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Coin Minting Plan Disastrous for Public Investors’ Confidence

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The scenario of a U.S. debt default would be devastating for institutional investors; furthermore, catastrophic for the world economy. US$ 16.4 trillion is the current debt limit for the United States. Political gridlock and balance of power which has served the United States well for over its history has manifested the issue of debt ceiling brinkmanship. In 1917, Congress passed the Second Liberty Bond Act which put in place statutory limits on the amount of federal debt allowed to be outstanding at a point in time. Over the decades and years, Congress has repeatedly raised the debt limit in order to permit additional borrowing.

Recently, an idea from the internet took hold, the plan of minting a US$ 1 trillion platinum coin through an obscure law that was meant to mint commemorative coins. The minted coin would be deposited at the Federal Reserve Bank of New York to hold over the U.S. government’s debts until a debt limit increase. Financing the Federal government, through a coin or coins, would be a clear, negative signal to institutional money in the long-term. The coin plan would undermine the United States budget process and set precedence for executive power in American politics; however, a default would be far worse in terms of current investments. Ratings agencies would most likely act in a negative manner if this coin scenario came into fruition.

During a press conference on January 9, 2013, White House spokesman Jay Carney did not rule out the idea of minting a US$ 1 trillion coin.

Brinkmanship is a dangerous strategy to engage in; however, there are many points in economic history where brinkmanship led to positive outcomes. The United States has amassed a massive current account deficit over the decades, more so at a faster pace in recent years. This battle of ideas could result in spending cuts and entitlement reforms, if the White House were willing to compromise with Congress. While the rest of the world’s fiscal governments cut spending, sell off public assets (some to sovereign funds), and raise taxes, the United States keeps expanding debt. This approach has irritated many sovereign funds and pension investors as they have had to increase risk in their portfolios to achieve their target level of returns. This has been a boon for alternative asset managers.

Medium-Term Market Reaction Scenarios

Possible Scenarios Medium-Term Reaction Probability
Negotiations – Significant Reform, Contain Spending Very Positive Low
Negotiations – Scalpel Reform Positive High
Negotiations – Postponing Neutral High
New Debt without Congressional Approval Negative Medium
President’s usage of Section 4 of the 14th Amendment Negative Low
Platinum Coin(s) Minting Very Negative Low
U.S. Default Catastrophic Very Low

Source: Park Alpha

In the coming weeks, the White House will likely not mention the coin deal scenario publicly. The scenario that would most likely happen if negotiations with Congress fail is that the White House may go with the “Weimar” coin plan as a last resort. This would be used to prevent a calamitous default. If President Obama used the coin deal, then Congress would have leverage that the President has tipped the balance of powers of U.S. government.

BlackRock Contemplates Stake in Eurizon

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Asset management giant BlackRock is contemplating purchasing a 30% ownership stake in Intesa SanPaolo’s asset management unit called Eurizon Capital SGR S.p.A. BlackRock is keen on growing its technology business and increase market adoption of its Aladdin platform.

Intesa has been working with UBS to seek out strategic options for Eurizon. Intesa is keen on maintaining control over Eurizon.

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SWFI First Read, June 22, 2018

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JPMorgan Fund Buys 40% of Oxford Properties’ French Portfolio

A fund advised by JP Morgan Asset Management committed €400 million in Oxford Properties’ French portfolio. Essentially, Oxford Properties sold a 49.9% non-managing interest in 32 Rue Blanche, 92 Avenue de France and Paris Bastille. Oxford Properties made its maiden investment in Paris in 2014 when it acquired 32 Rue Blanche.

Oxford Properties is the real estate unit of OMERS.

Temasek Explores Further Cash Commitments to FirstCry

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DOL Fiduciary Role is Struck Down by Fifth Circuit Court of Appeals

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The U.S. Court of Appeal, Fifth Circuit, confirmed a March 15th decision to strike down the U.S. Department of Labor’s (DOL) fiduciary rule. The fiduciary rule is a series of seven different rules that broadly interpret the term “investment advice fiduciary” and redefine exemptions to provisions concerning fiduciaries that appear in the Employee Retirement Income Security Act of 1974 (ERISA). The 5th U.S. Circuit Court of Appeals overturned a decision by a Dallas federal court that had upheld the DOL fiduciary rule.

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