My grandfather abruptly pulled off I-79 just south of Pittsburgh no less than 15 minutes to go on our return trip home from the city.

He said nothing as his Chrysler New Yorker found its way to the back of the recently opened Toys R’ Us parking lot.

This was typical for the Westinghouse nuclear engineer. Unscheduled stops were scheduled. Everything was always “part of the plan.” Even a five-year-old reared in the heart of the Cold War knew better than to ever question the decisions of a man who spent his working days developing nuclear subs while his overindulged grandson dutifully did his part perfecting a wicked playground wiffleball pitch in between mandatory naps and afternoon story time.

He fought the Russians by sea. I did my part by land. I took great pride in displaying the wonders freedom and a weekly allowance conveniently bestowed…a luxury my pre-school comrades stuck behind the Iron Curtain certainly lacked.

Anyhow, he walked me through the doors of Pittsburgh’s newest Toys R’ Us. Without a second thought, he instructed me to pick out any one single toy my heart desired. I knew he was serious. He never joked on monetary issues. For what it’s worth, neither did I.

Without hesitation, I took off for the Hot Wheels aisle. I needed to replace the Exxon 18-wheel tanker truck my jackass cousin launched from the fourth-story window of my parent’s attic.

My perseverance took no less than three minutes. He waited by the cashier as I placed the fifty-cent piece of rolling plastic on the black conveyer belt.

“Is that all?” he insisted. “You’re certain that’s what you want?”

I was no fool. My grandpa had a soft heart and cash to burn. So I snagged two packs of Rollos and some peanut M&M’s. These assets were strict contraband in the House of Hancock. But for two weeks a year, my mother wasn’t in charge. And I diplomatically manipulated this power like the Chinese and their undervalued Yuan.

But rest assured, this isn’t some cheap, trivial “the price of everything and the value of nothing” kind of tale.

Sometimes I simply like to relive those brief moments in life when world was truly my oyster. It’s a feeling the managers of the top 12 sovereign-wealth funds must be experiencing these days.

This select group The Economist calls a secretive society each control anywhere from $20 billion to hundreds of billions of dollars to invest. According to The Economist, some estimate these funds combined will control $2.5 trillion by the end of this year alone (in contrast, hedge funds are thought to have a mere $1.6 trillion).

And assuming FOREX coffers keep growing at this remarkable pace, the amount could balloon to $12 trillion by 2015. I’m not sure that even the Fed’s printing press running at full capacity could match that mark so quickly:

Source: The Economist

So what does this mean? For one, the global liquidity lush fest doesn’t seem to be ending anytime soon. Governments around the globe effectively possess a weapon more powerful than even the greatest industrial military complex could ever produce.

For influences sake, it makes more sense to own the building itself than waste the time, money and energy blowing it to pieces. That’s the real way to apply diplomatic pressure. I believe China certainly knows this. And that’s why I believe we should find China’s symbolic stake in Blackstone so compelling. The Blackstone deal may effectively pave the way for Beijing to circumvent government protectionism in their quest to purchase sensitive assets on foreign soil.

To take this step further, why wouldn’t other, less influential nations (say Russia, South Korea or Singapore) not follow suit? But let’s not lose focus.

The point remains: Governments’ position over the commanding heights has taken a whole new twist.  Not only have most governments, both East and West, assumed the enlightened function of providing a pampers-to-pampers welfare state, but federal entities have also cleverly assumed the role as private money managers as well.

They’re certainly no dummies. They read the papers. They see the money private equity firms and hedge funds are making. They want in. They want a piece of the action.

Consequently, they’ve anointed themselves as the new mega-hedge funds… And we know when governments have money to spend, they undoubtedly possess the insatiable propensity to spend it.

But the real question remains: What will they buy?

Dear reader, that’s the million-dollar question.

Let’s think for a second. If you were head of a multi-billion dollar sovereign-wealth fund, and you were given the task of securing a premium well above a benchmark government bond, which markets would instantly grab your attention?

Take a quick look at the % change since December, 29, 2006:

Source: The Economist

Well, one things for sure. If I were a sovereign-wealth manager, assets denominated in the U.S. dollar would probably be the last place I would sink the majority of my country’s hard-earned cash right now.

And if the dollar’s precipitous slide continues like the good people of Agora Financial believe it will, it may be a long time before we can make the case that the dollar is poised for a fundamental climb.

In the mean time, we’ll keep focusing where we think a majority of this wealth will eventually end up. We’ll focus on markets outside the good ole U.S. of A…we’ll keep following the growth. We’ll follow the true wealth.

Right now, for the select few controlling this multi-trillion dollar hedge fund, the world is literally their oyster. The best we can hope to do may be tag along for the ride.

Until Next Time,
Christopher Hancock
June 1, 2007

Christopher Hancock

Christopher Hancock lives and breathes emerging markets. He travels extensively and utilizes his contacts across the globe to recommend the best international investments in the world. After working with Citigroup in Hong Kong on the challenges and opportunities associated with the forthcoming RBM flotation reform, Christopher left many of his friends behind and decided to return to the States to pursue a career in equity research.

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