Trump's Sovereign Wealth Fund Idea Explained

Hello and welcome back to The Trading Floor. And before we begin today's episode, quick shout out to Feedspot for placing us, Piers, as number 10 in their latest list of the global 35 best financial markets podcasts. So we've got a little bit of work to do, but we've cut the top 10 and made the list.

It's pretty cool. Who are we ahead of that I might have heard of?

Number 1 is Motley Fool Money, which is very well followed in the States. I know they've got many millions, uh, of social followers. And I think there's that other podcast, number 2, is the one about the billionaires, the series about the strategy and tactics. So yeah, there's some big names on there. We're definitely ahead of Fidelity, Schroders, NatWest, Standard Chartered. They're all on the list.

There you go.

You know, in your— in, in the backdrop of your, uh, shadow, let's say, uh, of Piers Curran.

But, um, well, let's, uh, next stop, top 5.

Okay.

Yeah.

And look, we're not, we're not competitive at all, so if you haven't already rated and reviewed the show, please do so, because it definitely helps get the show out there. Maybe you can bump us up another few notches next time that list drops. But look, let's crack on and let's talk about— really, we are going to talk about tariffs because it's such a big thing and it's critically important for understanding the market. In the short term at least, and the fluctuations day to day. And there's been a lot of headlines, there's been a lot of market moves, so we'll touch on that as the second segment. To start with though, there was this headline, uh, beginning of the week that President Trump has signed an executive order directing the Treasury and Commerce Department to establish a US Sovereign Wealth Fund within the next 12 months. In fact, within 90 days he wants recommendations on his desk— funding mechanisms, investment strategies, fund structure, governance models, Yeah, I'm sure— was it, uh, Benson Bessett has got his work cut out. He's only just started in the job and he's had that land in his email box first thing on Monday. But what I wanted to do was not, um, go with the thinking that everyone knows exactly what a sovereign wealth fund is. Uh, there are many other countries that have these, probably the most notorious ones being Norway from a success point of view, but also the Middle East sovereign, uh, Saudi Arabia, countries like that, UAE, very active in that space as well as China. So I wanted to kind of pick your brains and maybe do a bit of, um, jargon busting for sovereign wealth funds. What is it? How do they work? What's the likelihood of the US going through with this? Pros and cons. Go through that and then we can talk tariffs after.

Okay. Well, let's start. With the definition. It's an investment vehicle or fund, um, that is run and owned by a government. So that's it in short. There are— I mean, these things are— this is big business these days. Generally, you're looking more Middle East, sort of Asia, um, for this kind of thing, but You'd be surprised at how many Western, you know, developed economies are kind of having a go at this. So right now, total funds under management within sovereign wealth funds, $13 trillion. So we're not messing about here. This is a— I mean, that's all that— that's— I mean, that would be the second, the third largest economy on the planet at that kind of size. But yeah, look, it's an investment vehicle owned by the government, right? Um, actually, did you know there's already— so this is like, whoa, what the hell, Trump, wow, this is like out of left field, you know, typical Trump style. But actually, did you know there are already 20 pseudo-sovereign wealth funds in the US already? And that they are funds being run at a state level.

I'm assuming this is where that Alaska one falls in, but is that because of the nature of Alaska state and what they do? Right. Very much is on infrastructure and oil.

So I'll go into— there are broadly speaking 3 types of sovereign wealth fund. You've already hit on one. That's that idea that a state or a country or a government owns huge amounts of assets and, and kind of natural, you know, like oil up in Alaska is a really good example, right? Sat on a huge gold mine of natural resources. So, right, that's your value. And then it's from that that, and, you know, Saudi Arabia's, you know, fund as well, of course, from oil, right? That's what everyone thinks and imagines. Norway's the same in a way, right? Everyone just thinks that, all right, anybody's got loads of natural resources, bang, let's sell it. From the revenues generated, let's siphon some of those into a fund, which we're then going to invest and run just as a fund to try and take that money and, and get to drive capital appreciation for the benefit of the country and everyone in it over the long term, right? Um, but there are 86 countries, um, in the world that have sovereign wealth funds. Some have multiples. There's actually 206 sovereign wealth funds in total from 86 different countries. So the 3 types I mentioned One starts with cash, okay? So you have already have a pool of wealth, you've got cash as a government from somewhere, and that could be the oil example actually, because you don't put barrels of oil in your fund, you want cash so that then you can start investing it. So they're selling the oil. So Norway is actually an example of this first one, which is a cash starting position of a KAS. You can think about it as a kind of rainy day fund. It's like, let's siphon off some of the revenue we're generating from oil. We're not going to spend it now. Let's siphon it into a fund. We're going to invest it, try and make that grow through investments. And that's like a side pot that we can tap into in case of emergency.

Context on that, the Norges Bank Investment Management, they had a 13% return last year on 1.8 trillion.

Yeah, that's a lot of money, but they've been going at it for— actually, I don't know when they started that fund. Does it It's probably 20-odd years ago.

Yeah, not, not sure when they started, but I, I know the numbers. So in terms of the scale effect, uh, 2005 under management, $207 billion. 2015, $845 billion. Another, another 10 years, $1.8 trillion.

Yeah, I mean, look, if you look back over the last 10 years Basically being, generally speaking, a long-only fund, it's been a great time. I mean, yes, we had a massive nosedive when COVID hit, but it all came smashing back. And you know, you go around the world, by and large, stocks are very handsomely priced. And in many, many, many cases, indexes are trading at all-time highs, right? So if you've been invested in that stuff, and especially US stocks, if you've been invested in that stuff, then, you know, it's been a great decade. Um, and look, when you're a fund, um, throwing around that amount of capital— because for Norway, they've got a particular problem. They've got so much money that then it becomes a liquidity issue. And actually, there was a stat— this is, I don't know, 5+ years old, and I can't— I'll have to dig it out. I don't know what it is now, but there was a stat that basically the Norway Sovereign Wealth Fund used to own basically the equivalent of more than 1% of every publicly listed company on the planet. It has enough money to be a 1%+ owner through buying shares of every company listed on the planet, which is kind of staggering.

It's actually about 1.5% now.

Right. Well, there you go. Right. So in the last decade, stocks have gone up, they've been fully invested in it, and it's been happy days. And now they've got a $1.8 trillion rainy day fund. And I guess one thing to say, well, when does the rainy day fund become big enough that you don't just use it for rainy days? But that's why actually these funds that countries have been operating, they did tap into them during COVID So that's important to say. It's perfect for a COVID scenario. Something comes out of left field, it's going to cost you as a government huge amounts of money, right? Let's tap into that fund to help us cover that emergency cost.

In addition, also diversifying that. I know that Norway invests a lot in real estate and also the energy transition. So a lot of those infrastructure projects.

Yeah, yeah. Okay. Um, all right, so look, that's fund type number one. You're starting with cash. Often you're getting that from selling your natural resources, but then it's about investing, okay, and making that money grow. Number 2, it's— this is where you're starting with assets, fixed assets, that then the government— that the government owns, and you're basically transferring the ownership of those assets into the sovereign wealth fund. And then those assets might be income generating. A good example of this is Singapore's state-owned wealth fund, whose name is Question?

Don't have it.

Temasek.

Ah, yes, Temasek.

You should know that. You want to know why?

Yeah, because we had one of our alumni work there.

They're a client of ours.

Yeah.

Um, so this is an example of Type 2. They actually started in 1974. I'll have to check. That's got to be one of the first ever sovereign wealth funds, I would imagine. But they actually started off with a collection of ports post offices and other government holdings, right? But those ports is a really good example, right? That's an asset, it's owned by the government, it generates income. And so you're transferring that asset into the fund, and then the income that's being generated stays in the fund and starts to be invested in equities, for example. And slowly but surely over the years, all that income that you get pulling off your assets, it is getting gen— funneled into what is an ever and ever, ever bigger portfolio of kind of financial assets, and it kind of goes from there. They are clocking, I think, $288 billion was the value of their fund in 2024. Okay, there's a third type then, and this is where it's actually, they don't have cash and they don't have assets, but they still want to start a fund. So you're like, uh, all right, well, how does that work? Well, you need outside investment. Okay, now examples: the Indonesian Investment Authority, um, so they did this, and more infamously, the Malaysian 1MDB fund did this.

We're not going to name any bank names who would have facilitated that.

Absolutely not. But you— but that's a good point though. You need banks, investment banks, they now to help you set up that fund because you're like any other entity that wants to raise capital. All right, well, you need an investment banker to help you tap the markets and raise funds, right? But the thing about the Malaysian one, I say infamous is because it all imploded because what they were basically doing, there was corruption going on. They were basically raising capital. They're basically siphoning it off into the pockets of various Malaysian politicians, and so it kind of all blew up and there was a huge scandal. Google it. But look, they're the 3 types of funds, right? There is a top 10. We'll come back in a sec to think about, well, all right, if Trump wants a fund, which of those 3 types of structures might make sense for them? But in terms of the top 10, so here, this is the top 10 in order of, you know, the funds under management, assets under management. Okay, so Norway, so the Norge Bank Investment Management Fund, as you've already said, $1.8 trillion. Next, well, I'm gonna, I'm gonna ask you, who's, who's number 2? What do you reckon?

Saudi?

Just give me a country. Saudi, their Public Investment Fund, PIF, which is probably one of the most famous, especially if you follow things like football and golf and boxing, and they're the, they're the entity that's kind of funding all of that kind of stuff that you and Stephen have spoken about many times, um, on the Deal Room podcast, but they're actually clocking in at 6th.

Kuwait.

Kuwait are not in the top— oh, sorry, they are, they're 5th. Apologies. The Kuwaiti Investment Authority. Good shout. Now you're just thinking about oil.

Yeah, basically anywhere in the Persian Gulf.

And 3rd, 2nd and 3rd basically don't have oil. Well, they do, but it's nothing, it's nothing.

China.

Correct. It's China in number 2 and China in number 3, cuz they've got multiple funds and their 2 biggest is the China Investment Corporation, $1.3 trillion, and then the SAFE, uh, investment company, $1.2 trillion.

Do you mean to say China like Trump says China, or is that just how you say China?

What do you mean, China?

Just did it again.

What's that? What? China.

There you go. A bit more normal now.

Hang on, how does Trump say it?

China.

China.

You always say it like that. Maybe it's those Welsh roots.

I've been listening to too many kind of Trump kind of sound bites, I think. Um, but yeah, by and large it's big oil countries plus then China. Like you got Qatar in there. It's UAE, Saudi. Yeah, you've got the main— but look, thinking about the US, what should— so should they— is this a good idea of Trump's? I mean, can Trump have good ideas? Or is this just Trump being Trump?

I guess the first question, if you're a critic, is the current situation the US faces, significant budget deficits and a growing national debt. So how do you— I get around that.

Definitely agree. But how about flipping and spinning that by saying, actually, this could be a method for helping manage and paying down their deficit and their debt. So we're not thinking the number one type of fund here. Cash. So what, you know, and we're not thinking about number 3 either, which is kind of rate— well, there's one type of number 3. Number 3, remember, is you're basically raising outside capital. They could issue debt, right, and borrow the money into the fund. That's got zero legs. That— there is zero, zero, zero chance of that path. Because their debt is already way too high. They don't want to pile more on top. Forget about that. So then it's about, well, do they have assets that generate cash? And actually, one of the things that DOJ, the Department of Government Efficiency, is kind of tackling, you know, in their first 10 days, they've been trying to think about, right, how can we cut costs? And one of the first things you'll have read about in the press is about, right, all government federal workers have to go back to the office. 5 days a week. So this is classic Musk. He did this at Twitter, right? It's, how do you reduce costs? Well, people costs are normally one of the biggest line items. How do you get people to quit? Force them back to the office. Now there's going to be a small portion of people that would prefer not to go back to the office and are willing to quit their job because they don't want to do that, right? So that's happened, and so great. The second step has been um, to offer voluntary redundancy with an 8-month redundancy package payout. Okay, that's their step number 2. Anyway, so this is happening. That's it. That's irrelevant to sovereign wealth funds. But the other part of the thing they're trying to cut costs on is apparently the US government. They own a lot of property, okay, plus they also rent a lot of property. A lot of office space for federal workers that all work at home. Basically, there is huge swathes of empty office space in America that's being leased at top rate by the government for nothing. So it's just about going through the docket. Okay, what's empty? What's almost empty? Let's cancel the leases on those. But on the flip side, again, that's got not much to do with sovereign wealth funds. The other side is they do own a lot of property. And so, right, what's happening with the income that's coming off that? Are they generating income off it, you know, as they should be? Is there further income gains that can be had? But you're right to say, well, shouldn't those be steered into paying down debt rather than being bunged into some kind of investment portfolio? And I think you'd probably have a strong argument there. But there is another way, and Trump's hinted at this, And that is because some sovereign wealth funds, you know, they take ownership stakes in businesses. Now you might think straightforward, well, they'll buy a stake, right, by buying the shares. Uh, for example, the Saudi fund owned a 10% stake in Heathrow Airport, so they bought that, right? But you can also take ownership stakes in a slightly different way, and Stargate Someone hinted at this, and it was like, so Stargate was that collaboration between OpenAI and, um, the— and SoftBank, right, predominantly. And they're going to build out— it's a $500 billion 5-year plan to build out huge compute power for the US to keep them in the race for AI. Now, Deepseek might have thrown that all off course, but we don't know really yet. But, um, Trump was very quick to get them all into the White House, tap them on the back, and go, look, the US government is very much endorsing this. But the US government weren't playing a direct role. Trump's idea was, well, we'll get indirect benefits because there will be huge investment in infrastructure in the US. It'll create a huge number of jobs because that infrastructure has got to get built, and it'll keep us ahead of the game against other countries in this AI race because we'll have more compute than them, right? So they're your second-order benefits. But actually, Trump was saying, well, maybe we can have a first-order benefit. Because if the government's endorsement for them to do this is so powerful, well, shouldn't we be saying, look, we'll endorse this, but we want a 5% cut? We want 5% equity ownership in this business as part of the package and the deal for you lot to come in here into the US and do whatever you want to do. That's quite an interesting idea.

Yeah, that is really interesting. Business smarts. However, is one of the reasons why there isn't already a prevalent sovereign wealth fund in England, the UK, in Europe, in America? Because if Trump's got a 1% interest in the success of OpenAI or Google or Microsoft, surely that in the way of which the regulatory environment is set up governance is set up, it just would never pass in the way of which it's structured at this present point in time.

But I would—

does he control— he's the one who controls the system so he can define the rules.

Look, I'd say there's a few ways to look at this in Europe. So you say, well, why haven't European countries got sovereign wealth funds? Well, basically, they— some of them do, but they're so small, no one's really ever heard of them. For example, Ireland have a sovereign wealth fund. It's just got $14 billion, which, all right, it's fine, a lot of money in one sense, but it's not in the sovereign wealth fund game. France have one, $45 billion. Italy's got one. It's actually got $500 billion in assets in the Italian sovereign wealth fund. So actually, that's, that's now starting to get sizable. Spain have a small one. Denmark, Sweden. They have funds, right? But I would say, think about which countries are dominating in this sphere, right? It's Middle Eastern countries, it's the Chinas of this world. Now, they've set up incredibly differently from a political point of view, right? And it's more like dictatorship or communism, which is very much about the, the, the benefits of that The pros to that model is long-term strategic thinking, right? So like the Saudi Vision 2030, okay, well, they started that like in 2020, and that's like a 10-year thing, or even before 2020, right? And so they're like, okay, how do we get to where we want to be in the long term? Well, actually, this fund idea, it's a lot— it's playing the long game. So Norway are now like like massively seeing the benefits because they've been at it for 20+ years. So the problem with kind of, you know, Western politics is it's very short-termism, you know, particularly in the US where maximum 4-year term, right? So it's about how do I get elected in 4 years' time? Well, this sovereign wealth fund business, that'll pay off in 10. I'm not going to be here. So right, let's focus on short-term stuff. So I think generally that's probably one of the underlying reasons why Europe and the US hasn't bothered. But I would say that as time's gone on, and Norway best example, people are going, wow, I wish we had started a fund 10, 20 years ago. And the thing about all of that is, well, look, we might as well just get on with it and start it, and it will be a benefit in the long term. I might not get the full kind of positive kickback on that, but you you know what, it's the right thing to do. Yeah.

And actually thinking, if I was a strategist as part of Trump's team, I would say this is an absolutely appropriate order to issue, and it doesn't matter if it comes to nothing. The power of just bringing the idea and having the proactivity, the lateral thinking to think of other ways and means to generate growth within the US and using other good models of success like Norway.

Yeah.

Because that Norway news only just came out as well, and obviously a good thing to anchor to.

And I would say for Trump, obviously he can't have another term. This is his second and last, right? So maybe he's thinking about his legacy. You know, if you are the guy who set up the fund, and let's say you are Norway in 20 years' time, right? It'll be forever called the Trump Sovereign Wealth Fund, right? It's a bit, it's a bit like Obamacare. I mean, you can debate whether that's good or not, but it's a kind of that legacy thing. I'm sure there's some of that in this sort of direction that Trump's heading in here. But look, I think it's a good idea. Um, they're not going to see the benefits for many years, but it could in time be a really powerful thing that can help them. Balance their budget and stay balanced. Um, that's their big problem. Their debt levels are out of control and it needs sorting. That's why Doge is happening. But is that going to be successful enough is the question mark.

Maybe a question for Stephen, who can leave a comment on this episode, is 90 days to go through the funding, the investment strategies, the fund structure, the governance model I don't see how they can do that without paying for help. Someone's making some money out of that. And so that timeline is so tight for such a complex vehicle, surely.

I mean, I would agree. Sounds like cutting corners, Trump style. Let's get it done. But actually corners getting cut may come back to haunt you. Yeah, that does sound rushed, to say the least.

100 days. Make it happen. All right. So tariffs. Well, I know that China's come out. It's kind of been a bit of ping pong, isn't it? Where there's been a lot of fear and anxiety about retaliations. It's kind of Trump delayed it, then he didn't. And then, then now China's come out and they've been fairly passive, lifted it a little bit. So where do we stand at the moment?

So we stand where we're kind of round Round 1 is complete. Um, he obviously went after Canada and Mexico over the weekend, threatening 25% tariffs starting on Monday. Um, and you know, his bullying tactics worked because they came to the table and Trump got what he wanted for now. And it's definitely a for now there, by the way, because he hasn't cancelled the tariffs. He's just said, well, all right, we'll give you a 1-month reprieve. They're going to start, you know, at the beginning of March. So we'll see if, um, Mexico and Canada are just— yeah, they're just under the thumb. And we'll see how much Trump wants to try and squeeze out of them. But from a market reaction point of view, quite a lot of violence and volatility on Monday morning as markets opened. And this was one of those great cases where something happens over the weekend when all markets are shut, apart from crypto, I should say. And right, it's just chaos when things kick off on Monday morning. And there was some big moves, right? Like stocks got hammered, the dollar spiked, went through the roof. Gold went up very nicely. You had some big moves lower in some US domestic kind of cyclical stocks that are right in the firing line with regards to tariffs. And the defensives went up, right? So it was a classic risk-off with them particular companies and sectors that are most exposed getting the most heavy damage. All right, safe havens— gold went up, for example. And then the Mexican peso and the Canadian dollar, they were the two worst-performing assets essentially, and they got absolutely hammered. We talked about why last week, because, you know, US— sorry, their Canadian exports into the US is like 20% of all of their exports, and it's kind of 3% of their GDP or something, but, um, or sorry, 20% of their GDP. So look, it's, it's, it makes sense that the Canadian dollar and the Mexican peso got hammered. But look, the politicians were forced to the table, an interim deal's done, and so fine, you had all these markets seesaw back in the main. Like, certainly the Mexican peso and the Canadian dollar reversed all of their losses, all of them. Um, some of the stocks came back, you know, halfway, but not all. So look, lots happening there. But with China, what's interesting I think is they've played a different tactic here. Whilst Canada and Mexico have kind of come to the negotiating table and given concessions and said, okay, fine, China have not. And actually, I think they've played this very fine line here where they've been able to— because look, their economy is struggling, right? They've not had a good year, to say the least. So So they really want to avoid tariffs because obviously that's just going to squeeze them. But they still want, from a domestic point of view, they want to be seen as strong and standing up to the US. Um, and so, and they want some leverage going into any negotiations that might take place in the coming days, uh, and weeks, right? So they've kind of hit this middle ground where they haven't gone to the negotiating table. They've retaliated, but their retaliation is quite small. So it's like saying, look, this is going to hurt only a tiny amount, but we're just saying we're not going to go down, you know, bend over here. Um, yes, we may come to the negotiating table, but we're going to retaliate in the meantime. And some of their retaliations are quite interesting. Um, it's 10 to 15% on energy, basically. So that's liquefied natural gas, it's coal, it's crude oil. And actually, coal particularly, you know, the US exports to China is— that's a big part of US energy exports to China. So that's probably the one that's going to hurt the most. But then they've actually set about other things. So they've reopened an investigation into Google, uh, antitrust investigation. They've put some exports controls on rare metals. They've added some other companies to their national security blacklist, I think like Intel, for example. So there's other, there's other non-tariff related retaliations. And look, they're gonna come to the table, right? It's just when and how does that negotiation go? Um, that's the unknown.

It doesn't feel too dissimilar to 2016.

Yeah.

In terms of we went through a bit of a phase of tit for tat, tit for tat until it gets to a point where there probably is a little too much pain and then something moves. But, uh, a quote I saw, and to quote again Sun Tzu, was the philosophy to the negotiation tactic that's happening here, which is that principle that the supreme art of war is to subdue the enemy without fighting, right? And that's, that's the point here. These are both superpowers going head-to-head. Um, the principle could be interpreted in economic context as using strategy, diplomacy, trade negotiation to achieve each national objective without the resort of conflict, which in the modern-day context is very unlikely to happen. I— not impossible, but unlikely. Um, using obviously economic and technological means of where the fight really happens. So yeah, we'd expect more of this then to go run on, run on a little bit more.

100%. As you said, it's very familiar, you know, to Trump's last time round. The only difference being it's happening way sooner in his term. He's got, he's kicked off straight away, right? I think when he first time round, his tariff thing didn't really kick in until more like midway through the year. So he's definitely, um, you know, sped up the time cycle here. Um, so yeah, it'll be the same. I mean, what I, I just wrap on the tariff thing. There was an FT article I read that I thought was quite interesting because, look, if you're an investor, then it's a lot of uncertainty because how's this all going to play out? Which way is it going to fall? The tariff's going to go up? Aren't they going to go up? Then the second order effects. I mean, is it going to be inflationary if there are tariffs or not? I mean, there's arguments for both cases, right? So there's so much unknown. And so this article, I framed it quite well, and it said, look, there's 5 questions you need to answer before you can be confident about, you know, really strong, confident investment thesis. And the FT article concluded by saying, we don't know the answer to any of these 5 questions yet. The questions were: will negotiations during the 1-month tariff reprieve for Canada and Mexico lead to tariffs significantly lower than the 25% that Trump threatened? Don't know yet. Can Europe earn a similar tariff reprieve? Were the Mexico and Canada reprieves part of a plan, or was the decision taken by President Donald Trump just yesterday? Meaning, was this the— was this playbook from the start? Right, I'm going to threaten 25, I'll come back off that, we'll get into the negotiating table. What was this all part of a strategy, or is he just shooting from the hip and reacting every kind of 24 hours in a different way? Number 4, were the reprisals motivated in part by markets' negative reaction? I find that really interesting. Because Trump likes nothing else than new all-time highs on the S&P.

Yeah. Yeah. There's a lot of weight in that last one because, yeah, he is definitely not going to be liking what's been happening with Nvidia and some of the other market moves of late. So, yeah, his balance is strange. It's kind of— there's this public metric that, that Main Street is aware of. That they kind of debunk all complexity and just look at where's the stock market. And if it's collapsing, like a lot of the media headlines have been suggesting, that just isn't a good look.

So doesn't that— isn't that the natural sort of dampener on Trump tariff threats? Because ultimately, if he threats and goes big, markets dump, and then he rows back. Maybe that's the mechanism.

And then you go, right, control, hand in the, uh, in the bag, and I pull out Sovereign Wealth Fund.

It's the great distraction tactic.

All right, cool. We'll leave it at there. Thank you very much for, for breaking that down for us, Piers. Always appreciated. Any questions at all, please feel free to drop us a comment. I know that is possible on Spotify. And don't forget to share the episode with a peer, a colleague, or a friend. I'd love to get it out to as many people as possible. Till next week, take care.

Cheers, Anthony Cheung. Bye.