SKEPTIC’S GUIDE TO INVESTING
Straight Talk for All, Nonsense for None
About - Our podcast looks to help improve investing IQ. We share 15-30 minutes on finance, market and investment ideas. We bring experience and empathy to the complex process of financial wellness. Every journey is unique, so we look for ways our insights can help listeners. Also, we want to have fun😎
Your Hosts - Meet Steve Davenport, CFA and Clem Miller, CFA as they discus the latest in news, markets and investments. They each bring over 25 years in the investment industry to their discussions. Steve brings a domestic stock and quantitative emphasis, Clem has a more fundamental and international perspective. They hope to bring experience, honesty and humility to these podcasts. There are a lot of acronyms and financial terms which confuse more than they help. There are many entertainers versus analysts promoting get rich quick ideas. Let’s cut through the nonsense with straight talk!
Disclaimer - These podcasts are not intended as investment advice. Individuals please consult your own investment, tax and legal advisors. They provide these insights for educational purposes only.
SKEPTIC’S GUIDE TO INVESTING
A U.S. Sovereign Wealth Fund: Is it Realistic?
Please text and tell us what you like
This episode tackles the contentious concept of a U.S. sovereign wealth fund, dissecting its potential feasibility, funding challenges, and political implications. With existing programs already serving similar purposes, the necessity of a new fund comes into question against the backdrop of America’s daunting debt landscape.
• Discussion on the nature and purpose of sovereign wealth funds
• Examination of the feasibility of establishing one in the U.S.
• Political implications and challenges tied to governance
• Review of current funding sources and their limitations
• Consideration of socio-economic issues that need first attention
• Closing thoughts on the redundancy of a new fund amidst existing programs
Straight Talk for All - Nonsense for None
Please check out our other podcasts:
https://skepticsguidetoinvesting.buzzsprout.com
Welcome everyone, and today we're going to talk to you about Sovereign Wealth Funds. Steve Davenport and Clem Miller, we're here from Skeptic's Guide to Investing, and today we're going to talk about a topic that has been in the news a lot and is generating a lot of buzz, but we're not sure if this buzz is just more and more puffery. So we thought we would try to dig into the concept of a sovereign wealth fund for the US, and this concept is around for countries like Saudi Arabia, which have a lot of money coming from energy and they realize that that's a limited supply. So ultimately, they're trying to create other industries with their sovereign wealth fund to allow the country to move from an energy-based economy to a broad-based economy. The US is already a broad-based economy. So, clem, where does a sovereign wealth fund sit in your probabilities and also in how it would be funded?
Clem Miller:So I don't think that we are going to end up with something that's called a sovereign wealth fund in the sense that you were talking about, with Saudi Arabia or Kuwait or the UAE, which you know have large investments in, at least in part, in domestic industries. You know that serve as sort of development funds, or the type of sovereign wealth fund that you know that Alaska has, you know the permanent fund, or that Norway has, which are basically funds that invest in, you know, a combination of fixed income and and uh equities and alternatives. You know sort of what you would think of as an endowment right? So there's a difference. There are two different types of sovereign wealth funds. Uh, one are sort of the normal endowment type uh wealth funds and the other one are basically development uh development funds and the other one are basically development funds.
Clem Miller:And I really don't see the US government being involved in either of those, and I think that the main reason for that has to do with the question of you know, how would the US government actually fund those sovereign wealth funds or the sovereign wealth fund? How would they fund it? Where would they get the capital for this from? And so that's the key question, steve, I think there have been precious few options sort of presented for this. It's almost like the idea is that well, we'll conjure this funding out from nowhere, right, and so there's only Well, we're going to conjure it from all the savings that the government gets from the Doge.
Steve Davenport:But I've heard three different sources. It's going to come from the cost savings of the government, it's going to come from the existing gold reserves we have and we're going to convert from gold to other investments. And then I've also heard that it's going to come from the tariffs, and I think that if we're going to fabricate money, we can fabricate it from many different places. The question is are we taking it away from a current need and investing in a long-term return that we think is going to be better than some of the current needs? And I think that I don't know what's the downside to us putting more money into the markets and allowing government to be a beneficiary of excessive Fed easing.
Clem Miller:Well, let me just talk about some of the funding sources that you were talking about. So you know, if to the extent there are Doge efficiencies, those aren't going to be used to fund a sovereign wealth fund. Those are gonna be used to try to reduce deficits. So you know, I just don't think, you know, I don't think we're going to have the necessary support among the you know, the, the tea party conservatives within the, within the Republican Party, those who are concerned about deficits, to use those Doge savings, to just use them willy-nilly for a sovereign wealth fund or for anything else for that matter, any other ideas like building condos in Gaza or whatnot. I just don't think that's going to happen.
Steve Davenport:I do think that they will pass the tax bill, which will also cause more deficit.
Clem Miller:Yeah, yeah, I mean they're going to, they're going to reduce, I mean they're going to. You know, if they're going to use this money from the Doge savings for anything, it's basically to cover the additional deficit costs arising from the tax bill. It's not going to be used to to fund a sovereign wealth fund. That's that's not going to happen. Wealth funds that's not going to happen. I think that the re's another. You know you mentioned the gold funding. You know selling gold to fund the, to fund this, I mean, I'd have to look at the numbers but honestly, I don't think there's enough gold to really make, you know, create a meaningful sovereign wealth fund along the lines of what a Norway has or an Alaska has or whatnot, saudi or UAE.
Steve Davenport:I guess I would ask is how big would it have to be to really be what I would call a normal size? I mean, I think that Norway, we know, is a huge part of their economy because they've done unbelievably well, and UAE and Saudi Arabia, I think, are large, but I don't know, like, are we talking about 10 percent of the economy, 20 percent of the economy? Are we talking about 10% of the economy, 20% of the economy? Because then we can say the US is $30 trillion in economy and GDP and come up with a rough estimate of how much sovereign wealth funds should be.
Clem Miller:I think that's a good question. I think that if you look at some of these smaller economies, you're talking about sovereign wealth funds that are 500 billion or upwards of a trillion dollars, right, I mean, they're big, these sovereign wealth funds. So if you apply that to a much larger economy like ours, you know the equivalent would be would have to be something like two or three trillion dollars, right, and that's. You know, nothing like that is ever going to happen. It's just not going to happen. The other thing I would mention is you know how is this? You know where's the funding going to go from this sovereign wealth fund and who's going to determine where it's going to go? Is it going to be allocated on a political basis? Is it going to be allocated by, you know, professional investors without, uh, without political uh, oversight? Um, you know, I think you know, steve, you and I would agree that there's going to be uh, if there is a sovereign wealth fund, there's going to be a lot of political interference in such a fund, in the operation of such a fund.
Steve Davenport:Oh, I think that we could just talk for the whole hour about how it gets funded and we could cover every different you know. But I agree, the problems don't just end with how does it get funded. The problems don't end with how do we pick between different investments of different areas of the US economy. But then I think the arm's lengthness and the discipline to have a really good sovereign wealth fund. I mean, just for giggles, norway's sovereign wealth fund is four. For giggles, norway's sovereign wealth fund is four times the GDP of Norway. Saudi Arabia, on the other hand, it can't be that large because that would be, I don't know.
Clem Miller:It's interesting.
Steve Davenport:I think it's an interesting construct, but I think it's just that it stays on the drawing board, because I think there are too many conflicts in our economy. My question is if this makes sense, in that there are companies who are starving for capital, who aren't getting it in the United States, and the government could be a viable lender or investor of last resort to help things that don't normally get proper investment. I could see this for woman-based startups. I could see this for woman-based startups. I could see this for low-income startups. I could see this for just like we have investment in communities and opportunity zones, this would become the opportunity zone from real estate to the opportunity zone for investors.
Clem Miller:So, steve, everything you just mentioned is stuff that the U? S government already does, okay, and already has programs for, uh, and is routinely thought of as being kind of by the, by the Republicans, as being far left ideas. Um, you know these are. You know the idea of. You know, opportunity zones are a Republican idea or, let's, let's say in, a Republican idea that's been adopted also by the Democrats, but that's different. That's like providing tax cuts.
Clem Miller:What the Republicans are against is the idea of funds being outlaid for you know what they, you know what they would consider to be boondoggles. Okay, so that's why they were so against. That's why the Republicans are so against the. You know the so-called inflation reduction act, because it had a lot of funds going out for things like, you know, solar and wind. And you know the CHIPS Act and you know, in terms of providing subsidies for, you know, for semiconductor development.
Clem Miller:I mean this goes back a long way. I mean I used to work for the Export-Import Bank for many years. I used to work for the Export-Import Bank for many years and that was an entity that provided financing, or guarantees for financing, to support US exporters for the purpose of creating jobs, and you know. So it goes back to that and that entity was created in 1934. So you know you've got a lot of of government government agencies. You got the. You know the agriculture department makes loans uh for, uh, you know for to, to support production, wheat production, corn production, to provide equipment, agricultural equipment. You've got the us government is those?
Steve Davenport:do those things necessarily not have funding, though?
Clem Miller:yeah, the us.
Clem Miller:I guess, that's what yeah they, the us government, is very, very involved in funding various aspects of the us economy. The us government, you know it, it it always operates, or claims to operate, as the lender of last resort, to use the term that you use. They use that all the time in justifying these programs, and I'm not saying the programs are bad. I think these programs are important, but I just want to make the point that you don't need a sovereign wealth fund on top of what the US government is already doing in these programs, and that you know the tea party if it gives you a higher percent return.
Steve Davenport:I mean, let's talk about returns to the community, whether they be abstract returns or whether they be actual dollars. Does that matter to you, scott?
Clem Miller:What do you mean?
Steve Davenport:If we have a head start program that we invest in for young children and we say, okay, we're putting this money as an investment in our future.
Clem Miller:We already have a head start program. If we just if we just, you know, if there was political and courts opposition which there is now to cutting some of these things to the Doge operations, you're going to preserve these operations that have built up and built up over the decades and you won't need to create this sort of sovereign wealth fund, which would, in effect, be a slush fund right For politicians and their friends, or, to use the expression that you hear a lot of the billionaire class, right, right.
Steve Davenport:I just want to have the understanding that a lot of this idea of returns of a fund or returns to society or returns of existing programs to compare, how do we keep one program versus another? Well, because this one has a higher return on the investment. And my question to you is are we really stacking things by investment return or are we just saying these things have investments and, just like anybody else selling an investment, they believe the return is worthwhile, so you should invest. But are people just talking their own book? Or are people really actually have returns that show you that road investment and infrastructure is gives you a 9.4 return and Head Start gives you a 12.4? So you should always give to Head Start ahead of highways Does?
Clem Miller:this really exist in the world. So, steve, steve, I think what we're, I think what you're talking about falls under the category of the streetlight effect. You know, what that is is where you know if you drop a quarter out of your pocket on a dark night, the first place you're going to look is under a streetlight. Okay, but that's, that's a psychological thing, right? It's easier to see a financial return when it comes to a stock or a bond, much easier to see it. But that doesn't mean that the returns on things like Head Start or on roads and bridges and so on aren't, you know, don't have economic returns. They do have economic returns. They're just not as easy to measure or define as the financial returns you get from a stock or a bond. It doesn't mean they're any less valuable. They could be even more valuable to the extent these economic returns are earned over decades. Bitcoin, if you own it over a few decades, it's like Bitcoin.
Steve Davenport:If you own it over a few decades, its return is tremendous, right.
Clem Miller:No, okay, its return ultimately will be zero. Okay, because the whole thing will collapse. In my opinion, the whole issue about Bitcoin is all about when do you get in and when do you get out.
Steve Davenport:And ED HARRISON. I'm giving you a hard time, clement, I know that you realize that, but I just think the discussion about returns and efficient use of capital and putting that in the same sentence with Doge, where we've got such a broad economy and so many people and so many ways that are interconnected, that we're really, when we look at the world and how government makes decisions, we have this idealistic image that there's some efficient allocator of capital that moves between one part of government to another part of government and those funds are all moving in such a way that they maximize the benefit to the US citizen and in reality, they maximize the benefit to whoever the congressman and senator is in that state that's going to get that funding and that's what they focus on and that's all they care about, because they're there for two years or six years, but they're still based on a short-term focus From the standpoint of Congress.
Clem Miller:Right, there's no question about that, there's a political, you know, either political inputs or a political layer let's call it of analytical review Well, not even analytical review a political layer of decision making, right, political layer of decision-making. On top of that, it's sort of like, you know, it's sort of like how the defense industry, boeing and so on, they spread their operations across the country, trying to cover as many states and districts as possible to, you know, establish support for their various, you know expensive programs. So, you know, the same kind of thing you try to you try to establish political support and, and my, you know my issue with a sovereign wealth fund is that you're putting an awful lot of power in the hands of, you know, the the four or five people who might constitute the board or the investment committee of the sovereign wealth fund And-.
Steve Davenport:I agree. I think it's ludicrous to try to. I mean, first of all, let's just stop from one topic and go on to the next, which is how we would fund this when we are already so far in debt at 123% of GDP, and that doesn't include our obligations to Social Security and Medicare, which would add trillions more to the obligation of the US government, of the US government. So, while we're somewhere around 36, 37 billion, I think that the number is really close to the 55 billion of obligations and Trillion, trillion, trillion.
Steve Davenport:Sorry, I forgot the team name 55 trillion on a 30 trillion it's so big it's hard to even imagine the 30 trillion economy is ridiculous, and I think that what we're seeing is how do we then decide that we're going to give somebody else in government the money to make decisions about where the future of the US economy should go? And in my mind, there's already plenty of programs and ways that the government can influence the marketplace, so why are we giving them another hammer when they're not using the existing hammers necessarily to their fullest?
Clem Miller:I totally agree. I totally agree. There's all sorts of programs out there that you know. Yeah, you can say that they have political influence, but they're actually narrow purpose driven, mission driven. Let's call them mission driven fund programs, especially if it's one that doesn't have a. It's not run like an investment fund like Norway's or Alaska's. If it's run more like a Saudi one or a Gulf one, it can become almost a slush fund.
Steve Davenport:I just looked up Saudi Arabia. Saudi Arabia's fund is about $970 billion and the entire economy, gdp-wise, is about $2.2 trillion. So it's well over 40% of the economy and 60% of the investments go into Saudi Arabia. Correct? So there's no investor who is larger than the sovereign wealth fund, right? So when you look at the US, we have a larger pool, but we also have such a large economy. I don't think any of the sovereign wealth funds that exist today could be a model for us, because they're so much larger in their impact than we could ever create in the US.
Clem Miller:I totally agree. There's never going to be a sovereign wealth fund in the United States that will be able to deliver dividends, like a Norwegian fund, like an Alaska fund, dividends to citizens, like an Alaska fund or a Texas fund, or you know, the Gulf funds too I mean the Gulf funds, you know, funded by energy, you know, are there to you know, as you pointed out, energy, you know are there to you know, as you pointed out, sustain these economies past a uh, a non-oil, you know, into a non-oil future, uh, with the benefit of keeping taxes zero or low, uh, for their citizens. Right, and I just, I just don't see that that there's anything we can do in terms of a sovereign wealth fund to minimize taxes or to provide dividends to US citizens. It's all going to be a political slush fund.
Steve Davenport:Yeah, I mean, I think that one of the characteristics that I, when I look up sovereign wealth fund in the dictionary, it talks about how they have to be consistent, they have to generate returns in a very disciplined way and they have to be able to invest when the whole market is down in order for them to continue to see. You know real growth. You know real growth. And I look at those words consistent discipline and I have a hard time with the current administration coming up with, yes, this is their sweet spot. They're going to be able to deliver consistent disciplines and unpoliticized investments towards things that are good for all of the American people. I mean, it's just, first of all, it would be hard to construct, to get the money. Second of all, it would be hard to be as big as it needs to be to influence an economy our size, I would say. Thirdly and you may disagree with me, I think there is already a good supply of investments to the various people who need funding. So I would say there's already a pretty large system in place in the US for investments. So therefore, we're kind of creating, we're creating a solution to a problem that we don't have. Then we get into the next step, which is okay. Let's just forget about funding and let's forget about size and let's just whiteboard this and think about how we would run it.
Steve Davenport:Then we get into the political. Who points the committee? What are the committee's boundaries? Are they bound by things that are real assets or can they buy crypto? Are they bound by things that are futuristic, or do they need to provide a dividend and a return to people? If they need a dividend and there's no dividend paid to, how do we construct a return profile for the committee to evaluate whether they're good or bad? If the SAP is up 20 and they're up nine, do we fire the board and start again? How do you think you should construct?
Clem Miller:it. Oh, I don't think we should have one to begin with. I just don't think, I don't think we have the consistency and discipline in this country to to do that. I mean, if, if you're going to have a, a presidentially appointed board, which is what you know exim bank, I Bank, uh had, and a lot of government agencies have presidentially appointed boards, they might have, you know, members of both parties on those boards. Or, you know, used to before you know, trump 2.2, trump 2.0. Um, but they're all presidentially elected.
Clem Miller:And so do you really want presidentially elected people, presidentially appointed people, who are, uh, you know, the overseers of the sovereign wealth fund? I don't think so. Right, and yet, and yet, are we going to put responsibility for managing these things with, like a BlackRock? I mean BlackRock. The US government's thrift savings plan is essentially run by BlackRock. Do we really want BlackRock, or some other folks, to private sector folks to themselves run this thing? No, I don't think so. I think that, to the extent that you have, well, I would rather have private sector people run it than politicos, sector people run it than politicos.
Clem Miller:But I think the best solution, uh, for a sovereign wealth fund idea is simply to not have it at all. Um, it's not like a pension, it's not like a pension fund where you have to have a government pension fund. You know that's, that's an, that's a? Uh. You know that's not a? Um, an option, right, that a requirement. But sovereign wealth fund is just a pie in the sky idea, uh, that you know people talk about it because they, they, you know it sounds nice, right, but it's not. The? U is not Norway or Saudi Arabia or you know, beyond Texas. You know we don't even have the resources that a Texas or an Alaska do, right, as the you know, the overall US government. So I just don't see, I don't see any real possibility that this will happen, especially with, you know, an emphasis by many Republicans on deficit reduction. Yeah, I don't think it fits with the.
Steve Davenport:I don't think it fits in the current perspective of where we are financially. I don't think it fits with our priorities. I'm not sure it fits with something that's really necessary, our priorities. I'm not sure it fits with something that's really necessary. Because I don't feel like, when I look at these investors, there are investors who are willing to take more risk in the private space and they want private debt, they want private equity. I'm not sure.
Clem Miller:Yeah, you're right. I mean, you've got folks who are willing to invest in housing, for example. Right, right, there's real estate funds.
Steve Davenport:There's private real estate, there's public real estate. So I believe that we're order to have a sovereign wealth fund is very hard for me to see being achieved. So I think that we need to figure out what we want to be when we grow up, and I think the first thing would probably be let's get control of our debt, yeah. Then let's get control of our health, and then maybe let's get control of our educational and future development. Yeah, I mean, those things seem like they would be first and foremost if the health, you know, if we improve the health of America, if we improve the way we take care of money and the way the government spends money.
Steve Davenport:the way we take care of money and the way the government spends money, yes, we could see a huge improvement in the mental, physical and financial well-being of a country Right.
Clem Miller:Basically, socioeconomic returns is what you're talking about, and I would I add on to health and education. I would say infrastructure as well. I mean, when you compare. When you compare, you know, I was in Japan for a month last year and Japan's infrastructure is so much better than US infrastructure. It's just unbelievable how much better it is. And even Spain, which I had been to a few years ago, has a fantastic train infrastructure. I just think that there is so much more we can do in terms of infrastructure in this country. Correct, I think that there is so much more we can do in terms of infrastructure in this country Correct.
Steve Davenport:I think that infrastructure just has, in my mind, kind of a political overtone to it, because I keep remembering that senator from West Virginia who kept repaving the road every two years, and you know the road only got about 5,000 cars a year but it still kept getting repaved even though you know the pavements last for 20 years, right? And so there is a certain amount of infrastructure corruptness that I feel makes it less broad. The beneficiaries of infrastructure, in my mind, tend to be very narrow and they don't tend to be widespread, and I agree that some of the infrastructure that we've had in Internet access has been significant, and I think that's where we need to think about the infrastructure is not just the roads and bridges, just the roads and bridges, but some of the pipes that people operate businesses through, some of the utilities that are trying to develop technologies that are going to be better for us.
Clem Miller:I think that's the type of the future, so to speak, as opposed to public sector investments in, you know, highways and you know, ports and all that.
Steve Davenport:I just think we need to think differently about it as to what.
Clem Miller:I think we need, I think you know the the. I think the private sector is looking for financial returns and I think there's plenty of infrastructure that the private sector can development, develop, that has financial returns. But I think, I still think that public infrastructure, a lot of it, will not be achieved without, you know, some significant amount of government money, for example, from the Highway Trust Fund, which is financed by, you know, by gasoline taxes, for example financed by gasoline taxes, for example.
Steve Davenport:Yeah, I mean, I think there is stuff in place already for highways, and I guess my question is if we look at the you know, the internet or the Wi-Fi, and the spectrum, and how does the spectrum get allocated? How does the spectrum get bought for and controlled by the different cellular providers? I think there's ways that we're going to use this spectrum that needs to be thought of in a more holistic manner. For, summing up, sovereign wealth funds Clem, you'd be strong, maybe, or how do you want to?
Clem Miller:end it on sovereign wealth funds. I think the chances of us having one, any kind of meaningful one, are zero. I think that you know, it's quite possible that there could be some empty executive order signed which means absolutely nothing because it won't be funded at all. So that's possible.
Steve Davenport:But I think the chance You're saying there's a chance.
Clem Miller:Well, it's vanishingly small. There will be one, and that's mainly because you're just not going to have political support from Congress for doing such a thing.
Steve Davenport:I agree with you. I think that this is just another thing that's being thrown around as an idea to be futuristic and to be different, and I think that the existing government has already built and is funding a lot of these things that we say we want to achieve. So, in my mind, this is a solution without a problem is a solution without a problem. So I would say that it's unlikely to get funded, it's unlikely to be able to be run effectively and therefore, it's probably unlikely that we should go down this path. I'd like to thank everybody for listening and encourage you to listen to our next podcast, which is going to be on inflation and the latest data that came out today on inflation and the latest data that came out today, and how has inflation been a rule of the markets here in 2025?. So, thank you for listening and please like and share as much as you can with our podcast so that we can grow our base. Have a good one, thank you.
