Pros and cons of a US sovereign wealth fund
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Pushkin. Does the US government need an investment fund? A lot of people have dismissed the idea, but you know what? It might just get one. Donald Trump has been talking about setting up what's known as a sovereign wealth fund, vaguely along the lines of the Middle East model. So big stashes of cash that invest across global stocks, bonds and whatever else they want. Today on the show, we're asking why, though?

This is Unhedged, the markets and finance podcast from the Financial Times and Pushkin. I'm Katie Martin, a market columnist at FT Towers in London, where the sun is finally making an appearance.

And I'm joined very fresh from his travels by Aidan Reiter from the Unhedged newsletter in New York. Aidan, where have you been? I was in London, hanging out with you, Katie. Then I was in Bosnia, Serbia, and Israel. You've been to some wacky places. Yeah, it was really interesting. Would not recommend going to Sarajevo and Belgrade in the winter, but it was really, really beautiful. Okay, noted. So,

So, okay, a sovereign wealth fund. Yeah. A MAGA sovereign wealth fund, no less. What's the score here? Well, Donald Trump has, I think on February 3rd, issued that they want to create a sovereign wealth fund for the benefit of the U.S. population. That would theoretically allow them to invest in foreign assets, in U.S. domestic priorities, whether that be promoting manufacturing, whether that be supporting supply chains. It's unclear, right? They were not clear with what the actual goal of such a fund would be.

We should note that they're not the first administration to flirt with this idea. Apparently, the Biden administration also looked into making their own sovereign wealth fund. But we assume since they didn't actually do it, they concluded that this is not the best idea. So what we've got now is there's an executive order that's been signed. Trump wants to see a plan from the Treasury secretary within the next couple of months.

This is kind of weird though, right? So sovereign wealth funds, if you're not familiar with them, they're like big pots of cash that sort of sit somewhere in government apparatus. And generally they fall into a few buckets. Some of them are like savings funds. So they're like piggy banks for the distant future.

Some of them are stabilization funds. So just in case in a rainy day, say there's some sort of crisis that hits, you can tap into it then. And some of them are like strategic funds, which are almost like, so you're a government that's got various state assets. You don't quite know where to park them. So you stick them in these special purpose vehicles. So the big example of this, there's quite a few of them in the Middle East, but the big example is Norway. Yeah.

We had the chief exec of the Norwegian Oil Fund on this very podcast just a few months ago.

But the point is Norway discovered oil, had oil coming out of its ears, loads and loads of oil, just too much money coming in all at once. And so the Norwegian government said, I know, why don't we take these oil revenues that we don't want to spend all at once and put them in a fund and use them to invest around the world. And then when at some point we run out of oil or we decide not to drill any more of it out of the ground, we've still got this massive pot of national wealth.

The Brits, for what it's worth, decided to do it differently, just spent it all back in the 70s. And now look where we are. Anyway, that's a whole other story.

But the U.S. is not quite in that situation, right? It's not in a situation where it's got too much money coming in. It doesn't quite know what to do with it. So what is Donald Trump talking about here? We're in the opposite situation. We are borrowing a lot of money, much more than we're getting in terms of revenues from taxpayers or other oil and lease agreements. So he's talking about...

trying to create some pile of money, and it's a pile of money we arguably don't have right now. The US deficit is huge. It is growing. It is a constant problem for people in the market. If you want to make a wealth fund, you need wealth.

The United States does not have wealth right now. Now, there are some funds that theoretically could be tapped into. And there are some pockets of money sitting around the U.S. government that are kind of sitting idle. So you have things like the Exchange Stabilization Fund. As you were saying before, some countries have funds that they could deploy in the case of a crisis. The U.S. government has about $200 billion that could be deployed to support the U.S. dollar.

But it's not that big of a fund. 200 billion is not a lot in terms of how large and liquid the US dollar market is. Yeah, for the US, that's not that much. Yeah. No, exactly. And then we have gold in Fort Knox. It's not that much. We do have something that's huge, and we've written an unhedged newsletter on this. We have the Social Security Trust funds, which are trillions of dollars.

But those are very politically contentious because say you were to take that fund and put it in the market and then lose that money, you would lose a lot of taxpayers' money, which should be going to older people in the United States who have worked to have that money. So we sit on some... There's some piles of money we could use, but it doesn't really make sense because at the end of the day, if you want to make a wealth fund, you have to take it from some other part of the government.

or you have to borrow more. We've had like a bunch of brain boxes writing about this in the FT over the past few weeks. One of them is Brendan Greeley, who's like a real nerd about this stuff. Hello, Brendan. If you're listening, I mean nerd in the nicest possible way.

As he points out, the White House fact sheet for this executive order that says, I want a sovereign wealth fund, says that the US already holds $5.7 trillion in assets. But actually, only about, I say only, it's a lot of money, but only about $1.2 trillion of that is in cash or gold. The rest of it is in often quite illiquid assets.

So what they're talking about is issuing MAGA bonds, potentially. This is like one way around it. So you issue MAGA sovereign wealth fund bonds and you use the revenues that come from that and stick it into investments all around the world. Again, there's still a lot of people who are just like scratching their heads and saying, I really don't get the point of this. And as Brendan points out in his piece,

One of the potential problems you have here is, OK, so you have a pot of wealth that's controlled by the US government in some form. What are the checks and balances that mean that that money will be deployed properly?

Fairly and not for any kind of commercial or personal favors. So, for example, you look at the Norwegian Sovereign Wealth Fund that has so many guardrails around it that you don't know which way is up. And it is achingly transparent about what money it deploys, when, to whom, on what grounds. You know, it's got all sorts of like ethical and sustainability requirements that go along with it.

How would this money be deployed and how would you make sure that it wasn't used to settle personal scores or to extract favors from foreign governments? Well, it would depend how you structure it. And that's not clear from what we've gotten from Trump. This could wind up looking a little more like the Saudi oil fund.

which is invested in the domestic economy and abroad. It's extremely not transparent. That money is often flowing to large family conglomerates with ties to the Saudi royal family. So it could become a basis of cronyism. But there's also other risks that you could have here. Even if there's not guardrails and transparency measures, you could have a crowding in effect or a crowding out effect.

If the government starts investing in certain public companies, investors might flock to that company and then the stock would go up and that would dilute returns. It could also cause some asset bubbles and inflationary events in the stock market based on where the money is getting put. If you think that's where the government is invested, the governments could give them certain favors that other companies will not get. That results in an inefficient market.

That being said, that also could be the point, right? So one of the questions I've seen when people have talked about sovereign wealth funds is if you really want to make this strategic and invest in things in the US economy, we already have a process for that. It's called legislation. The Inflation Reduction Act was about $1 trillion that went to green tech, bioenergy, all these really important sectors in the United States economy that are probably not getting enough market support to begin with.

And the point of doing it that way is you have congressional approval. You have democratic processes here. The point of a sovereign wealth fund, it would seem, would be to strategically deploy capital without the democratic counterbalances. That could just be the point. Trump has done a lot of things without Congress. It seems that he has no legislative agenda. He's just pushing out these executive orders. This is a way to start taking some of the power of the purse away from Congress and throwing money where he sees fit.

Huh. That's an interesting way of looking at it. But I'll tell you one thing. So again, Brain Box is writing in the FT about this. We've got a piece today by Steven Jen. Now, Steven Jen, he's a bit of a kind of like rock star in macro circles. He used to be like a currency and macro analyst at Morgan Stanley back in the day, one for the hipsters there.

And one of the things that he did was like in the early noughties was he was talking and writing a lot about sovereign wealth funds that were popping up all over the world in countries that had like excess money effectively. You know, so he's been looking into this stuff since way before it was cool. He's writing the FT today and saying, look, take this idea seriously. This could become the largest and most strategically important sovereign wealth fund in the world.

He's also pointing out that Trump has been talking to the Saudis, as you were mentioning earlier, and he was talking about the Saudi fund, which is like $925 billion. A lot of money. A lot of money. And he would say, well, the Saudi fund is on the large side, but eventually we'll catch it.

That's Trump's kind of idea here. So he's talking big money and he's potentially talking big money quickly. And again, so Stephen Jen is saying, you know, imagine you have these MAGA bonds that come along that are the kind of seed capital for this kind of fund. Say it gets to $2 trillion of assets under management. That's a lot. That would make it one of, if not the biggest sovereign wealth fund on the planet. Yeah.

If that tracks how the S&P 500, so the US Stocks Index, has been doing over the past 20 years, that could be $13.4 trillion in 20 years. So this could become, like the US government, weirdly, could become like this gigantic...

hedge fund, effectively. But again, even if they have those returns, you have to think about the impacts on the market, right? Just pumping $2 trillion into S&P 500 will inflate prices, will dilute returns. The market's not going to like that. Also, the market is already somewhat concerned over the level of US deficit. And we've seen that a little bit in the term premium and in bond yields. This is always going to be some form of borrowed dollars adding to the deficit. You could have a market implosion from this. Yeah.

So, it's not like it's a costless event to create something like this. And it will have both impacts in the borrowing phase and the deployment phase. I would be very concerned. Also, one could argue that, "Oh, well, we're just going to keep the deficit where it is

And whatever cost savings we're getting from Doge will just go into this. We've talked about this on the podcast before. It's unclear how much money Doge will actually save. It doesn't seem like it's going to be $2 trillion if they're not going to slash Medicare and Social Security.

So I am personally skeptical of what this could actually achieve in size, although it seems like he's convinced this could be real. The thing is, if we've learned nothing else, like, I don't know, it's been a long month, but Donald Trump has been back in office for one month. Oh, my God. It's only been one month? It's very...

It's only been a month. I have so many more gray hairs. And, you know, big policy pronouncements and big ideas and big kind of norm busting and checks and balances busting initiatives are just like all over the place. And, you know, let's do a quick, you know, quick detour around Doge as you mentioned it. And as I wrote about it in your newsletter today is that

There was this idea before Elon Musk's so-called Department of Government Efficiency came along that lots of investors and lots of analysts at investment banks were saying, look, we just don't think that Doge is going to be able to do that much. So it's going to take a look at these government departments, but we don't expect it to save very much money. Actually, what has happened is that...

Lots of federal employees have lost their jobs already and they've pretty much got rid of USAID, the Overseas Development Agency. So there's a lot of this sort of checks and balances and guardrails that don't appear to be really working at the moment. And one thing that really strikes me is that the markets are just like, oh, well, whatever. All this institutional resilience that we've spoken about for the past few decades as being absolutely central to the US as a reserve currency and as a reserve asset.

Sounds like we're actually not that bothered about it. I find this kind of amazing, personally. Yeah, it's frustrating. Isn't the market supposed to be the thing that stops reckless actions? But I think the things he's done so far...

Tariffs aside, because tariffs definitely have large economic impacts, have more invisible economic impacts. US aid is very important to how the world functions. I would argue it's very important to the US's standing in the world, but it's a relatively small part of the US's budget. And it doesn't have immediate flow through into US stocks, emerging market stocks, bond yields, et cetera. Tariffs obviously will have some impact, but the market still doesn't know what to make of them. We're signed up in negotiation phases with some of them.

And the rest hasn't truly impacted the budget or hasn't really truly impacted the economy. I think we'll actually have to wait and see. Something like sovereign wealth fund directly impacts the profile of U.S. debt. And that is where the market might actually start to kick and scream or applaud. Who knows? Yeah. The thing is, there's a lot of people who've been kind of waiting for that moment where markets kick and scream. And they say, okay, these tariffs are too much or this...

This destruction of checks and balances is too much or this idea of a sovereign wealth fund is too wacky. But actually what the markets are doing is they're fine. They're looking at Doge and saying, oh, it's cutting federal spending. That's probably good for US government bonds. Let's keep on buying.

So, yeah, it's just a surprise to me that this sort of institutional thing is less of an immediate market mover than everyone was warning ahead of the election and that I had previously thought. Yeah, I mean, I think it's the strategic ambiguity. We don't know exactly how these things will flow to the economy. Also, I think the markets have never been that good a gauge of politics. You know, especially do we think investors are huge institutionalists?

Are they going to balk at the dissolution of Development Finance Corporation or USAID? I'm not sure how many investors were paying attention to those individual agencies before.

So, Aidan, this whole idea is a little bit out there. The US has never done this quite like this before, this idea that it might amass a pot of cash, a big sovereign wealth fund for deploying in any way that it sees fit. But if it happens, it could be one of the biggest investment funds on the planet. Do you think this is really going to happen? It's hard to say, but I can give my pros and cons. I think pro...

is, as you said, you can use market forces to grow a big pot of money for the American people. If that works, that's fantastic. It could help things like social security. It could help things like healthcare, creating larger pots of money for people. Other pro, theoretically, it creates a nimble way for a president, if you believe in a powerful executive, to invest in their domestic priorities or their international priorities.

I think there's too many big cons. Right. This doesn't, you know, we don't actually have wealth to speak of. You have to borrow this. This undermines so many of the deficit reduction things the Trump administration has said they're trying to do.

It also has so many possible failures, right? So if you lose that money in the market, which is always a risk, huge political backlash. You could have cronyism. You could have huge return dilution if you take trillions of dollars of U.S. funds and throw them into the market. I don't think people would be very happy about that. So overall, I'm coming out as this doesn't make much sense and it seems like just a frustrating way to get around the legislature. But I am open to other opinions. What about you, Katie? Katie?

I'm pretty much done with thinking about pros and cons of government policy anywhere, because I just feel like so far this year, you look at something and you think, wow, that's a terrible idea. Don't do that. Oh, I see you've already done it. So, you know, like it's not up to me. And so, you know, we just have to accept the world as we find it. I agree with you that there's like a lot of potential banana skins here. But I feel like if this is what

Donald Trump wants, then this is likely to be what Donald Trump gets. So we'll just have to see what the market impact will be. But I guess I'm wondering, you know, okay, when you get the phone call from Donald Trump or Scott Pesent and saying, hey, Aidan, how about it? Do you want to manage? Oh, let me check. Two trillion dollars of assets.

Are you available? Are your services available? Well, given that I would be the same, you know, I'm the same age as all these guys running Doge, I guess I'm qualified. But I think I would have to wait and see how my this year's stock picking returns come out for the FT contest before I put myself up to manage the US's money.

But you're right. These are salad days for young men. So, you know, Mr. President, Aidan is waiting for your call. We're going to be back in a sec with Longshore.

In the short term, there's going to be a lot of volatility. But in the end, I think what we've seen is that the underlying aspects of productivity may end up being the more profound driver than the fears of government impact from the fiscal or the monetary side, for that matter. To learn more about macroeconomic disruption, subscribe to PGM's The Outthinking Investor in your favorite podcast app.

Alrighty, it's time for Long Short, that part of the show where we go long, a thing we love, or short, a thing we hate. Aidan, what's on your mind? I am long the reappearance of Chinese mogul Jack Ma. Where's he been? He's been out of the public eye, potentially under government control.

you know, duress and pushed out of the spotlight by the government. Allegedly, he somewhat reappeared. There was some high-level discourse with government officials, and I believe he spoke with Xi Jinping. Either way, I'm not sure what this actually pretends for the future of the Chinese economy, for the future of Alibaba. I just find it interesting, and I missed having, you know, the Chinese mogul discord. I feel like we've been focused so much on Chinese leadership. Where are the business leaders? This is going to be an interesting year to talk about them. The bank.

They're back. I am long Diet Coke. You and everyone else. Other beverages are available, but Emma Jacobs wrote a very funny column in the paper today about this, saying that it's the rocket fuel of America's macho working habits. That's not why I like it. I'm just slightly addicted to it, but I do keep it down to one can a day. Apparently, your president drinks 12 cans of this stuff a day.

How is that even possible? I wish I had his genetics because if I had his diet, I think I'd be a puddle. I mean, he's obviously made of strong stuff. As, of course, we should all be so that we're still around on Thursday to listen to the podcast again then. So listen up.

Unhedged is produced by Jake Harper and edited by Brian Erstadt. Our executive producer is Jacob Goldstein. We had additional help from Topher Forges. Cheryl Brumley is the FT's global head of audio. Special thanks to Laura Clark, Alistair Mackey, Greta Cohn and Natalie Sadler. FT Premium subscribers can get the Unhedged newsletter for free. A 30-day free trial is available to everyone else. Just go to ft.com slash unhedged offer. I'm Katie Martin. Thanks for listening.