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MACROECONOMIC OUTLOOK |
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Volume 00 |
Sovereign Wealth Funds |
Issue 03 |
Rapidly emerging and secretive Sovereign Wealth Funds hold an immense amount of cash and most Americans are not aware of their existence. Sovereign Wealth Funds are assets of a country that are held by its government for purposes of investment. Currently foreign governments hold over $5.5 Trillion in U.S. dollars. These funds have accumulated through U.S. trade deficit dollars and are returning to be invested in this country.
Secretive fundsIt is relatively easy to use the International Wire Transfer of Funds today to move hundreds of millions of dollars around the planet and draw very little attention. It is difficult to track the size and composition of these funds because they do not publicly disclose this information. Many times it is the investigative reporting of the financially-focused segment of the press that uncovers these transfers of power and wealth. Some foreign governments have become so awash with U.S. dollars that they must separate their funds to distract public attention away from themselves. It is difficult for most observers to comprehend the enormity of their U.S. dollar holdings.
Moving away from bondsThe foreign recipients of your $850 Billion per year trade deficit had been investing their money in U.S. Treasury Bonds but they can't do that forever. Foreign investments now hold more that half of the U.S. debt in the form of bonds. So now many countries with trade surpluses feel it is time for them to buy control of private enterprises in the United States.
Due to the fact that they are reducing their purchases of U.S. Treasury Bonds, Americans will have to start financing more of their own government excesses which will drive up interest rates. Part of the fantasy land of Americans living off foreigners is coming to an end. The Asian Big 4, Saudi Arabia, Russia and others desire to purchase control of American companies so they can receive greater returns on their investments.
A new armyThe current estimate is that the Sovereign Wealth Funds currently hold over $5.5 Trillion in investments and they are expected to reach $14 Trillion by 2015. The huge American Trade Deficit feeds them $70 Billion U.S. dollars monthly. They can also convert their U.S. bonds to stock by not reinvesting in bonds when they mature. The rapid rise in the Sovereign Wealth Funds dramatizes the shift in world economic power away from the United States, the greatest debtor nation on earth, to the increasingly powerful group of creditor nations.
The wealth funds farm out their funds to money managers in their country who are on the prowl for U.S. investments. Many of them see this as their "Ultimate Revenge" for American arrogance and other matters. We are beginning to find that economic armies are more powerful than military armies. The economic invaders are coming.
Where they are investingThe creditors are primarily the Asian Big 4, their Arabic partners and the Russians who have a surplus due to their oil exports. For example, a chemical company controlled by Saudi Arabia's Fund agreed to buy General Electric's plastics business for $11 Billion recently. The government of China invested a 10% stake in the Blackstone Group, a U.S. private investment firm. Russia is planning to put more of their $357 Billion U.S. dollar reserves into their Sovereign Wealth Fund so they can invest in more U.S. companies. The fund already has $32 billion so there is plenty available to add to their investment fund. South Korea is forming a new fund that will have over $30 Billion as will the fund being formed in India. Investment Dar and Adeem Investment Co. of Kuwait just purchased Aston Martin from Ford Motor Co. Dubai's Istithmar just bought Barneys New York for $942 million. Sovereign funds are using their power.
Who said the Trade Deficit did not matter? The American Trade Deficit is the most profound economic change in the last 50 years. The proof is that it is coming back to haunt you!!
Why are these sovereign wealth funds growing so fast? The high price of Oil is adding to the coffers of Russia, Saudi Arabia, Iran, Norway, United Arab Emirates, and yes the home of El Diablo, Venezuela. Add to that the huge trade surplus of the Asian Big 4 and you have enormous amounts of U.S. Dollars and Euros going into these countries daily. China, Japan and Saudi Arabia have manipulated their currencies which has given them huge trade surpluses. Frick and Frack (Democrats and Republics in Congress) do nothing. You have a government that cannot deal with China, Japan and Saudi Arabia who manipulate their currencies to your detriment!!!
Some of the major Sovereign Wealth Funds in existence and their U.S. dollar holdings are shown below:
| Country | Sovereign Fund Name | Estimated Amt. of Fund |
| China | China Development Bank | $1.4 Trillion |
| Japan | State Investment Fund | 1.3 Trillion |
| United Arab Emirates | Abu Dhabi Investment Authority | 875 Billion |
| Saudi Arabia | Various Funds | 600 Billion |
| Russia | Future Generations Fund | 357 Billion |
| Singapore | Temasek Holdings Pte. Ltd. | 330 Billion |
| Norway | Gov't Pension Fund | 312 Billion |
| Kuwait | Kuwait Investment Authority | 90 Billion |
| Australia | Australia Future Fund | 50 Billion |
The above list does not include the new funds that are being set-up by South Korea, India and some of the oil producing states that have large U.S. dollar surpluses. It is difficult to obtain information about these secretive Sovereign Wealth Funds because their foreign government owners do not want the American public to know about all of their U.S. dollar holdings. Norway is a huge oil exporter and their fund is relatively transparent. Their fund has grown from $90 Billion in 2002 to its current level. Their fund has over $60,000 per citizen in it which is a huge surplus that was accumulated in a short period of time.
The big Daddies of Sovereign Wealth Funds are China, Japan and Saudi Arabia. Saudi Arabia already owns over 30% of Citibank in New York, the world's largest bank. China has already stated that it is moving away from funding the U.S. Government, purchasing U.S. Treasury Notes, and will move into the stocks of American businesses. They recently invested $3 Billion in the Blackstone hedge fund IPO. China's currency reserves are building by more than $400 Billion per year. They want a foothold in the U.S. equity markets and they have now established it. They are now contemplating buying one of the Wall Street Investment Banking firms which would let them buy and sell whatever companies they wish.
Japan has been more secretive about where they plan to spend their U.S. dollars in this country as have Korea and India. China has more dollars and is more apt to flex their financial muscles sooner because they do not want to wind-up owning too much of the debt of the Federal Government. China made an unsuccessful attempt to buy Unocal Oil company in 2005. Dubai Ports World failed to buy control of a number of U.S. ports. Dubai/Islam just bought an aircraft repair company in the U.S.
We were warnedCan you imagine, even Warren Buffett has warned Americans? He said that running a $850 Billion trade deficit means we are effectively selling ourselves to our trading partners. Good boy Warren!! We told the readers that over a year ago. We stated that we are exporting our wealth to support our current excess consumption. Most economists have also forecasted this outcome but the ignorant and apathetic American public does not want to hear it. In order to comprehend American ignorance, one must realize that we still have some readers who think there are no problems with the trade deficit. Just look at the table above!
The efforts of Sugar Daddy, Frick and Frack to counteract the rigging of exchange rates by China, Japan and others have been fruitless. They should stand-up and tell the American public the truth. Foreigners own Trillions of U.S. dollars due to your worshipping Asian manufactured goods and gas guzzling vehicles that promote excessive oil imports. The trade deficit is putting $850 Billion per year in their hands. They now have the U.S. dollars and the right to come in here and buy up whatever companies, commodities, foodstuffs and other items they desire. You, the American consumers, gave them your money so now you have to accept the Free Trade fact of life that they are returning to buy control of the U.S. economy.
The new investment strategyOne of the unstated downsides of the Trade Deficit is the U.S. Money Markets and the Treasury Market for government securities. The U.S. Treasury market is already being hurt by the fact that foreign governments are pouring more money into the Sovereign Wealth Funds. Instead of keeping the funds in official reserves which are U.S. Federal Government notes, they are purchasing equity securities in the United States by way of their Sovereign Wealth Funds. This will reduce the demand for Treasury Notes and the American public will have to support their government by purchasing more government bonds. The fear of a stock market crash is temporarily supporting the bond market by holding down interest rates. Stocks are overvalued!!
The largest holders of Treasury bonds like the Chinese and Japanese are not likely to sell them but when they mature they will replace them with the common stocks of American companies. Stocks, commodities and real estate will become the preferred choice of investments for the Sovereign Wealth Funds. The Norway government fund recently changed the mix of its investments from 65% bonds and 35% stocks to 60% stocks and 40% bonds. They have an internal ethical problem because their investment rules do not permit them to invest in certain U.S. defense contractors. Other Sovereign Wealth Funds do not appear to have restrictions on their investments so these funds are free to purchase the stock of defense contractors or whatever American companies they wish.
Japan is on the verge of creating one of the world's largest Sovereign Wealth Funds because they have over $1.3 Trillion of U.S. currency reserves. Up to this point, they have kept their reserves in U.S. Government notes but their demand for higher returns is driving them to expand their Sovereign Wealth Fund into the common stocks of American companies. They already own numerous American companies.
The $850 Billion dollar U.S. Trade deficit per year is quietly re-entering this country to purchase control of U.S. companies. It will not take too many years before foreign investors own control of many American businesses. This was said this many years ago and many people scoffed at the notion. Some American fools today say we have always had a trade deficit so what does it matter. Just ask the CEO of Citibank. He goes to Saudi Arabia monthly to get direction from his largest stockholder. The temptation of most Americans is to default to simplicity because they do not spend their time on Macroeconomic analyses so they revert to quick solutions that are fed to them daily by the media. Macroeconomics is very complex!
The ultimate priceThe emergence of these Sovereign Wealth Funds is proof of our current horrendous trade deficit and the transfer of economic power to the Asian Big 4 and the Arabs. Foreigners have your money so they can and will purchase any American business they want. The Asians have now taken over the U.S. domestic auto industry so some think computers and software will be their next American industry takeover targets. When will they take-over the industry you work in? The ultimate price for exporting our wealth is the decline in our standard of living.
© 2008, This document is copyrighted by the Foundation For Fiscal Reform, Inc. and all rights are reserved.