Even debt-free Canadians could eventually feel a pinch from someone else's maxed-out credit cards, suggests research presented to senior officials at the federal housing agency.

Canada Mortgage and Housing Corp. board members received an update in March on the country's credit and housing trends.

The presentation contained a warning: the steady climb of the household debt-to-GDP level had put Canada's long-term economic growth prospects at risk.

The document pointed to a study that argued household debt accumulation eventually hampers economic growth over the longer term, eclipsing the nearer-term benefits of consumption.

The strong expansion of household spending, encouraged by a prolonged period of historically low borrowing rates, has created concerns over Canadians' record-high debt loads.

It has also been a major driver of economic growth.

The Canadian Press obtained a copy of the CMHC presentation via the Access to Information Act. It was included in a "confidential" memo to deputy finance minister Paul Rochon.

Citing international research, the CMHC presentation points to an estimate that says a one percentage point increase in household debt-to-GDP tends to lower growth in a country's real gross domestic product by 0.1 percentage points at least three years later.

The calculation, published in a January study by the Bank for International Settlements, was based on an average produced from the data of 54 countries from 1990 to 2015.

"Our results suggest that debt boosts consumption and GDP growth in the short run, with the bulk of the impact of increased indebtedness passing through the real economy in the space of one year," said the BIS report.

"However, the long-run negative effects of debt eventually outweigh their short-term positive effects, with household debt accumulation ultimately proving to be a drag on growth."

Only Australia has faster debt growth

An accompanying chart in the CMHC presentation showed that between 2010 and 2016 Canada's household debt-to-GDP level rose by more than five percentage points. The household debt-to-GDP ratio increased from almost 93 per cent to just over 101 per cent at the end of 2016, Statistics Canada says.

A reduction of even 0.1 percentage points in the country's GDP can have an impact. For example, Canada saw year-over-year growth in real GDP last year of 1.3 per cent.

The chart listed eight developed countries and ranked Canada second, behind Australia, for having the biggest increase in household debt-to-GDP level over the six-year period.

BMO chief economist Doug Porter says he doesn't dispute the broader conclusion that a rising household debt-to-GDP level poses risks for growth.

But he's skeptical one can draw a direct line from the household debt-to-GDP directly to economic growth down the road. For one, he said interest rate levels must be factored in.

"I'd be very cautious about putting pinpoint accuracy on that," Porter said. "I think that's incredibly difficult to do."

However, Porter says the record levels of household debt piling up in Canada, like in many industrial-world economies, does suggest it will be tougher for the country to grow as quickly as it has in the past.

"The consumer spending and housing gains that we could reap from lower interest rates have basically been reaped," he said.

"And, if anything, interest rates are probably more likely to rise than fall from current levels. So, to me that suggests we just really can't count on the consumer to really pull the economy ahead as they have in recent years."

1. The global jobs crisis: High structural unemployment, especially youth unemployment, and less and less good paying jobs with benefits.
2. Demographic time bomb: A rapidly aging population means a lot more older people with little savings spending less.
3. The global pension crisis: As more and more people retire in poverty, they will spend less to stimulate economic activity. Moreover, the shift out of defined-benefit plans to defined-contribution plans is exacerbating pension poverty and is deflationary. Read more about this in my comments on the $400 trillion pension time bomb and the pension storm cometh. Any way you slice it, the global pension crisis is deflationary and bond friendly.
4. Excessive private and public debt: Rising government and consumer debt levels are constraining public finances and consumer spending.
5. Rising inequality: Hedge fund gurus cannot appreciate this because they live in an alternate universe, but widespread and rising inequality is deflationary as it constrains aggregate demand. The pension crisis will exacerbate inequality and keep a lid on inflationary pressures for a very long time.
6. Technological shifts: Think about Amazon, Uber, Priceline, AI, robotics, and other technological shifts that lower prices and destroy more jobs than they create.

Canadians owe more than ever before on their mortgages, but fewer and fewer borrowers are falling behind on their payments.

That's one of the major takeaways from a report published Tuesday from credit monitoring firm TransUnion, which looked at every active credit file across the country to gauge the financial health of borrowers and consumers.

TransUnion found that as of the end of June, the average Canadian mortgage had $198,781 left on it, a figure that has increased by almost five per cent in the previous 12 months. That's in part a factor of high housing prices, which have prompted people to borrow more than ever to finance a home.

But it's not just that people are borrowing more — more people are borrowing, too.

"The total number of active mortgage accounts grew annually to 6.0 million, an increase of 1.2 per cent from last year," TransUnion said.

While Canadians may be borrowing more to get into the real estate market, thus far they seem to be staying on top of their debts, as delinquency rates dropped to 0.56 per cent for the third quarter in a row.

Credit agencies consider a debt to be delinquent if the borrower is more than two months behind on payments. A delinquency rate of 0.56 per cent means barely one of every 200 mortgage holders was more than 60 days behind on their mortgage payment as of the end of June.

"Despite increases in mortgage debt, serious delinquency rates remain low with very little volatility observed over the past two years," Matt Fabian, TransUnion Canada's director of research and analysis, said in a release. "Consumers have so far been able to manage their mortgage obligations despite the increasing balance levels."

Overall consumer debt climbing

But mortgages aren't the only type of debt that's growing fast. The average Canadian owed $22,154 on top of any mortgage at the end of June, TransUnion said, a figure that has grown by 2.7 per cent in the previous 12 months.

The average credit card balance was at $2,840 at the end of June, and on average, people owed $19,087 against their car, if they owned one. Some 23.7 million Canadians have at least one credit card, and there are 3.3 million auto loans across the country.

The fastest growing type of debt, meanwhile, is installment loans, which are unsecured, high-interest, short-term loans, such as the ones often offered to buy home furnishings and other big ticket items. Among the 6.4 million Canadians who had one as of the end of June, the average balance was $20,466 — up 5.5 per cent in the past year.

The delinquency rate for that type of debt is also the highest at four per cent, TransUnion said.

For the first time ever, I contested my municipal evaluation.

The valuation applied by the City of Montreal was ridiculously overstated (by at least 15%). The whole process is a bit of a sham. You have to pay $500 to contest and it is not reimbursable if you win.

Of course, the City benefits by exaggerating valuations so their incentive to err on the exaggerated end is high. I won the challenge (hands down). They didn't even put up a fight which tells that I didn't go far enough.

Somebody should really do a study which compares how municipal taxes have increased over time on an inflation adjusted basis. What is ridiculous is that the municipalities used to offer services but now charge extra for everything. I bet that taxes have increased way beyond inflation.

When a reporter asked me this week what major cities housing refugees from Vancouver or Toronto should explore to find “a bargain”, the answer was simple. None. There are no bargains just before real estate values decline. Only wealth traps. Especially for first-time buyers who cannot afford losses.

The reason is simple and it’s called B-20. The forgettable name is “Residential Mortgage Insurance Underwriting Practices and Procedures” and it emanates from the banks’ regulator, OSFI. Freaked out at the size and growth in mortgage debt, along with what looks like a rapid decline in the quality of that debt, OSFI has proposed tough new borrowing guidelines which it says, “will be issued in autumn 2017, and will come into effect shortly thereafter.”

It sure looks like a game-changer, as this pathetic blog heroically explains. The main consequence will be a stress test every person taking out or renewing a mortgage must pass, proving they can afford payments at current rate +2%. If financial circumstances have eroded or house equity faded, it’ll be current rate +3%. If you want a home loan from one of the Big Six, that’s the rule sometime after Thanksgiving.

Why is this happening?

Because (a) interest rates will be upped by the Bank of Canada another four to six times over the coming years, (b) mortgage debt is out of control and a third of borrowers say last month’s single quarter-point hike is already hurting them, and (c) down payment money from the Bank of Mom has completed screwed things up. Parental cash has purposefully skirted rules designed to protect people from borrowing too much. It’s love gone awry.

“Why is this happening? Because (a) interest rates will be upped by the Bank of Canada another four to six times over the coming years”

Really? Want to bet on that? Garth, read my blog comments because you still think rising rates are what’s going to kill the great Canadian housing bubble. You and others who think rates are headed up have been wrong and continue to claim this. You don’t see the big global deflation tsunami headed our way and how high debt and higher unemployment will kill the housing market for decades, NOT rising rates. Agree with rest of your comments.

Actually restricted credit, not higher rates, will be the true enemy of real estate. But the cost of money, nonetheless, will increase.

Norway’s $977.4 billion Government Pension Fund Global returned 2.6%, or 202 billion kroner ($25.53 billion), in Q2 of 2017.

The fund had a market value of 8.020 trillion kroner as of June 30, of which 65.1% was invested in equities, 32.4% in fixed income, and 2.5% in unlisted real estate. Equity investments returned 3.4%, while fixed-income investments returned 1.1% for the quarter. Investments in unlisted real estate returned 2.1%, and the total return on investments was 0.3% higher than the return on the benchmark index.

“The stock markets have performed particularly well so far this year, and the fund’s return in the two first quarters was 6.5[%]. This gives a total return of 499 billion kroner, which is the best half-year return measured in Norwegian kroner in the history of the fund,” said Trond Grande, deputy CEO of Norges Bank Investment Management.

However, Grande added that “we cannot expect such returns in the future. The record-high return is primarily due to the fact that the fund has become so large.”

The returns would have been even higher, however, the kroner appreciated against the main currencies during the quarter, which decreased the value of the fund by 32 billion kroner. In the second quarter, 16 billion kroner was withdrawn from the fund by the government.

While the fund said that the returns were driven by continued healthy growth in the global economy, it added that some macroeconomic data, especially for the US economy, were weaker than the market had anticipated. Growth expectations for emerging markets were mainly unchanged from the previous quarter, while those for developed markets improved, which was due to greater optimism in the euro area.

The strongest returns came from European equities, which returned 6.3%, and accounted for 36.6% of the fund’s equities at the end of Q2. The UK, which was the fund’s largest market in Europe with 9.7% of its equity investments, returned 3.3%, or 1.5% in local currency. North American stocks returned 0.7%, and comprised 38.6% of the equity portfolio. US stocks, which were the fund’s single-largest market with 36.4% of its equity investments, returned 0.8%, or 2.9% in local currency.

The health-care sector delivered the best return for the fund during the quarter, as health-care stocks returned 5.7%, spurred on by market expectations of stronger earnings in the sector. The fund said that the inability of the US Congress to significantly alter its health-care system’s regulatory framework was interpreted by the market as a continuation of stable operating conditions.

Industrials returned 4.9%, driven by an improved outlook for economic growth, particularly in Europe and emerging markets. Returns were strong in the industrial machinery sector, which was attributed to increased demand for construction machinery, and more stable demand for capital goods in the commodity industry.

Japan's GPIF and CPPIB are long-term investors and they need to think more carefully about how they will construct their respective portfolios across public and private markets to ride through the coming pension storm.

In this regard, CPPIB is well ahead of GPIF but it's a lot smaller too. GPIF will have a very hard time finding solid active managers across public and private markets as the mystery of inflation-deflation unfolds.

Still, GPIF is moving as fast as possible to diversify into private markets. It recently announced it's plowing into real estate, asking asset managers around the world to submit proposals to run portions of the fund's real estate investment portfolio.

But make no mistake, GPIF's assets recently hit a record¥144.9tn on the back on passive investments and the fund has massive beta exposure, far more than its large peers around the world. This is why the focus right now is on active managers in public and private markets.

[..] if you account for inflows and returns, and the new enhanced CPP, there is little doubt CPPIB will become a multi-trillion behemoth by 2090.

It seems crazy when you think of it but you should keep in mind by that time, world GDP will have grown significantly, increasing CPPIB's opportunity set across global public and private markets.

Also, keep in mind there are a few global pensions (Norway and Japan) that are already managing over a trillion each, and they aren't as well diversified across global public and private markets as CPPIB.

Moreover, some Canadian insurance companies manage over a trillion now, so CPPIB isn't the only large Canadian fund that will grow to become a behemoth by 2090.

How will CPPIB manage this explosive growth over the decades? The exact same way it's managed it over the last ten years, carefully and diligently diversifying across global public and private markets.

Negative interest rates will be needed in the next major recession or financial crisis, and central banks should do more to prepare the ground for such policies, according to leading economist Kenneth Rogoff.

Quantitative easing is not as effective a tonic as cutting rates to below zero, he believes. Central banks around the world turned to money creation in the credit crunch to stimulate the economy when interest rates were already at rock bottom.

In a new paper published in the Journal of Economic Perspectives the professor of economics at Harvard ­University argues that central banks should start preparing now to find ways to cut rates to below zero so they are not caught out when the next ­recession strikes (click on image).

Traditionally economists have assumed that cutting rates into negative territory would risk pushing savers to take their money out of banks and stuff the cash – metaphorically or possibly literally – under their mattress. As electronic transfers become the standard way of paying for purchases, Mr Rogoff believes this is a diminishing risk.

“It makes sense not to wait until the next financial crisis to develop plans and, in any event, it is time for economists to stop pretending that implementing effective negative rates is as difficult today as it seemed in Keynes’ time,” he said.

“The growth of electronic payment systems and the increasing marginalisation of cash in legal transactions creates a much smoother path to negative rate policy today than even two decades ago.”

Countries can scrap larger denomination notes to reduce the likelihood of cash being held in substantial quantities, he suggests. This is also a potentially practical idea because cash tends now to be used largely for only small transactions. law enforcement officials may also back the idea to cut down on money laundering and tax evasion.

The key consequence from an ­economic point of view is that forcing savers to keep cash in an electronic ­format would make it easier to levy a negative interest rate.

“With today’s ultra-low policy interest rates – inching up in the United States and still slightly negative in the eurozone and Japan – it is sobering to ask what major central banks will do should another major prolonged global recession come any time soon,” he said, noting that the Fed cut rates by an average of 5.5 percentage points in the nine recessions since the mid-1950s, something which is impossible at the current low rate of interest, unless negative rates become an option.

That would be substantially better than trying to use QE or forward guidance as central bankers have attempted in recent years.

“Alternative monetary policy instruments such as forward guidance and quantitative easing offer some theoretical promise for addressing the zero bound,” he said, in the paper which is titled ‘Dealing with Monetary Paralysis at the Zero Bound’.

“But these policies have now been deployed for some years – in the case of Japan, for more than two decades – and at least so far, they have not convincingly shown an ability to decisively overcome the problems posed by the zero bound.”

1. The global jobs crisis: High structural unemployment, especially youth unemployment, and less and less good paying jobs with benefits.
2. Demographic time bomb: A rapidly aging population means a lot more older people with little savings spending less.
3. The global pension crisis: As more and more people retire in poverty, they will spend less to stimulate economic activity. Moreover, the shift out of defined-benefit plans to defined-contribution plans is exacerbating pension poverty and is deflationary. Read more about this in my comments on the $400 trillion pension time bomb and the pension storm cometh. Any way you slice it, the global pension crisis is deflationary and bond friendly.
4. Excessive private and public debt: Rising government and consumer debt levels are constraining public finances and consumer spending.
5. Rising inequality: Hedge fund gurus cannot appreciate this because they live in an alternate universe, but widespread and rising inequality is deflationary as it constrains aggregate demand. The pension crisis will exacerbate inequality and keep a lid on inflationary pressures for a very long time.
6. Technological shifts: Think about Amazon, Uber, Priceline, AI, robotics, and other technological shifts that lower prices and destroy more jobs than they create.

1. Will it promote aggregate demand? 
2. Will it significantly reduce inequality?
3. Will it spur more business investment and help productivity?
4. How will it impact risk-taking behavior?
5. How will it impact pensions? Will it exacerbate pension deficits?

Trenches have been dug, heels are firmly planted, fingers are locked and loaded, ready to point at the most convenient scapegoat — the war over Kentucky’s public pensions has begun.

The first strike came Monday, when a state-paid consulting group, PFM, issued a report recommending drastic changes to the pension plans that cover most of Kentucky’s public employees — retired, active and future.

Read more here: http://www.kentucky.com/news/politics-government/article170086847.html#storylink=cpy

Lawmakers were quick to point out that the recommendation was just that — a recommendation.

“There’s good ideas in there. I will say there’s a lot of good ideas, some of them may be implemented, some of them may not be,” Gov. Matt Bevin said in a Facebook Live video hours after the report. “There’s some that, quite frankly, I don’t think there will be an appetite for, even though they may be financially appropriate for us to pursue.”

Legislators, the people who will vote on any pension overhaul, have expressed similar reservations about the report, which contained proposals that outraged every subset of government employees in the state.

“The PFM report should be, and I think to a large degree was, not political and now you’re going to introduce politics in the process,” said state Rep. James Kay, D-Versailles. “And there are going to be winners and losers.”

So far, government workers have largely been kept in the dark about what action the legislature might take.

Members of the House of Representatives held a closed-door meeting Tuesday afternoon to discuss the PFM report, shutting the public out of their first discussion about potential changes that might directly affect the pocketbooks of about 500,000 Kentuckians.

Lawmakers said the meeting largely consisted of asking the consultants and state budget director John Chilton questions about the report. Among other things, it recommended raising retirement ages, freezing the pensions of most state and local government workers and pushing them into 401(k)-style retirement plans.

Going forward, a variety of interest groups are poised to battle for the votes of lawmakers.

“I think we’re all hearing from folks,” said House Speaker Jeff Hoover, R-Jamestown. “Look, we’re all concerned about it, it affects every Kentuckian. I said yesterday that this issue is not just about retired workers or retirees, it’s not just about current state workers or current teachers. It affects everything with regard to the state budget and it affects every Kentuckian.”

Facebook pages for state government workers and retirees lit up with reaction Monday night to the consultant’s report and Bevin’s video chat. All of the groups have asked members to make their presence felt in Frankfort.

“We are currently in a fight to preserve the retirement benefits so many have been promised and spent a lifetime of service earning,” the Kentucky Fraternal Order of Police said on Facebook. “Please tell your state legislators to protect our pensions.”

The Kentucky Government Retirees group posted a request Tuesday for lawyers to offer suggestions about “how to proceed with evaluating and securing suitable legal counsel.” The group has pledged to fight a recommendation that would take away cost-of-living adjustments given to retirees from 1996 to 2012, a change that would reduce the monthly checks for many in the state (click on image).

Read more here: http://www.kentucky.com/news/politics-government/article170086847.html#storylink=cpy

Kentucky's finance and administration cabinet, Frankfort, hired PFM Group to provide a performance and best practices analysis of the state's retirement plans.

PFM will analyze the plans’ overall solvency and liquidity, outstanding obligations, reasons for the plans’ current financial status, and best practices and future actions to shore up the plans, said a news release from the governor’s office on Monday.

The firm’s final report is due Dec. 31, said a spokeswoman in the finance and administration cabinet in an e-mail.

An RFP was issued in May.

PFM Group will provide the state with financial and other information relating to the current and projected financial situation on its retirement plans and advising the state on various paths forward. “Reforming the state’s ailing pension systems is one of this administration’s top priorities,” said Gov. Matt Bevin in the release. “The findings that will come from this pension fund audit will accurately identify our actual pension liabilities. It is our intention to shine the antiseptic light of transparency on the country’s worst funded pension system and financially secure the pension system for generations to come. Kentucky taxpayers, retirees and current employees deserve nothing less.”

The $18 billion Kentucky Teachers' Retirement System, $15 billion Kentucky Retirement Systems and $94 million Kentucky Judicial Form Retirement System, all based in Frankfort, face roughly $35 billion in unfunded liabilities combined.

The PFM Consulting Group says that the many changes in recommended Monday for Kentucky's pension systems would eventually save the state more than $1 billion a year.

That's if all of them are adopted.

And some of the recommendations have been controversial.

Of course, it remains to be seen what the final result will be when a special legislative session — which Gov. Matt Bevin has said he will call this fall — convenes. The governor insisted on Facebook Live Monday night that any plan would be done in consultation with state workers and would protect benefits they have accrued thus far.

Of course, PFM's recommendations address other issues besides benefits (assumptions used by the retirement plans, investment practices of retirement systems, the basic approach the state takes to funding the plans, etc.)

But here are some of its more controversial recommendations:

1. Repeal retirees' cost of living adjustments

PFM recommends state and local government retirees give up the portion of their future benefit payments resulting from cost of living increases granted to Kentucky Retirement Systems members between 1996 and 2012. That would mean a reduction in benefit checks for anyone who retired before 2012, with some reductions of 25 percent or more.

2. Suspend teachers' cost of living adjustments

Recommends suspending future cost of living adjustments for teachers until the Teachers’ Retirement System is 90 percent funded, which is certain not to happen for many years. Teachers currently get cost of living increases, partly because — unlike most other public employee retirees — they do not get Social Security benefits, which do include an annual cost of living adjustment.

3. Create new 401(k) plans for most state and local government workers

Recommends freezing benefits earned so far and moving current workers into a 401(k)-style defined contribution plan for the rest of their careers. This proposal includes an optional “buyout” provision to encourage workers to move fully into the 401(k)-style plan. The new 401(k)-type plan would require an employee contribution of 3 percent of salary and a guaranteed base employer contribution of 2 percent of salary. Employers would also match 50 percent of additional employee contributions up to 6 percent of salary. Employees in hazardous duty jobs, such as police and firefighters, would not be shifted to the new 401(k) plans.

4. Increase retirement age for current workers

The consultant recommends increasing the age for retirement with non-reduced benefits to 65 for non-hazardous workers and teachers and to 60 for hazardous duty employees.

5. Drop some teacher benefits

Recommends ending certain benefits of teachers, including one that lets teachers use accumulated unused sick days to enhance their benefits.

6. Move new teachers into 401(k) plan

Recommends moving new teachers into a 401(k)-type plan with Social Security. This move into Social Security would increase the cost to employers. PFM says school boards could pick up this new Social Security cost.

7. Don't separate County Employees Retirement System

Does not recommend separating the County Employee Retirement System plans from the Kentucky Retirement Systems. CERS funds pensions for county and city employees as well as non-teaching school district employees, from the Kentucky Retirement Systems.

The Kentucky League of Cities and Kentucky Association of Counties want to pull CERS from the KRS umbrella, which includes other pension plans that aren't as well-funded.

Minnesota’s debt to its workers’ retirement system has soared by $33.4 billion, or $6,000 for every resident, courtesy of accounting rules.

The jump caused the finances of Minnesota’s pensions to erode more than any other state’s last year as accounting standards seek to prevent governments from using overly optimistic assumptions to minimize what they owe public employees decades from now. Because of changes in actuarial math, Minnesota in 2016 reported having just 53 percent of what it needed to cover promised benefits, down from 80 percent a year earlier, transforming it from one of the best funded state systems to the seventh worst, according to data compiled by Bloomberg.

“It’s a crisis," said Susan Lenczewski, executive director of the state’s Legislative Commission on Pensions and Retirement.

The latest reckoning won’t force Minnesota to pump more taxpayer money into its pensions, nor does it put retirees’ pension checks in any jeopardy. But it underscores the long-term financial pressure facing governments such as Minnesota, New Jersey and Illinois that have been left with massive shortfalls after years of failing to make adequate contributions to their retirement systems.

The Governmental Accounting Standards Board’s rules, ushered in after the last recession, were intended to address concern that state and city pensions were understating the scale of their obligations by counting on steady investment gains even after they run out of cash -- and no longer have money to invest. Pensions use the expected rate of return on their investments to calculate in today’s dollars, or discount, the value of pension checks that won’t be paid out for decades.

The guidelines require governments to calculate when their pensions will be depleted and use the yield on a 20-year municipal bond index to determine costs after they run out of money.

The Minnesota’s teachers’ pension fund, which had $19.4 billion in assets as of June 30, 2016, is expected to go broke in 2052. As a result of the latest rules the pension has started using a rate of 4.7 percent to discount its liabilities, down from the 8 percent used previously. As a result, its liabilities increased by $16.7 billion.

The worsening outlook for Minnesota is in line with what happened nationally. Pension-funding ratios declined in 43 states in the 2016 fiscal year, according to data compiled by Bloomberg. New Jersey had the worst-funded system, with about 31 percent of the assets it needs, followed by Kentucky with 31.4 percent. The median state pension had a 71 percent funding ratio, down from 74.5 percent in 2015.

While record-setting stock prices boosted the median public pension return to 12.4 percent in 2017, the most in three years, that won’t be enough to dig them out of the hole.

Only eight state pension plans, in Minnesota, New Jersey, Kentucky and Texas, used a discount rate “significantly lower" than their traditional discount rate to value liabilities, according to July report by the Center for Retirement Research at Boston College.

“Because of that huge drop in the discount rate under GASB reporting, their liabilities skyrocket," said Todd Tauzer, an S&P Global Ratings analyst. “That’s why you see that huge change compared to other states.”

Public finance scholars at George Mason University’s Mercatus Center have found “considerable variance" in how states were applying the new standards. In Illinois, for example, despite the state’s poor history of funding its plans, actuaries project they won’t run of money until 2072.

In Minnesota lackluster returns and years of shortchanging have taken a toll. The state’s pensions lost 0.1 percent in fiscal 2016.

But other factors also helped boost Minnesota’s liabilities: Eight of Minnesota’s nine pensions reduced their assumed rate of return on their investments to 7.5 percent from 7.9 percent, while three began factoring in longer life expectancy.

Minnesota funds its pensions based on a statutory rate that’s lower than what’s need to improve their funding status. School districts and teachers contribute about 85 percent of what’s required to the teacher’s pension, according to S&P Global Ratings.

“It’s woefully insufficient for the liabilities," said Lenczewski, the director of Minnesota’s legislative commission on pensions. “You just watch this giant thing decline in funding status."

Uh oh. The miss on U.S. employment numbers in August, when the economy created 156,000 jobs versus 180,000 expected, is likely to reopen the debate about the Federal Reserve's monetary tightening stance.

Wage growth also missed expectations slightly, coming in at 2.5% versus 2.6%, while the unemployment rate was 4.4% compared with expectations of 4.3%. Reaction in European assets was muted, with stock markets still in positive territory and the euro virtually flat.

The Federal Reserve has been talking about shrinking its huge balance sheet, but renowned Societe Generale bearish economist Albert Edwards believes the U.S. is heading straight toward deflation.

"There is mounting evidence that underlying U.S. CPI inflation has already slid into outright deflation in exactly the same way that Japan did seven years after its credit bubble burst. Hence, we repeat our call for U.S. 10-year bond yields to ultimately converge with Japan and Germany at around minus 1%," Edwards wrote in recent research.

After Japan's asset bubble burst in 1991-1992, the country experienced the so-called "lost decade" -- a period of economic stagnation that in fact should be re-named the lost two decades, as it extended well beyond the first 10 years.

This stagnation is due to deleveraging by households at a time when the population is aging rapidly, in Edwards' view. "Both factors would also combine to push the West into a similar deflationary bust, despite the best efforts of policymakers (who incidentally would in no way follow the advice they had previously given Japan to liquidate capacity)," he said.

Like many other market observers, Edwards focuses on wage data. He noted that ordinarily, at this point in the U.S. economic cycle, a tight labor market would normally have caused a "notable upturn" in wages and inflation. This would prompt the Fed into a tightening cycle that would usually end in a recession.

Edwards had expected this to happen at the start of the year, and the ensuing recession to tip the U.S. into deflation, but now he said he had been "too optimistic" about that scenario. He noted that over the past six months there were "consistent downside surprises" in the pace of acceleration for wages, which came hand-in-hand with "an unprecedented slump in underlying U.S. CPI inflation into outright deflation."

Core CPI (excluding food, energy and shelter) never fell over a six-month period since the 1960s, according to Edwards, who added: "Deflation did not need another US recession to emerge. It is already here."

[...] it’s the wage data that, for policy makers, may be the greatest disappointment and will provide the doves, who are concerned about the economy’s lack of inflation, serious arguments to delay the beginning of balance-sheet unwinding at this month’s FOMC.

There are two big risks in the market right now:

1. A major correction or even a meltdown unlike anything we have seen before as literally every risk asset is way overvalued.
2. A 1999-2000 melt-up where stocks go parabolic led by tech giants and biotech, forcing fund managers to keep buying at higher multiples or risk severe underperformance.

Risk managers often focus on the first risk but neglect the second one which is much more painful because it can last a lot longer than fund managers can stay solvent.

No doubt, 2008 was very painful, I remember it like yesterday when the Dow was falling 400, 500 or 700 points a day. It was beyond scary and I don't want to minimize the psychological effects of a severe meltdown.

But what about the risks of stocks continuing to grind higher? I'm not going to lie to you, that risk is in the back of my head too at the time of writing this comment, and it's something I lived back in 1999-2000 when you'd wake up and see tech stocks up 10, 20 or 30 percent a day every single day!

It was relentless, like a giant steamroller eviscerating short sellers and leaving many value managers scratching their head asking whether there is a new paradigm in markets.

The problem with these melt-up rallies is they're led by huge liquidity. That's what happened back in 1999-2000 and it took several rate hikes before that tech bubble burst.

But now we have even more liquidity in the system as central banks around the world slashed rates to near zero and engaged in unprecedented quantitative easing.

In other words, it could take a lot of time for this liquidity party to dry up so don't be surprised if stocks continue making record gains, frustrating fund managers who don't want to indiscriminately buy at these high valuations.

1. The global jobs crisis: High structural unemployment, especially youth unemployment, and less and less good paying jobs with benefits.
2. Demographic time bomb: A rapidly aging population means a lot more older people with little savings spending less.
3. The global pension crisis: As more and more people retire in poverty, they will spend less to stimulate economic activity. Moreover, the shift out of defined-benefit plans to defined-contribution plans is exacerbating pension poverty and is deflationary. Read more about this in my comments on the $400 trillion pension time bomb and the pension storm cometh. Any way you slice it, the global pension crisis is deflationary and bond friendly.
4. Excessive private and public debt: Rising government and consumer debt levels are constraining public finances and consumer spending.
5. Rising inequality: Hedge fund gurus cannot appreciate this because they live in an alternate universe, but widespread and rising inequality is deflationary as it constrains aggregate demand. The pension crisis will exacerbate inequality and keep a lid on inflationary pressures for a very long time.
6. Globalization: Capital is free to move around the world but labor isn't. Offshoring manufacturing and service sector jobs to countries with lower wages increases corporate profits but exacerbates inequality.
7. Technological shifts: Think about Amazon, Uber, Priceline, AI, robotics, and other technological shifts that lower prices and destroy more jobs than they create.

The Bank of Canada unexpectedly hiked its key interest rate by 25 basis points to 1.00% on Wednesday, citing stronger than expected economic data.

The majority of economists surveyed by Bloomberg forecast that the central bank would hold at this meeting.

"Recent economic data have been stronger than expected, supporting the Bank's view that growth in Canada is becoming more broad-based and self-sustaining," the bank said in the accompanying statement.

The bank also said that although the global economy is seeing stronger than expected growth indicators there are "significant geopolitical risks and uncertainties around international trade and fiscal policies remain, leading to a weaker US dollar against many major currencies."

Wednesday marks the bank's second consecutive rate hike.  At its previous meeting in July, the BoC raised its key rate for the first time in seven years, also by 25 basis points.

Investors had been expecting the bank to hike one more time this year, said Craig Erlam, senior market analyst at OANDA, in emailed comments ahead of Wednesday's rate decision. However, most thought the rate hike would come later in the year, not at the September meeting.

Looking forward, the BoC suggested that there could be more rate hikes in the future.

"While we can’t rule out another rate hike before the end of this year, we should note that the economy is still overly dependent on the heavily indebted household sector to support economic growth," said David Madani, senior Canada economist at Capital Economics, in emailed comments. "That was possible when housing prices were rising rapidly and interest rates were at record lows. But both of those supports are clearly fading."

"With the housing market teetering even before rates began to rise, we expect the economy to lose momentum before the year is over, prompting the Bank to abort its rate hike cycle."

The Canadian dollar shot up after the announcement. It was stronger by 1.1% at 1.2238 at 10:05 a.m. ET after holding little changed ahead of the decision.

Canadian real estate prices have soared, and so did borrowing against that value. Our analysis of domestic bank filings from the Office of the Superintendent of Financial Institutions (OSFI) shows that loans secured against property has reached an all-time high. More surprising is the unprecedented rate of growth experienced this year (click on image).

Canadians Borrowed Against Over $313 Billion In Real Estate

Loans secured against residential real estate shattered a few records in June. Over $313.66 billion in real estate was used to secure loans, up 3.43% from the month before. The rise puts annual gains 11.16% higher than the same month last year, an increase of $31.51 billion. The monthly increase is the largest increase since March 2012. The annual gain is unprecedented according to an aggregate of domestic bank filings (click on image).

Over $266 Billion Was For Non-Business Related Reasons

Not all borrowing against residential property is all bad, sometimes it’s a calculated risk. For example, someone may need to secure a business loan, and use the loan for operating risks. It doesn’t mean the property is safe, but it’s a risk that could potentially boost the economy (click on image).

This is opposed to non-business loans, which is used as short-term financing. This type of financing is often used for things like renovations, and putting a fancy car in the driveway. Experts have observed that more homeowners are using these to prevent bankruptcy. Bottom line, it’s not typically healthy looking debt. So let’s remove loans obtained for business reasons, and take a peek at higher risk debt.

The majority of these loans are non-business related according to bank filings. The current total is over $266 billion as of June 2017, a 1.01% increase from the month before. This is a 4.9% increase from the same month last year, which works out to $12.49 billion more. Fun fact, that’s around $23,763 per minute. The number is astronomical.

Are Canadians Borrowing Time?

Debt experts have expressed concern with the rate homeowners are borrowing against their homes. Hoyes-Michalos, one of Ontario’s largest debt consultancies, recently said more Canadians have been borrowing against their home to avoid filing for bankruptcy. This is a temporary fix that will become much more complicated in the very near future. As interest rates rise to normal levels, the ability to keep making payments becomes harder. Hoyes-Michalos estimates a mild rise in rates could push bankruptcies above 2009 levels.

Increasing equity extraction remains a sleeper threat for Canadian real estate markets. Borrowing against homes increases the chance that a mild shock could impact real estate. This shock could be a correction, recession, or even just higher interest rates. Normal market mechanics have become a threat to the economy, which is pretty disturbing. Bottom line, try not to buy more home than you can afford.

The Ontario Teachers’ Pension Plan reached an asset total of $180.5 billion as of June 30, 2017, representing a $4.9-billion increase since the start of the year.

“Central banks are pulling liquidity and the geopolitical realities speak for themselves. While these factors lend uncertainty to markets, I’m pleased we had a half year with solid returns,” said chief executive officer Ron Mock during the plan’s mid-year conference call.

The plan’s net return was 3.6 per cent, equalling an investment income of $6.4 billion. “These results illustrate that we have remained disciplined and are executing against our strategy of investing for the long term,” said Mock.

Shifts in asset class exposure have been broadly positive for the fund. “As we balance our portfolio risk, we have increased our exposure to private asset classes while decreasing our exposure to public equities,” said Bjarne Graven Larsen, chief investment officer. “At the same time, we are leveraging our core active management strength across all asset classes. As such, we have reduced out allocation to passive equity investments and increased our allocation to actively managed investments.”

Inflation-sensitive assets were the only asset class that performed worse than anticipated given market conditions, said Larsen.

The Canadian dollar’s appreciation against many global currencies during the first half of the year was a significant factor to contend with. Gross asset return in local currencies was 4.5 per cent. “Currency volatility continues to be a theme in 2017, shaving 0.8 per cent from returns in the half of the year in Canadian dollar terms. This is because we invest in 37 currencies in over 50 countries but we report all assets and liability in Canadian dollars.”

“While we like foreign assets, we do not always like the associated currency risk.” The currency risk has held an evident sting in 2017 so far: in dollar terms, that 0.8 per cent meant $1.4 billion less in returns.

Ontario Teachers' Pension Plan (Ontario Teachers') today announced its net assets reached $180.5 billion as of June 30, 2017, a $4.9 billion increase from December 31, 2016. The total-fund gross return was 3.7% (3.6% net of investment administrative expenses), reflecting $6.4 billion of income generated by investments.

The five- and ten-year gross returns as at December 31, 2016 are 10.5% and 7.3% respectively. Since its inception in 1990, the Plan's annualized gross return as at December 31, 2016 was 10.1%.

"At Ontario Teachers' our investment portfolio is designed for stable performance in a variety of market conditions," said Ron Mock, President and Chief Executive Officer. "Our international team of investment professionals is focused on identifying opportunities to help deliver sustainable pensions to our members."

Ontario Teachers' continued to execute on its long-term strategy based on three pillars: total-fund returns, value-add (above benchmark) returns, and risk management. Key initiatives in this area include the launch of a department responsible for developing global investment relationships, and the centralization of trade and treasury functions to improve efficiency, support innovation and decrease execution costs.

It also involved the implementation of Ontario Teachers' previously-announced asset class realignment to better reflect the behaviour and risk-profile of its investments, as follows (click on image):

"Returns in the first half of 2017 were driven by strong performance from global public equities, infrastructure, private equity and government bonds. Overall returns were offset by the impact of currency and declining commodity and natural resource prices," said Chief Investment Officer Bjarne Graven Larsen.

Ontario Teachers' takes a disciplined approach to managing the portfolio through a variety of different market conditions. A forward-looking and inclusive focus across the organization helps ensure a diverse allocation of risk with appropriate and aligned interest rate, inflation, foreign exchange and equity exposures.

Gross asset return in local currency was 4.5%. The Plan invests in 37 global currencies and in more than 50 countries, but reports its assets and liabilities in Canadian dollars. In the first half of 2017 the appreciation of the Canadian dollar had an impact of - 0.8%, or -$1.4 billion, on the Plan's total-fund gross return.


In June, as a result of the preliminary surplus reported as of January 1, 2017, the Ontario Teachers' Federation (OTF) and the Ontario government, which jointly sponsor the pension plan, announced they will use surplus funds to restore full inflation protection for retired members and decrease contribution rates by 1.1% for active members. Both changes are effective January 1, 2018.

*Net of trading costs, investment management expenses and external management fees, but before Ontario Teachers' investment administration expenses.

About Ontario Teachers'

The Ontario Teachers' Pension Plan (Ontario Teachers') is Canada's largest single-profession pension plan, with $180.5 billion in net assets at June 30, 2017. It holds a diverse global portfolio of assets, approximately 80% of which is managed in-house, and has earned an annualized gross rate of return of 10.1% since the Plan's founding in 1990. Ontario Teachers' is an independent organization headquartered in Toronto. Its Asia-Pacific region office is located in Hong Kong and its Europe, Middle East & Africa region office is in London. The defined-benefit plan, which is fully funded, invests and administers the pensions of the province of Ontario's 318,000 active and retired teachers. For more information, visit otpp.com and follow us on Twitter @OtppInfo.

[..] I typically don't cover CPPIB's quarterly results or la Caisse's mid-year results. In fact, I truly believe both organizations should abolish these intra-year performance updates, they are a nuisance and in my opinion, totally useless.

Why? Who cares how CPPIB performs in any given quarter or what la Caisse's mid-year results are? These pension funds manage billions in pension assets for people who have long-dated liabilities, so the only results that truly matter are long-term results.

The other reason why I don't cover these performance updates in detail is they typically omit valuations of private markets, I know that's a fact for CPPIB but maybe la Caisse includes them in their mid-year results.

Having said this, following the 2008 debacle, la Caisse has to report its mid-year results by law and so does CPPIB, its law says the Fund will provide quarterly updates of its performance.

In June, as a result of the preliminary surplus reported as of January 1, 2017, the Ontario Teachers' Federation (OTF) and the Ontario government, which jointly sponsor the pension plan, announced they will use surplus funds to restore full inflation protection for retired members and decrease contribution rates by 1.1% for active members. Both changes are effective January 1, 2018.

The largest U.S. pension fund is talking to BlackRock Inc. about outsourcing its private equity business as it seeks to control fees and offset anemic returns, people familiar with the matter said.

The California Public Employees’ Retirement System is in discussions with New York-based BlackRock about managing some or all of its $26.2 billion in private equity investments, said the people, who asked not to be identified because the conversations were private. The discussions are preliminary, they said.

Calpers spokesman John Osborn and Brian Beades, a spokesman for BlackRock, declined to comment.

Calpers is reckoning with criticism over its private equity investing and how it discloses and accounts for fees. The pension giant convened a panel of executives, including Carlyle Group LP’s Sandra Horbach and BlackRock’s Mark Wiseman, to discuss possible models during a board meeting in July. Calpers leadership raised questions about challenges of bringing direct-investing capabilities in-house, contracting with outside managers or creating an independent entity with appropriate oversight.

Target Cut

Calpers, which manages about $333 billion on behalf of police officers, firefighters and other current and retired government employees, is trying to improve its investment performance and reduce fees amid low returns across many asset classes. In December, Calpers voted to cut its long-term return target from 7.5 percent a year to 7 percent, a move that will require larger contributions from workers and taxpayers.

The mandate would be a big win for BlackRock, which is best known for offering lower-fee passive products, such as iShares exchange-traded funds. The world’s largest money manager, which oversees $5.7 trillion in assets, has been trying to expand its more lucrative alternatives business to increase fee revenue and meet client demand for investments that aren’t closely correlated to the stock and bond markets.

BlackRock’s $128 billion alternatives business includes private equity, real estate, infrastructure and hedge funds. The firm hired Wiseman last September as chairman of the unit and global head of active equities. He previously led the Canada Pension Plan Investment Board and directed the private equity efforts at Ontario Teachers’ Pension Plan Board.

Real Desrochers, the head of Calpers’s private equity division, quit in April. The fund hasn’t announced plans to replace him.

The California Public Employees’ Retirement System (CalPERS) is in talks to outsource its private equity business to BlackRock Inc (BLK), according to a person familiar with the matter.

The largest U.S. pension fund’s discussions with BlackRock about managing some or all of its private equity investments are at a preliminary stage and may not result in a deal, the person added.

Private equity has been CalPERS’ best-performing asset class in the past two decades and accounts for about $26 billion of its portfolio.

But CalPERS, under increasing pressure to achieve higher returns, has been criticized for accepting the high fees and limited disclosures typically associated with the asset class.

The fund said in July it was considering making direct investments in private companies, a potential shift in strategy to improve returns on their investments, in part by cutting fees.

“No decisions have been made. We are still looking at models to bring back to the board,” a spokeswoman for CalPERS said on Thursday.

BlackRock declined to comment.

Bloomberg reported CalPERS’s discussions with New York-based BlackRock earlier on Thursday.

Canadian pension plans are among the most admired institutional investors for their prowess as money managers. Now pension plans in Canada are upping the ante, increasingly issuing long-term bonds and using the borrowed money, or leverage, to try and generate even better returns, a new report shows.

Much of the money raised will back private equity investments, a big source of outperformance for the top-ten Canadian pension plans, according to a research report on pension plan debt issuance that will be released this week by capital markets technology firm Overbond. The company is an electronic platform for primary bond issuance, directly connecting issuers with investors.

“On the back of their huge private equity businesses, Canadian pension plans have become debt issuers themselves,” says Vuk Magdelinic, CEO of Overbond.

According to the report, Canadian pension plans are taking advantage of their strong long-term track records and high credit ratings to issue debt at low rates. The report is based on interviews with institutional investors and data from the Overbond platform. The platform allows issuers to identify potential bond buyers, as well as benchmark and price issues.

“The plans want to lever up, but not at all costs,” says Magdelinic. One such recent deal: AIMCo Realty Investors, a division of Alberta Investment Management Co., issued C$400 million ($327 million) in seven-year senior unsecured notes on June 26th.

Plans are using borrowed money to try and counter the pressure from the falling number of active workers that are supporting their retirees. Institutional investors, particularly corporate pensions, have been eager to buy bonds issued by the Canadians.

“The market is hungry for new bonds, and this is a quality type of issuer,” says Magdelinic. “Financing private equity through the bond market is an efficient form of financing.”

Issuing bonds is not the only way institutional investors can leverage their portfolios. They can also directly invest in hedge funds and other vehicles that use complex derivatives.

All but one of the top-ten Canadian pension plans have more than 20 percent of their portfolios in private equity, an allocation that has contributed to excess returns over the past ten years, according to the Overbond report. Ontario Teachers’ Pension Plan, for one, has a whopping 46 percent of its portfolio in private equity.

“In order to fund more PE acquisitions and maintain high returns, pension plans are more inclined to issue long-term debt securities,” write the report’s authors. Eight of the top-ten Canadian pension plans have issued debt, with $32 billion currently outstanding, or 2 percent of their combined assets.

Five-year annualized returns for the top-ten Canadian funds hover around 10 percent, compared with the 2 percent generated by the S&P TSX Total Returns index. Still, many Canadian pension funds need more. They have to support a growing number of retiring baby boomers through longer life spans than previous generations.

At the same time, fewer workers, who pay into the pension system with each paycheck, are joining the public sector than are retiring, putting more pressure on other income sources. According to the report, OMERS, the Ontario pension for municipal workers, had nine active employees for every retiree in 1976, four in 1986, and less than two active workers per retiree in 2016.

Canadian public pensions are issuing debt to increase returns, even as corporate pensions are selling bonds to fill funding holes. In July, Kroger, the U.S. supermarket chain, issued debt to help the underfunding of its pension plan, while FedEx did the same in January.

For the second time in a week, Canadian pension funds have demonstrated that their debt offerings are more than welcome anywhere — even in markets where they haven’t been before.

Wednesday, AIMCo Realty Investors LP, a unit of AIMCo, an Alberta Crown corporation with almost $100 billion in assets, launched its initial debt offering in Canada. The unit hoped to raise $400 million by way of an offering of seven-year senior unsecured notes.

Before noon, the $400-million target was reached — and word is that because of strong demand, the issuer could have raised more — and AIMCo was required to pay 2.266 per cent. The notes, which could only be sold in Canada, were rated AA low by DBRS.

In an email, AIMCo said the “debt issuance is a highly cost-effective financing strategy that will provide a new source of funds and liquidity, as well as, enhance returns for AIMCo’s clients.”

It plans to use the proceeds to repay a revolving credit facility and for general corporate proceeds.

One week back, it was CPP Investment Board’s turn to branch into new markets. CPPIB Capital, a unit of CPPIB, launched its initial offering of euros and raised 2 billion euros over a seven-year term at a coupon of 0.375 per cent. Given that the senior unsecured notes — rated AAA by four rating agencies — were priced at a slight discount, the yield to maturity, at issue, was 0.465 per cent.

And as further proof that things go in threes, last Friday, Montreal-based PSP Capital Inc. priced a $1.75-billion five-year offering of senior unsecured notes. For that privilege, the borrower was required to pay 1.73 per cent. TD, BMO and CIBC were joint leads on the private placement.

These three recent offerings, two of which were in new markets, continue a trend that started in late 2001 when Ontrea Inc. a real estate, non-taxable company owned by Ontario Teachers Pension Plan Board, became the first pension fund to issue debt. It raised $600 million of AAA-rated debt at 5.7 per cent with the interest payments and repayment of capital unconditionally and irrevocably guaranteed by the fund. Such a guarantee was possible because of provincial legislation.

One year later, OMERS, through OMERS Realty, entered the debt issuing game with its initial offering. In 2003, CDP Financial Inc., the funding arm for subsidiaries of the Caisse de depot, raised $750 million for five years in what was its inaugural issue. Those offerings were rated AAA.

All those entities have continued to borrow — some in different form. Last March, Cadillac Fairview Properties Trust, a unit of Ontario Teachers, raised US$1 billion in its initial offering. The AAA-rated issuer was established to hold all of the shares and inter-corporate debt of Cadillac Fairview Corp. and Ontrea (In effect, the ownership, valued at $22.4 billion, was transferred to the trust from Teachers.)

bcIMC Realty Corp. OPB Finance Trust, and PSP Capital have also issued debt, not all of which was rated AAA. But of all the pension funds, the CPPIB has been the most active borrower.

According to its latest annual report, for the 12 months ended March 31, it raises external debt under a global medium term note program. It does that by selling unsecured senior notes by way of private placements. In all, when its Canadian borrowings are included, it has $8.8 billion of debt outstanding. It also has issued $11.1 billion of commercial paper via its Canadian and US programs.

 "Yes they are here to stay. We now have a commercial paper program.Market needs more frequent updates as other plans do. So it is something we will be doing as an ongoing semi annual process. Mid year and year end."

I first met Ron back in 2002 when I was working as a portfolio analyst for Mario Therrien at the Caisse covering directional hedge funds and a few fund of funds. That first meeting left a lasting impression on me. In fact, I was so blown away that kept thinking how I wish I worked for him.

I remember taking a lot of notes in that meeting. I was a junior asking an industry veteran a lot of questions. I was fascinated by hedge funds and didn't want to squander the opportunity to learn as much as possible from one of the world's best hedge fund investors.

Ron started the meeting by stating: "Beta is cheap but true alpha is worth paying for."What he meant was you can swap into any index for a few basis points and use the money for overlay alpha strategies (portable alpha strategies). His job back then was to find the very best hedge fund managers who can consistently deliver T-bills + 500 basis points in any market environment. "If we can consistently add 50 basis points of added value to overall results every year, we're doing our job."

He explained to me how he constructed the portfolio to generate the highest possible portfolio Sharpe ratio. Back then, his focus was mainly on market neutral funds and multi-strategy funds but they also invested in all sorts of other strategies that most pension funds were too scared to invest in (strategies that fall between private equity and public markets; that changed after the 2008 crisis). He wanted to find managers that consistently add alpha - not leveraged beta - using strategies that are unique and hard to replicate in-house.

As you know, at this stage in my life, I want to pass along the principles that have helped me and Bridgewater. It was these principles, and not me, that produced whatever success we’ve had, so I believe they can also help other people and other organizations. To pass them along, I did a TED talk and wrote my book, Principles. The 16-minute TED talk will give you a glimpse into the logic of our culture and what it looks like from the inside. The book will give you a much richer picture. What you do with them is up to you.

What our culture is really like and the logic behind it is confusing for some people because I haven't described it openly before and because it has been talked about a lot in the media, occasionally by sensationalistic writers who create distorted perspectives. The most studied and professional views come from three world-renowned organizational psychologists and business professors who examined Bridgewater in depth. In case you're interested, here's some of what they wrote in their books.

Adam Grant in his book, Originals, wrote:

"My time studying Bridgewater began to change me. I'd become more direct in giving critical feedback ... I'd come to believe that no one had the right to hold a critical opinion without speaking up about it."

“When I polled executives and students about the strongest culture they had ever encountered in an organization, the landslide winner was Bridgewater Associates.”

“Although there’s always a lot of debate, Bridgewater is a highly cohesive, close-knit community, to the point that its staff frequently call it a family, and it’s common for employees to stay for decades.”

“In the investment world, you can only make money if you think differently from everyone else. Bridgewater has prevented groupthink by inviting dissenting opinions from every employee in the company. When employees share independent viewpoints instead of conforming to the majority, there’s a much higher chance that Bridgewater will make investment decisions no one else has considered and recognize financial trends no one else has discerned. That makes it possible to be right when the rest of the market is wrong.”

“At Bridgewater, employees are expected to challenge the principles themselves. During training, when employees learn the principles, they’re constantly asked: Do you agree? ... Rather than deferring to the people with the greatest seniority or status . . . decisions at Bridgewater are based on quality. The goal is to create an idea meritocracy, where the best ideas win. To get the best ideas on the table in the first place, you need radical transparency.”

“Dalio can be confident that members of his staff won’t feel pressured to nod and smile whenever he presents an opinion; his whole team will be radically transparent in challenging his assumptions about markets, and they’ll be the same with one another. Decisions will be made based on an idea meritocracy, not a status hierarchy or democracy.”

Bob Kegan in his book, An Everyone Culture: Becoming a Deliberately Developmental Organization, wrote:

“Imagine finding yourself in a trustworthy environment, one that tolerates—even prefers— making your weaknesses public so that your colleagues can support you in the process of overcoming them. . . You’re imagining an organization that, through its culture, is an incubator or accelerator of people’s growth.”

“Bridgewater stands for the pursuit of what is true, no matter how inconvenient, both as a business necessity in the financial markets and as a path for personal evolution and cultural integrity.”

“At Bridgewater, learning from one’s mistakes is a job requirement... Bridgewater destigmatizes (and even celebrates) making mistakes. More than that, it treats the ongoing, often painful experience of one’s imperfections as valuable data for learning rather than unproductive blame.”

Ed Hess in his book, Learn or Die, wrote:

“[High-quality] learning requires high-quality critical thinking and high-quality learning conversations, which in turn require an environment of trust and authenticity, the freedom to speak freely, and the freedom to be ‘human’ and disclose our weaknesses ... Bridgewater has put in place these processes that enable and promote not only critical thinking but also the confrontation of each individual’s ego defenses that inhibit his or her learning and growth.”

“I am not saying that Bridgewater is just like the Navy SEALs. Making the best investment decisions is not analogous to executing a Navy SEAL mission; however, it’s clear that there are common threads between the cultures of these two high-performance but very different organizations. The fact that some of the same learning mindsets, capabilities, and processes apply in high-change environments, both business and nonbusiness, is compelling.”

“Bridgewater is probably the most advanced learning organization I have studied—by that I mean that its learning culture and processes are consistent with what is known in the science of learning. Bridgewater has confronted our “humanness” better than most organizations I have studied or worked with; the only other organization that I have found that relies as heavily on the science of learning is the U.S. Army.”

“Disagreements are encouraged because . . . the process of wrestling through disagreements and stress testing one’s thinking and beliefs [gets one] to the truth or a better place. One senior manager told me ‘I don’t like conflict. But I deal with it here because it has rational benefits.’”

“At Bridgewater, Ray continually emphasizes that people’s differences—their unique ways of thinking and seeing the world—are good, because all jobs are not the same. It is those differences that bring together different ideas and the different perspectives necessary to stress test ideas and create the best outcomes for an organization. The challenge is to educate people to embrace each other’s uniqueness and independent thinking.”

For me, all this stuff on "radical transparency" is just marketing fluff and it's a huge distraction for everyone, including Ray Dalio and the employees at Bridgewater. Imagine going around with an iPad to every meeting where you know you're being taped and rating your colleagues?

Thinking back to my on-site due diligence of Bridgewater, this would explain why I felt most people there were tense and scared. Gapper is right, people aren't robots, and while Ray Dalio may have mastered the machine, his attempt to master the right culture at Bridgewater has backfired on him, exposing a much more paranoid, cynical side of what all this radical transparency is all about -- to control people and stop any revolution from within the ranks to overthrow King Dalio. 

Ok, maybe I'm being too harsh, maybe Ray has great intentions and I have to admit, I like some of his principles, especially the ones on dealing with slimy weasels (if you can't say something to someone's face, you're a slimy weasel, period).

But the bigger problem I have with this "radical" view of how people should interact in a company, especially a large hedge fund full of competitive individuals is on philosophical and ethical grounds. Let me explain. Ray Dalio may have mastered the machine but people aren't machines. His mechanistic/ deterministic view on markets and how the economy and world work cannot be translated into the way people should or can realistically interact with each other. 

In short, while you can code many relationships in the economy and financial markets, human interactions are far more complex. People aren't machines and when you try to impose some mechanistic deterministic view on how they should interact with each other (in order to control them?), you're bound to stifle creativity and breed contempt and an atmosphere of animosity, especially when the fund underperforms.

What else? I believe what ultimately matters is what Bridgewater employees are thinking and saying when the cameras and iPads are off or when they leave the shop. Bridgewater can tape all the meetings they want but Ray Dalio can't read minds and he doesn't know what is being said in private when employees are venting to each other or their partners at home (unless he's secretly taping them at the workplace and their homes, which is a sign of disrespect, not to mention it exhibits traits of a delusional paranoid tyrant).

Also, Gapper is right, there's an elitist (and narcissistic) air to all this. They hire a bunch of Ivy League kids and if after 18 months they manage to "get to the other side" of their emotions they then  become part of the Bridgewater "Navy SEALs," the select few who have mastered their emotions and are able to view things without their emotions getting in the way.

It's such nonsense and while it's great for marketing purposes, when the fund starts losing money, it exposes the shortcomings of this elitist mechanistic approach. Worse still, it leaves no room for real diversity at the workplace (how many people with disabilities does Bridgewater hire?) and you end up with a bunch of emotionally challenged robots at "the other end" who follow rules to conform to what their master wants, not because they truly believe or want to live by these ridiculous rules governing their every interaction.

Sure, Bridgewater is a great hedge fund, one of the best. But in my opinion, it's a victim of its success and it's gotten way too big and in order to control this explosive growth, they've implemented this 'radically transparent' cultural approach without properly thinking through what this entails or whether it stifles diversity, creativity, camaraderie and cooperation.  

Dalio, like most other economists and financial analysts, lives in a bifurcated world of economics vs. politics. For him, economics is a machine (he calls himself a mechanic). This machine would have worked just fine (equilibrium) if it were not for the external political shocks that constantly bombard it (distortions). His main claim to fame (other than the money he manages and owns) is to argue that current political shocks are bigger than other analysts believe.

The idea that capital is not an economic category but a political entity to start with, that capitalization discounts not utility but sabotage, and that capitalism is not a mode of production and consumption but a mode of power is something he cannot possibly fathom (for more on this latter perspective, see our 2016 paper "CasP Model of the Stock Market" and the accompanying video here which is embedded below).

A lot of the behavioral traits discussed here can be traced to insecurities. In today's job market, insecurities are rampant and can manifest themselves in truly destructive ways. Having said this, I don't like the title and sensational expressions like "kill your career". It allows for no redemption or forgiveness and places the onus entirely on employees and not companies and managers. A good manager will be able to identify the strengths and weaknesses of their employees, address the insecurities that lead to destructive behaviors

Ontario Teachers' Pension Plan is getting a new partner in its investment in a growing European airport that is in the midst of an expansion.

Part of Denmark's Copenhagen Airports is trading hands as an infrastructure division of Macquarie sells a 27.7-per-cent stake to the country's state pension plan known as ATP Group, for 9.77 billion Danish Krone ($1.9-billion). Combined with the 30-per-cent stake Teachers owns, this will give pension funds control over 57.7 per cent of the flight hub. The Danish government will continue to own a nearly 40-per-cent stake.

The deal showcases the value of relationships among the world's top private market investors. Macquarie had been looking sell off its holding in the airport for several months and was required to first offer the stake to Teachers, because of a privilege called pre-emptive rights. Teachers, which also owns portions of a variety of other airports around Europe, did not want to enlarge its already sizable investment. But the Toronto-based pension fund was able to act as a matchmaker between ATP and Macquarie to secure a like-minded partner that is well-known and respected in its home Danish market. This could be an advantage as the airport continues an extensive capital investment and renovation plan amid rigorous regulatory oversight.

In infrastructure investing, being aligned with a partner that has similar aspirations, expectations and growth targets for the asset is desirable. Copenhagen is currently seeking to boost its status as a European hub airport, with the aim to increase the number of flights as well as domestic and international passengers moving through the terminal each year. It plans to boost capacity to 40 million passengers annually from 29 million, and at the same time lower some fees.

"The airport in Copenhagen is key infrastructure in Denmark and we are proud to be one of its stewards going forward," Christian Hyldahl, CEO of ATP Group, said in a statement. "We are keen to work together with all stakeholders to further develop the airport and contribute to its long-term continuation as a critical transportation hub in northern Europe to the benefit of both Danish society as well as the members in ATP."

Deals for infrastructure around the world are increasingly competitive and the utility assets where cash-flow streams are contracted and regulated are among the most appealing to investors. For pension funds looking for a proxy to fixed-income investments in a low-interest-rate environment, these holdings have a lot of appeal. Airports are a little different because they are high profile, relatively scarce and offer the potential for growth not only by increased global travel but also through the development of retail offerings and other services such as parking and on-site hotels.

Teachers and Macquarie have a long history working together on airport deals. Teachers' bought into Copenhagen's airport in 2011 when it agreed to trade stakes with a division of Macquarie. Teachers gave over its 11-per-cent holding in Sydney, Australia's airport and paid nearly $800-million (Australian) ($780-million) in exchange for stakes in Brussels and Copenhagen airports.

Since then, Teachers has had an active airport investment strategy, building up a dedicated aviation subsidiary called Ontario Airports Investments Ltd. to oversee its portfolio, as well as source other acquisition opportunities. It now owns parts of London City, Bristol and Birmingham airports, as well as Brussels and Copenhagen.

Danish pension fund ATP has agreed to buy a 27.7 percent stake in Copenhagen Airports (CPH) from Australia’s Macquarie for about 9.8 billion Danish crowns ($1.57 billion).

The transaction depends on approval by the Danish and European Union authorities and is expected to be completed in the fourth quarter, the parties said in a joint statement.

ATP estimated the offer price would be about 5,700 crowns per share, but said this could fluctuate depending on the date of completion.

Shares in the airport company rose as much as 12.3 percent after the announcement to 5,750 crowns per share. It closed at 5,620 crowns on Thursday.

Macquarie has invested more than 10 billion crowns during its 12 years of ownership in the company which owns Kastrup airport, the main international airport serving Copenhagen.

The Danish state owns 39.2 percent of the firm and Denmark’s Finance Minister Kristian Jensen said on Twitter he was “very satisfied” that the future ownership was clarified and was looking forward to working with the new shareholders.

Canadian pension fund Ontario Teachers’ Pension Plan (OTTP) holds a 30 percent stake in the airport company.

Canada’s second-biggest public pension fund and the French private equity investor are set to acquire the stake from French Sagard Private Equity Partners. The terms of the deal were not disclosed.

Alvest designs, manufactures and distributes technical products for the aviation industry and has more than 1,800 employees. It operates 10 factories in the United States, Canada, France and China.

Canadian pension funds still love airports, judging by the latest deal of the Public Sector Pension Investment Board.

On Tuesday, PSP Investments said it purchased a 40 per cent interest in Aerostar Airport Holdings LLC, operator of the Luis Munoz Marin International Airport in San Juan, Puerto Rico.

The balance of Aerostar is held by Grupo Aeroportuario del Sureste S.A.B. de C.V. (ASUR), which already owned 50 per cent and picked up an additional 10 per cent stake.

The seller was funds managed by Oaktree Capital Management L.P., and the combined new purchases by PSP and ASUR were valued at US$430 million.

“This acquisition is an excellent fit with PSP Investments’ long-term investment philosophy and leverages the capabilities of AviAlliance, our airport platform,” said Patrick Charbonneau, managing director of infrastructure investments at PSP.

AviAlliance holds interests in the airports of Athens, Budapest, Düsseldorf and Hamburg. With the latest investment in Aerostar, airports will represent more than 15 per cent of PSP Investments’ infrastructure portfolio, a spokesperson for the pension investment manager said.

The latest deal comes amid speculation that the Canadian government is mulling the sale airports, or stakes in them, to private interests to raise funds. Toronto’s Pearson International Airport has been valued at $5 billion, according to media reports.

Canada Pension Plan Investment Board chief executive Mark Machin told the Financial Post earlier this year that CPPIB would look at any Canadian airport put on the block.

“We know airports, we like airports, we’d be interested if something happened,” he said during an interview in March.

A group of Canadian pension investment managers including the Ontario Teachers’ Pension Plan, OMERS, and Alberta Investment Management Corp. (AIMCo) joined a consortium last year to purchase London City Airport.

Teachers’ had already acquired a 39 per cent stake in Brussels Airport, and a 30 per cent of Denmark’s Copenhagen airport in 2011.

In the beginning, Hugh Hendry was the consummate contrarian bear, which helped him make a killing a decade ago when everyone else was blowing up. Unfortunately for him, he did not realize just how far the central planners were willing to take their monetary experiment, so after the market troughed in 2009, he kept his bearish perspective, which cost him dearly in terms of missed gains and lost capital under management, until one day in November 2013, he capitulated and turned bullish, infamously saying "I cannot look at myself in the mirror; everything I have believed in I have had to reject. This environment only makes sense through the prism of trends."

Since then, the reborn Hendry who would never again fight central banks, gingerly made his way, earning his single digit P&L...(click on image)

.... even as many of his formerly loyal LPs deserted the former bear. It culminates with July and August, when Hendry posted some of his worst monthly returns on record which ultimately sealed his fate, and as he writes in a letter sent to investors today, Hendry decided to shut down his Eclectica hedge funds after 15 years, following a 9.8% YTD loss and massive redemptions, which left the fund which as recently as a few years ago managed billions with just $30.6 million as of August 31. As he best puts it "It wasn’t supposed to be like this."

The final P&L (click on image):

So what is Hendry's parting message to his investors and fans? Surprisingly, perhaps, he disavows the original Hugh Hendry, and goes out long (if not quite so strong). Below we repost his full final letter in its entirety, and wish Hendry good luck in his next endeavour.

CF Eclectica Absolute Macro Fund

Manager Commentary, September 2017

What if I was to tell you I wasn’t bearish on anything? Is that something you would be interested in?

It wasn’t supposed to be like this and it is especially frustrating as nothing much has gone wrong with the economy over the summer. If anything we feel more convinced that our thesis of a healing global economy is understated: for the first time in an age all parts of the world are enjoying synchronised economic momentum and I can’t see it ending for some time. It’s just that our substantial risk book became strongly correlated over the short term to the maelstrom of President Trump and the daily news bombs emanating from the Korean Peninsula; that and the increasing regulatory burden which makes it almost impossible to manage small pools of capital today. Like I said, it wasn’t supposed to be like this…

But let me bow out by sharing my team’s views. For the implications of a sustained bout of economic growth are good for you. It’s good because it should continue to underwrite a continuation in the positive performance of global equities. I would stay long. It’s also good because I can’t see interest rates rising abruptly to interrupt the upward path of equities. And commodities have already acknowledged the upturn in the fortunes of the global economy and are likely to trend higher still. That’s a lot of good news.

But it is bad news for me because funds like mine are required to demonstrate negative correlation with risk assets (when they go up like this I go down…), avoid large drawdowns and post consistent high risk adjusted returns.

Oh, and I forgot, macro fund clients don’t like us investing in the stock market for the understandable fear that we concentrate their already considerable risk undertaking. That proved to be an almighty puzzle for a fund like mine that has been proclaiming the stock market as a “safe-ish” bet ever since 2013.

Let me explain the “markets are wrong and we boom now” argument. To begin with, and for the sake of clarity, I think we have to carefully go back and deconstruct the volatile engagement between capital markets and central banks for the last ten years for an understanding of where we stand today.

The first die was cast by the central bankers in early 2009: having stared into the abyss of a deflationary spiral in 2008 the Fed and the BoE announced a radical new policy of bond purchases named Quantitative Easing. The bond market hated the idea as it was expected to cause a severe inflation problem.

Thankfully Bernanke, a student of the great depression knew better.

Markets primed themselves for inflation yet even with a ripping stock market in 2009/10 they were disappointed. QE rescued the financial system but the liquidity created was distributed to the very rich who have a very low monetary velocity and so the expected inflation fillip never materialised as the liquidity injection came to be stored rather than multiplied by the banking system.

Several years later, in 2013, the Fed suggested a reduction in the pace of its QE program. They wanted to tighten credit conditions gradually. However, capital markets beat them to it and the ensuing “taper tantrum” tightened monetary policy on their behalf. Within four months the market had taken 10 year treasuries from a yield of 1.6% to 2.9%, a move of far greater impact, and much more rapid, than anything the Fed had contemplated doing.

Markets initially thought the US could cope with this higher level of rates, but with a slowing economy, an unfortunately-timed oil price crash, and persistent ghosts in the machine (like the substantial Yuan devaluation fear which never materialised) they were proven wrong. Back then, with a 7.6% national unemployment rate and tepid wage inflation, this tightening always looked a little premature to us and so it proved with the rate of price inflation inevitably sliding lower to present levels.

And so last year, following many years of berating the Fed for its easy monetary policy regime, investors collectively threw in the towel. This rejection of the basic tenets of the business cycle by those who direct the huge pools of real money is proving particularly onerous to attack as it seems that the basic macro fund model is broken: there are just not enough “coins in them pirates’ chests” to challenge the navy of this flawed real money doctrine. Managers, and I must count myself in this camp, feel compromised by our poor absolute returns since 2012 and we find ourselves unable to put up much resistance to this FAKE NEWS.

Why should you fight it? Well let’s look at the last few times American unemployment dipped below 4.5% like today. I would largely ignore 2000 and 2006 when monetary policy was tightened and the economy buckled under the duress of the dramatic reversal in what had been credit fuelled misallocations of capital in the TMT and property sectors. No, for me 1965 is far more illuminating. Then, like today, there was no epic bubble or set of circumstances whose reversal could cause a slump; people forget but recessions don’t come out of thin air. No, in 1965, economic growth got choked by a tight labour market; a market as ominously tight as today’s.

In the middle of 1964, CPI core inflation was running at 1.7% and indeed dropped to just 1.2% in 1965; unemployment was 4.5%, the same as today. And yet by the end of 1966 inflation had essentially got out of control and didn’t dip below 2% again until 1995, almost 30 years later (click on image).

It seems to me that wage or cost push inflation is far more difficult to prevent and contain than asset price inflation. It tends to bear comparison with how Hemmingway described going broke: slow at first and then devastatingly quick. It may prove especially potent right now as the labour market is tight and there are no catalysts to generate a self-correcting US recession with both central bankers and markets now united in their desire for loose policy.

Look at the graph below, the unemployment rate (red) is at lows, job openings (blue) have increased beyond the hiring rate (teal) and are now approaching the unemployment rate for the first time since the Job Openings and Labor Turnover Survey data began. Ultimately robust GDP growth plus this labour tightness will lead to wage hikes and conceivably a self-sustaining inflationary cycle.

This is all the more ominous as the Fed has been reluctant to unwind its balance sheet. The largesse of this program fell to those already wealthy (“the global creditor”) and who had a low propensity to spend: financial markets boomed, less so the real economy. However the legacy of QE plus wage gains would turn this equation on its head. It would distribute incremental dollars to those with a much higher propensity to spend. The boost to monetary velocity from widespread wage increases would start to look much more like the helicopter money that Chairman Bernanke promised back in 2002 and subsequent central bankers dared not distribute.

The macro shock would not necessarily be the subsequent inflation but, that by waiting to respond until later, higher policy rates might fail in the first instance to induce a recession setting off a loop begetting higher and higher rates. Let me explain: companies will continue to employ staff, and with wages increasing, it is likely that sales will hold up and, depending on whether they achieve productivity gains or not, corporate profitability might also remain firm. So companies will commit to pay staff more whilst raising prices to meet higher wage and interest payment demands where possible. Like I said, wage or cost push inflation is a very different beast to contain.

I have to say that should this scenario unfold then capital markets will be as culpable as the Fed. This year, bond investors have aggressively flattened the US yield curve. The clear message is that 1.25% overnight rates threaten to pull the US economy into recession. I disagree. I think they are undermining the ability of the Federal Reserve to respond proactively; the Fed is simply not going to hike rates under such conditions having learnt the hard way back in 1999 and 2005. But what if such flatness has more to do with the commercial investment pressure brought on by QE rather than a genuine recession threat? Could it be that the bond market’s cautionary recessionary indicator is stuck flashing RED whilst the US economy goes from strength to strength? I fear so.

Clearly of course no one knows. However if an inflationary path like 1966 is gestating then I fear there is very little chance that anything timely will be done about it. Rate hikes will continue to be sparse, we only have one quarter point hike predicted between now and the end of 2019, which if fulfilled will be highly unlikely to spark a severe recession. Most likely the US economy will continue to grow and the labour market will tighten making a larger adjustment to rates in the future inevitable.

And so QE could conceivably end up doing what it was always supposed to do in the first place: find its way through the financial system to increase, not decrease, interest rates. This scenario would diminish greatly if bond curves steepened a lot now and gave the Fed the credibility to hike. Sadly I just don’t see this happening. They will steepen of course but I fear only after the virus of cost push inflation is released into the global hothouse.

This potentially leaves us in a strange environment. In the absence of any recognisable asset bubble set to burst, and the Fed grounded, the US economy is unlikely to slip into recession. China continues to rip. And now the European continent is recovering. Risk assets should continue to trend positively. And with the bond market, wrongly in my opinion, infatuated with the likelihood of an approaching US recession, the Treasury market is unlikely to move much. This is simply not a good time to offer a risk diversifying portfolio.

However, perhaps being long fixed income volatility isn’t such a bad idea. It has not been persistently lower than this for almost three decades. And unlike equity volatility it does not tend to trade in lengthy and definable regimes; it is never a great idea to go long equity volatility just because it happens to be low. The same cannot be said of its fixed income counterpart.

The collapse in volatility since 2012 seems to resonate with the drawn out process of QE in the US and its slow spread across the world. However that era is clearly now abating as this year’s synchronised global growth gradually shifts the debate from looseness to gradual global tightening. And yet fixed income volatility resides on the floor…

Looking at the one year implied volatility on 10 year swaps, the cost of entry seems reasonable even compared to the narrow trading range we have seen this year. That is unless you expect volatility to crash and the trading range to contract even further. With only one Fed hike priced in until the end of 2019 any further contractions are likely to be driven by outright recession. In that case volatility will rise across all asset classes. On the other hand, if our thesis is right, and the market and Fed are too complacent on inflationary pressures, then it is likely that we see more hikes from the Fed alongside yield curves steepening from their currently very low levels. Fixed income volatility will surge. When the status quo priced in is this boring, fixed income volatility really has only one direction it can go (click on image).

With inflation still weak and government bond prices unlikely to crack just yet it is too early to seek a short fixed income trade in disguise. In the past, correlations have, just like in the stock market, typically been negative between the price (SPX or Treasury) and the implied volatility (VIX or swaption vol.). Now however the correlation is mildly positive. So being long fixed income volatility is not necessarily the same as being short fixed income. My contention is simply that fixed income volatility has over shot to the downside, that such moments are fleeting and that you are not necessarily dependant on a correction in treasury prices (click on image).

Sadly I will be unable to participate with such trades during the next upheaval in global markets with the Fund but I hope that this commentary has at least roused you into contemplating scenarios that are presently deemed less plausible.

It remains only that I thank you for the great honour of having been responsible for managing your capital and to wish you all great financial fortune.

Hugh Hendry and team

1. Load up on US long bonds (TLT) as I see a US slowdown on the horizon, deflation headed to America, and the yield on the 10-year Treasury note plunging well below 1%.
2. Start nibbling on the US dollar (UUP) and get ready for a major reversal of the downtrend as I still see deflation wreaking havoc in China, Europe and Japan and their economies are getting ready to roll over. This means their currencies will necessarily need to bear the brunt of this coming slowdown.
3. Short oil (OIL), energy (XLE), metal and mining (XME), emerging market shares (EEM) and short commodity indexes and currencies like the Canadian dollar (FXC).

1. The global jobs crisis: High structural unemployment, especially youth unemployment, and less and less good paying jobs with benefits.
2. Demographic time bomb: A rapidly aging population means a lot more older people with little savings spending less.
3. The global pension crisis: As more and more people retire in poverty, they will spend less to stimulate economic activity. Moreover, the shift out of defined-benefit plans to defined-contribution plans is exacerbating pension poverty and is deflationary. Read more about this in my comments on the $400 trillion pension time bomb and the pension storm cometh. Any way you slice it, the global pension crisis is deflationary and bond friendly.
4. Excessive private and public debt: Rising government and consumer debt levels are constraining public finances and consumer spending.
5. Rising inequality: Hedge fund gurus cannot appreciate this because they live in an alternate universe, but widespread and rising inequality is deflationary as it constrains aggregate demand. The pension crisis will exacerbate inequality and keep a lid on inflationary pressures for a very long time.
6. Globalization: Capital is free to move around the world in search of better opportunities but labor isn't. Offshoring manufacturing and service sector jobs to countries with lower wages increases corporate profits but exacerbates inequality.
7. Technological shifts: Think about Amazon, Uber, Priceline, AI, robotics, and other technological shifts that lower prices and destroy more jobs than they create.

This time is different are the four most dangerous words any economist or money manager can utter. We learn new things and invent new technologies. Players come and go. But in the big picture, this time is usually not fundamentally different, because fallible humans are still in charge. (Ken Rogoff and Carmen Reinhart wrote an important book called This Time Is Different on the 260-odd times that governments have defaulted on their debts; and on each occasion, up until the moment of collapse, investors kept telling themselves “This time is different.” It never was.)

Nevertheless, I uttered those four words in last week’s letter. I stand by them, too. In the next 20 years, we’re going to see changes that humanity has never seen before, and in some cases never even imagined, and we’re going to have to change. I truly believe this. We have unleashed economic and technological forces we can observe but not entirely control.

I will defend this bold claim at greater length in my forthcoming book, The Age of Transformation.

Today we will zero in on one of those forces, which last week I called “the bubble in government promises,” which I think is arguably the biggest bubble in human history. Elected officials at all levels have promised workers they will receive pension benefits without taking the hard steps necessary to deliver on those promises. This situation will end badly and hurt many people. Unfortunately, massive snafus like this rarely hurt the politicians who made those overly optimistic promises, often years ago.

Earlier this year I called the pension mess “The Crisis We Can’t Muddle Through.” Reflecting since then, I think I was too optimistic. Simply waiting for the floodwaters to drop down to muddle-through depth won’t be enough. We face an entire new ocean, deeper and wider than we can ever cross unaided.

Storms from Nowhere?

This year marks the first time on record that two Category 4 hurricanes have struck the US mainland in the same year. Worse, Harvey and Irma landed directly on some of our most valuable and vulnerable coastal areas. So now, in addition to all the problems that existed a month ago, the US economy has to absorb cleanup and rebuilding costs for large parts of Texas and Florida, as well as our Puerto Rico and US Virgin Islands territories.

Now then, people who live in coastal areas know full well that hurricanes happen – they know the risk, just not which hurricane season might launch a devastating storm in their direction. In a note to me about Harvey, fellow Rice University graduate Gary Haubold (1980) noted just how flawed the city’s assumptions actually were regarding what constitutes adequate preparedness. He cited this excerpt from a recent Los Angeles Times article:

The storm was unprecedented, but the city has been deceiving itself for decades about its vulnerability to flooding, said Robert Bea, a member of the National Academy of Engineering and UC Berkeley emeritus civil engineering professor who has studied hurricane risks along the Gulf Coast.

The city’s flood system is supposed to protect the public from a 100-year storm, but Bea calls that “a 100-year lie” because it is based on a rainfall total of 13 inches in 24 hours.

“That has happened more than eight times in the last 27 years,” Bea said. “It is wrong on two counts. It isn’t accurate about the past risk and it doesn’t reflect what will happen in the next 100 years.” (Source)

Anybody who lives in Houston can tell you that 13 inches in 24 hours is not all that unusual. But how do Robert Bea’s points apply to today’s topic, public pensions? Both pension plan shortfalls and hurricanes are known risks for which state and local governments must prepare. And in both instances, too much optimism and too little preparation ultimately have devastating results.

Admittedly, public pension liabilities don’t come out of nowhere the way hurricanes seem to – we know exactly where they will strike. In many cases, we know approximately when they’ll strike, too. Yet we still let our elected officials make impossible-to-fulfill promises on our behalf. The rest of us are not so different from those who built beach homes and didn’t buy hurricane or storm surge insurance. We just face a different kind of storm.

Worse, we let our government officials use predictions about future returns that are every bit as unrealistic as calling a 13-inch rain in Houston a 100-year event. And while some of us have called pension officials out, they just keep telling lies – and probably will until we reach the breaking point.

Puerto Rico is a good example. The Commonwealth was already in deep debt before Irma blew in – $123 billion worth of it. There’s simply no way the island can repay such a massive debt. Creditors can fight in the courts, but in the end you can’t squeeze money out of plantains or pineapples. Not enough money, anyway. Now add Irma damages, and the creditors have even less hope of recovering their principal, let alone interest.

Puerto Rico is presently in a new form of bankruptcy that Congress authorized last year. Court proceedings will probably drag on for years, but the final outcome isn’t in doubt. Creditors will get some scraps – at best perhaps $0.30 on the dollar, my sources say – and then move on. We’re going to find out how strong those credit insurance guarantees really are.

“That’s just Puerto Rico,” you may say if you’re a US citizen in one of the 50 states. Be very careful. Your state is probably not so much better off. In 10 years, your state may well be in the same place where Puerto Rico is now. I’d say the odds are better than even.

Are your elected leaders doing anything about this huge issue, or even talking about it? Probably not.

As it stands now, states can’t declare bankruptcy in federal courts. Letting them do so would raises thorny constitutional issues. So maybe we’ll have to call it something else, but it’s going to end the same way. Your state’s public-sector retirees will not get what they were promised, and they won’t take the outcome kindly.

Blood from Turnips

Public sector bankruptcy, up to and including state-level bankruptcy, is fundamentally different from corporate bankruptcy in ways that many people haven’t considered. The pension crisis will likely expose those differences as deadly to creditors and retirees.

Say a corporation goes bankrupt. A court will take all its assets and decide how to divvy them up. The assets are easy to identify: buildings, land, intellectual property, cash, etc. The parties may argue over their value, but everyone knows what the assets are. They won’t walk away.

Not so in a public bankruptcy. The primary asset of a city, county, or state is future tax revenue from households and businesses within its boundaries. The taxpayers can walk away. Even without moving, they can bypass sales taxes by shopping elsewhere. If property taxes are too high, they can sell and move. When they take a loss on the sale, the new owner will have established a property value that yields the city far less revenue than it used to receive.

Cities and states don’t have the ability to shed their pension liabilities. They are stuck with them, even as population and property values change.

We may soon see an example of this in Houston. Here in Texas, our property taxes are very high because we have no income tax. Your tax is a percentage of your home’s taxable value. So people argue to appraisal boards that their homes are falling apart and not worth anything like the appraised value. (Then they argue the opposite when it’s time to sell the home.)

About 200 entities in Harris County can charge taxes. That includes governments from Houston to Baytown to Hedwig Village, plus 20 independent school districts.

There’s a hospital district, port authority, several college districts, the flood control district, a multitude of utility districts, and the Harris County Department of Education. Some homes may fall within 10 or more jurisdictions.

What about those thousands of flooded homes in and around Houston; how much are they worth? Right now, I’d say their value is zero in many cases. Maybe they will have some value if it’s possible to rebuild, but at the very least they ought to receive a sharp discount from the tax collector this year.

Considering how many destroyed or unlivable properties there are all over South Texas, I suspect cities and counties will lose billions in revenue even as their expenses rise. That’s a small version of what I expect as city and state pension systems all over the US finally face reality.

Here in Dallas I pay about 2.7% in property taxes. When I bought my home over four years ago, I checked our local pension and was told we were 100% funded. I even mentioned in my letter that I was rather surprised. Turns out they lied. Now, realistic assessments suggest they will have to double the municipal tax rate (yes, I said double) to be able to fund fire and police pension funds. Not a terribly popular thing to do. At some point, look for taxpayers to desert the most-indebted cities and states. Then what? I don’t know. Every solution I can imagine is ugly.

Promises from Air

Most public pension plans are not fully funded. Earlier this year in “Disappearing Pensions” I shared this chart from my good friend Danielle DiMartino Booth (click on image):

Total unfunded liabilities in state and local pensions have roughly quintupled in the last decade. You read that right – not doubled, tripled or quadrupled: quintupled. That’s nice when it happens on a slot machine, not so nice when it’s money you owe.

You will also notice in the chart that much of that change happened in 2008. Why was that? That’s when the Fed took interest rates down to nearly zero, meaning it suddenly took more cash to fund future payments. Also, some strapped localities conserved cash by promising public workers more generous pension benefits in lieu of pay raises.

According to a 2014 Pew study, only 15 states follow policies that have funded at least 100% of their pension needs. And that estimate is based on the aggressive assumptions of pension funds that they will get their predicted rate of returns (the “discount rate”).

Kentucky, for instance, has unfunded pension liabilities of $40 billion or more. This month the state budget director notified local governments that pension costs could jump 50-60% next year. That’s due to a proposed reduction in the system’s assumed rate of return from 7.5% to 6.25% – a step in the right direction but not nearly enough.

Think about this as an investor. Do you know a way to guarantee yourself even 6.25% average annual returns for the next 10–20 years? Of course you don’t. Yes, some strategies have a good shot at doing it, but there’s no guarantee.

And if you believe Jeremy Grantham’s seven-year forecasts (I do: His 2009 growth forecast was spot on), then those pension funds have very little hope of getting their average 7% predicted rate of return, at least for the next seven years.

Now, here is the truth about pension liabilities. Let’s assume you have $1 billion in funding today. If you assume a 7% compound return – about the average for most pension funds – then that means in 30 years that $1 billion will have grown to $8 billion (approximately). Now, what if it’s a 4% return? Using the Rule of 72, the $1 billion grows to around $3.5 billion, or less than half the future assets in 30 years if you assume 7%.

Remember that every dollar that is not funded today means that somewhere between four dollars and eight dollars will not be there in 30 years when somebody who is on a pension is expecting to get it. Worse, without proper funding, as the fund starts going negative, the funding ratio actually gets worse, sending it into a death spiral. The only way to bring it out of the spiral is with huge cuts to other needed services or with massive tax cuts to pension benefits.

The State of Kentucky’s unusually frank report regarding the state’s public pension liability sums up that state’s plight in one chart (click on image):

The news for Kentucky retirees is quite dire, especially considering what returns on investments are realistically likely to be. But there’s a make or break point somewhere. What if pension plans must either hit that 6% average annual return for 2018–2028 or declare bankruptcy and lose it all?

That’s a much greater problem, and it’s a rough equivalent of what state pension trustees have to do. Failing to generate the target returns doesn’t reduce the liability. It just means taxpayers must make up the difference.

But wait, it gets worse. The graph we showed earlier stated that unfunded pension liabilities for state and local governments was $2 trillion. But that assumes an average 7% compound return. What if we assume 4% compound returns? Now the admitted unfunded pension liability is $4 trillion. But what if we have a recession and the stock market goes down by the past average of more than 40%? Now you have an unfunded liability in the range of $7–8 trillion.

We throw the words a trillion dollars around, not realizing how much that actually is. Combined state and local revenues for the US total around $2.6 trillion. Following the next recession (whenever that is), the unfunded pension liabilities for state and local governments will be roughly three times the revenue they are collecting today, and that’s before a recession reduces their revenues. Can you see the taxpayer stuck between a rock and a hard place? Two immovable objects meeting? The math just doesn’t work.

Pension trustees don’t face personal liability. They’re literally playing with someone else’s money. Some try very hard to be realistic and cautious. Others don’t. But even the most diligent can’t control when the next recession comes, or when the stock market will crash, leaving a gaping hole in their assets while liabilities keep right on rising.

I have had meetings with trustees of various government pensions. Many of them want to assume a more realistic discount rate, but the politicians in their state literally refuse to allow them to assume a reasonable discount rate, because owning up to reality would require them to increase their current pension funding dramatically. So they kick the can down the road.

Intentionally or not, state and local officials all over the US made pension promises that future officials can’t possibly keep. Many will be out of office when the bill comes due, protected from liability by sovereign immunity.

We are starting to see cities filing for bankruptcy. That small ripple will be a tsunami within 7–10 years.

But wait, it gets still worse. (Do you see a trend here?) Many state and local governments have actually 100% funded their pension plans. Some states and local governments have even overfunded them – assuming they get their projected returns. What that really means is that the unfunded liabilities are more concentrated, and they show up in unlikely places. You think Texas is doing well? Look at some of our cities and weep. Look, too, at other seemingly semi-prosperous cities all over the country. Do you think the suburbs of Dallas will want to see their taxes increased to help out the city? If you do, I may have a bridge to sell you – unless you would rather have oceanfront properties in Arizona.

This issue is going to set neighbor against neighbor and retirees against taxpayers. It will become one of the most heated battles of my lifetime. It will make the Trump-Clinton campaigns look like a school kids’ tiddlywinks smackdown.

I was heavily involved in politics at both the national and local levels in the 80s and 90s and much of the 2000s. Trust me, local politics is far nastier and more vicious. And there is nothing more local than police and firefighters and teachers seeing their pensions cut because the money isn’t there. Tax increases of up to 100% are going to become commonplace. But even these new revenues won’t be enough… because we will be acting with too little, too late.

This is the core problem. Our political system gives some people incentives to make unrealistic promises while also absolving them of liability for doing so. It also places the costs of those must-break promises on innocent parties, i.e. the retirees who did their jobs and rightly expect the compensation they were told they would receive.

So at its heart the pension crisis is really not a financial problem. It’s a moral and ethical problem of making and breaking promises that profoundly impact people’s lives. Our culture puts a high value on integrity: doing what you said you would do.

We take a job because the compensation package includes x, y and z. Then someone says no, we can’t give you z, so quit and go elsewhere.

The pension problem is going to get worse as more and more retirees get stuck with broken promises, and as taxpayers get handed higher and higher bills. These are irreconcilable demands in many cases. It’s not possible to keep contradictory promises.

What’s the endgame? I think much of the US will end up like Puerto Rico. But the hardship map will be more random than you can possibly imagine. Some sort of authority – whether bankruptcy courts or something else – will have to seize pension assets and figure out who gets hurt and how much. Some courts in some states will require taxes to go up. But courts don’t have taxing authority, so they can only require cities to pay, but with what money and from whom?

In many states we literally don’t have the laws and courts in place with authority to deal with this. And just try passing a law that allows for states or cities to file bankruptcy in order to get out of their pension obligations.

The struggle will get ugly, and innocent people on both sides will be hurt. We hear stories about retired police chiefs and teachers with lifetime six-digit pensions and so on. Those aberrations (if you look at the national salary picture) are a problem, but the more distressing cases are the firefighters, teachers, police officers, or humble civil servants who served the public for decades, never making much money but looking forward to a somewhat comfortable retirement. How do you tell these people that they can’t have a livable pension? We will see many human tragedies.

On the other side will be homeowners and small business owners, already struggling in a changing economy and then being told their taxes will double. This may actually happen in Dallas; and if it does, we won’t be alone for long.

The website Pension Tsunami posts scores of articles, written all across America, about pension problems. We find out today that in places like New York and Chicago and Cook County, pension funds have more retirees collecting than workers paying into the fund. There are more retired cops in New York and Chicago than there are working cops. And the numbers of retirees just keep growing. On an individual basis, it is smart for the Chicago police officer to retire as early possible, locking in benefits, go on to another job that offers more retirement benefits, and round out a career by working at least three years at a private job that qualifies the officer for Social Security. Many police and fire pensions are based on the last three years of income; so in the last three years before they retire, these diligent public servants work enormous amounts of overtime, increasing their annual pay and thus their final pension payouts.

As I’ve said, this is the crisis we can’t muddle through. While the federal government (and I realize this is economic heresy) can print money if it has to, state and local governments can’t print. They actually have to tax to pay their bills. It’s the law. It’s also an arrangement with real potential to cause political and social upheaval that Americans have not seen in decades. The storm is only beginning. Think Hurricane Harvey on steroids, but all over America. Of all the intractable economic problems I see in the future (and I have a vivid imagination), this is the most daunting.

1. First, and most importantly, rates will plunge to new secular lows and remain ultra-low for years. Because the duration of pension liabilities is much bigger than the duration of assets, any decline in rates will disproportionately hurt pensions, especially chronically underfunded pensions.
2. Second, a prolonged bear market will strike public and private assets too. Not only are pensions going to see pension deficits soar as rates plunge to new secular lows, they will see their assets shrink, a perfect double-whammy storm for pensions. 

Keith Brainard, research director for the National Association of State Retirement Administrators, said risk doesn't disappear under a 401(k) plan.

"These proposals shift that risk from the state and its public employers and taxpayers and put it all on the workers. In fact, there’s going to be more risk because they are no longer in a group that can manage the risk much better," he said.

Whether the moves actually will save the state money is a question being hotly debated.

Jason Bailey, executive director of the Kentucky Center for Economic Policy, of Berea, said, “Moving employees into 401(k)-type plans is actually more expensive … and harms retirees while making it much more difficult to attract and retain a skilled workforce.”

It's not as simple as compensation alone. You still need people to sign up. Lack of independence and bureaucracy in investment decision-making, reputation for being extremely slow in decision-making, the fact that there's one office in Sacramento and that will not be changing, the fact that Sacramento is a real stretch for anyone with a family living elsewhere, and don't forget the silly reporting on your personal life and myopic focus on expenses and gifts like coffee mugs and umbrellas. And flying economy on long-haul flights to do multi-billion dollar deals while paying thousands for free conferences. There are a lot of factors at play on why it's difficult for them to attract and retain people. Plus in certain areas like fixed income cronyism runs rampant.

All these factors deter highly sophisticated people from making the career risk. And the really good people that join end up staying for a limited time once they get the idea. So you're left with people who join to get a fat pension down the road. The sick thing about that level of high job security is it breeds mediocrity and also creates a false sense of loyalty. Loyalty is only good if a highly competitive culture can be maintained.

Basically, there are two levers Ontario Teachers' Pension Plan uses when the plan goes into deficit to restore fully-funded status:

• It partially or fully removes cost-of-living adjustments (conditional inflation protection) and
• It raises the contribution rate from the base of 9% to an agreed upon rate (a special levy)

After the plan ran into deficits after the 2008 crisis, the contribution rate was increased to 13% and since it is a jointly sponsored plan, both teachers and the government needed to contribute this rate.

However, unlike 1997 where benefits were increased, now that the plan is fully-funded,  the new agreement is simply to restore full inflation protection and reduce the contribution rate back to the base case of 9% (can never go lower).

The key here is there are no increases in benefits, it's simply restoring full inflation protection and reducing the contribution rate going forward to the base rate of 9%.

Healthcare of Ontario Pension Plan (HOOPP) has formed a strategic partnership with CIFC LLC, a U.S. private debt manager specializing in U.S. corporate and structured credit strategies. HOOPP has committed a “substantial” undisclosed amount to a new risk retention vehicle, CIFC CLO Strategic Partners II (CMOA II), which will purchase the majority equity positions of CIFC’s new issue collateralized loan obligations. CIFC has committed US$75 million. CMOA II is expected to support about US$7.5 billion of the firm’s incremental new issuance over the next several years. Toronto-based HOOPP oversees more than $70 billion in assets.

(Correction: It was previously reported that HOOPP committed US$75 million to CMOA II. The commitment was actually undisclosed.)

PRESS RELEASE

CIFC Partners with Healthcare of Ontario Pension Plan to Form New Risk Retention Vehicle

Healthcare of Ontario Pension Plan Commits to CIFC CLO Strategic Partners II

September 14, 2017

NEW YORK–(BUSINESS WIRE)–CIFC LLC (“CIFC” or the “Firm”), a U.S. private debt investment manager specializing in U.S. corporate and structured credit strategies, today announced that it has entered into a strategic partnership with the Healthcare of Ontario Pension Plan (“HOOPP”) to form CIFC CLO Strategic Partners II, a new capitalized manager-owned affiliate of CIFC (“CMOA II”). CMOA II intends to purchase the majority equity positions of CIFC’s future, new issue Collateralized Loan Obligations (CLOs) to comply with U.S. and E.U. risk retention rules.

Under the terms of the partnership, HOOPP has made a substantial, single external investor commitment to CMOA II, with CIFC committing up to $75 million. CIFC has issued a total of $2.9 billion in new CLOs, making the Firm the largest issuer by assets this year. CMOA II is expected to support approximately $7.5 billion of CIFC’s incremental new issuance over the next several years.

Oliver Wriedt, Co-CEO of CIFC, said, “We are thrilled to partner with HOOPP, a well-recognized thought leader within the Canadian pension fund community and a long-standing, active participant in the CLO market. We are pleased that HOOPP has chosen CIFC to help it gain access to the new issue CLO opportunities that lie ahead and look forward to a mutually beneficial strategic relationship for years to come.”

David Long, Senior Vice President and CIO of HOOPP, added, “CIFC has a strong and consistent track record, making the Firm our choice with whom to partner to access new issue CLO opportunities. As we embark on this partnership, we look forward to leveraging CIFC’s deep expertise as one of the top CLO managers in the world.”

About CIFC

Founded in 2005, CIFC is a private debt manager specializing in U.S. corporate and structured credit strategies. Headquartered in New York and serving institutional investors globally, CIFC is an SEC registered investment manager and one of the largest managers of senior secured corporate credit in the United States. As of August 31, 2017, CIFC has $15.7 billion in assets under management. For more information, please visit CIFC’s website at www.cifc.com.

About HOOPP

With more than $70 billion in assets, HOOPP is one of the largest DB pension plans in Ontario, and in Canada. Our proven strategy and track record of investment returns drive our plan performance, making HOOPP a leader among its global peers. HOOPP is fully funded which means it has more than enough assets to pay pension benefits owed to members today, and in the future. HOOPP is a defined benefit pension plan that is dedicated to providing a secure retirement income to more than 321,000 workers in Ontario’s healthcare sector. More than 500 employers across the province offer HOOPP to their employees. For more information, please visit HOOPP’s website at www.hoopp.com.

• Collateralized loan obligations have many investor-friendly structural features, a history of strong credit performance, and characteristics that seek to provide protection in a rising interest-rate environment
• Historically, CLOs have experienced fewer defaults than corporate bonds of the same rating, a testament to the strength and diversity of the underlying bank loan collateral

Collateralized Debt Obligations (CDO) were first issued in 1987 to allow investors the opportunity to invest in the underlying collateral indirectly. The underlying collateral assets and securities are typically comprised of various loans or debt instruments and financed by issuing multiple classes of debt and equity. CDOs either have a static structure or an active structure that is managed by a portfolio manager. With a static deal, investors can assess the various tranches within the CDO. With an active deal, a portfolio manager will actively manage the CDO by reinvesting the cash flow by buying and selling the assets. Portfolio managers perform coverage tests for the protection to the note holders and an event of default may be triggered if collateral values fall too low.

CLO, also known as Collateralized Loan Obligation, is a special purpose vehicle (SPV) with securitization payments in the form of different tranches. Financial institutions back this security with receivables from loan portfolios. CLOs allow banks to reduce regulatory capital requirements by selling large portions of their commercial loan portfolios to international markets, reducing the risks associated with lending.

CDOs and CLOs are similar in structure to a Collateralized Mortgage Obligation (CMO) or Collateralized Bond Obligation (CBO).

1. Senior secured loans are very attractive relative to other assets in the current market environment where credit spreads are at historic lows. Since these loans are the basis of this investment, they offer a better risk-reward option.
2. Opportunity for HOOPP to engage in a strategic partnership with CIFC in a 'risk retention vehicle' where HOOPP is the sole partner (segregated account). This allows us to achieve an attractive price and scale of investment with a top-notch CLO manager.
3. CLO equity tranche has a unique set of attributes different from the underlying portfolio of loans: Most importantly, the tranche allows an investor to access much of the income from a large loan portfolio but limits the downside risk to the amount invested.

"Let's say you have a $500 million loan portfolio managed by a CLO manager and you decide to invest $50 million in the first-loss equity tranche, you will receive the highest coupon and your downside risk is limited to the $50 million you put in. However, in order to gain the same return investing in corporate bonds or emerging market bonds, you need to allocate significantly more to generate the same return at a time when spreads are down at historic lows."

"At HOOPP, we always worry about the risk of not generating enough return to meet out liabilities over the long run as well as the risk of negative returns in the short run. Our day-to-day operations consist of finding the best allocation of risk without necessarily increasing overall risk. Hypothetically, we can and likely will reduce our risk in other credit markets because of this deal."

Like Ontario Teachers', the Healthcare of Ontario Pension Plan (HOOPP) is no stranger to leverage. For quite some time, it has been using extensive repo operations to intelligently lever up its massive bond portfolio. Ontario Teachers' has been doing the exact same thing.

Jim told me once: "People think we are increasing risk by leveraging up but they don't understand there is more risk in a traditional 60/40 stock bond portfolio."

Like so many companies in America, Boeing Co. has largely neglected the gaping deficit in its employee pension as it doled out lavish rewards to shareholders.

What’s raising eyebrows is how it plans to shore up the retirement plan.

Last month, Boeing made its largest pension contribution in over a decade. But rather than put up cash and lock in the funding, the planemaker transferred $3.5 billion of its own shares, including those it bought back in years past. (The administrator says it expects to sell them over the coming year.)

It’s a bold move, and one cheered by many on Wall Street. Yet to pension experts, it isn’t worth the risk. After a record-setting, 58 percent rally this year, Boeing is betting it can keep producing the kind of earnings that push shares higher. If all goes well, not only will the pension benefit, but Boeing says it will be able to forgo contributions for the next four years.

But if anything goes awry, the $57 billion pension -- which covers a majority of its workers and retirees -- could easily end up worse off than before.

“It’s an irresponsible thing to do certainly from the perspective of the plan participants,” said Daniel Bergstresser, a finance professor at the Brandeis International Business School. “Ideally, you would like to put assets in the pension plan that won’t fall in value at exactly the same time that the company is suffering.”

Under Chief Executive Officer Dennis Muilenburg, Boeing’s pension shortfall has widened as the Chicago-based company stepped up share buybacks. The $20 billion gap is now wider than any S&P 500 company except General Electric Co. And relative to earnings, Boeing shares are already trading close to the highest levels in a decade, a sign there might be more downside than upside.

‘Good Value’

Boeing disagrees and sees the strategy as a win-win.

“We continue to see Boeing stock as a good value,” spokesman Chaz Bickers said. “This action further reduces risk to our business while increasing the funding level of our pension plans. Our employees and retirees benefit as well since this action provides funding earlier, giving the plan sponsor more flexibility to grow the plans’ assets.”

It’s too early to tell how things will play out -- especially for a company whose shares have historically been sensitive to the ups and downs of the economy -- and early returns are mixed. Gains have slowed markedly since Boeing transferred 14.4 million shares to its pension on Aug. 1, but the 2.4 percent advance is still more than the S&P 500. (The plan has the option to dispose of the shares at any time.)

Analysts see Boeing climbing to $262.86 a share in the coming year, supported by a near-record $423 billion backlog of jet orders that’s equal to about seven years of factory output. That would be good for a 7.2 percent gain from Thursday’s price of $245.23, and roughly in line with analysts’ estimates for the broader market. In the previous 12 months, Boeing stock nearly doubled.

Price Targets

Of course, Boeing isn’t the only company to opt for stock instead of cash when it comes to its pensions. GE’s plan holds more than $700 million of shares and IBM had about $28 million of stock in its U.S. pensions. But Boeing’s transfer is notable because it was one of the largest in recent memory and happened just one day after the company’s shares reached an all-time high.

Pension experts and academics have long debated how much company stock is too much for retirement plans, particularly because workers’ livelihoods become even more intertwined with their employer’s fortunes when they own shares. The dangers came into full view when Enron’s collapse a decade ago saddled its employees with millions of worthless shares in their 401(k)s.

With pensions like Boeing’s, the risks to the company can be greater when share prices plunge because employers are on the hook to cover any shortfall. And for Boeing, the deficit is already considerable.

“It would have been a cleaner decision to contribute cash to the pension,” said Vitali Kalesnik, the head of equity research at Research Affiliates. “Boeing to a degree is a very cyclical company.”

Boeing’s pension went deep into the red after the global financial crisis in 2008 hurt aircraft sales, while delays in its 787 Dreamliner program burned up cash. Record-low interest rates in the years since hurt pension returns across corporate America, and made it hard for Boeing to claw its way out.

Pension Freeze

At the end of 2016, its pension had $57 billion in assets and $77 billion in obligations -- a funding ratio of 74 percent, data compiled by Bloomberg show.

Boeing froze pensions for Seattle-area Machinist union members last year under a hard-fought contract amendment. It also switched non-union workers to a defined contribution plan.

And the stock transfer last month, combined with a planned $500 million cash payment this year, would be equal to all the company’s contributions during the previous five years. Nevertheless, it still leaves Boeing with roughly $15 billion in unfunded pension liabilities, although the shortfall should gradually shrink over the next four years, according to Sanford C. Bernstein & Co.

To be clear, Boeing has the money. In the past three years, the company generated enough excess cash to buy back $30 billion of its own shares.

But using equity instead of cash does have its advantages. It allows Boeing to conserve its free cash flow -- a key metric for investors -- by transferring Treasury shares that were repurchased at far lower values than today’s prices. In addition, Boeing will get a $700 million tax benefit, which will offset the cost of its $500 million cash contribution.

Risk Strategy

The strategy shows how Boeing can “look at risk differently, be proactive and manage that today, and take that uncertainty out over the next five years,” Greg Smith, Boeing’s chief financial officer and chief strategist, told an investor conference on Aug. 9.

It’s not the first time Boeing has plowed stock into its underfunded pension. In 2009, the company contributed $1.5 billion. The shares jumped 27 percent that year and 21 percent in 2010. By 2011, the plan had cashed out.

But this time, Boeing’s valuation is much higher. With a price-earnings ratio of 23, the stock is more than three times as pricey as it was at the start of 2009. Given the nature of Boeing’s business, its earnings could be vulnerable to geopolitical shocks or an economic slowdown that saps demand for air travel.

What’s more, the longer its pension remains under water, the more expensive it becomes to maintain. The Pension Benefit Guaranty Corp., a government agency that acts as a backstop when plans fail, has tripled its rates for companies with funding deficits, and more increases are on the way.

There’s a limit to how long Boeing can put off underfunded liabilities. Over the next decade, the company expects to pay out about $46 billion to retirees.

Stark headlines have appeared over the past few years proclaiming that public pension plans in California are woefully underfunded and that basic services like police, parks and libraries may suffer as a result.

In fact, full funding of public pension plans isn’t necessary or even prudent for their healthy operation, according to a recent analysis by Tom Sgouros of the Haas Institute in Berkeley.

In the private sector, pension systems need to be 100 percent funded to protect the pensions of workers in case of bankruptcy. In the public sector, however, while governments may encounter periodic budget ups and downs due to economic cycles and fluctuating revenues, they are not going away. Public employees are hired and begin contributing to the pension system during their working lives. Their contributions help pay the benefits of retirees who worked before them. Once they retire, contributions from employees who replace them will help pay their retirement benefits, and so on, indefinitely.

Full funding of a public pension plan amounts to covering the total future benefits of all current workers. The Hass Institute analysis describes this as a waste of money because it equates to insuring against a city or county’s disappearance. According to the report, the real question of a pension plan’s fiscal viability is whether it can continue to pay its obligations each year, in perpetuity — not whether it can cover all future obligations immediately. This is why some fiscal credit rating agencies consider a 70-80 percent funded ratio adequate for public pension systems.

Imagine you sign a lease to rent an apartment for 12 months at $1,000 a month. Your ultimate obligation is $12,000, but should the landlord refuse to rent to you if you can’t show you have $12,000 available at the outset of the lease (100 percent funding)? No, the landlord simply wants assurance you can pay your rent each month.

If you’re a homeowner, you probably have a 30-year mortgage. Your mortgage allows you to own your home without fully funding the purchase. If, for example, you have a $300,000 home with a $150,000 mortgage, it might be said that your homeownership is at a 50 percent funded ratio. That’s not reckless; it’s prudent use of debt.

Each of these examples involves an ultimate obligation to pay off all the debt by a specific date. Public pensions are different in that the obligation is open ended, but so are the income sources.

Let’s consider a pension fund that has 70 percent of what it needs to pay all retirees decades in the future. During any given year, the pension fund must pay promised benefits to current retirees. Provided that annual contributions from the employer and current employees, combined with investment returns, are equal to benefit costs, the fund operates at break-even.

If at the end of the year the fund is at 70 percent, it’s a wash. The fund can go on indefinitely under these conditions. According to the Haas report, America’s public pension systems were, on average, 74 percent funded as of 2014.

There are two strong reasons not to move to 100 percent funding.

First, doing so would require significant, unnecessary expense to employees, employers and taxpayers.

Since public pensions can exist indefinitely at 70 percent or 80 percent funding, why not use those funds for more immediate needs?

There’s a larger concern, though.

Historically, when pensions in California approached 100 percent funding due to unusually high investment returns, policymakers reduced or skipped annual contributions, under the flawed assumption that high market returns were the new normal. They also increased benefits without providing adequate funding, again expecting investment returns would cover the cost. When investment returns returned to normal, these decisions had long-term negative consequences.

Some people speculate that future investment returns will be lower than past returns, requiring higher contributions from workers and taxpayers to sustain pension funds. In truth, no one knows.

The prudent course is to review returns each year and make gradual course corrections, as needed. That’s why independent auditors regularly evaluate and advise public pension funds on necessary course corrections.

So when you hear concerns about public pensions being underfunded, understand that ensuring 100 percent funding isn’t critical to the healthy functioning of a public pension system, and it can be very expensive.

Both the city and county of San Diego pensions systems are quite stable at a 70-80 percent funding ratio.

Wouldn’t the tax dollars required to get them to 100 percent funding be better spent on other needs — like police, parks and libraries?

*****

McTighe is president of Retired Employees of San Diego County. Baross is president, City of San Diego Retired Employees’ Association. Hall is president, City of San Diego Retired Fire and Police Association.

The beleaguered condition of state and local pension plans is one of those ongoing disaster stories that crops up about once a week somewhere. The explanation usually goes something like this: Irresponsible politicians and greedy public employee unions created over-generous benefit schemes, leading to pension plans which aren't "fully-funded" and eventual fiscal crisis. That in turn necessitates benefit cuts, contribution hikes, or perhaps even abolishment of the pension scheme.

But a fascinating new paper from Tom Sgouros at UC Berkeley's Haas Institute makes a compelling argument that the crisis in public pensions is to a large degree the result of terrible accounting practices. (Stay with me, this is actually interesting.) He argues that the typical debate around public pensions revolves around accounting rules which were designed for the private sector — and their specific mechanics both overstate some dangers faced by public pensions and understate others.

To understand Sgouros' argument, it's perhaps best to start with what "fully-funded" means. This originally comes from the private sector, and it means that a pension plan has piled up enough assets to pay 100 percent of its existing obligations if the underlying business vanishes tomorrow. Thus if existing pensioners are estimated to collect $100 million in benefits before they die, but the fund only has $75 million, it has an "unfunded liability" of $25 million.

This approach makes reasonably good sense for a private company, because it really might go out of business and be liquidated at any moment, necessitating the pension fund to be spun off into a separate entity to make payouts to the former employees. But the Government Accounting Standards Board (GASB), a private group that sets standards for pension accounting, has applied this same logic to public pension funds as well, decreeing that they all should be 100 percent funded.

This makes far less sense for governments, because they are virtually never liquidated. Governments can and do suffer fiscal problems or even bankruptcy on occasion. But they are not businesses — you simply can't dissolve, say, Arkansas and sell its remaining assets to creditors because it's in financial difficulties. That gives governments a permanence and therefore a stability that private companies cannot possibly have.

The GASB insists that it only wants to set standards for measuring pension fund solvency. But its analytical framework has tremendous political influence. When people see "unfunded liability," they tend to assume that this is a direct hole in the pension funding scheme that will require some combination of benefit cuts or more funding. Governments across the nation have twisted themselves into knots trying to meet the 100-percent benchmark.

While all pensions have contributions coming in from workers, the permanence of those contributions is far more secure for public pensions. Plus, those contributions can be used to pay a substantial fraction of benefits.

Indeed, one could easily run a pension scheme on a pay-as-you-go basis, without any fund at all (this used be common). That might not be a perfect setup, since it wouldn't leave much room for error, but practically speaking, public pension funds can and do cruise along indefinitely only 70 percent or so funded.

This ties into a second objection: How misleading the calculation for future pension liabilities is.

A future pension liability is determined by calculating the "present value" of all future benefit payments, with a discount rate to account for inflation and interest rates. But this single number makes no distinction between liabilities that are due tomorrow, and those that are due gradually over, say, decades.

Fundamentally, a public pension is a method by which retirees are supported by current workers and financial returns, and one of its great strengths is its long time horizon and large pool of mutual supporters. It gives great leeway to muddle through problems that only crop up very slowly over time. If huge problems really will pile up, but only over 70 years, there is no reason to lose our minds now — small changes, regularly adjusted, will do the trick.

Finally, a 100-percent funding level — the supposed best possible state for a responsible pension manager — can actually be dangerous. It means that current contributions are not very necessary to pay benefits, sorely tempting politicians to cut back contributions or increase benefits. And because asset values tend to fluctuate a lot, this can leave pension funds seriously overextended if there is a market boom — creating the appearance of full funding — followed by a collapse. Numerous state and local public pensions were devastated by just this process during the dot-com and housing bubbles.

I have skipped past several more technical objections from Sgouros (whose paper is really worth reading). But the fundamental point here is fairly simple. Accounting conventions are supposed to help people think clearly about their financial health. But in the case of public pensions, they have warned of partly imaginary danger, pushing governments to stockpile vast asset hoards that are much larger than is necessary, and created a goal which is itself rather dangerous. The next time you see someone complaining about a pension funding shortfall, check the details carefully.

A few observations from me:

• Pensions are all about matching assets and liabilities and since the duration of assets is much lower than the duration of liabilities, the decline in rates has disproportionately hurt private and public pensions because liabilities have grown a lot faster than assets.
• Unlike public pensions which use an assumed rate-of-return of 7% or 8% to discount future liabilities, corporate pensions use a market rate based on corporate bond yields (see below). This effectively means that the way American corporations determine their future liabilities is a lot stricter and more realistic than the way US public pensions determine their liabilities.
• Companies hate pensions. Instead of using money from corporate bonds to top up their pensions, they prefer using these proceeds to buy back shares, rewarding their investors and propping up executive compensation of their senior managers.
• The pension crisis is deflationary and will only ensure low rates for a lot longer. Shifting out of defined-benefit plans into defined-contribution plans will only exacerbate pension poverty.

Now, let me thank Mathieu St-Jean, Absolute Return Manager at CN Investment Division, for bringing the top article to my attention. I commented on his LinkedIn post but lost it and there was a very nice actuary who corrected me, stating the discount rate corporate pensions use is A or AA, not AAA bond yields.

The point is that corporate pensions use a market rate, not some assumed rate-of-return based on rosy investment assumptions. Some argue this is way too stringent while others argue it is far more realistic and if US public pensions used this methodology, their pension deficits would be far worse than they already are.

As you may already well know, my proposed financing policy for defined benefit (DB) pension plans holds that solvency valuations (i.e. assuming a rate of return based on interest only bearing investment vehicles as opposed to the return realistically expected on the concerned actual pension fund) are not appropriate because they unduly increase any emerging actuarial surplus or debt of a DB pension plan.

Nevertheless, while assuming a realistic rate of return as opposed to a solvency rate would decrease the concerned USA DB pension plans' released debts, any resulting surplus would not appear realistic to me if the assumed long-term real rate of return were higher than 4% for a plan providing indexed pensions.

I have been covering America's public and private pension crisis for a long time. It's a disaster and John is right, it's only going to get worse and a lot of innocent public-sector workers and retirees and private-sector businesses are going to get hurt in the process.

But it's even worse than even John can imagine. With global deflation headed to the US, when the pension storm cometh, it will wreak havoc on public and private pensions for a decade or longer. At that point, it won't just be companies breaking the pension promise, everyone will be at risk.

Importantly, if my worst fears materialize, this isn't going to be like the 2008 crisis where you follow Warren Buffett who bought preferred shares of Goldman Sachs and Bank of America at the bottom, and everything comes roaring back to new highs in subsequent years.

When the next crisis hits, it will be Chinese water torture for years, a bear market even worse than 1973-74, one that will potentially drag on a lot longer than we can imagine.

This will be the death knell for many chronically underfunded US public and private pensions for two reasons:

1. First, and most importantly, rates will plunge to new secular lows and remain ultra-low for years. Because the duration of pension liabilities is much bigger than the duration of assets, any decline in rates will disproportionately hurt pensions, especially chronically underfunded pensions.
2. Second, a prolonged bear market will strike public and private assets too. Not only are pensions going to see pension deficits soar as rates plunge to new secular lows, they will see their assets shrink, a perfect double-whammy storm for pensions. 

No doubt, some pensions will be hit much harder than others, but all pensions will be hit.

This brings me to another point, how will policymakers address this crisis when it really hits them hard and they can't ignore it because pension costs overwhelm public budgets?

Well, Kentucky's public pensions may be finished but I am truly disheartened by the moronic, knee-jerk response. Tom Loftus of courier-journal reports, Kentucky pension crisis: Are 401(k) plans the solution?. I note the following passage:

Keith Brainard, research director for the National Association of State Retirement Administrators, said risk doesn't disappear under a 401(k) plan.

"These proposals shift that risk from the state and its public employers and taxpayers and put it all on the workers. In fact, there’s going to be more risk because they are no longer in a group that can manage the risk much better," he said.

Whether the moves actually will save the state money is a question being hotly debated.

Jason Bailey, executive director of the Kentucky Center for Economic Policy, of Berea, said, “Moving employees into 401(k)-type plans is actually more expensive … and harms retirees while making it much more difficult to attract and retain a skilled workforce.”

I will keep hammering the point that moving public sector employees to a 401(k) plan shifts retirement risk entirely onto employees, leaves them exposed to the vagaries of public markets, and ultimately many of them will succumb to pension poverty just like private sector employees with DC plans. Moreover, the long-term effects to the state of Kentucky are not good, they will raise social welfare costs and cut economic growth as more people retire with little to no savings.

Another point I need to make to the John Mauldins of this world, the pension crisis is deflationary. Period. I don't care if it's DB or DC pensions, a retirement crisis putting millions at risk for pension poverty will exacerbate rising inequality and necessarily impact aggregate demand and government revenues (collect less sales taxes).

Don't get me wrong, the US has a whole host of problems with their large public DB plans, and chief among them is lack of proper governance. Sure, states aren't topping them up, pensions still use rosy investment assumptions to discount future liabilities, but the biggest problem is government interference and their inability to attract and retain qualified investment staff to manage public and private assets internally.

On top of these issues, some decently-funded US pensions are getting hit with brutal changes to accounting rules. I recently discussed how this new math hit Minnesota's pensions but as other states adopt similar rules to discount future liabilities, get ready, they will get hit hard too.

This is why on top of good governance which separates public pensions from the government, I believe we need to introduce some form of risk-sharing in public pensions so when the plans do experience a deficit, contribution rates increase and/ or benefits are cut until the plan regains fully-funded status again.

In my recent conversation with Jim Leech on pensions and Canada's Infrastructure Bank, the former President and CEO of Ontario Teachers' shared this with me on how OTPP regained its fully-funded status:

Basically, there are two levers Ontario Teachers' Pension Plan uses when the plan goes into deficit to restore fully-funded status:

• It partially or fully removes cost-of-living adjustments (conditional inflation protection) and
• It raises the contribution rate from the base of 9% to an agreed upon rate (a special levy)

After the plan ran into deficits after the 2008 crisis, the contribution rate was increased to 13% and since it is a jointly sponsored plan, both teachers and the government needed to contribute this rate.

However, unlike 1997 where benefits were increased, now that the plan is fully-funded,  the new agreement is simply to restore full inflation protection and reduce the contribution rate back to the base case of 9% (can never go lower).

The key here is there are no increases in benefits, it's simply restoring full inflation protection and reducing the contribution rate going forward to the base rate of 9%.

Lastly, a dire warning to John Mauldin and residents of Dallas. All roads lead to Dallas. The great state of Texas will survive and rebuild after Hurricane Harvey but get ready for major increases in property taxes when the pension storm cometh and deflation hits the US.

And there will be no escape (to where? Illinois, New Jersey or Kentucky?!?). The pension storm will strike us when we least expect it and it will wreak havoc on the US and global economy for a very long time.

It's high time the United States of America adopts a single payer healthcare system like Canada and the rest of the civilized world has done and privatize and enhance Social Security for all workers, adopting the Canadian governance model to make sure it's done well.

"Thanks for the note and the kind words. I'm with you on the discipline question, by the way. I just think the current system of discipline -- which is mostly just about people yelling at the mayor if he makes a bad pension decision -- isn't working very well. Discipline isn't consequences a decade down the line. Discipline is having your checks to retirees bounce or your budget not balance in the very near term. The closer we can get to a system like that, the better off systems will be in the long term, in my opinion."

As parents and students start writing checks for the first in-state tuition hike in seven years at the , they hope the extra money will buy a better education.

But a big chunk of that new money — perhaps tens of millions of dollars — will go to pay for the faculty’s increasingly generous retirements.

Last year, more than 5,400 UC retirees received pensions over $100,000. Someone without a pension would need savings between $2 million and $3 million to guarantee a similar income in retirement.

The number of UC retirees collecting six-figure pensions has increased 60% since 2012, a Times analysis of university data shows. Nearly three dozen received pensions in excess of $300,000 last year, four times as many as in 2012. Among those joining the top echelon was former UC President Mark Yudof, who worked at the university for only seven years — including one year on paid sabbatical and another in which he taught one class per semester.

The average UC pension for people who retired after 30 years is $88,000, the data show.

The soaring outlays, generous salaries and the UC’s failure to contribute to the pension fund for two decades have left the retirement system deep in the red. Last year, there was a $15-billion gap between the amount on hand and the amount it owes to current and future retirees, according to the university’s most recent annual valuation.

“I think this year’s higher tuition is just the beginning of bailouts by students and their parents,” said Lawrence McQuillan, author ofCalifornia Dreaming: Lessons on How to Resolve America’s Public Pension Crisis. “The students had nothing to do with creating this, but they are going to be the piggy bank to solve the problem in the long term.”

At a UC Board of Regents meeting this month, university officials began discussing next year’s budget and broached the possibility of another tuition increase. Pensions and retiree healthcare topped their list of growing expenses, but it’s unclear whether regents would approve another hike.

Public pension funds are in crisis across the country, and particularly in California. The underlying cause is essentially the same everywhere. For decades, government agencies and public employees consistently failed to contribute enough money to their retirement funds, relying instead on overly optimistic estimates of how much investments would grow.

UC’s pension problem, while not unique, is distinctly self-inflicted. In 1990, administrators there stopped making contributions for 20 years, even as their investments foundered, leaving a jaw-dropping bill for the next generation — which has now arrived.

After setting aside about a third of the new money for financial aid, university officials expect this year’s increased tuition and fees for in-state students to generate an extra $57 million for the so-called core fund, which pays for basics like professors’ salaries and keeping the lights on in the classrooms. But they also expect to pay an extra $26 million from the fund for pensions and retiree health costs, according to the university’s most recent budget report.

UC spokeswoman Dianne Klein said it’s impossible to say precisely how much of the tuition increase will go toward retirement costs because the university pools revenue from a variety of sources, including out-of-state tuition and taxpayer money from the state general fund, to cover expenses.

The steep rise in six-figure pension payments over the last five years was driven by a wave of retiring baby boomers with long tenures at high salaries, Klein said. “UC, as you know, has an aging workforce.”

University officials have attempted to control costs by increasing the retirement age and capping pensions for new hires, but those are long-term fixes that won’t yield significant savings for decades. And the current budget promises $144 million in raises for faculty and staff, a move that will send future pension payments even higher.

The top 10 pension recipients in 2016 include nine scholars and scientists who spent decades at the university: doctors who taught at the medical schools and treated patients at the teaching hospitals, a Nobel Prize-winning cancer researcher and a physicist who oversaw America’s nuclear weapons stockpile.

The exception is Yudof, who receives a $357,000 pension after working only seven years.

Under the standard formula — 2.5% of the highest salary times the number of years worked — Yudof’s pension would be just over $45,000 per year, according to data provided by the university.

But Yudof negotiated a separate, more lucrative retirement deal for himself when he left his job as chancellor of the University of Texas to become UC president in 2008.

“That’s the way it works in the real world,” Yudof said in a recent interview with The Times.

The deal guaranteed him a $30,000 pension if he lasted a year. Two years would get him $60,000. It went up in similar increments until the seventh year, when it topped out at $350,000.

Yudof stepped down as president after five years, citing health reasons. Under the terms of his deal, his pension would have been $230,000. But he didn’t immediately leave the university payroll.

First, he collected his $546,000 president’s salary during a paid “sabbatical year” offered to former senior administrators so they can prepare to go back to teaching. The next year he continued to collect his salary while teaching one class per semester, bringing his tenure to seven years and securing the maximum $350,000 pension.

In 2016 he got the standard 2% cost-of-living raise, resulting in his $357,000 pension.

Asked if he was worth all the money, Yudof said it would be more appropriate to ask the members of the university’s Board of Regents, who agreed to the deal.

Richard C. Blum, who was chairman of the board in 2008, did not respond to requests for comment.

Six of the top 10 pensions recipients last year — each of whom got more than $330,000 — were doctors who taught at the medical schools or treated patients at the teaching hospitals.

For decades, university officials have argued that the generous pension plan is essential to compete with other top schools, especially private ones that offer higher salaries.

Rival medical schools in California, including Stanford and USC, do not provide doctors guaranteed, lifetime pensions. Instead, they offer defined contribution plans in which the employer and employee each pays into the employee’s personal retirement account. When the worker retires, he or she gets the money and the employer is off the hook — no lifetime of continuing payments.

The vast majority of doctors in the U.S. who don’t work for public universities are offered such plans instead of pensions, as are the vast majority of other professionals working in private industry.

Three physician recruiters told The Times that they thought persuading top doctors to work at UC would be easy, given the prestige of the institution and the fact that the hospitals are located in some of the nation’s most desirable places to live.

“I think I could sell it against a higher-paying job in the private sector, even without a guaranteed pension,” said Vince Zizzo, president of Fidelis Partners, a national search firm based in Dallas. Working for a university “is a protected world of guaranteed this and guaranteed that,” Zizzo said. In private practice, doctors are paid based on the number of patients they see and how much they bill. “It’s a much harder life; you eat what you kill.”

Most of UC’s top pension recipients did not respond to requests for comment on this story.

Two interviewed by The Times said they were grateful for the pensions, but the retirement plan played no role in their decision to take jobs at the university early in their careers.

Nosratola Vaziri, a former kidney and hypertension specialist at UC Irvine’s medical school, collected a $360,000 pension last year. He went to work at UCI after finishing a fellowship at UCLA in 1974 and stayed for the next 37 years, contributing to more than 500 scientific articles. Despite offers from other institutions, he never left because he loved the work, Vaziri said.

“Neither salary nor pension were the reason for my choice,” Vaziri said.

Radiologist Lawrence Bassett spent 41 years working at UC hospitals after finishing his residency at UCLA. He specialized in the emerging field of breast imaging and said UC was a great place to benefit from leading research. Asked whether the pension had been a factor in his decision to take the job initially, or stay over the years, Bassett said, “No, honestly it wasn’t.” Bassett’s pension was $347,000 last year.

McQuillan, the author and Senior Fellow at the Independent Institute, a nonpartisan think-tank in Oakland,said it would be simpler, more transparent and ultimately cheaper for UC hospitals and medical schools to compete with other institutions by paying higher salaries.

Pensions involve a guess about how much the employer will have to invest today to pay a retiree a guaranteed amount later. It’s common for public officials to guess low, saving money in the short term, and leaving their successors to figure out how to make up any shortfall.

That’s what has been happening at UC for decades, McQuillan said. “At least with a big salary, there isn’t this ticking time bomb that’s going to explode 30 years down the road.”

Like most public employee pensions — they’re rare in the private sector these days due to the cost — UC’s is funded through regular paycheck contributions from employers and employees. The money is invested in stocks, bonds and real estate around the world with the hope that it will grow enough over time to cover the guaranteed payments in retirement.

As is often the case, the UC pension fund’s financial trouble didn’t begin when there was too little money; it began when there was too much.

In 1990, after years of strong investment returns, university officials determined the fund had accumulated more than it would owe retirees into the foreseeable future. So they took what was supposed to be a temporary “holiday” from making contributions to the fund. They let employees do the same.

The policy was popular and difficult to overturn even as the fund started slipping into the red.

By the time contributions were reinstated in 2010, the fund had fallen billions of dollars behind.

Since then, university administrators have been scrambling to catch up, borrowing and transferring $4 billion from other university accounts to plow into the pension fund. They also raised the minimum retirement age from 50 to 55.

In 2015, Gov. Jerry Brown offered a $436-million gift of state taxpayer funds in exchange for an agreement from UC President Janet Napolitano to cap the amount of salary that can be used to calculate a pension at $117,000 — a move that will save money decades from now, but does little in the short term.

The deal also required Napolitano to offer new employees the choice of a defined contribution plan.

Despite all these efforts, UC’s pension hole hasn’t shrunk since 2010; it has grown by billions, according to the university’s most recent valuation. That’s because the return on investments has not kept pace with the growth in staff, salaries and departing employees’ pension payments. This year’s stock market gains will help but have not yet been included in the published valuations.

As the university struggles to deal with the problem, Napolitano’s office has become a jealous guardian of pension information.

In December, the nonprofit California Policy Center sent a public records request to UC for an update of a 2014 spreadsheet listing pension payments to the university’s retirees. A school administrator responded with an email saying UC had provided the previous spreadsheet as a “courtesy” and was no longer willing to do so.

When the nonprofit pressed — the information is indisputably public under the law, and other California government agencies routinely provide pension data without delay — the administrator sent an email claiming that the employee who created the 2014 spreadsheet had since retired and nobody could find the query he had used to extract the information from a larger database.

“They lost the computer program? That’s not my problem,” said Craig P. Alexander, a Dana Point attorney representing the nonprofit. The university finally turned the pension data over in May, but only after the Alexander threatened to sue.

Napolitano’s staff also initially refused when The Times requested the pension information in February. It took until June for them to provide usable data — which showed the dramatic rise in six-figure pension payments and revealed for the first time the full amount of Yudof’s pension.

• Immediately cap all pensions to a certain amount, including those of these pension "elites" and let them take you to court if they feel you are reneging on their contract.
• Immediately raise the contribution rate and cut benefits (cost of living adjustment) until the plan gets back to fully-funded status.
• Make pension contribution holidays illegal at UC and everywhere in California and the United States. Period.
• Raise the retirement age of UC's professors to 65. If my 86 year-old father who like most doctors everywhere has no pension can still work as a psychiatrist three times a week, these professors can tough it out in academia till 65 (most work well past that age).
•  Forget shifting new professors to defined-contribution (DC) plans. The brutal truth is they're horrible and will only ensure pension poverty down the road. UC needs to curb pension largess but shifting to DC will only ensure pension poverty and make it harder to attract qualified staff.
• Follow Canada's CAAT Pension Plan when it comes to the gold standard in pensions for university defined-benefit pensions. CAAT Pension Plan is a jointly sponsored plan where sponsors share the risk of the plan if it goes into deficit. You can read all about this plan here and read their 2016 annual report here.

Jagdeep Bachher stands out among chief investment officers.

First, there’s the headwear. Bachher is a practicing Sikh, and the turban he wears, whether orange, red, or baby blue, is always perfectly paired with his business attire, matching his tie, even his socks.

Second is his obsession with management fees. While institutional investors have gotten more particular about costs in recent years as high-priced hedge funds have struggled to deliver returns above market indexes, Bachher has taken it to the extreme. Since being hired to lead the University of California Regents’ $110 billion pension and endowment in 2014, he’s fired almost half of the outside money managers formerly on his payroll as he’s sought to cut fat and concentrate market bets.

“I truly believe that less is more,” Bachher says. “Let’s do a few things and do them well.” And so he has: While the funds’ performance when he arrived was middling at best, they gained about 15 percent in the 12 months through June. “A high cost structure kills you in the long run,” says Laurence Siegel, former head of investment research at the Ford Foundation. “The basic goal is to keep your money.” Bachher has thrown the funds’ weight behind promising new managers instead and also backed an advisory group with a few other institutional investors called Aligned Intermediary Inc., which researches investment opportunities in green infrastructure with the potential for high returns.

Among his peers, Bachher is known for his charisma, his intellectualism, and being extremely organized—all traits that serve him well navigating the notoriously prickly politics of a state university system. Born and raised in Nigeria, he was precocious from an early age. When he was just 14, his parents moved the family halfway around the world to Canada so their son and his older sister could attend the University of Waterloo, one of the country’s top engineering schools, located in a sleepy Toronto exurb.

Bachher went on to earn a doctorate in management sciences in 2000 from Waterloo’s school of engineering. For his thesis, he studied how venture capitalists decide which companies to back, interviewing dozens of the famously secretive money managers. His insight made him attractive to the money management arm of the Canadian insurer Manulife Financial Corp., which hired him out of school. He later worked for Alberta Investment Management Corp., a $90 billion nonprofit that invests public funds for the province, where he rose to deputy chief investment officer.

While he’s best known for taking a sharp scalpel to the regents’ portfolio, Bachher says his overriding philosophy is simply to borrow the best ideas wherever he can find them. “We’re starting to see the results,” he says. “There’s no change just for the sake of change.”