The worst trades in history… Kuwaitis gamble on stocks

In the 1970s, oil prices surged as the global economic boom of the past two decades shifted the balance of power in favour of the oil producers. The oil market was given a further boost when many of the world’s largest oilproducing countries decided to work together to push prices upwards, in part to punish the US for its support of Israel. Prices surged more than tenfold from an average of $2.96 per barrel in 1970 to a high of $39 in 1981. This led to an economic boom in the oil-rich Gulf, particularly in relatively small countries such as Kuwait.

What was the trade?

The influx of wealth led to a stock boom. When it started to collapse in 1976, the Kuwati government stepped in to bail out those who had lost money, creating a belief that the market was risk-free. Meanwhile, frustrated at the small number of shares available on the official market, many Kuwatis turned to the unofficial Souk al-Manakh. Stocks on that exchange rose by an average of 61% in 1981.

What happened then?

This success led to further speculation, with investors buying shares using cheques that could only be cashed at a future date. A national stigma against unpaid debt had previously limited the use of such cheques, but this quickly dissolved – a group of eight speculators (led by a former clerk from the immigration office) used $55bn worth of such cheques in an attempt to corner the market. When one investor tried to cash the cheque early it bounced, destroying confidence. The government, which had grown sick of the speculation, investigated and shut the market down in 1982.

Lessons for investors

At its peak the Souk al-Manakh was worth more than $100bn, briefly making it the third-largest market in the world. The wealth destroyed by its collapse was worth roughly $90,000 for every man, woman and child in Kuwait. The collapse led to a recession that spread throughout the Gulf region, and the problems were still being resolved a decade later. The episode is a classic example of a market bubble brought on by an influx of wealth, poor regulation and government policies, and a rise in credit.