Another Gulf Crisis: Dinar Devaluation Looms As Bahrain Begs Neighbors For Bailout

Despite the recent rise in oil prices, all is not well among the allies in the Gulf. The "pegged-to-the-dollar" Bharaini Dinar has tumbled in the last few days as Bloomberg reports the nation has asked Gulf Arab allies for financial assistance as it seeks to replenish its foreign-exchange reserves and avert a currency devaluation - which could spread contagiously through MidEast markets.

Bloomber notes that the slump in oil prices has battered the six-member Gulf Cooperation Council, at times raising questions over whether a dollar peg seen as a bedrock for economic stability for more than three decades was sustainable. And while bets against the region’s currencies have subsided this year, a devaluation of a GCC member would risk shifting the attention to others. Gulf central banks, including Bahrain’s, have repeatedly brushed aside talk of abandoning their exchange-rate regimes.

But Bahrain has seen its central bank"s foreign reserves collapse over 75% from 2014 highs as they have defended the currency peg.

And so, as Bloomberg reports, according to people with knowledge of the talks, Bahrain has asked for a bailout.

The request was made to Saudi Arabia and the United Arab Emirates, two of the people said.

 

A third person said Kuwait was also asked.

 

The countries responded by requesting the island kingdom do more to bring its finances under control in return for the money, the people said on condition of anonymity because the discussions were private.

 

The talks are at an early stage, one person said.

It appears the FX markets are not convinced as the Dinar tumbled...

The IMF estimates that Bahrain needs oil prices at $99 a barrel to balance its budget this year, compared with $73.1 a barrel for Saudi Arabia, which is overhauling its economy.

While Brent crude is trading at the highest level in more than two years, it’s still almost $40 below Bahrain’s breakeven price.

But, Bloomberg points out that economists say that a Saudi-led bailout of Bahrain will be less costly than cleaning up the mess of a devaluation.

“Most people are fully expecting the other Gulf countries to come to Bahrain’s aid,” said Jason Tuvey, a London-based economist at Capital Economics.

 

“If Bahrain was forced to devalue its currency it would probably start to raise questions about other currency pegs.”

Will this be the next ripple to spook markets? Or just another dip to buy?

Rickards Warns "Prepare For A Chinese Maxi-Devaluation"

Authored by James Rickards via The Daily Reckoning,

China is a relatively open economy; therefore it is subject to the impossible trinity.

China has also been attempting to do the impossible in recent years with predictable results.

Beginning in 2008 China pegged its exchange rate to the U.S. dollar. China also had an open capital account to allow the free exchange of yuan for dollars, and China preferred an independent monetary policy.

The problem is that the Impossible Trinity says you can’t have all three. This model has been validated several times since 2008 as China has stumbled through a series of currency and monetary reversals.

For example, China’s attempted the impossible beginning in 2008 with a peg to the dollar around 6.80. This ended abruptly in June 2010 when China broke the currency peg and allowed it to rise from 6.82 to 6.05 by January 2014 — a 10% appreciation.

This exchange rate revaluation was partly in response to bitter complaints by U.S. Treasury Secretary Geithner about China’s “currency manipulation” through an artificially low peg to the dollar in the 2008 – 2010 period.

After 2013, China reversed course and pursued a steady devaluation of the yuan from 6.05 in January 2014 to 6.95 by December 2016. At the end of 2016, the Chinese yuan was back where it was when the U.S. was screaming “currency manipulation.”

Only now there was a new figure to point the finger at China. The new American critic was no longer the quiet Tim Geithner, but the bombastic Donald Trump.

Trump had threatened to label China a currency manipulator throughout his campaign from June 2015 to Election Day on November 8, 2016. Once Trump was elected, China engaged in a policy of currency war appeasement.

China actually propped up its currency with a soft peg. The trading range was especially tight in the first half of 2017, right around 6.85.

In contrast to the 2008 – 2010 peg, China avoided the impossible trinity this time by partially closing the capital account and by raising rates alongside the Fed, thereby abandoning its independent monetary policy.

This was also in contrast to China’s behavior when it first faced the failure of its efforts to beat impossible trinity. In 2015, China dodged the impossible trinity not by closing the capital account, but by breaking the currency peg.

In August 2015, China engineered a sudden shock devaluation of the yuan. The dollar gained 3% against the yuan in two days as China devalued.

The results were disastrous.

U.S. stocks fell 11% in a few weeks. There was a real threat of global financial contagion and a full-blown liquidity crisis. A crisis was averted by Fed jawboning, and a decision to put off the “liftoff” in U.S. interest rates from September 2015 to the following December.

China conducted another devaluation from November to December 2015. This time China did not execute a sneak attack, but did the devaluation in baby steps. This was stealth devaluation.

The results were just as disastrous as the prior August. U.S. stocks fell 11% from January 1, 2016 to February 10. 2016. Again, a greater crisis was averted only by a Fed decision to delay planned U.S. interest rate hikes in March and June 2016.

The impact these two prior devaluations had on the exchange rate is shown in the chart below.

Major moves in the dollar/yuan cross exchange rate (USD/CNY) have had powerful impacts on global markets. The August 2015 surprise yuan devaluation sent U.S. stocks reeling. Another slower devaluation did the same in early 2016. A stronger yuan in 2017 coincided with the Trump stock rally. A new devaluation is now underway and U.S. stocks may suffer again.

By mid-2017, the Trump administration was once again complaining about Chinese currency manipulation.

This was partly in response to China’s failure to assist the United States in dealing with North Korea’s nuclear weapons development and missile testing programs.

For its part, China did not want a trade or currency war with the U.S. in advance of the National Congress of the Communist Party of China, which begins on October 18.

President Xi Jinping was playing a delicate internal political game and did not want to rock the boat in international relations. China appeased the U.S. again by allowing the exchange rate to climb from 6.90 to 6.45 in the summer of 2017.

China escaped the impossible trinity in 2015 by devaluing their currency.

China escaped the impossible trinity again in 2017 using a hat trick of partially closing the capital account, raising interest rates, and allowing the yuan to appreciate against the dollar thereby breaking the exchange rate peg.

The problem for China is that these solutions are all non-sustainable.

China cannot keep the capital account closed without damaging badly needed capital inflows. Who will invest in China if you can’t get your money out?

China also cannot maintain high interest rates because the interest costs will bankrupt insolvent state owned enterprises and lead to an increase in unemployment, which is socially destabilizing.

China cannot maintain a strong yuan because that damages exports, hurts export-related jobs, and causes deflation to be imported through lower import prices. An artificially inflated currency also drains the foreign exchange reserves needed to maintain the peg.

Since the impossible trinity really is impossible in the long-run, and since China’s current solutions are non-sustainable, what can China do to solve its policy trilemma?

The most obvious course, and the one likely to be implemented, is a maxi-devaluation of the yuan to around the 7.95 level or lower.

This would stop capital outflows because those outflows are driven by devaluation fears. Once the devaluation happens, there is no longer any urgency about getting money out of China. In fact, new money should start to flow in to take advantage of much lower local currency prices.

There are early signs that this policy of devaluation is already being put into place. The yuan has dropped sharply in the past month from 6.45 to 6.62. This resembles the stealth devaluation of late 2015, but is somewhat more aggressive.

The geopolitical situation is also ripe for a Chinese devaluation policy. Once the National Party Congress is over in late October, President Xi will have secured his political ambitions and will no longer find it necessary to avoid rocking the boat.

China’s President Xi Jinping awaits appointment to a second term at the 19th National Congress of the Communist Party of China, starting October 18. His reappointment is a foregone conclusion.

China has clearly failed to have much impact on North Korea’s nuclear weapons ambitions. As war between North Korea and the U.S. draws closer, neither China nor the U.S. will have as much incentive to cooperate with each other on bilateral trade and currency issues.

Both Trump and Xi are readying a “gloves off” approach to a trade war and renewed currency war. A maxi-devaluation of the yuan is Xi’s most potent weapon.

Finally, China’s internal contradictions are catching up with it. China has to confront an insolvent banking system, a real estate bubble, and a $1 trillion wealth management product Ponzi scheme that is starting to fall apart.

A much weaker yuan would give China some policy space in terms of using its reserves to paper over some of these problems.

Less dramatic devaluations of the yuan led to U.S. stock market crashes. What does a new maxi-devaluation portend for U.S. stocks?

We might have an answer soon enough.

Revisiting Saudi Arabia

By Chris at www.CapitalistExploits.at

In May of last year I was attempting to figure out if there was an asymmetric play to be had in the land of sand and black gloop. There were a lot of moving pieces to deal with. I think it"s worth revisiting but first it"s worth reviewing what I thought just over a year ago. Much has subsequently happened so we can piece a little bit more together now.

A few years ago, when living in Phuket, Thailand, a group of Saudis stayed for a week’s holiday in a neighboring villa.

Outside of the religious and social confines of the land of black gold and endless sand, this group made a bunch of spoiled 5-year olds left to run amok in a candy shop without adult supervision look positively angelic.

They were very visible, with an entourage of young Thai “ladies” and a fleet of Land Cruisers to haul them about. On one occasion, after my son witnessed one of the guys buying a beer and throwing a US$100 bill at the waiter, telling him to keep the change, he asked me how come they had so much money to waste.

I explained that Saudi Arabia has two things in abundance: sand and oil. And though the world doesn’t need sand as much as it does oil, they have grown very wealthy selling the oil to the rest of the world.

Depending on whose numbers you take, somewhere between 75% and 85% of Saudi Arabia’s revenues come from oil exports, and fully 90% of revenues come from oil and gas. Clearly the Kingdom is dependent on oil revenues in the same way that an infant is dependent on its mother’s milk. And unless you’ve been living under a rock for the last few years, you’ll have noticed that the price of oil has collapsed.

Now, in a “normal” market the reduced revenues would manifest in a weaker local currency as demand for Riyals declines.

But governments and central bankers don’t believe in “normal” markets and so the Saudi riyal has been pegged at 3.75 to the US dollar since 1986.

It’s not hard to see a situation where Saudi Arabia may very well be forced to de-peg the currency to curb the fall in the country’s FX reserves should low oil prices persist.

Let’s look at some of the potential catalysts for this.

Could Yellen Kill The Peg?

While the Sheiks contemplate how to deal with their predicament from diamond encrusted cars and golden toilets, across the pond we find that monetary policy in the US has been tightening albeit modestly. What’s important to understand is that in order for Saudi Arabia to maintain its currency peg it needs to follow FED monetary policy.

By following Yellen the Saudis land up sacrificing growth, and by diverging they sacrifice FX reserves in order to maintain the peg. Clearly neither are attractive propositions. According to the Saudi Arabian Monetary Agency (SAMA), for every 100 basis point increase in the Saudi Interbank Offered Rate (SIBOR) this leads to a 90 basis point decline in GDP in the subsequent quarter, and a further 95 basis points in the following quarter.

Falling GDP in a country where over 60% of the population are under 30 brings about its own set of problems. Political instability in the Kingdom has been rising and the royal family is increasingly fighting for survival. After all, they had the experience of watching the Arab Spring unfold on their flat screens.

If, on the other hand, they opt not to follow the stumpy lady, the gap between interest rates in the US and Saudi Arabia will be quickly exploited by people like me as arbitrage opportunities open up.

So this is what we’re all looking at right now: SAMA will have to buy riyals in the open market by selling from its hoard of dollar reserves. Any rise in interest rates in the US will mean SAMA will have to further deplete reserves.

As I have mentioned before, all pegs eventually break. The question is one of timing.

How long do the Sheiks have under current oil prices?

The falling oil price since mid-2014, has significantly reduced Saudi Arabian revenues. So much so that the scorecard for 2015 showed a deficit of $98bn, and SAMA is estimating a further $87bn deficit this year.

The Saudi government have been funding this deficit by drawing down on forex reserves, spending $132bn in the year to January of this year. With current prices and current reserves they can easily last another 4 years.

Some things I’m thinking about:

• Iran will bring additional supply to a market in surplus. Saudi Arabia will be forced to keep the pedal to the metal on production, not wanting to lose any market share. And so I’m not convinced we’ll see oil rising in the next 12 to 24 months.


• Internal domestic political pressures can be "addressed" with creating an external pressure or conflict. It wouldn"t be the first time.


• We’re in a US dollar bull market as I’ve stated here,here, and here and many other times. Dollar strength will put pressure on the price of oil and thus revenues to the Kingdom.

This could certainly get interesting and traders have begun speculating on a de-pegging from the dollar.

Should low oil prices persist for the next 3 to 4 years, Saudi Arabia will be forced to decide whether it prefers to either cut the production or loosen the currency peg.

I could be wrong but I feel like it’s too early to play this trade and the costs of entry are not astoundingly cheap. Saudi Arabia has almost no debt and can easily access the credit markets. With debt to GDP of just 2% they have a lot of room to move. Coupled with the upcoming partial listing of Aramco their ability to tap international markets for capital is certainly a factor I’m not sure all currency speculators are considering.

What is worth watching are neighbour states. While Kuwait, Qatar, and the UAE all have dollar pegs, they too have vast central bank reserves and sovereign wealth funds. But what looks pretty precarious to me are Oman and Bahrain who could run out of reserves in less than three years. Both these countries have resorted to issuing debt to extend the longevity of their reserves but issuing dollar denominated debt which is essentially asset underwritten by the price of oil in an environment of persistently low oil prices certainly looks like a precarious bet to be making.

Investors looking for asymmetry in markets will do well paying attention to the currency markets, and existing dollar pegged currencies in particular. As I mentioned before… all pegs break, and the returns that can be made in such situations are of the life changing variety.

– Chris

“If Saudi Arabia was without the cloak of American protection, I don’t think it would be around.” – Donald Trump

Ok, so that was over 12 months ago. Fast forward to today and we have some of the answers... and we"re a little further down the road.

Oil

Still looks like isht. The supply and demand setup hasn"t gotten any better, and this is not what the house of Saud wants. Nothing shocking to what we expected anyway.

Rates

The tubby lady at the FED has gone ahead with a divergent policy (raising rates). As you can see, I discussed in that article what effect the raising of rates could (or would have) on the finances in Saudi Arabia. Again, nothing we never expected.

Conflict

I penned an article on Qatar here. I do think the spat with Qatar has less to do with them than it has to do with Iran and with the Saudi"s domestic problems - both financial and political. In the article above, I mentioned some stupid conflict but wouldn"t have put it up there as a probability over 50%. And yet now it"s happening in real time. Does it subside, does it blow up, or something else?

The question I think we need to ask ourselves today is this: now that the conditions have been met that do nothing to assist the Saudis with their finances (and at the same time they"ve chosen a path of "external" enemy) where does that leave us with original idea of looking for an asymmetric payoff on the riyal having to de-peg their currency?

I"m watching the dollar index very, very closely. If we break higher, then the Saudis will have a very, very serious problem on their hands as their balance sheet blows out. This could get interesting... and profitable.

- Chris

"Rockefeller once explained the secret of success. Get up early, work late - and strike oil." — Joey Adams

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S&P Downgrades Qatar To AA-, Credit Risk Spikes To 2017 Highs

Citing expectations of notable slowing in economic growth andconcerns about fiscal and current account deficits widening, S&P has downgraded Qatar from AA to AA- as credit risk premia hit 2017 highs.

Qatar credit risk is at 2017 highs (but remains well below Jan 2016 recent highs...

Full Statement from S&P...

• On June 5, 2017, a group of governments including Saudi Arabia, United Arab Emirates, Bahrain, Egypt, Libya, and Yemen moved to cut diplomatic ties, as well as trade and transport links with Qatar.


• We believe this will exacerbate Qatar"s external vulnerabilities and could put pressure on economic growth and fiscal metrics.


• We are therefore lowering our long-term rating on Qatar to "AA-" from "AA" and placing it on CreditWatch with negative implications.


• The negative CreditWatch encompasses numerous downside risks to the rating as a consequence of recent events, reflecting that we could lower the ratings if domestic political risks were to substantially increase or if government indebtedness increases materially quicker than we currently expect. We could also lower the ratings if our assessment of contingent liabilities from the banking system or the government"s related entities were to increase, or if Qatar"s external financing lines were withdrawn.

RATING ACTION

On June 7, 2017, S&P Global Ratings lowered its long-term rating on the State of Qatar to "AA-" from "AA" and placed the rating on CreditWatch with negative implications. The "A-1+" short-term rating was affirmed. The Transfer & Convertibility assessment is "AA".

As a "sovereign rating" (as defined in EU CRA Regulation 1060/2009 "EU CRA Regulation"), the ratings on the State of Qatar are subject to certain publication restrictions set out in Art 8a of the EU CRA Regulation, including publication in accordance with a pre-established calendar (see "Calendar Of 2017 EMEA Sovereign, Regional, And Local Government Rating Publication Dates published Dec. 16, 2016, on RatingsDirect). Under the EU CRA Regulation, deviations from the announced calendar are allowed only in limited circumstances and must be accompanied by a detailed explanation of the reasons for the deviation. In this case, the reason for the deviation is a significant geopolitical development impacting creditworthiness. The next scheduled rating publication on the sovereign rating on the State of Qatar will be on Aug. 25, 2017.

RATIONALE

On June 5, 2017, a group of states including Saudi Arabia, the United Arab Emirates (UAE), Bahrain, Egypt, Libya, and Yemen moved to cut diplomatic ties, as well as trade and transport links, with Qatar. The measures imposed include  a blockade of land, sea, and air access and the expulsion of Qatari officials, residents, and visitors from the group of states. We believe this will exacerbate Qatar"s external vulnerabilities and could put pressure on its economic growth and fiscal metrics. The negative CreditWatch encompasses numerous downside risks to the ratings as a consequence of recent events. At this stage, we note that there are numerous uncertainties regarding Qatar"s response, the extent to which these measures will be imposed, and their longevity. We expect to review this and the potential impact on our projections as further details emerge and by our next scheduled review, on Aug. 25, 2017.

We understand these moves to be motivated by Qatar"s apparently more conciliatory stance toward Iran amid allegations that Qatar is financing terrorist activity. We note that Qatari authorities vigorously  deny these allegations, and that Qatar"s exact policy response is uncertain at the moment.

Supporting the ratings, Qatar holds the third-largest proven natural gas reserves in the world, and is the largest exporter of liquid natural gas (LNG). We expect Qatar"s reserves to provide many decades of  production at the current levels. GDP per capita is among the highest of rated sovereigns, estimated at US$62,500 in 2017. The hydrocarbon sector contributes about 50% of Qatar"s GDP, 90% of government revenues (oil and gas taxes and royalties, plus dividends from Qatar Petroleum), and 85% of exports.

Nonresident deposits in Qatar"s banking system increased over 2016 by 17% of GDP, which has weakened Qatar"s external liquidity position as related external short-term obligations have increased (see our ratio of gross external financing needs); the average maturity of these deposits is under one year. Over the same period, bank credit directly to the government increased by a similar amount, and the funds were generally used to finance Qatar"s ongoing significant infrastructure program. This dynamic has therefore increased pressure on our external stock metric (narrow net external debt), as the increase in external liabilities was not matched by external liquid assets. While we no longer expect the continued accumulation of these external liabilities, in our opinion recent events have the potential to destabilize these nonresident deposits and provoke an outflow.

Although we do not expect this potential outflow to pose immediate and significant issues for Qatar"s banks (see "A Sharp Rise In External Debt Leaves Qatari Banks More Vulnerable," published May 8, 2017), it could mean that government support would be needed in some form to offset any potential major outflow, including the potential use of QIA (Qatar Investment Authority, the sovereign wealth fund) assets, in addition to the central bank"s contingency reserves. Moreover, we now consider risks to external financing lines to the whole economy, including foreign direct investment, portfolio flows and to the financial sector to be elevated, and this could lead to pressure on Qatar"s pegged monetary arrangement. We subtract Qatar"s monetary base from usable reserves, which we view as consistent with maintaining confidence in a pegged currency. We estimate government liquid external assets to be worth 170% of GDP, which remains a key rating support.

Qatar"s fiscal and current account deficits could widen as related revenues from regional trade diminish. In 2016, 10% of Qatar"s exports was to the group of states that have blocked trade. We believe this figure includes gas exports through the Dolphin pipeline, the position of which under the embargo is currently unclear. The same group of states provides 15% of Qatar"s imports, potentially causing substantial shortages of key materials, including those used for construction projects, and food. Furthermore, the imposition of air travel restrictions could have significant implications for Qatar Airways" profitability. We note that debt of government-related entities (GREs) accounts for approximately 85% of GDP. There is currently no indication that Qatar"s main trade partners (Japan, South Korea, China, and India), who purchase the bulk of Qatar"s LNG production, will reconsider their existing trade arrangements. These four countries account for 55% of Qatar"s total exports.

Although still very strong, the government"s net asset position (net general government assets are 120% of GDP) could weaken as a result of deploying these assets to support revenue shortfalls and  because the potential for debt financing at similar prices to recent issues appears unlikely. Additionally, government support to the banking system (as was the case during the financial crisis) and to its GREs, which also require external financing, could place an additional burden on government assets. These developments could weigh on our external analysis to the extent that they act as a drain on liquid external assets and reduce coverage of external debt. At the moment, we expect that Qatar will continue with its substantial infrastructure development, the bulk of which is not related to the 2022 World Cup, but rather developing road and sewerage networks, schools, and public transportation networks.

As a result of these factors, we expect that economic growth will slow, not just through reduced regional trade, but as corporate profitability is damaged because regional demand is cut off, investment is hampered, and investment confidence wanes.

The policy response of Qatari authorities to falling oil prices since 2015 has been very visible and is illustrated by reigning in current expenditures, merging line ministries, and implementing numerous cost-saving initiatives within its core GREs. In comparison with regional peers, fiscal deficits have been modest as a result and their financing strategy clear. In our opinion, the government has been clear with its stated ambitions on economic diversification and its supporting infrastructure development plan. We do not expect that the aims of the authorities will deviate as a result of the embargo, but that achieving them while maintaining the current level of creditworthiness will now require additional fiscal effort, which therefore raises some uncertainty on the exact policy response. We expect details to emerge in the next few weeks. We do not consider the recent lifting of the moratorium on Qatar"s North Field in our assessment because the potential related revenues fall outside of our rating horizon. Less certain still, in our opinion, is Qatar"s policy response to the apparent demands of the group of states and Qatar"s position in the Gulf Cooperation Council. We view these factors as damaging to overall policy predictability.

We believe the fixed exchange rate of the Qatari riyal to the U.S. dollar leads to limited monetary flexibility, and we expect the currency peg to be maintained. Qatar"s real effective exchange rate has appreciated by 14% since early 2014. In our view, this represents a deterioration in international competitiveness of the country"s modest tradeables sector and a dampening of nonhydrocarbon GDP growth, absent any offsetting factors such as improved efficiency or technological capacity.

*  *  *

Interestingly S&P expects the currency peg to be maintained - something the market strongly disagrees with...

5 Head Scratchers

By Chris at www.CapitalistExploits.at

Market dislocations occur when financial markets, operating under stressful conditions, experience large widespread asset mispricing.

Welcome to this week’s edition of “World Out Of Whack” where every Wednesday we take time out of our day to laugh, poke fun at and present to you absurdity in global financial markets in all its glorious insanity.

While we enjoy a good laugh, the truth is that the first step to protecting ourselves from losses is to protect ourselves from ignorance. Think of the “World Out Of Whack” as your double thick armour plated side impact protection system in a financial world littered with drunk drivers.

Selfishly we also know that the biggest (and often the fastest) returns come from asymmetric market moves. But, in order to identify these moves we must first identify where they live.

Occasionally we find opportunities where we can buy (or sell) assets for mere cents on the dollar – because, after all, we are capitalists.

In this week’s edition of the WOW: 5 head scratchers

Today we"re going to blast through a few shards of information that have bloodied my windshield recently... but first some context.

The world is a web, interconnected at multiple levels but in it"s entirety it is one giant capital flow chart. This is why looking at events, trends and prices from multiple angles and with historical context is critical. It means that in order to understand global capital flows and the world at large investors needs to be generalists. Specialisation renders one towards narrow focus by necessity. There is nothing wrong with narrow focus when you need it so long as it can be brought into focus through a broad understanding.

Let"s therefore look at a number of topics.

1: Saudi Arabia Got WHAT??

In what I dearly wish was a delayed April fools joke the United Nations just elected Saudi Arabia to the Woman"s Rights Commission. No isht!

A quick reminder: this is the only country in the world which actually bans women from driving cars while implementing Sharia Law, which - for those among you who haven"t read the intricacies of - permits, among other heinous things, honour killings. Way to go UN!

Question: does this make the UN complicit in crimes against humanity committed by Saudi Arabia"s government? Oh, wait...

Why do I even mention this?

Davos men, the UN, the kleptocrats in Brussels, Washington, and sundry such creatures who muddy the halls of power are slowly losing their grip. This step - electing the fox in to guard the hen house - is a candid, dare I say it, balsy admittance to what we already knew. That they value money more than morals.

Why it"s important is because, in their desperate desire for riches, they just dealt another blow to the establishment"s credibility. Credibility rests on trust, and trust is easily destroyed. What these podium donuts have just done is provided additional kerosene to the anti-establishment fire, which - if they"ve not looked outside their windows - is smouldering around them.

When alternatives for governance are sought, as they are now, it doesn"t require a genius to understand that views and beliefs are translated into how capital gets allocated.

Ask yourself this.. If Davos Man is increasingly shown to be the morally bankrupt sociopath he is, then at what point does faith in Davos Man"s institutions and obligations (sovereign debt, I"m looking at you) get called into question?

2: Risk Party... I Mean Parity

In case you wondered what it was...

"Risk parity (or risk premia parity) is an approach to investment portfolio management which focuses on allocation of risk, usually defined as volatility, rather than allocation of capital."

Simplistically risk parity funds buy assets based on their implied volatility. If company X"s volatility drops, then the models allocate more capital towards company X. By buying more of company X this has the effect of causing volatility to decline further. You get the picture. I"ve written about this before when talking about a bubble in dumb money.

Imagine buying companies not based on their balance sheets, income statements, or any of that boring stuff but purely on how volatile their share prices have been. Imagine... These risk parity funds are completely price insensitive. They don"t even know what they"re buying and will just as happily buy company X if it"s trading at 200x earnings... so long as volatility is low.

Now, I would be remiss in mentioning that artificially low interest rates (thanks central banks) have had the effect of suppressing volatility in markets. These ETFs, coupled with sustained idiotic central bank policies, have created truly epic distortions in the markets.

And, just to prove that stupidity can last for quite some time, below is an updated chart on where things stand with this fun game.

3: Circling Back to the Saudis

I don"t know about you but I find that when I need to understand something a little better it"s often best to let the idea ruminate a little while before revisiting it. This allows it to mulch around in your brain, squeeze out the flatulent useless bits, and present you with what is usually be a better grasp on what really matters.

Sticking with this process, let"s revisit the first topic of this week"s WOW.

Curious minds should be asking the question: why on earth is the UN treating the Saudis like a cross between Mother Theresa and Ghandi?

Call me cynical but I reckon it"s usually always about the money. So the fact that grand master Mohammad Bin Salman Al Saud has decided to list a sliver (5%) of Saudi Aramco may well have a little to do with this.

We know there are problems in the Kingdom. Serious problems.

And no, I"m not referring to the fact their poor citizens are governed by a bunch of psychopaths with medieval beliefs who would still be living in caves if it weren"t for the black stuff under their sandals.

I"m talking about financial concerns around its now infamous decision in November 2014 to abandon its role as the global swing producer and ramp up production (even as global supplies were increasing and prices were collapsing).

Take a look at this:

Now take a look at this:

This is what a pegged currency looks like (Saudi riyal vs. USD).

I"ll let you put two and two together.....

Done?

Ok.

So you"re in a cash crunch, running the biggest budget deficits ever, you have to hold your currency peg which means dipping into your foreign exchange reserves, and you"re fighting a wall of supply from Iran (a topic for another day but you can go listen to my conversations on Iran here and here). What do you do?

You do what anyone would do. You sell stuff.

The "Kingdom" had their first ever bond sale last year and now they"re flogging Aramco to the world. The problem with all of these things is that you"re needing to interact with the rest of the world a tad more and that still requires "legitimacy". A "credible" seat at the UN should help, no?

I wonder how much they paid the bankers for that seat at the UN?

We"ll probably get some insight when we see where Aramco"s shares get listed, and by whom.

4: The Wisdom of Age

Just in case we think we can fathom what the future holds.

How much of what Emma witnessed in her 117 years on this ball of dirt could she have seen coming in her life?

The answer is not likely many things. But... identifying just one of the completely asymmetric changes that took place would have definitely been very, very well worthwhile for Emma. Imagine having had the ability and foresight to have invested in just one of the items Sprezza lists in its early phase... and hung on.

Identifying the trends could have been done but I dare say hanging on is likely the hardest thing for us humans to do.

5: And Lastly But by No Means Least

Did you see the massive rally in the euro?

I"ve a great number of thoughts on this which I share with Insider members this week, including what I think is a wonderful setup. I"d encourage you to join us.

After all, there are just a few days left in April, which means you can gain access to membership at the inaugural price... before the price goes up.

Until next time, have a good weekend.

- Chris

"The biggest mistake investors make is to believe that what happened in the recent past is likely to persist. They assume that something that was a good investment in the recent past is still a good investment. Typically, high past returns simply imply that an asset has become more expensive and is a poorer, not better, investment." — Ray Dalio, Founder, Bridgewater Associates

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