Tuesday, November 25, 2008

SWFs Stay Home While Helicopter Ben Takes Off

I love being right! I've been blogging that Asian institutional investors will increasingly focus on using their remaining reserves to shore up the economies of their home countries instead of investing in the West. Media reports are beginning to confirm this trend:

Sovereign wealth funds in the Gulf are switching their focus away from Western stock markets to shore up ailing economies in the Middle East and protect themselves from losses in the City and on Wall Street.

Investment funds in Kuwait, Qatar, Dubai and Abu Dhabi are understood to be changing their investment strategies after losing billions of dollars buying shares in Western companies. Several Gulf-based banks are being propped up with state investment. Local stock markets have collapsed and some funds are shifting their assets into local shares in an attempt to inject confidence.

Nationalism trumps modern portfolio theory. The coming bust in foreign direct investment into the West will be especially bad for the U.S. No foreign buyers for U.S. debt means that the only solution left for U.S. policymakers is inflation. They have not admitted this in so many words, but recent actions speak volumes:

Under the new mortgage program, the Fed will buy up to $100 billion of debt issued by government-sponsored mortgage enterprises Fannie Mae, Freddie Mac and the Federal Home Loan Banks. It will also buy up to $500 billion of mortgage securities backed by Fannie Mae, Freddie Mac, and Ginnie Mae.

The central bank also launched a $200 billion facility to support consumer finance, including student, auto, and credit card loans and loans backed by the federal Small Business Administration. This will lend to investors who hold securities backed by this debt.

The Fed's creation of $800B out of thin air is a huge step in devaluing the U.S. dollar against other currencies and real assets (like gold!). Helicopter Ben's printing press is running at full tilt.

Hmmm . . . how can I play this? Note the mention of credit to support SBA loans. If I take out a loan to expand the operations of Alfidi Capital, a couple of years' worth of inflation will whittle it down to nothing in real terms. Paying off a fixed amount of principal with devalued future dollars makes inflation a debtor's best friend. Thanks Helicopter Ben! I might as well head on down to my local SBA office and fill out a loan application ASAP.