Sovern Funds - The new "Gold Standard" - After Dollar Fails

Sovern Funds are assets of government, differing from their reserves mainly by NOT being applied principally in foreign treasury bonds. They are growing rapidly as faith in the US Treasury is falling. It is falling for two main reasons:
(1) Central banks that have held assets in US treasury bonds have been losing purchasing power for about two years now. (Just my estimate: perhaps only one, perhaps three years.) Even loyal (to US) and very stupid central bankers are learning that the interest paid has not compensated for the dropping value of the dollar. Except for TIPs, the "face value" of the bond is a fixed number of dollars. If need be, the US can just run the mint's printing press to pay the bond when it comes due, and someday this will be the done because offering ever higher interest to have the bonds "rolled" instead of paid will destroy the US economy. (Politicians always choose inflation instead of depression as home owners with mortgages to pay are also voters.)
(2)US is going deeper into debt every year and with the slowing growth the real economy the debt as a percent of GDP, is rising (above 6% now). Thus the interest paid to service the debt is also growing even faster. This is why many central bankers are now at least questioning the "security" of holding their reserves in dollars. Almost all are converting reserves into sovern funds. (Unfortunately, Brazil is still only discussing doing so.)

Here are the current leaders in this trend (sovern funds in billions of US$):
Arab Emirates...875
Cinapour .........430
Norway...........315
China..............300
Saudi Araba.....300
Kuait...............250

The Emirates are the leaders of this trend, especially when compared to their reserves, which are much, much smaller. I.e. the Emirates have essentially ceased to hold dollars or other US Treasury issue.

Cinapour is well on the way to total conversion also. Their total reserves are only 144 billion dollars. Thus, sovern funds represent 75% of their total assets.

I do not have data on the reserves of the other four named aboved (and too lazy to search for it) but suspect they too are at least 3/4 converted to sovern funds.

The total of all sovern funds is 2.5 trillion and the global total of reserves is 5.3 trillion. Thus, the world as a whole is now 1/3 converted (holding 1/3 of all governmental assets as sovern funds). Morgan Standly's Jen Stephen projects that in 2011 the division will be 50/50 with each totally 6.5trillion, as China and the oil exporters continue to have large net influxes of dollars.

Two examples of how sovern funds grow: Dubai just bought 5 billion of MGM and China's new agency to run its foreign funds bought 3.2 billion of the Blackstone IPO.

The US is in the process of "selling the family farm" but some parts are not for sale. For example: China was not allowed to buy Unical and Dubai was not allowed to become the owner/operator of most US ports. This effectively is a statement that dollars can not be used to buy whatever you want. This is also contributing to the dropping real value of the dollar. What good is that green paper if you can not buy what you want with it?

SUMMARY: US, under GWB is destroying the faith on which the value of the dollar is based, by:
(1) converting Clinton's surpluses to history's greatest deficits,
(2) refusing to let buyers buy what they want to with their dollars,
(3) foreign policy based on the US military (also a big contributor to the uncontrolled and growing debts).

This destruction is so extensive now that US dollar will collapse - my estimate is in 4 + or - 3 years - in a run to get out. (no longer possible to avoid the associated depression in US and EU.)

The creation and rapid growth of foreign sovern funds is the "pre cursor" of the dollar collapse. After the dollar collapse, the leaders of this movement into sovern funds will official link their currency to their sovern funds holdings, not gold and certainly not dollars.

 

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Billy do you mean sovereign wealth funds? I haven't heard of sovern funds

edit: Ah I think perhaps its sovereign investment funds

http://en.wikipedia.org/wiki/Sovereign_investment_fund

 

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Yes. they are usually compactly refered to as SWFs, but my new thread title is long so I dropped the "wealth."
Also I intentionally wanted to refer to all financial asset other than treasury issues, which only require printing presses to produce. E.g. Dubai will own ~9% of MGM and the number of dollars this is expressed in will roughly double when the dollar has half its current value. - i.e. it is a real asset, not a piece of paper printed by the US government as the majority of conventional reserves are. I feared (but do not know) that SWFs may not refer to all real assets, so avoided that term also for this reason.

PS you seem to have switched your loyalty to dogs from cats. Any reason?

 

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So what is the difference between a wealth fund and an investment fund? Also, what differentiates them from central banks with large foreign exchange reserves?

Are there political ramifications to the Arabs having such an interest in SWFs? Does that give them some sort of leverage over US economy? I cannot believe it is a coincidence that they are rapidly accumulating so many of them. There MUST be a political advantage to it, if I know the Arabs.

 

I do not know, or care much about precise definitions. I am trying to point out that governments are rapidly getting out of treasury PAPER and into REAL ASSETS.

This is too complex to be confident in all the ramifications. There will be enormous political consequences to a dollar collapse, perhaps even an end to democarcy in the US, if grocery stores in cities do not have food on the shelves, roits, martial law, acceptance of a "strong man" as new leader? I am not predicting this, only noting that "strong men" like Napolen and Hilter do come to power as "solutions to social chaos."

I do not fully share your POV that the arabs have some hidden motive by switching assets out of US Treasury paper. I think they are just tired of watching that lose real value and wanting protection of their wealth so now are putting at least all of the new petro dollars into real (not paper) assets.

Norway is not an "Arab nation" and is doing the same, I think for the same simple self-interest reason.

 

Where could I get a list of the assets that the countries are accumulating? I'd like to see if there is a pattern there.

 

Here is an interesting POV:

http://www.ft.com/cms/s/0/8c9dea94-3e30-11dc-8f6a-0000779fd2ac.html

An another interesting development:
http://www.economist.com/displayStory.cfm?story_id=9556414&fsrc=RSS

So it looks like developing countries are tired of short term gains and are going long term in their outlook.

And some people are getting worried:

http://www.iht.com/articles/2007/06/17/bloomberg/bxatm.php

http://www.ft.com/cms/s/0/0b5e0808-454a-11dc-82f5-0000779fd2ac.html

http://www.iht.com/articles/2007/08/20/business/wealth.php

Thanks Billy, I hadn't realised how much the debate had heated up.

 

Post 1 gives the 6 leaders in the switch from dollar reserves into real assets (sovern funds invested in companies, real estate, etc. instead of pieces of PAPER, printed by US Treasury.) and notes that the central banks of the world are now 1/3 converted out of dollars (Treasury PAPER) on average.

This post gives some details about Brazil, which as yet is 0% converted and thus lossing lots of value as the dollar drops. Even the stupid management of Brazil's central bank is learning and will soon join the other central banks moving out of Treasury PAPER. Here is why:

For several years now there has been a large net flux of dollars into Brazil.
This due to:
(1)Strong buying, mainly by China, of soy beans, iron ore, etc. and paying with some of China's surplus dollars. (I have advocated that Brazil refuse to accept dollars and insist on payment in Yuan, which are rising in value instead of dropping - perhaps the central bank will force this to be done soon)
(2)Because Brazil's real interest rate on bank deposits is the highest in the world, still even after very significant reduction (now only about 1% per month instead of 2% / month) Brazil has been the target of much of the "carry trade"* and also increasingly the destination of wealty individuals, smart enough to seen that they need to get their wealth out of dollars and gold is not a good alternative. Gold is same price as a year ago but Brazilian stocks, on average, have more than doubled in dollars or at least doubled in local currency because of all the foreign demand for them. (35 to 40% of all the buying of stocks in Brazil is by foreigners, mainly with dollars converted into Reals.)

Brazil has struggled hard to develop its industry (even using high tarrifs and technical devices such as TV transmission in format "PAL B" that US made** TVs can not recieve, etc.). Because when factories are closing workers lose jobs and vote against the government, "de-industralization" is being resisted by the government, especially by the central bank, but despite this resistance it is proceeding rapidly.*** This hugh influx of dollars into Brazil, is making excessive demand for the Real. (You can not invest in Brazil without first converting the dollars into Real, so there is excess of Dollars, which no one wants.)

The central bank resists the rapid increase in the value of the Real caused by the surplus of dollars (which no one needs, except tourist going to US and now that Real is so strong some importers) flowing into Brazil by buying them up. In less than two years, the central bank has paid off all of the IMF loans and watched its reserves go from 40 to 160 billion dollars. This is very costly for the central bank because to buy the dollar (take them out of the public hands) it must issue bonds locally and as the local interest rates are the highest in the world, this is big money loser. (Borrow locally at 12 to 15% and get 5% on the US treasury bonds it has been buying with the dollars it takes in) Despite this effort to help prop up the declining dollar (or keep the Real from getting so strong that Brazilain companies can not export at a profit - same thing just a POV from other "side of the same coin") it now takes only 1.95R$ to buy a dollar instead of 4R$ it took a few years ago. I.e. in Brazil the dollar has lost more than half of its value already!

This problem (buying and holding "dropping dollars" as reserves instead of growing "sovern funds") is rapidly becoming worse and can not continue. I.e. if the Brazilian central bank had simply bought Brazilian stocks, the real value of the "sovern assets" would have doubled instead of dropped to half of what it was! The loss experienced in the first 6 months of 2007, by Brazil's central bank was $30,304 million dollars, vs. only 12,219 million in first 6 months of 2006!!!

Surely there is a limit to the stupidity of even Brazil's central bank. I.e. they too will soon cease to hold US paper and instead invest in real assets.

Long SUMMARY:
The policy of GWB (wars, tax rebates for the wealthy terminating Clinton's surpluses, etc) plus the continued "twin deficits" will collapse the dollar and send the US and EU into deep depression. Brazil will "de-industralize" and become an "economic colony" of Asia, mainly suppling China with food stock, minerals, and energy (oil and soon alcohol, if Japan does not have the total alcohol production capacity all locked up first). Interest rates paid by the US Treasury will rise, reaching double digits, as foreigners are learning (even Brazil's stupid bankers) that financing the US's deficits by buying Treasury PAPER, at current interest rates is the surest way to lose purchasing power. ALL governments will soon cease buying US Treasury PAPER at current rates. The alternative of investing in "sovern funds," which make profits, instead of loses is irresistable and well under way already (see post 1 for details).

short SUMMARY:
GWB's wars, surplus destroying tax rebates and resulting "twin deficits" have doomed the the dollar. At this point, there is no way to recover - no way to avoid a deep depression in US and EU coming in 4 + or - 3 years.

PS of course I am sad about this - all my grandchildern live in the US, but the efforts I made (posting warnings here and my book) trying to avoid this fate back when it could have been avoided have failed.

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*For those readers not well informed economically: "carry trade" is borrowing mainly in Japan where real interest rates have been very low (even negative at times) and then imediately investing the borrowed funds where the interest rates are high, (often Brazil as they have been the highest with much less risk that Turkey which has had the second highest real rates) Now that rastes are rising in Japan, and falling in Brazil, some of the borrowed funds are being repaid (this requires buying Yen to repay with). Thus the cost of buying yen is rapidly rising and this stimulates others to also want to repay their loans before it gets too expensive and wipes out all their profits. This self acceleration process is called "unwinding" the carry trade.

**Later by edit: My age is showing - I forgot that the US does not make TVs anymore. I think Sylvania was the last to do so and they quit 25 or more years ago, but none-the-less PAL B was designed in Brazil (only place it is used, I think) to keep the then US makers of TVs out of the local market.

***The sugar / alcohol complex provided approximztly 60% of all the net new jobs in Brazil last year, mainly cutters in the expanding cane fields. Car makers are hiring as sales are at all time high with the growing wealth of the population but this gain is largely wiped out by the closing factories job loses. Two years ago, while waiting for wife to shop in NYC's Macys, I sat bored in the ladies shoe department. Most of the shoes came from Brazil then - now those labor intensive factories are closed. (Workers must be paid in Real and the dollars the shoes can be sold for are worth too few Real to pay them.)

Final SUMMARY / ADVICE: Get out of dollars while they still have some value. Buy ADRs.

 

new buy for Qatar's sovern funds:

"Qatari Investment Authority have indicated a willingness to pay as much as 15 pounds a share for Nasdaq's 31 percent stake in the London Stock Exchange the Sunday Times newspaper said. ... Deutsche Boerse , Borse Dubai , ASX and Singapore's Temasek all were interested buyers, but each has {now} distanced itself from the notion either publicly or privately. ..."

More at:
http://news.moneycentral.msn.com/provider/providerarticle.aspx?feed=OBR&Date=20070902&ID=7407245

Note: This is a high bid (approximatly US$ 2 billion). The others interested appear to have dropped out. Temasek is the second largest of all of the sovern funds and may still try to buy. - see post 1. To pay US$ 2 billion for a third of the LSE, Quatar will probably* need to sell some of its US Treasury holdings. I.e. Quatar is obviously joining the leaders listed in post 1 in the move to get out of Treasury paper.
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*I doubt if there is that much cash under the shiek's bed.

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Although most of the move to get out of dollars is coming from those who hold them, not all. Others are betting on the dollar's continued fall by borrowing them now with obligation to pay dollars back later (when many, including me, think they will cost less to buy with almost any other currency):

For example:

" ... second largest lender, ICICI Bank, on Tuesday said it has signed a multi-tranche dual currency USD 1.5-billion syndication loan agreement in Singapore.*
"The syndication is a benchmark deal as this facility marks India's largest offshore syndicated loan financing by a financial institution," ...
The facility is split into three tranches - a USD 500 million 364-day tranche (tranche A), USD 500 million three-year tranche (tranche B) and USD 500 million five-year tranche (tranche C). ..."
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*Singapore is already mainly out of dollars - See post 1 - so they may be "hedging their bets" to cover the possibility that the dollar will not continue to fall.

 

"... Dubai Group, a government-controlled investment fund, reportedly has said it is investing $2.5 billion into China and India over the next two years, with a focus on large-scale investments in manufacturing, finance and real estate.
Announcements of this kind are notable given the subprime crisis, which while shaking up Western economies is making emerging markets in Asia and the Middle East look increasingly attractive. "Sovereign wealth funds are looking for longer term value and these are increasingly to be found in emerging markets, '''
FROM:
http://www.forbes.com/2007/09/10/du...0markets20.html?partner=globalnews_newsletter
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"... Singapore operates one of the world’s oldest and largest sovereign funds--and arguably its most transparent one--in Temasek, its aggressive state investment agency. Temasek has waded deep into the region’s financial industry and, lately, has become involved in the United Kingdom through an investment in Barclays, together with China Development Bank.
But Temasek’s growing reach, buttressed by a portfolio of more than $100 billion, with a primary focus on Asia, is running into resistance amid rising fears in the United States and Europe about similar funds created recently in China and the Persian Gulf states that are extending their influence in the relatively free Western markets. ..."

{Billy T coment: more truthfully and clearly stated: Afraid of this rapidly growing alternative to buying Treasury bonds.}

FROM:
http://www.forbes.com/2007/09/10/te...0markets01.html?partner=globalnews_newsletter

 

There are no general lists, unless the country involved wants to make it available. The most you can do is scan the financial press to see what deals they are doing, like say China's deal to buy a stake in Blackstone Group (and even then you only know the details not being kept confidential).

There's less transparency for sovereign investment funds than there is for hedge funds (or private equity firms like Blackstone).

 

ADRs are ownership shares in compaines based in courties other than US, which you can easily buy with dollars. As many companies are global the distinction is not clear between ordinary stocks and ADRs. In fact, the average of stocks listed in the DOW now has more than half of their income from outside of the US so even buying GE etc is more than 50% investing outside of the US. There are, however, ADRs that are 100% investment outside of the US. For example, my biggest ADR holding is the water company of Sao Paulo (symbol SBS) I bought in dollars at just below $5 / ADR about 5 years ago and it now trades around $45/sh (I do not intend to sell so do not actually know what it is now - It still pays good dividends!)

SUMMARY it is not entirely accurate to say simply say "buy ADRs" but the idea is - you want profitable companies earning their income in parts of the world with rapid growth*, not the US.

This holds true for people living in Europe also, but as the infrastructure in Europe is better designed for high oil cost ($100/barrel will be here soon) than the "surburban infrastructure" of the US (poor public transport, SUVs, low density "1/2 acre developments" big show-place individual houses, etc.) the US will suffer more than Europe. The Euro zone's "twin deficits" is only 0.6% of their GDP but the US is 7.0% of its GDP - data from current issue of the Economist Thus the interest burden on the US is more than 10 times harder to carry already and growing. Some good ADRs are in fact in the Eastern part of Europe (former USSR countries) and several German exporting companies should be considered. (Germany is world's leading exporter.)
Because GWB has transferred wealth from Joe American to the already rich, the German luxury cars are selling very well (>15% increases YoY in some cases) while Ford and Chevy sales are dropping.

Hope that helps. PS I do not know, but bet EDRs exist (European Depository Reciepts you buy with Euros. If they do, I bet they trade both in Franfurt and Paris. - goolgle and let me know.)
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* I own nothing in China or Russa as do not trust them not to simply confiscate some day - Russia already is in the energy field but states that it is just enforcing the enviromental laws.

 

Mainly the other two BRICs Brazil and India. I like to be able to read the annual reports, local papers etc in English. (except I read the financial papers in Brazil while having my breakfast - well before the NYSE market opens.) New Zeeland (not just now) and Australia also. Countries that the British sense of fair play exists in.

Are GDRs sold in Euros? Where do they trade? If they are priced in Euros, that is an easy way for the little American guy to bet on the Euro and against the dollar.

 

"...Exchanges are also in the spotlight today, as Qatar and Dubai both
struggled to gain dominance with major purchases. The Qatar Investment
Authority reported that it obtained a 20% stake in the London Stock
Exchange (LSE), on the heels of a report that the Borse Dubai will buy 28%
of the LSE from Nasdaq Stock Market (NDAQ: sentiment, chart, options), and
take a nearly 20% stake in the Nasdaq itself. In exchange, Nasdaq will
acquire pan-Nordic stock-exchange operator OMX from the Borse Dubai . . .
though Qatar urged OMX shareholders not to take action on the deal. ..."

FROM:
part of Schaefer's morning news letter for today but can not give good link as was an Email to me.


" ...Mubadala Development Co., an investment company owned by the government of Abu Dhabi, will also commit $500 million to a Carlyle investment fund. Mubadala will buy the non-voting stake at a 10 percent discount, Carlyle said in a statement today. The deal values Washington-based Carlyle at $20 billion. ..."

Later by edit as I failed to copy the main part ($1.35 billion):
"Carlyle Group, the second-biggest buyout firm, plans to sell a stake to the government of Abu Dhabi for $1.35 billion as it considers an initial public offering. "

FROM:
http://www.bloomberg.com/apps/news?pid=20601087&sid=amPTX9HhjPyQ&refer=home

SO TOTAL IS NEARLY 2 BILLION ! (almost as big as China's 3 billion private purchase of 3/4 of the Blackstone IPO. More and more companies are doing the sale to sovern funds*, instead of or as part of an IPOs to convert there values into cash. More bad news for the US Treasury trying to finance the debt.**
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*As this direct to sovern fund sale saves the fee that the investment bank would normally get, there is usually a discount on the price the sovern fund must pay. (I seem to recal the discount China got on the blackstone buy was 5% off the average price of the IPO. Dhabi will get 10% discount! There is, of course, no big buyer's discount on new Treasury bonds.)

** As some wag noted many years ago: "A billion here and a billion there and soon, you are talking about real money" (no longer going into US Treasury bonds).

 

" ... Sovereign wealth funds have invested an estimated $35bn in the shares of banks, securities houses and asset managers since the beginning of 2006 ... cover companies such as Barclays, Blackstone, Carlyle, Deutsche Bank, London Stock Exchange, Nasdaq and HSBC ... The most recent flurry of activity accounts for less than 1 per cent of the $2,800bn in assets that sovereign wealth funds are estimated to control. {Other wise called 2.8 TRILLION, and rapidly growing as governments get out of US treasuries} ... But the flow of cash from state-backed agencies, especially those based in Asia or the Middle East, is prompting concern among politicians in Europe and the US, who worry it may give foreign governments influence over the financial sector. ... sovereign wealth funds have favoured institutions with exposure to emerging markets, the securities business or the private equity and hedge fund industries. ... Though much of the recent investment has come from funds in Asia and the Middle East, other countries are also becoming active. The Norwegian government’s pension fund recently decided to increase the share of equities in its $328bn portfolio to 60 per cent from 40 per cent. ..."

FROM:
http://www.ft.com/cms/s/0/54ccecb2-6b91-11dc-863b-0000779fd2ac.html

I could not up-load the link's "exhibt 2" showing a bar graph of the top 20 sovern funds's estimated wealth in financial firms. (No one really knows and that is scary*, IMHO.)
Visit link and see it. (Up load it if you can.)
------------------------------
*For example, Norway has just decided to tranfer 66 billion from bonds into equities via its sovern funds. (From data in next to last paragraph of the article, but not quite so clearly stated.)

 

Part of reason why it is hard to know how much the sovern funds hold is illustrated by the following (in this case obviously known, but other "private placements" made directly, instead of via a bank that must report to shareholders, etc. are not):

"The ICICI Bank {India's 1st or 2nd largest private one} has said its one year old private banking unit in Dubai has seen $300m worth of Gulf investment being channelled into India, reported Bloomberg. The Indian lender said the investments were made in the form of ten private equity deals and privately placed share sales in the infrastructure, property and corporate sectors. ..."

Dubai & Quatar are both developing stock markets and in fierce struggle to determine which will be the banking center of the mid East oil money. One owns 20% of the US's Nasdaq already and both are trying to buy the Nordic exchange. (Bidding againsts each other.) Neither wants to continue using NYC (or perhaps even London, although phasing out their use of London will be harder) to server their financial needs.

 

" China Investment Corp., the nation's $200 billion sovereign wealth fund, starts operations today {29/9/07}*as the government seeks to boost returns on the world's biggest foreign-exchange reserves.

The investment agency will come under the direct supervision of the nation's cabinet, the State Council. Lou Jiwei, former vice finance minister, will act as director and Gao Xiqing, former deputy chairman at the National Council for Social Security Fund, will be general manager, according to information disclosed at an opening ceremony in Beijing.

China set up Asia's biggest state-owned investment company after surging trade surpluses helped push the nation's currency reserves to a record $1.33 trillion. The agency's creation has spurred speculation of a flood of Chinese investments into overseas companies and resources such as oil and metals. ..."

"... the agency, to be funded by a total of 1.55 trillion yuan ($205 billion) special government bond sale that will be used to buy foreign-exchange reserves from the central bank. By Sept. 28, 700 billion yuan has been raised by 10-year and 15-year bonds issues. The finance ministry will sell more long-term bonds by the year-end to meet the budget. ..."**

FROM:
http://www.bloomberg.com/apps/news?pid=20601087&sid=aGy8fzTT25.w&refer=home
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*I guess the 3 billion put into Blackstone IPO privately (3/4 of total with a discount) was just to get "feet wet" before official start.

**Unless I missunderstand this text, it means that China's central bank assets (largely US Treasury bonds) will be sold (converted into dollars and used to buy real assets) this will put downward pressure on the price of US Treasury bonds, but I think probably not enough to cause others to immediately start the run on the dollar. - I.e. I will stick with my prediciton that the run will not begin before Halloween 2008. (Full prediction has it happen before Halloween 2014 as I think the central banks will get world economy thru the current problem. I.e. they have already started the next "6L cycle" i.e. the add Liquitity phase, but the second phase, make easy Loans, clearly has not yet started. The "6L cycles usually take approximately 6 years - that is how 2014 was selected to end the dollar run collapse "window." I.e. the 6L cycle just now starting is the last - it ends in deep depression.)

 

17Oct07: "... A newly established Libyan sovereign wealth fund is starting to deploy its $40bn (£19bn, €28bn) capital on international markets as the oil-rich state showcases its rehabilitation in the global community. Following in the footsteps of the Gulf countries, the regime of Colonel Muammar Gaddafi earlier this year allocated tens of billions of dollars that had been managed by the central bank to a new entity, the Libyan Investment Authority (LIA), which will now also receive a portion of the surplus oil revenues each year. ..."
FROM:
http://www.ft.com/cms/s/0/c4bd32be-7cd2-11dc-aee2-0000779fd2ac.html?nclick_check=1

You know, a billion, here, few billion there no longer buying US Treasury bonds, could get to be a problem.

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:shrug:

Hope you have bought your ADRs before the US mint's printing presses run 24/7 to pay off the Treasury bonds that can not be "rolled." (at any interest rate, which is not even more damaging than the inflation part of "stagFlation" this will cause.)

 

Billy T,

The comment "no longer buying US Treasury bonds" is misplaced. Libya was never a buyer of US Treasury bonds. It has had an isolationist-type economy ever since the sanctions imposed because of the Lockerbie Aircraft bombings. Libya has decided to join the global economy by investing in foreign enterprises and opening itself up to foreign investments as well, mostly in its oil sector.