The Rude Awakening
Reno, Nevada
Tuesday, July 3, 2007 ------------------------- - The super funds you never hear about,
- Spoon-feeding China's voracious appetite,
- Following the trail of money and plenty more…
------------------------- Eric Fry, reporting from Reno, Nevada…. A couple of days ago, your California editor rolled into Reno, Nevada, to attend his daughter's volleyball tournament. Volleyball isn't particularly big in Reno, except during the first week of July, when hundreds of girls and their families descend upon the town for a 6-day tournament. Your editor had never before passed through Reno, despite having traveled to nearby Lake Tahoe on numerous occasions. Before arriving, therefore, he had expected to find a kind of Las Vegas with pine trees and gold courses. Instead, he found a strip mall with slot machines. To be fair, the sky was blue, the sunsets were brilliant and the surrounding hillsides were beautiful. But the casino district was somewhat less than brilliant and beautiful. Up here in "America's Biggest Little City," it's hard to figure out exactly what turns the gears of commerce…other than spinning roulette wheels and whirling slot machines. Reno does not seem to possess any extensive industrial infrastructure, nor any obvious commercial attributes. Rather, it resembles a kind of neon ash trash, surrounded by leafy suburbs and impressive mountain ranges. The center of Reno features a number of tired casinos, bordered by pawnbrokers and lending establishments. A little farther out of town, billboards advertise entry-level homes from every one of the nation's leading homebuilders. As such, Reno features the essence of the modern American dream: Risk-taking, financed by reckless borrowing, secured by over-leveraged real estate. When all of this works, it works beautifully. Participants in this mass charade feel rich, bond yields languish near generational lows, share prices levitate near all-time highs, and collapsing real estate markets worry no one…except for the handful of worrywarts who sold their homes two years ago and spend their time fretting from the sidelines. Maybe the worrywarts are overly worried. Maybe the "Reno model" of capitalism can continue to flourish for another few decades. But risk-taking, debt and leverage would seem to provide a very curious foundation for prosperity, especially when so many other nations are pilling up massive currency reserves. China's government coffers, for example, are now brimming with more than $1 trillion. Meanwhile, hundreds of billions of dollars are piling up in governmental treasuries throughout Asia and the Middle East. These enormous "sovereign wealth funds" are beginning to exert a potent new influence over the global financial markets, and over the structure and destiny of global capitalism, as Chris Mayer explains below… --- The Agora Financial Reserve - Final 2 Days --- Find out how you can grab a free subscription to our newest $995 Energy & Scarcity Investor service AND lock in all our best investment ideas…for life. The Agora Financial Reserve is open for three more days. Details Here: The Agora Financial Reserve --------------------------------------------------- When Poor Countries Get Rich
By Chris Mayer "There is no precedent for such fortunes suddenly finding their way into global financial markets"
- The Economist, May 26, 2007 When you hear the phrase, "There is no precedent," you should sit up and take notice. As this world totters on its way to some veiled future, it is in such small phrases that you will find big clues as to where the trade winds of the market might blow next. In this case, your clue is the massive pool of money building in a way that has never happened before. It's bigger than the hedge fund industry - which makes so much noise and inspires so much comment. In total, these funds run into the trillions of dollars. Yet it is almost like a secret club. Few investors are even aware they exist. Traditionally, this money has been content to sit on low-risk, low-paying investments - like U.S. Treasuries. That is changing. And where this money is heading next could have a huge impact on market prices - and on your investments. "How and where this massive - and often secretively managed - pool of funds is deployed," opines the Financial Times, "will be one of the big investment themes of coming years." On May 21, China announced its intention to invest in Blackstone, a U.S. buyout firm. China has $1.2 trillion piled up in reserves. It is the flip side of the U.S. trade deficit, you might say. That pile of money grows by about $1 billion every day. Before May 21, China had been content to invest in highly liquid and "safe" investments - such as U.S. Treasury debt. Now, China let the world know that it would set aside about $300 billion this year to invest in things other than Treasuries. Stratfor, a consulting firm, adds this: "That amount represents the single largest pool of cash that any government has thrown at anything, ever. Adjusted for inflation, the U.S.'s largest effort, the Marshall Plan, comes in at just over $100 billion." China controls one of the world's largest stacks of foreign currency reserves. Yet there are other stacks of similar money out there - the excess foreign currency reserves of other foreign nations. Andrew Rozanov, writing in the scintillating journal Central Banking, named them sovereign wealth funds (SWFs). As Rozanov says: "These are neither traditional public pension funds nor reserve assets supporting national currencies, but a different type of entity altogether." Sovereign wealth funds control about $2.5 trillion in assets worldwide, compared with about $1.6 trillion in the hedge fund universe. And money continues to pour in. By some estimates, these funds could control $12 trillion in assets by 2015. Where did these enormous funds come from? Many of them were set up decades ago. But they've come on our radar only recently for three reasons, as pointed out by Rozanov: There are a lot of new ones coming online (such as China's); they are growing rapidly; and they are getting so large - on par with the largest public pension plans. Governments created many of them with surplus revenues from oil, gas and other natural resources. The UAE and Norway and Russia all got the bulk of their dough from oil. Chile's funds came from copper revenues. Even Botswana has a $5 billion fund (the Pula Fund) flush with the proceeds of diamond sales. Not all of them are commodity related. Singapore and Hong Kong are exceptions. So these governments are flush with cash and have set up sovereign wealth funds to invest the money. Today's unmistakable trend is to invest more and more of that money in private enterprise, stocks and real estate. Norway recently upped the amount it will invest in the stock market. In the past, about 40% was set aside for stocks. As of last month, it became 60%. Norway runs a giant $300 billion fund. That's a lot of buying power. Russia, India and others are also in the process of setting aside more money for riskier assets. As The Economist notes, "Sovereign wealth funds could soon become the most important buyers of such assets, and many others besides." Consider China. For China to put its money to work in the U.S., it would, says the Financial Times, "have to become the biggest player in the U.S. market." To put even 40% of its staggering fund to work, China "would have to buy more than 10% of the capitalization of the Dow Jones Industrial Average." Putting that kind of money to work could be politically impossible. After all, when China's CNOOC, a partially state-owned oil company, tried to buy Unocal, an American-based oil company, there was such resistance that CNOOC called it off. That may be why China's first purchase is in a private firm that does not own any "strategic" assets. Still, China's appetite for natural resources is extraordinary. Just last week, China deployed some of its cash horde to acquire exploration rights in the oil sands of Canada. China National Petroleum Corp., the parent of NYSE-listed Petrochina, paid the Province of Alberta for the rights to explore 104 square miles in the oil sands. Two years ago, this same state-owned oil company paid $4.2 billion to acquire PetroKazakhstan. Clearly, many of the powerbrokers in China believe that their country's growing currency reserves ought to be used to acquire vital supplies of natural resources. The flourishing Chinese economy desperately needs many other commodities - aluminum, steel, copper, grains, clean water and more. So it would not be surprising if China put some of its money to work in these areas. The Blackstone deal was just the first little spoonful behind an enormous appetite. Look for more headlines as China and these other giant sovereign wealth funds put their money to work in a history-making buying spree. -------------------------------------- Rude Endnote: Chris is just one of the experts on hand to track the global cash flow and, more importantly, help you redirect some of that into your own coffers. We've got blokes specializing in resources trading, options, value investing, small caps, tech stocks…you name it, we're there. When all this research is bundled up and offered for life, it's an opportunity worth investigating. You have two days to get in on the Agora Financial Reserve before the doors shut. All the details are here: Agora Financial Reserve - Final 2 Days! | 
