Canada Pension Plan Investment Board, which manages the assets of the C$287.3 billion ($217.4 billion) Canada Pension Plan, Ottawa, signed a memorandum of understanding with the National Development and Reform Commission of the People’s Republic of China to offer its expertise to the country on a variety of issues, a CPPIB news release said Thursday.

The memorandum of understanding includes the CPPIB assisting China’s policymakers “as they address the challenges of China’s aging population, including pension reform and the promotion of investment in the domestic senior care industry from global investors,” the news release said.

“As we continue to deploy capital in important growth markets like China for the benefit of CPP contributors and beneficiaries, there is significant value for a long-term investor like CPPIB in sharing information, experience and successful practices with policymakers as they work toward improving policy frameworks,” said Mark Machin, CPPIB’ president and CEO, in the news release. “We are (honored) to have the opportunity to share our perspective and expertise with Chinese policymakers to tackle the issues of providing for an aging population.”

CPPIB will offer joint training, workshops and pension reform research as well, the news release said.

The memorandum was signed Thursday as part of bilateral agreements between China and Canada. In January, the CPPIB was designated by the China Securities Regulatory Commission for renminbi qualified foreign institutional investor status, granting it broad access to China’s capital markets.

No surprise. This is now a political issue. It is about fighting for the poor rather than protecting the wealth generated by the influx of Chinese. The government has now started the snowball and it will be difficult to reverse.

Very shortsighted thinking. There were many ways to tackle the problem which could have accomplished both objectives (protect wealth and restore some balance to the market). It would have taken longer and been less dramatic.

Everyone outside of Vancouver assumes that this is simply a demand-side issue and that by curbing "Chinese" demand, the problem will go away.  It won't. It will certainly cause a temporary haircut at the upper end of the market but even after a 50% haircut, the average Joe will not have the means to buy property.

The only way to solve this is to create supply and to do this, the government needs to release land from the agricultural land reserve for development of affordable single family housing.  They have done it before (in White Rock).

They also need to allow construction up and over the mountains on the North Shore. Yes this means cutting down trees and laying havoc to the landscape but there really is not a lot of choice here.

What they are doing now is basically driving away the Chinese and their investment dollars. When you look at the BC economy, they really can not afford to do this.

This month, ICICI Venture Funds came up with a new investment platform to acquire conventional power assets. The fund comes at a time when capital goods maker Bharat Heavy Electricals (BHEL) is seeing 45 per cent of its Rs 1.1-lakh core order book face the challenge of stalled or slow moving projects. A large number of this are stuck due to financial constraints that ICICI Venture’s power platform plans to benefit from. Prashant Purker, managing director and CEO of ICICI Venture Funds, spoke to Abhineet Kumar on his plans for that. Edited excerpts:

What is the worth of assets you are targeting to acquire with your $850-million power platform?

We’re targeting to acquire $3-3.5 billion worth of (enterprise value) assets in the conventional power segment across thermal, hydel (hydro electric) and transmission businesses.

Clearly, there are a lot of power assets just getting completed or stuck in the last mile of completion with over leveraged situations at company or sponsor level. They need someone who can buy the assets out, inject equity to complete the project and have the capability to operate these assets on a long-term basis. This platform provides that — Tata Power bring operating capabilities and ICICI Venture provide fund management service as sponsors for the fund.

In return, these assets benefit those investors who need long-term yields. This is ideal for our investors such as Canadian pension fund CDPQ (Caisse de depot et placement du Quebec) as well as sovereign funds Kuwait Investment Authority and State General Reserve Fund of Oman.

As a funds-house, what is your strategy for platforms? Can we expect more such platforms to come in the future?

In 2014, we collaborated with Apollo Global Management to raise first special situation funds for India. We raised $825 million under our joint venture AION Capital Partners. Unlike funds, platforms are dedicated to some sort of investments where assets can be aggregated. Our strategy is to identify situations or opportunities in the market that require certain things to be brought together and then bring it with whatever it takes.

With the pedigree and group linkage, ICICI Venture is in a unique position to achieve this. Among domestic institutions, it is the only one which is truly multi-practice with four investment teams across private equity (PE), real estate, special situation and power assets. Across these four, we have $4.15 billion assets under management and it does not include the fund we raised in the venture capital era. Today, we have the largest dry powder of $1.5 billion across these funds.

It has come with our ability to spot opportunity earlier, and bring together whatever it takes. We will continue to look for new platform opportunities.

What is the update on your PE and real estate funds?

For real estate, we’ve total assets under management of $625 million with two funds fully invested. Now we plan to raise our third fund and have applied to the regulator for approval.

For PE, we are in the process of raising our fourth fund and have concluded interim closing as well as the first two investments. We have also started investing from our fourth fund with a couple of investments — Anthea Aromatics and Star Health Insurance — already made. Our PE fund will remain sector-agnostic and look for growth capital investment opportunities coming from rising consumption. In terms of exits, we have returned nearly half of our third fund to investors from various exits with Teamlease being the latest one where we used the IPO (initial public offering) route. Exit from the rest of the investee companies from the third fund is in the process of using multiple routes of IPOs, secondary sale, or strategic sell-off.

What is the sense you get on limited partners' view for investments in India as you raise your fourth PE fund?

Limited partners are today happier with exits position than they were a couple of years ago. Obviously, markets can’t just keep absorbing the capital; it has to return. With IPO markets opening up and given the increasing number of secondary deals, the sentiment for investments has improved. We are also seeing larger traction for strategic buy-outs as Indian promoters are fine with giving up controls. Is it that people are hundred per cent convinced to come to India - we are not in that position. People are looking for quality managers. Many funds would not be able to raise money as investors now want to gravitate to a few who have delivered returns and have a track record to show.

As disruption affects businesses across industries, how prepared are your investee companies to face it?

Today, every company has to be on its toes to look at technology – be it health-care or banking. At every company’s board, directors with grey hair are asking about social media presence and how customers are being acquired. So, technological disruption has become truly mainstream.

It is an ongoing process, and they are today definitely more prepared than they were two years back.

Canada's third-largest public pension plan has halved the number of computer-driven hedge funds in its investment portfolio and put more money into the funds its sticking with, sources with knowledge of the matter told Reuters.

The Ontario Teachers' Pension Plan this summer pulled cash from 10 of the 20 hedge funds in its portfolio which use computer algorithms to choose when to buy and sell, two of the sources said.

Ontario Teachers' allocates $11.4 billion to hedge funds, making it the fourth-largest North American investor in the industry, data from research house Preqin showed.

Hedge funds worldwide are under increasing pressure in the wake of poor or flat returns as well as investors' efforts to cut costs. Data from industry tracker Eurekahedge showed that investors have pulled money from hedge funds globally every month in the four months to end-August.

One of the hedge funds that received more funds from the Ontario Teachers' Pension Plan said it had told them it was looking for funds which offered a different strategy from other funds.

"They expressed that a lot of strategies today you can mimic with a few exchange-traded funds or create synthetic products and there is no reason to pay management or performance fees," the source said.

Another hedge fund which the Canada fund dropped said the pension scheme had said it wanted to avoid funds invested in similar underlying assets.

Some of the computer-driven hedge funds the Ontario Teachers' pulled money from followed market trends, such as Paris-based KeyQuant, which has more than $200 million in assets under management, according to its website.

The Ontario scheme also withdrew $65 million in June from trend-follower Cardwell Investment Technologies, a move which ultimately led to it shutting its doors this summer, one of the sources said.

Those funds to receive a boost offered a more specialist set of skills, such as London-based computer-driven currency hedge fund Sequoia Capital Fund Management, in which the pension fund doubled its investment, a second source said.

• Underperformance: Maybe these particular hedge funds were underperfoming their peers or not delivering the return objectives that was asked of them.
• Strategy/ portfolio shift:Unlike other investors, maybe the folks running external hedge funds at Teachers think the glory days of computer-run hedge funds are over, especially if volatility picks up in the months ahead (read this older comment of mine). Maybe they see value in other hedge fund strategies going forward and want to focus their attention there. Teachers has a very experienced hedge fund group and they are very active in allocating and redeeming from external hedge funds.
• Internalization of absolute return strategies: Many popular hedge fund strategies can be easily replicated internally at a fraction of the cost of farming them out to external hedge funds, foregoing big fees and potential operational risk (I used to work with a very bright guy called Derek Hulley who is now a Director of Data Science at Sun Life who developed such replication strategies for his former employer and since he traded futures, he had intimate and detailed knowledge of each contract when he programmed these strategies, which gave his replication platform a huge advantage over other more generic ones.)
• Cut in the overall allocation to hedge funds: Let's face it, it's been a hellish few years for hedge funds and all active managers. If you're a big pension or sovereign wealth fund investing billions, do you really want to waste your time trying to find hedge funds or active managers that might outperform or "add alpha" or are you better off directly investing billions in private equity, real estate and infrastructure over the long run? 

It usually takes a financial crisis of the magnitude witnessed in 2008 for glitches within an economic system to come to light.

It has been widely known and reported that private equity dealmakers could at times be ruthless when dealing with their portfolio companies’ management, employees and lenders. But at least these PE fund managers (general partners or GPs) were treating one party with all the respect it deserved. Their institutional investors (the limited partners or LPs) could feel appeased in the belief that the managers’ interests were aligned with their own. According to a report recently issued by research firm Preqin and entitled Investor Outlook: Alternative Assets, H2 2016, 63% of PE investors agree or strongly agree that LP and GP interests are properly aligned.

One of the most prevalent urban legends perpetuated by GPs and their PR machine is that their actions are vindicated by their sole concern to serve their investors’ interests. After all, given the 2% of annual management commissions limited partners pay to cover the GP executives’ salaries and bonuses, this argument of perfect alignment seems to make sense. But it is emphatically not the case.

Let’s review some of the many tricks that financial sponsors use to serve their own interests rather than (often to the detriment of) their LPs’. Note that the following is not meant to be an exhaustive list; just a few pointers that some LPs have come across in the past.

First, just to remind the reader, quick exits and dividend recapitalizations have one key advantage: they boost the internal rate of return (IRR), the key performance yardstick in private equity. You might think that it is a good thing for LPs, since it delivers strong performance. But actually, it is not always ideal. Upon receiving their money back, LPs then need to find a new home for the capital that has been returned to them earlier than expected.

Let me expound. What institutional investors like pension funds and university endowment departments aim to do when they commit capital to the PE sector is to yield a higher return on their money than if it was allocated to lower-risk securities. But another crucial decision criteria is to put money to work for several years (typically 6 to 10 years).

When I state ‘higher return’, there are two ways to look at it: either through the IRR or via a money multiple. The difference is that an IRR is expressed as a percentage whereas cash-on-cash return is shown as a multiple of the original investment. And the difference matters enormously.

If a GP exits after two years (via a quick flip), a 1.5-times return yields a 22.5% IRR. It is massively above the hurdle rate (usually 8%, although many larger GPs do not bother with offering any preferred return to their LPs, or they offer a lower rate). So this 22.5% yield would enable the GP to look forward to carried-interest distribution (assuming of course that the rest of the portfolio does not contain too many underperforming assets and that there is no clawback clause in the LP agreement).

But a similar 1.5-times return after six years only yields an internal rate of return of 7%, which is below the standard hurdle rate, so it will not give right to carry for the GP since it did not give LPs an adequate return for the risk they were exposed to. A six-year holding period represents a higher-risk investment for a GP. Yet, an LP would receive 1.5 times its original capital and would still be satisfied, especially if that capital had delivered lower returns in a low-coupon bond environment like the one witnessed since 2009.

Because GPs know that the time value of money affects the likelihood of their investment performance falling below the hurdle rate, they have every incentive to partially or fully realise (that is, exit) their investment as quickly as possible. Quick flips are therefore preferable to GPs, even if the LP wished to see its capital remain deployed in order to accrue further value. GPs do not care if LPs then struggle to find a new home for the capital returned too early. All a GP cares about is whether its strategy will deliver carried interest, which is why quick flips and dividend recaps are so prevalent. The time value of money explains why GPs do not always serve their LPs’ interests.

Conversely, at times GPs prefer to hold on to investee companies longer than warranted, even when they receive approaches from interested bidders. In some instances fund managers can make more money from the annual fees they charge their LPs than by selling an asset. Imagine that a portfolio company is given a value by third parties that would grant an IRR of less than 8%. It might be totally acceptable to the LP, but because it falls below the hurdle rate, it will not enable the financial sponsor to receive carry. However, if the latter retains the company in portfolio, it will continue to charge annual management fees (of 1% to 2%) on the LPs’ capital invested in that company. You understand now why some LBOs turn into long-term corporate zombies or end up spending a while in bankruptcy. As long as their financial sponsors retain ownership of the companies, they keep charging management commissions to their LPs, but as soon as control is transferred to the creditors, fees stop coming in because the investment is deemed ‘realised’.

This strategy, as old as the industry itself, was adopted by very many GPs in the years following the Credit Crunch; especially GPs who failed to raise a follow-on fund. These PE managers (themselves becoming zombie funds) simply decided to milk the assets the only way advantageous to them, even if it meant extending the life of the fund beyond the typical 10-year period. For the LPs, realising the portfolio would have been clearly preferable in order to reallocate the recovered capital to higher-yielding opportunities. But they had few means to force their fund managers to comply (since they had already refused in most cases to up their commitment in a subsequent vintage). For the GPs, charging these fees enabled the senior managers to make millions in annual bonuses for several more years without having to sell the assets.

There is more. Consider the following practice, which most GPs are guilty of. When a fund is relatively recent (say, less than five years old since its original closing), it contains a fair share of unrealised assets in its portfolio. By this I mean that a lot of acquired companies are still held in portfolio. The implication is that, when valuing the unrealised portion of the portfolio at the end of each quarter, the GP managers need to use estimates. There is a guideline issued by national trade associations to define these estimates, but there is quite a bit of wiggle room here. What prevents a GP from taking out ‘outliers’ that do not show a pretty enough comparable multiple? Many GPs tend to be quite carefree (who wouldn’t be when doing his/her own self-assessment?) by mostly using comparable multiples that grant a high valuation (and therefore a high unrealised IRR) to the portfolio.

Why do GPs bother acting that way? For several reasons, but here is the key one: imagine that the GP wants to raise a subsequent vintage to its current fund. Its existing LPs will certainly be more interested in taking part in the new vehicle if they see a high IRR (even if unrealised) as a likely outcome of the current fund. You might argue that LPs are not that gullible and will not commit further capital unless a significant portion of the portfolio has been exited and has shown good results. Yet in 2008 several funds were raised even though the 2005/06 vintages had not been fully utilised, let alone materially realised. We know what happened to these 2005/06 funds. Their performance was far from stellar.

Recent years have seen a vast number of GPs raise new vintages even though their previous funds had seen no or very few portfolio realisations. North American energy specialist investor Riverstone launched a fresh fundraise in 2014 only one year after closing its previous vehicle (Riverstone Global Energy and Power Fund V) and before having exited any investment from that vintage. Admittedly, the fundraising process lasted more than two years. This month, tech specialist Thoma Bravo closed its latest fundraise at $7.6 billion, exceeding its $7.2 billion hard cap even though it was set at practically twice the size of the $3.65 billion fund raised in 2014. British outfit Cinven raised its sixth vintage in the first half of 2016 - after just four months on the road - when it had only divested one company (out of 15 portfolio companies) from its fifth fund of 2013. Cinven VI was reportedly twice oversubscribed. French mid-market firm Astorg had exited none of the seven companies acquired out of its fund V (raised in 2011) before reaching the hard cap of its fund VI in June 2016. Similarly, Australian shop Quadrant raised its fifth fund in August 2016 (on its first close) only two years after raising the previous vehicle. Quadrant PE No4 had exited none of its five investments. All these GPs had to use interim IRRs in order to raise fresh vintages despite the lack of meaningful exit activity from their previous vehicles. Time will tell whether the reported unrealised IRRs were realistic, but LPs do not seem too bothered by the very high-risk profile of immature vintages.

There is another reason why, traditionally, GPs artificially inflated their unrealised IRRs. In the early days of the sector’s history, PE managers used to be able to raise funds without granting LPs any right to the aforementioned clawback. Clawbacks are ways for institutional investors to recoup previously distributed carry if the GP manager’s performance at the end of the life of the fund falls below the hurdle rate. Nowadays, the vast majority of PE funds’ agreements include a clawback clause, but years ago it wasn’t always so, which explains why GPs tended to ‘tweak’ IRR calculations to their advantage and distribute themselves carried interest on the basis of high unrealised returns. Why not do it if you can get away with it.

Anyone telling you that GPs only care about maximising returns is just a scandalmonger. In truth, GPs care even more about charging fees, primarily because two-thirds of GPs never even perform well enough to receive any carried interest. Thus, I cannot possibly draw a list of LP/GP interest misalignment without raising the issue that has made front-page news (at least in the specialised press) in the years following the financial crisis.

The debate that has been taking place around management and monitoring fees and the double-charging by GP managers is not new, but it looks like even the foremost LPs committing billions of dollars to the sector failed to keep track of how much they were being charged annually by their GPs. Perhaps this is why, according to the aforementioned Preqin report, two-thirds of investors consider that management fees remain the key area for improvement and more than half of respondents are asking for more transparency and for changes in the way performance fees are charged.

In 2015, high flyers KKR and Blackstone were fined by the Securities and Exchange Commission $30 million and $39 million respectively for, allegedly, failing to act in the interest of their LPs in relation to deal expenses and fee allocation. Similarly, following another S.E.C. investigation, in August of this year their peer Apollo was slapped with a $53 million fine for misleading investors on fees. The issue of fee transparency and conflicts of interest is unlikely to be restricted to the mega segment of the industry. So there might be more bad news to come if the regulators choose to pursue the matter further.

Again the foregoing list is not meant to be exhaustive, but it serves to demonstrate that the alignment of interests between private equity GPs and LPs is kind of a myth. It took a financial crisis to remind everyone of this evidence, though based on Preqin’s research, not all investors seem aware of it.

Deutsche Bank finds itself in the center of a panic, and some analysts are pointing fingers at U.S. regulators.

Germany's biggest bank fell under fresh scrutiny beginning on Sept. 16 when it surfaced that the U.S. Department of Justice was demanding it pay a $14 billion fine for its mortgage lending activities during the housing bubble. Shares of Germany's biggest bank plunged on Thursday on reports that a handful of its big hedge fund clients were limiting their exposure to Deutsche Bank, though the bank has characterized those media reports as "unjustified concerns."

Certainly, the Justice Department is not the only organization scrutinizing Deutsche Bank: The IMF released a report this summer stating that that Deutsche Bank poses a greater risk to the global financial system than any other bank in the world.

But the size of that Justice Department fine has many analysts talking.

"We see little practical or political upside for the Justice Department to press Deutsche Bank for a penalty that is so large that it could destabilize the bank and provoke a new financial crisis," Jaret Seiberg, managing director at Cowen, said in a Thursday note. Like many analysts, he said he expects the final settlement to be negotiated to a lower price.

The Department of Justice declined to comment to CNBC, as did Deutsche Bank.

Some market participants worry that Deutsche Bank can't pay the billions in fines without some help from the German government or the European Central Bank. As of June 30, the bank had 5.5 billion euros ($6.17 billion) in litigation reserves.

"Certainly this appears to be severe. The size of the fine is severe. It may be intended to be severe. It may in fact prove to be devastating, and I wonder if the regulators thought that through," said Michael Farr, CEO and founder of financial consulting firm Farr, Miller & Washington.

He said he does not think a failure of Deutsche Bank would cause a banking crisis. "I think it really depends on how nervous investors get," he said, adding that a possible outcome for the bank could be a merger with another bank.

A plunge in Deutsche Bank's shares to record lows in New York trade Thursday temporarily left the financial institution with a market value of less than $17 billion, though the stock rebounded sharply on Friday.

Size of US bank settlements compared with issuance of mortgage-backed securities

Indications of diminishing confidence in the firm picked up this week. Selling began Monday following a weekend report that German Chancellor Angela Merkel ruled out state aid for her country's largest lender and any interference in the Justice Department investigation, according to a Reuters translation.

One of the messages the German chancellor may have wanted to send was to tell the United States, "if you take down Deutsche Bank, it's going to affect you as much as it did us," said George Friedman, chairman of Geopolitical Futures, an online publication that forecasts global events.

The last few days have seen various statements in which German authorities and Deutsche Bank representatives, including CEO John Cryan, have repeatedly said there is no need for government support.

The Department of Justice has been relatively quiet in contrast. Principal Deputy Associate Attorney General Bill Baer said at a conference Tuesday how banks generally could receive credit for their cooperation with investigations into residential mortgage-backed securities. And rather than make an official government announcement, The Wall Street Journal was the first to report two weeks ago that the Justice Department had proposed the $14 billion settlement. Deutsche Bank then confirmed the news in a press release.

"My guess is the U.S. regulators would (have) called it off if you thought it would really damage Deutsche Bank," said Maris Ogg, president at Tower Bridge Advisors. "You've got to worry about, certainly the U.S. regulators are not going to bring a bank down that's going to jeopardize the system."

Foreign bank, bigger fine?

Even if the fine is eventually negotiated lower, some speculate one of the reasons for the huge starting figure from the Department of Justice is the fact that Deutsche Bank is a European bank rather than an American one.

The DOJ "ran into a political green light because there was action to punish," David Bahnsen, chief investment officer of HighTower's The Bahnsen Group, said in an email. And since Deutsche Bank is a "non-U.S. bank they could take a shot at it."

Deutsche Bank would be the first European bank to settle on residential mortgage-backed securities with the DOJ. Others on the radar include Barclays, Credit Suisse, Royal Bank of Scotland and UBS.

On Friday, the Financial Times reported, citing sources, that the U.S. Department of Justice hopes to combine cases against Barclays, Credit Suisse and Deutsche Bank into a multibillion dollar settlement. All four parties declined to comment to the newspaper.

Looking at the relative volume of mortgage-backed securities issued by U.S. banks during 2005 and the actual fines they paid, Goldman Sachs analysts in a Wednesday note estimated Deutsche Bank will likely face a settlement in the range of $2.8 billion to $8.1 billion.

'Individuals commit crimes'

Certainly, prominent critics both within and outside government, as well as the U.S. public at large, have repeatedly said that big banks in general have not paid a dear enough price for the role they played in triggering the Great Recession.

Bartlett Naylor, a shareholder activist and a member of financial watchdog group Public Citizen, said the U.S. regulators should go after the individuals who misrepresented mortgage-backed securities rather than the entire bank.

"We're looking for individuals, because individuals commit crimes, not shareholders," he said. He's owned shares of Deutsche Bank for at least five years.

Reporting on those individuals is one of a bank's steps towards receiving cooperation credit, the Justice Department's Baer said in his speech.

Helping Canadians achieve a safe, secure and dignified retirement is a core element of the Government of Canada’s plan to help the middle class and those working hard to join it. The Canada Pension Plan (CPP) enhancement agreed to by Canada’s governments on June 20, 2016 will give Canadians a more generous public pension system, which will support the conditions for long-term economic growth in Canada.

Minister of Finance Bill Morneau today tabled in Parliament the 27th Actuarial Report on the Canada Pension Plan. The Report concludes that the existing CPP is on a sustainable financial footing at its current contribution rate of 9.9 per cent for at least the next 75 years. CPP legislation requires that an actuarial report be prepared every three years to support federal and provincial finance ministers in conducting financial state reviews of the CPP as joint stewards of the Plan.

The CPP enhancement will build on this strong record of financial management: The Chief Actuary will conduct an actuarial assessment of the enhancement once legislation implementing the enhancement is introduced in Parliament.

“The CPP enhancement agreement that Canada’s governments reached in June means that Canadian retirees will enjoy a more secure retirement and a better quality of life. This Actuarial Report confirms that the agreement will build on a rock solid financial foundation. I would like to thank Chief Actuary Jean-Claude Ménard and his Office on behalf of Canadians for their hard work and dedication, and look forward to their continued efforts in helping to ensure that Canadians can count on a stronger CPP well into the future.”

If you're open to topics for your blog, the Chief Actuary of Canada's report was tabled by the Minister of Finance yesterday - looking into the sustainability of the CPP. This only happens once every three years. It is a deep dive into the program. It is a big deal and no one really places enough attention to it, remarkably.

In any event, it is astounding to see that, since the last report (2012), investment income (CPPIB) is nearly 250% above what the Chief Actuary had projected three years ago. The report indicates that this allows a lower minimum contribution rate. For those detractors of active management - this slams the misguided view that it is mere experiment.

• Despite the projected substantial increase in benefits paid as a result of an aging population, the Plan is expected to be able to meet its obligations throughout the projection period.
• With the legislated contribution rate of 9.9%, contributions are projected to be more than sufficient to cover the expenditures over the period 2016 to 2020. Thereafter, a portion of investment income is required to make up the difference between contributions and expenditures.
• Total assets are expected to grow from $285 billion at the end of 2015 to $476 billion by the end of 2025.
• The average annual real rate of return on the Plan’s assets over the 75-year projection period 2016 to 2090 is expected to be 3.9%.
• The minimum contribution rate required to finance the Plan over the long term under this report is 9.79%, compared to 9.84% as determined for the 26th CPP Actuarial Report.
• Investment income was 248% higher than anticipated due to the strong investment performance over the period. As a result, the change in assets was $70 billion or 175% higher than expected over the period. The resulting assets as at 31 December 2015 are 33% higher than projected under the 26th CPP Actuarial Report.

• Strong investment performance obviously matters for any pension plan. The stronger the investment performance, the better the health of the plan as long as liabilities aren't soaring faster than assets, and this this translates into less volatility for the contribution rate (ie., less contribution risk).
• Unlike HOOPP or OTPP, however, the Canada Pension Plan is not a fully-funded plan (it is partially funded) and assets are growing very fast, which effectively means the managers at CPPIB can use comparative advantages over most other pensions to take a really long view and invest in highly scalable investments across public and private markets.
• I think it's critically important that Canadians realize these advantages and why it sets CPPIB apart not only from other (more mature) pensions but more importantly, from long only active managers, hedge funds, and even private equity funds, all of which are struggling to deliver the returns pensions need. 
• In particular, the crisis in long only active management is a testament to why the CPPIB is so important to the long-term health of the Canada Pension Plan and more importantly, why large, well-governed defined-benefit plans are far superior to defined-contribution plans or registered retirement and savings plans. 
• Not only this, the success of the Canada Pension Plan should make our policymakers rethink why we even allow private defined-benefit plans at all and why we don't create a new large public defined-benefit plan that amalgamates the few corporate DB plans remaining in Canada to backstop them properly with the full faith and credit of the Canadian federal government. 

It’s human nature to ignore pension tensions. Until the money runs out.

Full credit to our political leaders for coming together to expand the Canada Pension Plan this summer, recognizing that a looming retirement shortfall requires a long-term remedy.

Their historic CPP deal came just in time, for time is running out on conventional pensions in the private sector.

Long live the CPP. Private pensions are on life support, and fading fast.

If anyone still doubts the need for concerted action, or ignored the high stakes negotiations over the summer, here are two bracing wake-up calls from just the past week:

First, unionized autoworkers at GM made an unprecedented concession to relinquish full pensions (which pay a defined benefit upon retirement) for newly hired employees. The agreement, ratified by Unifor members over the weekend, marks the end of an era in retirement security.

Like virtually all other private-sector workers, new hires at car factories will be given a glorified RRSP savings account. These so-called “defined contribution” plans (I prefer not to call them pensions) get matching employer contributions but remain at the mercy of the stock market for decades to come, without the security of annuitized payments upon retirement.

It’s hard to fault Unifor for throwing in the towel after long insisting on pension parity among all workers. They were among the last major private-sector unionists to cling to full-fledged pensions that have been phased out across North America.

Why continue to burden your own employer with legacy pension costs that disadvantage them against competitors? For example, Air Canada has faced major pension liabilities in recent years, while upstart start-up airlines like Porter were free from such legacy costs and financial risks because their newly hired workers weren’t getting “defined benefit” (DB) plans backstopped by the company.

A second development last week tells the story of our pension peril from a different angle: While autoworkers were surrendering full pensions for new hires, steelworkers were fighting to rescue and reclaim their full defined benefit pensions.

But the way in which their pensions are being salvaged portends a losing battle. When U.S. Steel Canada filed for creditor protection, after taking over Stelco’s assets, it revealed a pension shortfall of more than $800 million. Upon insolvency, that liability would land in the lap of the province’s little-known Pension Benefits Guarantee Fund.

It has always been something of a Potemkin pension fund, with little to prop up its facade of protection. Like an undercapitalized bank, the pension fund could not withstand a run on its assets if too many private pensions failed — requiring replenishment by the provincial government and all other employers in the province.

That’s why Queen’s Park has long been loath to see a big bankruptcy deplete the fund. Behind the scenes, it recruited former TD Bank CEO Ed Clark to find a way to rehabilitate what remains of the old Stelco operations so that those pension liabilities could somehow be avoided.

After drawn-out court hearings and closed-door negotiations, a New York investment firm signed a deal last week with the provincial government to invest hundreds of millions of dollars to save 2,500 jobs — and prop up those pensions a little longer. The United Steelworkers union, which had been deeply skeptical of previous bidders, likes this proposal because it provides a pension infusion.

While that may sound like good news for pensioners and workers, it is surely just a stop-gap — neither a sure thing for the former Stelco workers, nor a safe bet for the taxpayers who could be on the line if it all unravels.

We don’t know how the story will end. The only certainty is continued uncertainty for private-sector pensions, no matter how much union muscle is brought to bear. Private DB pensions are dying, and our only recourse is a reliable, diversified public DB pension in the form of the CPP.

All the more reason to herald the CPP expansion agreed to this summer after nearly a decade of drawn-out negotiations and foot-dragging by the previous Conservative government in Ottawa. A strong push by Ontario’s Liberal premier, Kathleen Wynne, and national leadership by the new federal Liberal government, helped persuade other premiers to accept a pan-Canadian compromise.

Details of the CPP reform, announced this month, will take years to phase in. In truth, it is a relatively modest and staged increase after a half-century of virtual stasis since the plan’s creation.

It is a promising start. But decades from now, as more private sector plans die off and today’s young people grow older, Canadians will wake up to the need for a more robust round of CPP expansion to pick up the slack.

It’s only human.

Rhode Island’s pension plan has decided to cut its investment in hedge funds by two-thirds, as retirement systems across the US re-evaluate their strategies for generating the returns they need to pay participants.

Over the next two years, the $7.7bn Employees Retirement System of Rhode Island will cut its allocation to hedge funds to 6.5 per cent from the 15 per cent it set in 2011 — joining a growing list of large investors who are dissatisfied by performance and pulling money from the sector.

“This wasn’t something we woke up one day and decided to do — it wasn’t something we did in response to headlines or political pressure,” said Seth Magaziner, general treasurer for the US state.

“We put a lot of work into this, a lot of modelling, a lot of testing and retesting of assumptions, and this was the result that the process led to,” he said: “We came to the conclusion that Rhode Island and many other states have been doing the process backward by starting with an assumed rate of return and trying to hit it.”

Instead, he said, Rhode Island set a risk tolerance “defined by real economic factors” such as the odds that certain costs may spike or that the fund would drop to less than 50 per cent funded. From there, it chose allocations designed to generate the most money possible at that risk level, and, working with the Pension Consulting Alliance, tested its conclusions against “thousands” of scenarios.

Many pension funds adopted alternative investment managers like hedge funds and private equity as high valuations across markets and low interest rates threatened returns from conventional long-only mutual funds. But hedge funds have struggled to generate returns in volatile markets, and their high fees have prompted some investors including the New Jersey and the New York City retirement systems to scrap or reduce their programmes.

Investors have already pulled more than $50bn from hedge funds this year, according to eVestment.

The total assets under management of the hedge fund industry exploded in size from $500bn at the turn of the millennium to almost $3tn by 2015. As assets have grown performance has suffered, with hedge funds as a whole failing to beat the S&P 500 over the past four years.

Rhode Island — which has less than 60 per cent of the assets it needs to pay its liabilities — is turning to passive trend-following strategies and private equity to help it claw back to a level where it can pay out its obligations. It is boosting its allocation to private equity from 7 to 12 per cent, over five years or more, to spread out exposure across different fund years and to avoid being forced to choose managers in a hurry, Mr Magaziner said.

Rhode Island will jettison its equity-focused hedge funds, but keep strategies categorised as “absolute return” with managers who have demonstrated that they are not correlated to the broader markets, and who will generate positive returns, he said.

“We’re going to stay passive when it comes to long public equity,” Mr Magaziner said. “We just didn’t have faith that active management could consistently achieve equity-like returns, so that’s that.”

Eight per cent of the plan has also been dedicated to a new strategy called “crisis offset” or “crisis protection” — long-duration Treasuries and passive momentum or trend-following strategies, assets that historically have made money in downturns.

“This is the part of our portfolio that we think is going to help us control against risk better than the bulk of our hedge funds have,” Mr Magaziner said. “If there really are strategies out there that will achieve positive performance at a time when everything else is dropping, that can be tremendously valuable.”

Yesterday Rhode Island General Treasurer Seth Magaziner announced that the state pension would cut its $1 billion hedge fund investments– made under former Treasurer, now-governor Gina Raimondo– after losing big over the past five years. Neither Raimondo nor Magaziner ever heeded warnings that these high-cost, high-risk investments were inappropriate for the pension. A version of this article was published in GoLocal Prov yesterday.

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Do Rhode Island Governor Gina Raimondo and General Treasurer Seth Magaziner really believe they are smarter than Warren Buffett, considered to be one of the most successful investors in the world?

Of course not.

How could they?

The wreckage related to Raimondo’s failed stint as a small-time venture capitalist is finally out in the open for all Rhode Islanders to see.  The Point Judith II fund she pitched to the Employees Retirement System of Rhode Island (in which the pension risked $5 million) has returned a pathetic -1.1 percent over the past almost ten years—after paying her rich fees of 2.5 percent. If making money off your investors defines success, then Raimondo’s a superstar.

Magaziner, on the other hand, can boast a summer internship at Raimondo’s Point Judith Capital and two years as a portfolio associate, then research analyst at a small money management firm in Boston. Is this 31-year old qualified to manage $7.7 billion in state pension assets? Hardly.

Ignoring Warren Buffett and Other Questions

So why did Raimondo ignore Warren Buffett’s warning that public pensions should not gamble on hedge funds?

(As I advised Rhode Islanders approximately 4 years ago, Buffett made a million-dollar bet at the start of 2008 that a low-cost S&P 500 index fund would beat hedge funds over the next ten years. After eight years, as Buffett gloated at his company’s recent annual meeting in Omaha, the S&P 500 is crushing it. The fund Buffett picked, Vanguard 500 Index Fund Admiral Shares is up 65.67%; the high-cost, high-risk hedge funds are up, on average, a dismal 21.87%.

Also, when asked by a public pension trustee, Buffett advised that public pensions should avoid hedge funds and should prefer index funds.)

Worse still, why has Kid Magaziner stuck with Raimondo’s billion dollar-plus losing hedge fund bet and only yesterday announced plans to dump half the pension’s hedge fund investments for lower-cost, more traditional assets?

Why is it going to take Magaziner two years to exit hedge funds, even now?

The Answer to the Mystery

The answer to this longstanding mystery: Raimondo and Magaziner’s gambling state pension assets in hedge funds has never been about investing or prudent pension practices. It’s always been about politics.

These Rhode Island elected officials blatantly ignored credible warnings (by Buffett and, yes, me) and used $1 billion of public pension assets for their own political objectives. This week Magaziner even boasted that he gave my dire warnings about the dangers of high-cost, high-risk hedge funds “zero consideration.”

(Kid Magaziner should be sat down and told by a grown-up that when pension fiduciaries gamble and lose hundreds of millions of workers retirement savings, it’s probably not smart to admit having ignored the warnings of experts.)

Steering public monies to Wall Street has dramatically increased Rhode Island politicians’ campaign coffers to unprecedented levels. On the other hand, according to the General Treasurer’s office, the pension has lost 10 percent or approximately $100 million a year by investing in hedge funds. Over five years, that amounts to $500 million.

Any “savings” related to cutting workers’ 3 percent Cost of Living Adjustment (COLA) benefits over the past five years have been squandered. So much for Raimondo’s “pension reform” that was supposed to resolve the underfunding crisis. Further benefit cuts, or taxpayer infusions, will be required to restore funding.

The Bottomline

Workers’ benefits were slashed 3 percent to pay massive 4 percent fees to Wall Street hedge fund billionaires (who lost half a billion in workers’ retirement savings)—all in exchange for a measly few million dollars in political contributions. Talk about a deal with the devil. Was this foreseeable, and indeed foreseen, sleight of hand worth it?

Maybe to Raimondo and Magaziner the $500 million price paid by the pension to further their political ambitions is acceptable, but I doubt any state workers or taxpayers would agree.

That’s precisely the question the SEC, FBI (and, for that matter, Rhode Island’s sleepy Attorney General Peter Kilmartin) should be investigating.

[...] we can argue whether we are on the verge of a hedge fund renaissance or whether active managers could be ready to shine again but the point I'm making is most large pensions and sovereign wealth funds are more focused on directly or indirectly investing huge sums in illiquid alternatives and I don't see this trend ending any time soon.

In fact, I see infrastructure gaining steam and fast becoming the most important asset class, taking over even real estate in the future (depending on how governments tackle their infrastructure needs and entice public pensions to invest).

I will end with a point Ron Mock made to me when I went over Teachers' 2015 results. He stressed the importance of diversification and said that while privates kicked in last year, three years ago it was bonds and who knows what will kick in the future.

The point he was making is that a large, well-diversified pension needs to explore all sources of returns, including liquid and illiquid alternatives, as well as good old boring bonds.

And unlike other pensions, Ontario Teachers has developed a sophisticated external hedge fund program which it takes seriously as evidenced by the highly trained team there which covers external hedge funds.

The head of the Canada Pension Plan Investment Board will face lawmakers for the first time in 14 years as Prime Minister Justin Trudeau’s government finalizes a trillion-dollar cash expansion of one of the world’s largest public pension funds.

Mark Machin, who took over as president and CEO of the arm’s-length investment board in June, will speak to the House of Commons finance committee Nov. 1 at its request. His testimony comes as Trudeau prepares to amend the law governing both the Canada Pension Plan and CPPIB, which manages the $287-billion fund, to formalize a deal to expand benefits.

The new plan, rolled out from 2019 to 2025, will leave the fund on pace to reach $2 trillion by 2045 — doubling the value of the original program. Enacting legislation will be made public “shortly,” Finance Minister Bill Morneau said Tuesday after British Columbia signed on to the deal, clearing the way for the government to move forward.

Morneau has said he and his provincial counterparts are still finalizing pension expansion changes and will meet in December. A departmental official said CPP “policy actions” could still be forthcoming as part of a triennial review, while Morneau spokeswoman Annie Donolo ruled out “major changes.” All modifications must be approved by seven provinces representing two-thirds of Canada’s population.

“We need to make sure we get all the details right,” Morneau said Sept. 6. “We see the CPPIB vehicle as a respected and effective vehicle for managing Canada’s pension assets.”

Lower for longer

The Canada Pension Plan is the mandatory workplace retirement savings program for 19 million Canadians. Its expansion will substantially increase the investment board’s portfolio at a time when pension funds are coping with an era of low global interest rates that threaten returns.

Board officials, excluding Machin, met informally with lawmakers earlier this year, according to finance committee chairman Wayne Easter. “We enthusiastically look forward to engaging with members of the House finance committee based on good dialogue held so far,” CPPIB spokesman Michel Leduc said.

Trudeau’s expansion will, in effect, create a two-stream plan managed by the investment board. Government officials refer colloquially to “CPP 1” and “CPP 2,” each distinct from an accounting perspective. The independent new program is considered to be fully funded and therefore will rely more heavily on future returns. Benefits for each generation will “depend on their own contributions and the associated investment returns,” finance department spokesman Jack Aubry said. That leaves fund directors under pressure to deliver.

‘Strong’ performance

The investment board’s track record is solid. It had a net return of 16 per cent on its investments for the calendar year in 2015, and a 7.5 per cent net return on an annualized basis for the past decade, according to a spokesman.

That compares to a 9.1 per cent net return in 2015 at Canada’s second-largest pension fund, Caisse de Depot et Placement du Quebec, according to its website. The Caisse returned about 5.96 per cent on an annualized basis over the past decade. Ontario Teachers’ Pension Plan had a 13 per cent net return in 2015 and an annualized return of 8.2 per cent over the past decade, according to its website.

CPPIB invests in private and public equities, fixed income products and real assets around the globe. Trudeau’s government isn’t considering “using other vehicles” to manage the new cash influx, Donolo said.

The Office of the Chief Actuary, in a report last month, found the fund’s investment income was nearly 250 per cent higher over the past three years than originally expected due to its “strong investment performance.” The investment board has been concentrated on diversifying across asset classes and geographies in an effort to reduce risk, in effect turning its eye away from Canada.

Political autonomy

The investment board is a world-renowned model, according to Michel St-Germain, a vice-chairman at the Association of Canadian Pension Management. “We have managed to create a governance structure that’s very autonomous, independent of political pressure. I’m quite confident that we will be able to maintain this,” he said. “Having said that there is a challenge. There will be a lot of money there.”

Machin, an Englishman who spent years in Asia for Goldman Sachs Group Inc., may shed light on how CPPIB will handle the cash influx. His appointment was announced in May along with the departure of former president and CEO Mark Wiseman to BlackRock Inc. At the urging of lawmakers, Machin’s hearing date was moved up to Nov. 1 from an initial date later in the month. It will be the first finance committee appearance by the head of the investment board since 2002.

“With the very rapid succession, I think it was important that parliamentarians and Canadians hear from the new CEO of the CPPIB,” Liberal lawmaker and committee member Steven MacKinnon said in an interview. “Ideally it would have been better to have had him earlier, but it’s now very timely with the announced expansion.”

Vancouver, BC: CARP members will be pleased to learn that the Province of British Columbia has confirmed their support of the agreement in principal to enhance the Canada Pension Plan, allowing all the provinces and the federal government to proceed with legislation enabling CPP enhancement.

Over the last week CARP members had engaged in an email writing campaign to BC Minister of Finance, Michael de Jong, asking him to support CPP enhancement without delay.

An agreement in principal was signed by the majority of provincial Ministers of Finance on June 20th, but in mid-July, Minister de Jong called for consultations with stakeholders in BC, before proceeding with ratification.

Today, the Government of British Columbia formalized their support of the agreement, citing strong support for CPP enhancement among the over 2000 comments received, with 65% supportive and 32% unsupportive. In contrast, over 90% of CARP members polled were supportive of CPP enhancement, even though they themselves would not benefit from the updated pension plan.

CARP COO & Vice President, Advocacy, Wanda Morris, who is currently in British Columbia meeting with volunteer Chapter leaders and government officials said, “Minister de Jong made the right decision to support CPP enhancement in June and we are glad that he has reiterated that support today, after hearing from British Columbians who are supportive of a strengthened national pension plan for Canadian workers.”

“Increases in CPP contributions from employees and employers are modest and affordable and will be phased in over a period of several years in the proposed plan, but the end result will be of significant benefit to future retirees and Canada will be a better country for it,” said Wade Poziomka, CARP Policy Director.

On Wednesday, I attended the first ever cap intro emerging managers conference here in Montreal. Before covering it, let me begin with a comment which Simon Schilder recently wrote for Hedgeweek, Emerging hedge fund managers - challenges and solutions:

Who would want to be a start-up hedge fund manager? Simon Schilder, partner at Ogier in Jersey, and TEAM BVI UK member with BVI Finance, examines the challenges facing the next generation…

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The challenges facing the next generation of hedge fund managers are starker than ever before, with increased barriers to entry caused by an ever increasing regulatory burden coupled with the continued existence of a macro-economic environment impacting upon investment performance.

For emerging managers seeking to attract investor allocations, the need to be able to demonstrate a proven track record to prospective investors has never been more important. Generally institutional investors will look to a three-year track record as a pre-requisite for investing, whilst funds-of-funds, family offices and high net worth investors will frequently be comfortable with a shorter track record than this (perhaps 12 to 18 months?). The challenge facing an emerging manager therefore is how does it achieve this track record as cost effectively as possible without drowning under the operational constraints of running an investment management business. In addition to surviving long enough to develop a track record, the "holy grail" of target assets under management (AUM) has long been spoken as being an AUM of USD100 millon, as that number then very quickly becomes USD200 million or USD300 million as the fund suddenly comes onto the radar of institutional managers whose own investment restrictions prevent them allocating their investment capital to smaller funds.

With the deck very much stacked in favour of established hedge fund managers, where does this leave emerging managers without the benefit of significant seed capital to rely upon it getting through the early years? For most emerging managers, their survival during these early years depends upon their ability to manage their cost bases efficiently and effectively. As part of doing this comes the choice of the most appropriate jurisdiction for domiciling their fund vehicle.

Given its historic cost advantages, the British Virgin Islands (BVI) has long been the natural choice of jurisdiction for emerging managers looking for a jurisdiction to domicile their hedge funds. For such managers, the traditional route was to establish as either a "Professional Fund" (being a fund for "professional investors with a minimum investment of USD100,000) or a "Private Fund" (being a fund for a maximum of 50 investors, making offers to invest on a private basis). These two categories of funds remain consistently the most popular fund vehicles for managers establishing their funds in BVI. To complement these established fund products, during 2015, the BVI introduced two new categories of funds aimed specifically at the small/ mid-sized/ emerging managers, in the form of the “Incubator Fund” and the “Approved Fund”. These two new fund products offer such managers solutions which might not otherwise be available to them.

Whilst an Incubator Fund and an Approved Fund are broadly similar fund products, there are subtle differences, which appeal for different types of investment managers.

The Incubator Fund product is aimed at the start-up investment managers, with one key feature of the regime being that upon the second anniversary of being an Incubator Fund or, if sooner, once the fund has grown beyond a stated minimum size (more than 20 investors or assets under management of more than USD20 million for two consecutive months), the Incubator Fund is required to convert to either a Private Fund, a Professional Fund or an Approved Fund. This therefore gives start-up/ emerging managers an opportunity to get a foot in the door, by offering them a cost effective regulated fund solution to bring their funds to market whilst managing their operational cost base. A point of note is that an Incubator Fund has no mandatory service providers, such that in establishing an Incubator Fund, the promoters are free to appoint as many or few service providers as it wishes, further enabling it to manage fund expenses during the early years.

An Incubator Fund is available to “sophisticated private investors” only (for these purposes, to be a "sophisticated private investor" a person must be invited to invest and the amount of his or her minimum initial investment must not be less than USD20,000). As mentioned above, Incubator Fund status is limited to two years (with a possible further 12 month extension available at the discretion of the BVI's regulatory, the Financial Services Commission), following which the Incubator Fund must either (i) convert into a Private Fund; Professional Fund; or an Approved Fund or (ii) cease operating as a fund.

An Approved Fund by contrast is very much aimed at family offices and friends and family offerings. As with Incubator Funds, an Approved Fund is available to a maximum of 20 investors, but distinct from an Incubator Fund, its maximum aggregate assets under management may not exceed USD100 million (or its equivalent in another currency). Additionally and unlike an Incubator Fund, there is no time limit on the duration in which a fund can take advantage of its eligibility for Approved Fund status, such that an Approved Fund's status is indefinite. To the extent that an Approved Fund exceeds 20 investors or assets under management of more than USD100 million for two consecutive months, it is required to notify the FSC of that fact in writing and submit an application to convert and so become recognised as either a Private Fund or a Professional Fund. Other than a requirement to have a fund administrator, there are no other mandatory service providers.

In both cases, the conversion process for an Incubator Fund or an Approved Fund is reasonably straight forward and can be implemented reasonably expediently and, critically, at the time of converting (and so availing the fund to a more onerous regulatory regime), the longer term financial viability of their investment management business will be much more certain.

I'm not qualified to discuss the pros and cons of an Incubator Fund or an Approved Fund, but I agree with Mr. Schilder, for all sorts of reasons (especially regulatory), the deck is increasingly stacked against all emerging managers (to be brutally honest, this is the worst environment to start any fund, you need some major financial reserves and lots of patience to succeed).

On Wednesday, I attended the first ever cap intro event for emerging managers held here in Montreal. The group behind this initiative is the Emerging Managers’ Board (EMB), a non-profit organization whose mission is to promote and contribute to the growth of Canadian emerging managers. It also strives to educate asset allocators and investors about the benefits of investing with local talent.

You can find a list of all the members that participated in the conference here. Admittedly, a lot of people did not show up but there was a strong presence and overall, it was a very good event.

The conference took place at Club St-James on Union street, which is a nice venue for this type of event. I got there at 9:45 in the morning just in time to listen to parts of the first panel discussion on how emerging managers can emerge featuring three speakers:

• Peter Pavlina, Managing Director at Hamersley Partners
• Jeffrey Sprotts, Chief Executive Officer at Prophecy Asset Management
• Floyd R. Simpson II, Manager Research Analyst at FIS Group

This was a good discussion filled with advice for emerging managers. They covered topics like existing emerging manager platforms, how to properly communicate and follow up with prospective investors, which consultants to target, why emerging managers should avoid pensions when trying to emerge (except those that have emerging manager platforms) and why emerging managers need to stay humble, have realistic growth expectations and communicate their process and strategy very clearly, including what their real niche/ competitive edge is relative to others (and why experience is not an edge).

After that panel discussion, Geneviève Blouin of Altervest who is president of this organization, asked me to step in for someone rom FIS who wasn't there for the one-on-one 15-minute manager "speed dating" session. I said "sure" as I love talking shop with managers and grilling them hard (I was nice).

The first manager I met was Jean-Philippe Bouchard, Vice-President at Giverny Capital, a long only value shop that was founded by François Rochon in 1998. Prior to founding Giverny, Mr. Rochon was managing a private family portfolio. You can see their impressive returns on their website here.

Giverny Capital is basically a value investor which focuses on North American equities. They are sector agnostic but Jean-Philippe told me they don't invest in energy or commodity shares.

In order to produce outsized returns over a long period, they have a fairly concentrated portfolio of 20-25 names and Jean-Philippe told me that the top ten positions make up roughly 60% of their portfolio (basically use the Warren Buffett approach, take concentrated bets in a few stocks you know well).

They use Factset and Morningstar to screen stocks with a high ROE and EPS growth and low debt, and focus on well run companies that are market leaders with competitive advantages and low cyclicality.

To give you an idea on stocks they invest in, I looked at their latest (US) 13-F holdings which are available here. Here you will find names like Bank of the Ozarks (OZRK), Carmax (KMX), LKQ Corp. (LKQ), Walt Disney (DIS), and Visa (V). In Canada, the fund made great returns buying Dollarama (DOL.TO) early on.

Quite impressively, Giverny Capital now manages close to $800 million and may be in line to become the next Letko Brosseau or Jarislowsky Fraser in Montreal.

After that meeting, I met Philippe Hynes of Tonus Capital, another young, bright long only portfolio manager with a value/ contrarian investment philosophy.

Tonus Capital's investment philosophy is right on the main page of its website:

The objective of Tonus Capital is to outperform the market return over the long term. It is our firm belief that one of the best strategies to accomplish this is to focus on a small number of companies that we understand well and to invest in them when they are trading significantly below intrinsic value. We are market-cap agnostic, which means that our investment decisions are not determined by a company’s market capitalization but only by its potential to generate a strong absolute return over time.

Tonus was founded in 2007, it has an 8 year track record and currently manages roughly $70 million in AUM invested in North American equities.

Their portfolio is concentrated, consisting of 15-20 positions, mostly in financials and consumer products sector and like Giverny, Tonus is sector agnostic but it does invest a bit in the energy sector if opportunities present themselves.They focus on companies with no debt and net cash that are typically out of favor and ready to turn around over the course of the next three years.

You can view their performance below (click on image):

Philippe told me his objective is to return 50% to 100% over a three year investment horizon and if he has strong conviction, he will invest up to 10% in one company. Currently, he is 30% cash and researching which companies he wants to scale into.

[Note: Whenever you are talking to a long only or L/S equity fund, be careful to make sure the benchmarks they use to evaluate their performance matches the market cap and risk of the stocks they invest in.]

He told me he looks at IPOs of companies that are not tracked and looks at stocks making 52-week lows that fit his strict criteria to invest in and that can turn around nicely. Some examples of stocks he invested in include Sleep Country Canada (ZZZ.TO), a leading specialty mattress retailer in Canada, and Blue Bird (BLBD), the main manufacturer of school buses in North America.

I told him that I trade these markets, focus mostly on biotech but I screen over 2000 stocks in 100 industries and thematic portfolios I created for free on Yahoo Finance over the last ten years (thank you Neil Cunningham!), and I must admit, contrarian investing isn't for the faint of heart.

I honestly prefer the approach of Martin Lalonde at Rivemont who looks at stocks making 52-week highs or breaking out to get ideas of which companies he wants to scale in and out of.

But the beauty of these investment cap intro conferences is you get to meet different individuals with different approaches and styles. Diversity is a good thing and just because a style doesn't work for one manager, it doesn't mean it can't work for another who takes a longer term approach.

Let me give you another example, a couple of weeks ago, Fred Lecoq and I went to Old Montreal to visit a stock trader at Jitney who used to work with me at the National Bank. This trader is a very good trader, probably one of the best in Canada, and I know this because out of 100 + prop traders at the National Bank back in 1999, he is one of the only ones left doing this for a living, eating what he kills. He told me he has never had a losing month in over 20 years.

What's his secret? He trades boring Canadian companies that aren't always very liquid and he has mastered the art of reading trading action on the stocks he follows closely and will cut his losses quickly when he is wrong (he will hold positions overnight but not often).

I told him I love trading volatile biotech stocks that swing like crazy and are very liquid but I have to endure gut wrenching swings that make me puke at times (I prefer upside volatility). Not for him but he told me something good: "It doesn't matter what you trade, trade what you're comfortable with but cut your losses early" (I don't but use big biotech dips to add to positions I have conviction on).

In other words, there is no one way to approach these markets. Some like trading boring stocks, others prefer trading highly volatile and risky stocks, some buy the breakouts, others look at buying 52-week lows. You need to be very comfortable trading what you are trading and be true to your nature.

Now, after those two manager meetings, the person I was replacing showed up and I was excused and asked to go upstairs to mingle. There, I hooked up with Karl Gauvin and Paul Turcotte of Open Mind Capital.

Unlike many other emerging managers, Karl and Paul come from an institutional background. They are extremely bright and nice and have developed a few adaptive smart beta and L/S equity strategies for US stocks which you can read about here.

Karl shared with me the actual returns of Open Mind Capital's Adaptive Smart Beta US Equity strategy as of September 30th (click on image):

These aren't pro forma returns, these are actual returns of a strategy delivering in excess of 400 basis points over the S&P 500. And this is a highly scalable strategy (they calculated $5 billion capacity).

Now, Karl and Paul aren't the sales types, far from it, they look like scientists and they will admit they are the worst salesmen. They are also brutally honest and tell you under which vol regime they can outperform and when they will underperform.

If you want to meet smart people who can offer you a lot more than just money management, these are the type of partners you want by your side. You should definitely talk to Karl and Paul and you can contact them here (like others I cover, they are francophone but speak English).

Speaking of super smart and nice people you want to partner up with, after Karl and Paul, I hooked up with Jacques Lussier, President and CEO of Ipsol Capital. It was Sean Sirois who introduced us (Sean used to work at Deutsche but recently joined Ipsol).

Jacques is very well known in Quebec and the rest of Canada. An academic with impeccable credentials, he used to run a mammoth fund of hedge funds portfolio at Desjardins which suffered devastating losses during the financial crisis and was eventually shut down (at the time, this fund of funds was bigger than the one at Ontario Teachers and was running beautifully for many years, until the financial crisis hit it) .

As he told me, that was a very humbling experience, but even before this happened, he was questioning why they paid hedge funds 2 & 20 for strategies they can develop cheaply internally (and started doing internally).

It was the first time I met Jacques Lussier and he really impressed me because he is humble, wickedly brilliant and has an insatiable thirst to continue learning about markets and research new strategies.

We talked about his two books but he told me he enjoyed writing his second one,Successful Investing Is a Process: Structuring Efficient Portfolios for Outperformance. You can read a book review from Mark Kritzman here.

What I like about Jacques Lussier and Ipsol Capital is they have a research driven approach to everything and despite being stacked with PhDs, they are humble enough to admit on their presentation that Return = Alpha + Beta + Luck (see a copy of their presentation from October 2015 here).

Jacques and I talked at length about smart beta, risk parity, and behavioral factors (like animal spirits) impacting markets. He told me a lot of people are doing smart beta but many models are wrong or out of date. On risk parity, he said while people make a big fuss, claiming it causes a lot of volatility in markets, the truth is risk parity strategies are not very popular with big investors (concerned with leverage in these strategies).

He also told me that while financial practitioners are good at listing risk factors, very few are good at forecasting risk factors (with exception of volatility which he said Garch models forecast with a 30-40% accuracy rate).

He also told me that unlike other large funds, Ipsol is very technology and research driven and enjoys partnering up with clients they can learn and interact with. He does not believe in 2 & 20 and he and his team are developing a platform where investors will be able to gauge the performance of all their alpha strategies very quickly (will be ready by June 2017).

Look, I am going to be honest with you, Jacques Lussier is no emerging manager, he is well known which is why Ipsol Capital manages in excess of $300 million. But if you're looking for scale, brains, and a more fruitful relationship, you should definitely contact them here (Jacques is fluently bilingual but I must warn you, just like Karl and Paul, he's not the 'salesy' type and told me "sales bore him").

At lunch, we all sat at the same table and listened to another panel discussion featuring three panelists:

• François Rivard, President and CEO of Innocap 
• Marie Helène Noiseux, professor of finance at UQAM
• Ian Fuller, Managing Director at Westfuller Advisors  

1. Importance of keeping true to our style
2. Importance to understand the supply and demand dynamics of the industry and see if the product the manager is supplying is competitive and in demand
3. It is very hard for small managers to penetrate the pension plan circle, especially in Quebec as they are very conservative, but the product needs to be differentiated

Some of the hottest trades of the past few years could stage a sharp reversal as global markets face "peaks" in liquidity, free trade, and income inequality.

That's the big-picture call from Bank of America Merrill Lynch, whose analysts argue in a report published Thursday that an apparent fightback against globalization in advanced economies represents a game-changer for global asset-allocation.

"We are convinced that policy is decisively shifting in a direction that is less positive for 'deflation assets' and more positive for 'inflation assets,'" the team, led by Chief Investment Strategist Michael Hartnett, write. This year and next, investors face a reversal of "bullish" trends that have buttressed globalization and liquidity in recent years, they argue.

In sum, Hartnett and team say it's time for investors to consider a new normal for equity and fixed-income markets.

"A reversal of these trends, together with a shift toward fiscal stimulus and higher interest rates strongly argues that the excess returns from stocks and bonds in the past eight years are also likely to reverse," they say.

Explaining their rationale in predicting declining liquidity, the team cites declining enthusiasm among central bankers in Europe and Japan towards negative interest-rate policies. "Central banks are starting to feel political backlash for fueling inequality, and 'Quantitative Failure' (671 rate cuts since Lehman bankruptcy has fostered neither robust economic recovery nor 'animal spirits' as corporations & households continue to hoard cash) means that the era of excess liquidity and QE is now largely behind us."

Anti-immigration and anti-trade sentiment also appears to have increased in the U.S. and U.K. in recent months, while trade tensions are rising. Against this backdrop, BAML reckons trade policies might become more restrictive in the coming years. "Events show nations are becoming less willing to cooperate, more willing to contest," they write, adding that global trade expansion in 2016 is forecast at around 1.7 percent of GDP, below the rate of economic expansion, a development historically associated with recessions.

Inequality might also be reaching a boiling point in a bevy of developed markets, raising the prospect of active fiscal policies, which BAML reckons will help fuel inflation. In this scenario, investors should buy fewer bonds as "a shift toward Keynesian policy is likely to raise growth expectations and interest rates."

Amid signs of a growing backlash against the inequities generated by globalization, analysts at Bank of America last month foresaw a new era with looser fiscal policy in developed countries — combined with trade protectionism and wealth redistribution — that would redraw the global investment map. The report on Thursday adds meat to this call; BAML on Thursday says it is bullish on stocks and commodities and bearish on bonds. The bigger returns are likely to come from 'zero interest rate policy losers,' they conclude.

Nevertheless BAML concedes central banks could remain very accommodative in their policies, and a recession could imperil its calls to snap up inflation-hedges, while the IMF doubts a looser fiscal policy will be unleashed next year.

Job creation edged lower in September as the labor market showed there still may be room to run.

Nonfarm payrolls increased 156,000 for the month and the unemployment rate ticked up to 5 percent, the Bureau of Labor Statistics reported Friday. Economists surveyed by Reuters had expected 176,000 new jobs and the jobless rate to hold at 4.9 percent. The total was a decline from the upwardly revised 167,000 jobs in August (compared with the original number of 151,000).

"This is within the broad range of expectations," said Mark Hamrick, senior economic analyst at Bankrate.com. "The main point is, slow and steady does win the race for this recovery, which began in the summer of 2009."

Average hourly wages pushed higher, rising 6 cents to an annualized rate of 2.6 percent. The average work week also inched up one-tenth to 34.4 hours.

A broader measure of unemployment that includes those who have stopped looking for jobs as well as those working part-time for economic reasons was unchanged at 9.7 percent.

The number of workers considered not in the labor force fell by 207,000 to 94.2 million, the number in the labor population surged by 444,000 and the level of the employed jumped by 354,000, according to the household survey. The employment-to-population ratio rose to 59.8 percent, a half-percentage point gain from a year ago.

Professional and job services led the way with 67,000 new jobs while health care added 33,000 and restaurants and bars contributed 30,000.

The report comes at a critical time for the Federal Reserve as the U.S. central bank looks to resume getting rates back to normal. The Fed last hiked rates in December, the first such move in more than nine years. However, it has held off since then amid a variety of global and domestic concern.

Traders expect the Fed to hike again in December.

"This is a solid number," Cleveland Fed President Loretta Mester told CNBC. "This is very consistent with what we expected to see, certainly with my forecast."

Traders pushed chances for a December rate hike higher, from 63.9 percent prior to the payrolls report to 70.2 percent afterward.

"It's a solid labor market report," Mester said on "Squawk Box." She's a voting member this year on the Fed's policy panel, the Federal Open Market Committee. "This is very consistent with what we expected to see."

"The economy has been very resilient," she said, citing bounce backs from the stock market plunge early in the year and the June vote by Britain to leave the European Union.

On Friday morning, the Labor Department said 156,000 nonfarm jobs were added in September. The unemployment rate rose slightly to 5 percent. "The unemployment rate is about at what my estimate of full employment is, natural rate of unemployment," Mester said.

Economists polled by Reuters had predicted the U.S. economy would create about 175,000 nonfarm payrolls last month, with an unchanged jobless rate of 4.9 percent.

"Remember 75,000 to 120,000 [jobs added] per month is about what you need to keep unemployment stable," Mester said, citing stronger labor market numbers this year, with the three month average of about 192,000.

Average hourly earnings matched expectations with an increase of 0.2 percent in September and an annualized rate of 2.6 percent. The average work week also inched up one-tenth to 34.4 hours.

"I see inflation measures moving up," in addition to stronger jobs, Mester said. "We have to be forward-looking. So in terms of our two goals ... it makes sense to move up the [fed funds] rate another 25 basis points."

The Fed's next two-day meeting concludes on Nov. 2, just six days before the presidential election. But Mester said "all meetings are on the table" for a possible rate increase, and that politics do not have any bearing on policy setting decisions.

The Fed also meets in December, one year after the Fed hiked rates for the first time in more than nine years.

"I don't think we're behind the curve yet. I don't see that we need to bring rates up very quickly," Mester said. "I'd like to be on this gradual path that we've been communicating."

Evidence that the so-called natural rate of interest has fallen to low levels could mean the economy is stuck in a low-growth rut that could prove hard to escape, Federal Reserve Vice Chair Stanley Fischer said on Wednesday.

Speaking to a central banking seminar in New York, the Fed's second-in-command said he was concerned that the changes in world savings and investment patterns that may have driven down the natural rate could "prove to be quite persistent...We could be stuck in a new longer-run equilibrium characterized by sluggish growth."

As a result, he said, central bankers may face a future where the short-term interest rates set by policymakers never get far above zero, and the unconventional tools used during the financial crisis become a "recurrent" fact of life.

"Ultralow interest rates may reflect more than just cyclical forces," Fischer said, but "be yet another indication that the economy's growth potential may have dimmed considerably."

Fischer's remarks did not address current Fed policy or interest rate plans.

Dalio, 67, says that the long-term debt cycle, which typically lasts 50 to 75 years, is approaching its limits. This is also the “most important” force at play in the economy.

“The biggest issue is that there is only so much one can squeeze out of a debt cycle and most countries are approaching those limits,” Dalio said.

Since the financial crisis, central banks around the world loosened monetary policy aggressively, keeping interest rates low and encouraging more lending activity. But the incremental benefits of all of this has been diminishing. This is troubling when balance sheets are becoming increasingly debt-laden and vulnerable.

“In other words, they are simultaneously approaching both their debt limits and central banks’ ‘pushing on a string’ limits,” he said. “Central banks are approaching their ‘pushing on a string’ limits both because interest rates are approaching their maximum lows, and because the effectiveness of [quantitative easing] is approaching its limits as the risk premiums and spreads are compressing. Also, the wealth gap and numerous other factors make lending to spenders more challenging.”

Critically, this is not an isolated problem.

“This is a global problem,” he said. “Japan is closest to its limits, Europe is a step behind it, the US is a step or two behind Europe, and China is a few steps behind the United States.”

The coming squeeze will happen as the baby boomer generation leaves the workforce and begins collecting retirement and healthcare benefits like Social Security and Medicare. According to Dalio, many of these promises can’t be kept. The problem is the expected low returns on assets won’t be enough to fund those government liabilities.

For now, any sense of financial security among individuals can be characterized as a false sense of security.

“Holders of debt believe that they are holding an asset that they can sell for money to use to buy things, so they believe that they will have that spending power without having to work,” he said. “Similarly, retirees expect that they will get the retirement and health care benefits that they were promised without working. So, all of these people expect to get a huge amount of spending power without producing anything. At the same time, workers expect to get spending power that is equal in value to what they are giving. They all can’t be satisfied.”

It’s an all-around gloomy situation that could force policymakers into desperate positions before the whole thing ends in tears.

“As a result of this confluence of conditions, we are now seeing most central bankers pushing interest rates down to make them extremely unattractive for savers and we are seeing them monetizing debt and buying riskier assets to make debt and other liabilities less burdensome and to stimulate their economies,” he said. “Rarely do we investors get a market that we know is over-valued and that approaches such clearly defined limits as the bond market now.”

These low or negative interest rates translate to low or negative returns on bonds. This incentivizes investors and savers to avoid bonds and put their money into 1) safe-haven stores of wealth like gold, or 2) riskier assets like stocks that promise higher returns. Dalio argues that these alternatives are not necessarily cheap relative to their risks, but they certainly look cheap relative to bonds.

“[H]olding non-financial storeholds of wealth like gold could become more attractive than holding long duration fiat currency flows with negative yields (which is what bonds are), especially if currency volatility picks up.”

The Canadian philosopher Charles Taylor has been named the winner of the first Berggruen Prize, which is to be awarded annually for “a thinker whose ideas are of broad significance for shaping human self-understanding and the advancement of humanity.”

The prize, which carries a cash award of $1 million, will be given in a ceremony in New York City on Dec. 1. It is sponsored by the Berggruen Institute, a research organization based in Los Angeles and dedicated to improving governance and mutual understanding across different cultures, with particular emphasis on intellectual exchange between the West and Asia.

Mr. Taylor, 84, is widely regarded as one of the world’s leading philosophers, and a thinker whose ideas have been influential in the humanities, social sciences and public affairs. His many books include “Sources of the Self,” an exploration of how different ideas of selfhood helped define Western civilization, and “A Secular Age,” a study of the coexistence of religious and nonreligious people in an era dominated by secular ideas.

He was chosen for the prize by an independent nine-member jury, headed by the philosopher Kwame Anthony Appiah. The jury cited Mr. Taylor’s support for “political unity that respects cultural diversity,” and the influence of his work in “demonstrating that Western civilization is not simply unitary, but like all civilizations the product of diverse influences.”

Mr. Taylor’s previous honors include the 2015 John W. Kluge Prize for the Achievement in the Study of Humanity (shared with Jürgen Habermas), the 2007 Templeton Prize for achievement in the advancement in spiritual matters and the 2008 Kyoto Prize, regarded as Japan’s highest private honor. Both the Templeton and Kluge prizes also carry cash awards of more than $1 million.

Possible changes to the Quebec Pension Plan and the merits of a trust fund for a relative on welfare were among the topics raised in the latest batch of reader letters. Here’s what they wanted to know.

Q: “The other provinces and the federal government appear to have come to an agreement on changes to the Canada Pension Plan (CPP). Where does this leave Quebec?”

A: Not budging from its holdout position, at least for now. Quebec Finance Minister Carlos Leitāo told the Montreal Gazette that Quebec isn’t obliged to adopt the reforms, since it runs its own retirement plan (Quebec Pension Plan), and the same issues that kept Quebec from signing on to the federal proposals last summer haven’t gone away.

Leitāo said Quebec has a lot of low-income workers who would find themselves paying more in contributions from their weekly paycheques, only to have the extra pension cash in retirement cut into the guaranteed income supplement available to low-income earners. “They’re worse off with this type of change,” he said.

Quebecers already pay slightly higher dues for the Quebec Pension Plan than other Canadians do for CPP (5.325 per cent of pensionable earnings up to $54,900, compared to 4.95 per cent for CPP) and payroll taxes for Quebec businesses (which include the employer’s matching QPP contribution) are higher than elsewhere.

The new CPP deal, going ahead after British Columbia approved it this month, will be phased in between 2019 and 2025. It will raise the CPP contribution rates of workers and employers and the amount of employment income on which those contributions are charged. In exchange, workers will get significantly higher benefits — as much as 50 per cent more, Ottawa says— from CPP in retirement. Someone with $50,000 in constant earnings throughout their working life would receive $16,000 annually from CPP instead of $12,000 now, the government said.

Ottawa said it’s cushioning the blow on low-income earners by enhancing its working income tax benefit and making the extra CPP dues tax-deductible. Leitāo said Quebec isn’t standing pat, just taking the time to study the issue further over the next year to make sure it implements reforms appropriate “for Quebec reality.” Since the federal changes aren’t coming until 2019, “we have time,” he said.

George Osborne's pension reforms will backfire and end up costing the taxpayer billions of pounds more every year as people stop saving for their retirement, the official Treasury watchdog has warned.

The Office for Budget Responsibility said new saving schemes and the removal of tax relief on pensions for higher earners - billed as a move to save money - will ultimately end up costing the Exchequer £5 billion a year.

The watchdog warned that higher earners will move their money to tax efficient investments and may even drive up property prices as a result of the ill-thought through policy.

The Government controversially cut the amount people can save in a pension to £1m through their lifetime. The annual allowance was also cut to £40,000 - despite cuts in interest rates and stock market returns which combined to decimate the value of life savings.

The move was condemned by business groups and pension experts at the time who said it would deter millions of people from saving.

Theresa May is now under pressure to reverse the policy in the forthcoming Autumn Statement after the OBR warned it would also undermine public finances in the future.

Tom McPhail, head of pension policy at Hargreaves Lansdown, said: "The Government urgently needs to rethink its savings policies.

"In the short term fiscal changes such as the lifetime allowance cap at £1m will save it money, however in the longer term the package of various measures such as the pension freedoms, the increased Isa limits and the secondary annuity market will result in a worsening of public finances.

"Investors will simply substitute more tax advantaged products such as the Isa for the pensions where they fact the lifetime allowance cap." The OBR's analysis looked at a series of cuts to tax breaks on pensions savings for high earners since 2010, together with the impact of George Osborne's new pension freedoms.

The Government has reduced the annual pension allowance, the amount people can put into their retirement pots before they have to pay tax, from £255,000 in 2010 to £40,000.

It has also cut the lifetime allowance from £1.8million to £1million today.

Over a million middle to high earners including teachers, doctors, lawyers and managers will have their retirement savings restricted as a result of the lower pensions lifetime allowance.

While the reforms will benefit the economy in the medium term because of increased tax, in the longer term there will be a cost to the taxpayer as people choose to invest their savings in alternative schemes, the report found.

The OBR said that by 2035 the Government's policies will cost it £5billion a year in lost tax revenue.

It states: "In recent years, the Government has made a number of significant changes to the tax treatment of private pensions and savings and introduced a variety of government top-ups on specific savings products.

"In doing so, it has generally shifted incentives in a way that makes pensions saving less attractive - particularly for higher earners - and non-pension savings more attractive - often in ways that can most readily be taken up by the same higher earners."

Under the Coalition Government Mr Osborne also increased the amount people can save in Isas, which led to more people using them to save. The value of adult ISAs had risen from £287billion in 2006 to £518billion.

As a result, wealthy savers are expected to max out newly increased £20,000 a year Isa limits instead of saving into pensions where the tax benefits are starting to look far less attractive.

However the report warns that: "If interest rates were to increase towards historically normal levels, the amount of tax forgone on interest income would increase", adding to the long-term cost of the policies.

The watchdog warned that the Government's assault on pension savings means house prices could rise because more people are investing in housing as a result.

It said: "Measures that change the relative incentive to save, whether in savings or pensions, will also affect the attractiveness of other investments such as housing.

"A number of the measures we cover in this paper could affect the housing market, mostly by increasing demand for housing and putting upward pressure on house prices."

George Osborne’s various pension reforms in his time as chancellor will blow a £5bn-a-year hole in the public finances in the long term by discouraging saving for retirement, the Budget watchdog has found.

Analysis by the Office for Budget Responsibility, published on Tuesday, found that the reforms had made pensions less attractive compared with other forms of savings, especially for those on high incomes.

The OBR examined multiple changes to the tax treatment of pensions and savings as well as the freedoms given to people to gain access to their retirement funds.

Mr Osborne, who was removed from the Treasury by Theresa May when she formed her post-Brexit vote government, scrapped the requirement for those with private pensions to buy an annuity on reaching retirement and allowed pensioners to sell their existing annuities on a secondary market.

He also oversaw restrictions to the annual pensions allowance and lifetime allowance which lowered annual tax free pensions contributions to £40,000 and lifetime contributions to £1m.

At the same time he lifted the individual savings account limit and introduced several new types of ISA, including the Lifetime ISA, seen as a rival to the traditional pension.

Although the reforms provided a small benefit in the medium term — until about 2021 — over the longer period there would be a significant cost, potentially adding a sum equivalent to 3.7 per cent of gross domestic product to public sector net debt over a 50-year period, according to the OBR.

“In recent years, the government has made a number of significant changes to the tax treatment of private pensions and savings and introduced a variety of government top-ups on specific savings products,” it said.

“In doing so, it has generally shifted incentives in a way that makes pensions saving less attractive — particularly for higher earners — and non-pension savings more attractive — often in ways that can most readily be taken up by the same higher earners.”

Forecasts by the OBR are taken seriously because it is Whitehall’s official spending watchdog. Its report found that “the small net gain to the public finances from these measures over the medium-term forecast horizon becomes a small net cost in the long term”.

The benefit from the reforms would peak at £2.3bn in 2018-19 before turning negative from 2021-22, rising in cash terms to reach £5bn by 2034-35.

Steve Webb, director of policy at Royal London investments group and a former pensions minister, said the report showed the consequences of the Treasury’s “attraction to ISAs and dislike of pension tax relief”.

“Although the overall cost of savings incentives has increased slightly over the long term, the balance has shifted markedly, with pension savers seeing cuts in support and greater incentives for short-term savings,” Mr Webb said.

“For a society with a major shortfall in long-term savings this seems a very odd rebalancing. What the Treasury has given in savings incentives via ISAs and related products it has largely taken away in cuts to pension tax relief, making pensions less attractive.”

The report acknowledged that the “relatively slow pace” at which the changes would affect the public finances would allow future governments to adjust policy if necessary.

Ros Altmann, who was pension minister until this summer, also criticised the changes: “We shouldn’t be spending extra taxpayers money subsidising people to have tax-free pension pots from the age of 60, which will be the case with the Lifetime ISA.”

The tax system affects the post-tax returns an individual can expect from investing in different financial assets. The Government is therefore able to influence individuals’ incentives – and so behaviour – by changing the tax treatment of private pensions and savings products. In recent years, the Government has made a number of changes in this area and introduced a variety of government top-ups on specific savings products. This has generally shifted incentives in a way that makes pensions saving less attractive – particularly for higher earners – and non-pension savings more attractive – often in ways that can most readily be taken up by the same higher earners.

GBP is trading like an EM currency without central bank smoothing

The low print was 1.1378 but not many banks are recognizing that, most say its 1.1480 regardless the move highlights the algo (machine) trading problem... with banks not willing to take on risk you will get these moves.

It also counters the argument that hedge fund traders (algos) make/ provide liquidity and narrow spreads..something I have been arguing against all along. They front run the flow and force the price to gap until the true liquidity is found and since we have a scenario where the real liquidity providers are not providing liquidity any more (as a result of reduced risk implemented by regulators) you will get these moves. The banks don't honor s/l orders anymore, they will fill you at the next best price (yeah sure, once they take their mandatory spread which is guaranteed profit at no risk).

You essentially have very little recourse (they will say we don't want to lose you as a client so we will do our best (our best for themselves, not the client) and since almost all banks are acting the same way, where can you go... they say it's not them it's the regulators.

Until the certified letters from Sacramento started coming last month, Loyalton, Calif., was just another hole in the wall — a fading town of just over 700 that had not made much news since the gold rush of 1849. Its lifeblood, a sawmill, closed in 2001, wiping out jobs, paychecks and just about any reason an outsider might have had for giving Loyalton a second glance.

“It’s a walking ghost town,” said Don Russell, editor of the 163-year-old Mountain Messenger, a local newspaper that refuses, fittingly, to publish on the web.

But then came those letters, thrusting Loyalton onto center stage of America’s public pension drama. The California Public Employees’ Retirement System, or Calpers, said Loyalton had 30 days to hand over $1.6 million, more than its entire annual budget, to fund the pensions of its four retirees. Otherwise, Loyalton stood to become the first place in California — perhaps in the nation — where a powerful state retirement system cut retirees’ pensions because their town was a deadbeat.

“I worked all those years, and they did this to me,” said Patsy Jardin, 71, who kept the town’s books for 29 years, then retired in 2004 on an annual pension of about $48,000. Now, because of Loyalton’s troubles, Calpers could cut it to about $19,000.

“I couldn’t live on it — no way,” she said. “I can’t go back to work. I’m 71 years old. Who’s going to hire me?”

Public pensions are supposed to be bulletproof, because cities — unlike companies — seldom go bankrupt, and states never do. Of all the states, experts say, California has the most protective pension laws and legal precedents. Once public workers join Calpers, state courts have ruled, their employers must fund their pensions for the rest of their careers, even if the cost was severely underestimated at the outset — something that has happened in California and elsewhere.

Across the country, many benefits were granted at the height of the 1990s bull market on the faulty assumption that investments would keep climbing and cover most of the cost. And that flawed premise is now hitting home in places like Loyalton.

There and elsewhere, local taxpayers are paying more and more, and some elected officials say they want to get off the escalator. But Calpers is strict, telling its 3,007 participating governments and agencies how much they must contribute each year and going after them if they fail to do so. Even municipal bankruptcy is not an excuse.

The showdown in Loyalton is raising the possibility that California’s pension promise is not absolute. There may be government backstops for bank failures, insurance collapses and pensions owed to workers by bankrupt airlines and steel mills — but not, apparently, for the retirees of a shrinking town.

“The State of California is not responsible for a public agency’s unfunded liabilities,” said Wayne Davis, Calpers’s chief of public affairs. Nor is Calpers willing to play Robin Hood, taking a little more from wealthy communities like Palo Alto or Malibu to help luckless Loyalton. And if it gave a break to one, other struggling communities would surely ask for the same thing, setting up a domino effect.

Some see a test case taking shape for Loyalton and for other cities with dwindling means. “Nobody has forced this issue yet,” said Josh McGee, vice president for public accountability for the Laura and John Arnold Foundation, which focuses in part on sustainable public finance, and a senior fellow of the Manhattan Institute.

When Stockton, Calif., was in bankruptcy, for instance, the presiding judge, Christopher M. Klein, said the city had the right to break with Calpers — but it could not switch to a cheaper pension plan without first abrogating its labor contracts, which would not be easy. Stockton chose to stay with Calpers and keep its existing pension plans, cutting other obligations and pushing through the biggest sales tax increase allowed by law.

Loyalton — which sits in a rural area of Northern California near the Nevada border, less than an hour’s drive from Reno — severed ties with Calpers three years ago. It has no labor contracts to break. Though the town is not bankrupt, its finances are in disarray: It recovered more than $400,000 after a municipal employee caught embezzling was fired. But a recent audit found yet another shortfall of more than $80,000.

“If a city doesn’t have the funds to pay, it’s just completely unclear how the legal plumbing would work,” Mr. McGee said. “I don’t know what would happen if the retirees sued.”

The retirees say they are open to filing a suit but cannot afford to hire lawyers for a titanic legal clash with Calpers.

“Nobody does squat for you with Calpers,” said John Cussins, Loyalton’s retired maintenance foreman, who now serves on the City Council. “I contacted every agency possible. To me, it’s just unbelievable that there isn’t some kind of help out there with the legal side of things. It leaves us at the mercy of the city and Calpers.”

Mr. Cussins said he had a severe stroke last year and was recently told he had Parkinson’s disease. He needs continuing care and said he might not be able to afford his health insurance if his pension were cut. Every time the pension issue comes up at City Council meetings, he is told to leave because, as a retiree, he is deemed to have a conflict of interest.

“I’d like to see somebody go to jail for this,” he said.

Calpers has total assets of $290 billion, so an unpaid bill of $1.6 million would hardly be a deathblow. But if Calpers gave one struggling city a free ride, others might try the same thing, causing political problems. Palo Alto may have lots of money, but its taxpayers still do not want to pay retirees who once plowed the snow or picked up the trash in far-off Loyalton.

“I think this is all about precedent setting,” Mr. McGee said.

In September, Calpers sent “final demand” letters to Loyalton and two other entities, the Niland Sanitary District and the California Fairs Financing Authority. The Niland Sanitary District has struggled with bill collections, and the fairs financing authority was disbanded several years ago when the state cut its funding. Both entities stopped sending their required contributions to Calpers in 2013 but have continued to allow Calpers to administer their pension plans.

In Loyalton, the City Council voted in 2012 to drop out of Calpers, hoping to save the $30,000 a year or more that the town had previously sent in, said Pat Whitley, a former mayor and a City Council member. (She is not one of the four Loyalton retirees but earned a Calpers pension through previous work on the Sierra County Board of Supervisors.)

“All our audits said that our benefits were going to break the city,” Ms. Whitley said. “That’s exactly why we decided to withdraw. We decided it would be a perfect time to get out, because everybody was retired.”

Loyalton did not plan to offer pensions to new workers, she said. And it had been paying its required yearly contributions to Calpers, so officials thought its pension plan must be close to fully funded.

But Calpers calculates the cost of pensions differently when a local government wants to leave the system— a practice that has caught many by surprise. If a city stays, Calpers assumes that the pensions won’t cost very much, which keeps annual contributions low — but also passes hidden costs into the future, critics say. If a city wants to leave, Calpers calculates a cost that doesn’t rely on any new money and requires the city to pay the whole amount on its way out the door.

That is why Calpers sent Loyalton the bill for $1.6 million.

“I never dreamed it was going to be that, ever. Ever!” Ms. Whitley said. “It defies logic, really.”

Loyalton’s expenditures for all of 2012 were only $1.2 million, and much of that money came from outside sources, like the federal and county governments. Local tax collections yielded just $163,000 that year, according to a public finance website maintained by the Stanford Institute for Economic Policy Research.

Ms. Whitley said Calpers had snared Loyalton in a Catch-22. The agency would not tell the town the cost of terminating its contract until the contract was ended, she said. But once that was done, it was too late to go back.

“We were very confused about why we owe $1.6 million, and why didn’t they tell us that before we signed all the papers,” she said.

Mr. Davis, the Calpers spokesman, said that since 2011, Calpers had been giving its member municipalities a “hypothetical termination liability” in their annual actuarial reports, so there was little excuse for not knowing.

Ms. Whitley disagreed. “It’s just too confusing,” she said. “I looked at what’s been happening with all the other entities, and I saw that eventually it’s got to collapse. It’s almost like a Ponzi scheme.”

The bill was due immediately, but Loyalton did not pay it. It has been accruing 7.5 percent annual interest ever since.

Meanwhile, Calpers has continued to pay Loyalton’s four retirees their pensions. But at a Calpers board meeting in September, some trustees said it was time to find Loyalton in default and cut the pensions. The board is expected to make a final decision at its next meeting, in November.

In Loyalton, Mr. Cussins, the retiree and City Council member, said he was so frustrated about being barred from the council’s pension discussions that he and another former town worker drove to Sacramento to attend Calpers’s last board meeting.

The trustees were cordial, he said, but they held out little hope.

“We had a bunch of them come and shake our hands,” he said. “I said, ‘We need some guidance.’ They told us the city could apply to get back into Calpers next spring. But they made it very clear that they will not allow the city to get back into Calpers until that $1.6 million is paid.”

Quite simply, in a ZIRP & NIRP world where ultra low rates and the new negative normal are here to stay, the pension Titanic will keep sinking but some pensions, defined-contribution (DC) plans in particular, will sink much further and leave millions struggling with pension poverty while others, like large well-governed defined-benefit (DB) plans, will offer workers the ability to retire in dignity and security.

So, when I expose the brutal truth on defined-contribution plans and explain why Canadians are getting a great bang for their CPP buck, somewhere behind that message lies the influence of Chuck Taylor and a more just society.

One of the disinflationary pressures that’s gripped the global economy for the past five years is abating.

China’s factory gate prices -- falling since the start of 2012 -- turned positive in September, squeaking out an increase of 0.1 percent from a year earlier. Given China’s status as factory to the world, that means prices of everything from T-shirts, televisions, tools and toys may follow -- or at least stop getting ever cheaper.

With global demand still tepid -- as demonstrated by weak export numbers from China Thursday -- it’s premature to call for a bout of Chinflation that’ll send consumer prices surging from Tokyo to Berlin.

"As reassuring as it is to finally see producer prices in China rising again, it is far too early to sound the all clear," said Frederic Neumann, co-head of Asian economic research at HSBC Holdings Plc in Hong Kong. "The world hasn’t fully escaped its deflationary funk over the past several years."

Core consumer prices in Japan fell 0.5 percent in August from a year earlier, the fifth-straight decline, while in the euro area they’re barely positive. U.S. inflation has fallen short of the Federal Reserve’s 2 percent objective for four years.

Yet the return of price gains at China’s factories does remove one of the forces that had been exacerbating the world’s deflationary spell. The following chart underscores the link between China’s PPI and its export prices:

“The turn up in China PPI is indicative of receding deflation risks globally,” said Shane Oliver, Sydney-based head of investment strategy at AMP Capital Investors Ltd., which oversees about $121 billion. “It’s another sign that global deflation is fading.”


Producer prices for mining goods swung to a 2.1 percent increase, and manufactured goods also turned positive. Food prices climbed 0.3 percent and clothing increased 0.7 percent.

As well as altering the global price outlook, positive producer prices and an acceleration in consumer inflation may limit scope for more monetary stimulus in China.

"Underlying inflation momentum is picking up, which will limit the room for monetary policy easing for the time being," said Zhou Hao, an economist at Commerzbank AG in Singapore. At the current pace of gains, he expects PPI inflation to quicken to 1.5 percent in December.

China's producer prices unexpectedly rose in September for the first time in nearly five years thanks to higher commodity prices, welcome news for the government as it struggles to whittle down a growing mountain of corporate debt.

Official inflation data on Friday also showed a pick-up in consumer prices, helping to ease investors' concerns about the health of the world's second-largest economy after disappointing trade numbers on Thursday rattled global markets.

Corporate China sits on US$18 trillion in debt, equivalent to about 169% of gross domestic product (GDP), according to the most recent figures from the Bank for International Settlements. Most of it is held by state-owned companies.

"An uptick in inflation, if sustained, would be good news for China's ability to service its overhang of corporate debt," Bill Adams, senior international economist at PNC Financial Service Group, said in a note. "With low interest rates keeping debt service costs in check and producer prices rising, the outlook for Chinese industrial profits is improving."

The producer price index (PPI) rose 0.1% in September from a year earlier, the National Bureau of Statistics said.

While the gain was slight, it was the first time producer prices have expanded on an annual basis since January 2012, and came a bit earlier than the year-end time frame that some analysts had expected. Producer prices had edged up on month-on-month basis over the summer.

Analysts polled by Reuters had predicted a decline of just 0.3% on-year, after a drop of 0.8% in August.

China's factory prices have been falling since March 2012, and more than four years of producer price deflation have squeezed industrial companies' cash flow.

Profits at roughly a quarter of Chinese companies were too low in the first half of this year to cover their debt servicing obligations, as earnings languish and loan burdens increase, according to a recent Reuters analysis.

However, a construction boom, fuelled by a government infrastructure spending spree and a housing rally, have helped boost prices for building materials from steel to copper in recent months, while coal prices have jumped as the government tries to shut excess mining capacity.

Prices of ferrous metals, non-ferrous metals and coal mining together rose 4.1% on-year, a key factor in the PPI turning positive, the statistics bureau said.

The number of industries registering price increases also rose to 25, eight more than the previous month, indicating that a recovery in Chinese companies' pricing power was becoming more broad-based.

"Debt pressure will certainly be reduced," said Zhou Hao, analyst at Commerzbank AG in Singapore. But he cautioned that China's mounting debt is also a structural problem, and that higher prices for commodities such as coal and steel may be "speculative" in nature.

CONSUMER PRICES ALSO PICK UP

Consumer price inflation also quickened more than expected to 1.9% in September year-on-year, mainly due to higher food prices. Food prices were up 3.2% in September on-year, compared with 1.3% in August.

Analysts had expected the consumer price index (CPI) to rise 1.6% from 1.3% in August, a 10-month low.

"A rebound in CPI growth is largely due to seasonal factors, and the overall growth trend is quite stable. It also dismissed previous concerns of deflation risks," said Zhang Yongjun, analyst at the China International Centre For Economic & Technical Exchanges.

The end of deflation is likely to dash any lingering expectations of further cuts in Chinese interest rates or banks' reserve ratios, economists at ANZ said.

The odds of such moves by the People's Bank of China (PBoC) had already been seen as rapidly receding due to growing concerns in the government about rapidly rising debt levels and potential asset bubbles.

"However, we do not expect the PBoC to tighten liquidity soon either," ANZ said in a note. "The PBoC should be balancing the yuan exchange rate, deleveraging, and the concerns around a slowing economy."

Global stocks and the dollar rebounded on Friday from losses a day earlier, buoyed by a surprising rise in Chinese producer prices and strong U.S. economic data that bolstered expectations the Federal Reserve would raise interest rates in December.

The dollar was on track for its largest weekly increase in more than three months, with rebounding U.S. retail sales and a broad rise in producer prices last month indicating the economy regained momentum in the third quarter after a lackluster first-half.

U.S. producer prices rose in September to record their biggest year-on-year rise since December 2014, while retail sales gained 0.6 percent after a 0.2 percent decline in August.

"Observers are increasingly confident that December will finally bring the long-awaited interest rate hike," said Dennis de Jong, managing director at UFX.com in Limassol, Cyprus.

The dollar index, which tracks the greenback against a basket of six major currencies, added 0.4 percent to 97.862 (DXY) and was up 1.3 percent for the week.

In China, September producer prices unexpectedly rose for the first time in nearly five years and consumer inflation also beat expectations, easing some concerns about the health of the world's second-biggest economy.

Disappointing Chinese trade data on Thursday had rattled investors and pushed global equity markets to three-month lows.

European shares tracked Asian markets higher and Wall Street jumped as better-than-expected results from JPMorgan and Citigroup lifted financial stocks.

Shares of JPMorgan (JPM), the biggest U.S. bank by assets, rose 0.77 percent after it beat forecasts for revenue and profit. Citigroup (C) rose 1.18 percent after earnings fell less than expected.

In Europe, the pan-regional FTSEurofirst 300 index rose 1.55 percent to 1,344.44, while MSCI's all-country world index of equity markets in 46 countries rose 0.77 percent.

The Dow Jones industrial average  rose 141.07 points, or 0.78 percent, to 18,240.01. The S&P 500 gained 14.08 points, or 0.66 percent, to 2,146.63 and the Nasdaq Composite added 37.96 points, or 0.73 percent, to 5,251.29.

Oil slipped below $52 a barrel, giving up earlier gains, as abundant crude supplies outweighed tighter U.S. fuel inventories and plans by the Organization of the Petroleum Exporting Countries to cut output.

"The fundamental backdrop is still bearish," said Commerzbank analyst Carsten Fritsch. "Every increase is driven by speculation and optimism," rather than tighter supplies, he said.

Global benchmark Brent was down 23 cents at $51.80 a barrel. U.S. crude CLc1 slide 8 cents to $50.36 a barrel.

The gain in Chinese producer prices helped lift U.S. Treasury yields, with the benchmark 10-year note down 8/32 in price to yield 1.7659 percent.

Rising U.S. Treasury yields, on the growing perception the U.S. Federal Reserve will raise interest rates in December, pushed euro zone government bond yields higher.

The benchmark 10-year German bund rose 2.1 basis points to 0.056 percent.

The dollar rose 0.63 percent to 104.31, while the euro fell 0.45 percent to $1.1006.

[...] I still think we're headed for a long period of debt deflation but there are always going to be tradeable opportunities in these markets if you know where to plunge (and which sectors to steer clear of).

This brings me to the BAML report at the top of this comment. I remain highly skeptical of a global economic recovery and would take profits or even short emerging market (EEM), Chinese (FXI),  Metal & Mining (XME) and Energy (XLE) shares on any strength. And despite huge volatility, I remain long biotech shares (IBB and equally weighted XBI) and keep finding gems in this sector by examining closely the holdings of top biotech funds.

And in a deflationary, ZIRP & NIRP world, I still maintain nominal bonds (TLT), not gold, will remain the ultimate diversifier and Financials (XLF) will struggle for a long time if a debt deflation cycle hits the world (ultra low or negative rates for years aren't good for financials).

As far as Ultilities (XLU), REITs (IYR), Consumer Staples (XLP), and other dividend plays (DVY), they have gotten hit lately partly because of a backup in yields but mostly because they run up too much as everyone chased yield (be careful, high dividend doesn't mean less risk!). Interestingly, however, high yield credit (HYG) continues to make new highs which bodes well for risk assets.

The Federal Reserve may need to run a "high-pressure economy" to reverse damage from the 2008-2009 crisis that depressed output, sidelined workers, and risks becoming a permanent scar, Fed Chair Janet Yellen said on Friday in a broad review of where the recovery may still fall short.

Though not addressing interest rates or immediate policy concerns directly, Yellen laid out the deepening concern at the Fed that U.S. economic potential is slipping and aggressive steps may be needed to rebuild it.

Yellen, in a lunch address to a conference of policymakers and top academics in Boston, said the question was whether that damage can be undone "by temporarily running a 'high-pressure economy,' with robust aggregate demand and a tight labor market."

"One can certainly identify plausible ways in which this might occur," she said.

Looking for policies that would lower unemployment further and boost consumption, even at the risk of higher inflation, could convince businesses to invest, improve confidence, and bring even more workers into the economy.

Yellen's comments, while posed as questions that need more research, still add an important voice to an intensifying debate within the Fed over whether economic growth is close enough to normal to need steady interest rate increases, or whether it remains subpar and scarred, a theory pressed by Harvard economist and former U.S. Treasury Secretary, Lawrence Summers, among others.

Her remarks jarred the U.S. bond market on Friday afternoon, where they were interpreted as perhaps a willingness to allow inflation to run beyond the Fed's 2.0 percent target. Prices on longer dated U.S. Treasuries, which are most sensitive to inflation expectations, fell sharply and their yields shot higher.

The yields on both 30-year bonds and 10-year notes ended the day at their highest levels since early June, and their spread over shorter-dated 2-year note yields widened by the most in seven months.

Jeffrey Gundlach, chief executive of DoubleLine Capital, said he read Yellen as saying, "'You don't have to tighten policy just because inflation goes to over 2 percent.'

"Inflation can go to 3 percent, if the Fed thinks this is temporary," said Gundlach, who agreed Yellen was striking a chord similar to Summer's "secular stagnation" thesis. "Yellen is thinking independently and willing to act on what she thinks."

While investors by and large think the Fed is likely to raise interest rates in December this year, in a nod to the country's 5.0 percent unemployment rate and expectations that inflation will rise, they do not see the Fed moving aggressively thereafter.

"This is a clear rebuttal of the hawkish arguments," to raise rates soon, a line of argument pitched by some of the Fed's regional bank presidents, said Christopher Low, chief economist at FTN Financial.

Boston Federal Reserve Bank president Eric Rosengren, who is hosting the conference at which Yellen spoke, was one of three policymakers who dissented at the Fed's September policy meeting and argued for an immediate increase in interest rates. He feels a slight increase now will keep job growth on track and prevent a faster round of rate increases later.

But in a speech earlier on Friday Rosengren also referred to the economy as "nonconformist" because of its slow growth, and the general mood at the conference was that the sluggishness is largely the result of forces like aging and demographics that are unlikely to change.

"We may have to accept the reality of low growth," said John Fernald, a senior research at the San Franciso Fed. "Potential is really low."

That sort of assessment could figure importantly in coming debates over rate policy, and over whether support is building at the Fed to risk letting inflation move above its 2.0 percent target in order to employ more workers and perhaps encourage more investment. It could even impact the central bank's willingness to put more aggressive monetary policies back into play if the economy slows.

"If strong economic conditions can partially reverse supply-side damage after it has occurred, then policymakers may want to aim at being more accommodative during recoveries than would be called for under the traditional view that supply is largely independent of demand," Yellen said. It would "make it even more important for policymakers to act quickly and aggressively in response to a recession, because doing so would help to reduce the depth and persistence of the downturn."

From low inflation to the effect of low interest rates on spending, Yellen's remarks demonstrated how little in the economy has been acting as the Fed expected.

With public expectations about inflation so hard to budge, Yellen said tools like forward guidance, "may be needed again in the future, given the likelihood that the global economy may continue to experience historically low interest rates, thereby making it unlikely that reductions in short-term interest rates alone would be an adequate response to a future recession."

You will recall I openly questioned Morgan Stanley's call that the greenback was set to tumble at the beginning of August (they blew that call).

I've always maintained that global macro traders should short currencies where deflation is prevalent (like Europe and Japan) and go long currencies where deflation has yet to strike (like the United States). I also warned my readers to keep an eye on the surging yen as it could trigger a crisis, especially another Asian financial crisis.

The way to think about currency moves is simple. A rising currency lowers import prices and exacerbates disinflation and/ or deflation. In a country like Japan which imports and exports a lot of goods, a rising currency will wreak havoc on its exports and attempts to reflate inflation expectations. And more deflation in Japan puts more pressure on other Asian economies to lower prices, exporting deflation to the rest of the world.

This is why it's a big deal if China can escape deflation. The thing you need to ask yourself is whether the pickup in inflation in China is sustainable and credible or doomed to dissipate quickly depending on what is going on in Japan and the Eurozone. Because if Japan and the Eurozone can't escape deflation, it's hard to envision China escaping deflation (there is a reason why China's exports were down sharply, and it has to do with weak demand from Europe and elsewhere).

And if the US dollar keeps rising, and global deflation comes back with a vengeance, it's going to be hard for the US to escape deflation too.

One thing I can guarantee you, if the US dollar keeps rising, the Fed will proceed very gradually in terms of rate hikes. It might hike rates 25 basis points in December (not convinced it will) and wait to see the effects on emerging markets and China.

A rising US dollar will also effectively cap commodity prices (lower oil, gold, energy prices) and even long bond yields (lower import prices mean lower inflation expectations going forward). It will also alleviate pressure on the Fed to raise rates as a rising dollar tightens financial conditions.

Federal Reserve Chair Janet Yellen's speech on Friday on running a "high pressure" economy with a tight labor market to reverse some of the negative effects of the Great Recession of 2008 suggests the U.S. central bank will stay accommodative for longer, said Jeffrey Gundlach, chief executive of DoubleLine Capital.

"I didn't hear, 'We are going to tighten in December,'" Gundlach said in a telephone interview. "I think she is concerned about the trend of economic growth. GDP is not doing what they want."

Gundlach said the GDP Now indicator from the Atlanta Federal Reserve has been cut in half to only 1.9 percent for the third quarter after only 1.1 percent actual for the first half of this year. "GDP Now keeps fading away. If we get only 1.9 percent GDP for third — and fourth quarters — we are looking at only 1.5 percent GDP this year," he said.

Gundlach, who oversees more than $106 billion at Los Angeles-based DoubleLine, said Yellen's remarks suggest that she embraces the hypothesis introduced by former U.S. Treasury Secretary Larry Summers, who said that secular stagnation, or a lack of demand, is pushing down global growth.

"I think Yellen is saying, "You don't have to tighten policy just because inflation goes to over 2 percent. Inflation can go to 3 percent, if the Fed thinks this is temporary," Gundlach said. "Yellen is thinking independently and willing to act on what she thinks."

The California State Teachers’ Retirement System plans to pull $20bn from its external fund managers. The third-largest US pension scheme is blaming the withdrawal on high fees and disappointing returns across the investment industry.

Sacramento-based Calstrs, which oversees $193bn of assets, currently allocates half of its assets to external fund companies.

Jack Ehnes, the chief executive of Calstrs, told FTfm the scheme will reduce the level of money run by external companies to 40 per cent because it “costs pennies” to run the money internally versus paying fees to external investment managers.

“The best way to get better returns is not finding better managers,” he said. “For every $10 we pay an outside manager, we would pay $1 inside. That is a pretty daunting ratio.”

According to its latest annual report, the pension scheme’s largest external mandates are with Generation Investment Management, the London-based company that was co-founded by Al Gore, the former US vice-president, New York-based Lazard Asset Management and CBRE Global Investors, the property investment specialist.

As pension deficits grow due to rising life expectancy and poor returns, other schemes have also pulled mandates from external fund companies that are already under pressure from market volatility and the popularity of cheaper, passive portfolios.

Alaska Permanent Fund, which manages $55bn, said last week it will retrieve up to half its assets from external managers, while ATP, Denmark’s largest pension provider, and AP2, the Swedish pension scheme, both dropped mandates from external managers earlier this year.

Calstrs has already shifted $13bn of its assets in-house over the past year, according to Mr Ehnes. The number of investment staff employed by the pension fund has risen 15 per cent, to 155, over the past two years to deal with the increase in capital managed internally.

Calstrs’ latest annual report showed it paid $155.7m in investment fees in the year to the end of June 2015, nearly a 10th less than it paid in fees the previous year.

The fee intake of investment managers Morgan Stanley, T Rowe Price and Aberdeen Asset Management fell significantly, by 61 per cent, 24 per cent and 15 per cent respectively.

Mr Ehnes said the proportion of assets managed in-house at Calstrs could increase beyond 60 per cent as its expertise develops.

The New York state comptroller’s decision to stick with hedge funds despite their poor returns has cost the Common Retirement Fund $3.8 billion in fees and underperformance, according to a critical report by the Department of Financial Services.

The state comptroller, who invests $181 billion for two systems covering local employees, police and fire personnel, "has over relied on so-called ‘active’ management by outside hedge fund managers," the department said Monday in the 20-page report. "For years the State Comptroller has been frozen in place, letting outside managers rake in millions of dollars in fees regardless of hedge fund performance."

Spokeswoman Jennifer Freeman defended the office of comptroller Thomas DiNapoli, accusing the department of harboring political motives.

"It’s disappointing and shocking that a regulator would issue such an uninformed and unprofessional report," Freeman said in a statement. "Unfortunately, the Department of Financial Services seems more interested in playing political games, so remains unaware of actions taken by what is one of the best managed and best funded public pension funds in the country."

Hedge funds, which charge some of the highest fees in the money-management business, have faced mounting criticism from clients over steep costs and performance that mostly hasn’t kept pace with stock markets since the financial crisis. The California Public Employees’ Retirement System, the largest U.S. pension plan, voted to divest of hedge funds in 2014 because they were too complicated and expensive. On Friday, the investment committee for the Kentucky Retirement Systems voted to exit its $1.5 billion in hedge fund holdings over three years.

Opening Round

The DFS report appears to be the opening round in an broader investigation into the management of New York’s retirement system, the third largest state fund at the end of 2015. Led by Superintendent Maria Vullo, the department said it was considering potential regulations on fees and profit-sharing "as well as pre-approval of contracts that provide for fees or profit sharing in excess of a certain rate."

The topic is of interest to Governor Andrew Cuomo, who oversaw a three-year investigation of the comptroller’s office when he was New York Attorney General. By the end of that probe, former Comptroller Alan Hevesi pleaded guilty to one felony count stemming from a pay-to-play kickback scheme.

Categorized under New York system’s “absolute return strategy,” hedge fund investments lost 4.8 percent in the fiscal year that ended March 31, according to the system’s annual report. The average hedge fund lost 3.8 percent in the same period, according to data compiled by Hedge Fund Research Inc. New York’s hedge fund investments have returned an average of 3.2 percent each year over the past 10 years, compared with 5.7 percent for the total fund.

The DFS’s report said the state had paid almost $1.1 billion in fees to its absolute return managers, a category that includes hedge funds, since 2009. Had the system allocated that money to global equities managers instead, their performance would have netted the fund $2.7 billion more in gains.

Doubling Down

In the face of three years of “massive hedge fund underperformance,” the report added, the comptroller continued the gamble by almost doubling -- increasing by 86 percent -- the assets poured into the managers between 2009 and 2011.

Freeman said DiNapoli and Chief Investment Officer Vicki Fuller have taken "aggressive steps" to reduce hedge fund investments and limit fees, and that the system hasn’t put money into a hedge fund in well over a year.

The report also criticized the lack of transparency related to the system’s private equity investments, saying the comptroller hadn’t taken sufficient action to make sure funds were disclosing all their fees and expenses.

The pension system "has only recently discovered what should have been clear long ago -- that making a commitment to alternative investments places a much greater monitoring burden on the investor," the report said. "Taking on asset allocations that are complex to monitor and oversee and only belatedly understanding the challenges reflects poor planning."

Norway’s $880bn oil fund is being urged to invest billions of dollars more in equities and take on more risk in what would be a big shift in its asset allocation away from bonds.

The world’s largest sovereign wealth fund should invest 70 per cent of its assets in shares, up from today’s 60 per cent, at the expense of bonds, according to a government-commissioned report on Tuesday.

The move is highly significant for global markets as the oil fund owns on average 1.3 per cent of every single listed company in the world and 2.5 per cent in Europe.

The report is the latest salvo in a debate on how much risk the long-term investor should take and comes amid growing warnings of dwindling returns for government bonds in particular. The allocation to equities was increased from 40 per cent to 60 per cent in 2007.

“With a higher share of equities the expected return will increase as will the income to the government budget. Yes, it comes with higher risk but we think we are well equipped to handle this risk,” Hilde Bjornland, an economics professor behind the recommendation, told the Financial Times.

The centre-right government will evaluate the recommendations before setting out its own position in the spring. Senior insiders said they expected the allocation change to go through as the report was co-authored by two former finance ministers.

Siv Jensen, the finance minister, told the Financial Times: “We are always thoroughly evaluating how we are running the fund … We know now that we have a very low interest rate regime globally. We have 40 per cent in bonds, and that will affect the return over time.”

Saker Nusseibeh, chief executive of Hermes Investment Management, a UK asset manager, said there was a broader trend of investors looking to increase their equity exposure. “This is about the realisation that you cannot make returns of the same amount that you used to make in the past,” he said.

He added: “If you are a sovereign wealth fund … you will question why you would have so much in fixed income at all.”

The latest survey of fund managers from Bank of America Merrill Lynch shows a rise in cash holdings, which in part reflects “scepticism or outright fear of bond markets”, according to Jared Woodard, an investment strategist at the bank.

In a sign of how the Norwegian debate might unfold, the chairman of the report, Knut Mork, voted against the other eight members and argued the allocation to equities should be cut to 50 per cent. This would give the government a more predictable income stream from the fund, he said.

The Norwegian government is permitted to take out up to 4 per cent of the value of the fund each year to use in the budget. But it is using only about 3 per cent this year.

The report estimated that the fund’s real rate of return was expected to be 2.3 per cent over the next 30 years. A majority of the commission suggested “one potential margin of safety” could be to restrict the government’s ability to take money out of the fund to the level of the expected real return.

Norway’s $874 billion wealth fund needs to add more stocks as record low interest rates and a weak global economy will otherwise lower returns to just above 2 percent a year over the next three decades, a government-appointed commission recommended.

The Finance Ministry should raise the fund’s stock mandate to 70 percent from 60 percent, the committee, comprised of academics, investors and two former finance ministers, urged on Tuesday. A decision on increasing its stock investments will be made by the ministry, which hasn’t always agreed with the conclusions of similar reviews on the fund’s holdings.

“A higher share of equities increases the expected return, and the contribution to the fiscal budget, but also entails more volatility in the value of the Fund and a higher risk of a decline in its long-run value,” the group said. “The majority is of the view that the this risk is acceptable, provided that there is political will and ability to adapt economic policy to the accompanying increase in risk, in both the short and long run.”

Norway is looking for ways to boost returns that have missed a real return goal of 4 percent as interest rates have plunged globally in the aftermath of the financial crisis. The government is this year withdrawing money from the fund for the first time to make up for lost oil income after crude prices collapsed over the past two years.

“The 60 percent equity share has over time been very good for us because it has given us considerable income from the fund,” Finance Minister Siv Jensen said in an interview after a press conference. “But we have also experienced that there can be swings from one year to another because the stock market moves over time.”

‘Considerably Less’

After getting its first capital infusion 20 years ago, the fund has steadily added risk, expanding into stocks in 1998, emerging markets in 2000 and real estate in 2011 to safeguard the wealth of western Europe’s largest oil exporter.

It’s currently mandated to hold 60 percent in stocks, 35 percent in bonds and 5 percent in real estate. After inflation and management costs, it has returned 3.43 percent over the past 10 years.

The committee said that the expected returns from the fund are now “considerably less” than 4 percent. With the current equity share, the commission predicts an annual real return of just 2.3 percent over the next 30 years.

Still, that didn’t stop the chairman of the commission, Knut Anton Mork, from disagreeing with the majority’s conclusion. The former chief economist at Svenska Handelsbanken in Oslo instead recommended cutting the stock holdings to 50 percent.

“The minority recognizes that the reduction in the oil and gas remaining in the ground over the last decade is an argument in favor of a higher equity share, but considers this less important than the predictability of budget contributions from the fund,” he said.

Norway's Global Government Pension Fund, the biggest sovereign wealth fund in the world by assets under management, could be about to start taking a lot more risks if it follows the advice of a government-commissioned report into the way it allocates its assets.

The new report, released on Tuesday, argues that the £716 billion ($880 billion) fund should increase its holdings of shares, and move around £71 billion ($87 billion) of its assets into riskier equity holdings.

This would mean that roughly 70% of the fund's assets are held in stocks, up from just less than 60% right now.As a result, the fund's government bond portfolio would shrink substantially. 

"A higher share of equities increases the expected return, and the contribution to the fiscal budget, but also entails more volatility in the value of the Fund and a higher risk of a decline in its long-run value," the report noted.

"The majority is of the view that this risk is acceptable, provided that there is political will and ability to adapt economic policy to the accompanying increase in risk, in both the short and long run."

Previously, the fund held around 40% in equities before increasing its allocation to 60% in 2007, just before the global financial crisis hit.

Norway's sovereign wealth fund is looking for new ways to make money given the rock-bottom yields most developed-market government debt has right now, and following the crash in oil that has seen prices for the world's most important commodity crash from more than $100 per barrel to just more than $50 now, having briefly dropped below $30 early in the year.

The crash has impacted Norway's economy so much that in 2016 — for the first time in nearly two decades — the fund is expected to  see net outflows, with the Bloomberg reporting February that the government will withdraw as much as 80 billion kroner (£7.99 billion; $9.8 billion) this year to support the economy.

Rock-bottom global bond yields are making things even more tricky, as interest rates close to zero all around the world continue to bite. The eurozone, Switzerland, Sweden, Denmark, and Japan all already have negative interest rates, and rates in most other developed markets are pretty close to zero. In the UK, the rate is 0.25%, while in the USA it is 0.5%.

Low interest rates mean low yields on bonds, meaning that the fixed-income market is not one where there is much money to be made right now, and that has helped drive the recommendation to move more money into stocks.

"With a higher share of equities the expected return will increase as will the income to the government budget. Yes, it comes with higher risk but we think we are well equipped to handle this risk," Hilde Bjornland, an economist who was part of the team that compiled the report, told the Financial Times.

Should the fund take up the report's recommendations, it could have a substantial impact on European, and even global markets. The fund's stock holdings are already so large that if averaged out, it would hold 2.5% of every single listed company in Europe. In the UK for example, the fund has invested almost £50 billion in stocks, spread across 457 different companies.

The Government Pension Fund Global is saving for future generations in Norway. One day the oil will run out, but the return on the fund will continue to benefit the Norwegian population. 

The first uses data from IPD for unlisted real estate investments, adjusted for autocorrelation. The return series from IPD can be broken down into the countries and sectors in which the fund is invested. The greatest challenge when using IPD data for calculating tracking error is that the time series are updated only quarterly or annually. The relative volatility of equities and bonds is currently calculated using weekly data, equally weighted, over a three-year period. Even an extension of the estimation period to ten years, for example, will yield relatively few observations if the calculations have to be performed on quarterly or annual data.

The second method uses data for shares in listed REITs, adjusted for leverage. The main benefit of using REITs over IPD data is the availability of observable daily prices. To be able to represent the fund’s unlisted real estate investments meaningfully, we need to select individual funds in the markets in which the fund is invested. Their leverage must also be adjusted to the same level as the “equivalent” investment in the fund. This selection process and adjustments to take account of differences in risk profile will to some extent need to be based on criteria that will be difficult for experts outside the bank to verify.

The third method is based on an external risk model developed by MSCI. The Bank has commissioned MSCI to compute a return series for an unlisted real estate portfolio that resembles the GPFG’s portfolio of unlisted real estate investments. An external risk model gives the Bank less insight into, and less control over, the parameters that influence the return series, but has the advantage of being calculated by an independent party.

The Bank of Canada flirted with the possibility of another interest-rate cut this month in the face of a gloomier forecast for the country’s export-led economy.

Governor Stephen Poloz and his top deputies “actively discussed” the merits of what would have been a third cut since the beginning of last year in the lead-up to Wednesday’s rate decision, he acknowledged to reporters in Ottawa.

In the end, the central bank opted to leave its benchmark rate at a still-low 0.5 per cent, because of the “significant uncertainties” clouding the bank’s economic outlook, including the tumultuous U.S. election and new mortgage insurance rules in Canada.

The central bank said it is closely monitoring the effect of the federal government’s move this month to tighten lending standards and limit access to mortgage insurance for riskier borrowers. The new rules should cool resale activity in the housing market and push developers to focus on building smaller units, the bank said.

The housing measures will slice as much as 0.3 per cent a year off economic growth by 2018 as resale activity and home construction take a hit, but they’ll also lead to “higher quality” borrowing patterns over the longer term, according to Mr. Poloz.

“While household debt levels have continued to increase, these measures should, over time, help ease the growth of economic vulnerabilities related to household debt and housing,” he later told members of the Senate banking, trade and commerce committee.

Earlier Wednesday, Mr. Poloz told reporters he wants to be “dead certain” that the bank’s downgraded projection for exports is permanent. He suggested that many businesses in the all-important U.S. market may be holding off on making investments until after the election, and that affects the U.S. appetite for Canadian goods and services.

“It’s worth having a little more time to examine some of these things,” Mr. Poloz explained.

Not cutting rates was the right thing to do, Toronto-Dominion Bank economist Brian DePratto said.

“An interest rate cut would likely do little to spur exports, while potentially undoing much of the impact of recent housing market rule changes,” he argued.

The central bank now expects the economy to grow 1.1 per cent this year and 2 per cent in 2017, down from its July projection of 1.3 per cent and 2.2 per cent respectively, according to its latest monetary policy report, released Wednesday. As well, the bank said the economy won’t get back to full capacity until “around mid-2018” – at least half a year later than it predicted just three months ago.

This expected delay suggests it could be another two years before the bank starts trying to push up interest rates – a timetable that now puts it well behind the U.S. Federal Reserve and could keep a lid on the value of the Canadian dollar, now trading at about 76 cents (U.S.) for the foreseeable future.

“This is a bank that has precisely zero appetite for rate hikes, and seems to be keeping a flame alive for the possibility of rate cuts, should the need arise,” Bank of Montreal chief economist Douglas Porter said in a research note.

On the positive side, the bank said the worst may be over for the resource sector, where economic activity appears to be “bottoming out.” And the bank expects the global economy will “regain momentum” over the next two years.

Still, the bleaker forecast is the latest in a series of disappointments for Mr. Poloz, who has repeatedly predicted that a rebound in non-resource exports would lift the country out of its economic funk. The bank’s latest forecast slashes expected export growth by a full percentage-point in 2017 and 2018, shaving roughly 0.5 per cent off economic growth – and some of the loss may be permanent, rather than cyclical, according to Mr. Poloz.

“The level of exports is well below where we thought it would be by now,” Mr. Poloz told reporters. He suggested that rising protectionism, the unknown status of various free-trade deals, high electricity costs and poor infrastructure may be inhibiting investment and exports.

Wednesday’s report from the bank provides an extensive explanation for why Canada’s exports haven’t hitched themselves to the recovery in the U.S. – the destination for nearly three-quarters of Canadian goods exports. The main culprits are weaker-than-expected U.S. business investment and more pronounced competitive challenges for Canadian exporters. While a cheaper Canadian dollar has made exports more affordable to foreign buyers, the currencies of major trading rivals have declined even more against the U.S. dollar, giving them an edge in the U.S. market, the bank pointed out in its report. The Mexican peso, for example, has fallen by more than 30 per cent since mid-2014, compared with a 20-per-cent drop for the loonie.

The central bank now expects U.S. business investment to grow just 3 per cent over the next two years, down from a previous estimate of 4 per cent, due to greater uncertainty.

Investors seeking insight into Bank of Canada Governor Stephen Poloz’s thinking on monetary policy need to look beyond the main rates statement for clues.

For the second time in seven months, Poloz whipsawed markets with prepared comments to reporters after the rate decision was released Wednesday, saying that the central bank “actively” considered adding stimulus to prop up a sluggish economy.

The Canadian dollar, which had rallied on the rates announcement at 10 a.m., erased gains after Poloz read from a separate statement 75 minutes later. Canada’s 2- and 10-year bond yields reacted in the same way, rising and then falling.

“It was interesting that he waited until the press conference to deliver the real message, which in the end was a pretty dovish one,” Alvise Marino, a foreign-exchange strategist at Credit Suisse in New York, said by phone Wednesday. “He just conveyed in a more strong way that easing is still on the table, which was something the market isn’t pricing at all.”

The moves reflect a shift under Poloz, who said in 2014 he was starting to offer more color on the bank’s deliberations in his preamble to the press conference after each quarterly release of the bank’s Monetary Policy Report. Other changes under Poloz include abandoning so-called forward guidance that gives a direct hint on the next move in borrowing costs, and adding new language to forecasts about inflation risks.

The opening statement at the press conference “fills the gap between the MPR and the press release, offering insight into which issues were really on the table during the deliberations and how those issues influenced the decision,” Bank of Canada spokeswoman Jill Vardy said in an e-mailed message. “We think this helps people understand better the thinking behind the decision and provides useful information to market participants about our risk management approach to monetary policy.”

Loonie Declines

The currency initially gained and bonds dropped after the central bank held its benchmark interest rate at 0.5 percent and the policy statement dropped a reference to downside inflation risks that featured in its previous stance from September. The markets then did an abrupt u-turn after Poloz said policy makers discussed monetary easing “in order to speed up the return of the economy to full capacity.”

The currency weakened 0.1 percent to C$1.3128 against the U.S. dollar as of 4 p.m. in Toronto, reversing a rally of as much as 0.8 percent. The rate on Canada’s bond due in November 2018 fell two basis points to 0.57 percent, after an earlier gain of two basis points (click on image).

“I was a little bit surprised how the statement and Poloz didn’t seem to line up too cleanly,” Tom Nakamura, Toronto-based vice president and portfolio manager at AGF Investments Inc. that has C$34 billion ($26 billion) under management. Some of the market reaction to the statement may have gone too far since it wasn’t out of line with Poloz’s overall worldview, he said. “What I think happens is that the market doesn’t think through the big picture sometimes.”

April Move

Investors went through a similar ride in April. Poloz held borrowing costs unchanged in the official rate decision, adding in his opening statement to reporters that the bank “entered deliberations” about easing monetary policy further. The dollar initially reversed losses after the rate announcement, only to resume declines during that press conference.

For a central bank that doesn’t offer minutes of their meetings, the context is helpful, said Marino at Credit Suisse.

“It was totally appropriate for them to say that in the press conference and not the statement,” he said. “It’s not different from what everybody else is doing.”

Investors will hear from Poloz again Wednesday, as he testifies at the Senate Banking Committee beginning at about 4:15 p.m. Another opening statement is expected.

• There was no surprise that the Bank of Canada decided to leave rates unchanged since oil prices have been hovering near $50 a barrel, bolstering the loonie and tightening financial conditions (remember, the loonie is a petro currency, as oil rises, it follows, lifting the pressure on the BoC to raise rates as financial conditions tighten).
• The big surprise came after during the press release when Steve Poloz said he and his top deputies "actively discussed" the merits of another rate cut. Why were they actively discussing this? No doubt, the Bank is worried about weakness in real estate and exports but I also think there was an active discussion on whether global deflation risks are really fading and more importantly, whether Janet Yellen's speech last Friday was a real game changer. 
• By all accounts, the Fed is set to raise rates by 25 basis points in December but during her speech last Friday, Fed ChairYellen dropped a bomb stating the Fed might need to stay accommodative for longer and risk overshooting its 2% inflation target. 
• I interpreted these remarks as the Fed is still worried about global deflation and might even fear it's behind the deflation curve, so there is no rush to raise rates and it might be smarter to stay accommodative for longer, even if that means risking inflation down the road (they won't publicly admit this but they'd much prefer inflation than deflation even it will take a miracle to achieve this outcome by inflating risks assets which only exacerbates rising inequality and the retirement crisis which ironically exacerbates deflation!!).
• What signal is the Fed sending to the Bank of Canada and other central banks? Basically, have no fear, the Fed is in no hurry to raise rates and even if it does raise in December, it will be a one and done deal. 
• On Thursday, the US dollar hit seven-month high after ECB meeting, pressuring oil and US stocks. I had warned my readers to ignore Morgan Stanley's call at the beginning of August on the greenback being set to tumble, and turned out to be right. The US Dollar Index (DXY) has rallied sharply since then and is now closing in on 100. 
• I spoke to my buddy in Toronto this morning. He runs a one-man currency hedge fund machine and he was telling me that he thinks now is the the time to take profits on the long USD position and if the DXY goes over 99, start shorting the greenback. He also told me to he's long the British pound (especially versus the euro) but thinks the Canadian dollar could fall as low as 73 cents (oil prices between $50 and $60 will help Alberta and bolster the loonie but slowdown in real estate and exports and divergence in monetary policy will weigh on the Canadian currency).
• Obviously my buddy who has been trading currencies for over 25 years knows what he's doing and I agree with him on a cyclical basis, especially after Yellen's speech, but structurally, I remain short currencies in regions where deflation is wreaking havoc on the economy and if a financial crisis erupts anywhere, King Dollar will surge much higher. 
• My buddy also told me that the pickup in China's PPI last week was all due to the devaluation in the Chinese currency, allowing them to import inflation but he too doesn't see this as a sustainable strategy.