jim says the Bank of Japan is under threat — almost mafioso-style — from the International Monetary Fund.
The IMF brokered the Shanghai Accord in February, and acts as its enforcer. Earlier this month, the IMF held its regular spring meeting in Washington — and Jim was in attendance. At IMF chief Christine Lagarde’s news conference, she laid down the law. “Lagarde is warning Japan not to intervene in foreign exchange markets to weaken the yen,” says Jim.
Here were her exact words: “As far as Japan is concerned, we have fairly robust criteria under which intervention is legitimate, and that clearly can happen in a case, and only in a case, where very disruptive volatility must be avoided. So we are watching carefully what is happening in the Japanese markets.”
Jim couldn’t help but notice her body language as she said that…
Lagarde lays down the law
It all adds up to “an implied threat,” Jim writes in the new issue of Rickards’ Strategic Intelligence, “that if Japan reneges on the Shanghai Accord, there will be a price to pay” — the IMF perhaps refusing to provide dollars or SDRs if a liquidity crunch or market panic hits Japan.
“The IMF has used this kind of muscle on Greece, Cyprus and Ukraine in recent years,” Jim reminds us. “Now the Godfather was making Japan an offer they couldn’t refuse — stick to the Shanghai Accord and we’ll be there for you if needed; renege, and you’re on your own.”
Hmmm… Think we’ll lay our bets on the BoJ not doing any further easing…
What’s this? You and I can have an account at Goldman Sachs now?
Yep, you can have your own Goldman Sachs savings account for an opening deposit as small as $1. Gee, what did we do to deserve this?
“Goldman’s shift down market comes as the bank is under pressure to develop new streams of funding,” says the Financial Times. “Weak first-quarter results from the big U.S. banks have highlighted the challenges faced by their investment banking units, under pressure from volatile markets and tight regulations.”
Here’s a salient fact the salmon-colored rag didn’t see fit to include in its story: Were it not for the Panic of 2008, Goldman wouldn’t be in a position to do this. Remember at the height of the crisis, both Goldman and Morgan Stanley converted from investment banks to commercial banks. That way they could get access to emergency loans from the Fed’s “discount window.”
So now Goldman is doing what all the cool kids at the Big Four banks do — tapping your “savings” to cover losses from investment banking. We only wonder why they didn’t start doing it sooner…
“Intel has fallen victim to what’s known as the ‘innovator’s dilemma,’” says our Ray Blanco, reflecting on one of the big business stories of last week — Intel cutting 11% of its workforce — 12,000 employees.
The Innovator’s Dilemma is the title of a 1997 book by innovation guru and venture capitalist Clayton Christensen. “The dilemma is this,” Ray sums up: “When you’ve innovated successfully and have hugely profitable tech on the market, it becomes painful to innovate again — especially if the new tech you’re working on is going to disrupt and destroy your old one.”
So while most computers have “Intel inside,” Intel didn’t catch onto the smartphone wave and most phones have “ARM Holdings inside.” (That’s something Ray spotted early on, guiding readers to 116% gains on ARM.)
“And there are other growth areas where Intel is missing,” Ray says. “Artificial intelligence and deep learning, virtual reality and other applications need powerful, massively parallel graphics processing units (GPUs) to crunch numbers and render graphics.” Intel’s technology doesn’t cut it.
But Ray has uncovered a “tech triad” of three companies that do. They’ll ride the leading edge of the hottest technology coming to market right now — virtual reality. As Ray’s been telling us for a couple of weeks, VR has the potential for 81,000% growth by 2020. And it’s still early days — judging by the industry that’s been fastest to put the technology to use. (Warning: The preceding link takes you to a video that, while not graphic, is nonetheless suggestive. “NSFW,” as the expression goes…)
“In regard to the VR porn,” begins today’s mailbag: “On one hand, I see your valid point about some technological progresses made and money made as well. It has helped drive some results over the decades.
“However, there’s a flip side I believe is important. Porn is also one of the single greatest destroyers of family values, and the families those values held together…”
[We don’t mean to cut the reader off here, but our 5 Mins. are nearly up already, and we understand the point. Let’s jump to the reader’s conclusion.]
“To choose to put your money into that is your own personal decision. But do not have any illusions as to what you are really buying into. I will never put money into it again, no matter the return.”
The 5: Did you refuse to buy a VCR 30 years ago because the adult entertainment biz was first to figure out how to monetize the home video market? Do you refuse to watch anything on YouTube because the porn-meisters were pioneers in streaming video?
You’re not “profiting from porn” by investing in the technology that makes VR possible. The companies that make the technology don’t count porn producers among their vendors. We’re merely pointing out how, for better or worse, porn is an “early adopter” of a technology whose applications are nearly infinite.
In any event, if you want to see a porn-free investment case for VR, we have that too.
“With the ongoing rash of discussion of various conspiracy theories,” a reader writes, “I begin to wonder if all this folderol over who ‘graces’ our paper currency is really a conscious effort to make the topic so political that even reasonable folks begin to accept the notion of a cashless society — just to end the tiresome tirades from the social justice squadristi!
“Love The 5 — my daily cyber highlight.”
The 5: Yeah, but it gives us something to talk about too, right?
Now… if matters ever reach the point that the debate is so tiresome that we won’t ever talk about it here… that’s when to start worrying!
Best regards,
Dave Gonigam
The 5 Min. Forecast
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