Could the US really set up a sovereign wealth fund? TD Cowen responds via Investing.com

Investing.com — The idea of ​​a US sovereign wealth fund has gained attention, with both former President Donald Trump and current President Joe Biden proposing different versions of such a fund.

Trump’s concept calls for 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 government-owned investment entities that invest in financial assets such as stocks, bonds, real estate and other businesses.

Countries such as 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 goal is usually to generate long-term profits that can finance future government spending or advance national interests.

The US version of a sovereign wealth fund has been launched 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 the national debt.

Instead, the Biden administration is exploring a more targeted fund targeting 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 large US 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 objective of maximizing returns for taxpayers.

This could lead to public outcry if the investments were seen to benefit 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.

“It appears that Trump wants to fund the fund with tariffs, although we think that would require legislation,” analysts said.

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

While a large US SWF modeled after those in Saudi Arabia or Norway seems unlikely, TD Cowen sees the potential for a more focused fund based on national security.

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

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

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

Rather than seeking broad economic returns, the primary goal 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 proponents arguing that it could help strengthen the long-term solvency of the Social Security system.

However, the financial crisis of 2008, which saw the stock market fall by almost 50%, largely ended the momentum for investing in the social security market.

Despite that, TD Cowen analysts suggest the idea could return as financial pressures on the Social Security system intensify.

“This may rekindle the debate over whether social security funds should be invested in the market to boost returns,” analysts said. While politically contentious, the issue may gain more traction as financial realities force tough choices about the program’s future.