Jamal Mecklai: The Lord works in strange ways

MARKET MANIAC

What goes up must come down. Or, as my friend Michael used to say, "What goes around comes around."

And so it goes.

Citigroup is rescued by Abu Dhabi. Morgan Stanley gets an infusion from China. Merrill Lynch is saved by Singapore. In short order, three of the four crown jewels of American capitalism have been helped off the mat by financial institutions from poorer, less developed, more backward nations.

Is this a hint of a beginning? As more red ink flows off the books of US (and, to be sure, European) banks and brokerages, will we see emerging economy powerhouses gain greater control of some of these pucca capitalist tools? And might this confirm that the decline of American influence in the world "" which began as far back as the 1980s with Reagan's scaling back on funding for the State department (as a result of which Americans know even less about the world than they used to) "" is, indeed, accelerating?

While a hesitant "yes" may well be the correct answer to all three questions, a lot depends on how these new power brokers wield their holdings. They may simply play them as other financial investors and push management to maximise returns "" Singapore is most likely to follow this approach. On the other hand, they may choose to exercise the political value of these holdings and, in a reversal of the usual capitalist process, use money to create political power. For instance, the Gulf states, while actually benefiting from the turmoil in West Asia "" everybody with any wealth in the wider region has one limb in Dubai or Abu Dhabi or Bahrain "" may well become interested in bringing their new economic weight to bear on the West Asian peace process.

And while a piddling stake in Citigroup is hardly enough to divert the Empire from its purposes, if oil remains above $80 a barrel for a couple more years, and the bloodletting in the US housing market continues, who's to say how big a share of key US assets may end up in the hot little hands on these new kids on the block.

And these new kids are different from earlier eager buyers of US assets, some of whom "" notably the Japanese "" bought huge chunks at the top of the cycle. These new players are experienced (Temasek has produced returns in excess of 18% a year for over a decade), smart (I heard someone say the other day that five years ago, the Arabs had money, no brains and little respect; two years ago, they had money, some brains "" mostly through advisers "" but still no respect; today, they have it all "" money, brains and respect), and Chinese (about whom you can say anything and be both right and wrong).

And while they each appear to be currently playing their individual games, and, doubtless, competing with each other for deals, it seems reasonable to assume that at some point in the future they will come together to, say, brainstorm over a particularly intransigent investment (like other private equity investors) or, more interestingly, to brainstorm over their possible common political interests.

I note, for instance, that China, which is really all over the world all of the time, seems to have very little interest in Israel. I guess there's not a whole lot the Israelis have that they need, the market is hardly significant, and they know their bread is buttered (or should I say oiled) by the Arab states. Thus, the Chinese may well find it sensible to support Arab demands for a lasting solution to the continuing trauma in West Asia, which many seem to believe revolves around Israeli compromise. And with Israel more or less the 51st state of America, the key chunks "" not yet, but, possibly, soon "" of US assets that may be in Arab/Chinese hands could well be a more effective lever to move towards peace. [If this seems an extravagant stretch of a usually fertile imagination, it is worth noting that the American Enterprise Institute, till now a bastion of free enterprise, has already been editorialising about the need to limit voting rights of sovereign funds.]

Perhaps high oil prices and the recent capitulation of the crown jewels of American capitalism are all part of a plan to bring the recalcitrant parties to the table. As they say, the Lord "" or, should I say Allah "" works in strange ways.

Working back from this line of thought suggests that (a) oil prices will remain high for a few more years (at least), (b) the inflationary threat this creates will keep US (and world) interest rates higher than the market expects, resulting in slower growth, weaker equity markets in developed economies, and a stronger dollar, (c) as money drives sanity into the politics of the region, we may be in the last throes of the "new Islamic revolution", and (d) emerging markets in general (and India in particular) will continue to do well as the ocean of oil cash continues to remain high.

A nice set of prognoses for 2008 "" Happy New Year!