Sovereign wealth funds
In this guest post, Manmohan Singh of the International Monetary Fund and Phil Prince of Pine River Capital Management argue that the use of longer-term securities as collateral for short-term borrowing should affect how central bankers think about “money”. All views expressed are of the authors only and do not represent the opinions of the IMF or Pine River Capital.
You know who doesn’t like a falling oil price? Sovereign wealth funds for countries dependent on high oil prices and in love with their (endangered) petrodollars. And a risk based on that dislike is a presumption of forced selling and equity market weakness becoming self-fulfilling as/ if oil prices slide. Stable oil prices means SWFs don’t have to suddenly liquidate but the opposite would also seem to be true… The last time JPM’s Flows & Liquidity team looked at this risk they based it on a fall in Brent to an average price of $45 per barrel. They now assume an average oil price of $40 for 2016 and also note that the “YTD average has already fallen to $42.”
The DAO is a decentralised autonomous organisation, which the cryptocurrency faithful believe could disrupt corporate structures forever. It is, to put it simply, a kind of crowd-funded investment fund. It’s only been going for over a month or so but in that time the DAO has already raised stacks of illiquid and variably priced Ether (ETH) coupons for funding its potential ventures — worth some $150m at the last count (or there about, because mark to market). The faithful say the DAO will solve the problem of how revenue can be generated within a purely decentralized environment, with its core supporters claiming it is superior to a normal corporation because all the decisions it makes are transparent and because, well, its finances can be audited by anyone, making corruption impossible.
Because if his Royal Highness the prince wants the world’s largest sovereign wealth fund — then who’s to say no? As for the Arab and Islamic depth, we have the Qiblah of Muslims. We have Medina. We have a very rich Islamic heritage. We have great Arab depth. The Arabian Peninsula forms the basis of Arabism. The kingdom constitutes a large part of it. That issue has not been exploited in full. We have a pioneer investment power at the level of the world. Today, you see that many statements are being made, including statements indicating that the Saudi Sovereign Fund will be the largest fund in the world by far, compared to the other funds. That will be the main engine for the whole world and not only the region. There will be no investment, movement or development in any region of the world without the vote of the Saudi Sovereign Fund.
Finance is the wrong business for people committed to the idea of objective truth. No asset is inherently worth anything, just some multiple of the income you think it will produce over time. Both the earnings forecast and the multiple can change at a moment’s notice — sometimes because the outlook for the future has genuinely changed, but often for other reasons.
FT Alphaville readers will not be strangers to the argument a ballooning petrodollar float over the last decade set alight an emerging market export feedback loop, one of dot comedy vendor-financing proportions. Or how encumbered petrodollars have played an important role in the counterintuitive side-effects of a drop in the price of oil. The analysts at Citi are on the case as well, calling it “Oilmageddon — death by circular reference”. Here’s the thrust of their argument set out in a note published Friday (our emphasis): It appears that four inter-linked phenomena are driving a negative feedback loop in the global economy and across financial markets: 1) stronger USD, 2) weaker oil/commodity prices, 3) weaker world trade/capital flows, eg petrodollars, and 4) weaker EM growth. This cycle then repeats.
It’s a Scottish lament for investors this morning as Aberdeen Asset Management reports another quarter of major outflows and Royal Bank of Scotland announces bilions in charges. FT Opening Quote, with commentary by City Editor Jonathan Guthrie, is your early Square Mile briefing. You can sign up for the full newsletter here.
The world is waking up to the petrodollar reversal issue… as well as its significant liquidity impact on EM countries (i.e. NOT oil exporters, but importers). This, as we’ve explained before, is down to the contraction of petrodollar base money in the global monetary system, which acted as a sort of unofficial float for a market-controlled an international fractional reserve system. There’s also a significant feedback loop connected to what we’ve previously described as the petrodollar vendor financing circle, wherein those who are long petrodollars extend duration by investing them in countries which redeploy them on growth projects, which create demand for commodities. Global growth-based commodity consumption, in this way, is underpinned by the availability of recycled petrodollars.
Some bullet points from JP Morgan’s Flows & Liquidity team to start the week. Signs of capitulation, as they put it, in the face of a slowing China, the CNY and its “depaluation”, the Fed, a liquidity vacuum etc: Retail investors were heavy sellers of equity funds for two consecutive weeks on extreme pessimism.
Markets: Asian stocks fell for a third day with industrial and health care companies retreating, trimming the biggest monthly advance on the regional benchmark index since January 2012, as fears mounted of the impending showdown in Washington over a possible US government shutdown. (Financial Times) (Bloomberg) (Reuters)
BlackBerry watchers see an uphill struggle || CIC Chinese fund buys 12% equity stake in Uralkali || Telefonica reaches deal to increase stake in Telecom Italia || JPMorgan faces US charges on mortgage-backed securities || A U.S. regulator filed lawsuits against Morgan Stanley || Citigroup to lay off around 1,000 people || Chrysler files for IPO || Apple sells more than 9m of its latest iPhones || Markets
Crédit Agricole appeared to post Q2 results early – and they beat, apparently || HSBC acknowledges US mortgage payout could cost $1.6bn || Sony rejected Daniel Loeb’s proposal || Standard Chartered took a $1 billion hit on the value of its Korean business || RBA cut its official rate to a record low || UK manufacturing bounces back || Private-equity firms are adding debt to companies they own to fund payouts to themselves at a record pace || CNOOC mulls $3bn dollar-bond || Indian rupee sank to a fresh record low || BP denied allegations it manipulated US natural gas prices in the aftermath of a 2008 hurricane || Neiman Marcus hired banks to work on an initial public offering || Markets wrap || FTAV’s latest
Asian stocks fall || Crédit Agricole reveals Q2 results early || HSBC’s US mortgage penalty may be $1.6bn || Sony rejects Loeb entertainment sale proposal; shares fall || Australia’s central bank cuts to 2.5% || BP denies manipulating US natgas prices after 2008 hurricane || On Jeff Bezos and the Washington Post || Analyst round-up of China debt views
China’s central bank assures financial markets || Flat Japanese consumer prices aid Kuroda || Investors pull $8.6bn from US bond funds || European leaders agreed on new steps to fight youth unemployment and promote lending to credit-starved small business on Thursday || Chinese wind-turbine maker indicted in US || Bank fees rise 9% despite dealmaking dip || Vatican cleric arrested in bank probe || China poised to name new head for $500bn wealth fund CIC || CVC attracts pledges of €14bn in six months || Markets wrap || FTAV’s latest
Japan’s economy grew at the fastest pace in a year last quarter || Lawyers for JPMorgan Chase have demanded that Bloomberg hand over data logs || Richemont chairman to take a break || IRS chief quits over Tea Party scandal || UK High Court rules Goldman Sachs tax deal lawful || Chinese FDI misses forecasts || RP Martin has removed its chief executive and an executive director from their posts || David Cameron is “open to all ideas” for returning RBS to private ownership || Platts fought an attempt to impose new regulations on world oil benchmarks last year || Spanish banks are bracing themselves for a fresh financial hit || Banks sue Lisbon over ‘toxic’ asset allegations || Brazil raised a record Rbn in its first auction of licences for oil exploration blocks || Warning over SWF opacity || Markets wrap || FTAV’s latest
Japan falls on bank forecasts || Japanese Q1 GDP beats forecasts || JP Morgan wants Bloomberg employee logs || RP Martin removes CEO and one director || Chinese FDI misses || Spanish banks brace for push on NPLs || Cameron ‘open to ideas’ on RBS || The few who set oil benchmarks
Surprise! Economists mostly failed to predict that the Reserve Bank of Australia would cut rates to a record low of 2.75 per cent at its monthly meeting today. Yep, lower than during the height of the financial crisis — another sign that we’re living in different times now.
By Theo Casey, marketcolor This might be best considered an addendum to Kate’s Politburo detective work on Friday which highlighted China’s changing attitude to growth (now maybe less important) and financial risk (now probably more important). It’s a piece of the China recovery puzzle we don’t look at enough.
Australia’s currency has become a different kind of creature in the past few years, moving from being mostly a commodity play to more of a safe haven. This has been something of a double-edged sword for the country’s monetary policymakers: it helped avoid a big inflationary spike as the mining investment boom was booming; but now that wave is close to peaking, the burdens of having a premium currency are becoming harder to bear.
We compared the Eurogroup to an EM crisis talking shop earlier. Well, selected quotes from Eurogroup Working Group conference call notes, from Reuters: “The (Cypriot) parliament is obviously too emotional and will not decide on anything, if Cyprus does not even feel that they can attend the call it is a big problem for us” “We have never seen this” “Markets believe that we will find a solution and that we will provide more money and this might not be the case” Sorry to EM crisis talking shops.