Spot the contradiction in these two excerpts from a Bloomberg piece out this morning:
- Norway’s $970 billion wealth fund has been ordered to raise its stock holdings to 70 percent from 60 percent in an effort to boost returns and safeguard the country’s oil riches for future generations.
- “We don’t have any views on whether the market is priced high or low, whether bonds and stocks are expensive or cheap,” Trond Grande, the fund’s deputy chief executive said.
Now look, I get what old Trond is trying to communicate there, but those two things are inherently inconsistent.
You can’t say you’re trying to “boost returns” and “safeguard” your country’s wealth and then in the same breath claim you don’t have a view on whether the assets you’re investing that very same wealth in to generate those very same returns are “expensive or cheap.”
That is, obviously you do have some “views” and clearly those views are at least some semblance of bullish or you wouldn’t be upping your allocation to those assets if your goal is to “boost returns.”
That’s like saying something like “I don’t have any views on whether fried chicken is good or bad for my health, but I’m upping the fried chicken allocation in my diet to 70% of my caloric intake from 60% in order to improve my health and safeguard my heart.” You’re taking a view on fried chicken and fried chicken’s likely impact on your health by doing that whether you admit it to yourself or not.
As you may or may not know, Norway’s SWF is legendary. And its assets have more than doubled in the last five years:
But when you think about everything said above, you have to put it in the context of oil prices and the extent to which the country has been drawing on that SWF to plug budget gaps since early 2016.
Here’s a quick summary from a Reuters piece that ran after news of the first withdrawal hit last year:
With its economy weakening, Norway’s government made its first withdrawal from the country’s $826 billion sovereign wealth fund in January, 20 years after first depositing cash from its vast oil sector into the account, the finance ministry said.
The finance ministry did not confirm details of the withdrawal, but newspaper Dagens Naeringsliv said 6.7 billion Norwegian crowns ($780 million) had been extracted to pay for public spending.
The government, led by Prime Minister Erna Solberg of the Conservatives and Finance Minister Siv Jensen of the smaller Progress Party, had flagged in its October budget that it might make the first withdrawal from the rainy-day fund this year.
Norway has sharply raised its annual budget spending to counter an economic downturn triggered by falling oil industry investments as the price of North Sea crude has fallen by 70 percent since mid-2014.
Got that? They started funding fiscal spending with profits from the SWF to counter an oil rout.
Well, fast forward to October, and some folks were getting concerned. Here’s Bloomberg:
Norway’s government on Thursday revealed plans to withdraw 121 billion kroner ($15 billion) from the $890 billion fund [in 2017] as part of an oil-fed spending bonanza that’s filling a budget hole that’s almost 8 percent of gross domestic product.
As recently as 2015, Norway was using oil revenue to replenish its wealth fund. Now, it’s taking out more than half its estimated income from bonds, dividends and real estate to make up for lost oil revenue. Though the fund was created to help Norway cope with tougher times, the withdrawals have started much earlier than expected.
[…]
“Now that we are in an extraordinary situation, hit by the biggest oil price shock in 30 years, it would be crazy if we didn’t have an expansionary fiscal policy,” Finance Minister Siv Jensen said. Jensen rejected suggestions that the fund was “vulnerable.” She described it as “rock solid.”
You’re probably starting to see where this is going.
Common sense dictates that if yields are suppressed on the fixed income portion of the SWF and simultaneously there’s pressure for the government to fund fiscal policy initiatives with withdrawals from that same fund, well then what do you think they’re going to be tempted to do? Increase the allocation to assets that have the potential to increase returns, of course.
Right now, that’s working out pretty goddamn well. Here’s WSJ with more on the Q2 numbers:
Norway’s sovereign-wealth fund, the world’s biggest, continued its march toward a $1 trillion valuation after the best half-year return in its history.
The fund announced a 2.6% return on its investments in the second quarter of this year, helped by a solid performance from its stock-market portfolio.
Norges Bank Investment Management, the arm of the central bank that manages the fund, said Tuesday the quarterly return equated to 202 billion Norwegian kroner ($25.6 billion).
The total value of the fund on June 30 was 8.02 trillion kroner–or $957.13 billion calculated at the exchange rate on that date. This figure would have been even higher were it not for a 16 billion kroner withdrawal by the government and the strong krone, which in combination reduced the value of the fund by 32 billion kroner, NBIM said.
Norway approached the trillion-dollar milestone despite pressure on sovereign-wealth funds globally. Ultralow interest rates are crimping returns and cheap oil is cutting into the income of the largely resource-dependent countries rich enough to possess such funds.
Last year was the first time Norway’s government, seeking to fill a hole in its budget, withdrew more money from the fund than it put in.
However, stock markets have set record after record in 2017, powered in large part by a revival in U.S. corporate earnings. The Dow Jones Industrial Average passed 22000 in August, more than tripling from a low in March 2009.
“The stock markets have performed particularly well so far this year, and the fund’s return in the two first quarters was 6.5%,” Trond Grande, deputy chief executive of Norges Bank Investment Management, said.
Ok so the problem with all of this should be glaringly obvious: if that fund is being used to plug budget gaps and the fund’s managers are under pressure to increase its exposure to stocks in order to generate higher returns, then fiscal policy is by definition becoming increasingly beholden to the vicissitudes of global equity markets.
And on that note, we’ll leave you with a quote from Deputy central bank governor Egil Matsen who said this last year:
Say you have a decline in the equity market, and these returns have been partly funding the government, do you want variations in international financial markets to have a direct impact on fiscal policy?
