Monday, October 16, 2017

The Coming Renaissance of Macro Investing?

John Curran, a partner and head of commodities at Caxton Associates, and chief investment officer at Tigris Financial Group, a family office, wrote a comment for Barron's, The Coming Renaissance of Macro Investing:
In the summer of 1974, Treasury Secretary William Simon traveled to Saudi Arabia and secretly struck a momentous deal with the kingdom. The U.S. agreed to purchase oil from Saudi Arabia, provide weapons, and in essence guarantee the preservation of Saudi oil wells, the monarchy, and the sovereignty of the kingdom. In return, the kingdom agreed to invest the dollar proceeds of its oil sales in U.S. Treasuries, basically financing America’s future federal expenditures.

Soon, other members of the Organization of Petroleum Exporting Countries followed suit, and the U.S. dollar became the standard by which oil was to be traded internationally. For Saudi Arabia, the deal made perfect sense, not only by protecting the regime but also by providing a safe, liquid market in which to invest its enormous oil-sale proceeds, known as petrodollars. The U.S. benefited, as well, by neutralizing oil as an economic weapon. The agreement enabled the U.S. to print dollars with little adverse effect on interest rates, thereby facilitating consistent U.S. economic growth over the subsequent decades.

An important consequence was that oil-importing nations would be required to hold large amounts of U.S. dollars in reserve in order to purchase oil, underpinning dollar demand. This essentially guaranteed a strong dollar and low U.S. interest rates for a generation. Given this backdrop, one can better understand many subsequent U.S. foreign-policy moves involving the Middle East and other oil-producing regions.

Recent developments in technology and geopolitics, however, have already ignited a process to bring an end to the financial system predicated on petrodollars, which will have a profound impact on global financial markets. The 40-year equilibrium of this system is being dismantled by the exponential growth of technology, which will have a bearish impact on both supply and demand of petroleum. Moreover, the system no longer is in the best interest of key participants in the global oil trade. These developments have begun to exert influence on financial markets and will only grow over time. The upheaval of the petrodollar recycling system will trigger a resurgence of volatility and new price trends, which will lead to a renaissance in macro investing.

Let’s examine these developments in more detail. First, technology is affecting the energy markets dramatically, and this impact is growing exponentially. The pattern-seeking human mind is built for an observable linear universe, but has cognitive difficulty recognizing and understanding the impact of exponential growth.

Paralleling Moore’s Law, the current growth rate of new technologies roughly doubles every two years. In the transportation sector, the global penetration rate of electric vehicles, or EVs, was 1% at the end of 2016 and is now probably about 1.5%. However, a doubling every two years of this level of usage should lead to an automobile market that primarily consists of EVs in approximately 12 years, reducing gasoline demand and international oil revenue to a degree that today would seem unfathomable to the linear-thinking mind. Yes, the world is changing—rapidly.

Alternative energy sources (solar power, wind, and such) also are well into their exponential growth curves, and are even ahead of EVs in this regard. Based on growth curves of other recent technologies, and due to similar growth rates in battery technology and pricing, it is likely that solar power will supplant petroleum in a vast portion of nontransportation sectors in about a decade. Albert Einstein is rumored to have described compound interest (another form of exponential growth) as the most powerful force in the universe. This is real change.

The growth of U.S. oil production due to new technologies such as hydraulic fracturing and horizontal drilling has both reduced the U.S. need for foreign sources of oil and led to lower global oil prices. With the U.S. economy more self-reliant for its oil consumption, reduced purchases of foreign oil have led to a drop in the revenues of oil-producing nations and by extension, lower international demand for Treasuries and U.S. dollars.

ANOTHER MAJOR SECULAR CHANGE that is under way in the oil market comes from the geopolitical arena. China, now the world’s largest importer of oil, is no longer comfortable purchasing oil in a currency over which it has no control, and has taken the following steps that allow it to circumvent the use of the U.S. dollar:
  • China has agreed with Russia to purchase Russian oil and natural gas in yuan.
  • As an example of China’s newfound power to influence oil exporters, China has persuaded Angola (the world’s second-largest oil exporter to China) to accept the yuan as legal tender, evidence of efforts made by Beijing to speed up internationalization of the yuan. The incredible growth rates of the Chinese economy and its thirst for oil have endowed it with tremendous negotiating strength that has led, and will lead, other countries to cater to China’s needs at the expense of their historical client, the U.S.
  • China is set to launch an oil exchange by the end of the year that is to be settled in yuan. Note that in conjunction with the existing Shanghai Gold Exchange, also denominated in yuan, any country will now be able to trade and hedge oil, circumventing U.S. dollar transactions, with the flexibility to take payment in yuan or gold, or exchange gold into any global currency.
  • As China further forges relationships through its One Belt, One Road initiative, it will surely pull other exporters into its orbit to secure a reliable flow of supplies from multiple sources, while pressuring the terms of the trade to exclude the U.S. dollar.
The world’s second-largest oil exporter, Russia, is currently under sanctions imposed by the U.S. and European Union, and has made clear moves toward circumventing the dollar in oil and international trade. In addition to agreeing to sell oil and natural gas to China in exchange for yuan, Russia recently announced that all financial transactions conducted in Russian seaports will now be made in rubles, replacing dollars, according to Russian state news outlet RT. Clearly, there is a concerted effort from the East to reset the economic world order.

ALL OF THESE DEVELOPMENTS leave global financial markets vulnerable to a paradigm shift that has recently begun. In meetings with fund managers, asset allocators, and analysts, I have found a virtually universal view that macro investing—investing based on global macroeconomic and political, not security-specific trends—is dead, fueled by investor money exiting the space due to poor returns and historically high fees in relation to performance. This is what traders refer to as capitulation. It occurs when most market participants can’t take advantage of a promising opportunity due to losses, lack of dry powder, or a psychological inability to proceed because of recency bias.

A current generational low in volatility across a wide spectrum of asset classes is another indicator that the market doesn’t see a paradigm shift coming. This suggests that current volatility is expressing a full discounting of stale fundamental inputs and not adequately pricing in the potential of likely disruptive events.

THE FEDERAL RESERVE is now in the beginning stages of a shift toward “normalization,” which will lead to diminished support for the U.S. Treasury market. The Fed’s total assets stand at approximately $4.5 trillion, or five times what they were prior to the financial crisis of 2008-09. The goal of the Fed is to “unwind” this enormous balance sheet with minimal market disruption. This is a high-wire act a thousand feet in the air without a safety net or prior practice. Additionally, at some not-so-distant future date, the U.S. will need to finance enormous and growing entitlement programs, and our historical international sources for that financing will no longer be willing to support us in that endeavor.

The market participants with whom I met theoretically could have the ability to accept cognitively the points made in this article. But the accumulation of many small losses in a low-volatility and generally trendless market has robbed them of confidence and the psychological balance to embrace any new paradigm proactively. They are frozen with fear that the lower- return profile of recent years is permanent—ironic in an industry that is paid to capture price changes in a cyclical world.

One market legend with whom I spoke suggested he wouldn’t have had the success he enjoyed in his career had he begun in the past decade. Whether or not this might be true, it doesn’t mean that recent lower returns are to be extrapolated into the future, especially when these subpar returns occurred during the quantitative-easing era, a period that is an anomaly.

I have been fortunate to ride substantial bets on big trends, earning high risk-adjusted returns using time-tested techniques for exploiting these trends. Additionally, I have had the luxury of not participating actively full-time in macro investing during this difficult period. Both factors might give me perspective. I regard this as an extraordinarily opportune moment for those able to shed timeworn, archaic assumptions of market behavior and boldly return to the roots of macro investing.

The opportunity is reminiscent of the story told by Stanley Druckenmiller, who was promoted early in his investment career to head equity research at a time when his co-workers had vastly more experience than he did. His director of investments informed him that his promotion owed to the same reason they send 18-year-olds to war; they are too dumb to know not to charge. The “winners” under the paradigm now unfolding will be market participants able to disregard stale, anomalous concepts, and charge.

RELATEDLY, THERE IS a running debate as to whether trend-following is a dying strategy. There is plenty of anecdotal evidence that short-term and mean-reversion trading is more in vogue in today’s markets (think quant funds and “prop” shops). Additionally, the popularity of passive investing signals an unwillingness to invest in “idea generation,” or alpha. These developments represent a full capitulation of trend following and macro trading.

Ironically, many market players who wrongly anticipated a turn in recent years to a more positive environment for macro and trend-following are throwing in the towel. The key difference is that now there is a clear catalyst to trigger the start of the pendulum swinging back to a fertile macro/trend-following trading environment.

As my mentor, Bruce Kovner [the founder of Caxton Associates] used to say, “Nobody rings a bell at key turning points.” The ability to properly anticipate change is predicated upon detached analysis of fundamental information, applying that information to imagine a plausible world different from today’s, understanding how new data points fit (or don’t fit) into that world, and adjusting accordingly. Ideally, this process leads to an “aha!” moment, and the idea crystallizes into a clear vision. The thesis proposed here is one such vision.
John Curran has written a lot of food for thought in this comment which admittedly is also a bit self-serving, but let me quickly go over some of my thoughts.

First, I don't buy the nonsense of the "end of the petrodollars". This is pure nonsense and all this talk of alternative exchanges that will threaten the preeminence of the US dollar or US exchanges is beyond ridiculous.

 I suggest Mr. Curran and all of you who buy into this nonsense read Yannis Varoufakis's first book, The Global Minotaur. Let me be clear, I'm no fan of Varoufakis and his pompous leftist nonsense but this book is a must-read to understand why the US is gaining global strength as its national debt mushrooms.

In short, the US runs a current account deficit for years but it benefits from a capital account surplus as all those countries running current account surpluses (China, Germany, Japan, etc) recycle their profits into the US financial system, buying up stocks, bonds, real estate and other investments.

The second book I want you all to read is John Perkins's The New Confessions of an Economic Hitman, an expanded edition of his classic bestseller. You will learn the world doesn't work according to some nice, tidy economic model full of complicated equations. Behind the scenes, there are a lot of dirty things going on.

Importantly, and this is my point, the US dominates global finance and the global economy, which is why I scoff at the idea of China, Russia or any other country is gaining on it and threatens to displace it or displace the greenback as the world's reserve currency.

Is China important? Absolutely. But make no mistake, the US exerts immense power over China and other countries and it leads the world, not the other way around.

And China has its own internal problems right now. Over the weekend, I read about how China’s mortgage debt bubble raises spectre of 2007 US crisis and why Jim Rickards thinks we need to prepare for a Chinese Maxi-devaluation.

Remember, it was a little over two years ago that China's Big Bang rocked markets, clobbering risk assets across the spectrum.

Is it possible that another Chinese devaluation is coming? It's unlikely now but if the US dollar continues to appreciate from these levels, which is one of my macro calls, I certainly think it's a definite risk.

Why should we care if China devalues again in a significant way? Because it will heighten global deflation at a time when deflation already threatens the US and a time when global inflation is in freefall.

Importantly, the last thing the world needs right now is for China to devalue its currency, it will wreak havoc in emerging markets and heighten global deflationary headwinds at a time when the world is at risk of entering a long period of debt deflation.

[Note: China devaluing puts pressure on Asian emerging markets to devalue their currencies and on Japan to devalue its yen, flooding the world with cheap goods, effectively exporting more goods deflation to developed nations which are already highly indebted and unlikely to keep buying cheaper goods indefinitely.]

This brings me back to John Curran's comment above. I agree, there is a technological revolution going on in energy which is deflationary and will cap and lower the price of oil over the long run. The Saudis aren't stupid, they see the writing on the wall which is why they're planning to sell part of Saudi Aramco.

And where do you think Saudi Arabia will invest its proceeds to diversify its economy away from oil revenues? You guessed it, global stocks, bonds, real estate, private equity, and infrastructure and it will invest primarily in the US using US banks and funds.

Now, let me tackle this part of John Curran's article:
The Federal Reserve is now in the beginning stages of a shift toward “normalization,” which will lead to diminished support for the U.S. Treasury market. The Fed’s total assets stand at approximately $4.5 trillion, or five times what they were prior to the financial crisis of 2008-09. The goal of the Fed is to “unwind” this enormous balance sheet with minimal market disruption. This is a high-wire act a thousand feet in the air without a safety net or prior practice. Additionally, at some not-so-distant future date, the U.S. will need to finance enormous and growing entitlement programs, and our historical international sources for that financing will no longer be willing to support us in that endeavor.

The market participants with whom I met theoretically could have the ability to accept cognitively the points made in this article. But the accumulation of many small losses in a low-volatility and generally trendless market has robbed them of confidence and the psychological balance to embrace any new paradigm proactively. They are frozen with fear that the lower- return profile of recent years is permanent—ironic in an industry that is paid to capture price changes in a cyclical world.

One market legend with whom I spoke suggested he wouldn’t have had the success he enjoyed in his career had he begun in the past decade. Whether or not this might be true, it doesn’t mean that recent lower returns are to be extrapolated into the future, especially when these subpar returns occurred during the quantitative-easing era, a period that is an anomaly.
I used to invest in top macro funds all over the world and one of my biggest pet peeves was lame excuses for underperformance. "The Fed and other central banks are distorting financial markets and this will come to an abrupt end."

Really? Why? Because you say so as you collect a big, fat 2% management fee on billions as you severely underperform these markets? I've been waiting for years for your theory on central banks "blowing up" to come to fruition and so far, you've been wrong and it cost me potential returns elsewhere as you collect a management fee on billions.

I read Charles Hugh Smith's comment on the endgame of financialization being stealth nationalization where he posted this chart (click on image):


So what? We all know Janet in Wonderland and her global colleagues are buying up assets like crazy, enriching bankers and their elite hedge fund and private equity clients.

What I want to know is whether there are limits to central bankers' prowess? I asked one astute hedge fund manager this very question and he replied:
"The limits to CB prowess are now in full manifestation via political+social volatility.  It is this apparent and rising political and social volatility which is forcing central banks to shift from expansion to contraction of their aggregate balance sheets."
I'm hardly convinced this is why central banks are shifting gears. In fact, I firmly believe the Fed knows deflation is headed for the US and it's trying to store up ammunition as fast as possible to help shore up big banks and prepare for the next financial crisis.

It's a big gamble. Why? Because the Fed only controls the short end of the curve, not the long end which is primarily influenced by inflation expectations which keep dropping. And the irony is that as the Fed tightens and raises rates, it's accelerating this drop in inflation expectations, further stoking deflationary headwinds here and around the world.

This is why BlackRock's Larry Fink is warning of the risk of an inverted bond yield curve:
The head of the world’s largest asset management company said investors’ appetite for those assets could move long-dated yields below those of shorter-term debt.

That condition, known as an inverted yield curve, is often considered a precursor to recession and could presage a decline for stocks.

“If there is a risk, it’s that,” Fink said in an interview. “I hope the Federal Reserve pays attention.”

However, he said he did not see an inverted yield curve materializing within the next year as global economic growth accelerates.
Larry is dreaming if he thinks global economic growth is set to accelerate. I know that's what BlackRock is hoping for but the opposite will happen.

This brings me to my final point on the coming renaissance of macro investing. As bond traders face and inflation gamble that will last a generation, they better get it right, because if they don't, it will cost them dearly.

The link between asset inflation/ bubbles and the real economy is what worries me as this crazy stock market keeps punishing sellers. Now more than ever, you need to be very careful navigating though these prickly markets.

As I stated in my last comment on why the bubble economy is set to burst, downside risks are mounting:
Nothing can stop these central bank-controlled markets. Janet in Wonderland and her global colleagues are in control (or so they want you to think), which is why Jim Chanos and other short-sellers are losing money this year as markets melt up.

Is it time to party like it's 1999? Are we on the cusp of a major parabolic market breakout that will last a couple of more years?

Before you get all excited, let me share with you what one astute hedge fund manager I know, Dimitri Chalvasiotis, sent me last Friday after the close:

Volatility Adjusted SP500, as of Friday’s closing metrics, has reached an historic extreme printed a handful of times since 1971. In other words, going forward, either SP500 declines in value or SP500 realized volatility rises. Rare (mathematical) juncture in time/price (click on image).

In other words, get ready for some rock 'n roll, the silence of the VIX won't last forever, and even if markets keep melting up, all that's happening is downside risks are mounting.
So, I do agree with John Curran on one point, those who foolishly think global macro is dead are wrong. It's not dead but the problem is markets can stay irrational (thanks to central banks) longer than macro gods who are in big trouble can stay solvent.

On that note, Bloomberg's Nishant Kumar reports Brevan Howard Asset Management, the hedge fund firm co-founded by Alan Howard that’s battling an investor exodus, is planning to start two more funds, including one that is betting on volatility in the Treasuries market.

The only volatility I foresee in US Treasuries is upside volatilty in prices as yields plunge to a new secular low, sending US long bond prices (TLT) to record highs.

And Canada’s housing market is “ripe for a pretty severe correction” with Canadian Imperial Bank of Commerce the most vulnerable, according to the Big Short's Steve Eisman, a fund manager at Neuberger Berman Group LLC.

You already know I thought the Bank of Canada was flirting with disaster raising interest rates earlier this year but it seems to have backed off for now. Eisman is right to note Canada hasn't had its credit cycle yet and it's about to have one. Read Ted Carmichael's latest global macro comment to understand why Canada's credit cycle downturn is coming (keep shorting that overvalued loonie).

This is hardly news to those of us who have been warning of Canada's growing debt risks but speculation on houses continues, including here in Montreal where bidding wars are breaking out in nice neightborhoods "rich" Chinese seek to move to (as long as your house has good feng shui).

Those poor Chinese and Canadians buying houses now are in for a rude awakening and all the feng shui in the world won't help them recover the losses they will suffer over the next decade.

The coming renaissance of macro investing? Maybe but only the best will survive the coming shakeout in the hedge fund industry.

Friday, October 13, 2017

The Bubble Economy Set to Burst?

Andy Xie, an independent economist, wrote an op-ed for the South China Morning Post, The bubble economy is set to burst, and US elections may well be the trigger:
Central banks continue to focus on consumption inflation, not asset inflation, in their decisions. Their attitude has supported one bubble after another. These bubbles have led to rising ­inequality and made mass consumer inflation less likely.

Since the 2008 financial crisis, asset inflation has fully recovered, and then some. The US household net worth is 34 per cent above the peak in 2007, versus 30 per cent for nominal GDP. China’s property ­value may have surpassed the total in the rest of the world combined. The world is stuck in a vicious cycle of asset bubbles, low consumer ­inflation, stagnant productivity and low wage growth.

The US Federal Reserve has indicated that it will begin to ­unwind its QE (quantitative easing) assets this month and raise the ­interest rate by another 25 basis points to 1.5 per cent. China has been clipping the debt wings of grey rhinos and pouring cold water on property speculation. They are ­worried about asset bubbles.

But, if recent history is any guide, when asset markets begin to tumble, they will reverse their actions and ­encourage debt binges again.

Recently, some central bankers have been puzzled by the breakdown of the Philipps Curve: that falling unemployment rates would lead to wage inflation first and consumer price inflation next. This shows how some of the most powerful people in the world operate on flimsy ­assumptions.

Despite low unemployment and widespread labour shortages, wage increases and inflation in Japan have been around zero for a quarter of a century. Western central bankers assumed that the same wouldn’t happen to them without understanding the underlying reasons.

The loss of competitiveness changes how macro policy works. Japan has been losing competitiveness against its Asian neighbours. As its population is small, relative to the regional total, lower wages in the region have exerted gravity on its ­labour market. This is the fundamental reason for the decoupling between the unemployment rate and wage trend.

The mistaken stimulus has the unintended consequences of dissipating real wealth and increasing inequality. American household net worth is at an all-time high of five times GDP, significantly higher than the bubble peaks of 4.1 times in 2000 and 4.7 in 2007, and far higher than the historical norm of three times GDP. On the ­other hand, US capital formation has stagnated for decades. The outlandish paper wealth is just the same asset at ever higher prices.

The inflation of paper wealth has a serious impact on inequality. The top 1 per cent in the US owns one-third of the wealth and the top 10 per cent owns three-quarters . Half of the people don’t even own stocks. Asset inflation will increase inequality by definition. Moreover, 90 per cent of the income growth since 2008 has gone to the top 1 per cent, partly due to their ability to cash out in the ­inflated asset market. An economy that depends on asset inflation always disproportionately benefits the asset-rich top 1 per cent.

There have been so many theories on why inequality has risen. The misguided monetary policy may be the culprit. Germany and Japan do not have significant asset bubbles. Their inequality is far less than in the Anglo-Saxon economies that have succumbed to the allure of financial speculation.

While Western central bankers can stop making things worse, only China can restore stability in the global economy. Consider that 800 million Chinese workers have ­become as productive as their Western counterparts, but are not even close in terms of consumption. This is the fundamental reason for the global imbalance.

China’s model is to subsidise ­investment. The resulting overcapacity inevitably devalues whatever its workers produce. That slows down wage rises and prolongs the ­deflationary pull. This is the reason that the Chinese currency has had a tendency to depreciate during its four decades of rapid growth, while other East Asian economies experienced currency appreciation during a similar period.

Overinvestment means destroying capital. The model can only be sustained through taxing the household sector to fill the gap. In addition to taking nearly half of the business labour outlay, China has invented the unique model of taxing the household sector through asset bubbles. The stock market was started with the explicit intention to subsidise state-owned enterprises. The most important asset bubble is the property market. It redistributes about 10 per cent of GDP to the government sector from the household sector.

The levies for subsidising investment keep consumption down and make the economy more dependent on investment and export. The government finds an ever-increasing need to raise levies and, hence, make the property bubble bigger. In tier-one cities, property costs are likely to be between 50 and 100 years of household income. At the peak of Japan’s property bubble, it was about 20 in Tokyo. China’s residential property value may have surpassed the total in the rest of the world combined.

How is this all going to end? Rising interest rates are usually the trigger. But we know the current bubble economy tends to keep inflation low through suppressing mass consumption and increasing overcapacity. It gives central bankers the excuse to keep the printing press on.

In 1929, Joseph Kennedy thought that, when a shoeshine boy was giving stock tips, the market had run out of fools. Today, that shoeshine boy would be a genius. In today’s bubble, central bankers and governments are fools. They can mobilise more resources to become bigger fools.

In 2000, the dotcom bubble burst because some firms were caught making up numbers. Today, you don’t need to make up numbers. What one needs is stories.

Hot stocks or property are sold like Hollywood stars. Rumour and ­innuendo will do the job. Nothing real is necessary.

In 2007, structured mortgage products exposed cash-short borrowers. The defaults snowballed. But, in China, leverage is always rolled over. Default is usually considered a political act. And it never snowballs: the government makes sure of it. In the US, the leverage is mostly in the government. It won’t default, because it can print money.

The most likely cause for the bubble to burst would be the rising political tension in the West. The bubble economy keeps squeezing the middle class, with more debt and less wages. The festering political tension could boil over. Radical politicians aiming for class struggle may rise to the top. The US midterm elections in 2018 and presidential election in 2020 are the events that could upend the applecart.
This is a great comment from a very intelligent economist who obviously knows the major macro forces at work, shaping the global economy.

Xie is right, asset inflation/bubbles have been the focus of central banks. Why? Because central banks don't care about underfunded pensions, millions retiring in poverty, all they care about are big banks and making sure their big private equity and hedge fund clients are in good shape to continue paying them big fees.

Of course, many big US public pensions (and other pensions) have been getting squeezed by large hedge funds and private equity funds charging them hefty fees for a long time, contributing to the unprecedented rise of inequality.

Importantly, large, poorly governed US public pensions getting squeezed on fees as their funded status continues to deteriorate are exacerbating rising inequality (Canada's large, well-governed pensions pay hefty fees too but they also do a lot of direct investing through co-investments lowering overall fees and are for the most part fully-funded even if they're piling on the leverage).

You might think asset inflation in public and private markets is a good thing for all pensions. It is up to a certain point as long as interest rates don't keep plunging to record lows.

Remember, and I keep emphasizing this, pensions are all about managing assets and liabilities, but the duration of assets is lower than the duration of long-dated liabilities, which means a drop in rates disproportionately impacts pension deficits, even if assets keep rising.

But when deflation hits the US, it's game over as we will suffer the worst bear market ever, and it will send rates and asset values plunging, effectively destroying many chronically underfunded pensions.

I keep warning you, the pension storm cometh, and it will be ugly. If you think US pension storms from nowhere are bad now, just wait till the real storm hits us.

I know, Amazon shares (AMZN) are now trading over $1,000 and NVDIA's shares (NVDA) keep defying logic, going up, up, up, just like the rest of the stock market (SPY) (click on images):




Good times! Nothing can stop these central bank-controlled markets. Janet in Wonderland and her global colleagues are in control (or so they want you to think), which is why Jim Chanos and other short-sellers are losing money this year as markets melt up.

Is it time to party like it's 1999? Are we on the cusp of a major parabolic market breakout that will last a couple of more years?

Before you get all excited, let me share with you what one astute hedge fund manager I know, Dimitri Chalvasiotis, sent me last Friday after the close:
Volatility Adjusted SP500, as of Friday’s closing metrics, has reached an historic extreme printed a handful of times since 1971. In other words, going forward, either SP500 declines in value or SP500 realized volatility rises. Rare (mathematical) juncture in time/price (click on image).

In other words, get ready for some rock 'n roll, the silence of the VIX won't last forever, and even if markets keep melting up, all that's happening is downside risks are mounting.

I told you before, I can trade small biotech companies like a lunatic, and likely make great returns (and be stressed out of my mind), but all my money right now is in US long bonds (TLT) which is my highest macro conviction trade going forward (click on image):


As you can see, US long bond prices have been choppy lately as reflationistas talk up Trump's tax cuts and infrastructure spending program.

But with global inflation in freefall, I'm not worried one bit, and think we have yet to see the secular lows in bond yields. I'm not the only one, Van R. Hoisingotn and Lacy Hunt of Hoisington Investment Management wrote another great Quarterly Review where they note the following on the Fed's quantitative tightening (click on image):


Friday's US CPI misses initially weakened the US dollar (UUP) but it came back strong and I think it might retest its weekly lows or just keep surging higher from these levels (click on image):


All I know is what I told you last Friday still stands, as you navigate through these prickly markets, be careful, downside risks are mounting, don't get pricked when you least expect it.

"Leo, that's all fine and dandy but my benchmark is the S&P 500 and as long as it goes up, I'm underperforming and risk losing my highly lucrative portfolio manager job. I simply can't risk underperforming these markets for another year."

I hear you, brothers and sisters, the risks of a melt-up are very real in these central bank controlled markets where hedge fund quants rule the world, but I watch these markets like a hawk and see bubbles everywhere across public and private markets.

So, hold on to your bitcoin hats, and let's get ready to rumble because all it takes is one piece of negative news no one is expecting to send these markets crashing.

By the way, while most macro gods are still in big trouble, Ray Dalio and the folks at Bridgewater are betting over $700 million on the fall of Italian financials.

Mamma Mia! Take that Jim Grant!


In all seriousness, I've been warning everyone that Italy will make Greece and even Spain look like a walk in the park (keep shorting euros here and stay short!).

So, is the bubble economy set to burst? I don't know but listen to professor Richard Thaler who just won the Nobel Economics Prize for his 'nudge' theory setting the foundations for behavioral economics.

Below, Thaler spoke to Bloomberg's Amanda Lang back in June 2016 on misbehavior in economics. Interestingly, if you have a 401(k) plan at work, there’s a good chance that you’re saving more for retirement because of Richard Thaler.

This week, Thaler said these markets make him nervous as vol is too low. You should all heed his warning as the Undiscovered Managers Behavioral Value Fund he helps manage has almost doubled the S&P 500's gains since the beginning of the bull market.

Hope you enjoyed reading my comment. I want to end by thanking the few who subscribe and donate to this blog via PayPal on the top right-hand side under my picture (view web version on your smart phone). I appreciate it and simply want to thank you for your financial support.




Thursday, October 12, 2017

CPPIB Comes Out on Asian Data Centers?

Lynette Khoo of Singapore's Business Times reports, CPPIB invests up to S$350m in Keppel's Alpha Data Centre Fund:
The Alpha Data Centre Fund (ADCF), managed by Keppel Capital's wholly owned unit, Alpha Investment Partners, is receiving another shot in the arm from Canada Pension Plan Investment Board (CPPIB), which is investing up to US$350 million of capital, with an option to invest another US$150 million.

CPPIB's latest commitment and option will bring the ADCF's total fund size to up to US$1 billion, doubling the Fund's initial target size of US$500 million.

When fully leveraged and invested, the Fund will potentially have assets under management of about US$2.3 billion, said Keppel Capital, the asset management arm of Keppel Corporation.

Jimmy Phua, CPPIB managing director and head of real estate investments for Asia, said: "The continued strong growth in data requirements globally has driven demand for quality data centre space, particularly in the Asia-Pacific region where digital infrastructure is relatively under-developed. By investing alongside the ADCF, CPPIB is able to gain exposure into this critical sector."

The ADCF was launched in July 2016 by Alpha amid strong interest from institutional investors for quality alternative asset classes.

This fund taps the experience of Keppel Data Centres - a 70-30 joint venture between two Keppel group entities, Keppel Telecommunications & Transportation Ltd and Keppel Land - that has designed, built and managed data centres for more than a decade.
The Nikkei Asian Review also reports, Canadian Pension Fund To Invest In Singapore Keppel's Asset Management Business:
Canada Pension Plan Investment Board has decided to make an initial investment of up to $350 million, with an option to invest another $150 million, in Alpha Data Centre Fund, the asset management business of Singapore's Keppel Corporation.

CPPIB's latest commitment and option will bring the ADCF's combined and co-investment interest up to $1 billion, double its initial target size of $500 million, Keppel said in an exchange filing today. "When fully leveraged and invested, the fund will potentially have assets under management of approximately $2.3 billion."

ADCF is managed by Alpha Investment Partners Limited, the private fund management arm of Keppel Capital, a Keppel Corp unit.

Keppel Corp is best known for its rig building and property businesses.
CPPIB is looking into the digital future and wisely investing in Asian data centers alongside its partner, the Alpha Data Centre Fund (ADCF), the asset management business of Singapore's Keppel Corporation.

I've already covered why PSP, Ontario Teachers' and other large Canadian pensions are investing in data centers so I don't want to dwell on this topic too long. We live in a data-driven world where data and data analytics are an integral part of our lives.

However, I do want to refer you to an article Paul Mah wrote a couple of years ago in Datacenter Dynamics, The rise and rise of data centers in South East Asia:
There is no question that the data center landscape in South East Asia is a vibrant and growing one, with many new developments and happenings taking place in the region. A significant proportion of the action in this region is centered on Singapore, where many data center operators are busy building their second or even third data centers.

For example, Telin Singapore in June held a groundbreaking ceremony for its Telin-3 data center, which will be built on the first plot of land awarded at the Singapore data center park. On its part, Digital Realty will have its second data center here converted and ready for an estimated late-2015 first phrase delivery, while 1-Net’s 1-Net North data center is currently scheduled for completion by the first quarter of 2016.

Cloud providers too, have been setting up in the island nation to tap into the growing demand in this region. The name list includes the likes of Amazon Web Services (AWS), Microsoft Azure, Digital Ocean, GoDaddy, and Linode, to name a few.

Interestingly, the country is also the place where East meets West, with Aliyun, the cloud division of China’s Alibaba Group, announcing in August that its second overseas data center and international HQ will be set up in Singapore.

Acquisitions are also happening as larger players turn their attention to the region. Colt acquired KVH last year, and more recently, the Hong Kong and Singapore based Pacnet was acquired by Australia’s Telstra as it sought to strengthen its subsea network and data center assets in the region.

Innovation in the region

Local challenges have also resulted in some developments that may be viewed as unorthodox or even frowned upon elsewhere. In land-scarce Singapore, both Equinix and Google have opted to build a new data center right next to an existing one, with the latter having built its first ever multi-level data center here.

For Equinix, building its third data center (SG3) across the road to SG1 gives it the advantage of running direct fiber links to the many telecommunication operators and network providers that already have a Point of Presence there.

When it comes to Google, the reason presumably has to do with the fact that there is no need to build at a separate location, not when you consider the lack of natural disasters, excellent security, and relatively low number of violent crimes.

In Indonesia, the JK1 data center in Jakarta that was built as part of a partnership between Equinix and PT Data Center Infrastructure Indonesia (PT DCI) is fed by an on-site power station to mitigate the risk of an unstable power grid and to protect it from local power shortages.

For all the progress and innovations, much work remains to be done when it comes to sustainability here, especially in the dense urban areas where traditional sustainable energy options such as hydroelectricity, solar and wind power are not available.

This has not stopped some such as Singapore from promotion the use of high-grade reclaimed water it calls NEWater for cooling data centers. More needs to be done, however, and it will be interesting to see where the future will take us.
It will indeed be interesting to see where the future will take us. There are a lot more challenges in Asia than here in Quebec where we have lots of land and hydroelectric power, making us a prime spot to host large data centers.

But wherever Asia's data center future takes us, CPPIB will be invested in it, that much I guarantee you. These investments are part of CPPIB's long-term thematic approach across public and private markets all over the world.

And to do this properly, CPPIB and others need to find the right partners in Asia to partner up with. In this case, it's the Alpha Data Centre Fund (ADCF) which recently invested in a newly built facility in Singapore worth SGD170m (€108m):
Alpha Data Centre Fund has taken a 70% stake in the asset through a 70-30 joint venture, known as Thorium, with Keppel Data Centres.

Keppel Data Centres developed the 16,900sqm facility which is spread over five floors. More than 25% of the space has been committed.

Alpha, itself a subsidiary of Singapore’s Keppel Group, raised US$130m (€113m) for the fund in a first close a year ago.
It's clear that this fund specializes in Asian data centers, and that's all its managers specialize in.

In other CPPIB related news, this week, CPPIB celebrated the National Coming Out Day as part of its focus on inclusion and diversity (click on image):


CPPIB’s Women’s Initiative aims to ensure CPPIB actively hires, develops and engages women and Out@CPPIB helps foster an environment where LGBT+ employees feel comfortable bringing their whole selves to work. Out@CPPIB does this by leading activities externally and within CPPIB to ensure the recruitment, retention and development of LGBT+ talent.

CPPIB's President and CEO Mark Machin even proudly showed his support of the LGBT+ community on National Coming Out Day (click on image):



I couldn't resist to post this comment on LinkedIn: "We're in 2017, anyone who still has an issue with the LBGT community is completely out to lunch. #promotediversityintheworkplace".

Honestly, and I don't want to be controversial or minimize the struggles of women and the LBGT+ community in the workplace, but we live in 2017, anyone who has an issue with working with or reporting to women or anyone in the LBGT+ community is simply out to lunch and doesn't live on this planet. Period. 

It's like saying I have a problem working with blacks, Jews, Greeks, Indians, Latinos, Asians and Muslims. We shouldn't even give it a second thought.

In 2008, when I was working at the Business Development Bank of Canada (BDC) replacing a senior economist on maternity leave, my direct supervisor was a woman. She was very competent at her job but not particularly good at managing people, and this was blatantly obvious to her subordinates and eventually to her superiors (she's still there, thriving but doesn't manage anyone). 

Anyway, I had to work closely with a very nice homosexual man who was our graphic designer. He was openly gay and proud of it. A bit too proud and he sometimes crossed the line but in a harmless and joking way, knowing I was a proud heterosexual Greek-Canadian. Sometimes he would compliment the way I looked, dressed or smelled but he was teasing me, and I teased him back to the point where we would make other employees laugh and a bit uncomfortable at times. 

In fact, when it got too much, we even told each to tone it down or else we're going to get in big trouble (there is a line where jokes and teasing become inappropriate and unacceptable even if there is mutual consent).

My point here is working with people from the LBGT+ community is no big deal regardless of whether they are open or not about their sexuality. I even know one very senior pension fund manager in Canada who is openly gay. Moreover, my 86 year-old father who still works as a psychiatrist tells me 50% of the staff psychiatrists are gay and they bring their partners to  parties and events, something which was unheard of 45 years ago when he first started working (my father is very open-minded and enjoys conversing with all his colleagues) . 

It's no big deal. Where it becomes a big deal is when one suffers workplace bullying or discrimination (overt or tacit) based on the color of their skin, their religion, sexual orientation, gender, or disability. 

Earlier this week, I wrote about Quebec's atypical pension fund chief, where I unleashed another tirade about how people with disabilities are treated inhumanely by Canada's large private and public organizations:
Many years after la Révolution tranquille (the Quiet Revolution), Quebec has a serious reverse racism problem which is ingrained in its large public and private organizations. Many anglophones and ethnics have given up hope living here and the ones that stayed are pushing their children to leave this province or stay and face reverse discrimination.


I'm not going to mince my words here, and I can look in the eyes of Louis Vachon, Guy Cormier, André Bourbonnais and many other French-Canadian leaders who sit on the board of Finance Montréal or le Cercle Finance du Québec and tell them this province is going down the tubes in terms of diversity in the workplace and they're either going to take concrete actions to promote it at all levels of their organization or Quebec as we know it is doomed in the future.


By the way, I would say the exact same thing to Premier Philippe Couillard and Prime Minister Justin Trudeau who has no clue what a mafia the federal public service has become in terms of getting in and how it regularly ignores important diversity laws. When our own public institutions aren't practicing diversity in the workplace, it sets a terrible example for private organizations.

In particular, and let me be crystal clear here, the way Canada's large public and private organizations treat people with disabilities is a national disgrace and travesty.


I blame our leaders at public and private organizations for this national disgrace. They make every excuse in the book for not hiring competent people with disabilities at all levels of their organization but at the end of the day, they know I'm right to criticize them openly and publicly and I challenge them to show me the numbers to prove I'm wrong.


Anyway, don't get me started on that topic, discrimination in all its ugly forms makes my blood boil, just like it made Michael Sabia's blood boil when he had to defend his Québécois roots to the likes of Jean-Martin Aussant years ago.

As someone who was diagnosed with Multiple Sclerosis 20 years ago and lives discrimination I will do everything in my power to expose the plight of people with disabilities (I'm actually one of the lucky ones, doing relatively well, but have seen way too much injustice to keep my mouth shut on this national travesty).
On Thursday, Quebec Premier Philippe Couillard shuffled his cabinet before next year's provincial elections and also appoined a Minister of Anglo affairs for the first time, realizing there's a huge problem with the way anglophones are treated in this province.

I'd love to see him appoint a Minister of People with Disabilities just like we have at the federal level because if there's one minority group who is ruthlessly and systemically neglected and mistreated in our society, it's people with disabilities. For example, in Quebec, wheelchair users face severe job market discrimination which is totally unacceptable and against the law (not that the situation is better in the rest of Canada).

There's a reason why the unemployment rate for people with disabilities by some estimates reaches a shocking 70% or higher. Nobody really knows or cares about the full extent of real problem but suffice to say it's a national travesty.

"But Leo, it's not easy accommodating people with disabilities. It's much easier focusing on women and the LBGT+ community because at least they can walk and don't have any physical or mental disabilities that require accommodations we're not willing to do or aren't properly trained for."

My reply to this pathetic line of reasoning is stop being ignorant, get informed, there are a few non-profit organizations doing great work helping people with disabilities, and if you're not willing to actively recruit and hire people with disabiltiies who arguably need the most help (along with Aboriginal people), then not only are you violating the spirit of the law, you're part of the problem.

Earlier this week, JP Morgan Chase posted a beautiful article by Lisa Lucchese, Disability to Some; Extraordinary Ability to Others. Mrs. Lucchese is Global Finance and Business Management, Global Head of External Reporting Operations & Co-Executive Sponsor of Access Ability, Mid-Atlantic Region.

Anyway, her comment is a must-read because she explains how she dealt with her mental illness and got support from her employer. She ends on this note:
The Office of Disability and Inclusion Policy has allowed me to get comfortable sharing my story in an effort to help current and future employees who suffer or have suffered in the past. Access Ability is an internal facing Business Resource Group here at JPMorgan Chase, aimed at bringing employees with disabilities and caregivers together as a way to foster networking opportunities and a sense of camaraderie. As the newly appointed co-executive lead for Access Ability for the Mid-Atlantic region, I hope to raise awareness, offer encouragement to others and to be an advocate on their behalf. Imagine the day when employees or prospective employees with Attention Deficient Disorder (ADD) or other types of diagnosis can ask for the assistance they may need to enable success.


I work for a company that leads by example and is willing to break down barriers and promote a diverse and inclusive workforce. Imagine a day where employees and prospective employees with mental illness are a competitive advantage for this great firm. That day is here!
Wouldn't it be nice if all public and private organizations had an Office of Disability and Inclusion Policy? When are we going to see disABILITY@CPPIB, a sincere effort to actively recruit and hire people with disabilities from across Canada at all levels of the organization?

And by the way, I'm not picking on CPPIB. I've met Mark Machin and think he's extremely nice and humble and very engaged in social issues (a lot more than others who blow hot air on diversity). He's also extremely knowledgeable on Multiple Sclerosis and we had a private conversation on this disease and how it's important to help people with disabilities. 

Do you know from all the organizations I ever worked at, the only place where I saw a couple of employees in a wheelchair was at the BDC? To its credit, the BDC is fully equipped to handle their needs but even that organization has a lot more work to do in terms of hiring more people with disabilities.

My message to all of Canada's leaders is stop talking about diversity and inclusion and start acting upon it, placing a special focus on disadvantaged minorities that need it the most. It's not going to be easy but nothing worthwhile ever is. 

What does all this rambling on diversity and people with disabilities have to do with Asian data centers? Nothing, it's my blog and I'm free to express myself in any way I see fit. You're also free to agree, disagree or ignore me, but I'm not keeping quiet on issues that matter to me. There are too many people with a disability suffering alone, alienated and unable to express their plight so I'm using my platform to awaken the powers that be and hopefully they can start doing something about this.

Below, Joe Lonsdale, a founding partner at 8VC, talks about reinventing the way technology is used to monitor big data problems. This is a fascinating discussion.

Also, PBS Economics correspondent Paul Solman reports on how the unemployment rate for people with a disability is more than double than for those without even though the law bars such discrimination, it can be difficult for these Americans to get hired (it's actually much higher here in Quebec where wheelchair users face severe job market discrimination and are routinely ignored).

But that’s not the full story: Some employers are seeing how the special abilities of workers on the autism spectrum can boost their bottom lines. Watch this excellent report and be empathetic and open-minded.


Wednesday, October 11, 2017

AIMCo, PSP Looking at US Real Estate?

Mark Heschmeyer of CoStar Group reports, Starlight Commences $1.3 Billion U.S. Multifamily Acquisition Program:
Toronto-based Starlight Investments has formed an institutional partnership with Canada's Public Sector Pension Investment Board and the Alberta Investment Management Corp. (AIMCo) to acquire up to $1.3 billion of multifamily properties across the southern and western regions of the U.S.

"We are entering into this newly formed partnership with great excitement and expectations," said Neil Cunningham, senior vice president, global head of real estate and natural resources at PSP Investments. "We are looking forward to working closely with Starlight and AIMCo to assemble a large, professionally managed, institutional quality portfolio of multifamily properties in select U.S. markets."

The partnership is looking to acquire recently constructed, garden-style multifamily communities in the suburban markets of Atlanta, Austin, Dallas, Denver, Orlando, Phoenix and Tampa. The partnership will target submarkets that demonstrate superior rental income growth potential due to positive multifamily dynamics including compelling population, economic and employment growth.

The partnership's first acquisition is Parkhouse Apt. Homes, a Class A, garden-style, multifamily property constructed in 2017 in the Denver suburb of Thornton, CO. The 465-unit complex at 14310 Grant St. sold for $121.6 million or about $261,505 per unit.

"We are extremely pleased to acquire the first in a number of multifamily properties with two prominent global institutions and continue the expansion of the Starlight U.S. multifamily platform," said Daniel Drimmer, CEO and president of Starlight Investments.

PSP Investments is one of Canada's largest pension investment managers with $135.6 billion of net assets under management as of March 31, 2017. Alberta Investment Management is one of Canada's largest and most diversified institutional investment managers with more than $100 billion of assets under management.
Real Estate News Exchange also reports, PSP Investments, AIMCo JV with Starlight on $1.3B venture:
Starlight Investments announced Tuesday morning it is partnering with the Public Sector Pension Investment Board and the Alberta Investment Management Corporation on a program to purchase US$1.3 billion worth of residential properties in five U.S. states.

While the program had been previously announced by Starlight, the partners had not been identified.

This morning’s announcement also said the partnership has made its first purchase, Parkhouse Apartment Homes in Denver. The 465-unit, class-A, garden style, multi-family property is newly constructed and located in one of the five target markets.

“We are entering into this newly formed partnership with great excitement and expectations,” said Neil Cunningham, senior vice-president, global head of real estate and natural resources at PSP Investments, in a release.

“We are looking forward to working closely with Starlight and AIMCo to assemble a large, professionally managed, institutional quality portfolio of multi-family properties in select U.S. markets.”

The partnership will target the suburban markets of Atlanta; Austin and Dallas, Texas; Denver; Orlando and Tampa; and Phoenix. Specifically, the partnership will target submarkets demonstrating superior rental income growth potential due to positive multi-family dynamics including compelling population, economic and employment growth.

“AIMCo is pleased to enter the partnership and excited about the opportunity to expand our multi-family footprint to new markets,” said Micheal Dal Bello, senior VP, Real Estate of AIMCo, in the release.

“The partnership capitalizes on the synergies of our respective investment programs and creates a long-term platform to generate the returns required of our clients and stakeholders.”

Major move for Starlight

Partnering with PSP Investments and AIMCo is a significant move for Starlight. The Toronto-based, privately held, full service, real estate investment and asset management company currently manages $7.5 billion of multi-family and commercial properties through funds, joint ventures and club deals.

Starlight’s portfolio consists of approximately 35,000 multi-family units, of which 24,000 are across Canada and 11,000 across the U.S., along with more than 4.6 million square feet of commercial properties throughout Canada.

“We are extremely pleased to acquire the first in a number of multi-family properties with two prominent global institutions and continue the expansion of the Starlight U.S. multi-family platform,” Daniel Drimmer, CEO and president of Starlight Investments, added in the release.

“We look forward to building a premium multi-family portfolio in conjunction with PSP Investments and AIMCo.”

Denver is one of the fastest-growing U.S. metro areas with the lowest unemployment rate. The city is consecutively voted as the best place for businesses to grow by Forbes, with employers continuing to relocate and add jobs at a considerably faster rate than the national average. Denver is also a city where millennials, who are a key renter demographic, are the largest and fastest growing population group.

Parkhouse is located in a prosperous northern corridor of Denver. The downtown is approximately 25 minutes to the south, providing easy access to major employment centres and entertainment. Within walking distance to Parkhouse is access to major retail hubs and local hospitals.

Parkhouse is a luxury complex consisting of 20 three-storey garden style apartment buildings, offering top of the market amenities including two clubhouses with fitness and business centres, a games room and a bike and ski repair shop. Outdoor amenities include two resort style swimming pools, outdoor kitchens, neighborhood parks and walking trails.
AIMCo, PSP and Starlight put out this press release which is also available in PDF here:
Starlight Investments ("Starlight") is pleased to announce its institutional partners in connection with its previously announced Partnership (the "Partnership") as the Public Sector Pension Investment Board ("PSP Investments") and the Alberta Investment Management Corporation ("AIMCo"), on behalf of certain of its clients. In addition, Starlight is pleased to announce that the Partnership has commenced its acquisition program with the purchase of Parkhouse Apartment Homes ("Parkhouse"), a 465-unit, Class "A", garden style, multi-family property constructed in 2017, and located in Denver, Colorado.

"We are entering into this newly formed Partnership with great excitement and expectations," said Neil Cunningham, Senior Vice President, Global Head of Real Estate and Natural Resources at PSP Investments. "We are looking forward to working closely with Starlight and AIMCo to assemble a large, professionally managed, institutional quality portfolio of multi-family properties in select U.S. markets."

"AIMCo is pleased to enter the Partnership and excited about the opportunity to expand our multi-family footprint to new markets," said Micheal Dal Bello, Senior VP, Real Estate of AIMCo. "The Partnership capitalizes on the synergies of our respective investment programs and creates a long-term platform to generate the returns required of our clients and stakeholders."

The Partnership was formed to acquire U.S.$1.3 billion of Class "A", recently constructed, garden style multi-family communities located in the suburban markets of Atlanta, Georgia; Austin and Dallas, Texas; Denver, Colorado; Orlando and Tampa, Florida; and Phoenix, Arizona. Specifically, the Partnership will target submarkets that demonstrate superior rental income growth potential due to positive multi-family dynamics including compelling population, economic and employment growth.

"We are extremely pleased to acquire the first in a number of multi-family properties with two prominent global institutions and continue the expansion of the Starlight U.S. multi-family platform," added Daniel Drimmer, CEO and President of Starlight Investments. "We look forward to building a premium multi-family portfolio in conjunction with PSP Investments and AIMCo."

Denver is one of the fastest growing U.S. metro areas with the lowest unemployment rate. The city is consecutively voted as the best place for businesses to grow by Forbes, with employers continuing to relocate and add jobs at a considerably faster rate than the national average. Denver is also a city where millennials, who are a key renter demographic, are the largest and fastest growing population group.

Parkhouse is ideally located in the prosperous northern corridor of Denver. The downtown is approximately 25 minutes to the south, providing easy access to major employment centres and entertainment. Within walking distance to Parkhouse is access to major retail hubs and local hospitals. Parkhouse is a luxury complex consisting of 20 three-storey garden style apartment buildings, offering top of the market amenities including two clubhouses with fitness and business centres, a games room and a bike and ski repair shop. Outdoor amenities include two resort style swimming pools, outdoor kitchens, neighborhood parks and walking trails. For more information, visit www.liveparkhouse.com.

About PSP Investments

The Public Sector Pension Investment Board (PSP Investments) is one of Canada's largest pension investment managers with $135.6 billion of net assets under management as of March 31, 2017. It manages a diversified global portfolio composed of investments in public financial markets, private equity, real estate, infrastructure, natural resources and private debt. Established in 1999, PSP Investments manages net contributions to the pension funds of the federal Public Service, the Canadian Forces, the Royal Canadian Mounted Police and the Reserve Force. Headquartered in Ottawa, PSP Investments has its principal business office in Montréal and offices in New York and London. For more information, visit www.investpsp.com or follow us on Twitter @InvestPSP.

About Alberta Investment Management Corporation

Alberta Investment Management Corporation (AIMCo) is one of Canada's largest and most diversified institutional investment managers with more than $100 billion of assets under management. Established on January 1, 2008, AIMCo's mandate is to provide superior long-term investment results for its clients. AIMCo operates at arms-length from the Government of Alberta and invests globally on behalf of 32 pension, endowment and government funds in the Province of Alberta. For more information, please visit www.aimco.alberta.ca.

About Starlight Investments

Starlight Investments is a Toronto-based, privately held, full service, real estate investment and asset management company driven by an experienced team comprised of over 120 professionals. Starlight currently manages $7.5 billion of multi-family and commercial properties through funds, JV's and club deals. Starlight's portfolio consists of approximately 35,000 multi-family units, of which 34,000 are across Canada and 11,000 across the U.S., along with over 4.6 million square feet of commercial properties throughout Canada. For more information, please visit www.starlightinvest.com and connect on LinkedIn at www.linkedin.com/company/starlight-investments-ltd-.
I must admit, my first question after reading this was who is Starlight Investments and why are AIMCo and PSP partnering up with a Canadian fund to invest in US multifamily real estate?

So, I went digging into Starlight Investments' executive team which you can see here and below (click on image):


In particular, I honed in on Evan Kirsh who is the President of Starlight's US Multi-Family (click on image):

Notice Mr. Kirsh’s experience includes executive positions with Revera Inc., GWL Realty Advisors and MetCap Living Inc. as well as positions with Brazos Advisors, Citibank Canada and Manulife Real Estate (the global real estate arm of Manulife Financial Corporation).

Revera Inc. is a leading provider of retirement living homes, retirement communities & dedicated long-term care services for seniors which operates in Canada, the US and the UK. It is also fully owned by PSP and has been a great real estate platform for that fund.

So, that is the connection. There is no doubt Evan Kirsh is very experienced and knows his market well but it helps that he has a track record at Revera and knows Neil Cunningham very well. Neil is now PSP's Senior Vice President, Global Head of Real Estate and Natural Resources.

What is the AIMCo connection? Who knows, maybe PSP was looking for another large investor for this platform and approached AIMCo.

Whatever the case, this is a great deal to enter for a lot of reasons. I happen to think the Canadian dollar is very high and now is the time to pounce on US assets. I'm not particularly keen on US commercial real estate because I'm worried about deflation striking the US and think a lot of commercial real estate is outrageously overpriced with cap rates hitting record lows.

But I like the markets they're focusing on:
The partnership is looking to acquire recently constructed, garden-style multifamily communities in the suburban markets of Atlanta, Austin, Dallas, Denver, Orlando, Phoenix and Tampa. The partnership will target submarkets that demonstrate superior rental income growth potential due to positive multifamily dynamics including compelling population, economic and employment growth. 
And this too:
The partnership will target the suburban markets of Atlanta; Austin and Dallas, Texas; Denver; Orlando and Tampa; and Phoenix. Specifically, the partnership will target submarkets demonstrating superior rental income growth potential due to positive multi-family dynamics including compelling population, economic and employment growth.
In other words, the partnership is not focusing on overpriced prime markets, its focus will be on up and coming secondary markets which are experiencing strong growth trends and "superior" rental icome growth.

In other PSP real estate related news, Daniel Sernovitz of the Washington Business Journal reports the principals behind Hoffman-Madison Waterfront traveled the world to find the right equity partner for their mixed-use project, and they found it in one of Canada's pension investment managers. You can read it here (subscription required).

And in private equity, Benefits Canada reports, Ontario Teachers’, PSP Investments to acquire German ceramic manufacturer:
A consortium of funds that includes the Ontario Teachers’ Pension Plan and the Public Sector Pension Investment Board has reached an agreement to acquire CeramTec Group, a German manufacturer of technical ceramic components.

The company’s advanced ceramics are used across a number of different industries, including medical technology, the automotive industry, the electronics sector, energy and environmental technology, and equipment and mechanical engineering. Its portfolio comprises more than 10,000 different products, parts and components made of technical ceramics, as well as a large number of ceramic materials.

CeramTec Group also has a global presence with production plans and subsidiaries across Europe, the Americas and Asia. In the 12 months to June 2017, it generated revenues of 538 million euros. The company employs more than 3,400 people worldwide, with about 2,000 in Germany.

“We believe CeramTec has great potential to achieve profitable and sustainable growth, both organically and through acquisitions, and we look forward to working closely with the company’s management team and its employees,” said Stefan Zuschke, managing partner of BC Partners, the private equity firm advising the consortium of funds.

“We are pleased to be backing this transaction alongside BC Partners, Ontario Teachers’ and CeramTec management,” said Guthrie Stewart, senior vice-president and global head of private investments, at PSP Investments. “This is a perfect example of our strategy to invest in global leaders in order to support their management team and create long-term value, alongside world-class private equity investors such as BC Partners.”

Jo Taylor, senior managing director, international at Ontario Teachers’, noted the pension fund considers Germany to be a very attractive market.
You can read PSP's press release on this deal here. I don't have much to add except to state the obvious, CeramTec Group is a solid international company growing fast and when you partner up with OTPP on a deal led by private equity powerhouse BC Partners, it's a winning deal for all parties.

Below, Denver Mayor Michael Hancock says the economic boom his city is experiencing may be due to the millennial generation (2015). Hancock also says entrepreneurial opportunity has made the city flourish. I'm sure Colorado's decision to legalize pot also helped attract a lot of millennials to Denver.