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Sovereign Wealth Funds to the Rescue

Posted by Karl Deeter on 11 February 2008

Sovereign Wealth Funds were a topic of this blog last year and they are coming to general attention again. A Sovereign Wealth Fund or SWF are (for the most part) the surplus money that developing countries have, sometimes this is due (like in the middle east) to oil revenues, other times (like China) its from industrial output, but in any case it is a fund which is owned and controlled by a countries government, some people are quite sceptical of them claiming that they can interfere with markets on different levels even as far as being the cause of geopolitical risk .

Since last year many of the banks that should have gone out of business are still treading water thanks to these funds, they have been the healing salve to the wounds of the sub prime mortgage fiasco. Citibank and Merrill Lynch were both saved by SWF’s. (China and Abu Dhabi). Maybe this is a signal that capitalism is working but for some countries such as France they are an unwelcome guest, Sarkozy recently promised to protect France from their influence, however, to be fair none of them are looking to get involved with French companies.

SWF’s don’t operate like other monetary funds, they don’t really have to answer to anybody - with the exception of Norway’s Sovereign Wealth Fund, and that’s precisely what causes so much suspicion of them, they can be, and likely are, the ultimate Vulture Investors, they can ply cash into areas when the proverbial hits the fan, typically this is by bailing out companies who are distressed and with a stock price to reflect that, again, Citi and ML both had huge losses and were saved by SWF’s, in fact, Citi’s write off of 18 billion is the same size as the whole of AIB who are considered a big player in the Irish Market, it kind of puts things in a global perspective I suppose. Another issue is that Sovereign Wealth Funds are not regulated and they answer to nobody, if Jerome Kerviel can mess up to the tune of €5 billion before being caught out then imagine the damage a fund with twenty times that amount in liquid cash could do before it was fully realise the impact?

It has even become an issue in American politics, Hillary Clinton said it on the 15th of January ‘We need to have a lot more control over what they [SWF’s] do and how they do it’ reflecting perhaps the ongoing American concern over Arabs owning their ports and the Chinese owning their oil companies. On a separate note Barack Obama looks set to be the next president so in any case it will be his views that will matter the most in the long term. On one hand there is the fact that once a crisis passes that help from outside may no longer be fashionable or wanted and my personal guarantee says that at some stage there will be a backlash against some of the SWF’s. As well as that, the money is coming from the likes of China who don’t have a liberalised currency and that alone is an argument for shafting them out of it at some point in the future. I have no fear of this being actually read in China, not because its in English but because their idiot government also has very tight controls on the Internet and bans any site that doesn’t agree with them.

One thing that would ease concerns would be if there was some more transparency and some understanding behind what the Sovereign Wealth Funds are seeking long term, however they are not obliged to do that and the truth is why would they bother doing that if they don’t have to? What gives me a pained but wry smile is that the USA and Europe have been doing it for years and we never had to answer to these countries so I suspect that any call for greater transparency will be met with a ‘well you didn’t do it when it was your turn so neither will we’.

Filed under: International Finance - [Trackback] - Top Of Page

Things can only get better

Posted by Karl Deeter on 7 February 2008

Don’t be too unhappy, because although January was the worst stock market since the January of 1990, the S&P was down by 6.1% and the MSCI world index said goodbye to 7.7% of its value, markets in India and China are down (at one stage India actually had to suspend trading on their market), despite all of these things the good news is that bad times don’t last forever.

Market commentators sometimes remind me of psycho ex-girlfriends who just can’t let go, (if you want to see one of the old Internet comic phenomenons type ‘psycho ex-girlfriend into your search engine) they are the type where by the time they realise whats happened its like the whole world is falling and its never going to get any better, they’ll NEVER love anybody again! Keep the faith.

Around the world the reaction was indeed just that, a reaction, it was reactive to results and not pro-active. The fed held an emergency meeting and slashed 75 basis points off rates and then at a regular meeting they cut another 50 basis points. That was the biggest rate cut since 1990, a lot of the things that are happening are all pointing back towards 1990, performance and rates are just some of them (mortgage rates are not).

The GDP figures for January are (in the USA) 0.6%. This could be the sign of a stall in the economy, this is one of the dangers of ‘Stagflation’ which is where you have a stagnant or reducing GDP and at the same time you have inflation. The mortgage lenders and the sub-prime market may have helped to kick things off but a recession may now be the phoenix to rise from the flames of the mortgage mess, a fairly unwelcome burning bird by any measure.

Borrowers are still going to face ARM’s coming on stream, ARM means an ‘adjustable rate mortgage’ which is basically what we would call variable rates over here. In the USA the mortgage market works differently and all these people have yet to come off good value fixed rates onto the higher variables or ARM rates. This is part of what caused the mortgage melt-down to begin with. Even banks here are feeling the pinch PTsb have said that they had exposure to the American mortgage market issues as have Ulster Banks parent company RBS who lost in the hundreds of millions.

We could be about to witness the first negative GDP figure, and this means that we have entered a recession. I did a post at the start of the month called ‘one prediction you won’t want to hear for 2008′ and in it I said that I felt we were on the cusp of a recession and that we wouldn’t realise it until the end of quarter one, that is because monetary performance only comes out in hindsight, that was stated at the time, we are now getting close to telling whether I am a blithering idiot (which may be true irrespective of what the economy does) or a genius (a long shot even if I’m right).

Either way, non-farm payrolls came out at negative seventeen thousand, that hasn’t happened in over four years, granted those are figures from America but I adhere to the belief that the USA sneezes and Europe catches a cold.

The main thing is that I made a call and my actions reflected my belief, I went into cash for the first time in my adult life, no stocks. I hope that perhaps some of you readers followed this advice. If you didn’t and you lost the shirt off your back… well, just remember, you can make it back someday (maybe). I don’t necessarily know how, check out the Derren Brown system or something?

The average recession doesn’t even last a year, the average boom lasts five years, if you got stung just sit it out for a while and get planning for the five year good times, and soon may they arrive!

Filed under: General Financial News, Mortgages - [Trackback] - Top Of Page

Yipee! lets blow 44 Billion!… or should we say Yahoo?

Posted by Karl Deeter on 1 February 2008

Do you Yahoo? Statistically the answer is probably no, you don’t, but in a world of decreased market penetration for every search engine (other than the Ubersearcher Google) the megalith companies like Microsoft -who’s MSN (I won’t even ask ‘do you MSN’) is even lower on the scale - are looking for ways to corner a portion of the Internet search engine market, initially they thought that the success of Internet explorer over Netscape navigator was a big deal, in hindsight it wasn’t, ask people the difference between Mozilla and IE7 and expect a blank stare, except from the closet online gamers whom I seem to be meeting more and more recently.

Google came from nowhere and used a simple approach, they have an interface that could only have been dreamt up by Mac or …well…. Google, and it was a huge success. I lived in Chicago the first time I heard of Google, it was around the year 1999 or 2000 and I recall there was another search engine called ’snap’ or something that also impressed me, anyways, these years later Google is a monolith, I have no idea what happened to Snapfind or whatever it was called, and Google are (perhaps) becoming more like Microsoft than they had hoped for when they coined their corporate slogan ‘Don’t do Evil’.

This won’t stop Microsoft from trying to stay in the game by offering $45 billion (thats $45,000,000,000.00 - the long version is alwasy so much more impressive!) to procure Yahoo! who are so far down the chain that it really represents a desperate approach to consolidate all the losers in an effort to dethrone the champion. I suspect that if they succeed Yahoo! will be called MSYahoo! or some other ridiculous moniker, for instance we used to have NBC, good channel, then Microsoft bought it and it became MSNbc…. anyways, I deviate, the point is that the heat is on. Microsoft made an approach last year offering $43 per share, the most recent offer represents value of about $30 per share, granted its well shy of last years offer but its also about a 60+% gain on the current share price.

My earnest thoughts? Google are becoming kind of unpopular in the Internet community the same way Microsoft originally did, perhaps there is a third company out there who can provide honest, clear search and in a way that makes sense, lets be honest, Google don’t publish any of the rationale behind their search algorithm so I don’t, and never will understand why when I type ‘mortgages’ into Google that MoneyWeb and Fool.co.uk are the first two showing up, are they the most relevant? I don’t think they are but I didn’t write the rule book, where is my knight in shining armour? We need a new search engine, one that is government backed and that will never sell advertising, one with intelligent rules and stringent adherence to them.

This news actually caused Wall St. to finish up on a high note, thats how huge a deal it represents, I just can’t say that it means things will all end up ‘happily ever after’.

Filed under: General Financial News - [Trackback] - Top Of Page

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