The document provides a macroeconomic update and discusses several topics: 1) Demographics are an important factor in economic growth, and western countries face challenges from aging populations while emerging economies like China have younger populations. 2) Up to 40% of US corporate profits come from the finance sector, disproportionately benefiting from monetary policies. 3) US policies have the effect of exporting inflation to trading partners through currency devaluations. 4) Government deficits and debt are growing much faster than tax receipts in many developed nations, risking unsustainable trajectories.

1. Agcapita Macro Update
January 2010
1

2. Summary
DEMOGRAPHICS ARE DESTINY
The 19th century belonged to the UK, the 20th century belonged to
the US and it appears that the 21st century may belong to China.
A consistent theme in the emergence of a new global power is a
young population with a large and growing pool of domestic savings
and a focus on investing in the capital base of the economy rather
than consumption. The world’s western economies find themselves
heavily in debt with deteriorating demographics (our populations are
aging and our birth rates are low) and economies skewed towards
consumption. We are accruing ever-greater liabilities to cover vast
social, medical and retirement programs that we currently do not
have the workers or more importantly the high growth economies
to pay for. It has been said that “demographics are destiny’.
Unfortunately, rather than face these issues, our governments
are attempting to fix our manifest problems by accelerating the CONTENTS
consumption friendly policies that were largely responsible for 1 Demographics Are Destiny
getting us into this situation in the first place. As an example of 3 Forty Percent of US Corporate
this, the US Federal funding gap is growing rapidly. Over the last six Profits From Finance!
years: 4 America’s Current Export –
Inflation
– unfunded obligations increased approximately 50% from US$79 4 How Can this End Well?
trillion to US$114.7 trillion; but 4 ZIRP and Commodity Prices –
– revenue rose approximately 12%. Is There A Link?
5 Money Velocity Increasing
The US government is now in the position of increasing its liabilities 6 Interest on US Debt
four times faster than its tax receipts. This is a trend being repeated 6 US Residential Housing Sector
throughout the developed world. The US Federal Reserve recently – Losses Now Nationalized?
disclosed that it purchased half of the newly issued US Treasuries 7 Private Sector Growth is
in the second quarter of 2009 – all of which would have been Absent in the US
purchased with newly created money – direct debt monetization. 7 US Bailout Cost
7 Equity and House Price
Investors must be alive to the growing divergence between the Declines – Over?
economies of the west and those in the emerging world and 7 Government Fiscal Deficits Will
position themselves accordingly. We believe that the way to benefit Continue to Worsen
from long-term Chinese growth is to invest in what China needs 8 Top 10 Points for Canadian
in politically stable parts of the world. That gives you the best of Limited Partnership Investors
9 Quick News Review
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3. both options – first world political risk and transparency combined
with emerging world growth rates. Clearly a category that fits this
description is commodity investment in western Canada
– Agriculture
– Energy
And to a lesser degree commodity linked investment in western
Canada:
– Businesses that service the commodity sector
– Businesses and sectors that benefit from general population/
economic growth in Western Canada
2

4. Global Macro Update
FORTY PERCENT OF US CORPORATE PROFITS
FROM FINANCE!
Given the rapid reflation of the prices of speculative Despite widespread belief to the contrary,
assets and the collapse of risk premiums, the government intervention into broad swathes of the
ongoing money printing efforts in the developed economy to support “too big to fail” companies
world are having limited effect outside of the “finance or more accurately to prevent capital destroying
economy”. It is estimated that up to 40% of US business activity from being eliminated to the benefit
corporate profits are generated by the finance sector of the entire economy is not a positive for future
– largely from speculative activities. Corporate profits growth. There is an economic truism that whatever
attributable to the finance sector were effectively you subsidize you get more of – hence by subsidizing
stable until the 1970s when the growth in the US failure we are ensuring bigger failures in the future
money supply turned sharply higher on a sustained and worst of all penalizing well run businesses. The
basis. Given the finance sector’s intimate relationship firms that were prudently managed leading up to the
with the US Federal Government and the Federal crisis should have benefited from the demise of their
Reserve banking system it is not surprising that the poorly run competitors – in a free economy capital
newly printed money has flowed into and through would have flowed to the profitable businesses rather
the finance sector acting as a wholesale subsidy than the loss making ones. The fact that this didn’t
that drove corporate profits, compensation and happen creates a perverse “if you can’t beat’em,
speculation. join’em” mentality with respect to risky and imprudent
business practices.
QUICK FACTS
China US
GDP: $14.2 trillion - increased a total of 18% (real
GDP: $4.3 trillion – increased a total of 430% in last
terms) in last 10 years and added ZERO private
10 years
sector jobs
20% percent of economy in state sector 30% percent of economy in state sector
Consumer demand is 35 per cent of GDP Consumer demand is 70 per cent of GDP
Savings rate is 40 percent of household disposable Savings rate is 6 percent of household disposable
income (one of the highest in the world) income
3

5. Global Macro Update (continued)
AMERICA’S CURRENT EXPORT – INFLATION
CHART 2: CRB SPOT INDEX (1967 = 100)
The US zero-interest rate policy (“ZIRP”) has lead to
sustained efforts to cause currency devaluations on 550
the part of its trading partners. The idea is that if they 500
weaken their currencies, domestic producers will be 450
able to maintain market share in the US. The net 400
result is that the US is effectively exporting inflation to 350
its global trading partners. 300
250
200
HOW CAN THIS END WELL? 150
100
Often a picture is worth a thousand words…
50
1947 1951 1955 1959 1963 1967 1971 1975 1979 1983 1987 1991 1995 1999 2003 2007
CHART 1: FEDERAL SURPLUS OR DEFICIT Source: Commodity Research Bureau
(USD$ BILLIONS)
400,000
200,000 CHART 3: 2009 CRB INDEX CONSTITUENT
0
-200,000
RETURNS
(Millions of Dollars)
-400,000
Wheat -11.46%
-600,000 Nat Gas -0.89%
Live Cattle 0.15%
-800,000
Corn 1.72%
-1,000,000 Soybeans 6.97%
Lean Hogs 7.84%
-1,200,000 Coffee 21%
Gold 22.91%
-1,400,000 Cocoa 23.41%
-1,600,000 Aluminium 44.81%
1895 1910 1925 1940 1955 1970 1985 2000 2015
Silver 48.5%
Heating Oil 50.73%
Cotton 54.22%
Source: St. Louis Federal Reserve, White House – Office of Nickel 58.33%
Crude 77.94%
Management and Budget (shaded areas indicate recessions) Orange Juice 88.25%
RBOB 102%
Sugar 128.19%
Copper 138.38%
-30 0 30 60 90 120 150
Source: Reuters
ZIRP AND COMMODITY PRICES – IS THERE A
LINK?
The CRB Index of 19 raw materials increased 23 The rebound in commodity prices was lead by oil
percent in 2009 as can be seen in Chart 2 – this copper and sugar (see Chart 3) as China’s demand
represents the largest annual increase since 1979 – continued to grow even in the face of the global
the last period of highly inflationary monetary policy. recession.
4

6. Global Macro Update (continued)
Interestingly, the rebound in the CRB index is mirrored increasing after it started falling in the first quarter
by another powerful upward surge in US base money of 2007 - six quarters before economic growth
supply (M0) after its initial doubling in late 2008, early slumped. The recent increase in MZM velocity may
2009. point to increased economic activity, the question
then becomes whether it will be sustained as can be
MONEY VELOCITY INCREASING seen in the capacity utilization numbers.
For those who are adherents of the money velocity
theory of economic activity, the velocity of MZM is CHART 6: MZM VELOCITY (DARK BLUE)
V. US GDP % GROWTH (LIGHT BLUE)
CHART 4: US M0 (US$ BILLIONS) 2.4 10.0%
GDP Growth current terms
8.0%
2.2
6.0%
MZM Velocity
2,400
2.0 4.0%
2,000
2.0%
1,600 1.8
(Billions of Dollars)
0.0%
1,200
1.6 -2.0%
800
1.4 -4.0%
400
Jun-99
Jun-00
Jun-01
Jun-02
Jun-03
Jun-04
Jun-05
Jun-06
Jun-07
Jun-08
Jun-09
0
-400
1910 1920 1930 1940 1950 1960 1970 1980 1990 2000 2010 Source: St. Louis Federal Reserve
Source: St. Louis Federal Reserve (shaded areas indicate
recessions) CHART 7: ESTIMATED US INTEREST
PAYMENTS
CHART 5: CAPACITY UTILIZATION (PERCENT OF
CAPACITY) $800 in billions
90 700
85
600
(Percent of Capacity)
500
80
400
75
300
70
200
65
1965 1970 1975 1980 1985 1990 1995 2000 2005 2010 2010 2019
Source: St. Louis Federal Reserve (shaded areas indicate Source: GAO
recessions)
5

7. Global Macro Update (continued)
Further increases in this velocity are considered Treasury department’s recent announcement that it
by many as an essential precursor for sustained will provide unlimited backing to Freddie Mae and
economic growth. Fannie Mac these two organizations now underwrite
almost 80% of all new mortgage lending in the US
INTEREST ON US DEBT – de facto nationalizing of the market, a market that
represents:
More than half of the $9 trillion in debt the US Federal
government is expected to build up over the next – $14.6 trillion in total U.S. mortgage debt
decade will be incurred to pay interest charges - outstanding
US$4.8 trillion. – $8.9 trillion in total U.S. mortgage-related
securities.
In 2015 $533 billion in interest payments will be – $7.5 trillion in pooled mortgages, of which about
equal to a third of the federal income taxes expected $5 trillion is securitized or guaranteed by Freddie
to be paid that year – obviously a dangerous trend Mae, Fannie Mac or FHA
given that longer term interest rates can be expected
increase from their currently historically low levels. Charts 8 & 9 show that while most mortgage lenders
The other issue for the US is that the duration of have been withdrawing from the US residential
its borrowing is rather short – in simple terms that housing market, Freddie and Fannie loan books are
means the US federal government must constantly exploding.
refinances its existing debt in addition to borrowing
more to fund ongoing deficits. The magnitude of this
issue is shown in that the US Treasury estimated
CHART 8: REAL ESTATE LOAN AT COMMERCIAL
in November 2009 that “approximately 40 percent
BANKS (US$ BILLIONS)
of the debt will need to be refinanced in less than
one year.” This shortened duration leaves the US 4,000
3,600
quickly exposed to any increases in borrowing costs 3,200
demanded by the markets.
(Billions of Dollars)
2,800
2,400
2,000
1,600
US RESIDENTIAL HOUSING SECTOR – LOSSES 1,200
NOW NATIONALIZED? 800
400
0
The US automobile industry has been nationalized, -400
the banking sector has been nationalized, medical 1940 1950 1960 1970 1980 1990 2000 2010
care has been nationalized and now the residential Source: St. Louis Federal Reserve (shaded areas indicate
housing sector has been nationalized. With the recessions)
6

8. Global Macro Update (continued)
EQUITY AND HOUSE PRICE DECLINES – OVER?
CHART 9: TOTAL FEDERAL GOVERNMENT AND
SALLIE MAE CONSUMER LOANS Research (Aftermath of Financial Crisis, Reinhart and
(US$ BILLIONS) Rogoff, 2008) shows that the average real decline
in equity and house prices following a banking
200
180
crisis is 56% and 35% over 3.4 years and 6 years
(Billions of Dollars)
160 respectively. If this historical average holds, and
140
120 arguably the current crisis far exceeds virtually all the
100
80
others over the past 100 years, then both house and
60 equity prices will fall much farther in real terms.
40
20
0
-20 GOVERNMENT FISCAL DEFICITS WILL
1975 1980 1985 1990 1995 2000 2005 2010
CONTINUE TO WORSEN
Source: St. Louis Federal Reserve (shaded areas indicate
recessions) Research shows that even with the current dramatic
deterioration in G7 government finances we can
expect worse to come (Aftermath of Financial Crisis,
PRIVATE SECTOR GROWTH IS ABSENT IN THE US Reinhart and Rogoff, 2008). Over the course of the
typical banking crisis government debt levels rise an
Private sector has actually shed jobs in the
last decade and generated very little in inflation
adjusted GDP growth – hence the nagging feeling CHART 10: US JOB GROWTH BY DECADE
in the middle class that they are not getting ahead.
Unfortunately the same cannot be said for the US % change in
gross domestic
% change in
household net
government that continues to grow relentlessly. product
By decade,
worth
By decade,
38% inflation adjusted inflation adjusted
1940s 72.0% unavailable
US BAILOUT COST 1960s 53.1% 44%
1970s 38.1% 28%
Despite the varied and often conflicting reports 1950s
1980s
51.3% unavailable
34.9% 42%
about the total cost of the US bailouts – when all 1990s 38.6% 58%
the programs are taken into account the cost is
approximately US$14 trillion. Given the pre-bailout 0%
money supply of the US was around US$ 15 trillion 0 2000s 17.8% -4%
Year in Decade
this represents a truly staggering amount of money. 1 2 3 4 5 6 7 8 9 10
Source: Washington Post
7

9. Global Macro Update (continued)
average of 86 percent in the three years following. produce a superior performance unless you do
The buildup in government debt has been a defining something different from the majority...”
characteristic of the aftermath of banking crises for 3. Tax efficient structure – Tax can have a major
over a century. The question that will inevitably effect on your returns. Make sure that all
arise is that if investment demand is not present reasonable and credible steps have been
for the huge debt issuances that this will entail, will taken by the management team to manage tax
the worlds central banks revert to monetizing their obligations.
governments’ debts – or in simple terms printing the 4. Audited financial statements – Management must
money. provide annual audited financial statements. A
past failure to do so should act as a red flag.
TOP 10 POINTS FOR CANADIAN LIMITED 5. Regular operational reporting – Management
PARTNERSHIP INVESTORS must be open and available to answer your
questions about the business.
Investors in private limited partnerships are faced 6. Clearly defined hold period – Make sure that
with a wide range of offerings – from classic private the hold period is clearly defined and cannot
equity vehicles to real estate development projects. be arbitrarily changed or extended by the
Here are some simple criteria to help you make your management team. You need to know how long
decisions about what private LPs to consider for their your investment will be committed and exactly
RRSP portfolio this year. when you can expect repayment.
7. No non-arms length transactions – Situation
1. Experienced management team – A significant where the management team acquires the target
number of investment teams have NO experience assets first and then sells them to the fund for
in fund management or even in the sector in an upfront profit. Even if disclosed in the offering
which they are investing your capital. Work documents this is a poor practice and creates
with teams that have a track record at both a mismatch between the economic interests of
the investment management level and at the the management team and the interests of the
operational level – there is NO substitute for investors.
a track record of successful investment and 8. No acquisition fees - Fees where the
operation in the business area by the team you management team gets paid a portion of all
are trusting to act on your behalf. capital deployed. This creates a mismatch
2. Clear investment premise – The investment between the economic interests of the
premise should be based on sound fundamental management team and the interests of the
analysis that is simple to understand and clearly investors, as acquisition fees are not tied to
laid out in the presentation. Avoid momentum- returns.
based investments where the core rationale is 9. No fee escalation – Management fees should not
effectively that “everyone else is doing it”. To be tied to appraised or calculated asset value that
quote Sir John Templeton - “It is impossible to is an unrealized gain. The only valuations that
matter are the purchase price and the sale price.
8

10. Global Macro Update (continued)
Management should receive the bulk of their standing in the tropical sun outside a popular
fees based on gains that are actually realized for store. The government acknowledges prices will
investors. rise after the devaluation, but say the upward trend
10. Incentives reward ACHEIVED performance – will be more gradual. State run television and radio
Favor investments where the manager makes stations avoided using the word “devaluation,”
the bulk of his return only when you make a preferring the word “adjustment.” One pro-Chavez
return. This fee structure is commonly referred radio station responded to critics of the measure by
to as “success based”. Lifts, acquisition fees, playing a popular Argentine song called “Imbecile.”
escalating annual management fees are not With oil crowding out other sectors of the economy,
success based. Venezuela heavily relies on imports for consumer
goods, leaving it subject to big price swings
QUICK NEWS REVIEW depending on the exchange rate. Older Venezuelans
are accustomed to sharp losses in the value of their
Venezuela Devalues: “Shouting “buy, buy, the world money, with numerous devaluations and currency
is going to die,” Venezuelans went on a frantic regimes over the last three decades of economic
shopping spree on Saturday following a sharp turmoil. Inflation, the highest in the Americas, at
currency devaluation that is expected to drive up 25 percent last year, reached 103 percent in 1996
prices. President Hugo Chavez announced a dual after a previous president lifted exchange and price
system for the fixed rate Bolivar Friday night while controls. Chavez’s high-spending policies during an
much of the country was watching a baseball game. oil bonanza fueled a massive consumer boom and
“I’ve been lining up for two hours outside to buy a fast growth that shuddered to a halt when oil prices
television and two speakers because by Monday plunged a year ago. The sharp drop in oil revenues
everything is bound to be double the current price,” also undermined the Bolivar and made a devaluation
said Miguel Gonzalez, a 56-year-old engineer inevitable at some point.” Source: Reuters Jan 2010
9

11. DISCLAIMER:
The information, opinions, estimates, projections and other materials
contained herein are provided as of the date hereof and are subject to
change without notice. Some of the information, opinions, estimates,
projections and other materials contained herein have been obtained from
numerous sources and Agcapita Partners LP (“AGCAPITA”) and its affiliates
make every effort to ensure that the contents hereof have been compiled or
derived from sources believed to be reliable and to contain information and
opinions which are accurate and complete. However, neither AGCAPITA
nor its affiliates have independently verified or make any representation or
warranty, express or implied, in respect thereof, take no responsibility for
any errors and omissions which maybe contained herein or accept any
liability whatsoever for any loss arising from any use of or reliance on the
information, opinions, estimates, projections and other materials contained
herein whether relied upon by the recipient or user or any other third
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Information may be available to AGCAPITA and/or its affiliates that is not
reflected herein. The information, opinions, estimates, projections and other
materials contained herein are not to be construed as an offer to sell, a
solicitation for or an offer to buy, any products or services referenced herein
(including, without limitation, any commodities, securities or other financial
instruments), nor shall such information, opinions, estimates, projections and
other materials be considered as investment advice or as a recommendation
to enter into any transaction. Additional information is available by contacting
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