PrefBlog

Some timely commentary from Pew Research:

Manufacturing jobs in the United States have declined considerably over the past several decades, even as manufacturing output – the value of goods and products manufactured in the U.S. – has grown strongly. But while most Americans are aware of the decline in employment, relatively few know about the increase in output, according to a new Pew Research Center survey.

Four of every five Americans (81%) know that the total number of manufacturing jobs in the U.S. has decreased over the past three decades, according to the survey of 4,135 adults from Pew Research Center’s nationally representative American Trends Panel. But just 35% know that the nation’s manufacturing output has risen over the same time span, versus 47% who say output has decreased and 17% who say it’s stayed about the same. Only 26% of those surveyed got both questions right.

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But the news of the day was the FOMC statement:

Information received since the Federal Open Market Committee met in June indicates that the labor market has continued to strengthen and that economic activity has been rising moderately so far this year. Job gains have been solid, on average, since the beginning of the year, and the unemployment rate has declined. Household spending and business fixed investment have continued to expand. On a 12-month basis, overall inflation and the measure excluding food and energy prices have declined and are running below 2 percent. Market-based measures of inflation compensation remain low; survey-based measures of longer-term inflation expectations are little changed, on balance.
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In view of realized and expected labor market conditions and inflation, the Committee decided to maintain the target range for the federal funds rate at 1 to 1-1/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.
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For the time being, the Committee is maintaining its existing policy of reinvesting principal payments from its holdings of agency debt and agency mortgage-backed securities in agency mortgage-backed securities and of rolling over maturing Treasury securities at auction. The Committee expects to begin implementing its balance sheet normalization program relatively soon, provided that the economy evolves broadly as anticipated; this program is described in the June 2017 Addendum to the Committee’s Policy Normalization Principles and Plans.

Voting for the FOMC monetary policy action were: Janet L. Yellen, Chair; William C. Dudley, Vice Chairman; Lael Brainard; Charles L. Evans; Stanley Fischer; Patrick Harker; Robert S. Kaplan; Neel Kashkari; and Jerome H. Powell.

No dissent! And in the States that means something – not like in Canada, where the very idea of two people disagreeing is considered to be too embarrassing for words.

There was an immediate reaction on the FX markets:

The Bloomberg Dollar Spot Index fell to the lowest in more than a year, while the 10-year Treasury yield slipped back below 2.3 percent after the Fed held rates steady and indicated it would start unwinding its balance sheet “relatively soon.”

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… but Treasuries regained most of the ground lost yesterday:

• •The yield on 10-year Treasuries fell five basis points to 2.29 percent.

PerpetualDiscounts now yield 5.28%, equivalent to 6.86% interest at the standard equivalency factor of 1.3x. Long corporates now yield a little under 3.95%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 295bp, a significant narrowing from the 305bp reported July 19.

The SEC says cryptocurrencies are securities (link to full report added):

The Securities and Exchange Commission issued an investigative report today cautioning market participants that offers and sales of digital assets by “virtual” organizations are subject to the requirements of the federal securities laws. Such offers and sales, conducted by organizations using distributed ledger or blockchain technology, have been referred to, among other things, as “Initial Coin Offerings” or “Token Sales.” Whether a particular investment transaction involves the offer or sale of a security – regardless of the terminology or technology used – will depend on the facts and circumstances, including the economic realities of the transaction.

The SEC’s Report of Investigation found that tokens offered and sold by a “virtual” organization known as “The DAO” were securities and therefore subject to the federal securities laws. The Report confirms that issuers of distributed ledger or blockchain technology-based securities must register offers and sales of such securities unless a valid exemption applies. Those participating in unregistered offerings also may be liable for violations of the securities laws. Additionally, securities exchanges providing for trading in these securities must register unless they are exempt. The purpose of the registration provisions of the federal securities laws is to ensure that investors are sold investments that include all the proper disclosures and are subject to regulatory scrutiny for investors’ protection.
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The SEC’s Office of Investor Education and Advocacy today issued an investor bulletin educating investors about ICOs.

The Ontario government’s pension fund manager has opened for business:

Toronto-based Investment Management Corporation of Ontario (IMCO) begins managing the $60-billion on behalf of its first two clients, Workplace Safety and Insurance Board (WSIB) and the Ontario Pension Board (OPB), on Monday after a lengthy integration process. IMCO hopes to add other small public-sector plans over time by offering them access to a broader range of asset classes at lower fees.
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IMCO has roots in a 2012 report on what might be gained by pooling Ontario’s fragmented public-sector pension funds. It was penned by Bill Morneau, who was then president of Morneau Shepell and a pension investment adviser to Ontario’s Minister of Finance. His review suggested that size does matter in investing, that grouping these funds together would be a more efficient investment method and that plans might collectively save more than $75-million each year.
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When the initial build out of IMCO’s investment teams is completed more than a year from now, he will need to be able to make a compelling argument to potential future clients that the improved returns and lower costs will lead to better results than what they would be able to source on their own. Otherwise, there’s no incentive for a prospective client to join the voluntary IMCO group.

But the model already has a strong track record in Western Canada. Alberta Investment Management Corp., known as AIMCo, manages more than $90-billion of assets for 26 pension, endowment and government funds in its province. British Columbia Investment Management Corp., or BCIMC, is even larger, managing $135-billion for more than 30 institutional clients.

Like its Western cousins, IMCO will also look to manage more of its money in house, rather than buying investments in asset through other fund managers.

It will not have escaped the intelligent and assiduous reader that, in the context of a $60-billion portfolio, $75-million in projected fee savings is only slightly greater than the square root of fuck-all. I don’t want to issue any doom-filled forecasts here, but as I have pointed out in the past:

I don’t think there’s anything wrong with the Yale model, but there are definitely problems with the implementation – as I told one guy recently, just because I believe the “Warren Buffet style” of investment CAN work, doesn’t mean I think YOU can do it.

The field is filled with ignoramuses and charlatans and institutional boards aren’t any better at picking winners than any other retail investor who handles his investments as a part-time job. Hiring a small group of specialists to farm out the work to third party firms just makes matters worse, because then allocations are made on the basis of two salesmen talking to each other.

For an institution to outperform, I believe that you have to have most, if not all, of the investment expertise in-house. ‘You don’t need to sell anything, guys, you just have to outperform on a rolling four year basis or you’re fired.’ This is the Teachers/OMERS model – and it works.

So, I will direct readers’ attention to the assertion in today’s Globe article: he will need to be able to make a compelling argument to potential future clients that the improved returns and lower costs will lead to better results. That is to say, sales. It must be remembered that, in government as in business, the guys in charge of pension plans are not professional investors and don’t have any more expertise in investing than any other accountant with a $200,000 RRSP. So they’re susceptible to just as much stockbroker flim-flam as any other member of the gullible investing public.

So you get investment decisions being made on the basis of how well it can be explained to an uninformed client and that view becomes pervasive throughout the organization; with people’s bonuses being paid not for performance, but for Assets Under Management. In the worst case scenario, people start brown-nosing the government of the day instead of asking themselves how, exactly, do I put more actual money into my actual clients’ actual pockets:

It’s a black day for the professionalism of the Canadian investment management industry, such as it is. It looks like the OTPP’s foray into politics (sneered at on October 7) comes straight from the top:

Ontario’s proposal to create a voluntary disclosure rule to boost women on boards is unlikely to cause much improvement and will likely have to be turned into a quota, warns the head of Ontario Teachers’ Pension Plan.

Speaking at a public forum Wednesday hosted by the Ontario Securities Commission, Jim Leech said Canada has a smaller proportion of women on corporate boards than countries like Turkey and Poland. He said voluntary disclosure rules can be tried for three or four years, but will probably end up being rejected as inadequate.

“Let’s skip this intermediate step we don’t think is going to work,” Mr. Leech proposed.

Teachers has urged regulators to instead require all public company boards to have at least three women directors.

Maybe Leech is sucking political arse in hopes of a position with the proposed Ontario Pension Plan.

So, let’s hope. And particularly, let us hope that the new entity looks more like HOOPP, one of the best organizations I know of and not so much like Honest Jimmy’s Best Mutual Funds:

Never let it be said that I never say anything nice on this blog! For instance, on March 25, 2009 and again on April 17, 2012, I said nice things about the Hospitals of Ontario Pension Plan (HOOPP). And now there are more nice things to say:

The Healthcare of Ontario Pension Plan (HOOPP) has posted returns for 2012 of 17.1 per cent, which boosted the pension plan for Ontario healthcare workers to a record $47.4 billion in assets, compared to $40.3 billion at the end of 2011. This strong double-digit return increased HOOPP’s 10-year average rate of return to more than 10 per cent, one of the best long-term records among pension plans worldwide.

At the end of 2012, HOOPP was 104 per cent funded – this fully funded status means the Plan has sufficient assets to pay for every promised member’s pension benefit, with no shortfall.

“HOOPP had a very strong year in 2012 – with our best investment results in more than a decade,” says HOOPP President & CEO Jim Keohane. “This was a year when all of our investment strategies worked. We were firing on all cylinders, with positive returns from every type of investment,” he said. HOOPP’s liability driven investment (LDI) strategy continues to contribute to HOOPP’s success, Keohane added.

“Liability Driven Investment” is the cool way of saying “paying attention to your client’s needs”. HOOPP is in a good position to do this, because they have exactly one client and aren’t looking for new ones, despite idiotic initiatives from Premier Dad’s office that would encourage large plans to stock up on salesmen and get rid of those dreary nerds. That’s the real secret – a focus on return made possible by a complete absence of pressure for sales. Then you can fire the moron whose sole useful attribute is being buddies with a large client; then you can do all kinds of things. In an interview with the Star, though, president and CEO Jim Keohane emphasized scale, which is probably more diplomatic.

It was a tough day for global bonds:

Markets took a risk-on tone Tuesday as generally positive earnings and economic data bolstered confidence in the strength of the global economy. The data come as the Fed will weigh robust global growth against feeble inflation and mixed U.S. economic data. Expectations are for policy makers to keep rates on hold; clues to the fate of its balance sheet will be key.

• •The yield on 10-year Treasuries rose seven basis points to 2.33 percent, the most in a month.
• •Germany’s 10-year yield rose six basis points to 0.566 percent.
• •Britain’s 10-year yield rose seven basis points to 1.258 percent, the highest in more than a week.
• •France’s 10-year yield rose seven basis points to 0.812 percent, the first advance in more than a week.

In Canada the five-year yield popped up to 1.63% and the ten-year rose to 2.02%.

The Tembec Empty Voting controversy, discussed on July 20, now looks like a fizzle:

Shares in Tembec Inc. rose the most since May after Rayonier Advanced Materials Inc. won support from two key shareholders for its increased bid for the Canadian lumber and paper producer.
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Rayonier Advanced is now offering Tembec investors the choice of receiving C$4.75 a share in cash — valuing the company at about C$475 million ($379 million) — or 0.2542 Rayonier Advanced shares for each Tembec share.
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Paul Boynton, chief executive officer of Rayonier Advanced, said in an interview Sunday that the companies have entered into an irrevocable agreement with Tembec’s two biggest shareholders, Oaktree Capital Group LLC and Restructuring Capital Associates to support the deal. The pair collectively hold about 37 percent of the target’s shares.

Today’s inflation numbers provided some ammunition for the hawks:

Canada’s core consumer prices and retail sales came in faster than expected, signaling that overall inflation may turn around to clear the way for another rate increase this year.

The average of the central bank’s three core inflation measures rose to 1.4 percent in June, Statistics Canada said Friday from Ottawa, up from a May reading of 1.3 percent that was the lowest since 1999. Retail sales doubled economist forecasts for May with a 0.6 percent increase, bringing the year-over-year gain to 7.3 percent, more than double the average over the last decade.

Canada’s dollar strengthened a fourth day as the reports lined up with Bank of Canada Governor Stephen Poloz’s argument that inflation will shrug off some temporary weakness and move back toward his 2 percent target over the next year.

S&P downgraded Manitoba:

• •Although Manitoba is taking clear steps to improve its fiscal sustainability in the long term, it faces large projected budget deficits and further growth in its already-high debt burden over the next two years.
• •We are therefore lowering our long-term issuer credit and senior unsecured debt ratings on the Province of Manitoba to ‘A+’ from ‘AA-‘.
• •The stable outlook reflects our expectations that, in the next two years, the government will implement the medium-term measures to control costs that were introduced in its 2018 budget, putting it on a gradual path to fiscal sustainability.

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The downgrade reflects the large, expenditure-driven structural deficits currently facing Manitoba. The current government, in power for a little more than a year, has laid out a seven-year path back to operating balance mostly through restructuring its cost base. While these steps bode well for strengthening budget performances in the medium term, they will not prevent the government from posting large after-capital deficits over the next two years, in our view. We expect borrowing needs associated with these deficits to keep Manitoba’s debt burden well above that of its Canadian provincial peers.