Friday, September 29, 2017

Janet in Wonderland?

Earlier this week, Ed Yardeni posted an interesting blog comment, Janet in Wonderland (added emphasis is mine):
Borio vs Yellen. Last Wednesday, Fed Chair Yellen, in her press conference following the latest FOMC meeting, reminded me of Alice in Wonderland. She wondered why inflation remained so curiously low. In the world that she knows, ultra-easy monetary policy should stimulate demand for goods and services, lower the unemployment rate, and boost wage inflation, which would then drive up price inflation.

Since the time Yellen became Fed chair on February 3, 2014 through today, the unemployment rate has dropped from 6.7% to 4.4% (from February 2014 through August 2017). Yet over that same period, wage inflation has remained around 2.5% and price inflation has remained below 2.0%. Yellen expected that by now wages would be rising 3%-4%, and prices would be rising around 2% based on the inverse correlation between these inflation rates and the unemployment rate as posited by the Phillips Curve Model (PCM)—which apparently doesn’t work on the other side of the looking glass.

Last Friday, Claudio Borio, the head of the Bank for International Settlements’ (BIS) Monetary and Economic Department, presented a speech explaining to Janet in Wonderland that the real world no longer works the way she believes. The speech was titled “Through the looking glass.” The BIS chief economist started with the following quote:
“‘In another moment Alice was through the glass … Then she began looking about, and noticed that … all the rest was as different as possible’ – Through the Looking Glass, and What Alice Found There, by Lewis Carroll.” He might as well have replaced Alice’s name with Janet’s.
I agree with Borio’s underlying thesis that powerful structural forces have disrupted the traditional PCM, which logically posits that there should be a strong inverse relationship between the unemployment rate and both wage and price inflation. I have been making the case for structural disinflation for almost all 40 years that I’ve been in the forecasting business. I’ve discussed how globalization, technological innovation, demographic changes, and Amazon have subdued inflation and continue to do so.

The central bankers have been late to understand all this. Most still don’t, including Yellen. So it’s nice to see at least one of their kind showing up at the structural disinflation party, which has been in full swing for a very long time.

Yellen’s Mystery. Meanwhile, Fed Chair Janet Yellen is still trying to come up with the answer to the following question: “What determines inflation?” She first asked that in a public forum on October 14, 2016. She did so at a conference sponsored by the Federal Reserve Bank of Boston titled “Macroeconomic Research After the Crisis” that should have been titled “Macroeconomic Research in Crisis.” She still doesn’t have the answer, as evidenced by a review of what Janet in Wonderland said at her press conference last Wednesday about inflation:
(1) Transitory. “However, we believe this year’s shortfall in inflation primarily reflects developments that are largely unrelated to broader economic conditions. …. [T]he Committee continues to expect inflation to move up and stabilize around 2 percent over the next couple of years, in line with our longer-run objective.”

(2) Imperfect. “Nonetheless, our understanding of the forces driving inflation is imperfect, and in light of the unexpected lower inflation readings this year, the Committee is monitoring inflation developments closely.”

(3) Mysterious. “For a number of years there were very understandable reasons for that [inflation] shortfall and they included quite a lot of slack in the labor market, which [in] my judgment [has] largely disappeared, very large reductions in energy prices and a large appreciation of the dollar that lowered import prices starting in mid-2014. This year, the shortfall of inflation from 2 percent, when none of those factors is operative is more of a mystery, and I will not say that the committee clearly understands what the causes are of that.”

(4) Lagging. “Monetary policy also operates with the lag and experience suggests that tightness in the labor market gradually and with the lag tends to push up wage and price inflation….”

(5) Idiosyncratic. “So, you know, there is a miss this year I can’t say I can easily point to a sufficient set of factors that explain this year why inflation has been this low. I’ve mentioned a few idiosyncratic things, but frankly, the low inflation is more broad-based than just idiosyncratic things. The fact that inflation is unusually low this year does not mean that that’s going to continue.”

(6) Persistent. “Of course, if it, if we determined our view changed, and instead of thinking that the factors holding inflation down were transitory, we came to the view that they would be persistent, it would require an alteration in monetary policy to move inflation back up to 2 percent, and we would be committed to making that adjustment.”

(7) And again, mysterious. “Now, inflation is running below where we want it to be, and we’ve talked about that a lot during this, the last hour. This past year was not clear what the reasons are. I think it’s not been mysterious in the past, but one way or another we have had four or five years in which inflation is running below our 2 percent objective and we are also committed to achieving that.”
Borio’s Solution. The man from the BIS has the answer for Fed Chair Janet Yellen and all the other central bankers who have a fixation with their 2% inflation targets: “Fuggetaboutit!” In his speech, Borio sympathized with their plight: “For those central banks with a numerical objective, the chosen number is their credibility benchmark: if they attain it, they are credible; if they don’t, at least for long enough, they lose that credibility.” His advice to just move past the quandary rests on many of the points I’ve been making on this subject for some time:
(1) Inflation is neither a monetary nor a Phillips curve phenomenon. He starts off by challenging Milton Friedman’s famous saying that “inflation is always and everywhere a monetary phenomenon.” He also acknowledges Yellen’s confusion: “Yet the behaviour of inflation is becoming increasingly difficult to understand. If one is completely honest, it is hard to avoid the question: how much do we really know about the inflation process?” He follows up with two seemingly rhetorical questions: “Could it be that we know less than we think? Might we have overestimated our ability to control inflation, or at least what it would take to do so?” The rest of the speech essentially answers “yes” to both questions.
As Exhibit #1, Borio shows that, for G7 countries, “the response of inflation to a measure of labour market slack has tended to decline and become statistically indistinguishable from zero. In other words, inflation no longer appears to be sufficiently responsive to tightness in labour markets.” If the PCM isn’t dead, it is in a coma (click on images).


Borio mentions, but doesn’t endorse, former Fed Chairman Ben Bernanke’s view that central bankers have been so successful in lowering inflationary expectations that even tight labor markets aren’t boosting wages and prices. In a 2007 speech, Bernanke explained: “If people set prices and wages with reference to the rate of inflation they expect in the long run and if inflation expectations respond less than previously to variations in economic activity, then inflation itself will become relatively more insensitive to the level of activity—that is, the conventional Phillips curve will be flatter.”

So according to Bernanke, the PCM isn’t dead, but in a coma because inflationary expectations have been subdued.

(2) Globalization is disinflationary. Borio, who seems to be the master of rhetorical questions, then asks: “Is it reasonable to believe that the inflation process should have remained immune to the entry into the global economy of the former Soviet bloc and China and to the opening-up of other emerging market economies? This added something like 1.6 billion people to the effective labour force, drastically shrinking the share of advanced economies, and cut that share by about half by 2015.” Sure enough, the percentage of the value of world exports for the G7 countries fell from 52.4% at the start of 1994 to 33.1% in April, as the percentage for the rest of the world rose from 47.6% to 66.9%.

I am getting a sense of déjà vu all over again. In my 5/7/97 Topical Study titled “Economic Consequences of the Peace,” I discussed my finding that prices tend to rise rapidly during wars and to fall sharply during peacetimes before stabilizing until the next wartime spike. I wrote: “All wars are trade barriers. They divide the world into camps of allies and enemies. They create geographic obstacles to trade, as well as military ones. They stifle competition. History shows that prices tend to rise rapidly during wartime and then to fall during peacetime. War is inflationary; peace is deflationary.” I called it “Tolstoy’s Model of Inflation”.

Borio logically concludes that measures of domestic slack are insufficient gauges of inflationary or disinflationary pressures. Furthermore, there must be more global slack given “the entry of lower-cost producers and of cheaper labour into the global economy.” That must “have put persistent downward pressure on inflation, especially in advanced economies and at least until costs converge.” That all makes sense in the world most of us live in, if not to the central bankers among us with the exception of the man from the BIS.

(3) Technological innovation is keeping a lid on pricing. Borio explains that technological innovation might also have rendered the Phillips curve comatose or dead, by reducing “incumbent firms’ pricing power—through cheaper products, as they cut costs; through newer products, as they make older ones obsolete; and through more transparent prices, as they make shopping around easier.”

Wow—déjà vu all over again! In the same 1997 study cited above, I wrote: “The Internet has the potential to provide at virtually no cost a wealth of information about the specifications, price, availability, and deliverability of any good and any service on this planet. Computers are linking producers and consumers directly.” I predicted that alone could kill inflation. Online shopping as a percent of GAFO retail sales rose from 9.1% at the end of 1997 to 30.3% currently.

Borio concludes, “No doubt, globalisation has been the big shock since the 1990s. But technology threatens to take over in future. Indeed, its imprint in the past may well have been underestimated and may sometimes be hard to distinguish from that of globalisation.”

(4) The neutral real rate of interest is a figment of central bankers’ imagination. Borio moves on from arguing that the impact of real factors on inflation has been underestimated to contending that the impact of monetary policy on the real interest rate has been underestimated. In the US, Fed officials including Fed Chair Yellen and Vice Chair Stanley Fischer have contended that the “neutral real interest rate” (or r*) has fallen as a result of real factors such as weak productivity.

Borio rightly observes that r* is an unobservable variable. Ultra-easy monetary policies might have driven down not only the nominal interest rate but also the real interest rate, whatever it is. Last year, in the 10/12 Morning Briefing, I came to the same conclusion, comparing the Fed to my dog Chloe barking at herself in the mirror when she was a puppy:
“In any event, in their opinion, near-zero real bond yields reflect these forces of secular stagnation rather than reflect their near-zero interest-rate policy since the financial crisis of 2008. …. Their ultra-easy policies have depressed interest income, reducing spendable income and also forcing people to save more. Cheap credit enabled zombie companies to stay in business, contributing to global deflationary pressures and eroding the profitability of healthy companies. Corporate managers have had a great incentive to borrow money in the bond market to buy back shares as a quick way to boost earnings per share rather than invest the proceeds in their operations.”
(5) Ultra-easy monetary policies are stimulating too much borrowing. Borio concludes that central banks should consider abandoning their inflation targets and raise interest rates for the sake of financial stability. He is concerned about mounting debts stimulated by ultra-easy money. I am too, and I’m also concerned about a potential for stock market melt-ups around the world.

The risk he sees is a “debt trap … [which] could arise if policy ran out of ammunition, and it became harder to raise interest rates without causing economic damage, owing to the large debts and distortions in the real economy that the financial cycle creates.”
Great comment, take a minute to read Claudio Borio's speech, Through the looking glass, which is available here.

Earlier this month, I wrote my most important macro comment of the year, discussing why deflation is headed for the US, citing the seven structural factors that lead me to believe we are headed for a prolonged period of debt deflation:
  1. The global jobs crisis: High structural unemployment, especially youth unemployment, and less and less good paying jobs with benefits.
  2. Demographic time bomb: A rapidly aging population means a lot more older people with little savings spending less.
  3. The global pension crisis: As more and more people retire in poverty, they will spend less to stimulate economic activity. Moreover, the shift out of defined-benefit plans to defined-contribution plans is exacerbating pension poverty and is deflationary. Read more about this in my comments on the $400 trillion pension time bomb and the pension storm cometh. Any way you slice it, the global pension crisis is deflationary and bond friendly.
  4. Excessive private and public debt: Rising government and consumer debt levels are constraining public finances and consumer spending.
  5. Rising inequality: Hedge fund gurus cannot appreciate this because they live in an alternate universe, but widespread and rising inequality is deflationary as it constrains aggregate demand. The pension crisis will exacerbate inequality and keep a lid on inflationary pressures for a very long time.
  6. 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 to prepare for global deflation.

In that comment, I also linked deflation to the ongoing US pension crisis:
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.

[Remember, 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 are a lot of people reading this comment who will roll their eyes and dismiss this as total nonsense. These are the same people who believe in the Maestro and others warning of a bond bubble ready to burst. They simply don't understand there is no baffling mystery of inflation deflation, the latter is clearly gaining on the former.

These people are in for a very rude awakening, one that will decimate the bulk of DB and DC pensions across the world and decimate the retirement accounts of millions of people as they get ready to retire and succumb to pension poverty.

It pains me to see the Fed and other central banks ignoring the risks of global deflation. It equally pains me to see policymakers unable to address things on the fiscal front. More worrisome, it pains me to see pensions taking on dumb risks across public and private markets at a time when they desperately need to hunker down and really think carefully of their long-term strategy to make sure they have enough assets to meet the needs of their beneficiaries.
In my last comment discussing Canada's pension overlords, stated the following:
I recently wrote two important comments on why deflation is headed for the US and why all of you, institutional and retail investors alike, need to prepare for the worst bear market ever.
I know, stocks soared on Wednesday to record highs as the Trump administration's proposed tax cuts leaked to the media, everybody is getting excited, there is a global bond rout going on, it seems Jeffrey Gundlach is right as yields on 30-year Treasuries are having their biggest two-day rise since December (click on image):



What is going on? Was Warren Buffett right earlier this year to ask who in their right mind would buy a 30-year bond? Was Beijing behind the whole move on US Treasuries to drive the US dollar lower and halt the yuan from appreciating (which exacerbates deflation in China)?

All a bunch of smoke and mirrors. I remain staunchly in the global deflation camp and note deflation is picking up everywhere and even in Germany, inflation failed to accelerate in September, reflecting the euro area’s continued struggle to restore price stability (click on image):


The appreciation of the euro since the beginning of the year didn't help stoke inflation in the Eurozone but there are structural factors at play here too.

Importantly, now is the time to be loading up on US long bonds (TLT), especially if you're a chronically underfunded pension. It's the best bang for your risk buck, bar none, and I would be viewing any selloff in US long bonds as a golden opportunity to load up before we suffer the worst bear market ever as deflation strikes the US.
In that last comment, I also stated this:
I recently noted the Bank of Canada is flirting with disaster but it looks like Mr. Poloz is coming back to his senses (for now). I can't say the same for the Liberal hypocrites running our country to the ground with their insane tax policies which they claim are fair but will set us back years.
In his speech, Bank of Canada Governor, Stephen Poloz, highlighted the "'unknowns". The Bank of Canada press release states this (added emphasis is mine):
While growth in the second quarter far exceeded expectations, and showed the expansion becoming more broadly based and self-sustaining, “recent data point clearly to a moderation in the second half of the year,” the Governor said.

The challenge for the Bank now is to weigh the upside and downside risks to inflation as the economy approaches its capacity. In the current environment, several unknowns are preventing the Bank from thinking mechanically about the outlook for interest rates, the Governor said.

In particular, as the economy nears its potential, business investment can have the effect of pushing out its capacity limits, either through increases in productivity or the workforce, giving the economy more room to grow in a non-inflationary way, he said.

Other unknowns that are clouding the outlook for inflation include the impact of the digital economy, which may be placing downward pressure on inflation, ongoing weak wage growth, and the sensitivity of the economy to higher interest rates given elevated levels of household debt.

“We need to keep updating our understanding of the economy in real time,” the Governor said, as he highlighted the work done by the Bank’s regional offices to gauge business sentiment and gather intelligence from the business community.
“There is no predetermined path for interest rates from here,” the Governor concluded. “Monetary policy will be particularly data dependent in these circumstances and, as always, we could still be surprised in either direction. We will continue to feel our way cautiously as we get closer to home, fostering economic growth and keeping our inflation target front and centre.”
I strongly doubt the Bank of Canada will proceed with another rate hike this year but you never know with Mr. Poloz, he likes to keep people guessing.

Either way, it doesn't matter, when deflation strikes the US, Canada and the rest of the world are in for a long, hard road ahead.

But for now rejoice as the number of millionaires in Canada shot up 11.3% in a year.  Good times, good times, until the music stops and those paper millionaires see their fortunes dwindle and crumble faster than they can say "Oh Canada!".

So maybe this comment shouldn't be Janet in Wonderland. Maybe it should be called Canada in Wonderland.

Below, Stephen S. Poloz, the Governor of the Bank of Canada, speaks before the St. John’s Board of Trade on The Meaning of “Data Dependence”: An Economic Progress Report. I also embedded the press release following this speech.

Needless to say, my inflation forecast is well below anyone else's and I truly believe this time next year, the Fed and Bank of Canada will be entering into QE Infinity. I know, Leo in Wonderland!


Thursday, September 28, 2017

Canada's Pension Overlords?

Garth Turner, publisher of the Greater Fool blog, put out a comment recently, The overlords:
As a gesture of thanks, three days after the election in which I was punted as an MP and cabinet minister, I asked the dozen senior staff in my office at Revenue Canada out for a meal. Nice restaurant overlooking the Rideau Canal. So long.

I sat and reflected on my path ahead. No job. No pension. No prospects. A house in the wrong city. No fortune. No offers. No security. No severance. Across from me, merrily munching on a Salisbury, sat the deputy minister. When I am pounding on doors in Toronto, looking for a break, I thought, he’ll still be here. Guaranteed job, government-paid car and driver, big bucks, long vacations, group benefits and a lifetime defined-benefit pension plan, indexed.

The contrast was stark, and dark. On one side the politician – elected on public whimsy, drenched in risk – and on the other the bureaucrat – paid richly by the public, yet strangely unaccountable.

This may help explain our current circumstances. There’s a huge overlord class of public sector workers in Canada. More than 3.5 million people, or 24% of the working population. For them, risk is foreign, benefits are assured, salaries are guaranteed, with the security of a life-long string of monthly payments after they retire. In comparison, two million plumbers, lawyers, farmers, doctors and hair salon owners have no wage security, no pensions and no paid holidays. Bureaucrats in the Department of Finance have been calling them tax cheats and loophole-abusers lately because the government wants to increase taxes, but not decrease spending.

Federal civil servant pensions cost a lot. The average retirement pay-out for a federal worker is $1.2 million after 35 years on the job. The current shortfall (called the unfunded liability) is $4.5 billion. So Ottawa has to find about $415 million in additional revenue every year for the next 14 years to meet its obligations to retiring workers. By whacking small business owners (who have no pensions) as the government is proposing, an estimated $250 million will be realized.

My former deputy minister, who made a very large salary, did not need to save for retirement. He knew he’d receive a monthly payment based on the five best (highest-paid) years of his career, as well as retain the benefits of the public service health plan. No need to worry about market conditions or fluctuating RRSP and TFSA assets, since all future payments were legislated and funded by the taxpayers. The car and driver he enjoyed daily were not taxable benefits, either. Nor did he ever have to stand for election and throw his fate into the hands of the deplorable masses.

Public workers with DB pensions can also split that income with a spouse as a mechanism to reduce the overall tax bill in retirement. If that constitutes their only income, it’s not hard to split it down to the 20% range – while private sector people cashing in RRSPs may face bills twice as steep. Ironically, the T2 gang are about to strip drywallers, family doctors and haulage contractors of the same benefit, even though none have guaranteed pensions.

In one week the short period of time the government allowed for debate on these major tax changes will be over. Small businesses retaining earnings to tide them over the lean years or to fund a retirement will face a tax rate of up to 73%. And while unrelated men and women who start companies can share income in the form of dividends, if they get married it’s called ‘income sprinkling’ and becomes illegal. Entrepreneurs and medical people who played by every rule in the book, living frugally so they could save for retirement within their corps, are now pilloried and demonized by the very crew who wrote the rules.

Are there some people who hide behind incorporations and manage to shelter money the government desperately needs to pay pensions of federal workers? You bet. But there may be better places to get it than whacking all the folks who, collectively, create half the jobs in Canada. Making the federal pension plan fairer would be a start. Or even taxing the windfall and unearned capital gains on residential real estate.

Most of the people about to be squished by Mr. Morneau are not, like him, 1%ers. Most have no job security, no paid time off, no maternity leave, no benefits, and they sure don’t have access to money for life.

Yes, let’s make the system fairer for the middle class. Now you know how.

Garth followed up with another comment, What were you thinking?, where he noted this:
Much of the hate oozing from the very pores of this pathetic blog yesterday was about pensions. These days it’s estimated 70% of all workers have no corporate plan with any kind of defined benefit (like government workers, teachers and the prime minister). Instead most people have crappy group RRSPs which are stuffed into even crappier mutual funds run by an oft-crappy insurance company. If you’re lucky, the boss kicks in some cash.

And folks change jobs, of course. Sometimes they get to drag behind a portion of a pension as a locked-in retirement account (LIRA). Sometimes not. In any case, registered pension plans run by employers are, on whole, massively inadequate for a world in which people retire at 60 and croak at 90.

The CPP and OAS? Fine, if you live on Cape Breton and like mac & cheese. Every day.

The kids know this. Ask a Mill if she’ll get a pension at 65 and you can watch her tats jiggle in response. Even people on the public payroll who are under the age of 40 have serious doubts about the sustainability of the system. Already funding public pensions is a massive ongoing liability for Ottawa, and every year it augments. As mentioned here yesterday, the annual top-up alone to keep the system stable is more than $400 million. Meanwhile nobody’s topping up private sector pensions. In fact, Mr. Morneau is about to tax the poop out of small business earnings set aside for retirement. And his boss already gutted the TFSA. Seems like we have two sets of rules. No?
I have to hand it to Garth, he nicely exposes the hypocrisy of the Liberals' new tax plan. Go after "rich" doctors, lawyers, self-employed professionals who like most people have no pension and their "evil" corporations while the PM, Finance Minister and Deputy and Assistant Deputy Ministers in Ottawa sit back and collect a nice, fat defined-benefit pension for the rest of their life. It's a complete and utter travesty.

I recently noted the Bank of Canada is flirting with disaster but it looks like Mr. Poloz is coming back to his senses (for now). I can't say the same for the Liberal hypocrites running our country to the ground with their insane tax policies which they claim are fair but will set us back years.

This on top of cutting the maximum contribution amount to TFSAs, income splitting, and a lot of other smart policies. About the only smart thing the Liberals have done was to enhance the CPP for all Canadians and even there, I should give the credit to Ontario which threatened to go it alone, forcing all the provinces and the federal government to finally enhance the CPP.

Garth Turner is right, most Canadians don't have the luxury of a defined-benefit pension. They have "crappy group RRSPs which are stuffed into even crappier mutual funds run by an oft-crappy insurance company (and banks) and if they're lucky, the boss kicks in some cash.

This is why I've been ruthlessly exposing the brutal truth on defined-contribution plans on my blog. They don't work. RRSPs or 401(k)s in the US have been an abysmal failure as the de facto pension policy and if it weren't for a long bull market since the 2008 crisis, the situation would be a lot worse for millions retiring with little to no savings.

Importantly, unlike defined-benefit plans which pool investment and longevity risks, lower costs, and invest across public and private markets all over the world, and offer safe, secure benefits for life, defined-contribution plans shift retirement risk entirely onto workers, leaving them exposed to the vagaries of public markets and many of them will ultimately succumb to pension poverty.

I recently wrote two important comments on why deflation is headed for the US and why all of you, institutional and retail investors alike, need to prepare for the worst bear market ever.

I know, stocks soared on Wednesday to record highs as the Trump administration's proposed tax cuts leaked to the media, everybody is getting excited, there is a global bond rout going on, it seems Jeffrey Gundlach is right as yields on 30-year Treasuries are having their biggest two-day rise since December (click on image):


What is going on? Was Warren Buffett right earlier this year to ask who in their right mind would buy a 30-year bond? Was Beijing behind the whole move on US Treasuries to drive the US dollar lower and halt the yuan from appreciating (which exacerbates deflation in China)?

All a bunch of smoke and mirrors. I remain staunchly in the global deflation camp and note deflation is picking up everywhere and even in Germany, inflation failed to accelerate in September, reflecting the euro area’s continued struggle to restore price stability (click on image):


The appreciation of the euro since the beginning of the year didn't help stoke inflation in the Eurozone but there are structural factors at play here too.

Importantly, now is the time to be loading up on US long bonds (TLT), especially if you're a chronically underfunded pension. It's the best bang for your risk buck, bar none, and I would be viewing any selloff in US long bonds as a golden opportunity to load up before we suffer the worst bear market ever as deflation strikes the US.

Now, back to Canada's pension overlords. Someone from one of Canada's large pension plans recently contacted me to ask me if I updated my comment on the list of highest pension fund CEOs.

I told them I haven't but I have briefly discussed compensation at each of Canada's large pensions in each of my detailed comments going over their annual results:
Below, you will find a summary of total compensation of senior officers at each of these organizations except HOOPP which for some strange reason is considered a private pension plan and doesn't report compensation (it absolutely should make it publicly available in its annual report).

I updated information for the Caisse and OMERS because their annual reports don't come out at the same time as they release their results (this should be rectified by releasing everything all together like OTPP and others do). Click on images to enlarge.

Caisse (updated information from the 2016 Annual Report)


OMERS (updated information from the 2016 Annual Report)


OPTrust


Ontario Teachers' Pension Plan


CPPIB


PSP Investments


AIMCo


bcIMC


As you can clearly see, the big boys (and a few girls) at Canada's large pensions make big bucks. The compensation at HOOPP, while not public, is in line with the compensation at their large peer group (a bit less but not a lot less).

OMERS' CEO Michael Latimer and his senior CIOs in public and private markets enjoyed the biggest gains in compensation last year based on their 2016 and long-term results.

And these tables above only provide you with a glimpse of total compensation because the senior officers also get a defined-benefit pension for life and if they are fired for any reason other than performance or gross negligence, they are entitled to huge severance packages which run in the millions depending on how long they worked at these organizations.

Derek Murphy, the former Head of Private Equity at PSP, used to arrogantly tell me in private conversations: "Don't f@$k up, this is the best gig in the world." It most certainly was for him and other PSP senior officers who made multi-millions during their time there and then enjoyed a few more millions in severance (apparently, total severance packages PSP doled out in FY 2017 topped $30 million).

It's enough to make hard-working teachers, nurses, police officers, firefighters, municipal, provincial, and federal public-sector workers, and even doctors, lawyers, accountants, engineers and other professionals with no pensions reading this comment wonder why in God's name are we doling out millions in compensation to public sector pension fund managers?

The short answer to this? You don't want our large public pensions to end up like the ones in Kentucky, Illinois, New Jersey and other public-sector pensions in the US which are hanging on by a thread, and would be insolvent if they were using the discount rates Canada's large pensions use.

Importantly, the success at Canada's large pensions is built on a governance model that allows them to operate at arms' length from the government, allowing them to set compensation to attract and retain qualified staff to manage assets internally across public and private markets.

Are these guys paid extremely well? You bet, and my personal opinion is like many people in finance, they are grossly overpaid for the work they do. I base this on the work my 86-year old father who has no pension and still practices psychiatry three times a week does and gets compensated for (and taxed to death which he seems fine with and unlike me, thinks the Liberals are doing a great job).

But compensation cannot be based on what other professionals are making, it has to be based on compensation in a particular industry and in order to achieve stellar long-term results, Canada's large pensions need their compensation to aligned with their mission statement to attract and retain qualified individuals to manage billions across public and private markets to add value over benchmarks over the long run.

We can have another discussion on which benchmarks each pension uses or the fact that they are increasingly leveraging up their portfolio to juice their returns and whether this needs to be taken into account when determining compensation, but there is no doubt Canada's large defined-benefit pensions are delivering stellar long-term results and compensation is aligned with those long-term results (typically based on rolling four or five-year results).

Below, take the time to watch a great discussion on lessons from the Canadian pension fund model which took place last year featuring OTPP's CEO Ron Mock and the Caisse's CEO, Michael Sabia.

Also, CPPIB's President and CEO, Mark Machin, discusses how once a year, every CPPIB employee comes together to discuss what it means to truly live their Guiding Principles. I applaud CPPIB and others who have a dedicated YouTube channel and actually post clips regularly.

Lastly, take the time to watch this CTV News interview with Rick Hansen who along with Terry Fox, is a personal hero of mine and millions of others (watch this interview here if it doesn't load below).

The reason why I am including this interview is because Hansen brings up great points here and expresses concerns over how slow things are in Canada in terms of taking actions to include people with disabilities in our society.

I challenge all our leaders in the public and private sector to stop talking about diversity and start taking real, concrete and measurable actions to diversify your workplace at all levels of your organization. In particular, I'd like to see you target people with disabilities to hire them and include them at all levels of your organization.

Everyone deserves the dignity of work, especially people with disabilities who are treated inhumanely in our society, often marginalized and left fending for themselves in a brutal world.



Wednesday, September 27, 2017

Ohio Braces For Pension Cuts?

Alan Johnson of The Columbus Dispatch reports, Ohio’s public-employee pensions face cutbacks:
Public-employee pension funds are big business in Ohio, providing a safety net for 1.75 million people.

There’s a lot riding on them.

Collectively, Ohio’s five public pension funds have $192 billion in assets and last year paid out more than $15 billion in pension benefits and $1.1 billion in health-care benefits. They are not required by law to provide health insurance, but all five do. Whether they will in the future is uncertain.

Although the funds have been mostly reliable and financially sound for decades, recent economic downturns, soaring health-care and prescription-drug costs, and the increased longevity of retirees have taken a toll. Several of the funds are reducing or eliminating cost-of-living adjustments, cutting subsidies and increasing health-care premiums.

The five funds are the Ohio Public Employees Retirement System (public workers); State Teachers Retirement System (teachers); School Employees Retirement System (school-bus drivers, cafeteria workers, janitors, secretaries); Ohio Police & Fire Pension Fund (municipal police officers and firefighters); and the Highway Patrol Retirement System (state troopers). The Ohio General Assembly has oversight of all five through the Ohio Retirement Study Council.

The big question: How long can the pension funds hold out financially in this economic climate? A study released in December by the Mercatus Center at George Mason University painted a gloomy picture.

“Ohio’s four largest public pension plans are severely underfunded based on traditional metrics of pension solvency, and they are only guaranteed to be able to finance their promised obligations for roughly the next decade without additional taxpayer contributions,” economists Erick Elder and David Mitchell wrote.

“However, the funding ratio does not take into consideration the investment risk associated with pension-plan assets; even if Ohio’s pensions were fully funded today, they would still only have a fifty-fifty chance of being able to fulfill their promises in the year 2045.”

The School Employees Retirement System

Members of this pension fund are the lowest-paid of the five, averaging about $24,000 a year, and the fund is under fire from members and the Ohio Association of Public School Employees, a labor union, because of proposed changes in cost-of-living adjustments.

Retirees receive a 3 percent COLA one year after retirement, but fund administrators propose eliminating the COLA from 2018 to 2020 and then capping it at 2.5 percent thereafter. Retirees would get no COLA until their fourth anniversary.

About 200 union members marched last week from the Statehouse to the fund headquarters at 300 E. Broad St. in protest. Some said they are worried that the proposed COLA changes signal bigger problems.

“The fear people have is not having a pension,” said OAPSE President JoAnn Johntony, 76, head custodian in the Girard City Schools in Trumbull County, where she has worked for 50 years. “To try to solve these problems on the backs of school employees is wrong.

“We have to live and pay bills like everybody else,” Johntony said. ’They’re not seeing the human side of this. They’re not seeing how this affects our daily lives.”

Lois Carson, 57, the union’s vice president and a secretary in the Columbus school district, said she will live on her late husband’s small pension and her pension when she retires.

“I will probably be moving in with my kids to survive,” she said. “I’m very scared about it.”

Facing increases in health-care costs, SERS retirees will be making less in retirement benefits than they did 30 years ago, Carson said.

The fund must get legislative approval for the COLA changes. Bills are pending in both the Ohio House and Senate. Administrators say the changes are needed to stabilize the fund and continue to provide health-care benefits that otherwise probably would run out in less than a decade.

The Ohio Retirement Study Council recommended last week that the legislature approve the COLA adjustment for the school-employees fund.

Ohio Public Employees Retirement System

With 1 million active members and retirees, this is the largest public pension fund in Ohio and the 12th-largest public retirement system in the nation. It affects about 1 in 12 Ohioans and has 3,680 public employers in the system.

Changes began in 2012 when the General Assembly approved cost-cutting measures.

OPERS spokesman Todd Hutchins said the changes keep the health-care package intact “for the foreseeable future.” Hutchins said the fund is 80 percent funded for the future, falling within the 30-year requirement under state law for paying off pension liabilities.

Some of the changes, however, will make it harder for younger retirees and spouses of retirees. New retirees will pay about $219.33 in monthly health premiums, more than six times what retirees paid last year. The fund is also ending both premium payments and reimbursement of some Medicare expenses for the spouses of members.

Ohio Police & Fire Pension Fund

The fund provides pension, disability and optional health-care benefits to full-time police officers and firefighters and their dependents.

“We continue to meet the state requirements as far as our funding level. That’s something we have to look at every year,” spokesman David Graham said. “We must be able to pay off our unfunded liabilities in a 30-year period, and we’re at 29 years.”

But changes are coming for fund members as trustees begin the process of providing stipends to retirees to seek their own health-care coverage rather than providing health insurance for them.

John Gallagher, the fund’s executive director, told The Dispatch, “Our investment returns in 2016 were excellent, with a net 10.9 percent return for the year. Our current challenge is finding a way to sustain a health-care option for our retired population. While it is not a requirement that we provide a health-care plan, we realize it is a vital part of a secure retirement.”

State Teachers Retirement System

Like other public employees, retired teachers face big changes in their benefits. As of July 1, the system will temporarily eliminate all new cost-of-living increases in pensions to “preserve the fiscal integrity of the system.” Spokesman Nick Treneff said the situation will be re-evaluated in five years.

The system previously reduced the annual increase to 2 percent from 3 percent.

Treneff said the decision to eliminate the COLA resulted from three factors: lower-than-expected returns on investments, a larger-than-expected payout in pension benefits, and new mortality statistics showing that retirees are living longer, thus increasing the fund’s financial liability.

“Health care isn’t a requirement, but we know members value it,” Treneff said “To have good coverage is essential to the life of retirees. We don’t divert any money to health care from employee contributions.”

Ohio Highway Patrol Retirement Fund

With 3,200 members, the fund is by far the smallest pension system, and it has had to increase health-care premiums annually to remain in the black.

Like the other funds, the patrol system is struggling to meeting costs, said Mark Atkeson, the executive director. “Health-care costs have skyrocketed. The collapse of 2008-2009 set everything back, and we’re not completely recovered from that.”

Last week, the retirement study council approved removing a provision allowing patrol members to retire at age 48 with unreduced benefits; it also approved some reductions in off-duty disability and survivor benefits. The changes need the approval of the legislature.

Although those adjustments will help, the system’s health-care fund is projected to run out of money in less than a decade, Atkeson said.
Michael Katz of Chief Investment Officer also reports, Ohio PERS Considers Cutting COLA for Retirees:
The $90.6 billion Ohio Public Employees Retirement System (OPERS) said it is considering limiting the cost-of-living adjustments (COLA) for its retirees.

“Our retirees are living longer, requiring us to pay benefits for many more years than in the past. Further, we are in a decades-long period of low inflation,” said OPERS Executive Director Karen Carraher in a mailer to plan participants. “With this environment in mind, we have begun to gather feedback from members, retirees, and stakeholder groups about potential changes to the cost-of-living adjustment that would affect current retirees.”

OPERS started providing a COLA in 1970, and it has changed several times since then, according to Carraher, who said the purpose of a COLA is to lessen the effects of inflation on participants’ pension benefit, not to fully offset it. OPERS currently has a fixed 3% COLA for its retirees. For those who retired after January 2013, that COLA is scheduled to match the Consumer Price Index (CPI), with a maximum adjustment of 3% starting in 2019.

“The CPI has topped 3% only five times during the past 25 years, so OPERS’ fixed COLA has resulted in a net benefit increase for many retirees,” said Carraher. “Simply put, the COLA we are paying is exceeding the CPI in these low inflationary times.”

Because of this, OPERS has proposed a plan to base the COLA for all retirees, including current retirees, on the CPI capped at 3% starting in 2019. For plan members who retired before 1990, and who have seen inflation reduce their purchasing power, Carraher said OPERS could provide a one-time benefit increase.

“We are also looking at other options,” said Carraher, “including a COLA freeze and a COLA based on the CPI capped at 2.5% or 2%. There are many other scenarios that could be added as we gather feedback.”

Any changes to the COLA require approval by the OPERS Board of Trustees as well as the Ohio Legislature. According to Carraher, OPERS is funded at 80%, and is well within the state-mandated limits for pension fund solvency.

“However, we can’t always count on the future reflecting the past,” she said. “In order to retain our strong financial position, and continue to offer the COLA to current and future retirees, we are considering these steps now. As we go down this path together, it is important to stress we are gathering feedback and will move through a very open and public process to evaluate changes.”
As you can read, things aren't looking good at Ohio's public sector pensions and active and retired members are right to be concerned.

Ohio's pension woes are part US pension storms from nowhere which I recently covered in detail. It's not as bad as Kentucky, where public pensions are finished and I keep reading articles on this website that it's only getting worse.

But Ohio has its pension issues to contend with and it needs to get real on public pensions to sustain them over the long run.

This week, I covered the University of California's pension scandal where I made the following recommendations to shore up their pension plan:
  • Immediately cap all pensions to a certain amount, including those of these pension "elites" and let them take you to court if they feel you are reneging on their contract.
  • Immediately raise the contribution rate and cut benefits (fully or partially remove cost-of-living adjustments) until the plan gets back to fully-funded status.
  • Make pension contribution holidays illegal at UC and everywhere in California and the United States. Period.
  • Raise the retirement age of UC's professors to 65. If my 86 year-old father who like most doctors everywhere has no pension can still work as a psychiatrist three times a week, these professors can tough it out in academia till 65 (most work well past that age).
  •  Forget shifting new professors to defined-contribution (DC) plans. The brutal truth is they're horrible and will only ensure pension poverty down the road. UC needs to curb pension largess but shifting to DC will only ensure pension poverty and make it harder to attract qualified staff.
  • Follow Canada's CAAT Pension Plan when it comes to the gold standard in pensions for university defined-benefit pensions. CAAT Pension Plan is a jointly sponsored plan where sponsors share the risk of the plan if it goes into deficit. You can read all about this plan here and read their 2016 annual report here.
Now, I realize it's hard capping pensions after the fact and illegal but dire situations require drastic actions.

In Ohio, things aren't that bad but I would definitely make some recommendations:
  • Introduce a shared-risk model and make sure employees and the plan sponsors share the risk equally. This effectively means when the plan runs into trouble, contributions are raised and benefits are cut (fully or partially remove COLAs) until plans are back at fully-funded status.
  • Alamagate all of Ohio's public sector plans into OPERS which is actually well run and has better governance than all the other plans. When it comes to pensions, bigger is better as long as the governance is there.
  • Get real on investment assumptions and future returns and prepare for the worst bear market ever
I'm dead serious about that last one and added to my US long bonds (TLT) at the open this morning as everyone got excited about tax cuts and bonds sold off (click on image):


Too little, too  late. Don't get excited, be prepared here, the pension storm cometh and it will wreak havoc across US public and private pensions, especially once deflation strikes the US.

Below, the Silver Report Uncut reports the pension crisis has now moved to Ohio. Faced with no funding Ohio scrambles to hold on by eliminating the COLA cost of living adjustment. Pensioners worry about their ability to afford retirement.

Take these doomsday clips with a shaker of salt, the situation isn't apocalyptic, these are long-dated liabilities, but it's clear there needs to be certain changes, including changes to risk-sharing and governance, to bolster Ohio's public defined-benefit plans over the long run.

But make no mistake, the US pension crisis is here to stay, it's deflationary and it will exacerbate pension poverty and keep us in a low growth, low inflation world for years.

Tuesday, September 26, 2017

Steven Cohen's Dubious Rerun?

Nir Kaissar of Bloomberg reports, Steve Cohen's Dubious Rerun:
Don’t call it a comeback just yet.

As Bloomberg News reported on Tuesday, hedge fund manager Steven A. Cohen is preparing to raise as much as $10 billion from outside investors in 2018 for a new fund. Combined with his personal fortune of $11 billion, the fund could oversee more than $20 billion, which would make it the largest U.S. hedge fund launch in history.

Do It Again

It would also mark an extraordinary turnaround for Cohen. Just four years ago, he made history in all the wrong ways. His hedge fund firm at the time, SAC Capital Advisors LP, was charged with insider trading. The firm pleaded guilty and paid a record $1.8 billion penalty.

In addition, six current or former SAC employees were convicted of various criminal charges related to insider trading. Cohen was never charged with insider trading, but the Securities and Exchange Commission did accuse him of failing to supervise misbehaving employees. In the ensuing settlement, Cohen agreed not to manage outside money until Jan. 1, 2018.

Theories abound about why Cohen would want to get back in the game of managing other peoples’ money, ranging from ego to boredom. And in the end, he may not go through with it.

Cohen clearly doesn’t need the money. Sure, it would be nice to have outside investors help pay for his 1,000-employee family office, Point72 Asset Management LP. But the profits on his personal investments should more than cover those expenses.

Maybe, as Fortune writer Jen Wieczner put it, “Steve Cohen wants people to believe that he never did anything wrong. So how does he prove that? Well, if he can deliver the highest returns -- at least as high as he always has -- while he literally has people from the government, including a government appointed compliance monitor, in his office, then people are going to believe that he really is just that good.”

But trying to recreate the SAC magic with $20 billion would be a huge gamble. If Cohen falls short, it would only reinforce the suspicions he might be trying to dispel. And generating outsize returns with that much money won’t be easy.

Hedge funds generally don’t disclose their performance to the public, but Frontline published a chart in 2014 showing SAC’s annual returns from 1992 to 2012. Using that chart, I estimated the performance of SAC Capital Management LP -- SAC’s fund for U.S. investors -- during that period.

The fund’s performance over the entire period was spectacular. SAC tripled the return of the broad market with comparable risk. The fund returned roughly 26 percent annually over those 21 years with a standard deviation of 22 percent. Over the same time, the S&P 500 returned just 8 percent annually, including dividends, with a standard deviation of 19 percent. (Standard deviation reflects the performance volatility of an investment; a lower standard deviation indicates a less bumpy ride.)


There’s a critical detail in the numbers, however. Cohen launched SAC in 1992 with $25 million. Over the next 10 years, the fund returned roughly 43 percent annually, or 30 percentage points annually better than the S&P 500.

Then investors piled in. The firm eventually ballooned to $16 billion, and sustaining those monster returns became ever more difficult along the way. Over the 10 years that ended in 2012, the fund returned roughly 12 percent annually, or 5 percentage points annually better than the S&P 500.

It’s not just SAC. According to Hedge Fund Research Inc., hedge funds managed $100 billion in 1992. Over the next 10 years, the HFRI Fund Weighted Composite Index returned 15 percent annually. By 2012, hedge funds were managing $2.3 trillion, and the returns over the previous 10 years shrunk to 7 percent annually.

Size Kills

As the hedge fund industry has grown, returns have shrunk

It’s a recurring theme in finance: Size kills. There’s a reason why one of the best-performing hedge funds of all time, Renaissance Technologies’ Medallion Fund, obsessively caps its capacity at $10 billion. And yet it’s a lesson that both managers and investors routinely fail to heed.

It's one that Cohen can't ignore as he decides whether he wants to try to reconjure the magic.
Rachael Levy of Business Insider also reports, Steve Cohen just took a big step forward in his comeback with a massive new hedge fund:
Steve Cohen, the billionaire hedge-fund manager briefly banned from the industry after an insider-trading investigation, this week sent investors documents pitching his new fund, Stamford Harbor Capital, a person who has reviewed the deck told Business Insider.

The pitch is the latest move cementing the controversial billionaire's return to managing money.

Investors will have to agree to steep terms to put their money with the famed investor — including a minimum investment of $100 million and an annual management fee of over 2.5% of those assets — this person said, asking not to be identified discussing private information.

Jonathan Gasthalter, a spokesman for Cohen, declined to comment for this story.

Cohen's new fund is arguably one of Wall Street's most anticipated new launches. Bloomberg News reported earlier this month that he could raise between $2 billion and $10 billion. At the high end, it would be the largest hedge-fund launch in history.
'Wink wink, nudge nudge'

Until now, though, investors, advisors, and others in the hedge-fund industry said Cohen's representatives had limited themselves to vague and almost bizarrely hypothetical conversations about the fund along the lines of: If a particular person named Steve Cohen happens to launch a fund, and that fund happens to open next year, what would it take for an investor to sign on?

"It was a lot of wink wink, nudge nudge," said one person, who spoke of meetings before the documents were sent this week. As Bloomberg News reported earlier this month, the official line, meanwhile, was that Cohen was undecided about his plans.

Cohen has been running a family office called Point72, with some $11 billion in assets, since 2014 after he agreed not to manage other people's money and return outside investors' capital. The agreement came after a years-long insider trading investigation at Cohen's SAC Capital that ended with a conviction for one of Cohen's subordinates but not him. His failure, according to the SEC, was to supervise those traders as head of SAC Capital. SAC also pleaded guilty and paid a record fine, $1.2 billion, to settle insider-trading claims.

The ban will be lifted in January 2018.

Now, in anticipation of this, Cohen's marketing is being led by a man named Doug Blagdon at an advisory firm called ShoreBridge Capital who previously led the marketing effort at SAC Capital. Blagdon didn't immediately respond to requests for comment.

Wealthy investors, funds of hedge funds and sovereign wealth funds are the most likely investors in Cohen's new fund, people in the industry say. Public pensions, endowments, and foundations that have become major backers of the hedge fund industry are likely to stay out because they face greater public scrutiny and may find it difficult to explain an investment with a manager who — though he generated huge profits — was tarred by an association with a huge insider trading scandal.

Cohen is also said to have lined up firms to handle the back-end of a hedge fund's operations — the prime brokers who would manage settlement of trades and other basic functions as well as the "cap intro" teams at big banks who serve as gatekeepers to investors. Still, the pitch to investors is not yet widespread, and may never be. Many investors who are usually briefed on hedge fund launches say they have yet to hear anything.

Privately, Cohen has expressed doubts about whether he should come out again, a potential investor who also knows Cohen personally said. Cohen's family office hasn't recently posted the kind of 30% annual returns that he was once famous for.

"I suspect the real question is whether Cohen can still achieve outsized alpha," said Chris Cutler, a consultant, using a hedge-fund term for outperformance. "If even he can't, what is the fate for other long/short-focused managers? I think Cohen will have a willing and ready list of LPs ready to invest with him. He doesn't need to worry about which LPs won't invest with him."

Staffers at Point72, which has been investing Cohen's billions since SAC got shut down, have been largely kept in the dark. They were unsure until recently whether Cohen would open up again. Those who know Cohen personally say the same.

Staffers said they hoped that Cohen would raise outside money – it would show a sense of permanency for their jobs and would make it less likely that Cohen would shut the operation down voluntarily, a person familiar said. Creating a hedge fund would also spread the cost of employees and support staff among other investors — as Point72 is currently managing Cohen's own money and that of some employees.

The hefty demands being made of investors — the minimum investment and fees — are a luxury only afforded to the most superstar investors. Cohen is one, famed for his consistent double-digit returns before he was rocked by the insider-trading investigation.

He has an army of admirers, often those who were made rich by him, either by working for him directly or by investing with him. Many think he has never done anything wrong, and that he's the greatest investor of all time.
Blatant 'no'

But he's also a polarizing figure because of the legal issues.

For at least two investors Blagdon has reached out to, and other potential investors who have yet to hear from him, the answer is a blatant "no."

No matter that the past several years, Cohen has tried to clean up his image. He hired former Department of Justice staffers and McKinsey consultants, and started a training program for young college grads – something Business Insider was invited to tour.

To show how compliant he was, he even put a ban on hiring from Visium, an $8 billion-dollar fund that shut down amid one of the most recent insider-trading scandals, before the public knew that Visium was even under investigation.

Still, it would be "willful ignorance" to think Cohen didn't have some hand in the trading, or at least know about it, one person in the industry said.

Investors who worry about this won't be investing.
Jon Shazar of Deal Breaker also reports, Kicking And Screaming Steve Cohen Being Dragged Back To Hedge Fund Industry:
At long last, the pretense that Steve Cohen’s return to the hedge fund industry (which is not really a return at all, but whatever) is lifting: Now, in addition to the third-party marketer and fee structure and growing global footprint and ramped-up hiring and shadow-boxing with British regulators and all the rest of it, there’s something tangible and not easily deniable in a “we’re just trying to run the best damned family office we can” sort of way: a marketing deck for Stamford Harbor Capital that’s been seen by real potential investors, albeit not all that many of them.
Until now, though, investors, advisors, and others in the hedge-fund industry said Cohen’s representatives had limited themselves to vague and almost bizarrely hypothetical conversations about the fund along the lines of: If a particular person named Steve Cohen happens to launch a fund, and that fund happens to open next year, what would it take for an investor to sign on?

“It was a lot of wink wink, nudge nudge,” said one person, who spoke of meetings before the documents were sent this week.
There is also the matter of the service providers being lined up, including cap intro folks who’ll get to pitch potentials on the twice-in-a-lifetime opportunity to invest with the great man, now at the low, low price of a 2.5% management fee and $100 million minimum investment, which are the sorts of things that family offices don’t really need but that hedge funds do.

Even still, however, there are those clinging to the belief that Cohen will not, in fact, begin managing outside money again. Including, the rumors and water-cooler talk on Cummings Point Road say, Steve Cohen himself.
Privately, Cohen has expressed doubts about whether he should come out again, a potential investor who also knows Cohen personally said. Cohen’s family office hasn’t recently posted the kind of 30% annual returns that he was once famous for….

Staffers at Point72, which has been investing Cohen’s billions since SAC got shut down, have been largely kept in the dark. They were unsure until recently whether Cohen would open up again. Those who know Cohen personally say the same.
So why, wracked with self-doubt and with his heart not in the project, would Papa Bear be willing to put himself out there? To risk getting hurt again? To deal with slings and arrows like the following?
For at least two investors Blagdon has reached out to, and other potential investors who have yet to hear from him, the answer is a blatant “no….”

It would be “willful ignorance” to think Cohen didn’t have some hand in the trading, or at least know about it, one person in the industry said.
Open your eyes (and hearts), people: Steve Cohen is not doing this for himself! He doesn’t need the money, even if it would come in handy when that tax bill shows up or during his next visit to Christie’s. It’s not even about redeeming his good name. No: Coming back, in the face of the scorn and sniggers, isn’t about raking in a cynical $250 million a year just for sitting on people’s money. It’s about helping people. It’s about not disappointing his fans and his dependents. It’s practically a philanthropic effort for this man focus his time and attention on managing outside capital at these ridiculously low ratess.
Staffers said they hoped that Cohen would raise outside money – it would show a sense of permanency for their jobs and would make it less likely that Cohen would shut the operation down voluntarily, a person familiar said….

He has an army of admirers, often those who were made rich by him, either by working for him directly or by investing with him. Many think he has never done anything wrong, and that he’s the greatest investor of all time.
Lastly, Ronald .orol of The Street reports, The Astonishing Return Of Steven Cohen:
In 2013, an insider-trading scandal took apart billionaire Steve Cohen's otherwise incredibly successful hedge fund.

But surprising, perhaps shockingly, at least for those who haven't followed the situation closely, Cohen is back. A 2016 settlement with the Securities and Exchange Commission will allow the beleaguered money-manager to accept outside money starting in January. Cohen hasn't said whether he wants to take on other investors, but the consensus opinion is that he will the second he's permitted. Expect to find lots of willing investors ready to allocate capital to his funds - and the intense glare of the nation's securities regulator watching his every move.

"I say this with a certain pessimism, but I think he'll have no difficulty marketing his fund to a certain kind of investor," said Columbia Law School Professor John Coffee. "The investors don't take the risk of criminal liability, Cohen and his fund managers do."

In 2013, Preet Bharara, then the U.S. attorney for the Southern District of New York, issued an indictment of Cohen's fund, S.A.C. Capital Advisors, the only time a whole hedge fund had been charged with insider trading. Specifically, the SEC charged Cohen with failing to supervise employees, some whom were convicted of insider trading while working for the fund.

"Bharara came within a whisker of charging Cohen," Coffee said. "It was a judgment call, and he didn't want to take the risk of losing a high-profile case."

At the center of the SEC's charges involved so-called "expert networks," firms that provide specialized information about companies and industries to hedge funds, mutual funds, and other investment firms in exchange for large fees. In the case, the SEC alleged that an S.A.C. Capital portfolio manager, Mathew Martoma, traded on confidential information about a drug trial provided by Dr. Sidney Gilman. Gilman was chairman of a safety-monitoring committee overseeing the clinical trial and a paid consultant to an expert networking firm that Cohen's hedge fund employed.

Flash forward to 2017. Cohen manages a "family office," Point72 Asset Management LP, based in Stamford, Conn., under an SEC exemption that lets him advise family members only. Cohen's family office, however, has over 1,000 employees and offices in New York, London, Hong Kong, Tokyo, and Singapore.

Point72's capital can sometimes be found at companies targeted by an activist investor. The firm reported a significant stake in Pandora Media Inc. (P - Get Report) , where Corvex Management's Keith Meister has been agitating. It also owns stakes in BroadSoft Inc. (BSFT - Get Report) , Brookdale Senior Living (BKD - Get Report) CenturyLink Inc. (CTL - Get Report) and Bob Evans Farms BOBE, all also recent targets of activist efforts. Post Holdings on Tuesday announced it was buying Bob Evans for $1.5 billion, at a significant premium.

Should the high-profile money-manager start accepting external investors, expect the SEC to be watching intensively, taking special notice if Cohen's fund engages the same kinds of expert networks that got him into trouble in the first place.

"If I were Mr. Cohen I would be quite careful about employing expert networks," said Tom Gorman, a partner at Dorsey & Whitney LLP and a former senior counsel at the SEC in Washington. "The SEC may well want to look at the sources behind the information coming from the expert networks."

Gorman suggested that the agency may have less concern about those networks if its analysts are not also employed in a particular industry. However, if, for example, the networks bring in doctors who are supervising trials for drug companies that would be a red flag, he added.

And Columbia's Coffee agrees that the commission will be watching. "The SEC is like the elephant, it never forgets. They'll always have him in mind," Coffee said.

Looking back at the Cohen case, prosecutors, ex-SEC lawyers, and academics all contend that it would likely have been a lot easier for the government to prove its insider-trading case today, following a federal appeals court decision last month to uphold Martoma's conviction.

Specifically, in a 2-1 decision, the U.S. Court of Appeals for the Second Circuit found that a lower court's ruling should stand and that the government had "presented overwhelming evidence that at least one tipper had received a financial benefit" from providing confidential information to Martoma.

"Based on this [August] result, the SEC may have gotten what they initially requested in the case -- to bar him [Cohen] from the securities business," Gorman said.

Nevertheless, Gorman noted that the August court decision wouldn't have any direct impact on Cohen's situation because he settled with the SEC in a January 2016 deal that prohibited the billionaire money manager from accepting outside money for two years. Had that settlement come after the August decision, Cohen might not be posed to return to the investment advisory game.

Now, Cohen appears to be taking steps to accept outside money. In March, he set up a hedge fund next to Point72 called Stamford Harbor Capital, of which he owns 25%.

"One reason to set up a hedge fund like Stamford Harbor Capital is to establish a track record for a particular kind of strategy before seeking to accept outside money," Gorman said. "This way the adviser can tell outside investors that the fund, with a particular trading focus, has achieved a certain return over a period of time."

Also, Cohen reportedly hired ShoreBridge Capital Partners to gauge and identify interest among outside investors in such a fund. Prospective clients have reportedly already begun receiving marketing material, and Bloomberg reports that Cohen could raise between $2 billion and $10 billion. Shorebridge did not return calls.

Many investors are sure to express an interest. Kerrisdale Capital founder Sahm Adrangi, a prolific activist, and short-seller said he expects that Cohen's fund will meet tough compliance requirements for big funds that take in outside money. That level of oversight should comfort investors interested in allocating capital but wary of Cohen's background.

"These platform shop firms have a very strict compliance infrastructure," Adrangi said. "They have a lot of officers and software and technology they use to monitor everyone across-the-board with respect to compliance."

For now, expect investors -- and the SEC -- to be paying close attention.
Love him or hate him, there's no doubt Steve Cohen is one of the best hedge fund managers of all time.

There is also no doubt he's coming back to run a hedge fund and he will most definitely have a say in investments and trading operations.

I actually called Point72 Asset Management this morning to arrange a short (15 minute) phone conversation with Steve Cohen and was politely turned down by Mark Herr, Managing Director, Head of Corporate Communcations at Point72:
"Steve has asked me to respond to your email, seeking an interview with him for your blog.

We’re going to pass.

Sorry we can’t be more helpful on this."
Given how quickly Mark responded to my email inquiry, I highly doubt Steve Cohen even read my email. Or maybe he did and remembered an older comment of mine, the perfect hedge fund predator, and said "no way, this guy is nuts!". 

Whatever, it doesn't matter if Steve Cohen doesn't want to talk to me, I will give you my honest and fair opinions here. Cohen most definitely wants to come back to manage outside money and it has nothing to do with money or ego, it's all about his legacy.

In his deepest moments of self-reflection, Cohen has to be thinking about his legacy and how he will be remembered. He doesn't want people to remember him as the hedge fund king who ran the world's biggest insider trading hedge fund. He wants to be remembered as one of the best, if not the best, hedge fund manager who ever lived.

Of course, his reputation is forever tarnished. He knows this, he's not an idiot. But think what you want about SAC Capital and all the shady things that went on there, there's no doubt he is an incredible trader who has a great sense of markets and he hired very talented traders and individuals. 

Will he be able to produce 30%++ annual returns ever again? No, not in his wildest dreams. That's just a pipe dream not just for him but for Jim Simons, Ken Griffin, George Soros, Ray Dalio, David Tepper and many other "elite" hedge fund managers I cover here every quarter

And what gives him the right to charge a 2.5% management fee and demand $100 million minimum investment? Nothing, he's Steve Cohen, he can charge whatever he wants, and at one time was charging 3% management fee and 50% performance fee to manage outside money (How do you think he amassed a fortune in the multi billions? It wasn't his good looks and charm!).

Will institutional investors accept those terms? Some will, some won't. I highly doubt Jagdeep Bachher over at the University of California will (maybe he will) but I can almost guarantee you Ontario Teachers' Pension Plan, the Caisse and CPPIB will have a very close look at Cohen's new hedge fund regardless of his terms and shady past. 

If they don't, they won't be doing their job and fulfilling their fiduciary duty. Period. 

I would even go back to Cohen and say "Why don't we agree on a 3% management fee contingent on a 15% hurdle rate above Libor? If you don't attain the bogey, management fee drops to 50 basis points. How do you like them apples, big guy?"

In all seriousness, every large institutional investor in the world should be looking very hard at Steve Cohen's new fund, send a due diligence team down there, kick the tires thoroughly and talk to a lot of senior and junior staffers, even Papa Bear himself if he's willing to take some time from his busy schedule to talk to you. 

Last Friday, I warned my readers to prepare for the worst bear market ever. I believe that now is the time to get to work to find great hedge fund and private equity partners who are able to deliver alpha over a very long period. 

Forget Warren Buffett's bet, forget everything you think is proven right because markets keep making record highs, you need to prepare for a long, arduous bear market across public and private markets.

Now more than ever, you need to be allocating risk a lot more intelligently even if it means paying big fees to outside managers with proven track records. Period. 

And if my fears of deflation coming to the US prove right, you need to find hedge funds that know how to trade and deliver alpha in highly volatile markets (the lower rates go, the more volatile things will get).

In short, you need a guy like Steve Cohen to add alpha to your portfolio but also to leverage off his deep insights on markets. You don't have to love him. You are a number to him and he should be the same to you but try to learn from him as much as possible by investing with him and other elite hedge fund managers. 

That's all I have to say about Steve Cohen's "dubious rerun". I'll send my comment over to Papa Bear and if he has anything to add, I will update you. 

Below, Bloomberg's Simone Foxman discusses Steve Cohen's pitch for a comeback. I agree that he was targeted and singled out among a group of hedge funds back then.

Also, Fox Business News' Charlie Gasparino reports billionaire investor Steve Cohen could be plotting a comeback. Gasparino and Liz Claman  talk on Closing Bell and he provides interesting insights on Cohen's next moves.

Lastly, watch the PBS Frontline investigation, To Catch a Trader, and Sheelah Kolhatkar, author of Black Edge, discusses the government's wide-reaching fraud investigation against Cohen on Lunch Break with Tanya Rivero as well as how Cohen emerged from the investigation as one of the world's wealthiest men.

You should watch these clips with a shaker of salt. They're not wrong but blatantly biased and let me assure you, SAC wasn't the only big hedge fund that routinely engaged in shady activities to gain an edge. It got caught while others never attracted the attention to get caught.

Also, people make mistakes in life, they learn from them and move on. Cohen had plenty of time to think about the mistakes he made and how he wants to rebrand himself and run his new fund, making sure everything is kosher and upfront no matter what. 

Let me leave you on another note. The multi-strategy hedge fund that really impresses me these days is Balyasny Asset Management which has been hiring from Citadel, Point72 and J.P. Morgan. Steve Cohen isn't the only big player out there and there's a lot more competition out there nowadays.

Cohen knows this all too well but I think he's ready to put the past behind him and make the comeback of his life.

And yes, if I had a choice to work at Bridgewater and deal with Ray Dalio's obsessive focus on culture and principles or working with a bunch of great traders under Cohen's watch, I'd opt for the second, hands down. Both are high-pressure, cutthroat shops but one is a lot more fun to work at.

Update: Things aren't starting off well for hedge fund king Cohen. According to the New York Times, just months before starting his new fund, Cohen lost his top trader, Phil Villhauer.