Monday, December 11, 2017

Bitcoin's Big Bang?

Rob Urban, Camila Russo and Yuji Nakamura of Bloomberg report, Two trading halts, 26% gain: Bitcoin hits Wall Street with a bang:
Bitcoin has landed on Wall Street with a bang.

Futures on the world’s most popular cryptocurrency surged as much as 26 per cent from the opening price in their debut session on Cboe Global Markets Inc.’s exchange, triggering two temporary trading halts designed to calm the market. Initial volume exceeded dealers’ expectations, while traffic on Cboe’s website was so heavy that it caused delays and temporary outages. The website’s problems had no impact on trading systems, Cboe said.

“It is rare that you see something more volatile than bitcoin, but we found it: bitcoin futures,” said Zennon Kapron, managing director of Shanghai-based consulting firm Kapronasia.


The launch of futures on a regulated exchange is a watershed for bitcoin, whose surge this year has captivated everyone from mom-and-pop speculators to Wall Street trading firms. The Cboe contracts, soon to be followed by similar offerings from CME Group Inc. and Nasdaq Inc., should make it easier for mainstream investors to bet on the cryptocurrency’s rise or fall.

Bitcoin wagers have until now been mostly limited to venues with little or no oversight, deterring institutional money managers and exposing some users to the risk of hacks and market breakdowns.

Bitcoin futures expiring in January climbed to US$17,540 as of 11:29 a.m. in London from an opening level of US$15,000, on 2,798 contracts traded. The spot price climbed 6.4 per cent to US$16,647 from the Friday 5 p.m. close in New York, according to the composite price on Bloomberg.

The roughly US$900 difference reflects not only the novelty of the asset but also the difficulty of using the cash-settled futures to trade against the spot, strategists said.

“In a normal, functioning market, good old arbitrage would settle this,” Ole Hansen, head of commodity strategy at Saxo Bank A/S in Hellerup, Denmark, said by email. “If they were deliverable you could arbitrage the life out of it.”

Proponents of regulated bitcoin derivatives say the contracts will increase market transparency and boost liquidity, but skeptics abound. JPMorgan Chase & Co. Chief Executive Officer Jamie Dimon has called bitcoin a “fraud,” while China’s government has cracked down on cryptocurrency exchanges this year. The Futures Industry Association — a group of major banks, brokers and traders — said this month that contracts in the U.S. were rushed without enough consideration of the risks.


So far though, trading has kicked off without any major hiccups.

Dealers said volume was high for a new contract, even though it was tiny relative to more established futures. And the trading halts took effect just as Cboe had outlined in its rules. Transactions stopped for two minutes after a 10 per cent gain from the opening price, and for five minutes after a 20 per cent jump. Another five-minute halt will take effect if the rally extends to 30 per cent, Cboe said in a notice on its website.

“It was pretty easy to trade,” Joe Van Hecke, managing partner at Chicago-based Grace Hall Trading LLC, said in a telephone interview from Charlotte, North Carolina. “I think you’ll see a robust market as time plays out.” For now, Cboe futures account for a tiny slice of the world’s bitcoin-related bets. The notional value of contracts traded in the first eight hours totalled about US$40 million. Globally, about US$1.1 billion of bitcoin traded against the U.S. dollar during the same period, according to Cryptocompare.com.


Some people who would like to trade futures are having a hard time accessing the market because not all brokers are supporting it initially, said Garrett See, chief executive officer of DV Chain. Participation may also be limited because of higher capital requirements and tighter risk limits, See said.

“We’re in the early stages here, and there’s not enough professional liquidity from the big market makers who can provide depth and hold in the movements,” said Stephen Innes, head of trading for Asia Pacific at Oanda Corp. “It’s going to be a learning curve.”

It’s been painful for investors stuck on the sidelines. This year alone, bitcoin is up more than 17-fold. The surge has been driven largely by demand from individuals, with technical obstacles keeping out most big money managers like mutual funds.

The new derivatives contracts should thrust bitcoin more squarely into the realm of regulators, banks and institutional investors. Both Cboe and CME on Dec. 1 got permission to offer the contracts after pledging to the U.S. Commodity Futures Trading Commission that the products don’t run afoul of the law, in a process called self-certification.

Not everyone is happy with the expedited roll out. Exchanges failed to get enough feedback from market participants on margin levels, trading limits, stress tests and clearing, the Futures Industry Association said this month. In November, Thomas Peterffy, the billionaire chairman of Interactive Brokers Group Inc., wrote an open letter to CFTC Chairman J. Christopher Giancarlo, arguing that bitcoin’s large price swings mean its futures contracts shouldn’t be allowed on platforms that clear other derivatives.

Still, Interactive Brokers is offering its customers access to the futures, with greater restrictions. The firm’s clients won’t be able to go short, and Interactive’s margin requirement, or how much investors have to set aside as collateral, will be at least 50 per cent. That’s a stricter threshold than both Cboe’s and CME’s.

The start of futures trading is an important milestone for bitcoin’s shift from the fringes of finance toward the mainstream, but it could be some time before the cryptocurrency becomes a key part of investor portfolios — if it ever does.

“You never say never,” David Riley, who helps oversee US$57 billion as head of credit strategy at BlueBay Asset Management LLP in London, said in an interview on Bloomberg Television. “But I do think we’re quite some way from making cryptocurrencies even a relatively small part of some of the funds we manage at the moment.”
Claire Brownell of the National Post also reports, Big changes coming as bitcoin futures trading, ETFs launch:
Cryptocurrency fever was already rampant when Evolve Funds Group Inc. on Sept. 22 announced it was the first company to file a prospectus to offer a Canadian bitcoin exchange-traded fund. Since then, investor frenzy has reached a fever pitch.

Over the past two and a half months, bitcoin has more than quadrupled in price. Investors have poured US$1 billion into initial coin offerings, where startups offer cryptocurrencies in exchange for capital. Even digital cats — yes, digital cats — are being bought and sold for six-figure sums on the blockchain of Ethereum, a rival cryptocurrency platform.

Institutional investors will soon be able to join the fun by trading bitcoin futures for the first time, first through Cboe Global Markets Inc. on Sunday and then through rival CME Group Inc. on Dec. 18.

As a result, the amount of capital at risk if the cryptocurrency bubble bursts is probably going to grow exponentially. And the traditional financial system, which some predicted would be obliterated by Bitcoin, will become even further integrated into what was once considered a fringe curiosity.

Despite the potential dangers and an eye-popping trading price, bitcoin is going mainstream.

Evolve chief executive Raj Lala said the demand for a Canadian bitcoin ETF is incredibly strong. He said having a regulated futures market on reputable mainstream exchanges is an important first step before offering the fund, because it eliminates the need for actual bitcoin to change hands.

“Futures have become a great proxy way to participate in a commodity,” Lala said. “This just makes for an easier way for you to participate in the price performance of bitcoin.”

But participating in the price performance of bitcoin is certainly not for the faint of heart.

On Friday, bitcoin surged to a new high of more than US$17,000 overnight, plunged to just under US$14,000 by noon and finally recovered to about US$16,000 by the end of the day. Just one year earlier, a single bitcoin was worth just US$770.

Currently, many institutional investors are unable to buy cryptocurrencies for a variety of regulatory and practical reasons. But futures contracts and ETFs will make it possible for them to place bets on the price of bitcoin going up or down using familiar exchanges and financial tools.

Big-name investors might be anxiously awaiting the opportunity to trade bitcoin futures, but the banks, which have to guarantee those trades, are not so eager.

Walt Lukken, chief executive of the Futures Industry Association, which represents financial institutions that hold customer funds and clear trades, expressed his concern in an open letter on Thursday to the U.S. Commodity Futures Trading Commission.

“A more thorough and considered process would have allowed for a robust public discussion among clearing member firms, exchanges and clearinghouses to ascertain the correct margin levels, trading limits, stress testing and related guarantee fund protections and other procedures needed in the event of excessive price movements,” Lukken said.

“The recent volatility in these markets has underscored the importance of setting these levels and processes appropriately and conservatively.”

The bitcoin futures markets that are about to launch are all cash-settled, which means a trader who buys an option to purchase bitcoin at a certain price in the future and holds the contract to expiration will receive or pay the gain or loss in regular central-bank-issued dollars.

In other words, the futures market won’t directly affect demand for bitcoin for the most part, although some investors might spot arbitrage opportunities or hedge their positions by actually buying the cryptocurrency.

However, bitcoin futures and ETFs will increase the digital asset’s visibility and bring it to the masses. The financial instruments will also further cement bitcoin’s current principal use as a store of value, rather than a censorship-resistant payment network that’s independent of government control.

Anthony Di Iorio, a founder of Ethereum and chief executive and co-founder of Jaxx, a multi-cryptocurrency wallet, and Decentral, a Toronto innovation hub, said bitcoin’s evolution from a proposed payment network to an asset worth holding is not necessarily such a bad thing.

He said the big institutional money moving into bitcoin is likely to further increase the fee that miners charge per transaction — making it even less financially viable to use bitcoin as a means of buying a cup of coffee — but there are hundreds of other cryptocurrencies that may be better suited for that purpose.

“Perhaps Bitcoin is not going to be what people thought,” Di Iorio said. “It might not be Bitcoin for the day-to-day stuff, for the smaller things. But other ones are emerging, other ones will still find gaps.”

At a conference in Riga, Latvia, in late November, Bitcoin security expert and entrepreneur Andreas Antonopoulos said the entry of futures doesn’t necessarily mean the cryptocurrency is about to lose its radical roots and become a speculative playground for Wall Street types.

In a video of his remarks posted to YouTube, Antonopoulos said the futures market will perform a useful function for the Bitcoin ecosystem, allowing the miners who secure transactions to hedge against price swings by taking short positions.

“I think it’s important to recognize the CME is not Wall Street,” said Antonopoulos, who works on the oversight board of the exchange’s bitcoin reference rate. “I don’t think these people are as alien to our culture as many believe.”
So, bitcoin finally hit Wall Street with a bang? I've avoided jumping on the bitcoin bandwagon largely because I didn't know enough about cryptocurrencies, the blockchain technology underpinning them, and to be truthful, the whole bitcoin phenomena looked extremely silly to me.

Still, on Friday, I got a phone call from a broker buddy of mine who loves to boast about how much money he's always making in markets. "You gotta write something on bitcoin, it's going to explode up." He invested in it last year and told me "it's headed to $250,000 and when it does, I'm going to make millions, cash out and buy a nice big house."

I listened patiently and some of the points he made sense. For example, he thinks bitcoin is a better store of value than gold and its market cap will reach that of gold and likely supplant it. I mentioned recent events in Saudi Arabia and how elites around the world are growing increasingly anxious about their wealth being arbitrarily confiscated by monarchs, despots and governments.

Perhaps the biggest argument I can make for bitcoin is that rising inequality will eventually lead to political backlash. The power elite is aware of this and wants to protect its wealth using any means necessary from governments looking to redistribute it.

In fact, over the weekend, Marko Papic, Chief Strategist, Geopolitics at BCA Research, posted this on LinkedIn:

To which I replied:


The world is changing, many ubber wealthy individuals are worried about their wealth, especially in countries where they can be persecuted for political reasons, so it's not surprising that bitcoin has taken off in such a massive way.

My initial thoughts on bitcoin were it was being used for money laundering and authorities would allow it to estimate the size of the world's underground economy. As silly as this sounds, there most definitely is a lot of money laundering going on through cryptocurrencies and anyone who claims otherwise is ignorant.

But there is also no doubt in my mind that bitcoin is increasingly being used by high net worth individuals worried about future redistribution policies and looking to hide their wealth from tax authorities. It's not outright money laundering, it's tax evasion, however.

That's why when Jamie Dimon came out to call "bitcoin a fraud", I was shocked because it demonstrated a complete lack of understanding of the political dimensions propelling bitcoin higher. In recent days, Dimon is more "open-minded" on bitcoin and other cryptocurrencies using regulations (aka, he sees potential profits to be made and won't put his foot in his mouth again).

The same goes for Citadel's Ken Griffin who recently stated bitcoin has "elements of the tulip bulb mania". This too demonstrates a total lack of appreciation for what's truly driving bitcoin higher (too easy to dismiss it as just speculative fervor).

Now, I'm not advocating for anyone to jump on the bitcoin bandwagon but given my views, I wouldn't be surprised if bitcoin prices head much higher despite all the naysayers.

Importantly, there is definitely a political dimension to bitcoin which is completely underappreciated by skeptics who dismiss this as just another bubble.

Having said this, there are also risks attached to bitcoin. If bitcoin and other cryptocurrencies continue to thrive, adding billions more to the fortunes of the Winklevoss twins and others, you can bet governments are going to coordinate and find ways to regulate, disrupt, and even go as far as hacking cryptocurrencies.

In fact, there are already security concerns as it was recently reported North Korea was trying to hack bitcoin as the cryptocurrency keeps soaring to record levels.

Moreover, the IRS recently ordered Coinbase, a popular platform for buying and selling bitcoin and other cryptocurrencies, to turn over identifying information on accounts worth at least $20,000 during 2013 to 2015. It's unclear whether the exchange will comply or contest the ruling:
The order, which affects about 10,000 accounts, is a narrowing of an earlier effort by the IRS. In a blog on the Coinbase website, the company notes that the first request would have impacted another 480,000 accounts.

The court case arose after the IRS found that for in each year from 2013 to 2015, only about 800 taxpayers claimed bitcoin gains. During that time, the cryptocurrency rose to $430 from about $13.

So how do you determine what you owe?

If you held it for one year or less, it is a considered a short-term gain and is taxed as ordinary income. Depending on your tax bracket for 2017, that could range from a tax rate of 10 percent to 39.6 percent.

Any bitcoin you sold or spent after owning it for more than one year is taxed as a long-term gain. Taxable rates on those gains range from 0 percent to 20 percent, with higher-income households paying the highest rate.

In a nutshell, although bitcoin and its brethren are often viewed as being anonymous, not reporting your gains could be viewed as tax evasion by Uncle Sam.

"I've told clients who own it that it's up to them to track their cost basis, their holding period and their sale price," Boyd said. "It might seem innocuous and veiled and like no one will follow up, but records of those transactions are available."
Earlier today I had a chance to speak with Fred Pye, President of 3iQ, a firm which looks to provide institutional quality portfolios that offer accredited investors core exposure to bitcoin, ether, and litecoin. Their funds will also provide access to leading external active managers in the digital asset space.

Fred is based here in Montreal, he obviously knows his stuff when it comes to bitcoin and other cryptocurrencies. He first showed me Bitnodes, a site which is currently being developed to estimate the size of the bitcoin network by finding all the reachable nodes in the network.

He then showed me how TradeBlock works, taking me over how all these cryptocurrency trades are registered. For example, you can see recent bitcoin blocks live here.

Fred also sent me two comments, one written by his partner Greg Foss, Spot the Horse, which was published on Zero Hedge, and another one, Fat Protocols, on understanding the differences between the Internet and the Blockchain.

Anyway, it goes without saying that Fred is bullish on bitcoin and thinks there is a lot more upside ahead, even if it will be very volatile. Fred used to work at Fidelity and he invested in gold way back when, which was interesting because he feels there can be a market for bitcoin and gold (one doesn't have to supplant the other).

He said there is now $275 billion in cryptocurrencies and the market value of gold is roughly $7 trillion (see figures here) whereas as the value of total global assets is roughly $200 trillion.

"So the first big move is bitcoin heading to 1% of total global financial assets ($2 trillion) and then once institutions like pensions and sovereign wealth funds invest, it can double or triple from that level."

But according to Fred, the real big move will happen "when there is a crisis in fiat currency" and everyone will be looking to cryptocurrencies to preserve their capital.

Fred isn't exactly some snake oil salesman. If you talk to him, you'll see he really knows his stuff and truly believes in the figures he's quoting, even if they seem wildly optimistic right now.

Exactly how the bitcoin market evolves and how it will impact monetary and fiscal policy remains to be seen. There are too many unknowns right now but as bitcoin becomes mainstream, it will present opportunities and challenges to investors and regulators.

One thing is for sure, institutional investors can't just sit back and ignore bitcoin, blockchain, and other cryptocurrencies. They need to stop listening to skeptics or perennial optimists and really do their homework properly.

As for me, I'm having way too much fun trading biotech shares to focus on bitcoin right now but given my views on the global power elite being scared of redistribution policies in an era of debt deflation, I wouldn't be surprised if bitcoin hits $200,000 before it hits $2000 again. It's just too speculative for my blood.

Still, the people reading this blog should get Fred Pye and other experts to come to their offices to talk to them about cryptocurrencies and how they can get cheap and secure long-only exposure.

Whatever you do, stop listening to Jamie Dimon, Ken Griffin or even Nassim Taleb and Mike Novogratz, do your homework and study these cryptocurrencies and the blockchain technology underpinning them very carefully and think carefully as to which economic and political factors will impact their value going forward.

Below, Andreas Antonopoulos gives you an introduction to bitcoin. You can view more clips on Andreas's YouTube channel here, including bitcoin for beginners.

[Note: Interestingly, Fred told me Andreas wasn't an early investor in bitcoin because "he had to pay the rent" but some investors set up a page to raise money for him to invest in bitcoin.]

Next, Mike Novogratz, Galaxy Investment Partners CEO, the man who called bitcoin $10,000, discusses his next call on bitcoin. He might be right but it will be a bumpy ride up.

Just to reinforce my last point, Interactive Brokers chairman Thomas Peterffy, who took out a full page ad in The Wall Street Journal to warn about bitcoin, insists he doesn't hate the cryptocurrency, but thinks it needs to stay far away from the real economy.

Peterffy said on CNBC's "Fast Money" on Thursday, his concern is that the cryptocurrency could continue to rise to $100,000 or more before crashing to zero, and could pull down small brokerages in the process (Interactive Brokers requires a 50% margin to trade bitcoin futures).

Lastly, Fred Pye, CEO of 3iQ, was interviewed by Michael Hainsworth of BNN. I didn't embed it below but you can watch it here.


Friday, December 8, 2017

Best of All Worlds For Stocks?

Patti Domm of CNBC reports, Strong November jobs report shows solid economy and best of all worlds for stocks:
November's solid jobs gain and modest wage growth shows a strong economy with still low inflation, a perfect recipe for stock market gains.

There were 228,000 jobs added in November, and unemployment remained at a low 4.1 percent rate. Average hourly wage growth at 0.2 percent was a slight disappointment, as economists were hoping to see 0.3 percent, or a 2.7 percent year-over-year rise and a signal that inflation would be picking up.

"This is another addition in the 'Goldilocks' scenario—slightly better jobs, no faster wages, no pressure on inflation. It's not going to change the Fed from increasing rates next week, but there's nothing so dramatic as to accelerate their time table, or at this point ease back," said Ed Keon, managing director and portfolio manager at QMA. "It just shows a robust economy and not one yet that shows inflation pressures."

Stock futures rose after the 8:30 a.m. ET report, and the market opened higher with tech leading the gains. The important monthly jobs report comes after a sloppy period for stocks, but ahead of the time of year when seasonal forces and a "Santa" rally often give the market a boost.

Meanwhile Treasury yields at the short end trended slightly lower, particularly the 2-year note. That area of the yield curve is most affected by Fed rate hikes. The 2-year was at 1.80 percent in morning trading.

Strong areas of hiring included professional and business services, up 44,000; manufacturing, up 31,000; health care, up 30,000, construction up 23,000.

ZipRecruiter's chief economist, Cathy Barrera said manufacturing may be seen as an area that needs help, but it has been doing well.

"Manufacturing is continuing to be called out for a third or fourth month in a row. That usually surprises people. It seems that actually we've seen jobs added there...We've added about 175,000 since last October," she said.

The lack of wage growth may be a concern for economists, but for the markets, it buys more time for a Fed that can slowly increase interest rates.

"We've seen this dance before —strong growth, no inflation. It doesn't change the Fed for December. How much the Fed goes next year is going to be dependent on whether we get inflation pressures picking up," said John Briggs, head of strategy at NatWest Markets. "The fact the economy is doing well and the unemployment rate remains low...means you can keep them on track to gradually raise rates but there is a point where if you do not get inflation pressure, it might give them pause."

The market is now awaiting the Fed's meeting next week, where it is expected to raise interest rates by a quarter point. The Fed also issues its outlook and forecast for interest rates, the last in the Fed headed by Janet Yellen. Fed Governor Jerome Powell takes over as Fed chair in February.

The Fed has forecast three hikes for next year, and it is expected to keep its outlook about the same even though the market has been skeptical it will hike as much as it expects.

"You're starting to enter the transition from Yellen to Powell. I'm not sure this is the time you want to have a huge messaging shift from the Fed," Briggs said.
Jeff Cox of CNBC also reports, November nonfarm payrolls rise 228,000 vs. 200,000 est.:
Economists surveyed by Reuters had expected nonfarm payrolls to grow by 200,000.

A more encompassing measure of joblessness that includes discouraged workers and those holding part-time positions for economic reasons moved up one-tenth of a point to 8 percent. The ranks of those not in the labor force edged higher by 35,000 to 95.4 million.

Closely watched wage data fell short of expectations. Average hourly earnings rose 0.2 percent for the month and 2.5 percent for the year, versus projected increases of 0.3 percent for the month and 2.7 percent for the year.

"The November employment data is largely as expected. For an expansion that began in mid-2009, no negative surprises are welcome," said Mark Hamrick, senior economic analyst at Bankrate.com. "The lingering impacts of recent hurricanes and flooding have reverted back to relative calm in the statistics, meaning that this is a 'cleaner' number."

Federal Reserve policymakers have been concerned over the lack of income growth, though they are still expected to raise the central bank's benchmark interest rate a quarter point next week. The probability dipped a bit after the jobs release but remains above 90 percent, according to the CME FedWatch Tool.

"The jobs number in the report is good news for American workers, but the lack of stronger wage growth is not," said Robert Frick, corporate economist with Navy Federal Credit Union. "Without stronger wage growth, higher inflation remains in doubt, and that takes away one reason for the Fed being more aggressive in hiking rates."

The biggest November job gains came in professional and business services [46,000], manufacturing [31,000] and health care [30,000]. In total, goods-producing occupations rose by 62,000. Construction saw a gain of 24,000, almost all of which were specialty trade contracts, a profession that has added 132,000 jobs over the past year.

Heading into the holiday season, retail jobs also grew by 18,7000.

Markets reacted positively to the news, with major stock indexes opening higher.

Job growth has slowed this year — to 174,000 per month compared with 187,000 a year ago — as the economy edges closer to what officials consider full employment, or the condition where those looking for work have positions. However, Fed officials have been dismayed that the tight labor market has not resulted in significantly higher wages.

"With continued improvement in the labor market, room for continued upward trajectory in 2018 is likely limited because there's not much slack left to hire workers for further growth," said Steve Rick, chief economist at CUNA Mutual Group.

The quality of job creation tilted toward full time, whose ranks grew by 160,000, while part-time positions contracted by 125,000, according to the household survey.
Lucia Mutikani of Reuters also reports, Strong U.S. job growth in November bolster economy's outlook:
U.S. job growth increased at a strong clip in November, painting a portrait of a healthy economy that analysts say does not require the kind of fiscal stimulus that President Donald Trump is proposing, even though wage gains remain moderate.

Nonfarm payrolls rose by 228,000 jobs last month amid broad gains in hiring as the distortions from the recent hurricanes faded, Labor Department data showed on Friday. The government revised data for October to show the economy adding 244,000 jobs instead of the previously reported 261,000 positions.

Employment gains in October were boosted by the return to work of thousands of employees who had been temporarily dislocated by Hurricanes Harvey and Irma. November’s report was the first clean reading since the storms, which also impacted September’s employment data.

Average hourly earnings rose five cents or 0.2 percent in November after dipping 0.1 percent the prior month. That lifted the annual increase in wages to 2.5 percent from 2.3 percent in October. Workers also put in more hours last month.

The unemployment rate was unchanged at a 17-year low of 4.1 percent amid a rise in the labor force. Economists polled by Reuters had forecast payrolls rising by 200,000 jobs last month.

The fairly upbeat report underscored the economy’s strength and could fuel criticism of efforts by Trump and his fellow Republicans in the U.S. Congress to slash the corporate income tax rate to 20 percent from 35 percent.

“The labor market is in great shape. Tax cuts should be used when the economy needs tax cuts and it doesn’t need tax cuts right now,” said Joel Naroff, chief economist at Naroff Economic Advisors in Holland, Pennsylvania. “When politics and economics are mixed in the stew, the policies that are created often have a very awful smell.”

Republicans argue that the proposed tax cut package will boost the economy and allow companies to hire more workers. But with the labor market near full employment and companies reporting difficulties finding qualified workers, most economists disagree. Job openings are near a record high.

The economy grew at a 3.3 percent annualized rate in the third quarter, the fastest in three years, and appears to have maintained the momentum early on the October-December quarter.

The average workweek rose to 34.5 hours in November, the longest in five months, from 34.4 hours in October. Aggregate weekly hours worked surged 0.5 percent last month after October’s 0.3 percent gain.

“A six-minute increase in the work week does not sound like much, but given the size of the labor market, it turns out to be significant in terms of output,” said Marc Chandler, global head of currency strategy at Brown Brothers Harriman in New York.

The dollar was trading higher against a basket of currencies, while prices for U.S. Treasuries fell. Stocks on Wall Street rose.

FULL EMPLOYMENT

While November’s employment report will probably have little impact on expectations the Federal Reserve will raise interest rates at its Dec. 12-13 policy meeting, it could help shape the debate on monetary policy next year.

The U.S. central bank has increased borrowing costs twice this year and has forecast three rate hikes in 2018.

Employment growth has averaged 174,000 jobs per month this year, down from the average monthly gain of 187,000 in 2016. A slowdown in job growth is normal when the labor market nears full employment.

The economy needs to create 75,000 to 100,000 jobs per month to keep up with growth in the working-age population.

The unemployment rate has declined by seven-tenths of a percentage point this year. A broader measure of unemployment, which includes people who want to work but have given up searching and those working part-time because they cannot find full-time employment, ticked up to 8.0 percent last month from a near 11-year low of 7.9 percent in October.

Economists believe the shrinking labor market slack will unleash a faster pace of wage growth next year. That, combined with the tax cuts, would help to boost inflation.

“Detractors will argue that wage increases are too slow but we have shown in our research that adjusting for demographic effects, wage gains are where one ought to expect them to be,” said John Ryding, chief economist at RDQ Economics in New York.
"Adjusting for demographic effects, wage gains are where one ought to expect them to be." I love that comment, it's a keeper.

Alright, it's Friday, let me take a step back, analyze this US jobs report and talk markets. First, the US economy is humming along nicely as are plenty of other economies all over the world. That is great news for stocks and other risk assets but it still begs the question, how sustainable is this going forward?

In particular, Zero Hedge notes the following on the November jobs report on where the jobs were:
Assuming that the BLS' estimate of avg hourly warnings growing only 0.2% in November is accurate, it would imply that - as has often been the case - the bulk of job growth in November took place in minimum-paying and other low-wage jobs. However, a breakdown of jobs added by industry shows the contrary to expectations, the bulk of new job creation, and 3 of the 4 top categories, were not in the "low wage" bucket. In fact, as shown below, with the exception of Education and Health jobs which rose by 54K in November, Manufacturing (+31K), Professional and Business Services (+27), and Construction (+24) were the fastest growing occupations in the previous month.


For those wondering, yes waiters and bartenders did hit a new all-time high of 11.783 million in November, an increase of 18.9k for the month.

Now, the folks at Zero Hedge are perennial gold bugs who see inflation conspiracies everywhere, so it doesn't surprise me they think the official numbers are under-reporting real wage inflation.

If you think wage infation is coming back strong next year, now is a great time to load up on SPDR Gold Shares (GLD) and in particular, junior gold miners (GDXJ) which are at critical make-or-break weekly levels:


I'm not in the "inflation is coming" camp so it's hard for me to get excited about gold. I think gold shares will take off after the next crisis, when central banks engage in QE infinity.

Right now, I'm far more worried about deflation headed to the US which won't happen tomorrow, but when it does strike, watch out, it will fundamentally transform markets and the global economy as we know it.

Interestingly, while stocks took off after the employment numbers were released, there was no big selloff in bonds as yields in the long end remain unchanged. US long bond prices (TLT) are still doing well despite all the great economic news:


One has to ask why aren't long bonds selling off strongly, especially if wage inflation is right around the corner?

My answer is that the bond market isn't buying this inflation argument, and neither should you. In fact, even though US inflation expectations edged up again in October to 2.61 percent, touching their highest level in six months, according to a Federal Reserve Bank of New York survey, some are worried about the trend.

Last month, Chicago Federal Reserve Bank President Charles Evans said he is worried about a drop in US inflation expectations and called for the US central bank to respond by flagging the likelihood of higher inflation ahead:
"When I look at the downward drift in multiple expectations measures, I find it tougher to confidently buy into the idea that inflation today is just temporarily low once again," Evans said in remarks prepared for delivery to the UBS European Conference in London.

To prevent low inflation expectations becoming entrenched, he said, "our public commentary needs to acknowledge a much greater chance of inflation running at 2-1/2 percent in the coming years than I believe we have communicated in the past."

Evans, a voter this year on Fed policy, did not say in his prepared remarks whether he would support an interest-rate hike in December, as many of his colleagues have said they would, and as markets overwhelmingly expect.

But his comments suggest he has become increasingly frustrated with falling inflation, despite an economy he said is headed for "continued solid growth" in 2018.

Evans warned Wednesday that unless the Fed addresses falling inflation expectations, "we could be in for the kind of trouble that Bank of Japan has faced for so long."

Inflation by the Fed's preferred measure, core personal consumption expenditures (PCE), was just 1.3 percent in September, even though the unemployment rate, at 4.1 percent, suggests the U.S. economy is at full employment.

Fed Chair Janet Yellen has said she believes that as the labor market tightens, inflation will rise back toward 2 percent. Evans is not so sure.

"With each low monthly reading, it gets harder and harder for me to feel comfortable with the idea that the step-down last spring was simply transitory," Evans said. "There is a big strategic risk in failing to get core PCE inflation symmetrically around 2 percent before this economic cycle ends."

Regional Fed presidents like Evans have varying degrees of influence on the direction of Fed policy.

In 2010, Evans tried and failed to win support at the Fed for a new strategy of monetary policy known as price-level targeting that at the time he thought could have lifted troublingly low inflation.

In 2012, though, the Fed included a promise to keep rates near zero until unemployment or inflation reached certain thresholds, an idea Evans had publicly championed for a year before it became policy.
When it comes to inflation, I'm with Charlie Evans and Minneapolis Fed President Neel Kashkari and fear with global inflation in freefall, it's only a matter of time before deflation rears its ugly head on this side of the Atlantic.

The mystery of inflation-deflation has baffled many market analysts but I assure you, there's no big reversal in inflation going on in the US (or elsewhere), and even the recent pickup in inflation expectations is a blip and can be explained by the decline in the US dollar (UUP) over the last year:


Remember, as the greenback sells off relative to the euro and yen, it increases US import prices, temporarily giving a lift to inflation expectations. There is nothing structural going on.

The only structural factor that will boost inflation expectations over the long run is wage inflation, which has been noticably absent despite the US economy being in full employment.

Why is this the case? Well, I think a lot of people are worried about losing their job and maybe, just maybe, the US economy isn't as strong as we think. Forget the baby boomers retiring in droves, there is a lot more Schumpeterian-style "creative destruction" going on than there is job creation.

I listened to Larry Kudlow this morning on CNBC stating that "tax cuts will unleash an investment boom" in the US, but all they will do is exacerbate rising inequality and maybe spur business to invest in more robots, not people.

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

More importantly, when deflation strikes America, it will have devastating effects on risk assets across public and private markets and it will decimate private and public pensions, especially those that are already chronically underfunded.

[Note: Pensions are all about managing assets and liabilities. Deflation strikes both, especially liabilities which will soar to unprecedented levels when the pension storm cometh and rates decline to new secular lows.]

There is a reason why Jack Bogle -- Mr. Index -- is worried about US pensions. He sees the writing on the wall and knows the math simply doesn't add up and "it will end badly".

People confuse the stock market with the economy. Stocks are part of the leading economic indicators but stocks move up and down based upon a lot of factors, including plentiful liquidity.

In a world where bitcoin is going parabolic, Saudi princes are buying paintings for $450 million, and stocks keep soaring to new highs, all it tells me is there is too much money out there chasing risky assets higher and higher.

But as I keep warning you, stocks don't go up forever even if they can go up longer than pessimists and optimists think. There is a lot of money out there fuelling speculative frenzy, and it's coming from central banks, big trading outfits and hedge funds playing the momentum game, hoping to squeeze the very last dollar and get out in time.

The deafening silence of the VIX and bears leads many to erroneously conclude that central banks control these markets and what they say goes. The next generation of "Big Shorts" is anxiously awaiting for something, anything, to blow up (China, Eurozone, etc.) but thus far markets keep soaring higher, steamrolling over them.

Remember what I told you a long time time ago, there are two big risks in these markets right now:
  1. A meltdown unlike anything we've ever seen before, making 2008 look like a walk in the park.
  2. A melt-up unlike anything we've ever seen before, making 1999-2000 look like a walk in the park.
It might shock you to learn that it's the second risk that keeps asset managers awake at night because it forces them to chase risk assets at higher and higher levels knowing that downside risks are multiplying as asset vaues keep hitting record levels.

In other words, if we first get a melt-up before we get the next huge meltdown, it will buy central bankers some time but ultimately, it will ensure a much longer and deeper recession, and likely lead to that prolonged debt deflation scenario I keep warning of.

So maybe it's not as good as it gets for stocks, maybe there is more "juice" left to squeeze shorts and send stocks a lot higher but the bond market isn't buying any of it and neither should you. Trade stocks but be careful, when the music stops, we will experience the worst bear market ever.

Let me end by giving you some quick thoughts on market sectors I track.  As you know, given my fears of deflation, I'm short emerging market stocks (EEM), Chinese shares (FXI), oil (USO), energy (XLE), metals and mining (XME), industrials (XLI) and financials (XLF) and remain long and strong good old boring US bonds (TLT), the ultimate diversifier in these insane markets.

Now, if you look at financials (XLF), you'd think the US economy is just beginning a major expansion but I would use this weekly breakout to take profits:


Energy (XLE) shares have popped recently along with the price of oil but are hovering around the 200-week moving average and unable to make new 52-week highs:


Emerging market stocks (EEM) and Chinese shares (FXI) look like they're rolling over here after a huge run-up:



I definitely would be booking my profits and shorting these sectors going into the new year.

Earlier this week, a lot of fuss over the so-called FANG stocks selling off, but if you look at technology shares (XLK) they have yet to roll over in a meaningful way on the weekly chart:


One area of concern for technology is semiconductor shares (SMH) which look very vulnerable for a reversal here:


As far as biotech, right now I'm more bullish on large biotechs (IBB) than smaller ones (XBI) which ran up lot this year but in general, I still like this sector even if it's extremely volatile:



Lastly, it's Friday, so have fun peeking at stocks making big moves up and down on my watch list (click on images to enlarge):



The stock of the week this week was Sage Therapeutics (SAGE) which exploded up on hopes for breakthrough depression drug:


Once again, hope you enjoyed this week's market comment and please remember to take the time to contribute via Pay Pal on the right-hand side under this image:


I thank all of you who take the time to donate or subscribe to my blog, I truly appreciate it.

Below, Diane Swonk, DS Economics founder & CEO, and David Kelly, JPMorgan Funds chief global strategist, discuss November’s jobs report. Wage growth is disappointing and I fear it will not significantly improve over the next year.

Second, Michael Feroli, JPMorgan chief economist, and Daniel Skelly, Morgan Stanley Wealth Management, discuss the labor market, manufacturing and interest rates in 2018.

Third, days after hitting turbulence, a sustainable comeback for tech stocks could be in the offing, according to Bespoke co-founder Paul Hickey.

Fourth, David Tice, who's known for running the Prudent Bear Fund before selling it to Federated in 2008, predicts stocks could sharply rise again in 2018 before prices plunge and stay low for a long time.

Lastly, CNBC's Meg Tirrell reports on Sage Therapeutics soaring more than 70 percent after a depression drug breakthrough.

Coming from a family with two psychiatirsts, I can assure you there is a desperate need for new treatments for depression, especially hard to treat depression, but temper your enthusiasm because it's still way too early to conclude this new treatment is a "game changer" (there are very few game changers in psychiatry).





Thursday, December 7, 2017

Mr. Index Worried About US Pensions?

Lisa Abramowicz of Bloomberg reports, Jack Bogle Is Worried About U.S. Pensions:
Jack Bogle isn’t optimistic about the state of U.S. pensions over the next decade.

The founder of Vanguard Group thinks a conservative portfolio of bonds will only return about 3 percent a year over the next decade, and stocks won’t do much better, with a 4 percent annual gain over a similar period. This is “totally defeating” for pensions, which “are not going to be able to meet their 7.5 percent or 8 percent obligations,” Bogle said in a Bloomberg Radio interview that aired Thursday.

Bogle is well known for first conceiving of low-fee funds for individual investors, pegging strategies to indexes rather than giving managers free reign to buy what they wanted. This philosophy has helped Vanguard grow into a $4.5 trillion behemoth that will likely reach $10 trillion in assets within the next 10 years.

Bogle, 88, also has a self-professed knack for making accurate market calls. His prognostications on stocks have had about an 81 percent correlation to what actually happens, while his bond predictions have been accurate 95 percent of the time, he said.

“The only return you get on a bond is from the interest coupon,” with fluctuations in prices eventually evening out and becoming relatively negligible over the longer term, he said. Given a portfolio of about half corporate bonds and half U.S. Treasuries, the blended yield is about 3 percent today.

“So that’s what you get over the next decade,” he said.

This is a huge problem for pensions, which rely on bonds to provide steady, reliable income needed to cover benefit payments to plan participants. For example, the largest U.S. pension, California Public Employees’ Retirement System, is considering more than doubling its bond allocation to reduce risk and volatility as the bull market in stocks approaches nine years.

Pensions have generally lowered their returns targets over the past few years, but they’re still aiming for annual gains of more than 7 percent on average. To Bogle, that’s an unlikely scenario.

“It is almost a given that it will end badly,” he said.
Jack Bogle is absolutely right, this will end badly as there is no way US public pension funds will attain a 7 or 8 percent annualized rate of return over the next ten years without taking huge risks -- risks that can place them in an even worse predicament than they already are.

Let me repeat this, even if US pension funds aggressively allocate more to alternative investments -- hedge funds, private equity, real estate, infrastructure, etc. -- there is still little chance of attaining a 7 or 8 percent annualized rate of return over the next ten years.

And if my worst fears of deflation headed to the US materialize, even 4% annualized rate of return over the next ten years will be difficult to attain.

To understand why, go back to read my recent comment on pensions' brave new world where I noted the following:
Interestingly, the Alpine Macro report did discuss return scenarios under the deflation and inflation surprises, which you can see in table 2 below (click on image):



Quite shockingly, the authors conclude higher inflation would result in a worse outcome:
This is primarily because the P/E ratio would be compressed significantly, and the ERP would rise, both undercutting expected returns for stocks. For example, if we assume that steady-state inflation in the U.S. were to rise to 3.5%, with 2.5% steady-state real growth, equilibrium bond yields would be 6%. With the ERP at 200 basis points, the expected total return for U.S. stocks would be 3.2%. After inflation, the real return will be -0.3%.
I say shockingly because for pensions managing assets and liabilities, there is no question that unexpected inflation (which leads to higher rates) is a much better outcome than unexpected deflation.

I guess it all depends on what deflation scenario we're talking about because a prolonged debt deflation scenario I'm worried about will roil assets and make liabilities soar as the yield on the 10-year US Treasury note hits a new secular low. Mild disinflation is fine, prolonged debt deflation is a nightmare.
Let me quantify this so you understand my worst-case scenario for pensions. Prolonged deflation for me means an episode that lasts more than five years, where debt defation drives the yield on the 10-year Treasury note down to 0% or even negative territory.

We can argue whether this is a disaster scenario which is unlikely to occur barring another financial crisis of epic proportions, but if this happens, that 4% bogey won't be easy to attain for pensions even if they're heavily invested in alternative investments.

The problem now is stocks are quietly melting up and all risk assets are extremely overvalued, so people roll their eyes when I talk about the risks of prolonged debt deflation.

That's fine, even if we take Jack Bogle's sensible analysis which is nowhere near as dire as my worst case scenario, there is little chance US pensions will attain their desired rate of return.

So what does that mean in practice? Well, since many US public pensions are already chronically underfunded, what this means is contribution rates need to go up, benefits need to be cut or both to shore up these plans.

And neither unions nor state and local governments want to pump more money into their pensions but the problem is taxpayers don't want to see more hikes in their property taxes either, so something has to give.

No problem Leo, the Mother of all US pension bailouts is coming our way, Congress will quietly pass it and the Senate will approve it. Secretary Mnuchin will instruct the US Treasury to float a 50-year bond, and voila, the pension problem will disappear.

If you believe in fairy tales, be my guest, I prefer to stick to reality. And the truth is one way or another, US public pensions need to drop their pension rate-of-return fantasy even if that means contribution rates need to rise, benefits need to be cut or both.

By the way, it's not just Jack Bogle warning US public pensions to get real. Yale's David Swensen said the exact same thing recently, slamming US public pensions who justify a discount rate of 7.5 percent when he thinks they should be using the 10-year bond yield plus 50 basis points (roughly 3 percent).

Below, Vanguard's Jack Bogle isn’t optimistic about the state of US pensions over the next decade and talks about the inflows into passive investment products in Vanguard and BlackRock. See my comment on passive investing taking over and what that means exactly for investors.

Wednesday, December 6, 2017

The UK's Pension Disaster?

 Katie Morley of the Telegraph reports, UK state pensions ranked the worst in the developed world:
The British state pension is now worst in the developed world as it has fallen below Mexico and Chile, data shows.

An average worker entering the UK workforce today can expect to receive less than a third (29 per cent) of their final working salary as a basic pension income after tax, according to a report published every two years by the Organisation for Economic Co-operation and Development.

This is a reduction of around 40 per cent of what their equivalents who entered the labour market back in 2002 could have expected to receive as a percentage (47.6 per cent) of their final salary. Since the study began the UK has consistently ranked low on the list, ranking below Chile and Mexico last year, however it has never come last before.

The reason for the UK falling to the bottom of the league table is down to the earnings-related element of the state pension being removed along with the introduction of the new flat-rate pension, the OECD said.

It means UK retirees who fail to make their own pension provision face a steep income drop when they retire compared with other OECD countries.

By contrast the average worker across the OECD can expect 63 per cent of their salary as a state funded pension.

TUC general secretary Frances O’Grady said: “Working people in Britain face the biggest retirement cliff edge of any developed nation. We are letting down today’s workers if we can’t provide them with a decent retirement income.”

The OECD said that like other countries, the UK is “ageing quickly” and the number of people aged 65 and over for every 100 people of working age will rise from about 30 today to 48 in 2050.

It said: “Already today, poverty among older people is high in the United Kingdom: among those aged 75 and over 18.5 per cent have incomes below the poverty line, most of them women. The main reason is the low level of the state pension.”

The new simplified state pension should improve matters, but there is a long transition period, the report said. While those who are able to save, buy their own home and put money in private pensions may have relatively good incomes, retirees without these types of revenue “are left with few resources,” it said.

The report also suggested that the pension freedoms and the rigidity of the state pension, which cannot be accessed until people reach a certain age, could increase inequality in the UK. It said recent changes enabling older people to withdraw chunks of cash from their retirement pots could lead to further inequality “as not all will be able to finance retiring earlier”.

The OECD also warned that some people using the pension freedoms may be inclined to spend their lump sums early or underestimate their life expectancy, leaving them with limited resources at a very old age.

In July, it was announced that the the state pension age in the UK will rise from 67 to 68 between 2037 and 2039, seven years earlier than previously planned.

The OECD promotes policies aiming to improve the economic and social wellbeing of people globally.

A DWP spokesperson said: “We have taken decisive action to address our changing population through a new, generous State Pension, retaining the Triple Lock and protecting the poorest through Pension Credit - reducing pensioner poverty close to historically low levels.

“But there’s always more to do. Thanks to automatic enrolment, around 11 million people will be newly saving or saving more into a workplace pension by 2018.”
Patrick Collinson of the Guardian also reports, OECD: UK has lowest state pension of any developed country:
Britain’s workers can look forward to the worst state pension of any major country, according to a report by the developed world’s leading economic thinktank.

The Organisation for Economic Cooperation and Development (OECD) study calculated that a typical British worker will at retirement receive a state pension and other benefits worth around 29% of what they had previously been earning. That compares with an average of 63% in other OECD countries, and more than 80% in Italy and the Netherlands.

The report said this expected “net replacement rate” will be the lowest of any OECD country.

The UK population is ageing rapidly, has relatively high levels of poverty among the over-75s, and a much bigger problem with obesity in old age, said the OECD, with 20% of British over-80s classified as obese, compared with 15% in the US and under 10% in Italy.

The TUC general secretary, Frances O’Grady, said: “Working people in Britain face the biggest retirement cliff edge of any developed nation. We are letting down today’s workers if we can’t provide them with a decent retirement income.”

However, on some measures Britain’s pension system is performing better than many other OECD countries. The OECD noted that the new single-tier pension (currently £159.55) will be worth 30% more than the old state pension (currently £122.30) but added, “there is a long transition period and current retirees will not see a difference”.

The UK also fares well on employment rates among older adults, and with the introduction of auto-enrolment in 2012, the downward trend in private workplace provision has been reversed.

While the UK has the worst “mandatory” entitlements such as the state pension, it has a much bigger private pension system.

The OECD said the UK has $2.2tn in private pension assets, equal to 95% of GDP, one of the highest levels of private saving in the world. While the US, Switzerland, the Netherlands and Denmark had figures above 100% of GDP, in France and Germany, where state pension entitlements are much higher, private pensions are worth less than 10% of GDP.

Once the UK’s private pensions are added to the state pension, the average income in retirement for UK pensioners rises to just over 60% of former career earnings, just below the OECD average.

A Department for Work and Pensions (DWP) spokesman said: “We have taken decisive action to address our changing population through a new, generous state pension, retaining the triple lock and protecting the poorest through pension credit, reducing pensioner poverty close to historically low levels.

“But there’s always more to do. Thanks to automatic enrolment, around 11 million people will be newly saving or saving more into a workplace pension by 2018.”

Caroline Abrahams, the charity director at Age UK, said the report should serve as a “wake-up call”.

She said: “Given the current situation, the state pension undoubtedly remains a vital tool in the fight against pensioner poverty, giving millions of older people a small element of financial security in an increasingly uncertain world.

“But the government must look at how auto enrolment into workplace pensions can work with the state pension to deliver a decent standard of living in retirement for everyone.”
Lastly, Brian Milligan of the BBC reports, UK pension the lowest of advanced nations, says OECD:
The UK's State Pension is the least generous of all the most advanced economies in the world, according to a new report.

A study by the Organisation of Economic Co-operation and Development (OECD) suggests full-time workers in the UK do relatively poorly.

The report found that the average pensioner can expect to receive just 29% of what they earned at work.

Only South Africa - which isn't a member of the OECD - is less generous.

However, once "voluntary" pensions - such as auto enrolment or workplace pensions - are taken into account, the UK model fares better in comparison.

Even so, the pension systems in Japan, Germany, France, Italy, the United States, Canada, the Netherlands and Ireland all pay out a higher proportion of working income.

When voluntary pensions are included, the average UK pensioner receives 62% of his or her working income. This is still lower than the OECD average of 69%.

'Cliff edge'

The TUC said the government needed to improve the way the pension system works in the UK.

"The OECD has confirmed what we have long suspected - the UK is bottom of the league for pension provision," said Frances O'Grady, the TUC's general secretary.

"Working people in Britain face the biggest retirement cliff edge of any developed nation."

Since 2010 the state pension has been protected by the so-called triple lock, meaning that pension pay-outs have risen by the highest of earnings, inflation or 2.5%.

However the 2.5% element of the triple lock is due to end in 2020.

In response to the OECD report, the government pointed out that 11 million people will be saving into a workplace pension by 2018.

It said the State Pension was now more generous than it was.

"We have taken decisive action to address our changing population through a new, generous State Pension, retaining the triple lock and protecting the poorest through Pension Credit - reducing pensioner poverty close to historically low levels," a spokesperson for the Department of Work and Pensions said.

"But there's always more to do."

Discrimination

A separate report, from the Pension Protection Fund (PPF), declares that defined benefit pension schemes in the UK are increasingly investing in bonds rather than shares.

That suggests such schemes are becoming much more conservative, and risk-averse.

Back in 2006, 61% of scheme assets were invested in equities. By 2017 that number had fallen to 29%.

By contrast the percentage of assets held in bonds has risen from 28% to 56%, making such investments less volatile, but less likely to grow in value.

Some experts are critical of this trend, which they say could discriminate against younger workers in defined contribution schemes.

"Of all investors in the UK, final salary schemes should be able to take the most patient, long-term view of asset allocation and investment risk, yet they have become increasingly short-term and conservative in their strategy," said Nathan Long, pensions expert at Hargreaves Lansdown.

"This comes at the expense of the auto-enrolment generation who desperately need higher levels of contribution directed into their modern day pensions."
The UK's pension system isn't a disaster but there are serious problems that have not been addressed properly and these articles highlight them.

First, take the time to read the OECD report, Pensions at a Glance 2017, which is available here. The full report is also available here.

There is nothing shocking in this report, at least not to me. I can sum up the UK's pension policy in five words: Let them eat cat food.

The only thing saving the UK from total embarrassment when it comes to its pension system is that it has a much bigger private pension system which helps raise the "average" income in retirement for UK pensioners to 62% of former career earnings, which is still below the OECD average of 69%.

Of course, UK seniors will bear the brunt of these meager pensions, and many of them already struggling with poverty and rising health costs will be condemned to live the rest of their living years in pension poverty, joining other seniors around the world like in Japan and South Korea.

As if things aren't bad enough, Britons were recently warned they are on course for the longest fall in living standards since records began 60 years ago after the UK’s fiscal watchdog took the ax to its outlook for economic growth.

Then there are the ongoing Brexit discussions which are proving to be disastrous for Prime Minister Theresa May. The Brexit saga is also putting pressure on the pound, sparking renewed protests by 500,000 expats with 'frozen' state pensions.

Any way you slice it, it's not a good time to be a British pensioner regardless of whether you live in or outside the UK.

I'm particularly concerned with the private defined-benefit plans that are de-risking, putting more money in fixed income instead of taking intelligent risks across public and private markets all over the world. This may make sense in the short run but it spells disaster in the long run because they won't generate enough return to meet their long-term liabilities.

[Update: A corporate pension expert told me: "The reason UK corporate pension plans have such a high allocation to fixed income is that tight funding regulations force them to match their assets and liabilities very closely, just like in the Dutch plans."]

Welcome to pensions' brave new world. What the UK needs is a total rethink of its pension system to introduce a large, well-governed national public pension fund, akin to what we have here in Canada with CPPIB managing the assets of the Canada Pension Plan.

By the way, the leader of CPPIB, Mark Machin who recently exposed CPP myths, is British and doing a great job leading this organization. I would urge the Brits to hire him away but we'd like to keep him here for a few more years.

In all seriousness, the Brits need to study the evolution of the Canadian pension model more carefully. Their pension system isn't a disaster but it's far inferior to what we have in Canada, that much I can assure you.

Below, Chancellor of the Exchequer Philip Hammond recently released a budget that left him little room for fiscal maneuver as Brexit looms. UK living standards are dropping, and its deteriorating pension system will mean that these standards will continue dropping for millions of Brits facing the dire prospect of pension poverty.

Update: All is not lost for the UK, Abby Jackson of Business Insider reports for the first time in 14 years, the best university in the world isn't in America. Oxford and Cambridge topped the list.