Pension360

For the first time under the Multiemployer Pension Reform Act, pension fund members have voted to cut their own pension benefits in order to maintain the solvency of the fund.

The Iron Workers Local 17 pension fund was the first to have its benefit cut proposal approved by the Treasury back in December; other pension funds have submitted proposals for benefit cuts, but they had been rejected by the Treasury.

Under the MPRA, plans are eligible to propose cuts if their funding is “critical and declining”. There are 70 such plans in the United States.

More from Bloomberg BNA:

Members of Iron Workers Local 17 in Cleveland have approved cuts to their pension benefits in an effort to keep their pension plan from going insolvent, and it’s the fund’s retirees who are going to take the hardest hit.

Of the nearly 2,000 plan participants, fewer than half submitted a vote. That’s significant because under the MPRA, not casting a vote is the same as voting to approve the pension cuts. Of the 936 members who did vote, two-thirds voted in favor of the cuts.

[…]

Benefit cuts, under the MPRA, are allowed only if the plan trustees determine that all reasonable measures to avoid insolvency have been and continue to be taken and that the suspension would allow the plan to avoid insolvency, assuming the suspension of benefits continues until it expires by its own terms or, if no such expiration is set, indefinitely. Cuts can be made to no more than 110 percent of the Pension Benefit Guaranty Corporation’s limits for multiemployer plans.

Reporter Ed Mendel covered the Capitol in Sacramento for nearly three decades, most recently for the San Diego Union-Tribune. More stories are at Calpensions.com.

Actuaries are recommending that one of California’s oldest public pension systems, the California State Teachers Retirement System formed in 1913, lower its investment earnings forecast from 7.5 percent to 7.25 percent.

If the newly empowered CalSTRS board adopts the lower forecast next week, state rates paid to the pension fund would increase by 0.5 percent of pay, an additional $153 million bringing the total state payment next fiscal year to $2.8 billion.

Rates paid by an estimated 80,000 teachers hired after Jan. 1, 2013, when a pension reform lowered benefits, also would increase by 0.5 percent, taking about $200 a year from the average salary of $40,000.

The new rate-setting power is sharply limited. But it’s a big change for CalSTRS which, unlike nearly all California public pension funds, has lacked the power to raise employer rates, needing legislation instead.

CalSTRS could only plead with the Legisture for a rate increase as the funding level of its projected assets needed to pay future pensions fell from 120 percent in 2000 to less than 60 percent in 2009. Now despite a long bull stock market, the funding level will drop from 69 percent to 64 percent if the new forecast is adopted.

Legislation expected to put CalSTRS on the path to reaching 100 percent by 2046 was finally enacted three years ago. Most of the increased cost will come from school districts as their rates more than double, gradually going from 8.25 percent of pay to 19.1 percent in 2020.

The long phase in of the school district rates, which increase to 14.43 percent of pay in July, is already said by some to be severely squeezing money available for student services and teacher pay raises.

The legislation gave CalSTRS very limited power to raise school district rates beginning in 2021. Any increase is limited to 1 percent of pay a year, and the total school district rate cannot exceed 20.25 percent of pay.

The legislation increased the state rate from 4.5 percent of pay to the current rate of 8.8 percent. In its biggest power boost, CalSTRS was authorized to raise state rates 0.5 percent of pay a year, reaching a maximum of 23.8 percent before the legislation expires in 2046.

Teachers had been paying about the same CalSTRS rate as school districts, 8 percent of pay compared to the 8.25 percent for their employers. The legislation increased the rate paid by teachers hired before Jan. 1, 2013, to 10.25 percent of pay.

Their rate was capped by “California rule” court decisions that pensions offered at hire can’t be cut, unless offset by a new benefit. The new benefit for teachers hired before 2013 made a routine annual 2 percent cost-of-living adjustment a vested right that can’t be cut.

Rates paid by teachers hired after 2012, however, were not capped but are limited. The reform calls for an equal employer-employee share of the “normal” cost, the pension earned during a year excluding the often larger debt or “unfunded liability” from prior years.

It’s the requirement that teachers hired after the pension reform pay half the normal cost that would trigger the 0.5 percent of pay CalSTRS rate increase for some teachers, if the earnings forecast used to “discount” future pension costs is lowered to 7.25 percent.

About 20,000 new hires have been hired during each of the last three years. So, CalSTRS estimates that 80,000 teachers with the new 2% at age 62 formula, about 20 percent of the total, would get a rate increase in July if the earnings forecast is lowered to 7.25 percent.

The CalSTRS board may decide whether to use its new rate power for the first time at a meeting next Wednesday (Feb. 1) in San Diego, which can be viewed by webcast after clicking on a tab on the CalSTRS website.

The board will receive an “actuarial experience” study, the first in five years. The consulting actuary, Milliman, found that over the next 30 years the life span of the average retiree is expected to increase by three years.

The report recommends lowering the earnings forecast to 7.25 percent because “there is a less than 50 percent probability” of a 7.5 percent return over the long term, based on “capital market assumptions” and dropping the inflation forecast from 3 to 2.75 percent.

“Going to 7.00% would be an acceptable alternative if the board wanted to add another level of conservatism in the actuarial assumptions by increasing the likelihood the investment assumption will be met long term,” the report said.

The state budget proposed by Gov. Brown for the new fiscal year beginning in July assumes a $153 million increase in the state payment based on a lower 7.25 percent earnings forecast.

If the earnings forecast was dropped to 7 percent, the report said, the state rate would be expected to increase 0.5 percent a year for 10 years, instead of for five years as expected under a 7.25 percent forecast.

For teachers hired after 2012 that receive lower pensions under the reform, the rate increase next year would be 1 percent of pay or about a $400 a year pay cut for the average teacher, instead of 0.5 percent of pay and a cut of $200 a year.

Though it’s not recommended, the report said the CalSTRS board could decide to leave the earnings forecast at 7.5 percent, with no rate increase for the state and new teachers, and still be on a path to full funding by 2046 because of its new power to raise rates later.

Whether earnings forecasts used by public pension funds to discount future pension obligations are too optimistic, and thus conceal massive debt, is one of the main disputes in the debate over the need for more cost-cutting reform.

The Pension Tracker at Stanford University, for example, shows that California public pension systems report a debt or unfunded liability of $228.2 billion using a 7.5 percent discount rate. The debt soars to $969.5 billion if the discount rate is 3.25 percent as used by CalPERS for terminated plans.

The California Public Employees Retirement System, which has different investment allocations and pension costs than CalSTRS, dropped its earnings forecast from 7.5 percent to 7 percent last month, causing a major rate increase that will be phased in over eight years.

The lower earnings forecast dropped the CalPERS funding level from 69 percent to 64 percent, Ted Eliopoulos, CalPERS chief investment officer, told Bloomberg News earlier this month. (As previously noted, the CalSTRS funding level also could drop from 68.5 to 64 percent.)

Consultants told CalPERS last spring that its investment portfolio would probably earn only 6.2 percent during the next decade. Higher earnings in the following decades were expected to keep earnings above 7.5 percent in the long run, a point cited by early opponents.

CalPERS staff met with employer groups, public employee union leaders, and retiree associations to explain the need for a rate increase. The Brown administration reportedly helped negotiate an agreement, and the lower forecast was adopted with little opposition.

While describing the process that resulted in the lower CalPERS earnings forecast, the new CalSTRS report said CalPERS has not yet released an official estimate of the rate increase for non-teaching school employees.

“However, information presented at the CalPERS Board meeting in December indicates the contribution rate for school employers will likely double from its current level of 13.888 percent of payroll,” said the CalSTRS report.

CalPERS had no immediate comment on the CalSTRS report yesterday.

The new CalPERS rate increase is the fourth in recent years: earnings forecast lowered from 7.75 percent to 7.5 percent in 2012, actuarial method no longer annually refinances debt in 2013, and a longer average life span for retirees in 2014.

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Alvin Powell of the Harvard Gazette reports, Course change for Harvard Management Company:

Explaining that challenging investment times demand “we adapt to succeed,” the new head of the Harvard Management Company (HMC) announced sweeping internal changes today, including a major shift in investment strategy, workforce reductions, and a compensation system tied to the overall performance of the University’s endowment.

N.P. Narvekar, who took over as HMC’s president and chief executive officer on Dec. 5, immediately began executing his reorganization, announcing four new senior hires: Rick Slocum as chief investment officer, and Vir Dholabhai, Adam Goldstein, and Charlie Savaria as managing directors.

“Major change is never easy and will require an extended period of time to bear fruit,” Narvekar said in a letter announcing the moves. “Transitioning away from practices that have been ingrained in HMC’s culture for decades will no doubt be challenging at times. But we must evolve to be successful, and we must withstand the associated growing pains to achieve our goals.”

Founded in 1974, HMC has overseen the dramatic growth in the University’s endowment that has made it, at $35.7 billion, the largest in higher education. Made up of more than 13,000 funds, many of them restricted to particular purposes, the endowment is intended to provide financial stability year to year for the University. In the last fiscal year, which ended on June 30, endowment funds provided $1.7 billion, more than a third of the University’s $4.8 billion budget. Such endowment income supports Harvard’s academic programs, science and medical research, and student financial aid programs, which allow the University to admit qualified students regardless of their ability to pay.

During the 1990s and early 2000s, returns on Harvard’s endowment regularly outstripped those of other institutions, making HMC a model for endowment management. Since the market crash of 2008, however, endowment performance has been up and down. Last year, endowment returns fell 2 percent, dropping the value below the $36.9 billion high-water mark reached in the 2008 fiscal year.

Narvekar has decided to shift from the policy of using both in-house and external fund managers that had made HMC’s approach to investing unique. In recent years, he said in his letter, competition has intensified for both talent and ideas, making it tougher to both find and retain top managers and exploit “rapidly changing opportunities.”

In what he called “important but very difficult decisions,” Narvekar announced that the in-house hedge fund teams would be leaving HMC by July, and the internal direct real estate investment team would leave by the end of the calendar year. The natural resources portfolio, meanwhile, will remain internally managed. Altogether, he said, the changes will trim HMC’s 230-person staff roughly in half.

“It is exceptionally difficult to see such a large number of our colleagues leave the firm, and we will be very supportive of these individuals in their transition,” Narvekar said. “We are grateful for their committed service to Harvard and wish them the very best in their future endeavors.”

The changes are in step with an overall strategy shift that will move away from what Narvekar called a silo investing approach, wherein managers focus on specific types of investments — whether stocks, bonds, real estate, or natural resources — to one in which everyone’s primary goal is overall health and growth for the endowment.

The problem with the silo approach, Narvekar said, is that it can create both gaps and duplication in the overall portfolio.

“This model has also created an overemphasis on individual asset class benchmarks that I believe does not lead to the best investment thinking for a major endowment,” Narvekar added.

Narvekar sees his incoming “generalist model,” which is employed at some other universities, as fostering a “partnership culture” in which the entire team debates investing opportunities within and across asset classes.

Narvekar, who previously oversaw the endowment at Columbia University, said he would encourage managers to be open-minded and creative as they move forward, adding that the generalist model is flexible enough that, under the proper circumstances, it could again allow for hiring in-house managers down the road.

“While I don’t expect a large portion of the portfolio to be managed internally as a practical matter … nothing is out of bounds in the future,” he said.

Narvekar expects a five-year transition period for the changes to be fully implemented, and although he warned that investment performance will likely be “challenged” this year, by the end of the calendar year organizational changes should have taken hold and HMC will look and act differently.

In effect, HMC’s compensation structure will move away from a system where managers are compensated based on how their siloed investments perform relative to benchmarks. The new system, to be implemented by July, will be based on the endowment’s overall performance.

In a press release, Narvekar said he has known the four executives brought aboard to implement the changes for much of his career. Three of them — Dholabhai, Goldstein, and Savaria — have earlier experience at the Columbia Investment Management Co. where Narvekar was CEO. The fourth, Slocum, who starts as chief investment officer in March, comes to Harvard from the Johnson Company, a New York City-based investment firm. He has worked at the Robert Wood Johnson Foundation and the University of Pennsylvania.

In addition to his experience at Columbia, Dholabhai, who starts on Monday, was most recently the senior risk manager for APG Asset Management US. Goldstein, who starts on Feb. 6, comes directly from Columbia, where he was managing director of investments. Savaria, who also starts on Monday, co-managed P1 Capital.

“I am pleased to welcome four senior investors to HMC who bring substantial investment expertise and deep insight into building and working in a generalist investment model and partnership culture,” Narvekar said. “I have known these individuals both personally and professionally for the majority of my career, and I value their insights and perspectives.”

The last time I discussed Harvard’s ‘lazy, fat, stupid’ endowment was back in October where I drilled down to examine criticism of another dismal year of performance and ‘mind blowing’ compensation.

HMC’s new president, N.P. Narvekar, wasted no time in setting a new course for Harvard’s endowment fund. In essence, he’s basically admitting that Yale’s endowment model which relies primarily on external managers is a better model and he’s also putting an end to insane compensation tied to individual asset class performance.

Narvekar is absolutely right: “The problem with the silo approach is that it can create both gaps and duplication in the overall portfolio. This model has also created an overemphasis on individual asset class benchmarks that I believe does not lead to the best investment thinking for a major endowment.”

I don’t believe in the silo approach either. I’ve seen first-hand its destructive effects at large Canadian pension funds and I do believe the bulk of compensation at any large investment fund should be tied to overall investment results (provided all the asset class benchmarks accurately reflect all the risks of the underlying portfolio).

At the end of the day, whether you work at Harvard Management Company, Yale, Princeton, or Ontario Teachers’ Pension Plan, the Caisse, CPPIB, it’s overall fund performance that counts and senior managers have to allocate risk across public and private markets to attain their objective.

Now, US endowment funds are different from large Canadian pensions, they have a shorter investment horizon and their objective is to maximize risk-adjusted returns to more than cover inflation-adjusted expenses at their universities, not to match assets with long-dated liabilities.

Still, Narvekar and his senior executives now have to allocate risk across public an private market external managers. And while this might sound easy, in an low interest rate era where elite hedge funds are struggling to deliver returns and shafting clients with pass-through and other fees, it’s becoming increasingly harder to allocate risk to external managers who have proper alignment of interests.

What about private equity? Harvard and Yale have the advantage of being premiere endowment funds which have developed long-term relationships with some of the very best VC and PE funds in the world but even there, returns are coming down, times are treacherous and there are increasing concerns of misalignment of interests.

And as Ron Mock recently stated at Davos, you’ve got to “dig five times harder” to find deals that make sense over the long run to bring in a decent spread over the S&P 500.

All this to say that I don’t envy Narvekar and his senior managers who will join him at HMC. I’m sure they are getting compensated extremely well but they have a very tough job shifting the Harvard Endowment titanic from one direction to a completely different one and it will take at least three to five years before we can gauge whether they’re heading in the right direction.

What else worries me? A lot of cheerleaders on Wall Street cheering the Dow surpassing the 20,000 mark, buying this nonsense that global deflation is dead, inflation is coming back with a vengeance and bonds are dead. Absolute and total rubbish!

When I read hedge funds are positioned for a rebound in the oil market and they’re increasing their bearish bets on US Treasuries, risking a wipeout, I’m flabbergasted at just how stupid smart money has become. Go read my outlook 2017 on the reflation chimera and see why one senior Canadian pension fund manager agrees with me that it’s not the beginning of the end for US long bonds.

In fact, my advice for Mr. Narvekar and his senior team is to be snapping up US Treasuries on any rise in long bond yields as they shift out of their internal hedge funds and to be very careful picking their external hedge funds and private equity funds (I’d love to be a fly on the wall in those meetings!).

Below, Bloomberg reports on why Harvard’s new fund manager is copying Yale, farming out money, ending on this sobering note:

Mark Williams, a Boston University executive-in residence who specializes in risk management, said the moves mark the end of a long, painful realization that its strategy was failing, a capitulation he considered “long overdue.”

Williams said the move will mark an opportunity for outside managers eager to oversee funds for such a prestigious client: “It’s going to be a bonanza for those money shops.”

That’s what worries me, a bunch of hedge funds and other asset managers lining up at Harvard’s door begging for an allocation, looking for more fees. But I trust Narvekar and his senior team will weed out a lot of them. For the rest of you, pay attention to what is going on at Harvard, it might be part of your future plans.

The Harvard Management Co. announced this week that it’ll be sending half its employees home for good and outsourcing most of its money management.

It’s a big change for an endowment that for many years was the best money manager in the business; but since 2005, the fund’s fortunes have changed.

HMC lost money in FY2016, returning -2% even as its benchmark portfolio returned 1% and broader markets grew even more.

Are there any lessons to learn from HMC? Barry Ritholtz think so. He writes at Bloomberg:

No. 1. When a money manager is outperforming the benchmarks, leave them alone: Under Meyer, HMC had captured lightning in a bottle. Messing with that rare and delicate thing is simply foolish. Harvard had to learn that the hard way.

No. 2. Simpler and cheaper beats complicated and expensive: Investing luminaries such as Charles Ellis, Jack Bogle and Burton Malkiel have long argued that the simpler and cheaper a portfolio is, the better its long-term performance. This is true even for a $37 billion endowment like Harvard’s.

No. 3. Opining about things you know nothing about is an expensive self-indulgence: The second-guessing of outsiders who thought they knew better is a perfect example of this. The Harvard professors and alums who deemed themselves more insightful about the mysteries of investing than the professionals is just the sort of hubris that the trading gods love to punish. This 2004 New York Times article about how much higher Jack Meyer’s pay was than that of Yale Chief Investment Officer David Swensen sums up the critics’ complaints — and naivete. What the critics accomplished was saving millions of dollars in management compensation while forsaking billions of dollars in returns. That was a dumb trade.

No. 4. Costly, underperforming alternative investments are on notice: This is part of a broader trend that was first thrust into view in 2014, when the giant California Public Employees Retirement System (CalPERS) pension fund said it was dumping its hedge fund investments, and reducing other so-called alternative investments. But pension funds and endowments move slowly; Harvard has had six different endowment managers before reaching the same conclusion as CalPERS. Other pension funds and endowments are likely to find religion as well. (Are you listening, New York?) It’s inevitable that pensions and endowments will also cool on venture capital and private equity.

Read the rest of the lessons at the link.

Trustees for the California State Teachers’ Retirement System next month will discuss whether to lower the pension fund’s assumed rate of return from 7.5 percent to 7.25 percent.

CalSTRS’ current rate is right at the nationwide median; but many public plans — including CalPERS — are continuing to lower their assumptions.

More from Reuters:

The California State Teachers’ Retirement System will consider lowering its expected return rate to 7.25 percent from 7.5 percent, based on economic factors and improvements to beneficiaries’ life expectancies.

CalSTRS Board is scheduled to consider the move during its February meeting. The recommendation was published late on Wednesday on the public pension fund’s website.

The changes are based on new lower assumptions for price inflation and general wage growth, which reduced the probability that CalSTRS would achieve its 7.5 percent return to 50 percent over the long-term, according to the report.

[…]

CalSTRS must also take into account improvements in beneficiaries’ life expectancies, the report noted.

Under the proposed changes, CalSTRS’s funding ratio would drop to 63.9 percent from 67.2 percent, and contribution rates would rise.

CalSTRS estimates that under a 7.25 percent expected return, the state contribution rate would increase by 0.5 percent of payroll for each of the next five years. Currently, the state contribution rate is 8.8 percent of payroll.

 

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Tawfik Hammoud and Vinay Shandal of BCG recently wrote an op-ed for the Globe and Mail, Canada needs to work on its private-equity game:

When you look at who attended last week’s World Economic Forum in Davos, it’s striking how many are global investors or work for large funds – and in particular, private-equity firms.

The question Canadians should be asking themselves is, how do we ensure that Canada receives its fair share of the trillions of dollars deployed by global investment funds, including real estate, infrastructure, venture capital and private equity? How can our entrepreneurs and company owners benefit from this growth capital and the opportunities that come with it?

How can we create an investment ecosystem that gives rise to more Canadian investment firms led by top professionals?

The global investors who gathered in Davos, Switzerland, have much to be thankful for. Business is thriving and the various private asset classes’ performance keeps pumping up demand, especially relative to fixed income and public equities. Take private equity, for example: 94 per cent of investors in a recent survey count themselves satisfied with the returns, and more than 85 per cent say they intend to commit more or the same amount of capital to private equity next year. As a result, the capital flowing into private equity is unprecedented, established firms are raising record amounts of money and fund oversubscription is common.

More than 600 new private-equity funds were created last year alone and the industry is holding $1.3-trillion (U.S.) of “dry powder,” or uninvested capital, that is sitting on the sidelines waiting to be invested. While the merits and operating model of private equity can and should be debated (as they were when former private-equity man Mitt Romney ran for president in the 2012 U.S. election), there is no denying its growing importance in many economies. Carlyle Group and Kohlberg Kravis Roberts & Co. (and their portfolio companies) employ more people than any other U.S. public company outside of Wal-Mart Stores Inc.

The sector’s roaring success might also be the biggest risk to its future. There might be such a thing as too much money, after all.

A swath of new entrants is pouring into private assets, searching for yield in a world of low interest rates. Chinese, Middle Eastern and other emerging markets investors are on the rise and have quadrupled their outbound investment over the past few years. Sovereign wealth funds, pension plans, insurance companies and even some mutual funds are allocating money to the private markets and borrowing from their playbooks. So much money chasing a limited number of opportunities has pushed prices up: historically high multiples combined with lower levels of leverage are putting pressure on returns. Private-equity deal multiples, for example, have exceeded the peaks last seen in 2006-07 for larger transactions (deals above $500-million) and deals above $250-million are also flirting with these highs. But most indicators still point to a favourable outlook as long as the credit markets remain fluid and fund managers continue to create value during their ownership period.

Canadian pension funds, many of which were present at Davos, are increasingly active in this crowded field. They have invested time and money to develop direct capabilities and increasingly stronger investment teams. In many regards, they are years ahead of their peers around the world. However, outside of our pension funds and a few select local firms, Canada tends to punch under its weight. We lack the kind of developed investment ecosystems that are thriving in other countries. As an example, the United States has 24 times more private-equity funds than Canada and has raised nearly 40 times more capital over the past 10 years.

The point is broader: Canada should be attracting more foreign direct investment, including money from global investment firms. FDI in Canada has grown by just 2 per cent a year since 2005, compared with an average of 7 per cent for all OECD countries and 8 per cent for Australia. As a percentage of GDP, Canada still sits in the middle of pack of OECD countries, but 30 per cent of that investment is driven by mining and oil and gas and is heavily skewed to M&A as opposed to greenfield investment (relative to other countries).

Something doesn’t add up. Canada is a great place to put money to work. We are a country with low political risk, competitive corporate taxes, an educated and diverse labour force, liquid public markets and a real need for infrastructure investments. Yet, we are net exporters of capital: foreign investors are often not finding Canadian opportunities as attractive as they should.

For all the criticism the investment industry sometimes faces, it would be a real miss if we failed to show long-term, growth-minded investors that Canada is an attractive place to put their money to work. We want global investors writing cheques for stakes in Canadian companies, so they can help improve their productivity, invest in technology, create new jobs, and grow global champions in many industries. If investors don’t hear our compelling story, Canada and many of its companies could be left on the sidelines as they watch all this dry powder get deployed in other markets.

This is an excellent op-ed, one that I want all of you to read carefully and share with your industry contacts. The last time I saw Tawfik Hammoud of BCG is when we worked together on a consulting mandate for the Caisse on sovereign debt risks (back in 2011). He is now the global head of BCG’s Principal Investors & Private Equity practice and is based in Toronto (all of BCG’s team are very nice and bright people, enjoyed working with them).

So, what’s this article all about and why is it important enough to cover on my blog?  Well, I’ve been short Canada and the loonie since December 2013, moved all my money to the US and never looked back. I know, Canadian banks did well last year but investing in the Canadian stock market is a joke, it’s basically composed of three sectors: financials, telecoms and energy.

Ok, now we’re in January 2017, the Bank of Canada recently “surprised” markets (no surprise to me or my buddy running a currency hedge fund in Toronto) by stating they are on guard and ready to lower rates if the economic outlook deteriorates, sending the loonie tumbling to about 75 cents US (it now stands at 76 cents US).

You would think global investors, especially large US investors, would be taking advantage of our relatively cheap currency to pounce on Canadian public and private assets.

Unfortunately, it doesn’t work that way. Canada isn’t exactly a hotbed of private equity activity. Yes, our large Canadian public pensions invest in private equity, mostly through funds and co-investments and a bit of purely direct investments, but the geographic focus remains primarily in the United States, the UK, Europe and increasingly in Asia and Latin America.

Sure, we have great private equity companies in Canada like Brookfield Asset Management (BAM), our answer to Blackstone (BX), the US private equity powerhouse, but even Brookfield focuses mostly outside Canada for its largest private equity transactions.

So why? Why is Canada’s private equity industry under-developed and why are global and domestic private equity powerhouses basically shunning our economy, especially now that the loonie is much cheaper than it was a few years ago?

The article above cites Canada’s stable political climate, competitive corporate tax rate and diverse and highly educated workforce but I think when it comes to real entrepreneurial opportunities, Canada lags far behind the United States and other countries.

Now, we can argue that maybe Canada’s large pensions should do more to invest in and even incubate more domestic private equity funds (they already do some) but the job of Canada’s pension fund managers isn’t to incubate domestic private equity funds or hedge funds, it’s to maximize returns taking the least risk possible by investing across global public and private markets.

Only the Caisse has a dual mandate of investing part of its assets in Quebec’s public and private markets and we can argue whether this is in the best interests of its beneficiaries over the long run (the Caisse will talk up its successes but I’m highly skeptical and think Quebec pensioners would have been better off if that money was invested across global markets, not Quebec).

In my opinion, the biggest problem in Canada is the culture of defeatism and government over-taxation (on individuals) and over-regulation of industries. At the risk of sounding crazy to some of you tree hugging left-wing liberals, Canada needs a Donald Trump which will cut out huge government waste and insane regulations across the financial and other industries, many of which are nothing more than a government backed oligopoly charging Canadians insane fees (look at banks, mutual funds and telcom fees and tell me we don’t need a lot more competition here).

My close buddies reading this will laugh as they recently blasted me for voting Liberal in the last election. Yes, I too voted for “boy wonder” mostly because I was sick and tired of Harper’s arrogance but Trudeau junior’s ineptitude, inexperience and recent comments on Alberta’s tar sands and ridiculous and needless cross country tour just pissed me off enough so I will be returning to my conservative economic roots during the next election even if O’Leary wins that party’s leadership race (love him on Shark Tank, not so sure how he would be as our PM).

Politics aside, we need to ask ourselves very tough questions in Canada and across all provinces because it’s been my contention all along that far too many Canadians are living in a Northern bubble, erroneously believing that we can afford generous social programs forever. Canadians are in for one rude awakening in the not too distant future.

What else pisses me off about Canada? Unlike the United States where the best of the best rise to the top regardless of the color their skin, gender, sexual orientation, religious beliefs and disabilities, there is a pervasive institutionalized racism that is seriously setting this country back years, if not decades (you can disagree with me but I’m not going to be politically correct to assuage your hurt feelings, Canada lacks real diversity at all levels of major public and private organizations).

So, before Canada can rightfully argue that it deserves a bigger chunk of the global private equity pie, we need to reexamine a lot of things in this country on the social, cultural and economic front, because the way I see it, we’re not headed in the right direction and have not created the right conditions to attract foreign investment from top global private equity funds.

As always, these are my opinions, you have every right to disagree with me but I’m not budging one iota and I can back up everything I’ve written above with concrete facts, not fake news.

Rising interest rates and a potentially shrinking corporate income tax could lead to a higher percentage of companies closing their defined-benefit plans in 2017, according to Willis Towers Watson.

From Employee Benefits Advisor:

Michael Archer, leader of the Client Solutions Group at Willis Towers Watson’s North American retirement practice, says that an expected drop in the corporate income tax and an expected rise in interest rates will make it easier for defined benefit plan sponsors to terminate their retirement plans in 2017.

[…]

“If we get tax legislation that reduces corporate income taxes and is retroactive to the beginning of the year, we will see many plan sponsors make contributions in advance and fund their plan balance. They will do it because they are faced with PBGC premiums, which are increasing at a rapid rate, and those increases affect the cost of debt in retirement plans,” he says. “Now there are two incentives to fund and fund now because of the bigger deduction and they get out of paying the variable premium.”

The report also has some words for 401k plan sponsors. From EBA:

Archer encourages 401(k) plan sponsors to pay attention to the fees that are charged and the investment options they offer and also keep abreast of general compliance issues in the new year.

Regulatory bodies like the IRS and Department of Labor have increased the number of audits they are doing and the amount of attention they are paying to retirement plans.

“The focus on compliance is really important,” he says.

Archer pointed out that the Department of Labor has been sending letters to plan participants who are over the plan’s normal retirement age reminding them they can start their benefits.

“That kind of outreach hasn’t been seen before,” he says.

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

Lawrence Delevingne of Reuters reports, Struggling hedge funds still expense bonuses, bar tabs:

Investors are starting to sour on the idea of reimbursing hedge funds for multi-million dollar trader bonuses, lavish marketing dinners and trophy office space.

Powerful firms such as Citadel LLC and Millennium Management LLC charge clients for such costs through so-called “pass-through” fees, which can include everything from a new hire’s deferred compensation to travel to high-end technology.

It all adds up: investors often end up paying more than double the industry’s standard fees of 2 percent of assets and 20 percent of investment gains, which many already consider too high.

Investors have for years tolerated pass-through charges because of high net returns, but weak performance lately is testing their patience.

Clients of losing funds last year, including those managed by Blackstone Group LP’s (BX.N) Senfina Advisors LLC, Folger Hill Asset Management LP and Balyasny Asset Management LP, likely still paid fees far higher than 2 percent of assets.

Clients of shops that made money, including Paloma Partners and Hutchin Hill Capital LP, were left with returns of less than 5 percent partly because of a draining combination of pass-through and performance fees.

For a graphic on the hedge funds that passed through low returns, click on image below:

Millennium, the $34 billion New York firm led by billionaire Israel Englander, charged clients its usual fees of 5 or 6 percent of assets and 20 percent of gains in 2016, according to a person familiar with the situation. The charges left investors in Millennium’s flagship fund with a net return of just 3.3 percent.

Citadel, the $26 billion Chicago firm led by billionaire Kenneth Griffin, charged pass-through fees that added up to about 5.3 percent in 2015 and 6.3 percent in 2014, according to another person familiar with the situation. Charges for 2016 were not finalized, but the costs typically add up to between 5 and 10 percent of assets, separate from the 20 percent performance fee Citadel typically charges.

Citadel’s flagship fund returned 5 percent in 2016, far below its 19.5 percent annual average since 1990, according to the source who, like others, spoke on the condition of anonymity because the information is private.

All firms mentioned declined to comment or did not respond to requests for comment.

In 2014, consulting firm Cambridge Associates studied fees charged by multi-manager funds, which deploy various investment strategies using small teams and often include pass-throughs. Their clients lose 33 percent of profits to fees, on average, Cambridge found.

The report by research consultant Tomas Kmetko noted such funds would need to generate gross returns of roughly 19 percent to deliver a 10 percent net profit to clients.

‘STUNNING TO ME’

Defenders of pass-throughs said the fees were necessary to keep elite talent and provide traders with top technology. They said that firm executives were often among the largest investors in their funds and pay the same fees as clients.

But frustration is starting to show.

A 2016 survey by consulting firm EY found that 95 percent of investors prefer no pass-through expense. The report also said fewer investors support various types of pass-through fees than in the past.

“It’s stunning to me to think you would pay more than 2 percent,” said Marc Levine, chairman of the Illinois State Board of Investment, which has reduced its use of hedge funds. “That creates a huge hurdle to have the right alignment of interests.”

Investors pulled $11.5 billion from multi-strategy funds in 2016 after three consecutive years of net additions, according to data tracker eVestment. Redemptions for firms that use pass-through fees were not available.

Even with pass-through fees, firms like Citadel, Millennium and Paloma have produced double-digit net returns over the long-term. The Cambridge study also found that multi-manager funds generally performed better and with lower volatility than a global stock index.

“High fees and expenses are hard to stomach, particularly in a low-return environment, but it’s all about the net,” said Michael Hennessy, co-founder of hedge fund investment firm Morgan Creek Capital Management.

INTELLECTUAL PROPERTY

Citadel has used pass-through fees for an unusual purpose: developing intellectual property.

The firm relied partly on client fees to build an internal administration business starting in 2007. But only Citadel’s owners, including Griffin, benefited from the 2011 sale of the unit, Omnium LLC, to Northern Trust Corp for $100 million, plus $60 million or so in subsequent profit-sharing, two people familiar with the situation said.

Citadel noted in a 2016 U.S. Securities and Exchange Commission filing that some pass-through expenses are still used to develop intellectual property, the extent of which was unclear. Besides hedge funds, Citadel’s other business lines include Citadel Securities LLC, the powerful market-maker, and Citadel Technology LLC, a small portfolio management software provider.

Some Citadel hedge fund investors and advisers to them told Reuters they were unhappy about the firm charging clients to build technology whose profits Citadel alone will enjoy. “It’s really against the spirit of a partnership,” said one.

A spokesman for Citadel declined to comment.

A person familiar with the situation noted that Citadel put tens of millions of dollars into the businesses and disclosed to clients that only Citadel would benefit from related revenues. The person also noted Citadel’s high marks from an investor survey by industry publication Alpha for alignment of interests and independent oversight.

Gordon Barnes, global head of due diligence at Cambridge, said few hedge fund managers charge their investors for services provided by affiliates because of various problems it can cause.

“Even with the right legal disclosures, it rarely passes a basic fairness test,” Barnes said, declining to comment on any individual firm. “These arrangements tend to favor the manager’s interests.”

Interestingly, Zero Hedge recently reported that Citadel just paid a $22 million settlement for front-running its clients (great alignment of interests!). Chump change for Ken Griffin, one of the richest hedge fund managers alive and part of a handful of elite hedge fund managers in the world who are highly regarded among institutional investors.

But the good fat hedge fund years are coming to an abrupt end. Fed up with mediocre returns and outrageous fees, institutional investors are finally starting to drill down on performance and fees and asking themselves whether hedge funds — even “elite hedge funds” — are worth the trouble.

I know, everybody invests in a handful of hedge funds and Citadel, Millennium, Paloma and other ‘elite’ multi-strategy hedge funds figure prominently in the hedge fund portfolios of big pensions and sovereign wealth funds. All the more reason to cut this nonsense on fees and finally put and end to outrageous gouging, especially in a low return, low interest rate world.

“Yeah but Leo, it’s Ken Griffin and Izzy Englander, two of the best hedge fund managers alive!” So what? I don’t care if it’s Ken Griffin, Izzy Englander, Ray Dalio, Steve Cohen, Jim Simons, or even if George Soros started taking money from institutional investors, nonsense is nonsense and I will call it out each and every time!

Because trust me, smart pensions and sovereign wealth funds aren’t stupid. They see this nonsense and are hotly debating their allocations to hedge funds and whether they want to be part of the herd getting gouged on pass-through and other creative fees.

Listen to Michael Sabia’s interview in Davos at the end of my last comment. Notice how he deliberately avoided a discussion on hedge funds when asked about investing in them? All he said was “not hedge funds”. The Caisse has significantly curtailed its investments in external hedge funds. Why? Because, as Sabia states, they prefer focusing their attention on long-term illiquid alternatives, primarily infrastructure and real estate, which can provide them with stable yields over the long run without all the headline risk of hedge funds that quite frankly aren’t delivering what they are suppose to deliver — uncorrelated alpha under all market conditions!!

Now, is investing in infrastructure and real estate the solution for everyone? Of course not. Prices have been bid up, deals are very expensive and as Ron Mock stated in Davos, “you have to dig five times harder” to find good deals that really make sense in illiquid private alternatives.

And if my long-term forecast of global deflation materializes, all asset classes, including illiquid alternatives, are going to get roiled. Only good old US Treasuries are going to save your portfolio from getting clobbered, the one asset class that most institutional investors are avoiding as ‘Trumponomics’ arrives (dumb move, it’s not the beginning of the end for bonds!).

By the way, I know Ontario Teachers’ Pension Plan still invests heavily in hedge funds but I would be surprised if their due diligence/ finance operations people would let any hedge fund pass through dubious fees on to their teachers. In fact, OTPP has set up a managed account platform at Inncocap to closely monitor all trading activity and operational risks of their external hedge funds.

Other large institutional investors in hedge funds, like Texas Teachers’ Retirement System (TRS), are tinkering with a new fee structure to get better alignment of interests with their external hedge funds. Imogen Rose-Smith of Institutional Investor reports, New Fee Structure Offers Hope to Besieged Hedge Funds (click on image):

You can read the rest of this article here. According to the article, TRS invests in 30 hedge funds and the plan has not disclosed how it will apply this new fee structure.

I think the new fee structure is a step in the right direction but if you ask me, I would get rid of the management fee for all hedge funds managing in excess of a billion dollars and leave the 20 percent performance fee (keep the management fee only for small emerging hedge fund managers that need it).

“But Leo, I’m an elite hedge fund manager and my portfolio managers are expensive, rent costs me a lot of money, not to mention my lifestyle and my wife who loves shopping at expensive boutiques in Paris, London, and New York and needs expensive cosmetic surgery to stay youthful and look good as we keep up with the billionaire socialites.”

Boo-Hoo! Cry me a river! Life is tough for all you struggling hedge fund managers charging pass-through fees to enjoy your billion dollar lifestyles? Let me take out the world’s smallest violin because if I had a dollar for all the lame, pathetic excuses hedge fund managers have thrown my way to justify their outrageous fees and mediocre returns, I’d be managing a multi-billion dollar global macro fund myself!

If you’re an elite hedge fund manager and are really as good as you claim, stop charging clients 2% to cover your fixed costs, focus on performance and delivering real alpha in all market environments, not on marketing and asset gathering (so you can collect more on that 2% management fee and become a big fat, lazy asset gatherer charging clients alpha fees for leveraged beta!).

I’m tired of hedge funds and private equity funds charging clients a bundle on fees, including management fees on billions, pass-through fees and a bunch of other hidden fees. And trust me, I’m not alone, a lot of smart institutional investors are finally putting the screws on hedge funds and private equity funds, telling them to shape up or ship out (it’s about time they smarten up).

Unfortunately, for every one large, smart institutional investor there are one hundred smaller, dumber public pension plans who literally have no clue what’s going on with their hedge funds and private equity funds. Case in point, the debacle at Dallas Police and Fire Pension System which I covered last week.

I’m convinced they still don’t know all the shenanigans that went on there and I bet you a lot of large and small US public pensions are in the same boat and petrified as to what will happen when fraud, corruption and outright gross incompetence are uncovered at their plans.

For all of you worried about your hedge funds and private equity funds, get in touch with my friends over at Phocion Investment Services in Montreal and let them drill down and do a comprehensive risk, investment, performance and operational due diligence on all your investments, not just in alternatives.

What’s that? You already use a “well-known consultant” providing you cookie cutter templates covering operational and investment risks at your hedge funds and private equity funds? Good luck with that approach, you deserve what’s coming to you.

On that note, I don’t get paid enough to provide you with my unadulterated, brutally honest, hard-hitting comments on pensions and investments. Unlike hedge funds and private equity funds charging you outrageous fees, I need to eat what I kill by trading and while I love writing these comments, it takes time away from what I truly love, analyzing markets and looking for great swing trading opportunities in bonds, biotech, tech and other sectors.

Please take the time to show your financial appreciation for all the work that goes into writing these comments by donating or subscribing to the PensionPulse blog on the top right-hand side under my beautiful mug shot. You simply won’t read better comments on pensions and investments anywhere else (you will read a bunch of washed down, ‘sanitized’ nonsense, however).

Last month, hedge fund Albourne Partners revealed in a white paper a new fee structure it had been working on with the Texas Teachers’ pension fund.

It’s unclear how the “1 or 30″ structure will catch on in the U.S.; but it’s already gaining steam in Asia.

Institutional Investor explains the structure:

1 or 30 is designed to ensure that the investor gets 70 percent of the economics from its hedge fund investment, while recognizing the need to pay a performance fee to asset managers in lean times. Under the proposed fee model, the management fee gets paid back through a discount to the performance fees (applied over time if the hedge fund fails to perform in any given year), and Texas will pay performance fees only after reaching an agreed-upon hurdle rate. The maximum that a manager can make is 30 percent of the alpha, or performance after the benchmark, minus the one percent management fee.

The simplest way to consistently meet an investor’s 70% alpha share objective would be a fee structure with no management fee and a 30% performance fee, paid only on alpha. Such a fee structure, however, could result in significant business risk to the manager during any prolonged period of underperformance as there could be long periods without any certain revenue for the manager from either management or performance fees, wrote Albourne portfolio analyst Jonathan Koerner in the paper. To eliminate this risk, 1 or 30 structure guarantees regular management fee income to the manager on a consistent ongoing basis, identical to current traditional management fee mechanics. A reduction of the same amount is then made to the performance fee to return total fees to equilibrium at 30% of alpha.

In Hong Kong, at least two hedge funds are implementing the “1 or 30″ model. According to Albourne, over two dozen managers globally are adopting the structure.

From Bloomberg:

As investors worldwide are balking at hefty fees, Hong Kong hedge funds Myriad Asset Management and Ortus Capital Management are crafting alternatives that mark a radical departure from the industry practice of charging 2 percent of assets in management fees and 20 percent of profits.

Myriad, which manages more than $4.1 billion, is adding a new share class in its hedge fund that charges the greater of a 30 percent cut of profits or 1 percent of assets under management to better align its interests with those of investors, said a person with knowledge of the matter. Ortus in July started a fund that takes a 33 percent share of profits without charging any management fee, according to a newsletter to investors obtained by Bloomberg.

[…]

Globally, at least two dozen “well-known” managers with institutional investors have either adopted or are working on a so-called “1-or-30″ fee model that was introduced to the industry in the fourth quarter, according to Jonathan Koerner of Albourne Partners, which advises clients on more than $400 billion of alternative investments globally.

Leo Kolivakis is a blogger, trader and independent senior pension and investment analyst. This post was originally published at Pension Pulse.

This is a bilingual comment, bear with me, I will translate the key points below. Julien Arsenault of La Presse Canadienne reports, Sabia repart de Davos avec beaucoup d’interrogations:

Que ce soit en raison des risques géopolitiques, de la montée du protectionnisme ou de l’arrivée du républicain Donald Trump à la Maison-Blanche, le président et chef de la direction de la Caisse de dépôt et placement du Québec (CDPQ), Michael Sabia, repart du Forum économique de Davos avec de nombreuses interrogations.

Tout cela n’est toutefois pas suffisant pour l’inciter à modifier les stratégies mises en place au cours des dernières années par l’investisseur institutionnel, dont l’actif atteignait 254,9 milliards en date du 30 juin dernier.

«Je n’ai pas changé d’avis. Avec un monde incertain, notre stratégie est de bien sélectionner les actifs et de nous éloigner, dans la mesure du possible, des risques du marché», a-t-il dit, jeudi, au cours d’un entretien avec La Presse canadienne, avant de quitter les alpes suisses.

M. Sabia a donné comme exemple la cimenterie de Port-Daniel, dont la construction a été marquée par des dépassements de coûts de l’ordre de 450 millions avant que la CDPQ prenne le contrôle du projet en y injectant 125 millions de plus. En redressant des actifs de la sorte, le grand patron de la Caisse estime qu’il est possible de créer de la valeur indépendamment de la volatilité des marchés, ce qui mitige les risques.

L’institution continuera également à se tourner vers les infrastructures ainsi que l’immobilier, des actifs «stables» à long terme, a précisé M. Sabia.

À l’instar des nombreux participants du Forum, le dirigeant de la Caisse a pris part à des ateliers dans lesquels les discussions ont tourné autour des visées protectionnistes de M. Trump, qui deviendra vendredi le 45e président des États-Unis.

«Beaucoup semblent convaincus que cette nouvelle administration mettra en vigueur des politiques au coeur des préoccupations du monde des affaires et qui vont dynamiser l’économie rapidement en 2017, a dit M. Sabia. J’ai trouvé cela surprenant, parce que c’est très axé sur le court terme.»

Il dit avoir du mal à comprendre l’optimisme de certains à Davos en raison d’un «mur de risques». Il cite l’arrivée de M. Trump, la sortie attendue du Royaume-Uni de l’Union européenne et d’importantes élections à venir en Europe, notamment en France et en Allemagne.

M. Sabia estime qu’il faut donner six mois à la nouvelle administration républicaine à Washington, étant donné qu’elle veut «faire des choses difficiles». Déjà, Wilbur Ross, désigné par M. Trump pour devenir secrétaire américain au Commerce, a prévenu que le nouveau gouvernement se pencherait rapidement sur l’Accord de libre-échange nord-américain (ALENA).

Le sujet des infrastructures a été largement discuté à Davos, puisque plusieurs représentants de firmes d’ingénierie et d’investisseurs institutionnels – qui se tournent vers ces actifs pour diversifier leur exposition aux risques – étaient présents.

«Ç’a été une confirmation qu’il s’agit d’un vecteur de croissance important dans le monde», a affirmé M. Sabia, lorsque questionné quant au message qu’il a tiré des discussions.

En date du 31 décembre dernier, la valeur du portefeuille de la Caisse dans les infrastructures était de 13 milliards, comparativement à 10,1 milliards en 2014.

Par ailleurs, malgré les visées protectionnistes de M. Trump, M. Sabia ne s’est pas inquiété pour l’avenir de la cimenterie de Port-Daniel, qui vise les États-Unis comme principal marché d’exportation.

Si le 45e locataire de la Maison-Blanche veut vraiment aller de l’avant avec son intention d’injecter 1000 milliards US dans l’économie, les États-Unis n’auront d’autre choix que de laisser entrer du ciment en provenance de l’extérieur, croit M. Sabia.

«L’offre aux États-Unis ne serait pas suffisante pour répondre à une telle demande, a-t-il estimé. Selon moi, la priorité que cette administration veut mettre sur les infrastructures représente une belle occasion.»

Michael Sabia, president and CEO of the Caisse, was in Davos last week with the world’s elites trying to figure out what a Trump administration means for the Caisse’s long-term strategy.

He basically has not changed his mind stating “it’s an uncertain world” and the Caisse will continue to select value stocks and try to minimize market risk as much as possible, mostly by focusing its attention on long-term asset classes like infrastructure and real estate which provide stable yields over the long run.

Sabia also notes that he is surprised by the optimism surrounding the new administration noting that many people think it will reinvigorate the US economy quickly in 2017 but there are still many obstacles, including key elections in Europe and how Brexit will unfold.

Sabia said we need to give the Trump administration at least six months to implement difficult policies which include renegotiating key trade deals like NAFTA. Overall, he was encouraged to see many representatives of big infrastructure and engineering companies at Davos and thinks infrastructure spending will be a key driver of growth going forward and some Canadian companies, like la cimenterie de Port-Daniel, a controversial cement plant the Caisse invested in, will benefit from US spending on infrastructure.

Last week, I shared Ron Mock’s thoughts from Davos as Ontario Teachers’ eyes a new tack. Ron stated that Teachers already invests in brownfield US infrastructure but these new greenfield projects the new administration is eying take a long time to set up and likely won’t be ready until late in Trump’s second term (if he gets a second term) or well after he departs.

My take on all this? There is way too much “Trumptimism” (Trump optimism) out there and like I stated in my outlook 2017, this silliness is propagating the reflation chimera, making US long bonds the best risk-return asset in the world.

But Ray Dalio talked about “animal spirits” being unleashed after Trump’s victory and how it’s the end of the thirty year bond bull market as we head back to the future.

Let me be crystal clear here. I couldn’t care less what Ray Dalio, Paul Singer, Kyle Bass state publicly, I still maintain that global deflation risks are extremely high and think we are entering a danger zone, one where the surging US dollar can continue rising to a level which could bring about the next global crisis.

When I hear bond bears claiming long bond yields will continue rising, I tell them to go back to school because they clearly don’t understand macro trends. A rising US dollar means lower US import prices and lower inflation expectations going forward, which are both bond friendly.

More importantly, the US is temporarily shouldering the rest of the world’s deflation problems but it’s far from clear what Trump’s administration means for emerging markets and if they aren’t careful, protectionist policies will only reinforce global deflation, ushering in a new era of ultra low growth and zero or negative interest rates.

Ironically, all the tough talk on Mexico is driving the Mexican peso lower, making it that much better for German and American car manufacturers to invest there, even if Trump imposes tariffs on cars made in Mexico. President Trump is trying to talk the US dollar down, striking a protectionist tone in his inauguration speech, but this might be short-lived as the US is still a net importer and traditionally wants a stronger dollar.

And let’s pretend the US dollar continues to weaken relative to the rest of the world and Trump manages to renegotiate trade deals quickly to put “America first”. What will that mean? A higher euro and yen going forward and more unemployment in these regions struggling with deflation. Not exactly the recipe to “make America great again” in the long run.

Michael Sabia is right to leave Davos with more questions than answers. He’s also right to question the irrational optimism which has sent global risk assets higher following Trump’s victory.

John Maynard Keynes once stated “markets can stay irrational longer than you can stay solvent.” It’s my favorite market quote of all time and what it means is you can see huge market dislocations persist for a lot longer than you think but at one point, gravity takes over and all the silliness comes crashing down.

I think the second half of the year will bring about a sobering reality that global deflation is far from dead and if Trump’s administration isn’t careful, it will reinforce the global deflationary tsunami headed our way.