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

I think most, including me, already knew what you point out about trucks selling better than cars (I drove a pick up in US 20 years ago.*) and Japanese owned car plants in US (Toyota's in in Tenn., I think) I tend not to state waht is well known. Thus, I did not comment that fuel efficency standards for trucks is lower, either (nor did you "point this out"). As far as "posting hype" about the future of US car makers in their US operations, that is clearyly just my expectations. You may hold different ones, but the trend of increasing losses and reduction in shair of the US market makes me say this. Why do you call extention of thoses trend "hype"? (Or is that just "anti-Billy T" POV hype with zero logic behind it?)

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*It was a Nisson, extended bed (I am tall and did occasionally camp out, sleeping in it, with tarp/tent arrangement I made.)

 

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13 billion more has been sold to foreigner's "sovern funds" as a result of the "sub-prime mess":

" ... Swiss bank's {UBS} announcement that it had found a helping hand in the form of an $11.5 billion loan from GIC, a Singaporean sovereign wealth fund, and a $1.8 billion loan from an undisclosed strategic investor in the Middle East, reportedly the government of Oman. {These "loans" are really sales. The sovern wealth fund now owns a little more than 9% of UBS just about the same as Duabi's sovern wealth fund now owns of US's Citi bank.}

After all of the US is sold or "out competed" like Toyota does in US made car sales, the profits enrich foreigners, not the US economy of Joe American.

PS relative to my last posts, especially 59:

Although GM sales in US are dropping, not true in Asia:

"Honda Motor Co., Volkswagen AG and half a dozen other companies plan to spend at least $6.6 billion in India on new factories to cash in on the nation's auto demand. GM is spending more than $300 million to build a second car factory in India. ..." {but closing factories in the USA as dollar would need to drop about 70% more for them to be competive in India & China where the market is rapidly growing.}

From: http://www.bloomberg.com/apps/news?pid=newsarchive&sid=ar06xz6rEBpY

 

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I would edit an old post but can not as too much time has lapsed. I just wanted to record for the record being built here that for 5 billion dollars, China's sovern fund just picked up 9.9% of Morgan Stanely, who had 3.6 billion loss, the first loss in their 74 year history.

Piece, by piece, the US is being sold to foreigners because of the debt problem (about 2 million dollars going out of US each day more than coming in to finance the trade imbalance, even though it is now at a two year low).

This debt problem is obviously begining to "feed on itself" as 9.9% of Morgan Stanely's future profits will be going to China in addition to the dollar paying for items US is importing. Etc. for many other firms that hav e been partially sold or closed their factories and move their production to Asia (For example, Levi Jeans closed it last US factory a few yeras ago. It does not get much more symbolic than that - Jeans are like coke, a symbol of the USA.) The US exports will not include Levi- Jeans anymore - that is the other fact increasing the debt as factories are closed. The job growth in US is mainly local - like selling hambergers or cutting hair etc. - not exporting hardware. London and India appear to be taking over the financial serives industry, so not much long range hope there, especially as the dollar falls, as that too "feeds on itself."

 

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"... Dec. 24 (Bloomberg) -- Merrill Lynch & Co., reeling from the biggest loss in its 93-year history, will receive a cash infusion of as much as $6.2 billion from Singapore's Temasek Holdings Pte. and Davis Selected Advisors LP. ..."
From:
http://www.bloomberg.com/apps/news?pid=20601087&sid=arw1CQBwKgkI&refer=home

Foreigner' sovern funds (mainly dollars earned by oil wealth or Asian production) now own nearly 10% of the main US brokerage firms and one of the largest US banks. If they get control of the US financial system, they will control the US. With deficit at 6% of GDP, and GWB's tax cuts + wars policys, the US has little chance of avoiding this in the end.

 

What a wonderful weapon for the Chinese to use in any conflict with the US over Taiwan.

 

And just what weapon, that they realistically could use, is that?

 

Not any NOW unless forced to as it would be very costly to use. Not only would destroying the dollar erode much of the value in their reserves, but also the collapse into deep depression in both US and EU, which will follow the dollar's collapse, would remove most of the CURRENT market for the products of their factories.

In a about a decade, however, this is no longer the case. China will need its entire productive capacity to supply the domestic demand and the obligations it has under taken in South American and Africa, as result of the 30 year contracts signed to assure China of food stocks, raw material and energy it will need.

More details of why Chinese domestic purchasing power will easily displace sales to US and EU at:

http://www.sciforums.com/showpost.php?p=1597857&postcount=651 {this is not best post but first I found. I will give better link soon by edit to one of the many times I have already explained in detail why the day will come when IT IS TO CHINA'S ADVANTAGE to tell US and EU to "Go to Hell." (I.e. less competion for economies in depression for the items China must import.}

Post 322 of "a Thought to Ponder" thread gives some of reasons as:

"... In an era of high automation and expensive energy, a static population or even a declining one is an ASSET, not a liability as he thinks. The simple fact is that the current US standard of living is not possible for China (or India) if their populations exceed 1 billion because the resources to support this do not exist on Earth. As I have been posting for more than a year, the day will come when it is to China's economic advantage to destroy the dollar, even though that will cause some loss in the purchasing power of their remaining dollar reserves and some* of their externally owned assets (in "sovern funds" accounts). (Lower prices for oil etc. with US and EU in deep depression will compensate for these losses in the long run.)

There will not be a "glut of factories" - he is idiotically assuming that if the US and EU do not buy the Chinese factory production that it will be impossible to sell it! The domestic population is basically debt free and just now learning what credit cards are. Western banks have been buying parts of the Chinese banking system, which WAS as he described an inefficient way to prop up the inefficient State owned enterprises. This inefficiency was almost needed back Mau's era to keep the workers employed. Now, however, China's problem is to find enough qualified workers - salary are rising rapidly and inflation also - China has raised the interest rates and/or bank reserve requirements at least 4 times (I think 5) in 2007 alone to fight the demand-driven internal growth inflation. (Price of pork has doubled in a year as more can now afford to eat it and production is down due to a spreading disease problem.) China will need even more factories to supply this growing domestic demand. In a decade, if they use credit cards, stop saving about 25% of their salaries, etc - a demand greater than the US's total purchasing power! (When the continuing and rapid drop in purchasing power of the dollar is considered. I.e. China can surpass the US by US dropping into deep depression as well as by four times the US's growth rate, which alone would take several decades.) The Chinese will be very hard pressed to both meet the domestic demand and honor the many long term promisses they have made to their future "economic colonies."..."

Correction update: China has raised the rates 6 times now in 2007 in effort to cool their "super hot economy."

or FROM POST 419 of the "More great economic news" thread the following:

"as I have repeatedly pointed out it is not yet in China's interest to destroy the US. China still needs to sell much of its production to US and EU (more went to EU in 2007 than US and US is becoming less important to China with every passing year.) The Chinese domestic middle class is both rapidly growing in numbers (almost a million peasants move to the cities each month, and in individual purchasing power.) The domestic sales are current up 18.8% YoY. In addition, the 30 year contracts that China is signing in Africa and South America for the raw materials, food stock and energy represent large demands on the production of China's factories. In about a decade, China will not need to sell anything to US or EU and can tell US and EU to "Go to hell. - Your paper money is worthless." as two oil exporters had already stated. (But they take dollars still and just convert them quickly to more stable or appreciating currencies, etc.) Brazil starting 1/1/08 will not accept dollars from Argentina (and conversely) to settle the bi-lateral trade deficit, and this is growing more common else where. The dollar, is after all in reality, when faith in US economy is gone, only green paper.

Also note that when China does not need to sell to US and EU it will be greatly to China's advantage to destroy their economies so the demand for the things China must import will be greatly reduced and cost China much less. ..."

 

"... Saudi Arabia plans to establish a sovereign wealth fund that is expected to dwarf Abu Dhabi's $900bn and become the largest in the world.

The new fund will be a formidable rival for other government-owned investment funds in the Middle East and Asia, which are playing an increasingly active role in channelling capital to western companies, particularly financial companies hard hit by the US mortgage meltdown. ..."

From:
http://www.ft.com/cms/s/f7e31b46-b0...Saudi+Sovern+Fund&aje=true&dse=&dsz=&x=12&y=6

If the Saudi Arabia buys stock in companies instead of US treasury bonds, expect US Treasury to raise interest rates and US economy to rapidly pass into recession, (assuming it has not already as some believe). This, could trigger the run on the dollar I have predicted will occur between Oct 2008 and Oct 2014 sooner than I expected. The damage that saudi Arabia could do to US by simply stopping to buying Treasury bonds would be much greater than the sending of 15 of the 9/11 attackers did. GWB will not say or do anything as the Saudi money has been his (and his father's) main source of campaign funds since before he was govenor of Texas. The saudi government want an "oil friendly" US president and they got that in GWB, who is keeping the cheap sugar cane alcohol out of the US, which is currently the only real means to reduce US oil imports. (Iowa corn based alcohol as motor car fuel will actually slightly increase oil imports compared to running the cars on 100% gasoline, according to Cornell and UCLA studies. Only the sudies paid for by oil companies, corn growers, or alcohol industry show a slight gain. Sugar cane alcohol has an 8 fold energy gain - one of the reasons why it is much cheaper. Three other reasons are that sugar requires very little fertilizer, compared to corn; crushed cane gives sugar directly, not the straches of corn which must be enzimatically borken down into different sugars, some of which are not converted into alcohol so cane's alcohol yield is greater; cane is often cut manually by cheap labor, not expensive gasoline powered agricultural machines used for planting and harvesting corn.

Currently in Brazil, alcohol is approximately half the cost of gasoline and neither has any subsidy with both taxed equally on their energy content. More details in thread: "How DUMB can US voters be?"

 

Why would they raise interest rates?

 

If the a major purchaser of Treasury paper stops buying, the US has three choices, the first is unthinkable - will never happen and is included just to be logical.

(1) Declare default - I.e. refuse to pay the bonds that are maturing.
(2) Print more money to pay the maturing bonds.
(3) Raise interest offered on the Treasury bonds enough to attract other investors to compensate for the loss of purchase by the Saudi government.

Note in September, 2007, for the first time in US history, so many holders of Treasury bonds refused to "roll" them over into new bonds, that the redemptions exceeded new sales of Treasury paper. Since then, there has been a net sale of Treasury paper, but this net is running at about 10% of the tradition net sales (of last few years) and is already not adequate to finance the debts. I think the debt limit will need to be raised again soon, and also that some "creative financing" is being done to hid this problem. Perhaps pledging expected Social Security's current surplus to financial institutions, like cash rich insurance companies? - I am just guessing. Someone should look at the money supply. Perhaps the printing press are already running?

In any case, it is hard to imagine that government will reduce spending just before a presidential election, so some sort of "creative financing" must be going on as net Treasury sales are already not meeting the increase in government expenditures.

 

Most seem to expect rates to cut again.

 

Yes it is very likely, especially with the stock market off to worst start of the year EVER! The FED, I think will ignore the effect on inflation and the Treasury will print money to pay off the maturing bonds that holders will not "roll."

Sure gald I told all here who were reluctant to buy the ADRs of India and Brazil as I recomended that they should at least buy the US Treasury's TIPs nearly a year ago. The dollar will tank, more rapidly in 2008 than it did in 2007.

 

TIPs?

 

Treasury Inflation Protected (bonds) Note that the formula used to increase the principle may not fully compensate for inflation, but some think it more than compensates - it depends upon what things you typically buy.

The interest rate is fixed but as the principle is increased periodically the amount of interest you get with each payment increases. - I.e. Unlike regular bonds, which lose purchasing power, you receive interest with constant purchasing power and when bond matures the government pays more back to you than you paid to buy (but this only is returning your original purchasing power).

All of the above is very attractive when inflation is a problem*, and of course you pay for this (No free lunches) by a lower rate of interest than on other bonds. TIPs are very attractive to me for several reasons:

(1) I have so much money that I only want to protect the purchasing power of what I have.
(2) I have so large capital gains that I can not afford (tax wise) to take more profits (Government forces me to take some out annual because of my age)out of my retiement plans (30 years of capital gains in indexed funds and foreign funds) so My Tiaa/Cref is now 100% in TIPs. (did this about a year ago.)
(3) I am getting old so need to be more conservative than when I was younger and big risks were my mode. I do, however, still own about 40 early stage drug developers (very high risk) as I like to learn about the developments in this exciting field and everone knows the high risk, so it is "well priced in." With the diversification of 40 of them, some will hit "home runs." Two (KOSP and SRAi) did last year as "big pharma" bought them up. I like this high risk as the dollar risk, while very large is still smaller that the risk their drug will never get to market.

Again, however, Brazil and India's ADRs are better for most people. - But I can not choose them with my retirement funds in Tiaa/cref and Vanguard.
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*Trust me inflation is soon to be a big problem for US as foreigners will not much longer finance even the interest on Treasury debt**, so the printing presses will pay off the maturing bonds, resulting in first an acceleration in the dropping dollar value and then a run to get out which terminates in deep depression, which history will call "the Great Depression" (much worse than the 1929 one.)

**In sept07 they redemed more than Treasury could sell - first time in history.

 

You've probably explained it but how do ADRs help, if they are in dollars.

 

ADRs are traded in US and priced in dollars, but they are shares in a foreign company. For example, I bought SBS at about 5 US$ and it is now about 45 (has dropped a little for last time I looked about 3 months ago). I.e. about a factor of 9 gain in dollars. But if you bought it on the same dates, directly in Brazil the gain would only be about factor of 4. The dollars has lost more than half of its value wrt tyhe Brazilain real. Thus to now buy what has gone up only by factor of 4 in Brazil, more of these weaker dollars are required. I.e. you own a part of the company. As the dollar gets weaker, that part is worth more in dollar terms so people will pay more dollars for that part EVEN IF IN BRAZIL THERE HAS BEEN NO CHANGE IN THE REAL VALUE OF THAT PART.

Same is true of gold. It is LESS valuable by factor of MORE THAN two now than it was in 1980, but as the dollar is worth much less now, the price of gold in dollars is higher now than in 1980. I.e. If you bought gold in 1980, you have now LOST more than half of your purchasing power!

ADRs are an efficient way to protect your purchasing power because the more the dollar drop the more the price of the ADR increases even if there is no gain in the local price of the stock. If you can chose one that is growing the both that and the drop of the dollar give you more dollars (but only the true value increase of the stock locally is increase in your purchasing power.

SBS has done very well as many are now doing what I did 6 years ago - seeking ways to invest in Brazil and India. This demand is part of why the stock is doing so well in the local currency. People with brains and money are getting out of dollars.

 

Big 14 page article about Soveign Funds on the front cover of The Economist today. I'll see what I can dig up on it.

 

Here it is:

http://www.economist.com/opinion/displaystory.cfm?story_id=10533866

The invasion of the sovereign-wealth funds

The biggest worry about rich Arab and Asian states buying up Wall Street is the potential backlash

"BEN BERNANKE once spoke of dropping money from helicopters, if necessary, to save an economy in distress. The chairman of the Federal Reserve probably did not envisage that choppers bearing the insignia of oil-rich Gulf states and cash-rich Asian countries would hover over Wall Street. Yet just such a squadron has flown to the rescue of capitalism's finest.

On January 15th the governments of Singapore, Kuwait and South Korea provided much of a $21 billion lifeline to Citigroup and Merrill Lynch, two banks that have lost fortunes in America's credit crisis. It was not the first time either had tapped the surplus savings of developing countries, known as sovereign-wealth funds, that have proliferated in recent years thanks to bumper oil prices and surging Asian exports. Since the subprime-mortgage fiasco unfolded last year, such funds have gambled almost $69 billion on recapitalising the rich world's biggest investment banks (far more than usually goes the other way in an emerging-markets crisis). With as much as $2.9 trillion to invest (see article), the funds' horizons go beyond finance to telecoms and technology companies, casino operators, even aerospace. But it is in banking where they have arrived most spectacularly. They have deftly played the role of saviour just when Western banks have been exposed as the Achilles heel of the global financial system.
Moneymen or mischief-makers

At first sight this is proof that capitalism works. Money is flowing from countries with excess savings to those that need it. Rather than blowing their reserves on gargantuan schemes, Arab and Asian governments are investing it, relatively professionally. But there are still two sets of concerns. The first has to do with the shortcomings of sovereign-wealth funds. The second, bigger, problem is the backlash they will surely provoke from protectionists and nationalists. Already, Nicolas Sarkozy, the French president, has promised to protect innocent French managers from the “extremely aggressive” sovereign funds (even though none has shown much interest in his country).

Although sovereign-wealth funds hold a bare 2% of the assets traded throughout the world, they are growing fast, and are at least as big as the global hedge-fund industry. But, unlike hedge funds, sovereign-wealth funds are not necessarily driven by the pressures of profit and loss. With a few exceptions (like Norway's), most do not even bother to reveal what their goals are—let alone their investments.

For the bosses at the companies they invest in, that may be a godsend: how nice to be bailed out by a discreet “long-termist” investor who lets you keep your job, rather than be forked out in the Augean clean-up hedge-fund types might demand. A quick glance back at “long-termist” nationalised industries shows what a mess that leads too. And it is not just a matter of efficiency. The motives of the sovereign moneymen could be sinister: stifling competition; protecting national champions; engaging, even, in geopolitical troublemaking. Despite their disruptive market power, their managers have little accountability to regulators, shareholders or voters. Such conditions are almost bound to produce rogue traders.

So far there is no evidence of such “mischievous” behaviour, as the German government calls it (curiously, from another country yet to attract the sovereign-wealth crowd). And weighing the risk of such eventualities against the rewards of hard cash, on the table, right now, makes it clearly daft to raise too much of a stink. America is either in recession or near one; Mr Bernanke has all but promised more aggressive rate cuts, but confidence in the banking system is low. There is a wise old proverb about beggars and choosers.

The relatively friendly welcome sovereign funds have found in America may be temporary. Before the credit crunch American politicians objected to Arabs owning ports and Chinese owning oil firms. On January 15th Hillary Clinton said: “We need to have a lot more control over what they [sovereign-wealth funds] do and how they do it.” Once an emergency has passed, foreign money can often be less welcome. One of Singapore's funds, Temasek, has learned that lesson to its cost in Indonesia.

In politics, appeals to fear usually sell better than those to reason. But the hypocrisy of erecting barriers to foreign investment while demanding open access to developing markets is self-evident. Host countries should not set up special regimes for sovereign wealth. Although every country has concerns about national security and financial stability, most already have safeguards for bank ownership and defence.

Until East and West even out the surpluses and deficits in their economies, sovereign-wealth funds will not go away. Ideally, the high-savings countries of the Middle East and Asia would liberalise their economies, allowing their own citizens to invest for themselves, rather than paying bureaucrats to do it for them. But do not expect miracles. In the meantime, what should be done to keep the rod of protectionism off their—and the world's—backs?
Shed light or take heat

For a start, more transparency would go a long way towards easing concerns: an annual report that discloses the fund's motives and main holdings would be a start. Investments through third parties, such as hedge funds, help too, providing an additional layer of protection against the misdeeds of rogues. Ideally, the funds would eventually take fewer stakes in individual companies, which expose them to the inevitable risks of stockpicking and political pressure. Investing across indices provides more diversification anyway.

At a time when Western governments have at last learned to let the private sector run banks (however lousily it is sometimes done), it is far from ideal that state-owned funds from emerging economies should be buying stakes in them, even minority ones. On the other hand, such cross-border bargain-hunting gives developing countries a bigger direct stake in capitalism's future. The chief danger will not lie with them. The problem is likely to be in the rich world—and a rising nervousness about foreign money."

 

A very good discusion Carcano, part I reproduce now:

AP Online 05:21 PM ET 03/20/2008:
"The Bush administration said {today} it had reached agreement Abu Dhabi and Singapore that they will not use their huge government investment funds to further their political goals. {Billy T comment: I wonder what Bush promissed them? or Perhaps he is only fabricating again? The US despirately needs them to continue recycling dollars back to US as IRS's collections are dropping with the falling domestic economy and expenses are increasing with unemployment and Bush's wars.}
The funds have raised concerns about the potential threats that large amounts of foreign investment could pose to the U.S. economy and other industrial countries.
A set of policy principles was released after Treasury Secretary Henry Paulson met with officials from Abu Dhabi, home to the world's largest government investment fund, and Singapore, which also controls a sizable investment fund."We had a good discussion today on the issues surrounding sovereign wealth funds," Paulson said in a statement. He said the principles that had been agreed to would further efforts to develop a set of best practices to govern how the funds operate.
The International Monetary Fund and the Paris-based Organization for Economic Cooperation and Development are working to develop a voluntary set of best practices to address issues that have been raised. ..."

More at:
http://cs.schwab.com/clicker/cli?re...ilMsgID=mcs031963283585bacmr4tt-xaaaaarjj5cfd

 

"... {shares of} the fourth-largest U.S. securities firm, ... Lehman, climbed ...Shares of the New York-based firm dropped almost 80 percent this year before today... A Reuters report earlier today cited a spokesman saying that the {Korean} government-controlled bank is "open to'' possibilities, including a purchase of Lehman. ... "I would be very surprised by any deal that would lead to complete control,'' said Stuart Eizenstat, a former U.S. Deputy Secretary of the Treasury. "That would elicit a lot of questions and political blowback. I'm sure that's not going to happen.''

An acquisition of one the largest American investment banks by a company controlled by a foreign government would likely draw U.S. regulatory scrutiny, according to Eizenstat. ..."

From: http://www.bloomberg.com/apps/news?pid=20601087&sid=a81mY1s5LiL0&refer=home

Billy T comment: Soon the US will no longer have any choices except to let foreigners control the economy or wreck it with printing press money. Can not bail everyone out - perhaps not even Fanny & Freddy without serious damage to the dollar.