Futurology

Continuing the argument about sovereign wealth funds, what might this portend for US Treasury securities?

If foreign governments pull the rug out, there could be a run on the dollar on a scale that the US government wouldn't dare correct with proportionately high interest rates, seeing how indebted everyone is. The doomsters are probably right that it could happen, which is why everybody will make sure it doesn't.

And such a fall wouldn't be in the interest of creditor nations who still value the trade surpluses they enjoy with Uncle Sam. Many Chinese light manufacturing industries are working on narrow margins and don't want to see their profits disappear through foreign exchange movements (though their State is sufficiently powerful and ruthless to go that way if it wants to). I suspect that China will continue to develop towards heavier industries and gradually allow the trainer-stitching work to go to even poorer countries like Vietnam. Meanwhile, it's in no hurry to kill the US cow while she's still giving milk.

So here's my bet:

1. For domestic political reasons, the US will not do what is needed to get the economy back on the level. It will continue to borrow but, fearful of its vulnerability to potentially unfriendly foreigners, lean on its friends for more finance.
2. The US Treasury securities held by China will remain much the same, or even gradually increase in dollar terms, but "ally nations" will increase their holdings proportionately faster. There's not much an emotionally or politically vulnerable British PM won't do for a pat on the back at G8 summits, Bilderberg tie-looseners etc. Goodness knows how much of our future has been sacrificed to the last one's ego.
3. Creditor nations will increase their sovereign wealth funds, favouring investments that are involved in the supply lines from their manufacturing concerns to our end purchasers. Marxism has moved on: you have to have control of the means of production, but even more so of the means of distribution.
4. They will also invest in the lines leading towards their industries: energy, industrial metals and infrastructure. I also guess China will explore healthcare, energy-efficiency, food-oriented genetic research and environmental protection. And water. And foreign farmland (Bill Bonner and Marc Faber are really smart). City planning in all its aspects could become really important.
5. If these countries were private investors, we'd be seeing their portfolios alter their balance between bonds and equities, in the direction of higher risk, higher returns. And like good long-term investors, they will get richer. Maybe eventually, as James Kynge says, demographics and healthcare will eat into this wealth, but it's not going to benefit the West much either way.
6. In the US and the UK, our collective concern will be how to handle the social disruption in our own societies; our concern as individuals will be how to save and invest while we still can, and how to set up our own children in relative security.

Place your bets

The Dow Jones Industrial Average closed yesterday at 13,785.07. Where will it go? Please see the survey on the right.

Here's an idea: the doomsters may be correct in their analysis, but wrong in their prognosis. If sovereign wealth funds continue to grow, we may see a new type of massive institutional investor, one that has no plans to retire or die. So ownership of American, British and other Western countries' businesses will shift to the East.

Initially, this will seem to make little difference, except that the markets may become better-supported against falls and may trend upwards, long-term (in currency terms; I'm not so sure about inflation-adjusted terms). But the dividends on foreign-owned shares will not accrue to the host countries, and so the US and UK will bleed from two wounds: trade deficits and accelerating loss of investment income.

If small businesses are eaten by big businesses, and big businesses have been taken over by sovereign wealth funds of other nations, the result for us may be not only economic impoverishment, but a form of slavery, since we will have lost control of our means of production. All we will have left is our labour, and in world terms, you and I are grossly overpaid. There is an developing Eastern middle class that can and will do everything better, faster, harder and cheaper than you. Many of them speak better English than the English.

Look at the businesses these sovereign wealth funds are going for. China: $3 bn for a 9.9% stake in giant US hedge fund Blackstone in May this year, and now (with Singapore) 10% of Barclays Bank (UK); Qatar: Sainsbury's (UK supermarket chain). These investments involve commercial property, finance and retail distribution. I've recently relayed James Kynge's statement that Chinese manufacturing only gets them 15% of the end price; now they're after the other 85%. I shouldn't be surprised if we start to see acquisitions in marketing and advertising firms, too.

What to do? I think:

• Work hard and earn as much as you can, while you can.
• Look after your health. Better not to get sick in the first place, than hope for "healthcare" to put Humpty Dumpty back together.
• Live simply and well within your means. Do you need a car? One that size?
• Pay off debts as fast as possible.
• Save and invest.

And if you have time and don't mind potential official surveillance and bullying, give your politicans earache about their incompetence, which is on a scale that to some might seem almost treacherous.

They are the masters now - or will be soon

The BBC Ten o' Clock News last night featured an article about China's purchase of a share in Barclays Bank. I have posted a video of part of Chris Mayer's speech at Vancouver (see below), where he discusses "sovereign wealth funds".

China, India and Japan have enormous surpluses of money from their trade. They have bought US Treasury securities (bonds, i.e. loans to the US), but this is a thing governments do to park money that they might need back in year or two, when the trading balance has altered. Since the US/UK (etc) trade deficits are long-running, these eastern countries can now start thinking like young private investors, in which case equities become attractive - offering income from dividends AND the potential for capital growth.

These countries are turning our debt into their ownership, like an old Punch cartoon where a plumber took his customer's house in payment for his work.

This issue is big.

Prohibition: Uncle Sam beat Eliot Ness

Don Boudreaux, of Cafe Hayek fame (see blogroll), writes that Prohibition ended, not because of popular demand, but because the US government was running short of tax money in the Depression.

It's an interesting theory. I have long thought that the UK government is more hooked on cigarettes than the smokers. If they really wanted to ban smoking, they'd start by cutting the tax, so as to wean themselves off financial dependence. But how would they replace the lost revenue?

Familar themes, and a sales pitch (not mine!)

This is NOT a recommendation, but you may be interested in the general trend of thinking it reveals: The Daily Reckoning features a sales spiel for a newsletter from Tim Price, which passes on pessimistic comment on the near future of the markets, and indicates four areas for investment:

"Portfolio insurance"
Infrastructure (e.g. roads, railways)
Gold
Oil

We are seeing these themes crop up again and again among the contrarians. Though I'm not quite sure what is meant by the first - unless it's futures and options, which make me nervous.

Chris Mayer at Vancouver, on China

"Daniel" has responded to an earlier post re rail revival, to say that Chris Mayer's speech at the Agora Financial symposium in Vancouver has now been put on YouTube. Here it is, with my thanks to Daniel:

Plunge Protection Team trying to keep precious metals low

An extraordinary (to me) comment by Michael Misunas, responding to Michael Panzner's post in Seeking Alpha today - do read it. He says that the US Government's "Plunge Protection Team" has not only punted huge sums into derivatives to support the stockmarket each time it falls significantly, but has recently been rigging the market against gold and silver.

Assuming that you can't buck the market forever, it looks like an opportunity to buy precious metals.