I very much doubt it. There is too much oil and too few derivatives and anyone that is willing to be on the other side of a trade with an oil producer is an idiot, since they can adjust the price of oil and wipe you out.

One consequence of recent events is that it has caused companies to be more strongly associated with governments and this will have some interesting impact. The US government has bailed out GM, but there is no way at all that it will bail out Toyota or Nissan. Once GM gets money, then the US government will be rather upset of GM uses this to money plants to China or Mexico.

One other thing to note is that the US government is going to make a series of extremely crucial decisions in the next two months, namely what to do about the banks, and what to do about General Motors and Chrysler.

The constant statements that the US intends to continue with a private economy reminds me a lot of the Chinese leadership in 1978 insisting that the experiments in market economics and private ownership where just small scale experiments, and that they would be kept limited like a bird in a birdcage.

What is going to happen is that once some crucial decisions are made, this forces you to make other decisions until you get somewhere that you never intended.

If the Federal government decides to nationalize GM and the banks, it may eventually return them to private control, but it’s going to take some years before that happens. Right now, I sense that people are under the impression that the Federal government will maintain control of the banks and auto companies for a few months, and then privatize them, and this seems very unrealistic to me.

Once you get to the point where you see Federal ownership as a semi-long term situation (i.e. 3 to 5 years), then it becomes essential to set up an SWF structure rather than having things done ad-hoc.

I think in this situation saying that “China seeks” is not a good idea since the risks are spread among the different actors within China.

Having said that I think that the loans that are being made to the SOE’s are medium risk, at least from the point of view of the people making them. As debt obligations, they have to be paid before anyone else, and if the investments go bad, the SOE is forced to either pay for the loans from other operations or go bankrupt. The types of corporate expansions that the SOE seem to be wanted to undertake are standard variety corporate expansion activities that would be classified as medium risk in the West.

What would be considered high risk are either straight bets on commodity prices or high technology venture capital start ups. Neither of which I see the Chinese government doing much of.

Also in conversations I’ve had about the priorities for the Chinese financial system, there are three issues that always come up….

a) the need for more funding to small and medium enterprises,
b) the need for some mechanism similar to Silicon Valley venture capital to fund high risk high technology growth companies,
c) the need for some mechanism to encourage small and medium business growth in rural areas

One big problem in banking is that its relatively easy to make 2 US$1 billion loans, but really difficult to make 2 million US$1000 loans. As a result, SWF’s often have this bias toward funding (and over funding) large capital intensive enterprises, but an inability to find small businesses.

Chinese banks tend to be awful at lending to small businesses. So what has happened is that small manufacturing businesses in the coast get their money from overseas, partly through foreign direct investment, but more often through loans from ethnic Chinese through Hong Kong and Taiwan. This I think had two effects:

1) it increased exposure to international banking crises since the HK and Taiwan money came from investment banks, and

2) it biased investment toward exports, If you are a non-PRC investor, you just can’t easily invest in a small non-export factory in rural, central China, because there is no easy way you can convert the profits of that factory back to US dollars. If you are going to put money in something, it’s going to be a factory that you can make goods that you can exchange for dollars.

So the bias toward exports was as much a result of state non-policy as it was a result of state policy.

Usually the Middle East is more tuned in to Europe than we are, so I’m sure they see it coming too.

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While Rome Burns
http://www.frontlinethoughts.com/gateway.asp?ref=reprint

Brad, welcome back.

If there is any truth to the rumored size of European bank exposure to a crumbling economy in Eastern Europe, large parts of Europe could be on fire sale by this time next year. With euro sovereign bond issues failing, it looks like they may have much more trouble than the US in recapitalizing the euro economy. Then Trichet will be under real pressure to fix things up again the only way Central Banks know how.

So next year they may have a smorgasbord of things to pick thru, ranging from Spanish banks to Berlin office buildings, to maybe even whole countries like Luxembourg, or at least the post office.

But of course it would be wise to wait and look for signs of the global economy stabilizing and asset prices and currencies to stop falling.

So until then they can join the crowd in short term treasuries or US government insured commercial paper. Maybe even do a little carry trading in the 10 year to juice up returns a bit.

and in the past indian investor has called me a “sadist individual” and a few other things, no doubt hoping for reaction. most of these comments have been taken down as well. I don’t mind having my arguments challenged; in fact, i would be disappointed if there weren’t challenged. But the tone on this blog needs to be civil, and not personal.

now, we should discuss the content of rachel’s posts …

Rachel — agree that some risk seeking sov. investors have become conservative. but china now seems to be seeking risk again — or rather moving toward a bimodal portfolio of safe treasuries and potentially risky $ loans to Chinese SOEs looking to expand abroad, without much in the middle.

indeed, i suspect a host of sov. investors — not just the known (former) risk seekers in the gulf — took on a bit more risk in the first part of 07 (notably by dabbling in equities and non-SDR currencies like the Aussie dollar) and subsequently have gotten burned.

Great post. Learned alot. Two questions for you:

- My sense is that what were once important economic steam valves to release either currency or commodity pressure, SWFs might now become bets of last resort for maintaining adequate liquidity (or solvency in the case of Dubai)… if this is a fair assessment, how might it change the management? Will these governments become more attentive / take a more active interest?

- If not consumer goods, then what sort of recession proof investments do you foresee? I’ve long advocated soliciting SWF investment in US infrastructure, which by its nature, seems to carry less of the CFIUS-style risks that might trip SWF investment ( executing a surprise financial attack where infrastructure is concerned would seem to amount to blowing up a bridge or a dam; far more mutual destruction than simply pulling out of a massive holding overnight). The obvious problem with this is the liquidity point that you mentioned, but perhaps some of this could be mitigated through playing with the bond offerings? Or channeling it into an infrastructure fund — perhaps run by the IFC or some other intermediary– that could allow for a little more liquidity if / as needed.

- what sort of M&A activity with SWFs are you referring to? Does this portend more clubbing deals with some of the major pension and PE funds in the US?