Featured in Bloomberg Opinion: Selling the family silver, American-style

Corrections and Sovereign Wealth Funds

Scott Bessent says he isn’t worried. In the last week, market overconfidence has been replaced by a drastic dose of nerves. When the S&P 500 drops by more than 10% from its peak, and gold passes a big landmark ($3,000 per ounce), then the perception of risks has changed radically. This is how gold and the S&P have performed since 2020:

That new awareness of risk has come at the same time as a startling grasp that other countries’ stock markets might just offer a good alternative to the US:

Speaking on NBC, Bessent made clear that he could live with market corrections, which can often be healthy. He’s clearly playing a long game (even if the administration’s more erratic shifts in position on tariffs tend to obscure this). The US is backing away from globalization, as is plainly the wish of voters. But the world system of the last 80 years has offered some big advantages to the US, including downward pressure on inflation (from untariffed imports) and lower interest rates, and higher asset prices (as foreigners recycle their trade profits by buying US bonds and stocks). 

A stock market correction from a high level isn’t much of a price to pay if the US can indeed find its way to a more self-sufficient (or “autarkic” in the economic jargon) system that retains most of these benefits. And that, I increasingly grasp, will depend on the proposal to set up a US sovereign wealth fund. Here are the main points:

It’s Not as Far-fetched as It Seems

The biggest and most famous SWFs (like those of Norway or Saudi Arabia) take revenues generated by exports — generally from oil or other resources — and diversify them. America’s problem is that it has a trade deficit, not a surplus. It lacks a big supply of export receipts to recycle into anything.

However, roughly half of SWFs aren’t based on such revenues, according to the International Forum of Sovereign Wealth Funds, and the US has other potential sources of capital. Exciting options that have been canvassed include revaluing US gold reserves to their current market price and putting the massive paper profit to work in an SWF, or funding it with seized cryptocurrency. But Ian Harnett of Absolute Strategy Research suggests that it should be easier. The government owns a lot of land, valued 10 years ago at $1.8 trillion, and presumably worth far more now. It also owns a range of nationalized industries, from the Tennessee Valley Authority to Amtrak. Selling land or companies, at a discount to fair value to make sure there were buyers, would fund a SWF quite nicely. The UK’s radical privatization program under Margaret Thatcher provides a template.

It’s also not as much of a political challenge as first appears, since the Democrats under President Biden had already been exploring just such an idea. So while it can sound rather overblown, it’s far more feasible than many of the other policy actions that have been batted around. 

It Could Be a Necessary Piece of the Trumpistas’ New System

The flip side of the trade deficit is that other countries are left with huge holdings of US assets. Freedom of capital flows has boosted demand, particularly for Treasuries (seen as risk-free) and Magnificent Seven stocks (which are now treated as though they’re almost risk-free). If countries are selling less stuff to the US because of tariffs, they will have less money to park in US assets — and may also want to take the money home in any case. The ownership of the US stock market shows the growing importance of foreign buyers:

Source: Absolute Strategy Research

A more autarkic world in which goods flow less freely will almost certainly mean that capital also flows less freely. The former would be good for the US. The latter, on the face of it, would be bad. This is the gaping flaw in the plan to restructure the world trading system — and whether the creation of a big, patient buyer funded by monetizing US natural resources might fill that gap and take over the role of foreign finance. 

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