¶ Intro / Opening
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¶ Introduction: Gulf Region Transformed
Hello and welcome to another episode of the Odd Thoughts podcast.
I'm Tracy Alloway and I'm Joe. Isn't thal Joe.
It is currently April tenth, That's right, it's a Friday. It's a beautiful friday outside. We always say when we're recording things nowadays, because we never know what's going to change in the next hour or day or week. But at the moment, there is some sort of ceasefire, yes,
between the US and Iran. Israel is rather more uncertain at the moment, but it seems that whatever happens in the short term with this particular conflict, that the region, the Gulf region and the Middle East has already been vastly, vastly changed.
Yeah, it seems almost of that in many different dimensions. I mean, look, you know, first of all, there's just been the little physical damage. You can have a ceasefire, but there's going to be energy and time to get expended,
et cetera. Then, of course, and we already have done an episode for example, about Dubai real estate in particular, or Dubai in particular, and the question of like, here's this country that was perceived really by people around the world is maybe one of the most stable places that you could live. And obviously some of that is being
called into question. But then, like you know, here's just a gigantic war, and wars, even short ones potentially have all kinds of ripple effects and scars and so forth, and it'll change obviously the course of the region.
Yeah, the way I think about it is the Gulf region was sort of a center of let's say three things, so energy mm hmm, oil and resulting petrochemicals. Yes, we've talked a lot about capital capital. There's a lot of money emanating from the region because of it oil wealth, and that flows into all sorts of things from you know, US tech stocks to infrastructure investments, and I love that. And then thirdly, it's well, I guess I could add trade.
It's a purveyor of trade routes for sure, but setting that aside, thirdly, it's also a capital of living standards and this idea of we're going to build a diversified Gulf city state where people can come and live, and we sort of talked about on the Dubai episode, but today we're going to be talking about maybe all three or four of those things, and what this particular conflict actually means for them for a region that has really
built itself around this idea of energy, capital, living standards, and trade.
And then the one thing I would just point out is that obviously the region has almost a reputation for being in some version of constant war or there is constant tension, et cetera. Right, so at various time do you disagree.
I mean, the Iran threat has always been there, but one of the key themes of the UAE, for instance, it's becoming this haven of stability was that it wasn't expected to erupt in this way.
That is indisputable, and that is part of why it's so shocking. But you know, tensions in the Middle East on some level is almost like a cliche in the news, et cetera. And so the you know, over years, we're in multiple Gulf wars et cetera. The war in Gaza that's been taking place over the last multiple years, I mean, there's just extraordinary. There's a long history of conflict.
Yes, so we are going to be talking about how the latest conflict is going to impact the region potentially forever. So we have the perfect guest. I'm very happy to say we are going to be speaking with the chief emerging markets economist over at Bloomberg Economics, Zia Daoud, someone we've spoken to before. I think our last episode with him was about Egypt, but someone I used to speak to a lot more when I was actually based in
Abu Dhabi and he was based in Dubai. He's about to go back to Dubai after being in London for the past few weeks. So, Zied, thank you so much for coming back on our thoughts.
¶ Anticipating and Reacting to War
Thank you for having me John Tracy.
So out of curiosity, what have the past few weeks been like for you as someone who is not, you know, not just living and breathing golf economics, but also physically living in the region for the past few years.
It's been intense because although we've been expecting the war to take place, the intensity of it, the reaction and feeling it rather than expecting it and living through it rather than expecting it has been unprecedented I think for the region. But yeah, it was expected, but it was still different when you feel it when they need just anticipate it.
When you say it was expected, do you mean it was expected in the sense that by early February that okay, you know clearly the rhetoric and the actions and ship movements instead of or appointing to possible war or is it something deeper, long standing, We're there was this tension that was eventually perhaps going to come to a boil or come to a head in some manner or another.
I think for us, and we've done this in writing, and I've done that mostly with my colleague Dinas Fandi, is that since the last war in June, the Twelve Day War, it felt like there was unfinished business and there'll be a second round of this war. So we've written multiple pieces saying this is not over, there'll be another rand of escalation. And towards the beginning of the year, as you had more US mobilization, as you had more threats from President Trump, it became increasingly lucky that a
war was going to take place. I personally canceled some trips because I thought the war would erupt all I'm abroad and I didn't want to be stuck abroad. And we also thought that it was going to start on a weekend. Actually we thought it was going to start either on a Friday or a Saturday. So I think from January onwards, every Friday at the office US for expectations. Who thinks that there will be a war this coming weekend? And sure enough it did her up on February twenty eighth.
So yeah, in some sense it was expected. I was on alert every weekend waiting for something to happen.
One thing that I think was more unexpected was the retaliation by Iran on places like the UAE. And I think it's probably fair to say that if you were a leader in the UAE or Saudi Arabia for that matter, who had invested heavily in Trump in various ways politically, this was maybe not what you were expecting to be dragged into this particular conflict and see some of your infrastructure directly hit. What's the mood like for UAE and Saudi leaders at the moment?
¶ Gulf Leaders' Disappointment with US
For them, I think is probably their worst nightmare. In some sense, it is an outcome they had tried and lobbed to avoid for a long time. That just during this Trump's term of presidency, which started in January twenty twenty five, the golf leaders hosted Trump on his first planned foreign trip. If you exclude the trip to the
Vatican when the Pope died. Or Peckplus, which is led by Saudi Arabia and it has a number of golf countries as important producers, started raising oil output in April, shortly after Trump's inauguration by a month, so far bigger
than markets were expecting. And that came after months of delay, and we were, among other people were asking why did they do this against probably their economic interests, And one potential hypothesis is that they were trying to please Trump because he liked lower oil prices, so they hosted him on his first trip. They gave him, you know, they injected a lot more barrels of oil into the market to lower oil prices, potentially against some of their economic interests.
They pledged trillions and trillions of dollars of investments and deals in the US. So they gave all of this, and I think they wanted one thing, which is basically no regional war, because they thought they'd be caught in the crossfire. And what did they get. Trump visited the Golf three golf states in May twenty twenty five. He visited the UAE, He visited Saudi Arabia and he visited Cutter. A month later, war erupted between Israel and Iran, which
the US intervened in. Four months later, Israel bombed Toheim Cutter, where Trump was in May, and about less than a year later, in fact, we have a regional war in in which these countries are in the crossfires. So I think it's an outcome that they tried hard to avoid. But for Trump, when it became a choice between what the golf wanted and what Israel wanted, Trump had the clear basically choice which he choices Israel over the golf.
One of the things you hear about people talk about is okay, the US is an important security partner for the region. It provides a quote security umbrella, et cetera. What does it mean to be an important security partner? Or if infrastructure was in fact hit, not all of it was able to stop the US was not able or has not been able to open the Strait of Hormuz unilaterally and actually at the moment, Iron clearly controls.
It does this fundamental premise like setting aside how people feel if the US does not have the capability the missiles, the missile defense, et cetera, to actually keep secure the infrastructure to keep the strait of Hormoves open. Does it change the discussion or the thinking of what a security relationship even means.
¶ US Security Capability and Political Will
I think it does. But there are two dimensions to this. There's a dimension where you have the military equipment, and there's a dimension where you have sort of the political will and the strategic side of it. In terms of military equipment, I think the US military equipment may have proven their worth. Okay, a lot of drones, a lot of missiles were thrown at the Gulf, and very few percentage of this has filtered through. Yes, some have, but
it could have been a lot worse. And the reason why it wasn't a lot worse is because they were using state of the art US military equipment, which has proven their worth. So I don't think that will stop. Actually, interestingly, if you look at the golf trade relationship, there was a big change. So the US used to be an important trade partner, then China took over around twenty ten, and now trade with China is at least three times
as big as trade with the US. Except in one area where defense, the US completely dominates, so that side and I don't think that will change. And then there is the political and sort of the strategic side. This is not the first time that the US security umbrella disappoints the Gulf. This is one episode out of several. There's this current one which is probably the biggest. There was an episode in twenty seventeen one cutter Face to blockade from its neighbors and didn't get the US protection
that it wanted. You know, in twenty eighteen and nineteen there were attacks on energy facilities in the Gulf, both in the Persian Gulf but as well as the attack on Aramquo in twenty nineteen, and the US was nowhere to be seen. So I think the security umbrella, the political umbrella for the US security is definitely there's a challenge there and hasn't delivered on certain important points of time. But when it comes to the military equipment, I think that has proven its worth.
¶ Evolving Intra-Gulf Relations
Can we talk about intra golf relationships for a second, because it's hard to keep up from what I remember. The blockade of Katar was the big story when I was in the region in like twenty seventeen, and since then it seems like kat a kind of made up with Saudi and the UAE but there are still some tensions. Meanwhile, Saudi Arabia and the UAE are still maybe best described as frenemies at this point, I don't know what's the
current status of those relationships. And does the conflict in Iran maybe start to bring some of those regional superpowers closer together.
Right, So, the big story in the golf in terms of intragolf relations before February twenty eighth was there was a big Saudi and UAI rift. It was visible, it was out in the open. It reminded a lot of people of the rift with Katar in twenty seventeen, although I didn't think it would escalate to that level. And the points of disagreement where basically the two policies, two contradictory policies on Yemen, on Libya and on Sudan. I think, if you think about the golf, there are so many
common things in the golf, you know they share. There are almost the same ethnicity, same language, same religions, same coastline, same geography, even at times, same external threats. But there are also points of disagreement. I think if you think about the economics, all of these countries are trying to diversify away from oil, and they're sort of sometimes they
overlap on the same sectors at times. They have different visions for how to manage the oil wealth, which is important and that sometimes shows up in OPEC plus meetings. And on the security and national security and geopolitics. There is disagreement about the role of political Islam in the region. There are disagreements on how to deal with the other
regional powers Turkey, Iran, and Israel. And there are different visions for what to do with the wider region, with Yemen, with Sudan, with Libya, and even Egypt than the Horn of Africa. So the current state is basically these countries have different visions in different paths, and I think even after this conflict, there'll be different visions on how to deal with the US. The question that Jaw asks, you know there is a disappointment in the US. What do
we do? I think some countries like the UE with double down on its relationship with the US and possibly Israel. I think a country Lakata will stick to the US but tries to create a rift between the US and
Israel while it has an alliance with Turkey. I think if you're Saudi Arabia, where the US wanted from you is money, is deals, but also a normalization with Israel because every US president thinks that they can get the nobel peace price if they deliver that that looks distant now in the context of the current war, and Saudi had to choose where it aligns itself relative to the others Oman is a completely neutral country that is talking to everyone and quietly doing things its own way, and
Bahrain is again somewhere in between. So I think we used to think about the Gulf as one entity. This these six countries are all monarchies, all in gas producers, that have the same foreign relations or foreign relations strategy, and it's actually very different now that at least three or four sides to it.
The other point of contention that I think was sort of like coming to the fore, although it was never as explos some of the foreign policy stuff was it felt like everyone was trying to do the same thing economically at the same time, which was diversify the economy, so not just have oil, but also build up petrochemicals,
build up toursm build up the technology centers. Everyone's going to be, you know, like a big data center play, And the question in my mind was always like, well, can everyone be doing this at exactly the same time.
¶ Economic Diversification Challenges
That's that's a great question, Tracy, And possibly the likely answer is no, and you're right. So they faced the common question, which is basically, their economies are extremely dependent on oil and gas. If you look at the exports, if you look at government revenues, they're dominated by oil and gas. They knew they need to diversify away from this. They need to diversify away from this because all prices
were volatile. Because if all processes drop by fifty percent, you can't have your incomes drop by fifty percent without adjusting your spending, which is usually painful. So it's good to diversify. So what they did is they went to consultants and ask them, you know, what sectors should we target, and they got the same answer. You should move to petrochemicals, you move up the hydrocarbon value chain. You should be a financial center, a tourism hub, a logistical hub. And
now it's called AI. It used to be called knowledge based economy and big data at some points.
For a while there.
Yeah, the problem with this is you're talking about small geography and the same time zone almost So do you really need multiple mega airports with multiple global airlines? Probably not. Do you need multiple megaports, probably not. You probably need one or two. Do you need multiple financial centers. It's a financial center in Dubai, another one Abu Dhabi, an old one in Manama and Bahrain. Qatar has one, Saudi has one. Probably not. You probably just need one. So
you have this sort of crowding out again tourism. Yes, like in January and December, it's beautiful over there. The weather is great when the rest of the world is dark, cold and rainy. But probably people are not going to come and spend you know, six weeks instead of ten days there. They're going to split that ten days between
different countries. So that Chris a form of cannibalization and competition, and that asked to basically the intra sort of GCC competition which comes to the surface at times.
Tracy, do you know the name of Cutter's first LNG carrier?
I have no idea what is it?
It's a very random trivia question. I came across the other day.
Do you know, No, I don't know.
Their first LNG carrier is the ship the Rex Tillerson because he got involved to end that blockade you talk about the twenty seventeen one, So he was the one that sort of crafted the diplomatic solution. So it is an honor to him their first LNG carrier.
Then that's amazing.
Yeah, it's right.
Now, it wouldn't be the case that Trux Tellison used to be the CEO of Excellent, one of the one of the early companies that went into the industry.
There you go, So that's right. So like he you know, he's like a patron saint of the country basically, and so he got they named the ship after him. Something I'm curious about is, you know, you mentioned in your first answer this disappointment nightmare scenario because ultimately Trump, despite the visits and all this stuff, like went to war with Iran. At least it chose the security preferences of Israel.
Is maybe perhaps a neutral way to put it or something like that, that he prioritized Israel's security interests over the rest of the region. What I'm curious about is like, Okay, so the regional players, they're very disappointed with that, but they're probably gonna grit their teeth et cetera, and they'll continue to you know, you mentioned you you may double down on its US relationship grit their teeth continue. Does that create problems though domestically now and even beyond just
this war obviously the war in Gaza, et cetera. Does that create domestic stability problems for these countries? Is just in terms of like, why aren't our government taking a more confrontational stance on this entire issue.
¶ Wealth, Stability, and Dubai's Allure
I think there's a few things here. I think the first thing is is you're right to point out the flare up in the Middle East did not start on February twenty eighth, twenty twenty six. The Middle East has been enormous, constant state of war at least since October twenty twenty three. It's just we're feeling it more in the global economy because you have the closure of the Strait of Hormos, and because energy facilities in the Gulf are being hit and it has been weaponized now unlike
the what was happening before February twenty eighth. I think you're also right that what happened in Gaza has definitely led to a level of anger and fury in the Arab world. That's probably unprecedented, and we've reported and this my colleagues San Dagar and others have written about this for Bloomberg. I think the Gulf though, is sort of
different to other states. And the unique thing about the Golf from the rest of the Middle East, which is why why they were insulated from the volatility in the region, is that for the most part, maybe with the exception of Saudi Arabia, these are small countries or small populations, and at least three of them create the UAE and cut or have enormous hydrocarbon wealth relative to the size
of the population. And if you have that, then that can lubricate a lot of things, and that can calm a lot of things done.
That's a very different condition than say Jordan, right, which is.
Egypt or other places. Yes, that's exactly right. That's the unique thing about the God is the level of wealth. And I think that's another motivation for why they want to diversify away from oil if in the future, because all again has not just created an economy and petro dollars and sovereign wealth funds and reinvestments into the global economy, it has created a political economy, a social contract and a political system, and a political system that remains calm
and stable in the face of a volatile region. And what you want to do is to make sure that you maintain do Com. You have a source of income that maintains dot Com and that cohesiveness when oil becomes worthless in the future versus now. And this is why you have this big push towards diversification. But I think the fact, yeah, the level of wealth versus the size of the population creates different dynamics and trade offs versus other bigger countries in the region.
¶ Strategic Energy Export Routes
Wait, can we go back to the Rex tillersonship for a second, because this is actually a serious question. But Katar famously doesn't actually pipe anything through the ground. It sends all of its gas out on ships because it distrusts its only land border, which is with Saudi Arabia.
When we're talking about physical changes to the Middle East and maybe physical changes in the way that oil actually flows out of the region, could we see a situation where starts to actually pipesuff through the ground instead of just ship it out.
I mean, this war has exposed something. A couple of things are very important. First, that the Middle East Despite the rise of renewables, despite the rise of shell oil in the US, despite the rise of alternative sources of energy, the Middle East is still super important for global energy supplies. And the second thing, most of the energy that comes from the delease goes through this small choke point that's called the Strait of Hormos, which exposes the world because
it can cost supply. But also it's important for these countries to get there. They're oil out and get and gas out and get their their money in so they can you know, sustain their economies and investments and so on. Now, I think this war has tortu is a third thing. If you have a root out of the Strait of Hormos, you're probably insulated and you are in a better position than.
Otherwise a route besides the Strait of Hormones, right not or an.
Alternative Yeah, okay, yeah, so I think for example, I think now so the Araba is probably making more money out of all exports compared to the pre war periods simply because they have that pipeline that goes from the
east of the country to the Red Sea. If you think about it, just just simple maths, you know, Saudi Arabia exports thirty percent less now, but all processes are up by a lot more So if it takes sort of that back of the envelope calculation, that tells you Saudi is probably making more income out of his all exports despite what is going on in the region, obviously, like the threats that this pipeline could be attacked and the port in the Red Sea could be attacked, But
as things stand, it's probably making more money now than it did before the war. So if you're Saudi, if you're the UAA and you have these alternative routs to Hormus, it's probably one of the better investments that you've made over the past few decades and it's paying off now. You know, Geography is kind to you because you could do this unilaterally. You can just have a pipeline from Abu Dhabi to Fijeira. You don't need to go through
other countries. You can have a pipeline from the east Saudi Arabia to the west of Saudi Arabia doesn't have to go through other countries. Other nations don't have that sort of geographical dividend. If you're Kuwait, if you're Bahraining, if you're cotter. You have to do it through other countries. Other has only one land border, which is Saudi Arabia.
So if they want to have an alternative to having restellers in LNG tanker or other tankers, then have to do a pipeline, and the pipeline probably go through Saudi Arabia. I'm not an expert enough. I dodn't they to go an underground pipeline to Iran or all the way. I do know to Kuwait via Iraq, but I think the most feasible thing is vy Saudi Arabia. Is that going to happen? I don't know. Let's see, I don't know. I'm fifty to fifty on.
That global is issue. Is so beautiful because I'm just sorry I'm reading about the rex Stellers and more so, first of all, it's the first conventional size l G carrier, the Verstord that the country had. The naming ceremony though, was held at the Hudong zhang Wi Shipyard in China, which of course is where it was built. It's just so beautiful.
Was the rextellers in there?
I don't know. I hope you got to like smashed the glass or you're gonna smash the champagne glass.
Is that still an active tanker or yeah, yeah, yeah it is.
Because I'm looking at Marine Traffic dot Com. It's in the kind of near the Gulf of Mexico right now. Looks like I don't know what it's doing there, but yeah, maybe it's leaving the Port of Houston or something like that.
But then being stuck in the gulf.
Yeah, yeah, it's not stuck. Actually, that was one of the interesting things that we talked about in her episode with Bob Brackett, which is that actually a lot of the guitars LNG revenue right now is from exports from the Port of Houston because it's involved in the investment there, et cetera. Let's talk about so we mentioned one of the topics that we've discussed is just like the phenomenon, the global phenomenon known as Dubai.
Right.
Oh, I'm so sorry, I'm I'm googling the Rex till I go on, and I just learned. I just learned that Rex Tillerson is not the only American official to have energy carrier named after them. Guess what the other one is, Okay, Chevron once named an oil tanker, the Condoaliza Rice.
That's great.
I love that.
But let's talk about the phenomenon known as Dubai and all around the world. If you're an influencer and you're good looking and you like to post selfies or you made a bunch of money and crypto and you don't really have anything to do, it's like, okay, Like I know there's more of the Dubai economy than that. To be a little bit facetious, et cetera. But does this change the trajectory at all or from your view, given
you know the relative I don't know that. Basically, the trends of people who are looking for a very stable place with low taxes and wonderful weather, et cetera. Will they Will that trend continue in the same way that it had been.
So let me just tell you something about the Dubai attractiveness. Yeah, every time I came to London and obviously o Blomberg offices in the city, and I saw old friends. Seriously, every time people ask me how can we move to the Middle East and how can we move to Dubai? And these are people how to know links to the Middle East.
That's incredible.
I think it's in. And let me just give you another example. Actually, in late twenty twenty four, I took sabbatical from Bloomberg and I was I was teaching at Tarvard and twenty percent of my office hour was people asking me how to get jobs in the Middle East.
Incredible, we were these Americans asking you mixed Yeah, But so it's not just influences and pretty people.
It's like a lot of brainy people also wanted to move there.
I feel like, for as much as we know about all everyone who has moved to Dubai, the big like it actually remains perhaps an even underreported story, the sort of like exit loyalty and voice, the exit people wanting to get out of what they see is crumbling, high techs unsafe Western world where the margaret.
And yeah, I think what it offers you. And this is why I think there's two sides to this. I think there are people who live there. I haven't heard a single person saying I want to move out of Dubai permanently as a result of this war. Okay, some people have relocated temporarily. I think some people on the margin might to leave, but I haven't heard that yet.
And I think what it offers you is obviously like incredible safety, is well connected, the weather is good six months of the year, and obviously for a lot of people, taxes is just like zero taxes is appealing. And if you're on the right I wouldn't say you're right extreme of the income distribution, but if you're on the right of the right half of the income distribution, it's actually a nice life. So I think people who live there, I think they're going to prove to be stickier than
we think. I think where there will be probably challenge is that the questions I've been getting about, can you know, how can I move to Dubai and how can I get there? They might become fewer as this war develops, and it depends on how long this this wall was. I think there's something else that happened in Dubai way it is attractiveness increased after the pandemic, is that you have the network effect. People have the friends moved into Dubai.
Sure they thought, oh, you know what, the weather is good, taxes are really really zero, and you know, life is nice, and you get all the support that's on the x rans. Things are convenient, and then people had that. You know, a network of friends that are already they are already there, and they're willing to move there and live there. So I think that's that's the element of it. I think. Yeah, So I think in terms of the long term aspect of it, I think people who live there are probably
going to prove stickier than we think. The attraction of new people is probably going to ease on the margin, But again, there was a whole long queue of people who wanted to move there, and probably, yeah, that might that much slow a bit, but probably not significant. I think the other thing with Dubai is, I know this war is different because it's hitting it directly, but it
did benefit from previous wars. Money did tend to move to Dubai as a result of conflicts, whether it's in the Middle East or even in the case for example of Russia Ukraine, where we saw a lot of money going into Dubai. We saw the pandemic was beneficial to Dubai. A lot of Brits moved to Dubai as a result of that, and you know that's one of the reasons what the real estate market has taken since twenty twenty.
Just one related question on this, how can I move to Dubai as.
What do I do?
What is what are the basic.
First of all, you'll still be paying taxes, Joe as an American, forget about that. Can we do like local economics in Dubai for a second, because if I go on some of the message boards and again, I think like one important thing to recognize here is that social media in the UAE can be fairly controlled. I see a lot of posts right now about like I just
lost my job, I need to leave the country. I'm taking out a new credit card in order to buy my flight out of Dubai, which might be a little bit extreme, but just from an economic perspective, like how many jobs do we expect to be available locally in Dubai given some of the pressures that we're seeing.
On your questions, Tracy, I think it depends on the duration of war. If the war ends tomorrow, or if even it continues at a lower intensity where you have some you know, ships going through the Strait of Hormus, where the attacks on Dubai ease a bit, and the UAE in general and the golf in general, that is very different world from if the world continues until I don't know June or July or August for six months. So I think the economic impact depends on the duration
of war, and that is a big uncertain aspect. On your question, Joe, who's moving to Dubai. A lot of HETCH funds and as the managers are actually moving to the UAE a lot, So you know, the people that move are there, and then you have the sort of the supporting environment that supports these these companies. Every every company that were We are in Dubai, for example, we're in the Dubai International Financial Center and that has grown
significantly since the pandemic. They're doing a new expansion and offices are full, and we've even our Bloomberg office we expanded into a new floor in Dubai.
Actually, that reminds me since we're talking about the DIFC. You know, I mentioned in the intro there is this
¶ Impact on Capital Flows and Defense
huge capital component in the Golf region. There's a lot of money there and it tends to flow outward into other things. Talk to us about how you anticipate changes to some of those capital flows, as perhaps some of
the oil money is reduced. Although I take your point that Saudi Arabia might be making more than ever, would you still expect that outward flow or would you maybe expect some of the golf countries to have to start directing it more inward to maybe rebuild the infrastructure that they've lost, so a few things.
I think so Saudi's not making more money than ever, it's just making more money than when oil is at sixty five dollars per barrel.
Sure, sure, oh, yes, of course, yes, yeah.
In terms of the direction of captain and you're right, I think the way I think about the golf is that the golf give supplies the world with three inputs, supplies it with energy, supplies it with capital, and supplies it with trade routes, and all three are being hit by the current war. And it gets from the world to three prices. It gets the price of interest rates because they have PEX to the dollar, it gets the price of the dollar exchange rate, and it gets the
price of oil. Doesn't determine the price of oil that comes from the global economy. In terms of direction of capital, I think the answer for me is fairly clear. The direction is going to go down, and it's going to go down because you having the interruptions to oil exports, because that source of capital is that you export oil
and gas. You get the income, you spend some of it domestically, and then the surplus you invest a broad I think the second thing, the defense spending will go up, one because they need to replenish on the defense systems that they've been using over the past six weeks. And second because they're realizing that the world is a far
more dangerous place than it was six weeks ago. Iran is more dangerous, Israel's more expansionist, and then you have these you know, non state actors, Iraqi militant groups, who is in Yearmen. I think this conflict would probably create new groups that we haven't heard about before, and they are a threat. So I think they'll be spending more on defense, and that if you spend more on defense, and if your income is lower, that necessarily means that what you sent to the world in terms of capital
exports will come down. And that is important. That is important not just for you know, English foot book clubs, and I don't know real estate in London or in Egypt, or Turkish bank deposits or tech companies. You guys hosted my colleague Tom Orlik and Jamie rush On the book that Boomberg Economics wrote on the Price of Money. We had the chapter on that on petro dollars and how petro dollars actually suppressed long term interest rates in the US. Okay,
it was twenty five basis points. But given the size of the US economy and the size of his debt, that's still tens of billions of dollars every year. If there's less flow into there, that will affect not just these smaller markets, but also the deepest market in the world, which has the US treasuries.
¶ Iran's Strengthened Regional Stature
So you mentioned something there that I thought was important, you know. Okay, One effect is going to be likely an increase in military spending for obvious reasons, setting aside the fact that we don't know how or when this war is going to end. It's something we haven't really talked about yet. But setting aside that we don't know how this is going to end, it may emerge. And right now many people probably say this is likely that at the end of this war, our estimation at Viran
as a major power will have increased. It may be a toll collector for the strade of her moves going forward. It is established that the government is actually quite strong. Several months ago, maybe people thought it was teetering on the edge. It may turn out that actually this strengthens the IRGC and the stability of the existing regime established that it has a military that can to some extent withstand the fall might or at least the partial might
of the United States. How does that change the region that Okay, everyone's view of Iran as a sovereign security state has to rise or seems very likely to rise as a result of this war.
I think there's a couple of things to mention here. The first thing is, as far as Iran is concerned, I think this last past six weeks have taught us something. And I keep saying, you know, things talk to something, but we keep learning from the world was happening now. And that's basically, if you have clear and achievable goals,
you can punch above your weight. Iran had just basically two simple goals because they were completely cornered, which is basically survival of the system and the terrence so that they don't get attacked again in a few months. And they thought they could achieve this. So it's very very clear goals, very existential. They thought that they could achieve this by impoison costs on the neighbors, by hitting the golf on the global economy, by hitting the golf and
closing the Strait of Hormos and hitting energy facilities. Israel had that clear goal, but it probably wasn't achievable, which is a regime change in Iran, and the US is just confusing what they're doing in terms of this war, Like there's no clear, well articulated goal for this current war. And I think that's why Iran is punching above his weight. What does that mean. I don't know if it's going to you know, Iran is going to emerge as a power.
But given that, you know that is punching above his weight, given that it's controlling the Strait of Hormos, given that it actually has discovered that the weight to pressure the US and Israel is by imposing costs on the global economy via attacking the golf. That's not a safe world
that the golf want to be in. And I think for the golf they're thinking now about, you know, giving that because even if this current system in Iran does not survive and we have a new system you know they've learned the same lesson, which is basically, if you get attacked, if you're cornered, this is how you get out of it by closing the straight up homos and
by attacking the Gulf. For the Gulf. That's a challenge, and that's the challenge that they need to address and think about because they haven't faced that sort of threat before.
¶ Unforeseen Long-Term Consequences
Can I ask one more question, which is you mentioned the expansion of the Dubai Financial Center DOIFC two point zero and I'm looking at some of the mockups for it. It's supposed to be completed in twenty forty, but all of the mockups very beautiful, lots of shiny glass buildings.
And when I'm thinking about potential changes from the Iran War, one very visible one would be, well, maybe maybe there aren't as many very tall glass buildings in places like Dubai that can end up getting damaged by drones, Like would you expect an actual physical change to the city's architecture as a result of this?
So this is what I think. Also, the war would hit like unexpected corners beyond defense and relationship with the US and the Strait of Hormos it's also architecture. You know, there's a lot of building that's taking place in all these cities in the Gulf are growing. The problem is that when you were in Dubai, you know, living on the twentieth floor, and you get the alert saying you know it's under attacks, stay away, don't go out and
stay away from windows. You know your places is floor to ceiling of windows.
Hey, you have to go down into the car park where there's no air conditioning.
Some people did, some people did. And also I don't know if it's safe to be next to cars or insight cars. So the mudurithinking about this, the Mudi thinking, you know, this is this is what wars do. They change a lot of things and a lot of perspectives on things, and that goes into corners that we didn't think about before, and including architecture. I always think the example of Kuwait is a clear one. Kuwait in nineteen ninety or before nineteen ninety, relative to its neighbors, it
was fairly advanced. You know, it had culture, It was an open society, It had a participatory political system times a parliament that was quite loud and vocal. Infrastructure was modern and all of a sudden, Iraqi tanks rollin. There's an Iraqi invasion of Quait in nineteen ninety and things changed in Kuwait. And the big thing that happened there is that they started investing lesson tom and sending most of their wealth abroad, and over decades that means deteriorated infrastructure.
If you think about Kuwait. There's a couple of news items recently that Kuwait might have power cuts, which for an oil powerhouse, one of the most richest countries in the region and one of the hottest countries in the world, to have power cuts is strange. But you can trace what is happening there in terms of the electricty shortages in Kuwait in twenty twenty six to an event that
happened in nineteen ninety. So yeah, it will. Yeah, it may not be the same lesson everywhere else, but I think the lessons will be deep and broad and they'll go to unexpected corners, including architecture trades.
All right, da Daoud, thank you so much for coming back on all thoughts. Truly at the perfect guest to walk us through all of this. Really appreciate it.
Thank you for having me.
¶ Episode Conclusion: Lasting Ramifications
Joe that was a great conversation with Yeah, as always truly the perfect guest. There's so many things that stuck out at me. But I think his last comment about how war, you know, kind of unfolds and changes things in unexpected ways. Yeah, it was very interesting. I'm the Kuwait example he cited was very compelling.
No, that's fascinating. I would have had no idea and I'm reading this right now Kuwait, here is this energy powerhouse that quates schedules electricity cuts to do maintenance, and that the lack of maintenance that had happened through the domestic infrastructure could be traced to fiscal priorities and the wake of a war that happened over thirty five years. It's really wow. Yeah, I mean like, yeah, I wouldn't have thought about that, but it's obvious. And so this
is going to reshape the region. Obviously in these we can't anticipate. It was very ominous that when he was talking about various non state actors he mentioned including non state actors we've never heard of that will now get stronger, that will emerge out of this. So again, even if you know, we look at our screens and the markets back and maybe hopefully, you know, maybe the ceasefire will hold longer, or will the ceasefire will turn into the
end of the war, et cetera. It seems obvious there's going to be major ramification.
Yeah.
The other thing that stood out to me was the short comment about petro dollars, which is really what we mean when we're talking about capital emanating from the golf and I think, like to some extent that hasn't really
been appreciated yet. If you think that these golf economies are maybe going to have to rebuild infrastructure that was damaged, if you think they're going to have to build new infrastructure as a result of nervousness around what happens with the strait of horror moves in the future, if you think that maybe they have to do stimulus for their local economies because of jaw losses, it just feels like there's going to be potentially a lot less money circulating in the global economy.
Yeah. And then another way to think about it too is that we're already in a period of resource constraints, and so just like the rebuilding of various infrastructure in fact, and I don't know that you know, one of the facilities that was hit. I think there is a basic issue,
which is that they need natural gas turbines. And we know that natural gas turbines are among the scarcest thing in the world right now due to the AI data center build out, and so here you have even further strain and demand being placed on the sort of physical building blocks of the modern world at a time when they were already very tight.
Yeah, it feels very inflationary.
Yeah, yeah, exactly.
All right, shall we leave it there.
Let's leave it there.
This has been another episode of the Authoughts podcast. I'm Tracy Alloway. You can followow me at Tracy Alloway.
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