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Showing posts from January, 2016

The New Negative Normal?

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Justin McCurry of the Guardian reports, Bank of Japan shocks markets by adopting negative interest rates:
Japan’s central bank has made a shock decision to adopt negative interest rates, in an attempt to protect the flagging economy from market volatility and fears over the global economy.

In a 5-4 vote, the bank’s board imposed a 0.1% fee on deposits left with the Bank of Japan (BoJ) – in effect a negative interest rate.

The move, which follows the similarly aggressive precedent set by the European Central Bank in June 2014, is designed to encourage commercial banks to use excess reserves they keep with the central bank to lend to businesses.

The surprise decision came just days after the bank’s governor, Haruhiko Kuroda, suggested he had dismissed any drastic easing measures to boost business confidence.

On Friday, the bank said it had not ruled out a further cut. “The BoJ will cut the interest rate further into negative territory if judged as necessary,” it said in a statement.

It…

Europe's Pension Time Bomb?

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Francesco Guerrera of Politico reports, European pension schemes ‘vulnerable to big market downturn’(h/t, Suzanne Bishopric):
Many work pension schemes are vulnerable to a major market and economic shock, the first Europe-wide stress tests of the sector found.

The tests, carried out by the European Insurance and Occupational Pensions Authority (EIOPA), found that dramatic falls in equity prices and other adverse economic occurrences would dramatically reduce the amount of money held by pension funds to pay for the retirement of current and past workers.

Pension funds suffer when markets fall because they invest in equities, bonds and other asset classes. Any reduction in interest rates is also detrimental because it reduces pension funds’ returns.

The results, released Tuesday, showed that “defined benefit” schemes — ones where the pension payout is based on the number of years worked and the level of salary attained — would find themselves with a deficit of more than €750 billion alm…

Ontario's "Wynning" Pension Strategy?

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Matt Scuffham of Reuters reports, Ontario pushes ahead with new government pension plan:
Ontario, Canada’s most populous province, said on Tuesday it will push ahead with the launch of a new government pension plan rather than counting on an expansion of the country’s existing federal plan.The Ontario Retirement Pension Plan (ORPP) is set to be introduced in 2017 and is designed to benefit the two-thirds of workers in Ontario who do not have an employer pension plan, provincial officials said.

“Our government is unwavering in its focus on ensuring a financially secure retirement for every worker in our province through the Ontario Retirement Pension Plan,” province Premier Kathleen Wynne said.

Ontario has taken a two-track pension strategy since 2013, preparing to introduce the ORPP while also waiting for a possible expansion of the Canada Pension Plan (CPP), the federal plan that covers most working Canadians.

However, Ontario Finance Minister Charles Sousa said it had so far proven t…

The Only Game in Town?

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Ray Dalio, founder of Bridgewater, wrote an op-ed for the Financial Times, Pay attention to long-term debt cycle:
I have a controversial view that is based on my alternative economic template, and I feel a responsibility to share at this precarious time.

In brief, the Federal Reserve’s template, and that of most economists and market participants, reflects the business cycle.

Based on it, tightening should occur when a) the rate of growth in demand is greater than the rate of growth in capacity and b) the usage of capacity (as measured by indicators such as the GDP gap and the unemployment rate) is becoming high.

As a result, tightening now makes sense.

However, as I see it, there are two important cycles to pay attention to — the business cycle, or short-term debt cycle, and the debt supercycle, or long-term debt cycle.

We are seven years into the expansion phase of the business/short-term debt cycle — which typically lasts about eight to 10 years — and near the end of the expansion…

Private Equity's Not So Golden Age?

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David Carey and Devin Banerjee of Bloomberg report, Private Equity's Golden Age Wasn't So Golden After All:
Henry Kravis called it private equity’s golden age. From 2005 to 2007, buyout firms paid fat prices to buy about 20 supersized companies, from Hilton Worldwide Holdings Inc. to Hertz Global Holdings Inc.

Now, a decade later, the results of that debt-fueled spree can be tabulated -- and it’s hardly golden. The mega-deals produced mostly mediocre returns, falling well short of the profits that leveraged buyout shops typically seek, according to separate compilations by Bloomberg and asset manager Hamilton Lane Advisors. In more than half the deals -- each valued at more than $10 billion -- the firms would have been better off if they had put their investors’ money into a stock index fund.

Have the Masters of the Universe learned a lesson? They say they have. Caution is now a watchword and less is more. TPG Capital has sworn off buyouts as large as $30 billion, peopl…