Asian Monetary Sluices Opening?

Seems so.

Two events of potentially profound significance are now in train. On September 29th, China's new sovereign wealth fund, China Investment Corp., commenced operations. This fund is initially capitalized at $200 billion.
On Monday, the Japanese Post Office will be privatized. This institution constitutes the world's single largest pool of savings -- $3 trillion. This privatization will actually occur over a 10-year period, with the first stage beginning on Monday.

These two events signal the beginning of a major asset re-allocation. Heretofore, all these funds were invested in government securities, or used to finance massive public works expenditures. Going forward, an increasing portion of them will seek more lucrative homes. Likely residences: equities, real estate, participation in hedge funds, private equity, leveraged deals. While both the Chinese and Japanese authorities are hewing to the line that safety will be the primary consideration, with capital appreciation secondary, even this constitutes a notable change from the past, where there was only one objective: safety.

Our guess is that both China and Japan are looking at the performance of American university endowment funds for inspiration. Since departing from the conservative standards of the past, which mandated that endowment funds be invested in relatively "safe" investments -- high quality bonds and blue chip U.S. stocks -- many of these funds have wracked up impressive returns. Of course, these returns have been achieved by accepting risk greater, by orders of magnitude, than those deemed prudent in the past. Thus far, the gamble has paid off, though there is no assurance that this new financial mantra will not end in tears.

Institutional investors, like individual investors, tend to move toward greater risk as markets rise and as PAST RETURNS accelerate. In this regard, we do not expect sovereign funds or the Japanese Post Office to behave any differently. While paying lip-service to "safety" the practice will likely be to take on ever more risk, as greed overwhelms fear, and frustration over low returns from government bonds becomes intolerable. This is the normal progression; it ends only when there is a crash (a la the mortgage-backed collapse).

For the near-intermediate future, the decisions of China and Japan mean more liquidity for equity markets, reinforcing the bull run in U.S. equities. The attractiveness of American equities, which combine compelling valuations with low risk and high human capital, is further enhanced by the falling dollar,which allows Chinese and Japanese investors to purchase more U.S. shares with the same number of yuan or yen.