What the Saudi Shakeup Means for Your Money
News broke over the weekend that the Saudi Kingdom had detained 11 princes, 4 ministers, and 34 other senior officials, former ministers, and prominent business owners as part of an anti-corruption campaign. All are apparently being held at Riyadh’s Ritz Carlton Hotel and sleeping on thin mattresses placed on the floor in a ballroom – including billionaire investor Prince Al-Waleed bin Talal, who is well known in the west for investments in such companies as Citigroup Inc. (NYSE:C), Twitter Inc. (NYSE:TWTR), and Apple Inc. (NasdaqGS:AAPL).
The Western media has reported this move as part political shakeup, part coup prevention, and part power play by a young, ambitious Crown Prince Mohammed Bin Salman.
As usual, they’re missing the real story.
What’s happening in Saudi Arabia is all about money – who’s had it and, more importantly, who will have it very shortly.
Make no mistake about it, this is a big story, perhaps even THE story of a generation. It’s also a phenomenal opportunity for savvy investors.
Which is, of course, why we’re talking about this today.
What You Need to Know to Be One Step Ahead
Most folks are vaguely familiar with Saudi Arabia if for no other reason than it’s played a hugely important role as one of the world’s primary oil suppliers. Not surprisingly, they view it as a “modern” influence.
In reality, the House of Saud stretches back centuries to its earliest recorded ancestor, Mani’ ibn Rabiah Al-Muraydi of Diriyah around 1450. Its history is filled with intrigue, powerful people, and even more powerful influence.
“Modern” Saudi Arabia really doesn’t come into its own until 1945 when King Abdulaziz bin Abdul Rahman – known in the West as Ibn Saud – solidified a relationship with the United States revolving around oil reserves discovered by American surveyors near Dammam in 1937.
That relationship would prove critical in the 1970s when the U.S. government abandoned the Bretton Woods gold standard in favor of a military alliance protecting Saudi Arabia’s oil fields.
The exchange, of course, would be that all oil sales were to be priced exclusively in U.S. dollars by 1974, and that surplus proceeds would likely be invested in U.S. debt. All other OPEC nations were on board only a year later in 1975.
The relationship did three things that are important to what we’re going to discuss because they set the stage for the changes I see ahead:
- Dollars for oil ensured artificial global demand for U.S. dollars tied to a commodity priced by market conditions rather than strictly by economic requirement, as had been the case with gold.
- Petrodollars, as they would become known, enabled the United States to grow its monetary base exponentially using a currency – the dollar – that could be created out of thin air when needed. Or, convenient.
- Other countries had to tag along because selling their exports to the U.S. meant dollars that they could, in turn, use for oil.
Which brings us to today.
By all reports, Crown Prince Mohammed Bin Salman is exceptionally intelligent and progressive.
He’s watched the old guard build Saudi Arabia into what it is today while also understanding that the Age of Oil is ending. He’s also a strong proponent of extending current OPEC production cuts.
Most investors cannot reconcile the two, yet I think there’s a very clear path ahead.
Crown Prince Mohammed Bin Salman – “MBS” for short – is a reformer who wants to reduce the Kingdom’s dependence on oil and diversify its economy by moving Saudi Arabia away from oil through non-oil related industry trade, infrastructure, and consumer products development as part of a plan called Vision 2030.
More immediately, he’s already undertaking a $500 billion future city referred to as NEOM – which is an abbreviated contraction of the Latin “neo” – meaning new – and the Arabic “mustaqbal” – meaning future.
We’re going to be talking about this a lot in the months ahead, but for now what you need to know is that all of the world’s top players are already involved.
The Prince commented to Bloomberg recently, for example, that his representatives are in discussions with Amazon.com Inc. (NasdaqGS:AMZN), Alibaba Group Holding Ltd. (NYSE:BABA), Airbus, and Alphabet Inc. (NasdaqGS:GOOGL), just to name a few of the companies we talk about all the time by virtue of the Unstoppable Trends we follow.
Now, here’s the twist.
The Crown Prince will not be able to achieve his vision if he remains beholden to the U.S. dollar. So, he will increasingly shift to the Chinese yuan as an alternative, giving rise to the Petro-Yuan.
The move will be embraced by China, Russia – which is already in talks to extend its three year yuan-ruble swap agreement – and likely by dozens of other countries keen to get away from the U.S. dollar. There won’t be a “crash” per se like the “permabears” suggest in their fear-laden emails, but rather, a gradual decline in U.S. influence similar to the decline of the British pound as that currency fell out of favor a century ago.
Remember the part about exports and the U.S. dollar?
China’s built up trade with Russia in recent years, which is why Russian oil sales are now priced in yuan… yuan that Russian companies now use to buy Chinese exports in a move that completely bypasses U.S.-based petrodollars and U.S. products. Not coincidentally, Russian oil purchases are now 15% of Chinese totals, up from only 5% a few years ago.
Three Ways to Line Up Huge Profit Potential
I see three profit plays at hand – one short-term, a medium horizon play, and a longer-term move.
The fact that many Western investors have blinders on when it comes to the policy and investment implications we’ve discussed makes them that much more appealing.
- The price of oil in U.S. dollars will rise as OPEC-related production cuts continue under the Crown Prince’s direction. The best way to play that is a producer like Diamondback Energy (NasdaqGS:FANG), which recently beat Q3 earnings, doubled quarterly revenue, and raised FY 2017 production guidance.
- The Chinese Yuan will continue to strengthen as Petro-Yuan replace Petrodollars. Many investors simply don’t want to believe this is happening, but the yuan has already risen 6% this year and there’s even talk in the global trading community that the Chinese yuan will become a “safe-haven” play. The best way to play that is via an ETF like the WisdomTree Chinese Yuan Strategy Fund (NYSE:CYB).
- The Crown Prince will lift restrictions on foreign ownership in conjunction with his desire to attract capital. The best way to play that is also the simplest – iShares MSCI Saudi Arabia Capped ETF (NYSE American:KSA), which is trading at around $25 a share now and carries a relatively low expense ratio of 0.74% and sports a yield of 2.29% as of September 29, according to iShares data.
In closing, there are a lot of investors who will read today’s column and decide that what we’re talking about can’t happen, or that it won’t happen.
That means more opportunity for you.
Never forget that skepticism and reluctance eventually turn to acceptance and profits.
I’ll be with you every step of the way.
Until next time,