http://online.wsj.com/article/SB123246890427498251.html?mod=yahoo_hs&ru=yahoo

I assume you’ve seen this?: Crunch ‘cost Arabs $2.5 trillion’ [BBC].

Tried to post a few times earlier yesterday. Briefly, your analysis is very helpful, since it deflates the hype generated by investment banks (trying to stroke clients’ ego) and scaremongers (who believed that a short term move is a trend). However the analysis is og course vulnerable to your assumptions re asset/currency mix. Much could have happened in the past three years (the period when the GCC funds more or less doubled or tripled) by bad or good timing of sales and purchases, application of hedges, etc.

As to the remark about oil exporters (sensitive to the world business cycle) investing in equities (likewise), I think that matters are a lot more complicated than that. There was a time when bond prices and equities were positively correlated, and oil prices and bonds negatively, for instance. I think that the business cycles drives oil prices in the short term, and then oil prices act somewhat like a consumption tax. But no one knows what drives oil prices (there is no oil equivalent of things like the CAP for stocks), or at least there are no widely rspected theories as far as I know. We do know that anticyclical/antiinflationary monetary policy as widely practised would tend to aggravate the impact of rising oil prics in the short term, leading to equity expectations of lower profits and (somewhat later) lower interest rates. Since the interest rates and profit expectations are important, but opposing elements in the CAP, it depends what stocks do. Traditionally, stocks rally close to the bottom of a recession, before oil demand starts rising again and bond prices become iffy. Hence I am not so sure that an investor relying on an oil based revenue stream (and with ample liquidity and without investment constraints or designated liabilities) could do very well by having a strong equity component. With the benefit of hindsight, of course the GCCs (if your analysis is correct) should have underweighted equities before the end of 2007.. But as a general rule, I think that the very rough correlation of equity returns and oil revenues, does not rule out a successful equity strategy. Bond prices can also fluctuate quite a bit, and just imagine what a breakdown of China’s currency management strategy combined with reluctance to fight incipient inflation in the West (and absent the mortgage crisis), would have done for bond returns, even default-free ons.

People that make strategic investment decisions in SWF’s tend to come from the community of pension fund managers. Financial is quite international. People usually don’t care very much what nationality and religion a person is, and there are no differences in cultural outlook, that I can see between pension manager that is an Islamic Saudi and a Christian Peruvian.

Where there is a cultural need it can be satisfied. Western investment banks that deal with the middle east invariably have access to a staff of Islamic clerics that can issue legal opinions on the whether a financial structure is permissible under Sharia law. From the point of view of the bank, it’s just other compliance issue.

What makes a huge difference is not culture but compensation. If you reward people for making short term decisions and punish them for making long term decisions, that’s exactly what they will do, since if they won’t, they get fired.

The information that CIC has delivered has been interviews and press releases, and has generally been sourced attributed. CIC has been far more visible and available to the press than any other SWF that I know of. I don’t see how CIC hasn’t been involved in “real” disclosure.

Personally, I think that a good intense interview with the head of the SWF, contains far more useful information than financial numbers.

bsetser: And frankly i wouldn’t have half the trouble i do estimating china’s true foreign reserve growth (including the cash held by the CIC) if there was a data series on its size. i assume it now has $19b less than in sept b/c of ABC, but i cannot prove that .. and so on

ABC is unusually because it hasn’t been listed yet, but these transfers are in the annual reports. The other holdings of CIC are publicly listed so any major transfer of funds are reflected in securities filings.

It’s not in one place, and it takes some effort at collating the data, but there isn’t much about CIC that is opaque. Now when and if CIC starts investing money in 100 companies rather than 10, it will be much, much harder to track, and at that point, any complaints about CIC not being transparent will have much more teeth to them.

On the other hand, if CIC decides to be a financial state holding company rather than diversified SWF, then it’s going to be relatively easy to track holdings.

bsetser: and i rather suspect that if safe did a bit more public disclosure the state council wouldn’t have been surprised to learn it had $500b of agencies and we might be in a better place now, as there wouldn’t have been the huge over-reaction back into cash.

1) unless you have information I don’t, then I don’t think that the state council was surprised since everyone else in the world knew about agencies holdings, and

2) What did surprise everyone was that until last July GSE debt was viewed as Treasury equivalents. China can be faulted for making that mistake, but so did everyone else in the financial world.

In any event, Agencies aren’t Treasury equivalents now.

Agencies have become rather risky since Treasury’s guarantee extends only to $100 billion per GSE, and it’s very plausible that the losses in the GSE will exceed that. The GSE’s have about $2 trillion each outstanding which means that all you need to overwhelm the Treasury guarantee is a 5-10% default rate in prime mortgages which is quite plausible.

Right now if China dumps agencies there are a lot of people who are willing to buy them for a rather small risk spread. However it it doesn’t get out now, then it risks massive losses if something bad happens.

It’s the difference between a certain 10% loss, and a 10% chance of a 100% loss. Right now China is willing to take the former to avoid the latter, whereas there are lots of people right now that are willing to take the latter bet.

I ask the question because I judge that the people taking strategic decisions for the funds are long-sighted investors with an Islamic focus on outcomes rather than market fluctuations.

and i rather suspect that if safe did a bit more public disclosure the state council wouldn’t have been surprised to learn it had $500b of agencies and we might be in a better place now, as there wouldn’t have been the huge over-reaction back into cash.