Propped Up

Story Highlights:

• A new mythology of fear has emerged this week: Foreign investment into US companies is propping up the markets.
• Capital from sovereign wealth funds (SWFs) and other forms of foreign investment into the US are not forms of charity, but the conduct of rational investors seeking opportunity.
• Foreign investment is a net positive and promotes more stable, dynamic capital markets.

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News that a few sovereign wealth funds (SWFs) have recently invested in big US Financials companies has given rise to a whole new mythology of fear. Namely, that Middle Eastern and Asian countries are "propping up" US markets. Without their bailing us out with repeated infusions of liquidity, our firms and markets would collapse.

This is ridiculous.

A few billion bucks from Dubai and China to help the short-term cash needs of a small number of US Financials' (such as China's purchase of about 10% of Morgan Stanley this week) is simply not enough to artificially prop up stock markets.

If your retort is, "It's not the fundamentals, it's the psychology," we don't buy that either. On the contrary, there's a great deal of skepticism and worry surrounding SWFs today. We see few signs of a "sigh of relief now that China has swooped in."

Let's keep things in perspective. $10 billion, $50 billion…even a few hundred billion worth of foreign investment aren't very much within a US economy with a market cap of many tens of trillions and annual GDP over $13 trillion. Also, it's worth noting that US interest in foreign assets is far, far more pervasive.

But it is true that countries which peg their currency to the dollar, like China, must often purchase dollar-denominated assets to maintain their peg. But that money isn't going into stocks—almost all of it is government-issued fixed income.

We'd posit that most foreign investment in the US—even from those countries with a dollar peg—isn't charity. Why is it so difficult to fathom that SWFs see a great opportunity!? This article rightly describes SWFs as opportunity seekers, not charity cases.

Great Wall Street of China
By Rick Carew, Laura Santini and James T. Areddy, The Wall Street Journal
https://www.wsj.com/articles/SB119805649734239175

As we argued in yesterday's commentary, "Strength from Weakness", all of this amounts to a net positive for the global economy reflecting orderly and stable capital markets.