Battered SWFs Bode Ill for Global Economy

By Irwin Greenstein

No one really knows how long the global recession will last, but based on a recent article it may persist longer than predicted. The message to investors, therefore, is that bonds and gold may be the best way to ride out the storm instead of trying to cherry pick winners.

An article in the English-language of the German der Spiegel newspaper reported that the billion-dollar Sovereign Wealth Funds [SWFs] have lost up to 25% of their value - depriving the markets of a major cash source.

For those of you unfamiliar with SWFs, they are state-owned investment houses whose charter is to protect any budget surplus with prudent investments. The commodity boom of the past few years has filled the coffers of SWFs rich in raw materials such as oil, natural gas and metals.

Thought to be impervious to market swings, SWFs were held up as secretive groups with an uncanny knack for finding the best investments. That reputation blew up, however, when SWFs started to prop up Merrill Lynch (MER), Citigroup (C) and other big investment banks that ultimately lost a bundle.

These once-infallible mega-investors are now liquidating as they try to save their butts. In the process, money that they would have allocated to major investment projects such as commercial real estate, banking, oil exploration and other cash-intensive endeavors is simply going away.

The implications for both emerging and industrialized markets are profound, fueling speculation that the economic malaise could last longer than previously anticipated.

The article in der Spiegel reports that Norway’s $300 billion Government Pension Fund-Global, was down 7.7 percent in the September quarter. It was the worst performance in the 18-year history of the fund, which invests Norway’s oil revenues.

All told, SWFs have lost 18% to 25% this year alone, according to der Spiegel story. That could mean some $700 billion in cash has been taken out of the global investment pool.

The Abu Dhabi Investment Authority, perhaps the world’s biggest SWF, may have lost up to one-third of its $900 value, the German newspaper said. Things were bad in other Mid-East SWFs as well.

The Kuwait Investment Authority lost about 30% of its $250 billion reserve, although $50 billion of those losses may have been recouped with a new infusion of oil money. The Qatar Investment Authority is thought to be down 20% in 2008.

As the recession continues, where will new money come from? Well, it seems that taxpayers are picking up where the oil sheiks left off with bailout campaigns going on all over the world.