SWFs and high oil prices come full circle, right into protectionists’ crosshairs

Wayne Arnold

• Last Updated: June 06. 2008 12:37AM UAE / June 5. 2008 8:37PM GMT

The White House’s efforts to jawbone the dollar up appear to be working. Not only is the dollar rising, but the Kuwait Investment Authority has said it might raise its stakes in Citigroup and Merrill Lynch, signalling a vote of confidence in US investing. [It may be Lehman Bros. that needs the cash infusion, however.] Kuwait’s statements in London could indicate that Gulf sovereign funds are convinced that protectionist rhetoric in the US won’t jeopardise their investments and that the dollar is a one-way bet downward. The Treasury Secretary Henry Paulson can take some credit, having travelled all the way to the Gulf to assuage Arab investors. But most of the credit belongs to Ben Bernanke, who broke the Fed’s usual silence on currency issues to worry out loud this week about the inflationary pressure of a weak dollar.

Bernanke may be able to afford to be a bit more hawkish on inflation: indicators out of the US are starting to look less than horrible, with factory orders, productivity and the services sector all surprising on the upside. The US economy is now in good hands: Bernanke wrote his undergraduate thesis at Harvard on battling the inflation caused by high energy prices. Now he’s getting his chance to put theory to practice.

Nonetheless, a backlash now appears more likely to swing back against sovereign wealth funds, despite the best efforts of their friends in Washington. More commentators are making the connection between high oil prices and Gulf sovereign wealth fund investments. It seems a matter of time before they start making a causal link and the backlash against SWFs early this year comes full circle to become part of the latest backlash against high oil prices. An op-ed piece in the LA Times today suggests that SWFs will soon be determining the course of the US home ownership via the mortgage market and Newsweek’s latest edition suggests that the rise of Gulf SWFs is increasing the likelihood of international armed conflict over oil.

Here in the UAE, the liquidity bubble looks like it could be running into a very sharp, pointy object in the form of real-estate lending caps. Now midsized property developers are reportedly finding it hard to find financing, which could mean that either a) existing property will become even more valuable, or b) would-be buyers will find financing hard to come by as well, drying up the market for the flippers.


warnold@thenational.ae