Could the US really establish a sovereign wealth fund? TD Cowen answers

Investing.com -- The idea of a U.S. Sovereign Wealth Fund has been gaining attention, with both former President Donald Trump and current President Joe Biden proposing different versions of such a fund. 

Trump's concept envisions a broad national investment initiative, while Biden's plan focuses more narrowly on securing critical resources in technology, energy, and supply chains. 

Sovereign wealth funds are state-owned investment entities that invest in financial assets like stocks, bonds, real estate, and other ventures. 

Countries like Norway, Saudi Arabia, and China have used SWFs to diversify their economies, stabilize budgets, and reinvest national revenues, often from natural resources or surpluses. The aim is typically to generate long-term returns that can fund future government spending or strengthen national interests.

The U.S. version of a sovereign wealth fund has been floated in two distinct forms. During a speech at the New York Economic Club, Trump called for the creation of a fund that could invest in major national projects, with profits used to finance tax cuts and reduce national debt. 

The Biden administration, in contrast, is reportedly exploring a more targeted fund aimed at strategic sectors like technology and energy, with a particular focus on strengthening key links in global supply chains. 

TD Cowen analysts express skepticism about the feasibility of a broad U.S. SWF. They argue that such a fund would be vulnerable to political motivations, with investment decisions potentially shaped more by political agendas than by the goal of maximizing returns for taxpayers. 

This could lead to public outcry if investments were seen as benefiting certain sectors or interests over others. Moreover, any investment losses could become highly politicized, with immediate repercussions for the administration in charge, while gains would take years to materialize, limiting the political benefits.

“Trump reportedly wants to finance the fund with tariffs, though we believe this would require legislation,” the analysts said. 

This redirection of resources could lead to higher national debt and increased costs for consumers and businesses tied to rising Treasury rates.

While a broad U.S. SWF modeled on those of Saudi Arabia or Norway seems unlikely, TD Cowen sees potential for a more focused, national security-driven fund. 

Such a fund would align more closely with the Biden administration’s goals of securing critical industries and technologies, particularly in the face of increasing global competition from countries like China. 

By framing the fund as a national security priority rather than a purely financial initiative, the administration might be able to garner bipartisan support.

In this scenario, investments could focus on industries such as semiconductors, renewable energy, and supply chain resilience. 

Rather than attempting to achieve broad economic returns, the primary objective would be to ensure U.S. competitiveness and security in strategic sectors, potentially bypassing some of the political hurdles that would accompany a more general investment fund.

One potential consequence of these discussions is a renewed debate over the idea of investing Social Security funds in the stock market to increase returns. 

This concept was a hotly debated issue in the early 2000s, with advocates arguing that it could help shore up the long-term solvency of the Social Security system. 

However, the 2008 financial crisis, which saw the stock market plummet by nearly 50%, largely ended the push for Social Security market investments.

Despite this, TD Cowen analysts suggest that the idea could make a comeback as the financial pressures on the Social Security system intensify. 

“This may re-ignite the debate about whether Social Security funds should be invested in the market to boost returns,” the analysts said. While politically contentious, this issue may gain more traction as financial realities force difficult choices about the future of the program.