SoftBank and the Saudi bubble

As the boss of SoftBank compares himself to Jesus, it is tempting to suggest that only a miracle can stop a bubble that includes Saudi and SoftBank itself from bursting. Such an event could leave devastation across the global economy.

Article updated: 21 May 2020 9:00am Author: Michael Baxter

Sometimes bubbles can be formed fast. If you had asked me six months ago whether the Saudi economy was built on a bubble, I would have said “of course not.” Well, it now looks like it is.

No one could have foreseen it. Even ardent fans of renewable energy like me thought that oil was still at least a decade away from seeing its reign come to an end.

But Covid-19 is changing everything. When oil began trading at less than zero on the futures market, we all knew that times had emerged that defied prediction.

Back in 2014, Saudi Arabia sat on $735 billion in foreign reserves. By March of this year, that figure was down to $464bn.

In my view, Crown Prince Mohammed bin Salman correctly saw that oil had a limited future; so he reasoned that the Kingdom needed to draw in as much cash as possible and use the money to re-balance the Saudi economy away from oil towards technology. He realised the window of opportunity to do this was short; that is why Aramco was floated.

Well, it is beginning to look as if Saudi has left it too late. The Crown Prince’s dream of a gleaming tech city in the desert called Neom is beginning to look doomed.

I am beginning to question whether the oil market will ever recover, even after the Covid crisis ends. The cost of energy generated by renewables is now getting ridiculously cheap. See this superb explanation by Ramaz Naam

But what got me thinking was when I saw that the Saudi Sovereign Wealth Fund is seeking a $10bn loan, for which it is planning to use its stake in the SoftBank Vision Fund as collateral.

So let me now turn to SoftBank.

Misunderstood like Jesus

Its founder Masayoshi Son has compared himself to Jesus — at least according to the FT, in a recent call with investors, he said words to the effect that like Jesus he is misunderstood.

Of course, he is not the only person to have compared himself in such a way. John Lennon surely regretted saying the Beatles were bigger than Jesus. Intriguingly, Mr Son also drew an analogy with the Beatles, saying they weren’t that popular at first.

The problem is that SoftBank is struggling. Some of its high profile investments such as Uber and WeWork have seen valuations fall. The flotation of WeWork was pulled, in part because of fears that a low valuation would hit confidence in its main shareholder, SoftBank.

In the past, a key investor in the Vision Fund was Saudi Arabia. Well, SoftBank has had that rug pulled away. Now Masayoshi Son has been propping up the valuation of the fund with share buybacks.

Do you see the bubble? Saudi seeks to raise money against shares in a fund that actually needs more money from Saudi Arabia.

The FT Lex column gave SoftBank a right pasting after it revealed a $13bn loss.

The Vision Fund has been a critical investor in technology around the world — without it, an awful lot of techs may never have got going.

I question its future viability, wonder what impact its troubles will have upon the Saudi economy and what all this might mean for the future of tech.

Not the real bubble

Yet I am going to be controversial and kind of stick up for the fund.

Bill Gates once said we overestimate the impact of new technology in the short run but underestimate its long-term impact.

This is SoftBank’s problem. I suspect that long-term, some of its investments will excel. But the short term prognosis is clouding the judgement of investors.

But while the cool heads of Wall Street look on at SoftBank with incredulity, I look at their cool heads and see too much hot air.

Earlier this week two headlines cropped up in my newsfeed in quick succession. The first said that markets rose on renewed hope of an imminent vaccine. The second said that a government advisor warns there might never be a vaccine. The markets focused on the positive news and ignored the more worrisome news.

At least SoftBank is investing in products that may change the world in the near future. The markets are stuck in old thinking. That is where the true bubble lies; the markets are deluded.

These views are those of the author alone and do not necessarily reflect the view of The Share Centre, its officers and employees

Michael Baxter portrait photo
Michael Baxter

Economics Commentator

Michael is an economics, investment and technology writer, known for his entertaining style. He has previously been a full-time investor, founder of a technology company which was floated on the NASDAQ, and a director of a PR company specialising in IT.

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