Sovereign Wealth Funds Threat to United States Economy
Economics / Sovereign Wealth Funds Jan 16, 2008 - 09:34 AM GMTBy: Jim_Willie_CB
The Sovereign Wealth Fund (SWF) movement has begun to expand in a powerful manner, and will not go away. In fact, it will expand on a grand basis since foreign nations have had their fill of US Treasury Bonds, and see grand risks ahead for any US$-based investments.
The SWF fund movement is intended to pursue the two prime commodities, GOLD & CRUDE OIL, the premier financial anchor and commercial fuel in the increasingly upside down world. Several stories have emerged, on Chinese and Arab managed funds purchasing giant equity stakes on cash infusions for large crippled US banks. Regard the movement as creditor receivership in stages, as the mammoth credit masters for the US Economy over the last 30 years are slowly taking over in stages major US corporations, the latest stage focused upon bank bailouts. In the past few months, a total of $60 billion has been poured into the Western big banks, more with each passing week seemingly.
Rather than to permit the banks to go bust with grotesque messy embarrassing bankruptcies, the creditor (benefactors) have dispatched grand sums of billion$ to fill cash coffers, in exchange for large stakes in their capital structures. This is NOT capital infusion, but rather capital extraction. The US banks has sold stakes to foreigners for cash, relinquishing some control in the process.
Step back to see that the SWF fund phenomenon has three major effects. 1) They are vehicles used to gain more control of US corporations. Investments are not handouts, but rather purchases of greater controlling interest. 2) They are agents to continue the powerful commodity bull market. Their new strategies tilt in favor of energy, metals, in all forms, acquisitions of entire companies, commodity stockpiles, and futures contracts. 3) They have become oppositional forces against central banks, which have systematically abused powers to interfere with free markets. The hundreds of billion$ in the SWF coffers renders them major players in whatever market they participate.
They have supplanted hedge funds as the big private players, ever since hedge funds choked on large plates of subprime slime cuisine. The SWF funds are probably purchasing gold bullion far more than is publicized. They are mostly run in secrecy. USGovt officials actually believe they have the right to know how foreigners invest their savings, an incredibly arrogant notion. They fear opposition to the failing paper game. Perhaps the Manhattan Made Men believe their cartel activities are their business, but foreign savings are also their business. A tax on their air is next, the trouble being it carries a horrid stench.
FOREIGN FUNDS FLEX MUSCLES
The rest of this decade will see powerful displays of Sovereign Wealth Fund, as they form dynamic formidable investors. Morgan Stanley chief currency economist Stephen Jen said of emerging market economies as a major source of capital flows, “[They are] a watershed in the balance of world economic power. [These funds] have been particularly active with financial active with financial institutions in the developed world, which they broadly consider as strategically important. In our view, this is not a fad but the beginning of a long-term trend, as the sovereign wealth fund will form the most powerful new category of investors in the world, with Japan likely the next new member.” In my view, the SWF funds have the potential to resist Western central banks and their manipulative behavior intended to prop up the US Dollar and US Treasury Bond.
SWF funds also can oppose cartel efforts to suppress gold. Lately, not much secrecy has been shown. The birth and growth of the SWF fund movement represents the flip side to the US hemorrhage of debt and inflation export. Collectively, McKinsey Global Institute estimates these new so-called Power Brokers held between $6.5 and $6.9 trillion at yearend 2006, one year ago. By 2012 they are estimated to hold $11 trillion, growing by $700 billion per year, or $2 billion per day. They serve as a dynamic force have to date invested in companies, property, natural resources, as well as investment vehicles. As commodity supplies become more scarce and supply lines become more vulnerable, the SWF funds work to secure national interests, securing supply lines, from the young energetic emerging economies, not the old strained developed economies.
In the 1990 decade, and early 2000 decade, hedge funds flexed their muscles, demonstrated their power, and earned both respect and animosity. Hedge funds have been blamed for several effects, like pushing up crude oil prices via speculation, even aiding and abetting the mortgage finance bubble. They grew in size to 9000 funds controlling $1.6 trillion in total. They stand first in line for carnage, having taken huge losses in the mortgage bond and Collateralized Debt Obligation (CDO) bond debacle. Most have suffered losses, while the great minority of smarter ones have profited on the opposite side of trades. In the process, hedge funds generally have lost a great deal of collective power, in a tarnished image. Meanwhile, the SWF funds have taken over as the prominent funds in the news, making their presence felt. In their arena, being entities connected and funded by major governments, they are huge in size. The SWF funds are the sharks operating in the ocean of liquidity, much fewer in number than the thousands of hedge fund minnows. Many hedge funds are over $1 billion in size though.
ONE COULD CONCLUDE THAT FOREIGN INSTITUTIONS HAVE BEGUN TO SHUN US$-BASED BONDS. CENTRAL BANKS ARE INCREASINGLY TURNING TO SOVEREIGN WEALTH FUNDS AS PROFITABLE INVESTMENT VEHICLES. SWF FUNDS ENABLE A CHANGE IN COURSE, ONE WHICH THREATENS US BANKERS TO THE EXTREME. UK BONDS ARE IN THE SAME SEWER PIPE AS THE US BONDS. AFTER SWF FUNDS BUY UP BIG SLICES OF US BANKS, THEY CAN PURCHASE GOLD FREELY AND PULL THE DOG CHOKER ON US BANKERS IF NEED BE, RESTRAINING THEM.
BAILOUTS WREST CONTROL
As the US Dollar has suffered valuation losses versus almost every currency, US$-based assets have grown more attractive. Only to those already deeply involved up to their necks, in danger of losing not only big money but their reputations. Imagine the specter of big Arab sheiks participating in bankruptcy courts! They don't have shareholders, but they do have pride! The Abu Dhabi Authority captured the most news with their $7.5 billion investment in Citigroup. The biggest transactions were the $8.5 billion acquisition by Toronto Dominion for Commerce Bancorp of New Jersey. Then there was the $8.1 billion buyout by Nokia Oyj (telecom firm in Finland ) for Navteq of Chicago. Temasek of Singapore will invest $4.4 billion in Merrill Lynch. The Chinese Investment Corp will send $5 billion to Morgan Stanley. UBS is taking $1.73 billion from a Saudi, a month after bringing in $10 billion from a second Singaporean SWF fund. Bear Stearns is also on the receiving end from a Chinese firm, or selling end, just plain bleeding end.
By this time next year, expect another 20 such mega-$B investments in what must be regarded as a capital hemorrhage. It is funny that the Dubai Ports World deal was nixed 18 months ago, when it would now probably be welcomed. The US bank situation has changed the landscape, where desperation colors the deals more favorably. No longer is the United States turning inward, protecting itself from outsiders, and practicing jingoism. Distrust and xenophobia have given way to tin cup efforts on the global circuit. The transition from hegemon bully to beggar will take time, quite the adjustment. Some corporate psychologist staffs will be working overtime. Having a military does have its advantages. So does having a truly mindless consumer mindset among its millions of swarthy natives.
Numerous other smaller merger & acquisition (M&A) deals do not make headlines, but they add up. An odd one caught my eye, with a Turkish fund coming to agreement on a buyout of Godiva chocolate maker of New Jersey for $850 million. JPMorgan has brokered many such M&A deals last year totaling $36.4 billion, edging out Goldman Sachs with a $35.3 billion total. Foreign firms accounted for $105.3 billion of the $230.5 billion in purchases of US businesses. American businesses are up for sale, whereas up to now mainly USGovt officials and legislators have been up for sale. Controversy is certain to come with some deals. One might have expected more resistance to the Dubai purchase of a significant stake in the Nasdaq Stock Market, which in early January won approval by the Committee on Foreign Investment in the US (CFIUS). In the past year or more, other deals outside the financial sector were involved. The $9.5 billion deal by Kuwait Petroleum for a 50% stake in the Dow Chemical plastics business, and the $11 billion deal by Saudi Arabian Sabic for the General Electric plastics business, were prominent.
These guys in Wall Street make me want to puke. They make money in good times in straight business, but they make bad times worse with their fraud. During national elections, they finagle indexes and make money there too. See the 2006 midterm US elections and the alteration of the GSCommodity Index weight for gasoline from 9% to 2%, sparking a major selloff going into the November voting period. They make money with insider information on Plunge Protection Team maneuvers to intervene on markets. They made money in selling Initial Public Offerings for major Chinese banks in 2006, like ICBC bank, on sweet deals undoubtedly laced with scummy reciprocation among government officials. Now they make money in brokering deals to sell off American corporation interests. Such is the nature of the Fascist Business Model, loaded with corruption, cronyism, inefficiency, influence peddling, and unprosecuted fraud, eventually leading to a transformation of the political system toward totalitarianism. By the way, those who doubt such a path are challenged to find a single exception in modern history.
CITIGROUP OBITUARY IN DISGUISE
The Citigroup obituary continues. The worst earnings report ever detailed a $9.83 billion loss, amounting to a $1.99 per share loss in Q4. Only 4200 job cuts were formally announced, but 17k to 24k eventual total jobs cuts are expected. Their statement said, “the Q4 reserve for job cuts is a down payment” while “the first stage in head count reduction” described the initial job cuts. They admitted a divestment of more core assets, citing attention needed to the balance sheet, risk management, and expense control.
They have cited $17.4 billion in writedowns to date, including over $1 billion in credit cards, which comprise 5.5% of their loan portfolio. The credit card loss is a dire signal. Citigroup also suffered a debt downgrade, with a negative outlook given. Art Cashin of UBS from the NYSE floor, always colorful with a phrase, said “Citi wrote off not only the kitchen sink, but the entire kitchen.” They cut their dividend by 41%, in direct violation to a public stated pledge. They expect another 14% decline in housing prices, no doubt the most honest forecast on housing on Wall Street! This saga casts a grand insult to the legacy of outgoing CEO Sandy Weill.
A bankruptcy comes of a magnitude never seen before in US bank sector history, a grand failure. Citigroup would do well to beat the courts to the punch, restructuring before a bankruptcy court takes on that duty. Their statement on Tuesday contained no mention of pending lawsuits of multiple variety, an innocent omission. With tin cup in hand, Citigroup is touring Asia and the Middle East , seeking $14.5 billion in cash as it plans to sell more capital. They want money from guys who earn it, as opposed to printing it or defrauding for it. Good tidings, the tour was a success! In exchange for convertible preferred shares, the funds are coming from a Singapore fund, the Kuwait Investment Authority, Saudi Prince Alwaleed, hedge fund Capital Research & Mgmt, the state of New Jersey , and former CEO Sandy Weill.
CITIGROUP IS THE FOCAL POINT FOR THE REQUIRED MONETARY STIMULUS THAT WILL TAKE GOLD WELL PAST $1000 AND TOWARD $1500 IN PRICE. It is an ugly microcosm of the catastrophe. Their bailout is sure to spill over. What ails Citigroup is the housing crisis, the mortgage debacle, exhausted consumers, and the imminent USEconomic recession. The enlightened are well aware of the recession showing its sharp fangs since summer. One must be dumber than a dairy cow to believe the USGovt statistics nowadays. The banking policies and stimulus packages are intended to prevent a recession with Gross Domestic Product decline of worse than MINUS 4%, since the 4% figure is the size of the lie from gimmicks to lift the official GDP figure.
Additionally, Merrill Lynch just announced a $6.6 billion sale of preferred stock to a group that included the Kuwait Investment Authority, the Korean Investment Group, and a unit of the Japanese Mizuho Financial Group. Merrill Lynch is expected to post a $15 billion loss this week. In these deals, cash comes in, stock is diluted, capital is forfeited to foreigners, while corporate core is enhanced. THESE ARE NOT CAPITAL INJECTIONS. Then there is Canadian Imperial Bank of Commerce (CIBC), announcing a $2.5 billion loss. It plans to seek C$2.75 billion in stock sales to rebuild its corporate core.
A NEW SAUDI SOVEREIGN FUND
In this spirit, against this backdrop, the Saudis do not want to be eclipsed by the $200 billion Abu Dhabi sovereign wealth fund in the news. The Saudis plan to launch a SWF fund expected to dwarf the Abu Dhabi fund and become the world's largest. Once more, the media tells the story backwards. The Financial Times of London mentioned the wave of Asian and Middle Eastern money, “playing an active role in channeling capital to Western companies, particularly financial companies hard hit by the US mortgage meltdown.” NO! They are channeling cash as they buy capital stakes, and equity stakes. CAPITAL IS SENT TO FOREIGN HANDS. It is ironic that the center of 20th Century capitalism neither comprehends what capital is, nor practices much free market capitalism anymore. The Saudi Arabian Public Investment Fund is expected to lead the effort to establish the new SWF. Very likely, a large number of Saudi royal family members from numerous branches are to contribute to a monolith SWF fund. Their wealth is scattered widely in myriad funds.
King Abdullah has embarked on an ambitious initiative of infrastructure projects, expanding the budget and projects scheduled for 2008. So the Arab leaning toward private equity firms and hedge funds has shifted weight toward bailouts of beleaguered insolvent US banks. Going across the grain has been local infrastructure investment inside Saudi Arabia . One should note that the Saudis are doing what the United States refuses to do, invest in its own massive internal structure, one in far worse state of deterioration than the Saudi's. Then again, the US is on the fast track to Third World status.
The recent follow through on the Saudi SWF fund came in the form of criticism by the chief economist of the National Commercial Bank, the kingdom's biggest state bank. Said al-Shaikh has urged the Riyadh leaders to reduce the USDollar exposure of their invested assets. He pushes for both a managed fund and a break of the US $ peg to the Saudi riyal, directly citing both risk of loss from US$-based assets and risk of erosion in real terms from price inflation tied to the US $ peg itself.
The tightly held peg has kept the front door of the House of Saud wide open to permit rampant price inflation to rush in. The economist said, “Time has come to reconsider the continued pegging of the Saudi riyal to USDollar, provided that this is done gradually, taking into account the unfavorable impact on official reserves, which are mostly denominated in dollars. [The government should set up a SWF fund] to increase the returns on investment of most government surpluses, which are currently invested in USTreasury Bonds. [The kingdom should] diversify government investment across all asset types, countries, and different currencies, to reduce risks and increase profitability... The continued weakness of the dollar and declining interest rates would shrink returns achieved by these investments. With the continuing rise of inflation rates, the real returns may become less and even risk dwindling.” These are strong words stated by the top economist at the top bank in Saudi Arabia .
He is setting the ideological foundation for greater diversification by Saudi investment managers, like for gold.
Several Saudi officials, such as the finance minister and central bank governor, actually claim that the US $ peg is the cornerstone of economic stability. That was yesterday; this is today. The US $ peg has been the EXACT OPPOSITE, ushering in massive price inflation. Last week, King Abdullah stressed that economic growth must be consistent with efforts to protect against price inflation. A compromise is being floated, whereby they keep intact the US $ peg, but they order an upward revaluation in the riyal currency versus the USDollar. The defacto PetroDollar standard continues to be at huge risk. If the Saudis break, look for a quantum drop in the USDollar valuation across broad currency exchange rates. They are under pressure, pretending to be best buddies with the Infidels.
CHINA & AUSTRALIA
The situation in China requires a note. The State Admin of Foreign Exchange (SAFE) director Hu Xiaolian warns about continued USFed rate cuts, saying “ If the US federal funds rate continues to fall, this will certainly have a harmful effect on the USDollar exchange rate and the international currency system. [However,] the USDollar's dominant position in international currency markets is unlikely to change in the near term.” The Chinese have steadily commented that the falling world reserve currency motivated the sale of some US$ assets. They urge the investment shift back to Asia or elsewhere in search of better returns. The Chinese economy posted a November trade surplus of $26.28 billion, down from $27.1 billion in October. The surplus is up 52% for the first eleven months, on an annual basis. Exports grew at 22.8% from last Nov2006, while imports grew at 25.3% from a year ago. The faster rate of imports testifies to generating domestic demand, still inadequate to weather a Western economy slowdown.
Some financial analysts call the entire Chinese bank system worse than any subprime problem. At a Wharton forum in 2005, the Citigroup Chairman for their Chinese subsidiary assessed, “The four major state owned banks in China are technically insolvent. They have weak governance, bureaucratic cultures, and staggering levels of non-performing loans.” In 24 months since its successful $22 billion Initial Public Offering, the largest IPO in history, ICBC bank has a market capitalization higher than Citigroup ($120 billion).
Chinese major banks have an estimated 40% to 60% non-performing loans on their books, earning a Moodys ‘E+' debt rating, near the bottom of barrel. Their exposure to US subprime slime loans is a mere $13.5 billion, according to Moodys. The state owned enterprises provide funding massive projects for infrastructure and factories, compiling 65% of loan volume but accounting only for 25% of the national gross domestic economy. Their banks suffer from chronic corruption, lack of qualified staff, and credit management problems. Regardless, many Western firms pitch in for investment stakes, viewed as options on Chinese growth. Their leaders hope to grow their way out of any significant ball & chain debt problems. ICBC grew earnings by 62%, and the Bank of China grew earnings by 52%, each in the first half of 2007. A pattern is seen of papering over non-performing loans (NPL) using equity stakes taken by foreigners. Although Chinese banks such as ICBC claim the NPL ratio has fallen from 34% to 4%, Moodys points out how ledger item reshuffling is their answer, as they merely mosey NPL loans to the ‘Special Mention' column in a shell game akin to US shady accounting.
Chinese credit growth in the first eight months of 2007 matched the entire 2006 year. Loans to the Chinese private sector and non-financial government enterprises run at 160% of Chinese GDP, which is kind of big. If a recession hits China , their banking system could enter a downward spiral with momentum. Nicholas Vardy of The Global Guru said, “A back-of-the-envelope calculation shows that much of China 's $1.3 trillion in reserves could be eaten up by banking bailouts.” Experts believe China will require another 15 to 20 years to mature in its banking system. Vardy calls Chinese banks the #1 global subprime problem.
China is not only the #1 minerals customer for Australia , but its 4th largest foreign investor with A$42 billion in projects.
China 's biggest iron ore trader Sinosteel has bid A$1.2 billion for Perth-based Midwest Corp in what would be the premier buyout by a Chinese firm of a metals company. A lower bid was in place by Murchison Metals, a company backed by Japanese and Korean rivals. Australians are on the defensive politically. Barnaby Joyce said, “If an Australian company tried to become involved in a key aspect of the Chinese economy, the Chinese would block it.” Joyce urges the Aussie Foreign Investment Review Board (akin to CFIUS) to intervene if a Chinese state owned attempted to acquire any Aussie assets.
China regards Australia as very attractive for supply source, since it is politically stable, has plentiful resources, and has proximity to China . The shipping costs paid by China are $50 less per metric tonne for iron, compared with costs to ship from Brazil . Deals continue at a steady clip. Anshan Iron & Steel entered a joint venture with Gindalbie Metals for A$1.8 billion on two iron ore projects. Citic Pacific is investing A$5.2 billion in an iron project. Aluminum Corp of China will soon embark on a A$3 billion deal with aboriginal groups in a bauxite mine and refinery. Lastly, a deal between Yilgarn Infrastructure Ltd of Australia and five Chinese companies is worth A$3 billion to develop a railway line and ocean port facilities to ship iron ore. Yilgarn chairman John Saunders said, “ China is no longer interested in just being a buyer. They want to control the means of production and the transportation infrastructure.”
China will continue to press onward with commodity investments. The year 2008 will mark China as the #1 gold producer, now that South Africa has fallen significantly in gold output. Soon, the Chinese government will likely purchase all of its national gold output, just like Russia . A conclusion comes to mind: CHINA IS THE PREMIER CAPITALIST NOWADAYS, as the US crackpots suffer the losing fate of their lunatic financial engineering, chronic inflation, counter-productive emphasis on war, and mindless economic policies. BUT, China has banking challenges extending to its rapid industrial expansion. The handing of the baton from the US to China will not be smooth. The music in the background is “Glory Days” by the boss Bruce Springsteen, played for GOLD and its numerous investment trombones.
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