Tuesday, August 15, 2017

CPPIB and Caisse's Performance Updates?

Jacqueline Nelson of the Globe and Mail reports, CPPIB manages gains amid global competition for ‘real asset’ investments:
With record amounts of capital seeking investments around the world, the Canada Pension Plan Investment Board still found ways to invest billions of dollars in recent months.

From buying an operator of international schools to developing logistics facilities in India, there was no shortage of deals turned out by CPPIB’s investment teams in its first fiscal quarter of 2018, which ended June 30. And new transactions announced since then indicate that pace is set to continue.

This comes at a time when there’s more than $1.1-trillion (U.S.) being held by private capital-investment funds around the world just waiting to be put toward new investments in private equity, infrastructure, natural resources and other so-called real assets, according to a recent report from data provider Preqin. 2017 is on track to be the largest fundraising year ever for private capital funds, exceeding the peak achieved before the financial crisis.

Mark Machin, chief executive officer of CPPIB, said that this trend is squeezing returns and encouraging more competition among investors. But he added that conversations between institutional investors have remained relatively friendly.

“There’s a massive world, and a massive opportunity set, and we have long-term relationships with people,” Mr. Machin said. “We intend to keep those relationships and work with the best and brightest where we can.”

CPPIB, the country’s largest pension fund and manager of the Canada Pension Plan’s portfolio, posted net investment gains of 1.8 per cent in its first quarter. During that period, total assets climbed to $326.5-billion (Canadian) compared with $287.3-billion at the same time last year. Assets increased $9.8-billion in the first quarter, and this gain was made up of investment income of $5.7-billion after costs, as well as $4.1-billion in net CPP contributions.

“Each major CPPIB investment program contributed to first-quarter results. Global equity markets produced a significant uplift and gains from fixed income improved,” said Mr. Machin of the main factors that moved returns this quarter.

Less helpful to CPPIB was the strengthening Canadian dollar, compared with most other major currencies. The pension fund’s philosophy has long been not to pursue a currency-hedging strategy, taking a view that the ups and downs of various countries’ coins and bills will balance out over the long life of the portfolio. That said, Mr. Machin noted that this trend had accelerated in the first half of the current quarter.

“To the extent that that continues, then we will see a dampening of our returns,” he said of the near-term impact.

The Caisse de dépôt et placement du Québec had its own issue with Canada in recent months as national equities performed worst of all the developed markets in the pension fund’s portfolio.

“The weak performance of the Canadian stock market this year contrasts with its strong returns last year and with those of major markets abroad,” Caisse chief executive Michael Sabia said in a statement.

Mr. Sabia noted that he is wondering about the monetary-policy actions that central banks will take in the coming months.

“There appears to be an emerging bias among central banks in favor of tightening monetary conditions. However, it remains to be seen whether these actions will be relatively modest and short-term, or more substantial and sustained over a longer period,” he said. “These scenarios are likely to have quite different consequences for market performance and economic growth.”

The Caisse reported financial results for the first six months of the year on Friday, producing a 5-per-cent return in the period as net assets climbed to $286.5-billion.

Both Mr. Sabia and Mr. Machin said that their portfolios had benefited from global equity-market gains. And both of their funds took steps to continue to diversify investment holdings in an effort to carve out new sources of returns in competitive markets.
You can read the press release on CPPIB's fiscal Q1 results here and la Caisse's mid-year results here.

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

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

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

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

The big story in both these funds is global equities which rallied due to a shift in investor sentiment favoring global over Canadian equities.

However, as shown in the weekly chart of the Canadian dollar relative to the USD, the strength in the loonie impacted performance (click on image):


Keep in mind, CPPIB doesn't hedge its foreign exchange exposure which is a smart move over the long run because it effectively means the Fund is naturally long the USD over the long run. I believe the same goes for the Caisse, it doesn't hedge its F/X exposure.

Now, I'm on record with my top three macro conviction calls going forward:
  1. Long US long bonds (TLT) as I see the US economy slowing and global deflation spreading to the United States. 
  2. Long the USD (UUP) as I see the global economy following the US economy and slowing. Even if the Fed pauses its rate hikes, the USD will gain as global economies start slowing. If a crisis hits, it's bullish for the greenback and yen.
  3. Short oil (OIL), energy (XLE) and metal and mining (XME) shares as well as commodity currencies. Why in the world would you be long energy and commodities with global deflation looming around the corner? That's just plain nuts.
All this to say, if I was consulting la Caisse, CPPIB, and other large Canadian pensions, I would be diversifying outside Canada in both public an private assets and be very defensive at this stage, significantly increasing my allocation to US long bonds.

There will be plenty of opportunities that arise for large Canadian  pensions in the years ahead as I predict severe dislocations across global public and private markets.

In other news, Michael Sabia recently called on Quebec's government to fast-track light rail transit legislation:
The Quebec government must act quickly and pass a bill allowing construction to begin on the fourth largest automated transportation system in the world, the head of the province's pension fund said Friday.

Fund President and CEO Michael Sabia said if construction on Montreal's light rail system is to begin as scheduled in the fall, legislators have to adopt Bill 137 as soon as possible.

"I can't insist more strongly about the importance of Bill 137," he said on a conference call after the fund released its results.

"It's not just an option to pass the law quickly, it's absolutely essential."

The pension fund, called La Caisse de Depot et Placement du Quebec, partnered with the Quebec government to launch the $6-billion project.

If completed, it will be the fourth largest automated transportation system in the world after the projects in Singapore, Dubai and Vancouver.

The fund is contributing $2.67 billion, Quebec has promised $1.28 billion and the federal government confirmed in June it would contribute another $1.28 billion.

Macky Tall, head of the fund's infrastructure arm, said work is scheduled to begin in the fall, and therefore the Quebec government needs to pass Bill 137 quickly.

Quebec's legislature returns from summer recess Sept. 19.

During the first six months of 2017, the fund posted a 5 per cent return, compared to 4.8 per cent for its benchmark portfolio.

Over five years, the fund recorded a 10.6 per cent annualized return, which was more than its benchmark portfolio of 9.3 per cent.

As of June 30, it held $286.5 billion in net assets, an increase of $15.8 billion compared to Dec. 31, 2016.
Michael Sabia and Macky Tall are right, the government needs to fast-track these funds as soon as possible or risk costly delays in this massive light rail project.

La Caisse recently announced it will acquire a significant minority stake in Sebia, a global leader in the medical diagnostics sector, from Astorg and Montagu:
Headquartered in Lisses (Paris, France), Sebia is a global multi-specialty in-vitro diagnostics company focusing on oncology, genetic haemoglobin and metabolic disorders. The company is one of the pioneers of clinical electrophoresis.

With the support of CDPQ, Sebia intends to pursue the successful strategy of the past years, based on the reinforcement of its undisputed leadership position in multiple myeloma diagnostics, the global expansion of its diabetes franchise, and the continued search for other highly-promising applications for its differentiated technology.
You already know my thoughts on biotech and medical diagnostics, I'm bullish over the long run and believe this is a great deal for both parties.

Lastly, an update on the hyperthytoid market which I discussed on Friday. My buddy, a radiologist, did an ultrasound on my neck to see my thyroid and said: "The good news is there are no nodules, so you don't have thyroid cancer and won't need surgery or a biopsy. The bad news is your thyroid is destroyed, most likely from some sort of autoimmune thyroiditis so you need to go see an endocrinologist as soon as possible to regulate your thyroxine because it's causing you all sorts of terrible symptoms including major muscle weakness. You probably had this for a long time and didn't know about it."

Another buddy of mine, a cardiologist at Stanford University shared this with me:
The good news is that it's a highly treatable condition and it's quite straightforward to diagnose the cause. However, eventually, you may need thyroid replacement hormone paradoxically either because of the condition or the treatment. Not a big deal either but you will need to take the medication for rest of your life (very common situation for older women)

I am guessing you have some form of autoimmune thyroid disease (Grave's, Hashimoto's with hashitoxicosis presentation, or thyroiditis). Are you taking any immune modulating drugs right now for MS? Some are associated with thyroiditis (interferon alpha, Interleukin-2).
I haven't been on any drug for MS for over ten years, only diet, exercise, vtiamin D and recently started high dose alpha lipoic acid. I'm looking to get into a new study using biotin to treat MS.

All this to say, check your thyroid regularly, especially if you're an older woman, as you might be suffering from hypothyroidism and not be aware. The same goes for people on medication to treat some autoimmune disease (not just MS), check your thyroid regularly as the new drugs can wreak havoc on your thyroid. Once diagnosed, it can be treated by an endocrinologist, which is where I am headed now.

Below, Jim Lowell of Adviser Investments makes the case for active investors given the need for stock selection in the current market environment. I agree these aren't markets for robo-advisors shoving you in the hottest ETFs. The only ETF I like now is the iShares 20+ Year Treasury Bond ETF (TLT) and that's where I put all my money and the money of my loved ones.

You can also watch a recent interview with Michael Sabia and François Cardinal here where he discusses the light rail project (in French).

Friday, August 11, 2017

Beware of the Hyperthyroid Market?

John Mellow of CNBC reports, Recent history says buy this 200-point dip in the Dow, but some fear it's different this time:
The Dow Jones Industrial average fell 204 points Thursday in its first drop of that point magnitude or greater since a 373-point shellacking in May. Before that, the benchmark had only fallen more than 200 points one other time this year, a 238-point drubbing on March 21.

This has been such a calm bull market that there's been only five single-day declines greater than 200 points by the Dow in the last 12 months.

Using hedge fund analytics tool Kensho, CNBC looked at what happened during the day and week following those five sell-offs. Here is what the Dow did the next day, on average, and its top winners and losers (click on image):


Here's its average performance one week out and top winners and losers (click on image):


The Dow was up 100 percent of the time one week out. (And note Apple leading the bounce again.)

So this "buy-the-dip" market has earned that mantra.

But some investors who have "bought the dip" recently are changing their tune this week because of new factors like over-the-top bullishness and the North Korea war of words initiated this week by President Donald Trump.

Doug Ramsey of The Leuthold Group believes a sell-off amounting to about 8 percent is ahead, citing seasonal weakness that typically comes around this time and an irrational surge in bullish sentiment.

"Conditions have slipped into place for at least a short-term correction," said Ramsey, the CIO of the firm.

Jonathan Krinsky, chief market technician at MKM Partners, wrote in a note to clients Thursday morning that, "While the major indices continue to give a sense of calm above the surface, there is a growing list of negative divergences."

And he cited the seasonal weakness as well, displaying this chart in his note (click on image):

Source: MKM Partners, Bloomberg

So some investors and market observers believe this could be the end of that buy-the-dip mentality.
In my last comment looking at when the tech bubble will burst, I stated are two big risks in the market right now:
  1. A major correction or even a meltdown unlike anything we have seen before as literally every risk asset is way overvalued.
  2. A 1999-2000 melt-up where stocks go parabolic led by tech giants and biotech, forcing fund managers to keep buying at higher mutltipes or risk severe underperformance.
I will let you read that comment in detail but suffice to say that right now, I see huge deflationary risks in the world which is why I truly believe US long bonds (TLT) offer investors the best risk-adjusted returns over the next year or longer and will prove to be the ultimate diversifier, protecting your portfolio from being obliterated as deflation roils all risk assets.

Since writing that comment, stocks and other risk assets got whacked mostly owing to geopolitical jitters due to tensions with North Korea, driving US long bond yields lower (and prices higher), but my bearish views had nothing to do with geopolitics, it was all about my macro views where I see a US slowdown followed by a global slowdown.

I didn't mean to scare people with my cataclysmic views but I think it's really important to properly understand the macro risks going forward because if you get it wrong, you're dead. And buying the dip in this market isn't as simple as before because the macro winds have shifted abruptly.

On Thursday, Bridgewater's Chairman and CEO Ray Dalio posted a comment on LinkedIn, Risks Are Rising While Low Risks Are Discounted:
There are returns, and there are risks. We think of them individually, and then we combine them into a portfolio. We think of returns and opportunities as coming from those things we’d bet on, and we think of risks as the adverse market consequences of us being wrong due to our being out of balance. We start with our balanced beta portfolio—i.e., that portfolio that would most certainly fund our intended uses of the money. Everyone should have their own based on their own projected uses of money, though more generally, it’s our All Weather portfolio. We then create a balanced portfolio of opportunity/alpha bets based on what we think is likely to happen. We then combine them.

We bet on the events/outcomes that we think we have an edge in understanding. For events/outcomes where we don’t think we have a particular edge—e.g., political events—we aim to construct our portfolio to be relatively neutral or balanced to those risks.

Risk and Volatility

As a rule, periods of lower risk/volatility tend to lead to periods of greater risk/volatility. That is reflected in our aggregate market volatility gauge (see below), and markets are pricing in volatility to remain low next year too (click on image).


As a related rule, people adapt to the circumstances they have experienced and are then surprised when the future is different than the past. In other words, most people are inclined to assume that the circumstances they have recently encountered will persist, which leads them to change what they are doing to be consistent with that recently experienced environment. For example, low-volatility periods in which credit is readily available tend to lead people to assume that it’s safe to borrow more, which leads them to lever up their positions, which contributes to greater volatility and hurts them when things change.

That appears to be the case now—i.e., prospective risks are now rising and do not appear appropriately priced in because of a) a backward looking at risk and b) corporate leveraging up has been high because interest rates are low relative to many companies’ projected ROEs and because past risks have been low. The emerging risks appear more political than economic, which makes them especially challenging to price in. Most immediately, during the calm of the August vacation season, we are seeing 1) two confrontational, nationalistic, and militaristic leaders playing chicken with each other, while the world is watching to see which one will be caught bluffing, or if there will be a hellacious war, and 2) the odds of Congress failing to raise the debt ceiling (leading to a technical default, a temporary government shutdown, and increased loss of faith in the effectiveness of our political system) rising. It’s hard to bet on such things, one way or another, so the best that one can do is be neutral to such possibilities.

When it comes to assessing political matters (especially global geopolitics like the North Korea matter), we are very humble. We know that we don’t have a unique insight that we’d choose to bet on. Most importantly, we aim to stay liquid, stay diversified, and not be overly exposed to any particular economic outcomes. We like to hedge our bets, though we are never completely hedged. We can also say that if the above things go badly, it would seem that gold (more than other safe haven assets like the dollar, yen, and treasuries) would benefit, so if you don’t have 5-10% of your assets in gold as a hedge, we’d suggest that you relook at this. Don’t let traditional biases, rather than an excellent analysis, stand in the way of you doing this (and if you do have an excellent analysis of why you shouldn’t have such an allocation to gold, we’d appreciate you sharing it with us).
I looked at the five-year weekly chart of the S&P Gold Trust ETF (GLD) and see it looks ready to climb higher here (click on image):


But given my deflationary views, I'm bullish on US bonds (TLT) and the US dollar (UUP) here which is why I would avoid gold altogether in a deflationary world (unless there is a major crisis of confidence in the future but we're not there yet).

In fact, I even  posted a comment on LinkedIn in response to Ray's comment which you can read below (click on image):


If you can't read it, I posted this:
Ray, back in 2004, I warned you global deflation is coming and you rightly asked me "what's your track record?". Thirteen years later, I'm still beating the global deflation drum. I don't like gold because I see a deflationary meltdown ahead, so I put all my money in US long bonds (TLT) two weeks ago, stopped trading biotechs (XBI), and been sleeping like a baby ever since. I suggest everyone else reading this comment follow my lead.
One of my great highlights of my short pension career was meeting Ray Dalio. He's imposing, tough, very sharp and he can be very abrasive but that's ok because while he sent me on my way with my balls in my mouth, at least I can say I met Ray Dalio and got under his skin (only got to meet Ray because Gordon Fyfe accompanied me on that meeting. I tend to irritate a lot of people, just ask Gordon.)

I also lied to you when I told you I've been sleeping like a baby lately after I recently put all my money in US long bonds (TLT) and stopped trading biotech (XBI) stocks.

You see, I haven't been feeling well all summer. I lost close to 30 lbs in a couple of months, had night sweats, heat intolerance, been more irritable than normal, extremely weak and haven't been able to sleep well at all.

Now, I was diagnosed with Mutltiple Sclerosis 20 years ago, so intitially I thought my MS was getting worse, but when I was losing weight rapidly and had night sweats, I freaked and was worried I had Lymphoma, so I went to do a battery of tests.

My blood tests showed I have hyperthyroidism (overactive thyroid) which is a condition in which your thyroid gland produces too much of the hormone thyroxine. The classic symptoms are the following:
  • Rapid heart rate and palpitations
  • Shortness of breath
  • Goiter (swelling of the thyroid gland)
  • Moist skin and increased perspiration
  • Shakiness and tremors
  • Anxiety
  • Heat intolerance and sweating
  • Increased appetite accompanied by weight loss
  • Insomnia
  • Irritability
  • Swollen, reddened, and bulging eyes (in Graves disease)
  • Occasionally, raised, thickened skin over the shins, back of feet, back, hands, or even face
  • In crisis: fever, very rapid pulse, agitation, and possibly delirium
  • Changes in menstrual periods
  • Difficulty concentrating
I have many of these symptoms except for changes in menstrual periods (lol). I am always hot, sweating profusely, my heart is beating like crazy, my eyes are bulging, and I wake up in the middle of the night starving and eating like crazy and still lost a lot of weight. And not to share too much information, but I have increased bowel urgency and frequency which is another classic sign of hyperthyroidism.

The image below shows you the symptoms of Grave's disease, an autoimmune condition which affects your thyroid, making it more active (click on image)


It's also important to note that hyperthyroidism is a lot less common than hypothyroidism which has the following symptoms:
  • Unexplained weight gain (even if you eat well and exercise)
  • Fatigue
  • Cold temperature intolerance
  • Muscle weakness, aches or stiffness
  • Joint pain or stiffness
  • Constipation
  • Dry skin
  • Thinning hair
  • Decreased heart rate
  • Depression
  • Memory loss
The autoimmune disease associated with hypothyroidism (under-active thyroid) is called Hashimoto's disease (click on image below):


[Note: Grave's disease is the autoimmune disease typically associated with hyperthyroidism and Hashimoto's disease is an autoimmune disease typically associated with hypothyroidism. It's tricky but your thyroid has to produce just enough thyroxine. Too much or too little leads to major health issues. Read about Hashimoto's thyroiditis here.]

I believe I have suffered from periods of both hypothyroidism and hyperthyroidism for a very long time (it alternates but now it's classic hyper) and because I have MS, I always chalked these symptoms up to MS. And I come from a family of doctors and all my friends are doctors and they too were surprised to hear I have an overactive thyroid.

It's not their fault, doctors often miss thyroid problems. Luckily, both thyroid conditions (hypo and hyper) can be treated by seeing an endocrinologist which is my next step. Left untreated, hyperthyroidism can bring about debilitating long-term effects, including osteoporosis and even blindness.

Bottom line: Always check your thyroid even if you have another condition, it can wreak havoc on your health and well-being.

As far as these markets, they too suffer from hyperthyroidism but they don't know it yet. And there is no endocrinologist in the world that can save these markets from global deflation, and the long-term effects will be equally devastating.

Hope you enjoyed this comment. If you know someone who has these symptoms I described above, or if you have them, please check your thyroid and get the necessary treatment.

I've been busy going to hospitals doing tests and I need to treat this as soon as possible so forgive me if I haven't been publishing my usual daily comments, I am wiped and don't feel well. Hopefully, once I get my thyroid under control, I will be back to my normal (less irritable) self.

I thank those of you who checked in on me and especially thank those of you who continue to support my blog through donations and subscriptions. I need to think about my next steps because blogging is a lot of work which is grossly underpaid and once I get my health under control, I am ready to do something else.

I have contacted a few organizations in Montreal and I would appreciate your help.

That's all from me, remember to always check your thyroid, and always take care of your health first and foremost.

Below, Barry James warns a correction is 'inevitable', even as the market looks happy on its surface. A 'herd mentality' has driven up valuations, and he warns there’s a 'supervolcano' waiting to erupt beneath a seemingly 'beautiful' market.

Also, I embedded a clip where a registered nurse discusses the differences between hypothyroidism and hyperthyroidism, including the causes, signs and symptoms, and treatments. Once again, if you think you have thyroid issues, get a blood test to be sure and get treated for it as soon as possible.




Tuesday, August 8, 2017

When Will the Tech Bubble Burst?

Ruchir Sharma, author of “The Rise and Fall of Nations: Forces of Change in the Post-Crisis World,” and chief global strategist at Morgan Stanley Investment Management, wrote an op-ed for the New York Times, When Will the Tech Bubble Burst?:
At the height of a market mania in 1967, the author George Goodman captured the mood perfectly, comparing it to a surreal party that ends only when “black horsemen” burst through the doors and cut down all the revelers who remain. “Those who leave early are saved, but the ball is so splendid no one wants to leave while there is still time. So everybody keeps asking — what time is it? But none of the clocks have hands.”

Every decade since, the global markets have relived this party. In the late 1960s the mania was for the “nifty 50” American companies like Disney and McDonald’s, which had been the “go-go” stocks of that decade. In the late 1970s it was for natural resources, from gold to oil. In the late 1980s it was stocks in Japan, and in the late 1990s it was the dot-com boom. Last decade, investors flocked to mortgage-backed securities and big emerging markets from Brazil to Russia. In every case, many partygoers were still in the market when the crash came.

Today, tech mania is resurgent. Investors are again glancing at a clock with no hands — and dismissing the risk. The profitless start-ups that were wiped out in the dot-com crash have consolidated into an oligopoly composed of leading survivors such as Google and Apple. These are giants with real earnings, yet signs of an irrational euphoria are growing.

One is pitchmen bundling investments with very different outlooks into a single package. Last decade they bundled Brazil, Russia, India and China to sell as the BRICs. More recently they packaged Facebook, Amazon, Netflix and Google as FANG, then, as names and prospects shifted, subbed in Alphabet, Apple and Microsoft to make Faama. Others are hyping the hottest tech companies in China as BAT, for Baidu, Alibaba and Tencent. Whatever the mix, acronym mania is usually a sign of bubbly thinking.

Seven of the world’s 10 most valuable companies are in the tech sector, matching the late 1999 peak. As the American stock market keeps marching to new highs — the Dow hit 22,000 this week — the gains are increasingly concentrated in the big tech stocks. The bulls say it is inevitable that Apple will become the first trillion-dollar company.

No matter how surreal the endgame, booms tend to begin with real innovation. In the past, manias have been triggered by excitement about canals, the telegraph and the automobile. But not since the advent of railroads incited market booms in the 1830s and 1840s has the world seen back-to-back booms like the dot-com bubble of the 1990s and the one we are in now.

The dot-com era saw the rise of big companies that were building the nuts and bolts of the internet — including Dell, Microsoft, Cisco and Intel — and of start-ups that promised to tap its revolutionary potential. The current boom lacks a popular name because the innovations — from the internet of things to artificial intelligence and machine learning — are sprawling and hard to label. If there is a single thread, it is the expanding capacity to harness data, which the Alibaba founder, Jack Ma, calls the “electricity of the 21st century.”

Market excitement about authentic technology innovations enters the manic phase when stock prices rise faster than justified by underlying economic growth. Since the crisis of 2008, the United States economy has been recovering at the rate of around 2 percent, roughly half the rate seen for much of the past century. The areas of growth are limited in this environment. Oil’s not very euphoric, with prices depressed, while regulators are forcing banks to keep the music down. In the most direct echo of 1999, technology is once again seen as the best party in town.

It is true that prices today are not quite as widely overvalued as in 1999. Large technology stocks are up 350 percent this decade, the low end of the range for the hot stocks from earlier booms, which saw gains of 300 to 1,900 percent. Only a few select technology companies — mainly the internet giants — are trading close to the valuations of the dot-com era, when the average price-to-earnings ratio for tech companies hit 50. The average ratio for that sector today is 18.

However, the scale of today’s tech boom is not readily visible because much of the investment action has moved into the hands of big private players. In 1999, nearly 550 start-ups went public, and after many ended in disaster, the government tightened regulation of public companies. In part to avoid that red tape, this year only 11 tech companies have gone public. Many are raising money instead from venture capitalists or private equity funds. Venture capitalists have poured more than $60 billion into the technology sector every year for the past three years — the highest flows since the peak in 2000 — and private equity investors say there has never been a better time to raise money.

These new private funding channels are creating “unicorns,” companies that haven’t gone public but are valued at $1 billion or more. Unicorns barely existed in 1999. Now there are more than 260 worldwide, with technology companies dominating the list. And if signs emerge that the privately owned unicorns are faltering, the value of publicly owned tech companies is not likely to hold up either.

We can never know when the end will come. Still, there are three critical signals to watch for.

The first is regulation. The tech giants are seen today as monopolizing internet search and commerce, and they are angling to take over industries such as publishing and automobiles, raising alarms at antitrust agencies in Europe and the United States. Fear that new internet technologies are doing more to waste time and brainpower than to increase productivity has already provoked a backlash in China, where officials recently criticized online gaming as “electronic heroin.” A regulatory crackdown on tech giants as either monopolies or productivity destroyers could pop the allure of tech stocks.

The other signals are more familiar. Going back to the “nifty 50” stocks of the 1960s, nearly every big market mania ended after central banks tightened monetary policy and many people who had borrowed to get in the game found themselves in trouble. The dot-com bubble peaked in 2000, after the Federal Reserve had increased interest rates multiple times. The current boom will likewise be at risk if an increase in inflation compels the Fed to raise interest rates beyond the modest rise the market currently expects.

Finally, watch for tech earnings to start falling short of analyst forecasts. The dot-com boom was driven in part by increasingly optimistic predictions for technology company earnings, and it imploded when earnings started to miss badly. Investors realized then that their expectations about profits from the internet revolution had become unreal.

Of course, no two booms will unfold exactly the same way. We are now eight years into this bull market, making it the second longest in history, behind only the run-up of the late 1990s. No bull market lasts forever, and while it is clear that we are entering the late stages of this cycle, it is impossible to say whether this moment is like 1999, or 1998 — or earlier.

The clocks have no hands, and the black horsemen may appear at any time.
It makes me nervous when I see the chief global strategist at Morgan Stanley write an op-ed pondering when the tech bubble will crash.

Why? Simply because typically bubbles go on a lot longer after some strategist writes these articles in a major newspaper, a lot longer.

There are two big risks in the market right now:
  1. A major correction or even a meltdown unlike anything we have seen before as literally every risk asset is way overvalued.
  2. A 1999-2000 melt-up where stocks go parabolic led by tech giants and biotech, forcing fund managers to keep buying at higher mutltipes or risk severe underperformance.
Risk managers often focus on the first risk but neglect the second one which is much more painful because it can last a lot longer than fund managers can stay solvent.

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

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

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

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

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

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

"But Leo, with rates near zero, it's a no-brainer, just buy more stocks as record low rates justify these valuations in tech stocks and in dividend stocks which have also run up a lot."

I guess there is an argument to be made that record low rates justify these valuations (the so-called Fed model of stocks) but I always begin my analysis with macro fundamentals, and they're not good.

In my last comment, I looked at the baffling mystery of inflation deflation, noting this:
Last week, I discussed why Alan Greenspan and others are wrong on bonds, alluding to six structural factors that lead me to believe we are headed for a prolonged period of debt deflation:
  1. The global jobs crisis: High structural unemployment, especially youth unemployment, and less and less good paying jobs with benefits.
  2. Demographic time bomb: A rapidly aging population means a lot more older people with little savings spending less.
  3. The global pension crisis: As more and more people retire in poverty, they will spend less to stimulate economic activity. Moreover, the shift out of defined-benefit plans to defined-contribution plans is exacerbating pension poverty and is deflationary. Read more about this in my comments on the $400 trillion pension time bomb and the pension storm cometh. Any way you slice it, the global pension crisis is deflationary and bond friendly.
  4. Excessive private and public debt: Rising government and consumer debt levels are constraining public finances and consumer spending.
  5. Rising inequality: Hedge fund gurus cannot appreciate this because they live in an alternate universe, but widespread and rising inequality is deflationary as it constrains aggregate demand. The pension crisis will exacerbate inequality and keep a lid on inflationary pressures for a very long time.
  6. Technological shifts: Think about Amazon, Uber, Priceline, AI, robotics, and other technological shifts that lower prices and destroy more jobs than they create.
These are the six structural factors I keep referring to when I warn investors to temper their growth forecasts and to prepare for global deflation.

Now, let me take a little detour here to teach people some very basic macro points which everyone seems to get wrong:
  • First, in an ultra low interest rate world, currency swings matter a lot. Why? When the US dollar takes a hit relative to the euro and yen, like it did since December, this means the euro and yen strengthen, which means tighter financial conditions and lower import prices in these regions as they are effectively importing deflation. The problem is Japan is stuck in deflation and the Eurozone isn't far behind (never mind the rosy headlines proclaiming deflation risk is removed in Europe, that's utter nonsense). In other words, given the deflationary headwinds in Japan and the Eurozone, they can't afford to see their currencies appreciate for a long period, it only reinforces more deflation at a time when they're desperately trying to escape it.
  • Second, and more importantly, the US leads the world. When the US economy is slowing -- and make no mistake, despite Friday's good jobs report, it is slowing -- it leads the rest of the world by six to nine months. So expect the US dollar (UUP) to rally relative to other currencies even if the Fed takes a pause from raising rates. Why? Because as the world ex-US slows, real rate differentials widen, making the US dollar that much more attractive. And if there is a full-blown financial crisis, then the flight-to-liquidity will support US bonds (TLT) and the dollar.
  • Third, as the US dollar gains relative to other currencies, US import prices will fall as the US imports global deflation. The threat then becomes a full-blown dollar crisis which I warned of late last year (it hasn't happened yet) and deflation coming to America which I discussed three years ago. 
  • Lastly, and equally important, talk of a bond bubble is just silly in a deflationary environment. Legions of hedge funds shorting JGBs in the 90s got wiped off the planet and legions of hedge funds shorting US Treasurys now and in the future will suffer the same fate.
In a deflationary environment, I remain long US long bonds (TLT) and the US dollar (UUP) and short cyclical risk assets, including energy, commodities, emerging market stocks, bonds and currencies and commodity currencies.

I tell all my friends and family to use the strength in the loonie to buy US assets now, particularly US long bonds (TLT) which will rally as long bond yields make a new secular low. Moreover, they will gain more as the US dollar gains on the Canadian dollar over the next year(s).

Why US bonds? Why not US or Canadian dividend stocks? Because their valuations are high and there's too much beta embedded in them.

More importantly, if a crisis hits us, only US long bonds will offer you the ultimate diversification and protect your portfolio from being obliterated.

I'm astounded at how many financial advisors and institutional investors just don't get it and buy the garbage that global growth is strong and inflation will roar back.
Now, getting back to Ruchir Sharma's comment, he cites inflation and the risks of the Fed raising rates as one of the three factors that will spell the end of this tech bubble.

He's out to lunch and I won't mince my words here. It's not inflation stupid, it's deflation and plunging rates whch will spell the end of the current tech and non-tech bubble. Period, end of story.

"But Leo, plunging rates are always good for stocks and home prices, right?" Wrong, wrong, wrong! Not when they are due to debt deflation and high unemployment, then plunging rates won't counteract the deadly effects of deflation, they will only reinforce them.

Folks, Ruchir Sharma is asking the wrong question. It's not when the tech bubble will burst, it's when will deflation come to America and obliterate all risks assets for a very, very long time.

You see, when the next crisis hits us, risk assets will get clobbered and stay low for a lot longer than even pessimists warn of. It will be a generational shift, unlike anything we've ever seen before.

There will be no more buying FANG stocks at whatever multiple, what I'm talking about is a crisis in capitalism, unlike anything we have ever lived through in the developed world.

"Leo, stop, you're scaring me with this Marxist doomsday talk." Alright, I'll stop here but there are limits to inequality and at one point, high structural unemployment and rising inequality fueled by rising pension poverty will threaten social democracies as we know them.

But for now, enjoy the tech bubble as tech stocks like Nvidia (NVDA) keep making record highs (click on image):


Just remember the laws of gravity apply to stocks too, and when macro winds turn south, tech high-flyers will get crushed.

On that note, Michael Kantrowitz at Cornerstone Macro put out a comment and video earlier today on why stocks are skating on thin ice this summer. Take the time to listen to him, he explains why the huge rally in large cap growth is not a good sign for the future.

Again, I recently put all my money in US long bonds (TLT) because while I made great money trading biotech (XBI) stocks in the first half of the year, I fear these high-beta high-flyers will get killed too when the next beta tsunami hits us.

I've been sleeping like a baby ever since I stopped trading biotech stocks but sometimes I get the urge to nimble here and there when I see moves like Fibrogen and other biotech stocks I track closely (click on image):


Still, while I like biotechs (XBI) a lot even in a deflationary world (they have pricing power), I need to remain disciplined and focused and let my macro views dictate my risk-taking behavior.

And right now, I see huge deflationary risks in the world which is why I truly believe US long bonds (TLT) offer investors the best risk-adjusted returns over the next year or longer and will prove to be the ultimate diversifier, protecting your portfolio from being obliterated as deflation roils all risk assets.

Let me end my comment by thanking those of you who take the time to donate and subscribe to my blog. I truly appreciate it and sincerely thank you for your support.

Below, Ruchir Sharma, Morgan Stanley, provides insight to the tech sector, stock valuations and earnings. Keep my comments above in mind as you listen to his views.

Monday, August 7, 2017

The Mystery of Inflation Deflation?

Kopin Tan of Barron's reports, The Baffling Mystery of Inflation Deflation:
The stock market has gone more than a year without a 5% pullback, but a correction isn’t the only thing missing in action. What’s also baffling is the mystery of disappearing inflation.

A correction, like your misplaced car keys, will turn up sooner or later. But inflation’s absence has become especially glaring after the long, loud drum roll anticipating its appearance—what with our economic expansion entering its ninth year, a well-publicized synchronized global recovery, the Trump administration’s promise of fiscal fireworks, and tightening policies by central banks from the U.S. to China. Yet the core consumer price index eked out a year-over-year increase of just 1.7% in June, the slowest in two years. Stripping out shelter costs, core inflation grew just 0.6%, the most sluggish rate since 2004. Personal-consumption expenditures are growing at a 1.4% pace, shy of the Federal Reserve’s 2% target.

You may think it’s perverse to wish for inflation, and life’s necessities—a nice house, stiff drinks, Orlebar Brown swim trunks—seem only to get more expensive, not less. But stable inflation lets businesses hike prices of the goods and services they sell, and raise wages. It’s no coincidence the labor market is tight and unemployment is down to 4.4%, but wages are growing at a glacial pace of about 2.5%.

For a stock market braving new peaks—the Standard & Poor’s 500 index just snagged its 27th record high of 2017—weak inflation reinforces concerns that the Fed is tightening even when our slow-growth, low-interest-rate economy is going nowhere fast.

Why does inflation keep falling short of expectations? For one thing, “excess debt encourages saving, not spending,” notes Michael Hartnett, Bank of America Merrill Lynch’s chief investment strategist, who cites data from the Institute of International Finance showing global debt hitting an all-time high this year of $217 trillion, roughly 327% of global gross domestic product. Next, he adds, aging populations also tend to save more and spend less, and even though demographic trends here are sprightly compared with, say, Japan and Europe, over the past decade the annual growth in the U.S. working population has shrunk from 1.3% to just 0.5%.

On top of that, automation, robots, and artificial intelligence are pressuring human wage expectations. Technology disruption may one day prompt policy changes that could include, for example, taxing robots or levying higher taxes on Silicon Valley profits, Hartnett notes. For now, he says, “corporations continue to emphasize cost-cutting over risk-taking, and wide swaths of the labor market see that their ability to maintain wages and incomes are under enormous threat from technology.”

The worrisome thing is how inflation seems to have befuddled central bankers. Fed chair Janet Yellen has said that weak recent inflation readings are merely “transitory,” and she pointed to a price war in mobile phone services and a decline in prescription drug prices as momentary inflation depressants. But the Fed has brushed aside feeble inflation as transient year after year after year, and still inflation has yet to catch up to the Fed’s 2% goal. Back in 2015, for example, Yellen said inflation was held back by collapsing oil prices and weakening imports in the face of our strong dollar. Well, energy prices have since rebounded from early-2016 depths, and the dollar just declined to a 30-month low against the euro. But there’s always something else, and new culprits springing forth to hold inflation hostage.

IN THE COMING MONTHS, expect the Fed to be extra sensitive to any whiff of faltering growth. With inflation already below target, the Fed has less cover to continue its painstakingly telegraphed plan to raise rates and shrink its balance sheet. At first, this will cheer a market accustomed to the addictive fix of easy money. But the Fed has fewer tools at its disposal if growth starts to flag, what with interest rates already low. On the other hand, if inflation were to start climbing, financial markets—which are pricing in only a 39% chance of one more rate hike through year end—just might be startled.

It’s a good thing the economy is growing, but how much of that growth is already factored into rising stock prices? Companies are on track to report second-quarter profit growth of 9.6%, compared to 15.3% in the first quarter. So far this earnings season, companies that beat targets have eked out average gains of 0.6% in the first session after reporting, notes Bespoke Investment Group. But companies merely meeting their forecasts slipped 2.7%, while those missing their marks were drubbed 4.6%.

In June, retail sales grew 1.2% year over year, down from 2.1% in May, and it remains to be seen if Washington can deliver the promised tax cuts and fiscal stimulus before growth slows further. In a July survey of global fund managers conducted by BofA Merrill Lynch, the percentage who expect faster global growth over the next 12 months shrank to 38%, down from 62% back in January. Profit expectations are rolling over as well. Only 41% see profits improving over the next 12 months, the lowest since the election and down from 58% in January.

Against this backdrop, we’re crowding back into what we fear could become scarce. Big tech stocks, after a brief bout of profit-taking in late June, have regained their swagger and market leadership and are up 23% this year. Growth stocks in the S&P 500 nudged back ahead of their value counterparts to reach another all-time high and are up 15.8% this year, compared with 4.5% for value stocks. Inflation may be in retreat, but in the stock market, prices seem only to march higher.
There is no baffling mystery of inflation to me, global deflation is coming our way and those who aren't prepared, like the lambs who think stock markets are headed higher and those shorting volatility thinking it will remain low forever, will get slaughtered (credit investors get it).

Last week, I discussed why Alan Greenspan and others are wrong on bonds, alluding to six structural factors that lead me to believe we are headed for a prolonged period of debt deflation:

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

Now, let me take a little detour here to teach people some very basic macro points which everyone seems to get wrong:
  • First, in an ultra low interest rate world, currency swings matter a lot. Why? When the US dollar takes a hit relative to the euro and yen, like it did since December, this means the euro and yen strengthen, which means tighter financial conditions and lower import prices in these regions as they are effectively importing deflation. The problem is Japan is stuck in deflation and the Eurozone isn't far behind (never mind the rosy headlines proclaiming deflation risk is removed in Europe, that's utter nonsense). In other words, given the deflationary headwinds in Japan and the Eurozone, they can't afford to see their currencies appreciate for a long period, it only reinforces more deflation at a time when they're desperately trying to escape it.
  • Second, and more importantly, the US leads the world. When the US economy is slowing -- and make no mistake, despite Friday's good jobs report, it is slowing -- it leads the rest of the world by six to nine months. So expect the US dollar (UUP) to rally relative to other currencies even if the Fed takes a pause from raising rates. Why? Because as the world ex-US slows, real rate differentials widen, making the US dollar that much more attractive. And if there is a full-blown financial crisis, then the flight-to-liquidity will support US bonds (TLT) and the dollar.
  • Third, as the US dollar gains relative to other currencies, US import prices will fall as the US imports global deflation. The threat then becomes a full-blown dollar crisis which I warned of late last year (it hasn't happened yet) and deflation coming to America which I discussed three years ago. 
  • Lastly, and equally important, talk of a bond bubble is just silly in a deflationary environment. Legions of hedge funds shorting JGBs in the 90s got wiped off the planet and legions of hedge funds shorting US Treasurys now and in the future will suffer the same fate.
In a deflationary environment, I remain long US long bonds (TLT) and the US dollar (UUP) and short cyclical risk assets, including energy, commodities, emerging market stocks, bonds and currencies and commodity currencies.

I tell all my friends and family to use the strength in the loonie to buy US assets now, particularly US long bonds (TLT) which will rally as long bond yields make a new secular low. Moreover, they will gain more as the US dollar gains on the Canadian dollar over the next year(s).

Why US bonds? Why not US or Canadian dividend stocks? Because their valuations are high and there's too much beta embedded in them.

More importantly, if a crisis hits us, only US long bonds will offer you the ultimate diversification and protect your portfolio from being obliterated.

I'm astounded at how many financial advisors and institutional investors just don't get it and buy the garbage that global growth is strong and inflation will roar back.

This morning, Bloomberg reported that investors just made a big bet on global growth and a soft dollar, loading up on industrials (XLI). Bad move, I'm short industrials and while they have made impressive gains over the last year, now is the time to take your profits, underweight and/ or short them (click on image):


Once again, let me show you my number one macro conviction trade on a risk-adjusted basis going forward, long US long bonds (TLT) and stay long over the next year and possibly longer (click on image):


Let me also take this opportunity to once again plug the research of Francois Trahan and Michael Kantrowitz at Cornerstone Macro. Earlier today, they wrote a great report on what they're watching which is a must read for all investors, especially institutional investors (click here to subscribe to their research).

In an email to me on July 21st when I shared my macro conviction calls, Francois shared this with me: "We put a 1.5% target on the 10-year in our outlook piece back in January ... all 51 forecasts on Factset are calling for higher yields." I replied "Yup, I remember you in Montreal (in January), agree completely and yields might even go lower than your forecast."

In fact, let me make a bold forecast here: Yields on the 10-year Treasury note are headed below 1% and might touch 0.5% or head even lower if a global deflationary crisis develops.

Am I sounding too bearish, discounting the possibility of another 1999-2000 melt-up rally in risk assets where they go parabolic? Maybe, but I recently put all my money in US long bonds (TLT) because while I made great money trading biotech (XBI) stocks in the first half of the year, I fear these high-beta high-flyers will get killed too when the next beta tsunami hits us (plus I've been sleeping like a baby ever since I stopped trading biotechs).

Let me end this comment by plugging a family friend of mine, Nicolas Papageorgiou, professor of finance at HEC Montreal, who is also a VP at Fiera Capital, a Montreal-based asset manager founded by Jean-Guy Desjardins, a legend in the industry.

Jean-Guy and I have very different views on the energy sector and the S&P/TSX (he is bullish on both, I am short) but there's no denying he's an astute businessman who isn't afraid to take risks, grow by acquisition and he hires very smart people like Nicolas and Nadim Rizk, one of the best Canadian portfolio managers you probably never heard of and a nice guy to boot (just like Nicolas).

In fact, Nicolas and Nadim are my two favorite people at Fiera Capital and are living proof that it pays to diversify and hire some ethnics along the way (don't be scared, even though our names sound different, we won't hurt you). Fiera also hired Heather Cooke away from Unigestion and she's now the Deputy CIO (another example that it pays to diversify).

Below, Fiera Capital Vice President Nicolas Papageorgiou discusses how the Defensive Global Equity Fund has performed year-to-date, the strategy's key differentiators against peers, as well as the fund's current level of risk overlay.

To all the big pensions and other large institutional investors who regularly read this blog, take the time to meet Nicolas, not only does he really know his stuff, he's also extremely nice and will help you manage your asset allocation decisions in what will prove to be a very challenging time for markets in the years ahead as global deflation takes over, crushing risk assets across the spectrum.

Friday, August 4, 2017

America's Corporate Pension Disaster?

Brandon Kochkodin and Laurie Meisler of Bloomberg report, S&P 500’s Biggest Pension Plans Face $382 Billion Funding Gap:
People who rely on their company pension plans to fund their retirement may be in for a shock: Of the 200 biggest defined-benefit plans in the S&P 500 based on assets, 186 aren’t fully funded. Simply put, they don’t have enough money to fund current and future retirees. The situation worsened for more than half of these funds from fiscal 2015 to 2016. A big part of the reason is the poor returns they got from their assets in the superlow interest-rate environment that followed the financial crisis. It’s left a hole of $382 billion for the top 200 plans.

Of course, the percentage of workers covered by traditional defined benefit plans—those that pay a lifetime annuity, often based on years of service and salary—has been declining for decades as companies shift to defined contribution plans such as 401(k)s. But each time a pension plan is terminated, canceled or altered, thousands of workers are affected.

Last month, the 70,000 participants in the United Parcel Service Inc. pension plan learned they won’t earn increased benefits if they work after 2022. Late last year DuPont Co. announced it would stop making payments into its pension plan for 13,000 active employees, and Yum! Brands Inc. offered some former employees a lump-sum buyout to offload some of its pension liabilities. General Electric Co. has a major problem. The company ended its defined benefit plan for new hires in 2012, but its primary plan, covering about 467,000 people, is one of the largest in the U.S. And at $31 billion, GE’s pension shortfall is the biggest in the S&P 500.
Below, you will find two charts related to this article (click on images):



I've already covered how GE botched its pension math and now I'd like to widen the lens to look at the state of US corporate pension plans, and it's not good.

Sonali Basak, Katherine Chiglinsky, and Brandon Kochkodin of Bloomberg report, Corporate Employers Flee Pensions With Gap Topping $375 Billion:
The vast majority of S&P 500 companies don’t have enough money set aside to meet all their obligations to current and future retirees. There’s a total gap of at least $375 billion for the 200 largest plans. This is how they got here.

1975 to 1999

Assets in U.S. pension plans go from $186 billion to more than $2 trillion. A booming stock market helps the funds grow, since many are largely invested in equities (click on image).


2000 to 2005

The dot-com bubble bursts and markets tumble, pushing many big corporate pension plans into the red after having a surplus. Bankruptcies of companies including United Airlines Inc. put a burden on the Pension Benefit Guaranty Corp., the government agency that backstops plans.
2006

President George W. Bush signs the Pension Protection Act, which promises to make pensions safer—and less likely to end up in the hands of the PBGC.

2008

The new law puts stricter funding requirements on companies with plans but comes just in time for the financial crisis and a brutal recession. Pension plans lose about 15 percent of their value in a single year.

Post-Crisis

The market climbs back, though not enough to make pensions whole. That’s partly due to low interest rates: The accounting value of a pension liability rises when rates fall, because it becomes more difficult to earn the money needed to meet future costs. Companies are also spending money on stock buybacks and acquisitions to boost shareholder returns, sometimes at the expense of pension obligations. General Electric Co. has spent $45 billion on buybacks in recent years—and has a pension shortfall of $31 billion. The company says it will put $3 billion into its plan in 2017 and 2018 (click on images).



Now

Companies are eager to get out of the pension business. Most prefer 401(k) plans, where the employee alone bears the risk of falling short at retirement. More are also offloading their pension plans, paying insurance companies to take them on instead. Only about two dozen companies in the S&P 500 have overfunded pensions. Nine of them are banks.
A few observations from me:
  • Pensions are all about matching assets and liabilities and since the duration of assets is much lower than the duration of liabilities, the decline in rates has disproportionately hurt private and public pensions because liabilities have grown a lot faster than assets.
  • Unlike public pensions which use an assumed rate-of-return of 7% or 8% to discount future liabilities, corporate pensions use a market rate based on corporate bond yields (see below). This effectively means that the way American corporations determine their future liabilities is a lot stricter and more realistic than the way US public pensions determine their liabilities.
  • Companies hate pensions. Instead of using money from corporate bonds to top up their pensions, they prefer using these proceeds to buy back shares, rewarding their investors and propping up executive compensation of their senior managers.
  • The pension crisis is deflationary and will only ensure low rates for a lot longer. Shifting out of defined-benefit plans into defined-contribution plans will only exacerbate pension poverty.
Now, let me thank Mathieu St-Jean, Absolute Return Manager at CN Investment Division, for bringing the top article to my attention. I commented on his LinkedIn post but lost it and there was a very nice actuary who corrected me, stating the discount rate corporate pensions use is A or AA, not AAA bond yields.

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

Lastly, following my comment on HOOPP's warning of a crisis, Bernard Morency, the former Executive VP of Depositors at la Caisse, sent me this:
On the issue below concerning corporations getting out of the pension business and letting Federal and States (provinces) handle it. As you know, I have been an advocate of a better C/QPP. However, don’t you think that, especially in the US, the States have proven that they are more unfunded and, perhaps, have botched pension math even more than corporations? So we would need to be especially careful if we were to ask them to do more.
Excellent point and let me clarify something, my recommendation is to have large, well-governed public pensions handle all the pension needs of a society. If they don't get the governance right, then state pensions shouldn't be managing corporate pensions. Period, end of discussion.

But clearly America has a public and private pension problem and it is only getting worse, leaving millions exposed to reduced pensions and pension poverty.

And make no mistake, America's pension crisis is a big part of the $400 trillion pension time bomb threatening the global economy and it is deflationary and bond friendly.

Below, a YouTube clip on America's pension crisis which covers an important topic. Even though I don't agree with everything, watch it, he covers the main points.