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PART 1: How Institutional Investors Would Fare Under Alexandria Ocasio-Cortez’s Green New Deal?

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This article goes into the controversial Green New Deal package put out by U.S. freshman Congress member Alexandria Ocasio-Cortez (known on Twitter as AOC) and veteran lawmaker Senator Edward Markey. Majority Leader Mitch McConnell moved to bring the legislation to a vote in the U.S. Senate. However, the probability of such legislation passing would require a Democrat figure in the White House, but it outlines what key party members feel about capitalism, Modern Monetary Theory (MMT), economics, and policy.

Nearly all of the major front runners of the Democrat party 2020 presidential race have endorsed it, including Senator Cory Booker, Senator Kamala Harris, Senator Elizabeth Warren, Representative Tulsi Gabbard, and Senator Bernie Sanders (not announced). Independent U.S. Presidential candidate Howard Schultz, the former CEO and founder of coffee giant Starbucks, ripped the proposal viewing it as “not realistic.” U.S. President Trump went even further at an El Paso, Texas rally, saying “But I really don’t like their policies of taking away your car, taking away your airplane flights, of ‘Let’s hop a train to California,’ or ‘You’re not allowed to own cows anymore!'”

The U.S. dollar is the world’s reserve currency, a major home for private investment, and a beacon for businesses. The proposed Green New Deal would drastically reshape the asset allocation patterns of sovereign wealth funds, pensions, and endowments.

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Even if a law is passed, implementation most of the time takes longer, especially in things that have not been invented yet. Courts may challenge laws. Essentially, the ambitious Green New Deal seeks to redistribute income and wealth, create a larger welfare state by embracing universal income, excise the oil and gas and nuclear energy industries from the country, eliminate air travel (now removed), provide universal healthcare and healthy food, free education, guarantee jobs, and having America being powered solely on renewable energy. The elimination of air travel proposal in place of a global train system was removed. A few days after the release of the Green New Deal bill, California Governor Gavin Newsom scaled back the ambition of California’s high speed rail (HSR) project that was supposed to connect Los Angeles to the San Francisco Bay Area. The HSR projects costs skyrocketed from estimates of US$ 33 billion to estimates of US$ 77 billion or more, while the completion data was extended to 2033 from 2020.

A key line on AOC’s website regarding the Green New Deal, stated supporting “economic security to all those who are unable or unwilling to work,” which triggered a backlash among policymakers from both parties. The line was later removed.

From AOC’s FAQ, “Why 100% clean and renewable and not just 100% renewable? Are you saying we won’t transition off fossil fuels?

“Yes, we are calling for a full transition off fossil fuels and zero greenhouse gases. Anyone who has read the resolution sees that we spell this out through a plan that calls for eliminating greenhouse gas emissions from every sector of the economy. Simply banning fossil fuels immediately won’t build the new economy to replace it – this is the plan to build that new economy and spells out how to do it technically. We do this through a huge mobilization to create the renewable energy economy as fast as possible. We set a goal to get to net-zero, rather than zero emissions, in 10 years because we aren’t sure that we’ll be able to fully get rid of farting cows and airplanes that fast, but we think we can ramp up renewable manufacturing and power production, retrofit every building in America, build the smart grid, overhaul transportation and agriculture, plant lots of trees and restore our ecosystem to get to net-zero.”

Sovereign Wealth Funds

The United States remains a major end user of fossil fuels both in oil and natural gas. Oil-based sovereign wealth funds would be majorly fiscally impacted such as Norway Government Pension Fund Global and the Gulf oil funds like Abu Dhabi Investment Authority as their country’s liabilities would rise. The price of oil would crash, sending large shockwaves across Africa, Russia, the Middle East, and Australia. Another Arab spring could be triggered by a resource crash, drawing millions of migrants toward Europe and the U.S., due to relatively generous welfare policies and employment. Seeking a safe haven, these resource-based sovereign funds would drastically move allocation from alternatives to cash and fixed income, accelerating a global sell off of assets. Non-oil based SWFs, private equity firms, and Canadian pensions would take advantage trying to buy assets on the cheap.

1. Redistribution of Wealth and QE

Trump’s tax cuts and reforms such as opportunity zones brought in capital investments from repatriated cash and surged stock markets. This benefited institutional investors who held U.S. equities, while increasing employment in the United States among various constituencies. A 70% marginal tax rate on wealthy individuals and the probable increase of corporate taxes are in the Green New Deal. There would be a big boon in the tax services industry, which would alter capital spending plans. More assets would be held offshore, thus there would be an exodus of capital.

Proponents of the Green New Deal buy into Modern Monetary Theory (MMT) versus the conservative austerity economics (pay down your debts). MMT contends that the U.S. dollar is a public monopoly and the only limit to government spending is inflation. Essentially, if the U.S. government needs more money it can print it. MMT has failed other economies like Zimbabwe and Venezuela, but currencies that have strong backings are initially less at risk. Furthermore, the central plan seeks to use the power of the U.S. Federal Reserve to extend credit to fund projects and form public banks to support renewable energy infrastructure and the retrofitting of all properties in the country. On top of current military expenditures, these Keynesian measures would add more financial pressure to the U.S. government deficit. Higher tax rates would temper capital spending and employment, U.S. companies would most likely reverse and shift more operations offshore, benefiting allocators to ex-Europe international equities. Asset owners would temper U.S. GDP growth and be selective in areas in which the government would pick the winners, such as renewable energy. Already, a large number of Canadian pensions, such as CDPQ and CPPIB are acquiring wind and solar farms across the United States, while forming partnerships with major energy firms or newer ones like Pattern Energy.

A universal basic income (UBI) would dynamically shift labor effects in the U.S. Finland conducted a UBI test in which participants where happier, but still jobless. Keep in mind Finland has an educated and relatively small population of 5.5 million people. Would a UBI be successful in Venezuela, Cuba, or South Africa? UBI would put money into the hands of lower-wealth consumers who typically have lower savings rates.

However, the U.S. is still a growing demographic with lax immigration policies compared to Latin America, Europe, and Asia. Providing a larger welfare state would force the U.S. government to print more money to pay for such policies and add to U.S. Social Security and Medicare programs. This would lower the value of the U.S. dollar relative to other economically powerful nations such as China which have slowing population growth. SWFI research believes, ceteris paribus, the beneficiary countries of geographic asset allocation of the Green New Deal would most likely be China, India, other Asia-Pacific nations, and Western Europe. Pensions and SWFs would seek more diversification ex-U.S., as the fiscal deficit would explode, unless the U.S. were to achieve GDP figures of 6% to 7% per year.

2. Ban Oil & Gas and Nuclear Energy

Trending under former U.S. President Barack Obama and now President Trump, the United States is an exporter of oil & gas, bringing in major revenue to the country, while increasing GDP by making energy easier to access. Oil and natural gas can be stored, transported, and combusted. Going to 100% wind, solar, and other forms of renewable could not happen in a 10-year span. Critical infrastructure such as hospitals rely on fossil fuels. Even Google uses natural gas for some of its data centers. Most likely a Green New Deal would be a boon for companies like Tesla, solar manufacturers, wind farms, while increasing consumer spend on energy, which would decrease consumer discretionary spending, thus, hotels, apparel, and other elastic goods would be at risk. This would accelerate the demise of retail malls and media and entertainment sectors.

Pension funds, endowments, and sovereign funds would take a major hit in their private equity portfolios, as many are invested in the shale revolution through credit funds, master limited partnerships, and private equity funds. Oil majors such as Chevron and ExxonMobil would most likely go out of business or be widdled down to solar and wind farm companies. The risk of carbon-stranded assets would be taken more seriously.

If the U.S. were to cease 90% of its fossil fuels, that would greatly reduce carbon dioxide emissions, beneficiaries of that would be renewable energy manufacturers and suppliers, such as rare earth and lithium miners.

Stay tuned for Part II.

Yale’s Love Affair with Venture Capital Overshadows Other Asset Classes

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Yale’s US$ 29.4 endowment has earned staggering returns of 7.4% per year over the past 10 years, racing past its benchmark and adding US$ 6.5 billion to the fund. In the year ending June 30 2018, Yale earned 12.3%. Yale’s success is due to active management, and an unconventional approach to investing, at least from the perspective of a university endowment. Yale is overweight venture capital and real estate, which has paid off handsomely over the last 10 years. Many properties throughout the country have returned to, or surpassed, their pre bubble-era prices. Yale has also actively participated in leveraged buyouts. Yale is underweight U.S. equities and its fixed income holdings are low, as is cash on hand.

Yale’s annual report notes, “The heavy allocation to nontraditional asset classes stems from their return potential and diversifying power.” Perhaps earning their Princeton Review # 3 ranking in 2018, Yale’s commitment to thinking outside the box is responsible for their recent investment philosophy: “Alternative assets, by their very nature, tend to be less efficiently priced than traditional marketable securities, providing an opportunity to exploit market inefficiencies through active management.” Alternative investments have been gaining steam among major players in the global markets, including US$ 6.5 trillion investment manager Blackrock Inc. Blackrock plans to open a new European alternative asset headquarters in Paris.

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eFront Finds a Home at BlackRock

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BlackRock Inc. entered into an exclusive agreement to acquire eFront, a French software provider of risk management products for the alternative investments industry. Asset management firms are worried about margins and have increasingly acquired service provider firms to buffer revenues. BlackRock sells the Aladdin (Asset, Liability, Debt and Derivative Investment Network) platform, which is one of the largest portfolio operating systems in the investor community. BlackRock’s offer is to pay US$ 1.3 billion in cash for 100% of the equity of eFront. The seller of eFront is private equity firm Bridgepoint.

Bridgepoint acquired eFront in January 2015 in a transaction totalling approximately €300 million. In 2006 eFront listed on the Alternext Paris market of NYSE Euronext (ALEFT) and was taken private in 2011 by Francisco Partners. eFront was founded in 1999 by Olivier Dellenbach.

According to the press release, “The combination of eFront with Aladdin, BlackRock’s investment operating platform used by more than 225 institutions around the world, will set a new standard in investment and risk management technology.”

BlackRock is funding the eFront acquisition through a combination of existing corporate liquidity and debt.

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CDPQ Supports Domestic AI Fund

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Institutional investor Caisse de dépôt et placement du Québec (CDPQ), which works primarily on behalf of pension funds and insurance plans, is opening a new fund dedicated to Québec businesses that specialize in AI, or artificial intelligence. Available funds are slated at US$ 250 million for the enterprise. The commercialization of AI seems to be a natural fit for CDPQ, “Since Montréal is emerging as a global beacon of excellence in artificial intelligence, we need to enhance our offering and ramp up the financial and development support we provide AI businesses through the various stages of their growth,” according to Executive Vice President of Quebec and Global Strategy, Charles Émond. Émond aspires to see AI spread throughout “all sectors of our economy.” The AI fund will be run by CDPQ’s Venture Capital and Technology team. They will look for companies that are already doing well in the sector.

Another program is targeting early stage organizations. Mila Quebec AI Institute, a research and development organization founded by three universities, is building a new complex to help facilitate CDPQ’s goals. The new complex will house early-stage AI companies. CDPQ is especially interested in companies that can accelerate their growth and enter markets quickly, providing speedy returns. There is a social component, whereby companies will be required to contribute to Mila. Michael Sabia, President and Chief Executive Officer of CDPQ, noted, “With this partnership, la Caisse is pursuing its commitment to helping Québec businesses in this new economy thrive and expand.”

Keywords: Caisse de depot et placement du Quebec

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