Wednesday, March 22, 2017

OPTrust Punching Above its Weight?

Kirk Falconer of PE Hub Network reports, OPTrust punches above its weight with private equity strategy:
OPTrust has greatly expanded its private equity program, deploying a strategy that gives the mid-sized pension fund access to opportunities usually available only to larger institutions.

OPTrust, which invests on behalf of OPSEU Pension Plan, the retirement system for about 90,000 Ontario public employees, this week reported a net return of 6 percent for 2016. Net assets grew to more than $19 billion from $18.4 billion in 2015.

Overall numbers were boosted by a strong performance in the PE portfolio. PE investments returned a net 20.6 percent last year, up from 14.4 percent in 2015.

These results cap a major five-year increase in OPTrust’s PE allocation. At the end of 2016, the portfolio held nearly $1.6 billion in assets, more than triple the amount in 2012. Private equity’s share of total assets rose in this period to 9 percent from 4 percent. OPTrust’s notional target is 15 percent.

OPTrust Managing Director Sandra Bosela, who heads the global PE group, told Buyouts that most of the growth owes to a strategic shift favouring direct deals and co-investments.

Prior to 2012, the main focus of OPTrust’s PE portfolio was funds and secondaries, with direct activity accounting for 20 percent of assets, Bosela noted. By 2016, the direct share was 48 percent.

Bosela, formerly a general partner with 15 years of experience, joined OPTrust Private Markets Group in 2012 to develop the PE strategy and ramp up direct investing. She says the result is an ability to “punch above our weight.”

“I’m pleased with the progress,” Bosela said. “Our strategy has been designed to carve out a niche that leverages our size and includes more direct, actively managed investments. It has opened doors for us and created access to deal flow that’s typically available only to our much larger peers.”

Deals plus funds

OPTrust is targeting a 50:50 balance between the portfolio’s direct and fund sides, Bosela said. That’s because many of the best opportunities for co-underwriting deals come from a core group of fund partners.

Opportunities are also sourced with “like-minded partners,” Bosela said. They include a range of market players, such as PE firms, strategic investors, financial players and business owners.

Drawing on these sources, OPTrust has increased both the pace and range of its mid-market buyouts and other PE transactions in North America, Europe and developed Asia.

Disclosed examples include OPTrust’s 2014 investments alongside Altas Partners in St. George’s University, a Grenada medical school, and alongside CDCM in Skybus, an Australian airport transit service.

Over 2014-2015 it also joined Imperial Capital Group in backing U.S. home-alarm monitor Ackerman Security Systems and Canadian dental network Dental Corp.
John Groenewegen, Partner, Osler, Hoskin & Harcourt LLP.

In-house resources

OPTrust’s experience may provide a model to some other small and mid-sized pension funds looking to expand their PE allocations.

John Groenewegen, a partner at law firm Osler, Hoskin & Harcourt, says OPTrust’s private equity program has “put them in a position they would not otherwise be in.”

Groenewegen, who advises pension-fund clients, says a central factor in OPTrust’s approach is in-house resources that include “professional deal-makers.”

“OPTrust has invested in the right funds, and an experienced team has ensured it can act quickly and make decisions quickly,” he said. “That’s key to being a good deal partner, to being invited back.”

Bosela agrees, noting that OPTrust’s ability to be “a value-adding partner, one that can execute shoulder-to-shoulder, even on complex transactions” is essential to its direct investing. “We’re not the big elephant in the room,” she says. “We must offer something other than our money.”

Not standing still

OPTrust aims to place more capital in the months ahead, Bosela said. She is mindful, however, of an “overheated” market environment, fuelled by high values and “heightened levels of dry powder.”

Market frothiness has reinforced a disciplined, selective focus to investments, Bosela said. OPTrust also will give more emphasis to private debt and long-term equities to help balance the portfolio and reduce volatility.

Bosela says OPTrust is not “standing still” with the PE program, but will instead continue to add to its capabilities. For example, it is exploring “proactive origination,” intended to accelerate independent sourcing of direct opportunities.

OPTrust PMG has a team of 18 located in offices in Toronto, London and Sydney, Australia. Overseeing nearly $4 billion in assets, it is co-led by Bosela and Gavin Ingram, a managing director and head of the global infrastructure group.
I recently covered how OPTrust is changing the conversation, emphasizing its funded status first and foremost instead of its annual results.

In that comment, I covered a conversation with OPTrust's President and CEO, Hugh O'Reilly, and its CIO, James Davis, where we spoke at length about the funded status and shift in investment philosophy.

When I went over some of their private market investments, I noted the following:
In private equity, they invest and co-invest with funds but as James told me, "they're not looking to fill buckets" and will use liquid markets to fulfill their allocation to illiquids if they're not fully invested.

In infrastructure, they have done extremely well by investing primarily directly through co-sponsored deals with their strategic partners. Their focus is on the mid-market, with cheque sizes of $100M to $150M and where there is less competition.  
After reading the article above, I noted the following on LinkedIn (click on image):


If you can't read it, here it is again:
Agreed, Sandra Bosela has done a great job expanding co-investments at OPTrust. As far as "proactive origination", that gets tricky because a) it's hard to source great deals and b) you don't want to compete with your GPs because they will end up seeing you as a competitor and cut you out of co-investment opportunities. Still, Mrs. Bosela should be commended for her work at OPTrust and she has the right game plan and strategic thinking.

The truth is OPTrust is punching above its weight in private equity and other activities but just like everyone else, there are limits to what Canada's mighty PE investors can do in terms of "proactive origination" in direct private equity deals.

Most direct investing at Canada's large pensions is done via co-investment opportunities the general partners (GPs) offer their limited partners (LPs, ie. pensions and other institutional investors).

Even though LPs pay big fees for comingled funds, co-investments have little or no fees but they require expertise from the pension staff that needs to quickly evaluate these larger transactions before investing in them.

In fact, John Groenewegen alluded to this: “OPTrust has invested in the right funds, and an experienced team has ensured it can act quickly and make decisions quickly,” he said. “That’s key to being a good deal partner, to being invited back.”

And Bosela is right, OPTrust’s ability to be “a value-adding partner, one that can execute shoulder-to-shoulder, even on complex transactions” is essential to its direct investing. “We’re not the big elephant in the room,” she says. “We must offer something other than our money.”

In order to expand your co-investments to lower the overall fees you pay in private equity, you need to a) invest in the right funds and b) have an experienced team to quickly evaluate co-investment opportunities.

It sounds easy and straightforward but it isn't. If your pension fund doesn't have the right governance to attract and retain qualified staff, you can forget all about expanding direct investments in private equity by gaining access to more co-investment opportunities.

So, first you need to choose the right funds and second you need to have very qualified people on your team to evaluate co-investment opportunities.

And judging by the outstanding long-term returns, Bosela and her team are good at both. She's also right to fret about the current conditions in private equity which I alluded to on Friday when I discussed why there's no luck in Alpha Land:
[...] it's not just hedge funds. The same thing is going on in private equity where there's a mountain of dry powder and the market return differential over public markets is narrowing:
Private equity firms had as much as $1.47 trillion in funds available to invest at the end of 2016, and debt capital was also readily available to bolster their investments. Still, a situation of rising asset prices, together with fierce competition for these assets in an environment overcast with a possibility of an upcoming recession that could drive down prices, made it difficult to close deals, according to an annual global private equity report from Bain & Company. These firms are cautious about whether today’s deals will bring them to their targeted returns. Banks are also wary of financing big deals.

According to Hugh MacArthur, head of global private equity with the Boston management consulting firm, “Capital superabundance and the tide of recent exits drove dry powder to yet another record high in 2016. Shadow capital in the form of co-investment and co-sponsorship could add another 15% to 20% to that number. While caution about interest rates remains, there is a general expectation that debt will remain affordable. As a result, deals won’t be getting any cheaper.”

Investors continued to show interest in private equity in 2016, and these firms raised $589 billion globally, just 2% shy of the 2015 total. One 2016 trend to note is the rise in “megabuyout” funds that raised more than $5 billion each, with 11 such funds raising a total of $90 billion. These funds appear particularly appealing to institutional investors who want to deploy large amounts of money into private equity, the management consulting firm reports.

And an overall decline in the net asset values of buyout firms, as their distributions to investors outpaced their new investments plus the value of their existing holdings, meant that some investors found themselves short of their targeted private equity allocation. For instance, the Washington State Investment Board pension fund found its private equity allocation down to 21% in 2016, from 26% in 2012. This created a positive environment for private equity fundraising in 2016, but the industry is apprehensive that this strong pace cannot last for too long, as a recession and a stalling stock market, for instance, could upset the strong dynamics.

The buyout market started off slow in 2016, as the Chinese stock market bust, declining oil prices and the uncertainty regarding Brexit in Europe all had an impact. In North America, the market did not recover momentum and the total number of deals for the year was down 24%, with deal value off 16%. In Europe, there was a more moderate drop off.

Bain finds that there is a potential for almost 800 public companies to be taken private in buyouts, but expects a much lower level of actual public-to-private buyouts going by historical activity. While returns on private equity buyouts continue to outshine the returns on public markets, the gap is closing, as it is getting harder for private equity to find outsize returns on undervalued assets in today’s more benign economic environment.

Private equity investors have also settled into longer holding periods of about five years for their investments, and this state of affairs is likely to endure for the near term. Historically, these firms have held on to assets for three to five years, but this period was pushed up in the aftermath of the financial crisis as firms had to nurse their assets over a slow recovery period, the management consulting firm reports.

In fact, deals that private equity firms were able to quickly flip over, holding onto them for less than three years, made up a mere 18% of private equity buyouts in 2016, compared to a 44% share in 2008.
No doubt, these are treacherous times for private equity and there is a misalignment of interests there too. Just ask CalPERS, it's experiencing a PE disaster even if it's been completely misconstrued in the popular blog naked capitalism.

I recently had a chance to talk to Réal Desrochers, the head of CalPERS's PE program, and he told me he was concerned about the wall of money coming into private equity from super large sovereign wealth funds, many of which aren't staffed adequately but just write "huge cheques" to private equity funds (and hedge funds).

It's a recipe for disaster and it all reminds me of what Tom Barrack said in October 2005 when he cashed out before the crisis hit:
"There's too much money chasing too few good deals, with too much debt and too few brains." The amateurs are going to get trampled, he explains, taking seasoned horsemen, who should get off the turf, down with them. Says Barrack: "That's why I'm getting out." 
Every large and small  institutional investor playing the cheque writing game should post this quote in their office along with my favorite market quote by Gary Shilling often attributed to Keynes: "The market can stay irrational longer than you can stay solvent."

As far as private debt, it's an increasingly popular asset class among Canada's large pensions, including PSP which is "playing catch-up" to its large peers in this activity.

I will end it there and just say that it's refreshing to see how OPTrust is punching above its weight in private equity and other activities. It's not always size that matters, you can differentiate yourself in other ways as long as the governance is right.

Below, Bain & Company partner Graham Elton talks about the challenges that private equity firms are currently facing. CNBC’s Annette Weisbach reports from Berlin’s SuperReturn conference in late February. Very interesting discussion, well worth listening to his comments on strategics, IPO markets and exits.

Tuesday, March 21, 2017

CPPIB Looking to Raise its Stake in China?

Geoff Cutmore and Nyshka Chandran of CNBC report, Canada Pension Plan looks to raise its bet on China:
China's gradual market liberalization may be good news for Canadian pensioners.

Canada Pension Plan Investment Board (CPPIB), the country's largest pension fund, currently has 4 percent of its portfolio in the mainland — a figure that president and CEO Mark Machin said is too low for a globally diversified portfolio such as his.

But he plans to increase that share as the world's second-largest economy opens itself up.

"We want to significantly increase our investment here over the long term," he said, explaining that his fund is "substantially" underweight relative to GDP, but not necessarily relative to available market cap.

Last month, the People's Bank of China allowed foreign investors to hedge bond positions in the foreign exchange derivatives market — a move that many strategists deemed significant to overall market reform.

"China is now by many measures the third-biggest bond market in the world at around $7 trillion, so allowing that to be more accessible to capital is yet another aspect of making this a more investable place," Machin told CNBC at the China Development Forum in Beijing.

"We're value investors and we're super long term. We like to say a quarter for us is 25 years, not three months," Machin said. "We don't necessarily need our money back for immediate use, so I think we're seen as relatively friendly capital, and therefore our access is reasonably good here."

CPPIB is particularly big on Chinese e-commerce and despite the dominance of giants such as Alibaba and Tencent, Machin said he believes the sector remains exciting.

Below those large behemoths is an ecosystem of start-ups, Machin explained: "The ecosystem around these large companies is part of the secret source of innovation in this country...China's been very thoughtful about creating the ingredients of innovation, which is creating more opportunities for all types of companies, whether it's e-commerce or others, to bloom."

As a long-term investor in a fast-changing market, it's key for CPPIB to speedily identify early-stage trends, he continued.

"It now takes very little money to develop a company given the amount of cloud computing capacity...you can get a company some market for very little money, very very quickly and have a very disruptive impact."
Last week I discussed why the Caisse and CPPIB are investing in Asian warehouses in Singapore and Indonesia noting the following:
I think it's pretty self-explanatory. The Caisse and CPPIB are betting on the demand from the rise of e-commerce and a burgeoning middle class in southeast Asia. This is a long-term bet and if you've been paying attention to e-commerce trends in North America, you can bet the exact same thing will happen in Asia but with exponential growth.

Canada's large pension funds are competing with large private equity firms for these logistic warehouses. They not only provide great growth potential, they are pretty much all leased up and will provide stable cash flows (rents) over a very long period.
As a burgeoning middle class develops in China and Southeast Asia and their service economy picks up, it will present long-term growth opportunities in many areas, especially e-commerce.

Let me remind you in public markets, CPPIB made a huge windfall off the Alibaba IPO a few years ago but that decision didn't happen overnight. It took years and boots on the ground to nurture that investment.

The article above quotes CPPIB's CEO Mark Machin as stating: "China's been very thoughtful about creating the ingredients of innovation, which is creating more opportunities for all types of companies, whether it's e-commerce or others, to bloom."

I will trust Mark's judgment on this but my own personal money is all invested in US stocks and I think it will only be invested in US stocks for the rest of my life, especially if the new Canadian federal budget announces higher taxes on capital gains and dividends. In my opinion, there is no other country that competes with the US when it comes to real innovation.

And let's not forget, China is a communist country experimenting with "controlled capitalism". This means capital isn't allocated efficiently across various sectors and there is way too much government interference at all levels of the economy.

What the Chinese have managed to do is create a massive overinvestment bubble which  threatens economic growth there. In fact, the OECD recently warned that China should urgently address rising levels of corporate debt to contain financial risks as it tries rebalance the nation’s economy:
Beijing should also step up efforts to retire “zombie” state firms in ailing industries to help channel funds to more efficient sectors and enhance the contribution of innovation in the economy, the organisation said its latest survey of China’s economy.

“Orderly rebalancing requires addressing corporate over-leveraging, overcapacity in real estate and heavy industries and debt-financed overinvestment in asset markets,” the report said.

It forecast China’s economy would grow 6.5 per cent this year and 6.3 per cent in 2018.

The report warned of mounting financial risks as enterprises are heavily indebted, while housing prices have become “bubbly”.

Corporate debt is estimated at 175 per cent of GDP, among the highest in emerging economies, climbing from under 100 per cent of GDP at the end of 2008, the report said.

“Soaring property prices in the largest cities and leveraged investment in asset markets magnify vulnerability and the risk of disorderly defaults,” it said. “Excessive leverage and mounting debt in the corporate sector compound financial stability problems, even though a number of tax cuts are being implemented to reduce the burden on enterprises.

Alvaro Santos Pereira, director of the country studies division at the OECD’s economics department, said at a briefing on the report: “Although the risks are rising, the firepower in the Chinese government is big enough and if there’s a problem, it’s able to sort it out.”

The report called for better and more timely fiscal data releases and to expand funding in health and education. Monetary policy should rely more on market-oriented tools and less on targeted government policy, it said.

China is trying to boost the services sector and encourage greater innovation in the economy, partly through promoting greater entrepreneurship and the commercial use of the internet.

Official data shows more than 100,000 new firms were registered each day last year in China, but the report said there were too many unviable firms and the progress on scrapping zombie state-run companies was modest.

It cited a research report published last year saying that nearly half of steel mills and half of developers were making losses, but could still obtain loans. Zombie companies, mainly state-owned enterprises in industries plagued by excess capacity, have aggravated credit misallocation and dragged down productivity, the report said.

The State-owned Asset Supervision and Administration Commission said last year it aimed to close 345 zombie firms in the coming three years. The report said the number was “rather modest” given that the commission controls about 40,000 companies.

It added that the government should remove implicit guarantees to state firms as a way to stop corporate debt from piling up and that bankruptcy laws should be improved to help phase out zombie state firms.

China is increasing spending on research and development, but innovation does not significantly contribute to growth, the report said. Despite the soaring number of patents, “only a small share are genuine inventions”. The utilisation rate of university patents is only about five per cent compared to 27 per cent in Japan.

“Only a fraction of Chinese patents are registered in the United States, the European Union and Japan and Chinese researchers are weakly linked to global networks,” the report said. Margit Molnar, chief China economist and lead author of the report, added: “The internet should be faster and cheaper.”

The report suggested government support for innovation should extend to more sectors rather than strategically important projects and high-tech industries.

The OECD has 35 member countries, with China a strategic partner.

The organisation has a stringent set of criteria for membership based on data transparency and other factors including oil reserve levels.

The attraction of membership for China has waned as it favours involvement with other international organisations, including the International Money Fund and the G20 group of industrialised nations.

“The OECD is no longer a rich men’s club. It is important the OECD is becoming more and more global because the world has been changing dramatically over the past years,” said Pereira. “China is looking at the OECD, hopefully, with increasing interest.”

He added the organisation had close cooperation with the Chinese authorities. “We welcome that,” he said.
As you can see, even though China is still "officially" growing at a 6.5% clip, most of this growth is increasingly financed by debt to support thousands of zombie companies that should be shut down.

Also, innovation in China is not a meaningful contributor to economic growth because the Chinese don't excel in innovation and have very few patents on any genuine inventions.

Having said this, China has managed its growth admirably thus far and we can debate whether a country like China can thrive on laissez-faire American capitalism (I personally don't think so, not that there has been much laissez-faire capitalism going on in the US either).

In my last comment on the $3 trillion shift in investing, I stated the following:
Given my views on the reflation chimera and the risks of a US dollar crisis developing this year, I would be actively shorting emerging markets (EEM), Chinese (FXI), Industrials (XLI), Metal & Mining (XME), Energy (XLE)  and Financial (XLF) shares on any strength here (book your profits while you still can). The only sector I trade now, and it's very volatile, is biotech (XBI) but technology (XLK) is also doing well, for now.

I still maintain that if you want to sleep well, buy US long bonds (TLT) and thank me later this year. In this deflationary environment, bonds remain the ultimate diversifier.  
Now,  this morning I read that Asian shares are at 21-month highs and the US dollar is soft on Fed views which are less hawkish than previously anticipated.

Great, so am I wrong on my macro call? Nope, I am rarely wrong on my macro calls but the story I'm describing won't hit us till the second half of the year and perhaps even in the last quarter of the year.

Yes, Chinese (FXI) shares have been breaking out on the weekly chart, propelling emerging market (EEM) shares higher too (click on images):



These are bullish weekly breakouts that augur well for these shares in the short run, but given my global deflation view, I wouldn't be investing here and I'm pretty sure once global leading indicators start heading south, these markets are in big trouble (keep shorting them on any strength).

What does this have to do with CPPIB raising its stakes in China over the long term? Nothing except I would be more like PSP and remain very cautious on emerging markets including China over the near term. If there is a massive downturn in China, then reevaluate and go in and raise your stakes.

Having said this, I realize that CPPIB is a super long term investor and doesn't need to perfectly time its entry in public and private markets, but all this bullishness on China at this particular time makes me very nervous.

Still, CPPIB is helping China fix its pension future  (they need all the help they can get) and it has developed solid relationships there, including high level government relationships it can leverage off of to make smart investments over the long run.

Below, Mark Machin, CEO of the Canada Pension Plan, says the fund is looking to increase its allocations in China over the long run. Again, this makes perfect sense over the long run especially since CPPIB is underweight China on a GDP basis, but I would be scaling in very slowly as I expect a massive dislocation to hit China and Asia either this year or early next year.

According to Goldman Sachs where Mark used to work, China’s economy may have slipped down the global worry list, but significant risks remain, including an abrupt end to a massive credit boom or an overly aggressive policy response if inflation should speed up.

I'm less worried of rising inflation and more worried of global deflation and a US dollar crisis developing this year, prompting another Big Bang out of China, hitting risk assets all around the world very hard.

But have no fear, if a big bad bear market develops, and it will, the folks over at CPPIB will be very busy snapping up public and private assets all over the world, including in China. This is why I'm such a firm believer in enhancing the CPP for all Canadians, it pools investment and longevity risks and lowers costs for all Canadians. The Chinese should take note of that and learn from the CPP-CPPIB model.

Monday, March 20, 2017

The $3 Trillion Shift in Investing?

Frank Chaparro of Business Insider reports, There could be a $3 trillion shift in investing, and it poses a huge problem for mutual funds:
A dramatic shift is underway in the investment world.

Passive investment products like exchange-traded funds have hoovered up assets at a fast clip in recent years. US-listed ETFs saw $283 billion in net inflows during 2016, taking aggregate assets under management to $2.5 trillion, according to Citigroup.

Exchange-traded funds could gain a further $2 trillion to $3 trillion in assets in the next three to five years, according to a big report on the future of the finance industry from Morgan Stanley and Oliver Wyman.

Fee pain is coming

ETFs are cheaper and more transparent than mutual funds, while mutual funds have struggled for performance in recent years. As such, money has poured out of mutual funds and into ETFs over the past few years. That has forced mutual funds to compress their fees so that they can compete.

With ETFs set to see their share in the US market increase from 15% to 40-60% over the next ten years, according to Credit Suisse, fee compression in the mutual fund industry will likely continue. Morgan Stanley estimates that fees charged by active managers could shrink by more than a third in 2017.

That's not good news, because lower fees means less profit.

The irony

The price compression that has swept the mutual fund industry has forced money managers to come up with ideas to cut costs in order to save their bottom line. One such solution they've come up with is a bit ironic.

According to Morgan Stanley and Oliver Wyman, mutual funds are now using ETFs, the very funds that have contributed to price compression, to cut their own costs. By investing in ETFs, mutual funds are able to free up time to focus on "more complex alternative investments," the report said.

Here's Morgan Stanley and Oliver Wyman's explanation (emphasis ours):
"Asset allocators such as Outsourced Chief Investment Officers (OCIO) and Wealth Managers will account for a large proportion of this incremental demand as they increasingly use ETFs at near zero cost to source beta exposure, allowing them to focus their resources on high conviction managers or more complex alternative investments. However, looking beyond 2019, the emerging use of passive vehicles as an integral part of an active fund management strategy will be arguably the more significant dynamic. Currently, Mutual Funds have ~$0.5TN invested in ETFs, much of which is used for liquidity management. We estimate using ETFs rather than the traditional approach of holding individual stocks offers a cost advantage of 5-8 bps in large and mid-cap equities. As Asset Managers search for ways to deliver performance at lower costs, this may mean that mutual funds find themselves among the largest investors in ETFs."
The report concludes that mutual funds will potentially be one of the biggest drivers of growth for ETFs.
This dramatic shift in the investment world -- ie. the proliferation of exchange-traded funds (ETFs) -- is nothing new, it's been going on for years which is why I'm increasingly worried that we moved from the big alpha bubble which has popped to one giant beta bubble.

Don't get me wrong, ETFs are fantastic, for most people it's the best low cost way to invest and gain market/ sector/ thematic exposure and I actually believe not only in ETFs but also digital platforms (aka robo-advisors) that manage people's portfolios by diversifying ETFs and rebalancing the portfolios automatically every year or as needed based on some simple rules.

If you're young and starting to invest for your retirement, you should learn all you can about digital investment advice and how it can improve your portfolio. Even seasoned investors and high net worth investors can profit off these platforms but you need to understand the key differences between them in terms of fees and services they provide (for example, some offer tax-loss harvesting, some offer services catering to high net worth clients, others offer no mimimums, etc.).

I'm not going to go over the pros and cons of robo-advisors but they too have contributed to this surge in exchange-traded funds (ETFs) taking place in the investment world.

As far as mutual funds increasingly using ETFs to manage their portfolios, no surprise there as almost all of them are closet indexers charging high fees as they underperform the market. And then we wonder why there is a crisis in active management and why big and small pension funds are increasingly insourcing their public market assets.

Keep in mind what Ontario Teachers' CEO Ron Mock told me back in 2002 when I first met him in Toronto when he was in charge of the multi-billion hedge fund program: "Beta is cheap, we can swap into any bond or stock index to gain exposure to beta for a few basis points. Real alpha is worth paying for."

Unfortunately, real alpha is getting harder to find these days but the point Ron was making is that you don't want to pay fees to any hedge fund for something you can cheaply replicate or gain exposure to using derivatives (swaps) or exchange-traded funds (ETFs) which many retail and institutional investors (including hedge funds) use to gain market exposure.

Why so much focus on fee compression? Because we live in a low growth world where ultra-low rates are here to stay (never mind what you hear in the financial media) and returns going forward will be a lot lower than what we experienced in the last 20 years.

In this low growth/ low rate/ low return environment, fees matter a lot to institutional and retail investors because they detract from net returns (after fees are factored in).

Unfortunately for the financial industry, fee compression isn't a good thing. It's having a marked effect on employment trends as big banks and investment firms myopically focus cost-cutting using computers and artificial intelligence to replace everything from bank tellers to traders and portfolio analysts and managers.

The digitization of finance is breathtaking and very worrisome because a lot of high paying and low paying jobs are vanishing and the new jobs being created to support this new infrastructure will eventually be outsourced to India or elsewhere at a fraction of the cost.

Banks are ruthless. Sure, profits rose in 2016 and bonuses are up but that only tells you part of the story. The truth is the big guys at the top are making all the money, the lower levels analysts are seeing their bonuses rise a little and everyone else in the middle is getting squeezed, fired and replaced by computers and algorithms.

[Note: In foreign exchange trading where big banks still rake their clients, rookie traders are causing problems at crucial moments. So much for letting go of the experienced traders!]

Following the 2008 crisis, new regulations forced banks to increase the base salaries of their employees to keep them happy as they slashed bonuses. What this did is bloat the compensation of some higher level staff (like managing directors) who subsequently weren't incentivized to take risk on their books. It just wasn't worth it for them to take the risk and risk losing their job. A lucky few crossed the street to join their big hedge fund clients but there too, most employees are unsatisfied with their bonuses (but 'quant geniuses' made off like bandits).

This is why I hate looking at the average bonus on Wall Street published in an annual report from the New York State Comptroller's Office. It tells us nothing of what is happening to the bonuses at the very top levels, lower levels and middle and upper levels. They should break it down in a lot more detail than what is currently provided because like I said, it's the people at the very top making the bulk of the money. The lower levels where salaries are relatively low enjoyed a bounce in their bonus but a lot of middle and upper level jobs are vanishing at an alarming rate.

The world of finance is irrevocably changing. Intense competition, fee compression, cost-cutting and artificial intelligence are all trends that will continue in the foreseeable future, exacerbating rising inequality which is deflationary.

In their infinite wisdom to evolve and myopically focus on cost-cutting, big banks are cannibalizing each other and killing aggregate demand in the process, a trend that should worry all of us. Because once those jobs disappear, they are gone forever, never coming back.

But it's not just finance, computers are slowly taking over pretty much every job (click on image; h/t, John Graham of Arrow Capital Management):


Anyway, back to the $3 trillion shift in investing. Beta is cheap, beta is great, but when everyone is jumping on the beta bandwagon, choose your beta carefully or you risk being exposed to severe downside risk.

Given my views on the reflation chimera and the risks of a US dollar crisis developing this year, I would be actively shorting emerging markets (EEM), Chinese (FXI), Industrials (XLI), Metal & Mining (XME), Energy (XLE)  and Financial (XLF) shares on any strength here (book your profits while you still can). The only sector I trade now, and it's very volatile, is biotech (XBI) but technology (XLK) is also doing well, for now.

I still maintain that if you want to sleep well, buy US long bonds (TLT) and thank me later this year. In this deflationary environment, bonds remain the ultimate diversifier

As far as active management, I see tremendous opportunities for stock pickers on the long and short side in these markets which is why I'm a bit surprised when I hear hedge funds say there are no opportunities. There are plenty of opportunities but you need to find them on both the long and short side.

Below, a list of US exchange-traded funds (ETFs) I track closely every day to give me a good overview of the various market sectors (click on images):


This is by no means an exhaustive list but it gives me a very good breakdown of which sectors are moving every day, allowing me to dig deeper into the over 2000 stocks in various sectors and industries I track.

Again, right now my attention is completely on biotech (XBI) where I see tons of great opportunities mostly in smaller names I track closely (click on images):


You can add Nektar Therapeutics (NKTR) to this list, another biotech I track which surged 43% on Monday on promising phase 3 results from its opiod drug.

But let me repeat, investing in biotech isn't for the faint of heart and unless you can stomach gut-wrenching volatility, forget about investing in individual names, stick to the ETFs (IBB, XBI) or ignore this sector altogether.

Some of the names I track above are from my research looking at top funds' activity every quarter but trust me, just because they're top funds, doesn't mean they don't get hammered on their picks too.

Anyway, I know what Jack Bogle would tell me, don't bother trading biotech or any hot sector, invest in a balanced portfolio of ETFs, get instant diversification on the cheap and remember to rebalance your portfolio once a year or as needed. Keep it simple stupid!

Below, CNN's Michael Smerconish's full interview with Vanguard Group founder Jack Bogle, the most important figure in investing most people don't know about. Listen carefully to Bogle's words of wisdom, not just on investing but on politics, inequality and how to live a long and fruitful life.

Friday, March 17, 2017

No Luck in Alpha Land?

Beth Jinks, Manuel Baigorri, Katherine Burton and Katia Porzecanski of Bloomberg News report, How to lose $4 billion: Bill Ackman’s long ride down on Valeant:
Bill Ackman was used to the question: how could he stick with a loser like Valeant?

But here it was again, this time over lunch with investors and bankers in London on Feb. 28. And there was Ackman, defending a signature investment that, on paper, had cost his clients billions. Yes, Valeant’s share price had cratered. But he insisted to attendees that the drug company’s turnaround prospects were bright, according to people with knowledge of the meeting.

So much for that. Ackman had spent the better half of two years trying to convince just about anyone he was right about Valeant. On Monday evening, just two weeks after that bullish lunch arranged by investment bank Jefferies Group, he conceded what most on Wall Street already believed: In fact, he’d been spectacularly wrong.

News that his Pershing Square Capital Management fund had sold its entire stake at a monumental loss was greeted with equal parts shock and relish. Plenty of investors got burned by Valeant Pharmaceuticals International Inc., which once seemed as if it could revolutionize the drug industry. But no one lost bigger than billionaire investor Ackman, who bought high and sold low, leaping to the company’s defense time and again in a futile attempt to persuade the world his bet would pay off. He held on, even as redemptions at his firm mounted into the hundreds of millions in the final months of last year.

Investor Withdrawals

In finally selling, the firm lost more than $4 billion, according to Bloomberg calculations based on public filings. Jefferies offered Pershing’s entire holding to the market, pricing the shares at just $11.10 a piece, according to a person with knowledge of the matter, who asked not to be identified because the details aren’t public.

Ackman must now contain the damage. With investor withdrawals piling up, Ackman was presented with a stark choice: hold on to Valeant, or surrender to refocus on other, potentially lucrative investments.

Ultimately Ackman acknowledged to the world that the headache of Valeant wasn’t worth it any more. Pershing Square said in a statement on the exit Monday that the diminished-value holding was sucking up too much time and resources.

Now the hedge fund will also have to try and stem withdrawals. It saw about $600 million in redemptions in the final three months of last year, according to data compiled by Bloomberg. In all of 2016, withdrawals totaled more than $1 billion. Those figures don’t include redemptions that have been requested but are still pending, as it generally takes investors two-to-three years to redeem from the funds.

Passionate, Dispassionate

To some, the Valeant saga — and Ackman’s journey in it — is an example of one of the most challenging parts of investing.

“To be a great investor you have to strike a balance between being passionate and being dispassionate at the same time,” Jonathan Grabel, chief investment officer for the Public Employees Retirement Association of New Mexico, said by phone. “It’s a difficult thing to strike that balance.”

The New Mexico pension was among those that redeemed last year from Pershing Square, due in part to the hedge fund’s long lock-up period — which would’ve kept New Mexico committed for another two years, he said.

Pershing Square initially bought Valeant shares in February and March 2015 at an average price of $196.72, according to filings. Within months of Pershing Square’s investment, Valeant was embroiled in controversies that caused a collapse in the shares. Ackman and colleague Stephen Fraidin joined the board a year ago, vowing a turnaround to salvage their investment. Top management was replaced, debts were renegotiated, and about $8 billion in non-core assets were put up for sale.

As the stock declined, the hedge fund continued to double down. But instead of buying shares outright, Pershing Square began relying on a combination of put and call options that increased its exposure while minimizing additional capital outlays.

Target, Herbalife

By Monday, Valeant was at about $11 a share, and Pershing’s losses from its stock and options contracts exceeded $4 billion, filings show. Ackman discussed his actions with Valeant’s management beforehand, a spokesman for the drug company said in an email Tuesday.

Having to acknowledge a big bet gone bad isn’t unknown territory for Ackman. The Valeant exit follows earlier high-profile losses in retailers J.C. Penney Co. and Target Corp. He has also amassed losses in an ongoing short battle over nutrition products group Herbalife Ltd. Pershing Square, which usually holds about 10 positions, has made billions investing in big winners such as General Growth Properties Inc. and Restaurant Brands International Inc. It recently — and profitably — exited investments in railroad holding Canadian Pacific Railway Ltd. and animal-health company Zoetis Inc. The hedge fund has two new as-yet unidentified holdings.

Mark Baak, director at Privium Fund Management, which has an investment in Pershing’s listed fund, said that it was worthwhile to exit because Valeant “probably dominated all the conversations” with clients.

“It’s a better use of his time just to drop it,” Baak said.

Valeant may go down in history as a stock that tarnished the reputation of a number of prominent investors. In addition to Ackman, hedge fund manager John Paulson and managers of the Sequoia Fund, a storied mutual fund started by a friend of Warren Buffett’s, saw billions of gains evaporate in 2015 and 2016 on a business they believed had found a new model for a drug company. Activist ValueAct Capital Management remains one of Valeant’s biggest holders after first investing in mid-2006 in what was then a small experimental-drug developer.

Short Seller

Many investors were seduced by former Chief Executive Officer Michael Pearson’s notion that he could buy drug companies, slash their research and development budgets, and keep getting bigger through acquisitions. It worked wonderfully, until it didn’t.

Some top investors saw it coming — and warned him. While Ackman was researching a potential transaction in the drug company, he asked Jim Chanos — the short-seller who predicted the fall of Enron Inc. and had also bet against Valeant — for his thoughts on the company, and in return received a 26-page analysis. Ackman later denounced Chanos’s short thesis on CNBC.

Pershing Square had embroiled itself in Valeant a year before it invested, teaming up with the drugmaker in a hostile bid for Allergan Plc. That effort failed, triggering lawsuits — and Ackman’s appetite for Valeant’s prospects.

At one point, Valeant was described as “a house of cards” by one of its own bankers, prior to being hired, in an email that was leaked by Allergan during that corporate clash.

Ackman is an investor of extremes, said John Hempton, chief investment officer of Bronte Capital Management, who started wagering against Valeant before it peaked.

“When he’s good, he’s really, really, really good,” said Hempton. “And when he’s bad he’s really, really, really bad.”
I'll tell you, the luck of the Irish hasn't been with Bill Ackman ever since he invested a huge stake in Valeant. And John Hempton is partially right, when he's good, Ackman is really good but when he's bad, he's really, really, "really to the power of n!" bad!

Don't forget Ackman blew up his first fund and just a year ago was acting a lot like he did during that time. Now, Ackman has learned the painful lesson that many Nortel and Enron lovers learned a while ago, never fall in love with a company. And never bet against Jim Chanos, he's rarely wrong (except for Tesla and China, for now).

Will Valeant (VRX) turn out to be the Canadian pharmaceutical equivalent of Nortel? Who knows and to be fair to Ackman, plenty of other high profile investors have invested in it and some of them recently increased their stake while others, like Bill Miller, have been parading on CNBC claiming the stock will double so "the lowest average price wins" even as shares subsequently hit new 52-week lows (click on image):


There is a word for a weekly chart like the one above: "UGLY". I've been warning my readers not to touch this high profile stock because it's increasingly looking like a terminal short.

We'll see now that Ackman is gone if shares will start rising again but honestly, there are so many BETTER large and especially small biotech opportunities out there, why waste your time hoping this dog will double from here and risk losing it all?

Anyway, enough on "baby" Buffett and Valeant. Anyone who manages an institutional portfolio and takes super concentrated risk on tens of billions is asking for trouble. Only Buffett has managed to do it well consistently over decades but even he has more than ten positions in his portfolio!

[Note: I take very concentrated positions in my personal portfolio and have suffered the joys and extreme pain of such concentration risk, but that is different from managing other people's money.]

Things haven't been going well in Hedgefundistan for a while now. The hedge fund industry doesn't have a PR problem, it has a serious ALPHA and an alignment of interest problem. Some smart hedge funds are addressing these problems but it's business as usual for other ones, including elite hedge funds shafting clients on fees.

Fed up with the lack of talent, Bloomberg reports that Steve Cohen is now teaching computers to think like his top traders.
Steven A. Cohen got rich by going with his gut on big trades. Now the billionaire trader is experimenting with another path: automating the decisions of his best money managers.

Cohen’s Point72 Asset Management, which oversees his $11 billion fortune, is parsing troves of data from its portfolio managers and testing models that mimic their trades, according to people familiar with the matter.

The wave of automation that’s sweeping finance, initially relegated to taking over mundane tasks, is starting to encroach the ranks of prized money managers who are among the industry’s highest paid. Cohen is pursuing this effort after producing his second-worst year as a trader and as he prepares to return to the hedge fund industry at a time of intense investor pressure on fees.

Unabashed in his view that the industry is short of talent, Cohen has ramped up the project over the past year or so, said the people, who asked not to be named discussing internal matters.
I don't know, this new "cutting edge" data analytics/ automation/ codification sweeping the hedge fund industry makes sense at one level but I'm highly skeptical on many levels of hedge fund quants taking over the world (they will only cannibalize each other in doing so).

At the end of the day, it goes back to what Ray Dalio told me a long time ago when we met: "what's your track record?" (lately, it's been much better than Bridgewater's but not on a risk-adjusted basis , lol).

Show me the beef, stop leaking news to the media of how you're automating your top traders, I couldn't care less and most investors don't care too. They want to see consistent results and a sound process that makes sense and isn't overly complicated.

What else do investors want? Alignment of interests. They are tired of marketing fluff and lame excuses as to why some of their hedge funds charging 2 & 20 or more are delivering mediocre results.

The best advice I can give all hedge fund managers in this tough environment: just be honest with your institutional clients even if it costs you assets. Don't pull the wool over their eyes, just be upfront as to why you're not delivering the goods.

For example, if the classic models are failing F/X hedge funds desperate for return, then it's important to dig deeper and understand why. Are the big prime brokers and algos taking out stops? What exactly is going on? Why are the models failing you now?

When you do due diligence on a hedge fund, you need to go above an beyond the standard cookie cutter questions available in books and AIMA's due diligence questionnaire. Not just for operations, but for investment and risk management risks.

It's ok to ask your hedge fund manager very tough questions, to grill them no matter how rich and powerful they are. That's the job of an institutional manager investing billions into hedge funds and other alternative funds.

Of course, to do this, you need to access the top managers at these funds and be confident enough to grill them properly. You need to really know your stuff and understand the risks of their positions and overall portfolio.

And it's not just hedge funds. The same thing is going on in private equity where there's a mountain of dry powder and the market return differential over public markets is narrowing:
Private equity firms had as much as $1.47 trillion in funds available to invest at the end of 2016, and debt capital was also readily available to bolster their investments. Still, a situation of rising asset prices, together with fierce competition for these assets in an environment overcast with a possibility of an upcoming recession that could drive down prices, made it difficult to close deals, according to an annual global private equity report from Bain & Company. These firms are cautious about whether today’s deals will bring them to their targeted returns. Banks are also wary of financing big deals.

According to Hugh MacArthur, head of global private equity with the Boston management consulting firm, “Capital superabundance and the tide of recent exits drove dry powder to yet another record high in 2016. Shadow capital in the form of co-investment and co-sponsorship could add another 15% to 20% to that number. While caution about interest rates remains, there is a general expectation that debt will remain affordable. As a result, deals won’t be getting any cheaper.”

Investors continued to show interest in private equity in 2016, and these firms raised $589 billion globally, just 2% shy of the 2015 total. One 2016 trend to note is the rise in “megabuyout” funds that raised more than $5 billion each, with 11 such funds raising a total of $90 billion. These funds appear particularly appealing to institutional investors who want to deploy large amounts of money into private equity, the management consulting firm reports.

And an overall decline in the net asset values of buyout firms, as their distributions to investors outpaced their new investments plus the value of their existing holdings, meant that some investors found themselves short of their targeted private equity allocation. For instance, the Washington State Investment Board pension fund found its private equity allocation down to 21% in 2016, from 26% in 2012. This created a positive environment for private equity fundraising in 2016, but the industry is apprehensive that this strong pace cannot last for too long, as a recession and a stalling stock market, for instance, could upset the strong dynamics.

The buyout market started off slow in 2016, as the Chinese stock market bust, declining oil prices and the uncertainty regarding Brexit in Europe all had an impact. In North America, the market did not recover momentum and the total number of deals for the year was down 24%, with deal value off 16%. In Europe, there was a more moderate drop off.

Bain finds that there is a potential for almost 800 public companies to be taken private in buyouts, but expects a much lower level of actual public-to-private buyouts going by historical activity. While returns on private equity buyouts continue to outshine the returns on public markets, the gap is closing, as it is getting harder for private equity to find outsize returns on undervalued assets in today’s more benign economic environment.

Private equity investors have also settled into longer holding periods of about five years for their investments, and this state of affairs is likely to endure for the near term. Historically, these firms have held on to assets for three to five years, but this period was pushed up in the aftermath of the financial crisis as firms had to nurse their assets over a slow recovery period, the management consulting firm reports.

In fact, deals that private equity firms were able to quickly flip over, holding onto them for less than three years, made up a mere 18% of private equity buyouts in 2016, compared to a 44% share in 2008.
No doubt, these are treacherous times for private equity and there is a misalignment of interests there too. Just ask CalPERS, it's experiencing a PE disaster even if it's been completely misconstrued in the popular blog naked capitalism.

I recently had a chance to talk to Réal Desrochers, the head of CalPERS's PE program, and he told me he was concerned about the wall of money coming into private equity from super large sovereign wealth funds, many of which aren't staffed adequately but just write "huge cheques" to private equity funds (and hedge funds).

It's a recipe for disaster and it all reminds me of what Tom Barrack said in October 2005 when he cashed out before the crisis hit:
"There's too much money chasing too few good deals, with too much debt and too few brains." The amateurs are going to get trampled, he explains, taking seasoned horsemen, who should get off the turf, down with them. Says Barrack: "That's why I'm getting out." 
Every large and small  institutional investor playing the cheque writing game should post this quote in their office along with my favorite market quote by Gary Shilling often attributed to Keynes: "The market can stay irrational longer than you can stay solvent."

On that note, I remind all you big institutional investors paying 2&20 for beta or sub-beta returns and even you large hedge funds and private equity funds charging alpha fees for leveraged beta to please subscribe to my blog and/ or donate any amount via PayPal on the top right-hand side under my picture.

And if you vehemently disagree with me, no problem, pay for the privilege of doing so and I have no issue publishing your thoughts. One thing I can't stand however is whiners who attack me via email but have never contributed a dime to my blog (even though they read it religiously).

Also, I don't need people telling me how good my blog is, I know it's good, the statistics are public, the who's who of the institutional world reads it, but I'm still the Rodney Dangerfield of pensions.

Below, Marc Levine, Illinois State Board of Investment chairman, discusses why he decided to pull money from hedge funds, in the wake of Bill Ackman exiting out of Valeant.

And CNBC's Jim Cramer discussed Bill Ackman's huge loss in Valeant with David Faber, stating it's one of the worst trades ever. Duh! And don't rush into Pershing Square any time soon!

Lastly, a classic skit from Rodney Dangerfield on No Respect. I'm sure Ackman can relate, I sure can!

Have a great St-Patrick's Day and please remember to donate and/or subscribe on the top-right hand side using PayPal. I thank all of you who support and value my work, it's highly appreciated.



Thursday, March 16, 2017

Will Collapsing US Pensions Fuel Next Crisis?

Jeff Reeves of MarketWatch opines, Collapsing pensions will fuel America’s next financial crisis:
Washington has a knack for ignoring long-term financial shortfalls and painting overly rosy scenarios about the future to make their numbers work in the here and now.

Case in point: Donald Trump’s unrealistic projection that the U.S. economy will grow at 3% this year, when the latest GDP forecasts have actually been reduced to 1.8% by a number of economists.

Then there is Social Security. Many politicians are just too intimidated, uninformed or complacent to tackle the unsustainability of Social Security — which by the latest tally will see its trust fund go to zero just 17 years from now, in 2034.

But while fudging GDP numbers is dangerous for America’s economic outlook and the demise of Social Security in two decades is a serious long-term concern, America faces a mathematical problem that dwarfs both of these items: A pending pension crisis that could leave millions of Americans high and dry in the very near future.

Sure, it would be difficult for many if the U.S. economy stumbles under misguided Trump policies. And yes, the idea of even modest cuts to Social Security in the coming decades could serious affect millions of seniors. But take a look South Carolina’s government pension plan, which covers roughly 550,000 people — one out of nine state residents — but is a staggering $24.1 billion in the red..

This is not a distant concern, but a system already in crisis.

Younger workers are being asked to do much more to support the pensions of retirees. An analysis by the The Post and Courier of Charleston noted recently that “Government workers and their employers have seen five hikes in their pension plan contributions since 2012, and there’s no end in sight.” (Most now contribute 8.66% of their pay, vs. 6.5% before the changes.) At the same time, the pension fund has been chasing more stocks and alternative investments instead of relying on stable investments like bonds that may be much less volatile but generate only meager returns.

And if that’s not troubling enough, South Carolina’s pension fund is far from alone.

The Michigan Public School Employees Retirement System pension fund is $26.7 billion underfunded, and mind-blowingly has paid out more benefits than it has actual assets in 41 of the last 42 years, according to some estimates. The Mackinac Center for Public Policy has estimated that, as a result, more than a third of Michigan’s school payroll expenses go to retirees, not those people actually teaching children in a classroom.

It’s not just government employee pensions at risk, either.

Legislators are debating help for roughly 100,000 coal miners who face serious cuts in pension payments and health coverage thanks to a nearly $6 billion shortfall in the plan for the United Mine Workers of America. And the Teamsters just got permission to slash benefits by as much as 30% for some 400,000 participants because its Central States plan is so deep in the hole.

It’s a very disturbing trend, and according to one organization nearly one million working and retired Americans are covered by pension plans at risk of collapse — and many more plans face shortfalls that could become equally problematic if action isn’t taken immediately.

The problem is only going to get worse as payouts remain bloated and investment returns remain hard to come by. With global growth minimal and the interest-rate environment still quite low by historical norms even in the face of recent Federal Reserve moves, the situation is quite urgent.

The looming problems with Social Security make things even more disturbing. If older Americans never bothered to build up much in the way of retirement savings because they were expecting their pension to be there, then Social Security is quite literally the only way for them to make ends meet.

And if you really want to terrify yourself, think about what would happen to the U.S. economy if older, low-income pensioners suddenly have 5% or 10% less to spend on necessities. According to data from 2013, the average household income of someone older than 75 is $34,097 and their average expenses exceed that, at $34,382. If their benefits are cut, their spending will assuredly fall — and that reduction in spending on food, energy and other staples won’t be replaced.

That’s the crisis I fear most: a dramatic reduction in benefits to millions of pensioners, the failure of Social Security to bridge the gap and a substantial decline in consumer spending as a result. Then it’s not just older Americans tightening their belts, but younger Americans facing a tough job market as restaurants and retailers start cutting back, too.

There’s also a serious concern about whether simply cutting benefits or boosting contributions is enough as global growth slows and fixed-income investments yield significantly lower than in recent years. As I wrote a few months ago, some investment experts expect as little as 4% annual returns in U.S. equities, and bonds to yield less than 2% for many years to come.

So what do we do?

Unfortunately, there are no easy answers. Pension reform — as with Social Security reform — is most equitably approached as a combination of benefit cuts, increased contributions and higher eligibility ages. But since those solutions tend to offend all stakeholders, it is difficult to get past the inertia.

However, America is rapidly approaching a point of no return.

Say what you will about the solvency of Social Security, and the imperative of acting on admittedly imperfect calculations that still give us a good 15 to 20 years until the trust runs dry. But the millions of Americans relying on underfunded pension plans have an urgent need for reform in 2017.

And if they don’t get it, it could have serious effects on the American economy for decades.
Please repeat after me: The global (not just American) pension crisis is deflationary because it exacerbates income inequality and will condemn hundreds of millions of workers to pension poverty.

Of course, the US pension crisis is nothing new to readers of this blog. I've been writing about it for years but now that the chicken has come to roost, financial journalists are sounding the alarm too.

I recently discussed America's crumbling pension future and followed that comment up with how the PBGC is running out of cash. It's high time the administration and Congress take a fresh look at the Pension Protection Act (PPA) of 2006 and do something to tackle the ongoing retirement crisis.

Just like healthcare, when it comes to pensions, things are far from perfect in America. We have academics teaming up with Wall Street titans peddling a revolutionary retirement plan but the only revolutionary plan that I recommend to my neighbors down south is to follow the model of the soon to be enhanced Canada Pension Plan whose assets are managed by the Canada Pension Plan Investment Board.

The major hurdle in adopting an enhanced Social Security where assets are managed at arms length from the government is the lack of proper pension governance. In the US, there is way too much political interference, all because the status quo governance benefits Wall Street and its big bonuses.

The power elite down south don't want to adopt the Canadian pension model where assets are managed primarily in-house, it doesn't benefit them.

This is the dire predicament of the US pension industry where one measure after another keeps placing a Band-Aid over a metastasized tumor, extending and hoping the problem will go away.

It won't, it will only get worse. Never mind the Trump rally, never mind the Fed and "gradual" rate hikes, when interest rates make new secular lows -- and mark my words, they will -- global pensions will get clobbered and many chronically underfunded US pensions are going to face insurmountable pension deficits.

What happens then? A sovereign debt crisis like Greece which will slash the pension payouts of retirees who worked in the public sector? Not quite. Unlike Greece, the US prints the word's reserve currency so it will never suffer a sovereign debt crisis (but will suffer many mini debt ceiling crises).

What will happen and is already happening at the state, city and local level is these pensions obligations will continue eating away at most of the budgets, forcing politicians to increase property taxes or worse still, cut benefits when taxpayers come at them with pitchforks.

I've been warning people of the global pension crisis since I started writing this blog back in June 2008, but the crisis started way before that, it actually began during the tech crash of 2000.

"Leo, you're being too cynical, the Fed is on top of it, Fed Chair Yellen, President Trump and Wall Street will save pensions, they need to so Wall Street can keep milking the pension cow."

If you believe that, you're delusional. There are significant structural issues that need to be addressed or else US public and private pensions will collapse and hinder economic growth for decades to come.

I'm not mincing my words. Emitting pension obligation bonds, raising property taxes, tinkering with the discount rate and retirement age, or worse still, shifting out of DB into DC plans, will do nothing to cure America's pension cancer. And don't kid yourselves, it is a cancer which will profoundly impact the US economy.

Now, you may think I'm too apocalyptic in my doomsday scenario and I'll admit that nothing is imminent but trust me, US pensions are on a collision course and they pose serious systemic risk to the US economy and global financial system longer term (for many reasons).

And if you think I'm too much of a doomsayer, let me introduce you to a friend of mine who thinks humankind is facing extinction in the not too distant future. Last night he told me flat out he doesn't read my blog any longer because "we've peaked on conventional oil in 2005 and tar sands, shale oil and alternative energy won't save us but the financial system is the major risk now and we are all doomed."

He even sent me links to blogs like Our Finite World, Economic Undertow, Surplus Energy Economics, and the Collapse of Industrial Civilization. He also sent me PDF files on The Perfect Storm: Energy, Finance, and the End of Growth and Financial System Supply-Chain Cross-Contagion: a study in global systemic collapse.

Surprisingly, he's a pretty upbeat fellow who enjoys every day of his life and is thankful for the life he has had thus far but tells me "we are all screwed, every one of us, even the top 0.00001%."

So maybe collapsing US pensions won't fuel the next major crisis. Maybe we are all losing the forest for the trees, unable to see the bigger ecological calamity which will spell not only the end of pensions, but the end of humankind.

Maybe but I prefer to be a little more optimistic than my buddy and hope that we find a way to keep this planet alive, safe and secure for many generations to come.

Below, watch yesterday's FOMC Press release where Fed Chair Janet Yellen explains the decision to hike rates gradually, going over the latest FOMC statement. You can read her opening statement here.

I quite enjoyed the exchange with Bloomberg's Kathleen Hays who confronted a startled Yellen on why the Fed is hiking rates with GDP and real wages sliding (not to mention soaring credit card debt). I actually agreed with Neel Kashkari, the lone dissenter who voted against his FOMC colleagues, concerned this decision will fuel more inequality (which is deflationary).

Also, if the Fed hikes more often than what the market anticipates, it risks fueling the 2017 US dollar crisis I warned of late last year. That too will be a deflationary disaster.

My take? The Fed is well aware that global deflation is coming and is trying to raise rates now while it can to have enough bullets to confront the next financial crisis which is on its way (needs ammunition to lower rates in the future).

The bond market will have none of this, it knows what's coming ahead, which is why I keep telling people to load up on US long bonds (TLT) at these levels and thank me later this year.

I also embedded a discussion with Dr. Charles Hall of the Dept. of the SUNY-Environmental and Forest Biology. He is the primary creator behind the concept of EROEI in the field of biophysical economics. He also co-wrote the book “Energy and the Wealth of Nations“.

A very interesting discussion and if you listen to Dr. Hall, you'll realize collapsing pensions, the Fed and the bond market don't really matter. We have much bigger problems to deal with.