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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.

SWFI First Read, September 21, 2018

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U.S. Public Becomes More Aware that Gmail Scans Emails

Alphabet is a major stock holding for sovereign wealth funds and large pensions. Search giant Google is under fire for allowing third-party partners and companies, like Return Path Inc and other advertisers, to share data from Gmail accounts. Many experts and tech observers already knew this, but more people in the public are becoming aware of Google’s practices when it comes to privacy. Google disclosed in a letter to U.S. lawmakers this finding. The Wall Street Journal reported that in some instances, app companies were able to read people’s emails in order to improve their algorithms. In 2017, Google said they would stop scanning all of one’s Gmail messages for the goal of personalized ads.

GPIF Infrastructure Exposure Almost Reached 200 Billion Yen in March 2018

Japan Government Pension Investment Fund’s (GPIF) exposure to infrastructure real estate was 196.8 billion JPY at the end of March 2018. At that period, 57% of the exposure was to the UK, 15% was to Australia, 15% to Sweden, 10% to Spain and 3% to Finland. 21% of GPIF’s infrastructure portfolio was linked to airports versus 27% to ports.

AIMCo-backed sPower Closes $498.7 Million Bond Deal

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Iceland Contemplates a Sovereign Wealth Fund

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The Government of Iceland is looking to possibly form a sovereign wealth fund to stabilize the country from unforeseen shocks to the national economy. The Iceland government released a statement saying, “The state’s contributions to the Fund will be equivalent to new revenues from publicly owned power production companies which are expected to accrue in the coming years.”

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CBRE Global Wins First GPIF Global Real Estate Mandate

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Japan Government Pension Investment Fund (GPIF) awarded its first global real estate mandate by hiring CBRE Global Investment Partners Limited. This is a global core real estate fund-of-funds separate account. Overseeing this mandate as a gatekeeper is Asset Management One Co., Ltd., which is a unit of Mizuho Financial Group. This RFP was launched in April 2017.

CBRE Global Investment Partners is the multi-manager arm of CBRE Global Investors.

In addition, on August 8, 2018, GPIF hired two custodians for short-term investments. These custodians are Trust & Custody Services Bank, Ltd and The Master Trust Bank of Japan, Ltd.

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