Dear Active Rainers:
A friend of mine, John in Oregon, read my recent blog on Soverign Fund investment activity in the U.S., and sent his take on the matter. All of the following is a direct quote without any additions or admissions from me to the editorial content.
Bill Cherry
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The capital markets are a never ending sources of fascination. They work differently in different places.
In Europe - the great banks were the center of capital- with weak capital markets, representing private wealth. Europe is still only now coming into its own after recovery from the great wars of the last century. The common market is breaking up some of these national concentration of capital. We are seeing London going back to a status as a premier source of world capital. The human capital necessary to sustain capital markets does not exist in much of Europe.
In Asia, groups of major corporations also had a bank at the center -- In japan and Korea. These industrial groups took risks that private markets were unable to fund or handle. The elite groups went to the same schools and intermarried. The result are ties that in this country would be illegal. The government itself has sponsored these groups and promoted types of preferred industrial activity - cars and electronics in Japan.
In Japan private savings are still held largely in the postal banks rather than invested in the stock market. 10 years of a down market will do that.
The sovereign funds are hardly new. But they are being used in a new way. China without a recent capitalist tradition could have been predicted to adopt the Japanese model of development-- but there were no large banks, no great corporations to work with. The same in Singapore and most of the mideast. Instead you have state owned businesses, small capital markets, little private savings. And you had western investors wanting government guarantees on their investment.
What is unique though is what these sovereign funds are investing in. The Japanese were happy to buy trophy buildings. golf courses and Hawaii and West Coast real estate of all sorts. They went bust.
The new sovereign funds may have learned from the Japanese. Buy real stuff. Buy strategic assets. Buy stuff on a risk adverse basis.
As to the model for the sovereign funds. The State of California pension fund has well over 150 billion dollars. My own state Oregon has more than 40 billion in pension funds. The total in the State pension funds is in the trillions. The social security fund has trillions as well in its accounts.
Social Security can't be considered as an active investor- but the state pension funds. California leads in investor activism. Oregon has been a major source of funds for KKR and other hedge funds.
Going beyond the states - look at our leading educational institutions, Harvard has an endowment of near $40 billion. Texas is not far behind. The top 50 educational institutions hold over a trillion in investable funds.
The great pools of capital all act alike. Economics may be a dismal science but when the directors of these pools of capital receive the same training and want the same objective-- the results are predictable.
I must admit to sharing some of your concerns. The last time we have seen concentrations of wealth on this scale, we had the Protestant reformation. Henry the VII seized church properties to pay off government debt. The English church concentrated more than half of England's wealth in one institution. That simply represented too great a threat to the central government.
And I would assume that some point in the future these great pools of capital will be confiscated by governments... or otherwise dispersed. Governments tend to be jealous of competing power centers.
