Kuwait bubble

Kuwait's Souk al-Manakh Stock Bubble
Perhaps the greatest speculative mania of all time was Kuwait’s Souk al-Manakh stock bubble in the early 1980’s, which is as fascinating as it was devastating. The bull market began when investing in local “Gulf Companies” became in vogue with Kuwaitis who wished to “ride the coattails” of the oil-induced Middle Eastern economic boom. A peculiar Kuwaiti custom allowed traders to pay for stocks using post-dated checks, under the assumption that default would be unthinkable. Unsurprisingly, human avarice prevailed as some traders speculated in stocks paid for by billions of dollars worth of unsecured checks, causing the stock market to inflate like a balloon and pop in a most analogous manner.

The rise in oil prices in the late 1970’s created an unprecedented amount of wealth in the oil-rich Persian Gulf countries, with Kuwait receiving a particularly large share of the good fortune. As US stocks embarked down a perilous bear market, Kuwaiti shares were experiencing a seemingly unstoppable bull run as nouveau riche Kuwaitis turned to stocks as an investment vehicle to store their wealth. The bull market was abetted by the scarcity of Kuwaiti stocks, which consisted of “only a few dozen uninteresting companies [that] were traded on the official exchange.” (1) The scarcity was the result of the royal sheiks’ reluctance to grant the corporate charters necessary for companies to become publicly traded for fear that companies “might become vehicles for stock speculation.” (2) Kuwaiti investors, however, weren’t concerned with risk, as their collective memories recalled a market panic in 1976 and 1977 in which “the government had moved in to support prices, buying heavily for its own account, so that nobody would suffer.” (1) These traders assumed that the government would always be on the sidelines ready to bail the market out if needed in the future, in effect, creating a floor underneath share prices.

By the summer of 1981, an unofficial over-the-counter stock market was formed called the Souk al-Manakh, which started specializing in the trade of highly speculative “unregulated non-Kuwaiti companies,” such as those incorporated in Bahrain or the United Arab Emirates. (3) Formerly a camel trading venue (1), the Souk’s history was long intertwined with trading. Not long after the Souk’s founding, the market became a hotbed of speculation, overflowing with “portly gentlemen in flowing white gowns (thobes) with capacious pockets full of papers, worry beads in one hand, cigarette in the other.” (1) Interest in Kuwait’s heavily-regulated official market dwindled as the Souk earned the reputation of being the more exciting of the two markets, in which one could double their money within a few months. Sharing more similarities with a casino than a stock market, the Souk al-Manakh attracted wealthy high-rollers whose preferred method of trading entailed placing orders via car phones. (1) Boredom during Ramadan spurred daily flurries of trading activity lasting well into midnight, as a form of entertainment.