Tuesday, September 18, 2018

CalPERS CEO Under Fire?

Adam Ashton of the Sacramento Bee reports, CalPERS hired a CEO without a college degree. Now the public pension fund is explaining why:
Marcie Frost did not claim to have a college degree when she applied to lead the California Public Employees’ Retirement System in 2016. She emphasized it in blue ink, writing “not degreed yet” in a box that asked about her education.

But two years after she got the job, Frost is under fire with a financial blogger alleging that she mischaracterized her education in her application and in a subsequent press release by implying she was further along in obtaining a degree than she actually was.

The report from blogger Susan Webber now is raising questions among retirees who are learning for the first time that the CalPERS chief executive officer did not graduate from college. Webber’s reporting this year has already led CalPERS to oust a chief financial officer and she has a dedicated readership among people who pay close attention to the fund.

“We are surprised. You just assume in today’s market if you’re going to be CEO of the nation’s largest retirement system that you’d have some kind of degree,” said Tim Behrens, president of California State Retirees. He added, “I don’t think anything happened badly because of her lack of a degree.”

Read more here: https://www.sacbee.com/news/politics-government/the-state-worker/article218274435.html#storylink=cpy

The questions date back to the CalPERS Board of Administration’s decision in 2016 to select Frost as the successor to Anne Stausboll. Board members said they chose Frost because of her commitment to engaging with retirees and public employers, as well as her track record leading Washington state’s public pension fund, the $90 billion Department of Retirement Systems.

CalPERS did not list a college degree as a necessary qualification for the job when it began searching for Stausboll’s successor. Frost said she told the board and a headhunting firm that she was interested in pursuing degrees at The Evergreen State College in Olympia, Washington, but board members did not ask her to complete a program when they hired her.

Frost, 54, said her career accelerated first in Washington state and then at CalPERS since she first took classes at Evergreen in 2010. She did not enroll in a class after that year, although she said she still intends to complete a degree some day.

“It’s something that I will finish in my life but this position at CalPERS is the most important thing I’m doing today,” she said.

Frost’s salary in her last full year in Washington state was $139,000. She earned $387,000 at CalPERS last year, according to state salary records.

No ambiguity, board members say

Five board members told The Sacramento Bee that there was no ambiguity about Frost’s education in her application or in her interviews. They said they chose her because they believed she was someone who could work with a public governing board and bring together people with strong and opposing opinions about CalPERS to advance the fund’s goals.

“It was very clear (Frost) did not have a degree,” CalPERS Board of Administration member Dana Hollinger said. “We were told she was not a college graduate. It never got more nuanced than that.”

Theresa Taylor, another CalPERS board member, said Frost closed her interview by reminding board members that she did not have a degree. Taylor said Frost told the board she was interested in obtaining one and she would make it a priority if the board asked her to do so. The board did not direct her to earn a degree.

“Quite frankly it’s not a piece of paper. It’s about somebody who can do a job. She presented herself as the best person who could do the job in that interview,” said CalPERS Board of Administration Vice President Rob Feckner. He described Frost as “up-front, very forthcoming” in disclosing that she did not have a college degree.

The chief executive is not the highest paid position at CalPERS, or the post that recommends major investment decisions for the fund. That position is chief investment officer, a position that has mandatory education requirements in its job description. CalPERS is recruiting a new chief investment officer, and Frost will oversee that position.

She rose up the ranks over 30 years in Washington State government and held a series of leadership positions at its pension fund between 2000 and 2016. She said she began working for the state on a 30-day temporary clerical contract as a young mom. That led to a nine-month contract, and eventually full-time work.

“I think that 30-day (contract) really illustrates what I did throughout my career. I work very hard, I get completely consumed by that job, and I want to build capacity in that job,” she said.

Washington State Gov. Jay Inslee, who appointed her to lead his state’s public pension fund, through a spokeswoman told The Sacramento Bee that he would hire her back “and that one of the worst things California has done is taking her from us.”

A problematic press release

The questions date back to the CalPERS Board of Administration’s decision in 2016 to select Frost as the successor to Anne Stausboll. Board members said they chose Frost because of her commitment to engaging with retirees and public employers, as well as her track record leading Washington state’s public pension fund, the $90 billion Department of Retirement Systems.

Read more here: https://www.sacbee.com/news/politics-government/the-state-worker/article218274435.html#storylink=cpy
Webber pointed to a section in the hiring packet that indicated Frost was pursuing dual degrees at The Evergreen State College in Olympia when she applied to work for CalPERS.

In fact, Frost had not taken classes at the college in years.

Frost told The Bee that she described her educational goals to headhunting consultant Heidrick & Struggles, which CalPERS hired to help it select a chief executive. The firm listed the degrees she hoped to obtain in the information packet it prepared for the board, describing Frost as “currently matriculated in a dual degree program.”

CalPERS included a similar description of Frost pursuing degrees at Evergeen in its press release announcing her hire and in her employee biography. CalPERS has since edited the biography in a way that deleted a reference to Evergreen.

The headline of Webber’s Aug. 27 piece on Frost’s background read, “CalPERS CEO Marcie Frost’s Misrepresentations Regarding Her Education and Work History During and After Her Hiring.”

Webber declined to speak to The Bee by phone. In an email, she said the body of her work on CalPERS speaks for itself.

CalPERS board member Margaret Brown told Bloomberg last month that she wants CalPERS to open an investigation into Frost’s hiring. Brown was not on the board when Frost was hired. So far, she is alone in demanding some kind of action following Webber’s pieces on Frost.

Read more here: https://www.sacbee.com/news/politics-government/the-state-worker/article218274435.html#storylink=cpy

In a follow-up piece on Frost’s background, Webber connected her work this year revealing misleading information in ousted CalPERS Chief Financial Officer Charles Asubonten’s application to Frost’s performance.

Read more here: https://www.sacbee.com/news/politics-government/the-state-worker/article218274435.html#storylink=cpy

“While it may seem pedantic to hector Frost over her error-rife resume, it is actually telling evidence of her failings as a manager,” Webber wrote.

She further criticized CalPERS board members for accepting claims in Frost’s application. “The fact that the board can’t be bothered to do this right says they are not fit to serve and need to be replaced,” Webber wrote.

Webber’s take on Frost’s application resonated with retirees who believe CalPERS withholds public information and suffers from weak leadership.

To them, CalPERS did not have a good reason to describe Frost as pursuing a degree when she was not enrolled in a program and not making progress toward a credential.

“Part of it for me is the pattern of secrecy CalPERS does about everything,” said Tony Butka, a former state labor relations mediator. He wrote a letter to the State Personnel Board this week asking that it investigate Frost’s hiring and discipline board member Richard Costigan. Costigan also is a CalPERS board member who has defended Frost’s hiring in news reports.

“If it was OK to have a high school degree, fine,” Butka said. “But to imply she was working on it when she’s not, that’s wrong.”

Outside groups backing Frost

Outside of CalPERS, lawmakers and advocacy groups have weighed in on Frost’s behalf since Webber began writing about Frost’s education.

“The CalPERS Board of Administration has the appropriate authority to address internal issues should anything be deemed inappropriate. I do not believe that will be necessary in this instance,” said Assemblyman Freddie Rodriguez, D-Pomona, chairman of the Public Employees, Retirement and Social Security Committee.

On the other side of the aisle, state Sen. John Moorlach, R-Costa Mesa, said he appreciated that Frost has been “accessible and she’s been willing to meet, she has experience.” Moorlach is a pension reform advocate who proposes every year to adjust the retirement benefits public agencies can offer.

The League of California Cities, which has been the most outspoken advocacy group raising concerns about CalPERS’ fiscal health since Frost took office, also continues to back her. The league earlier this year issued a report that said CalPERS fees were becoming “unsustainable” for some of its members.

Leaders of the league say Frost has motivated cities to become more active in CalPERS, and kept them informed about important votes.

“From sitting down with the League’s executive officers this last spring, to meeting with mayors and council members from all over the state in June, we have appreciated the efforts of Ms. Frost and her team to listen, actively engage our membership and identify common ground.,” league Executive Director Carolyn Coleman said.

Frost on Wednesday spoke about her background during an all-staff meeting at CalPERS. “I have to stay focused. We have to stay focused. It really is the only way we can achieve the goals we have set,” she said.
Mr. Ashton followed up on this article with another, CalPERS CEO with no college degree: ‘Integrity’ or ‘sad, sad circus?’:
A coalition of public employee unions is doubling down on its support for CalPERS CEO Marcie Frost, who has been taking heat for several weeks since a financial blogger drew attention to alleged misrepresentations in Frost’s job application and in a press announcement describing her background.

The Labor Coalition on Sept. 5 sent its letter backing Frost to CalPERS Board of Administration President Priya Mathur.

The letter, signed by California School Employees Association President Dave Low, praises Frost’s outreach to unions and public agencies. It criticizes Susan Webber, the corporate management consultant and Naked Capitalism blogger, who wrote the original pieces drawing attention to public announcements that portrayed Frost as enrolled in a college program when in fact Frost was not actively pursuing a degree.

“Our understanding is that the CalPERS board hired Marcie Frost with full knowledge of her resume, experience and education. Whether Frost has, or is currently pursuing a college degree, is therefore immaterial as long as the CalPERS board knew the facts when they made the decision to hire her. For those who believe a college degree is a requisite for a CEO, I have five words, Steve Jobs and Bill Gates,” Low wrote.

He wasn’t the only person likening CalPERS’ decision to hire Frost without a college degree to the Apple CEO Jobs. Guy Kawasaki, an early Apple marketing specialist, made the same connection on Twitter.

He tweeted a headline that began, “CalPERS hired a CEO without a college degree,” and added, “So did Apple.”

The praise does not mean Frost is in the clear. The Sacramento Bee published a story following Webber’s reporting, and many more people learned that Frost did not have a degree when the CalPERS board chose her to lead the nation’s largest public pension fund.

“CalPERS, responsible pension organization, or sad, sad circus?” wrote Lois Henry, a former Bakersfield Californian editor, on Twitter.

The board chose Frost because of her record leading Washington state’s public pension fund. It’s expected to discuss her performance at a regularly scheduled review later this month. Webber on Thursday published a letter from a former deputy state controller urging the CalPERS board to dismiss Frost.

Read more here: https://www.sacbee.com/news/politics-government/the-state-worker/article218407085.html#storylink=cpy

“What message does the retention of the CEO send to all CalPERS active and retired members who have pursued education goals and accurately presented their qualifications for their positions?” Terrence McGuire, the former deputy controller wrote. “The board failed the membership in the CEO hiring process; I hope the board does not fail them again in the termination process.”

Low’s support for Frost is not unexpected. He often speaks for labor to defend the state’s public pension funds and unions have a large voice at CalPERS because they advocate for current employees and retirees.

His letter to Mathur was supported by the California Teachers Association, California Professional Firefighters, SEIU Local 1000, Peace Officers Research Association of California, Professional Engineers in California Government., International Union of Operating Engineers and a number of other state and local unions.
You can read Dave Low's letter to President Mathur here or here.

You can also read Susan Webber's (aka Yves Smith) comment on the naked capitalism blog here going over how Marcie Frost supposedly misrepresented her education.

I stopped reading Yves' grossly biased and unreasonably critical comments on CalPERS a long time ago. Someone should ask her straight out, who is paying you to attack CalPERS every chance you get? (I'm dead serious)

Anyway, this is another much ado about nothing questionning the credentials of CalPERS' CEO Marcie Frost.

The lady did not lie about not having a college degree, she made it clear to CalPERS' board a few times and yet they hired her because of her commitment to engaging with retirees and public employers, as well as her track record leading Washington state’s public pension fund, the $90 billion Department of Retirement Systems.

As far as I am aware, she did a great job there and that is why she was hired as the CEO of CalPERS.

Don't get me wrong, having a college degree is important but she was honest and has great experience and a proven track record so I don't understand why naked capitalism and others are questionning her or CalPERS' board.

It's ridiculous especially during a time when we need more women as CEOs of major corporations and public pension plans.

It's also worth noting that Mrs. Frost is not the highest paid employee at CalPERS, that honor deservedly goes to the fund's CIO as they have tremendous responsibility overseeing $360 billion in assets.

Still, she gets paid very well and has done a great job at CalPERS as far as I can tell so this really is another naked capitalism hatchet job which should be ignored.

That's all I will say on this latest CalPERS smear job. When you're reporting or blogging on something, make sure you have all the facts or risk looking like a total ass.

Below, CalPERS CEO Marcie Frost discusses agenda item 4 at the March board meeting. Listen to her speak, she might not have a college degree but she sure knows what she's talking about and she's very impressive and composed while delivering her comments.

Monday, September 17, 2018

Blackstone's $18 Billion Distressed RE Fund?

Sabrina Willmer and Heather Perlberg of Bloomberg report, Blackstone Seeks $18 Billion for Biggest Real Estate Fund:
Blackstone Group LP expects to raise $18 billion for its biggest real estate fund ever.

The firm, already the private equity industry’s largest real estate investor, will have a strategy similar to its last fund, investing in distressed properties globally, according to people with knowledge of the plans. Blackstone’s prior fund gathered $15.8 billion in 2015.

Blackstone is seeking capital at an opportune time. Institutions such as public pension plans and insurance companies are betting big on property assets to protect against inflation and broaden their holdings beyond stocks and bonds. The number of investors allocating $1 billion to the space keeps increasing, according to data provider Preqin.

A representative for Blackstone declined to comment.

In June, New York-based Blackstone raised $7.1 billion for an opportunistic real estate fund focused on Asia, and Carlyle Group LP this month also raised its largest U.S. real estate fund.

Beyond real estate, investors are piling into alternative assets, helping firms raise much larger funds than before. The private equity industry brought in a record $453 billion last year. Blackstone, like its rivals, is taking advantage of that demand. It expects to raise more than $20 billion for its eighth buyout fund, Bloomberg reported in July. Its prior buyout fund was a third invested at the end of June, according to a regulatory filing.

Gray’s Push

Real estate investments are a big profit driver at Blackstone. That can largely be credited to bets made by Jon Gray, who earlier this year was promoted to president and chief operating officer after making the firm a property giant.

Under Gray’s leadership, at the height of the real estate boom in 2007, the firm paid $39 billion for Equity Office Properties Trust and $26 billion for the Hilton hotel chain. Those investments made profits of more than $20 billion. Kathleen McCarthy and Ken Caplan took over running the real estate group this year.

Blackstone started its real estate business in 1991 and has expanded it to $119 billion in assets. It owns investments in hotels, offices, retail, industrial and residential properties in the U.S., Europe, Asia and Latin America.

The firm’s eighth real estate fund produced a 1.4 times multiple on invested capital before fees as of the end of June, according to a regulatory filing. Its funds from 2011 and 2007 reported a 1.9 times and 2.5 times gross multiple, respectively.
John O'Brien of The Real Deal also reports, Blackstone launches $18B distressed real estate fund:
Blackstone Group is looking to raise $18 billion for its largest real estate fund to date.

New York-based Blackstone will invest the money in distressed properties globally, according to Bloomberg, which first reported the news.

Its previous real estate fund raised $15.8 billion when it closed in 2015, part of $40 billion raised from its three most recent real estate funds.

Blackstone is launching the fund at a time when institutional investors are turning toward real estate to protect against inflation and broaden their portfolios. Data provider Preqin last month said the number of institutional investors that allocate $1 billion or more to real estate grew to 499 in 2018. That was up from about 436 in 2017.

In June, Blackstone raised $7.1 billion for an opportunistic real estate fund focused on Asia.

Now led by Jonathan Gray, Blackstone started its real estate division in 1991 and has amassed $119 billion in assets globally. Its portfolio includes hotel, office, retail, industrial and residential properties in the United States, Europe, Asia and Latin America.

An recent analysis by The Real Deal shows Blackstone owns 20.1 million square feet in New York alone. It also owns the iconic Willis Tower in Chicago as well as numerous properties in Los Angeles and South Florida.
So Blackstone, one of the best alternative investment firms globally, is raising $18 billion for a distressed real estate fund.

Why am I beginning my week with this article? Who cares if Blackstone is raising yet another multibillion dollar real estate fund?

Because this is a sizable fund, Blackstone's largest, and it signals where it sees opportunities in the near future.

When you're assessing risk across public and private markets, you need to pay close attention to what the leaders are doing with their own funds.

And Blackstone is definitely a leader. A distressed real estate fund of this magnitude should catch your attention and you should ask why Blackstone is raising this money.

Basically, they see dislocations in real estate and want to be prepared to pounce on opportunities as they arise.

Where will they focus their attention? I'm not privy to that information. I don't know if their focus will be in the US and which sectors they will invest in but I have a strong feeling this fund will be in high demand, unlike the massive Saudi-backed infrastructure fund it trumpeted last year which is struggling to raise money.

The main point here is focus where the big money is going. I recently discussed how PSP is bolstering its private debt arm, focusing on investments in distressed companies.

When big money is preparing for distressed debt opportunties in real estate, private debt or elsewhere, it tells you we are in the late innings of the economic cycle and stock market.

A lot of companies and real estate developers are going to have a tough time refinancing when the economy falters, and this is the environment in which is where distressed debt thrives.

Keep that mind the next time someone asks you why invest in distressed debt.

Below, CNBC's David Faber interviews Jonathan Gray, Blackstone COO and president, at the 2018 Delivering Alpha conference in July.

If I had to invest in one real estate investor, it would be with Blackstone's Crown prince, he's very impressive and knowledgeable. Take the time to watch this interview.

Friday, September 14, 2018

Late Innings of the Bull Market?

Tae Kim of CNBC reports, David Tepper says the bull market is in the late innings and he's sold some stock holdings:
David Tepper, manager of $14 billion in assets, is more uncertain about the stock market due to President Donald Trump's trade war with China.

"If we do the tariffs on China that's going to make it a little bit tough on the market," the co-founder of Appaloosa Management said Thursday on CNBC's "Halftime Report."

"It is a little tricky at this point of time. ... It's a late inning game."

He said stocks could drop 5 percent to 20 percent if trade tensions between the world's two largest economies increase.

The investor said he is now about 25 percent exposed to the stock market. Tepper called the market "fairly valued" if the U.S. doesn't impose more tariffs on Chinese goods.

"I've taken down my exposure [to equities]," he said. "I'm just not sure what's going to happen with these tariffs. ... Our whole book we probably took down 30 percent at some point, the equity part."

Last Friday, Trump said he was "ready to go" on tariffs for another $267 billion in Chinese goods, which would be on top of the proposed tariffs on $200 billion in goods already being considered.

The public comment period on the $200 billion tariff plan expired Thursday. The world's two largest economies have already applied tariffs to $50 billion of each other's goods.

In January, Tepper was more optimistic about stocks. He told CNBC that month the bull market still had room to grow, citing Trump's tax cuts and equity valuations.
Akin Oyedele of Business Insider also reports, 'It's a late-innings game:' Hedge fund billionaire David Tepper says he's dumped some stocks, and warns of a bear market if Trump's trade war worsens:
David Tepper, the billionaire hedge fund manager of Appaloosa Management, said Thursday that his firm had reduced its holdings of US stocks.

"If you ask me what inning we're in, I think it's a late-innings game," Tepper, who manages about $14 billion in assets, told CNBC of the nine-year bull market in stocks.

At issue is the ongoing trade dispute between the US and China. The Trump administration has threatened to place tariffs on all Chinese products entering the country. A $200 billion round of duties that could be announced imminently, and Trump threatened last week to impose import taxes on another $267 billion worth of products.

Additional tariffs would "make it a little bit tough on the market," Tepper said, adding that stocks could drop between 5% and 20% if the trade war worsens.

"To me, the market is fair-valued if you don't have tariffs on China," Tepper told CNBC. "But if you do have tariffs on China, the question is how high will the dollar go, and then where will earnings be in that case."

Tepper said he had reduced his exposure to US stocks, although he remained long the market. He estimated his fund had around 25% exposure to the S&P 500 after reducing it by about 30%, which has been the wrong move "because the market has been very hot."

He said he remained bullish on Facebook because the stock was still cheap.

From inception in 1993, Tepper's hedge fund generated gross annual returns of more than 30 percent, according to a source familiar with the firm's returns.

The billionaire investor is also the owner of the National Football League's Carolina Panthers.
Earlier this week, I went over why Bridgewater's founder Ray Dalio thinks we are in the 7th inning of the economic cycle, stating the following:
[...] is Ray right, are we in the seventh inning of the economic cycle? Nobody really knows but if you ask me, we are closer to the ninth inning as the cycle has already peaked according to leading economic indicators and global PMIs.

People focusing on inflation and employment are focusing on lagging and coincident economic indicators which is typical at this point of the cycle.

So whether we are in the 7th or 9th inning, it doesn't matter because I agree with Ray, as time goes by, the risks are rising and investors need to position themselves defensively now to prepare for the eventual slowdown.

It's important to understand why risks are rising. As the Fed raises rates, it reduces global liquidity, spreads start to widen, the US dollar gains and financial conditions become more restrictive. The lagged effects of rising rates is starting to hit risk assets, especially emerging market stocks and bonds.

So, on the one hand, the US economy is roaring according to employment indicators but on the other, emerging markets are getting whacked hard and the risks are if the Fed continues raising rates, it will precipitate an emerging markets crisis which is deflationary.

Can we avoid a hard landing? Sure, if the Fed stops raising rates and pays more attention to what is going on outside the US, we can avoid a hard landing.

My fear, however, is the Fed is already determined to continue raising rates based on lagging and coincident economic indicators and just keeping an eye on what's going on in emerging markets.

This is where a policy error can happen because if the Fed overdoes it and raises rates too much, it will trigger a crisis in emerging markets, and we will need to prepare for a deflationary wave.
Now we have another hedge fund titan, David Tepper, telling us it's late innings for stocks. Is he right?

Calling the economy is a little easier for me than calling stocks and I'll explain why. Stocks move based on a lot of factors including liquidity.

Even though the Fed and other central banks are raising rates, removing global liquidity, there's still plenty of juice to drive stocks and other risk assets higher.

So, yes, I agree with Tepper, we are in the late innings for stocks which are a leading indicator of the economy, but it's at this stage of the market where risks are high for parabolic moves.

In fact, the whole tech bubble went parabolic a year after the Fed started raising rates and it lasted a lot longer than skeptics thought, decimating many value managers.

Value managers are lagging far behind growth managers again this year, which is normal. In a video clip this week, Francois Trahan and Michael Kantrowitz of Cornerstone Macro went over the structural shifts explaining why growth will continue to outperform value, highlighting these points:
  • Structural Shift In Growth/Value Complicates Historical Comparisons
  • Scarcity Breeds Premium: It’s Becoming Harder To Find Structural Growers
  • Growth Has Beaten Value in 2018 DESPITE Historical Valuation Spread
  • Beware Of Value: Low PE Stocks Used To Be Low Beta, Now Higher Beta
  • Valuation In Context: S&P500 Is Now Growthier Relative To Its History
I highly recommend you subscribe to their research, it is excellent.

According to Francois, the rally in growth stocks is "textbook at this stage" where investors are defensive and it's normal to see breadth narrowing.

However, he too is telling investors to start focusing on defensive sectors because the lagged effects of interest rate hikes will eventually hit all risk assets.

But if you drill down on markets, you see crazy things happening at stock levels. For example, look at shares of Tilray (TLRY), a company that engages in the research, cultivation, processing, and distribution of medical cannabis (click on image):

As you can see, animal spirits are alive and well, especially in pot stocks but as I stated on StockTwits last night,  momos are driving this game and a lot of retail investors are going to get burned badly buying these stocks, especially after a parabolic move.

Other stocks that caught my eye? Look at shares of Advanced Micro Devices (AMD) which have more than doubled in value this quarter (click on image):

AMD is one of the best-performing chip stocks which is great news for Vanguard, BlackRock and Fidelity, the top institutional holders, but also for top hedge funds like Renaissance Technologies and Balyasny which increased their stake significantly in the second quarter (click on image):

You'll recall when I went over top funds' activity in Q2 2018, I went over another semiconductor stock:
When I went over Q1 activity, I went through a lot of stuff, like why I wasn't so convinced with David Tepper's decision to increase his holdings of Micron Technology (MU). It turns out I was right:

Still, Tepper significantly increased his stake in Micron again in Q2 and is the fifth largest institutional holder of the stock.

Maybe there is a bounce to be played here but I wouldn't buy and hold it, that's for sure.
Shares of Micron Technology (MU) bounced on Thursday but they've been struggling this year, especially since the second quarter (click on image):

It's a tough market and even hedge fund gurus can get their stock picks wrong.

Still, as I stated last week in my comment on the confounding market, you can't throw in the towel on semiconductor stocks but you need to pay attention to them:
[...] semi stocks (SMH) are getting knocked off their perch and some market watchers think it's the canary in the coal mine.

Looking at the 5-year chart, I'm not worried yet, but definitely keeping a close eye on semis as I do believe they can get hit more if global growth continues to deteriorate.

Lastly, on global growth, Colby Smith of the Financial Times reports, The EM rout is not made in America:
As Turkey, Argentina and South Africa have come under pressure in recent months, many market watchers have blamed the Federal Reserve's tightening timeline. Yes, higher US interest rates do raise the cost of borrowing and put upward pressure on the dollar. But what's really driving emerging market pain has less to do with the Fed and more to do with domestic fundamentals and the global business cycle.

According to BCA Research, the correlation between EM risk assets and the fed funds rate is not that tight. In fact, there have only been two episodes since 1980 when emerging markets cratered as US interest rates ticked higher. And during both —the 1982 Latin American debt crisis and the 1994 Mexican Tequila crisis—the combination of high external debt, substantial current account deficits and pegged exchange rates laid the foundation for an unravelling. As indicated by the shaded grey areas, EM stocks and currencies have been more likely to perform well as the Fed tightened monetary policy:

What distinguishes these periods from 1992 and 1994 is basic domestic fundamentals. In other words, if an emerging market is on sound financial footing, the Fed's policy stance has minimal impact. During the debt crisis of 1997-8, imports grew in the US and Europe, Treasuries yields fell and equities in the US were in a bull market. Here's how the S&P 500 moved with stock prices across Asia stocks between 1993 and 2000:

Most emerging-market economies thrived. The ones that didn't had bigger external imbalances.

The hardest-hit emerging economies today share many of the same weak fundamentals that have sunk developing markets in the past: dual deficits, runaway inflation and a heavy reliance on external funding. But beyond domestic fundamentals, what drives emerging markets if not the Fed?


Displacing the US, China has become the main export destination for many emerging market countries — Brazil, South Africa, Malaysia and the Philippines. The relationship has become so pronounced that China's import growth correlates closely with the export growth for many emerging economies. While this does not imply causation, TS Lombard points out that it illustrates just how synchronised global trade has become with Asia's biggest buyer:

That linkage has become more problematic as China's growth slows. In August, the Caixin manufacturing PMI index fell to a 14-month low as new orders dried up. And as China attempts to delever, constrained credit growth has curbed investment in capital-intensive infrastructure projects. Emerging markets and G10 economies are already beginning to feel pinched. Here's a chart from Citi showing China's weight on the rest of the world:

Unfortunately for emerging markets, the world's second-largest economy is unlikely to see a reprieve anytime soon. The US is finalising plans for another round of tariffs on $200bn of Chinese imports. And this week, President Trump warned that additional levies on the remaining $267bn could come soon after that.
This is what worries David Tepper, an all-out trade war with the US can hit China and emerging markets' exports hard.

And even though emerging market stocks (EEM) and bonds (EMB) bounced this week, the trend is still down for the year (click on charts):

I'd also be very careful with that BCA chart showing a weak correlation between EM risk assets and the fed funds rate. We weren't on the precipice of a full-blown trade war back then and China wasn't the main driver of emerging markets' export growth.

Keep your eyes peeled on the US dollar (UUP) and US long bonds (TLT), this is where you'll see the global risk barometer (click on image):

There has been a bit of a pullback in both, giving emerging market risk assets some breathing room, but if all hell breaks loose, I expect the US dollar and US long bonds to rally concurrently, which isn't the norm but when global investors are scared, they flock to US assets (which is why US stocks have outperformed global stocks so much this year).

Below, Appaloosa Management's David Tepper said that tariffs on China were a "blunt" move for the Trump administration, but that maybe it was the right move because it is for the "future of our country". He also said the stock market may endure a little pain with tariffs on China, but that the markets will eventually adjust.

It remains to be seen just how painful the adjustment will be and that in my opinion depends on how much the Fed tightens given what is going on in emerging markets.

As always, I kindly ask all my readers to support this blog via a donation. You can donate and/or subscribe via PayPal on the right-hand side, under my picture. I sincerely thank all of you who take the time to donate or subscribe. Have a great weekend!

Thursday, September 13, 2018

UK's Railpen Snags BCI Executive?

Susanna Rust of Investment & Pensions Europe reports, RPMI Railpen hires from Canada for chief fiduciary officer position:
RPMI Railpen, the in-house manager of the industry-wide scheme for UK railway companies, has appointed Michelle Ostermann to the new role of chief fiduciary officer for investments.

Ostermann will join the manager in January next year. She will be responsible for determining the £28bn (€32bn) railway pension schemes’ high-level investment strategy and risk appetite, as well as defining the range of internally managed pooled funds.

The manager said she would work closely with the investment, funding and covenant teams in proposing tailored solutions for the multi-employer sectionalised schemes.

She will also be responsible for the manager’s sustainable ownership strategy and client relationship management.

Ostermann will join from British Columbia Investment Management, where most recently she was senior vice president, corporate and investor relations. From 2013 to June 2017 she was senior VP for investment risk, strategy and research at the Canadian asset manager. She has also held senior positions at Manulife and Sun Life Global Investments, and is the vice chair of the board of directors of the Pension Investment Association of Canada.

Julian Cripps, managing director at RPMI Railpen, said: “Michelle brings a wealth of international experience to RPMI Railpen and her proven track record of leading teams to deliver best practice across the institutional investment industry will be invaluable as we continue to fulfill our mission to pay members’ pensions securely, affordably and sustainably.”

Ostermann is the latest appointee to the UK pension investor’s leadership team. Earlier this year Railpen appointed its first chief investment officer and head of private markets, positions that were filled internally. In February, Philip Willcock replaced Chris Hitchen as CEO.
Paulina Pielichata of Pensions & Investments also reports, RPMI Railpen adds chief fiduciary officer:
Michelle Ostermann was named chief fiduciary officer, investments at RPMI Railpen, the manager of the £28 billion ($32 billion) Railways Pensions Scheme, London, a spokesman said.

The position is new. Ms. Ostermann will start Jan.1 and will be responsible for high-level investment and risk strategy of pension funds for the employees of U.K. railways. She will be defining the range of internally managed pooled funds, focusing on sustainable ownership strategy and client relationship management.

"(Ms. Ostermann) brings a wealth of international experience to RPMI Railpen, and her proven track record of leading teams to deliver best practice across the institutional investment industry will be invaluable as we continue to fulfill our mission to pay participants' pensions securely, affordably and sustainably," said Julian Cripps, managing director at RPMI Railpen, in a news release.

Ms. Ostermann previously was senior vice president at the C$145.6 billion ($112 billion) British Columbia Investment Management Corp., Victoria, where she was responsible for leading the corporate and investor relations team. A spokesman could not be reached to comment about a replacement.
I've never met Michelle Ostermann but on her LinkedIn profile, it clearly states she is the Senior Vice President, Consulting and Client Services at BCI (formerly called bcIMC) with the following responsibilities:
For almost twenty-five years I have tackled a wide variety of roles which have helped me develop a comprehensive understanding of the global investment industry. I have held positions that span both institutional pension and retail investment businesses such as:
  • Actuarial portfolio management, ALM
  • Investment risk management and governance
  • Total portfolio management, asset allocation, macro research & investment strategy
  • Product development, marketing & business development
  • Communications, stakeholder relations & media
I have been fortunate enough to have tackled some very large and influential projects for some of the largest financial institutions in Canada. I’ve gained very broad experience managing large pools of multi-client public assets and even larger balance sheets for publicly traded highly regulated financial services firms. This breadth has provided me the opportunity to learn global best practices across all aspects of the investment industry, across all asset classes, which I have successfully applied to several transformative projects.
  • Developed a world class investment risk management team (25 ppl) and governance model
  • Re-invented Canada’s leading segregated fund product
  • Built from scratch a global asset allocation team, managing $6B AUA for six different divisions/countries
  • Constructed and managed global multi asset class target risk and target date funds, $2B AUA
I am currently the Vice Chair of the Board of Directors of the Pension Investment Association of Canada (PIAC) and a proud member of the Junior Achievement BC Board of Directors. I have a Bachelor of Science degree in Economics and hold a Chartered Financial Analyst designation (CFA).
Obviously, Mrs. Ostermann has great experience and she's very competent and smart. All these attributes attracted her to her new employer, RPMI Railpen.

Now, I'm not sure why Mrs. Ostermann is leaving BCI, she might have fallen victim to the toxic work environment or decided to leave on her own, but that doesn't matter now as she has a great position at Railpen where she can capitalize on her experience.

The only thing I can share with you is the person who informed me of her departure also shared this with me: "This was not in the least what staff was told about the departure. Unreal."

Anyway, Mrs. Ostermann will now be part of a small group of highly competent women in the pension industry with very senior investment and risk roles.

In particular, off the top of my head, she joins people like Barbara Zvan, the Chief Risk Officer at OTPP, Julie Cays, CIO of CAAT Pension, Debra Alves, Managing Director/CEO of CBC's Pension Plan and Marlene Puffer, President and CEO of CN Investment Division.

I actually met Marlene recently as she took over the helm at CN Investment Division from Russ Hiscock. She's a very bright lady with great credentials and experience and she also once worked at BCA Research writing a fixed income product, so we shared some of the same experience.

Apart from these ladies, the Ontario Teachers' Pension Plan recently appointed Gillian Brown as Senior Managing Director, Capital Markets. Mrs. Brown was appointed to this important role and Stephen McLennan was appointed Senior Managing Director, Total Fund Management following the departure of Michael Wissell who joined HOOPP (Healthcare of Ontario Pension Plan) as the Senior Vice President - Portfolio Construction and Risk (good for him).

Below, Investopedia spoke with some of the leading women in finance about their careers, influences and lessons learned along the way. Interesting views which should be taken into account.

Wednesday, September 12, 2018

BlackRock Expands Private Markets?

Robin Wigglesworth of the Financial Times reports, BlackRock to expand its private investment activities:
BlackRock plans to ramp up its private investment activities, concerned that the US stock market is being shrunk by the surge in buybacks and a dearth of new listings but also enticed by the growing opportunities in the private debt market.

Mark Wiseman, global head of active equities at BlackRock and chairman of the asset manager’s “alternative” investing business — such as private equity, real estate and hedge funds — told the Financial Times that expanding its private investment capabilities had become an “increasingly big priority” for the $6tn investment group.

“I think it’s one of the most exciting things happening in BlackRock today,” Mr Wiseman said. “I think that most investors are heading in that direction. In part they’re heading in that direction . . . [because] the liquid public markets are shrinking.”

“Private markets” is a broad term for any asset that does not trade on an exchange, such as direct loans or unlisted shares. JPMorgan analysts estimate that pension fund allocations to traditional equity investments have shrunk by about 10 per cent over the past two decades, but allocations to private markets have increased by roughly 20 per cent over the same period.

Interest has been particularly strong in recent years, driven by a profound shift. While the value of the US stock market — as measured by the S&P Total Market Index — has roughly doubled over the past decade to $31.6tn, this is primarily because of rising prices rather than an expanding universe of listed companies.

Initial public offerings have sharply slowed since the dotcom boom and US corporations have instead emerged as the single biggest buyers of their own stock, both through mergers and acquisitions and huge share repurchase programmes.

This year’s corporate tax cut has further stirred the buyback frenzy. Bernstein analysts estimate that US companies are on track to repurchase $1.2tn of their own shares this year. That would lift the total since 2010 to more than $5tn — bigger than the Federal Reserve’s entire post-crisis quantitative easing programme.

BlackRock earlier this year announced it would raise up to $10bn for a new “long-term private capital” vehicle, and bought Tennenbaum Capital Partners, a $9bn investment group, to bulk up its private debt investments. Together with infrastructure and real estate, these four areas will be the main “pillars of growth” for BlackRock, said Mr Wiseman.

The Tennenbaum acquisition increased BlackRock’s “illiquid alternative” assets by $9bn to about $76bn, and Mr Wiseman indicated that this was just the start of a broader private market push by the BlackRock Alternative Investors unit led by David Blumer.

“There’s a lot of capital looking for risk and they’re not finding that risk in the public markets so they’re moving into private asset classes,” Mr Wiseman said. “There are huge opportunities.”

While valuations in private markets were “toppy” across the board, that did not mean this was a passing fad, argued Mr Wiseman.

“It’s like saying the public markets are overpriced right now; it doesn’t mean abandon public markets as part of the source of return. You just have to be that much more careful in terms of the positions that you take,” he said.
Very interesting article. You should also read an FT interview with Mark Wiseman on the need to evolve, it is excellent.

Mark Wiseman, the former president and CEO of CPPIB is right, you can't abandon public or private markets because they're overvalued but you need to be more careful in terms of the positions you take.

This is particularly true for private markets which are illiquid and very hard to hedge properly using derivatives which you can do to a certain extent in public markets.

But let me be clear on one thing here, both public and private markets are way overvalued, there is simply too much money chasing too few deals.

Still, there are opportunities, especially in private markets which by definition are less efficient and less well-covered, but asset managers need to work a lot harder finding great deals that make sense over the long run.

As far as BlackRock, it has been beefing up its private markets team all year and even recruited PSP's former CEO, André Bourbonnais.

The reason? Private markets are hot, that's where pensions and other institutional investors are focusing their attention. More importantly, the fees are a lot juicier than public markets where BlackRock has to compete with Fidelity, Vanguard and others for active and passive business.

But there is a lot of competition in private markets too and BlackRock needs to recruit talent and be competitive to win over mandates from large investors like CalPERS which is gearing up to go direct.

This is Mark Wiseman's job, to bring BlackRock's active equities team up to par with competitors across public and private markets. He already cleaned up public markets and is now focusing all his attention on ramping up private markets.

Below, a clip from last summer where Mark Wiseman explained how his company is using technology to augment money management for clients. Smart man who has a big job at BlackRock.

Tuesday, September 11, 2018

The 7th Inning of the Cycle?

Matthew Belvedere of CNBC reports, Ray Dalio: We are in the 7th inning of the current economic cycle:
Ray Dalio, the billionaire founder of the world's biggest hedge fund, told CNBC on Tuesday that the current economic cycle is in the seventh inning, predicting it has about two years left to run.

To help keep the economy and stocks moving forward, the Federal Reserve should not increase interest rates faster than the market expects, said Dalio, co-chairman and co-chief investment officer of Bridgewater Associates.

For now, Dalio warns that investors should be "more defensive" in the stock market and "as time progresses" he sees the risks increasing.

The "upside looks limited" because a lot of cash on the sidelines has been put to work and the benefits of the corporate tax cuts are "behind us," he added.

On Monday, Dalio put out a new book, "A Template for Understanding Big Debt Crises," as a free PDF or for purchase as an e-book and printed edition. He hopes that examining what caused the 2008 crisis will help prevent futures ones.

The biggest takeaway from the 2008 downturn, according to Dalio, is that central banks need to pay closer attention to bubbles that often precede crises. Current debt levels in relation to income are not troubling, he added.

Appearing on "Squawk Box" during the 10th anniversary week of the crisis, Dalio said the next crisis won't be a big bang-type affair but one that leads to more severe social and political problems.

Ten years ago this week, Lehman Brothers collapsed touching off a crisis that sunk the economy and the stock market, and led to government bailouts of financial firms and automakers and an extraordinarily easy Fed monetary regime.

On CNBC Tuesday, Dalio also talked about President Donald Trump's tariffs on China, saying they're not "that big of a deal." China is likely more concerned about its relationship with the United States, he added.

Bridgewater Associates, with $150 billion in assets under management, was started by Dalio in his two-bedroom apartment in New York City in 1975. Along the way to becoming a titan of finance and philanthropy, Dalio almost went bust in the early 1980s. He has said that near failure was a wake-up call, which highlighted the need to surround himself with independent thinkers to stress test his theories.

Dalio, according to Forbes, has an estimated net worth of $18.1 billion.
When Ray Dalio speaks, investors listen. Most of the large pensions, sovereign wealth funds and other large institutional investors have allocated to Bridgewater which has performed well over many years, catapulting Ray Dalio to the Forbes list of the wealthiest people on the planet.

If you told Ray he'd become one of the richest men on earth back in 1975, I doubt he would have imagined it.

Anyway, is Ray right, are we in the seventh inning of the economic cycle? Nobody really knows but if you ask me, we are closer to the ninth inning as the cycle has already peaked according to leading economic indicators and global PMIs.

People focusing on inflation and employment are focusing on lagging and coincident economic indicators which is typical at this point of the cycle.

So whether we are in the 7th or 9th inning, it doesn't matter because I agree with Ray, as time goes by, the risks are rising and investors need to position themselves defensively now to prepare for the eventual slowdown.

It's important to understand why risks are rising. As the Fed raises rates, it reduces global liquidity, spreads start to widen, the US dollar gains and financial conditions become more restrictive. The lagged effects of rising rates is starting to hit risk assets, especially emerging market stocks and bonds.

So, on the one hand, the US economy is roaring according to employment indicators but on the other, emerging markets are getting whacked hard and the risks are if the Fed continues raising rates, it will precipitate an emerging markets crisis which is deflationary.

Can we avoid a hard landing? Sure, if the Fed stops raising rates and pays more attention to what is going on outside the US, we can avoid a hard landing.

My fear, however, is the Fed is already determined to continue raising rates based on lagging and coincident economic indicators and just keeping an eye on what's going on in emerging markets.

This is where a policy error can happen because if the Fed overdoes it and raises rates too much, it will trigger a crisis in emerging markets, and we will need to prepare for a deflationary wave.

This is what Ray Dalio is hinting at but his comments were focused more on the domestic economy. His friend Larry Summers has openly questioned why the Fed is continuing to raise rates and I agree with him.

Lastly, Ray Dalio also spoke of unfunded pension liabilities and rising healthcare costs this morning, calling them "the big squeeze".

As I've stated plenty of times before, pension deficits and demographic pressures are deflationary and will impact long-term growth and keep rates ultra-low for a very long time.

Below, Ray Dalio, Bridgewater Associates founder, co-chair and co-chief investment officer, discusses his new book, "A Template for Understanding Big Debt Crises," which looks back on the lessons learned from the financial crisis.

Also, Ray  examines the crises is Turkey and Argentina and explains his expectations for the next economic downturn. He speaks with Bloomberg's Erik Schatzker on "Bloomberg Daybreak: Americas."

Monday, September 10, 2018

Pensions Slow to Move on Climate Risk?

Simon Jessop of Reuters reports, Public pension funds slow to move on climate change risk:
Most of the world’s largest public pension funds are providing little or no information about how climate change will affect the value of their assets, a report by the Asset Owners Disclosure Project (AODP) shows.

The AODP, part of investor pressure group ShareAction, tracked funds with combined assets of more than $11 trillion and found that 63 percent of them were at risk of breaching their duty to savers.

Less than 1 percent of the funds’ assets were invested in low-carbon solutions and only 10 percent of the funds had a policy to exclude coal from their portfolios, the AODP said in its report published on Monday.

The report is the first to assess the funds against the recommendations put forward by the Task Force on Climate Related Disclosures, set up by the Group of 20 Nations’ Financial Stability Board in 2015.

Launching a global ranking to show how funds were performing against the task force’s framework, the AODP said that a number of European schemes scored highly, including Fourth Swedish National Pension Fund (AP4), which manages assets worth about $40 billion.

Niklas Ekvall, chief executive of AP4, said that climate change was the “single biggest systematic threat to asset values in the long term” and that AP4 had moved to ensure its portfolio and engagement supported the move to a low-carbon economy.

“As large investors, pension funds own substantial parts of the global economy and have a stake in maintaining its long-term health and stability,” he said.
You can read the press release from the Asset Owners Disclosure Project’s 2018 ranking of investors’ climate risk management here.

Last week, I went over California's landmark climate change bill going over the report by the Asset Owners Disclosure Project’s 2017 ranking of investors’ climate risk management which is available here. I stated the following:
The table below provides you with the global rankings of pensions (click on image):

Australian and European pensions (especially Dutch) scored well but New York State Common Fund also ranked among the very top pensions when it comes to tackling climate-related financial risks.

The report states: "The world’s first law on mandatory climate disclosure for institutional investors took effect in France, setting a model for other countries."

Curiously, and quite disappointingly, none of Canada's large pension behemoths ranked among the global leaders which makes me wonder if they took part in this survey, and if they did, why didn't they rank well?

At the very least, I'd expect to see OPTrust among global pension leaders when it comes to tackling climate-related financial risk. OPTrust is taking climate change seriously and has taken the lead on with its climate change action plan to measure risks of climate change across its public and private portfolios:
Climate change poses risks across industries, governments and countries. Pension plans such as OPTrust – with their large, global investments – are not immune to these risks.

As a long-term investor, our role at OPTrust is to look decades into the future to identify challenges and opportunities that could affect our members’ retirement security. To ensure plan sustainability, we must better understand the risks climate change poses. The transition to a carbon-neutral economy will be increasingly disruptive and we need to be ready to adapt. Waiting for governments and regulators to act will take too long. The impacts of climate change are already being felt. That is why investors need to build climate risk into their investments, starting now.

We recently issued our Climate Change Action Plan. Among other things, the action plan commits us to determine our exposure to industries, geographies and companies that are most exposed; engage with companies on improved performance on ESG factors; and demand better disclosure of the information investors need to properly price climate change-related risk.

We have already made some progress in our climate-change journey. With our 2017 Funded Status Report, OPTrust became one of the first pension plans to report according to the recommendations of the Task Force on Climate-related Financial Disclosures. We have also issued a white paper calling for a standardised climate change disclosure framework.

Through a G7 initiative and groups such as Climate Action 100+, Canadian investors are working with others around the world to develop common standards and encourage corporations to curb greenhouse-gas emissions.

As a global pension citizen, we believe we must use our voice to influence organisations to better manage climate risk. Currently, 7.6 per cent of the OPTrust portfolio is invested in renewable energy and green real estate. This is our direct investment in the transition to a lower-carbon economy, and these are our guiding principles:

Change happens through influence. Fossil-fuel industries are going to be with us for the foreseeable future.We use our ownership position to promote better practices among our investee companies, which has a far greater impact than divestment. We have engaged 235 companies on climate-related issues, leading to improved climate risk reporting, climate-aware boards and emissions reduction.

Measurement matters. We are focused on developing and using measures and tools that accurately support pricing climate change-related risk.

Market forces can promote sustainability. Our job is to prioritise sustainability by balancing sufficient investment returns with appropriate amounts of risk. We don’t believe regulation will happen soon enough. Market forces will be the more effective means of keeping us adaptable so we can thrive in a changing climate.

Innovation has a role to play. Successful investing requires an emphasis on assessing and understanding a constantly changing environment. We understand the importance of having an innovation mindset and recognise that new technologies will be key in better understanding climate change risks and opportunities. The increasingly rapid pace of change is foundational to how we think about climate change.

Work continues

OPTrust is prepared to face these challenges.

Our approach will evolve over time and the same must happen at other companies for them to adapt to the evolving landscape. Companies must be agile to manage climate risk.

Canada is a global leader in so many respects. We can be even more so by working collaboratively with other global investors to improve understanding of climate-change impacts. One example is to bring together climate scientists and investors for thoughtful debate, to assess and analyse how climate risk exposure affects investment portfolios.

We want our plan members and the broader community to know that addressing climate change constitutes good business and contributes to value creation and plan sustainability.
All of Canada's large pensions take climate change risks seriously which is why they have dedicated teams for Responsible Investing but some take it more seriously than others.
It's also worth noting last week OpTrust put out a press release, Financial institutions launch cutting-edge research project to integrate climate change into strategic investment decisions:
The financial institutions AP1, a.s.r., OPTrust, Pensioenfonds van de Metalektro (PME) and Philips Pensioenfonds, supported by Ortec Finance - the provider of investment decision technology and solutions - announce the launch of their climate-savvy Asset Liability Management/Strategic Asset Allocation (ALM/SAA) pilot project.

The goal of the project

The pilot is one of the first efforts of its kind to integrate quantified risks associated with climate change into standard forward-looking financial scenario sets that drive strategic investment decision-making. The pioneering investors involved in the pilot will use these sets to analyze the impacts of various global warming pathways on their ALM/SAA. The pilot is expected to run until the end of 2018. If successful, the climate-savvy scenario set is expected to be made more widely available to investors by early 2019.

Collaborative effort

The pilot project is a broad collaboration between AP1, a.s.r., OPTrust, Pensioenfonds van de Metalektro (PME), Philips Pensioenfonds and Ortec Finance, along with Cambridge Econometrics and Carbon Delta. Additionally, I Care & Consult, the Institute for Environmental Studies – VU Amsterdam, the Grantham Research Institute at the London School of Economics, Potsdam Institute for Climate Impact Research, Sustainable Finance Lab, Utrecht University and the University of East Anglia offer their expert feedback in this project.


The research and development project, which links scientific climate data to ALM/SAA tooling, is a novel approach to mapping potential future climate impacts on investment performance. The methodology of the pilot is to combine existing academic research on climate-related risks associated with several global warming pathways with key macro-economic risk drivers such as growth, inflation and interest rates. Once completed, the results of this mapping will be integrated into Ortec Finance’s forward-looking financial scenario set that already includes a wide array of standard financial and economic variables. Piloting investors’ portfolios will be tested using these new climate-savvy financial scenario sets as the key input for the adjusted ALM/SAA analysis.

Expected results

The resulting insights will increase the piloting investors’ understanding of the sensitivities of their investment strategies to climate-related risks, inform alignment to international climate goals through setting Science Based Targets and enable forward-looking disclosure in line with the recommendations of the Task Force on Climate-related Financial Disclosures. Additionally, the pilot aims to inform academia of existing knowledge and data gaps to tailor future research to the financial sector practitioners’ needs.


With net assets of over $20 billion, OPTrust invests and manages one of Canada's largest pension funds and administers the OPSEU Pension Plan, a defined benefit plan with over 92,000 members and retirees. OPTrust was established to give plan members and the Government of Ontario an equal voice in the administration of the Plan and the investment of its assets through joint trusteeship. OPTrust is governed by a 10-member Board of Trustees, five of whom are appointed by OPSEU and five by the Government of Ontario.

About Ortec Finance

Ortec Finance was created in 2007 through a management buyout of the company ORTEC b.v, which was founded in 1981 by four innovative students of econometrics at the Erasmus University of Rotterdam, who believed mathematical theories and algorithms could be used to optimize the performance of companies. With a team of 250 experts in Rotterdam, Amsterdam, Hong Kong, the United Kingdom, Canada, and Switzerland, Ortec Finance is leading in innovation through strong tie with academic communities, regulators, and practitioners. The company’s long-standing and global client base comprises of leaders in the pensions, sovereign wealth, insurance, asset management, and private wealth management markets. Ortec Finance focuses on providing support for investment decision-making for institutional and private investors. The company designs, builds, and applies solutions for asset-liability management, ex-ante and ex-post risk management, performance measurement and risk attribution, and financial planning.
As I said, some pensions are taking climate change very seriously and they're taking the lead to be at the forefront of measuring and disclosing climate change risk.

This collaborative effort will not only benefit the pensions involved but other pensions and asset managers as well.

Below, an older (2014) clip where Dr John Hewson, the former Chair of the Asset Owners Disclosure Project, at the Festival of Dangerous Ideas in Sydney, Australia, on how your pension is destroying the planet.

I take issue with a lot of his comments, pensions are not destroying the planet but they can do a lot more to measure and disclose their part in addressing climate change risk and the collaborative effort I discuss above is a step in the right direction.

Friday, September 7, 2018

The Confounding Market?

Fred Imbert and Alexandra Gibbs of CNBC report, Dow drops 150 points after Trump says additional tariffs on China are ready to go:
Stocks fell on Friday after President Donald Trump said the U.S. is ready to slap tariffs on an additional $267 billion worth in Chinese goods.

The Dow Jones Industrial Average dropped 150 points while the S&P 500 fell 0.3 percent. The Nasdaq Composite also traded 0.1 percent lower.

Trump, speaking from Air Force One, said the tariffs on the additional goods are ready to go when he wants. His remarks come after a deadline for comments regarding tariffs on another $200 billion in Chinese goods had passed last night.

The iShares China Large-Cap ETF (FXI), which tracks certain Chinese stocks, fell to trade 1.5 percent lower. The iShares MSCI Emerging Markets ETF (EEM) also dropped 0.7 percent to re-enter bear-market territory.

They also come after the Wall Street Journal reported, citing U.S. officials, that the possibility of the U.S. and China reaching a trade deal are fading as the Trump administration tries to revamp the North America Free Trade Agreement (NAFTA). Meanwhile, Bloomberg News reports that the U.S. and Canada will likely end the week with no trade deal in place.

"There are lots of uncertainties in the market right now," said Komal Sri-Kumar, president of Sri-Kumar Global Strategies. The U.S. has been largely resilient, but "there are significant storm clouds that are gathering."

Trump also said the U.S. would be starting trade negotiations with Japan, noting: "If we don't make a deal with Japan, Japan knows it's a big deal."

The Japanese yen clawed back to recover some losses against the dollar; it was last down 0.1 percent at 110.85 per dollar.

Wall Street was also under pressure after strong wage data stoked fears of tighter monetary policy in the U.S. Average hourly earnings rose 2.9 percent for the month on an annualized basis, marking the largest jump since 2009. The U.S. economy added 201,000 jobs in August, more than the expected increase of 191,000.

Treasury yields jumped to their highs of the session following the jobs report release, while the dollar also rose. The Fed has already raised rates twice this year and is largely expected to hike two more times before year-end.

"This does give more support to the folks looking for December rate hike," said JJ Kinahan, chief market strategist at TD Ameritrade. But "we continue to see strength where we need to see it," and that's good for the market.

Boston Fed President Eric Rosengren told CNBC earlier on Friday that gradual rate hikes are appropriate should the economy continue to do well. "If things work out well for the economy, and that's what I expect and hope, then we'll be in a situation where we need to have somewhat restrictive policy over time," he said.

"The data is becoming even more important than ever now as the market tries to decide whether the Fed will raise a fourth time this year in December or take a pause," said Chris Zaccarelli, chief investment officer at Independent Advisor Alliance. "I would continue to be cautious as we head into the fall and be wary of trade concerns and increased equity volatility."

Trade tensions, coupled with a meltdown in emerging markets, have pressured equities this week, knocking the S&P 500 and Nasdaq from record highs. In fact, the Nasdaq was on track for its worst four-day start to September since 2008.

Tesla shares fell as much as 9 percent after Dave Morton, the company's chief accounting officer, resigned from his post. Morton said in a statement he left because of "the level of public attention placed on the company."
It's Friday, President Trump went bezerk on trade again (his timing is impeccable) and Elon Musk was kicking back last night, smoking marijuana on a live web show with US comedian Joe Rogan:
Musk, 47, spent two-and-half hours on the streamed podcast late on Thursday discussing everything from artificial intelligence and its impact on humankind to flame throwers and social media.

Taking a puff from a joint – which Rogan said was a blend of tobacco and marijuana and is legal in California – Musk said he “almost never” smoked. “I’m not a regular smoker of weed,” Musk said. “I don’t actually notice any effect … I don’t find that it is very good for productivity.”
Smoking pot isn't very good for productivity? You don't say?

The market had plenty to say on Musk's latest escapade as Tesla shares (TSLA) got slammed on Friday, down 6% on twice the daily average volume. Tesla's shares are weak and might retest their 52-week low of $244 a share hit back in April (click on image):

Short sellers are loving it but if you look at the 5-year weekly chart, Tesla's shares are right at their 200-week moving average where they bounced in the past (click on chart):

If shares continue to slide from here, it's bad news for investors as the stock will be in big trouble.

That's my two cents on Tesla shares, don't want to spend too much time analyzing this company and its CEO who is eccentric and strange, to say the least.

More importantly, if you look at the overall US market, the S&P 500 (SPY), it's gotten hit recently but it's still a very bullish chart (click on image):

So what's the big deal? The big deal is what's going on with emerging market shares (EEM) led by Chinese shares (FXI) which are down roughy 15% from their high reached in late January and are at risk of declining below their 200-week moving average (click on image):

The last time that happened was in early 2016 when we had a really bad growth scare.

As I explained yesterday in my comment on why pensions are rushing to buy Treasury strips, it's what happens outside the United States which matters more in terms of inflation expectations and the demand for Treasuries. At the margin, corporations rushing to buy "strips" ahead of the tax deadline helps but that's not the primary driver of US long bond yields.

If a full-blown emerging markets crisis materializes this fall, you will see inflation expectations sink, the US dollar will soar higher and Treasury yields will plummet to new lows.

This is why I cannot understand strategists who are confounded by the outperformance of US stocks relative to the rest of the world this year.

As Francois Trahan of Cornerstone Macro pointed out recently, this is a textbook late-stage rally, breadth deteriorates, growth stocks outperform value and if it gets worse, investors will return to stability.

But today we saw bond yields rise after the strong US jobs report as some are openly worried the Fed is behind the curve when it comes to wage inflation:

I'm not worried about US wage inflation running amok, I'm far more worried about the Fed continuing to hike rates based on (lagging) employment data while weakness in emerging markets persists.

The risks of policy error are huge, if the Fed overdoes it with rate hikes, it might exacerbate any deflationary crisis brewing in emerging markets

Keep this in mind as people tell you the US economy is doing great and the Fed should continue raising rates, ignoring what's going on in emerging markets.

Below, semi stocks (SMH) are getting knocked off their perch and some market watchers think it's the canary in the coal mine.

Looking at the 5-year chart, I'm not worried yet, but definitely keeping a close eye on semis as I do believe they can get hit more if global growth continues to deteriorate.

Lastly, Elon Musk made an appearance on the Joe Rogan Experience, a podcast hosted by the eponymous comedian, where the pair smoked a blunt and pondered the flat-Earth movement, the future of AI, “inventing shit” and several other of the eccentric billionaire’s favorite topics.

On that high note, have a great weekend and please remember to kindly donate or subscribe to this blog at the right-hand side under my picture. I thank those of you who take the time to contribute.