Dear Foreign Investors- We're on Sale!

In today's NY Times there is a great article-- Overseas Investors Buy Aggressively in U.S.

For much of the world, the United States is now on sale at discount prices. With credit tight, unemployment growing and worries mounting about a potential recession, American business and government leaders are courting foreign money to keep the economy growing. Foreign investors are buying aggressively, taking advantage of American duress and a weak dollar to snap up what many see as bargains, while making inroads to the world’s largest market.

We're talking huge sums here, last year alone was $414 billion, or a quarter of "all announced deals". Frankly, I think it's globalizations karmic retribution that's kicking us in the pants right now, and thank god because clearly our economy needs money from somewhere. After years of American companies snapping up factories, labor, and land in currency depressed nations, the world is returning the favor. And in economic irony- NAFTA, that trade agreement that allowed the US to bum rush Canadian and Mexican markets with it's big bad dollar and superpower-like economy, is now luring foreign investors into our market. If they own our companies, they enjoy the same open trade borders.

I wrote about sovereign welath funds a while ago, and certainly there is a ton of this foreign government investment vehicle in the mix, but it is not the majority of the money. The article refers to it as a trickle. Still, the nationality of foreign investors can ruffle some Buy American feathers. In an attached multi media graphic, the top spenders in announced mergers and acquisitions last year were (in descending order) Canada, Britain, Australia, Spain, Germany. The UAE follows, then Saudi Arabia, with China ranked 14- all of whom invested significantly less than the top three. The bruhaha about these three countries may be that in 2000 they were not even on the charts.

For many, it is a complicated pill to swallow.

Five million Americans now work for foreign companies set up in the United States, Mr. Kimmitt said, and those jobs pay 30 percent more than similar work at domestic companies. Nearly a third of such jobs are in manufacturing, which explains why Rust Belt states have been wooing foreign investment.

“We’ve lost 400,000 manufacturing jobs,” said Michigan’s governor, Jennifer M. Granholm, a Democrat, who has traveled three times to Europe and twice to Japan in pursuit of investment since taking office in 2003. “I’ve got to get jobs for our people.”

Some labor unions see the acceleration of foreign takeovers as the latest indignity wrought by globalization.

“It’s the culmination of a series of fool’s errands,” said Leo W. Gerard, international president of the United Steelworkers. “We’ve hollowed out our industrial base and run up this massive trade deficit, and now the countries that have built the deficits are coming back to buy up our assets. It’s like spitting in your face.”

Given the state of our economy, this level of foreign investment will only rise. The fact is, we need the money, and it's a prudent long term investment for them. They're buying blue chip companies in a blue chip market at a seriously steep discount. And honestly, it doesn't bother me. What does bother me are the economic and political forces that tanked our economy to begin with. And for that, the US has nobody to blame but itself.

NASA photo by TopTechWriter.US' via flickr

Sovereign Wealth Funds

I have long assumed that foreign governments use their trillions of US dollar currrency to buy our debt. China (whom the US consumer throws dollars at like money really does grow on trees) buys approximately one billion dollars of US treasury bills a day. However, this morning I was reading an article online by Joshua Kurlantzick that detailed what he referred to as "the next big market catastrophe"- sovereign wealth funds.

Governments have piles of US dollars and US consumers pretty much drive the world economy. Our voracious appetite for objects and oil is not going anywhere. When we buy goods in US dollars, foreign companies, and therefore banks and therefore governments, then have trillions of US dollars that are worthless as is. So they invest it. US treasury bills are issued by our government to pay for the things we can't/won't afford. They are secure and have various interest rates. Not high, but high enough that interest on a few trillion dollars worth will fund your own government quite nicely.

Sovereign-wealth funds, however, are using their monetary reserves to buy shares of foreign companies. Kurlantzick notes that they have an estimated worth of two times that of every hedge fund put together. The government used funds of Norway have transparency. The government used funds of Russia do not. Imagine China having its own hedge fund, investing trillions of dollars and euros without any international regulatory control, accountability, or transparency. The world markets suddenly look three sheets to the wind in unpredictability.

"If a fund backed by the Chinese government invests in an oil deal in Africa or Asia, is it making the same profit/loss calculations as, say, ExxonMobil, or is it investing because Beijing's leaders desire that asset, making it impossible for another company to compete for the deal? Did Russia buy into Airbus because it thinks the aerospace firm is a good deal or because the Kremlin wants to have more power over Western Europe through this company? If the fund owned by the United Arab Emirates invests in a defense company, is it trying to gain military technology for the UAE, potentially upsetting the balance of power in the Middle East?"

We should all be thankful that the US government has no room in its budget to do the same.