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The End Is Near, Part 7: Governments Become (Really Bad) Money Managers, Screw Up Markets

2015 was a year Brazil would like to forget. Its economy crashed, its political class was decapitated by a corruption scandal, a huge iron mine dumped toxic waste onto a bunch of villages — and the sludge is now seeping into the ocean. See In the Year’s Final Indignity, Slime Coats Brazil’s Pristine Beaches.

But the Brazilian development with the widest ramifications involves its sovereign wealth fund. This is an investment fund set up and run by the government and funded with the revenues from commodity sales, that was supposed to increase national wealth by buying things that would then rise in value. This too, has not gone as planned.

Brazil Dips Into Sovereign Wealth Fund as Finances Deteriorate

(Bloomberg) – Brazil dipped into its $620 million sovereign wealth fund on Tuesday as the government struggles to shore up public accounts that have been hit by the deepest economic recession in 25 years.

The government withdrew 855 million reals ($216 million) from the fund, or about one-third of its assets, as part of a strategy to boost public coffers, the Finance Ministry said in a statement Wednesday. The decision was made “in a context of economic contraction with a sharp drop in fiscal revenue and difficulties to cut mandatory expenses,” the statement read.

The move was expected after the fund earlier this year started unloading shares of state-owned Banco do Brasil SA, which account for most of its holdings. The fund raised 134 million reals by selling those shares in the first half of July.

Why do we care about Brazil’s sovereign wealth fund? Because these days such things are everywhere. Dozens of countries have set them up and released them into the financial markets, to the point that governments — perhaps the worst money managers that have every existed — now run in excess of $7 trillion, or more than venture capital and private equity funds combined. Here are the top ten, according to the Sovereign Wealth Fund Institute:

Sovereign wealth funds

There are at least two major problems with governments becoming hedge funds:

They’re infinitely corruptible. Note that the Brazilian fund owned mostly shares of a big state-run bank. That’s probably not because Banco do Brazil was the most attractive of all the world’s investments. More likely it’s because local elites worked for or owned shares in the bank and wanted its price to go up.

One of the complaints about sovereign wealth funds is that they’re opaque compared to, say, mutual funds that have to publish updated lists of their holdings. This is not an oversight. It’s how the people profiting from the funds’ activities like it. So to the extent that governments run lots of money, the system becomes correspondingly more corrupt — which is another way of saying the invisible hand of market price signaling is crippled, converting everyone — not just governments — into dumb money.

Here, for instance, is how Brazil’s sovereign fund did with its Banco do Brazil investment in 2015:

Banco do Brazil

They’re surprisingly volatile. National governments tend to see these funds as big pots of ready cash whenever budgets fail to balance. This is happening on a vast scale right now, as falling commodity prices crimp the previously robust finances of exporters like Saudi Arabia — which took back $70 billion from third-party managers this year. Those third-party funds will now have to sell investments to raise the required cash, and $70 billion is a lot of selling.

Sovereign funds have about $4 trillion of oil and gas related investments, so this is just the beginning.

To sum up, the rise of sovereign wealth funds has both impaired financial markets’ price signalling and increased their volatility, while making it easier for governments to avoid the hard choices necessary for long-term stability. And 2016 is when they’ll really start causing trouble.

23 thoughts on "The End Is Near, Part 7: Governments Become (Really Bad) Money Managers, Screw Up Markets"

  1. Love the podcast John, look forward to future episodes. I especially appreciate the understated and conversational tone, many try to emulate Wolfman Jack and it is off-putting and distracting.

  2. The nature of money in a crisis is to move from weak hands to strong hands. We’ll see who the strong hands are soon enough…

  3. So, is money management secret knowledge? Many claim to know how, yet performance is pitiful across the board. The problem may be outside of money itself. Buy cheap, sell dear. Those with the most money power can make anything else cheap at will. Not instantly, but directed intent. Economists provide after the fact analysis, and find no agreement. All players look really bad. The quarterly horizon is a vanishing point. God bless anyone who can pursue a long term vision in this intellectual, information-less present.

  4. National governments tend to see these funds as big pots of ready cash whenever budgets fail to balance. Sorta like too big to fail private sector banks seeing the tax payers as suckers when they were deregulated by the government as we were told regulations are stopping growth by the boys from the Chicago School of Economics. But in truth the regulations weren’t the problem it was the lack of it and let the crooks take over our economic policy. It who’s running the government that is the problem and it wasn’t the progressive agenda that set it off it was the free market fundamentalist, Ayn Rand, types on the right who pushed the left to the center as Bill Clinton became a devote to trickster supply side economics that set up the crash in O7 signing off the Republican Congress’s final assault on the Glass Steagall Act. Merry Christmas.

    1. It’s not a lack of regulation, the nation is choking on regulation. It’s the reality that those with enough money can BUY the kind of regulation (or deregulation) they wish.

      So odd you claim the Republicans attacked Glass-Steagall, when the only ‘big player’ from the right was Gramm. On the Democrat side you had Summers, Rubin (who later cleaned up mightily from in) and Clinton. I think we need to toss Greenspan in on the left as he was clearly enamored with Clinton.

      Later, when we got Dodd-Frank, it turned out both Democrats for which the bill was named were doing their best to water it down. Matt Taibbi did a great job of covering that.

      Your error s Classic in nature. You believe one party is better than the other. In reality both are well controlled and bought off by ‘big money’. As Schumer said, “the banks own Congress”.

        1. They don’t understand because they don’t want to understand,new ideas attack their cherished biases.They would need to think about things & that gives them headaches!
          Thomas Edison said “5% of the people think,10% think that they think & the other 85% would rather die then think”.

      1. The politicians never had the power to effect circumstances & decisions on their own,they merely passed on the orders handed down by the wealthy elites who employ them.They are just high profile grifters,…actors in the 3rd rate melodrama they call the ‘political process’,they hold fixed elections & tell the public that they,the people rule.It’s all pretend theater!
        I believe that if 90% of Congress were thrown out & replaced by used car salesmen,door to door vacuum cleaner peddlers & hustlers who sell home improvement scams to little old ladies,….there would be no fall off whatsoever in the quality of legislation coming out of Washington!

        As Groucho Marx once said ” those are my principles,and if you don’t like them….well,..I have others”!
        That should be political Washington’s new slogan!

      2. Your error is classic that you believe the two parties are the same as one would wonder about that when Republicans blocked any legislation to expose dark money in a NYT’s article.

        Republicans inserted a provision blocking the Internal Revenue Service from creating rules to curb the growing abuse of the tax law by thinly veiled political machines posing as “social welfare” organizations. These groups are financed by rich special-interest donors who do not have to reveal their identities under the tax law. So much for effective disclosure at the I.R.S.

        Republicans barred the Securities and Exchange Commission from finalizing rules requiring corporations to disclose their campaign spending to investors.

        1. I don’t defend either party. Unlike you, I don;t seek to blame only one of them. Some of the worst ‘reform’ of financial legislation occurred under the Clinton Admin. Fully unleashing Wall Street has led to many untold consequences.

          This is not my picking on Clinton alone, Or even the Democrats. It’s just pointing out the reality that neither part y has clean hands, and so long as people continue to believe in ‘parties’ there will never be hope for change.

          1. If voting doesn’t matter than matter than why do the Republicans spend any money and time on making it harder to vote? Not voting is exactly what the oligarchs want. It’s the last line of defense against their control over what’s left of the democratic republic. It’s up to each one of us to do our own homework and participate in the system at the lower levels as change comes from the bottom up not from the top down and that’s why the Kochs spend millions on state legislators and elections. If it didn’t matter they wouldn’t do it. Bernie isn’t in their pockets.

    2. Interesting to note that a double negative equals a positive.
      You may be correct to some degree because regulation,being a negative,is a type of makeshift solution for the failings of a bogus financial system built around debt as money.If we had a real Capitalist system rather then a Central banking-Reserve Banking system we wouldn’t need all of the regulations!
      Most regulations are just artificial supports for a financial system that is unnatural,that is a Pyramid Swindle!

      1. So who gave the right of incorporation to the public? The government so government sets the parameters of corporate behavior and if you don’t like it then I suggest look around and find another country that has corporations without parameters. Governments set the regulatory environment and the public ie businessman follows the laws and when he becomes corrupted or is allowed to become a monopoly the government has a fiduciary responsibility to step in in the public’s interest but’s that’s if the government hasn’t been corrupted by the same. The deregulatory environment we see today was a reaction of corporate America to government controlling them and started with the Powell Memo and a strong right wing attack on unions and government’s authority to oversee their behavior. The worst of it is that the media is now controlled by basically 6 people and the government looks the other way because the wealthy can now dump large sums of money into it for their favorite candidates. It’s the basis of Citizens United ruling in favor by 5 corporate lawyers who manged to be put in place to promote corporate interests over the public’s.

        1. Forget all of this right wing/left wing trash.The government does what the FED. & WallStreet tells it to do,not the other way around!You chase the politicians around in circles & end up where you began,they aren’t the basic problem.It’s like declaring a ‘War on Drugs’ or ‘War on Terror’ & then pick up the small fry on the street while the bankers are cutting deals with Drug Lords & War Lords.The government agencies have spent years chasing the drug dealers & jahadis around with minimal success,while the kingpins go to HSBC to get their money laundered,where are all of the highly paid regulators when this happens?
          You really believe that the regulatory agencies regulate the industries they are supposed to oversee?
          The agents move back & forth from the government to industries they were supposed to have been regulating,..When has the SEC ever brought to justice any of the Wall Street casino gamblers who break the law on a regular basis & walk away untouched?
          What the heck is the need to write regulations that can’t & won’t be enforced against the wealthy elites who are above the law.And finally you speak of the crooks from the Chicago School of Business taking over our economy.Well it is way past time to tell you that the Central Bankers at the FED took over our economy,& our nation,back in 1913.The boys from Chicago are only following in their footsteps.Anyone who thinks that Keynesian economics is not a form of embezzlement is a fool & no amount of regulation is going to change that!

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