Pension360

The Illinois State Board of Investment, the entity that manages investments for the pension funds covering the state’s non-school employees and judges, said this week it will yank $2.4 billion from active managers.

It will place that money in passive index funds in a bid to reduce the cost and complexity of its portfolio.

In the last year, the Board has rapidly reduced its allocation to active managers.

From the Wall Street Journal:

The move by the Illinois State Board of Investment, or ISBI, means an agency that oversees $16 billion for state employees, judges and lawmakers will have 35% of its holdings with actively managed investment funds, down from 70% in September 2015.

Limiting the number of active managers will reduce what the board pays in fees and simplify management of the portfolio, said Board Chairman Marc Levine.

[…]

The switch to more passively managed investments in Illinois is being led by Mr. Levine, who became chairman of ISBI in September 2015. Prior to Tuesday’s vote, the board had already terminated a total of nine active money managers over the past 14 months. In March it voted to pull $1 billion from hedge funds.

Two months ago, the board also terminated almost all of the active managers in a separate 401(k)-style plan it manages.

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

Bill Curry and Jacqueline Nelson of the Globe and Mail report, Trudeau touts Canada as safe option for infrastructure investment:

Justin Trudeau is billing Canada as a stable option for international investors amid market uncertainty in the aftermath of the election of Donald Trump in the United States.

Speaking at the end of a day spent courting some of the world’s largest wealth managers, the Prime Minister added a clear political spin to his government’s pitch that investors should be working with Ottawa on infrastructure projects.

“The fact is Canada is lucky to have citizens that are forward-thinking, that are reasonable, that are understanding that drawing in global investment will lead to good Canadian jobs,” he said.

Mr. Trudeau said Canada is attracting attention from people who wonder how the country remains open to investment, trade and immigration during a period of uncertainty, making reference to the “election of the Republican candidate in the United States” without naming Mr. Trump.

Mr. Trudeau is encouraging banks, pension funds, insurance companies and private wealth funds to take equity stakes in Canadian infrastructure projects through a new Canada Infrastructure Bank announced this month. Advocates say such a bank could group public and private funds together for large projects, allowing more construction to proceed more quickly.

Politics aside, some of the investors in attendance gave the government’s presentation an enthusiastic response.

Mark Machin, chief executive officer of the Canada Pension Plan Investment Board, was among the roughly two dozen Canadian-based investors who met Monday morning with Mr. Trudeau and senior ministers to discuss infrastructure spending.

“It’s a terrific initiative,” he said in an interview at the CPPIB’s Toronto headquarters following the meeting. Mr. Machin said the infrastructure plan should “absolutely” attract new money from institutional investors because the bank will offer firms a single point of contact and is promising to do the advanced research in order to prioritize infrastructure projects that are good candidates for private partnerships.

“I would think if this gets off the ground the way it should, then it should result in significant increase in activity in infrastructure,” he said.

The CPPIB announced earlier this month that the assets of the CPP fund have climbed above $300-billion as of Sept. 30, which is up from $287.3-billion the year before.

The CPP fund has just one current investment in Canadian infrastructure: a 40-per-cent share of Ontario’s 407 toll highway, which runs through the Greater Toronto Area.

Mr. Trudeau also met Monday with global wealth managers in the afternoon, among them representatives from BlackRock Inc., which is the largest asset manager in the world.

Executives from the country’s largest banks, pension funds and insurance companies said Monday morning’s meeting affirmed the government’s commitment to developing its infrastructure plan, but several attendees said it was short on details of what the planned infrastructure bank would look like.

Ministers representing the departments of Finance, Transport, Natural Resources and Infrastructure and Communities outlined the types of infrastructure deals and projects that are most interesting to the government. Some executives offered thoughts on what made certain infrastructure deals work well in other parts of the world, and they suggested different investment structures that could work for building new projects such as pipelines and electricity transmission.

“I believe that they have a vision to put together a model which is pretty ground-breaking,” said Ron Mock, chief executive officer of the Ontario Teachers’ Pension Plan, after the session. He noted that private funding models exist in Britain, Australia and Mexico and that Canada could be a leader with its plan. “In terms of the details of how it will actually be executed, I think they are correctly looking to the expertise that exists in the country for input and advice on how to move this agenda forward.”

Attendees characterized the meeting as an early step in gathering input and support for the part of the government’s planned $180-billion spending spree that is counting on an influx of private capital. But some said they were hoping there would be more clarity on what happens next, rather than being asked for another round of input on how to make the plan work.

During the session, the group discussed the widespread interest in so-called “brownfield” assets – where investors buy and operate existing infrastructure, rather than taking on the risk of constructing new projects from scratch. The government has expressed more interest in using private capital in building new infrastructure projects, called “greenfield.”

Questions about how the federal government would align its objectives with the provincial and municipal governments that traditionally control a lot of infrastructure spending were also top of mind for many participants. Constructing new infrastructure where users must pay fees or tolls may be a tricky sell to these lower levels of government and their constituents.

“Clearly the execution of this becomes important, and that in many cases requires the federal, provincial, municipal alignment, which is which is pretty key,” Mr. Mock said. “Because most infrastructure in this country is either provincial or municipal and it’s the federal government that is wanting to initiate such a plan.”

Barbara Shecter of the National Post also reports, Trudeau’s investment pitch wins praise as Ottawa courts world’s most powerful investors:

Prime Minister Justin Trudeau pitched fund managers from around the world on the merits of investing billions in Canadian infrastructure projects Monday, earning praise from some but leaving others with questions about how such deals would work.

Ottawa is setting up a new entity — the Canada Infrastructure Bank — to promote large national and regional projects, including revenue-generating ones it hopes will draw the interest of big institutional investors, including domestic pension funds.

Monday’s meetings in downtown Toronto — a morning session with Canadian pension funds managers and top bankers, and an afternoon discussion with international investors — brought the prime minister and key cabinet ministers face-to-face with some of the money managers they will need to attract to make the bank a success.

Ron Mock, chief executive of the Ontario Teachers’ Pension Plan, said Trudeau and his cabinet have “got their head in the right place” in creating projects that would draw on government money and investment from institutions, such as pension funds.

“They did a great job,” Mock said as he left the morning meeting, which also included Trudeau, Finance Minister Bill Morneau and top representatives from the Caisse de dépôt et placement du Québec and the Canada Pension Plan Investment Board.

But Hugh O’Reilly, chief executive of the Ontario Public Service Employees Union Pension Trust, said many details needed to be ironed out.

“We still have many questions about how this infrastructure bank will work,” he said. “But the federal government acknowledged that — and are looking to pension funds to provide advice.”

The plan, which has $16 billion in assets, will look at opportunities case by case, he added.

After the meeting, Trudeau said he was “tremendously pleased to see so many business leaders at the table.”

“We know that partnerships with the private sector can be done right, and we look forward to working with these significant global investors to see how we can make sure we’re responding to their needs,” he said.

His government has pledged $81 billion over the next 10 years for infrastructure, including public transit and renewable power projects. The first $15 billion will become available in the spring 2017 budget.

A spokesman for the Canada Pension Plan Investment Board called the talks “constructive.”

The Canadian Infrastructure Bank should offer “an intelligent bridge between what investors are looking for and what governments can offer. (CPPIB officials) look forward to seeing the pipeline of potential infrastructure investments.”

The prime minister said he hoped the bank would “be up and running in 2017, but we’re also working very, very hard with experts and listening to people to make sure we get it right.”

Earlier Monday, a few blocks from the Trudeau meeting, Marc Garneau, the transportation minister, told another group of investors Ottawa’s recently announced $10.1-billion funding commitment to upgrade trade transportation corridors does not depend on participation by the private sector.

Garneau said he expects there will be interest from the public–private partnerships to invest in the trade transportation improvements. But even if there isn’t, the federal government will go ahead with the spending.

“The funding is there,” Garneau said in a brief interview after his speech at a conference organized by the Canadian Council for Public-Private Partnerships, which attracted about 1,200 investors, project proponents and governments from around the world.

“If there is not large institutional investors that want to become involved with it, we will still be using the money, as I said in my speech, to reduce bottlenecks and congestion and make our trade transportation corridors as efficient as possible.”

Morneau announced the $10.1 billion in trade transportation funding in his fall fiscal update this month. The trade corridor upgrades are part of a massive boost in planned infrastructure spending.

Garneau said improving transportation corridors is so important for Canada’s trade, it won’t need to wait for private funding. About one-fifth of Canadian goods is shipped by rail, and much of that is destined for export.

Transportation volumes are increasing. Over the past 30 years, the amount of goods moved by rail has increased 60 per cent, while the amount shipped by sea is up 40 per cent.

The $10.1 billion in funding is designed to remove bottlenecks that are slowing traffic on important export corridors.

That doesn’t mean the government is not interested in encouraging private-sector involvement. The new infrastructure bank is intended to foster private investment in projects.

Garneau said Ottawa understands some projects, especially in public transportation, might require tolls to encourage private-sector investment.

“We’re open to that concept,” he said, in answer to a question from the audience.

Matt Scuffham of Reuters also reports, Canada courts sovereign wealth for infrastructure bank:

Canada’s Liberal government is speaking to sovereign wealth funds and global private equity firms as well as domestic pension funds as it ramps up efforts to attract funding for its new infrastructure bank, according to two sources.

The overseas investors that the officials developing the infrastructure bank are speaking to include the Government Pension Fund of Norway, one of the world’s largest sovereign wealth funds, said the sources, who declined to speak on the record because of the sensitivity of the talks.

The government said earlier this month it would set up an infrastructure bank and give it access to C$35 billion ($26 billion) to help fund major projects.

Prime Minister Justin Trudeau and Finance Minister Bill Morneau are attending an event in Toronto on Monday aimed at attracting private investment. The event is part of a series of meetings with private investors ahead of the launch of the bank, which Ottawa hopes will be up and running next year, the sources said.

Trudeau and Morneau had previously expressed a desire to attract investment from Canada’s biggest pension plans such as the Canada Pension Plan Investment Board (CPPIB), the Caisse de depot du Quebec and the Ontario Teachers’ Pension Plan.

A significant proportion of the projects the bank hopes to fund will be built from scratch, known as “greenfield” investments, rather than “brownfield” investments which have already been built.

The Canadian pension funds, among the world’s ten biggest infrastructure investors, have invested more in projects overseas than in their domestic market.

That is partly because they have preferred to invest in existing infrastructure which has established revenue streams and does not carry construction risk. However, that stance is changing as investors seek alternatives to government bonds and volatile equity markets.

Last week, CPPIB’s Chief Executive Mark Machin said in an interview the fund would be open to investing in greenfield projects through the infrastructure bank.

Meanwhile, the Caisse, Quebec’s public pension fund, is planning to build a new 67 kilometer public transit system in Montreal, investing C$3 billion and seeking to supplement that with C$2.5 billion of federal and provincial government funding.

That project could be one of the first to be funded by the new infrastructure bank, the sources said.

Sources said the Ontario Teachers Pension Plan is also planning to invest more in greenfield projects.

Before I start covering the latest developments on Canada’s infrastructure program, I want to correct an error I made last week when I posted that Bert Clark, the former head of Infrastructure Ontario, left that agency to head up the newly created Canadian Infrastructure Development Bank (CIDB).

It turns out that Mr. Clark is Ontario’s new pension leader, now in charge of running the newly created the Investment Management Corporation of Ontario (IMCO). As of now, the federal government has not named a leader for Canada’s new infrastructure bank. I can suggest a few people, including Bruno Guilmette, the former head of infrastructure at PSP Investments (not sure he wants this job but he is more than qualified and has the right connections).

Let me begin my coverage by referring you to a recent post where I explained why Canada’s large pensions are lukewarm on Canadian infrastructure.

In that comment, I went over concerns on governance and ended it with an update sharing some excellent insights from Andrew Claerhout, Senior Vice-President of Infrastructure & Natural Resources at Ontario Teachers’ Pension Plan who responded to Chas’s comment at the end of the Benefits Canada article:

• Andrew told me that OTPP, CPPIB, OMERS and the rest of Canada’s large pensions are not interested in small DMBF/ PPP projects which are typically social infrastructure like building schools, hospitals or prisons. Why? Because they’re small projects and the returns are too low for them. However, he said these are great projects for construction companies and lenders because you have the government as your counterparty so no risk of a default.
• Instead, he told me they are interested in investing in “larger, more ambitious” infrastructure projects which are economical and make sense for pensions from a risk/ return perspective. In this way he told me that they are not competing with PPPs who typically focus on smaller projects and are complimenting them because they are focusing on much larger projects.
• Here is where our conversation got interesting because we started talking about Australia being the model for privatizing infrastructure to help fund new infrastructure projects. He told me that while Australia took the lead in infrastructure, the Canadian model being proposed here takes it one step further. “In Australia, the government builds infrastructure projects and once they are operational (ie. brownfield), they sell equity stakes to investors and use those proceeds to finance new greenfield projects. In Canada, the government is setting up this infrastructure bank which will provide the bulk of the capital on major infrastructure greenfield projects and asks investors to invest alongside it” (ie. take an equity stake in a big greenfield project).
• Andrew told me this is a truly novel idea and if they get the implementation and governance right, setting up a qualified and independent board to oversee this new infrastructure bank, it will be mutually beneficial for all  parties involved.
• In terms of subsidizing pensions, he said unlike pensions which have a fiduciary duty to maximize returns without taking undue risk, the government has a “financial P&L” and a “social P & L” (profit and loss). The social P & L is investing in infrastructure projects that “benefit society” and the economy over the long run. He went on to share this with me. “No doubt, the government is putting up the bulk of the money in the form of bridge capital for large infrastructure projects and pensions will invest alongside them as long as the risk/ return makes sense. The government is reducing the risk for pensions to invest alongside them and we are providing the expertise to help them run these projects more efficiently. If these projects don’t turn out to be economical, the government will borne most of the risk, however, if they turn out to be good projects, the government will participate in all the upside” (allowing it to collect more revenues to invest in new projects).
• He made it a point to underscore this new model is much better than the government providing grants to subsidize large infrastructure projects because it gets to participate in the upside if these projects turn out to be very good, providing all parties steady long-term revenue streams.

Basically, Andrew Claerhout explains why pensions are not competing with DBFM/ PPPs and are looking instead to invest alongside the federal government in much larger, more ambitious greenfield infrastructure projects where they can help it make them economical and profitable over the long run.

Andrew added this: “Most infrastructure investors focus on brownfield opportunities while the government is most interested in seeing more infrastructure built (i.e., greenfield). The infrastructure development bank is meant to help bridge this divide – hopefully it is successful.”

As the Reuters article mentions, OTPP is open to investing in greenfield infrastructure projects of which the first one to likely be funded by the new federal infrastructure bank is the Caisse’s new 67 kilometer public transit system in Montreal.

Prime Minister Trudeau and Finance Minister Morneau pitched their new infrastructure program to Canada’s large pensions but also to sovereign wealth funds like Norway’s Government Pension Fund and Blackrock, the world’s largest asset manager where Mark Wiseman now works.

The thing that is a bit confusing is that typically large pensions and sovereign wealth funds invest in “brownfield” infrastructure which is already operational with known cash flows, but the federal government is not looking to sell stakes in Canada’s existing airports or ports which it owns.

Instead, the newly created Canada Infrastructure Bank will partner up with Canada’s large pensions and other large global funds to invest in greenfield projects which carry a whole new set of risks.

Can this be done successfully? Of course, and some of Canada’s large pensions like the Caisse have already begun working on greenfield projects and they have the internal resources to complete such ambitious projects.

When I mention the right internal resources, let me be very clear. Macky Tall, the head of CDPQ Infra, has assembled an outstanding team full of people with actual project finance and operational experience in large infrastructure projects. These people previously worked at large engineering/ construction companies like SNC-Lavalin and other places where they had to handle budgeting, building and operating large greenfield infrastructure projects.

I’m going to be very honest here, Canada’s large pensions have made outstanding “brownfield” infrastructure investments all over the world but nobody has assembled a team like that at CDPQ Infra to handle the risks and complexities that go along with greenfield projects.

In fact, when it comes to direct infrastructure and real estate investments, CDPQ Infra and Ivanhoé Cambridge, the Caissse’s real estate subsidiary, are truly on another level in terms of operational expertise.

Interestingly, I had a brief chat with Hugh O’Reilly, CEO of OPTrust, this morning in the midst of writing this comment and asked him why he said many details needed to be ironed out on this new infrastructure program.

Hugh repeated that there are a lot of questions on how the federal infrastructure bank will operate but the government is going to address these concerns. He also said the federal government needs to reach out to public-sector unions to address their concerns, “just like the Caisse did.” 

He also told me that OPTrust’s alternatives portfolio is growing and they are investing more and more directly in private equity, real estate and infrastructure. I will cover OPTrust in detail in a future comment and thank Hugh for taking the time from his busy schedule to speak with me (extremely nice man, would like to spend more time with him and James Davis, OPTrust’s CIO, to understand their investments and operations).

Let me end my comment by stating that even though there are a lot of details that need to be worked out, there is no question in my mind that Canada has the requisite expertise to make a successful partnership between the new Infrastructure Bank, Canada’s large pensions and foreign investors interested in investing in large greenfield infrastructure projects.

Importantly, if Canada’s new infrastructure program is successful and they get the governance right at the Canadian Infrastructure Development Bank (CIDB) , it will be a new unique approach to investing in greenfield infrastructure unlike anything else in the world. It will set a new global standard, one that many countries will try to adopt, including the United States where I really believe a Trump administration needs to approach US, Canadian and global pensions to “make America great again”  (Trump’s plan to rebuild America will be a lot harder to pay for than it sounds).

Lastly, please pay no attention whatsoever to Terence Corcoran’s latest, The Liberals’ new ‘infrastructure bank’ is pure central planning at its worst. I’m tired of addressing the drivel coming out of the National Post from the likes of Andrew Coyne and Terence Corcoran who quite frankly haven’t the faintest idea of good governance, investing in infrastructure, and why this plan makes sense for the federal government, Canada’s large pensions, their members and stakeholders, Canadian taxpayers and most important of all, for the Canadian economy over the long run.

Bloomberg put together this interesting graphic, above, of pension funds and endowments that have yanked their money from hedge funds in 2016.

The third quarter of 2016 saw investors pull a net $28 billion from hedge funds — a small slice of the industry’s overall assets under management, but still the highest outflow since 2009.

More details on the trend from Bloomberg:

Unhappy with mediocre results and high fees, pensions in states like Illinois, New York and Rhode Island are slashing their allocations to hedge funds. More than one in four endowments and foundations, from colleges to museums to hospitals, are doing the same or considering it, according to a survey by consultant NEPC. Many are demanding lower fees and better terms to stick around, and usually getting it.

[…]

The backlash is part of a broader rebellion that has seen an avalanche of money move from actively-managed funds to low-cost passive products like index funds. The $3 trillion hedge fund industry, however, has become the poster child for the sins of active management because it charges among the highest fees even as performance lags. That doesn’t sit well in the political world of public pensions and endowments. They face pressure to boost returns as an aging workforce enters retirement and tuitions rise.

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

Timothy W. Martin, Georgi Kantchev and Kosaku Narioka of the Wall Street Journal report, Era of Low Interest Rates Hammers Millions of Pensions Around World (h/t Ken Akoundi, Investor DNA):

Central bankers lowered interest rates to near zero or below to try to revive their gasping economies. In the process, though, they have put in jeopardy the pensions of more than 100 million government workers and retirees around the globe.

In Costa Mesa, Calif., Mayor Stephen Mensinger is worried retirement payments will soon eat up all the city’s cash. In Amsterdam, language teacher Frans van Leeuwen is angry his pension now will be less than what his father received, despite 30 years of contributions. In Tokyo, ex-government worker Tadakazu Kobayashi no longer has enough income from pension checks to buy new clothes.

Managers handling trillions of dollars in government-run pension funds never expected rates to stay this low for so long. Now, the world is starved for the safe, profitable bonds that pension funds have long needed to survive. That has pulled down investment returns and made it difficult for funds to meet mounting obligations to workers and retirees who are drawing government pensions.

As low interest rates suppress investment gains in the pension plans, it generally means one thing: Standards of living for workers and retirees are decreasing, not increasing.

“Unless ordinary people have money in their pockets, they don’t spend,” the 70-year-old Mr. Kobayashi said during a recent protest of benefit cuts in downtown Tokyo. “Higher interest rates would mean there’d be more money at our disposal, even if slightly.”

The low rates exacerbate cash problems already bedeviling the world’s pension funds. Decades of underfunding, benefit overpromises, government austerity measures and two recessions have left many retirement systems with deep funding holes. A wave of retirees world-wide is leaving fewer active workers left to contribute. The 60-and-older demographic is expected to roughly double between now and 2050, according to the United Nations.

Government-bond yields have risen since Donald Trump was elected U.S. president, though few investors expect a prolonged climb. Regardless, the ultralow bond yields of recent years have already hindered the most straightforward way for retirement funds to recover—through investment gains (click on image).

Pension officials and government leaders are left with vexing choices. As investors, they have to stash away more than they did before or pile into riskier bets in hedge funds, private equity or commodities. Countries, states and cities must decide whether to reduce benefits for existing workers, cut back public services or raise taxes to pay for the bulging obligations.

“Interest rates have never been so low,” said Corien Wortmann-Kool, chairwoman of the Netherlands-based Stichting Pensioenfonds ABP, Europe’s largest pension fund. It manages assets worth €381 billion, or $414 billion. “That has put the whole system under pressure.” Only about 40% of ABP’s 2.8 million members are active employees paying into the fund.

Pension funds around the world pay benefits through a combination of investment gains and contributions from employers and workers. To ensure enough is saved, plans adopt long-term annual return assumptions to project how much of their costs will be paid from earnings. They range from as low as a government bond yield in much of Europe and Asia to 8% or more in the U.S.

The problem is that investment-grade bonds that once churned out 7.5% a year are now barely yielding anything. Global pensions on average have roughly 30% of their money in bonds.

Low rates helped pull down assets of the world’s 300 largest pension funds by $530 billion in 2015, the first decline since the financial crisis, according to a recent Pensions & Investments and Willis Towers Watson report. Funding gaps for the two biggest funds in Europe and the U.S. have ballooned by $300 billion since 2008, according to a Wall Street Journal analysis.

Low rates helped pull down assets of the world’s 300 largest pension funds by $530 billion in 2015, the first decline since the financial crisis, according to a recent Pensions & Investments and Willis Towers Watson report. Funding gaps for the two biggest funds in Europe and the U.S. have ballooned by $300 billion since 2008, according to a Wall Street Journal analysis (click on image).

Few parts of Europe are feeling the pension pain more acutely than the Netherlands, home to 17 million people and part of the eurozone, which introduced negative rates in 2014. Unlike countries such as France and Italy, where pensions are an annual budget item, the Netherlands has several large plans that stockpile assets and invest them. The goal is for profits to grow faster than retiree obligations, allowing the pension to become financially self-sufficient and shrink as an expense to lawmakers.

ABP currently holds 90.7 cents for every euro of obligations, a ratio that would be welcome in other corners of the world. But Dutch regulators demand pension assets exceed liabilities, meaning more cash is required than actually needed.

This spring, ABP officials had to provide government regulators a rescue plan after years of worsening finances. ABP’s members, representing one in six people in the Netherlands, haven’t seen their pension checks increase in a decade. ABP officials have warned payments may be cut 1% next year.

“People are angry, not because pensions are low, but because we failed to deliver what we promised them,” said Gerard Riemen, managing director of the Pensioenfederatie, a federation of 260 Dutch pension funds managing a total of one trillion euros.

Benefit cuts have become such a divisive issue that one party, 50PLUS, plans for parliamentary-election campaigns early next year that demand the end of “pension robbery.”

“Giving certainty has become expensive,” said Ms. Wortmann-Kool, ABP’s chairwoman.

That is tough to swallow for Mr. van Leeuwen, the Amsterdam language teacher. Sitting on a bench near one of the city’s historic canals, he fumed over how he had paid the ABP every month for decades for a pension he now believes will be less than he expected.

Japan is wrestling with the same question of generational inequality. Roughly one-quarter of its 127 million residents are now old enough to collect a pension. More than one-third will be by 2035.

The demographic shift means contributions from active workers aren’t sufficient to cover obligations to retirees. The government has tried to alleviate that pressure. It decided to gradually increase the minimum age to collect a pension to 65, to require greater contributions from workers and employers and to reduce payouts to retirees.

A typical Japanese couple who are both 65 would collect today a monthly pension of ¥218,000 ($2,048). If they live to their early 90s, those payouts, adjusted for inflation, would drop 12% to ¥192,000.

The Japanese government has turned to its $1.3 trillion Government Pension Investment Fund for cash injections six of the past seven years. That fund, the largest of its kind in the world, manages reserves for Japan’s public-pension system and seeks to earn returns that outpace inflation. The more it earns, the more it can shore up the government’s pension system.

In February, Japanese central bankers adopted negative interest rates for the first time on some excess reserves held at the central bank so commercial banks would boost lending. The pension-investment fund raised a political ruckus in August when it said it lost about ¥5.2 trillion ($49 billion) in the space of three months, the result of a foray into volatile global assets as it tried to escape low rates at home.

The fund’s target holdings of low-yielding Japanese bonds were cut to 35% of assets, from 60% two years ago, and it has added heaps of foreign and domestic stocks. It is now considering investing more in private equity.

The government-mandated target is a 1.7% return above wage growth. “We’d like to strive to accomplish that goal,” said Shinichiro Mori, a deputy director-general of the fund’s investment-strategy department.

The fund posted a loss of 3.8% for the year ended in March because of the yen’s surge and global economic uncertainty. It was its worst performance since the 2008 global financial crisis. Mr. Mori said performance “should be evaluated from a long-term perspective,” citing returns of ¥40 trillion ($376 billion) since 2001.

Mr. Kobayashi, the former Tokyo government worker, said the government’s effort to boost returns by making riskier investments was supposed to “increase benefits for everyone, even if only slightly. It didn’t turn out that way…And they are inflicting the loss on us.”

Mr. Kobayashi joined roughly 2,300 people who marched in downtown Tokyo in October to protest government plans to cut pension benefits further.

In the U.S., the country’s largest public-pension plan is struggling with the same bleak outlook. The California Public Employees’ Retirement System, which handles benefits for 1.8 million members, recently posted a 0.6% return for its 2016 fiscal year, its worst annual result since the financial crisis. Its investment consultant recently estimated that annual returns will be closer to 6% over the next decade, shy of its 7.5% annual target.

Calpers investment chief Ted Eliopoulos’s strategy for the era of lower returns is to reduce costs and the complexity in the fund’s $300 billion portfolio. He and the board decided to pull out of hedge funds, shop major chunks of Calpers’ real-estate and forestry portfolios and halve the number of external money managers by 2020.

“Calpers isn’t taking a passive approach to the anticipated lower return rates,” fund spokeswoman Megan White said. “We continue to reassess our strategies to improve performance.”

Yet the Sacramento-based plan still has just 68% of the money needed to meet future retirement obligations. That means cash-strapped cities and counties that make annual payments to Calpers could be forced to pay more.

That is a concern even for cities such as affluent Costa Mesa in Orange County, which has a strong tax base from rising home prices and a bustling, upscale shopping center.

The city has outsourced government services such as park maintenance, street sweeping and the jail, as a way to absorb higher payments to Calpers. Pension payments currently consume about $20 million of the $100 million annual budget, but are expected to rise to $40 million in five years.

The outsourcing and other moves eliminated one-quarter of the city’s workers. The cost of benefits for those remaining will surge to 81 cents of every salary dollar by 2023, from 37 cents in 2013, according to city officials.

The mayor, Mr. Mensinger, is hopeful for a state solution involving new taxes or a benefits overhaul, either from lawmakers in Sacramento or from a California ballot initiative for 2018 that would cap the amount cities pay toward pension benefits for new workers.

Weaker cities across California could face bankruptcy without help, said former San Jose Mayor Chuck Reed, who oversaw a pension overhaul there in 2012 and is backing the 2018 initiative that would shift onto workers any extra cost above the capped levels. “Something is broken,” he said. “The plans are all based on assumptions that have been overly optimistic.”

Costa Mesa resident James Nance, 52, worries the city’s pension burden will affect daily life. “We could use more police,” said the self-employed spa repairman. “I’d like to know the city is safe and well protected, but I know there have been tremendous cutbacks.”

Costa Mesa ended the latest fiscal year with an $11 million surplus, its largest ever. But that will soon disappear, Mr. Mensinger said, as pension costs swallow up $2 of every $5 spent by the city.

“We have this gigantic overhead cliff called pensions.”

This is an excellent article which gives you a little glimpse of what lies ahead as global pensions confront an era of low growth and ultra low rates which are here to stay.

Or are they? Ken Akoundi of Investor DNA (subscribe for free here to receive his daily email with links to interesting articles like the one above) also posted a link to a free Stratfor report, Inflation Makes a Comeback in the Global Economy, which states assuming recent signals in the market are not false alarms, the world’s economies may be in for a big readjustment in 2017.

What I find quite amazing is how Trump’s victory has done more to  raise inflation expectations than all the world’s powerful central bankers combined, something John Graham of Arrow Capital Management noted on LinkedIn last week after the election (click on image):

You’ll notice my comment to his post and that of Glenn Paradis basically questioning how sustainable the rise in inflation expectations is going forward.

Why is this important? Because as I noted in my recent comments on sell the Trump rally and whether Trump is bullish for emerging markets, it’s far from clear what Trump’s election means for global deflation going forward.

As I keep warning, another crisis in emerging markets is deflationary, and investors need to keep an eye on the surging US dollar index (DXY) which just crossed 100, a key level of resistance (click on image):

I warned my readers to ignore Morgan Stanley’s warning that the greenback was set to tumble back in August and think the trend is continuing in large part due to Trump’s campaign proposal to slash taxes on cash US companies have stashed outside of the country, all part of his corporate repatriation plan.

The key thing to keep in mind is the surging greenback has the potential to disrupt and wreak more deflationary havoc on emerging markets (especially commodity producers) and clobber the earnings of US multinational corporations.

A surging US dollar will also lower US import prices, effectively importing global deflation to the United States, and if it continues, it might jeopardize that much anticipated Fed rate hike in December, especially after October’s Fed game changer which signaled the US central bank is ready to err on the side of inflation, staying accommodative for far longer than markets anticipate.

I think a lot of attention is spent on Trump’s fiscal plan to stimulate the US economy through massive infrastructure program, which is a great idea, especially if he attracts US, Canadian and global pensions into the mix, lowering the cost of this program.

A lot less attention is being placed on what Trump’s presidency means for emerging markets, the US dollar and global deflation going forward. Admittedly, I’m struggling to make sense of all this because it’s not entirely clear to me that President Trump will follow through with a lot of his more contentious campaign proposals regarding trade agreements.

In fact, like millions of others, I watched President-elect Trump on 60 Minutes Sunday evening, and found him a lot more sober, serious, subdued — and dare I say, a lot humbler — than the brash and arrogant candidate we were accustomed to.

At one point, he and his daughter Ivanka emphasized the needs of the country are far more important than the “Trump brand.” I made the mistake of tweeting my thoughts on the interview and got all these die-hard Hillary Clinton supporters on my case (click on image):

Even my mother called from London this morning to tell me “how terrible it is that Trump was elected” and that “Hillary was so much better than him in the debates.”

Like a good son, I listened patiently as she went on and on praising Hillary Clinton but at one point I had enough and politely interjected: “Mom, it’s over, for a lot of reasons Hillary Clinton lost and Trump will be the next US president. Take the time to watch his 60 Minutes interview, you’ll see his focus is on jobs and the economy, not on abortion and other divisive issues” (as I predicted).

[Note: My brother and I believed Bernie Sanders had a much better chance than Hillary Clinton to defeat Trump because he too tapped into voters’ anxieties about jobs and trade deals and he had a full-blown grass roots movement which was gaining momentum. But it will be a day in hell before America’s power elites accept a “socialist” like Bernie as their next leader; they’d rather a “nut” like Trump in power as he will cut taxes and bolster their power hold.]

One thing that is for sure, last week was a great week for savers, 401(k)s and global pensions. The Dow chalked up its best week in five years and stocks in general rallied led by banks and my favorite sector, biotechs which had its best week ever.

More importantly, bond yields are rocketing higher and when it comes to pension deficits, it’s the direction of interest rates that ultimately counts a lot more than any gains in asset values because as I keep reminding everyone, the duration of pension liabilities is a lot bigger than the duration of pension assets, so for any given move in rates, liabilities will rise or decline much faster than assets.

Will the rise in rates and gains in stocks continue indefinitely? A lot of underfunded (and some fully funded) global pensions sure hope so but I have my doubts and think we need to prepare for a long, tough slug ahead.

The 2,826-day-old bull market could be a headache for Trump but the real headache will be for global pensions when rates and risk assets start declining in tandem again. At that point, President Trump will have inherited a long bear market and a potential retirement crisis.

This is why I keep hammering that Trump’s administration needs to include US, Canadian and global pensions into the infrastructure program to truly “make America great again.”

Trump also needs to carefully consider bolstering Social Security for all Americans and modeling it after the (now enhanced) Canada Pension Plan where money is managed by the Canada Pension Plan Investment Board. One thing he should not do is follow lousy advice from Wall Street gurus and academics peddling a revolutionary retirement plan which only benefits Wall Street, not Main Street.

Three employees have sued Xerox HR Solutions for violating ERISA by inflating fees in cohort with investment adviser Financial Engines.

Read the complaint here.

From Bloomberg BNA:

The lawsuit, filed Nov. 9 in federal court in Michigan, seeks class treatment for thousands of plan participants for which Xerox provided record-keeping services and for which FE served as investment adviser. The workers allege that Xerox HR violated the Employee Retirement Income Security Act by entering a “pay to play” scheme that wrongfully inflated the price of professional investment advice services that were critical to the successful management of the workers’ retirement savings.

Kickback Scheme

Xerox HR contracted with FE to provide professional investment advice services to participants in the retirement plans serviced by Xerox HR through an agreement that dictated and controlled certain terms and conditions on which FE would provide its services.

Because FE was “interested” in securing an arrangement with Xerox to be the exclusive provider of investment advice to participants in plans administered by Xerox, it was “willing” to charge excessive fees to participants in order to meet Xerox’s demand for a kickback, the complaint said.

Xerox allegedly breached its fiduciary duties by requiring FE to charge excessive fees to plan participants. FE is paying Xerox over 30 percent of the fees it receives from the Ford plans, the complaint said.

The Canadian government is trying to recruit institutional investors to pour money into the country’s infrastructure, according to a Reuters report.

Though Canada’s pension funds rank among the world’s largest infrastructure investors, they typically put their money to work on overseas projects.

More from Reuters:

Canada’s Liberal government is speaking to sovereign wealth funds and global private equity firms as well as domestic pension funds as it ramps up efforts to attract funding for its new infrastructure bank, according to two sources.

The overseas investors that the officials developing the infrastructure bank are speaking to include the Government Pension Fund of Norway, one of the world’s largest sovereign wealth funds, said the sources, who declined to speak on the record because of the sensitivity of the talks.

The government said earlier this month it would set up an infrastructure bank and give it access to C$35 billion ($26 billion) to help fund major projects.

[…]

Meanwhile, the Caisse, Quebec’s public pension fund, is planning to build a new 67 kilometer public transit system in Montreal, investing C$3 billion and seeking to supplement that with C$2.5 billion of federal and provincial government funding.

That project could be one of the first to be funded by the new infrastructure bank, the sources said.

 

 

Japan’s Government Pension Investment Fund (GPIF), the largest pension fund in the world with $1.3 trillion in assets, moved this week to get more women on the corporate boards of portfolio companies.

The GPIF joined the U.S.’ Thirty Percent Coalition, an organization of institutional investors who use their influence to push for women on boards of public companies. CalSTRS is also a member.

More from CityWire:

GPIF has joined the 30% Club in the UK and the Thirty Percent Coalition in the US, both of which are seeking to achieve a minimum of 30% women on boards.

The JPY135 trillion (€1.14 trillion) fund, the world’s largest, said it believed the integration of environment, social and governance (ESG) factors into investment process mitigated investment risk, and gender diversity is widely regarded as one of major social and governance factors.

Launched in 2011, the Thirty Percent Coalition is a US organisation of more than 80 members committed to the goal of women, including women of colour, holding 30% of board seats across public companies. Among its members are representatives of such institutional investors as California State Teachers’ Retirement System (CalSTRS), Ohio Public Employees Retirement System, and City of Philadelphia Board of Pensions & Retirement.

Recent research has found board diversity to be correlated with fewer governance-related controversies and higher returns:

According to a November 2015 MSCI ESG report ‘Women on Boards’, women comprise only 3.4% of directors in Japan, which was the lowest number across developed markets, and even below the level of many emerging markets.

[…]

Among the key conclusions of the research is the finding that companies in the MSCI World Index which lacked board diversity suffered more governance-related controversies than average.

It also revealed that companies with strong female leadership generated a return on equity of 10.1% per year versus 7.4% for those without, measured on an equal-weighted basis. However, the authors of the study said that in this case they could only establish correlation, not causality.

The head of the Canada Pension Plan Investment Board (CPPIB) this week told Reuters he sees opportunities in the U.S. after Donald Trump’s win on Tuesday.

Particularly intriguing for CPPIB chief Mark Wiseman was Trump’s promise of massive infrastructure spending.

From Reuters:

He also identified Trump’s commitment to spend big on infrastructure as a potential opportunity for investors.

“There’s a lot of expectation of increased fiscal stimulus, less regulation, more economic activity, that’s getting priced in here and that’s obviously helping the value of the assets that we own in the country and we would expect it will throw up some interesting opportunities over time,” Machin said.

Machin added that the expectation for rising interest rates in the U.S. was something that the CPPIB had been “anticipating for quite a time”.

“The market’s moving towards where we’ve had some positioning,” he said.

Machin said CPPIB, the world’s third biggest infrastructure investor, would be keen to invest in more U.S. infrastructure projects.

“We’d very much welcome more infrastructure opportunities. That’s terrific for us,” he said.

 

Dallas voters on Tuesday approved a ballot measure that raises the retirement age for new hires into the Dallas Employee Retirement Fund, cuts COLAs for those workers and tweaks the Fund’s benefit formula.

The changes are expected to save $2.15 billion over 30 years. The cuts work out to about $4,500 less in annual benefits (2016 dollars) for the workers to which the changes apply, vs. someone who is already in the Fund.

More from the Dallas Morning News:

The changes that voters approved will only affect new workers hired after Jan. 1, 2017, not current employees. Among the changes: new staffers will have to work until 65 — not 60 — to receive full retirement benefits. Cost-of-living adjustments will be capped at 3 percent, not 5 percent, and allow for different pension benefit calculations. A $125-per-month supplemental health benefit would be eliminated and survivor benefits would be cut.

[…]

Even with the benefit cuts, there is no guarantee the fund will stay in good financial standing. Taxpayers bailed out the fund in 2005, using debt, but the city hasn’t contributed as much as it could to pay off the debt. Shaky investments, including during the recession, have prompted more instability, and the ERF has collected hundreds of millions of dollars in unfunded liabilities — the amount of money it couldn’t afford to pay if all its members retired tomorrow.

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

Everett Rosenfeld of CNBC reports, Donald Trump wins the presidency, hails ‘beautiful and important’ win:

Donald John Trump will be the 45th president of the United States, capping a historic and boisterous run by an outsider who captured a loyal following across a swath of America fed up with establishment politics, the news media and elected officials.

His success was only part of a larger, crushing victory for the Republican Party, which retained the House and maintained control of the Senate.

The brash New York businessman will win at least 270 electoral votes, according to NBC News projections, and will take his Republican ticket to the White House in January. Trump had trailed Democrat Hillary Clinton in polling averages for nearly the entire election cycle, but he bucked prognostications by picking up states many pundits deemed out of his reach.

On Twitter, the president-elect called his win “beautiful and important,” while the White House issued a statement that President Obama plans to publicly address the election results, and invite Trump to the White House on Thursday to discuss handing over power.

“Ensuring a smooth transition of power is one of the top priorities the President identified at the beginning of the year and a meeting with the President-elect is the next step,” the White House statement read.

The 70-year-old real estate mogul — who is now the oldest person ever elected to a first presidential term — declared victory early Wednesday, saying Clinton had conceded the election and that it’s time for the nation “to come together as one united people.”

The Republican congratulated his Democratic rival, saying that she waged “a very very hard-fought campaign.” He also commended her for having “worked very long and very hard” over her political career.

“Now it’s time for America to bind the wounds of division — have to get together,” he said. “To all Republicans and Democrats and independents across this nation, I say it is time for us to come together as one united people.”

Trump, who had been criticized by opponents for rhetoric characterized as divisive and racist, pledged, “I will be president for all Americans, and this is so important to me.”

Trump has never before held public office, but he will be joined in the executive branch by Vice President-elect Mike Pence and a host of politicians and business executives who rallied around the GOP nominee.

Although the vast majority of pre-election surveys had indicated a slight advantage for Clinton, Trump’s campaign had frequently predicted that a vein of electoral strength existed beyond the polls, pointing to his massive crowds at his events and online support.

Clinton — who was secretary of state under President Barack Obama, a U.S. senator for New York from 2001 to 2009, and first lady during her husband’s presidency in the 1990s — had been painted as the “establishment” politician, while Trump campaigned as a political neophyte who could “drain the swamp” of government corruption in Washington.

Trump will likely face significant Democratic attempts at opposition after he enters the White House in January. In fact, Trump has elicited strong outcries from liberal and minority groups since he first characterized many Mexican immigrants “rapists” in his June 2015 campaign kickoff.

Trump rose to prominence in a crowded GOP primary field by connecting with voters who felt they had been betrayed by Washington interests. The businessman focused his early pitch on forceful answers to economic issues like trade and immigration, which resonated with those Americans who had stopped believing mainstream Republicans cared about their communities.

Many experts in economics and policy studies have decried Trump’s prescriptions as nearly impossible to implement and unlikely to achieve their desired aims. But supporters, and Trump himself, have contended that his calls for extreme tariffs and mass deportations were opening salvos in forthcoming negotiations.

And Trump, who has been famous for decades as a symbol of wealth and business acumen, channeled the image of a negotiator throughout his campaign. The real estate developer — who co-authored “Trump: The Art of the Deal” — has repeatedly claimed that other countries are taking advantage of the United States, and the White House should work to renegotiate its existing agreements.

Clinton, meanwhile, had campaigned on a set of policy proposals made more liberal for her primary contest against Sen. Bernie Sanders. While Republicans painted Clinton as too liberal — an extension of Obama’s tenure — many on the left expressed discomfort with the former secretary of state, jeering that she was more aligned with right-of-center candidates.

Yet for all of those criticisms, Clinton had appeared ahead in the race, especially after her well-received debate performances. But that lead became more tenuous when the FBI announced just 11 days before the election that it was probing new evidence regarding her use of a private email server while secretary of state. The FBI subsequently said the new probe did not turn up any reason to charge Clinton with a crime, but Democrats, and even some Trump supporters, called foul on the timing of the original announcement: Clinton’s campaign was damaged as voters were reminded of a scandal that had faded from the forefront.

Trump also faced several challenges on his road to the White House, including allegations that he sexually assaulted or harassed multiple women, and several women making such claims came forward after the release of a 2005 video in which he bragged about groping women.

Still, Tuesday’s election results are a strong repudiation of the entire system of Washington politics, not just the Democrats or Clinton. A long list of Republican leaders and luminaries had come out against Trump, or at least refused to endorse their party’s new, de-facto head.

The Trump victory also marks a rejection of the mainstream news media, which extensively covered Trump’s scandals and self-contradictions. Polls showed many of the Republican’s supporters dismissed those reports.

As recently as last week, in fact, pundits on both sides suggested that Trump was not angling to win the election — he was instead interested, they said, in establishing a base of support for profitable post-race enterprises. But after an acrimonious election, Trump will now turn to building a team that can work together to implement his ideas for the country.

Scott Horsely of NPR also reports, Trump Wins. Now What?:

Donald Trump’s presidential campaign, like the business career that preceded it, was unpredictable, undisciplined and unreliable. Despite those qualities — or perhaps, in part, because of them — it was also successful.

So what should we expect from President-elect Trump, mindful that his path to the White House has defied expectations at every turn?

Some of Trump’s ambitions have been clearly telegraphed: He plans to build a wall along the U.S. border with Mexico, deport millions of criminal immigrants, unwind trade deals dating back more than two decades and repeal Obamacare. He has also promised to cut taxes and eliminate numerous government regulations — including power plant rules designed to combat global warming.

With the presidential pen and a friendly Republican Congress, Trump should have little trouble delivering on those promises.

But Trump’s campaign never really revolved around specific policy prescriptions. His agenda is not anchored to ideology but rather shaped by instinct and expedience.

“Trump operates very much from his gut,” said David Cay Johnston, author of The Making of Donald Trump. “The guiding philosophy of Trump is whatever is in it for his interests at the moment.”

When his initial tax plan prompted sticker shock among fiscal watchdogs, Trump readily shaved trillions of dollars off the bottom line. (His new plan is still a budget buster, though.) His impulsive call to ban Muslim immigrants gradually morphed into a vague prescription for “extreme vetting.” And he hastily concocted a plan to help working parents only after his daughter trumpeted a vaporware version at the GOP convention.

That flexibility seems to be just fine with tens of millions of supporters who trust Trump’s instincts and assume his success will boost the country as a whole. The campaign slogan “Make America Great Again,” which Trump trademarked just days after the 2012 election, is both vague and malleable enough to accommodate whatever nostalgic and aspirational vision his followers want to attach to it.

Supporters point to the way Trump rescued a New York skating rink that languished for years in the 1980s under city government supervision.

“What had taken the city over half a decade to botch, my father completed in less than six months, two months ahead of schedule and over a million dollars under budget,” Eric Trump told delegates at the Republican National Convention.

Backers hope the incoming president will bring similar accountability to the federal government.

One of Trump’s first tasks will be staffing up for a new administration. The celebrity businessman who turned “You’re fired!” into a catchphrase will soon be doing a lot of hiring.

“I will harness the creative talents of our people,” Trump told supporters at a victory party early Wednesday. “And we will call upon the best and brightest to leverage their tremendous talent for the benefit of all.”

Friends say assembling high-performing teams is one of the president-elect’s strengths.

“He pushes everybody around him, including you, through comfort barriers that they never thought they could ever shatter,” said Colony Capital CEO Tom Barrack, who delivered a testimonial for Trump at the party convention in July.

Trump’s daughter Ivanka told delegates her father has always promoted on the basis of merit.

“Competence in the building trades is easy to spot,” she said at the convention in July. “And incompetence is impossible to hide.”

In politics and in business, Trump has kept his organizations lean. He had only about one-tenth of the staff Hillary Clinton had, heading into the final months of the campaign.

Trump’s aides are often long on loyalty and short on formal credentials. Politico noted that the chief operating officer of the Trump Organization was initially hired to be a bodyguard, after Trump spotted him working security at the U.S. Open tennis tournament.

Trump may delegate, but there’s no doubt who’s in charge. Even if he fills his Cabinet with big personalities — Newt Gingrich has been floated for secretary of state and Rudy Giuliani for attorney general — Trump is not likely to share the spotlight.

“The only quote that matters is a quote from me!” Trump tweeted this summer, urging journalists to pay no attention to his subordinates. As late as Friday, he boasted that he didn’t need other celebrities to attract large crowds to his rallies.

“I didn’t have to bring JLo or Jay Z,” Trump said, mocking Hillary Clinton’s reliance on big-name warmup acts. “I am here all by myself.”

Trump, who prides himself on being a counter-puncher, can also be expected to use the levers of government to target his political rivals. He has already threatened on live television to appoint a special prosecutor to investigate Clinton.

“Trump’s philosophy, which he’s written and spoken about for many years, is to get revenge,” Johnston said.

Once Trump is in the White House, the news media will remain firmly focused on the new commander in chief.

“Donald is the most masterful manipulator of the conventions of journalism I’ve ever seen,” said Johnston, a Pulitzer Prize-winning former reporter for The New York Times.

Trump has long believed that even bad publicity is better than no publicity. Surprising and provocative statements are both a tool to keep the audience paying attention and a negotiating tactic.

“I always say we have to be unpredictable,” Trump told the Washington Post editorial board.

Everything for Trump is a negotiation. And much of his campaign was based on the idea that the U.S. has been getting a bad bargain.

“You look at what the world is doing to us at every level, whether it’s militarily or in trade or so many other levels, the world is taking advantage of the United States,” Trump told CNN. “And it’s driving us into literally being a third-world nation.”

As a businessman, Trump has a long history of using pressure tactics to drive hard bargains. USA Today found hundreds of examples in which employees and contractors accused Trump of not paying them for their work. They sometimes settled for less than they were owed, rather than face a lengthy legal battle against Trump and his deep pockets.

Similarly, Trump argues that if the U.S. puts pressure on other countries — by imposing import tariffs or demanding payment for military protection — they’ll quickly back down.

Some foreign policy scholars are not convinced this zero-sum mindset is appropriate.

“By threatening to drive harder bargains, he might manage to eke out a slightly larger share of the pie,” said Daniel Drezner of the Fletcher School of Law and Diplomacy at Tufts University. “But he also threatens to blow up that pie in the process.”

The stock market has sent clear signals that investors are worried about the economic fallout from a Trump administration. According to one estimate, the S&P 500 index will be worth 12 percent less under Trump than it would have been had Clinton been elected.

Count on the president-elect to loudly hype any success while downplaying any setback. And if that requires bending the truth a bit, so be it.

“People want to believe that something is the biggest and the greatest and the most spectacular,” Trump wrote in his best-selling 1987 book The Art of the Deal. “It’s an innocent form of exaggeration — and a very effective form of promotion.”

If history is any guide, the new Trump administration will not be overly constrained by facts.

Trump has shamelessly exaggerated the height of his buildings, the size of his profits, and even the number of people who showed up to cheer his presidential bid.

“When you have a huge crowd, and Trump draws huge crowds, there’s no need to exaggerate,” Johnston said. “Except in Donald’s mind where big is never big enough.”

Don’t expect that to stop now that he has achieved the biggest and most powerful office in the land.

Love him or hate him, Donald J. Trump will be the 45th president of the United States. I spent all night watching the US elections, flicking channels from CNN, ABC, CBS, NBC and FOX News, and tweeting on this historic election.

And I’m Canadian but nothing is more exciting to me than watching the actual US election because it can swing either way depending on who captures the swing states.

Last night, when Trump was leading in Florida, I started to believe he was going to pull it off, and when he won Ohio, it was a done deal for me.

People get so emotional when discussing these results but the goal of this post is to look well past the hysteria and understand what is going to happen next when president-elect Trump and his administration take office in the new year.

First, let me begin with something Francois Trahan and Stephen Gregory of Cornerstone Macro put out this morning:

If there is one thing that 2016 has taught us it is to not rule out the unlikely scenario. Indeed, the events surrounding the Brexit vote and now Donald Trump winning the U.S. presidency were unexpected to happen, at least according to the polls and their proponents. So what does all of this mean for the stock market anyway? It’s hard to know exactly what powers congress will convey on the new President but the biggest potential problem as we see things has to do with trade.

At this time, there is already a dynamic for an economic slowdown in place, one that the new president will inherit. Money supply has slowed across the developed world and rates have backed up. All of which will eventually add to a weaker U.S. economy. The real troubles with this story lie overseas where a number of countries have come to rely on the U.S. for trade. If the new President holds true on his promise to tear up trade agreements, then the outlook just got a lot more complicated. Our call for a bear market in 2017 was never about potential U.S. election results. Rather, it is about the consequences that tighter policy will bring to an already fragile world economy. As always, we shall see.

In a recent comment on lessons for Harvard’s endowment, I noted a video update, “A Recipe For Investment Insomnia,” where Francois Trahan and Michael Kantrowicz of Cornerstone Macro cite ten reasons why markets are about to get a lot harder going forward :

1. Growth Is Likely To Slow … From Already Low Levels
2. The Risks Of Zero Growth Are Higher Today Than In The Past
3. The U.S. Consumer No Longer The Buffer Of U.S. Slowdowns
4. The World Is Battling Lingering Structural Problems
5. A U.S. Slowdown Has Implications For The World’s Weakest Links
6. The Excesses Of China’s Investment Bubble Have Yet To Unwind
7. Demographic Trends In Japan … An Insurmountable Problem?
8. Central Banks Have Reached The Limits Of Monetary Policy
9. Slower Growth Is The Enemy Of Portfolio Managers
10. P/Es Are Hypersensitive To The Economy At This Time

These are all ten factors that President Trump will inherit and need to contend with. You should all subscribe to the high quality research Cornerstone Macro puts out as they do an excellent job covering markets and key economic trends around the world.

I might add the risks of global deflation are not fading, and if there is a severe disruption to global trade under Trump’s watch, this will only intensify global deflationary headwinds.

One area which Trump is definitely committed to is spending on infrastructure. Jim Cramer of CNBC said this morning he sees the Treasury department emitting new 30-year bonds to cover the trillion dollar spending program Trump has outlined to revamp airports, roads, bridges and ports.

Here, I will refer the Trump administration to what the Canadian federal government is doing setting up a new infrastructure bank, allowing Canada’s large pensions and other large global investors, to invest in large greenfield infrastructure projects.

I discussed this new initiative and what Canada’s large pensions are looking for in a recent comment where I also shared insights at the end in an update from Andrew Claerhout, Senior Vice-President of Infrastructure & Natural Resources at Ontario Teachers’ Pension Plan.

Why am I mentioning this? Because if Trump’s administration is really committed to “making America great again” and spending a trillion or more on infrastructure, they will need a plan, a blueprint and they definitely should talk to the leaders of Canada’s large pensions, widely considered to be among the best infrastructure investors in the world.

There is another reason why I mention this. The US has a huge pension problem as many public sector pensions are chronically underfunded. There is a growing appetite for infrastructure assets around the world, including in the United States where large public pensions are looking to increase their allocations.

If a Trump administration sets up the right program on infrastructure, modeled after the Canadian one, and establishes the right governance, it will be able to attract capital from US public pensions starving for yield as well as that from Canadian and global pensions and sovereign wealth funds which would welcome such a program as it fits perfectly with their commitment to infrastructure as an asset class.

The big advantage of integrating US and global pensions as part of the solution to rebuilding America’s infrastructure is that it will limit the amount the US needs to borrow and will make this ambitious infrastructure program more palatable to deficit hawks like Paul Ryan (who might not be the speaker of the House come January).

And if it’s done right, it will allow many US public pensions to invest massively in domestic infrastructure, allowing them to collect stable cash flows over the long run, helping them meet their mounting future liabilities. The same goes for Canadian and global pensions which would also invest in big US infrastructure provided the governance is right.

What else can Trump do to make America great again? He should consider bolstering Social Security for all Americans and modeling it after the (now enhanced) Canada Pension Plan where money is managed by the Canada Pension Plan Investment Board.

One thing Trump should not do is follow lousy advice from Wall Street gurus and academics peddling a revolutionary retirement plan which only benefits Wall Street, not Main Street.

Speaking of Wall Street, I just noticed how the stock market is surging as I end this comment, which goes to show you why you should NEVER listen to big hedge funds, gurus or market strategists warning you of doom and gloom if Trump is elected.

I warned all my readers last week when I went over America’s Brexit or biotech moment to ignore all these doomsayers on Trump and go long healthcare (XLV) and especially biotech stocks (IBB and equally weighted XBI) which are surging today.

Unlike many blowhard prognosticators, I put my money where my mouth is and if you made money on my call to go long biotech stocks last week, please do the right thing and contribute to this blog on the top right-hand side under my picture. Thank you.

As for president-elect Trump, he has the toughest job ahead of him but if he surrounds himself with a truly great team and focuses his attention on fixing the economy (not the divisive crap) using pensions to invest in infrastructure, then he might go down in history as a one of the best presidents ever.

In fact, I’m convinced his huge ego will drive him to fulfill this legacy which is why I take all these doomsayer scenarios with a shaker of salt. Never short the United States of America. Period.