The withdrawal of SWFs from American markets means that taxpayers must pick up the slack to the tune of $700 billion (or more). It could also mean that the disappearance of this source of capital could further delay any sustained recovery.

The Persian Gulf SWFs, in particular, are redirecting their funds to domestic projects, where they see a higher payoff, according to various news sources.

Dubai International Capital is turning its attention the Middle East, China and India.

Investment funds in Kuwait, Qatar, Dubai and Abu Dhabi are revamping their investment strategies after losing billions of dollars buying shares in Western companies.

The Kuwait Investment Authority (KIA) recently shifted $4 billion from Western markets into its own bourse. At the same time, the Qatar Investment Authority has begun a bailout of local banks. Dubai International Capital (DIC) is concentrating on emerging markets. And there are reports that the $700-billion Abu Dhabi Investment Authority is investing more in to local markets.

Sameer al-Ansari, the chairman and chief executive of DIC, was quoted as saying that the balance of economic power was shifting east and that the fund’s investments would follow.

Samba Financial Group, a Saudi Arabian bank, said that the Gulf’s wealth funds were likely to lose about $190 billion this year, effectively flattening profits gained from the high price of oil.

If you’re the kind of investor who likes to follow the money, the SWFs are showing that China, India and other emerging economies with low debt on the books are the places to be. But as we’ve all seen, the SWFs have been painfully wrong before.

The real lesson we’re seeing from the meltdown and the SWF shift of capital is this: Just because you’re fabulously wealthy doesn’t mean you’re innately smart.

According to Bloomberg:

Saudi Arabia’s influence as the biggest oil exporter would wane if the fields are as big as advertised, and China and India would become dominant buyers of Persian Gulf oil, said Peter Zeihan, vice president of analysis at Strategic Forecasting in Austin, Texas.

“The only certainty that comes with the discovery is that the oil, no matter how much there is, will be very hard to reach,” says Jason Simpkins in Money Morning. The field is 170 miles offshore, more than 6,000 feet under the surface of the water trapped beneath a shelf of salt 500 miles long and 125 miles wide.

“A decade ago, gaining access to such a field would have been a pipe dream (no pun intended). Just like Khurais, extraction will be a very costly process, even with today’s technology.

“Petrobas will have to ante up quite a bit of cash to expand its use of drilling rigs, which are in short supply. Right now, there are only 40 rigs on the planet capable of drilling into massive deep-sea salt deposits.”

The Financial Times  describing the outflow of cash as “a record shift that accelerates a longer-term trend away from US and western European stock markets” caused by the credit crisis and subprime mess in the US.

“The outflows also accelerate a trend for investors to put their money either in ultra-safe cash options such as money market funds, or into riskier markets and high-fee products such as hedge funds,” according to the report. “They are abandoning the middle ground of mainstream equity and fixed income funds, especially in the developed markets.”

Investors pulled $70bn from US, Japan and Western Europe funds during the quarter. Funds with inflows were almost all focused on Taiwan, Russia, the Middle East and Africa.