Bahrain Blues - 18th March

Markets…
*US markets have of course continued their positive run this week (DJIA +13% since early last week), with some stocks posting excellent gains in a matter of days – but when you discuss the latest developments with investors out there it does seem that we are seeing a quite severe short-squeeze and that not everything is as rosy as first appears. There is no doubt though that there have been some excellent buying opportunities for those out there brave enough to come in a pick up an extremely cheap-looking stock to ride out the squeeze and book a nice little profit (how about picking up Citi stock last Monday at $1.05 and selling out last night for a nice 140% gain? nice..)
*Asia’s markets have all contributed nicely to the upswing sweeping across all the majors from Japan across to India’s Sensex. Japan’s decision to buy more government bonds there helping to spur lending and a sign that there is a global concerted effort to reinvigorate the credit markets that have remained frozen since last September – even the Europeans are beginning to talk about more aggressive policies to avoid further GDP contraction. A definite sense of “everything will be ok” is being dispersed amongst the masses – but will it fool enough people for long enough to create a resilient sense of safety again?
*Oil made a mighty attempt at hitting and going above $50/brl but fell just short and has not been able to sustain the momentum created in the last 48hrs. Gold has been hovering steadily around $910-20/oz for last couple of weeks as emotional bets seem off for now.
*Currencies see US$ strengthen once more vs Euro and GBP, but the Yen suffers as it hits its lowest vs Euro this year as investors seek higher yielding investments following Bank of Japan’s announcement they will be buying (and hence pushing lower) their domestic debt.

Who took my bonus?
*Political games are getting tougher for those corporates that have been bailed out by the US govt – we had seen rumblings of discontent a few weeks back as Obama started talking out against the “culture of greed” – it then moved on to corporate retreat events and big hotel bookings being banned, no more private plane privileges and now even a move against one of the most sacred aspects of US business –lawfully binding contracts for the payments of bonuses.
*Of course, if it wasn’t for the media, I doubt very much that the US administration would be making quite as much of a show of reclaiming the cash that had been promised. It is a sensitive subject and certainly one that will be used by the US taxpayer to highlight some of the inefficiencies of the bail-out programmes, but is it really that much of a surprise that the top-echelons of corporate America are paying themselves so much money relative to the masses that make up the remaining population? Hasn’t that been the way the US has been running for the last 30yrs?
*Are we now saying that those that go through the necessary system of education, followed by higher education and a stint as an intern in several organisations across Wall Street and years of being the “young jock in the office” now doesn’t earn you the right to be remunerated (subjectively proportionately, objectively clearly out of kilter) when you are finally in a position to manipulate the system. This is a cynical viewpoint for sure, but it only points out the obvious. Political correctness and self-denial will combine to prevent anyone of influence in the US ever admitting this.

*There is also the knock-on effect of withholding these payments to what must surely be some of the more prominent spenders out there – where before the wives of AIG executives would have gone out and treated themselves to an entire new kitchen and wardrobe (the actually wardrobe as well as its contents I’m sure) facilitating the bottom line of many an entrepreneur, struggling business and/or international brand – it all helps the economy and is the very basic “multiplier effect” of economics.
*By the US government taking this money back, what exactly will it be spent on?? Despite some gallant efforts by Obama to increase transparency of the bail-out/stimulus packages, there remain many questions around the details and distribution mechanisms of the US’s attempts at saving the economy. More questions will now be raised and a dangerous precedent has been set. Predictions of more unrest and jumping on the “let’s-bash-the-rich” bandwagon will persist.

Bahrain Blues?
*Bahrain has been a great model since the late 1970s for many aspiring “service hubs”. A lull created by the debilitating civil war in the financial powerhouse that Lebanon was - for many a once natural choice for an international firm seeking a hub close to the woken giant of Saudi Arabia in the late 60s through to mid 70s – saw an emigration of skill and knowledge to the entrepreneurial and aspiring tiny island off the eastern seaboard of the Kingdom. It was the first country in the Gulf to recognise the benefit of providing services when natural resources were not as bountiful as their neighbours – concentrating on creating one of the world’s best (at that time, and still not too shabby) financial regulators and infrastructures as well as providing a more “relaxed” view on the consumption of alcohol and ability for western ex-pats to live a life they would recognise as familiar to that experienced back home.

*However, all has not been well for Bahrain in the last few years – Dubai has especially stolen its thunder ever since turning its sights on being not just the regional hub for trade but almost every other service to boot! It is a case of chicken-and-egg I guess as to whether the financial companies that have since flocked to Dubai did so because of the way of life offered or the way of life in Dubai was created through the financial firms moving here – regardless, Dubai succeeded in attracting the lion’s share – with a combination of marketing and tax-free incentives as well as some benefit in emulating what others had already spent time in creating (it learnt the hard Chinese lesson though that copying something does not always produce the same quality result).

*Bahrain has been looking to re-claim the crown as leading hub for the Gulf, and has been focusing on the, currently fashionable, Islamic banking world. Even this model may not prove enough to protect the state’s position of influence in the banking world – Islamic finance has not been immune to the global malaise and many questions over its model have arisen.

*It does still serve as the main choice for those exclusively serving Saudi, but apart from that niche it does not look to me as having a chance of either catching-up with, nor over-taking the momentum Dubai has created for itself. Religious and political tensions (I’ll go into more detail if you’d like to call in) are creating an environment of uncertainty and unease in what has otherwise been an extremely pleasant and relaxed environment – will it now only go down in history as a footnote that served to pave the way for others to replicate and improve upon its foresight and development initiatives? Or will Saudi’s gradual opening-up save it from disappearing into Dubai’s shadow? The GCC certainly only has space for one major service-providing hub, and if the UAE plays the next 24mths out correctly, no one will be able to compete effectively against its offering – now matter how pleasant a people the Bahrainis might be.