Monday, January 21, 2008
World markets, US economy and our Wall Street jobs
LOOKING AHEAD by Wally Dobelis
The markets have stopped the plunge, with Chairman Ben Bernake’s reduction of 75 basis points in the Federal benchmark interest rate. The big banks have been bailed out by Sovereign Wealth Fund investors. Taxpayers will be given a $150B rebate in the spring, to stimulate purchasing. Does this mean the economy will be saved from a recession? Can the East Midtowners feel less stressed about their Wall Street jobs?
Not necessarily, but maybe a bit – economists do worry that the Fed, fighting recession, is fueling inflation, and that the rebate will be used by prudent people to repay debt, rather than stimulate spending. The day-to-day market price stabilization is thin – the highs are not the highest, the lows not the lowest, the ranks of the stocks that come up are shallow. A recession is technically defined as two consecutive quarters of markets prices down. This we have not had, but we are close. Retail numbers are low, but online sales are holding. The holiday retail sales were below expectations, but online sales are up 19%, not quite the 25% of 2006, but not far below the 20% that has been the average since 2002.
Now what about the banks being saved, to the tune of tens of billions of dollars, by the sovereign funds? In late December Merrill Lynch sold $5B new shares to Termasek Holdings, a fund owned by the Finance Department of the Singapore government, another 1.2 to Davis Selected Advisors, a $100B fund manager of Tucson AZ, and 1.3 B worth of its ML Capital to GE.
Citigroup turned over $7.5B of shares to Abu Dhabi Investment Authority, with another $6.8B going to the Government of Singapore Investment Corporation and more to the Kuwait investment Authority in January. The Singapores were already taking $9.7B of the UBS stock, while $5B of Morgan Stanley went to China Investment Corporation. Starting with Citic Securities in China taking $1B of Bear Stearns in fall, some $50B of sovereign fund capital has been invested in weakened US financial institutions. Banks worldwide have written down the value of mortgage backed investments by over $100B, with some fear among analysts that the figure might double in time.
What are these sovereign wealth funds? Well, over the years the oil producers and major exporter countries were content to let their surplus funds rest in US Treasury bonds, but with the weakening of US currency their interests have swung over to investments in banks, investment funds, private companies and real estate. Dr. Edwin M. Truman, a former Assistant Secretary of Treasury under Clinton, currently a Senior Fellow of the Peterson Institute of International Economics, has identified 20 major Sovereign Wealth Funds, ranking from UAE (Abu Dhabi) and thrifty Norway in the $300+B range, to Canada, Iran and New Zealand in the $10B area. Testifying before the US Senate Committee on Banking, Housing and Urban Affairs late last year, he noted that the foreign reserves abroad are in the over $5 Trillion (that’s 5,000 Billion) category – compare that to the US GDP of $12T. The 20 SWFs identified above alone hold $2T.
The SWFs are controlled by politicians as well as economists, and operate in political as well as in global trade interests ( the difference being that economists, for instance, will not recklessly sell off US Treasuries for fear of overall global consequences). These funds are growing, and not all are friendly to US interests. Russia, for instance, has foreign currency reserves of $475B, acquired in windfall profits in oil and gas trading, and we should expect that it will use its growing influence to maintain high oil prices throughout the world. The Mideast oil producers, although speaking of globalism, cannot be expected to surrender their economic might to stabilize the US economy. Their directors now joining the boards of the mightiest US financial institutions are bound to pursue high oil price policies, not in the interests of the world’s largest consumer economy.
There is an effort on part of the bankers to attract US and non-government controlled foreign funds to the continuing bailouts, with the aid of New Jersey’s public pension fund and T. Rowe Price and Capital Research mutual funds, a hedge fund in New York and private investors. Prince Al Walid bin Talal of Saudi Arabia and Sanford I. Weil, the top owners of Citigroup, were making additional personal investments in the latter. The NJ State $81B pension fund will invest $700M in Citigroup and Merrill Lynch. More investments are coming from TPG-Axon, a $9B fund run by a former Goldman executive, and Olayan Group, run by a Saudi investor and Merrill board member, and from Mizuho Financial Group, Japan’s second largest financial institution . It cannot be said that major investors have lost faith in the US institutions. On the other hand, nothing has been heard from NYS and California pension funds, prime powers in finance, and Citicorp’s tightening credit is counterproductive. Hmm…
The markets have stopped the plunge, with Chairman Ben Bernake’s reduction of 75 basis points in the Federal benchmark interest rate. The big banks have been bailed out by Sovereign Wealth Fund investors. Taxpayers will be given a $150B rebate in the spring, to stimulate purchasing. Does this mean the economy will be saved from a recession? Can the East Midtowners feel less stressed about their Wall Street jobs?
Not necessarily, but maybe a bit – economists do worry that the Fed, fighting recession, is fueling inflation, and that the rebate will be used by prudent people to repay debt, rather than stimulate spending. The day-to-day market price stabilization is thin – the highs are not the highest, the lows not the lowest, the ranks of the stocks that come up are shallow. A recession is technically defined as two consecutive quarters of markets prices down. This we have not had, but we are close. Retail numbers are low, but online sales are holding. The holiday retail sales were below expectations, but online sales are up 19%, not quite the 25% of 2006, but not far below the 20% that has been the average since 2002.
Now what about the banks being saved, to the tune of tens of billions of dollars, by the sovereign funds? In late December Merrill Lynch sold $5B new shares to Termasek Holdings, a fund owned by the Finance Department of the Singapore government, another 1.2 to Davis Selected Advisors, a $100B fund manager of Tucson AZ, and 1.3 B worth of its ML Capital to GE.
Citigroup turned over $7.5B of shares to Abu Dhabi Investment Authority, with another $6.8B going to the Government of Singapore Investment Corporation and more to the Kuwait investment Authority in January. The Singapores were already taking $9.7B of the UBS stock, while $5B of Morgan Stanley went to China Investment Corporation. Starting with Citic Securities in China taking $1B of Bear Stearns in fall, some $50B of sovereign fund capital has been invested in weakened US financial institutions. Banks worldwide have written down the value of mortgage backed investments by over $100B, with some fear among analysts that the figure might double in time.
What are these sovereign wealth funds? Well, over the years the oil producers and major exporter countries were content to let their surplus funds rest in US Treasury bonds, but with the weakening of US currency their interests have swung over to investments in banks, investment funds, private companies and real estate. Dr. Edwin M. Truman, a former Assistant Secretary of Treasury under Clinton, currently a Senior Fellow of the Peterson Institute of International Economics, has identified 20 major Sovereign Wealth Funds, ranking from UAE (Abu Dhabi) and thrifty Norway in the $300+B range, to Canada, Iran and New Zealand in the $10B area. Testifying before the US Senate Committee on Banking, Housing and Urban Affairs late last year, he noted that the foreign reserves abroad are in the over $5 Trillion (that’s 5,000 Billion) category – compare that to the US GDP of $12T. The 20 SWFs identified above alone hold $2T.
The SWFs are controlled by politicians as well as economists, and operate in political as well as in global trade interests ( the difference being that economists, for instance, will not recklessly sell off US Treasuries for fear of overall global consequences). These funds are growing, and not all are friendly to US interests. Russia, for instance, has foreign currency reserves of $475B, acquired in windfall profits in oil and gas trading, and we should expect that it will use its growing influence to maintain high oil prices throughout the world. The Mideast oil producers, although speaking of globalism, cannot be expected to surrender their economic might to stabilize the US economy. Their directors now joining the boards of the mightiest US financial institutions are bound to pursue high oil price policies, not in the interests of the world’s largest consumer economy.
There is an effort on part of the bankers to attract US and non-government controlled foreign funds to the continuing bailouts, with the aid of New Jersey’s public pension fund and T. Rowe Price and Capital Research mutual funds, a hedge fund in New York and private investors. Prince Al Walid bin Talal of Saudi Arabia and Sanford I. Weil, the top owners of Citigroup, were making additional personal investments in the latter. The NJ State $81B pension fund will invest $700M in Citigroup and Merrill Lynch. More investments are coming from TPG-Axon, a $9B fund run by a former Goldman executive, and Olayan Group, run by a Saudi investor and Merrill board member, and from Mizuho Financial Group, Japan’s second largest financial institution . It cannot be said that major investors have lost faith in the US institutions. On the other hand, nothing has been heard from NYS and California pension funds, prime powers in finance, and Citicorp’s tightening credit is counterproductive. Hmm…
# posted by Wally Dobelis @ 7:12 AM 
