10/10/15: What, When, If the $7 trillion SWFs Gorilla Moves?

Remember this bit about Central Banks' reserves taking a dip globally? And now consider this, about Sovereign Wealth Funds shrinking their income/assets. The alarmism is premature, as the article explain, since SWFs are (1) big, (2) likely to see return to inflows of funds once oil and broader commodities prices recover, and (3) longer-term investment vehicles with broad mandates. Which implies there is not so much panic looming from SWFs downsizing their holdings (selling assets).

But the key is in the second order effects: as long as oil prices remain low, SWFs are not going to be active buyers of assets in the near term (so demand base for assets is taking a knock down, currently being obscured by the Central Banks' demand in some areas - e.g. Euro area, and/or by leveraged plays and carry trades still available on foot of Central Banks (more limited) adventurism. Which means that any 'normalisation' in monetary policies today is likely to coincide with a period of subdued demand from the SWFs for assets. And that is pesky enough of a problem to worry anyone in the markets.

Beyond this concern, note two other problems arising from the current oil price slump:

1. SWFs, having parked their buying for now, are becoming less predictable per strategy they might take when prices do recover (the longer the period of oil prices slump, the higher is uncertainty); and
2. How the future balancing between liquidity risk and returns going to play across the SWFs strategy (again, the longer the period of low oil prices, the more likely exit from the oil price slump will entail SWFs pursuing less risk-loaded assets and opting for greater safety - a sort of precautionary savings motive for the SWFs).

9/10/15: Quantitative Scaring & Secular Stagnation

One very important point being raised in this article from the Economist: "Controlling for the range of things that influence interest rates, from growth to demography, economists have attempted to gauge the impact of reserve accumulation. Francis and Veronica Warnock of the University of Virginia concluded that foreign-bond purchases lowered yields on ten-year Treasuries by around 0.8 percentage points in 2005. A recent working paper by researchers at the European Central Bank found a similar effect: increased foreign holdings of euro-area bonds reduced long-term interest rates by about 1.5 percentage points during the mid-2000s."

Which brings us to the idea of the 'savings glut' over the 2000s. I covered this in this article concerning the twin threats of supply and demand side-driven secular stagnation.

The Economist give us one side of that equation: Sovereign Reserves

All of which has two implications:

1. The commodities bubble bursting will have a second order effect on longer-term expected cost of Government borrowing in the advanced economies by removing the surplus of savings accumulated in the official accounts in the Emerging Markets. Which makes unwinding monetary policy excesses (from the balancesheets of the Central Banks in the advanced economies) so much harder. The knock on effect of this will be lower solvency of the Western pensions funds in the longer run; and
2. Depletion of savings on the sovereign side will require increased savings on the private sector side. Which will have compounding effect on demand.

Both points reinforce the adverse impact on global growth prospects.