Euphoria Wanes as Doubts Emerge?

Phillip Inman of the Guardian reports, Bailout rescue: euphoria wanes as doubts emerge:

A rally on European stock markets evaporated on Friday night as investors began to voice concerns about whether the eurozone rescue plan for Greece would be enough to stem the currency bloc's debt crisis.

One leading investment strategist described the new deal as "less sticking plaster and more of a proper bandage", but warned the underlying problems in the Greek economy had not been addressed. Another said the voluntary 21% "haircut" agreed by the banks was less than a third of what was required.

The credit ratings agency Fitch added to worries over the deal after it declared Greece would be in temporary default as the result of the €109bn (£96bn) bailout. The move is likely to be matched by rival ratings agencies.

The FTSE 100 finished up just 35 points at 5935, adding to small gains on the main French and German exchanges following a volatile day that saw most shares sink before a moderate recovery. Markets had initially cheered the deal and pushed up US stock prices overnight.

British and German government bonds, considered a safe haven, ended higher as investors started to have doubts about the scheme, which involves offering Greece, Ireland and Portugal longer to pay off their loans and a cut in interest payments.

Greece was also offered a relatively small one-off reduction in the value of its outstanding loans that will reduce its debt-to-GDP ratio from the 160% it was expected to reach before 2015.

French prime minister François Fillon said the deal guaranteed there would be no default by member states in the 17-nation bloc. However, comments by German banking bosses that the deal would need to be examined added to the air of uncertainty.

Germany's BdB association of private banks said that while an agreement was "an important step," the industry needed more information on its involvement.

The Institute of International Finance, which led talks for private investors, said 90% of creditors will sign up. Deutsche Bank, HSBC, BNP Paribas, Allianz and Axa are among the firms ready to support it.

Holders of Greek debt who are not on the institute's list of supportive firms include Royal Bank of Scotland, Italy's Unicredit and the French Crédit Agricole banking group.

The offer is voluntary, raising the possibility that some investors, such as hedge funds, will not participate and wait to be repaid at the full price.

Standard Life said the deal was a positive move but it would continue to shun European shares and sovereign bonds, leaving it underweight in both.

Richard Batty, the fund manager's global investment strategist, said the bailout package still failed to tackle the economic situation in Greece and other debt-laden countries: "This programme is less sticking plaster and more of a proper bandage but that still doesn't deal with the underlying issues. You have to make these ex-growth economies like Greece and Italy more productive and able to compete in global markets. Without higher productivity and growth it will prove difficult to pay down debts, even with the improved deal."

Gary Jenkins, head of fixed income research at Evolution, argued the compromise to limit private sector bank losses to 21% was not enough to save Greece from years of austerity: "We have long thought that the most likely outcome for Greek bondholders would be that they would take a small haircut first followed by a larger one at a later date.

"To give Greece a fighting chance they probably need a writedown close to 65%," he said.

Analysts also warned that the need to put the package to a vote in the parliaments of each eurozone member state meant the deal could yet be derailed.

"Some of the euphoria that was in the market as the result of [Thursday's] events has eased off a little bit," said Eric Wand, strategist at Lloyds Corporate Markets.

"Some of the measures that were announced have still got to be passed by national parliaments – particularly with regard to the EFSF [European Financial Stability Facility]. And there may be some concerns about the sustainability of the debt situation given the easing growth backdrop," Wand added.

Germany's Angela Merkel said she was confident the Bundestag would vote through the package after she secured private sector involvement against French fears it would trigger a mass withdrawal of private funds across the eurozone.

France's BNP Paribas is set to take the biggest hit of around €950m, as the largest holder of Greek government debt outside the country.

Fillon said France's debt would increase by €15bn by 2014 taking into account the cost of providing a guarantee. The increase in debt raises the risk that France may overshoot the government's debt targets, which foresee a peak at 87% of GDP in 2012.

Ireland said the reduction in interest rates and extension on much of its lending could save €1bn a year in costs. Prime minister Enda Kenny thanked UK chancellor of the exchequer George Osborne for matching the eurozone plan with a reduction to 3.5% on the interest payments of a separate loan Britain offered last year.

Other sharp investors are also warning against too much bailout euphoria. Stephen L. Jen, managing partner of London-based hedge fund SLJ Macro Partners LLP, told the Wall Street Journal that "ad hoc" measures won't address the fundamental challenges arising from economic and political divergence within the bloc of 17 nations that share the euro:

"We are not closer to the end," said Mr. Jen, who was formerly Morgan Stanley's global head of currency research and has worked as an economist at the International Monetary Fund, World Bank and Federal Reserve. Europe needs to become "a United States of Europe, rather than a collection of countries. Obviously, Europe is far from getting to that stage. This is why there will be problems for a long, long time in Europe."

Euro-zone leaders agreed Thursday to provide €109 billion in new loans for Greece as well as an additional €50 billion through a bond exchange and buyback plan. They also provided sweeping new powers to the €440 billion Financial Stability Facility, the region's bailout mechanism, including the power to buy Greek government bonds in the secondary market and provide credit lines to recapitalize member nations' banks.

Financial markets were initially cheered by the news, but skepticism crept back Friday, reflected in a decline in the euro. Rating agency Fitch said Friday that the role of the private sector in the new Greek bailout plan would constitute a "restrictive default" event.

Mr. Jen said the new measures, including the private sector participation, meant the debt crisis moved from the first stage--no default of any kind--to the second stage of an "orderly default".

"The third stage will be disorderly default when one country may decide not to honor debt obligations in the future," he said, describing a scenario in which bondholders have a "haircut," or losses, imposed upon their portfolio against their will. "The latest measures may be another hard kick of the can, and the can is dribbling."

His favorite trading strategy is to continue buying the Swiss franc and selling the euro, rather than to buy the dollar and sell the euro.

The franc is the "only true safe haven in Europe," he said, adding that the euro-dollar trade is complicated by both the euro zone crisis and the U.S. political impasse on debt-ceiling. The dollar may still falter due to the risks of another round of quantitative easing measures from the Federal Reserve, he added.

Mr. Jen said the euro is likely to trade between $1.30 and $1.48. The common currency, recently at $1.4357 Friday, is trading near the top end of the range with limited room to rise. Mr. Jen said he would sell the euro if it moves up to $1.46 area and he would buy it if the euro slides to the low end of the range.

Another attractive trade for Mr. Jen is to sell the dollar and buy Asian currencies. On top of his favorites are the Singapore dollar, the Malaysian ringgit and the Chinese yuan.

Let me share some thoughts with you. In order to give Greece a "fighting chance," they'll have to write off 75% of the debt or else we're going to see political chaos, debt repudiation and the return of the drachma next year. No matter what happens, I see another 400 years of tyranny ahead for my ancestral homeland.

My friend just came back from Greece and told me, "it's a disaster, very sad to see so many young, smart people unemployed." Indeed, the official youth unemployment rate in Greece stands at 45%, meaning one out of every two is searching for a job and those that are working are typically underemployed and receiving low wages. My friend added: "It's so bad that Albanians and Eastern Europeans are leaving Greece to go back to their countries. Over 50,000 Greeks applied for a US visa and only 50 were accepted." And as if things aren't bad enough, the dumb taxi drivers and sailors in Greece just decided to strike this past week smack in the middle of tourist season! I would throw these idiots, and the shameless politicians from all parties, all in jail for treason and hire unemployed who want to work.

But the "smart geniuses" over at the IMF will tell you not to worry, austerity is working just fine in Greece. I'll tell you that austerity is a total disaster in Greece and elsewhere. I just spoke to a couple from England who recently left Manchester to emigrate to Montreal, Canada. The lady told me Manchester is a "drug infested, gang infested hell on earth where kids as young as 6 years old are killing each other and beating up police officers. They cut the police force by half and crime went up 200%." She told me austerity in the UK is exacerbating income inequality to the point where social chaos will ensue and possibly "civil war." She's obviously exaggerating but she worked for a charity there helping troubled teens, so she was on the front line watching social degeneration.

Scary thought, but Manchester might be the future of all major cities in the developed world. That's why I remain confident that the world's power elite will do whatever it takes to re-liquify capital markets, introduce inflation in the system and try to inflate their way out of this structural debt crisis. That means that even though the overall indexes might trade sideways for a long, long time, there are plenty of trading opportunities in stocks because hedge funds, mutual funds, bank prop desks still need to make money and will trade like animals. They will squeeze the juice out of this sucker until they bleed it dry.

So relax folks, euphoria might wane, Ray Dalio might have mastered the machine, Michael Hudson is right, Wall Street's euthanasia of industry will continue unabated, but the truth is there are powerful interests behind this global "debt crisis" dictating the terms for the rest of us, and they will fight debt deflation tooth and nail. Just remember, they're always trying to screw you any way they can by scaring the shit out of you. It is futile to fight these powerful, rotten interests; much better to understand them and try to protect yourself as best as possible as the world sinks deeper into hell.

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Judge Sues N.J. Over Pension Cuts?

Before I get into my latest topic, I was advised by a union member that PSP Investments released its Annual Report 2011. They do this every year around this time because Parliament has to approve it before they post results. Problem is that the fiscal year ended in March (March 31st 2010 to March 31st 2011) and the delay in reporting the results publicly is unacceptable. Most people are away on vacation this time of year so reporters do not cover it.

The overall results are excellent, up 14.5%, or 180 basis points above the benchmark portfolio which returned 12.7% in FY 2011. But I want to take my time and go over PSP's annual report over the weekend, as well as the Special Examination 2011 performed by the Office of the Auditor General of Canada (OAG).

Given that I worked as a senior investment analyst at this organization in the past covering public and private markets, have tremendous respect for some individuals there (most aren't slimy weasels), and know senior people at the Treasury Board and the Office of the Auditor General of Canada, I promise to be fair, professional but ruthlessly critical in my comments covering the annual report and the OAG's special examination (trust me, you don't want to miss it!).

So let me get onto my Friday comment. Lisa Fleisher of the WSJ reports, Judge Sues N.J. Over Pension Cuts:

A New Jersey judge is challenging the state's recent pension and health-care cuts, claiming the state Constitution protects judges' salaries to keep the bench independent.

Judge Paul DePascale, who sits on the Superior Court bench in Hudson County, filed a lawsuit in state court Thursday challenging the laws signed last month by Gov. Chris Christie.

Judges, who must retire at age 70, are now required to contribute 12% of their salary, up from 3%. The state Constitution says that judicial salaries "shall not be diminished during their term of appointment." The lawsuit also said that an earlier draft of the legislation cited the constitutional requirement.

It's at least the second lawsuit filed challenging the cuts, which require current workers to contribute more of their salaries to receive the same pensions.

The Democratic leaders of the Legislature bucked the majority of their own party by putting the bills up for a vote. Unions vowed to take revenge in the November elections.

Michael Drewniak, a spokesman for Mr. Christie, pointed out that judges previously contributed an average of $59,300 to their pensions during their time on the bench. "Judge DePascale should probably just say, 'Thank you' and look forward to a comfortable retirement," he said.

MaryAnn Spoto of NJ.com covered the story more in depth, reporting that N.J. judge files lawsuit against new pension and health benefit increases for public workers:

New Jersey’s public worker pension and health benefits increases should be revoked for state judges because they unconstitutionally slash their salaries and undermine judicial independence, a state Superior Court judge claims in a lawsuit filed Thursday.

The complaint, filed Thursday by Superior Court Judge Paul DePascale, who sits in Hudson County, is the first legal challenge to the landmark health and benefit law enacted last month. State public employee unions angered by the changes are also vowing to go to court.

The complaint says the law runs counter to the part of the state constitution that says the salaries of the Supreme Court justices and Superior Court judges "shall not be diminished during their term of appointment."

"It diminishes the salary of all justices and judges appointed before the enactment of the subject legislation during their term of appointment and, by doing so, unconstitutionally and adversely (affects) the public and the independence of the judiciary," DePascale’s attorney, Justin Walder of Roseland, wrote.

Gov. Chris Christie’s spokesman Michael Drewniak fired back, saying judges fare far better than other public workers.

"Of all classes of New Jersey state employees, judges of the Superior Court have enjoyed the lowest pension contribution rate and received the richest pension benefits," Drewniak said. "Judge DePascale should probably just say thank you and look forward to a comfortable retirement."

Set by law, judicial salaries range from $165,000 for Superior Court trial judges, including DePascale, to $192,795 for Supreme Court Chief Justice Stuart Rabner. New Jersey now has 430 judges.

Drewniak said before changes judges’ contributions covered less than 10 percent of their pensions, while other public workers contributed about half. He said the average annual pension for a retired judge in the Judicial Pension System is $107,540.

DePascale, however, said in his court filing that his deductions will increase "steadily and dramatically" over the next seven years. His pension deductions would be hiked $14,849 by 2017, when he would be paying $18,137 into the pension system, according to court filings.

The new law, to be phased in over seven years, will make judges’ pension contributions go from 3 to 12 percent of their annual salaries. The same law will boost the contributions of members of the Public Employee Retirement System from 5.5 percent of their salaries to 7.5 percent over that same period.

DiPascale also said his health benefits contribution would more than double to $5,230.86, based on state estimates that would allow different levels of coverage, according to court papers.

Judges currently pay 1.5 percent of their salaries toward their health care benefits. The new law requires them to pay 35 percent of the premium cost.

The lawsuit concedes no New Jersey court has addressed its contention that increasing benefit contributions constitutes a salary cut, but it noted the Delaware Supreme Court ruled it was.

Drewniak declined to comment on the constitutional question.

Winnie Comfort, spokeswoman for the Administrative Office of the Courts, said Rabner is aware of the suit but has no comment. An initial hearing before Mercer County Assignment Judge Linda Feinberg is set for Sept. 16.

Pension changes took effect July 1. However, actual deductions start Oct. 14, along with health benefits contribution hikes.

I've already expressed my thoughts on this and other similar articles in comment on whether public pensions are a "vested right." I don't think so. While I empathize with public sector employees who contributed to their pensions, I'm also keenly aware that they shouldn't enjoy benefits that their private sector counterparts don't have, namely, retirement security for the rest of their life once they retire.

The state of New Jersey made its share of mistakes too, not topping up its state plan when it should have, but when the money isn't there, I don't think it's reasonable for judges and state workers to challenge the constitutionality of the cuts in benefits. If catastrophe strikes, all the laws in the world will not protect these public sector workers. People have to keep that in mind and stop thinking they're entitled to "gold-plated" pensions. They simply aren't part of this planet if that's what they think.

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Operation AIG II to Save Pensions?

Reid Epstein of Politico reports, The Fed, Wall Street plan for default:

With less than two weeks before the United States cannot borrow more money, the Federal Reserve and Wall Street are making plans to prepare for the country’s possible default on its $14.3 trillion debt.

In the most revealing comments to date, Charles Plosser, the president of the Philadelphia Federal Reserve, told Reuters the nation has for months been in “contingency planning mode” to deal with the fallout when the federal government runs out of money.

“We are developing processes and procedures by which the Treasury communicates to us what we are going to do,” Plosser said. “How the Fed is going to go about clearing government checks. Which ones are going to be good? Which ones are not going to be good? There are a lot of people working on what we would do and how we would do it.”

The Treasury Department has repeatedly denied making plans for default, saying raising the debt ceiling is the lone acceptable option. A spokesman did not comment to Reuters.

Wall Street officials are in the same boat, devising what the New York Times called “doomsday plans in case the clock runs out.”

Meanwhile, the Wall Street firms, the Times wrote, are seeking to reduce their risk related to Treasury bonds while hedge funds are hoarding cash to purchase U.S. debt if the price plummets in the event of a post-default sell-off.

The paper wrote that a full-scale financial panic has not set in but is close.

“The metaphor is a pile of sand,” Mark Zandi, the chief economist at Moody’s Analytics, told the Times. “You keep putting one piece of sand on the pile, nothing happens, and then, all of the sudden it just caves.”

Plosser also told Reuters that, despite the shaky economy, the Fed may raise interest rates before the year is out. He said he expects the unemployment rate, now at 9.2 percent, to fall to 8.5 percent.

“I don’t see the fundamentals of the economy as changed that much,” he said. “Yeah, there’s been some shocks and disruptions, but the underlying forces that are going to cause us to continue a slow, moderate recovery are still in place.”

Hate to tell you, but it's becoming easier and easier to telegraph the Fed, the ECB and the rest of the financial "elite." I literally laugh when I read about a "doomsday scenario" or Wall Street firms "reducing their risk to Treasuries." Who are we kidding here? Wall Street firms are long Treasuries, so is PIMPCO and they're all long risk assets waiting for the Mother of All Short Squeezes. When everyone is bearish, get greedy and become a pig. Contrary to popular belief, pigs often don't get slaughtered and they make out like bandits!

It will be rocky but at the end of the day this sucker has to keep grinding higher or else the risk of debt deflation shoots up tenfold -- something which the financial oligarchs will not mess around with. They'll fight deflation or the perceived threat of deflation tooth and nail to ensure future profits.

And what about public pensions? Mark Heschmeyer of CoStar Group reports, Pension Fund Earnings Skyrocket, But Concerns Temper Gains:

The nation's three largest pension funds reported preliminary gains ranging from 17.5% to more than 23% for their fiscal years ended June 30. While the results represent the funds' best performance in years, fund managers were subdued in their assessments because of current economic uncertainties, and because the returns still were not keeping up with the needs of its members.

Real estate gains for the three funds -- California Public Employees' Retirement System (CalPERS), The California State Teachers' Retirement System (CalSTRS), and The New York State Common Retirement Fund - were mixed. Real estate returns for the California did not match the overall performance, whereas real estate returns exceeded the New York fund's overall gain.

CalPERS Reports 20.7% Return

CalPERS, the nation's largest pension fund, reported a 20.7% return on investments in preliminary estimates for the one-year period that ended June 30, 2011.

"This is our best annual performance in 14 years," said Rob Feckner, CalPERS Board President. "For the second straight fiscal year, the pension fund exceeded its long-term annualized earnings target of 7.75%."

The net-of-fees performance was the strongest since the 20.1% return of 1997 and the highest since the 2007-09 recession.

As of June 30, 2011, the market value of CalPERS assets stood at approximately $237.5 billion. A year earlier, the fiscal year ended with $200.5 billion.

Real estate investments yielded a 10.2% return based on numbers only through March 31 (not June 30, 2011).

"Despite the good news, we're well aware of continuing uncertainties in the global financial markets," said George Diehr, Chair of CalPERS Investment Committee. "Accordingly, our strategy is accounting for such factors as high unemployment, the depressed housing market, and financial turmoil in Greece and other debt-plagued countries. We're moving forward with our risk-focused asset allocation strategy and developing new tools to respond to market conditions."

CalSTRS Earns a 23.1% Return

CalSTRS, the nation's second largest pension fund, posted a remarkable 23.1% return on its investment portfolio, the highest in 25 years.

The return rate soundly beat the actuarial assumed rate of 7.75%. It brought in $29 billion for the fiscal year ending on June 30, 2011. CalSTRS investment portfolio's market value ending June 30 was $154.3 billion.

This marks the second consecutive year of robust performance, after the fiscal year 2009-10 return of 12.2%.

Despite the healthy return in 2010-11, June's stubbornly high unemployment rate, a sluggish housing sector and weak consumer spending, nationally, point to continued challenges for the economy and for investors, highlighting that CalSTRS estimates it cannot invest its way back to financial health.

As of June 30, 2010, the gap between the value of the fund's assets and the value of CalSTRS obligations, or the funding gap, had grown to $56 billion.

"The stock market has rebounded nicely from the economic near-death experience of 2008, but it is far from healthy and it presses the need to put a solid funding solution into place for the long term," said CalSTRS Chief Investment Officer Christopher J. Ailman. "Solid performance in the past two fiscal years puts some wind in our sails, but it doesn't make up for a lost decade of returns."

"As a result, we have taken steps to generate returns in response to the financial crisis, such as our temporary shifting of 5% of assets from global equities to take advantage of opportunities in distressed markets in fixed income, real estate and private equity. This move alone has yielded returns of about 29% since inception, ahead of the equity market over the respective term," Ailman added.

Real estate investments in FY 2010-'11 yielded a 17.5% return.

New York Pension Fund Earns 14.6% Return

The New York State Common Retirement Fund, the third-largest fund in the nation, earned a 14.6% rate of return for the fiscal year ending March 31, 2011. The estimated value of the fund is $146.5 billion, the highest since the global economic downturn in fiscal year 2008-2009.

"The fund remained resilient during a tough economic period," said New York State Comptroller Thomas P. DiNapoli. "We've come a long way back."

"There still are reasons to be cautious about the ongoing recovery," DiNapoli said, "but the results are a good sign that the fund has weathered the worst of the downturn. We're on the right course."

Real estate investments yielded a 26.7% return.

All this proves to me is that US pensions plans are not out of the woods by any stretch of the imagination and judging from the meager Q2 results, Canadian pension plans are not faring any better. Importantly, if liabilities keep growing faster than investment returns, pensions are screwed and will need to cut benefits down the road.

So what will happen if the US defaults and "disaster strikes"? Absolutely nothing. Business as usual on Wall Street and they're going to be using every piece of negative macro news to buy the dips and make more money. Even if the sky falls, which it won't, the financial oligarchs are already busy preparing for Phase II of Operation AIG. Stay long risk assets throughout the remainder of the year and for all of 2012. If you want to speculate here, pick up some distressed European equities and bonds like National Bank of Greece (NBG).

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OTPP Swaps Assets With Australia's MAp Group

Sonali Paul and Narayanan Somasundaram of Reuters report, Australia's MAp agrees asset swap with Canadian fund:

Australia's MAp Group has agreed to swap airport stakes with Ontario Teachers' Pension Plan to beef up its holding in Sydney Airport in a deal worth A$1.6 billion ($1.7 billion), and flagged a possible cash return to shareholders.

The operator of Sydney airport will exchange its stakes in Brussels Airport and Copenhagen Airports for OTPP's 11 percent stake in Sydney Airport and A$791 million in cash, as it looks to simplify ownership of Australia's top airport.

The cash component was slightly lower than flagged when the proposal was announced in June, mainly due to the strengthening of the Aussie dollar against the euro.

After the deal, it will own 85 percent of Sydney airport and said it expected to make about A$1.5 billion available to MAp investors when the deal is completed, slated for the fourth quarter of 2011.

While MAp is trading its stakes in Brussels and Copenhagen airports for below their last valuation at A$1.94 billion, giving way to some concern, investors were still satisfied that the group was making progress on its plan to get out of other airports to focus on Sydney.

"It's disappointing they've decided to do it at this particular point in time when we're mid-way through the recovery in asset valuations," said Will Seddon, analyst at White Funds Management, which owns MAp shares.

"But that said, it cleans the structure up a lot and gives them absolute control of Sydney, which is a very good asset."

MAp shares rose 1.5 percent to A$3.44, underperforming the broader market , which rose 1.8 percent.

No decision has been made yet on exactly how MAp may return cash to shareholders, a MAp spokeswoman said.

"I guess they'll probably keep some powder dry for what opportunities may come up with respect to Sydney, but apart from that, the best thing they could do is return it to shareholders," Seddon said.

The biggest block to MAp taking full control of Sydney airport is German construction group Hochtief , which is trying to sell its airport concessions as a whole, including a 12 percent stake in Sydney airport.

OTPP will end up with a 39 percent stake in Brussels Airport and a 30 percent stake in Copenhagen Airport, adding to its airport holdings in Birmingham and Bristol in Britain.

"We believe that Brussels and Copenhagen Airports are excellent opportunities that strongly reflect our investment criteria and our long-term investment horizon," Stephen Dowd, senior vice-president of OTPP's Teachers' Infrastructure Group, said in a statement.

The Danish government remains the single biggest shareholder in Copenhagen Airports with a 39.2 percent stake.

Shares in Copenhagen Airports traded up 2.3 percent at 1,647 Danish crowns ($313.6) by 0724 GMT. ($1 = 0.934 Australian Dollars) ($1=5.252 Danish Crown)

Ontario Teachers' put out a press release on their website, Teachers’ invests in premier European airports:

The Ontario Teachers’ Pension Plan (Teachers’) has reached an agreement with MAp Airports (MAp) to exchange its interest in Sydney Airport and a cash payment for MAp’s interests in Brussels Airport and Copenhagen Airport.

The transaction will result in Teachers’ Infrastructure Group adding to its current airport holdings with ownership of 39 percent of Brussels Airport and 30 percent of Copenhagen Airport. MAp will receive Teachers’ 11 percent interest in Sydney Airport plus a cash payment. The transaction is expected to close in 2011, subject to regulatory approvals.

“We believe that Brussels and Copenhagen Airports are excellent opportunities that strongly reflect our investment criteria and our long-term investment horizon,” said Stephen Dowd, Senior Vice-President, Teachers’ Infrastructure Group. “As experienced airport investors, we look forward to working with the Belgian and Danish governments and other stakeholders to develop the full potential of these airports.”

Teachers’ Infrastructure Group’s other airport investments are Birmingham Airport and Bristol Airport, which are jointly controlled alongside other shareholders. Teachers’ Infrastructure Group makes investments that are subject to a fair and transparent regulatory framework and that generate stable, low-risk, long-term returns to help meet the plan’s pension obligations.

With $107.5 billion in assets as of December 31, 2010, Teachers’ is the largest single-profession pension plan in Canada. An independent organization, it invests the pension fund's assets and administers the pensions of 295,000 active and retired teachers in Ontario. For more information visit www.otpp.com.

Some comments on this transaction. First, I have never been to Australia (my dream is to swim with Great White Sharks at the Great Barrier Reef). Was at the hospital yesterday morning as part of some research study on transcranial magnetic stimulation in Multiple Sclerosis and one the Master's student shocking me with magnetic pulses was from Melbourne. I asked her why she decided to move to Montreal and she told me she followed her heart, married and moved here but she misses Melbourne and thinks the winters are brutal here (they are but so far we're having an amazing summer).

I do, however, know Brussels well because my mother and stepfather have been living there for the last seven years (he's a diplomat for the government of Quebec). I love that city. It's clean, classy and full of diplomats so most of the people are educated and cultured. You can drive to other cities like Bruges where you can visit museums and walk around to see amazing historical sites. Brussels is the hub of Europe. You can literally go anywhere from there. And the beer, fries and restaurants are awesome. Just writing about it makes me want to go back soon!

As for Copenhagen, it's a busy European airport so this too is a great asset for Ontario Teachers'. The terms of the deal are favorable for Teachers' and we'll see how MAp Group fairs out with its controlling stake in Sydney airport. I was told that group Hochtief, the German infrastructure powerhouse, is fighting off a takeover and is liquidating assets, so this could be a stumbling block for MAP taking full control. And just like Canada, Australia is going through its own bubble, dangerously overheating which could spell big trouble down the road.

All this to say that I think Teachers' did a good move here. However, airports are not always profitable ventures for pension funds. The Caisse de dépôt et placement du Québec, Canada's largest pension fund, took a huge writedown in 2008 from its troubled investment in British Airports Authority (BAA). These deals are complex and if the terms are wrong or all risks are not evaluated properly, pension funds will lose in the high stakes game of infrastructure investments.

***Feedback***

A senior pension fund manager was kind enough to share his thoughts:

“High stakes game of infrastructure investing”? These are supposed to be low risk, stable assets serving LDI purposes. They are usually priced to provide enhanced bond like return and duration outcomes. Unfortunately, these assets are often way more cyclical than people chose to believe, and are often financed like LBO’s, which further exacerbate the cyclicality. That’s why not all pension plans believe infrastructure provides for suitable risk/reward. Too bad more pension plans don’t do greenfield projects. That’s where the social need is. Trading and financial engineering built assets is indeed a game. I am not playing a game, I am trying to create profits to pay pensions. It may be a decent investment, I don’t know enough about it. But just reminding how the deal making excitement and profile can eclipse the post deal follow through on how things actually work out.

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Has Ray Dalio Mastered the Machine?

John Cassidy wrote an excellent article in the New Yorker magazine, Mastering the Machine, on how Ray Dalio built the world's biggest and strangest hedge fund:

Ray Dalio, the sixty-one-year-old founder of Bridgewater Associates, the world’s biggest hedge fund, is tall and somewhat gaunt, with an expressive, lined face, gray-blue eyes, and longish gray hair that he parts on the left side. When I met him earlier this year at his office, on the outskirts of Westport, Connecticut, he was wearing an open-necked blue shirt, gray corduroy pants, and black leather boots. He looked a bit like an aging member of a British progressive-rock group. After a few pleasantries, he grabbed a thick briefing book and shepherded me into a large conference room, where his firm was holding what he described as its weekly “What’s going on in the world?” meeting.

Of the fifty or so people present, most were clean-cut men in their twenties or thirties. Dalio sat down near the front of the room. A colleague began describing how the European Central Bank had just bought some Greek bonds from investors at a discount to their face value—a move that the speaker described as a possible precursor to an over-all restructuring of Greece’s vast debts. Dalio interrupted him. He said, “Here’s where you are being imprecise,” and then explained at length what a proper debt restructuring would entail, dismissing the E.C.B.’s move as an exercise in “kicking it down the road.”

Dalio is a “macro” investor, which means that he bets mainly on economic trends, such as changes in exchange rates, inflation, and G.D.P. growth. In search of profitable opportunities, Bridgewater buys and sells more than a hundred different financial instruments around the world—from Japanese bonds to copper futures traded in London to Brazilian currency contracts—which explains why it keeps a close eye on Greece. In 2007, Dalio predicted that the housing-and-lending boom would end badly. Later that year, he warned the Bush Administration that many of the world’s largest banks were on the verge of insolvency. In 2008, a disastrous year for many of Bridgewater’s rivals, the firm’s flagship Pure Alpha fund rose in value by nine and a half per cent after accounting for fees. Last year, the Pure Alpha fund rose forty-five per cent, the highest return of any big hedge fund. This year, it is again doing very well.

The discussion in the conference room moved on to Spain, the United Kingdom, and China, where, during the previous week, the central bank had raised interest rates in an attempt to slow inflation. Dalio said that the Chinese economy was in danger of overheating, and somebody asked how a Chinese slowdown would affect the price of oil and other commodities. Greg Jensen, Bridgewater’s co-chief executive and co-chief investment officer, who is thirty-six, said he thought that even a stuttering China would still grow fast enough to push world commodity prices upward.

Dalio asked for another opinion. From the back of the room, a young man dressed in a black sweatshirt started saying that a Chinese slowdown could have a big effect on global supply and demand. Dalio cut him off: “Are you going to answer me knowledgeably or are you going to give me a guess?” The young man, whom I will call Jack, said he would hazard an educated guess. “Don’t do that,” Dalio said. He went on, “You have a tendency to do this. . . . We’ve talked about this before.” After an awkward silence, Jack tried to defend himself, saying that he thought he had been asked to give his views. Dalio didn’t let up. Eventually, the young employee said that he would go away and do some careful calculations.

After the meeting, Dalio told me that the exchange had been typical for Bridgewater, where he encourages people to challenge one another’s views, regardless of rank, in what he calls a culture of “radical transparency.” Dalio had no qualms about upbraiding a junior employee in front of me and dozens of his colleagues. When confusions arise, he said, it is important to discuss them openly, even if that involves publicly pointing out people’s mistakes—a process he referred to as “getting in synch.” He added, “I believe that the biggest problem that humanity faces is an ego sensitivity to finding out whether one is right or wrong and identifying what one’s strengths and weaknesses are.”

Dalio is rich—preposterously rich. Last year alone, he earned between two and three billion dollars, and reached No. 55 on the Forbes 400 list. But what distinguishes him more from other hedge-fund managers is the depth of his economic analysis and the pretensions of his intellectual ambition. He is very keen to be seen as something more than a billionaire trader. Indeed, like his sometime rival George Soros, he appears to aspire to the role of worldly philosopher. In October, 2008, at the height of the financial crisis, he circulated a twenty-page essay immodestly titled “A Template for Understanding What’s Going On,” which said the economy faced not just a common recession but a “deleveraging”—a period in which people cut back on borrowing and rebuild their savings—the impact of which would be felt for a generation. This line of analysis wasn’t unique to Dalio, but almost three years later, with economic growth stagnating again, it does not seem off the mark.

Many hedge-fund managers stay pinned to their computer screens day and night monitoring movements in the markets. Dalio is different. He spends most of his time trying to figure out how economic and financial events fit together in a coherent framework. “Almost everything is like a machine,” he told me one day when he was rambling on, as he often does. “Nature is a machine. The family is a machine. The life cycle is like a machine.” His constant goal, he said, was to understand how the economic machine works. “And then everything else I basically view as just a case at hand. So how does the machine work that you have a financial crisis? How does deleveraging work—what is the nature of that machine? And what is human nature, and how do you raise a community of people to run a business?”

The entire article is too long to post here. I recommend readers buy a copy of the New Yorker magazine and read it. It's also available online by clicking here (9 pages in all).

I've already shared with you the time I met Ray Dalio back in 2004 when I discussed his principle #11, which is my motto in life: "Never say anything about a person you wouldn't say to him directly. If you do, you're a slimy weasel." Unfortunately, the slimy weasel who accompanied me on that trip screwed me over, but that's alright, he offered me tremendous opportunities too, and in the end he did me a favor. I hate working with weasels who are more concerned about managing their careers than managing money.

I also remember in that meeting when I told Ray I was much more concerned bout deflation than inflation (still am but the banksters will fight it tooth and nail), and he responded: "Son, what's your track record?," a polite way of saying "what the fuck do you know about managing money, kid?" That's what I like about Ray Dalio, his confrontational style. No bullshit, no sitting on the fence, tell me what you think and why I should listen to you. If I worked at Bridgewater, we'd either end up as best friends or as mortal enemies. I back down from nobody -- not Ray Dalio, not George Soros -- nobody intimidates me! I couldn't care less if you have more money than God, if I think you're full of shit, I'll tell it to you in your face!

Maybe that's why I'm blogging, doing my own thing and happier than ever. I like being the odd guy out, working on the fringes. And that's why I like Ray Dalio and Bridgewater. But I also fear that they too will ultimately be victims of their success. Hope I am wrong because lots of pension plans are relying on Bridgewater, but the bigger you are, the harder you fall.

And Ray, extend and pretend will continue. The debt boogeyman is overdone and once this week passes and they sign some deals in Brussels and Washington, the world will wake up to another beautiful day. As big and as smart as Bridgewater is, the world's financial oligarchs are bigger, stronger, more corrupt and more devious, always scheming on how to fuck the system to make ever more profits and record bonuses. Yup, at the end of the day, the slimy weasels will win and the rottenness of the world will prevail.

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Are Public Pensions a "Vested Right"?

Chris Panteli of Global Pensions reports, Public pensions a "vested right", CalPERS report finds:

Legal analysis carried out by the California Public Employees’ Retirement System (CalPERS) has ruled that pension promises made to current and retired members are a “vested right” and protected under State and federal laws.

The analysis, "Vested Rights of CalPERS Members," articulates provisions found in the contract clauses" of State and federal laws, concluding that the laws establish that public employee retirement benefits are a form of deferred compensation and part of the employment contract.

"The law is very clear - a promise of a pension made by a public employer to its employees is a promise the employer must keep," said Anne Stausboll, chief executive officer for CalPERS.

"We prepared this analysis for two reasons. First, to reaffirm the provisions of the law regarding the nature of our members' pension rights; and second, to outline CalPERS roles as fiduciaries and stewards of the pension fund. We need to ensure that our members' vested rights are honoured."

CalPERS analysis looked at more than a dozen California appellate cases over the last 70 years and identified several rules which have emerged from court decisions, including:

• Employees are entitled to benefits in place during their employment, meaning they obtain a vested right to the provisions of the applicable retirement law that exists during the course of their public employment.
• RRetired and inactive members have vested rights to the benefits promised to them when they worked.
• Employees are entitled only to amounts reasonably expected from the contract. Vested rights protection does not extend to unreasonable or unanticipated windfalls.
• The State's "emergency" powers are extremely limited and cannot be used to reduce the benefits that have been promised. The State's emergency powers do not enable it to solve its budgetary problems by eliminating or reducing the long-term benefit promises it has made.
• Future employees have no vested rights.
• Only lawful contracts with mutual consideration are protected by the contract clause.
• Active employees' vested rights may be unilaterally modified only under extremely limited circumstances. Modifications must be reasonable and must bear some material relation to the theory of a pension system and its successful operation. Changes that result in disadvantage to employees generally must be accompanied by comparable new advantages.

The report added if a pension reform proposal for current employees were to be enacted it would still have to "pass muster" under the Contract Clause of the California Constitution. If a proposed amendment eliminated the State Constitution's Contract Clause, the Contract Clause in the US Constitution would still give rise to the same protection of vested rights as the State Constitution.

"The assumption by authors of pension reform proposals that amending the State Constitution will avoid a constitutional challenge to altering vested retirement benefits is misplaced," said Peter Mixon, CalPERS General Counsel.

"Without consideration of State and federal rules, well-intentioned proposals may only lead to increased litigation and administrative costs that will further increase the costs of providing benefits."

You can download the CalPERS' report by clicking here. There is no question that retired, inactive and active members have more "vested rights" than future employees. They paid into their pensions, contributed part of their wages, and expect their employer to deliver on the pension promise. Having said this, when the money runs out, like it did in Greece, all bets are off and even if these "vested rights" are protected under the Constitution, the government can turn around and cut benefits and repeal all vested rights.

In other words, when it comes to pension benefits, public sector employees have a lot more protection under the law than their private sector counterparts but anyone who thinks that these "vested rights" are immutable and enforceable under any circumstance is simply deluding themselves. When catastrophe strikes, the only "vested right" you have is the right to survive as best as you possibly can. If the money runs out, you will see deep cuts in your pensions.

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Private Resources Pilfering Pensions?

Jonathan Chevreau of the National Post asks, Will a pension overhaul save your retirement?:

The Conservative government has let its plan for fixing the country’s pension system fly under the radar of late while rival political parties had their say. But that ‘quiet period’ ends Monday when they get to the nitty gritty of launching their promised Pooled Registered Pension Plans, or PRPPs.

Minister of State (Finance) Ted Menzies will be briefing pension administrators in Toronto about the PRPP proposal first sketched out last December. It’s the government’s preferred private-sector fix for the retirement income system.

Forget about the greatly expanded or “Big” Canada Pension Plan the Liberals, NDP and Big Labour have pushed for. Mr. Menzies is all about creating a system that will be run by the private sector with risks born equally by employees and employers.

You can also forget about mandatory participation, which would be inherent in a CPP-centric solution. The essence of PRPPs will be to let either employers or employees opt out.

And forget about defined or guraranteed benefits in retirement: This plan is based on defined contributions with the ultimate benefits tied to market performance.

Naturally, Bay Street is salivating at the prospect.

This is a giant potential opportunity for the nation’s banks, mutual fund companies, insurance firms and a growing number of manufacturers of exchange-traded funds. Pension consultants, actuaries, financial planners and investment advisors will also see various business opportunities created as PRPPs catch on — primarily with small- and medium-sized businesses that never before offered its workers a pension plan. Mr. Menzies, the cabinet minister responsible for PRPPs, says he’s travelled the country consulting with the provinces.

“When the concept of the pooled RPP was shared with the provinces and territories they all came together to agree this makes sense.”

Finance Minister Jim Flaherty still hasn’t ruled out a “modest” CPP enhancement but Ottawa’s preferred pension fix is clearly the PRRP.

On Monday, the politicians and pension industry will start by hashing out details contained in a 13-page consultation document issued June 15, bearing the admittedly unsexy title of Tax Rules for Pooled Registered Pension Plans (PRPPs).

Neither governments nor corporations wish to go back to the bad old days of bearing the burden of providing the kind of guaranteed payouts used in traditional defined benefit employer pension plans or similar assured payouts in the CPP.

Instead, PRPPs will be (hopefully) low-cost defined contribution schemes run by the private sector where ultimate benefits will depend on how financial markets perform. The PRPPs would resemble the United States’ 401(k)s or Australia’s superannuation scheme.

They will be administered by financial institutions rather than employers, which is why Bay Street views them as a potential bonanza. As the “pooled” part of their name suggests, assets are co-mingled for investment purposes to keep down costs.

The original idea was that PRPPs would be mandatory for employers that don’t offer their own registered pension plan but Mr. Menzies says that decision would be up to the provinces. “We’re putting it out there that there is an option for the employer and for the employee. I’ve spoken to many small businesses that said ‘finally here’s a low-cost affordable plan I can enroll my employees in.’ It will be a retention and enticement tool.”

Employers won’t be forced to make contributions, but may choose to do so. Employees will be automatically enrolled at a base contribution rate, but they can opt out.

There will be two types of members: Employed and individuals. The latter include the self-employed and employees of organizations that do not offer PRPPs. Benefits are portable. Employers offering PRPPs can move to a new plan if they wish. There are fewer portability restrictions for individual members, making them convenient if they later change jobs and want to take their pension with them.

Participating employers will make direct contributions to the plan and remit employee contributions. Individual members can make periodic or lump-sum contributions and will be responsible for choosing to enrol, selecting contribution rates and remitting contributions.

The challenge next week is to modify tax rules so PRPPs fit within the existing structure of Registered Pension Plans (RPPs) and RRSPs across the country. Many administrative details must be hammered out, such as accounting for pensionable service or permitting transfers between existing RPPs and PRPPs.

Mr. Menzies says he hopes federal legislation to implement PRPPs will be passed before the end of the year. The Canada Pension Benefits Standards Act hasn’t been modified since 1985, he said. Once passed, the provinces will have to pass their own legislation to integrate PRPPs with their own pension and tax regimes.

The first PRPP already exists as part of a rejigged Saskatchewan Pension Plan (SPP). Established in 1986, the SPP is also defined contribution in nature, with the money invested in a balanced fund or a short-term option, according to Vancouver pension consultant Greg Hurst.

At retirement, funds can be transferred to a life income fund with a financial institution, or retirees can buy annuities backed by the province. In December, when the Ministry of Finance unveiled its draft framework for PRPPs, Ottawa and Saskatchewan jointly announced changes to the SPP to align the plan’s tax regime with RRSP and RPP rules.

Mr. Hurst, president of Greg Hurst & Associates, has been a vocal opponent of an expanded CPP but is optimistic about the PRPP. The revised SPP has several things in common with the proposed PRPP: its administrators act as fiduciaries, investments are pooled across the plan, it’s portable and there are two classes of members.

Mercer Partner Malcolm Hamilton says PRPPs have the laudable goal of helping employees in smaller firms save for retirement without imposing excessive burdens on their employers. However, he is concerned that achieving this seemingly simple goal could prove to be “deceptively difficult.”

Automatic enrollment could be a problem for smaller firms to administer and someone will have to come up with the default contribution rate and default investment options, Mr. Hamilton says. He’s also concerned about where participants will turn for objective yet affordable advice, given the possible conflicts of the financial institutions that will administer the plans.

Finally, Mr. Hamilton doubts low-income workers making under $20,000 a year can benefit from PRPPs: they should be saving modest amounts in Tax Free Savings Accounts (TFSAs) rather than RRSPs or RPPs.

It’s not yet clear whether PRPPs could also be made to work with TFSAs. That’s one of the fine points to be hashed out next week.

There are many "fine points" on PRPPs that need to be hashed out, but let's call a spade a spade: PRPPs are a big giveaway to banks, insurance companies, mutual funds, pension consultants and the entire private sector and they're just a bad extension of RRSPs (and thus doomed to fail). They should rename PRPPs to Private Resources Pilfering Pensions because that is the essence of this stupid, shortsighted proposal. The private sector continues to rape employees with exorbitant fees as they make more inroads into retirement savings, grabbing a bigger stake of the shrinking pension pie.

Please go back to read my comment on why the fuss over pensions. Everything else you read in mainstream media is private sector garbage. I am tired of beating the pension drum on this issue and will continue to expose the charlatans who claim to know what's best for our retirement. They haven't got a clue which will be blatantly evident once the new Minister of State (Finance) Ted Menzies unveils the details of this new proposal. Mark my words, it's going to be a monumental failure and Canadians are going to end up paying dearly for it down the road.

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