But our other big national deficit is creating a different problem, as well as the potential for one low-risk, high-return investment opportunity. Here’s the bottom line…

Because the United States has run such a large and persistent trade deficit for so many years, other countries – like China – have been able to run up large current account surpluses. These surpluses, in turn, have enabled them to accumulate substantial foreign exchange reserves.

For years, this money was invested in the world’s safest securities: U.S. Treasuries. But the returns from these securities haven’t been so hot lately. Especially when you’re a foreign investor watching the greenback wilt like last week’s roses.

Many world governments are now putting their money to work elsewhere. (Can you blame them?) Sovereign Wealth Funds are their vehicle.

Sovereign Wealth Funds are the financial assets of a country – usually part of the national savings – that are owned and organized into a state-controlled fund. These funds are increasingly moving money into global equity markets. And the sums involved are fairly staggering.

Current assets controlled by Sovereign Wealth Funds are estimated to be $3 trillion. They are expected to reach at least three times this amount over the next five years.

This is a bit scary to some investors, because these funds are entirely secretive. There is no world body to which they have to disclose what they are buying or when.

But here’s a common sense insight. They aren’t buying small or mid-cap companies. There isn’t enough liquidity in these to allow them to enter or exit their positions efficiently.

No, these funds must invest in the world’s biggest companies. As an individual investor, you might benefit from picking up giant companies like General Electric or British Petroleum or HSBC.

Or you can do it the easy way, by plunking for a few shares of the Dow Jones Global Titans Fund (AMEX: DGT).

This exchange-traded fund (ETF) holds 30 of the world’s largest publicly traded companies. It also pays a 2.5% dividend, 25% more than the average money market is paying right now.

Its major holdings include the companies I mentioned above, plus other market bellwethers like AT&T, Johnson & Johnson, Nestle, Microsoft and Proctor & Gamble.

The Global Titans Fund has several advantages. It is well diversified, liquid, and gives you instant foreign currency diversification. (60% of the holdings are in the United States, the rest are in international markets.)

It also uses a passive indexing approach, so it is both cost-effective and highly tax-efficient. Annual expenses are only one half of one percent.

This fund was originally brought to my attention by Eric Roseman, the Sovereign Society’s savvy Investment Director. (To read Eric’s views and learn more about international money flows, global investing and financial privacy, I suggest you check out the Sovereign Society’s Off Shore A-Letter. It’s quite good – and it’s free.)

In sum, the Dow Jones Global Titans Fund is holding exactly the mega-cap global companies that Sovereign Wealth Funds are likely to plow money into for many years to come.

My suggestion? Pick up a few shares now. And let the world’s most powerful creditors push your shares higher in the weeks and months ahead.

Good investing,

Alex

Source: How to Turn Sovereign Wealth Into Personal Wealth

First, fuel. Crude oil reached US$119.41 on the NYMEX. That’s a nominal record. The latest big story is that British Petroleum shut down a key pipeline from the North Sea that carries nearly 40% of the U.K.’s daily oil output.

The company shut down the pipeline because of a strike at a refiner that supplies nearly one-tenth of Britain’s refined fuels. The strike at the Grangemouth refinery is important though, because the refinery also produces power that goes to a neighbouring facility which processes oil coming on land from at least 70 oil wells off shore in the North Sea.

A strike shuts down power. Power shuts down the refinery. And if the refinery ain’t refining, you don’t pump crude oil to it. It all makes perfect sense in its own way.

The strike at the refinery is a ‘finance’ issue. The employees apparently want better pensions. The company who runs the refinery, Ineos PLC, does not seem willing to oblige. The resulting impasse has led to 15 straight days of higher fuel prices for British motorists.

This little fuel crisis has nothing to do with an actual shortage of crude oil (though production from the North Sea is falling). It does show, however, how quickly a “system of systems” can be laid low by any interruption, man-made or otherwise. In the modern world, there’s a thin line between light, mobility, and abundance on the one hand, and darkness, immobility, and scarcity on the other hand.

For its part, oil is rising on both supply issues (in Nigeria), demand strength (everywhere), and dollar weakness (seemingly perpetual). On that score, some of oil’s 40% rise this year (and 20% in the last three weeks) is probably anticipation that the U.S. Federal Reserve will cut its target funds rate when it meets Tuesday in America.

We asked Friday if the Fed had reached the limits of effective monetary policy via interest rates. It’s kind of a Zen issue at this point, isn’t it? If a target rate is lowered but banks still won’t borrow or lend money, have rates really been cut?

The U.S. Fed, like the Reserve Bank here in Australia, finds itself helpless to control inflation in two key components that do not usually figure in ‘core inflation,’ food and fuel. Yet as you know, food and fuel prices are, indeed, rising.

For consumers at the margin, increases in food and fuel prices are very real factors on the household bottom line. They are not balanced by declines in the price of imported white goods and electronics. You can’t eat a dishwasher.

There is now a great deal of speculation in the press that the RBA should abandon its inflation targets. Pundits worry that the RBA will slam the economy into recession by raising rates to contain inflation that it can’t really contain anyway. Rate rises won’t contain price gains in food and fuel, they’ll just make houses more expensive, so the argument goes.

We don’t have an answer for the Bank here at the Old Hat Factory. In fact, we’re not even sure there IS a good answer. A decade of low interest rates has led to a surge in global growth (not least in population). That’s led to an increase in demand for real resources. Fiddling with the money supply may reduce investor’s appetites for speculation, but it is not going to make people in China and India less hungry.

The idea that fixing the price for money solves all economic woes is central to the Age of Finance. But maybe, along with the age of cheap oil, we’ve passed the peak of cheap money. Peak Finance!

“For the past three decades,” reports Justin Lahart in the Wall Street Journal, “finance has claimed a growing share of the U.S. stock market, profits and the overall economy. But the role of finance the businesses of borrowing, lending, investing and all the middlemen in between may be ebbing, a shift that would redefine the U.S. economy.”

We can only hope. The business of making money by moving money is nice work if you can get it a(especially during a bull market in credit). But it doesn’t really add economic value. Nothing real is produced, and obviously, the capital itself hasn’t been allocated more efficiently. Just ask investors in mortgage backed securities or bank and brokerage stocks that have taken billion in losses on bad loans.

The bubble in finance is popping just like the bubble in dot.com stocks popped. The deflating of the finance bubble has much bigger real world consequences, though. And in the stock market, the stocks that led the last bull market never lead the next one. We wouldn’t waste too much time picking through the rubble of the financial sector. Instead, you want to figure out what’s going to lead the market up next.

The trouble is, the market itself may not be headed up at all. That is, the indexes could move sideways or down, in real terms, over the next few years. Passively owning “the market” through an index fund will probably be a losing strategy. We reckon that the bear market in credit favors tangible assets.

We also reckon that investors who have outstanding investment returns will get them by focusing on asset quality, low debt levels, businesses with regular cash flow, and businesses that have a competitive advantage of some sort.

That all sounds pretty routine. And truly, there’s nothing revolutionary about it. But it’s amazing how many fund managers have been getting by on rising index values alone. Time to start working for your money again boys! Let’s hear it for good old fashioned securities analysis.

“Golden future emerges for precious metals,” reads a headline in today’s Financial Review. The fundamental appeal of gold as an inflation hedge still looks good.

Dan Denning
The Daily Reckoning Australia

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