David Parkinson and Barrie McKenna of the Globe and Mail report, Bank of Canada opens door to negative interest rates as oil, dollar sink:

The Bank of Canada has restocked its emergency kit to defend the Canadian economy against major shocks, including indicating that it would consider pushing interest rates as much as a half percentage point into negative territory in the event of a crisis.

But Governor Stephen Poloz stressed that the central bank’s new framework for using negative interest rates and other unconventional monetary policies, which he introduced in a speech Tuesday, does not mean the bank is preparing to use any of these measures – even as the country deals with the aftershocks of the collapse in the price of oil and other commodities.

“Today’s remarks should in no way be taken as a sign that we are planning to embark on these policies,” he told an Empire Club of Canada luncheon in downtown Toronto. “We don’t need unconventional policy tools now, and we don’t expect to use them. But it’s prudent to be prepared for every eventuality.”

The unveiling of the central bank’s new unconventional-policy framework comes after a week of distressing developments affecting Canada’s still-fragile economy. Oil prices plumbed six-year lows, sending the Canadian dollar to its lowest level against its U.S. counterpart in 11 years. Prices of other resource commodities also slumped, contributing to a 5-per-cent sell-off of the Toronto Stock Exchange in the past five trading days.

And all this is taking place just days before the powerful U.S. Federal Reserve looks likely to raise its key interest rate next week for the first time since before the Great Recession.

Most of the world’s central banks, including Canada’s, have been cutting rates. A Fed hike will mark a major divergence in global interest rates that is already sending tremors through the world’s stock, bond, commodity and currency markets.

Nonetheless, Mr. Poloz said Tuesday that he remains convinced that Canada’s economy remains on track for a continued recovery in 2016.

“I think we’ve got all the ingredients of a recovery in place,” he said in a news conference after the speech. “It’s being masked right now, to some degree, by the declines especially in the energy sector, but also in other resource areas.”

The Bank of Canada published new guidelines for using tools other than traditional interest rates – collectively known as unconventional monetary policy – to deal with economic crises at times when interest rates are near zero. The document updates a framework the bank introduced in April, 2009, as the global financial crisis still raged.

After years of persistently low interest rates not just in Canada but worldwide, and with economic trends pointing to a continuation of historically lower-than-normal rates for years to come, unconventional monetary tools have become increasingly common among the world’s central banks to stimulate economies. With the Bank of Canada having halved its own key rate to a historically thin 0.5 per cent after two rate cuts this year, it looked long overdue to address its guidelines on using unconventional measures.

“It’s been several years since we put them out. We knew they needed updating, based on our research and the experience in other countries,” Mr. Poloz said. “We’re making sure that our tool kit is up-to-date.”

The guidelines spell out several unconventional options the bank would consider, including large-scale asset purchases (known as quantitative easing), providing explicit statements about future policy intentions (forward guidance) and the funding of credit to specific sectors – all of which have proven to be effective, to varying degrees, in lowering market interest rates and providing economic stimulus. The Bank of Canada was a global pioneer in using forward guidance during the 2008-09 financial crisis, but unlike other central banks, it hasn’t tried any of the other unconventional tools it lays out in the guidelines.

Perhaps the most intriguing new wrinkle is the central bank’s calculation that the effective bottom (or “lower bound” in central-bank speak) for its interest rate is not zero, but rather negative-0.5 per cent. In its 2009 framework, it had considered 0.25 per cent to be its effective lower limit, which matches the record low of the bank’s key rate during the financial crisis.

But recently, a growing number of central banks, particularly in Europe, have resorted to negative interest rates – with no apparent ill effects. Just last week, The European Central Bank lowered the rate on its deposit facility to negative-0.3 per cent.

Commercial banks are willing to accept negative rates on their deposits with the central bank because there are considerable costs associated with the holding and storing of large volumes of currency – effectively, they are willing to pay central banks to hold it for them.

“This is a good change [that] they finally got around to acknowledging that they could go beyond zero,” said Carleton University economics professor Nicholas Rowe, who specializes in monetary policy. “What’s made it obvious is that so many other central banks are doing just that.”

It also implies that the current level of 0.5 per cent still leaves the bank with more room for additional cuts than many people had assumed.

“We now believe we have roughly 100 basis points worth of room underneath our current interest-rate setting,” Mr. Poloz told the news conference.

“This could be a signal that deflation is not a serious threat, because there are ways for monetary policy to keep up the fight,” McGill University economist Christopher Ragan said. He argued that this suggests there is no reason for the central bank to raise its current 2-per-cent inflation target – something the bank has been contemplating as it prepares for the renewal of its five-year inflation-targeting agreement with the federal government next year.

Still, Mr. Poloz insisted repeatedly Tuesday that the central bank doesn’t see any need to resort to negative interest rates, or any other unconventional policy tools, in the current economic environment – despite the latest battering of commodity prices and the Canadian currency.

Mr. Poloz insisted that the economy is still on track to return to full capacity “around mid-2017,” unchanged from the bank’s most recent economic forecast in October. He argued that the most recent reading of gross domestic product, which showed that the economy contracted by 0.5 per cent in September, was due to short-term “special factors,” most notably a fire that shut down most of the production at the huge Syncrude Canada Ltd. oil sands facility for the month.

“The overall economy is growing again, even as the resource sector contends with lower prices, because the non-resource sectors of the economy are gathering momentum,” he said in his speech.

He noted that the stimulative effects of the bank’s earlier rate cuts and the weaker Canadian dollar haven’t fully worked their way into the economy. On the rate cuts in particular, he said, the impacts “are still probably only half there. It will take another year for all those effects to come through.”

“We need to be a little bit patient here,” he said.

However, he also acknowledged one of the lessons of the post-crisis era is that monetary policy is less effective once interest rates reach ultra-low levels. “Fiscal policy tends to be a more powerful tool than monetary policy in such extreme circumstances,” he said.

The new Liberal government is vowing to spend billions on infrastructure projects to help kick-start the economy, and will go into deficit for at least two years to pay for it. That could take much of the pressure off the Bank of Canada to have to resort to negative interest rates and other unconventional policies.

“It’s not very likely if we have a federal government prepared to use fiscal stimulus if things get worse,” said Avery Shenfeld, chief economist at Canadian Imperial Bank of Commerce.

Pete Evans of CBC News also reports, Negative interest rates an option in Canada, Stephen Poloz says:

Canada could theoretically follow the lead of other countries that have recently gone to negative interest rates in order to stimulate the economy, central bank governor Stephen Poloz told a business audience today after yet another drop in the loonie.

Speaking to the Empire Club in Toronto, Poloz said moving its benchmark interest rates below zero is something in the Bank of Canada's monetary policy toolkit that the bank may consider down the line.

That's a departure from 2009, when the bank said its theoretical lowest-possible interest rate was 0.25 per cent because to go lower would have been incompatible with certain financial markets, such as money-market funds.

"The bank is now confident that Canadian financial markets could also function in a negative interest rate environment," Poloz said.

Poloz was speaking after the Canadian dollar today shed another half-cent from the previous day, dropping to a new 11-year low under 74 cents US.

But while Poloz opened the door to the possibility of negative interest rates, he stressed — in English and French — that the bank has no current intention to do so.

"Today's remarks should in no way be taken as a sign that we are planning to embark on these policies," Poloz said. "We don't need unconventional policies now, and we don't expect to use them. However, it's prudent to be prepared for every eventuality."

The Bank of Canada twice this year cut its benchmark interest rate in an attempt to stimulate the economy.

But other countries have gone even further, slashing their rates below zero in an attempt to encourage spending and investment, instead of fearfully hoarding capital.

Switzerland, Sweden, Denmark and the European Central Bank have all dipped their benchmark rate below zero for various reasons in recent years. Switzerland's central bank rate is now minus 0.75 per cent, for example. That means banks must pay a fee to store money with the central bank — something that encourages them to not do so, and deploy their capital into other investments that grow the economy.

"Why would anyone ever accept a negative nominal return when they could always simply hold cash and earn a zero return?" Poloz asked, rhetorically. "A big part of the answer is that there are costs to holding currency, particularly in large quantities, and these costs affect the lower bound. Because of the costs, which include storage, insurance and security, central banks can charge negative rates on commercial bank deposits without seeing a surge in demand for bank notes.

To put it simply, the Bank of Canada now thinks negative interest rates are a policy option in its tool belt because the experience of other countries that tried them wasn't calamitous. Negative rates, to varying degrees, achieved their goals without any undue negative consequences.

But that doesn't necessarily mean that Canadian consumers would actually see negative interest rates — a mortgage that pays you to hold it, for example — even if the central bank goes negative, Poloz said, citing examples of what happened in other countries' consumer lending markets once the central bank went below zero.

In those cases, commercial banks swallow the relatively small costs of the central bank's lending rate without ever directly passing it on to their own customers by charging fees to hold deposits.

"Interest rates don't go below zero for savers," Poloz said at a question-and-answer session following his speech, noting that in Switzerland and elsewhere, consumers still earn microscopic amounts on savings and pay tiny interest rates on consumer loans. "We would expect the same sort of behaviour here," he said.

"We now believe that the effective lower bound for Canada's policy rate is around minus 0.5 per cent, but it could be a little higher or lower," Poloz said.

But negative interest rates weren't the only central banking tools that Poloz discussed in Tuesday's speech.

Poloz announced another new unconventional measure added to the bank's arsenal: Funding for credit.

The option would ensure economically important sectors had continued access to funding even when the credit supply is impaired, Poloz said. That's exactly what happened in 2009 when the Canada Mortgage and Housing Corporation (CMHC) took mortgages off the books of Canada's big banks to free up cash for them to lend money to deserving borrowers.

"This program was clearly aimed at one market segment that was at risk of impairment and so had a similar purpose to funding for credit," Poloz said.

Poloz also said fiscal stimulus tends to be a more powerful tool than monetary policy in extreme crises.

All in all, Poloz reiterated his optimism for the Canadian economy and reaffirmed his projection it was strengthening despite the pain of persistently low resource prices. The non-resource sectors, Poloz added, have continued to strengthen.

"We will continue to watch how these policies work in other economies and adjust our own thinking at the Bank of Canada as appropriate," Poloz said. "In short, should the need arise, we'll be ready."

I've said it before and I'll say it again, we are very lucky to have Stephen Poloz as our central banker. I worked with Steve at BCA Research, know him well enough to know he's a very smart economist who understands the bigger global picture.

What are my thoughts on the Canadian economy? I told my blog readers to short Canada exactly two years ago and explicitly stated to short the overvalued loonie back then fearing that oil and commodity prices were going to drop a lot more (the loonie is a petro currency, period).

Exactly one year ago, I wrote that Canada's crisis is just beginning stating that Steve Poloz is right  to worry about deflation because if takes hold in Canada with household debt at a record high, it will get ugly for years, maybe even decades.

If you want to really see how bad things are in Canada go talk to restaurateurs, taxi drivers, small business owners which are suffering in droves. Just last night, I went with my buddy to grab a cheeseburger, fries and wine at Nouveau Palais.

The place is an old diner off of Avenue du Parc that used to be owned by Greeks. The French Canadian owners kept the old decor, changed the menu, added music and serve alcohol. Great little place that young Grungies love to hang out in. I love it because once in a blue moon when I want to deviate from my healthy Mediterranean diet and gorge on a juicy cheeseburger with fries and wine, this is the place for me (it has the best cheeseburger in the city; the one at DeVille is a close second).

Anyways, my buddy and I talked to Jacques, the owner/ manager of the place and I told him I was surprised to see how many stores are closing in the neighborhood. He told us that business is down across the board, the cost of hamburger meat has skyrocketed in the last few years and the city of Montreal is raising taxes on small businesses, all of which are squeezing profits because "you can't pass those costs on to consumers" (it also doesn't help that the Quebec government has black boxes in restaurants and pretty soon bars to make sure there's no tax evasion going on. It's only a matter of time before this gets introduced in Ontario).

The bottom line is things are not going well in Canada because most people are over-indebted, worried about losing their job and paying off their mortgage on their insanely over-valued house or just paying off credit card debts. They simply don't have the disposable income they once had to dine out every other day and spend money like they used to.

And this isn't just a Montreal problem although Quebecers are much poorer than Ontarians or people out in British Columbia. There's a real problem in Canada and it's obvious the worst hit province right now is Alberta where the suicide rate has jumped significantly in the first half of 2015.

[Note: Be careful interpreting these statistics. My father, a psychiatrist with over 40 years of clinical experience, tells me although financial distress can contribute to rising suicides the truth is "suicide is extremely complicated" and that depression is a lot more common than people think. Thankfully, only a very small percentage of depressed people take their own life because in most cases, depression can be easily treated with proper medical care and follow-up treatment.]

Back to the Bank of Canada and negative rates. What do they mean? The Globe and Mail's Rachelle Younglai covers the impact on banks, consumers and the economy here. Is it possible the Bank of Canada resorts to negative rates? You bet it is and I wouldn't be surprised if the Bank is forced to take aggressive measures in the future which include buying federal, provincial and corporate bonds, mortgage-backed securities and even stocks (all part of quantitative easing or large scale asset purchases), funding for credit or negative rates. These unconventional monetary policy measures are what all central banks are doing as they're trying to save the world from a prolonged period of debt deflation.

All central banks are in easing mode except for the Fed which is now preparing to hike rates in December in what might prove to be the greatest policy blunder of our time, especially if the surging greenback keeps rising and U.S. import prices keep falling.

I know, there are smart economists like Martin Feldstein who think that U.S. inflation pressures are picking up steam and that the Fed will be forced to raise rates more aggressively in 2016. Then there's Jeffrey Gundlach, the reigning bond king, who just posted a sober presentation entitled "Tick, Tick, Tick..." which presents a scary picture of what will happen if the Fed raises rates (click here to view it).

I don't know, think Mario Draghi offered Janet Yellen a gift last week allowing the Fed to raise rates next week as the euro has strengthened a bit, but this might turn out to be a bomb wrapped up in a gift box. If Gundlach is right, the Fed will be forced to reverse course in 2017 and that's when things get interesting and frightening as the Martingale casinos go for bust.

We shall see but one thing is for sure, things are not going well in Canada. I hope Governor Poloz is right and the effects of a lower loonie will eventually seep through the economy. I hope that Justin Trudeau's Liberals are able to pass major infrastructure projects very soon but I fear that Canada's crisis will continue and all these measures might help at the margin but will not prevent the ongoing carnage in our economy (trust me, I hope I'm wrong but fear the worst lies ahead, especially once Canada's housing bubble bursts).

Lastly, take the time to read Ted Carmichael's latest, Recession: A Made-in-Canada Definition. Ted doesn't blog a lot but I enjoy reading his comments just like I enjoy reading those of Brian Romanchuk, my former colleague at BCA Research and then the Caisse (see his latest on the Bank of Canada's Unconventional Monetary Policy as well as his last comment, Let The Fed Policy Error Debate Begin, which is more sanguine than Gundlach's dire presentation).

You're all very lucky to have people like Ted, Brian and me providing you with free thought provoking insights. Very lucky!!

On that note, please remember to subscribe to this blog on the top right-hand side and support my efforts in bringing you unique insights on pensions and investments. You will also notice that I now allow funds to post informative guest comments on my blog to provide their unique insights on markets. All I ask is that they donate or just subscribe to the blog which is read by the who's who of the global pension and investment industry.

Below, Bank of Canada Governor Stephen Poloz speaks before the Empire Club of Canada on The Evolution of Unconventional Monetary Policy. You can read his entire speech on the bank's site here.

Like I said, we Canadians are very lucky Stephen Poloz is at the helm of our central bank. Hope he's right that this is a cyclical downturn not "secular stagnation" but I'm a lot more concerned about what lies ahead, especially if deflation eventually comes to America. If that happens, expect negative rates in Canada, Europe, Japan and the U.S. to persist for a long, long time. Wouldn't that be something, eh?

Matt Scuffham of Reuters reports, Canada’s top 10 pension funds tripled in size since 2003:

Canada’s biggest 10 public pension funds now manage assets worth more than $1.1-trillion, having tripled in size since 2003, according to a study published by the Boston Consulting Group on Thursday.

The funds have expanded rapidly in recent years, pursuing a strategy of directly investing in assets globally with an emphasis on real estate and infrastructure projects such as bridges, tunnels and roads. Some pension experts say this approach has helped them mitigate the impact of volatility in global equity markets and challenging economic conditions.

About one-third of the top 10 funds’ investments are in alternative asset classes such as infrastructure, private equity and real estate, according to the study, which was commissioned by the top 10 funds.

“The top 10 have shown impressive growth in investment capabilities and scale to manage the realities of a post-financial crisis world,” said Craig Hapelt, partner and managing director at BCG.

“Their investments also have a broader positive impact on Canada’s prosperity,” he added.

By directly investing, the Canadian funds are able to manage assets themselves, a move the funds say results in lower costs. They have also built up sufficient scale over the past two decades to acquire capital-intensive assets such as infrastructure.

At the end of 2014, the top 10 funds now manage assets worth the equivalent of over 45 per cent of Canada’s gross domestic product (GDP), the research showed.

However, the funds face increasing economic headwinds including falling energy prices. Separate research by RBC in November revealed they had suffered a second consecutive quarterly fall in the value of their assets for the first time since the 2007-09 financial crisis.

The 10 largest funds include the Canadian Pension Plan Investment Board (CPPIB), the Caisse de dépôt et placement du Québec (Caisse) and the Ontario Teachers’ Pension Plan Board, the three biggest Canadian funds which are also in the top 20 public pension funds globally. Seven of the funds are among the top 30 infrastructure investors in the world.

Recent investments by Canadian pension funds include the $2.8-billion acquisition of the operator of the Chicago Skyway toll road by CPPIB, Ontario Teachers and the Ontario Municipal Employees Retirement System and the $7.5-billion purchase of an Australian electricity network by a consortium including the Caisse.

The Ontario Teachers' Pension Plan posted a press release on its website, Among the most successful in the world, the total value of Canada’s ten largest public pension funds has tripled since 2003:

According to  a new study conducted by The Boston Consulting Group (BCG), Canada's ten largest public pension funds (Top Ten) continue to drive impressive investment returns and remain key players on the global stage during a period of challenging economic conditions both domestically and in major markets globally. The funds now manage over $1.1 trillion in assets, which is the equivalent of over 45 per cent of Canada's GDP. An infographic highlighting key results and investments is available here.

"The Top Ten have shown impressive growth in investment capabilities and scale to manage the realities of a post-financial crisis world," said Craig Hapelt, a Toronto-based partner at BCG. "Not only do the funds represent an important aspect of Canada's retirement income landscape, but their investments also have a broader positive impact on Canada's prosperity."

The study indicates that three pension investment funds[1] are listed among the top 20 public pension funds globally. Additionally, the Top Ten remain prominent global players in the alternative asset management industry, with seven funds[2] named among the top 30 global infrastructure investors and five[3] listed as part of the top 30 global real estate investors.

Top Ten funds important to Canada's prosperity

The Top Ten are a significant component of Canada's retirement income system, helping to provide financial security in retirement to over 18 million Canadians. Their total assets under management tripled between 2003 and the end of 2014 and 80 per cent of this increase in value was driven by investment returns.

As investors behind several Canadian landmark assets and flagship companies, the Top Ten have invested approximately $600 billion across various asset classes in Canada and directly employ almost 11,000 professionals. In addition to monetary contributions, the Top Ten are responsible for creating talent clusters in multiple Canadian cities – attracting Canadian talent currently working abroad or providing home-based talent with opportunities to gain global experience.

Investment strategy promotes portfolio diversification to maximize long-term returns

While each fund's strategy is designed to meet its unique mandate, the Top Ten similarly focus on creating well-diversified portfolios that align with the funds' relatively long-term payout profiles. Enabled by their scale, approximately one third (32 per cent) of the Top Ten's investments are in alternative asset classes such as infrastructure, private equity, and real estate in Canada and abroad. This figure contrasts to a less than 11 per cent allocation in alternative asset classes by most other Canadian pension plans.

Some of these investments include Canada's TMX Group, Ontario's Yorkdale Mall, and BC's TimberWest Forest Corporation and Brentwood Town Centre. Globally, the Top Ten have invested in such assets as ING Life Korea; Globalvia, a portfolio of infrastructure assets in Europe and Latam; Port of Brisbane, one of Australia's fastest growing container ports; Open Grid Europe, a gas transmission network operator responsible for approximately 70 per cent of Germany's total national shipping volume; and, Camelot Group, the UK's national lottery operator.

About Measuring Impact of Canadian Pension Funds Report

This is the second time that BCG has been commissioned to conduct this survey on behalf of the Top Ten. The study focused on the ten largest public sector pension funds (ranked here by size of net pension assets under management): The Canada Pension Plan Investment Board ($265 billion), The Caisse de dépôt et placement du Québec ($192 billion), The Ontario Teachers' Pension Plan Board ($154 billion), PSP Investments ($112 billion),The British Columbia Investment Management Corporation ($104 billion), The Ontario Municipal Employees Retirement System ($73 billion), The Healthcare of Ontario Pension Plan ($61 billion), The Alberta Investment Management Corp. ($50 billion), The Ontario Pension Board ($22 billion) and The OPSEU Pension Trust ($18 billion).

About The Boston Consulting Group

The Boston Consulting Group (BCG) is a global management consulting firm and the world's leading advisor on business strategy. We partner with clients from the private, public, and not-for-profit sectors in all regions to identify their highest-value opportunities, address their most critical challenges, and transform their enterprises. Our customized approach combines deep insight into the dynamics of companies and markets with close collaboration at all levels of the client organization. This ensures that our clients achieve sustainable competitive advantage, build more capable organizations, and secure lasting results. Founded in 1963, BCG is a private company with 82 offices in 46 countries. For more information, please visit bcg.com.

You can download Boston Consulting Group's second study on Canada's top ten pensions here. I covered the first study going over the benefits of the top ten pensions in June 2013.

This study is a continuation of the first one and it demonstrates how impressive Canada's biggest pensions are not just domestically but internationally, investing across public and private markets all around the world.

To be sure, the BCG study is a bit of public relations piece commissioned by Canada's Top Ten so let me carefully scrutinize it by going over some important points which are worth bearing in mind:

• The growth of Canada's Top Ten since 2003 (after the tech bubble crashed) has been explosive and while a lot of this growth was fueled by strong gains in global stocks and corporate bonds, the bulk of the value added over public benchmarks came from private market investments like real estate, infrastructure and private equity (except for HOOPP which does invest in private markets but has delivered stellar returns primarily by investing like a multi-strategy hedge fund across public markets doing everything internally).
• The key point in the press release Ontario Teachers' put out was this: 80 per cent of this increase in value was driven by investment returns. This seems quite high to me (thought it was more like 70 percent) but the point is that it's investment gains, not contributions which explain the explosive growth of Canada's Top Ten. This and many other benefits of DB plans are critically important to remember when we look at bolstering our retirement system by building on the success of our large DB plans. 
• What else? Canada's Top Ten have roughly 30% of their assets in alternative asset classes like infrastructure, real estate and private equity in Canada and abroad. This figure contrasts to a less than 11% allocation in alternative asset classes by most other Canadian pension plans which explains why Canada's Top Ten are outperforming their domestic and international peers. It's not only the large allocation to alternative asset classes which explains this outperformance, it's the approach they use. Canada's Top Ten invest directly in real estate, infrastructure and private equity, saving a ton on fees. 
• The main reason behind the success of Canada's Top Ten is their governance model which ensures no government interference and introduces a compensation scheme that pays senior pension fund managers at Canada's Top Ten extremely well so they can attract talent to bring public and private assets in-house. 
• However, as I recently stated, the media loves overtouting the Canadian pension model and in doing so it often presents biased views of what the Top Ten are doing, especially in terms of direct private equity deals. Still, there's no denying the success of Canada's Top Ten which is why many public and private pensions are trying to emulate their approach.  
• The main drawback of this BCG study is that it doesn't delve deeply into the diverse approaches Canada's Top Ten use to add value over their benchmarks. For example, I recently covered PSP Investment's global expansion discussing how the fund is going into leveraged finance. The report also doesn't discuss the benchmarks Canada's Top Ten use to gauge their performance in public and private markets, nor does it discuss how a few in the Top Ten are highly levered relative to their peers which could explain part of their long-term outperformance (it's not the only factor but it's a big factor). 
• In other words, this BCG is more of a public relations study; it isn't a rigorous, comprehensive performance audit on Canada's Top Ten. To be fair, BCG and McKinsey are large consultants which are typically used by Canada's Top Ten for big studies but they're there to deliver a product which is shaped by the senior managers at these shops. The consultants' focus is on repeat business which is why they present findings in a favorable manner. They're not hired to rock the boat (that's my job!). 
•  Although I welcome this new BCG study, I wish the Government of Canada would commission a new study on the governance at Canada's Top Ten which closely examines the various approaches they use to deliver their results, the benchmarks they use to gauge their performance in public and private markets and whether their benchmarks appropriately reflect all the risks they're taking to deliver these results and whether these risks justify the very generous compensation being doled out to their senior managers.
• What else? We need to improve the communication at Canada's Top Ten and perhaps even legislate that board meetings will be made public on a dedicated YouTube channel just like CalPERS, CalSTRS and other large U.S. public pensions do. More transparency is needed on investments, benchmarks and how its tied to compensation. 

I know, I'm dreaming but when we want to shine a light on Canada's Top Ten, we're better off looking at the good, the bad and the ugly, not just the good.

Having said this, I'm a huge supporter of Canada's Top Ten and would like to build on their success to improve our retirement system and propel Canada to the top spot in the global ranking of top pensions. There are plenty of pension fund heroes in Canada who quietly do extraordinary work, delivering solid long-term results and even though I'm on their ass constantly to improve their governance and hire a more diversified workforce, if we're ever going to introduce real change to Canada's Pension Plan, we have to build on the success of our large DB pensions.

There's another reason why I'm a big believer in our large DB pensions. The next ten years will be nothing like the last ten years. We need to prepare for lower returns, especially here in Canada where negative interest rates could be right around the corner. In this environment, you're better off having your pension money invested in Canada's Top Ten than in some crappy mutual fund which rakes you on fees and is vulnerable to the whims and fancies of public markets.

Below, Caisse CEO Michael Sabia discusses theBombardier investment and 'evolution' in governance on Bloomberg television. I covered the Caisse's big stake in Bombardier a few weeks ago but didn't see this interview until today and it fits nicely here.

Paul Taylor of Reuters reports, As pension reform crunch nears, Greek coalition looks fragile:

Greek Prime Minister Alexis Tsipras' governing majority is looking fragile as crunch time approaches for a pension reform that will test his resolve to impose painful measures to satisfy Athens' international creditors.

The coalition of Tsipras' leftist Syriza party and the right-wing nationalist Independent Greeks has a majority of just three seats in parliament, and pro-European opposition parties that voted for Greece's latest bailout are publicly refusing him any help on the toxic pension issue.

The overhaul, which must deliver savings worth 1 percent of gross domestic product or 1.8 billion euros next year, is the most sensitive of a raft of reforms demanded by the euro zone and the International Monetary Fund in return for up to 85 billion euros in aid in the country's third bailout since 2010.

Trade unions have staged two 24-hour general strikes against further pension cuts and Tsipras has promised there will be no across-the-board reduction in benefits for retirees.

Tsipras says most of the savings will be achieved by ending early retirement under a law enacted last month, leaving about 600 million euros more to be saved.

"Hell, there must be ways to find those 600 million euros. It's not 6 billion, it's 600 million," he said in a television interview this week after critics said he would struggle to avoid a new round of unpopular pension cuts.

Instead the government is proposing to increase social security contributions, mostly by employers - a move the lenders warn would deter job creation and set back economic recovery, setting the stage for tough negotiations next month.

WARS OF WORDS

As the deadline approaches, Tsipras launched an attack on the IMF this week, saying it was making unconstructive demands on both sides and should make up its mind whether it wanted to stay in the Greek program.

That in turn triggered another war of words with Germany, the biggest European creditor, which insists the global lender must stay in the program to enforce tough discipline and to reassure German lawmakers.

Sources in Syriza say some deputies are unhappy at the prospect of a reform that will entail merging the country's multiple underfunded pension funds and reducing state subsidies to the system and is bound to lead to lower benefits for many.

No one knows how many, if any, of the grumblers may refuse to back the law.

Aides say Tsipras will negotiate hard with the lenders but ultimately will face down any opposition in his own party and push the pension reform through parliament so that Greece can start negotiations with the euro zone on debt relief in March.

Tsipras dismissed talk of a wider coalition in the state TV interview, saying his 153 seats in parliament were more solid than the 225-seat majority which had initially supported a 2011-12 interim government of technocrat Lucas Papademos, which crumbled within six months.

Political sources say the prime minister has put out feelers to a small opposition party, the Union of the Centre, which has hinted its nine lawmakers might let the legislation pass.

Despite their tough public stance, other opposition parties could well abstain or absent themselves in sufficient numbers to ensure passage of the pension bill, the sources said.

"No one has an interest in having another election now," said a senior political source, noting that the conservative New Democracy is in disarray ahead of a leadership election next week, and the center-left PASOK party is wary of taking any new responsibility for unpopular austerity measures.

The source said that while his "central scenario" was that Tsipras would ram the pension reform through, there was a risk that the prime minister would decide to play for time, delaying any reform until pressure mounted and the threat of another destabilizing Greek crisis began to affect financial markets.

A source on the lenders' side said creditors could also play things long to increase reform leverage over Greece and push back debt relief talks until after sensitive regional elections in Germany and a general election in Slovakia in March.

While Tsipras remains Greece's dominant politician, with no challenger in sight, Athens is awash with rumors of an "ecumenical government" combining technocrats with consensual politicians if he loses his majority.

The Greek pension system is effectively bankrupt and getting worse as the country keeps sinking into a debt deflation hellhole. It desperately needs to be reformed but with so many Greeks relying on grandpa and grandma's pension which has already been cut to the bone, I'm not surprised there's such massive opposition to reforming pensions.

Unfortunately, Greeks don't have much of a choice. Either they reform pensions, which means merging them, introducing real governance which shields them from political interference, and risk-sharing so that they're sustainable over the long-run or else those pensions are going to disappear altogether.

Of course this is Greece and nothing in Greece ever gets done without drama. I've given up hope on Greece and Greeks. It's quite shocking how they fail to grasp reality and this is reflected in the clowns they keep voting into power. I think Alexis Tsipras is finally taking the right stance but it's a day late and a dollar short. The titanic is sinking and I expect another "Greek crisis" in the near future which will only exacerbate Europe's deflation crisis (keep shorting the euro on any strength!).

Worse still, there's no end of the deflation supercycle and this is bad news for all pensions, not just the ones in Greece. In fact, Greek pension bombs are exploding everywhere including Illinois where the unfunded pension liability has risen to $111 billion:

Illinois added another $6.4 billion to its already large unfunded pension liability in fiscal 2015, pushing the total to $111 billion, according to a state legislative report on Thursday.

The bad news on the pension front comes as a budget stalemate between Republican Governor Bruce Rauner and Democrats who control the legislature continues nearly halfway through the fiscal year that began on July 1.

Analysts at the legislature's Commission on Government Forecasting and Accountability said changes in some actuarial assumptions at two of the five Illinois public employee retirement systems, along with insufficient state contributions, were the main reasons for the higher unfunded liability when fiscal 2015 ended on June 30.

Illinois has the worst-funded pensions among the 50 states and its funded ratio fell to 41.9 percent at the end of fiscal 2015 from 42.9 percent in fiscal 2014, the report said. Those percentages are well below the 80 percent level that is considered healthy.

Moody's Investors Service and Fitch Ratings in October pushed Illinois' credit ratings into the low investment grade triple-B level, citing the state's pension funding problems, the budget impasse, and a growing structural deficit.

A cash crunch resulting from the budget stalemate forced Illinois' comptroller to delay a $560 million November pension payment. However, stronger revenue this month made a $560 million December payment possible.

The legislative commission's report projected that the state's pension contribution will rise to $7.908 billion in fiscal 2017, which begins on July 1, from nearly $7.535 this fiscal year. The report also projected the unfunded liability will grow to $114.8 billion at the end of fiscal 2016 and will keep growing until it tops out at $132.16 billion in fiscal 2029.

Teachers' Retirement System, the biggest of the five state retirement systems, said on Thursday that Illinois' $3.986 billion fiscal 2017 contribution falls far short of the $6.07 billion that would be required using actuarial standards.

When people tell me the Greek pension fiasco can never happen elsewhere, I tell them to open their eyes as it's already happening all around the world, including in the United States where the trillion dollar state funding gap is set to explode higher as rates keep sinking.

Mark my words, a prolonged period of debt deflation will be brutal and unrelenting, especially for underfunded pension plans. Why do you think central banks are busy trying to save the world, introducing all sorts of unconventional monetary policy measures including negative interest rates?

These measures will punish pensions and force them to take increasingly more risk, but this exactly what central banks want to awaken "animal spirits" and stoke inflation expectations higher.

Will they succeed? I have my doubts and fear that the Fed is set to make a huge policy blunder if it raises rates next week. What really worries me is rising inequality and how deflationary this is for the U.S. and global economy.

In fact, Nobel-Prize winning economist Joseph Stiglitz wrote another great comment for Project Syndicate, When Inequality Kills, which discusses how rising inequality is literally very unhealthy for the U.S. economy and contributing to higher rates of drug abuse, alcoholism, and suicide.

But rising inequality is also adding to deflationary headwinds and this too spells big trouble for the United States of pension poverty. Unfortunately, America's pension justice is going the way of its justice system, penalizing the most vulnerable and rewarding the most affluent, some of whom have the gall to propose a solution to the retirement crisis which primarily benefits them.  And all of this is happening under the watchful eye of Congress, which ensures the quiet screwing of America.

George Carlin was right: "it's called the American dream because you have to be asleep to believe it." This holiday season, try to read Joe Stiglitz's latest book, The Great Divide, and make sure you read the chapter on the "Myth of America's Golden Age" twice. Then read Thomas Piketty'sThe Economics of Inequality, Tony Atkinson'sInequality: What Can Be Done?, and Bob Reich'sSaving Capitalism: For the Many, Not the Few.

After reading these books, if you're still convinced America, and by extension the world, doesn't have a massive inequality problem which will threaten future growth and all but ensure a long period of secular stagnation that Larry Summers is warning of, then hats off to you! My bet remains on global deflation and I see the Greek pension disease spreading all over the world in the not too distant future, wreaking more havoc on our already frail pension systems. 

Below, Info Wars looks at whether the U.S. is headed toward a Greek style debt default. I don't like Alex Jones or Info Wars, nor do I think the U.S. is headed toward a Greek style debt default (this is absurd, read Yanis Varoufakis's The Global Minotaur to understand why the U.S. economy thrives on domestic and global debt). But the clip features a snippet of Nomi Prins, author of All the President's Bankers, discussing the secret alliances that shape and control the global financial system and it's worth listening to her insights.

And according to new research from the Pew Research Center, the American middle class is losing ground and is no longer the majority, which hardly should surprise any of us. Gary Shilling, A. Gary Shilling & Co and Brian Wesbury, First Trust Advisors, join the discussion on CNBC. Listen carefully to Shilling's comments, he's been right on deflation all along. Enjoy your weekend!

Tim McLaughlin of Reuters reports, Third Avenue junk fund blow-up exposes risks of unsellable assets:

The blow-up of Third Avenue Management's junk bond fund this week, the biggest mutual fund failure since the financial crisis, show the dangers of loading up on risky assets that are hard to trade even in good times.

At least one-fifth of Third Avenue's Focused Credit Fund , with less than $1 billion under management, was composed of illiquid assets, meaning they trade so infrequently that they don't have a market price, according to a Reuters analysis. That's one of the highest percentages of exposure in the junk bond sector.

Meanwhile, some of the most popular U.S. junk bond funds also have made large bets on assets considered the hardest to trade and value in the industry, and their portfolios may not reflect the full extent of the current downturn in the junk bond market, said junk-bond analyst Marty Fridson, chief investment officer of Lehmann Livian Fridson Advisors LLC.

"Precisely because these (assets) are hard to price, they won't necessarily show the full extent of the market decline," Fridson said. "That can make a fund with lots of illiquid security look better than a fund with big, liquid names where the price declines are very transparent."

AllianceBernstein's AB High Income Fund has the biggest holdings on a percentage basis this year among the largest junk bond funds. At the end of July, the fund reported $1.08 billion in illiquid assets, or 15 percent of the securities in a $7.3 billion portfolio, according to a Reuters analysis of the 10 largest U.S. junk bond funds. The Third Avenue fund isn't in the top ten.

AllianceBernstein did not respond to questions seeking comment.

With the $236 billion junk bond mutual fund sector on course for its worst performance in seven years due to a rout in commodity prices and expectations of higher interest rates, some big junk bond funds already are scaling back exposure to their riskiest assets.

The $17 billion American Funds High-Income Trust Fund , which this year realized nearly $200 million in losses on its most illiquid assets, told Reuters it plans to reduce its current exposure of 1.6 percent of securities that are hard to price and trade.

An American Funds spokesperson said the positions are carefully researched.

High yield, also known as junk, debt issuance has skyrocketed from $147 billion in 2009 to more than $300 billion in each of the last three years. Record-low interest rates have encouraged investors to take on more risk, including the debt of less creditworthy issuers, to get a higher return.

Tom Lapointe, portfolio manager of the Third Avenue fund, said in an October 2014 interview with Reuters that "any company with a pulse has been able to refinance."

In addition to AllianceBernstein and American Funds, other investment funds such as BlackRock Inc and Waddell & Reed Financial Inc have junk bond funds - staple holdings for pension funds, retirement plans and mom-and-pop investors - that hold the largest amount of assets that are so illiquid and so hard to price that their valuations are sometimes pegged to assumptions made by the investment managers themselves, their fund disclosures show.

REAL CARNAGE?

The illiquid debt favored by junk bond funds ranges from subprime loans bundled into mortgage-backed bonds by Wall Street banks on the eve of the credit crisis to bank loans to distressed companies in the energy and chemical industries.

Fund managers favor illiquid assets because they may pay 50 cents on the dollar to buy them, for example, and they get a yield premium for carrying the extra risk, said Sumit Desai, an analyst at fund research firm Morningstar Inc.

Most junk bond funds don't hold any so-called Level 3 assets, which are generally considered risky and illiquid, or the amounts are less than 1 percent of their portfolios, according to a Reuters analysis of fund disclosures.

Junk bond portfolio managers already are navigating a treacherous market featuring a meltdown in the energy sector. Managers say junk-bond pricing volatility is reminiscent of the 2008 financial crisis. And investors have made $5.7 billion in net withdrawals from junk bond mutual funds this year, according to data from Lipper Inc, a unit of Thomson Reuters.

DoubleLine Capital bond star Jeffrey Gundlach this week predicted "real carnage" in the junk bond market as the Federal Reserve leans toward raising interest rates for the first time in nearly a decade.

The sector is losing 3.01 percent this year, compared with 2008 when junk funds lost 25.5 percent, according to Lipper Inc data.

Fund assets are typically categorized as Level 3, according to U.S. accounting rules, when pricing is unavailable and their value is set by internal estimates or quotes from outside vendors. By contrast, U.S. government bonds or blue-chip stocks are categorized as more liquid Level 1 assets because their value is easily discovered in the market and they trade frequently.

Some funds with the highest percentage of Level 3 assets also are among the worst performers, according to Lipper.

Waddell & Reed's $6.7 billion Ivy High Income Fund ranked fifth worst with a one-month total return of negative 3.33 percent. The fund's Level 3 assets were almost $260 million at the end of September, or 4 percent of the portfolio. The company did not return messages seeking comment.

BlackRock declined to comment about its holdings.

"For stuff that's illiquid even under ordinary conditions, anyone who sells under present conditions will take a bath," Fridson said.

Tae Kim of CNBC also reports, Are Third Avenue woes a sign of the next crisis?:

Wall Street is buzzing on the news of a redemption halt and liquidation of a well-known high-yield bond mutual fund.

If a well-respected value investment firm with an impressive track record such as Marty Whitman's Third Avenue Management can suffer such a misstep, are many more, less notable investors next?

Given the sell-off in the stock and bond markets Friday, the market believes the answer to that question is "yes."

Third Avenue sent a letter to clients Wednesday stating the liquidation of the Focused Credit Fund (FCF) is to protect investors:

"Investor requests for redemption, however, in addition to the general reduction of liquidity in the fixed income markets, have made it impracticable for FCF (Focused Credit Fund) going forward to create sufficient cash to pay anticipated redemptions without resorting to sales at prices that would unfairly disadvantage the remaining shareholders."

As of Wednesday, the Focused Credit Fund had $789 million in assets and returned a negative 27 percent year to date, according to Morningstar.

Noted bond fund manager Bill Gross of Janus Capital, formerly of Pimco, sees the news as a sign to take risk exposure down.

And Carl Icahn, Friday on CNBC's "Fast Money: Halftime Report," compared the junk bond market to a "keg of dynamite."

Other investors, however, think it is more of a one-off situation.

Brean Capital's Peter Tchir in an email to clients Friday explained the Focused Credit Fund was concentrated in the riskiest securities and may not be representative of the entire high-yield bond market with 50 percent of the fund in nonrated and 45 percent in CCC and below rated assets.

Jeremy Hill, managing partner of Old Blackheath agrees:

"Any time any fund closes redemptions it has to be a concern for the market. ... No matter what the manager claims, this is not about illiquidity. It's about pricing. The fund holds many publicly traded assets that currently have bids and offers. It's just that the manager doesn't want to sell at the prices offered, especially since the fund is already down 30 percent. ... That is not a reflection on bond market liquidity. That's manager judgment."

But Peter Kenny, an independent market strategist, believes the news has significant implications for market sentiment even if it's not indicative of the industry.

He wrote in an email: "Concern over bond market liquidity has emerged as a principal concern for analysts and investors alike in recent quarters. This closure may be a 'one off' but given the backdrop of concern on the Street, it will set off alarm bells and drive a heightened sense of bond-centric risk awareness. Certainly not a net positive for markets if this confirms a broader narrative."

The key takeaway may be not the liquidation itself, but what drove the underperformance of this fund.

A number of the fund's top 25 holdings are in the troubled energy and industrials sectors, according to Morningstar's website. As oil and commodity prices plunge in 2015, investors are becoming increasingly worried about the solvency of leveraged companies in those sectors.

The cost of buying default protection on the S&P 500 Energy Corporate Bond Index is up by 185 percent since May, according to S&P Dow Jones Indices.

Legendary energy trader John Arnold confirmed to CNBC Thursday that he expects half of U.S. energy companies to go bankrupt next year if oil prices do not rebound.

Investors are clearly starting to get worried about the meltdown in junk bonds. U.S. high-yield bond funds saw a net redemption of $3.5 billion from retail investors for the week ended Dec.9, according to Lipper.

S&P 500 vs. HYG YTD

Source: FactSet

The market in recent months diverged from the iShares iBoxx USD High Yield Corporate Bond ETF (HYG), but that changed this week. Another ETF tracking the asset class, the SPDR Barclays High Yield Bond ETF, is at it lowest level since the 2009 financial crisis.

"Debt-funded buybacks and mergers have been a massive source of demand for equities in recent years; a turn in the credit cycle has major implications for the broad stock market," Jesse Felder of the Felder Report wrote in an email.

Now 91, Whitman is operating as chairman of Third Avenue and all indications are he did not have a direct hand in managing assets in this particular fund.

If the drop in stocks Friday proved that Third Avenue's woes weren't priced into the market, a large default cycle by energy and industrial companies in 2016 certainly isn't accounted for either.

So, did the dreaded liquidity time bomb just explode and will it wreak havoc on markets? No, this is just another case of some fund managers taking excessively dumb risks in credit markets, loading their portfolios up with the riskiest bonds and now that oil prices dropped to an 11-year low, the chickens have come to roost.

Importantly, I agree with Jeremy Hill, managing partner of Old Blackheath,  it's not about illiquidty, it's about pricing. There are plenty of sharp investors on Wall Street investing in battered bondsat the right price, and now they'll have plenty of opportunities to continue doing so.

One of those investing in battered bonds through closed-end bond funds is Jeffrey Gundlach, the reigning bond king, who believes it's "unthinkable" that the Fed would want to raise rates with what's going on in the market now:

While most agree that the Fed will hike rates this week, not everyone is quite as sanguine about what's going on in the HY market.

"The entire existence of the high-yield bond market is during secularly declining rates," DoubleLine's Jeffrey Gundlach warned back in May.

And rates have effectively been in decline for three decades.

"I've got a simple message for you: It's a different world when the Fed is raising interest rates,"Gundlach said last Tuesday. "Everybody needs to unwind trades at the same time, and it is a completely different environment for the market."

Gundlach believes it's "unthinkable" that the Fed would want to raise rates with what's going on in the market now.

"This is a little bit disconcerting that we're talking about raising interest rates with corporate credit tanking," Gundlach said.

Gundlach's warnings came days before HY spreads really started to blow out. In recent days, we've heard money managers like Third Avenue and Lucidus liquidate their credit funds because of what's happening.

Karoui doesn't believe the worst is over.

"The heavy redemptions, rock-bottom levels of risk tolerance, and persistent downside risk for oil prices will likely continue to weigh on HY," Karoui said.

Maybe the Fed will flinch. We'll find out on Wednesday at 2:00 p.m. ET when the Fed publishes its policy statement.

I don't believe the worst is over either because I don't see any end to the deflation supercycle and I agree with Gundlach, the Fed will be making a monumental mistake if it raises rates on Wednesday.

It's not just the credit markets that concern me, it's the surging greenback and another emerging markets crisis, especially if we get another Chinese Big Bang, but by all accounts the Fed is ready to go. Still, don't discount the possibility of a December surprise even if it means markets will tank (I will discuss the Fed's actions on Tuesday and why it's damned if it does and damned if it doesn't raise rates).

All year, I've been warning investors to steer clear of emerging markets (EEM), Chinese (FXI), Energy (XLE), Oil Services (OIH), Oil & Gas Exploration (XOP) and Metals & Mining (XME). These are the sectors that are suffering the most as the deflation supercycle keeps ravaging the global economy.

So, let me ask you, does it surprise you that some idiots who bought the riskiest bonds in some of these sectors are now getting killed and seeing massive redemptions in their high yield bond funds?

It shouldn't. Whether you manage a mutual fund, hedge fund or any fund, making money and losing money is all about taking the right risks at the right time. Some fund managers are going to make a lot of money in this high-yield blow-up while others are going to be eviscerated.

Now, exactly one year ago, I wrote a comment on why the plunge in oil will not crash markets where I stated the following:

The reality is the collapse in oil will rock some markets and economies a lot more than others. Brazil, Mexico, Russia and especially Venezuela, will be among the hardest hit, but the plunge in oil will also hit Canada, albeit nowhere near as badly.

In my opinion, the credit contagion arguments have been blown way out of proportion. To compare the contagion effects of the plunge in oil to that of the decline in the U.S. housing market between 2006-2008 is pure fantasy and sloppy investment analysis.

Make no mistake, the plunge in oil markets will not roil credit markets and cause another financial crisis anywhere near what we saw back in 2008. To even think this is ludicrous.

What is happening right now is a major shakeout in the energy industry which will likely last for years. As I've repeatedly argued, lower oil and commodity prices are here to stay, and those betting on a major recovery in energy (XLE), commodities (GSC), materials (XLB) and other sectors that benefited from the boom like industrials (XLI) are going to be waiting a very, very long time.

Will there be relief rallies? Absolutely, and they can be violent relief rallies, but the trend is inexorably down as global deflationary headwinds pick up. Also, in this environment, we will see a pickup in mergers and acquisitions activity and I await more deals like Halliburton's (HAL) acquisition of Baker Hughes (BHI) and Repsol's recent bid for Talisman Energy (TLM).

As I've repeatedly argued, the biggest risk for stocks in 2015 is a major melt-up unlike anything you've ever seen before. The plunge in oil will do nothing to stop this. Markets can easily take off even if oil and commodity prices stay low (financials, retail, healthcare and technology make up a bigger proportion of the S&P 500 than energy, materials and industrials).

Are there going to be corrections along the way and unforeseen or even foreseen black swans that will cause major disruptions? Sure but in my opinion, the only thing that can derail this endless rally is a significant pickup in global deflationary headwinds.

And if deflation does hit America, that's when you'll see central banks really panic, putting an end to the old adage, "Don't fight the Fed." In my opinion, even though this time is indeed different, we are not yet at the precipice of a total, systemic loss of confidence. There is still plenty of liquidity and faith in central banks to drive risk assets much, much higher. You just have to be careful before plunging into stocks or you risk getting slaughtered.

Well, following China's Big Bang, global deflationary headwinds picked up significantly and didn't get any "melt-up in stocks." And now we're seeing a blow-up in some sectors in the U.S. credit markets and that's making investors uneasy, especially if the Fed starts raising rates.

But I caution you to be very careful here and not assume this latest high-yield "blow-up" will crash markets. Some sectors of this market are not going to be able to get debt financing. They might go to hedge funds or private equity funds which specialize in distressed debt or they might go to a pension fund like PSP Investments which is ramping up its leveraged finance business and has a much longer investment horizon than hedge funds or private equity funds.

Most highly levered companies in energy and commodities aren't going to survive this deflation supercycle. They'll be forced to issue more and more equity (diluting their shares) and when that game runs out, they're going to go bankrupt and die.

Will this have an impact on credit markets? Of course it will but there's a lot of hysteria out there which is not grounded on solid analysis and too many investors are throwing the baby out with the bathwater, which will present great opportunities for the sharpest investors in 2016.

Below, Martin Fridson, Lehmann Livian Fridson Advisors, sees no sign of a recession and talks about distressed bonds and the market selloff. Smart guy, listen to his comments before you read too much into this latest high-yield blow-up.

Luc Vallée, chief strategist at Laurentian Bank Securities, wrote a comment over the weekend for the Globe and Mail, The Federal Reserve’s tacit aim is to stabilize the dollar:

Here we are again, days from yet another Federal Reserve meeting to decide whether to increase U.S. interest rates for the first time in more than nine years.

This time should be the one, though. As former Fed vice-chair Alan Blinder wrote recently, “Only the stubborn remain unconvinced” that liftoff will happen next Wednesday. And I concur. Barring a disaster, Fed chair Janet Yellen would lose too much credibility if she did not deliver the long-awaited hike.

But, as some Fed officials have warned, too much attention is being paid to the timing of the first move rather than the path of subsequent rate increases. Credibility aside, there are excellent reasons for the Fed to finally want to move away from its zero-interest-rate policy (ZIRP), which was adopted after the financial crisis. And let’s face it, a mere 25-basis-point increase will not be the end of the world, but rather just the beginning of the monetary-policy normalization process.

Moreover, the neutral interest rate (the short-term policy rate consistent with stable inflation at full employment in the long run) might be lower today than it has been in the past. But, according to the Fed’s own research, the neutral rate is still likely to be around 3.75 per cent, a long way from where the Federal funds rate stands today.

Assuming that next week’s rate hike is a forgone conclusion, investors should turn their attention toward what the Fed is likely to tell us about its intentions for 2016 and beyond. Since September, 2014, it has been saying that over a 15-month horizon, the funds rate should increase by about 1.25 per cent, or 125 basis points. But the Fed has not moved since; all it has done is to roll forward these future rate increases. For instance, in September, 2014, the median of the “dots” (the policy rate forecasts of each member of the Federal Open Market Committee) called for the rate to reach 1.37 per cent – or for five rate hikes – by December, 2015. Yet, in September, 2015, one year later, the median “dot” was still pointing to the same rate of 1.37 per cent but, this time, to be delivered by December, 2016.

This 15-month forward rate forecast by the Fed is thus now much less credible. And the bond market has, unsurprisingly, adjusted its expectations to take into account the Fed’s failure to deliver on its own guidance. Bonds are now pricing increases of between 50 to 75 basis points (i.e., two or three hikes) for the whole of 2016. This is a significant divergence from the Fed’s view, which still officially anticipates that it will move by 25 basis points every two FOMC meetings (there are eight a year), while the market roughly thinks the Fed will hike similarly every four meetings.

And over a longer horizon, the expectations of future rate increases have also diminished. In September, 2014, the market may have been inclined to believe that the policy rate would move to 4 per cent after a few years, but investors on the bond market now implicitly forecast that the rate increases by the Fed beyond 2016 will be spread over a much longer period and end at a much lower rate than what the current “dots” suggest. The U.S. 10-year bond yield is 2.20 per cent and the 30-year rate (a good proxy for what the market thinks the upper limit of the neutral rate should be) stands at 2.95 per cent.

I believe that at its next meeting, the Fed will adjust to this new reality and communicate its thinking to the market in order to provide a more favourable environment to foster economic growth. This communication will be crucial, because many financial market participants still fear that once the Fed starts raising rates, there are considerable risks that it may tighten too soon and faster than warranted. One way to assuage this fear would be for the Fed to credibly signal that it recognizes the current economic recovery, domestic and global, stands on weak foundations and excessive leverage, and could relapse if pushed too hard.

Yet the United States is almost at full employment, and although inflation is below the Fed’s target of 2 per cent, there are reasons to believe this weak price environment is temporary, as energy and non-energy commodity prices are currently at cyclical lows. The timing and the rationale to raise rates are thus appropriate, especially given that monetary policy works with a lag.

What is the problem, then? One problem is that the recovery is much less firm in the rest of the world than it is in the United States, and as the Fed starts raising rates, global liquidity will begin shrinking, putting even more downward pressure on consumption and investment.

Preventively, other central banks – most notably the European Central Bank and the Bank of Japan – have launched massive asset-purchasing programs to compensate for the anticipated reduced global liquidity the Fed’s restrictive monetary policy will have once it starts raising rates. As a result of these pre-emptive expansionary policies outside the United States, the U.S. dollar appreciated significantly against the euro and the yen in the past year, although the Fed has yet to tighten. This would have been all very good had those depreciating currencies led to more growth in Europe and Japan in 2015. But, as in Canada, the positive effects of these engineered currency depreciations remain works in progress. In other words, despite all the stimulus recently provided by non-U.S. central banks, global growth is still tepid, an embarrassing outcome for policy-makers.

Conversely, the U.S. dollar’s appreciation has considerably slowed U.S. exports and growth in 2015. Fed vice-chair Stan Fischer, relying on a model developed at the Fed, acknowledged in a speech last month the negative impact an appreciating dollar has on U.S. growth. This may go a long way toward explaining why the U.S. economy’s performance was below most economists’ expectations this year. Ms. Yellen also explicitly recognized the phenomenon in a more recent speech, when she said the appreciating dollar probably cut U.S. growth by 0.5 per cent in 2015.

But, more important, Mr. Fischer argued the negative effects of the 2015 appreciation of the dollar are likely to unfold over time, and consequently could affect U.S. growth next year and beyond: “Recalling that the dollar’s actual appreciation has been about 15 per cent, … the cumulative reduction in U.S. aggregate demand from the dollar appreciation is likely to total 2.5 per cent of GDP after three years.”

From there, it is easy to conclude that the last thing we need today is a further appreciation of the U.S. dollar. U.S. growth in 2016 will be affected negatively by the dollar’s appreciation over the past 12 months, but growth could be even lower if it appreciates yet again next year. Furthermore, growth could deteriorate even further, and for several years, if the dollar were to pursue its ascension toward new highs.

Given that the American economy is one of the few engines – if not the only engine – for the global economy these days, slowing U.S. growth surely does not sound like a winning strategy for promoting world growth. It also does not look like a wise path if one wants to avoid a disorderly devaluation of the Chinese yuan in the near future, as the likelihood of such an event is more likely as the dollar strengthens and U.S. growth falters.

Reading between the lines in both Mr. Fischer’s and Ms. Yellen’s most recent speeches, as well as in European Central Bank president Mario Draghi’s underwhelming policy response to Europe’s woes last week, we can gather that central banks are most likely co-ordinating their efforts to stabilize the U.S. dollar. Implicitly, they are also contributing to stabilizing the yuan.

Where does that leave us next week after a Fed rate hike? In my opinion, the real news on Wednesday is not that the Fed is putting an end to seven years of ZIRP, but that it is reducing the speed at which it intends to raise rates going forward, tacitly aiming to stabilize the dollar.

The Fed is likely to do this by lowering the “dots” from four more increases in 2016 to just two. It may also further lower the long-run neutral rate to 3.0 per cent or less. In doing so, the Fed would credibly acknowledge that it underestimated global headwinds and the negative effects of the rising dollar on both U.S. and global growth. It would also signal that it intends to take the time needed to raise rates to the neutral rate while remaining data-dependent. This would also go a long way in calming nervous market participants and reducing uncertainty. This may even help to create a more favourable economic environment for business investment and job creation.

However, such a statement would likely complicate the Fed’s conduct. Its dual mandate today calls for stabilizing inflation and maximizing employment. It might never admit to it, but going forward, the Fed may have to actively try stabilizing the dollar.

This is a great comment from Luc Vallée, my former colleague at the Caisse who is now the chief strategist at Laurentian Bank Securities. He raises the key points that will weigh heavily on the Fed's big decision to raise rates on Wednesday (if you want to sign up to Luc's research, you can email him at ValleeL@vmbl.ca).

Jonathan Ratner of the National Post also recently reported, Why the U.S. dollar is raising alarm bells:

The threat of defaults around the world is rising as the U.S. dollar may appreciate further regardless of whether or not the U.S. Federal Reserve hikes interest rates later this month.

This comes as little surprise to those who keep an eye on the balance sheets of corporations in emerging markets, for example, since much of their debt is denominated in U.S. dollars.

“It’s hard to be bullish about the global economy these days,” said Krishen Rangasamy, an economist at National Bank Financial. “Besides China’s tricky rebalancing, which continues to have repercussions across the globe, there’s the growing threat posed by the surging U.S. dollar.”

He noted that global exposure to the U.S. dollar has never been higher, since the trade-weighted greenback has gained more than 12 per cent in 2015, which is the largest annual appreciation in more than 30 years.

Rangasamy warned that this increases the probability of corporate defaults, particularly when you consider recent data from the Bank for International Settlements. Its latest quarterly review showed that dollar-denominated debt held by non-financial entities outside the U.S. grew to US$9.8 trillion in the second quarter of 2015.

“That’s a record not just in absolute terms, but also as a percentage of GDP,” Rangasamy said in a report.

The economist also noted that at nearly 18 per cent of global GDP (excluding the U.S.), this debt level suggests the world’s exposure to the strengthening greenback is twice as large as it was 20 years ago.

I have long argued the Fed's deflation problem is being exacerbated by the mighty greenback and this has brought a sea change at the Fed forcing it to worry a lot more about global economic weakness and its effect on the U.S. dollar.

In particular, if the U.S. dollar keeps rising relative to all other currencies, U.S. import prices will keep declining and if there's another Big Bang out of China, there's a real risk that deflation will spread to America. And if that happens, it's game over; we're going to see negative interest rates in Canada, the U.S. and the rest of the world for a very, very long time.

I know, there are elite funds preparing for reflation and market oracles like Alan Greenspan and Paul Singer warning of a disaster in the U.S. bond market, but the only disaster I'm worried about is there's no end to the deflation supercycle and this will wreak havoc on the global economy for a very long time and possibly usher in negative rates around the world.

"Leo, deflation will never happen in the U.S." That's exactly what the managers of Vega Asset Management were telling me back in 2003 after I expressed concerns on their short U.S. Treasuries position (great hedge fund managers but they ended up closing their global macro fund after suffering huge losses).

I've been worried about global deflation for a very long time and have expressed my concerns to great hedge fund managers like Bridgewater's Ray Dalio. Dalio scoffed at my concerns when Gordon Fyfe and I met him ten years ago but his fund subsequently made a bundle playing the deleveraging theme.

It's crucially important for all of you to keep in mind these six structural factors which are deflationary and bond friendly:

• The global jobs crisis: Jobs are vanishing all around the world at an alarming rate. Worse still, full-time jobs with good wages and benefits are being replaced with part-time jobs with low wages and no benefits.
• Demographics: The aging of the population isn't pro-growth. As people get older, they live on a fixed income, consume less, and are generally more careful with their meager savings. The fact that the unemployment rate is soaring for younger workers just adds more fuel to the fire. Without a decent job, young people cannot afford to get married, buy a house and have children.
• The global pension crisis: A common theme of this blog is how pension poverty is wreaking havoc on our economy. It's not just the demographic shift, as people retire with little or no savings, they consume less, governments collect less sales taxes and they pay out more in social welfare costs. This is why I'm such a stickler for enhanced CPP and Social Security, a universal pension which covers everyone (provided governments get the governance and risk-sharing right).
• Rising inequality: The ultra wealthy keep getting richer and the poor keep getting poorer. Who cares? This is how it's always been and how it will always be. Unfortunately, as Warren Buffett and other enlightened billionaires have noted, the marginal utility of an extra billion to them isn't as useful as it can be to millions of others struggling under crushing poverty. Moreover, while Buffett and Gates talk up "The Giving Pledge", the truth is philanthropy won't make a dent in the trend of rising inequality which is extremely deflationary because it concentrates wealth in the hands of a few and does nothing to stimulate widespread consumption.  
• High and unsustainable debt in the developed world: Government and household debt levels are high and unsustainable in many developed nations. This too constrains government and personal spending and is very deflationary.
• Technology: Everyone loves shopping on-line to hunt for bargains. Technology is great in terms of keeping productivity high and prices low, but viewed over a very long period, great shifts in technology are disinflationary and some say deflationary.

In a recent comment on the Greek pension disease spreading, I harped on how rising inequality is deflationary and that while central banks' unconventional monetary policies were necessary to avoid another Great Recession, they're fueling more inequality, rewarding speculators and punishing savers and forcing pensions to take on increasingly more risks to meet their obligations. 

This too is part of the Fed's tacit aim, forcing pensions and other investors to take on a lot more risks to meet their obligations in an effort to awaken "animal spirits" and stoke inflation expectations higher. Will it work? I have my doubts but it forces all of us to play the game or risk being left out if markets go parabolic which can easily happen going into 2016.

One thing the Fed will likely ignore is the latest blow-up in the U.S. high yield market which is concentrated in the riskiest most illiquid bonds. Of course, I share the bond king's concerns and also think there are risks to raising rates in these markets but the Fed is itching to go. It has been telegraphing this move for a long time and if it doesn't raise rates, it will not be interpreted well by market participants. Some strategists think this will be a mistake but others think it's about time.   

In my opinion, the best thing the Fed can do on Wednesday is raise rates by 25 basis points and wrap it up in the most dovish wait and see tone it can possibly deliver. This will send the U.S. dollar lower and it might bring about a Santa Claus rally that a lot of funds and investors desperately need to make up for a terrible year in the stock market. 

On that note, Raymond James strategist Jeffrey Saut said Tuesday stock investors should get ready for a "rip your face off-type rally." Listen to his comments below. I agree with him, we've got the tax loss season behind us (December 15) and there will be plenty of beta chasers gunning for high beta stocks trying to make up for their losses this year. And as I stated back in October, this rally will be vicious and it will extend into the first half of 2016, so enjoy it while it lasts.

Chris Cooper of Bloomberg reports, Japan's $1.1 Trillion Pension Fund Boosts Infrastructure Section (h/t: Pension360):

Japan’s 135 trillion yen ($1.1 trillion) Government Pension Investment Fund is building up its alternative investment department after raising bets on infrastructure projects more than 10-fold to secure higher returns than low-yielding bonds.

The world’s largest retiree fund has boosted staff in its alternative investment section, formed last year, to five people, Shinichirou Mori, director of the fund’s planning department, said Dec. 11 in Tokyo. The fund is still trying to hire more people for the department, according to its website.

The fund’s investments in infrastructure rose to about 70 billion yen at the end of September, based on figures supplied by GPIF, up from 5.5 billion yen at the end of March. The decision to invest in infrastructure is drawing interest abroad, with India’s railway minister urging the nation to invest in rail projects there.

“Infrastructure investments can provide stable long-term revenue and so we anticipate it will help steady pension finances,” Mori said in an e-mailed response to questions Dec. 4. “We haven’t set a number on how many people we will add to the department. If there are good people we will hire them.”

Aging Population

Japan’s giant pension manager is shifting to riskier assets to help increase returns as the number of retirees grows and Prime Minister Shinzo Abe’s government tries to spur inflation, which erodes the fixed returns offered by bonds.

Last month the fund posted its worst quarterly result since at least 2008, as a slump in equities hurt returns. GPIF lost 5.6 percent last quarter as China’s yuan devaluation and concern about the potential impact when the Federal Reserve Board raises U.S. interest rates roiled global equity markets.

About 53 percent of the fund’s assets under management were in bonds as of Sept. 30, according to a statement on its website. The retirement fund’s stock investments are largely passive, meaning returns typically track benchmark gauges.The fund held 0.05 percent of its assets in alternative assets at the time, it said.

Canadian Ties

GPIF teamed up in February 2014 with the Ontario Municipal Employees Retirement System and the Development Bank of Japan to jointly invest in infrastructure such as power generation, electricity transmission, gas pipelines and railways in developed countries. It may expand infrastructure investments to as much as 280 billion yen over the next five years as part of the agreement, it said in a statement at the time.

The alternative investment department also can invest in private equity and real estate, although it hasn’t yet, Mori said. The fund will invest as much as five percent of its portfolio -- 7 trillion yen as of September -- in alternative assets, it said last year. Mori declined to give details of its infrastructure investments.

This year’s infrastructure investments were made through the unit trust structure announced for the joint OMERS projects. The investment decisions are made by Nissay Asset Management Corp. according to the mandate decided by the GPIF. The GPIF team makes sure the details are in line with the investment mandate it outlined for the trust, Mori said.

I recently discussed how Japan's pension whale got harpooned in Q3 as Japanese equities got slammed that quarter but this big shift into infrastructure is worth noting because it means GPIF will become a huge player in this asset class.

And teaming up with OMERS, which is arguably the best infrastructure investor in the world among global pensions, is a very smart decision. I covered the launch of OMERS' giant infrastructure fund back in April 2012 and think pensions looking to invest in this asset class should definitely consult them first (there are others like the Caisse, Ontario Teachers, CPPIB and PSP that invest directly in infrastructure but OMERS is widely recognized as a global leader in this asset class).

Interestingly, GPIF isn't the only giant fund looking to invest in infrastructure. Jonathan Williams of Investment & Pensions Europe reports, Norges Bank bemoans lack of scale for developing nations’ infrastructure:

The manager for Norway’s sovereign wealth fund has bemoaned the smaller scale of infrastructure projects in developing nations after a report to the government called for it be allowed to invest in the asset class.

Noting that infrastructure assets in emerging markets and developing economies present additional challenges not found in OECD countries, a discussion note released by Norges Bank Investment Management (NBIM) nevertheless emphasises that the less mature markets represent “interesting investment opportunities for investors willing and able to take on these additional risks”.

The publication of the note, released alongside a complementary paper discussing the opportunities in renewable energy, comes after the Norwegian government was urged to allow the Government Pension Fund Global (GPFG) to invest in unlisted clean energy and emerging market infrastructure.

In a report co-written by Leo de Bever, former chief executive of the Alberta Investment Management Corporation and commissioned by the Ministry of Finance last year, the government was also urged to broaden the GPFG’s property mandate to allow it to benefit from urbanisation in emerging markets.

The detailed report made a number of suggestions, although the three co-authors – de Bever, Stijn Van Nieuwerburgh of New York University and Richard Stanton of University of California, Berkeley – could not agree whether the sovereign fund should opt for listed or unlisted infrastructure investments, with a 2-1 split in favour of a “substantial” direct infrastructure portfolio.

Van Nieuwerburgh and Stanton were concerned with “myriad non-financial risks” stemming from unlisted holdings, including political and reputational risks, whereas de Bever argued that the sovereign fund’s peers were operating largely in the unlisted space.

Outlining their reasons for investing in emerging market infrastructure, the co-authors cite a strong historical performance but also the “enormous” funding need in such countries, especially after traditional funding sources were in decline.

“The main challenge lies in managing several incremental sources of risk such as political risk, regulatory risk and management and governance risk,” the report says.

It also recommends a greater focus on emerging market property once NBIM has built up sufficient internal expertise.

“Due to urbanisaton, a growing middle class and a rebalancing towards a larger service sector,” it says, “much of the world’s future demand for real estate will be in developing countries.”

The recommendation that NBIM be allowed to grow clean energy holdings into the unlisted space comes after the fund’s environmental mandate – partially comprising stakes in listed clean energy – was doubled.

The “opening up” to unlisted clean energy would allow NBIM to “explore” the sector, the report’s authors said, adding that clean energy would constitute “a majority” of energy investments over the coming 30 years.

You can view the press release Norway's pension fund put out here and download the entire report the three co-authors wrote by clicking here.

I contacted Leo de Bever, AIMCo's former CEO, who was kind enough to provide me with his insights on how Norway's GPFG should invest in real estate and infrastructure (added emphasis is mine):

Helping to answer Norway’s question whether to invest in more real estate and infrastructure in their GPFG fund has for me highlighted some key differences in academic and practitioner perspectives on investing and taking investment risk. Difference of opinion creates a market. Better ideas should flow from that, provided we all keep an open mind, without getting locked into any single investment paradigm too simplistic to be useful in addressing reality.

I believe that pension managers should have the courage to exploit the very real comparative advantages of stable capital and a long investment horizon. My colleagues on this report put their trust in the short-term efficiency of markets, the futility of trying to earn better than average returns, and the rigour of long-term historical data to guide future investment strategy.

Without seeming to be from Woebegone, I always look for ways to be better than average, by considering how future opportunities could be profitably different from the past. After 40 years of declining interest rates, historical evidence may be particularly suspect, and we will need to rely more on clear thinking than on historical statistics. As I learned long ago building macro-models at the Bank of Canada, present and future problems do not come with a neat data set to fit our econometric tool kits.

Most pension investors share my view that there are economies of scale and short-term market inefficiencies to be exploited. There also is value in going beyond conventional instruments and the zero sum game of listed markets, using long term strategies not accessible to most investors and managers. By definition these approaches cannot be replicated with a sequence of short-term strategies, and they often involve new types of investments that are attractive precisely because they are new and unusual.

Pursuing unusual long-term opportunities comes with personal risks long ago highlighted in Keynes’ observation that it is better for one’s reputation to fail conventionally than to try and succeed unconventionally. If you try to innovative, there will be setbacks, particularly in the short run, and there is no shortage of observers willing to tell you how irresponsible you were in assuming they could be successes. I have the bruises to show for it, but still believe it is the right thing to do. If that all seems too scary, stick with indexing. But if your worry about opportunity cost, factor in Gretsky’s observation that he missed 100% of the shots he never took.

My colleagues on this study analyzed the universe of real estate and infrastructure markets. They concluded that listed and unlisted markets for each of these two asset classes had the same return, and that the listed markets provide the governance advantage of current pricing and liquidity. Since most real estate is unlisted, they agreed Norway had little choice but to invest in unlisted real estate, but since most of the infrastructure they studied was listed, they advised investing in listed infrastructure.

However, no pension manager holds a proportionate slice of the broad real estate and infrastructure markets. They target mostly unlisted subsets of each market based on certain steady return and moderate risk characteristics. From their perspective infrastructure in particular has less to do with what it looks like, than with the economic contract defining its returns. To a long-term investor, lags in unlisted pricing are a nuisance, but the only numbers that ultimately matter are purchase and sale price, and one could question whether current prices are truly efficient. They worry more about the advantage for return of having greater insight and influence on governance at the asset level. As for liquidity, that is largely illusory for a big pension plan.

Based on my own research over the last four years into accelerating technological change, particularly as it relates to water and energy, Norway will have lots of opportunity to combine the profitable and desirable through private investments in more efficient and more environmentally friendly infrastructure. The main hold-up is the historical underpricing of most social infrastructure services like water, sewage, and roads.

As always, attracting private capital will require the right expected return, the right investment structures, and investor trust in the fairness of regulation and the enforceability of long term contracts. The greatest need for infrastructure will be in developing nations, but the political and governance issues will be particularly challenging in those geographies.

When it comes to infrastructure, Leo de Bever knows what he's talking about. In 2010, the godfather of infrastructure expressed serious concerns on the asset class but he's absolutely right in his recommendations and insights in this report.

Back in 2004, after I helped Derek Murphy on his board presentation on setting up PSP's private equity investments, I helped Bruno Guilmette with his board presentation on setting up PSP's infrastructure investments. I remember looking at the FTSE Infrastructure Index but there was no question whatsoever that unlisted infrastructure offered tremendous opportunities above and beyond what listed infrastructure investments offer over a long investment horizon with no stock market beta.

Are there risks investing in unlisted infrastructure? Of course, there are regulatory risks, currency risks, illiquidity risks and bubble risks which are magnified when every large global pension and sovereign wealth fund is looking to invest in infrastructure projects.

But it's simply mind-boggling that a giant pension fund like Norway's GPFG which doesn't have liquidity constraints and already has too much beta in its portfolio (like Japan's GPIF) wouldn't develop its unlisted infrastructure investments. Its senior managers also need to talk to OMERS, the Caisse, Ontario Teachers, PSP, CPPIB, and others on how to go about doing this in an efficient and risk-averse way where they don't get whacked on pricing or experience regulatory risks.

Having said this, I wouldn't chuck listed infrastructure out of the equation. There are great infrastructure companies in public markets well worth investing in. I would mix it up but keep the long-term focus on direct investments in unlisted infrastructure and I would use the FTSE Infrastructure Index and a spread to benchmark those unlisted infrastructure investments (I know the FTSE Infrastructure Index is far from perfect which is why many funds use a mix of stocks and bonds as their benchmark for infrastructure and adjust it for illiquidity and leverage).

I'm a stickler for solid benchmarks that properly reflect the risks of underlying investments at each and every investment portfolio of a pension fund, especially those governing private markets where leverage and illiquidity risks are present. Benchmarks are the key to understanding whether compensation adequately reflects the risks senior managers take to beat them. This was not discussed in the report.

Below, learn about the history, objective and management of Norway's Government Pension Fund Global (the Norwegian sovereign wealth fund), one of the world’s largest funds.

It's a great fund with top governance standards, stressing transparency and openness but it needs to evolve and diversify away from public markets and this will present new challenges to this global powerhouse. The same thing goes for Japan's GPIF which unfortunately lacks the governance that Norway has established.

Nishant Kumar of Bloomberg reports, Hedge Funds Just Had Their Worst Quarter Since the Crisis:

Hedge fund closures surged in the three months to the end of September as money managers reeled from declines in commodity and equity markets, while high-yield credit spreads widened.

The number of funds liquidated climbed to 257, up from 200 in the previous three months, according to a report from Hedge Fund Research Inc. on Friday, and taking total closures in the first nine months to 674, compared with 661 during the same period last year. Cargill Inc.’s Black River Asset Management shut four units, while Armajaro Asset Management LLP also closed one of its funds.

Liquidations rose “as investor risk tolerance fell sharply, and energy commodities and equities posted sharp declines, resulting in net capital outflows, wider performance dispersion and meaningful differentiation between hedge funds,” Kenneth Heinz, president of HFR, said in a statement.

The HFRI Fund Weighted Composite Index declined by more than 4 percent in the three months through September, its biggest quarterly drop in four years, as money managers were caught out by the devaluation of the Chinese yuan in August, which pummeled markets, and as oil and gold prices slumped.

Hedge-fund assets contracted by $95 billion to $2.87 trillion during the quarter, HFR data showed, the most since the fourth quarter of 2008, when the industry lost $314.4 billion amid the global financial crisis.

The number of new hedge funds rose to 269 during the quarter, compared with 252 in the previous three months, taking the total number of funds started in 2015 to 785, the data showed.

No doubt, it's been a brutal year for hedge funds, especially those trading commodities where one of the few surviving funds sees more pain ahead. I couldn't agree more.

In response to another brutal year, and perhaps sensing a wave of redemptions on the horizon, Mary Childs of the Financial Times reports that hedge funds cut fees to stem client exodus:

Many hedge funds are cutting fees and negotiating with investors to trim some of their hefty costs and avert withdrawals after another mediocre year for returns.

The industry has been shifting for several years away from its traditional model of charging 2 per cent of assets and keeping 20 per cent of profit. Some funds are already wooing customers with fees closer to 1 per cent and 15 per cent, people in the industry say.

Now pressures are mounting on a wider range of fund managers, as a crowded sector copes with a middling year. The HFRI Fund Weighted Composite index is up 0.3 per cent on the year and returned just under 3 per cent in 2014, according to Hedge Fund Research.

Management fees declined this year in every strategy except event driven, falling to a mean of 1.61 per cent from 1.69 per cent, according to JPMorgan’s Capital Introduction Group.

For performance fees, some strategies were impacted more than others, with the biggest declines in global macro, multi-strategy, commodity trading advisers and relative value.

When Sir Chris Hohn founded The Children’s Investment Fund about a decade ago, he was an outlier. His $10bn fund charges management fees as low as 1 per cent, depending on how long investors lock up their money.

He recently referred to himself as “the antithesis of the classic hedge fund,” because he waived performance fees until the fund crossed a set return hurdle for the year. But others are following his lead in an effort to attract and retain clients amid tough competition.

There are now more than 10,000 hedge funds compared with 610 in 1990, HFR data show, and there are increasing benefits for the larger operators, including lower prime broker costs and better access to company management for research.

The client base has also moved away from wealthy individuals, who were happy to take on significant risk in exchange for high returns.

Now funds depend on institutional investors such as insurers and pension schemes, who cannot afford to miss minimum return targets and are themselves under pressure from boards that oversee investments.

“Most [fund] managers prefer to haggle like rug-salesmen at a bazaar; institutional investors would rather shop at Ikea,” says Simon Ruddick, founder of consultant Albourne.

Several big-name funds have closed to outside investors or shut entirely this year: Michael Novogratz’s $2bn fund at Fortress Investment Group shut in October after having lost 17.5 per cent in 2015, and this month BlueCrest pushed out external investors, saying 2 and 20 was “no longer a particularly profitable business”.

Carlyle’s Claren Road, facing an exodus of half its clients after losses, delayed giving some money back, and offered reduced fees if investors agreed to stay with the fund for another two years, according to people familiar with the offer.

Glenview Capital manager Larry Robbins, whose fund is down 17 per cent this year, has now offered existing clients a chance to put new money into a healthcare-focused side fund, with no fees of any kind.

Public pension schemes including Railpen, one of the UK’s largest, and PFZW, Europe’s second-largest, have whittled their hedge fund investments. They follow Calpers, the biggest US public pension, which last year cut its programme entirely, citing complexity and cost.

An index of redemption requests, run by fund administrator SS&C, shows no significant uptick, but 2016 is projected to be volatile as the US Federal Reserve raises rates while other banks do not. Market ructions may favour hedge funds over traditional mutual funds, but investors are impatient for results.

“It’s across the board — every strategy is feeling the pressure,” says Adam Taback, head of global alternative investments for the Wells Fargo Investment Institute.

“Managers have been more flexible and understanding of needing to come down on fees a bit, but they’re also more willing to do it if you’re more willing to give them a more stable capital base. It’s a trade-off.”

Emma Bewley, Connection Capital’s head of fund investment, says investors who seek fee cuts need to be clear about what they are trying to achieve.

“If you’re pushing for lower management fees to save minimal basis points on a fund where you are unhappy with performance, as a fiduciary, you have to decide whether you want to keep that fund at all.”

For their part, funds are wary of offering deals to some clients, for fear of triggering “most favoured nation” clauses that guarantee other customers automatically receive the lowest fees charged. Poor returns also mean that many fund managers are not earning performance fees at all.

Still, the trend towards lower fees is not universal. The biggest and most popular hedge funds, including Millennium, Renaissance Technologies, Two Sigma, PDT Partners, and Citadel are not negotiating; they do not need to.

“No one’s complaining about the fees for the ones who are making money,” says Bob Jain, Credit Suisse’s global head of asset management. “You have to charge for what you’re offering.”

I've long argued that hedge funds need to chop their fees and think it's scandalous -- yes, scandalous and even criminal!! -- that in a world of deflation and ultra low rates some hedge funds managing billions have the gall to charge any management fee at all (if they're that good, let them survive on performance fees alone).

Of course, the truth is that it's always the funds that are struggling that offer to reduce their fees. When I discussed how some funds are investing in battered bonds through closed-end funds, I referred to how Boaz Weinstein's Saba Capital is finally doing the right thing, offering investors great terms, including an 8% hurdle rate before his fund starts collecting fees.

Other hedge funds don't need to lower fees or offer hurdle rates because they're outperforming their peers and delivering stellar results. Lawrence Delevingne of Reuters reports, Big losers mask net gains in hedge fund assets:

Hedge funds have had a lousy 2015 on average, but investors are little fazed by the meager returns.

The funds globally have taken in more than $45 billion of new money from clients this year, despite losing more than $100 billion on bad market bets and frequently reporting gains near zero.

Pension funds, endowments, wealthy individuals and other investors are not giving up, and instead are looking for funds that will provide better returns, or help cushion their portfolios from losses.

Unsurprisingly, fund managers that have performed well this year, including Millennium Management and Two Sigma, have attracted more money. Each has returned more than 10 percent in 2015, compared with gains of 0.3 percent for hedge funds on average, according to industry data tracker Hedge Fund Research. In turn, investors have poured billions of dollars into each, people with knowledge of the funds told Reuters.

But those gains belie asset declines elsewhere: Funds managed by P. Schoenfeld Asset Management, Litespeed Partners, JANA Partners, Perry Capital, Brevan Howard Asset Management, Och-Ziff Capital Management Group and Atlantic Investment Management have reported losses or meager gains year to date, apparently spurring investors to take money out, according to asset and performance information seen by Reuters.

"Without question, there have been some pretty sizeable losers this year,” said Rick Teisch, who heads up a group that picks hedge funds for institutional investors at Principal Global Investors in New York.

“There appears to be a rotation out of these weaker performers and into stronger ones. That's a tough game to play, as many of this year's losers have been among the strongest performers in years past.”

Growth of hedge fund assets has been relatively steady for decades. Investors added more money every year from 1995 to 2007, when assets reached $1.8 trillion before the financial crisis, according to HFR. Investors pulled money in 2008 and 2009, only to return the following year. Total hedge fund assets now stand at nearly $3 trillion.

Managers that Reuters reached out to either did not respond to requests for comment or would not speak on the record.

EVENT DRIVEN LOSSES

Many of the funds experiencing big client withdrawals are "event driven," meaning they bet on acquisitions, restructurings, dividend changes and other major corporate actions. It has been a tough year for these funds thanks to a series of popular wagers that went wrong, including ones on drug company Valeant Pharmaceuticals, whose shares have fallen more than 55 percent since August after questions arose about its accounting and drug pricing practices.

Event-driven hedge funds globally are on average down about 2.2 percent for the year through November, according to data tracked by HedgeFund Intelligence.

At Peter Schoenfeld’s PSAM, for example, assets under management have fallen nearly 25 percent to $2.8 billion, from $3.7 billion in January, according to a person familiar with the situation. That drop is much higher than the investment declines in its funds, suggesting that investors are taking their money out. PSAM's main fund, PSAM World Arb Partners, is down about 6 percent this year through November.

Another event-driven manager, Jamie Zimmerman’s Litespeed, has seen its overall assets decline by about 40 percent this year, to $1.93 billion in October from $3.24 billion around the new year, according to public filings and investor information seen by Reuters. Litespeed’s main Partners fund is down about 9 percent in 2015 through November, the second consecutive negative year and third overall since launching in 2000.

JANA, an event-driven manager led by Barry Rosenstein and best known for corporate activism, faces a more than 9 percent decline in overall assets to $9.9 billion at yearend from $10.9 billion as of Nov. 30, according to investor information seen by Reuters. Its largest fund, JANA Partners, is down an estimated 6.3 percent for 2015 through November.

A final example is Richard Perry’s Perry Capital, whose overall assets have fallen nearly 22 percent to about $7.9 billion as of Nov. 30, from $10.1 billion at yearend 2014, according to public filings and investor information seen by Reuters. Its International fund is down about 9.7 percent for 2015 through November.

“It’s definitely been a tough year for event,” said Jonathan Lubert, managing member of JL Squared Group, an investment adviser that allocates to hedge funds on behalf clients. “Given high volatility and underperformance, it wouldn’t be surprising to see even more outflows in 2016.”

OTHER MAJOR WITHDRAWALS

Capital at Alan Howard’s Brevan Howard is down nearly 11 percent to $24.8 billion despite small gains by its main multi-strategy funds this year through November, according to information obtained by Reuters.

Assets at publicly traded Och-Ziff, led by Dan Och, have fallen about 6 percent from yearend to $44.6 billion as of Dec. 1, according to public filings. That is also in spite of relatively positive performance by its hedge funds for the year, the filings show. Investors took out $4.18 billion from Och-Ziff’s multi-strategy hedge funds over the first nine months of the year, according to another filing. When inflows into credit and real estate funds are included, overall assets fell $1.71 billion this year through September.

A last example is Alexander Roepers’ Atlantic, whose assets have fallen nearly 29 percent since late February, to $1.5 billion, according to information obtained by Reuters. Its largest fund, which focuses on bets that stocks will appreciate in value, is down nearly 15 percent in 2015 through November. Smaller European and Asian focused funds are up between 11 percent and 21 percent for the year.

SOME BIG WINNERS

Predictably, hedge funds with strong performance had more money come in.

Israel Englander’s Millennium, for example, is up nearly 11 percent this year through November in its multi-strategy International fund, according to performance obtained by Reuters. Assets have risen nearly 26 percent from March to $34 billion as of Dec. 1.

Two Sigma, the data and technology-driven investment firm led by David Siegel and John Overdeck, has produced positive returns of 13 percent and 14.5 percent in two of its funds through November, according to return information see by Reuters. Firm assets are up more than 29 percent to $31 billion year to date as of Nov. 30.

What else is new? Institutional clients are chasing after the hottest hedge funds and while some will continue delivering great returns, others are going to sorely disappoint investors.

And while most hedge funds are hurting, others are partying it up. Reuters reports, Katy Perry and Andrea Bocelli; Hedge funds party despite losses:

Hedge fund managers faced a tricky question this holiday season: how to thank employees but not offend disappointed clients.

Despite a year of heavy losses for some in the industry, anecdotal evidence suggests holiday traditions were upheld and, in some cases, embellished, with guest appearances from pop star Katy Perry, acrobatic entertainers and at least one weekend sojourn to Florida as just some of the treats on offer.

"It's a very difficult and real balancing act," said Adam Herz, who specializes in hedge fund recruiting at Westwood Partners. "You want to recognize people for working hard even without bonuses and at the same time not offend clients when you may have lost money and taken fees."

Sliding commodity prices, a blow out in junk bonds and dramatic sell-offs in sectors such as healthcare have made 2015 one of the worst on record for the hedge fund industry. The Absolute Return Composite Index, which measures Americas-based hedge funds, is up just 0.66 percent for the year through November, the third worst performance since tracking began in 1998.

Despite the bruising year, employees of David Einhorn's Greenlight Capital were treated to a weekend at the Naples Grand Beach Resort in southern Florida this month, according to people familiar with the situation. The firm's main hedge fund lost nearly 21 percent in the first 11 months of the year, but an offsite trip from New York is an annual tradition.

John Paulson's epinonimous hedge fund firm held its holiday party at PH-D, a slick rooftop lounge on the top of the Dream Downtown hotel in Manhattan, according to a person familiar with the matter. The event venue in 2014 was the same. Many of Paulson's funds have lost money this year.

Mike Harris' Campbell, where investment performance has been mixed, has continued its holiday traditions this year. One is hosting a party for employees and their families, including a Santa Claus impersonator who hands out presents paid for by the firm, according to Adam Tremper, Campbell's marketing director.

Other traditions that the Baltimore-based firm plans to maintain include an offsite holiday event next month and apparel gifts; this year employees got a soft-shell winter jacket branded with the company logo.

"Campbell generally does a little extra for the employees around Christmas," Tremper told Reuters in an email.

Other firms weren't shy to celebrate major milestones.

Ken Griffin's Citadel marked its 25th anniversary with major parties last month. One, in its hometown of Chicago, was a black tie affair featuring singer Perry backed by costumed dancers and an elaborate lighting display, according to video clips of the event posted online. Another, in New York, featured band Maroon 5 and violinists suspended by strings. Citadel's main hedge funds have again performed well this year and the firm now manages a record $25 billion.

Viking, Andreas Halvorsen's Greenwich, Connecticut-based firm, had an anniversary party for employees at the Museum of Natural History in New York, according to a person familiar with the situation. The October event featured dinner and Cirque du Soleil-style performers. Viking, founded in 1999, now manages more than $30 billion, making it one of the largest private fund managers in the world. Its main hedge fund was up about 4 percent for the year through September, according to a report in hedge fund news provider Alpha.

Other holiday parties, according to people with knowledge of them, included Fortress Investment Group hosting employees at high-end event space Gotham Hall in New York, Tudor Investment Corp. gathering staffers at The Pierre, a Manhattan luxury hotel, and Whitebox Advisors throwing an annual event near its Minneapolis headquarters.

Spokesman for Citadel, Viking, Fortress and Tudor declined to comment or did not respond to a request.

SkyBridge Capital, the hedge fund investment firm led by Anthony Scaramucci, held a relatively low-key dinner event for staffers at the Manhattan restaurant he co-owns, Hunt & Fish Club. SkyBridge has been known to throw major parties at its annual "SALT" investment conference in Las Vegas, Nevada and at the World Economic Forum in Davos, Switzerland, among others.

The firm's fund of hedge fund portfolios have lost a small amount of money this year, but Scaramucci couldn't resist one flourish at the New York dinner: star singer Andrea Bocelli. The blind tenor, a personal friend of the SkyBridge founder, was in town for a concert at Madison Square Garden and Scaramucci invited him and his wife to the party as guests, according to a familiar with the situation.

Bocelli came and, according to the person, asked if there was a piano. Wearing sunglasses and a scarf, he was soon belting out Ave Maria, a traditional Christmas song that references a prayer to the Virgin Mary.

I understand, Katy Perry is a sight for sore eyes and Andrea Bocelli is music to my ears. It's hard to blame these overpaid hedge fund hot shots for splurging, especially Ken Griffin, the new king of hedge funds who just went through a brutal divorce which exposed he clips $68 million a month after taxes.

Nonetheless, King Ken should show a lot more respect to Illinois and other states' public school teachers and civil servants which have made him outrageously rich. But I agree with him, the Greek pension disease has spread to Illinois and many other states (I just don't agree with the asinine and shortsighted solutions these wealthy interest groups are promoting).

One hedge fund hotshot who won't be partying it up this holiday season is the controversial Turing Pharmaceuticals CEO Martin Shkreli. He resigned a day after he was arrested by the FBI amid a federal investigation involving his former hedge fund and a pharmaceutical company he previously headed.

Below, a picture of Shkreli being taken into custody in New York City after the securities probe. The FBI indicted him on fraud charges not on manipulating drug prices (this picture is priceless; wish I was there to see the little punk's face when they barged in and read him his rights):


On behalf of all hard working decent people who were tired of listening to this arrogant, pathetic excuse of a "hedge fund manager," let me thank the FBI and wish all the men and women who worked hard on this case Happy Holidays and a Happy New Year!

But remember, just because you caught one hedge fund cockroach, doesn't mean there aren't others hiding in their Manhattan offices. They're just smarter and keep a much lower profile than this idiot.

Watching that awkward moment at the end of Miss Universe 2015 on Sunday evening got me thinking about the biggest pension gaffe of the year. Earlier this month, Adam Mayers of the Toronto Star reported, $10,000 TFSA limit gone to help fund tax cut:

Friday’s Throne Speech didn’t mention Tax Free Savings Accounts (TFSAs), but federal Finance Minister Bill Morneau didn’t leave us in suspense for long.

On Monday afternoon, as part of measures to help pay for a middle-class tax cut, Morneau — cheerfully and in a brisk boardroom manner — said the $10,000 annual limit introduced by Conservative Finance Minister Joe Oliver is gone.

The good news is that the $10,000 amount stands for this year and goes into your lifetime total. But as of Jan. 1, it’s back to the future for this popular savings vehicle, dubbed the Totally Fantastic Savings Account by Wealthy Barber David Chilton. It reverts to $5,500 a year.

The Liberals argued during the election that the higher limit only benefits the rich, but I doubt the rich care one way or another about TFSAs. When you have millions to save, the $41,000 in room we all have after seven years isn’t meaningful. The rich have plenty of other ways to take care of themselves.

“It comes down to how you define ‘wealthy’ — which nobody does when making such statements,” says Dan Hallett, a financial planner and vice president of Oakville’s HighView Financial Group.

“And that’s a critical point. Certainly, those who maximize the TFSA contribution limits are more affluent than those that don’t — on average. But that doesn’t mean a higher limit only benefits the wealthy.”

For middle-income Canadians, older Canadians heading into retirement and those already there, the higher limit — and any portion of it they could use — would have been helpful. Savings rates are at record lows, so encouragement to save would seem to be a good thing.

Morneau says the promised middle-class tax cut will average $330 a year for single earners and $540 per couple. He has to pay for that, and imposing a higher tax on those making over $200,000 won’t do the job alone. Rolling back the TFSA is a way to narrow the gap.

Here, the new government is out of touch with the people who elected it. An Angus Reid poll in the middle of the election campaign found that 67 per cent of Canadians opposed rolling back the TFSA limit. By party, NDP supporters liked the increase more than Liberals — 63 per cent vs. 62 per cent — with Conservative supporters highest at 78 per cent.

A study by the Canadian Association for Retired People (CARP) this spring found the same thing. Two-thirds of CARP members supported the extra saving room.

The TFSA has been of particular benefit to older Canadians. It has only been around for seven years and so is a new way to shelter a little more money in retirement. Those 55 and older hold almost half of all TFSA accounts, according to the CRA.

Strict rules force you to convert your RRSP into a Registered Retirement Income Fund (RRIF) when you turn 71. That’s because the government wants the taxes foregone when you put the money into your RRSP and got a refund.

But some older Canadians don’t need all that money to live, on so they use a TFSA to let it grow tax-free.

So here’s where we are:

• The $10,000 TFSA limit introduced this spring stands for the year. If you don’t contribute the full amount, it becomes part of your lifetime limit.
• As of Jan.1, the limit reverts to $5,500 per year, which will be indexed, which the $10,000 wasn’t.
• Morneau said indexing will allow the TFSA to retain its real value. It is set to rise in $500 increments whenever inflation erodes the value by $250.

At a 2 per cent rate of inflation, that bump should come every three years or so, since the $5,500 is worth $110 less each year. The only increase so far was in 2013. It’s unclear when the next one will be.

In the end, the new government had to make choices about how to fund its ambitious agenda. A higher TFSA, cast as a perk for the rich, was an easy choice. But what the middle class is getting in a tax cut isn’t as large as what it’s losing in a higher TFSA limit.

But some people think the TFSA rollback while historic isn't a big deal. Jennifer Robson, an Assistant Professor at Carleton University, wrote a comment for MacLean's, The Liberal changes to TFSA contributions were actually historic:

The new government wanted to make its first policy move in the House substantive and symbolic, but it also managed to make it historic. On Monday, the government gave notice that it will introduce a motion (a Ways and Means motion, to be precise) to cut the second federal income tax rate (applied to taxable income between $45,283 and $90,563) and create a new tax bracket applied to taxable incomes of $200,000 or more.

It’s true that this is the first time since 2001 that the basic architecture of federal tax rates has been renovated in a big way. It’s also true that if your taxable income is $45,000 or less, then this tax cut isn’t for you. Finally, yes, it’s true that a person with a taxable income of $120,000 stands to save more ($783) on their federal tax bill than a person with a taxable income of $80,000 ($582).

No, no, that’s not the historic part in my view. Look, 2001 wasn’t that long ago and I’ve written loads before about tax credits and public programs that benefit the better-off.

I’m talking about Clause 9 of the government’s motion that scales back the annual contribution room available to adults who open a Tax-Free Savings Account (TFSA) from the current $10,000 limit introduced for 2015 to the $5,500 annual limit that had done just fine before an election loomed on the horizon. Don’t forget, unused contribution room rolls over each year and there is still no lifetime cap on contributions. This means that between exemptions for home equity, lifetime capital gains rules and the TFSA, it won’t be long before most households in Canada are able to shelter virtually all of their assets from income taxation.

Back before the election, federal officials were at pains to explain that the increase in the TFSA room was well, really, really necessary, because, you see, over a quarter-million low-income Canadians (making less than $20,000 a year) had managed to max out their TFSA room under the $5,500 limit. ”Don’t you understand that these low-income people are just trying to put away some savings? Why do you hate people who are just… frugal?” With the national household savings rate stumbling along at about four per cent these days, shouldn’t we reward those who were saving roughly half of their modest annual incomes?

Well, no, and here’s why: From what I can see, the phenomenon that was offered as”‘the problem” to be fixed is likely temporary.

Looking at data from the 2012 Survey of Financial Security (Statistics Canada) when the TFSA was four years old (offering $20,000 of accumulated room for every adult in Canada) is instructive here:

– Singles and families aged 65 and older are far more likely to own a TFSA than their working-age counterparts (38-47 per cent versus 25-34 per cent respectively).

– Median TFSA balances amongst all working-age singles (under age 65) were just $5,000 (or 25 per cent of that limit) but median balances for singles aged 65+ were $15,000 (75 per cent of the limit). That’s the median, meaning that half of single seniors had TFSA balances between 76 per cent and 100 per cent of their allowable limit.

– Among couples and families, the age-related gap in median TFSA balances persists: $10,000 at the median for working-age households and $20,000 for those aged 65 or older.

– Within the working age population, there are also important age-related differences. Median TFSA values for couples or families aged 35-44 suggest median deposits of about $1,000 per year. But closer to retirement (age 55-64), household TFSA balances suggest median deposits of a little more than $3,500 per year, still well below the old $5,500 limit.

Those older households are, in the vast majority of cases, unlikely to be saving “new” money. Instead, they may well be shifting assets from one source—maybe perhaps proceeds from the sale of a family house that is now too large for their needs; or maybe this is coming from taxable RRIF income that is being recycled into a different and non-taxable registered savings account. Recall that the TFSA doesn’t offer a deduction for (most) deposits, doesn’t create new tax liability on withdrawals and is exempt for the purpose of working out the key income-tested senior’s benefit, the Guaranteed Income Supplement (GIS). Seniors with $20,000 in total personal income have too much income to receive the GIS now, but they may worry about exhausting their savings and needing the GIS later on. In these cases, shifting assets into a TFSA just makes good financial sense.

But that’s not what the TFSA was supposed to be for.

When it was introduced in 2008, the late Jim Flaherty cheerfully called the TFSA “an RRSP for everything else in your life.” His budget communications documents that year offered examples of people saving for all kinds of short- and medium-term uses like vacations and “rainy days.” The literature dating back to at least a 1987 study by the Economic Council of Canada (of which, Liberals, please give thought to reviving that creature to complement the work of a beefed-up Parliamentary Budget Officer) saw tax-prepaid savings as a way to stimulate more saving and investment by giving households choices when RRSP incentives fail. The literature doesn’t seem to have anticipated asset-shifting uses among the already-retired.

Unless the TFSA undergoes more dramatic changes like a lifetime limit, future generations of seniors are unlikely to worry much about annual caps limiting their ability to shift assets around to gain the best tax and benefit treatment. A person aged 55 today will have nearly $100,000 in TFSA room by age 65. And while today’s seniors with low income but some savings may feel cheated by an accident of policy timing, there are many other ways to address some of their concerns—flexibility on RRIF withdrawals for example.

But I still haven’t given you the punchline, have I?

The TFSA is just one among five separate tax-preferred and registered savings instruments in Canada. The first was the RRSP, introduced in 1957. When Kenneth Carter recommended scaling back RRSP limits in his 1966 report on Canadian tax reform, he was summarily ignored. Instead, we have, through relentless incremental policy choices, grown a tax and transfer system that is schizophrenic in its treatment of savings—rewarding people who already have money for saving it but often penalizing small savers. In the last 58 years, there have been exactly zero reductions to annual contribution room to any of these instruments—that is, until now.

By scaling back annual TFSA limits, the new government can keep the flexibility that tax pre-paid accounts offer without encouraging as much asset-shifting among the already comfortable. Promoting economic growth is the stated motive behind this renovation to the income tax brackets. If the government is serious about making that growth inclusive, then removing regressive incentives is a good start at breaking a 58-year trend. But it’s just a start.

Jennifer Robson raises good points in her article but I think the Liberals' policy to rollback TFSA contributions is the dumbest most populist gaffe the Trudeau government could have done and I explicitly warned against this when I discussed real change to Canada's pension plan:

 There are other problems with the Liberals' retirement policy. I disagree with their stance on limiting the amount in tax-free savings accounts (TFSAs) because while most Canadians aren't saving enough, TFSAs help a lot of professionals and others with no pensions who do manage to save for retirement (of course, TFSAs are no substitute to enhancing the CPP!).

The point I'm trying to make here is that rolling back TFSA limits hurts a lot of hard working people who aren't rich, they're just trying to save as much money as possible for retirement because unlike the government bureaucrats that design these policies, they have no defined-benefit pension plan to rely on during their golden years.

And it's not just hard working people with no pension getting hurt with this asinine TFSA rollback. Neil Mohindra, a public policy consultant based in Toronto wrote a comment for the National Post earlier this month, TFSA rollbacks will hurt the needy:

The debate over maintaining or rolling back the TFSA limit of $10,000 has centred on whether middle class Canadians or only the rich benefit from the higher limit. But a rollback will disproportionately affect middle and lower income Canadians with limited work histories in this country, including new immigrants and Canadians who have spent time as caregivers.

Take the following fictitious example. Jonathan, a welder by trade, immigrated to Canada in his mid-forties with $175,000 in savings. During the three years he needed to qualify for this profession in Canada, he supported himself with minimum wage jobs. Every year he places $10,000 of his savings into his TFSA, to obtain a reasonable standard of living in retirement.

In Jonathan’s case, retirement income and savings in Canada will be limited. His CPP income will be lower because of fewer qualifying years and he will have limited RRSP space and no accumulated TFSA space on arrival in Canada. He will qualify for Old Age Security because of a social security agreement between Canada and his home country that will allow Jonathan to meet the minimum eligibility criteria. Despite earning a good living as a welder, Jonathan could be at risk of having inadequate income in retirement.

Many face Jonathan’s predicament. In the five years ending 2014-2015, 1.3 million immigrants arrived in Canada, 23 per cent of them over age 40 with limited work histories in Canada. While not all immigrants have savings, many will have real assets like houses or pensions that can be converted to savings and brought to Canada. Maintaining the TFSA limit at $10,000 instead of rolling it back to $5,500 allows these new Canadians to convert more savings into tax sheltered investments, reducing any disadvantage they may have relative to other Canadians.

Returning emigrants, people who work in boom-bust industries, and anyone whose working life is disrupted by a physical or mental disability could also be at risk of inadequate retirement income. A very significant group of Canadians at risk are caregivers. Take Mary, a recently widowed 67-year-old who worked full time for five years before quitting to raise children and care for a disabled sister. She worked part-time later in life. She has a modest inheritance from her sister’s estate of $50,000, and a payout from her husband’s life insurance policy of $250,000. Accumulated TFSA space will allow her to earn investment income on these amounts, and she will make modest periodic withdrawals to supplement her retirement income.

Mary, what Statistics Canada would describe as a “sandwiched caregiver,” may be representative of a significant number of Canadians. A Statistics Canada article, based on 2012 data, noted 28 per cent of caregivers, or 2.2 million individuals were sandwiched between raising children and caregiving. The article also indicated that in 2012, 8.1 million individuals, or 28 per cent of Canadians aged 15 years and older, provided some care to a family member or friend with a long-term health condition, disability or aging needs.

In Mary’s case, it is not the annual TFSA limit that is important but the accumulated limit. In her scenario, Mary would not have anywhere near the accumulated space that she needs, since TFSAs were only introduced in 2009. It will actually take 27 years before individuals will have the accumulated space they need for this scenario even at $10,000 per year.

A Broadbent Institute report criticized higher TFSA limit for not necessarily incenting Canadians to save more, rather to shift taxable assets into TFSA accounts. Jonathan and Mary provide counter examples. Maintaining the higher TFSA limit can play a role in helping low and middle income Canadians with limited work history in Canada successfully meet retirement goals.

Nevertheless, it's not all bad news. As provincial and territorial finance ministers gathered with their new federal counterpart in Ottawa on Sunday night to begin confronting the hard economic truths facing Canada, the good news is there seems to be enough provincial support to boost the CPP.

I can't overemphasize how crucial it will be to bolster Canada's retirement policy now more than ever. I've been warning of Canada's perfect storm since January 2013 and think our country will experience a serious crisis in the next few years which will bring about negative interest rates and other unconventional monetary policy responses.

Importantly, this isn't the time to rollback the TFSA contribution limit or to implement other populist policies "against the rich," but it's the time for the bureaucrats in Ottawa to finally get their heads out of their asses and closely examine all pension policies very carefully. Keep what works well and bolster what needs to be bolstered. 

And it's not just the rollback in TFSA limit that irks me. The age limit on converting RRSPs to RRIFs should be pushed back for seniors who continue to work in their seventies (there's a reason why they're working so why should they get penalized?). Also, Ottawa needs to significantly improve the registered disability savings plan (RDSP) which Jim Flaherty started to help Canadians with disabilities and parents with disabled kids to save money for their needs (the program is excellent but there should be an option to have the money managed by CPPIB).

What else? Dominic Clermont, formerly of the Caisse and now back from working at Barra in London sent me this interesting comparison to pt things in perespective:

In the UK, taxpayers can invest in an ISA which is equivalent to our TFSA. The yearly contribution limit for the fiscal year 2015-2016 is £15,240 which at current exchange rate is about $31,600 – much higher than the $10,000 which the Liberals found too high.

Interest rates are so low (you can find savings accounts paying 0.75% interest…), it doesn’t make much sense to tax small investors on such small interest. The first £1,000 of interest income is now non-taxable– that is more than $2,000/year of tax free interest income outside of the ISA (TSFA).

The maximum contribution to a pension scheme (employer or private – equivalent to our RRSP) is also much higher in the IK: £40,000 per year or about $83,000.

In Canada and particularly in Quebec, taxing the rich is always popular. The are such a minority that their vote is less important. The ultra-rich can afford to pay for the best fiscalist anyway. The regular rich can move elsewhere.

Also, a friend of mine shared this with me over the weekend on negative rates coming to Canada after he read the unintended consequences of negative interest rates in Switzerland:

"I found this article fascinating. Central Banks around the world have been experimenting with the economies of the G20 countries since the crisis. They are doing shit that they have never done before and it is clear that the world has become their Petri dish.

All of this comes from one fundamental issue - a demographic bubble of baby boomers going through the system. The world (including Canada) is completely unprepared for this new economic reality.

When push comes to shove, it is this demographic bubble that will drive the Canadian economy over the next 40 years and, unfortunately, I do not see Canadian policy preparing for this at all.

For example, the country should have increased immigration in 1990s but it did not because the unions stopped it. Instead, they invited high net worth individual to move to Canada (i.e. we want your money without you stealing our jobs). The unintended consequence of this policy was that these "high net worth individuals" came in droves, most of them Chinese and Middle Eastern, and pushed real estate prices skyward in two of our major cities to the point where no one in their 20s can buy a home.

So expect more of the same, Justin is not a visionary. He is simply a populist Prime Minister (no different than Greek PM Tsipras). He got voted in because everybody hated the other guy. He is now implementing tax policy that completely ignores reality but will secure his populist promises (tax the rich - give to the poor). When the next election comes, he will be faced with an opponent who will try to one-up him and the race to bottom will continue.

My reaction to Justin's tax policy. At a 53% marginal rate, I have a whole bunch of tax advisors looking at what to do to minimize it. I am sure that they will find a loophole than hasn't been plugged yet. If they don't, I will just adapt and perhaps leave Canada when I retire with my future tax dollars in hand."

I'm sure a lot of people sick and tired with dumb policies which supposedly favor the poor share my friend's views. Interestingly, we share conservative economic views and he completely agrees with me that bolstering the CPP is smart pension and economic policy:

"It's not about left wing or right wing politics. Enhancing the CPP is just a smart move. You're right, companies are unloading retirement risk on to the state and unless something is done, this demographic nightmare I'm talking about will explode in Canada and we'll see a huge rise in social welfare costs."

I hope someone in Ottawa will share this comment with the Privy Council and other offices in Ottawa. Unfortunately, the Conservatives made plenty of pension gaffes (and other gaffes) but raising the contribution limit on the TFSA wasn't one of them.

Below, Prime Minister Justin Trudeau says the Tories are "out of touch" with Canadians over tax-free savings account contributions after interim Conservative leader Rona Ambrose questioned him on reducing the annual limit to $5,500 from $10,000. If you read my comment carefully, you'll see that the Liberals and Conservatives are out of touch with the economic and pension reality our country is facing.

And in case you missed the crazy ending of the Miss Universe pageant, I embedded it below. I felt bad for both these ladies, especially Miss Colombia, but while Steve Harvey's epic gaffe will eventually be forgotten, an epic gaffe in our country's retirement policy won't be.

Leah Schnurr and Randall Palmer of Reuters report, Ministers eye no action on Canada Pension Plan premium:

Canada's federal and provincial financial ministers are considering not raising premiums for the Canada Pension Plan (CPP), federal Liberal Finance Minister Bill Morneau said on Monday, despite a Liberal campaign promise to enhance the plan.

The ministers will be considering a range of options over the coming year "from doing nothing because of the economy to more significant changes," Morneau told reporters after meeting with his provincial counterparts.

The Liberals, elected in October, campaigned on expanding the CPP, but the Canadian Federation of Independent Business warned that a premium increase would boost unemployment, because it does not take profit into account.

The CPP is comparable to the U.S. Social Security program.

The minister said the province of Ontario, which has talked about starting an Ontario pension plan because people are not saving enough, would continue with its process. But he said the Canadian government's clear hope is that there can be something done nationally.

The seniors' lobby group CARP Canada criticized the ministers for failing to act on CPP.

CARP members ... have given a clear political mandate in two major elections on what they want - specifically a CPP increase. What part of that declaration was unclear to the finance ministers?" asked CARP Executive Vice President Susan Eng in a release.

Bank of Canada Governor Stephen Poloz also briefed the ministers and presented a view of cautious optimism about the country's economic road ahead, Morneau said.

Andy Blatchford of the Canadian Press also reports, Canada's finance ministers agree to revisit pension reform talks in the new year:

A federal-provincial gathering of finance ministers reached rare consensus Monday on the polarizing subject of Canada Pension Plan reform — they agreed to keep debating it.

Federal Finance Minister Bill Morneau emerged from two days of discussions with his provincial and territorial counterparts to explain that the group will reconvene midway through 2016 to continue their talks about CPP enhancement.

“Our goal is that in a year from now, we’ll have more to talk to Canadians about, but we did not get to conclusion to what exactly we would be proposing,” Morneau told a news conference in Ottawa.

“We did not commit to any end game, nor in fact was that our objective today. Our objective today was to begin a process to review the potential to move forward.”

Morneau aims to eventually get some consensus on enhancing the Canada Pension Plan, a goal outlined in the new Liberal government’s election platform. The party has not released specifics on what changes could be made to the plan.

Changing the CPP would require support from seven of the 10 provinces representing two-thirds of the country’s population as well as a green light from Ottawa.

But it’s unclear how much support the Liberals will attract when it comes to CPP enhancement, even though the provinces agreed Monday to continue discussing the subject in the new year.

Ontario supports CPP expansion, while other big provinces like Quebec and British Columbia remain unconvinced. Quebec already has a public pension plan and B.C. has concerns about the fragile economy.

Saskatchewan, meanwhile, opposes beefing up the CPP.

“We’re happy with respect to the fact there’s no immediate changes to CPP — we’ve been advocating that,” Saskatchewan Finance Minister Kevin Doherty said Monday after the meetings.

Doherty has voiced his concerns about the negative impacts from the plunge in oil prices on his province’s bottom line.

The economic realities of the country in 12 months will dictate how the provinces proceed with the CPP, he added.

“We’ve agreed on a path forward with respect to coming back a year from now to talk about potential options — including not doing anything,” said Doherty, who noted fellow oil producers in Alberta and Newfoundland and Labrador are also facing intense fiscal pressure.

Quebec Finance Minister Carlos Leitao said, at the other end of the spectrum, the group will also look at the possibility of doubling the size public pensions — like Ontario plans to do. Leitao said he’s wary of going that far, especially since Quebec recently increased its payroll premiums just to maintain the current benefits.

“Whatever happens we have to be very mindful of a potential fiscal shock,” he said. “We want to avoid that.”

Ontario Finance Minister Charles Sousa said he was encouraged the provinces are willing to discuss enhancing the CPP, particularly since he felt some had been “reluctant” and were “pushing back” on the issue.

In the meantime, Sousa will proceed with his province’s own program, the Ontario Retirement Pension Plan, which essentially mirrors the CPP for anyone who doesn’t already have a workplace pension. He said it’s necessary for retirement security.

“We’re going down both tracks because the timing is essential,” said Sousa, who added the province has “off ramps” if changes are made to the CPP.

So here we are, another Christmas goes by and our finance ministers are dithering and "debating" enhancing the CPP (it was three years ago when we debated going slow on enhancing CPP!).

Let me enlighten our Canadian politicians. Canada is screwed, period. I've been warning of Canada's perfect storm since January 2013 and have been short Canada for a long time. Things aren't going to get better, they're going to get a whole lot worse. There is no end to the deflation supercycle and I foresee negative interest rates and other unconventional measures in the not too distant future.

But the country's dire economic situation shouldn't be a factor against enhancing the CPP now. In fact, quite the opposite, I believe the coming economic crisis is one more reason to start the process and get on with it because as I keep harping in this blog, enhancing the CPP is smart economic policy over the very long run.

I just finished blasting the Trudeau Liberals for the biggest pension gaffe of 2015. Their asinine policy of rolling back the TFSA limit is a dumb populist move to make them look as if they're going after the rich and helping the poor (in reality, this policy does the opposite).

I want you to all to once again read what a friend of mine sent me over the weekend on negative rates coming to Canada after he read the unintended consequences of negative interest rates in Switzerland:

"I found this article fascinating. Central Banks around the world have been experimenting with the economies of the G20 countries since the crisis. They are doing shit that they have never done before and it is clear that the world has become their Petri dish.

All of this comes from one fundamental issue - a demographic bubble of baby boomers going through the system. The world (including Canada) is completely unprepared for this new economic reality.

When push comes to shove, it is this demographic bubble that will drive the Canadian economy over the next 40 years and, unfortunately, I do not see Canadian policy preparing for this at all.

For example, the country should have increased immigration in 1990s but it did not because the unions stopped it. Instead, they invited high net worth individual to move to Canada (i.e. we want your money without you stealing our jobs). The unintended consequence of this policy was that these "high net worth individuals" came in droves, most of them Chinese and Middle Eastern, and pushed real estate prices skyward in two of our major cities to the point where no one in their 20s can buy a home.

So expect more of the same, Justin is not a visionary. He is simply a populist Prime Minister (no different than Greek PM Tsipras). He got voted in because everybody hated the other guy. He is now implementing tax policy that completely ignores reality but will secure his populist promises (tax the rich - give to the poor). When the next election comes, he will be faced with an opponent who will try to one-up him and the race to bottom will continue.

My reaction to Justin's tax policy. At a 53% marginal rate, I have a whole bunch of tax advisors looking at what to do to minimize it. I am sure that they will find a loophole than hasn't been plugged yet. If they don't, I will just adapt and perhaps leave Canada when I retire with my future tax dollars in hand."

On bolstering the CPP, my friend sent me this:

"It's not about left wing or right wing politics. Enhancing the CPP is just a smart move. You're right, companies are unloading retirement risk on to the state and unless something is done, this demographic nightmare I'm talking about will explode in Canada and we'll see a huge rise in social welfare costs."

I suggest our politicians read all about the benefits of defined-benefit plans (they should know all about retiring in EU style) and think long and hard about my friend's comments on Canada's demographic time bomb and how we're ill-prepared for it.

Then I suggest our politicians get to work and introduce real change to Canada's pension plan. Don't wait till the economy gets better, if you do you'll never enhance the CPP. Start thinking long-term and start making decisions which will benefit the country over the very long run. If you do, I promise you Canada will be on much more solid footing the next time we get hit by a global economic and financial crisis.

On that note, I'm taking the rest of the week off and will be back next week to go over end of year items. I wish you all a very Merry Christmas and Happy Holidays and want to particularly thank those of you who take the time to subscribe or donate to this blog. Thank you, I truly appreciate your ongoing support and hope others will join you and recognize the hard work that goes into this blog.

Below, BNN reports on the meeting of Canada's provincial finance ministers with the federal Finance Minister Bill Morneau in Ottawa where the economy and CPP were topics of discussion.

I'm glad there's a "new spirit of collaboration" but I hope this translates into concrete actions and enhancing the CPP once and for all. I don't want to see this debate going on till next Christmas and beyond.

Lu Wang of Bloomberg reports, The Year Nothing Worked: Stocks, Bonds, Cash Go Nowhere:

The idea behind asset allocation is simple: when one market struggles, it’s OK because an investor can jump into another that is thriving. Not so in 2015.

In fact, if you judge the past year by which U.S. investment class generated the largest return, a case can be made it was the worst for asset-allocating bulls in almost 80 years, according to data compiled by Bianco Research LLC and Bloomberg. With three days left, the Standard & Poor’s 500 Index has gained 2.2 percent with dividends, cash is up less, while bonds and commodities are showing losses (click on image below).

After embracing everything from Treasuries to high-yield bonds and technology shares amid seven years of zero-percent interest rates, investors found themselves with nowhere to run at a time when the Federal Reserve’s campaign of stimulus drew to an end. Normally it isn’t like this. Since 1995, practically every year has seen some asset deliver returns exceeding 10 percent.

“It’s been challenging from the point of view that the equity market and bond market are probably more joined at the hip than normal,” said Hayes Miller, the Boston-based head of multi-asset North America who helps oversee $35.8 billion for Baring Asset Management LLC. “We’ve had high cash exposure relative to norm because we felt cash provides one of the only good diversifiers against the risk-off trade.”

Bianco Research keeps track of the S&P 500, 30-year U.S. Treasury bonds, 3-month Treasury bills and the Thomson Reuters/CoreCommodity CRB Commodity Index to gauge performance in stocks, bonds, cash and commodities. The four are the most common asset classes considered by investors when an allocation strategy is designed, according to Jim Bianco, the founder.

While the depth of losses in equities and commodities is nowhere near as bad as in 2008, the correlation of declines highlights the challenge for money managers who seek to amplify returns by rotating among assets. Among other things it’s a recipe for pain among hedge funds, according to Bianco. The industry is heading for its worst annual performance since 2011, with closures rising, data compiled by Bloomberg and Hedge Fund Research Inc. show.

“The Fed stimulus lifted all boats, and then the Fed withdrawing the stimulus is holding the boats down,” Bianco said by phone. “If the argument is right that the economy is going into 2016 weak and earnings are negative, those conditions will continue and therefore on the asset allocation level, I don’t expect anything to break out just yet.”

S&P 500 futures slipped 0.2 percent and commodities fell at 9:56 a.m. in London, while Treasuries were little changed.

With nothing going up, exchange-traded funds that invest in different asset types as a way to diversify risk have struggled. Among 35 such ETFs tracked by Bloomberg, the median loss for 2015 is 5 percent. The iShares Core Growth Allocation ETF, which has a mix of 60 percent in stocks and 40 percent in bonds, has slipped 0.5 percent, and the First Trust Multi-Asset Diversified Income Index Fund is down 7.4 percent.

Uncertainty over the timing of the Fed’s first interest rate increase in almost a decade and its potential impact on the economy weighed on markets throughout 2015, according to Michael Arone, the Boston-based chief investment strategist at State Street Global Advisors’ U.S. Intermediary Business. Policy makers signaled the pace of subsequent increases will be “gradual” when finally tightening this month.

“The Fed has finally broken that cycle by beginning policy normalization, and hopefully this will provide the market some clarification and resolve in a more solid direction,” Arone said by phone. “If the market feels comfortable at the pace of which the Fed moves interest rates and the economy is recovering, risk assets like stocks could perform well.”

The S&P 500 has made little headway in 2015, adding 0.1 percent without dividends. Equities fared worse in dollar terms outside the U.S., with the MSCI EAFE Index dropping 3.1 percent while the MSCI Emerging Markets Index sinking 16 percent.

Commodities have fallen to a decade low as tepid global inflation dimmed the allure of precious metals, weak Chinese demand hurt raw-materials prices and a global supply glut sent crude oil tumbling. In the bond market, high-yield corporate debt is heading for first annual decline since 2008 amid a flood of investor redemptions from junk bond funds and concern rising borrowing costs will threaten corporate solvency.

According to Bianco’s study, gains from the best-performing assets had surpassed 10 percent in all but one year since 1995. During the last nine decades, 23 years, or a quarter of the total, saw at least one asset class returning more than 30 percent, and only four ended with gains smaller than 4 percent.

Let's face it, 2015 has been a brutal year, especially for hedge funds which just had their worst quarter since the crisis. I've been harping on hedge funds all year as many top funds have experienced serious losses and if you ask me, this latest hedge fund shakeout is far from over.

I mention this because I saw something on LinkedIn from UBS on hedge funds offering "superior risk-adjusted returns" over the next 5-7 years that made my eyes roll (click on image):


Amazingly, 145 people liked this chart. I just couldn't resist commenting on it: "What a joke, when are you all going to stop the hedge fund lovefest and just admit the bulk of hedge funds absolutely stink. They're nothing more than glorified leveraged beta chasers. It's ok, I expect a long period of debt deflation will wreak more havoc on the industry and weed out 3/4 of the funds over the next five years."

By the way, I'm not kidding, I expect the Fed's deflation problem to only get worse in 2016 and this will wreak more havoc on hedge funds and private equity funds which also have dim prospects going forward. There will be a shakeout in private equity too but I doubt it will be as brutal as the one hedge funds are experiencing (then again you never know).

The most important thing asset allocators need to understand is the macro environment. In particular, there's no end to the deflation supercycle and the ongoing global jobs crisis, pension crisis, and demographic time bomb keep weighing on inflation expectations. The Martingale casinos aren't about to go bust but there's an uneasiness out there that the Fed is committing a major policy blunder and that in the not too distant future, negative interest rates will rule the day.

Fears of deflation have prompted many large hedge funds and speculators to wisely abandon their short Treasuries positions a year after setting up their biggest bets against bonds (they would have been wiser to short the high yield market instead of government bonds).

The global deflation overhang has been particularly brutal on equities, especially in some sectors like emerging markets (EEM), Chinese (FXI), Energy (XLE), Oil Services (OIH), Oil & Gas Exploration (XOP), and Metals & Mining (XME), all of which are plays on global growth.

Not surprisingly, if you look at the worst performing S&P 500 stocks of 2015, you'll see names like Chesapeake Energy (CHK), Southwestern Energy (SWN), Consol Energy (CNX), Freeport McMoran (FCX), Kinder Morgan (KMI), Range Resources (RRC), Ensco (ESV) and Devon Energy (DVN). These stocks and many other stocks in energy and commodities are all down huge this year (anywhere between 50% to 80%++).

This is why I kept telling my readers to steer clear of energy and commodity stocks in 2015 and use any countertrend rally to get out or short them. And while some global funds are now betting on reflation and Canada's large pensions are betting on energy, I remain very cautious on energy and commodity stocks and would avoid them or trade them very tightly (ie. there will be countertrend rallies if people think global growth is coming back but these rallies will fizzle quickly once people realize global deflation is getting worse, not better).

But it's not just energy and commodity names that got hit in 2015.  A lot of retail stocks (XRT) like Macy's (M), Michael Kors (KORS) and Wal-Mart (WMT) also got clobbered in 2015 and this despite the huge drop in oil and gas prices. This is particularly worrisome because it means Americans are spending less, saving more and paying off their huge debts (all of which reinforces deflation coming to America). Stocks like Amazon (AMZN) soared in 2015 because in a deflationary world, price and convenience matter more than ever (still, be careful with this high flyer, as a pairs trade, I would short Amazon and go long Wal-Mart in 2016!!).

As far as large (IBB) and small (XBI) biotech, which remains one of my favorite sectors, 2015 was very volatile and brutal, especially if you were in the wrong stock. Here too, China's Big Bang not Hillary Clinton, was the culprit for the decline in this sector as investors and speculators feared the worst and took a RISK OFF approach. Still, I recommended buying the huge biotech dip in late August and stick by that call even if I know it will be very volatile.

But while nothing worked well in 2015, some short sellers made a killing and some of them are increasing their bets on major oil stocks. I think the best hedge funds are going to be the ones that are going to be the best stock pickers on the long and short end but in my experience, most hedge funds stink and are unable to deliver alpha, especially in their short book.

Anyways, hope you enjoyed this comment. I'm still in vacation mode, enjoying my holidays but think it's important to go over some end of year items as I prepare my Outlook 2016 next week. The bottom line is that global deflation matters a lot and that 2016 might be worse than 2015, especially if the Fed exacerbates its deflation problem by raising rates too aggressively (or even just raising them gradually!).

As always, please remember to donate and/ or subscribe to this blog at the top right-hand side and support my efforts with your wallet, not just your kind words. Most of you are freeloading off the generosity of a handful of individuals and that irks me off to the point where I'm considering going private in 2016 and sending my blog comments to people who actually take the time to subscribe.

Below, a Bloomberg panel discusses why nothing worked in 2015. A very interesting discussion which I recommend you listen to carefully bearing in mind my comments above.

In my final comment of 2015, I'm going to go over a few key comments of the year. To date, I published 238 posts this year and while I consider them all important, it's useful to highlight the ones which I think are worth remembering as we head to 2016.

January 2015

Outlook 2015: A Rough and Tumble Year?: I always start the year with my outlook which sets out my market views. If you read it carefully, you will see I made some bad calls on some biotechs (still like the sector) and small cap stocks in general but the big picture was bang on. In particular, I made great calls on deflation, shorting oil and the loonie and told my readers to keep steering clear of energy (XLE), Metals and Mining (XME), Materials (XLB) and commodities (GSG). That advice alone was worth more than a $1000 or even a $5000 annual subscription to this blog from major pensions and financial institutions!!

Prepare for Global Deflation?: A key macro theme I've been harping on for years is deflation. In fact, I laugh when I hear pensions like CPPIB, bcIMC or anyone else discussing "thematic investing." If you want to understand key investment themes, you better understand the advent of global deflation and what it means for all asset classes and thematic investments.

Will the Fed Make a Monumental Mistake?: Steven Roach just published a comment on Project Syndicate, The Perils of Fed Gradualism, but it  has been my contention all year that raising rates when the world ex-US is suffering from deflation is a major policy blunder. The Fed did raise by 25 bps in December but it's far from clear what the future path of interest rate hikes will be, especially if we get another emerging markets or financial market crisis.

Greece's Do or Die Moment?: Every couple of years we get another "Greek crisis" to remind us just how screwed up the eurozone truly is. As I wrote in that comment: "I'm very cynical on developments in Greece and the eurozone. I think too many people are being caught up in the theatrics of it all and a lot of investors are losing precious sleep over a lot of nonsense. More worrisome, they're not focusing on the bigger story, global deflation and the possibility of the Fed making a monumental mistake." 

February 2015

Will Deflation Decimate Pensions?: This is one of the most important comments of the year. As I've discussed plenty of times, declining rates are the primary driver of pension liabilities, especially when rates are at historic lows. In finance parlance, the duration of liabilities is a lot higher than duration of assets which means when rates are ultra low, a decline in bond yields disproportionately impacts pension deficits.

Will Longevity Risk Doom Pensions?: Another key risk to pension sis longevity risk. As people live longer, it means pensions will have to make more money to cover future liabilities. But make no mistake, longevity risk won't doom pensions anywhere near as much as the advent of global deflation.

The 'Inexorable' Global Shift to DC Pensions?: The world is moving away from defined-benefit (DB) pensions into defined-contribution (DC) plans and while it makes perfect sense for companies to unload retirement risk on to individuals, this trend should scare the hell out of us. Why? Because DC pensions are way more inferior than well-governed DB pensions, and companies are effectively unloading retirement risk on to the state which means higher social welfare costs down the road to deal with rising pension poverty. What else? the shift to DC pensions exacerbates global deflation at the worst possible time (ie., when all these baby boomers retire with little to no savings).

List of the Highest-Paid Pension Fund CEOs?: This was one of the most popular comments of the year but it makes Canada's pension plutocrats very nervous. They all make millions but some make a hell of a lot more than others and this comment highlights thorny issues on compensation including benchmarks used to determine compensation and why are we paying senior public pension fund managers with captive clients millions in compensation which is almost as much, if not more, than they'd be making in the private sector for a comparable job. Canada's pension plutocrats hate it when I shine the light on compensation, benchmarks and ask tough questions which their board of directors conveniently ignore (trust me, I hate writing on compensation too because it reminds me how woefully and ridiculously underpaid I am publishing this blog!!).

March 2015

Fully Funded HOOPP Surges 17.7% in 2014:  The Healthcare of Ontario Pension Plan is private (it should be public) but it's unquestionably the best large pension plan in Canada and the world over the last ten years. A lot of HOOPP's success is directly attributable to Jim Keohane, its CEO, who was instrumental in shifting the focus to asset-liability management after the 2001 tech crash. Unlike other large Canadian pensions, HOOPP does everything internally (is run like a multi-strategy hedge fund), has a much higher allocation to government bonds, and uses leverage and derivatives intelligently to deliver solid risk-adjusted returns over the long run. Their large bond allocation and fully funded status puts them in an enviable position, especially if global deflation materializes.

The Unwinding of the Mother of All Carry Trades?: Keep this comment in mind to understand trends in the U.S. dollar, bonds, commodities and emerging markets. It's all part of a massive global carry trade engineered by big banks and their big hedge fund clients which have leveraged this trade to the tilt. Importantly, if you don't understand carry trades, you will lose a lot of money in these markets.

America's Pensions in Peril?: An important comment which explains why America's public and private pensions are in deep trouble. In public pensions, there's a trillion dollar funding gap and in the private side, the great 401(k) experiment has failed. Of course, if you ask the conservative American Enterprise Institute, there is no retirement crisis (they are dreaming!!).

Transforming Hedge Fund Fees?:  Institutional investors are finally openly discussing hedge fund fees and terms. They're now realizing what I've been telling them for years, when it comes to hedge funds, it's all fees, no beef. In my opinion, all hedge funds should have a hurdle rate (like private equity funds), a high-water mark (to make up for losses before they start charging a performance fee again) and hedge funds managing multi billions shouldn't be charging any management fee whatsoever (if they're that big and that good, let them live and die by their performance).

April 2015

Fully Funded OTPP gains 11.8% in 2014: Along with HOOPP which I mentioned above, the Ontario Teachers's Pension Plan is one of the best and most recognized pension plans in the world. Teachers is bigger than HOOPP and it manages its assets and liabilities using internal and external managers. It too uses derivatives and leverage intelligently to juice its returns. Its CEO, Ron Mock, took over the reins from Jim Leech in 2015, and has done a great job leading this world class public pension plan.

Time to Short the Mighty Greenback?: Back in October 2014, I explained why the mighty greenback will keep surging to new highs, especially relative to the euro. I said that "I wouldn't be surprised if [the euro] goes to parity or even below parity over the next 12 months. There will be countertrend rallies in the euro but investors should short any strength." My thinking didn't change much since I wrote that comment. While everyone is talking about a recovery in Europe, they fail to understand this is a temporary boost due to the decline in the euro. I would be very careful trying to short the USD in this environment and pay particular attention to the Fed and the ongoing Euro deflation crisis.

Ron Mock sounds the Alarm on Alternatives?: In late April, Ron Mock sounded the alarm on alternatives. He was part of a panel discussion which featured Michael Sabia, CEO of the Caisse and André Bourbonnais, CEO of PSP, when he stated his thoughts. In a world where every large pension and sovereign wealth fund is increasingly allocating more and more risk to illiquid alternatives, I think it's important to heed Ron Mock's wise advice and pay particular attention to pricing and the environment we are in.

May 2015

Are U.S. (Public) Pension Funds Delusional?: Of course they are, read this comment and you will understand why. By and large, they still cling to their 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).

CPPIB Gains a Record 18.3% in Fiscal 2015: It was a record fiscal year for CPPIB, Canada's largest public pension fund. Its CEO, Mark Wiseman, and his senior team delivered incredible results across the board. 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 (unlike PSP, CPPIB doesn't partially hedge its currency exposure).

The Bigger Short?: Another hedge fund guru, billionaire investor Paul Singer, came out with his thesis on why government bonds are the 'bigger short'. Singer and others, like the Maestro, warning of the scary bond market are simply wrong. Sure, bonds didn't perform well in 2015 but they didn't crater either and the point is while bonds are boring, they're important in preserving capital. Moreover, as I stated: "I couldn't care less what Singer says and neither does the bond market. I'm telling you there is no question whatsoever in my mind that  the titanic battle over deflation will not sink bonds. And if the Fed makes a monumental mistake and starts raising rates too soon, it will all but ensure deflation because this time is different."

June 2015

The Liquidity Time Bomb?: A comment that looked into liquidity issues governing the U.S. bond and stock market. While liquidity issues are a concern, I think it's the fear of global deflation which is weighing heavily on markets and fueling this insane volatility.

Against the Gods?: I attended a luncheon discussing volatility in markets and covered it here. There were many good points raised but the most important debate -- deflation versus inflation -- wasn't covered until Mr. Pension Pulse raised it to his ex-boss who was moderating the discussion.

CPPIB Bringing Good things to Life?: CPPIB's acquisition of GE's Antares was unquestionably the biggest deal of the year and I think this will prove to be one of the best deals for the Fund over the very long run.

OECD's Dire Warning on Pensions?: No need to convince me, global pensions are screwed, which is one reason why I'm a strong proponent of well-governed DB plans.

CalPERS' Fiduciaries Breach Their Duties?: A look at whether CalPERS' fiduciaries breached their fiduciary duties by not disclosing all the fees paid out to their private equity general partners (GPs) throughout the years.

July 2015

Enfin, An Agreekment!: It was about time these Euro ditherers came up with a Greek deal. Unfortunately, it was more of the same, which means another Greek crisis will hit us some time in 2016 or 2017 (double sigh!!).

bcIMC Gains 14.2% in Fiscal 2015: British Columbia's giant pension fund posted solid gains in fiscal 2015 mostly owing to the China bubble. Hope they got out of that trade in time. As for Gordon Fyfe, bcIMC's CEO, I wish him a Happy and Healthy New Year and hope he's enjoying life out in Victoria (Gordon, "some things in life are tough" but you owe me a phone call...).

PSP Investments Gains 14.5% in Fiscal 2015: One of my best comments covering the performance of PSP Investments. It's important to note that PSP partially hedges its currency exposure which is one reason it underperformed CPPIB in fiscal 2015. Still, the results across public and especially private markets were very strong in fiscal 2015. I ripped into the benchmark PSP uses for Real Estate and continue to think it's a sham because it doesn't reflect the risks of that investment portfolio. Also worth noting that since writing that comment, there have been major departures at PSP. Bruno Guilmette, the head of Infrastructure, has left the organization and Jim Pittman, VP of Private Equity, also left PSP (the latter left on good terms out of his own volition but I find it very strange that two senior managers left so close together in December). It looks like André Bourbonnais is putting in his own people but if I was sitting on PSP's board, I'd be asking him very tough questions on these key departures in private markets where the performance was very strong in the last few years (I would also ask him the following: "Mr. Bourbonnais, do you want to surround yourself with a bunch of YES men and women or some truly great independent thinkers?!?").

August 2015

China Big Bang?: By far the biggest global macro event of the year was the devaluation of the yuan. It heightened global deflation fears and it spooked the hell out of world markets. Remember, China pegs its currency to the USD, so a stronger greenback hurts its exports. More worrisome, China is struggling with deflation and if it allows its currency to depreciate, it will force Japan and other Asian countries to do the same, and this will mean America will import more disinflation and possibly deflation if an emerging markets crisis develops in 2016 (stronger USD = lower import prices!).

Trouble at Canada's Biggest Pensions?: More nonsense from the media which fails to understand the key difference between the Caisse, CPPIB, OTPP, PSP, etc. and other Canadian DB pensions is the former are better positioned to weather the storm ahead. Their fortunes aren't tied to the rise and fall of oil prices or the S&P/TSX because they are (for the most part) globally diversified across public and private markets.

Betting Big on a Global Recovery?: There are a lot of big hedge funds and other big funds betting big on a global recovery but 2015 hasn't been kind to them. This theme will be visited and revisited many times in 2016 and while I remain skeptical on any global recovery, it's an important one to keep in mind as we head into the new year.

September 2015

A Sea Change at the Fed?: While the Fed has traditionally emphasized the domestic economy in forming its monetary policy, it's increasingly looking at foreign developments and their impact on the U.S. dollar. This comment explains why this represents as sea change at the Fed.

The End of the Deflation Supercycle?: A comment I will be referring to many times as I simply see no end to the deflation supercycle, which spells big trouble for hedge funds, private equity funds, as well as global pensions and sovereign wealth funds.

A Looming Catastrophe Ahead?: September was a very rough month for stocks and corporate bonds. Lots of gurus like Carl Icahn came out to warn us of a looming catastrophe ahead. Of course, the only catastrophe I saw in 2015 was in Icahn's portfolio which is long a bunch of commodity and energy names that got killed this year!

October 2015

CalSTRS Pulling a CalPERS on PE fees?: It hasn't been a great year for CalPERS or CalSTRS, both of which were under extreme pressure to disclose all the fees doled out to all their private equity funds over the life of those programs. I'm a stickler for more disclosure on fees, benchmarks and a lot more at public pensions.

Prepare For Lower Returns?: Given my thoughts on deflation, the ongoing global jobs and pension crisis and demographic time bomb, I think it's safe to assume we're entering an era of lower returns. This is reflected in the record low bond yields around the world. Already, the CalPERS of this world are lowering their investment targets and I expect more U.S. public pensions to follow suit.

Can Central Banks Save the World?: Ray Dalio is worried about the next downturn but central banks have a few tricks up their sleeve and aren't going to go down without trying everything they can to stave off global deflation.

A Brutal Year For Top Hedge Funds?: No doubt about it, a lot of "hedge fund gurus" got clobbered in 2015. Even Ray Dalio's risk parity strategies which some Canadian pensions replicate internally got whacked hard in 2015. It was a particularly brutal year for Bill Ackman, David Einhorn, and many other well-known hedge fund managers. And I expect this hedge fund shakeout to last for many more years. Still, don't shed a tear for these over-glorified billionaires. Despite huge losses, they're still collecting a 2% management fee on multi billions and spared no expense to party it up at their year-end shindigs.

Four Views on DB vs DC Plans?: There shouldn't be four, five or more views on DB vs DC plans. The sooner policymakers accept the brutal truth on DC plans, the better off hard working people all over the world will be over the very long run.

A Solution to America's Retirement Crisis?:  Yeah, Blackstone's solution, which ensures more money under management for alternatives shops (so they can collect more ever more insanely high fees) and the quiet screwing of America.

The Subprime Unicorn Boom?: Who can forget the Theranos affair and the subprime unicorn boom?

November 2015

Towards a New Macroeconomics?: Larry Summers is right, secular stagnation is here to stay and the world desperately needs a new macroeconomic paradigm to address deficient aggregate demand.

Canada's Highly Leveraged Pensions?: A comment which discusses how some of Canada's premiere pensions use leverage to juice their returns and compensation!

PSP Investments' Global Expansion?: From leveraged finance to opening up  offices around the world, PSP is on a global mission to bolster its public and private investments. They better start hiring the right people or else they're cooked!!

Forcing Green Politics on Pension Funds?: A critical and sober look at forcing green politics on pension funds.

AIMCo Investing in Renewable Energy?: A discussion with Kevin Uebelein, AIMCo's President and CEO on renewable energy and a lot more.

A Bad Omen For Private Equity Returns?: A must read guest comment on why investors need to temper their enthusiasm on private equity.

Elite Funds Prepare For Reflation?:  Oh boy, are they going to be sorely disappointed!!!

December 2015

Are Martingale Casinos About to Go Bust?: If you ask me, this is one of the most important macro comments of the year and it's a must read going into 2016. As central banks try to save the world from a deflationary disaster, they're sowing the seeds of the next financial crisis but have no fear, the Martingale casinos aren't about to go bust, at least not yet.

Overtouting the Canadian Pension Model?:  Did someone forget to remind me how great Canada's large DB pensions truly are? While we have our share of pension fund heroes, we also have our share of media "fluff" which typically distorts the truth on what Canada's large pensions are able to do internally.

Negative Interest Rates, Eh?: My former BCA colleague, Bank of Canada Governor Stephen Poloz, put on a brave face but negative interest rates are coming to Canada, and possibly to the United States, sooner than you think.

Will the High Yield Blow-Up Crash Markets?: No, it won't, but lower oil prices will continue to weigh heavily on high yield debt in 2016 and if the Fed goes berserk, watch out, it could really clobber the high yield bond market which is already reeling. This will hit many investors very hard but present great opportunities to a few buying up battered bonds through closed end bond funds.

Canadian Pensions Betting on Energy Sector?: A classic contrarian call which will undoubtedly pan out over the very long, long run but I think this is just hopeful wishing at this time as I see no end to the deflation supercycle wreaking havoc on energy and commodities.

Greek Pension Disease Spreading?: You better believe it is, just ask Illinois, Kentucky and many other states that are struggling with their chronically underfunded public pension plans.

Giant Pensions Turn to Infrastructure?:  Leo de Bever, AIMCo's former CEO, shares his thoughts on why giant pensions should invest in unlisted infrastructure. Great insights from the godfather of infrastructure.

No Enhanced CPP For Christmas?: What else is new? So far, Justin Trudeau's Liberals have failed to impress me. They committed the biggest pension gaffe of 2015 and are dithering on enhancing the CPP. Our politicians need to get to work and introduce real change to Canada's pension plan. Don't wait till the economy gets better, if you do you'll never enhance the CPP!

The Year Nothing Worked?: It was a brutal year for a lot of asset allocators who had no place to hide. Except for the every best short-sellers and top multi strategy hedge funds, 2015 was not an easy year to make money in markets.

As you can see, I was very prolific and provided my readers with great insights on pensions and investments in 2015. The amount of work I put into this blog is crazy and trust me, I'm woefully underpaid and greatly under-appreciated for the insights I provide you.

Still, I enjoy sharing my thoughts and I'm closing in on the 5 million page views mark after almost eight years of dedicating my time to this blog. Having said this, I need to move on and do something different to monetize on my efforts and I expect "Canada's pension powers" to help me.

I've sacrificed enough time and money publishing this blog and need your help to move on and get properly compensated for my efforts. Yes, I have progressive MS (and doing well), yes, I'm the furthest thing from a YES man and some may find me abrasive and overly critical at times, but I guarantee you won't find a more honest, hard working and dedicated person than me to help you navigate this uncertain investment landscape.

On that note, I wish you all a Happy and Healthy New Year and ask many of you who regularly read this blog to step up to the plate and join a few of Canada's top pension leaders who do subscribe to my blog and recognize the value and hard work that goes into writing these comments (use the PayPal options on the top right side under my picture).

Below, CNBC's Seema Mody details what 2015 looked like in markets around the globe, highlighting some surprising trends.

And Facebook posted an incredible video recap of the most-talked about events of 2015. If you ask me, it wasn't a great year for the world and I'm looking forward to saying goodbye 2015, hello 2016!!

Katherine Burton of Bloomberg reports, Ex-Soros's Bessent Raises $4.5 Billion for New Hedge Fund Firm:

Scott Bessent, who oversaw George Soros’s $30 billion fortune for the last four years, will be managing $4.5 billion by the end of the first quarter, one of the largest hedge fund startups ever.

Bessent, 53, began trading $2 billion from his former employer this week at Key Square Group, a macro fund that chases economic trends by trading stocks, bonds, currencies and commodities. The firm, which capped initial assets at $4.5 billion, raised most of the balance from fewer than 10 institutions and had to turn away some money, according to people with knowledge of the firm.

Bessent’s success in attracting money shows investors are willing to take a chance on managers with strong pedigrees and track records, even after several multi-billion-dollar macro funds, including ones run by Fortress Investment Group Inc. and Bain Capital, closed last year, primarily because of wrong-way currency trades. Chris Rokos, a former star trader at Brevan Howard Asset Management, raised more than $1 billion for his London-based firm that opened in October.

Key Square started with about 15 employees, according to one of the people, including nine from Soros Fund Management and three non-research professionals from Fortress’s macro fund. The investment professionals with ties to Soros include Michael Germino, Francis Browne, Greg Pappajohn, Charles Galbreath, John Roque and Bill Callanan, said the people. Bessent declined to comment for this story.

Bessent spent much of his career at Soros’s hedge fund. After graduating from Yale University in 1984, he did stints at Brown Brothers Harriman & Co., Saudi Arabian holding company Olayan Group and Jim Chanos’s Kynikos Associates before taking a job as an analyst for Soros in the early 1990s.

Returns to Soros

Soon after, he became the firm’s London-based portfolio manager as Soros fired his European team that had been struggling to make money. Bessent oversaw European investments for about eight years.

In 2000, he decided to strike out on his own after two of Soros’s lieutenants, Stan Druckenmiller and Nick Roditi, left the firm and the billionaire said he was cutting risk. He raised $1 billion for Bessent Capital Management -- including about $150 million from Soros -- and ran a global and European stock fund.

Bessent was in the process of starting a firm to make macro wagers when Soros asked him to return in September 2011 to be the chief investment officer. Under Bessent’s tenure as CIO, the family office has made about $10 billion in profit, or about 13 percent annualized.

Jack Meyer, the former head of Harvard University’s endowment, holds the startup record with his Convexity Capital Management, which opened with more than $6 billion in 2006. Druckenmiller’s former colleagues at Duquesne Capital Management started PointState Capital with $5 billion in 2011.

I've already covered investing in Soros's protégé and definitely think Scott Bessent has the pedigree and skills to become a great global macro hedge fund manager. However, I tempered my enthusiasm and think this is a brutal, BRUTAL, environment to start any hedge fund:

Mr. Bessent is not going to have any problem raising a huge sum of money from large endowments, global pensions and sovereign wealth funds. His track record and experience speak for themselves. Having Soros Fund Management as an anchor/ seed investor is the cherry on top to seal any deal.

His biggest problem will be managing expectations. After the initial hoopla, investors will want to see if Bessent can continue delivering exceptional results managing his own fund. And managing his own fund will present a ton of headaches and other institutional constraints he didn't have to deal with while managing Soros's family office investments.

Of course, Bessent knows all this. He has already managed his own fund but the landscape for hedge funds has drastically changed in the last few years. The institutionalization of hedge funds is placing a lot more emphasis on compliance and alignment of interests, lowering the fees that large hedge funds were once able to easily command.

Still, if Bessent raises billions more on top of Soros's initial $2 billion seed investment, and manages to keep up his stellar performance, he too will become a multi-billionaire overnight and enjoy the same success as his mentor, Druckenmiller, Dalio, Howard, Tudor Jones and other global macro "gods".

That all remains to be seen. As a rule of thumb, I generally don't get overly excited about anyone starting a hedge fund, especially in these brutal markets. It's one thing working as a CIO for Soros Fund Management and another going off on your own and dealing with managing a business and all the crap that goes along with it.

One thing I always loved about Soros is he ran a true global macro fund, investing in currencies, bonds, stocks and commodities. When I was investing in directional  hedge funds at the Caisse (CTAs, L/S Equity, global macro and funds of funds), it always struck me as odd that most global macro funds were investing only in fixed income and currencies, ignoring stocks and commodities.

When it comes to his fortune, George Soros doesn't mess around, he is merciless and will quickly pull the plug if he's not happy with his external managers' returns. If you don't believe me, just ask Bill Gross and Bill Ackman. These star managers both got the Soros sword and given their performance in 2015, especially Ackman who was down a whopping 21% last year, I'd say the undisputed king of hedge funds made the right call to pull out of his fund, ignoring all the hoopla on hot hedge funds.

Scott Bessent knows his mentor's ruthless penchant for investment excellence and will undoubtedly feel the heat if his fund doesn't perform well. The other thing he knows is that success is critical in the first three years of the fund, because if he performs well during this time, assets under management will mushroom and he too will become an over-glorified hedge fund "guru" collecting a 2% management fee on multibillions and party it up like the rest of the hedge fund hotshots no matter how well or poorly he performs.

[Note to the naive masses: If you want to understand rising inequality, look no further to the financialization of modern economies and how big hedge funds and private equity funds manage to gather billions in assets and then charge insane fees no matter how well or poorly they perform. It's beyond outrageous, it's the biggest financial scam of our era!]

Interestingly, I'd love to know who the other investors in Key Square are and if they include other well-known hedge fund gurus, big funds of funds (like Blackstone) or a few large public pension and sovereign wealth funds (Ontario Teachers, CPPIB, the Caisse, New Holland Capital might have gotten an allocation but I'm merely speculating and to be honest, not sure they would rush to seed any fund no matter how famous the manager is).

Apart from Key Square, the other huge global macro startup I've got my eye on is Rokos Capital Management run by Chris Rokos, the former star trader at Brevan Howard. Like Soros, Alan Howard who Rokos co-founded Brevan Howard with, is equally ruthless when it comes to investment success.

Brevan Howard has struggled to deliver stellar returns ever since Chris Rokos left in 2012. Its assets reportedly lost 11% of their value in nine months as markets were plagued by fears about the Chinese economy and dramatic currency fluctuations. Still, it's considered a great global macro fund and despite a tough year for the fund’s trading strategies, which has resulted in job cuts in recent months, the firm delivered a big pay rise for its London traders and other members, with the overall sum paid out passing £120m.

Rokos was embroiled in a bitter legal dispute with Alan Howard but that was settled last January and he got regulatory clearance to start his new macro fund in late September. Rokos then capped his fund at one billion dollars AUM:

The new macro hedge fund launched earlier this year by Brevan Howard co-founder Chris Rokos has reportedly already attracted more than $1 billion in assets.

The capital comes less than a month after Rokos Capital Management received approval from financial regulators in the United Kingdom.

Approximately half the capital is from outside investors, according to a Bloomberg article citing two unidentified people familiar with the situation. The rest is internal money belonging to the famed investment manager, whose net worth is estimated to be close to $1 billion, and his partners. Rokos hopes to eventually raise $3 billion for the new fund, the article noted.

Rokos left Brevan Howard in 2012 after making a reported $4 billion for Brevan’s fund between 2004 to 2012. He co-founded Brevan with Alan Howard in 2002, and reached a settlement earlier this year that voided an agreement with his former company that would have prevented him from managing external money until 2018.

Rokos has been on a hiring spree this year as he geared up to launch the new fund, hiring more than fifty employees and bringing former Nomura chief European economist Jacques Cailloux, former Goldman Sachs Asia Pacific macro head Stuart Riley, and former Brevan Howard colleague Borislav Vladimirov aboard as senior executives.

Based in London, Rokos Capital Management’s initial fund will trade on broad macroeconomic themes, taking positions across asset classes including stocks, bonds and currencies.

There's no doubt about it, Chris Rokos is a star macro trader and he too has tremendous potential to gather huge assets if his fund performs well in the next three years. Rokos is already among the richest Greeks in the UK, a list which includes big time shipowners, and if his fund performs well, he will become a lot richer (once that 2% management fee kicks in on multibillions, it's smooth sailing but he has to perform well over the next three years to see his assets under management and net worth explode up).

[Note: I got a buddy of mine who is a 48 year old Greek-Canadian star currency trader in Toronto looking to launch his currency hedge fund and I think he can give Rokos and Bessent a run for their money!!]

Anyways, Bessent and Rokos have launched their respective funds and now the real hard work begins. Will they be the next generation of macro gods and have one up on Soros? That all remains to be seen, especially since they decided to launch their funds at a time when the deflation tsunami is about to hit us.

I wish them and a lot of other macro funds the best of luck in this brutal environment. I suggest they all carefully read my Outlook 2016 and keep shorting emerging market stocks, bonds and currencies, oil futures, the CAD, Aussie and Kiwi, energy and commodity stocks and the euro (King Dollar will break parity shortly and that's when the fun begins).

What else? Get ready for another Big Bang out of China, which will add more deflationary misery to this wretched world economy where secular stagnation reigns.

And if Bessent, Rokos and others make oodles of money on my calls, they can join Canada's top pensions and throw me a bone by subscribing or donating to my blog at the top right-hand side under my picture.

As for George Soros, he didn't take my advice and hire Neil Petroff, Ontario Teachers' former CIO who retired in June of last year, as the next CIO of Soros Fund Management. Instead, he just named Ted Burdick to the position, someone who has been associated with him for more than 15 years and who sits on the investment committee. It's alright, Neil Petroff joined Northwater Capital in Toronto where he is the Vice Chair (great move for him and Northwater and a lot less stress!).

Below, Allianz Chief Economic Advisor Mohamed El-Erian, shares his Fed forecast and says fundamentals are pushing the markets down, but liquidity is not there to push it back up.

As I stated in my Outlook 2016, the Fed is making a grave mistake raising rates when the rest of the world is struggling with deflation. If it continues on this path, it will ignite another crisis in emerging markets which will all but ensure global deflation.

Having said this, there is plenty of liquidity to drive risks assets higher, so don't throw in the towel just yet but make sure you pick your spots carefully or risk having another year where nothing works.

One last note to Mr. Soros, pick up a copy of Charles Taylor's Philosophical Arguments. I just received a signed copy over the holidays from my mother and stepfather in London where Taylor recently gave a lecture on Democracy, Diversity, Religion at LSE, Soros's alma mater.

I embedded the lecture below. You will see why even if deflation ravages the Canadian economy, we still have the world's most brilliant political philosopher and in my opinion, Canada's greatest treasure.

Barry Critchley of the National Post reports, Pension solvency dipped slightly in 2015, Mercer report shows:

The poor equity market performance, the continued decline in long-term bond yields and new mortality tables that reflect increased life expectancy, have all combined to cause a slight decline in the funded status of the country’s pension plans in 2015. The only good news: the funded status of the 611 plans covered in the Mercer study was improved by the positive impact of the decline in the Canadian dollar on foreign asset returns.

That’s the two key conclusions contained in a report by Mercer, a pension consulting company that was released Tuesday. At the end of 2015, Mercer said that the “median solvency ratio of the pension plans” of its clients stood at 85 per cent, down from 88 per cent one year earlier.

A similar result applied when an alternative measure, The Mercer Pension Health Index, which represents the solvency ratio of a hypothetical plan, was used. That measure finished the year at 93 per cent down from 95 per cent at the end of 2014. In parts of 2014 and 2015 the same measure – that shows the ratio of assets to liabilities for a model pension plan – posted a solvency ratio of more than 100 per cent.

According to its analysis, a typical balanced pension portfolio would have returned 2.9 per cent during the fourth quarter and 5.3 per cent for 2015.

“There was considerable variability in the financial performance of pension plans in 2015,” said Manuel Monteiro, leader of Mercer’s Financial Strategy Group. “Pension plans with significant Canadian equity holdings and those that hedge their foreign currency exposure experienced larger than average declines in their solvency ratio.”

In its report, Mercer said that with “weak economic conditions continuing to persist and central bankers discussing the possibility of negative interest rates, plan sponsors are coming to the conclusion that they cannot count on higher interest rates to erase their lingering pension deficits.”

Mercer noted one possible solution: pension plans need to better understand the risks that they face, and establish a robust risk management strategy to manage them.

The report noted that at least four provincial governments have recognized the challenging economic conditions and are moving towards lessening the funding burden for defined benefit pension plan sponsors. Mercer said that Quebec is making the most significant changes “by moving away from a solvency-based funding target starting in 2016,” while Alberta and British Columbia have also introduced helpful changes in the past few years.

As for Ontario, Mercer said that it has recently announced plans to develop a set of reforms that would “focus on plan sustainability, affordability and benefit security while balancing the interests of pension stakeholders.”

I agree with the findings of Mercer's report. First and foremost, plan sponsors cannot count on higher interest rates to erase lingering pension deficits. This is especially true now that the global deflation tsunami is upon us and negative rates are right around the corner in Canada and possibly the U.S. if things get really bad.

Importantly, deflation will decimate all pensions because it will drive rates around the world to negative territory and bring asset values to new lows, including those of  illiquid alternative assets where pensions have increased their exposure to take on more risk in order to achieve their objective.

But when it comes to pension deficits, it's rates that matter most because the duration of liabilities is a lot bigger than the duration of assets so a decline in rates disproportionately hurts pensions a lot more than a decline in asset values.

Second, the Mercer report notes the following:

“There was considerable variability in the financial performance of pension plans in 2015,” said Manuel Monteiro, leader of Mercer’s Financial Strategy Group. “Pension plans with significant Canadian equity holdings and those that hedge their foreign currency exposure experienced larger than average declines in their solvency ratio.”

In terms of Canadian equity exposure, the typical Canadian DB plans aren't big enough to be as globally diversified as Canada's Top Ten across public and private markets, which explains why they underperform them over a very long period.

As far as currency risk, when I covered CPPIB's record results in FY 2015, I noted that the value of its investments got a $7.8-billion boost during that fiscal year from a decline in the Canadian dollar against certain currencies, including the U.S. dollar and U.K. pound. I also noted that even though PSP had solid results in FY 2015, it partially hedges (50% hedged) its foreign currency exposure, which is one reason why it didn't perform as well as CPPIB (they have the same fiscal year period and PSP is now reviewing its currency hedging policy).

I remember a conversation I had with Jim Keohane, CEO of HOOPP, on currency risk and hedging policy where he told me "from a strict asset-liability standpoint, it's better not to hedge F/X risk."

If you ask me, currency hedging is extremely important in a deflationary world, but you need to hire smart people who know how to make money in currencies and who can guide you on future trends in currencies (I have never heard of a star currency trader at Canada's Top Ten! There were one year wonders but nobody who can consistently make money trading currencies).

It's worth noting that I told my readers about Canada's perfect storm back in January 2013 and continued to warn everyone to short the loonie in December of that year because I saw oil prices going much lower. Given my Outlook 2016, I see no reason to change my views on Canada, oil or the loonie (I see it going to 66 cents US and settling around 66-68 cents).

It's also worth noting that if global deflation risks rise, investors will seek refuge in good old U.S. bonds, which will propel the mighty greenback even higher. King Dollar is already off to a great start in 2016 but this is a double-edged sword because as the USD rises, corporate profits decline and so do import prices, reinforcing deflationary headwinds in the US. and around the world.

This brings me to another topic the Mercer report discusses, namely, the importance of risk management. Pensions have long-dated liabilities and a much longer investment horizon than mutual funds, hedge funds and private equity funds. So when you see Canada's big pensions betting on energy, they're not looking to make a quick buck.

But there are structural factors at work here that present a different set of risks to pensions altogether. In a deflationary world, risk management is crucial and I'm not just talking about VaR and quantitative analysis, you also need to have great thinkers who are able to qualitatively assess important structural and cyclical factors that are shaping the investment landscape in the short-run and long-run (again, read my Outlook 2016 for more insights).

Lastly, a small comment on "Quebec moving away from a solvency-based funding target starting in 2016.” I'm very uncomfortable with this and think it's another way to mask Quebec's serious debt crisis. When it comes to solvency-based funding, I prefer if we all stop the charade and go Dutch on pensions. It will be tough and it will hurt, but I prefer living in reality than clinging to a rate-of-return fantasy or moving away from a solvency-based funding target.

Below, Stanley Fischer, Federal Reserve vice chairman, talks about the Fed's accommodative policy, stating the decline in oil won't go on forever. Of course not but oil prices are heading lower and they will stay low for a very long time, and if the Fed raises rates in this environment, it will ignite a crisis in emerging markets and all but ensure a long period of debt deflation.

Matt Clinch of CNBC reports, Soros: It's the 2008 crisis all over again:

Billionaire financier George Soros is warning of an impending financial markets crisis as investors around the world were roiled by turmoil in China trade for the second time this week.

Speaking at an economic forum in Sri Lanka's capital Colombo, he told an audience that China is struggling to find a new growth model and its currency devaluation is transferring problems to the rest of the world, according to media. He added that a return to rising interest rates was proving difficult for the developing world.

The current environment reminded him of the "crisis we had in 2008," The Sunday Times in Sri Lanka reported on Thursday morning. "China has a major adjustment problem," he added, according to Bloomberg. "I would say it amounts to a crisis."

China's CSI 300 tumbled more than 7 percent in early trade Thursday, again triggering the market's circuit breaker. As well as roiling sentiment across Asia, it also battered European risk assets with the German DAX down 3.5 percent at 11 a.m. London time.

U.S. stock index futures also indicated a sharply lower open as investors focused on China's swooning currency and economic slowdown.

China, the biggest economic story of the last 30 years, has soured in the eyes of many analysts. A stock market crash that began in the country last summer has thrown the vast difficulties officials are now facing into sharp relief. A raft of data has disappointed in recent months as the country's leaders refocus the economy on consumption from manufacturing.

Analysts also point to concerns over Chinese market regulators, who they believe do not appear to have a good grasp of the market, even with the introduction of the circuit breakers. In an attempt to stabilize markets, China's securities regulator has issued new rules to restrict the number of shares major shareholders in listed companies can sell every three months to 1 percent.

Marc Ostwald, a strategist at ADM Investor Services, believes that Soros' comments — alongside a gloomy report Wednesday from the World Bank— only serve to cast a "long shadow" over global markets.

"It should be noted that the current turmoil distinguishes itself from 2008, when reckless lending, willful blindness to a mountain of credit sector risks and feckless and irresponsible regulation and supervision of markets were the causes of the crash, given that central bank policies have been encouraged and been wholly responsible for the current protracted bout of gross capital misallocation," he said in a morning note.

Anusha Ondaatjie of Bloomberg also reports, George Soros Sees Crisis in Global Markets That Echoes 2008:

Global markets are facing a crisis and investors need to be very cautious, billionaire George Soros told an economic forum in Sri Lanka on Thursday.

China is struggling to find a new growth model and its currency devaluation is transferring problems to the rest of the world, Soros said in Colombo. A return to positive interest rates is a challenge for the developing world, he said, adding that the current environment has similarities to 2008.

Global currency, stock and commodity markets are under fire in the first week of the new year, with a sinking yuan adding to concern about the strength of China’s economy as it shifts away from investment and manufacturing toward consumption and services. Almost $2.5 trillion was wiped from the value of global equities this year through Wednesday, and losses deepened in Asia on Thursday as a plunge in Chinese equities halted trade for the rest of the day.

“China has a major adjustment problem,” Soros said. “I would say it amounts to a crisis. When I look at the financial markets there is a serious challenge which reminds me of the crisis we had in 2008.”

Soros has warned of a 2008-like catastrophe before. On a panel in Washington in September 2011, he said the Greece-born European debt crunch was “more serious than the crisis of 2008.”

Soros, whose hedge-fund firm gained about 20 percent a year on average from 1969 to 2011, has a net worth of about $27.3 billion, according to the Bloomberg Billionaires Index. He began his career in New York City in the 1950s and gained a reputation for his investing prowess in 1992 by netting $1 billion with a bet that the U.K. would be forced to devalue the pound.

Measures of volatility are surging this year. The Chicago Board Options Exchange Volatility Index, known as the fear gauge or the VIX, is up 13 percent. The Nikkei Stock Average Volatility Index, which measures the cost of protection on Japanese shares, has climbed 43 percent in 2016 and a Merrill Lynch index of anticipated price swings in Treasury bonds rose 5.7 percent.

China’s Communist Party has pledged to increase the yuan’s convertibility by 2020 and to gradually dismantle capital controls. Weakness in the world’s second-largest economy remains even after the People’s Bank of China has cut interest rates to record lows and authorities pumped hundreds of billions of dollars into the economy. Data this week reinforced a sluggish manufacturing sector.

I wonder if George Soros read my Outlook 2016 on the deflation tsunami as well as my follow-up comment on him and the next global macro gods entitled, One Up On Soros?.

Let me briefly sum it up for all of you. The world is in a very dangerous place. With all due respect to Stanley Fisher, the Fed made a huge mistake raising rates in December and Jim Grant is right, it will be forced to backtrack. If it doesn't and continues raising rates, it will ignite a crisis in emerging markets and all but ensure a prolonged period of global debt deflation.

I just can't understand why the Fed would raise rates in an environment where global deflation is the clear and present danger. All this will do is spur the mighty greenback higher, induce a profits recession and lower U.S. import prices, effectively importing deflation to America.

We are off to a horrible start to the new year. China is melting down and investors are worried about another major yuan devaluation, which is already happening, and what this means for global deflation.

All tell you exactly what it means: lower import prices for the eurozone and the U.S., and it will force Japan, Korea and other Asian economies to react with a retaliatory devaluation of their currencies, and pretty soon we will be getting the makings of a full-blown currency war and debt deflation crisis.

Markets around the world are rightfully reacting negatively to all this. They are basically telling the Fed to "wake up and smell the coffee." The Fed and other central banks better come up with a major coordinated effort to pump enormous liquidity into the system or risk having another 2008 or something far, far worse.

Are we going to crash early in 2016? I don't think so and think there's a lot of panic and program selling going on here and that presents great opportunities for long-term investors and short-term traders.

I'm actually starting to scale into some risk assets here for a nice swing trade. Even though the charts are UGLY, something tells me these RISK OFF markets are going to reverse course quickly if the Fed and central banks surprise us with a coordinated global liquidity stimulus announcement.

Stay tuned, the deflation tsunami is coming but central banks aren't going down without a fight! As I stated in my Outlook 2016, there will be big dips and big rallies ahead so try not to lose any sleep over what Soros or other hedge fund gurus are publicly stating out there. After all, they can be saying one thing publicly and doing something else in their book.

Below, a panel on Bloomberg discusses George Soros's dire warning on markets. Contagion risks are high and I think this will force global central banks to react if things get a lot worse.

And for some good news, Richard Bernstein, Richard Bernstein Advisors CEO, says the probability of the markets ending 2016 higher is improving. Bernstein also stated that it's not all but some of the Fed's fault, saying "in an environment of global deflation and profits recession, the Fed has decided to reverse course and that is very unsettling." I couldn't agree more!

Sho Chandra of Bloomberg reports, Payrolls in U.S. Rise More Than Projected, Jobless Rate at 5%:

Payroll growth surged in December after stronger job gains the prior two months, capping the second-best year for American workers since 1999 and further evidence of a resilient job market that prompted the Federal Reserve to raise interest rates.

The 292,000 advance exceeded the highest forecast in a Bloomberg survey and followed a 252,000 increase in November that was stronger than previously estimated, a Labor Department report showed Friday. The median forecast in a Bloomberg survey called for 200,000. The jobless rate held at 5 percent, and wage growth rose less than forecast from a year earlier.

Such job-market durability indicates employers were sanguine about the economy’s prospects just before the recent rout in global financial markets. Fed policy makers are counting on tighter labor conditions to lead to broader increases in worker pay and inflation.

“Job creation was solid in December,” said Michael Feroli, chief U.S. economist at JPMorgan Chase & Co. in New York and a former Fed economist. “This should calm some fears about the U.S. economy losing growth momentum. It’s reassuring in the backdrop of some recent economic reports that were weak.”

The December job gains, which were probably helped by mild winter weather across much of the country, were led by temporary-help services, health care, transportation and construction.

Labor Department revisions to prior reports added a total of 50,000 jobs to payrolls in the previous two months. For all of 2015, payrolls climbed by 2.65 million after 3.1 million in 2014 for the best back-to-back years for hiring since 1998-99.

Economists’ Forecasts

December payroll estimates of 92 economists in the Bloomberg survey ranged from gains of 135,000 to 250,000. November was initially reported as a 211,000 increase. The unemployment rate, which is derived from a separate survey of households, matched the median forecast.

With the latest jobs report, the Bureau of Labor Statistics also issued revisions for data from the survey of households dating back to 2011. Payroll figures from the survey of employers will be revised when the January data is released Feb. 5. There were no revisions to the rates in any month last year, when unemployment averaged 5.3 percent.

While employers continue to aggressively add to headcounts, worker pay has yet to show a sustainable pickup. Average hourly earnings were unchanged from the prior month. They increased 2.5 percent over the 12 months ended in December. The median forecast called for a 2.7 percent year-over-year gain (click on image).

The advance, which was the biggest since October, was primarily due to an easy comparison with December 2014, when earnings fell 0.2 percent from the previous month. This so-called base effect will probably result in some payback with the January employment report when earnings come up against a strong January 2015 comparison.

The average workweek for all workers held in December at 34.5 hours.

Another caveat about the wage and hours results: The Bureau of Labor Statistics found a processing error in the data from March 2006 through February 2009 and will issue corrected figures on Feb. 5.

The participation rate, which shows the share of working-age people in the labor force, increased to a four-month high of 62.6 percent from 62.5 percent.

Among measures of labor-market slack, the number of Americans who are working part time though would rather have a full time position, or the measure known as part-time for economic reasons, eased to 6.02 million from 6.09 million.

Underemployment Rate

The underemployment rate -- which includes part-time workers who’d prefer a full-time position and people who want to work but have given up looking -- held at 9.9 percent.

Employment over the final three months of 2015 increased 284,000 on average, the most since January 2015.

Hiring gains last month were broad, with construction adding 45,000 jobs, health-care providers taking on 52,600 and temporary help services boosting headcounts by 34,400. Factories even added the most jobs -- 8,000 -- in five months.

Minutes of the Fed’s December meeting, when policy makers boosted their target rate for federal funds, showed participants acknowledged the improvement in labor market conditions. Many judged it as “substantial.”

“Members agreed that a range of recent labor market indicators, including ongoing job gains and declining unemployment, showed further improvement and confirmed that underutilization of labor resources had diminished appreciably since early this year,” according to the minutes, released on Wednesday. At the same time, Fed officials said there was room for slack to be absorbed and signaled further hikes in interest rates would occur gradually.

On Thursday, the Standard & Poor’s 500 Index capped its worst-ever four-day start to a year as turmoil in China spread around the world. Selling in global equities began in China, where shares fell 7 percent after the central bank weakened the yuan an eighth day. Crude settled at a 12-year low, and copper dipped below $2 for the first time since 2009.

So, the December U.S. jobs report came in better than expected and everyone is making a big deal out of it. The same thing happened in Canada where last month's job growth smashed expectations but when you pull the curtain back to take a closer look, it really doesn't look good at all.

I've already discussed the Canadian economy extensively on my blog. I told my readers about Canada's perfect storm back in January 2013 and continued to warn everyone to short the loonie in December of that year because I saw oil prices going much lower. Given my Outlook 2016, I see no reason to change my views on Canada, oil or the loonie (the loonie is a petro currency; I see it going to 66 cents US or lower depending on how bad the next global crisis is before eventually settling around 66-68 cents for a very long time).

I want to focus my attention on the U.S. economy since the perceived wisdom is the U.S. will lead the world out of this global economic morass. Interestingly, I took a snapshot of the market's reaction after the data was released before the opening bell (click on image):


And  here is a snapshot an hour into the session (click on image):


Notice how fast traders sold the news? This doesn't mean much as stocks can still end Friday up, but clearly they are struggling this week (update: stocks ended in the red on Friday capping the worst start to the year ever on growth concerns from China).

I always look at the bond market to gauge how it digests the jobs numbers. Stock traders are too erratic and typically let their emotions dictate their trading. Bond traders are more methodical, very skeptical and will throw cold water on any jobs report.

The reaction of the bond market tells me nobody is buying this great U.S. recovery story (bond yields dipped after the report). Despite the solid job gains, I'm certainly not buying that there is a major U.S. economic recovery unfolding and will share with you a key reason as to why.

While the trend in jobs growth is encouraging, wages are stagnating and if the mighty greenback keeps surging higher and a profits recession develops, I expect to see major weakness in the jobs market in the second half of 2016 and even more wage stagnation going forward.

I bring this up because I think a lot of economists just don't get it. Inflation expectations will never pick up until you get a significant pickup in wage growth. Period. And for this to happen you need to see a huge pickup in the labor force participation rate and a drop in the chronically unemployed and under-employed.

The Economic Policy Institute does a great job discussing and monitoring wage growth in its Nominal Wage Tracker which was just updated:

On some fronts, the economy is steadily healing from the Great Recession. The unemployment rate is down, and the pace of monthly job growth is reversing some of the damage inflicted by the downturn. But the economy remains far from fully recovered.

A crucial measure of how far from full recovery the economy remains is the growth of nominal wages (wages unadjusted for inflation). Nominal wage growth since the recovery officially began in mid-2009 has been low and flat. This isn’t surprising–the weak labor market of the last seven years has put enormous downward pressure on wages. Employers don’t have to offer big wage increases to get and keep the workers they need. And this remains true even as a jobs recovery has consistently forged ahead in recent years.

Despite the incomplete nature of the recovery, influential voices are already calling for the Federal Reserve to guard against inflation by raising interest rates to slow the economy. The stakes in this debate are high. Macroeconomic policy (including monetary policy) that prioritized very low rates of inflation over low rates of unemployment is a key reason why real wages have stagnated for the vast majority of American workers in recent decades (as we have shown through our Raising America’s Pay initiative). Widespread wage growth will not occur over the coming years if the Federal Reserve prematurely slows the recovery in the name of fighting prospective inflation.

The following charts–which will be updated regularly when new data are released–help explain why the Fed should hold off on raising interest rates until nominal wages are growing at a much faster pace. Until nominal wages are rising by 3.5 to 4 percent, there is no threat that price inflation will begin to significantly exceed the Fed’s 2 percent inflation target. And it will take wage growth of at least 3.5 to 4 percent for workers to begin to reap the benefits of economic growth–and to achieve a genuine recovery from the Great Recession:

Note on the nominal wage target

The nominal wage target of 3.5 to 4 percent is defined as nominal wage growth consistent with the Federal Reserve’s 2 percent overall price inflation target, 1.5 to 2 percent productivity growth, and a stable labor share of income. As an example, if trend productivity growth is 1.5 percent, this implies that nominal wage growth of 1.5 percent puts zero upward pressure on overall prices; while an hour of work has gotten 1.5 percent more expensive, the same hour produces 1.5 percent more output, so costs per unit of output are flat. Nominal wage growth of 3.5 percent with 1.5 percent trend productivity growth implies that labor costs would be rising 2 percent annually–and if labor costs were stable as a share of overall output, this implies prices overall would be rising at 2 percent, which is the Fed’s price growth target.

Now, we can discuss the structural reasons as to why wages are stagnating, everything from demographics to education and technology, but the crucial point I'm making is that nominal wage growth has been extremely weak since the recovery took place in 2009 and it doesn't look like it will improve any time soon.

And if you think about the Fed raising rates with global deflation and a profits recession looming, you can understand why many think it's making a major policy blunder which will only lead to more deflation and wage stagnation.

Bottom line: Forget the hoopla on the U.S. economic recovery, it's all a chimera! Until you see a significant pickup in nominal wages, there will never be a sustained pickup in economic activity. And for this to happen, we need a new macroeconomic paradigm which recognizes that rising inequality is deflationary.

Below, Jan Hatzius, Goldman Sachs chief economist, discusses the December jobs report, stating it was a good report. If you ask me, Hatzius needs to mind the wage gap and trust me, if markets keep heading south, the Fed will backtrack fast on rates.

On this last point, Allianz chief economic adviser told CNBC the bigger issue for financial markets is that central banks are running out of ammo. "Markets are realizing that central banks can no longer repress financial volatility. And they are repricing to new volatility paradigm," he said in a "Squawk Box" interview (see below).

I take this stuff on central banks "running out of ammo" with a shaker of salt. There will be a Minsky Moment but it's too soon to declare central banks the losers in the titanic battle against deflation.

On that note, many of you need to step up to the plate and donate and subscribe to my blog. From my Outlook 2016, to my comments on Soros and pension deficits, to this comment on minding the wage gap, I provided you great insights this week on markets and pensions you simply won't read elsewhere.

In fact, while the stock market is off to a terrible start to the year, I've provided you with comments to help guide you through a very difficult investment landscape. So, please kindly donate or subscribe to my blog via PayPal under my picture. Thank you and have a great weekend!!

Barbara Shecter of the National Post reports, Ontario Teachers’ Pension Plan finds new chief investment officer in Denmark:

The Ontario Teachers’ Pension Plan has appointed a new chief investment officer to replace longtime CIO Neil Petroff, who retired in June.

Bjarne Graven Larsen, who will also serve as executive vice-president, takes the role Feb. 1, and will report to chief executive Ron Mock.

Graven Larsen is a former CIO and executive board member of Denmark’s largest pension plan, ATP, which is the fourth largest pension in Europe.

Most recently, however, he was chief financial officer of Novo A/S in Copenhagen, and before that he led the successful turnaround of Denmark’s sixth largest bank, FIH Erhvervsbank A/S, which was acquired by an ATP-led Danish consortium.

“With his investment expertise, global experience, forward thinking on risk management, and importantly, hands-on work within a total return framework, Bjarne is uniquely positioned to be our Chief Investment Officer,” Mock said in a statement Monday.

“He has the experience and vision to lead our world-class investment team into our next generation of global growth.”

Graven Larsen will lead Teachers’ senior investment leadership team, which was recently restructured “to reflect the evolving global pension investment environment,” the pension plan said.

Divisions include infrastructure and natural resources, public equities, capital markets, portfolio construction, emerging markets, Asia-Pacific, real estate and investment operations.

Graven Larsen, who is also former managing director of Denmark’s largest mortgage bank and a former monetary policy director at Denmark’s central bank, said he has “admired the innovative work and success of Ontario Teachers’ for many years.”

Jennifer Paterson of Benefits Canada also reports, Ontario Teachers’ appoints new CIO:

The Ontario Teachers’ Pension Plan has appointed Bjarne Graven Larsen as executive vice president and chief investment officer (CIO), effective February 1, 2016.

Graven Larsen is the former CIO and executive board member of ATP, Denmark’s largest pension plan and the fourth largest in Europe. He was most recently the chief financial officer at Novo A/S in Copenhagen. Between these two engagements he led the successful turnaround of Denmark’s sixth largest bank, FIH Erhvervsbank A/S, which was acquired by an ATP-led Danish consortium.

Graven Larsen will head up Ontario Teachers’ senior investment leadership team, which was recently restructured to reflect the evolving global pension investment environment.

“With his investment expertise, global experience, forward thinking on risk management, and importantly, hands-on work within a total return framework, Bjarne is uniquely positioned to be our chief investment officer,” said CEO Ron Mock. “He has the experience and vision to lead our world-class investment team into our next generation of global growth.”

“I have admired the innovative work and success of Ontario Teachers’ for many years,” said Graven Larsen. “I consider this position to be a career opportunity of a lifetime and I look forward to learning from the outstanding team here and sharing my experiences with them as we work together to deliver members’ pensions.”

Lastly, Reuters also reports, Ontario Teachers appoints Danish investment veteran as CIO:

The Ontario Teachers' Pension Plan (Teachers'), one of Canada's biggest investors, has appointed veteran Danish investment professional Bjarne Graven Larsen as its new chief investment officer (CIO) and executive vice president.

Graven Larsen, 52, is a former CIO and executive board member of ATP, Denmark's biggest pension plan and the fourth largest in Europe. He was most recently chief financial officer at holding company Novo A/S, majority shareholder in Danish insulin maker Novo Nordisk.

Teachers', which is Canada's third biggest public pension fund, said on Monday that Graven Larsen would report to its Chief Executive Ron Mock and be based in Toronto. He will take up the position on Feb. 1.

"With his investment expertise, global experience, forward thinking on risk management and, importantly, hands-on work within a total return framework, Bjarne is uniquely positioned to be our chief investment officer," Mock said in a statement.

Teachers' and peers like the Canada Pension Plan Investment Board and Caisse de dépôt et placement du Québec have been among the world's most active dealmakers in recent years, with major bets on real estate, natural resources and infrastructure.

Teachers' managed net assets worth 154.5 billion Canadian dollars ($109 billion) at the end of 2014.

Graven Larsen will succeed Neil Petroff, who retired in June.

Ontario Teachers' put out a press release here which basically states a lot of what is stated above.

Bjarne Graven Larsen is a huge recruit for Ontario Teachers as he has unbelievable experience as a former CIO of ATP and as a monetary policy director at Denmark's central bank.

He also has big shoes to fill as Neil Petroff who retired last year was unquestionably a great CIO. And before Neil Petroff, there was Bob Bertram, another great CIO who built Teachers' investment divisions along with Claude Lamoureux.

In my last conversation with Ron Mock before Christmas, he told me they were on the verge of hiring a CIO. And they hired a veteran who was a CIO at ATP, arguably one of the best pension plans in the world (on par with OTPP and HOOPP, if not better, and highly regarded by everyone including Jim Keohane, CEO of HOOPP, who told me he reformed HOOPP's asset-liability approach and based it on the one ATP is using).

This is a critical position and Ron Mock took his time recruiting someone who really knows his stuff. And I'm sure a lot of people within and outside Teachers' wanted this position which not only has big perks like huge compensation, but is also responsible for overseeing private and public investments as well as hedge funds and the risk that is allocated between them.

The fact that Ron Mock, who has tremendous investment experience under his belt, hired someone with this experience tells me he wanted a veteran who is able to navigate what increasingly looks like a very difficult investment landscape. Ron also wanted someone who will command the same respect Neil Petroff had and someone who offers fresh eyes and views to the way Teachers' invests across public and private markets.

Graven Larsen will now be responsible for a great investment team which includes Jane Rowe, John Sullivan, Michael Wissell, Wayne Kozun, Ken Manget, and Lee Sienna, just to name a few.

There is no doubt in my mind that Graven Larsen will be another great CIO for Ontario Teachers' during what will be a very difficult period marked by global deflation and lower returns.

When I met Kevin Uebelein, AIMCo’s chief executive officer, here in Montreal in late November, he asked me my thoughts on separating the CEO and CIO function at public pension funds. He appointed Dale MacMaster as the chief investment officer responsible for private and public investments.

I told him flat out: "I don't care if it's Ron Mock, Mark Wiseman, Leo de Bever, Gordon Fyfe or you, I do not think any CEO of a major Canadian pension fund can successfully carry both CEO and CIO hats. And if you're going to hire a CIO, make sure he or she is responsible for both private and public markets."

Michael Sabia at the Caisse who has the least investment experience hired Roland Lescure as CIO but the latter is only in charge of public markets. Neil Petroff once told me on the phone that to be an effective CIO, you need to allocate risk across public and private markets and he was absolutely right.

I know people have different views on this matter. Gordon Fyfe once told me he likes being CEO and CIO but as I explained to him during our breakfast right before I was wrongfully dismissed from PSP in October 2006, "it's stupid and leaves you exposed to all sorts of risks you have no idea of" (boy, that was an understatement).

Let me be crystal clear. I can't take any CEO of any major public pension fund seriously if they don't appoint an experienced CIO who can oversee and allocate risk across public and private markets. I think it's highly irresponsible not to do so.

Again, Ron Mock has more direct investment experience than all other CEOs at Canada's Top Ten (apart from Jim Keohane who is equally investment savvy) and he still chose to find an exceptionally talented CIO to help him manage investment risks. That speaks volumes to Ron's judgment and lack of investment ego.

I'm sure Gordon Fyfe is reading this and saying "everything worked well at PSP without a CIO" in charge of public and private markets. He is wrong, he was always wrong on this front. Period.

But let me not be too critical of Gordon, after all, I hear PSP is a total mess now after the departure of Bruno Guilmette, the head of Infrastructure and Jim Pittman, a senior VP of Private Equity. Neil Cunningham is still there as the head of Real Estate and Daniel Garant is CIO (of what exactly? public markets??) but the senior managers Gordon put in place have been forced out or are leaving on their own.

My sources tell me the culture at PSP is going from bad to terrible with a lot of infighting between and within investment teams and no real direction on where they're heading. You can criticize Gordon Fyfe on many fronts, and God knows I have done so on my blog, but at least he kept cohesion in his senior ranks and kept a balance between anglophones and francophones (even if it was a boys club full of egos).

I don't know what exactly André Bourbonnais is trying to accomplish but I suggest he takes me up on my lunch invitation and I will give it to him straight (have nothing to lose!). He needs to do a hell of a lot more to improve the culture at PSP and this means getting rid of some cockroaches at that place who are nothing more than backstabbing egomaniacs. I can say the same thing to Michael Sabia over at the Caisse. He too needs to shake things up in the senior ranks (and I'm not referring to Roland Lescure).

When I hear stories at all of Canada's Top Ten on some power-hungry weasels backstabbing people, it makes my blood boil, especially since it's typically these idiots that are responsible for poor performance and god awful culture at these big shops.

As far as Ontario Teachers', I'm sure it has its share of backstabbing egomaniacs but that shit won't fly with a guy like Ron Mock at the helm. And I doubt it will with a veteran outsider from Denmark like Bjarne Graven Larsen who is serious and focused on risk-adjusted returns.

The first article above states Teachers’ senior investment leadership team was recently restructured “to reflect the evolving global pension investment environment.” I have no details if this means some people were let go for poor performance or other reasons but knowing Ron, you better be focused on your job and be a team player or you're out. It's that simple.

Below, an older (2009) interview with Bjarne Graven Larsen discussing ATP's great results when he was CIO there. You can also view this interview here. He sounds like a very smart, soft spoken man. Listen to his comments carefully as I think he will bring the same "boring and steady" philosophy to OTPP where he will use derivatives and other investments to properly match assets with liabilities. 

Bjarne Graven Larsen ATP from IPE on Vimeo.

Anna Kitanaka and Shigeki Nozawa of Bloomberg report, Japan's GPIF Debates 3% Stock Cap in Push for In-House Investing (h/t: Pension360):

The world’s biggest pension fund signaled a willingness to cap direct holdings at 3 percent of a company’s stock as it seeks freedom to invest in equities itself rather than hiring asset managers.

Japan’s $1.2 trillion Government Pension Investment Fund currently tells external fund managers to hold less than 5 percent of a company, Hiromichi Mizuno, chief investment officer for the fund, said at a health ministry pension panel on Tuesday. Should GPIF begin direct investments in stocks, a 3 percent limit on holdings of each company should be considered, Mizuno said, without explaining why.

The fund has undergone unprecedented changes since 2013, paring its bond allocation to make way for more equities and a foray into alternative investments. GPIF’s overseers at Japan’s health ministry now want to improve the fund’s governance by creating a board of directors, and are debating whether laws should be changed to allow the fund to invest in stocks directly.

“I’m frequently meeting the CIOs of global pension funds, and when I tell them that most of our investments are outsourced and that only some passive domestic bond investments are in-house, they look amazed, and I’m sick of seeing it,” Mizuno said. “From a global standpoint, GPIF’s investment is behind the curve.”

The government panel is likely to meet about three more times to discuss changes to the law determining what GPIF assets can buy directly. The fund’s own staff managed 867.3 billion yen ($7.4 billion) of active domestic bond investments and 31.4 trillion yen in passive Japanese debt holdings at the end of March.

Debate, Law

When the panel met earlier this month, the health ministry proposed establishing a 10-person committee as it moves closer to completing the long-awaited governance revamp. If the panel agree GPIF should begin in-house stock investments, the health ministry will draft a bill along with the governance proposal and submit it to the Diet, which runs through mid-June.

By investing directly in equities, GPIF would gain access to more market information and reduce the fees it pays external managers, according to Mizuno. Under the current law, the fund is also unable to invest in derivatives to hedge investments, and this should also be reviewed, he said.

GPIF’s average annual payout in fees to domestic stock managers over the past three years was about 6 billion yen, it said.

Hiromichi Mizuno is obviously a bright guy who is responsible for a mammoth, political and arcane global pension giant that desperately needs to revamp its governance, investment policy and the way it invests in public and private markets.

I recently covered why Japan's pension whale got harpooned in Q3 2015 as global stocks sold off and how it's looking to diversify into infrastructure. Mizuno has his work cut out for him and I suggest he takes a trip to Toronto to meet up with Ontario Teachers' new CIO, Bjarne Graven Larsen, to discuss his investment strategy and the approach he wants to take.

And I don't blame Mizuno for being sick of outsourcing investments and think it makes absolutely no sense whatsoever to pay fees for things that can easily be done in-house at a fraction of the cost. Canada's large pension funds figured this out a long time ago and now they manage a huge portion of their assets in-house (some more than others).

What other advice do I have for Mr. Mizuno? Beware of hedge funds and private equity funds looking for a nice handout from GPIF so they can gather ever more assets and charge you huge fees. If you decide to invest in hedge funds or private equity funds, make sure you get the right alignment of interests and use your giant size to squeeze them hard on fees.

Trust me, they will bend over backwards for you but before you invest in external managers, make sure you think very carefully of what you want to outsource and what you want to bring in-house.

But I have to tell you,  I got very nervous when I read a Bloomberg article from last October, World's Biggest Pension Fund Is Moving Into Junk and Emerging Bonds. Apart from the terrible timing, GPIF is going to be doling out huge fees to these external active and passive bond investors, many of which will underperform in this environment, and those fees can be used to hire people to manage these investments in-house (at a fraction of the cost).

The problem for GPIF is it's too big, too slow and too political. External managers around the world are all salivating at the prospect of milking it dry. It desperately needs to reform its governance which it's finally slowly doing.

Another problem for Mr. Mizuno is my Outlook 2016 on the global deflation tsunami. I suggest he and everyone else paying huge fees to external managers read it very carefully. I don't envy any CIO at a large pension or sovereign wealth fund in this environment but if Mr. Mizuno is looking for help, I can provide him with four or five names of people in Canada with great experience that can help him structure his investment approach so he can better weather the storm ahead (just contact me at LKolivakis@gmail.com).

Below, Jonathan Beinner, the chief investment officer at Goldman Sachs Asset Management, thinks things are getting "too pessimistic" out there and this market is set for a 2016 bounce. Given the ferocity of the downside moves in oil, stocks and high yield bonds early in the year, I think he's right, we should see a nice bounce in the short term but longer term, deflation will continue ravaging these markets and I wouldn't bet on the Fed hiking rates four times this year.