VCF Journal Online
An Institutional Investor Forum For Key Issues in Economics, Finance & Governance

VCF Journal Short Notes

December 2010-August 2011

Section Overview:  1) Inflation in EM Countries 2) U.S. Bonds Yields 3) U.S. Policy Misstep on Commodity Inflation 4) Navigating the Perils of the Global Economy 5) Middle East Unrest & Implications for Institutional Investors 6) Soros vs Paulson on Gold 7) China’s Criticism of U.S. Credit Downgrade

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August 6th, 2011. Posted by Bhuv N. Raizada, Toronto, Canada.

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7. China’s Criticism of U.S. Credit Downgrade

For those investors which believe that China represents the future, a word of caution in light of their blunt criticism of the U.S. credit downgrade and call for a new reserve currency. Beware of wolves disguised in sheep’s clothing perpetuating their inherent self interest. Some quick thoughts:

  • China has amassed a large current account surplus (U.S. dollar reserves) in part because it keeps the Yuan/Renminbi tightly controlled vis-a-vis a fixed peg to the dollar creating an unfair trade advantage in their favor.
  • China has used unfettered access to U.S. markets (consumer/capital), technology and natural resources to leap frog their economy into the 21st century while limiting access for international companies to their domestic markets.
  • Chinese State Owned Enterprises (SOE’s) are becoming notorious for stealing technology and other intellectual property in joint partnerships with western companies too eager to access one of the world’s largest consumer markets.
  • China is using the stability of western democracies/economies to enrich itself while not contributing its fair share to international aid and anti-terrorism efforts. While the U.S. and others are policing the world at great financial cost (creating fiscal drag), China is exploiting the underlying security benefits which allow international trade and commerce to continue unabated.
  • Recent listing by Chinese companies on North American exchanges have been fraught with financial misrepresentation and highlighted shortcomings in accounting/auditing standards in China.
  • Unfair Chinese practices and governance standards mentioned above deprive U.S. companies of revenues, U.S. workers of income producing jobs (particularly in manufacturing) and the U.S. government of underlying taxes. This create fiscal deficits which the Chinese are quick to criticize but eager to exploit.

There is no question that China is a darling in the investment community right now and the fundamentals look great for an opportunistic play. However, for those that have some forsight, be careful of a country that embraces capitalism (emblematic of a democracy) while cloaked in a communist flag. “Free markets” means transparency, accountability, fair business practices and not just unbridled profit taking. One comes with the other and the Chinese need to realize that state sponsored capitalism is not really capitalism per say. Otherwise, unintended consequences arise including a trading partner with runaway current account and fiscal deficits.

Bhuv Narain Raizada is the Founder/Managing Director of Venture Catalyst Finance Inc. & GEFP Investment Forum. Mr. Raizada is a financial economist/trader given his training and former head of fixed income finance for Citibank Canada overseeing $2 billion in ALM. He also is a professional moderator of investment related forums including previously co-hosting a niche endowment & foundation conference. Mr. Raizada holds a degree in Economics from York University with a specialization in international finance & economics. He has also taught introductory economics at the Toronto School of Business.

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“VCF” is an acronym for Venture Catalyst Finance Inc. and VCF Journal Online is a related page to the website of venturecatalystfinance.com. All visitors agree that they have read and accepted the term of use which governs the use of the site. Editorial posts published by VCF officers cannot be reproduced, modified or retransmitted for any commercial purpose without prior permission and proper attribution to the author and VCF. Permission for commercial reprints, reproductions or electronic transmissions (including RSS feeds to commercial blogs/websites) can be obtained by sending an email to our company at info@venturecatalystfinance.com and will be subject to a licensing fee. This site is free to individuals for non-commercial use and viewing in personal browsers.

Copyright © 2009-2016 Venture Catalyst Finance Inc. All Rights Reserved.

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May 23rd, 2011. Posted by Bhuv N. Raizada, Toronto, Canada.

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6. Soros vs. Paulson on Gold

George Soros reportedly unloaded his position in gold (SPDR Gold Trust) recently according to SEC filings. This is ahead of the Fed ending its QE2 program in June. Meanwhile, Paulson continues to hold onto his similar ETF gold position creating a potential divergence of views from two well respected hedge fund practitioners. Which one is right? Some quick thoughts:

  • There has been no meaningful change in U.S. fiscal/monetary policy or the global macro environment
  • Federal Reserve is stopping QE2 but continuing to reinvest maturities.
  • U.S. budge deficit will top 1.4+ trillion this year and 14+ trillion cumulatively with no deficit plan in place due to political gridlock.
  • Political uncertainty and unrest continues in the Middle East leading to upward pressure on oil and commodity inflation.
  • Problems continue in Eurozone with PIGS countries and related debt.

Therefore, money printing and uncertainty continues in the present macro economic environment. Soros is likely taking profits off the table by selling the gold ETF and reinvesting it into underlying mining producers which he perceives as undervalued. Meanwhile, Paulson is likely to believe that more upside is possible given the macro scenario mentioned above and holds onto his ETF position. Seems one is a value player (Soros) while another is a momentum player (Paulson). Both men seem to believe that there is more upside in gold but are playing their hands with different investing styles and convictions. Maybe not so different after all in their outlook for gold if the reports are accurate!!

Bhuv Narain Raizada is the Founder/Managing Director of Venture Catalyst Finance Inc. & GEFP Investment Forum. Mr. Raizada is a financial economist/trader given his training and former head of fixed income finance for Citibank Canada overseeing $2 billion in ALM. He also is a professional moderator of investment related forums including previously co-hosting a niche endowment & foundation conference. Mr. Raizada holds a degree in Economics from York University with a specialization in international finance & economics. He has also taught introductory economics at the Toronto School of Business.

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“VCF” is an acronym for Venture Catalyst Finance Inc. and VCF Journal Online is a related page to the website of venturecatalystfinance.com. All visitors agree that they have read and accepted the term of use which governs the use of the site. Editorial posts published by VCF officers cannot be reproduced, modified or retransmitted for any commercial purpose without prior permission and proper attribution to the author and VCF. Permission for commercial reprints, reproductions or electronic transmissions (including RSS feeds to commercial blogs/websites) can be obtained by sending an email to our company at info@venturecatalystfinance.com and will be subject to a licensing fee. This site is free to individuals for non-commercial use and viewing in personal browsers.

Copyright © 2009-2016 Venture Catalyst Finance Inc. All Rights Reserved.
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February 19th, 2011. Posted by Bhuv N. Raizada, Toronto, Canada.

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5. Middle East Unrest & Implications For Institutional Investors

Recent political instability and resulting domino effect in MENA countries has gotten investors nervous about strategic allocations taken in their portfolio to exploit growth opportunities in this region. How should an institutional investor play this situation? Some quick thoughts:

  • Investors will definitely be looking at “value” plays in the region largely in energy and infrastructure as markets react to the turmoil.
  • A word of caution to those seeking opportunistic plays; investments in MENA now represent significant political risk in the portfolio and allocations near term should be reassessed, derisked or demand a significant risk premium.
  • Heightened liquidity risk should also be taken into account as these markets don’t have the same breath or depth of volume traded including underlying issuances versus more mature markets in North America or Asia Pacific.
  • While disaffected populations in these regions have won the battle to remove entrenched leaders, there is no guarantee that desired outcomes will emerge.
  • Most of these countries have little or no democratic institutions in place to absorb the vacuum created by removing long standing rulers.
  • Uncertainty heightens the risk of trade and oil disruptions; 60% percent of world oil reserves are located in these regions, as well, as other strategic assets of value such as the Suez Canal.
  • Unrest increases the chances of piracy, terrorism and other unwelcome outcomes in these regions as power vacuums emerge.
  • While Egypt fell quickly to demands for political reform, countries like Libya and others with firmly entrenched “Royal Families” will push back with harsh and likely violent assaults on any uprising.
  • Result will be near term stagnation of “real growth rates” (excluding Oil Exports) due to the economic disruption in the region coupled with already high inflation. This will be especially true for those countries which have no oil reserves to export to the west or do not allow “black gold” profits to filter down to the broader population. Throw in additional factors such as artificial pegs to the U.S. dollar combined with capital restrictions to foreign investors and a limited capital markets system giving the region less resilience in weathering economic calamities.
  • Bodes well for precious metals and commodity plays (e.g. gold and oil) near term as normal flight to safe havens (i.e. Greenback, Eurodollar) are being hampered by perception of fiat money. ETF’s for MENA region are available for those seeking downside protection in tactical overlay/hedging strategies. Conversely, ETF’s for stable and natural resource rich countries (free of political/currency risk) such as Canada should also be considered as upside protection. However, in both situations check liquidity and suitability with advisors before going further.

Needed economic and political reforms in MENA countries may bring about desired results for investors over a long term horizon. However, until a clearer picture emerges, it might be best to wait this out from the sidelines and preserve capital. Existing investments should be protected with hedges or overlays. Clearly, opportunities abound for short term players such as hedge funds in ancillary markets but danger also lurks over the horizon for institutional investors with direct exposure to the region!!!

Bhuv Narain Raizada is the Founder/Managing Director of Venture Catalyst Finance Inc. & GEFP Investment Forum. Mr. Raizada is a financial economist/trader given his training and former head of fixed income finance for Citibank Canada overseeing $2 billion in ALM. He also is a professional moderator of investment related forums including previously co-hosting a niche endowment & foundation conference. Mr. Raizada holds a degree in Economics from York University with a specialization in international finance & economics. He has also taught introductory economics at the Toronto School of Business.

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“VCF” is an acronym for Venture Catalyst Finance Inc. and VCF Journal Online is a related page to the website of venturecatalystfinance.com. All visitors agree that they have read and accepted the term of use which governs the use of the site. Editorial posts published by VCF officers cannot be reproduced, modified or retransmitted for any commercial purpose without prior permission and proper attribution to the author and VCF. Permission for commercial reprints, reproductions or electronic transmissions (including RSS feeds to commercial blogs/websites) can be obtained by sending an email to our company at info@venturecatalystfinance.com and will be subject to a licensing fee. This site is free to individuals for non-commercial use and viewing in personal browsers.

Copyright © 2009-2016 Venture Catalyst Finance Inc. All Rights Reserved.

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January 20th, 2011. Posted by Bhuv N. Raizada, Toronto, Canada.

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4. Navigating the Perils of the Global Economy

The global economy has become akin to a “hot spot” post the credit crisis with perils to navigate through in order to preserve capital and grow the portfolio. What are the some of the broad macro economic trends that an investor is likely to encounter and must navigate through in order to succeed? Some quick thoughts:

  • Bias towards cheap money is ending in EM and Frontier markets as monetary authorities raise interest rates to fend off inflation largely from commodities. Reflected in the roller coaster equity price movement of some composite indexes in these regions as they opened the new year with investors weighing growth versus inflation. By contrast, this is a split from the U.S. which is still dealing with benign growth/high unemployment and must maintain easy monetary/fiscal policy to reflate asset prices.
  • Insatiable demand for raw materials in EM Markets is driving commodity inflation (input prices). Meanwhile, entrance of sheer numbers of people/new businesses in these markets is driving down costs of wages and finished products globally (deflation); a paradox indeed.
  • Large fiscal deficits in most G-8 countries leaves underlying paper money status as a “fiat currency” in eyes of many investors including foreign central banks (e.g. China). Favors a push toward precious metals (i.e. gold) and another “reserve” currency (i.e. Yuan) as a substitute investment. Does not bode well for the U.S. dollar or Euro as a potential rival is emerging on the global stage. Heightens currency risk for these incumbent players and requires hedging strategies remain in play for investors.
  • Yuan denominated debt issuances are emerging from international conglomerates operating in mainland China and being soaked up by investors flush with cash; indicating an emergence of a capital markets system and setting the stage for a freely traded currency essential in international trade and finance.
  • Burgeoning middle class populations in EM markets (estimated to be 1 billion) is positive for international conglomerates exploiting these trends (e.g. financial services, consumer staple, luxury goods, infrastructure). Contrast this to domestic plays in these regions where valuations particularly in China are reaching “dot.com” status.
  • Europe continues to be mired in the aftermath of the credit crisis with austerity measures to cut budget deficits or face the wrath of bond vigilantes. Not positive for growth near term especially for those countries most affected by the crisis (PIGS). Germany is an exception as it exports high end products (e,g, luxury cars) to growing regions in the Asia Pacific (China).
  • Profit margins remain squeezed for many global companies and focus continues towards productivity, innovation and intellectual capital to improve profitability. Technology underpins this trend and remains a bright spot as evidenced by strong gains in this sector and a resurgence in the NASDAQ.

Both positive and negative trends are underway in the global economy. Investors need to keep their eye on the distant horizon looking for value plays in key sectors while bypassing “hot spots” which dominate the global economy post the credit crisis.

Bhuv Narain Raizada is the Founder/Managing Director of Venture Catalyst Finance Inc. & GEFP Investment Forum. Mr. Raizada is a financial economist/trader given his training and former head of fixed income finance for Citibank Canada overseeing $2 billion in ALM. He also is a professional moderator of investment related forums including previously co-hosting a niche endowment & foundation conference. Mr. Raizada holds a degree in Economics from York University with a specialization in international finance & economics. He has also taught introductory economics at the Toronto School of Business.

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“VCF” is an acronym for Venture Catalyst Finance Inc. and VCF Journal Online is a related page to the website of venturecatalystfinance.com. All visitors agree that they have read and accepted the term of use which governs the use of the site. Editorial posts published by VCF officers cannot be reproduced, modified or retransmitted for any commercial purpose without prior permission and proper attribution to the author and VCF. Permission for commercial reprints, reproductions or electronic transmissions (including RSS feeds to commercial blogs/websites) can be obtained by sending an email to our company at info@venturecatalystfinance.com and will be subject to a licensing fee. This site is free to individuals for non-commercial use and viewing in personal browsers.

Copyright © 2009-2016 Venture Catalyst Finance Inc. All Rights Reserved.

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December 14th, 2010. Posted by Bhuv N. Raizada, Toronto, Canada.

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3. U.S. Policy Misstep on Commodity Inflation

Recent rise in commodity prices is confusing the markets and raising fears of repeating catastrophic chain of events prior to credit crisis. Reflects misstep by U.S. regulatory agencies and financial exchanges to curb speculative excesses in markets. Some thoughts:

  • Policy intervention to curb demand for commodities is urgently required by increasing margin requirements, position limits and other measures for underlying financial contracts by U.S. regulators (e.g. Commodity Futures Trading Commission) and financial exchanges (e.g. Chicago Merchantile Exchange).
  • Commodities are being viewed by investors, speculators and the like as store of value in face of burgeoning deficits and uncertainty in financial assets post the global credit crisis. ETN’s, for instance, are using derivative contracts to mimic physical holdings and even offer 2 to 3 times exposure of the underlying commodity.
  • Producer Price Index (PPI) is showing strong underlying rise in commodity inflation (e.g. food, energy) year over year but nominal gain in the core rate resulting in a paradox policy response by the Federal Reserve.
  • Due to globalization and competition, inability exists to pass on rising input costs from commodities and are squeezing margins for businesses. Same is true for household budgets that are being squeezed by similar rising costs and marginal employment. Result is broad tax on the economy and reduced spending by households and businesses.
  • Federal Reserve responds to falling/benign margins (i.e. core CPI/PPI) in household and businesses by driving down interest rates but fuels further speculative rise in commodity prices with cheap money; resulting in a continuous feedback loop and paradox.
  • U.S. government responds by reducing taxes for the entire working population but raises the deficit further. Meanwhile, businesses focus on productivity gains by squeezing more from current employees rather than hire additional workers. Both actions impair long term growth and full employment.

Fed is about to embark on very substantive program to reduce interest rates with QE2. However, it is fueling a further rise in commodity prices which will put a broad tax on the economy. Without a co-ordinated response from other U.S. regulatory agencies and financial market exchanges, the U.S. is doomed to repeat policy mistakes on all fronts. Truly a tragic tale of policy makers trying to do the right thing but causing unintended consequences!!

Bhuv Narain Raizada is the Founder/Managing Director of Venture Catalyst Finance Inc. & GEFP Investment Forum. Mr. Raizada is a financial economist/trader given his training and former head of fixed income finance for Citibank Canada overseeing $2 billion in ALM. He also is a professional moderator of investment related forums including previously co-hosting a niche endowment & foundation conference. Mr. Raizada holds a degree in Economics from York University with a specialization in international finance & economics. He has also taught introductory economics at the Toronto School of Business.

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“VCF” is an acronym for Venture Catalyst Finance Inc. and VCF Journal Online is a related page to the website of venturecatalystfinance.com. All visitors agree that they have read and accepted the term of use which governs the use of the site. Editorial posts published by VCF officers cannot be reproduced, modified or retransmitted for any commercial purpose without prior permission and proper attribution to the author and VCF. Permission for commercial reprints, reproductions or electronic transmissions (including RSS feeds to commercial blogs/websites) can be obtained by sending an email to our company at info@venturecatalystfinance.com and will be subject to a licensing fee. This site is free to individuals for non-commercial use and viewing in personal browsers.

Copyright © 2009-2016 Venture Catalyst Finance Inc. All Rights Reserved.

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December 9th, 2010. Posted by Bhuv N. Raizada, Toronto, Canada.

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2. U.S. Bond Yields

Recent rise in U.S. bond yields has investors wondering which way the bond market is heading. Commodities show inflation on the radar while the Fed is continuing talk of deflation. Some thoughts:

  • Fed is determined to bring down rates to help de-leveraging process barring any political interference. Reducing interest rates increases real incomes for families and companies by refinancing older debt at lower rates. Significant sectors (e.g. real estate) and cross sections of the economy (e.g. state finances, general unemployment rate) remain under strain. Bernanke hinted that he will go beyond $600 billion asset purchase program (if necessary) to achieve mandate of full employment.
  • Commodity price rise (i.e. Oil) will only put more money into the coffers of foreign export driven economies which will use their current account surpluses to maintain artificial currency pegs to the U.S. dollar and trade advantages by buying U.S. treasuries.
  • Cheap money and positive carry trades are still in place for dividend yielding assets. Fed QE2 initiative will only serve to fuel demand for financial assets as it intentionally tries to reflate underlying prices. Same is true globally as many countries still have negative real interest rates.
  • Euro is still struggling in aftermath of PIGS crisis and the U.S. is still seen as “flight to quality” haven and retains status as major reserve currency.
  • Overall commodity inflation and recent extension of Bush tax cuts are weighing on long dated treasuries (red light) at the moment. Hot economies in BRIC nations and U.S. structural deficits underpin these factors in investors minds.

History suggests it’s unwise to bet against the Fed and global imbalances (fixed currency pegs) are still in place suggesting a status quo in the U.S. bond market in the near term. However, a warning light is starting to flash indicating trouble much further down the road. Please read my posting in Eagle-Eye Perspectives entitled, “Rising Bond Yields: A Red Flag” which I wrote last year. Parts of the post are still relevant and will put things in greater perspective.

Bhuv Narain Raizada is the Founder/Managing Director of Venture Catalyst Finance Inc. & GEFP Investment Forum. Mr. Raizada is a financial economist/trader given his training and former head of fixed income finance for Citibank Canada overseeing $2 billion in ALM. He also is a professional moderator of investment related forums including previously co-hosting a niche endowment & foundation conference. Mr. Raizada holds a degree in Economics from York University with a specialization in international finance & economics. He has also taught introductory economics at the Toronto School of Business.

Advertisements:

“VCF” is an acronym for Venture Catalyst Finance Inc. and VCF Journal Online is a related page to the website of venturecatalystfinance.com. All visitors agree that they have read and accepted the term of use which governs the use of the site. Editorial posts published by VCF officers cannot be reproduced, modified or retransmitted for any commercial purpose without prior permission and proper attribution to the author and VCF. Permission for commercial reprints, reproductions or electronic transmissions (including RSS feeds to commercial blogs/websites) can be obtained by sending an email to our company at info@venturecatalystfinance.com and will be subject to a licensing fee. This site is free to individuals for non-commercial use and viewing in personal browsers.

Copyright © 2009-2016 Venture Catalyst Finance Inc. All Rights Reserved.

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December 3rd, 2010. Posted by Bhuv N. Raizada, Toronto, Canada.

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1. Inflation in EM Countries

Inflation in Emerging Markets (EM) has been on the rise according to recent published data. A few quick thoughts on the matter:

  • A brief backdrop to EM Inflation for readers. Negative real interest rates helped badly needed growth in a co-ordinated policy response to the global credit crisis. However, it also helped stoke inflation, a rise in EM asset valuations and created bubbles in certain sectors (e.g. China real estate).
  • A greater percentage of disposable income is spent on basic staples (e.g. food, clothing, gasoline) in EM countries as compared to individuals in North America or Europe. This leaves less money available for purchases of other goods/services as EM economies try to grow domestic consumption. In effect, putting a tax on the broad economy. This endangers the growth story in emerging economies leading to reduced returns and heavy reliance on exports. As an example, China’s main stock index (Shanghai Composite) is down this year.
  • Forces monetary authorities to raise interest rates, margin rates and reserve requirements to combat inflationary pressures. Again, raises the cost of borrowing for businesses, individuals and investors across the broad spectrum of the economy and slows growth.
  • Problem has been compounded by the recent Federal Reserve decision to implement QE2. This will only force more speculative money into EM countries in search of yield if the Fed is successful in flattening the yield curve through purchases of longer dated U.S. Treasuries.
  • GDP forecasts for EM countries remain robust on a relative basis compared to most G-8 countries. However, inflation will reduce the lustre that these economies have grown accustomed to in recent years.

Bhuv Narain Raizada is the Founder/Managing Director of Venture Catalyst Finance Inc. & GEFP Investment Forum. Mr. Raizada is a financial economist/trader given his training and former head of fixed income finance for Citibank Canada overseeing $2 billion in ALM. He also is a professional moderator of investment related forums including previously co-hosting a niche endowment & foundation conference. Mr. Raizada holds a degree in Economics from York University with a specialization in international finance & economics. He has also taught introductory economics at the Toronto School of Business.

Advertisements:

“VCF” is an acronym for Venture Catalyst Finance Inc. and VCF Journal Online is a related page to the website of venturecatalystfinance.com. All visitors agree that they have read and accepted the term of use which governs the use of the site. Editorial posts published by VCF officers cannot be reproduced, modified or retransmitted for any commercial purpose without prior permission and proper attribution to the author and VCF. Permission for commercial reprints, reproductions or electronic transmissions (including RSS feeds to commercial blogs/websites) can be obtained by sending an email to our company at info@venturecatalystfinance.com and will be subject to a licensing fee. This site is free to individuals for non-commercial use and viewing in personal browsers.

Copyright © 2009-2016 Venture Catalyst Finance Inc. All Rights Reserved.

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