It will encourage technological development in environmental and other “future” industries. It will seek sources of energy other than the oil and gas we get from Mexico, Canada and OPEC. And it will put generous sums of money behind these initiatives.

The Obama government emphatically does not want banks to sit on the money they get from the government. Nor do they want it to go to shareholders in the form of dividend payments. This is why I look for more companies to cut their dividends and this plays perfectly into my Red Flag Insider strategy.

But wanting it and getting it are two different things. The financial crisis has spread to other countries, undermining economic growth everywhere and putting a dent into foreign exchange reserves. All the while, the printing presses of the world are working overtime. The draining of money from the global economy combined with the wanton printing of money has turned into a high-stakes battle.

The crisis continues unabated. The money drain is winning so far.  And here are four reasons why it’ll keep on winning…

1. Consumer, construction and commercial real estate loans are getting worse.
2. The U.S. economic crisis has turned into a global crisis. And now the global dimensions of the crisis is boomeranging back on the U.S. economy and aggravating our problems even further.
3. Some overseas economies have been hit hard. But many developing countries have not yet felt the full brunt of the global crisis. They will this year, making the crisis truly global.
4. The negative feedback cycle, as Warren Buffet calls it, is still playing out. Consumers have lost faith in the economy, buying less. Companies are laying off and cutting back, expecting consumers to buy less. And banks are increasingly fearful, lending less to both individuals and businesses.

This is worth watching. With so many sectors suffering, the ones that get government sustenance are operating at a competitive advantage.

Fair or not, it gives you a way to invest.

Source: Why the Bailout Won’t Work

A drop in the price of oil, the war in Georgia, and a gas-export dispute with the Ukraine have put a huge dent in the Russian economy, which now teeters on the verge of recession.  The devaluations reflect the new reality of low prices and falling demand for oil and other exportable commodities.

In order to contain the damage, the central bank is accelerating the ruble’s slide. Policymakers devalued the ruble every trading day last week except for Tuesday (Jan. 13), letting it fall an average 1.7% a day versus a basket of currencies. By comparison, November and December averaged two devaluations a week, according to Bloomberg News data.

In order to cushion the ruble’s fall, Russia has spent $245 billion since August, as policymakers sold over a quarter of the country’s gold and foreign-currency reserves. That has some economists calling for a free-float or a big devaluation to avoid depleting all of the reserves. Russia’s reserves, the world’s third largest, stood at $426.5 billion on Jan. 9, according to BNP Paribas SA.

Russia is intervening in the currency markets to prevent sharp swings that move people to withdraw their savings. Prime Minister Vladimir Putin pledged last month to use the nation’s foreign-exchange reserves to prevent huge moves and to promote calm in the Russian heartland.

Investors have reacted by pulling back from the currency.

“Fear of another devaluation means nobody wants to buy rubles right now,” Lars Rasmussen, an emerging markets analyst in Copenhagen at Danske Bank A/S told Bloomberg News. “The ruble has begun to look more and more overvalued because of the fall in the oil price.”

Meanwhile, downward spiraling oil prices continue to exert pressure on the overall economy.  Russia’s main oil export, Urals crude, has declined 69% to $44.43 a barrel from record highs in July. Analysts estimate the price needs to reach $70 a barrel for the government to balance the budget this year.

The government wants desperately to avoid another run on the central bank, like the one in 1998, when investors fled the market by selling rubles and Russian assets. That crisis forced Russia to spend its foreign reserves to defend the ruble, further eroding investor confidence and undermining the currency. Eventually, the ruble fell 71% against the dollar before finally stabilizing after the government defaulted on $40 billion of debt.

Despite government efforts, there are signs that remembrances of the 1998 crisis are spurring people to sell rubles.

“Of course I have changed my savings into foreign currency. I don’t want to lose my wealth,” Alexei, a Russian banker, told Reuters outside an exchange point in snowy central Moscow.  Others were busy changing money into dollars in anticipation of increasing prices for food and medicine.

Banks and companies are also hoarding foreign currencies, Evgeny Nadorshin, senior economist at Moscow’s Trust Investment Bank, told Bloomberg.

“All the attention of the people is focused on the Forex market,” Nadorshin said. “Companies aren’t buying supplies, they’re investing their rubles in dollars instead because the play is too attractive.”

But some analysts believe the devaluations may soon be over.  As the cost of money rises, and supply tightens, policymakers may be forced to halt the ruble devaluation.  Russia’s Moscow Prime rate, the average interest rate banks charge to lend money to each other, rose to a two-month high of 12.5% yesterday, Bloomberg reported.

Mark Mobius, the well-known globetrotting investor and the executive chairman at Templeton Asset Management Ltd., said he expects Russia’s currency will begin to stabilize, meaning the central bank may slow devaluations as the ruble approaches fair value.

“It’s not as overvalued as it was,” said Mobius, who manages more than $24 billion in emerging-market assets. “I know some commentators think further devaluations can be expected, but I’m not too sure about that.”

Source: Ruble Hits 11-year Low As Russia Accelerates Devaluation

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

Assets advanced a record $153.9 billion in the first three months of the year, after an increase of $94.6 billion increase during the fourth quarter. Currency holdings are 40% above where they were at this time last year, the People’s Bank of China said Friday.

“The rapid accumulation in foreign-exchange reserves is making it very difficult for China to control money supply and inflation,” Morgan Stanley (MS) Hong Kong Chief Economist Wang Qing told Bloomberg News.

Consumer prices in China jumped 8.7% in February after the worst snowstorms in half a century caused major disruptions in transportation and food deliveries. It’s not a small problem: Chinese policymakers – including Premier Wen Jiabao – have labeled inflation and economic overheating as the two single-biggest obstacles to ongoing growth that the country faces this year.

According to a recent report from Money Morning, meat prices had risen more than 50% from the year before. Eggs and dairy products have spiked, too, making some of these once daily staples more of a “one-in-awhile” treat for families on blue-collar worker salaries. And, unlike in the United States, there are no social programs to help families navigate such rough waters. Indeed, according to one recent account, families of hourly workers are being forced to spend one third of their monthly income – or even more – on groceries.

The record snowstorm only exacerbating the country’s inflationary woes.

Now the world’s fourth-largest economy, China expanded at a rate of 11.9% in 2007, its fastest advance in 13 years.

But here’s the problem. China’s currency gained 7% against the dollar last year and has surged another 4.3% already this year. The strength of the economy and in the yuan have opened the spigot on inflows of “hot money” – speculative capital – which is what caused the massive growth in China’s currency reserves.

In an effort to tamp down on liquidity, China’s central bank has cranked up the required reserve ratio for lenders to a record 15.5%. However, China has held off on raising interest rates after six increases last year, waiting to see if the rate-cutting campaign being waged by the U.S. Federal Reserve ends up having the desired, offsetting effect.

By boosting interest rates, China’s central bank “will only attract more money into China,” said Morgan Stanley’s Wang, explaining that the fast-rising yuan to crank down on a trade surplus that pumped up the financial system by additional $41 billion during the year’s first three months.

A rising currency makes exports more expensive. Tighter control of foreign-exchange inflows, higher-reserve requirements and more bond sales to soak up capital all are strategies China may turn to as a way of offsetting the growth in speculative capital inflows.

Here’s another point: The falling dollar has played a role in the surge in China’s foreign currency reserves. The reason: Since China’s reserve assets are quoted in U.S. dollar terms, the mere fact that the dollar is weakening against the yuan means that as the dollar falls the value of reserves held in other currencies will increase.

“The onset of the credit crisis and the crumbling of the U.S. housing bubble precipitated a significant sell-off of the dollar,” Jonathan Anderson, a UBS AG (UBS) economist, told Bloomberg. “A sizeable portion, 35% to 40% of China’s foreign-exchange reserves, is held in European and Japanese assets.”

This big jump in foreign reserves in many countries has led to the creation of a number of big “sovereign wealth funds,” government-run investment pools that are making major investments in high-visibility assets all around the world – and particularly in the United States, where the financial-services sector has permitted sovereign funds from Asia to the Middle East to get a foothold in some top-tier companies.

China Investment Corp., a $200 billion government-run venture fund, has acquired stakes in such firms as The Blackstone Group LP (BX) and Morgan Stanley. The Blackstone investment as resulted in a major loss for China’s sovereign fund.

It’s a stupid question.

1. China already owns a huge chunk of our national debt. It has accumulated $1.5 trillion in its foreign exchange reserves. At one point last year, it was adding $1 million a minute to its vaults. The U.S. already depends on China using that money to buy our bonds. It keeps our interest rates down. This by itself is more than enough power over our economy.

2. So far, the China Investment Corporation (CIC) – the name of its sovereign fund – has made investments totaling $200 billion. That’s a pretty big number. But only $60 billion of it is earmarked for foreign investment. And the U.S. will only get a small part of that. In other words, the numbers aren’t scary.

3. It’s invested $5 billion in Morgan Stanley. Oops. And $3 billion in Blackstone. Double oops. Maybe it’s not Americans that should be asking whether the Chinese should be investing billions into our companies, but the Chinese who should be asking whether they should be investing so much into assets falling in price.

Besides Chinese money, there are petrodollars, drug money, money from terrorist states and other suspect sources making their way into the global and U.S. economy. This is nothing new.

In a worst case scenario, can Chinese money exit all at once from U.S. companies – creating economic chaos? Can these small shares in very big companies lead U.S. companies into nefarious anti-U.S. activities?

No and no.

It reminds me of the paranoia surrounding Japan in the early 1980’s when they were buying some of our most cherished real estate. It’s true that Japan was (and is) an ally and China is a country where in some areas we cooperate and in some we compete. And in other areas we manage to cooperate and compete with them at the same time. In other words, it’s complicated.

U.S. companies have invested a great deal of money and technology into China. By the way, wouldn’t it be easier for the Chinese government to sabotage those investments on their own turf rather than pulling off something in the U.S.? And now, China is returning the favor – more with its money than technology.

I’m all for it. Anything that gives China more of a stake in our economy and our biggest companies doing well is fine by me.

What’s worrying me isn’t what they do with the $60 billion. It’s how they grew their foreign exchange reserve so fast. Our appetite for imports has made China a ton of money and has saddled the U.S with a huge debt.

A South Korean pension fund – the fifth largest in the world – just said it will stop buying Treasuries. Not being able to finance our huge debt is going to get us in the end, not China’s U.S. investments.