The Arabian stock market crash: Marc Faber's explanation

Dr. Faber is well known for his often brilliant market calls, and in the 21st century has seldom missed a major turning point. He even called the recent top in gold, although he remains one of the biggest bulls of the yellow metal, long-term and is author of the book 'Tomorrow's Gold' whose title says it all.

The recent sell-off in the Middle Eastern bourses has attracted his attention as seeming to be remarkable because it has occurred at a time of increasing liquidity and near-record oil prices.

His view is that the problem is not liquidity, but that the rate of growth of liquidity has been slowing down. He quotes GaveKal Research as saying: 'Bull markets are like drug addicts whose next fix/liquidity injection provides diminishing returns. To get the same effects, the fix/liquidity injections need to always get bigger...Or serious withdrawal follows.'

Slowing liquidity

In other words, yes oil money has been pumping into the stock markets of the region. But as Dr. Faber notes, the expansion of this cash flow has been slowing down, and from the end of 2005 oil production has been declining slightly and prices have stabilized.

Thus while liquidity is still strong, it has not been strong enough to support an exponential growth in stock market prices. And once stock markets loose their upward momentum then the same multiplier effect that pushed them upwards moves into reverse, and they fall back sharply.

Ergo Middle Eastern economies have experienced a tightening of monetary conditions in 2006 almost without realizing it. Yet the stock market crashes may still have gone too far.

Dr. Faber is on the record in his last column on AME Info as saying that he expects Arab bourses to rebound by 20-30% over the next few months, although new all-time highs are out of the question. For the Saudi bourse his prediction has already come true, with a bounce in this range, though the UAE stock market remains on the floor.

Outlook unclear

But clearly the longer term outlook for Arab stocks will be governed by the liquidity flow. Will geo-political issues force an oil price spike and a new flow of funds, and will this be sustainable? Will an economic recession hit the oil price and reduce liquidity? Or will the world continue on a path of growth, gradually raising oil prices and liquidity in the Middle East?

It is hard to answer these questions, and perhaps for that very reason the easy money has been made and now lost in Arab bourses.

On the other hand, Arab stock markets have taken a considerable battering this year, and buying over the summer at present levels is unlikely to be as risky as holding stocks in major markets where an equity sell-off may have just started. But perhaps there is really no good reason to do anything at present.