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Ron Mock Sounds Alarm on Alternatives?

Arlene Jacobius of Pensions & Investments reports, Ontario Teachers CEO calls alternative investments ‘too expensive’:
Ontario Teachers’ Pension Plan, Toronto, is starting to step back from investing in alternative investments such as real estate and infrastructure because they are “too expensive,” said Ron Mock, president and CEO of the C$154.4 billion ($126.4 billion) pension fund, while speaking on a panel at the Milken Institute Global Conference in Beverly Hills, Calif., on Wednesday.

“There’s a lot of money crowded into the broadly defined alternatives space,” Mr. Mock said. “We find it too expensive. It’s time for us to step back.”

Instead, Ontario Teachers executives are investing “between the asset classes where we found the most interesting deals today,” he said.

For example, Ontario Teachers is an investor in the U.K. and Irish lotteries for their stable cash flows and high rate of return, which can be improved with technological upgrades, Mr. Mock said.

“(The lottery investment) is almost like an infrastructure asset,” he said.

Even though Ontario Teachers is being more cautious in its infrastructure investments, Canada’s eight pension funds are “dying to come into the U.S. to fund (the country’s) infrastructure needs” using direct investments, Mr. Mock said. “We are working with the government because there are impediments.”

But Mr. Mock said sovereign wealth funds and pension plans are untapped capital pools for global infrastructure.

Hiromichi Mizuno, executive managing director and chief investment officer of Japan’s ¥137 trillion ($1.15 trillion) Government Pension Investment Fund, Tokyo, also said on the panel that the pension fund has a 5% cap rather than a target allocation for alternative investments. This means Japan’s pension fund executives can invest in alternative investments opportunistically rather than try to meet a target allocation.
In order to better appreciate the context of Ron Mock's remarks, I highly recommend you read my overview of Teachers' 2014 results where he shared a lot of insights on their asset-liability approach to investing.

I've known Ron long enough to tell you he doesn't make big proclamations to get his name in the papers. He's been thinking long and hard of what increased competition from global pensions and sovereign wealth funds means for Ontario Teachers and other big investors.

And Ron is always thinking about risks that lurk ahead -- like 18 to 24 months ahead! I remember a time when he came over to the Caisse and talked about his investment approach in front of Henri-Paul Rousseau, Gordon Fyfe and others. On the plane ride over to Montreal, he had jotted some notes on a napkin which would form the basis of his strategy and he had forgotten the napkin in the conference room on the 11th floor. Gordon called me to go pick it up from the conference room and bring it to him outside as they shared a ride after the meeting (I didn't peek, I swear!).

So why is Ron Mock sounding the alarm on alternatives? Maybe he's worried that we are about to experience a significant shift in Fed policy which will undermine America's risky recovery and hurt real estate and infrastructure assets. Or maybe he's worried of global deflation which will be even more devastating to risk assets, especially illiquid alternatives. Or maybe he just thinks things are getting out of whack and this huge influx of sovereign wealth and pension money chasing yield at all cost is bidding up prices of private market investments to ridiculous levels.

I don't know exactly what he's thinking but he reads my blog regularly and he knows my thoughts as I've personally expressed them to him. I love what Tom Barrack, the king of real estate who cashed out before the crisis said at the time: "There's too much money chasing too few good deals, with too much debt and too few brains."

In January 2013, I openly questioned whether pensions are taking on too much illiquidity risk, and used insights from Jim Keohane, president and CEO of the Healthcare of Ontario Pension Plan (HOOPP) to make some points. Jim shared the following back then:
I find this whole discussion quite interesting. I agree with the commentary of the former pension fund manager. Private assets are just as volatile as public assets. When private assets are sold the main valuation methodology for determining the appropriate price is public market comparables, so you would be kidding yourself if you thought that private market valuations are materially different than their public market comparables. Just because you don’t mark private assets to market every day doesn’t make them less volatile, it just gives you the illusion of lack of volatility.

Another important element which seems to get missed in these discussions is the value of liquidity.At different points in time having liquidity in your portfolio can be extremely valuable. One only needs to look back to 2008 to see the benefits of having liquidity. If you had the liquidity to position yourself on the buy side of some of the distressed selling which happened in 2008 and early 2009, you were able to pick up some unbelievable bargains.
Moving into illiquid assets increases the risk of the portfolio and causes you to forgo opportunities that arise from time to time when distressed selling occurs - in fact it may cause you to be the distressed seller!Liquidity is a very valuable part of your portfolio both from a risk management point of view and from a return seeking point of view.You should not give up liquidity unless you are being well compensated to do so.Current private market valuations do not compensate you for accepting illiquidity, so in my view there is not a very compelling case to move out of public markets and into private markets at this time.
Interestingly, nothing has changed since Jim shared those comments. If anything, things have gotten much worse from a valuation perspective and risks are higher than ever now that the Fed is hinting it's ready to start raising rates if economic data improves.

But even if the Fed doesn't raise rates anytime soon, the advent of global deflation should give big investors enough worries to pause and think about their entire strategy toward alternatives. Is it time to stick a fork in private equity? Are hedge fund fees ridiculously high? Is real estate the mother of all alternatives bubble, ready to burst and wreak havoc on public pensions and sovereign wealth funds?

On that last question, Tom Barrack (yup, the same guy from above), came out at the Milken conference to warn of amateurs investing in riskier assets:
Too many investors have moved outside their areas of expertise as they seek higher returns, posing dangers for riskier assets, according to Colony Capital Inc. Executive Chairman Thomas Barrack Jr.

“Everybody is outside of their own asset class,” Barrack said in a Bloomberg Television interview Tuesday with Erik Schatzker and Stephanie Ruhle at the Milken Institute Global Conference in Beverly Hills, California. “When amateurs enter the marketplace for all of this, you are going to get an abundance of something and it is usually not good.”

Central banks globally have pushed investors into higher-yielding assets by reducing interest rates and purchasing bonds. The Standard & Poor’s 500 Index reached an all-time high on Friday and sovereign debt in Europe is trading at negative yields.

“Institutional investors that are in this endless search for yield are ignoring the risk peril of all the consequences of those things,” he said.

Investors with an abundance of liquidity have used real estate as a safe haven, Barrack, 68, said. Apartments in New York City and London are serving as a “safe deposit box” for foreign investors, he said. The influx of money, particularly from international players seeking less risk, has pushed up property values.

“Real estate has become the last bastion,” he said. “The liquidity in the world has created this flurry for solidity. If you do not think there is a bubble at that level, you are going to be mistaken.”
Little Experience

Capitalization rates, a measure of real estate investment yield that falls as prices rise, are being driven down by buyers with less experience in property investing, Sam Zell, the billionaire chairman of Equity Group Investments, said during a Global Conference panel discussion about real estate.

“Capital investment in the last 10 to 20 years is all about allocation,” said Zell, 73. “It’s not a whole bunch of amateurs, but a bunch of people that may not have a lot of experience in real estate, but with a whole lot of money.”

To protect themselves from possible future losses, real estate investors should look for “equity-type returns” in the capital stack, Barrack said during the panel discussion.

“Floating debt can choke and kill you quickly,” he said.
Stagnant Rents

While commercial-property prices have risen, office rents in most urban downtowns, with the exception of New York City, are effectively at the same levels as 20 years ago, Barrack said.

Including such expenses as leasing commissions, tenant improvements and property taxes, “if you effectuate down in current dollars, true office rents are about the same as in 1995,” he said in the television interview.

Colony Capital oversaw about $24 billion of equity before Barrack combined it with Colony Financial Inc. this year. His firm in recent years has owned Michael Jackson’s Neverland Ranch, invested in single-family rental homes and distressed mortgages.

“When the masses start entering the water and thinking they can navigate the waves, I get out,” said Barrack.
Got to love Tom Barrack, he just says it like it is. Real estate, which has long been touted as the best asset class, might have seen its best days ever as the future looks increasingly gloomy for a lot of reasons, especially if America's risky recovery falters next year.

Barbara Corcoran, founder at The Corcoran Group, talked about New York City real estate on Bloomberg, the lack of affordable housing in the city and why the market may be in a new bubble. She thinks things are fine but she's so blatantly talking up her business.

And it's not just New York. The same nutty thing is going on in London and other real estate hot spots around the world as the world's elite fight with global pensions and sovereign wealth funds for prime real estate assets. What a joke, this is definitely going to end badly and a bunch of amateurs are going to get their heads handed to them.

Below, Ron Mock, the president of Ontario Teachers' Pension Plan, talks about hedge funds, private equity, the eurozone crisis and the Canadian economy with CNBC (January 2015). I also embedded an Economist interview with Ron from the Canada Summit (December, 2014). Listen to his comments on how "going global introduces a whole other layer of complexity."

Slugging Through A Rough Stock Market?

Evelyn Cheng of CNBC reports, Nasdaq plunges 1.5%; Dow slides triple digits, clings to gains for 2015:
U.S. stocks closed down more than 1 percent on the last day of trade for April as investors weighed mixed economic data and continued weakness in the dollar.

The major indices closed below their 50-day moving averages.

The Nasdaq closed down 82.22 points, or 1.64 percent, at 4,941.42, recovering slightly from a 2 percent dip. Biotechs weighed on the index, with the iShares Nasdaq Biotechnology ETF (IBB) ending more than 3 percent lower.

The Dow Jones Industrial Average closed down 195.01 points, or 1.08 percent, at 17,840.52, with Apple down 2.7 percent as the greatest laggard. American Express, Wal-Mart and Coca-Cola were the only blue chips advancers.

The blue chip index clung to gains of 0.10 percent for 2015. Earlier, the index lost more than 250 points to temporarily wipe out gains for the year.

The S&P 500 closed down 21.34 points, or 1.01 percent, at 2,085.51, with information technology leading all 10 sectors lower.

"Yesterday's weak earnings and today's light unemployment figure have got the market worried that the Fed's going to raise rates and the underlying economy is not as strong as everyone had hoped," said Kim Forrest, senior equity analyst at Fort Pitt Capital.

Wednesday's weaker-than-expected first-quarter GDP report and Fed meeting statement that removed all calendar references to a rate hike also put investors on edge ahead of a key economic indicator—April's jobs report due next Friday. The data could indicate a pickup in the second quarter and bring a rate hike sooner rather than later.

"We haven't seen yet a whole lot of evidence of things really turning around in April," said Bill Stone, chief investment strategist at PNC Asset Management. He still expects low- to mid- single-digit growth for 2015.

On Thursday, weekly jobless claims came in at 262,000, a 15-year low. U.S. personal income was flat in March, and consumer spending up just 0.3 percent when adjusted for inflation.

April's Chicago Purchasing Managers' Index (PMI) read was 52.3, topping expectations.

"Overall the data has been much weaker. It is still way too early to say you're going to see spectacular growth in the second quarter," said Krishna Memani, CIO of Oppenheimer Funds. "Clearly the bond market is not helping but the bond market is not the primary driver of equities."

Longer-dated U.S. Treasury yields held near highs as European bond yields climbed.

Earlier, U.S. stocks briefly halved losses as investors found some relief from news of progress towards a deal on Greece. An International Monetary Fund spokesman said the fund does not expect the country to exit the euro zone.

Meanwhile, Greece's government signaled the biggest concessions so far as crunch talks with lenders on a cash-for-reforms package started in earnest, while trying to assure leftist supporters it had not abandoned its anti-austerity principles.

The Athens stock exchange closed up 3 percent, with most European equities ending mildly higher.

The market was "at a recovery" from morning lows, said Tim Courtney, CIO at Exencial Wealth Advisors. "Part of it is what's coming out of Greece. What I think is moving the market today and last week is, where the good news is going to come from."

Corporate results have tended to beat estimates on earnings per share but miss on revenue.

Rising rates and lowered earnings expectations for stocks trading at high multiples makes the market "vulnerable," said Bruce Bittles, chief investment strategist at RW Baird.

Analysts noted Thursday's decline did not not indicate a significant selloff as the major indices came off high levels and traders took profits on the last day of trading for the month.

"It's nothing more than a normal, modest correction," said Paul Nolte, portfolio manager at Kingsview Asset Management. "Volume hasn't picked up."

"You need a clear reporting of earnings (at these multiples) that propels stocks higher," said Art Hogan, chief market strategist at Wunderlich Securities, noting that the U.S. dollar remained in focus.

The U.S dollar held lower against major world currencies after the euro traded above $1.12 for the first time in two months on Wednesday.

"Certainly the change in the direction of the dollar has caused a lot of anxiousness," Bittles said.

"I think the biggest meaning in the euro being strong is (ECB President Mario) Draghi's plan isn't working," said Marc Chaikin, CEO of Chaikin Analytics. "It's a negative for the U.S. economy as well because it takes off the table the whole notion of global expansion."

But some currency strategists say the euro's strength may be temporary.

German bund yields surged on Thursday, following a strong rally on Wednesday. U.S. Treasury yields also continued to trade higher, with the benchmark 10-year note yield hitting 2.10 percent on Thursday.

Investors also attempted to interpret Wednesday's Fed statement which removed all calendar references on the timing of a rate hike. Officials have indicated a desire to raise rates at some point this year, with the market now anticipating an increase possibly in September.

The markets "seem to be concerned about when that may take place," said Ryan Larson, head of U.S. equity trading at RBC Global Asset Management (U.S.). "The data has been good enough to confirm that we continue to improve but not enough for the Fed to move aggressively."

On Wednesday, official data showed gross domestic product in the U.S. expanded at an only 0.2 percent annual rate, on Wednesday. That was a big step down from the fourth quarter's 2.2 percent pace and marked the weakest reading in a year.

Major earnings on Thursday included Exxon Mobil, Colgate-Palmolive, ConocoPhillips, CME Group, Viacom, Imax and Beazer Homes before market open.

Exxon Mobil posted first-quarter earnings that declined sharply from a year ago but handily beat expectations on both the top and bottom lines.

AIG, Visa, LinkedIn, Western Union and Dreamworks Animation are due after the bell.

The CBOE Volatility Index (VIX), widely considered the best gauge of fear in the market, traded near 14.

About three stocks declined for every advancer on the New York Stock Exchange, with an exchange volume of 1.0 billion and a composite volume of 4.4 billion in the close.

Crude oil futures settled up 1.79 percent at $59.63 a barrel on the New York Mercantile Exchange. Gold futures settled down $27.60 at $1,182.40 an ounce.
It's been a rough week so let me walk you through it going over what I see trading these crazy schizoid markets. First, the rally in crude oil (USO) has been bolstered by talk of a global economic recovery, which sent many oil drilling and service shares surging on Thursday (click on image):


Shares of energy (XLE) and oil services (OIH) had a great month while biotech shares (IBB) suffered their worst month, with many big biotechs coming under pressure. It was even worse for smaller biotechs which got annihilated this week, some on bad news and others on no specific news whatsoever. They were victims of being in the wrong sector at the wrong time.

Now, everyone is talking about the "bursting of the biotech bubble" again and "sector rotation" out of "speculative junk" into "high quality names." And you will notice more and more people talking about a global economic recovery in the second half of the year and that now is the time to buy cyclical stocks like metals and mining (XME), gold (GLD), energy (XLE), and commodities (GSG), and emerging market (EEM), especially if you think the greenback will weaken further in the coming months.

My take on all this? It's all nonsense. This is all part of the "global hope trade" and as I explained in my recent comment on America's risky recovery, those who are betting big on a global recovery in the second half of the year are going to be sorely disappointed.

No doubt, there will be powerful countertrend rallies in many sectors that got killed last year and countertrend rallies in the euro but I would keep shorting these rallies. In fact, I'm sticking with my Outlook 2015 call where I stated it will be a rough and tumble year and recommended the following:
In this environment, investors should overweight small caps (IWM), technology (QQQ or XLK) and biotech shares (IBB or XBI) and keep steering clear of energy (XLE), materials (XLB) and commodities (GSG). And even though deflationary headwinds will pick up in 2015, I'm less bullish on utilities (XLU) and healthcare (XLV) because valuations are getting out of whack after a huge run-up last year.
Now, I made a mistake with healthcare (XLV) because I realized after there are some big biotechs in the top holdings of this ETF, but I still prefer playing the pure biotech indexes. Have a look below at the one year chart of the iShares Nasdaq Biotechnology (click on image):


You will notice the index plunged through its 50 day exponential moving average. Technicians love this stuff, it's very "bearish" but others like me just see it as a normal correction in a long secular uptrend. The biotech selloff was much scarier last year during the big unwind but again, that big dip was bought hard and biotech shares went on to make new highs.

Of course, this is not to say that some biotechs ran up to the stratosphere on pure hype and hope and were cruising for a bruising. Check out the one year charts of Pacira Pharmaceuticals (PCRX) and Aerie Pharmaceuticals (AERI) below (click on images):



OUCH! One had bad earnings and the other had bad phase III results for their glaucoma drug, which goes to show you that taking stock specific risks in biotech isn't for the faint of heart because you can get destroyed on any given day.

And it's not just biotechs. Check out what happened to social media darlings Twitter (TWTR) and LinkedIn (LNKD) this week after they reported earnings which didn't meet expectations (click on image below):



I still like Twitter and think this selloff presents yet another buying opportunity for top funds, but let it settle down to mid or low 30s before you add to an existing position or initiate a new one.

But there are other big tech stocks that are doing great this year. Check out the charts on Amazon (AMZN), Netflix (NFLX), Apple (AAPL) and even Microsoft (MSFT) and you will be very impressed. Amazon and Netflix in particular are killing it so far this year but I wouldn't touch either of them now, the big money has been made.

Then there is the interesting case of Voltari Corporation (VLTC). This piece of crap ran up from 60 cents to over 20$ in a few trading days as news broke that Carl Icahn increased his stake (click on image below):


I tweeted on Twitter and StockTwits to short it at $20, calling it the "mother of all Icahn pump and DUMPS!". I think it's heading back to pennies where it belongs but only after the momos let go of it (and they will). Welcome to the whacky world of stocks where you'll see all sorts of nonsense as regulators sleep on the job.

Let me end this brief comment by sharing some of the biotech names I like and trade (click on image below). But remember what I wrote above, taking stock specific risk in biotech (and sometimes even ETF risk!) isn't for the faint of heart and it can be particularly devastating so don't risk more than you can afford to lose!


Below, Corey Davis, specialty pharmaceuticals analyst at Canaccord Genuity, tells CNBC biotech's "great run" will continue despite a bumpy April and Gilead's earnings put a floor in the biotech space.

I also embedded the opening scene from one of my favorite movies, Gladiator, which captures how I feel after a rough and tumble week trading biotechs. Enjoy your weekend and the big boxing match on Saturday night and please remember to kindly subscribe and/or donate to my blog via PayPal on the top right-hand side under the click my ads picture. Thank you!


Transforming Hedge Fund Fees?

Stephanie Eschenbacher of the Wall Street Journal reports, Swiss Investor Calls for Big Cut in Hedge Fund Fees:
One of Europe’s biggest hedge fund investors, Unigestion, is pushing hedge funds to scrap management fees in place of a bigger slice of profits as investors attempt to crack down on high charges.

Nicolas Rousselet, head of hedge funds at the $16.7 billion investor, which has $1.9 billion invested in hedge funds, said that a zero management fee in exchange for a higher performance fee of 25% was “a great fee structure”. Hedge funds typically charge a 2% management fee and a 20% performance fee although better performing, more established managers can charge much higher fees. These top managers tend to attract investors easily, often having to turn away new ones, and can dictate terms to investors.

Mr. Rousselet said Swiss-based Unigestion had been pushing for a “transformation of fees”, that his team had successfully negotiated lower management fees with some hedge fund managers last year, and in two instances secured rates of lower than 1%.

Among those were both newer managers and more established ones that wanted to work with Unigestion on a new share class or fund.

Mr. Rousselet said: “If [a hedge fund manager] truly believes in his ability to perform, he should take my deal.” However, he acknowledged that low fees could pose a business issue for the hedge fund manager and conceded that the main challenge for investors was that the best-performing funds were oversubscribed.

He said that this transformed fee structure encouraged hedge fund managers to take on more risk, but that hedge fund investors like Unigestion needed to ensure that funds were prepared to take some risks. The aggressive stance is the latest development in a long-running fee debate between hedge funds and investors.

Data released earlier this month by Deutsche Bank Global Prime Finance showed that the success rate of fee negotiations was only gradually improving: some 37% of investors that negotiated fees were successful in one out of every two negotiations. This rate has increased from 35% a year ago, and 29% the year before that.

Investors are usually able to negotiate fees if they can commit a larger investment, and agree to invest for the longer term.

Deutsche Bank said that the most successful negotiators interviewed for its survey, which spanned 435 investors who have $1.8 trillion worth of investments in hedge funds, had an average of $5.6 billion invested in hedge funds. They agreed to invest on average $70 million for at least one year.
Institutional investors are finally openly discussing hedge fund fees and terms. Earlier this month, Ian Prideaux, CIO of the Grosvenor Family Investment Office, Marc Hendricks, CIO of Sandaire Investment Office and Simon Paul, Partner at Standhope Capital, wrote a letter to the FT on how the hurdle rate should apply to hedge fund industry as it does in private equity:
Sir, Sir John Ritblat makes a good point regarding hedge fund fees (Letters, March 2). Hedge fund managers should only be rewarded with an incentive fee for delivering performance that exceeds a “normal” hurdle.

For internal benchmarking purposes, many investors use an absolute return measure such as the return on short-dated Treasury bills plus 4 per cent. We should like to see a hurdle at a similar level adopted by the hedge fund industry generally, which by so doing would accept that it expected to deliver a “super return” in exchange for its incentive fee, as its highly talented managers no doubt consider themselves capable of producing. Otherwise investors can find themselves in the depressing position of paying an incentive fee on any positive performance however small.

If one assumes the “standard” — but by no means ubiquitous — 2 per cent plus 20 per cent fee structure, then a 5 per cent gross return to the fund is whittled down to a 2.4 per cent net return to the investor. A hurdle rate — typically of 8 per cent — is standard in the private equity fund sphere and only when the manager has delivered this return to the investor can he help himself to a share of the surplus. Why should the hedge fund industry not follow suit?
Good point, hurdles for hedge funds is something I discussed back in October, 2014. As far as fees, you know my thinking, it's about time a lot of overpaid hedge fund managers follow other wiser managers and chop fees in half.

I know there is still plenty of dumb pension money piling into hedge funds, especially the larger ones all those useless investment consultants are in love with, but the gig is up. Hedge funds have been exposed by none other than Soros and Buffett as outrageously expensive money managers that typically underperform the market.

I can hear hedge fund managers protesting: "Leo, Leo, Leo, you don't understand! We have 'niche strategies' and mitigate against downside risk. We need to charge hefty fees to all those dumb pension and sovereign wealth funds you mention on your blog so we can maintain our lavish lifestyle and make it on the Forbes' list of the rich and famous. It's expensive competing with Russian oligarchs and royalty from the Emirates for prime real estate in London and Manhattan. Not to mention the cost of Ferraris, yachts, private jets, fine art, and plastic surgery for our vain trophy wives is skyrocketing up in a world of ZIRP and QE!!"

Oh, cry me a river! When I was investing in hedge funds at the Caisse, one of the running gags was if we had a dollar every time some hedge fund schmuck told us he had "a niche strategy that's uncorrelated to the market," we'd all be multi-millionaires!

Thank god I'm no longer in that business because I'd be the biggest pension prick grilling these grossly self-entitled hedge fund prima donnas charging alpha fees for leveraged beta. And most hedge funds are still underperforming the market! No wonder hedge funds saw their worst year in closures since 2009 last year and a few top funds don't want to be called hedge funds anymore. Most hedge fund managers absolutely stink and should follow Goldman's fallen stars and pump away!

Alright, enough ranting on crappy hedge funds. Let's get serious. I think it's high time we critically examine what hedge funds and private equity funds offer pensions and other institutional investors. And by critically examine, I don't mean some puffy article written in Hedgeweek, extolling the virtues of hedge funds using sophisticated and (mostly) irrelevant mumbo jumbo. I mean "where's the beef baby?" and why should we pay these guys (it's still an industry dominated by testosterone) all these hefty alpha fees so they become nothing more than glorified asset gatherers on their way to becoming part of the world's rich and famous?

As far as fees are concerned, I don't fully agree with Unigestion's Nicolas Rousselet. I don't want hedge funds to be compensated for taking bigger risks, I want them to be properly compensated for taking on smarter risks. There's a huge difference and incentives have to be properly aligned with those of investors looking to consistently achieve some bogey, however illusory it might be.

As I've stated, there's a bifurcation going on in the hedge fund and private equity industry. The world's biggest investors are looking for "scalability" which is why they're increasingly focusing on the larger funds and using their size to lower fees. But they're still paying huge fees, which takes a big bite out of performance over the long-term.

As far as the smaller funds, they typically (but not always) focus on performance but they need to charge 2 & 20 to survive. Big pension and sovereign wealth funds aren't interested in seeding or investing in them, which is a shame but very understandable given their limited resources to cover the hedge fund universe. Typically, smaller endowment or family offices or a former hedge fund billionaire boss are their source of funding.

If I can make one recommendation to the Institutional Limited Partners' Association (ILPA) as well as the newer Alignment of Interests Association (AOI) is to stop schmoozing when you all meet and get down to business and come up with solid recommendations on hedge fund and private equity fees and terms.

What do I recommend? I think hedge funds and private equity funds managing multi billions shouldn't be charging any management fee -- or they should charge a nominal one of 25 basis points, which is plenty to pay big salaries -- and the focus should instead be on risk-adjusted performance. The alternatives industry will whine but the power isn't with them, or at least it shouldn't be. It should be with big investors that have a fiduciary duty to manage assets in the best interests of their stakeholders and beneficiaries.

I still maintain that most U.S. public pension funds are better off following CalPERS, nuking their hedge fund program. They will save big on fees and avoid huge headaches along the way. And forgive my bluntness but most pensions don't have a clue of the risks they're taking with hedge funds, but they're all following the herd, hoping for the best, managing career risk even if it's to the detriment of their plan's beneficiaries.

On that note, I leave you with something else to chew on. Neil Simons, Managing Director of Northwater Capital's Fluid Strategies sent me a comment on operational risk, A Hedge Fund Manager, an Astronaut and Homer Simpson walk into a bar…:
We would like to propose a question to you: Is it possible for an investment management firm to operate with the same level of precision and reliability found in industries where failure is simply not an option?

To answer this question, we looked at operational practices in industries such as nuclear power, space travel, aviation and healthcare, which face the prospect of catastrophic failure on a daily basis and have the highest standards for reliability and quality – after all, failure in these industries is a matter of life or death. While the consequences of success or failure in the investment management industry may not be quite as extreme, we do believe that investment managers must treat their investors’ dollars with the same level of respect and thus operate to the same standards.

In this post, we explore what investment management would look if we applied the same level of operational excellence found in these industries. Investment management is a business of precision, yet far too often you hear rumours of ‘fat-finger’ execution errors, or other more serious issues due to operational failures. And these are only the failures that you hear about – what about the failures that go unreported to clients, or even worse, failures that the investment manager itself is not aware of? What it all comes down to is that errors in investment management, no matter how small, are a sign of a lack of quality, and with a lack of quality there is a potential for loss and deviation from strategy.

Are Current Best Practices Sufficient?


Most major operational deficiencies (lack of proper oversight and separation of duties, for example) can often be uncovered by traditional manager due diligence activities. However, many approaches to manager due diligence are conducted through the use of questionnaires which are often built around a series of “check boxes” to ensure that nothing large falls through the cracks. This process places little attention to the quality and repeatability of investment operations. Third party due diligence firms conduct more detailed reviews, but can only see so far into the manager’s processes.

Most practitioners would agree that the intricacies of processes are a potential source of operational risk. For example, frequent small errors could be a reason why a fund might deviate from its benchmark or intended strategy. These errors may also reflect a general lack of attention to detail in the manager’s organization. But most importantly, they conspire to provide the investor with something other than what they are paying for – quality service and predictability of returns.

The Next Level: Systematic and Detailed Examination


Passing a due-diligence audit is a good first step, but managers have the ability to hold themselves to a higher standard. When we at Northwater think about operational deficiencies, we look at all potential failures that can occur throughout the investment process, e.g., inside the details of reconciliation processes, trade execution and model updates. It is only at the finest level of granularity that one can assess errors that may go unnoticed. A systematic method is needed in order to investigate, prioritize and the resolve potential failures.

Failure Mode and Effects Analysis (FMEA) is one technique that we have implemented to assess quality and to reduce the probability of smaller errors, not just to prevent large, obvious ones. FMEA was originally developed by reliability engineers and is widely used today in many non-financial industries. To implement FMEA concepts, we have taken an in-depth look at our own processes to identify areas that can be improved, examine the potential results of errors that can occur, develop highly-documented processes to ensure accuracy and consistency, and continually review and improve these processes.

Nuclear power plants, airlines and hospitals have all adopted strict and well-documented quality control processes that prevent not just large errors, but the potential for a small error to propagate through a system with the potential to push a system beyond its tipping point.

Acknowledge the Human Element

Other industries explicitly acknowledge and manage the human factor and acknowledge that human error rates are not zero even for the simplest task.  Consider a study conducted by NASA to understand human error rates when performing relatively simple tasks; cognitive scientists have found that humans have base error rates in performing even the simplest tasks such as the classification of even vs. odd numbers or identification of triangles.

Despite the best intentions of employees, an underlying issue in investment management is that firms are made up of people and people make mistakes– it is inevitable. Even if the average employee isn’t Homer Simpson, the pilots from “Airplane!”, or the cast from TV’s “Scrubs”, the staff at these organizations face legitimate challenges such as time availability, stress levels, distractions, and even ergonomics and office culture. As such, a lot can be assessed from a review of the processes in place to manage the ‘human factor.’

At Northwater, we have explicitly acknowledged the human element within our processes as well as the performance shaping factors that can impact human performance. Automating processes is a standard method for minimizing the probability of an operational error. It is also possible to redesign processes to reduce complexity. This reduction in complexity helps to minimize the probability of error when a human is involved with a process. We believe that this is an important aspect of our approach to the minimization of operational risk.

By looking to other industries, investment managers can achieve a higher operational standard. If you are interested in learning more about our novel approach to understanding and minimizing operational risk, please contact us.
Neil followed up with these comments for my blog readers:
As discussed, we probably didn't go into sufficient detail in the post. We did quite a few things in our opinion to reduce operational risk.

One, as mentioned, was the implementation of the FMEA methodology. Requires all the people involved in daily trading (PM's, ops people, model people) to systematically map all processes and then brainstorm on how processes can fail. Then rank how failures can cause problems by severity and ultimately prioritize and implement changes to processes to eliminate or significantly reduce the probability of those failures.

FMEA is a standard practice in many other industries to assess operations but you don't seem to hear about it in finance.

We believe that standard op risk practices are important and useful for finding issues associated with investment management firms. They play an important role in helping investors. This topic is more about assessing quality and repeatability of operations. And achieving the highest possible quality, resulting in minimizing the probability of an operational issue associated with day to day portfolio management.

We believe that the third party operational risk firms can't ever go into as much detail as the management firm itself. It is only the people involved in the actual processes that can really understand how processes could fail. Benchmarking and big picture best practices are done well by the third party people but I don't believe they can do a good job at assessing the real quality of the processes.

Financial firms typically strive to implement industry best systems. However, at times, these systems require workarounds and spreadsheets. As well, many of these workaround can be operated by junior people and we believe they are accidents waiting to happen. It is just assumed that these people won't make mistakes or it is up to these people to show sufficient "attention to detail" to never make a mistake. But to us, that is an unrealistic assumption.

Humans make mistakes.

The next aspect that helped us was acknowledgement of the human side. Once you read some of the literature on how humans screw up simple things, you realize it is just a matter of time until someone makes a mistake while operating a process. Humans have small, but non zero error rates for even the simplest tasks. As task complexity increases, the error rate increases.

If a diligent person does 20 simple tasks per day and they do that every day for a year, then you should consider the potential error rate of those tasks. A 1 in 1,000 error rate will cause errors to become a reality for the case of 20 tasks per day for an entire year. If the potential consequences of one of those errors is severe then you have a real problem.

When humans are involved in a process, make their tasks as simple as possible. This accounts for increasing error rates that occur as task complexity increases.

Obviously automation is a well-known solution. Some tasks can’t be automated or at times, systems require some human intervention, and at times a human must intervene in the instance of an exception. These are the instances when the human element should be considered.

We have implemented many more checklists and improved existing checklists for clarity. Implemented many more double checks for tasks involving humans and have also strived to make the independent double checks truly independent. i.e., two people sitting beside each other looking at the same information at the same time is not an independent test since they will potentially influence one another and reduce effectiveness of what is supposed to be an independent check.

We have also implemented a daily pre-trading huddle with people involved with trading, model updates, operations in order to understand the portfolio management tasks for the day. This mirrors the huddles that are more frequently used in operation rooms before a procedure starts (see “Checklist Manifesto”, book by Gawande below).

Again other industries recognize some of these human elements and try mitigate. Finance doesn't seem to do that, most just assume that humans involved in processes perform their tasks perfectly.

We intentionally also modified our working environment. During portfolio management model updates and trading times we do not permit any interruptions of the portfolio management team. We place an indicator in the office that says tells other people in the office that the portfolio management process is taking place and to stay away and do not interrupt the portfolio management team (operations, model updates, reconciliation, trading). An open office (most trading rooms) is great for communication, sharing ideas, etc. but a disaster waiting to happen if you consider how humans perform when they are interrupted or bothered while performing tasks. Again, other industries are aware of these issues.

The FMEA process changes need to be considered within that context. Obviously automation is key, but humans are involved in most processes at some point along the line. Making the human involvements as simple as possible and having safety modes that can catch failures is also key. FMEA is a manner for understanding all of that.

Implementing FMEA and also reading all about how humans make errors changes our way of thinking. We believe we have improved operational efficiency and minimization of operational risk.
Those of you who are interested in finding out more about the FMEA process and Northwater Capital's Fluid Strategies should contact Neil directly at nsimons@northwatercapital.com. As someone who has invested in many hedge funds, I can unequivocally tell you human mistakes happen more often than investors and funds want to acknowledge and there should be a lot more rigorous industry standards to mitigate against operational risk.

As always, feel free to contact yours truly (LKolivakis@gmail.com) if you have any insights you want to share on transforming hedge fund fees and mitigating operational risks. I don't pretend to have the monopoly of wisdom on these important topics and even though I come off as an arrogant cynical prick, I'm a lot nicer in person (just don't piss me off with your bogus niche strategy and if you ever want to meet me, the least you can do is subscribe or donate to my blog!).

One astute hedge fund investor shared his insights with me after reading my comment:
The challenge is that the managers who know they can deliver sustainable alpha (ie the only ones it is worth investing in under the current fee structure paradigm), are still not negotiable today unless you are prepared to write 10 figure tickets and underwrite business risk yourself. There is a considerable capacity shortage for quality alpha generators. In rare instances, 2% and 20% might not be enough!

However, in many instances, 0% and 25% is too much if you factor in all the operational risks that you face.

Unfortunately, the biggest problem brought by high fees is borne by managers as a whole in the form of abnormal attrition rates. High attrition rates exist partly because investors cannot tolerate drawdowns from high management expense ratio operation. That triggers a window dressing exercise, whether it is voluntary or policy driven.

I think if managers rewarded long-term investors by reducing the fee paid by an investor by a notch on each of its investment anniversary, attrition rates would stabilize. It would be less psychologically painful to re-underwrite a losing fund if the fee structure comes down every year. The only risk from the manager view point is that if he is really successful, after a few years, every investor stuck around and now its entire capital base is charged below market rates. But there are ways to circumvent that second order problem.

That's one approach we have tried to implement without success due to existing MFNs but we never lose an occasion to talk about that.

Ironically, MFNs signed by large investors who are members of high profile investor associations that supposedly promote better alignment of interest is what makes it almost impossible for managers to consider alternative fee structures where the economics are less skewed in favor of the manager.
Below, CNBC's Kate Kelly reports on the new players in hedge funds leading corporate activism. I've got a great young activist fund manager looking to get seeded in a world where everyone is hot and horny for big hedge funds. If you're interested, contact me directly (LKolivakis@gmail.com).

Second, a discussion on alternative investing strategies amid changing trends in interest rates, with Colbert Narcisse, Morgan Stanley Wealth Management head of Alternative Investments Group.

As my friend Brian Romanchuk points out in his blog, investors are making mountains out of molehills on the Fed lift-off. In his latest comment, Brian critically examines why the Fed is keeping rates low looking at former Fed Chairman Bernanke's first blog comment (for me, it's simple, raising rates now would be a monumental mistake but don't ever discount huge policy blunders!).

Lastly, Jamie Dinan, York Capital founder and CEO, shares his global economic forecast for Europe, Japan and China. He's a lot more optimistic than I am on Europe, Japan and China but I'm still playing the mother of all carry trades fueling the buyback and biotech bubbles everyone is fretting about.

As always, I work extremely hard to provide you with the very best insights on pensions and investments. The least you can do is show your financial support by donating any amount or by subscribing via the PayPal buttons on the top right-hand side (under click my ads pic). I thank those of you who have contributed and ask others to follow suit.



Europe's Pension Crisis?

Chris Johns of The Irish Times reports, Pension crisis is still a financial disaster waiting to happen:
Benjamin Franklin famously said the only two things about which we can be certain are death and taxes. If he were alive today he might be tempted to add pensions crisis as a third certainty of human existence.

I wrote my first “pensions are in crisis” article (for this newspaper) more than a decade ago. That is not a claim to successful futurology or deep insight. It was merely an observation of an existing state of affairs. It was also something that pension experts had been warning about for a long time. Attempts have been made to make things better but these have mostly been piecemeal. Of course, with regard to the National Pension Reserve Fund, it was a case of one step forward and then fall off a cliff. Many pensions are still in crisis, both public and private.

The list of culprits is a familiar one: we are living longer. In particular, we are living longer than expected by the actuaries who set up the pension schemes in the first place – yet another example of the futility of forecasts. Investment returns have also, in many instances, been lower than forecast. The ending of company defined benefit schemes has also created more problems than it solved.
Dilemma
All of this is standard stuff. The response of pension experts is always a rational one: above all else, we should be saving more for our old age. The action taken by most of us is often to yawn and pay attention to something more interesting. Like slowly boiled frogs, we do nothing as the problem builds. Curiously, unlike boiled frogs, we know what is happening and why. We also know what to do to escape the pensions dilemma but mostly choose not to.

This is where it gets interesting. The pensions industry yells louder at everyone to save more. During good times and bad times, the experts are mostly ignored. It’s not just about the recent recession leaving no money left over for saving. When things were booming we saved more but still nowhere near enough.

All of these remarks apply to many economies, not just Ireland’s. We are uninterested in our pension arrangements. Attempts to persuade people to do something often fail. Perhaps it is time to face up to this and acknowledge the consequences for public policy: a lot of people are going to be very disappointed by their pension entitlements. State pensions will remain a significant part of old-age income. This, in turn, will generate another fiscal crisis, sooner or later.

The political power of older people is growing in line with their numbers. Few politicians are willing to antagonise a most important bloc of voters. It seems to be easier to cut public sector pay than to take on pensioners. Nobody dares tackle existing benefits, some of which are as daft as they are unaffordable.

Journeys on the Aircoach from Killiney to Dublin Airport are illustrative. The conversation is often about overseas villas and the latest cruise. These well-heeled pensioners are travelling to their holiday destination in leather-seated, free wifi luxury at the expense of the taxpayer. It really is quite an experience.
Indefensible
Free travel for all is just one indefensible, unaffordable benefit that, I forecast, will never be tackled. I am not going to mention healthcare spending for fear of what will happen to me the next time I am on that bus.

It is tempting to say I must be wrong: a future financial crisis will force politicians to do the right thing and sort out pensions and unaffordable entitlement spending. But we have just lived through the worst financial crisis of all time which left many “unsustainable” benefits untouched and did little to sort pension arithmetic that doesn’t add up. These are battles that seem to be too hard, politically, to fight.

Future governments will be faced with a paradox: the ever-increasing power of pensioners will lead to ever-decreasing willingness to tackle unaffordable spending commitments. But those older people will be growing more and more disgruntled with their pensions.
There is no doubt in my mind the global pension crisis is getting worse and that along with the jobs crisis, these will be the political issues of the next decade(s). The author is correct, this isn't an Irish problem, it's a global problem and quite amazingly, it's a topic that receives little if any attention because most people just prefer to ignore it until it's too late.

What happens when it's too late? As an extreme example, look at Greece. Their pensions are on the verge of collapse and the country's left-wing leaders are desperately trying to negotiate terms to save them. But as Greece searches for a new deal, the reality is that its economy is in a dire predicament because decades of public sector profligacy have finally caught up, and the math simply doesn't add up.

I had a chat with a friend of mine in Greece yesterday who told me he thinks most Greeks are "hopelessly delusional." He shared the following with me:
"...there are 2.5 million private sector workers supporting 1.5 million public sector workers in Greece. How is this sustainable? I got into a fight with a professor of geology who was complaining to me her salary went down from 2,300 euros a month to 1,300 euros a month and she still has to work 12 hours a week. I told her she's lucky she still has a job and told her to go see my butcher who works close to 60 hours a week and only earns 750 euros a month to feed his family of four. And it drives me crazy when I hear Greeks talk about the good old drachma days when they were collecting 25% interest at a bank but the inflation rate was sky high and you took out loans at 40% interest, if you were lucky."
He added:
"The country is in desperate need of reforms but Greeks are incapable of governing themselves and cutting public sector expenses. Did you know that by law you're not able to foreclose on a primary residence in Greece? Did you know that if you own a private business you cannot fire more than 2% of your workforce at a time? The Greek government owes private businesses billions of euros in arrears and isn't paying them so many businesses close up shop, at which point people lose their job. But god forbid we cut expenses at Greece's over-bloated public sector, all hell will break loose. Still, this is what Greece needs, someone to come in here and make the needed cuts and I think that is what is going to happen once Syriza balks and signs a new agreement on specific reforms."
On Grexit, he doesn't think it's going to happen. Instead, he thinks Syriza will eventually cave and the ECB will take over the IMF loans to Greece (about 30 billion euros) and then Germany and other creditors will put the screws on Greek leaders to reform their economy once and for all (I certainly hope he's right).

But while Greece is an extreme example, other European countries face equally big challenges, especially when it comes to their pensions. Paul Kenny, a senior investment consultant at Mercer Ireland, wrote a comment for The Irish Times on how quantitative easing is creating new challenges for pension schemes:
The first month of quantitative easing (QE) has come and gone. Although early indicators are positive, it will take some time to tell whether QE will ultimately lift the euro zone out of its economic malaise. But the immediate impact of QE on defined benefit (DB) pension schemes is clear, and it is creating huge challenges.

QE has dealt Irish DB pension schemes, which are facing exceptionally low interest rates, yet another blow. The €60 billion per month of bond purchases in which the European Central Bank (ECB) is engaged is distorting an already stressed market very significantly.

Although QE has boosted asset returns, the considerable associated reductions in bond yields have pushed DB liability values to ever-dizzying heights and reduced expected returns on asset portfolios. This brings further massive financial reporting pressures for plan sponsors, who are committed to delivering pension benefits to their employees.
Liabilities
QE has likely already increased the value of Irish DB scheme liabilities by up to 20 per cent (ie by between €10 billion and €15 billion across all plans), making an already difficult situation at the end of 2014 considerably worse.

Yields on long-dated German bonds have now fallen below zero at maturities up to just under 10 years. As a result, local insurers are or may soon be pricing annuities at negative interest rates, resulting in the rather bizarre outcome that it may cost more than the sum of expected future payments to buy out a pension benefit.

For schemes that are required to reserve to this level under the local regulatory test, this provides significant funding difficulties.

For schemes in wind-up, it may result in an even more unfair distribution of assets from the viewpoint of non-pensioners.

The concept of building a regulatory funding hurdle around what is a very uncompetitive annuity buy-out market in Ireland remains a concern. This has not been adequately alleviated by the advent of sovereign annuities, which remain a relatively unused and unwieldy solution.

How should trustees react to these QE-related challenges? First, they need to realise that QE will not be permanent. It is scheduled to run until September 2016 and although it may be extended beyond then, there are some challenges in upsizing the programme. As a result, the current issues, although extremely challenging, may be temporary.

Second, they need to be aware that QE has provided massive support to asset prices but that this support will not be permanent and, at some stage, assets will have to stand on their own feet.
Caution
Third, they need to treat with caution the Pensions Authority’s position that bonds are the optimum investment class.

In its 2014 annual report, it expressed concern about the level of investment risk to which Irish DB pension schemes are exposed.

Risk management and diversification away from volatile equities should certainly be encouraged and supported. However, now is a very expensive time to reduce risk by increasing allocations to euro zone bonds. De-risking in this form, while QE is influencing the market, will likely have a permanent impact on pension benefits (through benefit reduction or a forced move away from DB schemes).

The regulatory framework should ideally take account of the unprecedented market conditions Irish schemes face due to QE and allow schemes that are well managed, have defined risk management strategies and are sustainable over the long term to navigate the current short-term challenges.

Unfortunately, there appears to be little sign of pragmatism or even acknowledgement that we going through extraordinary market conditions. The Pensions Authority says “...there should be no question of changing the standard in order to give schemes and their members the false impression that the situation is easier than it actually is... ”

Accordingly, it falls to trustees and sponsors to make sensible risk management decisions and do their best to plot a course for the long term while managing short-term financial challenges.
I'm not so sure this is a temporary problem. If anything, my fear is that Euro deflation crisis will get worse as politicians there keep putting off major structural reforms, forcing the ECB to take on more expansive and aggressive quantitative easing in the future. This is why I don't agree with those who think now is the time to short the mighty greenback.

Closer to home, I read a comment from real estate doom and gloomer Garth Turner on why Stan is a lucky guy:
Stan worked on the line at GM’s Oshawa plant for thirty years. “Last of the breed,” he says. “Man, look at the news.” Indeed. GM just punted a thousand workers, who will be gone by November. When Stan started there, 15,000 guys crowded the gates. Now there are 3,600. Soon, a third less. “This place is doomed,” he prophecies.

Pensions are one reason, which is why I was talking to the guy. GM Canada has about 30,000 retirees drawing monthly cheques. It also has an unfunded pension liability estimated to be more than $2 billion. That’s despite a $3.2-billion cash gift the company received from the government when GM was bailed out in ‘09. It effectively means most company pensioners today are drawing taxpayer money. Yep, just like civil servants. Except most ex-GM workers get more.

Stan never saved a nickel, has no RRSPs, no TFSA, no investment portfolio and $12,500 in his TD Canada Trust daily savings account earning 0.10%. But he does have a house east of Toronto he paid $220,000 for, plus a wife who works at Loblaws.

But Stan’s one lucky dude. He has a gold-plated pension from the olden days when automakers secretly sweated as the union’s brass swaggered to the negotiating table. He also has a big choice to make. He can collect a monthly cheque until he dies. Or he can commute it – taking over the pension himself with a lump-sum payment. In his case, it will be just under $1 million – some of it rolled into a tax-free registered account, some of it in taxable cash.

“I’m scared,” he said. “I can’t sleep, and now all I do is worry.” That’s normal, I told him. People lacking money worry occasionally about being poor. People who have money obsess about losing it. It’s why rich people never smile.

Well, Stan made his choice finally. He took the money, will have it invested privately and get his monthly allowance that way. Here’s why.

“I don’t trust them.” These are the words of a guy who’s watched the ranks of the employed decimated, seen his company rescued from colossal failure by the government, and knows there’s not enough money in the pot to fund his pension for the next 35 years. In fact, unfunded pension liabilities are a ticking timebomb with the potential to blow up the lives of many unsuspecting people.

For example, Canada Post has an unfunded pension liability of $6.5 billion, which should explain why it’s trying hard to get out of the mail delivery business and laying off armies of people. Across Canada it’s estimated there are $300 billion worth of pensions that public sector workers are expecting that actually have no dollars allocated to them. Some bitter surprises are in store.

Anyway, Stan’s smart. Why even take a chance when you can take the money now?

Then there’s this: “What if they screw up again?” Governments struggling with their own debts and deficits might not be so generous with GM the next time it hits the rocks. Pensioners in Canada could live through the same experience as cops and firefighters have in American cities and states where pension benefits are arbitrarily cut. Already teachers in Ontario have been forced to pay more into their massive pension plan and will be receiving less, just to keep it solvent.

By taking the money and putting it to work, hopefully matching long-term investment returns, Stan will never deplete it and harvest a monthly amount equal to that the pension administrators were promising.

Most importantly he said, “I have to do this for Brenda.” Smart. If Stan took the company pension the way most of his greying buddies are, with its stress-free payments, then died in a few years, Brenda would get a small and temporary survivor benefit. But by commuting the pension amount, Stan’s family owns 100% of the money – forever. If he passes first (“Like that won’t happen…”) then Brenda gets every cent, to support her and help the kids as they get established.

Besides, there couldn’t be a better time for the guy to be doing this, since interest rates have cratered. Low rates make a commuted pension worth more in today’s dollars, since the present value of it rises. If current rates were a couple of percentage points higher then the autoworker’s pension value would be at least $300,000 lower. In fact, his commuted value jumped enough to buy a new RV with the tiny quarter-point bank rate drop in January.

Like I said. Lucky dude.

Finally, Stan can take his wad, invest it reasonably for growth and stability, and end up paying less tax than his pension-collecting pals. That’s because a portion of his income can be deemed return of capital, which means it’s not reportable, keeping him in a lower tax bracket.

Of course, in return for these benefits, he worries. He has to trust someone with his million. And that is the highest hurdle.
Although I understand why Stan opted to take a lump sum pension payment, I don't share Garth Turner's enthusiasm for this option as it places the onus on Stan to invest that money wisely and make sure he and his beneficiaries don't outlive those savings.

He's probably going to invest the money in some crappy "balanced" mutual fund which will underperform the market and get eaten alive on fees. Even if he invests wisely in dividend staples like Bell Canada and those much loved Canadian banks which I'm shorting, he might live through another financial crisis and take a huge hit at a time when he needs stable income during his retirement.

As you can see, when it comes to retirement policy, Garth Turner is just as clueless as his Conservative buddies in Ottawa. If they had any policy sense whatsoever as to what's best for Canada which is about to go through a major crisis, they would have enhanced the Canada Pension Plan for all Canadians by now. Instead, they will increase the TFSA limit to help rich Canadians, which is just another dead giveaway to the financial services industry.

So, if you ask me, Stan is right to worry as the burden of retirement falls entirely on him now, but he should focus on his health first and foremost, and worry less about his retirement savings (retirement anxiety is bad for your health, another reason which is why I prefer DB plans!). As for others living in Ontario, there is hope as the provincial government recently passed legislation to create a provincial pension plan for more than three million people who do not have a workplace pension, despite critics' warnings it amounts to a job-killing payroll tax (they are clueless too!).

When it comes to the pension crisis, Ontario is wisely bypassing the feds and going it alone. I can only hope other provinces will follow its lead because the pension crisis isn't going away in Canada and elsewhere. It's only going to get worse, forcing politicians to take some very tough decisions down the road. I just hope they take the right decisions, not the politically expedient ones which will exacerbate pension poverty.

Below, as wide differences over pension and labor reforms continue to dog intensive negotiations between Greece's leftist government and its international creditors, Steen Jakobsen, chief economist at Saxo Bank, tells CNBC the country will eventually face bankruptcy.

As far as I'm concerned, Greece is already bankrupt -- financially, ideologically and morally bankrupt -- and the sooner they kick the clowns running the country out of office and introduce real reforms, the better off its citizens will be.

Lastly, Bill Gates, Warren Buffett and Charlie Munger talk about ultra low rates all around the world and how they pose leverage and bubble risks. In my opinion, there's no conundrum, the world isn't prepared for global deflation, but bond markets are worried about it.


And Now, The End Is Near?

Bill Gross' latest monthly investment outlook for Janus Capital investors is incredibly grim (added emphasis is mine):
Having turned the corner on my 70th year, like prize winning author Julian Barnes, I have a sense of an ending. Death frightens me and causes what Barnes calls great unrest, but for me it is not death but the dying that does so. After all, we each fade into unconsciousness every night, do we not? Where was “I” between 9 and 5 last night? Nowhere that I can remember, with the exception of my infrequent dreams. Where was “I” for the 13 billion years following the Big Bang? I can’t remember, but assume it will be the same after I depart – going back to where I came from, unknown, unremembered, and unconscious after billions of future eons. I’ll miss though, not knowing what becomes of “you” and humanity’s torturous path – how it will all turn out in the end. I’ll miss that sense of an ending, but it seems more of an uneasiness, not a great unrest. What I fear most is the dying – the “Tuesdays with Morrie” that for Morrie became unbearable each and every day in our modern world of medicine and extended living; the suffering that accompanied him and will accompany most of us along that downward sloping glide path filled with cancer, stroke, and associated surgeries which make life less bearable than it was a day, a month, a decade before.

Turning 70 is something that all of us should hope to do but fear at the same time. At 70, parents have died long ago, but now siblings, best friends, even contemporary celebrities and sports heroes pass away, serving as a reminder that any day you could be next. A 70-year-old reads the obituaries with a self-awareness as opposed to an item of interest. Some point out that this heightened intensity should make the moment all the more precious and therein lies the challenge: make it so; make it precious; savor what you have done – family, career, giving back – the “accumulation” that Julian Barnes speaks to. Nevertheless, the “responsibility” for a life’s work grows heavier as we age and the “unrest” less restful by the year. All too soon for each of us, there will be “great unrest” and a journey’s ending from which we came and to where we are going.

A “sense of an ending” has been frequently mentioned in recent months when applied to asset markets and the great Bull Run that began in 1981. Then, long term Treasury rates were at 14.50% and the Dow at 900. A “20 banger” followed for stocks as Peter Lynch once described such moves, as well as a similar return for 30 year Treasuries after the extraordinary annual yields are factored into the equation: financial wealth was created as never before. Fully invested investors wound up with 20 times as much money as when they began. But as Julian Barnes expressed it with individual lives, so too does his metaphor seem to apply to financial markets: “Accumulation, responsibility, unrest…and then great unrest.” Many prominent investment managers have been sounding similar alarms, some, perhaps a little too soon as with my Investment Outlooks of a few years past titled, “Man in the Mirror”, “Credit Supernova” and others. But now, successful, neither perma-bearish nor perma-bullish managers have spoken to a “sense of an ending” as well. Stanley Druckenmiller, George Soros, Ray Dalio, Jeremy Grantham, among others warn investors that our 35 year investment supercycle may be exhausted. They don’t necessarily counsel heading for the hills, or liquidating assets for cash, but they do speak to low future returns and the increasingly fat tail possibilities of a “bang” at some future date. To them, (and myself) the current bull market is not 35 years old, but twice that in human terms. Surely they and other gurus are looking through their research papers to help predict future financial “obits”, although uncertain of the announcement date. Savor this Bull market moment, they seem to be saying in unison. It will not come again for any of us; unrest lies ahead and low asset returns. Perhaps great unrest, if there is a bubble popping.

Policymakers and asset market bulls, on the other hand speak to the possibility of normalization – a return to 2% growth and 2% inflation in developed countries which may not initially be bond market friendly, but certainly fortuitous for jobs, profits, and stock markets worldwide. Their “New Normal” as I reaffirmed most recently at a Grant’s Interest Rate Observer quarterly conference in NYC, depends on the less than commonsensical notion that a global debt crisis can be cured with more and more debt. At that conference I equated such a notion with a similar real life example of pouring lighter fluid onto a barbeque of warm but not red hot charcoal briquettes in order to cook the spareribs a little bit faster. Disaster in the form of burnt ribs was my historical experience. It will likely be the same for monetary policy, with its QE’s and now negative interest rates that bubble all asset markets.

But for the global economy, which continues to lever as opposed to delever, the path to normalcy seems blocked. Structural elements – the New Normal and secular stagnation, which are the result of aging demographics, high debt/GDP, and technological displacement of labor, are phenomena which appear to have stunted real growth over the past five years and will continue to do so. Even the three strongest developed economies – the U.S., Germany, and the U.K. – have experienced real growth of 2% or less since Lehman. If trillions of dollars of monetary lighter fluid have not succeeded there (and in Japan) these past 5 years, why should we expect Draghi, his ECB, and the Eurozone to fare much differently?

Because of this stunted growth, zero based interest rates, and our difficulty in escaping an ongoing debt crisis, the “sense of an ending” could not be much clearer for asset markets. Where can a negative yielding Euroland bond market go once it reaches (–25) basis points? Minus 50? Perhaps, but then at some point, common sense must acknowledge that savers will no longer be willing to exchange cash Euros for bonds and investment will wither. Funny how bonds were labeled “certificates of confiscation” back in the early 1980’s when yields were 14%. What should we call them now? Likewise, all other financial asset prices are inextricably linked to global yields which discount future cash flows, resulting in an Everest asset price peak which has been successfully scaled, but allows for little additional climbing. Look at it this way: If 3 trillion dollars of negatively yielding Euroland bonds are used as the basis for discounting future earnings streams, then how much higher can Euroland (Japanese, UK, U.S.) P/E’s go? Once an investor has discounted all future cash flows at 0% nominal and perhaps (–2%) real, the only way to climb up a yet undiscovered Everest is for earnings growth to accelerate above historical norms. Get down off this peak, that F. Scott Fitzgerald once described as a “Mountain as big as the Ritz.” Maybe not to sea level, but get down. Credit based oxygen is running out.

At the Grant’s Conference, and in prior Investment Outlooks, I addressed the timing of this “ending” with the following description: “When does our credit based financial system sputter / break down? When investable assets pose too much risk for too little return. Not immediately, but at the margin, credit and stocks begin to be exchanged for figurative and sometimes literal money in a mattress.” We are approaching that point now as bond yields, credit spreads and stock prices have brought financial wealth forward to the point of exhaustion. A rational investor must indeed have a sense of an ending, not another Lehman crash, but a crush of perpetual bull market enthusiasm.

But what should this rational investor do? Breathe deeply as the noose is tightened at the top of the gallows? Well no, asset prices may be past 70 in “market years”, but savoring the remaining choices in terms of reward / risk remains essential. Yet if yields are too low, credit spreads too tight, and P/E ratios too high, what portfolio or set of ideas can lead to a restful, unconscious evening ‘twixt 9 and 5 AM? That is where an unconstrained portfolio and an unconstrained mindset comes in handy. 35 years of an asset bull market tends to ingrain a certain way of doing things in almost all asset managers. Since capital gains have dominated historical returns, investment managers tend to focus on areas where capital gains seem most probable. They fail to consider that mildly levered income as opposed to capital gains will likely be the favored risk / reward alternative. They forget that Sharpe / information ratios which have long served as the report card for an investor’s alpha generating skills were partially just a function of asset bull markets.Active asset managers as well, conveniently forget that their (my) industry has failed to reduce fees as a percentage of assets which have multiplied by at least a factor of 20 since 1981.They believe therefore, that they and their industry deserve to be 20 times richer because of their skill or better yet, their introduction of confusing and sometimes destructive quantitative technologies and derivatives that led to Lehman and the Great Recession.

Hogwash. This is all ending. The successful portfolio manager for the next 35 years will be one that refocuses on the possibility of periodic negative annual returns and miniscule Sharpe ratios and who employs defensive choices that can be mildly levered to exceed cash returns, if only by 300 to 400 basis points. My recent view of a German Bund short is one such example. At 0%, the cost of carry is just that, and the inevitable return to 1 or 2% yields becomes a high probability, which will lead to a 15% “capital gain” over an uncertain period of time. I wish to still be active in say 2020 to see how this ends. As it is, in 2015, I merely have a sense of an ending, a secular bull market ending with a whimper, not a bang. But if so, like death, only the timing is in doubt. Because of this sense, however, I have unrest, increasingly a great unrest. You should as well.
Boy, the fall of the bond king has really hit Bill Gross hard. He's now writing about how death frightens him and how "a 70-year-old reads the obituaries with a self-awareness as opposed to an item of interest."

True, life is finite. No matter how much money you have, you can't cheat the grim reaper. When your time is up, it's up, so make the best of it while you're alive. Bill Gross needs to look back and tell himself how fortunate he was to be part of the greatest bull run in financial markets. He, George Soros, Stan Druckenmiller, Julian Robertson, Ray Dalio and a few other investment superstars were all extremely fortunate and enjoy immense wealth that the restless many can only dream of. They are part of the grossly overpaid financial elite I keep referring to (to his credit, Gross does realize this).

But money doesn't buy you an eternal life, nor does it buy you happiness. My 83 year old dad who still works as a psychiatrist four days a week tells me that all the time. He has seen his fair share of rich and poor patients struggling with mental illness. He also tells me his faith has sustained him through good and bad times and he sees death as a normal part of life. He believes there is a lot more to life than this world we live in and takes the prospect of dying in stride. "Après moi, le déluge", he tells me when we talk about what happens after he passes away.

My dad's friend, an 82 year old retired pathologist who makes his own wine and grew up in Crete with him during the war years, isn't religious but equally not afraid of death. "In over 40 years of performing autopsies, I've never seen anyone rise from the table. Unlike your father, I don't believe in Christianity and life after death but I don't fear death either because it's a natural part of life. I believe in what is written on Nikos Kazantankis' epitaph'Δεν ελπίζω τίποτα, δε φοβούμαι τίποτα, είμαι λέφτερος' (I don't hope in anything, I'm not afraid of anything, I'm free)."

All this to say that Bill Gross is right to reflect on endings but he needs to liberate himself from the torture of always thinking the end is near. History has taught us that there are always good, bad and unfortunately horrific times, and nothing lasts forever.  There's always something to worry about and when your livelihood is based on beating some equity or bond index, or running a hedge fund where you promise absolute returns in all markets (but don't deliver while collecting obscene fees), you tend to worry a lot more than others that the end is near.

I worry a lot too. I see the jobs crisis and pension crisis getting a lot worse in the coming decade(s). All these unemployed young people and older people living in poverty worries me a lot. The financial and business elite should worry too because there are limits to massive inequality. Unfortunately, the power elite remain oblivious to the plight of the restless many, and keep going about their "puny, ineffectual lives" to borrow a phrase from Henry Miller (one of my favorite authors who wrote in the Tropic of Capricorn: "Take a good look at me. Now tell me, do you think I'm the sort of fellow who gives a f@#k what happens once he's dead?").

But at one point, the electronically lobotomized masses hooked on the latest iGadget and instagram will revolt against the power elite's cries of "let them eat cake (crumbs)". This is natural too, it's all part of the Hegelian dialectic which has governed societies throughout history. We're seeing mere glimpses of it in Baltimore, the real revolution I'm talking about will be unprecedented, crossing all states and countries, and it will be brutal. Hopefully I will be long gone from this wretched earth when it happens but I fear that my nephews' generation won't be as lucky.

But when it comes to markets and animal spirits, I keep reminding myself of the genius of Keynes and his famous quote: "Markets can stay irrational longer than you can stay solvent." The Nobel laureates running LTCM found that out the hard way and so have many other hedge fund and other investment gurus since the rise and fall of LTCM.

So perhaps it's fitting that Bill Gross talks about how the end is near. He joins the ranks of endless others spewing the same cataclysmic warnings on blogs like Zero (H)edge. I'm not buying it. Bill Gross should read Brian Romanchuk's latest comment on the debt supercycle versus secular stagnation. Brian has deeper insights than most market gurus appearing on Bloomberg and CNBC.

From where I sit, the only hogwash is the stuff I've been reading from Bill Gross and others lately. Even after Fed tapering, there's plenty of liquidity in the global financial system to boost risk assets to record high levels. It will be a tough slug making money in stocks and bonds, but this ain't over, not my a long shot.

Sure, America's risky recovery is riskier than at any other time but the reason is that far too many market participants are buying the global hope trade, ignoring the bigger threat that's lurking when global deflation hits us. I think guys like Ron Mock and Tom Barrack are right to sound the alarm on illiquid alternative investments like real estate but even they will admit this silliness can remain with us for a lot longer than we think.

Also, if there truly is a global recovery underway, pay attention to emerging markets (EEM), including China (FXI), Brazil (EWZ) and Russia (RSX) and sector ETFs like energy (XLE), oil services (OIH) and metals and mining (XME) which are early cyclicals. I remain highly skeptical and think many investors are confusing powerful countertrend rallies due to currency fluctuations and are underestimating the real potential of global deflation down the road, especially if the Fed moves on rates too early.

Or maybe not. Sober Look is now warning that sentiment is shifting on U.S. inflation expectations and the new bond king, Doubleline CEO Jeffrey Gunlach, told CNBC's Scott Wapner that rates have bottomed and are heading back up. If so, watch out, the end may indeed be near, and it will be a long, hot summer. But I still hear the music playing, so for now relax and listen to Franky!


Another Dumb Attack On The ORPP?

The National Post weighed in on Canada's pension debate in an editorial comment, The Ontario Retirement Pension Plan Act — a costly, unneeded plan:
Unnoticed amid the budget hoopla last week, the Ontario Retirement Pension Plan Act was passed into law, authorizing the provincial government to annex a portion of the wages of millions of Ontarians, totalling $3.5-billion annually, to invest on their behalf. You will forgive us if we do not cheer. This is bad policy, as unnecessary as it is misconceived, and destined to cause much harm.

To its alleged necessity, first: the Wynne government continues to claim there is a pension “crisis,” on account of the vast numbers of Ontarians who are said to be chronically “undersaving.” There is no evidence of this. Between the Canada Pension Plan, Old Age Security, Registered Retirement Savings Plans, and other private savings vehicles, the vast majority of Ontarians are not only in no danger of indigence when they retire — poverty, at record lows for the population at large, is even lower among the elderly — but can maintain themselves at a standard of living comparable to that of their working years.

Experts advise this requires a retirement income of one half to two thirds of earnings. According to a study by economists Kevin Milligan and Tammy Schirle, virtually every Canadian household in the bottom two fifths of the income scale meets or exceeds the 50 per cent threshold. At higher incomes, it is true, you find greater numbers with inadequate savings, particularly where neither spouse has a workplace pension: overall, these account for about one in six households.

And that’s only if you ignore the increasing amounts of savings held outside RRSP-type instruments, or in the equity in people’s houses. So it’s not clear there’s any need to force even these individuals to save more, let alone forcing everyone to, even assuming one could: many will simply save less through their RRSPs to make up for the income the government takes from them.

And that, remember, is what’s involved here. The Wynne government likes to make it sound like a gift they are giving Ontarians. But the money workers will receive, eventually, is only money the government takes from them, now: it’s a forced savings plan, not a redistribution scheme. Which might be tolerable, if the government had a halfway sensible plan to invest it. There are disturbing signs it does not.

While the plan is often said to be based on the CPP — indeed, it is touted as a substitute for expanding the CPP — the government has often cited the Quebec Pension Plan approvingly. The CPP’s runaway costs, wildly inflated salaries and exploding payroll are themselves a source of concern, but it is at least notionally focused on maximizing returns to pensioners (even if it underperforms the market as often as not). But the QPP is something else again: through the Caisse de Dépot et Placement du Québec, it is mandated to use pensioners’ savings to support Quebec’s “economic development,” meaning whatever schemes come into politicians’ heads.

So when we read in Ontario budget documents that the plan, starting in 2017, will provide “new pools of capital for Ontario-based project such as building roads, bridges and new transit,” we may be excused for feeling the government has something other than pensioners’ best interests in mind. And to the extent that Ontarians realize this, they will be less inclined to see it as a savings plan, and more as a tax grab by another name. But by then it will be too late.
Wow! The imbeciles at the National Post have really outdone themselves. They must be pissed the NDP just booted out the Conservatives in Alberta in an election upset, and now they're targeting Ontario's new pension plan which just received legislative approval to begin collecting contributions from large companies starting on January 1st, 2017 (not sure when the plan begins operations).

To be fair, the National Post comment raises some good points but completely bungles up most others. First, I met Kevin Milligan and Tammy Schirle at a conference in Ottawa back in November 2013 and wrote about it in my comment on whether Canada is on the right path:
I think the presentation that got a lot of us thinking was the one by Kevin Milligan, an associate professor of economics at the University of British Columbia. He argued convincingly that lower income Canadians are better off in retirement now and forcing them to pay more into the CPP will leave them worse off. You can read the paper he co-authored with Tammy Schirle of Wilfrid Laurier University by clicking here. The two main conclusions of their paper are:

1) CPP reform that expands coverage for lower earners can do them harm--it transfers income from a period they are doing poorly (while working) to one in which they were already doing better (retired).

2) An expansion of the CPP that simply expanded the year's maximum pensionable earnings (YMPE) upwards would have nearly the same impact on combined public pension income as the PEI proposal, but with greater simplicity.
But there was no debating that expanding the CPP would benefit the bulk of working Canadians who don't have a workplace pension. Premier Kathleen Wynne said the province had to create its own retirement plan for the more than two-thirds of Ontario workers who don't have a pension at work because the federal government refuses to enhance the Canada Pension Plan.

Where else does the comment above fall short? It attacks the CPPIB's "runaway costs, wildly inflated salaries and exploding payroll" as a source of concern but fails to put it into proper context. I've also criticized Canada's pension plutocrats, some of whom I think are outrageously overpaid, but there is no denying that the Canadian governance model is the envy of the world and this is the main reason why Canada's large public pensions are global trendsetters.

The problem with compensation is that pretty much everyone working in finance is way overpaid and grossly self-entitled, some a lot more than others. And when you're a pension based in Toronto trying to attract talent, competing with big banks and Canadian hedge funds, you have to pay up or risk hiring mediocre/ inexperienced employees who won't help you deliver strong performance. At the end of the day, it's long-term  performance that counts and even though I take shots at some of Canada's senior pension executives for padding their compensation by beating their bogus private market benchmarks, they still have to deliver on their targets or else they can't collect their hefty payouts.

And there is no denying that Ontario has the best pension plans in the world. Go read my comment on Ontario Teachers' 2014 results as well as that on the Healthcare of Ontario Pension Plan's 2014 results. There are a lot of talented individuals working there that really know their stuff and you have to pay up for this talent. The same goes for CPPIB, OMERS, and the rest of the big pensions in Canada. If you don't get the compensation right, you're basically condemning these public pensions to mediocrity.

What else does the National Post comment miss? It completely ignores the benefits of Canada's top ten to the overall economy but more importantly, it completely ignores a study on the benefits of DB plans and conveniently ignores the brutal truth on DC plans.

But the thing that really pisses me off from this National Post editorial is that it fails to understand costs at the CPPIB and put them in proper context relative to other global pensions and sovereign wealth funds with operations around the world and relative to the mutual fund industry which keeps raping Canadians on fees for lousy performance. It also raises dubious and laughable points on the Caisse and QPP with no proper assessment of the success of the Quebec portfolio or why our large public pensions can play an important role in developing Canada's infrastructure.

But the National Post is a rag of a national newspaper and I would expect no less than this terrible hatchet job from its editors. The only reason I read it is to see what the dimwits running our federal government are thinking. And from my vantage, there isn't much thinking going on there, just more of the same nonsense pandering to Canada's financial services industry and the brain-dead CFIB which wouldn't know what's good for its members if it slapped it across the face (trust me, I worked as a senior economist at the BDC, the CFIB is clueless on good retirement policy and many other policies).

Below, Bradley Safalow, Founder and chief executive officer of PAA Research, joins BNN to discuss why it's time to short the Canadian housing market. I have no idea who this guy is but I've been short Canada and the loonie for a long time and think the crisis is just getting underway (never mind the recent pop in oil prices, they're heading lower once global deflation hits us hard).

This is another reason why I can't accept asinine arguments against the new Ontario pension plan or enhancing the CPP for all Canadians.  In my opinion, the longer we wait, the worst it will be down the road for millions of Canadians retiring in poverty.

Life and Death on Wall Street?

Janet Tavakoli sent me Nomi Prins'review of her new book, Decisions: Life and Death on Wall Street:
Janet Tavakoli is a born storyteller with an incredible tale to tell. In her captivating memoir, Decisions: Life and Death on Wall Street, she takes us on a brisk journey from the depravity of 1980s Wall Street to the ramifications of the systemic recklessness that crushed the global economy. Her compelling narrative sweeps through her warnings about the dangers of certain bank products in her path-breaking books, speeches before the Federal Reserve, and in talks with Jaime Dimon.

She probes the moral complexity behind the lives, suicides and murders of international bankers mired in greed and inner conflict. Some of the people that touched her Wall Street career reflect broken elements of humanity. The burden of choosing money and power over values and humility translates to a loss for us all.

To truly understand the stakes of the global financial game, you must know its building blocks; the characters, testosterone, and egos, as well as the esoteric products designed to squeeze investors, manipulate rules, and favor power-players. You had to be there, and you had to be paying attention. Janet was. That’s what makes her memoir so scary. In Decisions, she breaks the hard stuff down with humor and requisite anger. As a side note, her international banking life eerily paralleled my own - from New York to London to New York to alerting the public about the risky nature of the political-financial complex.

Her six chapters flow along various decisions, as the title suggests. In Chapter 1 “Decisions, Decisions”, Janet opens with an account of the laddish trading floor mentality of 1980s Wall Street. In 1988, she was Head of Mortgage Backed Securities Marketing for Merrill Lynch. Those types of securities would be at the epicenter of the financial crisis thirty years later.

Each morning she would broadcast a trade idea over the ‘squawk box.‘ Then came the stripper booked for a “final-on-the-job-stag party.” That incident, one repeated on many trading floors during those days, spurred Janet to squawk, not about mortgage spreads, but about decorum. Merrill ended trading floor nudity and her bosses ended her time in their department. Her bold stand would catapult her to “a front row seat during the biggest financial crisis in world history.” Reading Decisions, you’ll see why this latest financial crisis was decades in the making.

In Chapter 2 “Decision to Escalate”, Janet chronicles her work with Edson Mitchell and Bill Broeksmit, who hired her to run Merrill’s lucrative asset swap desk after the stripper incident. Bill and Janet shared Chicago roots and MBAs from the University of Chicago. Janet became wary of the serious credit problems lurking beneath asset swap deals, many of which involved fraud. The rating agencies were as oblivious then, as they were thirty years later. Transparency was important to Janet. She and Bill “agreed to clearly disclose the risks—including [her] reservations about “phony” ratings.” Many Merrill customers with high-risk appetites didn’t care. They got burned when the underlying bonds defaulted. Rinse. Repeat.

During that time, Janet penned a thriller, Archangels: Rise of the Jesuits, eventually published in late 2012. It probed the suspicious death of shady Italian banker Roberto Calvi. In June 1982, Calvi was found hanged from scaffolding under London’s Blackfriars Bridge. Ruled a suicide, the case re-merged in 2002 when modern forensics determined Calvi was murdered. Neither Bill nor Janet bought the suicide story; though Bill joked he’d never hang himself.

Janet and I both moved to London in the 1990s, I left Lehman Brothers in New York for Bear Stearns in London in 1993 to run their financial analytics and structured transactions (F.A.S.T.) group. Those were heady days for young American bankers. We all wanted to be in London where the action was. Edson Mitchell and Bill Broeksmit wound up working for Deutsche Bank in London in the mid 1990s.

In 1997, Edson asked Janet to join him at Deutsche Bank given her expertise in structured trades and credit derivatives. The credit derivatives market was an embryonic $1 trillion. By its 2007 peak, it was $62 trillion. She declined. Edson died three years later in a plane crash.

In Chapter 3, “A Way of Life”, Janet describes her personal epiphany and public alerts about credit derivatives and the major financial deregulation that would impact us all. In 1998, she wrote the first trade book warning of those risks, Credit Derivatives: Instruments and Applications. A year later, on November 12, 1999, the Clinton Administration passed the Gramm-Leach-Bliley Act that repealed the 1933 Glass-Steagall Act that had separated deposit taking from speculation at banks. In 2000, President Clinton signed the Commodity Futures Modernization Act that prevented over-the-counter derivatives (like credit derivatives) from being regulated as futures or securities. His Working Group included former Treasury Secretary and former co-chair of Goldman Sachs, Robert Rubin, Treasury Secretary Larry Summers, and Federal Reserve Chairman Alan Greenspan.
With Glass-Steagall gone, banks had the green light to gamble with their customers’ FDIC-insured deposits and enter investment-banking territory through mergers. They “used their massive balance sheets to trade derivatives and take huge risks.” Our money became their seed money to burn.
Once the inevitable fallout from this government subsidized casino unleashed the financial crisis of 2008, bank apologists, turned star financial journalists like Andrew Ross Sorkin would say the repeal of Glass Steagall had nothing to do with the crisis, since the banks that failed, Bear Stearns and Lehman Brothers were investment banks, not commercial banks that acquired investment banks. That argument missed the entire make-up of the post-Glass Steagall financial system. Investment banks like Lehman Brothers, Bear Stearns and Goldman Sachs had to over-leverage their smaller balance sheets to compete with the conglomerate banks like Citigroup and JPM Chase. These mega banks in turn funded their investment bank competitors who concocted and traded toxic assets. They supplied credit lines for Countrywide’s subprime loan issuance. Everyone could bet on the same things in different ways.

While Janet’s 2003 book, Collateralized Debt Obligations & Structured Finance explained the architecture and risks of CDOs and credit derivatives, her 1998 book became an opportunists’ guide. One type of credit derivatives trade, a ‘big short’ that profited when CDOs plummeted in price, gained notoriety when Michael Lewis wrote a book by that name. Michael Burry, the man Lewis chronicled, ultimately testified before the Financial Crisis Inquiry Commission that, among other things, he read Janet’s 1998 book before trading. Lewis wrote of the aftermath, Janet’s analysis contributed to the main event. Taxpayers took the hit.

As the securitization and CDO markets exploded in the 2000s, credit derivatives linked to CDOs stuffed with subprime-loans became financial time bombs. Janet was one of a few voices with in-depth knowledge of the structured credit markets, sounding alarms. Her voice, and those of other skeptics (myself included) were increasingly “marginalized” by a media and political-financial system promoting the belief that defaulting loans stuffed into highly leveraged, non-transparent, widely-distributed assets wrapped in derivatives were no problem.

In early June 2010, Phil Angelides, Chairman of the Financial Crisis Inquiry Commission (FCIC) questioned former Citigroup CEO Chuck Prince and Robert Rubin (who became Vice-Chairman of Citigroup after leaving the Clinton administration. ) They denied knowing Citigroup had troubles until the fall of 2007. Incredulously, Janet listened as Angelides accepted their denial even though Citigroup was hurting in the first quarter of 2007 due to their $200 million credit line to Bear Stearns whose hedge funds had imploded.

So many lies linger. According to Janet, “One of the most unattractive lies of the 2008 financial crisis was that investment bank Goldman Sachs would not have failed and did not need a bailout.” But then-Treasury Secretary and former Goldman-Sachs Chairman and CEO, Hank Paulson rejected an investment bid in AIG from China Investment Corporation while AIG owed Goldman Sachs and its partners billions of dollars on credit derivatives wrapping defaulting CDOs. That enabled him to arrange an AIG bailout to help Goldman Sachs recoup its money at US taxpayers’ expense.

Goldman Sachs claimed it was merely an intermediary in those deals. Janet exposed a different story – presenting a list of CDOs against which AIG wrote credit derivatives protection. Underwriters of such deals are legally obligated to perform appropriate due diligence and disclose risks. Goldman Sachs had been underwriter or co-underwriter on the largest chunk of them, an active, not intermediary role. Some deals were inked while Paulson was CEO.

In Chapter 4 “Irreversible Decision,” Janet circles back to Deutsche Bank and her old boss, Bill. The SEC was investigating allegations that Deutsche Bank didn’t disclose $12 billion of credit derivatives losses from 2007-2010. In a 2011 presentation, Bill said the allegations had no merit. Meanwhile, Deutsche Bank faced investigations into frauds including LIBOR manipulation, helping hedge funds dodge taxes, and suspect valuation of credit derivatives.

Janet reveals the dramatic outcome of those investigations in Chapter 5, “Systemic Breakdown.” On January 26, 2014, Bill Broeksmit, 58, hung himself in his home in London’s Evelyn Gardens (the block where I first lived when I moved to London for Bear Stearns.) She was shocked by the method. Bill had made clear his “aversion to death by hanging.” Those decades in finance had crushed him.

Six months later, a Senate Subcommittee cited Deutsche Bank and Barclays Bank in a report about structured financial products abuse. Broeksmit’s email on synthetic nonrecourse prime broker facilities was Exhibit 26. Banks had placed a large chunk of their balance sheets at risk, flouting regulations, and enabling a tax scheme. From 2000 to 2013, the subcommittee reported hedge funds may have avoided $6 billion in taxes through structured trades with banks.

Finally, in Chapter 6, “Washington’s Decision: “A Bargain,”” Janet reminds us that September 2015 marks the seventh anniversary of the financial crisis. She calls Paulson and Rubin financial wrecking balls for their role in the crisis and cover-up.

She ends Decisions on the ominous note that “the government tried to hide the real beneficiaries of the bailout policies – Wall Street elites – behind a mythical idea of a “crisis of confidence” if we prosecuted, arrested, and imprisoned crooks. “

The real crisis of confidence though, is due to the clique of inculpable political and financial leaders. Alternatively, she writes, “If we indicted fraudsters, raised interest rates, and broke up too-big-to-fail banks, people would have more confidence in our government and in the financial system..”

Instead, we get Ben Bernanke espousing the "moral courage" it took to use taxpayers’ money and issue debt against our future to subsidize Wall Street over the real economy, allegedly for our benefit. Big banks are bigger. Wealth inequality is greater. Economic stability has declined. The bad guys got away with it. Read Janet’s illuminating book to see how and to grasp the enormity of what we are up against.
I thank Janet Tavakoli for sending me Nomi Prins' review and look forward to reading her book. My own thinking on the subject is the origins of the 2008 crisis can be traced back to the Clinton Administration and how Summers, Rubin and Greenspan ignored the dire warning of Brooksley Born, the then chairperson of the CFTC. 

Amazingly, Bill Clinton is revered in the U.S. as one of the best presidents ever, but the damage his administration ended up doing to the economy (along with George W. who continued deregulating Wall Street) is unprecedented. And now Hillary Clinton and Jeb Bush are prepping up for the 2016 elections, which tells me the status quo will continue as they too will pander to their Wall Street masters. U.S. politics is hopelessly corrupt and George Carlin was dead on: "It's called the American dream because you have to be asleep to believe it."

But there is something else that people don't understand, something the Greek finance minister Yanis Varoufakis discussed in his book, The Global Minotaur. The entire world economy is geared on recycling America's debt back into Wall Street. Far from being a negative, America's power grows along with its debt. Current account surpluses in Germany, Japan and elsewhere are allowed as long as the profits are funneled right back into Wall Street. 

"It's all bullshit and it's bad for you!" as Carlin rightly noted a long time ago. This is why I worry about inequality growing by leaps and bounds as more people retire penniless in the United States of Pension Poverty

U.S. and Canadian pensions also fell victim to the hubris on Wall Street. I wrote about my experience at PSP Investments and the Caisse in my comment on CPPIB's struggle with bold investment bets:
As far as organizational issues, I can tell you from my experience working at the Caisse and PSP Investments, big funds mean big egos. There are plenty of arrogant jerks working at these funds, foolishly believing they're "king shit" because they hold a chair. Trust me, once you lose your chair, nobody gives a damn about you unless of course you invest huge sums in a fund and plan your exit strategy while the folks at the Auditor General of Canada are snoozing at the wheel (what a scandal!).

Now, I don't know Don Raymond and don't think he has a huge ego (even if he is an ex Goldman alumnus, he's not a "big, swinging dick"). But his bias on quantitative investing was ridiculous to the point where you still can't apply to CPPIB's Public Markets unless you program C++ and are a derivatives and econometrics expert with a MSc in Finance and a CFA (a bunch of credentials that look good but mean nothing when it comes to making money in these markets).

I have an MA in Economics from McGill. During my undergrad years, I did my minor in mathematics at that same university. I also took honors history of economic thought and honors econometrics courses with Robin Rowley who taught us how to critically examine a lot of the quantitative nonsense being published in respected economic journals. Rowley graduated from the London School of Economics (LSE) at the same time as David Hendry, one of the best and most respected econometricians in the world who is equally skeptical on a lot of nonsense being published out there.

At McGill, I was also fortunate to take courses in comparative economic systems with Alan Fenichel and underground economics with Tom Naylor, the combative economist who taught us what is really going on in the world and to ignore the neoclassical garbage our other professors were teaching us. I also took and audited courses in political philosophy with Charles Taylor, a world-renowned philosopher (and the only professor who gave me intellectual orgasms in each and every class).

All this to say, I'm against the Don Raymond school of thought and the tyranny of quants and think a lot of Canada's large public pension funds are too busy hiring quants programming a lot of malakies (Greek word for wankers) and not enough thinkers from diverse backgrounds who can fundamentally and critically analyze what is going on in the global economy.

In the summer of 2006, right before I was wrongfully dismissed by PSP Investments, I did some research on the U.S. housing bubble and looked at the issuance of CDOs (collateralized debt obligations), including CDOs-squared and CDOs-cubed. I showed my findings to PSP's senior management and in particular, I showed them one chart on CDO issuance that scared the hell out of me (click on image below):


But the 'quant experts' shrugged it off and kept doing what they were doing, like using PSP's AAA balance sheet to sell credit default swaps (CDS) and buy as much asset backed commercial paper (ABCP) as the National Bank and Deutsche Bank were selling them. That didn't end well for PSP and exacerbated their huge losses in fiscal year 2009. It was even worse for the Caisse but that ABCP scandal is being covered up by Quebec's media
Unfortunately, Gordon Fyfe, the former president of PSP, didn't listen to my dire warnings back in 2006, but that's fine because even though PSP lost billions in FY 2009, Mr. Fyfe and his senior managers still collected hefty payouts that year and in the following years trouncing their bogus private market benchmarks. Interestingly, the Auditor General of Canada, ignored PSP's tricky balancing act in its report slamming public pensions, but all is good in Canada where we have "world class pension governance" as long as the pension plutocrats make off like bandits.

You'll forgive my cynical sarcasm but sometimes I think to myself I should write my own book and title it "Pension Phonies." I've seen the good, bad and downright ugly in the pension industry and continue to write about it even though what I really want is to get back to work and stop blogging altogether. Unfortunately, Canada's 'powerful pension titans' are not helping me in this regard but that's alright, as long as I'm healthy, nothing else really matters.

In her book, Janet discusses banker suicides and I can tell you what my dad, a psychiatrist with over 40 years of clinical experience, keeps telling me: "Depression is very common in society. Almost 10% of the population will suffer from it at one point in their life and it doesn't matter who they are or how rich they are. In most cases, it's easily treatable but you have to recognize symptoms and get the care you need."

This means that there are people right now working at Goldman, JP Morgan, the Caisse, PSP, Ontario Teachers and pretty much everywhere who are depressed and are probably trying to cope as best as they can. Luckily depression can easily be treated with proper care and medication but there are unfortunately cases of people who take their own lives because they can't cope with their depression. It has nothing to do with working in high finance, although the stress of these jobs is a silent killer.

Below, PBS Frontline presents The Warning. Take the time to watch the story of Brooksley Born because it will go down in history as the biggest monumental failure in regulating Wall Street.

Hedge Funds Prepare For War?

Miles Johnson of the Financial Times reports, Hedge funds dig deep for greater returns:
When the latest intake of hedge fund analysts arrived for their first day of work they might have imagined a life of poring over spreadsheets, and routine research trips to shiny corporate headquarters.

More recently, however, they might instead be expected to scope out an egg factory in a remote war zone, or eye up the quality of the brick work on an office block in the north of England.

Faced with meagre returns on bonds and highly valued stocks, an increasing number of hedge fund managers are seeking out more adventurous opportunities in order to deliver the type of high returns investors expect from the industry.

“Hedge fund managers are looking at more esoteric investments when they are looking for yield,” says Russell Barlow, head of hedge funds at Aberdeen Asset Management. “Yields have come in across the board, and as yields continue to compress across the more mainstream asset classes some managers are choosing to look further afield.”

Many hedge funds that specialise in credit have reached a point in the market cycle where most of their successful trades have become crowded and difficult to navigate. Over the past year investors in these hedge funds say they have become more used to managers pitching them ideas that would previously have been seen as edgy for even the most risk-tolerant.

An investor describes a pitch by one hedge fund to provide working capital loans to food exporters in Ukraine, such as egg factories, where double digit returns were promised for tying up money for 60 to 90 days.

“These sorts of trades usually involve only a small amount of exposure, but you need to take on war risk and political risk to get it done,” the investor says. “These funds are not specialists in this sort of thing, but in a world where spreads are at all-time lows they are just trying to find returns.”

Another group of hedge funds, according to their lawyer, who wanted to remain anonymous, last year explored the idea of buying up the euro-denominated Cypriot bank accounts of Russian citizens who had been placed under sanctions. By offering a so-called haircut to the holders, they hoped to make a quick return once the situation normalised, but the scheme was eventually scuppered by compliance fears, the lawyer said.

Investors say that while hedge fund managers argue they only seek to take on small pockets of risk that they understand, most are reluctant to be seen in public to be dabbling in the darker corners of the international markets.

The shadow of the pre-2008 world of hedge funds betting on highly illiquid holdings only to lose large amounts of money during the crisis still hangs over the industry.

At the same time, some of their investors, many of whom are large institutions such as pension funds, are more willing to accept risker propositions at a time when they are starved of returns elsewhere.

“Some hedge funds are going out to less liquid instruments, but they also have their investors pushing them that way,” says Mr Barlow of Aberdeen. “We are reluctant to be taking that same path, unless we have a structure and a mandate to do this. The risk is investors are just focusing on yield and may not be focusing on things like liquidity risk.”

Other hedge fund managers have focused their efforts on the more humdrum world of peer-to-peer and secured property lending. Omni Partners, a London-based hedge fund, has recently raised $45m of a planned $250m fund that makes short-term loans predominantly to developers across the UK secured against their properties.

Steve Clark, Omni Partners’ founder, argues that the 10.4 per cent net return delivered by the first incarnation of the fund last year demonstrates it is possible to generate double-digit performance through alternative lending without taking on large risks.

“There’s continued demand from investors for an unlevered high yield strategy that has the key characteristics of superior asset quality and short tenor,” he says.

Yet for the hedge funds that are trying to navigate a world of meagre yields, there are others who have decided the best strategy for a market they view as overvalued is to bet against it.

Crispin Odey, in this case an investor focused on stocks rather than credit, recently became one of the first well known hedge fund managers to position for a big fall in the stock market, based in part on his belief that the end of quantitative easing in the US could trigger large and unintended consequences across global markets.

One part of this strategy has been to use the shares of asset managers as a proxy for betting on a sell-off in emerging markets, as well as taking out numerous other so-called short positions against unprofitable companies he thinks investors have tolerated only due to low interest rates.

Other equities-focused hedge funds have eschewed the larger macroeconomic call of Odey, and instead continued to look for individual opportunities to make money through short selling.

Kyle Bass, founder of Dallas-based Hayman Capital Management, earlier this year said he would bet against pharmaceuticals companies while at the same time mounting legal challenges against drug patents he believed were unenforceable.

Managers such as these will need to have strong stomachs to withstand the long periods of paper losses that contrarians must endure, and for now it appears only a few feel bold enough to make outright bets against the status quo. For the rest, if interest rates continue to remain low they may need to get increasingly accustomed to trips to war zones to make money.
Whenever I read comments like “hedge fund managers are looking at more esoteric investments when they are looking for yield,” my antennas immediately go up. While lending money to egg factories in the Ukraine sounds cool, it tells me hedge funds are increasingly taking dumber risks in search of higher yields.

Right now, credit hedge funds are on a rampage, poaching talent away from bond dealers and lending money to anyone who needs a loan. Lawrence Delivingne of CNBC reports, For small biz, hedge funds are the new banks:
Investor Leon Black, like many peers, has urged caution given high market valuations. But the Apollo Global Management CEO said his $163 billion firm is rapidly expanding one of its business lines: lending money.

"Credit in general is a huge, huge opportunity today," Black said last week at the Milken Institute Global Conference in Los Angeles, noting the diminished role of banks in providing loans.

Black's Apollo is one of many investors to see the opportunity.

A new paper from the Alternative Investment Management Association, a London-based hedge fund lobbyist, estimates that private debt funds—including hedge and private equity funds, among others—now manage about $440 billion globally, with $64 billion of new capital allocated to the sector last year alone, per Preqin data.

The surge in activity from private lenders, according to AIMA, is a boon for smaller companies.

"Many small and medium sized businesses would miss out on growth opportunities or fail altogether if it were not for the absolutely vital support of hedge funds and other alternative asset managers," AIMA CEO Jack Inglis said in a statement.

Hedge funds and others in the space usually provide loans of between $25 million and $100 million, often for periods of one to three years, according to AIMA's survey. About 65 percent of companies taking the loans typically have earnings before interest, tax, depreciation and amortization of between $5 million and $75 million.

The report notes that the companies lent to are typically too small to raise capital through the public bond market and banks have been more reluctant to lend to them because of stricter standards following the 2008 financial crisis.

The most popular sectors for lending are consumer goods and services, healthcare, industrial, and real estate, according to AIMA's survey of private fund managers.

Examples of recent loans from U.S. firms given by AIMA include private equity shop KKR & Co giving an approximate $12 million loan to help grow a Scottish wind farm; a $26 million loan from hedge fund firm Pine River Capital to an American aircraft parts dealer for purchasing a target company; and Avenue Capital, another hedge fund manager, lending money to investment firm H.I.G. Europe to help it buy consumer loan broker Freedom Finance Nordic.

Another benefit of the private lending, according to AIMA, is systemic: instead of a few big banks, there are lots of funds to share the risk, and the funds use relatively little borrowed money to amplify their bets, so-called leverage.
So hedge funds and private equity funds are now lending to small businesses starving for credit. Having worked as a senior economist at the Business Development Bank of Canada (BDC), a Crown corporation that finances and consults small and medium-sized enterprises, I can only wish these private debt funds a lot of luck making money in this area.

True, U.S. job growth rebounded last month and the unemployment rate dropped to a near seven-year low of 5.4 percent, which bodes well for lending to small and medium-sized enterprises, but there's still plenty of slack in the economy with the number of Americans not in the labor force rising to a record 93.2 million (most of those unemployed are women). Moreover, America's risky recovery poses serious challenges to the economy and can come back to haunt these private debt lenders.

Does this mean hedge funds are better off following Crispin Odey and Hayman Capital Management and short the stock market as a whole or segments of the stock market? Nope. I don't buy arguments from Bill Gross and others that the end is near and think stocks are heading much higher but it will be a tough slug making money in these markets.

Still, all this talk of a buyback and biotech bubble is pure nonsense. Apple (AAPL) dove into the bond market this week, completing an $8 billion bond sale and said it will use the proceeds to help pay for share buybacks and dividends, part of an expanded capital-return program for shareholders the company announced last month.

And just this week, Alexion bought out Synageva BioPharma (GEVA) for $8.4B, sending its shares soaring by more than 100% (click on image):

And who are the top institutional holders of this biotech? Who else? The Baker Brothers and their partner in biotech crime, Big Boston (Fidelity), which pretty much own all the top biotech companies out there (click on image):

Tell Julian and Felix Baker the biotech bubble is about to burst as they laugh all the way to the bank! This is why I track their portfolio along with that of other top funds every quarter. They don't always pick ten baggers but they've scored huge on a number of their top picks.

Getting back to hedge funds preparing for war, I think the big war they need to prepare for is institutions looking to transform their fee structure. In fact, one of the questions asked at the SALT Conference in Las Vegas this week was whether hedge fund fees are too high.

Consider this, in the hedge fund world, even a mediocre year can be a very lucrative one:
Last year, the world’s top 25 hedge fund managers earned roughly half their 2013 income and the smallest amount since the 2008 financial crisis. But that still translated into astronomical paychecks: their collective income was $11.6 billion.

Consider the estimated 2014 paycheck for Jonathon S. Jacobson, founder of Boston-based Highfields Capital Management. The former Harvard University endowment manager accustomed to rock star status in his field made $50 million, according to an annual list published this week by Institutional Investor’s Alpha, a trade publication.

Jacobson’s compensation may seem spectacular, but it amounted to just one-tenth of the $500 million he is estimated to have made the previous year. And Highfields, which manages $12.5 billion, produced a percentage return only in the low-single-digits.

Among the top 25 hedge fund managers, the average pay was $467 million last year, down from $846 million in 2013, according to Institutional Investor’s calculations. Three earned more than $1 billion last year. Jacobson just barely made the top 50, coming in last on the list.

The only other Massachusetts investor on the roster was Seth Klarman, chief executive of Baupost Group, one of Boston’s largest hedge fund firms, with $28.5 billion under management. Klarman ranked number 26, with estimated pay of $170 million last year.

Klarman is considered a value investor who looks for bargains and unusual investments. As energy investments tanked last year, for instance, Baupost started looking for deals, according to a Bloomberg News report.

The firm delivered returns of 7 to 8 percent last year, according to a person briefed on the results.

That may sound modest to ordinary investors, who typically gauge their returns against the Standard & Poor’s 500 index of large stocks, which rose 13.7 percent last year. But that’s not the only measuring stick many hedge fund clients use.

Industrywide, the average hedge fund return last year was 2.9 percent, according to the Barclay Hedge Fund Index, which gathers data from thousands of firms. Within that universe hedge fund managers produce varying results with many approaches, from betting that stocks will rise or fall to investing in bonds, commodities, market sectors, and numerous other styles. Many of those funds struggle in periods when stocks are rising sharply.

“The equity market has been having quite a nice run. Almost anything that diversifies away from that will be lower [in returns] by definition,’’ said Robert J. Waid, a managing director at Wilshire Associates Inc., a Santa Monica, Calif., investment consulting firm.

Historically, many hedge fund managers have become famous, and wealthy, with aggressive strategies that produced big returns. Investors have been willing to pay their large fees — typically, 2 percent of assets plus 20 percent of profits — in the search for substantial gains.

But many institutional investors, like pension funds and endowments, allocate a portion of their money to hedge funds for an entirely different reason: to protect them when the market falls.

The Massachusetts state pension fund has 9 percent of its $61 billion in hedge funds, even as the nation’s largest public pension fund, the California Public Employees’ Retirement System, last year said it would exit the sector entirely.

Michael Trotsky, executive director of the Massachusetts fund and a former hedge fund executive himself, said he looks for hedge fund returns to come out somewhere between those of bonds and stocks. More than anything, he wants them to be less risky than stocks.

“Hedge funds are not as volatile as stocks — or as the S&P 500 — nor should they have the same returns,’’ Trotsky said.

He said there are some “great hedge funds” that don’t go up and down in ways tracking stock market performance. “We’re willing to pay for that,” Trotsky said.

The Institutional Investor’s rankings, now in their 14th year, are estimates based on such factors as the hedge funds’ rate of return and the fees they charge investors. Neither Klarman nor Jacobson would comment on the report.

Despite last year’s relatively low return numbers, investors are still putting money in hedge funds because they think they’ll outperform other investors over time, according to Institutional Investor’s editor, Michael Peltz.

“They’re looking at net returns after fees,” Peltz said. “And more often than not, these top managers over time have net returns better than the overall market.”
MassPRIM's Michael Trostky sounds like the typical hedge fund industry claptrap, making lame excuses for many underperforming hedge funds charging astronomical fees as they deliver mediocre returns.

Sure, there are great hedge funds but I couldn't care less if Ken Griffin dethroned David Tepper as the king of hedge fund pay, this is all nonsense to me. These overpaid hedge fund managers are raking in unbelievable fees because dumb pension and sovereign wealth funds are toppling over themselves to pile into hedge funds and other alternative investments instead of chopping their fees in half and doing away with that goddamn management fee which promotes asset gathering at the expense of performance when hedge funds get too large

Should Ray Dalio, Ken Griffin, David Tepper, Jim Simons, Bill Ackman and a host of other well known hedge fund gurus charge a 2% management fee on the multi billions they manage on behalf of hard working teachers, police officers, firemen, and public sector workers? Hell no! These guys and their grossly overpaid private equity counterparts are raking it in, moving up in the ranks of the world's rich and famous all because of the collective stupidity of global pensions and sovereign wealth funds.

"Leo, Leo! You're too harsh on hedge funds and private equity funds just like you're too harsh on Gordon Fyfe, PSP, the Caisse and Canada's pension plutocrats." Maybe I'm too harsh but I'm not collecting multi billion or multi million payouts gathering assets from dumb institutional investors or beating bogus private market benchmarks over a four-year rolling return period. I make my money one trade at a time, and I earn it the good old fashion way, by working my ass off to make money in increasingly schizoid markets.

But that's one aspect of my life I truly love. Making money in stocks and then going to the gym and hitting a nice terrace for lunch to enjoy the beautiful weather we've been blessed with in Montreal. It would be nice if all these overpaid hedge fund, private equity and pension fund managers I routinely rip into subscribed or donated to my blog, but I understand, why feed the 'monster' which exposes your industry's dirty little secrets? -:)

Better yet, why don't all these hedge funds with more money than they obviously know what to do with give me some funds so I can gather talent and set up a hedge fund right here in Montreal? I guarantee you we'll perform better than most top funds gathering assets and we'll definitely make more than funds lending money to egg factories in the Ukraine. And we'll charge you 1 & 10 until we raise a billion after which it will be 0.25 & 10!

On that note, I am off to enjoy my day. Below, Kynikos Associates founder Jim Chanos discusses short selling, his investment ideas and hedge-fund manager Daniel Loeb’s comments on Warren Buffett. He speaks on "Market Makers" from the 2015 Las Vegas Skybridge Alternatives Conference.

Dan Loeb can trash Warren Buffett all he wants but if you ask me, the Oracle of Omaha and the undisputed king of hedge funds, George Soros, are right to warn pensions to steer clear of hedge funds. Most institutional investors are clueless on the real risks of hedge funds and other alternative investments.

Also, York Capital Management's Michael Weinberger discusses the state of capital markets and the outlook for M&A activity with Bloomberg's Stephanie Ruhle and Erik Schatzker at the SkyBridge Alternatives Conference in Las Vegas. I like Chanos and Weinberger, unlike most hedge fund clowns, they know what they're talking about. Listen carefully to their comments.



The Greek Disconnect?

John Hooper of the Guardian reports, Greece’s plight at odds with public's lack of concern as default deferred – for now:
“Nothing will change this week,” said Aris Karnachoritis confidently as the waitress handed out bottles of beer and frosted glasses to him and his friends.

Constantinos Neocleous, sitting beside him at a table on the beach at Vouliagmeni near Athens, nodded in agreement. “It’s not in anyone’s interests to have a crisis now,” he said.

Beyond the beach lay shallow waters of radiant turquoise. Children paddled. Teenagers romped. And from nearby, where a group of young men were playing beach tennis, came the comforting “plock-plock” sound of bat on ball.

The talks between Alexis Tsipras’s government and its creditors have dragged on for so long that it has become hard to believe there will ever be a decisive make-or-break juncture. And never has that been harder to believe than now, with the arrival of summer and the entrancing distractions it brings to a country like Greece.

There is a striking disconnection in Athens between the blithe lack of concern that the government evinces, and which it has successfully communicated to much of the public, and the objective seriousness of Greece’s plight.

This week Greece and the eurozone face a week of fresh nail-biting uncertainty as the single currency area’s finance ministers prepare to report on progress towards an agreement with Tsipras’s government. On Tuesday Greece is due to repay €770m (£560m) to the IMF.

A deal with its creditors – the European commission, the European Central Bank (ECB) and the International Monetary Fund (IMF) – on moves to liberalise the economy would give it access to the remaining €7.2bn from a €240bn bailout. But it has refused to budge on two “red-line” demands – for pension cuts and looser rules on hiring and firing – and hopes of reaching an agreement in time for a meeting of the finance ministers on Monday have gradually seeped away.

On Thursday Greece’s finance minister, Yanis Varoufakis, promised that the IMF would nevertheless get its money. Armageddon – a Greek default on its borrowings followed in all likelihood by exit from the eurozone – may once again have been postponed. But for how long?

Beyond the IMF deadline loom far bigger repayments the government has to make to the ECB in the summer. Yet it is already so desperately short of funds that it has ordered local authorities and public bodies to turn over their cash reserves to the central bank.

“We have only the money to pay for this month,” conceded Karnachoritis, a young civil engineer, as he sipped his beer. “But that has been the situation for the past two months.” Like his companions, he thought it would take several more months to reach an agreement. “I don’t believe anything will happen before September,” he said.

Certainly, the government could do with time to lower the expectations it created and which swept Syriza to power last year: expectations it could renegotiate the terms of Greece’s bailout and convince Angela Merkel to abandon fiscal austerity.

In 2014 the Greek economy started to grow again. But last week the European commission cut its estimate for GDP growth this year to a miserly 0.5%

The evidence of real and painful economic hardship is subtle in Athens. But it is there.

As it passes through Dafni, a suburb of the capital, the road to Vouliagmeni becomes a shopping area. About four out of every five shops has closed.

“The owners of the shops think the reason they have no customers is because of a mall that opened up nearby,” said Nikos Servios, from the nearby Neos Kosmos district, who went to buy a pair of shoes. “But I’ve been to the other mall and most of the people go there to window-shop, watch a movie – it has a cinema – or drink a coffee. Nobody is buying.”

In the centre of Athens, the executive of a manufacturing company described how his firm was having to pay in advance for imported components because the exporters could not insure their credit risk.

“We are paying up front to companies the firm has dealt with for 20 years. That hurts. And it costs,” said the executive, who requested anonymity because he was not authorised to speak on behalf of his employers.

Kostas Panagopoulos, of Alco Polls, said a survey he carried out last month indicated the public was already resigned to compromise: 52% of respondents said they wanted a deal with Greece’s creditors “even if the prime minister had to step over those red lines”.

Tsipras’s real challenge, said Panagopoulos, is to “overcome the resistance of groups within his own party and that of the small right-wing party” with which Syriza is in coalition. Panagopoulos thought the prime minister’s most likely course would be to go to the country with a referendum.

On Friday when Tsipras reported to parliament on the negotiations, he left a notebook behind. The journalists who seized on it found he had drawn a doodle of a ballot box.

“I believe he did that on purpose,” said Panagopoulos.

In recent days Tsipras’s ministers appear to have embarked on a drive to push out the time horizon for a solution. Varoufakis suggested Monday’s meeting could be a “platform” for an eventual accord. On Thursday the deputy prime minister, Yannis Dragasakis, told the Guardian the government no longer wanted an interim deal but a comprehensive agreement.

The question is whether the time is there to be won. A referendum cannot be arranged overnight. Yet there are doubts about whether – even if the government repays the IMF on Tuesday – it will have enough cash left for pensions and wages come the end of the month.

Pressure is building elsewhere. The ECB has been propping up Greece’s commercial banks with emergency lending that the other eurozone countries, which are the ECB’s shareholders, fear may never be repaid. Last week saw a reportedly “intense” meeting at the central bank’s Frankfurt headquarters as some countries lobbied for the imposition of tougher conditions. That, however, could prompt a loss of confidence in Greece’s financial institutions and a run on its commercial banks’ deposits.

Not everyone views the situation with equanimity. Seating at a nearby table in the restaurant-bar at Vouliagmeni, dressed in ripped denim shorts and a crocheted bikini top, was Rania Mavroyani, who said she lived off property that had been left to her.

“I’m worried, because I don’t know what’s going to happen,” she said

Might Greece be better off leaving the eurozone and going back to the drachma?

“The drachma?” she repeated, and even through her sunglasses there was no mistaking the alarm in her eyes. “I don’t want it back. We must belong to Europe,” she said.

But was a return to Greece’s pre-euro currency a possibility?

“It [is a possibility,” said Mavroyani. “And it scares me.”
I'd be scared too if I were living in Greece but most Greeks are either hopelessly delusional believing whatever Tsipras and his cronies are feeding them, or just so disillusioned with the entire process of endless discussions which go nowhere that they're praying for a miracle. But drachma or no drachma, they know they're in for a lost decade or possibly much worse.

In his article, Greece's 'war cabinet' prepares to battle EU creditors as anger mounts, Ambrose Evans-Pritchard notes the following:
German finance minister Wolfgang Schauble said over the weekend that Greece risked spinning into default unless there was a breakthrough soon. "Such processes also have irrational elements. Experiences elsewhere in the world have shown that a country can suddenly slide into insolvency," he told the Frankfurter Allgemeine.

Greek officials retort that this is a conceptual misunderstanding by the German and North European authorities. Syriza officials say they may trigger the biggest sovereign default deliberately if pushed too far, concluding that it is a better outcome than national humiliation and the betrayal of their electoral vows to the Greek people.

"If it comes to the crunch, Greece must default and go its way," said Costas Lapavitzas, a Syriza MP and member of the party's standing committee. "There is no point raiding pension funds to buy time. We just exhaust ourselves for no purpose."

"We went up and down Greece in the elections urging the voters to throw out the old government. The question now is whether we mean what we say, and whether we have the courage of our convictions."

Officials say Russian president Vladimir Putin has offered Greece roughly €2bn up-front to smooth the way for the so-called "Turkish Stream" gas pipeline. While this would allow Greece to meet its IMF payments in May and June and then default later to the European Central Bank - deemed the real foe - it would not solve any of Greece's problems.

The implicit quid pro quo would be a Greek veto on an extension of Western sanctions against Russia. Such a decision would damage the rift with Europe beyond repair and would infuriate the Obama White House, which still has some sympathy for Syriza.

It is understood that US Treasury Secretary Jacob Lew told the Greeks that they would be "dropped like a stone" if they played this game.

Amos Hochstein, Washington's energy envoy, said in Athens on Friday that the pipeline was a foolish distraction. "Turkish Stream doesn't exist. There is no consortium to build it, there is no agreement to build it. So let's put that to the side," he said. Behind closed doors he has imposed an emphatic American veto on the whole plan.
I never bought the whole "from Russia with love" distraction. This was another feeble attempt from Syriza's leaders to divert attention away from the real problems in the Greek economy.

The latest news is that Greece will repay €750m to IMF to avoid default, but the country is hardly out of the woods. In her article, Mehreen Khan explains how the European Central Bank has become the real villain of Greece's debt drama:
“In their attempt to respect their duties, the ECB’s policymakers have made themselves political,” Greece’s finance minister Yanis Varoufakis told an audience of academics and economists in Paris last month.

The refrain strikes at the heart of his government’s complaints against the notionally independent ECB.

As one of Greece’s three main creditors - alongside the International Monetary Fund and the European Commission - the central bank is unique in wielding the power that can ultimately force the country out of the single currency.

Despite not officially being party to the political negotiations over extending Greece’s bail-out, the ECB has made a number of discretionary moves since theSyriza government was elected just over 100 days ago.

When he first swept into power, Prime Minister Alexis Tsipras appealed to Mr Draghi to provide some form of bridging finance to keep the country afloat as he sought to re-write the terms of Greece’s rescue programme.

It soon became clear the Italian would not be playing ball.

Not only has the ECB rebuffed requests for temporary financial relief, but its disciplinarian stance has led to accusations that it is acting ‘ultra vires’ - taking politically motivated action outside of its legal remit to ensure financial stability in the eurozone.

The first controversial move came as Mr Tsipras and Mr Varoufakis were hot-footing around Europe, drumming up support for their government’s nascent plans to rip up Brussels austerity contract.

On February 4, the ECB's 28-member Governing Council took a late-evening decision to remove its ordinary funding operations for Greek banks.

The vote was held hours after Mr Varoufakis had met with the ECB’s chief in Frankfurt earlier in the day.

In removing the waiver, which allowed Greece’s banks to post government debt as collateral for cheap cash, the Greek financial system became solely reliant on expensive emergency funds to stay afloat.

Frankfurt said its decision was based on an assessment that it was “not possible to assume a successful conclusion of the programme review”. This was widely interpreted as a threat to the fledgling Leftist government: capitulate, or you will be forced to suffer the consequences.

Greek bank stocks fell by as much as 30pc the following day and the beginnings of a bank run were well in motion.

The ECB has since been forced to inject ever-increasing amounts of emergency loans into Greece. Last week, the Governing Council met to make its 13th weekly hike of the emergency ceiling, taking it to €79bn.

The liquidity squeeze has since intensified. The central bank followed up its action by officially banning Greek banks from increasing their holdings of short-term government debt. This has proven to be another major constraint on the cash-strapped government which is struggling to pay out public sector pensions and salaries.
I will let you read the rest of that lengthy article here but if you ask me, the real villain in the Greek crisis is this disconnect between Syriza's red line demands on pensions and wages and creditors who are demanding that Greeks reform their economy once and for all and stop buying votes by expanding the ever bloated public sector.

Quite disturbingly, an ever defiant Syriza government passed a law last Tuesday night which opens the way to rehire thousands of workers cut loose from the country’s inefficient public sector in a reform enacted by the previous government. The country is on the verge of collapse and the clowns running Greece are back at their old games, buying votes with money they don't have.

No wonder German Chancellor Angela Merkel is coming under growing pressure from within the ranks of her own party bloc to give up on Greece for the sake of the euro. Germany's finance minister, Wolfgang Schaeuble, said his country will do everything it can to keep Greece in the eurozone under "justifiable conditions," but he certainly doesn't take Syriza's leaders seriously and has repeatedly expressed his frustrations negotiating with them.

Interestingly, the Germans are now calling for a Greek referendum as IMF default is avoided. Mr. Schaeuble says plebiscite on Greece's euro membership could prove "helpful" as Leftist government promises to stick by "red lines."

For his part, Greek finance minister Yanis Varoufakis keeps harping on a new deal for Greece but he fails to address the real problems plaguing Greece, its ever bloated and inefficient public sector that is weighing down the country and lack of much needed reforms to modernize their economy once and for all.

You can read the anti-austerity comments from Krugman, Stiglitz and other well-known economists but go back to read the comments from a friend of mine living in Greece which I referred to last week when I went over Europe's pension crisis. He shared the following with me:
"...there are 2.5 million private sector workers supporting 1.5 million public sector workers in Greece. How is this sustainable? I got into a fight with a professor of geology who was complaining to me her salary went down from 2,300 euros a month to 1,300 euros a month and she still has to work 12 hours a week. I told her she's lucky she still has a job and told her to go see my butcher who works close to 60 hours a week and only earns 750 euros a month to feed his family of four. And it drives me crazy when I hear Greeks talk about the good old drachma days when they were collecting 25% interest at a bank but the inflation rate was sky high and you took out loans at 40% interest, if you were lucky."
He added:
"The country is in desperate need of reforms but Greeks are incapable of governing themselves and cutting public sector expenses. Did you know that by law you're not able to foreclose on a primary residence in Greece? Did you know that if you own a private business you cannot fire more than 2% of your workforce at a time? The Greek government owes private businesses billions of euros in arrears and isn't paying them so many businesses close up shop, at which point people lose their job. But god forbid we cut expenses at Greece's over-bloated public sector, all hell will break loose. Still, this is what Greece needs, someone to come in here and make the needed cuts and I think that is what is going to happen once Syriza balks and signs a new agreement on specific reforms."
On Grexit, he doesn't think it's going to happen. Instead, he thinks Syriza will eventually cave and the ECB will take over the IMF loans to Greece (about 30 billion euros) and then Germany and other creditors will put the screws on Greek leaders to reform their economy once and for all.

I certainly hope he's right but when I look at the way this Greek government is handling crucial negotiations, I'm worried that they really don't know what they're doing. All this uncertainty is casting a dark cloud over Greece and making a terrible situation far worse than it needs to be.

The BBC also reports that Greece is urging eurozone ministers meeting in Brussels to recognize progress made in talks, but who can take these guys seriously? This is progress? Hiring public sector workers who were fired and increasing pension benefits when the country is on the verge of collapse?

Former German Foreign Minister and Vice Chancellor, Joschka Fischer, is absolutely right, Tsipras is in Dreamland. Either he doesn't understand the gravity of the situation or he's playing a dangerous lose-lose game, antagonizing the country's creditors to the point where they're left no choice but to kick Greece out of the eurozone.

Of course, kicking Greece out isn't as simple as many claim. If it was, it would have been done by now. The reality is that a sovereign debt default within the eurozone will spell the end of the union and heighten risks that other countries will follow. And German banks are hardly in great shape to withstand such a shock. Grexit will also exacerbate deflationary pressures at a time when the world can ill afford global deflation.

Finally, I agree with the ECB's Nowotny who says Greece more political than economic question:
Any solution to Greece's financial woes is more of a political than an economic question, European Central Bank policymaker Ewald Nowotny said on Monday, as euro zone finance ministers meet to continue Greek debt talks.

Top officials have voiced little optimism about a breakthrough at the meeting. Nowotny declined to suggest a way out of the impasse, reiterating that the ECB's role was to ensure price and financial stability.

He cited Monday's talks by euro zone finance minister, adding: "It would be premature to give any details," he told a panel discussion on Spain and Austria.
Unless there is political will on all sides to reach a more permanent solution, this endless Greek tragedy will continue into the summer, making an already explosive situation far worse. That won't bode well for risk assets and the global economy going into the Fall.

Below, the latest from Kathimerini on the Eurogroup meeting. Also, Marc Faber argues that preventing Russian influence in the Mediterranean is the real reason why Europe will never allow Greece to leave the eurozone. "If Greece leaves, the North Atlantic Treaty Organization [NATO] countries led by America are very afraid that Russia will establish closer relationships [in the Mediterranean]."

Faber is right but my biggest fear is that allowing Greece to remain in the eurozone at all cost when the country desperately needs to cut its grossly bloated public sector to an appropriate size and reform its antiquated economy will only widen the Greek disconnect much further and doom its citizens for another decade.

Something is going to give and I'm not sure preventing Russia's influence in Europe will take precedence over reforming the antiquated and hopelessly inefficient Greek economy once and for all.

Opening Canada's Infrastructure Floodgates?

Bill Curry of the Globe and Mail reports, Liberals would encourage pension funds to invest in infrastructure:
Enticing large pension funds to spend big on Canadian infrastructure projects will form a key part of the Liberal Party’s cities agenda, which is among the next policy planks that Leader Justin Trudeau will announce in the coming weeks.

Mr. Trudeau and his team of advisers are working on the final details of the infrastructure platform, which the party has long said would form a significant part of its pitch to voters in the October election.

But having decided to largely devote future surpluses toward tax cuts and enhanced direct payments to families, there is little room left to promise major additional spending on infrastructure.

Senior Liberals responsible for the party’s economic policies say the infrastructure component will draw inspiration from Australia and Britain, where efforts are being made to plan infrastructure projects so they meet the needs of pension investors looking for large, long-term projects that are open to private investment.

Liberal finance critic Scott Brison said in an interview that the Liberal plan would not interfere with the mandate of large Canadian pension funds such as the Canada Pension Plan, but would aim to address the reasons these funds are more likely to invest in infrastructure abroad than at home.

“You can respect absolutely the independence of Canadian pension funds to do their jobs – and that is maximize long-term pension security and returns for their members – but at the same time you can package projects within Canada that are attractive to not just Canadian pension funds but global pension funds,” he said. Mr. Brison and Liberal MP Chrystia Freeland met Monday with The Globe and Mail’s editorial board.

While no date has yet been set for the release of the party’s infrastructure platform, the annual meeting of the Federation of Canadian Municipalities is scheduled for June 5-8 in Edmonton and the party would like to have details ready by then to discuss with Canada’s mayors and city councillors.

Mr. Trudeau was also in Toronto on Monday where he delivered a speech to the Canadian Club that promoted the tax policies he announced last week. He argued that taxing high-income Canadians to pay for these measures is a better way to raise revenue than the NDP’s proposal of higher corporate tax rates.

The tax proposals were the first of what is expected to be a series of policy announcements in the coming weeks that will include infrastructure, child care and innovation.

Attracting more pension investment in Canadian infrastructure would require selling Canadians on a much larger role for public-private partnerships than is currently the case. It would also mean going further in a direction that is already preferred by the Conservatives. It is the Harper government that created a Crown corporation – PPP Canada Inc. – in 2009 focused on public-private partnerships for infrastructure. The 2015 federal budget promised a new public transit fund that would run through PPP Canada and would receive $1-billion in annual funding starting in 2019-20.

A 2013 analysis by the Organisation of Economic Co-operation and Development looked specifically at pension-fund investment in infrastructure and compared the Australian and Canadian approaches.

It said Canadian pension funds have been dubbed the “Maple revolutionaries” by the Economist magazine for their expertise in infrastructure investing around the world, but that these funds “bemoan the lack of investment opportunities at home.”

The report said these funds view public-private partnerships in Canada as too small. While Mr. Brison and Ms. Freeland said in interviews Monday they are interested in Australia’s approach, the OECD report questioned whether these policies would be popular with Canadians.

“Australia has a history of privatization over the last two decades, especially in large transport items such as airports, ports, toll roads and tunnels. In contrast, only very few privatizations of public infrastructure assets have occurred in Canada,” it said. “According to observers, there is no widespread political will to do so in the foreseeable future.”

Meanwhile, a 2011 program in Britain called the Pensions Infrastructure Platform that was meant to entice pension investment in infrastructure has run into criticism and has so far failed to meet its initial targets.
So what do I think of the Liberals' new infrastructure platform to entice Canada's large pensions to invest in domestic infrastructure? I need to see the details and one infrastructure expert I contacted told me "the key obstacles to having more pension funds participate in the Canadian infrastructure space are at the Municipal and Provincial level (not Federal)."

But as I recently stated in a comment on how the federal budget is looking at boosting federal pensions, we desperately need to change the rules to create more PPPs in Canada and get our big pensions on board to invest in these projects.

The Caisse's bid to handle some of Quebec's infrastructure projects will be closely scrutinized to see if it can successfully manage large greenfield projects while maintaining its independence from direct government intervention. There are critics who think the Caisse won't make money off these projects, but that remains to be seen.

The truth is infrastructure projects are exorbitantly expensive and even if you get all of Canada's top ten pensions to invest in domestic infrastructure, you still need massive government investment to finance these projects.

Consider high speed trains. Canada has no high speed trains going from coast to coast. But even if you built one going from Toronto to Montreal, it will cost billions and you still need to price the fares competitively or else people will just fly or take the old railway route. In other words, high speed trains are amazing but at $800 or $1,000 a round trip fare from Montreal to Toronto, you're not going to get the critical mass to finance such a project.

That's why the federal and provincial governments need to be involved. Infrastructure projects are very expensive but there's no denying Canada needs to invest billions to modernize our infrastructure and keep up with a growing population.

This is where pensions can play a critical role. Canada's large pensions have been investing directly in infrastructure all around the world for years. They already own a huge chunk of Britain's infrastructure and are continuously looking to invest in high quality infrastructure assets. This is why the Caisse is chunneling into Europe and why its CEO Michael Sabia has stated they are looking to invest in U.S. infrastructure.

And it's not just the Caisse. Last week, CPPIB announced that it has purchased a stake, worth about $1.6 billion, in two U.K. telecommunications companies. In April, CPPIB bought big stakes in the UK's top ports.

Back in December, Ontario Teachers' CEO Ron Mock stated the plan is seeking foreign investments out of necessity, not lack of confidence in Canada:
The strategy has come with challenges. Mr. Mock said one of the biggest difficulties is navigating the legal systems and governance requirements of foreign countries when buying large stakes in their companies.

Mr. Mock cited Asian companies that have not yet gone public among investment opportunities he’s keeping an eye on. He said the pension fund doesn’t typically make venture capital investments in Canadian companies because those types of investments are generally in the tens of thousands of dollars, while he’s looking to invest hundreds of millions at a time.

“As a fiduciary, we really do have to focus on earning the returns on behalf of the teachers,” he said.

Another opportunity he’s keeping his eye on is infrastructure investments in Europe and Canada. He said pension funds have a role to play in helping Canada address its crumbling infrastructure problem over the next 10 years.

“I think that is a vital opportunity in Canada,” he said.
No doubt about it, Canada's large pensions can play an integral role in funding domestic infrastructure but they have to maintain their arms-length approach in making such investments and not be forced to invest in these projects by any government. 

All of Canada's large pensions are shifting huge assets into infrastructure as they look for investments with very long investment horizons and steady cash flows offering them returns between equities and bonds. Infrastructure investments are an integral part of asset-liability management at pensions which typically pay out liabilities over the next 75+ years (the duration of infrastructure assets fits better with the duration of the liabilities of these plans).

The problem right now is there aren't enough domestic opportunities so our large pensions are forced to invest in infrastructure projects abroad. This introduces legal, regulatory, political and currency risks (their liabilities are in Canadian dollars). For example, PSP's big stake in Athens airport makes perfect long-term sense but if Greece defaults and exits the euro, all hell can break loose and the leftist or worse, a junta government, might nationalize this airport. Even if they don't nationalize, if they reintroduce the drachma, it will significantly damper PSP's revenues from this project.

As far as incorporating models from Australia and the UK, I think Australia has got it mostly right. They privatized their airports and ports and Canada needs to do the same to fund other projects. The UK's experience with the Pensions Infrastructure Platform has its share of critics but there have been some big deals there too.

Whatever the Liberals decide to do, their initiative needs to entice foreign pension and sovereign wealth funds as well. It won't be enough to have Canada's large pensions on board. And as I stated above, our governments will still need to invest billions in domestic infrastructure.

From an economic policy perspective, massive investments in infrastructure are needed especially now that Canada is on the precipice of a major crisis. We're living in Dreamland up here and I fear the worst as Canadians take on ever more crushing debt. The country desperately needs good paying jobs, the type of jobs massive infrastructure projects can provide.

Below, the CBC reports that Canadian cities say they need $123 billion to update roads, public transit, and water systems and another $100 billion for new projects to meet growing demands (2013 report). Where is that money going to come from? Our big pension funds can provide some but not all of the funds.

Get Ready For Global Reflation?

Ralph Atkins and David Sheppard of the Financial Times report, Oil and bond yields signal shift from deflation worry:
Europe’s deflation scare is over — inflation is back. That is one interpretation, at least, of a tumultuous week in the region’s bond and other financial markets.

So far in 2015 the story of continental Europe has been about central bank action to avert a damaging deflationary slump, triggered by sharp falls in global oil prices. This week, however, two things changed, causing shockwaves across markets and highlighting the risk of investor complacency.

First, oil prices rose to their highest this year. Second, benchmark 10-year German Bund yields — which supposedly signal investors’ inflation and economic growth expectations — experienced a bout of exceptional volatility. Having fallen to just 0.05 per cent in mid-April, they shot as high as 0.78 per cent, before easing again.

Disentangling the extraordinary moves has baffled even seasoned market professionals; German Bunds should be dull and stable. Large-scale European Central Bank “quantitative easing” purchases have distorted the signalling role of bond yields and much of the sell-off was about profit-taking and investors exiting crowded positions. But evidence is growing of a decisive change in market expectations about future inflation.

“My feeling is that there has been a shift away from deflation worries — the ‘deflation trade’, which led to the collapse of long-term yields — towards some kind of reflation story,” says Frederik Ducrozet, economist at Crédit Agricole. “So it’s no surprise that at least the fast money has shifted out of Bunds.”

Trevor Greetham, senior manager at Royal London Asset Management, adds: “There is likely to be a global headline inflation shock in the second half of this year — although it will be one of the most predictable shocks ever.”

If perceptions have really shifted, bond markets may have reached a turning point, with European yields unlikely falling to fresh lows and possibly on a trend rise. With the US Federal Reserve expected to raise US interest rates later this year, that could ignite much more volatility across global bond markets — if not worse.

This week’s upsets ricocheted across Europe’s markets. The euro rose while share prices dropped — perhaps counterintuitively, because an escape from deflation should help corporate earnings.

“Equities hate deflation so if bond markets are moving away from [pricing in] deflation that should be constructive but the speed of the move has been a problem,” explains Nick Nelson, European equity strategist at UBS. Eurozone shares ended the week down 3 per cent from their April 15 peak.

The inflation outlook will hang crucially on whether evidence mounts of a pickup in economic growth— and what happens to oil prices. Since falling 60 per cent between June and January to a six-year low of $45 a barrel, crude oil has posted a strong recovery. On Wednesday North Sea Brent, which prices around two-thirds of global crude deals, hit a high for the year of $69.63 a barrel, its rally fuelled by stronger demand and a near record number of hedge fund bets that the US shale boom would slow.

A linear rise to $100 a barrel by the end of the year would theoretically push annual eurozone inflation from zero per cent in April to 1.8 per cent in December, according to calculations by UniCredit. With inflation back within the ECB’s target of an annual rate “below but close” to 2 per cent, the future of its QE programme would be thrown into doubt.

Such scenarios could, however, quickly prove wrong — if the stronger euro or higher oil prices hit growth, for instance. Moreover many investors are asking if oil’s rally is sustainable. By Friday Brent had already fallen back to nearer $65 a barrel as traders said the recovery had come too soon. US shale operators say the price rally may allow them to keep increasing output, adding more oil to an oversupplied market.
“You are hearing one US exploration and production company after another saying they are going to deploy more rigs in the second half of the year than the first,” says Edward Morse, head of commodity research at Citigroup. “You also can get as much as another 700,000 barrels per day incremental growth in 2016 from the backlog of drilled-but-uncompleted wells in ‘shale plays’.”

So far the change in market inflation expectations has not been dramatic. “It doesn’t feel like a strong end-of-cycle pick up in inflation,” says Mr Greetham. The swaps markets assume an average eurozone inflation rate over five years starting in five years of 1.8 per cent — up from less than 1.5 per cent in January, but still significantly lower than in recent years.

“Markets are still pricing in extremely low levels of inflation — and nobody is forecasting much of an acceleration,” says Laurence Mutkin, global head of rates strategy at BNP Paribas. “I don’t think you can expect annual rates to rise soon above 2.5 per cent on either side of the Atlantic, so you don’t have to see bond yields rising much further either.”

Nevertheless, the change in sentiment is noteworthy compared with past gloom. Gilles Moec, European economist at Bank of America Merrill Lynch, warns: “The market is waking up a bit late to the fact that global deflation is not going to happen.”
Global deflation is not going to happen? Really? That's news to me because I keep warning my readers to prepare for global deflation or risk getting slaughtered in the years ahead.

Let's go over a few things which I think are confusing people. First, the euro deflation crisis is far from over. The fall in the euro temporarily boosted import prices and inflation expectations in the eurozone but the underlying structural issues plaguing its economies have not been addressed.

Unless you have a significant pickup in eurozone employment and wages, you can forget about any reflation in that region. The ECB will keep pumping trillions into banks but unlike the Federal Reserve, it's limited in what it can buy in its bond purchases.

Then there is Greece. The latest payment plan is just a shell game. The Greek disconnect is alive and well and threatens not only the eurozone but the entire global financial system through contagion risks we're unaware of and by extension, the entire global economy.

But even if they find a solution to this ongoing Greek saga, there are other far more important worries out there. The China bubble is my biggest concern right now. According to a senior Morgan Stanley investment strategist, the worst of the Chinese economic slowdown is likely still ahead because of the nation's debt:
"China, to try and sustain its growth rate in the post-financial-crisis era, has engaged in the largest credit binge of any emerging market in history," said Ruchir Sharma, head of emerging markets and global macro at Morgan Stanley Investment Management,

Sharma, speaking Tuesday at the Global Private Equity Conference in Washington, D.C., predicted that the credit boom would cause problems.

Whenever a country increases its debt to gross domestic product sharply over five years, in the next five years there's a 70 percent chance of a financial crisis and 100 percent chance of a major economic slowdown, according to Morgan Stanley research.

The Chinese government this week cut interest rates for the third time in six months because of projected 7 percent GDP growth this year, the lowest level in more than two decades.

Sharma said the slow growth he forecast would be around 4 percent or 5 percent over the next five years, about half the rate of what it used to be.

"If China follows this template, it really is payback time," he said.

Another speaker at the conference, former U.S. Gen. Wesley Clark, took a less grim view.

"I'm not as worried about the buildup of debt in China as other countries," the founder of Wesley Clark & Associates said.

He cited two reasons. The renminbi is not fully convertible to other currencies, and the Chinese economy still has elements of central control.

"Every year people at these business conferences say the demise of the Chinese economy is coming very rapidly," Clark added. "But it hasn't happened. And President Xi is not going to let it happen if he can avoid it."

Another China bull, Robert Petty, managing partner and co-founder of Clearwater Capital Partners, said China can forestall its debt problems.

"We believe the balance sheet of China absolutely has the capacity to do two things: term it out and kick the can down the road," Petty said.
It remains to be seen how Chinese authorities will forestall or mitigate  the inevitable slowdown but if it's a severe slowdown, watch out, we're going to have more deflationary pressures heading our way (any significant decline in the renminbi will mean much lower goods prices for the developed world since we pretty much import most of our goods from China).

The demographics of China and Japan are also scary. China is sliding into a pensions black hole and Japan isn't doing that much better. Some of the same structural issues plaguing the eurozone -- older demographics in particular -- are plaguing China and Japan.

So if China slows down considerably in the years ahead and Abenomics fails to deliver in Japan, where is global growth going to come from? Europe? Nope. BRICS? Apart from India, the BRICS are weak and getting weaker, not stronger. Russia is trying to hold on for its dear petro life and Brazil isn't going anywhere as China slows down.

Then there is America, the last bastion of hope! U.S. job growth rebounded last month and the unemployment rate dropped to a near seven-year low of 5.4 percent, but there's still plenty of slack in the economy with the number of Americans not in the labor force rising to a record 93.2 million (most of these long-term unemployed are women). Moreover, America's risky recovery poses serious challenges to the global economy, especially if the Fed makes a monumental mistake and starts raising rates too soon and too aggressively.

Perhaps this is why U.S. banks have tempered their bond purchases recently:

There's at least least one good reason why Treasury yields have been drifting higher all year: Banks haven't been buying.

In fact, total U.S. government debt holdings by the 18 largest banks in the country declined by $2.6 billion in the first quarter, according to SNL Financial data that Citigroup cited in a note Tuesday titled, "The Bid for Treasuries is Over."

The decline in purchases of Treasurys mirrored a general slowing in securities growth in the quarter, with holdings increasing by just $18 billion after rising $42 billion in the fourth quarter of 2014 and $61 billion in the third quarter.

Bond yields have been volatile through the year and on a general glide higher overall. The benchmark 10-year Treasury note began the year at 2.12 percent and traded around 2.24 percent Tuesday afternoon. The 10-year's price, which moves inversely to yield, has fallen 2.26 percent in 2015.

Fixed income bears believe U.S. economic gains and a less accommodative Federal Reserve will result in significantly higher interest rates this year. However, gross domestic product has shown only halting progress so far—and in fact could see a negative number when first-quarter revisions are through—while market expectations for a Fed rate hike are pegged firmly at the latter part of the year.

Of the biggest U.S. banks, most mildly added to their portfolios, but sharp drops from Bank of America, JPMorgan Chase and Morgan Stanley offset those gains. Wells Fargo was the biggest buyer in the quarter.
The bid for Treasuries is over? The end is near? Is the scary bond market about to get a lot scarier?

I'm sorry but I'm not buying all this nonsense. We are one significant credit event away from another major meltdown which is why central banks around the world are still in easing mode, some much more aggressively than others. And there are plenty of nervous global investors hitting the bids on Treasuries even if U.S. banks (temporarily) moderated their purchases.

All this liquidity being pumped in the global financial system is a desperate attempt to reflate risk assets and inflation expectations. As I've repeatedly stated, if there truly is a global recovery underway, pay attention to emerging markets (EEM), including China (FXI), Brazil (EWZ) and Russia (RSX) and sector ETFs like energy (XLE), oil services (OIH) and metals and mining (XME) which are early cyclicals. 

I remain highly skeptical and think many investors are confusing powerful countertrend rallies due to currency fluctuations and are underestimating the real potential of global deflation down the road, especially if the Fed moves on rates too early

But there's no doubt oil prices have recovered somewhat boosting many shares of energy companies. On Monday, there was another big countertrend rally in oil drillers and service stocks (click on image):


I can show you the same thing in other sectors leveraged to the global recovery, like shipping and mining stocks. You'll see powerful countertrend rallies and the bulls get all excited and will tell you the global recovery is only going to get stronger which is why bond yields are climbing all around the world. 

Be very careful here. There is a massive global head fake going on which will attract many suckers in only to disappoint them later on. I hope I'm wrong but if you're betting big on global reflation, hedge accordingly because I think it's going to be a long hot summer and scary Fall. 

Below, a discussion on the best way to play bonds, with Boris Schlossberg, BK Asset Management; Ari Wald, Oppenheimer and CNBC's Brian Sullivan. And Richard Jerram, chief economist of the Bank of Singapore, discusses why the outlook for China is even worse than imagined.

Social Security On The Fritz?

Janet Novack of Forbes reports, Social Security In Far Worse Shape Than Official Numbers Show:
Over the last 15 years, the Social Security Administration’s Office of the Chief Actuary has consistently underestimated retirees’ life expectancy and made other errors that make the finances of the retirement system look significantly better than they are , a new study by two Harvard and one Dartmouth academics concludes. The report, being published today by the Journal of Economic Perspectives, is the first, the authors say, to compare the government agency’s past demographic and financial forecasts with actual results.

In a second paper appearing today in Political Analysis, the three researchers offer their theory of  why the Actuary Office’s predictions have apparently grown less reliable since 2000:  the civil servants who run it have responded to increased political polarization surrounding Social Security “by hunkering down” and resisting outside pressures—not only from the politicians, but also from outside technical experts. “While they’re insulating themselves from the politics, they also insulate themselves from the data and this big change in the world –people started living longer lives,’’ coauthor Gary King, a leading political scientist and director of Harvard’s Institute for Quantitative Social Science, said in an interview Thursday. “They need to take that into account and change the forecast as a result of that.”

In its annual report last July, Social Security predicted its old age and disability trust funds, combined, would be exhausted in 2033 and that after that point the government will have enough payroll tax revenues coming in to pay only about three quarters of promised benefits. King said his team hasn’t estimated how much sooner the fund might run out, but described it as in “significantly worse shape” than official forecasts indicate.

In addition to underestimating recent declines in mortality (i.e. increases in life expectancy) for those 65 and older, the Actuary has overestimated the birth rate—meaning the number of new workers who will be available to pay baby boomers their benefits 20 years from now , the researchers assert. Before 2000, the Actuary also made errors, but they went in both directions and the Actuary was readier to adjust the forecasts from year to year as new evidence came in, King said. Since 2000, he added, the errors “all are biased in the direction of making the system seem healthier than it really is.’’

A Social Security spokesman said today that Chief Actuary Stephen Goss couldn’t comment on the papers because he wasn’t provided them in advance and is tied up today in meetings with the Social Security Advisory Board Technical Panel.  But the spokesman pointed to an Actuarial Note which Goss and three colleagues published in 2013 in response to a New York Times op-ed by King and one of his current coauthors,  Samir Soneji, an assistant professor at Dartmouth’s Institute for HealthPolicy& Clinical Practice. In that op-ed, they attacked the Actuary’s methods of projecting mortality rates and predicted the trust fund would be depleted two years earlier than predicted. In their response, Goss and his colleagues called King and Soneji’s methods of predicting death rates “highly questionable” and noted that the Actuary’s methods have been audited since 2006 by an independent accounting firm and received unqualified opinions.

The dust-up might be ignored as bickering by the pointy heads, if it weren’t so consequential.  In a recent Gallup survey, 36% of workers said they were counting on Social Security as a major source of retirement income. Differences over the estimates are important, King observed, because they affect “basically half of the spending of the U.S. government,’’ including Medicare.  Moreover, the forecasting assumptions affect the projected impact of any proposed changes to the program.

In their political paper, King, Soneji and Konstantin Kashin, a PhD candidate at King’s institute, recount how partisan fighting over Social Security intensified in the late 1990s, when conservatives began arguing the program was unsustainable and should be partially privatized, with younger workers offered individual savings accounts. In 2001, newly elected President George W. Bush appointed a commission intended to support such a change, but he put the issue aside after the September 11 terrorist attacks. After his reelection in 2005, however, Bush started pushing for changes in a series of town halls and speeches that, the paper notes, put the Social Security actuaries under “an extreme form of political pressure.’’ Democrats and news reports pointed to changes in the language used by the Social Security Administration that seemed (in line with White House policy) to emphasize that the program was not financially sustainable. Goss openly clashed with a Republican Social Security Commissioner.

Bush’s privatization push flopped and during recent elections some Republicans have attempted to cast themselves as the protectors of Social Security, which enjoys strong support from voters across the political spectrum. In 2013, after President Obama proposed a deficit reduction deal that, along with raising taxes on the rich, would have chipped away at inflation adjustments in Social Security, the idea was attacked by politicians from both parties.

But the problem of how to solve the system’s long term funding deficit has hardly gone away and the political  heat seems to be rising again. Democrats have slammed a provision adopted by the new Republican Congress that would block a transfer of money from the Social Security old age fund to the Social Security disability fund, which will be depleted next year. They say such transfers have been routine in the past and that it is a ploy by Republicans to force cuts in the retirement program too. Last month, Republican New Jersey Gov. Chris Christie, a possible Presidential candidate, proposed that the age for receiving full Social Security benefits be raised gradually to 69 and that benefits be limited for individuals with more than $80,000 in other income and ended completely for those earning more than $200,000. 
King emphasized that there is “no evidence whatsoever,” that Goss and his actuaries are bending to political pressure from either Democrats or Republicans. On the contrary, he said, while resisting such pressure, they’ve put too high a value on remaining consistent in their forecasts, in part because they don’t want to “panic” the public. “They’re trying to show the numbers don’t change because they think it will inspire confidence. Maybe in the very short run it will inspire confidence by not changing the numbers. But having the numbers be wrong doesn’t inspire confidence at all,’’ King said.

The political paper asserts that Goss has resisted changes in forecasting assumptions suggested by the Social Security Advisory Board’s Technical Panel on Assumptions and Methods—a panel of actuaries and economists that meets once every four years and is in session now. In some cases, the paper claims, the Actuary has made some suggested change in an assumption, but then changed another, unrelated assumption in the opposite direction “to counterbalance the first and keep the ultimate solvency forecasts largely unchanged.” In their 2013 Actuarial Note, however, Goss and his colleagues say that while the 2011 Panel did push for faster changes in mortality assumptions, the panel’s recommendations, if adopted in full, would have actually resulted in a projection that the Social Security trust funds would run out a year later.

King, who presented his own findings to the Technical Panel yesterday, is pushing for one big change in the Actuary’s practices that he says the Panel has also favored: making all the Actuary’s data and methods open for scrutiny by others. “This is a period of big data. When you let other people have access to data, things like Money Ball happen,’’ King said. In addition to new algorithms, he said, the government actuaries need to take note of recent findings about unconscious bias by researchers and apply new methods social scientists have developed to guard against such bias. “Four hundred years ago you had people sitting in a monastery and thinking they thought great thoughts and that was their entire life,’’ King said. “Now we check on each other. If they would leave things open they’d have so much help and they’d be better off politically because their forecasts would be better.”
I'm going to be very brief with my comments. First, Social Security is one of the best programs the United States ever adopted (never mind Stan Druckenmiller's dire warnings). President Roosevelt signed the Social Security Act on August 14th, 1935 and it had a profound effect on the retirement security of millions of Americans ever since (if only the U.S. had signed a universal health bill back then!).

As far as the article above, I'm in no position to verify the accuracy of the reports criticizing the actuarial methods of Chief Actuary Stephen Goss but I do agree that the data and methods need to be open to the scrutiny of others.

Actuaries have a god-like status in the financial world because it's hard to become an actuary. You literally have to pass a series of extremely tough exams and really need to know your stuff when it comes to the assumptions you plug into your models.

But actuaries aren't gods and there are plenty of disagreements among very smart actuaries. I've had discussions with the current and former Chief Actuary of Canada to see how they think and where they agree and disagree. Also, while the Office of the Chief Actuary of Canada prides itself on its independence, the reality is there are political pressures on it, especially when it doesn't toe the ruling party's lines (Canada's former finance minister Paul Martin did a hatchet job on our former Chief Actuary, one of his biggest political blunders ever).

But politics aside, I'm definitely not for privatizing Social Security to offer individuals savings accounts. The United States of pension poverty has to face up to the brutal reality of defined-contribution plans, they simply don't work. Instead, U.S. policymakers need to understand the benefits of defined-benefit plans and get on to enhancing Social Security for all Americans.

One model Social Security can follow is that of the Canada Pension Plan whose assets are managed by the CPPIB. Of course, to do this properly, you need to get the governance right and have the assets managed at arms-length from the federal government. And the big problem with U.S. public pensions is they're incapable of getting the governance right.

So let the academics and actuaries debate on whether the assumptions underlying Social Security are right or wrong. I think a much bigger debate is how are they going to revamp Social Security to bolster the retirement security of millions of Americans. That's the real challenge that lies ahead.

Interestingly, Bernard Dussault, the former Chief Actuary of Canada and a staunch defender of defined-benefit plans and enhancing the CPP, shared this with me on the article above:
All those discussions on the validity of the actuarial valuations on the OASDI programs are unfortunately just a case of "shooting the messenger". Irrespective of the degree of accuracy of the concerned actuarial estimates, the OASDI is actually (and still) in a difficult financial position. The worst aspect of it is the higher (currently 12.4%) contribution rate that will be required as soon as the fund is exhausted in the early 2030s. The current "intermediate" pay-as-you-go rate (13.6% re: http://www.ssa.gov/oact/TR/2014/VI_C_SRfyproj.html#317167 ) already exceeds the 12.4% actual contribution rate and will unavoidably continue to increase until at least 2030 (likely not beyond 2035) to about 18%.
I thank Bernard for sharing this with my readers. Below, CBS 60 Minutes reports on thousands of errors to the Social Security Administration's Death Master File can result in fraudulent payments -- costing taxpayers billions -- and identity headaches.

Keep in mind that 60 Minutes has a few critics who dismiss these reports as hit jobs. As I stated above, I believe Social Security is one of the greatest social programs introduced in the U.S. but it needs to be enhanced so that all Americans can retire in dignity and security.

Are U.S. Pension Funds Delusional?

John Coumarianos of Institutional Imperative wrote a comment for MarketWatch, You could be on the hook for pension funds’ lofty stock-market views:
What do Connecticut teachers and Dallas policemen and firemen have in common? They’re public sector employees whose respective pension funds are projecting 8.5% annualized long-term investment returns.

Along with the Houston Firefighters Fund and the Milwaukee City Employees Retirement System, which also project 8.5% returns, the Connecticut Teachers Pension Fund and the Dallas Policemen and Firemen Fund have the highest assumed rate of return of any public employee pension fund in the Boston College Center for Retirement Research’s database.

Relative to their peers, none of these four pension funds have outlandish assumptions. All 150 public employee pension funds in CRR’s database have an average estimated investment return of 7.7%. Twenty funds are at the median (half the funds are higher and half are lower) assumption of 7.8% returns. Forty funds share the mode (most occurring assumption) of 7.5%.

Nearly 97% of the funds posts return assumptions in the 7%-8% range after rounding. This is an extremely tight data set with regard to return assumptions, which should make anyone wonder why there are almost no differences of opinion.

The lowest assumed rate of investment return (and the only one that clocks in under 6%) is the Pennsylvania Municipal Retirement System’s at 5.5% (click on image).


Unfortunately, relative to some respected investors’ estimates of what mainstream stocks and bonds are likely to deliver over the next seven-to-10 years, every fund in CRR’s database except the Pennsylvania Municipal Retirement System may be projecting unrealistically high returns.

Likely future stock and bond returns

The easiest way to question these 7%-8% pension fund investment return assumptions is to begin with bonds. The 10-year Treasury is currently yielding a bit over 2%. That means an investor holding the instrument to maturity will get the yield it delivers, nothing more and nothing less. Perhaps investment grade corporate bond holders will receive 3%.

While junk bonds are yielding in the 5%-6% range, that’s not much given the asset class’s historical average default rate. Because defaults have pronounced cycles — moments where they seldom occur and moments when they’re rampant — it’s likely investors have fooled themselves that the current low-default environment is permanent.

Many investors think emerging markets bonds will deliver a bit more — say, 2.5% after inflation, or 5% assuming a 2.5% rate of inflation.

So altogether, let’s say the bond part of a pension fund’s portfolio will return 3.5% for the next seven-to-10 years (not counting management fees).

If our bond return assumption is correct, the stock part of a balanced portfolio split roughly evenly between stocks and bonds will have to deliver more than 10% annualized for the entire portfolio to approach a 7% return. Stocks will have to deliver close to 13.5% to the Connecticut teachers or the Dallas policemen and firemen to sustain those public employees through retirement.

Can stocks rise to these feats of heroism over the next decade or so? Not likely, according to Boston-based asset manager Grantham, Mayo, van Oterloo (GMO).

GMO, which lists its asset-class return assumptions monthly, currently thinks most developed market stocks will produce negative real — or after-inflation — returns over the next seven years. The firm evaluates stocks on long-term metrics such as (but not exclusively) current price over past 10-years’ inflation-adjusted average earnings, also known as the “Shiller P/E” after Yale economics professor Robert Shiller. Based on past earnings, GMO says, stocks are expensive and therefore poised for low future returns (click on image).

Since GMO publishes real or inflation-adjusted return numbers, one can just add an inflation assumption (say, 2%-3%) to the return forecast to get a nominal number, which is what the pension funds use. For example, GMO’s expected negative 2.0% real return for U.S. large company stocks might be a 1% nominal return if you assume 3% inflation. That’s breathtakingly far away from what the pension funds are assuming.

In developed markets only the highest-quality domestic stocks — those that consistently produce returns on invested capital in excess of their cost of capital and may be said to have economic “moats” or durable competitive advantages — are priced to deliver a minuscule 0.5% annualized real return, according to GMO.

Emerging markets stocks are the best of the bunch at 2.7% annualized for the next seven years. If one assumes 2.5% inflation, that’s a 5.2% nominal return — still far from (likely only about half) what they need to deliver to satisfy pension funds’ total portfolio return assumptions.

Although the starting yield does well in predicting future bond returns, predicting future stock future returns is fraught with difficulty.

Nevertheless, the pension funds have already made assumptions about future returns, as they must, and it’s not clear they’ve put much thought into the exercise. While century-long returns of a balanced portfolio may be in the 7% range, such portfolios go through multi-decade periods without returning anything close to the century-long results.

The pension funds have evidently made no attempt to take a measure of current valuation to arrive at their assumptions. They seem to have lazily plugged in century-long returns to satisfy their assumption requirements.

As for the Shiller P/E and GMO’s work, they are based on past earnings rather than being a complete guess as to what might materialize in the future. GMO has good, if imperfect, records in forecasting future seven-to-10 year stock returns, as this academic paper indicates.

Revising return assumptions downward would undoubtedly cause pension funds pain. Failing to do so, however, will cause future pensioners and possibly taxpayers pain. Public sector pension funds need to go back to the drawing board — or need to be made to go back to the drawing board — to think about future returns.
This is another excellent comment discussing the pension rate-of-return fantasy. Unfortunately, NASRA is still smoking hopium and nobody wants to talk about the elephant in the room. I fear the worst for pensions as global deflation sets in, decimating them and forcing them to come to grips with the fact that 8% will turn out to be more like 0% or lower in coming decade(s).

Nonetheless, the talking heads on Wall Street are talking up global reflation and U.S. public pension funds are increasingly shifting assets into high fee private equity, real estate and hedge funds to make that 8% bogey. Unfortunately for them, they will fall well short of their target, but they will succeed in enriching a bunch of overpaid hedge fund and alternatives managers that are preparing for war.

In my humble opinion, U.S. public pensions should heed the wise advice of the Oracle of Omaha as well as that of the king of hedge funds and steer clear of this space (because most don't have a clue of what they're doing).

They should also pay close attention to Ron Mock, the President and CEO of the Ontario Teachers' Pension Plan, who recently sounded the alarm on alternatives. It's worth noting that unlike U.S. public pension funds, the Oracle of Ontario uses one of the lowest discount rates in the world to discount their future liabilities and they monitor all risks very closely as they try to match assets with liabilities.

In fact, Neil Petroff, the soon to be retired CIO of Ontario Teachers once told me flat out: "If U.S. public pension funds used our discount rate, they'd be insolvent."

And the reality is that a lot of U.S. public pension funds are insolvent and their fate lies in the hands of judges and taxpayers. Steve Moore at Forbes reports, Judges For Higher Taxes, Not Pension Reform, In Illinois:
Last week the Illinois Supreme Court overturned a state law that would help fix the state’s notorious pension crisis. What a tragedy for the state’s taxpayers. The justices basically ruled that the pension arrangements are iron-clad, although these pensions are on a course to bankrupt the state and imperil public services that Illinois families depend on. The unions come first. This could have negative consequences for more than half the states that are trying to defuse government employee pension time bombs. ‎

By way of background: Illinois has one of the deepest public employee pension holes in the nation. The long term deficit is estimated at above $110 billion and the red ink rises every year. Even in California – where several cities have declared bankruptcy – the pension sink hole isn’t as deep on a per capita basis.

The watchdog group Open the Books reports that there are more than 5,000 teacher and other education officials who receive an annual pension of more than $100,000 a year. Worse yet, half of all government employees retire with benefits before age 60. That’s more than twice what a typical private worker gets for having worked 12 months, not nine months, a year.

The Illinois court invalidated a 2013 pension fix that was enacted by a Democratic legislature and a Democratic governor, Pat Quinn. That law cut off the front door to the pension swindle – switching new workers into defined contribution programs like 401k plans. The law also adjusted the automatic cost of living adjustments (now at 3 percent annually regardless of inflation). The reform also adjusted the retirement age for new employees after January 2011, highly important because at least half of the employees covered are retiring before age 60—including 70 percent of teachers. Even the features of the law dealing with new employees entering the bankrupt system were unbelievably tossed out by the court meaning that the costs must keep rising inexorably into virtual perpetuity.

The victims of these daunting pension costs are citizens who rely on state services. Pension checks are crowding out funding for everything else and last year rose 12 percent as most state spending is being cut or frozen.

Thanks to this ruling, there is no way out of the pension calamity absent a repeal of the pension clause in the Illinois Constitution.

The state can’t borrow – it already has the worst credit rating in the nation. It has to borrow less – not more. Last week’s court decision sent interest rates on Land of Lincoln debt to even higher levels – near junk bond status. Days later, Chicago bonds were marked down to junk status.

The state is already making deep cuts in other spending programs. To accommodate lavish government retiree pensions, the court has rules that everything else – from funding for schools, roads, bridges, prisons, and ‎police services – gets whacked. Current Governor Bruce Rauner is taking on the unenviable job of cutting at least $6 billion from state spending in order to balance the budget. The Court just made his job doubly excruciating.

The liberal justices made no secret of their preferred fix: raise taxes.‎They wrote: “the General Assembly could have also sought additional tax revenue,” and they chastised lawmakers for allowing a highly unpopular temporary tax increase to expire “even as pension funding was being debated and litigated.” But that tax hike was never meant to pay for pensioners even though most of the money was used to plug the massive growth in annual retirement payments. ‎

Raising taxes is an economic suicide pact for Illinois citizens. Illinois is already losing businesses and jobs due to some of the highest tax burdens in America. Raising taxes, as the pols in Springfield found out in recent years, raises almost no money because it accelerates the exodus to Texas, Florida, and Arizona.

The Court rejected the plea by lawmakers and others that the pension crisis qualifies as an emergency that grants the legislature the option of disregarding the pension protection clause. But this problem is a financial ticking time bomb that imperils funding for basic services that taxpayers and businesses depend on. ‎Is it not an emergency if the municipalities can’t get ambulances or fire trucks to their residents for lack of funds?

As in so many states today, pension costs in Springfield are crowding out funding for basic municipal services taxpayers depend on. The cost of borrowing keeps rising because of investor fear that these states will soon look like Greece. Balancing the budget now seems impossible. And the only people feeling financially secure are the state’s retired government employees – many of whom have moved to Palm Beach and Phoenix.

If courts won’t allow states to trim pension costs, eventually states like Illinois will rush to Washington for federal bailout money. With more than $1 trillion in unfunded public pensions nat‎ionwide, Illinois is looking like the canary in the coal mine. What a tragedy if courts in other states prevent legislatures from defusing these fiscal time bombs.
It's funny how the media is focused on dwindling pensions in Greece when the reality is that Illinois, Kentucky and other states are the next Greece. I started writing about pension bombs exploding everywhere back in 2008. Nobody was taking me seriously back then but they're reading me now and scared to death of what's going to happen with their pension.

While the Forbes article above raises excellent points, I don't particularly like it because it ignorantly promotes 401(k)s as the ultimate pension fix. This is pure rubbish. The 401(k) experiment has been an abysmal failure in the United States of Pension Poverty and the brutal truth is that defined-contribution plans don't mitigate against pension poverty, they exacerbate it.

As I stated in my last comment on Social Security, the only real long-term solution to the retirement crisis gripping the United States is to follow the model of the Canada Pension Plan whose assets are managed by the CPPIB. Of course, to do this properly, U.S. policymakers need to get the governance right and have the assets managed at arms-length from any government. And the big problem with U.S. public pensions is they're incapable of getting the governance right.

Why am I such a stickler on enhancing the CPP for all Canadians and enhancing Social Security for all Americans? Very simple. I believe the world is heading down a very uncertain path and in this environment, I want to see people's pensions managed by professional pension fund managers who can lower costs and invest across public and private market assets and anything in between.

The added advantage of enhancing the CPP or Social Security is people can pretty much work across the public and private sector and their pensions would be safely managed by professional pension fund managers (no issue of pension portability). Companies which are already dropping defined-benefit pensions wouldn't need to worry about pensions, they would just contribute to their employees' pensions.

It's also worth mentioning once again that good pension policy is good economic policy. The benefits of defined-benefit plans are not well understood or appreciated but when people retire knowing they have fixed payments till they die, they're able to spend more and governments are able to collect more taxes. In the long-run, enhancing defined-benefit plans isn't going to increase debt. If done right by introducing risk sharing, it will lower debt and help mitigate against downturns in the economy.

As far as young teachers, police officers, firemen, and other public sector workers working in the U.S., I'll give you the same advice that I give my girlfriend who is a young teacher here in Quebec. Even if you have what seems as a safe pension, don't take it for granted and save whatever you can, investing in dividend ETFs because you simply don't know what the future holds.

I personally learned that lesson the hard way. First in June 1997 when I was diagnosed with multiple sclerosis (MS) and second in October 2006 when I was wrongfully dismissed at PSP after warning Gordon Fyfe and their senior managers of the credit crisis. I know all about life and death on Wall Street and what it means to struggle when the odds are against you.

But I also learned a much more important lesson in life, the value of perseverance, self-discipline and focusing on what really matters and the people that truly love me. Trust me, there are a lot funner things I can be doing with my time than spending a few hours a day writing a blog on pensions and investments but I take the issue of retirement security extremely seriously and have devoted a good chunk of my life on this topic trying to help promote a healthy and much needed discussion on reforming pensions for the better, not worse.

All I ask from my readers is that you take the time to click my ads and donate or subscribe to my blog on the top right-hand side. Institutions that can afford to give a lot more are kindly requested to subscribe using one of the three options. I thank all of you who have done so and ask others to follow suit. Just because it's free, it doesn't mean that you can't help me and show your appreciation by donating or subscribing to this blog.

Below, Manhattan Institute Senior Fellow Steve Malanga and Chicago radio talk show host Dan Proft on growing concerns over Illinois’ pension crisis. Illinois has yet to slay its pension dragon and is heading the way of Detroit and Greece. Unfortunately, so are many other state plans suffering from the delusions of lofty investment assumptions which simply won't materialize.

Is The Greek Endgame Near?

Holly Ellyatt of CNBC reports, Greece 'in crisis' as officials insist deal is near:
Greek government officials are insisting that a deal with the country's international lenders over reforms is imminent, but one key business leader told CNBC that Greece needs to implement reforms fast, whether a deal is on the cards or not.

"Greece is in a liquidity trap. We need to rectify the situation and agree on certain issues," Costantine Michalos, president of the Union of Hellenic Chambers of Commerce & Industry, told CNBC Tuesday.

"You don't need an agreement with your lenders and partners to improve your tax collecting mechanism, you don't need an agreement to improve your labor laws based on European norms on flexibility, and you don't need an agreement in order to proceed with privatizations," he added.

It comes as Greece's Labour Minister, Panos Skourletis, added his voice to that of the prime minister and finance minister, insisting that a deal with creditors was imminent "in the coming days," Reuters reported Tuesday.

Greece has been negotiating with creditors for months over reforms that -- when implemented -- could unlock a last tranche of much-needed bailout aid, worth 7.2 billion euros ($8.14 billion).

Sticking points in the talks have ranged from labor market and pension reforms to disputes over the privatization of Greek state assets, although Greece has made some concessions on the latter point.

Greek Prime Minister, Alexis Tsipras, on Monday ruled out further pension cuts, but said a list of proposals for an overhaul of the nation's VAT (sales tax) regime had been sent to lenders and he claimed a deal was imminent.

Speaking at a meeting of the Greek Industrial Federation Monday, Tsipras said Greece had tabled proposals for a "viable deal with creditors" and that the country was "in the final straight for an agreement."

The remarks were echoed by the country's Finance Minister, Yanis Varoufakis, who added that Greece was near a cash-for-reforms deal with its euro zone partners and the International Monetary Fund (IMF) that would help it meet debt repayments next month.

"I think we are very close (to a deal) ... let's say in a week," Varoufakis told Greek TV channel, Star TV. "Another currency is not on our radar, not in our thoughts."

He also suggested that Europe's bailout fund pay back the country's maturing bonds held by the European Central Bank (ECB), and that Greece could pay it back at a later date.

There are also growing concerns that Greece could be facing bankruptcy, amid a risk of a default on debts to international creditors, with deadlines looming for repayments to the ECB and IMF next month.
Nikos Chrysoloras and Vassilis Karamanis of Bloomberg also report, Greek Endgame Nears for Tsipras as Collateral Evaporates:
Greek banks are running short on the collateral they need to stay alive, a crisis that could help force Prime Minister Alexis Tsipras’s hand after weeks of brinkmanship with creditors.

As deposits flee the financial system, lenders use collateral parked at the Greek central bank to tap more and more emergency liquidity every week. In a worst-case scenario, that lifeline will be maxed out within three weeks, pushing banks toward insolvency, some economists say.

“The point where collateral is exhausted is likely to be near,” JPMorgan Chase Bank analysts Malcolm Barr and David Mackie wrote in a note to clients May 15. “Pressures on central government cash flow, pressures on the banking system, and the political timetable are all converging on late May-early June.”

European policy makers are losing patience with Tsipras who said as recently as May 14 that he won’t compromise on any of his key demands. He’s planning to force a discussion of Greece at a summit of European Union leaders in Latvia that begins on May 21, a day after the European Central Bank’s Governing Council meets in Frankfurt.
Bonds Drop

Greek bonds tumbled on Monday, pushing 10-year yields up by the most since January. Yields on two-year Greek notes jumped 352 basis points to 24.44 percent. Greek bonds remain the best-performing sovereign securities over the past month, according to Bloomberg’s World Bond Indexes. The Athens Stock Exchange rose 1.6 percent, following a report that the European Commission is trying to broker a compromise deal. An EU Commission spokeswoman said she wasn’t aware of such a proposal.

While talks are centering on whether to give Greece more money, the ECB could decide to raise the stakes as soon as this week if it increases the discount on the collateral Greek banks pledge in exchange for cash under its Emergency Liquidity Assistance program.

Such a move might inadvertently prompt a further outflow of bank deposits and pressure Tsipras to choose between doing a deal and putting his country on the road to capital controls. A Greek government spokesman declined to comment, as did officials at the Greek central bank and the ECB.

“We are in an endgame,” ECB Executive Board member Yves Mersch said in an interview with Luxembourg radio 100.7 broadcast Saturday. “This situation is not tenable.”
Liquidity Lifeline

The arithmetic goes as follows: Greek lenders have so far needed about 80 billion euros ($91 billion) under the ELA program.

Banks have enough collateral to stretch that lifeline to about 95 billion euros under the terms currently allowed by the ECB, a person familiar with the matter said. With the central bank raising the ELA by about 2 billion euros every week, that could take banks to the end of June.

A crunch will come if the ECB increases the haircut on Greek collateral to levels not seen since last year. That could be prompted by anything from a complete breakdown in talks to a missed debt payment, the official said. A continuation of the current impasse could even be all that’s needed, the official said.

An increased haircut would reduce the ELA limit to about 88 billion euros, the person said. While that gives banks about four weeks before hitting the buffers, the leeway is so limited that Greece might need to impose capital controls, limiting transactions such as ATM withdrawals, to conserve the cushion. Market News International first reported on the reduced ceiling on May 12.
ECB Tools

“Since the great crisis of 2008, Europe has created many tools to control the flow of money and banks,” said Andreas Koutras, an analyst at In Touch Capital Markets in London. “Thus the crisis in Greece is more likely to be resolved through the tools of the ECB rather than” by political means.

Investors in Greek debt are showing few signs of panic for now, with the yield on the Greek 10-year bond still having dropped about 2.2 percentage points lower than its two-year high of 13.64 percent on April 21.

Nor are ECB policy makers willing to raise the pressure on Greek banks on their own. Central bank governors won’t take any action which would be seen as pushing Greece out of the currency bloc if negotiations show progress and convergence, the person said.

Collateral Fix?

Greek lenders are also working with the country’s central bank on plans to collateralize additional assets, a separate local official with knowledge of the matter said.

Still, it’s unclear if these assets, including government guarantees, would be accepted by the ECB if the standoff in bailout negotiations persists. According to a senior Greek commercial banker, the ECB’s decision on what to accept as collateral is essentially a judgment call, and not necessarily related to the quantity of the assets available.

“The Greek government at this point has no room for maneuver,” Spanish Economy Minister Luis de Guindos said in a speech in Madrid on Monday. He said he was still optimistic a deal will be reached in the coming days. “This deal is essential for Greece given its liquidity situation,” he said.

Tsipras will push Greece’s case at this week’s EU leaders’ summit in Riga after a weekend that showed few signs of progress. An International Monetary Fund memo dated May 14 said Greece won’t be able to make an IMF payment on June 5 unless an accord is reached with partners, the U.K’s Channel 4 news reported on Saturday.

The ECB’s next full monetary policy meeting is on June 3, two days before the IMF payment.

“There were too many people crying wolf before,” Koutras said. “But as Hemingway wrote: How did you go bankrupt? Two ways: Gradually, then suddenly.”
It's clear that the Greek endgame is near. We're fast approaching another major crunch and Anatole Kaletsky thinks Syriza will blink:
Once again, Greece seems to have slipped the financial noose. By drawing on its holdings in an International Monetary Fund reserve account, it was able to repay €750 million ($851 million) – ironically to the IMF itself – just as the payment was falling due.

This brinkmanship is no accident. Since coming to power in January, the Greek government, led by Prime Minister Alexis Tsipras’s Syriza party, has believed that the threat of default – and thus of a financial crisis that might break up the euro – provides negotiating leverage to offset Greece’s lack of economic and political power. Months later, Tsipras and his finance minister, Yanis Varoufakis, an academic expert in game theory, still seem committed to this view, despite the lack of any evidence to support it.

But their calculation is based on a false premise. Tsipras and Varoufakis assume that a default would force Europe to choose between just two alternatives: expel Greece from the eurozone or offer it unconditional debt relief. But the European authorities have a third option in the event of a Greek default. Instead of forcing a “Grexit,” the EU could trap Greece inside the eurozone and starve it of money, then simply sit back and watch the Tsipras government’s domestic political support collapse.

Such a siege strategy – waiting for Greece to run out of the money it needs to maintain the normal functions of government – now looks like the EU’s most promising technique to break Greek resistance. It is likely to work because the Greek government finds it increasingly difficult to scrape together enough money to pay wages and pensions at the end of each month.

To do so, Varoufakis has been resorting to increasingly desperate measures, such as seizing the cash in municipal and hospital bank accounts. The implication is that tax collections have been so badly hit by the economic chaos since January’s election that government revenues are no longer sufficient to cover day-to-day costs. If this is true – nobody can say for sure because of the unreliability of Greek financial statistics (another of the EU authorities’ complaints) – the Greek government’s negotiating strategy is doomed.

The Tsipras-Varoufakis strategy assumed that Greece could credibly threaten to default, because the government, if forced to follow through, would still have more than enough money to pay for wages, pensions, and public services. That was a reasonable assumption back in January. The government had budgeted for a large primary surplus (which excludes interest payments), which was projected at 4% of GDP.

If Greece had defaulted in January, this primary surplus could (in theory) have been redirected from interest payments to finance the higher wages, pensions, and public spending that Syriza had promised in its election campaign. Given this possibility, Varoufakis may have believed that he was making other EU finance ministers a generous offer by proposing to cut the primary surplus from 4% to 1% of GDP, rather than all the way to zero. If the EU refused, his implied threat was simply to stop paying interest and make the entire primary surplus available for extra public spending.

But what if the primary surplus – the Greek government’s trump card in its confrontational negotiating strategy – has now disappeared? In that case, the threat of default is no longer credible. With the primary surplus gone, a default would no longer permit Tsipras to fulfill Syriza’s campaign promises; on the contrary, it would imply even bigger cutbacks in wages, pensions, and public spending than the “troika” – the European Commission, the European Central Bank, and the IMF – is now demanding.

For the EU authorities, by contrast, a Greek default would now be much less problematic than previously assumed. They no longer need to deter a default by threatening Greece with expulsion from the euro. Instead, the EU can now rely on the Greek government itself to punish its people by failing to pay wages and pensions and honor bank guarantees.

Tsipras and Varoufakis should have seen this coming, because the same thing happened two years ago, when Cyprus, in the throes of a banking crisis, attempted to defy the EU. The Cyprus experience suggests that, with the credibility of the government’s default threat in tatters, the EU is likely to force Greece to stay in the euro and put it through an American-style municipal bankruptcy, like that of Detroit.

The legal and political mechanisms for treating Greece like a municipal bankruptcy are clear. The European treaties state unequivocally that euro membership is irreversible unless a country decides to exit not just from the single currency but from the entire EU. That is also the political message that EU governments want to instill in their own citizens and financial investors.

If Greece defaults, the EU will be legally justified and politically motivated to insist that the euro remains its only legal tender. Even if the Greek government decides to pay wages and pensions by printing its own IOUs or “new drachmas,” the European Court of Justice will rule that all domestic debts and bank deposits must be repaid in euros. That, in turn, will force a default against Greek citizens, as well as foreign creditors, because the government will be unable to honor the euro value of insured deposits in Greek banks.

So a Greek default within the euro, far from allowing Syriza to honor its election promises, would inflict even greater austerity on Greek voters than they endured under the troika program. At that point, the government’s collapse would become inevitable. Instead of Greece exiting the eurozone, Syriza would exit the Greek government. As soon as Tsipras realizes that the rules of the game between Greece and Europe have changed, his capitulation will be just a matter of time.
Andreas Koutras shared this with me: "Can someone say to Anatole that lack rationality and logic is exactly why Greece is in the current position. He is applying the wrong tool for the situation. Many have made this mistake including myself."

I'm not going to get into the strengths and weaknesses of Kaletsky's arguments but he makes one valid point, Syriza will be much weaker if it decides to default and it will implode. Also, as I explained in my last comment on a new deal for Greece,  Grexit and return to the drachma will bring about much more pain and devastation to Greece than the mindless austerity troika imposed on the country.

Interestingly, the Globe and Mail reports on a mysterious spike in the shares of a small Canadian pulp and paper stock is rumored to foretell an exit of Greece from the eurozone.

I strongly doubt that Grexit is going to happen, at least not this summer. With Greek tourism season set to commence, it's not in anyone's best interest to have a crisis now. But the endgame is near and I think Syriza will blink and disenchanted Greeks will realize there is no easy solution to the country's economic woes.

Below, a Bloomberg discussion on whether Greece’s endgame includes a referendum. And Costantine Michalos, president of the Union of Hellenic Chambers of Commerce & Industry, tells CNBC that "Greece is in a liquidity trap and we need to rectify the situation and agree on certain issues."

Wynne’s Pension Boondoggle?

Lorrie Goldstein of the Toronto Sun reports, Wynne’s pension boondoggle?:
Suppose Premier Kathleen Wynne’s Liberal government forced you into its Ontario Retirement Pension Plan (ORPP) and took 1.9% of your earnings up to a maximum of $1,643 annually for your entire working life.

Suppose it invested this money into poorly-run, money-losing Ontario public infrastructure projects, in which the government partnered with private companies and lost its shirt -- and thus your future pension benefits.

Based on the scant information the Liberals are giving out in preparing to implement their ORPP on Jan. 1, 2017, that could happen. Here’s why.

In Finance Minister Charles Sousa’s 2014 budget, here’s how the Liberals explained how they will invest over $3.5 billion annually in mandatory pension contributions.

These will come from more than three million Ontario workers who will be forced into the ORPP because they do not have private pension plans, and from their employers.

(The ORPP will be funded by a 1.9% annual payroll tax imposed on these workers, plus an additional 1.9% annual tax for each employee, paid by their employers.)

“By ... encouraging more Canadians to save through a proposed new Ontario Retirement Pension Plan, new pools of capital would be available for Ontario-based projects such as building roads, bridges and new transit,” the Liberals said.

“Our strong Alternative Financing and Procurement model, run by Infrastructure Ontario, will allow for the efficient deployment of this capital in job-creating projects.”

Really? First, the purpose of the ORPP should not be to help the Liberals fund infrastructure because they’re broke and can’t get the money elsewhere, other than by holding a fire sale of provincial assets like Hydro One, which they’re already doing.

The only purpose of the ORPP -- similar to the stated one of the Canada Pension Plan (CPP) -- should be to “maximize returns (to contributors) without undue risk of loss.”

To do that, the Canada Pension Plan Investment Board (CPPIB), which invests mandatory contributions on behalf of working Canadians so the plan will have the funds to pay them a pension upon retirement, operates independently of the federal and provincial governments.

As the CPPIB says in its 2014 annual report:

“As outlined in the CPPIB Act, the assets we manage ($219.1 billion) belong to the (18 million) Canadian contributors and beneficiaries who participate in the Canada Pension Plan. “These assets are strictly segregated from government funds.

“The CPPIB Act has safeguards against any political interference (operating) at arm’s length from federal and provincial governments with the oversight of an independent ... Board of Directors. CPPIB management reports not to governments, but to the CPPIB Board of Directors.”

To be sure, the CPPIB has been criticized over everything from its administrative costs, to the bonuses it pays to senior executives, to the wisdom of some of its investment decisions.

But on the key issue of how it is run, politicians, by law, aren’t allowed to interfere in its investment decisions, for obvious reasons.

By contrast, the Wynne government is sending contradictory messages about how investments needed to ensure its solvency will be decided by the ORPP.

On the one hand, Sousa says, “our plan would build on the strengths of the CPP ... publicly administered at arm’s length ... (and) have a strong governance model, with experts responsible for managing its investments.”

But on the other, the Liberals want a substantial amount of the funds raised by the ORPP to go to “new pools of capital” for “Ontario-based” infrastructure projects.

These are contradictory statements.

Either the ORPP investment board will be independent in its investment decisions, or it will be ordered, or influenced, by the Wynne government to make investments in Ontario infrastructure projects the government wants to build.

As for the Liberals’ claim their, “strong Alternative Financing and Procurement model, run by Infrastructure Ontario, will allow for the efficient deployment of this capital in job-creating projects”, Ontario Auditor General Bonnie Lysyk recently examined that model.

She concluded Infrastructure Ontario frequently gets its head handed to it in partnerships with the private sector, to the tune of billions of dollars in added costs.

Lysyk said the government could save money on infrastructure projects if it could competently manage them itself. (A big “if”.)

Finally, the CPPIB, which has a five-year annualized rate of return of 11.9% and a 10-year rate of 7.1%, invests only 6.1% of its portfolio in infrastructure (including a stake in the Hwy. 407 ETR).

Based on the little the Wynne government has said about how it will operate the ORPP, we should all be concerned.
The Toronto Sun as been quite critical of Premier Wynne’s pension mystery:
Premier Kathleen Wynne’s Ontario Retirement Pension Plan (ORPP) will have a huge impact on the pocketbooks of millions of workers.

But with the plan set to start Jan. 1, 2017, the Liberals have provided little information about it.

Among the key unanswered questions:

Who will be included?

How will the Liberals invest the $3.5 billion-a-year it will generate?

Wynne has said except for the self-employed, if you work for a business that does not provide a private pension plan, you have to join the ORPP.

You will pay 1.9% of your annual salary into the ORPP through a payroll tax, with your employer matching your contribution.

To give an idea of the costs, if you make $45,000 annually starting at age 25 and contribute for 40 years, you will make annual payments of $788, matched by your employer. At age 65 you will receive a pension until you die of $6,410 annually, in 2014 dollars.

If you earn $90,000 annually (earnings above this are exempt), you will pay $1,643 annually and receive a pension of $12,815.

But what is Wynne’s definition of a private pension plan?

Originally it was thought to mean any private workplace pension.

But pension experts now say it’s unclear whether workers in defined contribution plans will be exempt from the ORPP.

In these plans, the employer and employee make annual contributions, but there is no guarantee of what the final pension will be.

By contrast, defined benefit plans pay a pre-determined pension based on salaries and years of experience.

(We do know workers with defined benefit plans will be exempt from the ORPP.)

But it’s also unclear how the province will invest the $3.5 billion annually in new revenue the ORPP will generate, important so that it remains solvent and able to meet its financial obligations.

Wynne’s Liberals have sent out contradictory messages on this.

They have said both that the ORPP will be managed by an independent investment board like the Canada Pension Plan, but also that it will invest in Ontario government public-private infrastructure projects, meaning the board won’t be truly independent.

Ontarians have a right to answers. After all, it’s their money at stake.​
No doubt, Ontarians have a right to know more details of this new pension plan, but I think the media is getting ahead of themselves here. There have been quite a few dumb attacks on the ORPP, all backed by Canada's powerful financial services industry.

Having said this, I like Lorrie Goldstein's comment above because he's right, when politicians get involved in public pensions, it's a recipe for disaster. Infrastructure Ontario is proof of how billions in public finances are squandered on projects with little or no accountability.

The first thing this Liberal government needs to do is create a legislative act which clearly outlines the governance of this new pension plan. This sounds a lot easier than it actually is. Not long after I was wrongfully dismissed at PSP in October 2006, I was approached by the Treasury Board of Canada to conduct an in-depth report on the governance of the public service pension plan. I wrote about it in my comment on the Auditor General slamming public pensions:
I wrote my report on the governance of the federal government's public sector pension plan for the Treasury Board back in the summer of 2007. The government hired me soon after PSP Investments wrongfully dismissed me after I warned their senior managers of the 2008 crisis. And I didn't mince my words. There were and there remains serious issues on the governance of the federal public sector pension plan.

I remember that summer very well. It was a very stressful time. PSP was sending me legal letters by bailiff early in the morning to bully and intimidate me. I replied through my lawyer and just hunkered down and finished my report. The pension policy group at the Treasury Board didn't like my report because it made them look like a bunch of incompetent bureaucrats, which they were, and they took an inordinate amount of time to pay me my $25,000 for that report (the standard amount when you want to rush a contract through and not hold a bidding process).

If I had to do it all over again, I wouldn't have written that report. The Treasury Board buried it, and it wasn't until last summer that the Office of the Auditor General finally started looking into the governance of the federal public sector pension plan.

In 2011, the Auditor General of Canada did perform a Special Examination of PSP Investments, but that report had more holes in it than Swiss cheese. It was basically a fluff report done with PSP's auditor, Deloitte, and it didn't delve deeply into operational and investment risks. It also didn't examine PSP's serious losses in FY 2009 or look into their extremely risky investments like selling CDS and buying ABCP, something Diane Urqhart analyzed in detail on my blog back in July 2008.

I had discussions with Clyde MacLellan, now the assistant Auditor General, and he admitted that the Special Examination of PSP in 2011 was not a comprehensive performance, investment and operational audit. The sad reality is the Office of the Auditor General lacks the resources to do a comprehensive special examination. They hire mostly CAs who don't have a clue of what's going on at pension funds and they need money to hire outside specialists like Edward Siedle's Benchmark Financial Services.
Pension governance is my forte, which is why Canada's pension plutocrats get their panties tied in a knot every time I expose some of them for being grossly overpaid public pension fund managers.

But compensation is just one component of good pension governance. If you listen to some CEOs at Canada's coveted public pensions, you'd think it's the most important factor in determining their success but I beg to differ. It's one of many factors that has contributed to the long-term success at Canada's large public pensions.

Clearly, the most important thing is to separate the operations of a pension fund from government bureaucrats looking to interfere in decisions in their hopeless attempt to influence key investment decisions and indirectly buy votes. Public pensions funds need to be governed by qualified, independent board of directors.

I've worked in the private sector (BCA Research, National Bank), at Crown corporations (Caisse, PSP Investments, BDC) and the public sector (Canada Revenue Agency, Treasury Board, Industry Canada), and I can tell you what works and what doesn't at all these places. The last thing I want to see is government bureaucrats interfering with the operations of public pensions, especially ones like the ORPP or CPPIB.

Wynne's government has taken bold steps to bypass the federal government, which is still pandering to banks and insurance companies, to introduce its version of an enhanced CPP for Ontario's citizens which need better retirement security. If the feds did the right thing and enhanced the CPP for all Canadians, we wouldn't be talking about the Ontario Retirement Pension Plan (ORPP).

But now that the horse is out of the barn, Ontarians have a right to know a lot more. As always, the devil is in the details. I know there are eminently qualified people consulting the Liberals on this new pension plan, people like Jim Keohane, HOOPP's CEO and someone who believes in this new plan.

Of course, I wasn't invited to share my thoughts and for good reason. I've seen the good, bad and ugly working at and covering Canada's pensions and would recommend world class governance rules that would make Canada's pension plutocrats very nervous.

In the Leo Kolivakis world of pension governance, there would be no nonsense whatsoever. I would change the laws to make sure all our public pension funds have to pass a rigorous and comprehensive performance, risk and operational audit by a fully independent and qualified third party group that specializes in pension proctology (and it's not just Ted Siedle). These audits would occur every three years and the findings would be disclosed to the public via the auditor generals (they can oversee such audits).

What amazes me is how everyone touts how great Canada's pension governance is when in reality I can point to some serious lapses in the governance at all our coveted public pension plans. For example, none of our "world class" public pensions disclose board minutes (with an appropriate lag) or even televise these minutes. When it comes to communication, some are a lot better than others but they still need to improve and have embeddable videos of speeches and more explaining how they invest (Ontario Teachers and HOOPP does a decent job there; communication at PSP is non-existent).

What else? Diversity, diversity, diversity! I'm tired of seeing good old white boys (and a token white lady) when I look at the senior managers of the Canada Pension Plan Investment Board or other large Canadian public pensions. Don't get me wrong, I'm sure they're highly qualified professionals but the sad reality is this image doesn't represent Canada's rich cultural diversity and it sends the wrong message to our ethnic and other minorities.

When I wrote my comment on the importance of diversity at the workplace, I recommended that each of our public pension funds include a diversity section in their annual report discussing what steps they're taking to diversify their workforce and include hard numbers on the hiring of women, visible minorities, aboriginals and people with disabilities.

This is one area where I think we need more, not less, government intervention because I simply don't trust the "independent" board of directors overseeing these funds and think they're all doing a lousy job on diversity at the workplace just like they're doing a lousy job getting the benchmarks of their private market investments right, which is why you're seeing compensation soar to unprecedented levels at some of Canada's large public pensions (I believe in paying for performance that truly reflects the risks an investment manager is taking).

As you can see, I don't mince my words and I certainly don't suck up to any of Canada's "powerful" pension titans. They're perfectly content blacklisting me from being gainfully employed at their organizations because of my blog and more truthfully, because I have progressive multiple sclerosis (even though it's illegal to discriminate and I'm perfectly capable of working as long as they accommodate me which they are required to do by law), and I'm content writing my comments exposing all the nonsense I see at their pensions.

The irony is if any of these powerful pension titans had any brains whatsoever, they'd be working feverishly hard to hire me or find me a good job so I can stop writing my blog exposing uncomfortable truths. Instead, they keep discriminating against me, providing the lamest excuses and quite frankly, violating my right to apply to jobs I'm eminently qualified for (unfortunately and hardly surprisingly, Mr. Bourbonnais is no different from his predecessor and it remains to be seen if he'll change PSP's culture for the better. So far, I see more of the same, except he will surround himself with his own French Canadian people).

On that note, I'm off to the gym to enjoy my day. I don't get paid enough for writing these lengthy, hard-hitting comments and I'm going to spend a lot more time analyzing these schizoid markets and trading stocks and less time on Canada's pensions which keep disappointing me on so many levels.

You can dismiss some or all of my comments as coming from a 'disgruntled former employee' but the truth is if any of you had to put up with a fraction of what I have put up with, you'd be curled up in a fetal position, completely depressed from life. I'm actually quite happy with my life and choose to fight on even when the odds are stacked against me.

My last word of advice to Premier Wynne is to fight the feds and all negative press and forge ahead with the Ontario Retirement Pension Plan (ORPP). Good pension policy makes for good economic policy. If you want to put an Ontario spin to this plan, follow the example of the Caisse which has a dual mandate in Quebec and is going to handle some of Quebec's infrastructure projects.

But whatever you do with the ORPP, make sure you get the governance right, following examples at CPPIB and elsewhere, and set the bar extremely high when it comes to governance. I've only provided a few examples on how governance can be improved at all of Canada's large public pensions, there are plenty more. The ORPP is in a beautiful position to learn from others, incorporating some of their governance and improving on it where it falls short (if you want my advice, you need to pay me big bucks to consult you because I learned from my past mistakes consulting the feds).

Below, Cristina Martins’ debate statement in the Legislature regarding the Ontario Retirement Pension Plan (Feb. 19, 2014). You know my thoughts, I'm all for the ORPP but the devil is in the details. If they bungle up the governance of this plan, it's doomed to fail, but if they get it right, it will flourish and bolster the retirement security of millions of Ontario workers who desperately need something better to retire in dignity and security.

And if you haven't seen it, watch Noah Galloway dance with Sharna on Dancing With the Stars. It is very inspirational and shows you the best way to fight discrimination is to focus on people's abilities, not their disabilities!!



Dealing With a World of Underinvestment?

Michael Spence, a Nobel laureate in economics and Professor of Economics at NYU’s Stern School of Business, wrote a comment for Project Syndicate, A World of Underinvestment:
When World War II ended 70 years ago, much of the world – including industrialized Europe, Japan, and other countries that had been occupied – was left geopolitically riven and burdened by heavy sovereign debt, with many major economies in ruins. One might have expected a long period of limited international cooperation, slow growth, high unemployment, and extreme privation, owing to countries’ limited capacity to finance their huge investment needs. But that is not what happened.

Instead, world leaders adopted a long-term perspective. They recognized that their countries’ debt-reduction prospects depended on nominal economic growth, and that their economic-growth prospects – not to mention continued peace – depended on a worldwide recovery. So they used – and even stretched – their balance sheets for investment, while opening themselves up to international trade, thereby helping to restore demand. The United States – which faced considerable public debt, but had lost little in the way of physical assets – naturally assumed a leadership role in this process.

Two features of the post-war economic recovery are striking. First, countries did not view their sovereign debt as a binding constraint, and instead pursued investment and potential growth. Second, they cooperated with one another on multiple fronts, and the countries with the strongest balance sheets bolstered investment elsewhere, crowding in private investment. The onset of the Cold War may have encouraged this approach. In any case, it was not every country for itself.

Today’s global economy bears striking similarities to the immediate post-war period: high unemployment, high and rising debt levels, and a global shortage of aggregate demand are constraining growth and generating deflationary pressures. And now, as then, the level and quality of investment have been consistently inadequate, with public spending on tangible and intangible capital – a critical factor in long-term growth – well below optimal levels for some time.

Of course, there are also new challenges. The dynamics of income distribution have shifted adversely in recent decades, impeding consensus on economic policy. And aging populations – a result of rising longevity and declining fertility – are putting pressure on public finances.


Nonetheless, the ingredients of an effective strategy to spur economic growth and employment are similar: available balance sheets (sovereign and private) should be used to generate additional demand and boost public investment, even if it results in greater leverage. Recent IMF research suggests that, given excess capacity, governments would probably benefit from substantial short-run multipliers. More important, the focus on investment would improve prospects for long-term sustainable growth, which would enable governments and households to pursue responsible deleveraging.

Likewise, international cooperation is just as critical to success today as it was 70 years ago. Because the balance sheets (public, quasi-public, and private) with the capacity to invest are not uniformly distributed around the world, a determined global effort – which includes an important role for multilateral financial institutions – is needed to clear clogged intermediation channels.

There is plenty of incentive for countries to collaborate, rather than using trade, finance, monetary policy, public-sector purchasing, tax policy, or other levers to undermine one another. After all, given the connectedness that characterizes today’s globalized financial and economic systems, a full recovery anywhere is virtually impossible without a broad-based recovery nearly everywhere.

Yet, for the most part, limited cooperation has been the world’s chosen course in recent years, with countries believing not only that they must fend for themselves, but also that their debt levels impose a hard constraint on growth-generating investment. The resulting underinvestment and depreciation of the global economy’s asset base are suppressing productivity growth and thus undermining sustainable recoveries.

In the absence of a vigorous international re-investment program, monetary policy is being used to prop up growth. But monetary policy typically focuses on domestic recovery. And, though unconventional measures have reduced financial instability, their effectiveness in countering widespread deflationary pressures or restoring growth remains dubious.

Meanwhile, savers are being repressed, asset prices distorted, and incentives to maintain or even increase leverage enhanced. Competitive devaluations, even if they are not policymakers’ stated objectives, are becoming increasingly tempting – though they will not solve the aggregate-demand problem.

This is not to say that sudden “normalization” of monetary policy is a good idea. But, if large-scale investment and reform programs were initiated as complements to unconventional monetary-policy measures, the economy could move onto a more resilient growth path.


Despite its obvious benefits, such a coordinated international approach remains elusive. Though trade and investment agreements are being negotiated, they are increasingly regional in scope. Meanwhile, the multilateral trade system is fragmenting, along with the consensus that created it.

Given the level of interconnectedness and interdependence that characterizes today’s global economy, the reluctance to cooperate is difficult to comprehend. One problem seems to be conditionality, with countries unwilling to commit to complementary fiscal and structural reforms. This is especially evident in Europe, where it is argued, with some justification, that, without such reforms, growth will remain anemic, sustaining or even exacerbating fiscal constraints.

But if conditionality is so important, why didn’t it prevent cooperation 70 years ago? Perhaps the idea that severely damaged economies, with limited prospects for independent recoveries, would pass up the opportunity that international cooperation presented was implausible. Maybe it still is. If so, creating a similar opportunity today could change the incentives, trigger the required complementary reforms, and put the global economy on course to a stronger long-term recovery.
This is an excellent comment from an economist that understands the true nature of the crisis today.

Importantly, the world is awash in debt and liquidity but unless policymakers figure out a way to take advantage of historic low bond yields to invest and deal with unacceptably high chronic unemployment in the developed world, then deflationary pressures will persist and haunt us for a very long time.

Go back to read my comment on whether global reflation is headed our way where I wrote the following:
Global deflation is not going to happen? Really? That's news to me because I keep warning my readers to prepare for global deflation or risk getting slaughtered in the years ahead.

Let's go over a few things which I think are confusing people. First, the euro deflation crisis is far from over. The fall in the euro temporarily boosted import prices and inflation expectations in the eurozone but the underlying structural issues plaguing its economies have not been addressed.

Unless you have a significant pickup in eurozone employment and wages, you can forget about any reflation in that region. The ECB will keep pumping trillions into banks but unlike the Federal Reserve, it's limited in what it can buy in its bond purchases.

Then there is Greece. The latest payment plan is just a shell game. The Greek disconnect is alive and well and threatens not only the eurozone but the entire global financial system through contagion risks we're unaware of and by extension, the entire global economy.

But even if they find a solution to this ongoing Greek saga, there are other far more important worries out there. The China bubble is my biggest concern right now. According to a senior Morgan Stanley investment strategist, the worst of the Chinese economic slowdown is likely still ahead because of the nation's debt:
"China, to try and sustain its growth rate in the post-financial-crisis era, has engaged in the largest credit binge of any emerging market in history," said Ruchir Sharma, head of emerging markets and global macro at Morgan Stanley Investment Management,

Sharma, speaking Tuesday at the Global Private Equity Conference in Washington, D.C., predicted that the credit boom would cause problems.

Whenever a country increases its debt to gross domestic product sharply over five years, in the next five years there's a 70 percent chance of a financial crisis and 100 percent chance of a major economic slowdown, according to Morgan Stanley research.

The Chinese government this week cut interest rates for the third time in six months because of projected 7 percent GDP growth this year, the lowest level in more than two decades.

Sharma said the slow growth he forecast would be around 4 percent or 5 percent over the next five years, about half the rate of what it used to be.

"If China follows this template, it really is payback time," he said.

Another speaker at the conference, former U.S. Gen. Wesley Clark, took a less grim view.

"I'm not as worried about the buildup of debt in China as other countries," the founder of Wesley Clark & Associates said.

He cited two reasons. The renminbi is not fully convertible to other currencies, and the Chinese economy still has elements of central control.

"Every year people at these business conferences say the demise of the Chinese economy is coming very rapidly," Clark added. "But it hasn't happened. And President Xi is not going to let it happen if he can avoid it."

Another China bull, Robert Petty, managing partner and co-founder of Clearwater Capital Partners, said China can forestall its debt problems.

"We believe the balance sheet of China absolutely has the capacity to do two things: term it out and kick the can down the road," Petty said.
It remains to be seen how Chinese authorities will forestall or mitigate  the inevitable slowdown but if it's a severe slowdown, watch out, we're going to have more deflationary pressures heading our way (any significant decline in the renminbi will mean much lower goods prices for the developed world since we pretty much import most of our goods from China).

The demographics of China and Japan are also scary. China is sliding into a pensions black hole and Japan isn't doing that much better. Some of the same structural issues plaguing the eurozone -- older demographics in particular -- are plaguing China and Japan.

So if China slows down considerably in the years ahead and Abenomics fails to deliver in Japan, where is global growth going to come from? Europe? Nope. BRICS? Apart from India, the BRICS are weak and getting weaker, not stronger. Russia is trying to hold on for its dear petro life and Brazil isn't going anywhere as China slows down.

Then there is America, the last bastion of hope! U.S. job growth rebounded last month and the unemployment rate dropped to a near seven-year low of 5.4 percent, but there's still plenty of slack in the economy with the number of Americans not in the labor force rising to a record 93.2 million (most of these long-term unemployed are women). Moreover, America's risky recovery poses serious challenges to the global economy, especially if the Fed makes a monumental mistake and starts raising rates too soon and too aggressively.
On Wednesday, Jeff Cox of CNBC reported that 40 percent of unemployed have quit looking for jobs:
At a time when 8.5 million Americans still don't have jobs, some 40 percent have given up even looking.

The revelation, contained in a new survey Wednesday showing how much work needs to be done yet in the U.S. labor market, comes as the labor force participation rate remains mired near 37-year lows.

A tight jobs market, the skills gap between what employers want and what prospective employees have to offer, and a benefits program that, while curtailed from its recession level, still remains obliging have combined to keep workers on the sidelines, according to a Harris poll of 1,553 working-age Americans conducted for Express Employment Professionals.

On the bright side, the number is actually better than 2014, the survey's inaugural year, when 47 percent of the jobless said they had given up.

"This survey shows that some of the troubling trends we observed last year are continuing," Bob Funk, CEO of Express Employment Professionals and a former chairman of the Federal Reserve Bank of Kansas City, said in a statement. "While the economy is indeed getting better for some, for others who have been unemployed long term, they are increasingly being left behind."

Duration matters: The longer someone was out of work, the more likely it is that they've quit looking.

Of the total, 55 percent who were unemployed for more than two years fell into the category; 32 percent of those idle for 13 to 24 months and 34 percent out for seven to 12 months had quit as well. Just 21 percent out for three months or less had stopped looking.

Overall, nearly 1 in 5 (19 percent) said they spent no time looking for work in the week previous to the survey. Just 10 percent said they spent more than 31 hours looking.

Unemployment compensation also matters.

Federal guidelines allow for 26 weeks of unemployment compensation, though extended benefits are available in some circumstances.

Nearly 9 of out 10 respondents (89 percent) said they would "search harder and wider" for work if their benefits ran out. Moreover, in a series of statements about benefits, the one that garnered the most agreement, with 69 percent, was that benefits were "giving me a cushion so that I can take my time in searching for a job," while 59 percent said compensation "has allowed me to take time for myself," 36 percent agreed that it "has allowed me to turn down positions that weren't right for me" and 40 percent agreed "I haven't had to look for work as hard knowing I have some income to rely on."

Of those out of work and not receiving benefits—those who have quit looking are not eligible—22 percent said their benefits had run out and 32 percent said they weren't eligible.

The decline in labor force participation, in fact, has been a key to the drop of the unemployment rate in the post-recession economy. The jobless rate has slid from a high of 10 percent in October 2009 to its current 5.4 percent, the lowest level since May 2008. However, the participation rate has fallen from 66.1 percent to 62.8 percent during the same period.

Benefit programs have expanded as well, even as unemployment compensation dropped from the 99 weeks of eligibility during when the jobless rate was much higher.

The Supplemental Nutrition Assistance Program—food stamps—now serves 45.7 million Americans, down from nearly 48 million in 2012.

"Over the last year, we have seen the unemployment rate go down, but we too easily forget that there are people still hurting, still wanting to work, but on the verge of giving up," Express Employment's Funk said. "I believe everyone who wants to work should have a job, so we must not overlook those who have been left behind and left out of the job market."
And it's not just the U.S, this is a global problem. According to Bloomberg, the world is missing out on $1.2 trillion in wages:
The global financial crisis of 2008-10 had a big impact on jobs. Employment growth has stalled at a rate of about 1.4 percent per year since 2011. While this compares favorably with the crisis period when that rate averaged 0.9 percent, it is below the 1.7 percent annual rate between 2000 and 2007, according to the International Labour Organization.

The slower employment growth since 2011 compared with before 2008 means there are 61 million fewer jobs in 2014 than there would have been had the pre-crisis growth trends been maintained, the ILO said.

In 2013, that jobs gap corresponded to an estimated $1.2 trillion in lost wages around the world, which is equivalent to about 1.2 percent of total annual global output and roughly 2 percent of total global consumption.
I know all about chronic unemployment and discrimination, and vent on my blog from time to time (like here, here and here) because nothing is more incredibly frustrating than applying to jobs you're eminently qualified for only to get shut out because of political or discriminatory reasons.

But I dealt with unemployment by taking matters into my own hands, effectively creating my own job. I started this blog in 2008 and built it up one comment at a time to be one of the most read blogs on pensions and investments. I turn some people off sometimes but that's alright, I'm not writing this blog to win a popularity contest nor are they living my life to fully appreciate what I've lived through or where I'm coming from. Some people have helped me financially but nobody has offered me a job.

Anyways, chronic unemployment is an issue. Companies don't like hiring people who have been out of a job for a long time because they think their skill set has been eroded and they have nothing to offer. In some cases, this may be true, but in others it's blatantly false. In all cases, these are human beings who deserve an opportunity to work and provide for themselves and their family.

And what happens to all these chronically unemployed people when they're out of  a job for such a long time? They end up on social assistance, collecting food stamps to survive. This is the reality for millions of Americans living in the United States of Pension Poverty.

This is why when people get all excited about an improving labor market, I can't help but point out any improvement that doesn't improve the lives of millions of chronically unemployed is simply a chimera, an illusion that neglects the gravity and reality of how bad the situation really is.

Getting back to Michael Spence's comment, he points to rising inequality but fails to make the following connection. Rising inequality, the ongoing jobs crisis, the ongoing retirement crisis, the aging of the population, are all extremely deflationary factors. Spence alludes to it but doesn't delve into these topics.

But his call for boosting investment to boost aggregate demand is right on and I think public pensions can play an important role in this regard. Go read my comment on opening Canada's infrastructure floodgates where I wrote the following:
No doubt about it, Canada's large pensions can play an integral role in funding domestic infrastructure but they have to maintain their arms-length approach in making such investments and not be forced to invest in these projects by any government. 

All of Canada's large pensions are shifting huge assets into infrastructure as they look for very long-term investments with steady cash flows offering them returns between equities and bonds. Infrastructure investments are an integral part of asset-liability management at pensions which typically pay out liabilities over the next 75+ years (the duration of infrastructure assets fits better with the duration of the liabilities of these plans).

The problem right now is there aren't enough domestic opportunities so our large pensions are forced to invest in infrastructure projects abroad. This introduces legal, regulatory, political and currency risks (their liabilities are in Canadian dollars). For example, PSP's big stake in Athens airport makes perfect long-term sense but if Greece defaults and exits the euro, all hell can break loose and the leftist or worse, a junta government, might nationalize this airport. Even if they don't nationalize, if they reintroduce the drachma, it will significantly damper PSP's revenues from this project.

As far as incorporating models from Australia and the UK, I think Australia has got it mostly right. They privatized their airports and ports and Canada needs to do the same to fund other projects. The UK's experience with the Pensions Infrastructure Platform has its share of critics but there have been some big deals there too.

Whatever the Liberals decide to do, their initiative needs to entice foreign pension and sovereign wealth funds as well. It won't be enough to have Canada's large pensions on board. And as I stated above, our governments will still need to invest billions in domestic infrastructure.

From an economic policy perspective, massive investments in infrastructure are needed especially now that Canada is on the precipice of a major crisis. We're living in Dreamland up here and I fear the worst as Canadians take on ever more crushing debt. The country desperately needs good paying jobs, the type of jobs massive infrastructure projects can provide.
We need as a society to start taking the long, long view on public investments, jobs and pensions. If we don't, we are doomed to repeat the same mistakes of the past. Central banks can keep on printing but that won't address deep structural issues plaguing our economies, rising inequality and chronic unemployment being the two most worrying trends.

Below, digging into soft economic data, and what is signals about employment, with Joe LaVorgna, Deutsche Bank chief economist, and CNBC's Steve Liesman.

Also, the cataclysmic gold bugs over at Zero Edge posted an older clip of Bridgewater's Ray Dalio slamming Buffett and touting gold, but I was more interesting in this comment: "we're beyond the point of being able to successfully manage this... and I worry about another leg down in the economy causing social disruption... Hitler came to power in 1933 because of the social tension between the factions."

I hope Ray is wrong about that. On Friday, I will peek into the portfolios of top funds, including Bridgewater and show you what they bought and sold last quarter.

Also, let me end by plugging an ebook my friend Brian Romanchuk just completed, Understanding Government Finance. Brian sent me an advanced copy and it's a superbly written book which explains Modern Monetary Theory (MMT) and a lot more in very clear language.

I highly recommend all of you, including Ray Dalio, take the time to read it and understand the points Brian is advancing on debt and deficits. I embedded a clip of Warren Mosler, one of the fathers of MMT, where he explains the tenets of this theory in clear language. Listen carefully to this interview.



Top Funds' Activity in Q1 2015

Sam Forgione of Reuters reports, Top U.S. hedge funds continued to dump Apple amid rally:
Top U.S. hedge fund management firms, including Leon Cooperman's Omega Advisors and Philippe Laffont's Coatue Management, continued to reduce or slash stakes altogether in Apple Inc (AAPL.O) during the first quarter, as shares of the iPhone maker rallied.

According to regulatory filings released on Friday, Coatue cut its holding of Apple by selling 1.2 million shares during the first three months of this year, but it remains the fund's single biggest U.S. stock investment, with 7.7 million shares. Omega Advisors sold all of its 383,790 shares in Apple during the first quarter, while Rothschild Asset Management cut its stake by 107,953 to 938,693 shares, filings showed on Friday.

David Einhorn's Greenlight Capital also cut its exposure in Apple during the first quarter, slashing its stake by 1.2 million shares to 7.4 million shares.

Apple shares rose 12.7 percent in the first quarter and have continued to increase. Since the end of March, the shares have risen 3.6 percent through Thursday's close. Including Friday's trading, shares are up 3.3 percent since the end of March.

In the fourth quarter, David Einhorn's Greenlight Capital and Coatue Management reduced their stakes in Apple, which was a big winner in 2014, with its shares rising nearly 38 percent.

At the end of 2014, Apple was one of the hedge fund community's favored positions, according to Goldman Sachs. Their analysis of more than 850 funds with $2 trillion in assets showed 12 percent of hedge funds counted it among their top 10 holdings. And given its size as the largest publicly traded U.S. company, that made it "key for both hedge fund and index performance," Goldman said in its February report.

Not every big hedge fund manager is souring on Apple. Ray Dalios' Bridgewater Associates increased its stake by 473,500 shares to 732,997. And billionaire hedge-fund activist Carl Icahn kept his stake unchanged at 52.8 million shares as of the end of the first quarter.

The actions were revealed in quarterly disclosures of manager stock holdings, known as 13F filings, with the U.S. Securities and Exchange Commission. They are of great interest to investors trying to divine a pattern in what savvy traders are selling and buying.

The disclosures are backward-looking and come out 45 days after the end of each quarter. Still, the filings offer a glimpse into what hedge fund managers saw as opportunities on the long side.

The filings do not disclose short positions. As a result, the public filings do not always present a complete picture of a management firm's stock holdings.
The whole world knows Carl Icahn's views on Apple. He thinks underweight Apple bets will hurt funds' performance and he might be right on that call as the so-called "biotech and buyback bubble" keeps inflating. Listening to his wise son, Brett, Icahn senior has also made a killing in Netflix (NFLX), one of the top performing Nasdaq stocks this year. They still maintain 10% of the portfolio in this company but don't bother chasing Netflix higher now, the big money has already been made.

But should you invest like Icahn? That was a topic in a recent CNBC debate. When I look closely at his top holdings, there are stock bets I like and others where he's getting killed. For example, his big bets on Chesapeake Energy (CHK), Transocean (RIG) and CVR Energy (CVI) have hurt his fund (interestingly, Viking Global just took a position in Transocean in Q1). And Icahn's pump and dump of Voltari (VLTC) which I recently discussed here is an abomination.

Still, what I like about Icahn is he has the balls to take outsized bets on companies he has conviction on and he typically turns out to be right on his big bets which is why so many people track his fund's holdings closely.

Where else are well known hedge funds making big bets? Nathan Vardi of Forbes reports, Hedge Funds Keep Betting Big On Health Care:
In recent years, some of the most prominent hedge fund victories have been all about health care. Larry Robbins, the billionaire founder of Glenview Capital Management, has generated excellent performance in the last two years by allocating a big chunk of his portfolio to hospital stocks—one of his hedge funds has posted a three-year annualized return of 57%. Billionaire William Ackman had the biggest year of his hedge fund career in 2014 because of Botox-maker Allergan, which was responsible for 19.1% of Ackman’s gross return.

In the first three months of 2015, hedge funds continued to rush into health care, chasing returns in the sector that has led the U.S stock market this year. Hedge funds increased their long exposure to health care to $289.67 billion, according to research firm Novus, making up 10.35% of the net assets under management of stock-picking hedge funds. Novus, which does not include quantitative trading hedge funds in its stock holding analysis, says that in the last year hedge funds have gone from being underweight health care to overweight.

The most popular hedge fund health care stock by far is Actavis, the generic drug maker that bought Allergan this year for $67 billion and is run by Brent Saunders, a CEO who is popular with both Ackman and Carl Icahn. Goldman Sachs released a report on Thursday that showed Actavis is the most popular stock with hedge funds that it tracks, even more popular than Apple. There are 171 hedge funds invested in Actavis and those hedge fund owned $20.3 billion of the stock at the end of March, according to Novus. The only company in America in which hedge funds held more stock, according to Novus, was Apple.

Actavis is a hedge fund-fueled stock. Hedge funds owned 24% of the outstanding shares at the end of March. Big positions in Actavis are owned by funds managed by billionaire John Paulson, whose Paulson & Co., had Actavis as its second-biggest U.S. holding at the end of March, and billionaire Andreas Halvorsen, who has made Actavis the biggest U.S. stock position of his some $30 billion hedge fund.

Actavis was recently the second-biggest holdings of billionaire Dan Loeb’s Third Point hedge fund, which had biotech company Amgen as its biggest position at the end of March. These two stocks alone made up about a quarter of Loeb’s U.S. stock holdings. A big buyer of Actavis in the first quarter of 2015 was billionaire Stephen Mandel’s Lone Pine hedge fund.

Valeant Pharmaceuticals is the second-most popular health care stock with the hedge fund crowd when measured by the value of shares held by hedge funds, according to Novus. There are 100 hedge funds that own $17.8 billion of the stock. Valeant is a hedge fund machine that was essentially created by ValueAct Capital Management, the San Francisco hedge fund run by Jeffrey Ubben. The stock is Ubben’s biggest holding by far, recently making up more than 21% of his U.S. stock portfolio. It made up more than a quarter of Bill Ackman’s U.S. stock portfolio at the end of March after his Pershing Sqaure hedge fund finally took a position this year in the drug maker that Ackman had teamed up with in early 2014 to try to buy Allergan. Valeant is Ackman’s biggest position so far in 2015.

Johnson & Johnson is a health care stock owned by 163 hedge funds. More hedge funds own Johnson & Johnson than any other health care stock except for Actavis. Pfizer is another drug company that has long been very popular with hedge funds, which own more than $6 billion of the stock, as is Gilead Sciences, where 141 hedge funds owned nearly $5 billion of the stock at the end March, according to Novus.

What healthcare stocks were hedge funds buying in the first quarter? Davita Healthcare Partners is one example. They have also been playing the mergers that have dominated the industry, buying shares of Salix Pharmaceuticals, Hospira and Pharmacyclics.
It's that time of the year folks, when everyone gets hot and bothered over what overpaid and over-glorified hedge fund gurus bought and sold last quarter.

Let's go over some more articles. Akin Oyedele of Business Insider reports on the top stock pick from each of 50 biggest hedge funds. You can click on the image below to view them:


Goldman also came out with the 100 most important stocks to hedge funds. You can click on the images below to see the top 50 long and the top 50 short positions:

Top 50 longs (click on image):


Top 50 shorts (click on image):


Whale Wisdom provides a cool "heat map" on their site going over 13 F filings from top funds where you can sort top picks by sector and even see ones from previous quarters (click on image below):


Now, here's my take on all this. Unless you're a professional stock trader or investor, please ignore these articles and information from sites like market folly, Insider Monkey, Holdings Channel, and Whale Wisdom.

All this information overload will just confuse the hell out of you. Holding a top long position of hedge funds doesn't mean you will make money. Conversely, holding a top short position of a hedge fund doesn't mean you will lose money. In fact, Goldman Sachs told hedge fund clients this week to buy stocks that are unloved by their peers if they want any chance of beating them.

So why bother looking at the portfolios of top funds? And who exactly are top funds right now? I'll answer these questions with the help of my friends at Symmetric, Sam Abbas and David Moon.

In my opinion, Sam and David have created one of the best services to track hedge fund holdings and more importantly to dynamically rank hedge funds based on their holdings and their alpha generation.

Sam took some time earlier this week to walk me through their product which only costs $200 a month (no lockup! LOL!) and where you can literally go over the portfolios of top funds in great detail to see if they're adding real alpha. Honestly, it's amazing, I highly recommend you contact them here and try it out, it's simply amazing.

And by the way, I'm not affiliated with Symmetric, nor have they provided me with any money to plug them. They were nice enough to provide me with a free tryout and I'm using my knowledge of hedge funds and benchmarks to help them think about how they can improve their product.

Symmetric provides an in-depth report every quarter and Sam allowed me to share some information from their latest report with my readers:
The Symmetric Twenty comprise the top twenty ranked long-short equity managers. We force-rank the entire Symmetric universe according to their realized StockAlpha year to date, 12 months back and three years back. The list is further adjusted to reflect those whose StockAlpha has not only the greatest magnitude, but also the greatest consistency over each period.

The following chart shows the cumulative StockAlpha for the Symmetric Top 20 vs. cumulative StockAlpha for the entire hedge fund universe. The chart demonstrates the magnitude of dispersion between the best and most consistent stock pickers and the average stock pickers. The Symmetric Top 20 have added over 25% of StockAlpha above the average hedge fund over the past 3 years or roughly 8% a year.With hedge fund fees typically being around 2% of assets and managed and 20% of profits, its clear that only the very top stock pickers are worth paying for. The average hedge fund would return negative StockAlpha after fees (click on image).


And who are the top  20 funds right now according to Symmetric? Click on the chart below to view them:


They also provided the most profitable trades of the Symmetric Twenty in Q1 2015 (click on image):


And they provide the Symmetric Twenty's top five new positions as well as the top five increased positions in Q1 2015 (click on image).


Not surprisingly, Broadfin run by Kevin Kotler is at the top of Symmetric top 20 list. I track this fund's portfolio very closely as it's in the red hot biotech space which I like so much. There are many other funds I like in this space, including Baker Brothers, Perceptive Advisors, Palo Alto Investors and many more (see my list below).

Sam was also kind enough to do some custom work for me, looking at the funds that I track closely below. I can literally do some serious attribution analysis on all these funds. He provided me with some of the most crowded trades and top winners and losers for the funds I track (click on images):

Deep Value


L/S Equity


Sector Specific


Sam Abbas of Symmetric also shared this valid point with me on replicating hedge fund strategies:
Most allocators approach hedge fund replication using 13-Fs by pointing out the 45 day delay with filings releases and the lack of information about the short side/international part of the book. The standard argument is that this makes replication a bad idea.
We don't think this is the right way to think about it. A better approach is to ask: do the benefits of being invested directly in the fund (short exposure + inter quarter trading + international exposure) make up for the 2/20 in fees and long lockup periods? 2/20 is such an enormous performance drag that in some cases you may be better off than the net return of the fund just by replicating the publicly disclosed book.
At the very least allocators should be benchmarking their funds net returns to a synthetic replicated version to understand what value they are getting above and beyond what is available cheaply.
I thank Sam Abbas for all his wonderful insights. Once again, please contact them here for more information on this wonderful service they provide. You will be blown away!

Below, you can click on links to view the top funds of many hedge funds and other funds I track. This is a dynamic list that keeps getting bigger and bigger. Typically what happens is I look at stocks that are doing well and look at who the largest holders are to gain ideas as to which funds to add to my list. That's why the list keeps growing. I also added many Canadian funds for those of you looking to see what the big Canadian funds are buying and selling up here.

Finally, I'm a stock market junkie and track thousands of companies I've tracked in over 100 sectors and industries. I've built that list over many years and keep adding to it. I regularly look at the YTD performance of stocks, the 12-month leaders, the 52-week highs and 52-week lows. I also like to track the most shorted stocks and highest yielding stocks in various exchanges.

Gaining an edge on stock picking is a full time job. Please remember that these schizoid markets move on a dime and are heavily influenced by macro factors. Even the very best stock pickers get their hands handed to them from time to time and if they tell you otherwise, they're blatant liars.

Having said this, there is a reason why people like peering into Warren Buffett's portfolio or that of Seth Klarman (shown in pic at the top) or his protege, David Abrams, the one-man wealth machine. These managers are incredible stock pickers with a long and enviable track record. They don't hug benchmarks, they take very concentrated bets in a few stocks they really like and hold them for a long time, which is why they've delivered incredible outperformance over a very long period.

But even they aren't gods and they can't predict the future. These are very tough markets to make money in and I highly recommend you read my comment on slugging through a rough stock market as well as my more recent comments on hedge funds preparing for war and whether you should prepare for global reflation.

I'm still long a few biotechs which I like to trade around but these markets are making me increasingly nervous because there are a lot of hidden risks on the macro front and some not so hidden that worry me.

I can share a lot more information on specific stocks and macro risks with institutional investors that subscribe to this blog via the third option ($5,000 a year). Once again, I ask you all to please take the time to donate and show your appreciation for my work. You can do so via PayPal at the top right-hand side of this blog.

On that note, have fun peering into the portfolios of top funds below. I cover a lot of funds, not just hedge funds. By the way, that handsome and distinguished fella talking on his cell phone above is Andreas Halverson, founder of Viking Global, one of my favorite L/S Equity hedge funds and one of the best hedge funds in the world.

Top multi-strategy and event driven hedge funds

As the name implies, these hedge funds invest across a wide variety of hedge fund strategies like L/S Equity, L/S credit, global macro, convertible arbitrage, risk arbitrage, volatility arbitrage, merger arbitrage, distressed debt and statistical pair trading.

Unlike fund of hedge funds, the fees are lower because there is a single manager managing the portfolio, allocating across various alpha strategies as opportunities arise. Below are links to the holdings of some top multi-strategy hedge funds I track closely:

1) Citadel Advisors


2) Balyasny Asset Management

3) Farallon Capital Management

4) Peak6 Investments

5) Kingdon Capital Management

6) Millennium Management

7) Eton Park Capital Management

8) HBK Investments

9) Highbridge Capital Management

10) Pentwater Capital Management

11) Och-Ziff Capital Management

12) Pine River Capital Capital Management

13) Carlson Capital Management

14) Mount Kellett Capital Management 

15) Whitebox Advisors

16) QVT Financial 

17) Visium Asset Management

18) York Capital Management

Top Global Macro Hedge Funds and Family Offices

These hedge funds gained notoriety because of George Soros, arguably the best and most famous hedge fund manager. Global macros typically invest in bond and currency markets but the top macro funds are able to invest across all asset classes, including equities.

George Soros, Stanley Druckenmiller, Julian Robertson and now Steve Cohen have converted their hedge funds into family offices to manage their own money and basically only answer to themselves (that is my definition of true investment success).

1) Soros Fund Management

2) Duquesne Family Office (Stanley Druckenmiller)

3) Bridgewater Associates

4) Caxton Associates (Bruce Covner)

5) Tudor Investment Corporation

6) Tiger Management (Julian Robertson)

7) Moore Capital Management

8) Point72 Asset Management (Steve Cohen)

9) Bill and Melinda Gates Foundation Trust (Michael Larson, the man behind Gates)

Top Market Neutral, Quant and CTA Hedge Funds

These funds use sophisticated mathematical algorithms to initiate their positions. They typically only hire PhDs in mathematics, physics and computer science to develop their algorithms. Market neutral funds will engage in pair trading to remove market beta.

1) Alyeska Investment Group

2) Renaissance Technologies

3) DE Shaw & Co.

4) Two Sigma Investments

5) Numeric Investors

6) Analytic Investors

7) Winton Capital Management

8) Graham Capital Management

9) SABA Capital Management

10) Quantitative Investment Management

11) Oxford Asset Management

Top Deep Value, Activist and Distressed Debt Funds

These are among the top long-only funds that everyone tracks. They include funds run by legendary investors like Warren Buffet, Seth Klarman, Ron Baron and Ken Fisher. Activist investors like to make investments in companies where management lacks the proper incentives to maximize shareholder value. They differ from traditional L/S hedge funds by having a more concentrated portfolio. Distressed debt funds typically invest in debt of a company but sometimes take equity positions.

1) Abrams Capital Management

2) Berkshire Hathaway

3) Baron Partners Fund (click here to view other Baron funds)

4) BHR Capital

5) Fisher Asset Management

6) Baupost Group

7) Fairfax Financial Holdings

8) Fairholme Capital

9) Trian Fund Management

10) Gotham Asset Management

11) Fir Tree Partners

12) Sasco Capital

13) Jana Partners

14) Icahn Associates

15) Schneider Capital Management

16) Highfields Capital Management 

17) Eminence Capital

18) Pershing Square Capital Management

19) New Mountain Vantage  Advisers

20) Atlantic Investment Management

21) Scout Capital Management

22) Third Point

23) Marcato Capital Management

24) Glenview Capital Management

25) Perry Corp

26) Apollo Management

27) Avenue Capital

28) Blue Harbor Group

29) Brigade Capital Management

30) Caspian Capital

31) Kerrisdale Advisers

32) Knighthead Capital Management

33) Relational Investors

34) Roystone Capital Management

35) Scopia Capital Management

36) ValueAct Capital

37) Vulcan Value Partners

38) Okumus Fund Management

39) Eagle Capital Management

40) Lyrical Asset Management

Top Long/Short Hedge Funds

These hedge funds go long shares they think will rise in value and short those they think will fall. Along with global macro funds, they command the bulk of hedge fund assets. There are many L/S funds but here is a small sample of some well known funds.

1) Appaloosa Capital Management

2) Tiger Global Management

3) Greenlight Capital

4) Maverick Capital

5) Pointstate Capital Partners 

6) Marathon Asset Management

7) JAT Capital Management

8) Coatue Management

9) Omega Advisors (Leon Cooperman)

10) Artis Capital Management

11) Fox Point Capital Management

12) Jabre Capital Partners

13) Lone Pine Capital

14) Paulson & Co.

15) Bronson Point Management

16) Hoplite Capital Management

17) LSV Asset Management

18) Hussman Strategic Advisors

19) Cantillon Capital Management

20) Brookside Capital Management

21) Blue Ridge Capital

22) Iridian Asset Management

23) Clough Capital Partners

24) GLG Partners LP

25) Cadence Capital Management

26) Karsh Capital Management

27) New Mountain Vantage

28) Andor Capital Management

29) Silver Point Capital

30) Steadfast Capital Management

31) Brookside Capital Management

32) PAR Capital Capital Management

33) Gilder, Gagnon, Howe & Co

34) Brahman Capital

35) Bridger Management 

36) Kensico Capital Management

37) Kynikos Associates

38) Soroban Capital Partners

39) Passport Capital

40) Pennant Capital Management

41) Mason Capital Management

42) SAB Capital Management

43) Sirios Capital Management 

44) Hayman Capital Management

45) Highside Capital Management

46) Tremblant Capital Group

47) Decade Capital Management

48) T. Boone Pickens BP Capital 

49) Bloom Tree Partners

50) Cadian Capital Management

51) Matrix Capital Management

52) Senvest Partners


53) Falcon Edge Capital Management

54) Melvin Capital Partners

55) Portolan Capital Management

56) Proxima Capital Management

57) Tourbillon Capital Partners

58) Valinor Management

59) Viking Global Investors

60) York Capital Management

61) Zweig-Dimenna Associates

Top Sector and Specialized Funds

I like tracking activity funds that specialize in real estate, biotech, healthcare, retail and other sectors like mid, small and micro caps. Here are some funds worth tracking closely.

1) Baker Brothers Advisors

2) Palo Alto Investors

3) Broadfin Capital

4) Healthcor Management

5) Orbimed Advisors

6) Deerfield Management

7) Sarissa Capital Management

8) SIO Capital Management

9) Sectoral Asset Management

10) Oracle Investment Management

11) Perceptive Advisors

12) Consonance Capital Management

13) Camber Capital Management

14) Redmile Group

15) RTW Investments

16) Bridger Capital Management

17) Southeastern Asset Management

18) Bridgeway Capital Management

19) Cohen & Steers

20) Cardinal Capital Management

21) Munder Capital Management

22) Diamondhill Capital Management 

23) Tiger Consumer Management

24) Geneva Capital Management

25) Criterion Capital Management

26) Highland Capital Management

27) SIO Capital Management

28) Tang Capital Management

29) 12 West Capital Management

Mutual Funds and Asset Managers

Mutual funds and large asset managers are not hedge funds but their sheer size makes them important players. Some asset managers have excellent track records. Below, are a few funds investors track closely.

1) Fidelity

2) Blackrock Fund Advisors

3) Wellington Management

4) AQR Capital Management

5) Sands Capital Management

6) Brookfield Asset Management

7) Dodge & Cox

8) Eaton Vance Management

9) Grantham, Mayo, Van Otterloo & Co.

10) Geode Capital Management

11) Goldman Sachs Group

12) JP Morgan Chase& Co.

13) Morgan Stanley

14) Manulife Asset Management

15) RCM Capital Management

16) UBS Asset Management

17) Barclays Global Investor

18) Epoch Investment Partners

19) Thornburg Investment Management

20) Legg Mason Capital Management

21) Kornitzer Capital Management

22) Batterymarch Financial Management

23) Tocqueville Asset Management

24) Neuberger Berman

25) Winslow Capital Management

26) Herndon Capital Management

27) Artisan Partners

28) Great West Life Insurance Management

29) Lazard Asset Management 

30) Janus Capital Management

31) Franklin Resources

32) Capital Research Global Investors

33) T. Rowe Price

34) First Eagle Investment Management

35) Frontier Capital Management

Canadian Asset Managers

Here are a few Canadian funds I track closely:

1) Letko, Brosseau and Associates

2) Fiera Capital Corporation

3) West Face Capital

4) Hexavest

5) 1832 Asset Management

6) Jarislowsky, Fraser

7) Connor, Clark & Lunn Investment Management

8) TD Asset Management

9) CIBC Asset Management

10) Beutel, Goodman & Co

11) Greystone Managed Investments

12) Mackenzie Financial Corporation

13) Great West Life Assurance Co

14) Guardian Capital

15) Scotia Capital

16) AGF Investments

17) Montrusco Bolton

Pension Funds, Endowment Funds, and Sovereign Wealth Funds

Last but not least, I track activity of some pension funds, endowment funds and sovereign wealth funds. I like to focus on funds that invest in top hedge funds and have internal alpha managers. Below, a sample of pension and endowment funds I track closely:

1) Alberta Investment Management Corporation (AIMco)

2) Ontario Teachers' Pension Plan

3) Canada Pension Plan Investment Board

4) Caisse de dépôt et placement du Québec

5) OMERS Administration Corp.

6) British Columbia Investment Management Corporation (bcIMC)

7) Public Sector Pension Investment Board (PSP Investments)

8) PGGM Investments

9) APG All Pensions Group

10) California Public Employees Retirement System (CalPERS)

11) California State Teachers Retirement System (CalSTRS)

12) New York State Common Fund

13) New York State Teachers Retirement System

14) State Board of Administration of Florida Retirement System

15) State of Wisconsin Investment Board

16) State of New Jersey Common Pension Fund

17) Public Employees Retirement System of Ohio

18) STRS Ohio

19) Teacher Retirement System of Texas

20) Virginia Retirement Systems

21) TIAA CREF investment Management

22) Harvard Management Co.

23) Norges Bank

24) Nordea Investment Management

25) Korea Investment Corp.

26) Singapore Temasek Holdings 

27) Yale Endowment Fund

Below, dissecting the latest 13-F filings with the Fast Money traders. Also, inside hedge fund manager Seth Klarman's investments, with CNBC's Brian Sullivan and Kate Kelly. You can view a list of Klarman's top holdings from the link above or just click here.

I wish all of my American readers a nice long weekend, I'll be back on Tuesday. In the meantime, feel free to contact me directly (LKolivakis@gmail.com) if you need anything specific and please remember to donate and/ or subscribe to my blog at the top right-hand side. Thank you!


Warren Buffet's Big Bets For 2015?

Eric McWhinnie of The Cheat Sheet wrote a comment for USA Today, Buffett bets on these 8 stocks for 2015:
Berkshire's largest investments include some of the most popular blue chips known to Wall Street. In the recent quarter, Buffett added to several of these positions. Let's take a look at Berkshire's top eight holdings according to dollar value at the end of March, not including Buffett's option to purchase 700 million shares of Bank of America at any time prior to September 2021 for $5 billion.

8. Davita Healthcare Partners

This Denver-based company provides a variety of healthcare services throughout the United States and abroad. DaVita (DVA) is a leading provider of kidney care, delivering dialysis services to patients with chronic kidney failure and end-stage renal disease. It operates or provides administrative services at 2,197 outpatient dialysis centers located in the U.S. serving approximately 174,000 patients. The company also operates 93 outpatient dialysis centers located in 10 countries outside the U.S.

At the end of March, Berkshire held 38.6 million shares of DaVita, worth $3.13 billion. While Buffett is typically responsible for billion-dollar positions at Berkshire, he is not likely responsible for this investment. Ted Weschler, one of Buffett's hand-selected portfolio managers, is a major DaVita bull. He has been investing in the company for more than a decade.

7. U.S. Bancorp

Financials are a major part of Buffett's investing strategy. Berkshire raised its stake in U.S. Bancorp during the first quarter to 83.8 million shares, worth $3.66 billion. In comparison, Berkshire held 80.1 million shares at the end of 2014. In January, the bank reported record full year 2014 net income of $5.85 billion. Furthermore, U.S. Bancorp (USB) returned 72% of 2014 earnings to shareholders through dividends and share buybacks.

In April, the bank announced it returned 70% of first quarter earnings to shareholders, and was named one of the World's Most Ethical Companies by the Ethisphere Institute.

6. Procter & Gamble

At the end of March, Berkshire held 52.8 million shares of Procter & Gamble (PG), unchanged from the prior quarter and worth $4.33 billion. Last November, Berkshire announced it will acquire Procter & Gamble's Duracell battery business. In fact, Berkshire will exchange its P&G stake for a recapitalized Duracell, which will include $1.7 billion in cash at closing. The transaction is expected to close in the second half of 2015.

Procter & Gamble is typically considered a staple among investors seeking a solid dividend and stability, but shares have declined more than 10% this year so far. Nonetheless, the company declared a 3% dividend increase in April, marking the 59th consecutive year that Procter & Gamble has raised its dividend. In the first three months of 2015, net sales fell 8% year-over-year to $18.1 billion.

5. Wal-Mart

Berkshire maintained its stake in the world's largest retailer at 60.4 million shares during the first quarter. The position was worth $4.97 billion at the end of March, down from $5.2 billion at the end of December. Berkshire steadily increased its stake in Wal-Mart (WMT) last year as shares gained 9% in 2014. However, shares are down about 7% this year.

Looking ahead, Wal-Mart expects challenges to its operating income. In February's earnings release, Wal-Mart CFO Charles Holley said, "Given the investments we're making in our worldwide e-commerce initiatives and in our associates through higher wages and training, we expect operating income to be pressured in fiscal 2016. We will invest approximately $0.02 per share in the first quarter and approximately $0.20 per share for the full year in the new wage structure, comprehensive associate training and educational programs. Our incremental investment in global e-commerce initiatives will range between $0.06 and $0.09 per share this year. Together, we're investing between $0.26 and $0.29 per share for these initiatives in fiscal year 2016."

4. American Express

The only sector Buffett favors more than consumer staples is financial services. Berkshire held 151.6 million shares of American Express (AXP) at the end of March, worth $11.84 billion. The position was unchanged from the previous quarter, but the value of the position declined by over $2 billion due to a declining share price.

American Express is losing its exclusive partnership with Costco, and total revenue in the recent quarter shrank 3%. On the positive, the company remains committed to returning money to shareholders. In May, the board of directors approved the repurchase of up to 150 million shares, and hiked the quarterly dividend 12% to $0.29 per share. Berkshire also has positions in Mastercard and Visa.

3. International Business Machines

IBM (IBM) was the worst performer in the Dow Jones Industrial Average last year, but is Berkshire's third largest position. During the first quarter, Berkshire stayed faithful and raised its stake in Big Blue to 79.6 million shares, worth $12.77 billion and up from 77 million shares in the prior quarter.

In April, IBM announced its 12th consecutive quarter of declining revenue. Yet shares have found support this year and are among the best performers in the Dow. During the first quarter, IBM returned $2.3 billion to shareholders through dividends ($1.1 billion) and share repurchases ($1.2 billion). Buffett recently told CNBC that he's mainly sticking with IBM because he likes it and even expected revenue to decline. Buffett first started buying IBM shares in early 2011.

2. Coca-Cola

Coca-Cola (KO) is one of the most predictable positions at Berkshire. In fact, Buffett is on record saying he will never sell his shares in the world-renowned beverage company. At the end of the first quarter, Berkshire held the usual 400 million shares of Coca-Cola, worth $16.22 billion. Shares have been mostly flat over the past year as the market still has fears about consumers losing their taste for Coke, but the company is trying not to go stale.

Coca-cola recently entered into an agreement to purchase a 16.7% equity stake in Monster Beverage, hiked its strategic position in Keurig Green Mountain, and launched a new milk product called Fairlife. Coca-Cola is also making operating changes to drive stronger growth and save $3 billion annually by 2019.

1. Wells Fargo

America's most profitable bank is also Buffett's top holding. Shares of Wells Fargo (WFC) have performed well over the past year, but Buffett is still buying. Berkshire held 470.3 million shares of Wells Fargo at the end of the first quarter, up from 463.5 million shares in the prior quarter. The position was valued at $25.6 billion at the end of March. Like most of Warren Buffett's favorite stocks, Wells Fargo pays a healthy dividend, which was increased by 7% to $0.375 per share in April.
I decided to follow-up on my last comment on top funds' activity for Q1 2015 to take you inside how I look at the holdings of many gurus, including Warren Buffett.

Let's look more closely at Bershire's top holdings as of Q1 2015. First, you will notice Berkshire has a fairly concentrated portfolio of 47 positions for a total market value of over $110 billion (click on image):


Next, let's drill down to look at all the 47 positions of Berkshire as of the end of March, not just the top 8 positions mentioned in the article above (click on each image below):

  


There are a lot of interesting positions in the Berkshire portfolio that receive little or no attention. For example, while Buffett is long IBM, did you know his best technology positions are VeriSign (VRSN), an internet security company and Verisk Analytics (VRSK), an insurance risk analytic firm for government and businesses? He's made great returns on both these companies.

Buffett also has big positions in DirectTV (DTV), Moody's (MCO), Goldman Sachs (GS) and Deere & Co. (DE). Apart from American Express (AXP), Buffett also has big positions in Mastercard (MA) and Visa (V), which goes to show you the world's most famous investor knows people need credit cards to make ends meet, and that business is the biggest legalized scam on earth, raping consumers with extraordinary high interest charges (makes hedge fund fees look tame by comparison).

What else is worth noting? He maintains sizable positions in Suncor Energy (SU) and Philips 66 (PSX). He also has a sizable position in Wal Mart's competitor, Costco (COST) and a few big positions in media and entertainment companies like Liberty Global (LBTYA), Liberty Media Corporation (LMCA), Viacom (VIA) and Twenty First Century Fox (FOXA).

In healthcare, apart from DaVita (DVA), Berkshire has big positions in Johnson & Johnson (JNJ) and Sanofi (SNY) which looks like it's ready to break out to new highs (click on image):


What else? Buffett holds positions in well known companies like General Motors (GM), Verizon (VZ), General Electric (GE) and United Parcel Service (UPS). But he also holds positions in in less well known companies like Restaurant Brands International (QSR), Chicago Bridge & Iron Company (CBI) and NOW Inc. (DNOW).

As I stated in my last comment on top funds' activity in Q1 2015, there is a reason why people like peering into Warren Buffett's portfolio or that of Seth Klarman or his protege, David Abrams, the one-man wealth machine. These managers are incredible stock pickers with a long and enviable track record. They don't hug benchmarks, they take very concentrated bets in a few stocks they really like and hold them for a long time, which is why they've delivered incredible outperformance over a very long period.

There are many other less well-known funds that take concentrated bets to deliver outsized gains. One that I added to my asset managers is Akre Capital Management, which has a portfolio of 37 positions making up its $4 billion fund. Akre is part of the Symmetric Twenty (see details here).

As always, don't follow the gurus blindly and do your own due diligence before investing in any specific stock. I love going over the holdings of top funds and picking my favorite ideas. For example, from Buffett's portfolio, I like American Express (AXP), Wal Mart (WMT), IBM (IBM) and Sanofi (SNY) going forward but there are other gems in there, including ones of less known companies (don't buy stocks that have already run up big, focus on the ones that have recently dipped or coming off a base, making new highs).

Anyways, it's a long weekend in the United States, markets are closed there, so I had time to write this up. Don't forget the Oracle of Omaha has some pretty bright people working for him and he can also teach private equity firms a thing or two on making money in the long-term.

Please remember to contribute to my blog on the top right-hand side and institutional investors are kindly requested to subscribe. If you're looking for specialized consulting, feel free to contact me directly at LKolivakis@gmail.com and it will be my pleasure to discuss specific projects with you.

Below, a recent CNBC interview with Becky Quick and Warren Buffett. Also, CNN's Poppy Harlow sat down with  Buffett to discuss the U.S. economy, stocks, income inequality, money in politics and his pick for President in 2016. Great interview, listen carefully to his comments on inequality.

Reuters reported that Berkshire Hathaway's shareholders recently celebrated Warren Buffett's 50th anniversary running the conglomerate, as the billionaire expressed optimism the company would thrive over the long haul, even after he is gone. It no doubt will thrive but it just won't be the same without the Oracle of Omaha at its helm.


CPPIB Gains a Record 18.3% in FY 2015

Benefits Canada reports, CPPIB posts record 18.3% return:
The Canada Pension Plan Investment Board (CPPIB) delivered a net investment return of 18.3% for fiscal 2015—the biggest one-year return since it was created.

The CPP fund ended the year with net assets of $264.6 billion, compared to $219.1 billion at the end of fiscal 2014. The $45.5 billion increase in assets for the year consisted of $40.6 billion in net investment income after all CPPIB costs and $4.9 billion in net CPP contributions.

Multiple factors contributed to fiscal 2015 growth, including all major public equity markets, bonds, private assets and real estate holdings.

Combined, all three of CPPIB’s investment departments delivered substantial investment income to the Fund. International markets, both emerging and developed markets, advanced significantly, boosting returns further as CPPIB continues to diversify the fund. The benefit of the fund’s diversification across currencies also played a role in its returns, as the Canadian dollar fell against certain currencies, including the U.S. dollar.

In the 10-year period up to and including fiscal 2015, CPPIB has contributed $129.5 billion in cumulative net investment income to the fund after all CPPIB costs, and more than $151.5 billion since inception in 1999, meaning that over 57% of the fund’s cumulative assets are the result of investment income.
The Canadian Press also reports, CPP Investment Board has record year, targets U.S. for near term growth:
The Canada Pension Plan Investment Board sees the United States as a key destination for investments in the near term, but expects to shift a bigger share of its assets to faster-growing emerging economies over time.

Emerging markets equities account for about 5.9 per cent of the assets managed by the CPP Investment Board, but chief executive Mark Wiseman said Thursday the fund is building its capabilities in markets like India, China and Latin America in a “slow and prudent progression.”

“We believe they will undoubtedly have ups and downs, but in the long run those economies will produce disproportionately higher growth than the developed economies of Europe and North America,” Wiseman said.

The CPP Fund reported Thursday a return of 18.3 per cent for its latest financial year, its best showing ever.

Compared with the end of fiscal 2014, the fund’s assets were up $45.5 billion from the end of fiscal 2014 — the biggest one-year gain since the fund received its first money for investments in March 1999.

In the medium term, Wiseman said there are “excellent prospects” in the United States, which is home to about $100.7 billion or 38 per cent of the fund’s assets — the largest of any country.

“We see more investment opportunities there than in other developed world markets,” Wiseman said.

As for Canada, which represented about 24.1 per cent of the fund’s assets as of March 31, Wiseman said the CPPIB continues to have a positive view despite the impact of the recent oil price shock.

He said lower energy prices, the decline in the loonie’s value against the U.S. dollar, and “solid growth” in the United States — Canada’s biggest market — should help the overall economy.

“So, by and large, we remain optimistic about Canada as well as the U.S,” Wiseman said.

The CPP Investment Board says there were multiple reasons for the strong investment performance last year, including growth at all major stock markets, bonds, private assets and real estate holdings.

Only $4.9 billion of last year’s increase came from employer and employee contributions while $40.6 billion came from investments. None of the fund’s assets were required to pay benefits to current retirees, with contributions expected to carry the load until the end of 2022.

The value of its investments also got a $7.8-billion boost in fiscal 2015 from a decline in the Canadian dollar against certain currencies, including the U.S. dollar and U.K. pound.

The fund’s 10-year inflation-adjusted rate of return was 6.2 per cent — well above the 4.0 per cent that Canada’s chief actuary estimates is necessary.
Finally, take the time to read CPPIB's press release, CPP Fund Totals $264.6 Billion at 2015 Fiscal Year-End:
The CPP Fund ended its fiscal year on March 31, 2015, with net assets of $264.6 billion, compared to $219.1 billion at the end of fiscal 2014. The $45.5 billion increase in assets for the year consisted of $40.6 billion in net investment income after all CPPIB costs and $4.9 billion in net CPP contributions. The portfolio delivered a gross investment return of 18.7% for fiscal 2015, or 18.3% on a net basis.

“The CPP Fund generated exceptional returns this year, achieving both the highest one-year return and annual investment income since our inception,” said Mark Wiseman, President & Chief Executive Officer, CPP Investment Board (CPPIB). “More importantly, our 10-year return, a measure that better indicates how we seek to serve contributors and beneficiaries, reached 8.0% on a net basis.”

In the 10-year period up to and including fiscal 2015, CPPIB has contributed $129.5 billion in cumulative net investment income to the Fund after all CPPIB costs, and over $151.5 billion since inception in 1999, meaning that over 57% of the Fund’s cumulative assets are the result of investment income.

“First, let me cite the hard work, dedication and capabilities of the CPPIB team across all of our offices, as well as close collaboration with our key partners worldwide,” added Mr. Wiseman. “Many factors helped lift the year’s results but the impact of decisions made over several years – and patience – is evident.”

Multiple factors contributed to fiscal 2015 growth, including all major public equity markets, bonds, private assets and real estate holdings. Combined, all three of CPPIB’s investment departments delivered substantial investment income to the Fund. International markets, both emerging and developed markets, advanced significantly, boosting returns further as CPPIB continues to diversify the Fund. The benefit of the Fund’s diversification across currencies also played a role in its returns, as the Canadian dollar fell against certain currencies, including the U.S. dollar.

“While any large increase helps foster public confidence in the sustainability of the Fund, results can and will fluctuate in any given year,” said Mr. Wiseman. “The Fund’s horizon, size and funding allow us to accept more risk and invest differently than almost all other investors, including having a high tolerance for potential future negative shocks. In the same way that we temper our enthusiasm for this year’s exceptional performance, we will also stay on course even through negative returns in any given short-term period. As a result of our unique position, we focus on long-term results of 10-plus years.”

The Canada Pension Plan’s multi-generational funding and liabilities give rise to an exceptionally long investment horizon. To meet long-term investment objectives, CPPIB is building a portfolio and investing in assets designed to generate and maximize long-term returns. Long-term investment returns are a more appropriate measure of CPPIB’s performance than returns in any given quarter or single fiscal year.

Long-Term Sustainability

In the most recent triennial review released in December 2013, the Chief Actuary of Canada reaffirmed that, as at December 31, 2012, the CPP remains sustainable at the current contribution rate of 9.9% throughout the 75-year period of his report. The Chief Actuary’s projections are based on the assumption that the Fund will attain a prospective 4.0% real rate of return, which takes into account the impact of inflation. CPPIB’s 10-year annualized nominal rate of return of 8.0%, or 6.2% on a real rate of return basis, was comfortably above the Chief Actuary’s assumption over this same period. These figures are reported net of all CPPIB costs to be consistent with the Chief Actuary’s approach.

The Chief Actuary’s report also indicates that CPP contributions are expected to exceed annual benefits paid until the end of 2022, after which a portion of the investment income from CPPIB will be needed to help pay pensions.

Performance Against Benchmarks

CPPIB measures its performance against a market-based benchmark, the Reference Portfolio, representing a passive portfolio of public market investments that can reasonably be expected to generate the long-term returns needed to help sustain the CPP at the current contribution rate.

In fiscal 2015, the CPP Fund’s gross return of 18.7% outperformed the Reference Portfolio delivering $3.6 billion in gross dollar value-added (DVA) above the Reference Portfolio’s return, after external management fees and transaction costs. Net of all CPPIB costs, the investment portfolio exceeded the benchmark’s return by 1.3%, producing $2.8 billion in net DVA.

“Dollar value-added is an important measure as it shows the difference between active investments made relative to their benchmarks in dollar terms. We will maintain a greater focus on total Fund – absolute as well as relative – returns, by continuing to develop and apply our capabilities more widely to portfolio management,” said Mr. Wiseman. “Our attention to both measures helps maximize returns, CPPIB’s objective, in the best interests of current and future beneficiaries, since the source of pension benefits is the total Fund. To reduce volatility, DVA is particularly valuable when it is generated as loss reduction in negative market conditions. Both total returns and DVA can vary widely from year-to-year depending on market conditions. Accordingly, both measures must be looked at over longer periods of at least one market cycle, such as five years or more.”

Given our long-term view and risk-return accountability framework, we track cumulative value-added returns since the April 1, 2006, inception of the Reference Portfolio. Cumulative value-added over the past nine years totals $5.8 billion, after all costs.

Total Costs

CPPIB total costs for fiscal 2015 consisted of $803 million or 33.9 basis points of operating expenses, $1,254 million of external management fees and $273 million of transaction costs. CPPIB reports on these distinct cost categories as each is materially different in purpose, substance and variability. We report the external management fees and transaction costs we incur by asset class and report the investment income our programs generate net of these fees. We then report on total Fund performance net of CPPIB’s overall operating expenses.

Fiscal 2015 CPPIB operating expenses reflect increased incentive compensation due to strong total Fund and DVA performance over the past four years, and the continued expansion of CPPIB’s operations and further development of our capabilities to support 17 distinct investment programs. International operations accounted for approximately 30% of operating expenses, including the impact of a weaker Canadian dollar relative to countries we have operations in.

Fiscal 2015 external management fees and transaction costs reflect the continued growth in the volume and sophistication of our investing activities. With external management fees also reflecting performance-based fees, the year-over-year increase was in part driven by higher performance fees for exceptional financial performance. The increase in transaction costs in fiscal 2015 was due to a large private market transaction.

Portfolio Performance by Asset Class

Portfolio performance by asset class is included in the table below. A more detailed breakdown of performance by investment department is included in the CPPIB Annual Report for fiscal 2015, which is available at www.cppib.com.


Asset Mix

We continued to diversify the portfolio by return-risk characteristics of various assets and geographies during fiscal 2015. Canadian assets represented 24.1% of the portfolio, and totalled $63.8 billion. International assets represented 75.9% of the portfolio, and totalled $201.0 billion.


Investment Highlights

During fiscal 2015, CPPIB completed 40 transactions of over $200 million each, in 15 countries around the world. Highlights for the year include:

Private Investments
  • Signed an agreement to invest approximately £1.6 billion to acquire a 33% stake in Associated British Ports (ABP) with Hermes Infrastructure, an existing U.K.-based partner. ABP is the U.K.'s leading ports group, owning and operating 21 ports with a diverse cargo base, long-term contracts with a broad mix of blue chip customers and experienced management.
  • Expanded our Australian infrastructure portfolio with a A$525 million commitment to build and operate a new tunnelled motorway in Sydney, called NorthConnex. This transaction was completed with Transurban Group and Queensland Investment Corporation, our existing partners in the Westlink M7 toll road. CPPIB will own a 25% stake in the nine-kilometre motorway that will connect Sydney’s northern suburbs with the orbital road network and will be the longest road tunnel project in Australia.
  • Completed our first investment in India's infrastructure sector with the country’s largest engineering and construction company. We committed US$332 million in the Larsen & Toubro Limited (L&T) subsidiary, L&T Infrastructure Development Projects Limited (L&T IDPL), which has a portfolio of 20 infrastructure assets, including India’s largest private toll road concession portfolio spanning over 2,000 kilometres.
  • Completed a US$596 million secondary private equity investment in two JW Childs funds. As the lead investor, CPPIB invested US$477 million in a secondary transaction related to the JW Childs Equity Partners III fund, which provided an attractive liquidity solution to existing limited partners. We also committed US$119 million to a new fund, JW Childs Equity Partners IV. JW Childs focuses primarily on mid-market investments in the consumer products, specialty retail and healthcare services sectors across North America.

Public Market Investments
  • Acquired 172,382,000 ordinary shares of Hong Kong Broadband Network Limited (HKBN) as the sole cornerstone investor in HKBN’s initial public offering. CPPIB invested HK$1,551 million for an approximate 17% ownership interest, becoming the largest shareholder. HKBN is Hong Kong’s second largest residential broadband service provider by number of subscriptions, reaching more than 2.1 million residential homes and 1,900 commercial buildings.
  • Received an additional Qualified Foreign Institutional Investor (QFII) quota of US$600 million to invest in China A-shares that are traded on the Shanghai and Shenzhen Stock Exchanges. Since 2011, when CPPIB obtained its QFII licence, a total allocation of US$1.2 billion has been granted to CPPIB, thereby making it among the top 10 largest QFII holders.
  • Invested US$250 million in the initial public offering of Markit Ltd., representing an approximate 6% ownership interest. Founded in 2003, Markit is a globally diversified provider of financial information services that enhance transparency, reduce risk and improve operational efficiency.

Real Estate Investments
  • Entered into a new real estate sector with the 100% acquisition of a U.K. student accommodation portfolio and management platform operating under the Liberty Living brand, at an enterprise value of £1.1 billion. Liberty Living is one of the U.K.’s largest student accommodation providers with more than 40 high-quality residences located in 17 of the largest university towns and cities across the U.K.
  • Committed RMB 1,250 million to jointly develop the Times Paradise Walk project, a major mixed-use development in Suzhou, the fifth most affluent city in China, with Longfor Properties Company Ltd. The mixed-use development comprises residential, office, retail and hotel space for a total gross floor area of 7.9 million square feet. It is designed to be a top-quality, one-stop commercial destination in Suzhou with completion scheduled in multiple phases between 2016 and 2019.
  • Significantly expanded CPPIB’s real estate portfolio in Brazil during the year. We committed approximately R$1.3 billion to Brazilian retail, logistics and residential assets this year, bringing our total equity commitment to date to R$5.5 billion. This included a R$507 million commitment for a 30% ownership stake in a new joint venture with Global Logistic Properties comprising a high-quality portfolio of logistics properties located primarily in São Paulo and Rio de Janeiro.
  • Invested approximately €236 million in Citycon Oyj to hold 15% of the shares and voting rights, expanding CPPIB’s retail platform in the Nordic region. Citycon is a leading owner and developer of grocery-anchored shopping centres in the region. The investment helped to support Citycon’s acquisition and development opportunities.

Investment highlights following the year end include:
  • Entered into a joint venture partnership with GIC to acquire the D-Cube Retail Mall in Seoul, South Korea from Daesung Industries for a total consideration of US$263 million. Following the transaction, GIC and CPPIB will each own a 50% stake in the mall. Completed in 2011, D-Cube is an income-generating, high-quality retail mall in a prime location.
  • Entered into an agreement to form a strategic joint venture with Unibail-Rodamco, the second largest retail REIT in the world and the largest in Europe, to grow CPPIB's German retail real estate platform. The joint venture will be formed through CPPIB's indirect acquisition of a 46.1% interest in Unibail-Rodamco's German retail platform, mfi management fur immobilien AG (mfi), for €394 million. In addition, CPPIB will invest a further €366 million in support of mfi's financing strategies.
  • Signed an agreement to acquire an approximate 12% stake, by investing £1.1 billion alongside Hutchison Whampoa, in the telecommunications entity that will be created by merging O2 U.K. and Three U.K.
  • Signed a definitive agreement to acquire Informatica Corporation for US$5.3 billion, or US$48.75 in cash per common share, alongside our partner, the Permira funds. Informatica is the world’s number one independent provider of enterprise data integration software. The transaction is expected to be completed in the second or third quarter of calendar 2015.
  • Invested US$335 million in the senior secured notes of Global Cash Access, Inc. (GCA) through our Principal Credit Investments group. GCA is the leading provider of cash access solutions and related gaming and lottery products to the gaming sector.

Asset Dispositions
  • Signed an agreement, together with BC European Capital IX (BCEC IX), a fund advised by BC Partners, management and other co-investors, to sell a 70% stake in Cequel Communications Holdings, LLC (together with its subsidiaries, Suddenlink) to Altice S.A. Upon closing of the proposed sale, it is expected that BCEC IX and CPPIB will each receive proceeds of approximately US$960 million and a vendor note of approximately US$200 million. CPPIB and BCEC IX will each retain a 12% stake in the company.
  • Announced that AWAS, a leading Dublin-based aircraft lessor, signed an agreement to sell a portfolio of 90 aircraft to Macquarie Group Limited for a total consideration of US$4 billion. CPPIB owns a 25% stake in AWAS alongside Terra Firma, which owns the remaining 75% stake.
  • Sold our 50% interest in 151 Yonge Street to GWL Realty Advisors. Proceeds from the sale to CPPIB were approximately $76 million. Located in downtown Toronto, 151 Yonge Street was acquired in 2005 as part of a larger Canadian office portfolio acquisition.
  • Sold our 39.4% interest in a Denver office properties joint venture to Ivanhoé Cambridge. Proceeds from the sale to CPPIB were approximately US$132 million.

Corporate Highlights
  • In May 2015, we continued to expand our global presence with the official opening of a CPPIB office in Luxembourg, representing our sixth international office. We have a significant and growing asset base in Europe today. Establishing an office in Luxembourg supports our global strategy of building out our internal capabilities to support our long-term investment goals. Through our Luxembourg office, we will conduct asset management activities such as investment monitoring, cash management, finance and operations, including transaction support, legal and regulatory compliance.‎ Looking ahead, we expect to complete our previously announced plans to open an office in Mumbai later in calendar 2015.
  • Welcomed the appointment of Dr. Heather Munroe-Blum as the new Chair of CPPIB’s Board of Directors. Dr. Munroe-Blum succeeded Robert Astley, CPPIB’s Chair since 2008, upon the expiry of his term on October 26, 2014.
  • Welcomed the appointment of Tahira Hassan to CPPIB’s Board of Directors in February 2015 for a three-year term. Ms. Hassan also serves as a non-executive Director on the Boards of Brambles Limited and Recall Holdings Limited and held various executive leadership roles with Nestlé for more than 26 years.
  • Announced senior executive appointments:
    • Mark Jenkins was promoted to Senior Managing Director & Global Head of Private Investments responsible for leading the direct private equity, infrastructure, principal credit investments, natural resources and portfolio value creation functions. Mr. Jenkins joined CPPIB in 2008 and most recently held the role of Managing Director, Head of Principal Investments.
    • Pierre Lavallée was appointed to the new role of Senior Managing Director & Global Head of Investment Partnerships. Mr. Lavallée, who joined CPPIB in 2012, leads this new investment department to focus on broadening relationships with CPPIB’s external managers in private and public market funds, secondaries and co-investments, expanding direct private equity investments in Asia and further building thematic investing capabilities.
    • Following the year end, Patrice Walch-Watson was appointed to Senior Managing Director & General Counsel and Corporate Secretary, and a member of the Senior Management Team, effective June 5, 2015. Ms. Walch-Watson joins CPPIB from Torys LLP where she was a Partner, with expertise in mergers and acquisitions, corporate finance, privatization and corporate governance.

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You can download CPPIB's Annual Report for fiscal 2015 by clicking here. Take the time to read it, it's well written and provides in-depth information on their investments and a lot more. At the very least, read the President's message here.

Fiscal 2015 was an exceptional year for CPPIB. All public and private investments delivered strong gains. Most were double digit gains except for Canadian equities and bonds which each delivered a 9% gain. Also, the value of its investments got a $7.8-billion boost in fiscal 2015 from a decline in the Canadian dollar against certain currencies like the U.S. dollar and U.K. pound.

CPPIB's strong performance will silence its critics. The key passages from above:
  • In fiscal 2015, the CPP Fund’s gross return of 18.7% outperformed the Reference Portfolio delivering $3.6 billion in gross dollar value-added (DVA) above the Reference Portfolio’s return, after external management fees and transaction costs. Net of all CPPIB costs, the investment portfolio exceeded the benchmark’s return by 1.3%, producing $2.8 billion in net DVA.
  • Given our long-term view and risk-return accountability framework, we track cumulative value-added returns since the April 1, 2006, inception of the Reference Portfolio. Cumulative value-added over the past nine years totals $5.8 billion, after all costs. 
  • CPPIB total costs for fiscal 2015 consisted of $803 million or 33.9 basis points of operating expenses, $1,254 million of external management fees and $273 million of transaction costs. CPPIB reports on these distinct cost categories as each is materially different in purpose, substance and variability. We report the external management fees and transaction costs we incur by asset class and report the investment income our programs generate net of these fees. We then report on total Fund performance net of CPPIB’s overall operating expenses.
That really sums it all up. Yes, it's expensive to run an operation like CPPIB but the cumulative value-added over the past nine years totals $5.8 billion, after all costs. And they have done a good job of keeping those costs down, investing directly where they can.

And then people wonder why I'm such a stickler for enhancing the CPP for all Canadians. Because bar none, this is the most cost effective way to bolster the retirement security of all Canadians. The results speak for themselves and the fact is CPPIB invests across public and private markets, which adds important long-term diversification benefits.

By the way, you have to pay people for performance and the senior managers at CPPIB get paid very well (click on image):


But keep in mind this is an almost $300 billion fund operating in Toronto, which is is why they need to be competitive with compensation. Still, I wouldn't call Mark Wiseman's compensation outrageous relative to some of his peers. I think he gets paid very well for what he does and the huge responsibilities he has.

Mark is a good guy and sharp as hell. I'm not in total agreement with him on the outlook for Canada and I've been hard on him concerning diversifying the workplace at CPPIB at all levels, including senior managers (their board needs diversity too). Case in point, here is a picture with all of CPPIB's senior managers from the Annual Report (click on image):

Not exactly the epitome of diversification and Canadian multiculturalism, eh? Having said this, I trust Mark Wiseman and his senior managers are doing an outstanding job managing this juggernaut.

One thing I won't hide from you is that I've applied to jobs at CPPIB and even got an email from Mark nicely explaining "why I don't fit" in their organization and that they tried to find me " a suitable position." This is all rubbish to me because when David Denison was in charge of the place, I went as far as an interview for a job before the folks at PSP cut me off with one phone call (I know a lot more than people give me credit for which is why I find these excuses downright insulting).

Also, I know far too many talented folks who haven't been hired at CPPIB and all of them have received lame, if not laughable excuses. The same with other large Canadian pensions. Something is seriously wrong in the HR departments at CPPIB, the Caisse, PSP, Ontario Teachers and elsewhere if they're not hiring these talented individuals (and I include myself in that group). And I have no qualms stating this publicly.

Getting hired at these places is all about politics. I also noticed they don't like hiring people who are smarter than them or who can challenge them in any way, shape or form. Too bad, this is why the culture at these places reeks of politics, and why I just don't buy that "the best and brightest" are working at these places (again, I'm entitled to my opinion and the folks working at these places are entitled to theirs but I can give you my A-list of amazing individuals that were not hired for flimsy reasons at any of these coveted organizations).

I'm starting to get cynical in my old age. I'll end on a positive note, however. These results are only one year but the long-term results, the ones that count, are equally impressive. CPPIB is doing something right to manage the hundred of billions they're responsible for. And again, in spite of my criticism, I still maintain that we need to enhance the CPP for all Canadians. Period.

Take the time to read all the recent articles on CPPIB here. They have been very busy lately on all sorts of deals, some with partners and some with their peers like the Caisse.

Below, listen  to CPPIB employees talk about what makes the organization a special place to work. Take these comments with a grain of salt. And again, where are the visible minorities? People with disabilities? This is the biggest Crown corporation in Canada and we need to be on their case to diversify their workforce at all levels because it doesn't represent Canadian multiculturalism at its best.

If that last comment pisses off some people at CPPIB, tough luck, that is my opinion. Let them publish something in their Annual Report providing hard statistics to counter my claims. And when it comes to governance, CPPIB and all of Canada's top ten gloat on how they're the best but they can't even get diversity in the workplace right.

Tories Backtracking on Enhanced CPP?

The CBC reports, Joe Oliver to consult on 'voluntary' Canada Pension Plan boost:
Finance Minister Joe Oliver says his government is ready to start consulting Canadians on allowing larger, "voluntary," contributions to the Canada Pension Plan.

"We are open to giving Canadians the option to voluntarily contribute more to the Canada Pension Plan to supplement their current retirement savings," he told the House of Commons on Tuesday.

Oliver said the move would build on the Harper government's record of creating more options for retirement savings, including the pooled pension plans and tax-free savings account alternatives championed by the Conservatives. A statement released by his office said that "by providing voluntary, flexible savings tools, Canada's retirement system is, in fact, now among the best in the world."

No more details were provided in his brief answer to a planted question from a Conservative caucus colleague. It's unclear how the voluntary contributions would work, or what limits would apply.

But Oliver reiterated his government's position on hiking basic premiums, something federal government talking points have called a "mandatory, job-killing, economy-destabilizing, pension-tax hike on employees and employers."

"What we will not do is reach into the pockets of Canadians with a mandatory payroll tax, like the Liberals and the NDP would do," Oliver said in question period.

"A one-size fits all pension tax hike is not what Canadians want, nor what they need," Oliver's release said.
Policy reversal?

This is the second time in two years the government has seemingly done an about-face on the CPP issue.

In 2010, then-finance minister Jim Flaherty announced consultations had begun to expand CPP, calling the program "the envy of the world."

He said the expansion should be "modest and phased in," and that provinces were on board.

Then, in 2013, he abruptly backtracked and started referring to the CPP as a "payroll tax" that the country couldn't afford until there was more economic growth.

Employees and employers are each required to contribute up to almost $2,480 annually on income up to $53,600.

This year, the CPP pays out a maximum benefit of $12,780.

Past proposals have suggested doubling both the contribution cap and the maximum payout. Although Flaherty had made it clear he wasn't in favour of going that high, he never publicly outlined what numbers he had in mind.

Oliver now intends to spend the summer months ahead of a coming election consulting with "experts and stakeholders," on what voluntary contributions to the CPP might look like.

Finance critic NDP MP Nathan Cullen questioned what he called the Conservatives'"death-bed conversion" to CPP enhancement.

"It's incredibly vague. It's a non-announcement today. This is at the very last minute. If they were serious about this, we would have seen something a lot sooner," he said.

Ontario Liberal MPP Mitzie Hunter, the associate minister of finance, dismissed the announcement, saying the federal government "has made it clear they have no real interest in enhancing CPP."

"It's disappointing that the federal government is only concerned with their short-term election prospects instead of providing a secure retirement for millions of Canadians."

Canada's most populous province recently passed a bill approving the creation of a provincial pension plan that would start in 2017. Ontario's plan, which would be phased in over a two-year period, would be for those who don't have a workplace plan.
Bill Curry and Steven Chase of the Globe and Mail also report, Tories propose voluntary expansion of Canada Pension Plan:
The federal Conservative government is proposing a voluntary expansion of the Canada Pension Plan, adding a pre-election twist to the politically charged debate over how best to boost Canadian savings.

Finance Minister Joe Oliver made the announcement Tuesday in the House of Commons, promising that consultations will take place over the summer on the details.

The general premise is that Canadians who choose to pay higher CPP premiums would receive higher guaranteed payments in retirement.

The announcement marks a significant shift for the Conservatives, who have long resisted changes to the CPP on the grounds that higher premiums would represent job-killing payroll taxes.

It also amounts to a key campaign promise because this measure will not be in place before an expected Oct. 19 federal election.

“Our Conservative government believes all Canadians should have options when saving for their future. That is why we intend to consult on giving Canadians the voluntary option to contribute more to the Canada Pension Plan to supplement their retirement savings,” Mr. Oliver said.

Though the announcement represents a significant policy shift, the Finance Minister did not take questions from the media and few details were provided.

This expansion of the CPP on a voluntary, instead of compulsory, basis is an attempt by the Conservatives to offer voters another way to save for retirement without obliging them to do so.

The Tories have been at loggerheads with the opposition parties – and most provinces – over the issue for years.

Labour groups and the seniors advocacy group CARP have long argued that voluntary savings vehicles do not work and that a mandatory CPP expansion is needed to ensure that all Canadians are saving enough for retirement.

The Conservatives have sided with business groups, such as the Canadian Federation of Independent Business, that argue that increasing mandatory contributions to the CPP by employees and employers would be damaging to the economy.

The CFIB said Tuesday that it was “delighted” by Mr. Oliver’s proposal, provided that it would also be a voluntary decision as to whether or not employers make larger contributions for employees.

Susan Eng, the vice-president of CARP, also responded positively, although she stressed that mandatory increases are still likely to be needed.

Mr. Oliver said the voluntary plan would build on other government initiatives, including tax-free savings accounts and pooled registered pension plans.

He suggested that the Tories give Canadians more choice than the Liberals and the NDP.

However, Liberal finance critic Scott Brison noted it was his party that advocated both a mandatory and a voluntary expansion of the CPP in the 2011 election campaign.

NDP finance critic Nathan Cullen called the move a “deathbed conversion” by the Conservatives.

“You can tell when the government’s serious about something: They ram it through an omnibus bill. When they’re not serious about it, they launch a series of consultations over the summer on the eve of an election as if somehow they were going to be converted at the very last minute,” he said. “This is about polls. It’s about the Conservatives realizing they’re in trouble.”

At one point during the past several years of debate over CPP reform, the Conservatives spoke out against the idea they now propose.

In 2010, Jim Flaherty, then the finance minister, took the view that further voluntary savings vehicles were not enough.

The government later changed course. While Mr. Flaherty briefly advocated for expanded mandatory CPP contributions, Prime Minister Stephen Harper has long opposed the idea in his public comments.

The Ontario government has been among the most vocal advocates urging the federal government to support an expanded CPP. When Ottawa decided against the idea, Ontario proposed its own supplemental pension plan, which would begin in 2017 and would apply only to workers who do not have a company pension plan.

Ontario has suggested that if Ottawa changes its position and decides to support an expanded CPP, it would not go ahead with its own pension plan.

Ontario’s associate finance minister, Mitzie Hunter, described the federal proposal as “disappointing.”

“Two things are clear – people are not saving enough for retirement, and we don’t have a federal partner willing to tackle this problem,” she said in a statement.
Say it ain't so? Have the Harper Consevatives who continuously pander to the financial services industry finally seen the light on why now is the time to enhance the CPP? Do they finally realize the benefits of defined-benefit plans and how enhancing the CPP is not only a good pension policy but good economic policy for a country teetering on disaster?

The federal government is also looking at relaxing the 30 percent rule to allow federal pensions to invest more in infrastructure in Canada, which makes a lot of sense if they allow all our public pensions to do so and open infrastructure investments to global pensions and sovereign wealth funds.

Unfortunately, this latest about-face on enhanced CPP is nothing more than a farce. Harper's government doesn't have a clue of what they're doing on enhanced CPP and I can't say the Liberals or NDP are any better (a bit better but far from perfect).

As an ultra cynical Greek-Canadian who is tired of seeing politicians in Greece and Canada talk from both sides of their mouth, let me give it to you straight up. This latest proposal is going nowhere and even if it's implemented, the "voluntary" nature of it means it will only benefit the richest Canadians much like increasing the tax-free savings account limit to $10,000 a year (the few who  need it the least will wisely sign on but the majority who really need it will opt out).

By the way, a new survey shows a third of Canadians won’t take advantage of new TFSA limits:
A new survey suggests about a third of Canadians don’t have the money to take advantage of new rules under which Ottawa almost doubled the amount that can be contributed each year to tax-free savings accounts.

The poll done for CIBC found that roughly 34 per cent of respondents said they either didn’t have the money to take advantage of the new $10,000 limit or had other investment plans.

Breaking the figure down, 18 per cent of those surveyed said they would probably contribute less than the old limit of $5,500, while 12 per cent said they would not have enough savings this year to make a contribution. Four per cent said they would contribute to other saving plans.

The survey found just 10 per cent said they typically contribute the maximum and would now invest $10,000, while an additional 17 per cent said they would try to increase their contributions above $5,500.

Twenty per cent of those responding did not have a TFSA account and had no plans to open one.

The online survey was conducted between April 30 and May 4, less two weeks after the federal budget announcement.
Shocking eh? Not really. Most Canadians are in debt up to their eyeballs, paying off multiple credit cards and trying to make their mortgage payment every month on their insanely overvalued homes (when you see official denial from the finance minister and our central banker, you know they're worried about Canada's housing bubble but don't worry, according to some, Canada is the new Switzerland. Sigh!!).

I use my old Greek indicator to gauge economic activity. I talk to a few Greek taxi drivers and restauranteurs in Montreal to get the real scoop. They all tell me business is down across the board. Restauranteurs and cab drivers are praying the good weather holds up for the Grand Prix next weekend so they can make up for a devastating winter, but they tell me the economy is terrible and "people just aren't spending like they used to" which is why many retail stores are closing in Montreal. Hopefully, the lower loonie and some tourism will help but that is only temporary relief.

Anyways, back to the Tories and their latest proposal. Why am I so skeptical? Easy. Enhanced CPP shouldn't be voluntary, it should be mandatory for almost all Canadians (minus the poor and working poor). This is why behind the scenes, I've argued with some Liberals on their proposal because they too want to make enhanced CPP optional.

It doesn't work that way folks. Yes, higher CPP premiums means less money to spend on the economy and housing but it in the long-run, it also means more Canadians will be able to retire in dignity and security. And people who receive defined-benefit pensions are able to spend more in their golden years, allowing the government to collect more in sales and income taxes.

More importantly, RRSPs and TFSAs are savings vehicles, not defined-benefit pensions, and they place the retirement onus entirely on individuals to make the right investment decisions to be able to retire comfortably. When it comes to their retirement, most Canadians need a reality check because they're getting raped on fees investing in mediocre mutual funds which underperform the market over the long-run.

There is a much better option. Make enhanced CPP mandatory and have the money managed managed by the Canada Pension Plan Investment Board which just recorded a record 18.3% gain in fiscal 2015.

"But Leo, you just finished crucifying these guys for lacking a truly diverse workforce at all levels representing Canada's multiculturalism and you still want to enhance the CPP for all Canadians?!?"

Absolutely! I'm very hard on the CPPIB because I hold them to a much higher standard than any other large Canadian public pension because they represent all Canadians and even though I like their governance and operations, I think there can be significant improvements (see my discussion here).

In particular, I'm a stickler for diversity in the workplace and give a failing grade in this department to all of Canada's coveted top ten, not just CPPIB.  And don't kid yourselves, things are getting worse not better when it comes to diversity at Crown corporations, government organizations and private sector federally regulated businesses.

How do I know this? Because of my struggles to find full-time employment after I was wrongfully dismissed at PSP but also through my conversations with people with disabilities -- much more disabled than me -- who are frustrated with the lack of opportunities for them to find full-time work.

But aren't federally regulated employers suppose to hire people regardless of their age, sex, ethnic background, sexual orientation or disability? That all sounds great on paper but the brutal reality is the unemployment rate for minorities, especially people with disabilities is sky-high, and the hiring decisions at these places are often done in a covert manner to circumvent our laws.

When Michael Sabia, Mark Wiseman, Gordon Fyfe, Andre Bourbonnais or Ron Mock want someone in, there in. And when they want them out, they're out. It's that simple (this goes on everywhere but these are public pensions).

I remember a conversation I had with Mark Wiseman where he told me he contributes to the Multiple Sclerosis Society of Canada. I felt like saying "that's great but what are your doing as the leader of Canada's biggest Crown corporation to hire people with disabilities?"

The only big federally regulated Canadian bank that actually has a diversity blueprint is the Royal Bank but I can tell you from experience this is a bogus program that doesn't actively go out to search and hire minorities or people with disabilities and the jobs they offer are low level jobs that pay peanuts. But at least the Royal Bank has a diversity blueprint which is more than I can say for many other large private and public sector employers.

But my diversity qualms aside, I'm a huge believer in mandatory enhanced CPP for most Canadians and think the time has come that we do away with company pensions altogether and have pensions managed by our large well-governed public pensions that pool investment and longevity risks, lower costs by investing directly across public and private investments where they can and with top global funds where they can't.

Imagine for a second if we didn't have Air Canada, Bombardier, Bell pensions or AIMCo, OTPP, HOOPP, Caisse, OMERS, bcIMC, etc but several large, well-governed public pensions that operate at arms-length from the government and manage the pensions of all Canadians across the public and private sector. It wouldn't be one CPPIB juggernaut but several CPPIBs and there wouldn't be an issue of pension portability.

I'm telling you we have the people and resources to do this. All we lack is political will in Ottawa which is why Ontario is right to go it alone despite all the criticism Premier Wynne has faced. Some think the Conservative pension promise sets up showdown with Ontario but I don't think so.

The sad reality is that our politicians have ignored the pension crisis in this country for far too long and that will impact our debt and deficit in the future as social welfare costs climb. Enhancing the CPP on a voluntary basis isn't a good pension policy; it's a dead giveaway to rich Canadians with high disposable income just like increasing TFSA and RRSP limits are a dead giveaway to the rich and the financial services industry. These aren't the people that need help to retire in dignity and security.

If you have any questions or concerns on this comment and my views, feel free to reach me at LKolivakis@gmail.com. You don't have to agree with me and I know I can be very blunt and "controversial" (euphemism for someone who highlights uncomfortable truths) but that is my style and I make no apologies whatsoever for it (ask Tom Mulcair, Gordon Fyfe, Mark Wiseman, etc.).

Bernard Dussault, Canada's former Chief Actuary, shared this with me:
I will give an interview to CPAC on this matter at 1:30 this afternoon where my main two comments will be that:
  • The federal government should first consult the provinces rather than the public because the CPP can be amended only with the approval of at least 7 provinces covering at least 2/3 of the Canadian population.
  • Because participation in the CPP is mandatory, no voluntary contributions can be made to it. Voluntary contributions could only be made to a new plan (i.e. other than CPP), which would still require provincial approval because pensions are under provincial jurisdiction control.
I thank Bernard for his timely and wise insights. He is someone who understands what's at stake when it comes to molding the right retirement policy.

Below, a raw CBC clip where Conservative MP and Minister of State, Kevin Sorenson, talks about CPP consultations. I also embedded a Canadian Press clip on the Tories looking at voluntary CPP add-on contributions. Listen closely to these guys and how they choose their words. They're not serious about enhancing the CPP and bolstering our retirement system and economy. If they were, they would have enhanced the CPP when the great Jim Flaherty was still alive.


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