Petrodollars and Sovereign Wealth Funds

Summary

Discussion of sub-$50 crude oil on SWFs (Sovereign Wealth Funds) and the resulting reversal in flows to equity, bond, commodity, capital and asset markets.

Brief discussion of ED, or "euro/dollar," liquidity.

Brief discussion of the effects of a potential dollar melt up.

In addition to the summary bullets above, we include this advisory on what insight potential investors might gain from the ensuing discussion. What follows is a discussion of a complicated macroeconomic issue. We attempt to connect the dots on seemingly disparate and unrelated market occurrences. In attempting to decompose these events, it is our hope that we can share what little we know (next to nothing) while perhaps learning something new and useful along the path. As always, take the best and leave the rest.

In brief, this is the second chapter in a series of thematically-related missives which will attempt to identify the macroeconomic forces with the potential to adversely affect capital, commodity, equity, bond and asset markets.

From Jeffrey P. Snider's That 'Other' Non-Investment Stock Bid:

"Funded by oil revenues, mostly, it is estimated that sovereign wealth funds have amassed at least $7 trillion in assets, and quite likely significantly more than that.... That sets up a sort of petro-stock flow, operating in an almost direct manner exactly as the wrongly characterized petro-dollar is thought to. Oil revenues are recycled back into the world's asset markets... it raises a more fundamental question about the state of affairs in 2015. What might happen, then, if oil prices didn't just sail along into the 2020s on Bernanke's QE debasement, instead suddenly collapsing by more than 60%?"

A related non-trivial question from a friend:

"National Wealth funds will be forced to sell assets sooner or later in the next months, a portion of the last year's bull trend was powered by Qataris, Saudis, etc. Is there any scenario of how that might affect the 2016 market?"

With energy, oil and commodities getting gutted concomitant with a contraction in global economic conditions, there are far less petrodollars to invest or go around. So, the short answer to the question posed, a resounding yes. With oil under $35 today, and certainly under $50 for the near term, the effect on markets of the reversal in the sovereign wealth fund, or SWF, investment flows will not be trivial.

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