Money Sage (archive)

In a very general sense, we would regard the sovereign wealth funds' sizable cash infusions into our ailing banking system as one element in what we have termed "Bailout by Bits and Pieces." (See our essay under that title for more data). The substantial investments these funds have made -- and are continuing to make -- raise one interesting question. That question is: WHY?

Clearly, few of the super-savvy among American investors have acted on the repeated insistence in the financial media that bank stocks are a great buy, that this is where a lot of "smart money" is going, that these stocks possess the greatest rebound potential of them all. Insofar as we know, Berkshire Hathaway has NOT increased pre-existing stakes in any of the ailing bank stocks, apart from Wells Fargo, which is perhaps the least ailing of the lot. Nor have we heard any ringing announcements from the richest and savviest university endowment funds, or from other skilled, major institutional players in the American markets. At best, many of these non-participants are maintaining a stance of watchful waiting. What are they watching, and what are they waiting for? Oh, well, we bet you can guess.

Those who have sallied forth courageously into the fray are another stripe of financial animal. These are, of course, the sovereign wealth funds of countries like Abu Dhabi, Qatar, Singapore. What can we say about them and their motivations? The Persian Gulf oil producing states have a compelling self-interest in shoring up their financially weakening superpower protector. These militarily weak, immensely rich states are sitting ducks. Without the continuing protection of their American Big Brother they are little more than raw meat, easily consumed by predatory neighbors and predatory non-neighbors alike. Their vast wealth could disappear in a flash, along with their independence and, perhaps, their lives. The rulers of these countries are presumably aware of the financial damage to America of the Iraq adventure, and are mindful of public frustration with the costs of same. These costs would be even more difficult for the U.S. to tolerate if the lives of ordinary Americans deteriorate further in material quality. Consequently, there is no financial price too high for the Gulf states to pay in order to prevent a serious and/or prolonged American economic weakening.

As for Singapore, it is our understanding that the Singapore economy has CONTRACTED by around 5% in the latest quarter. This is a degree of contraction the American economy HAS NOT experienced since the 1937-1938 recession. It is clear to the clever folk who run Singapore that worse -- much worse -- is in store for them if the American economy continues to deteriorate. Ergo the imperative of doing whatever they reasonably can to shore us up. The focus of these efforts is, of course, on the point of greatest vulnerability, the fulcrum of our economy, the big banks.

The decisive point about the sovereign wealth funds, we think, is pretty obvious. They are SOVEREIGN. They are, in other words, extensions of their respective governments. They are owned and, ultimately, controlled by the rulers of their respective countries. Now, leaving aside the issue of their record as investors -- which in the case of Temasek, the Singapore investment fund, is very good -- it is important to bear in mind that states formulate policies and take actions in accordance with their perception of what is in their political and national self-interest. In the course of such decision-making and financial provisioning for same, issues of financial and economic gain may contra-indicate such policies they may come to adopt. (Our own country's Iraq policy comes to mind in this regard. The question here being: what are we getting for our TRILLION DOLLAR investment?)

When viewed from this perspective, the willingness of the militarily feeble Persian Gulf oil-producing states to spend multiple billions to shore up the American banking system possesses a rationality no financial/investment analysis would endorse (in our humble view). As for Singapore, the current economic sitation there demonstrates rather graphically, we think, the ILLUSORY nature of the contention that Asia has "decoupled" from the U.S., that for the Asian economies it is up, up, and away, irrespective of the state of the American economy.

Moneysage 2008 ©