Forget 'Fake News', Here's 'Fake Markets' - How MbS Spent Billions To Prop Up Saudi Stocks

In politics, "when it gets serious, you have to lie."

In the increasingly intermingled worlds of geopolitics and financials markets, when it get serious, you have to rescue your nation's stocks...

America's Plunge Protection Team has been a long-standing feature behind the scenes since Greenspan (some even think it has been around since 1944), ready as equity market buyer of last resort (and even getting subsidies for doing so from the exchanges).

See any number of magical and sudden reversals from 2008/9 and 2014...USA Today finally realizes, fundamentals don't matter anymore...

2015... The rescue bid arrives...

in dramatic size!!

But America's lessons have spread.

China's National Team is more erratic, sporadic, and definitely less successful.

But is nevertheless conspicuous in its sudden panic-buying sprees when Shanghai Composite nears critical levels (or economic strength needs to be projected domestically or otherwise).

For instance, this week...as China begins to fold on its strong-man trade war tactics...

And now, amid the current crisis of confidence in The Kingdom, The Wall Street Journal has exposed Saudi Arabia's stock market rescue squad...

The Journal pulls no punches in turning the conspiracy theory into conspiracy fact, noting that the government of Crown Prince Mohammed bin Salman has spent billions to counter selloffs in recent months.

According to a Wall Street Journal analysis of trading data and interviews with multiple people with direct knowledge of government intervention efforts, the Saudi government has placed huge buy orders, often in the closing minutes of negative trading days, to boost the market.

Most notably, while the Saudi stock exchange normally discloses how much stock the government buys, the recent purchases after political crises have been concealed from public view. That is because the government, rather than buying stock directly, has routed its money through asset managers at Saudi financial institutions who run funds that don’t need to reveal their clients, those people say.

Through the upheaval, MbS' government has been keen to show the world that Saudi Arabia remains safe for foreign investors.

“We need to highlight to the world that Saudi investment is good,” said a Saudi government official.

To prop up the market, the government has bought stocks via its sovereign Public Investment Fund, or PIF, say people familiar with the matter.

While the PIF’s recent stock purchases aren’t publicly disclosed, they’re openly discussed by Saudi traders.

“In the bad days of Saudi Arabia, when there are troubles related to government, you see these flows coming in,” said Abdullah al Marshad, a trader at Saudi Arabia’s Samba Financial Group.

“It tells people: Don’t worry.”

But, as Antoine van Agtmael, who coined the term "emerging market" almost 40 years ago, warns:

...government intervention makes the Saudi stock exchange “more of a fake market, and that kind of undermines the trust of investors in the long run.”

But in the short-term, all that matters is a bull market and the financial projection of economic strength, and as details of Jamal Khashoggi's murder in a Saudi consulate building emerged, the Tadawul All Shares Index (TASI) experienced 10 volatile days of trading. The Tadawul entered its steepest decline of 2018: Share prices sank 5% between Oct. 10 and 11. People familiar with the matter say most of the buying came from the PIF.

Zoomed in the moves are all the more impressive and sudden. A selloff sent the market down about 2% on Oct. 22. In the 40 or so minutes before the market closed that day, heavy buying boosted it by more than 3%.

How is it done? Very simple - When local share prices falter, one of these people says, PIF chief Yasir al Rumayyan tells deputies to start buying. They use the messaging program WhatsApp to contact managers at institutions including state-controlled NCB Capital Co. who manage PIF funds, this person says.

The Journal concludes that data and interviews show the government bolstered the market by buying about $2 billion in stock that week, but of course, local (and state-sponsored) media credited the crown prince's remarks for saving the world.

And so, just as OfTwoMinds' Charles Hugh-Smith wrote so prophetically in 2015, the herd must be turned away from selling by any means available, and at this point, that means coordinated buying by all the world's Plunge Protection Teams.

Central bankers are watching Marx's dictum all that is solid melts into air play out in global stock markets with a terror informed by the scalding memories of 2008's global financial meltdown.

Once the trap-door opens, there is no bottom without prompt action by the world's Plunge Protection Teams--the plausible-deniability action heroes of the hyper-speculative status quo who leap into action when global stock markets threaten to melt down.

After half a decade of ceaseless saves, we all know the mechanics of Plunge Protection.

Since the majority of trading is now done by software programs (trading bots, algorithms, etc.), the first step is to create positive momentum so the bots will detect an "up day" and buy, buy, buy.

The easiest way to generate positive momo is to buy a truck load of S&P 500 futures in a time of low volume, where the impact will be the greatest. usually this is pre-market open.

If this fails, the next step is to send a central bank Talking Head out to discuss more quantitative easing. Announcing the central banks' readiness to do more of what has goosed markets higher for six years will generally spark a buying frenzy, as those who have bet against central banks over the past six years have had their heads handed to them on a platter.

If this fails, grandiose but purposely vague claims of "doing whatever it takes" are issued. there is no need to actually have a plan, or to lay out a plan in public; the open-ended announcement is generally enough to reverse a trap-door decline.

If this fails, it's now serious. The Plunge Protection Team must start buying equities. This is usually done by private proxies via dark pools or offshore accounts or by state agencies--investment funds, retirement funds, etc.

When things get very serious, the central bank can buy assets directly, and in such massive quantities that the markets are forced to respond appropriately.

If this fails, the last resort is a coordinated buying campaign by all the central banks, acting in concert. This last stand has a rallying cry: Plunge Protection Teams of the World, Unite!

Of course the PPTs of the world monitor key technical support levels, but what the PPTs are really monitoring is the dangerous sentiments of fear and panic. When the trap-door opens and the herd turns to selling, the entire sten-year prop-job will crumble.

*  *  *

It seems the Saudis learned well on the real meaning of 'capitalism' and 'free' markets.