Investing, the Government Way

Governments around the world are pouring trillions into "Sovereign Wealth Funds” to gain exposure to capital markets.

Governments around the world have big reserves of cash. And now they're seeking returns on those assets previously just sitting in their coffers by putting the money in stocks, hedge funds, and all sorts of other capital markets goodies. These new funds, worth trillions in total, are called "Sovereign Wealth Funds" (SWF).

Sovereign Wealth Funds (SWF) became a hot topic recently as China established a $200-300B fund. This sparked concerns that nationalization of public corporations, financial protectionism, and government ownership of private companies for political, and not economic, reasons could lead the global market astray over time.

There's currently between $1.5 and $2.5 trillion in Sovereign Funds today globally, and $5.6 trillion in foreign reserves that could be placed into these same funds over time, totaling about 15% of global GDP. So, this isn't a small number--this is potentially a big thing.

The United States is pushing for capital account liberalization as an alternative to SWFs, potentially allowing private citizens rather than states to accumulate foreign assets.

Capitalism usually works better when private citizens and enterprises do the investing, but at least governments are funneling the cash back into the global economy and not into some new bureaucratic program. Many in the press are using this as another reason to be bearish on stocks...SWF's are going to take over the world! (gulp!) But what if we turned the issue on its head and saw the unfathomable in the situation? The truth is, SWF's are likely to keep demand for stocks high in the near term and put upward pressure on stock prices. That's a bullish thing.

As good capitalists here at MarketMinder, having the government do the investing isn't our first choice. We'd rather see it given back to the people in the form of tax cuts and other liberating measures. But we must admit, if the government must spend its money on something, better it be on private enterprise than some lumbering program.

For more on SWFs, here are some recent articles:

The World's Most Expensive Club
By Staff, The Economist

Warning Over Sovereign Wealth Funds
By Krishna Guha, The Financial Times

A $12 Trillion Monster Threatens Globalization

By William Pesek, Bloomberg

This Department of Treasury's press release on SWFs:

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*The content contained in this article represents only the opinions and viewpoints of the Fisher Investments editorial staff.