Wednesday, January 28, 2015

PSP Taps New CEO From Rival CPPIB

Euan Rocha of Reuters reports, Canada's PSP taps new CEO from rival pension fund manager CPPIB:
Public Sector Pension Investment Board (PSP), one of Canada's largest pension fund managers, announced on Tuesday it has chosen André Bourbonnais as its president and chief executive officer.

Bourbonnais joins PSP, which manages the pension funds of federal public-service workers, from rival pension fund manager the Canada Pension Plan Investment Board (CPPIB), where he was head of private investments. He replaces John Valentini, who was filling in as CEO after Gordon Fyfe left PSP last year to head the British Columbia Investment Management Corp (BCIMC).

PSP said Bourbonnais brings an extensive global network and proven portfolio management skills to his new job.

Separately, CPPIB announced that Mark Jenkins, who has been overseeing its direct private equity investments and its natural resources investment programs, will take on the role being vacated by Bourbonnais.

Jenkins, formerly a banker at Goldman Sachs and later Barclays, joined CPPIB in 2008.

CPPIB also named Pierre Lavallée to the new role of global head of investment partnerships. He will focus on broadening relationships with the fund's external managers in private and public funds, expanding direct private equity investments in Asia and building the fund's thematic investing capabilities.
Scott Deveau of Bloomberg also reports, Public Sector Pension Appoints Bourbonnais as CEO:
Public Sector Pension Investment Board has appointed Andre Bourbonnais president and chief executive officer, effective March 30.

Bourbonnais has more than 20 years of industry experience, most recently as senior managing director and global head of private investments at Canada Pension Plan Investment Board, PSP said in a statement.

He replaces interim CEO John Valentini at Ottawa-based PSP, which manages the retirement savings of Canada’s federal civil servants and security forces and had assets under management of C$99.5 billion ($80.4 billion) as of Sept. 30.

“We are confident he is the right person to lead PSP Investments into its next phase of evolution, which involves increasingly global activities and sustained growth,” ’ said Michael Mueller, PSP chairman.

Canada Pension said it had promoted Mark Jenkins to global head of private investment to replace Bourbonnais. 
PSP Investments put out a press release on this new appointment which you can read by clicking here. Mr. Bourbonnais is a lawyer by training who began his career with Stikeman Elliott back in 1986 working on mergers and acquisitions and then moved over to Teleglobe, Addenda Capital and the Caisse where he managed a private equity portfolio before heading off to CPPIB to eventually become the head of all private markets. SWFI published a great piece on André Bourbonnais discussing all his achievements.

So what do I think of this new appointment? I'm a little bit surprised he left CPPIB where I thought he was next in line to take over after Mark Wiseman. But he's a Montreal native and Mark Wiseman is a young CEO so he would have had to wait a very long time before taking over the helm.

More importantly, this new appointment makes perfect sense for PSP. They tapped someone with extensive private market experience, contacts, industry experience and someone who can manage PSP in the next phase of their operations. It also helps that he's French Canadian and perfectly bilingual as PSP's head office is in Montreal and many employees are French natives (but perfectly bilingual too).

I have never met André Bourbonnais so I can't tell you how he is in person but we did have an email exchange where truth be told, I was shocked because he told me to remove him from my distribution list. The way he made his request struck me as very arrogant and I let him know it.

But let me give the man the benefit of the doubt. Maybe he was having a bad day (he subsequently accepted my emails, probably because Mark Wiseman talked to him and told him to give me a break). He's now running a major Canadian pension fund and has his work cut out for him. His experience at the Caisse and CPPIB will serve him well and now that he is a CEO, his role will change in a significant way.

My experience at PSP allowed me to gain insights on the job of being a CEO. I saw the good, bad and ugly from a CEO's vantage point. The toughest job of being a CEO is not only managing people, which is often cumbersome, but also managing the board of directors, which can drive you insane depending on how the board members are.

I don't know much about Bourbonnais's managerial skills but he will have his work cut out for him at PSP where he will lead a diverse group of people. Still, he'll be surrounded by very competent professionals and I'm sure he will bring in a few of his own people to help him in this new role.

For PSP's employees, at least now they finally have a CEO after Gordon Fyfe left to head bcIMC, and he's someone with a strong reputation in the pension fund industry and someone with extensive private market experience which is the direction that most of Canada's large public pension funds are heading.

On that note, let me wish André Bourbonnais congratulations and best of luck in this new and important role leading PSP Investments. I will also publicly state that I've recently applied to senior investment positions at PSP and expect to be treated fairly and without prejudice regardless of my health status, past employment at PSP and sometimes abrasive blog comments which turn some people off (but others like them and tell me to keep forging ahead!).

One last heads up for Mr. Bourbonnais. I was reading yesterday that even before undertaking his portfolio, Greece's new alternate minister for shipping, Theodoros Dritsas, announced the cancellation of the privatization of Piraeus Port Authority (OLP).

The political earthquake that just hit Greece is something to be concerned about, especially for PSP which now owns part of Athens' airport. Greece's already-fragile banking sector has taken a hammering as fears of a debt default have hit lenders' stocks -- and deposits (see below).

I shudder to think what will happen if a Syriza-led coalition decides to renege on deals made by the previous government with foreign investors, however, I do think cooler heads will prevail. Moreover, Greece's new finance minister, Yanis Varoufakis, might be a left-wing academic but he's no extremist, and understands the need to respect private market transactions.

Still, the media in Greece has raised the possibility of nationalizing banks and private-public partnerships and I hope this doesn't happen because it will impact PSP's investment in Athens' airport. I liked that deal and still think it will be a huge success, especially once we get past the latest fears of a eurozone crisis.

Below, CNBC's Michelle Caruso-Cabrera reports the newly-elected Greek leaders are hiking the country's minimum wage and rolling back deals that were part of the bailout agreement.

And Friedrich Heinemann, head of department for public finance at ZEW, says Europe is prepared for the "worst case" of a Greek default. He's dreaming, Germany and Europe cannot afford 'Grexit' because if Greece goes, Spain, Portugal and Italy are next, which means the end of the eurozone.

Tuesday, January 27, 2015

Soros Warns Pensions on Hedge Funds?

David Sirota of the International Business Times reports, Billionaire Currency Trader George Soros Warns Against Investing Public Pension Money In Hedge Funds:
Another towering figure in the financial industry is warning major pension systems to beware of investing retiree money in hedge funds. During a Thursday meeting at the World Economic Forum, billionaire investor George Soros cited management fees charged by hedge funds in arguing that steering billions of dollars of public employees‘ money into such products is imprudent.

“Current market conditions are difficult for hedge funds,” said Soros, who recently retired from his currency focused hedge fund business. “Their performance tends to be equal to the average plus or minus a 20 percent management fee.” (correction: 20% performance fee). He said that while “you will always have some hedge funds that will provide outside performance ... to put a large portfolio into a hedge funds is not a winning strategy.”

Public pension systems currently have roughly $470 billion worth of investments in hedge funds, according to data compiled by Prequin, a financial research firm.

Soros made his comments only months after Warren Buffett issued a similar warning. A few months after Buffett’s comments, the United States’ largest pension system, the $296 billion CalPERS, or California Public Employees' Retirement System, made national headlines when in September it ended most of its hedge fund investments.

CalPERS’ move has been seen as a potential trend setter. In October, the $20 billion San Francisco pension system tabled a proposal to invest in hedge funds, and in December, New York Gov. Andrew Cuomo, a Democrat, vetoed legislation to increase the amount his state can invest in such high-risk vehicles.

The shift out of hedge funds has now moved to Europe. Earlier this month, the $184 billion Netherlands public pension system dumped its hedge fund investments. A top official told Reuters at the time: "With hedge funds, you're certain of the high costs, but uncertain about the return.”

In other remarks at the World Economic Forum, Soros urged world leaders to more forcefully intervene to challenge Vladimir Putin’s regime.

“Russia has become a mafia state in which the rulers use the resources of the country to enrich themselves and to maintain themselves in power,” he said. “They preserve the outward appearances of democracy such as holding elections, but there is no rule of law and no arrangements for a legitimate transfer of power.”

Of Russia’s standoff with Ukraine, he said: “Ukraine should be able to defend itself militarily as long as Putin maintains the pretense that the separatists are acting on their own, but it urgently needs financial assistance. I believe Europe will respond favorably... Much depends on the next few days. Not only the future of Ukraine but also the future of the European Union itself is at stake. I believe the loss of Ukraine would be an enormous loss for Europe. It would allow Russia to divide and dominate.”
When Soros talks about hedge funds, I listen, but when he rails against the "evil" Putin and Russia, I tune off because it's all U.S. propaganda that professor Stephen Cohen has thoroughly discredited.

Don't get me wrong, I know Putin is no angel and that Russia is a hopeless mafia state, but there are plenty of mafiosos in Washington with their own hidden agenda to destroy Russia and Putin's ambition to break the U.S. banking cartel. You should all read William Engdahl's latest on Russia and China and listen to Michael Hudson's discuss the Russian Pivot to gain a deeper understanding of the tensions between the U.S. and Russia.

Of course, Russia's fortunes are inexorably tied to the price of oil so when Gary Cohen, president of Goldman Sachs and a former oil trader, goes on CNBC to state that they believe oil prices will probably continue to decline and could reach as low as $30 a barrel in an extended slump, you know the banking cartel is winning the real (economic not political) war on Russia (but Russia is threatening to respond in kind).

Getting back to Soros's comments on hedge funds, he has nothing to lose because his money is being run by his family office. He pretty much states the obvious, namely, the bulk of hedge funds stink and are charging hefty alpha fees for sub-beta performance. 

Moreover, Soros is right, there will always be some hedge funds that deliver outsized performance, but current market conditions are very difficult for most hedge funds and picking winners is becoming increasingly more difficult. This is one reason why CalPERS dropped a bomb back in September and why the giant Dutch healthcare pension, Pensioenfonds Zorg en Welzijn (PFZW), dealt another blow to the industry recently and also exited hedge funds (CIO magazine reports that PFZW netted a $56 million profit in two months as it exited hedge funds last year).

Just how difficult are market conditions for hedge funds? Extremely difficult. Just look at how the Swiss currency tsunami hit macro funds hard, obliterating many of them. In fact, hedge fund manager Marko Dimitrijevic closed his largest hedge fund, Everest Capital's Global Fund, after losing almost all its money after the Swiss National Bank (SNB) scrapped its three-year-old cap on the franc against the euro.

Bloomberg reports that the franc fallout spread to other well-known macro hedge funds:
Billionaire Michael Platt’s BlueCrest Capital Management lost money in one of its funds and at least two employees departed as the fallout from last week’s sudden jump in the Swiss franc spread across the hedge-fund industry.

Platt lost 5.5 percent in his macroeconomic fund through Jan. 16, two people with knowledge of the matter said. Comac Capital, Fortress Investment Group LLC (FIG) and Everest Capital also reported declines.

Among managers avoiding losses are Leda Braga, a former BlueCrest executive who started her own computer-driven trading firm this month, and who gained 7 percent in January through last week. Billionaire Alan Howard posted gains in his main fund at Brevan Howard Asset Management.

The market turmoil caused by the Swiss National Bank’s surprise decision on Jan. 15 to remove a three-year-old cap on its currency pushed some currency-trading firms into insolvency and caused losses worth hundreds of millions of dollars at banks and hedge funds. The franc soared as much as 41 percent against the euro that day.

Speculators boosted wagers that the franc would weaken against the dollar to the highest in 1 1/2 years this month, Commodity Futures Trading Commission data show, only to be hurt by the currency’s jump.
Platt’s Woes

At BlueCrest, the declines are a further setback for former JPMorgan Chase & Co. trader Platt, 46, who started the firm in 2000. BlueCrest has faced underperformance, a decline in assets as clients pulled money and concern that an internal fund run for select employees may pose conflicts of interest between BlueCrest and its clients.

Amid last week’s losses, Luke Halestrap and Peter McGarry left the $15 billion Jersey-based firm, said the people, who asked not to be named because the information is private. BlueCrest shut a portfolio run by currency money manager, Peter Von Maydell, a person with knowledge of the decision, said yesterday.

Halestrap and McGarry didn’t reply to e-mails and telephone messages seeking comment. Before BlueCrest, Halestrap was at Merrill Lynch & Co., where he oversaw European trading in basic interest-rate related products. McGarry had previously worked at 5:15 Capital Management and BNP Paribas SA.
Braga’s Gain

Braga, the 48-year-old Brazilian who ran quantitative trading at BlueCrest, said in September that she was planning to start her own firm, Systematica. She planned to take almost a third of BlueCrest’s assets, with Platt’s firm taking a minority stake.

Her $5.6 billion BlueTrend fund posted a 3 percent gain last week, according to an investor update from her Geneva-based firm. Systematica oversees $7.7 billion in total in the strategy, which uses computer models to decide when to buy or sell stocks, bonds, currencies and commodities.

Another Geneva-based hedge fund manager, billionaire Howard, 51, avoided losses in his largest hedge fund, according to a person familiar with the matter. Howard’s Brevan Howard Master Fund gained 1.9 percent in the month through Jan. 16, compared with 1.1 percent as of Jan. 9, the person said.

Chris Rokos, who co-founded Brevan Howard with Howard and three other traders in 2002, said today that he will start his own hedge fund with the backing of his former employer after settling a lawsuit against the firm. Rokos had generated more than $4 billion when he worked at Brevan Howard.
Fortress’s Loss

In New York, Todd Edgar’s Atreaus Capital rose 10 percent last week as the $800 million currency and commodities hedge fund speculated that the euro would tumble, said another person. Atreaus, backed with $150 million from Goldman Sachs Group Inc.’s asset management arm in 2012, rose 9 percent last year, helped by wagers that the dollar would rise.

Other firms were less prescient. Fortress’s macro fund lost 7.9 percent this month through Jan. 16, according to an investor. The shares of the New York-based firm fell 4.4 percent today on the news, the biggest decline in four months.

Comac Capital, the $1.2 billion firm run by Colm O’Shea in London, is returning money to clients after losses. Everest Capital, run by Marko Dimitrijevic in Miami, saw all the money in its $830 million Everest Capital Global fund wiped out, leaving the firm with $2.2 billion in its other funds.

Officials for the hedge funds declined to comment.
I've already discussed Leda Braga, the most powerful women in hedge funds, when I went over PFZW's decision to exit hedge funds.

Zero Hedge, in its infinite wisdom, questioned how Soros and Alan Howard managed to avoid getting crushed by the surprise move from the Swiss National Bank but the truth is they were among a few savvy investors who were able to avoid steep losses.

This brings me to a very important point and I want all of you to pay attention here. I've invested with the very best global macro funds in the world, went head to head with the great Ray Dalio and others on why deflation is the ultimate endgame and I've never heard so many pathetic excuses by macro fund managers explaining their terrible calls on rates and currencies.

And it's not just macro funds. I'm amazed at the lame and ridiculous excuses coming out of many hedge fund managers for their poor performance. They blame the Fed and other central banks for 'juicing up' markets and removing volatility and when volatility comes roaring back, they are confounded, like deers caught in headlights.

In fact, part of me really misses grilling the hell out of these overpaid gurus but to be honest, I've danced enough with hedge fund prima donnas and would rather write my own views. A bright up-and-coming hedge fund manager told me yesterday how I got the call on deflation and rates right and I stick with my Outlook 2015 even with all the nonsense and fear following the Greek political earthquake.

Also, while the mighty greenback will hit earnings of many large corporations and exacerbate global deflation which most investors are not prepared for, I'm still betting on a melt-up in stocks led by technology (XLK) and especially biotech (XBI). My personal account was up huge last year and even though it was insanely volatile, I got my positions right because I got the macro calls right.

On that note, I ask all of you benefiting directly or indirectly from my insights to please show your appreciation and donate or subscribe to my blog via PayPal on the top right-hand side under my bio and contact info. I appreciate your words of encouragement but prefer your financial support (I'd be embarrassed if you haven't contributed, especially those of you who put me in this situation).

Below, Agecroft Partners' Don Steinbrugge and Bloomberg View columnist Barry Ritholtz discuss whether market volatility is good for hedge funds with Bloomberg's Trish Regan on "Street Smart."

Please keep in mind my comments and Soros's warning when investing in hedge funds. I honestly believe most pensions are better off following CalPERS and PFZW, exiting from hedge funds altogether.

Monday, January 26, 2015

A Political Earthquake in Greece?

Nick Squires of the Telegraph report, Greeks hand stunning victory to anti-austerity Syriza:
Greece set itself on a collision course with the rest of Europe on Sunday night after handing a stunning general election victory to a far-Left party that has pledged to reject austerity and cancel the country’s billions of pounds in debt.

In a resounding response to the country’s loss of financial sovereignty, Greeks gave Syriza 36.5 percent of the vote, according to the first official projections.

It will be able to send between 149 and 151 MPs to the 300-seat parliament, tantalisingly close to a majority.

The final result was too close to call but if the party wins 150 seats or fewer, it will have to form a coalition-- possibly with the Independent Greeks, a Right-wing party that also opposes the international bailout. (note: they did forma coalition, see below).

New Democracy, the conservative party which had governed since 2012, won just 27.7 per cent of the vote.

Led by the charismatic former communist Alexis Tsipras, 40, Syriza is now likely to form Europe's first anti-austerity government. The party, a motley collection of communists, Maoists and socialists, wants to cancel a large part of Greece's 320 billion euros of debt, which at more than 175 percent of GDP is proportionally the world's second-highest after Japan.

The debt is equivalent to nearly 30,000 euros for each Greek citizen.

Antonis Samaras, the outgoing prime minister, gave a brief statement in which he accepted the result and claimed he had put Greece back on the road to recovery.

"The Greek people have spoken and we all respect that decision," he said.

"I took charge of the country when it was on the edge of a cliff. I was asked to take burning coals into my hands and I did it. We avoided the worst, we re-established the credibility and prestige of our country."

He said: "We made some mistakes, but we averted the worst. I have a clear conscience because I told the truth to the Greek people right to the end."

The election victory threatens renewed turmoil in global markets and throws Greece's continued membership of the euro zone into question.

All eyes will be on the opening of world financial markets, although fears of a "Grexit" - Greece having to leave the euro - and a potential collapse of the currency have been less fraught than during Greece's last general election in 2012.

Mr Tsipras, an admirer of Che Guevara, has toned down the anti-euro rhetoric he used then and now insists he wants Greece to stay in the euro zone.

Austerity policies imposed by the EU and International Monetary Fund have produced deep suffering, with the economy contracting by a quarter, youth unemployment rising to 50 per cent and 200,000 Greeks leaving the country.

Mr Tsipras has pledged to reverse many of the reforms that the hated “troika” of the EU, IMF and European Central Bank have imposed, including privatisations of state assets, cuts to pensions and a reduction of the minimum wage.

But the creditors have insisted they will hold Greece to account and expect it to stick to its austerity programmes, heralding a potentially explosive showdown.

Greece has enough money to meet its immediate funding needs for the next couple of months but it faces around 10 billion euros of debt repayments over the summer.

Without fresh cash, it will be unable to meet the payments, raising the spectre of an exit from the euro.

The election result will reverberate in countries such as Italy, Spain and Portugal, where the rejection of German-inspired austerity is also growing.

“What’s clear is we have a historic victory that sends a message that does not only concern the Greek people, but all European peoples,” said Panos Skourletis, Syriza’s spokesman. “There is great relief among all Europeans.”

He said the election result was a rejection of “wild austerity” and would herald “a return of social dignity and social justice”.

The Syriza victory was quickly seized on by the European Left as a sign of hope.

Gianni Pittella, an Italian MEP and the head of the Social Democrats in the European Parliament, said: “The Greek people have clearly chosen to break with the austerity imposed on them by the troika’s diktats and to ask the new government to bring in fair policies with more social justice.

“The renegotiation of the Greek debt, and in particular the extension of the terms of its bailout, should no more be considered as a taboo.”

The head of Spain’s similar anti-austerity party, Podemos, also hailed Syriza’s victory.

“Hope is coming, fear is fleeing. Syriza, Podemos, we will win,” said Pablo Iglesias, who last Thursday joined Mr Tsipras at Syriza’s final election rally in Athens.

“In Greece tonight, we are already hearing that. We are hoping we will hear the same thing in Spain soon,” he told a gathering of about 8,000 party faithful in Valencia.

“Syriza winning an outright majority is huge for Europe, an earthquake,” Costas Douzinas, a political commentator and a professor of law at the University of London, told The Telegraph in Athens.

“If a tiny country like Greece can stand up to the lenders and achieve even a small haircut of the debt, the message to the Spanish, Portuguese and Italians will be that they too can stand up at some point.”

“The theory of austerity was a kind of black magic. It was the idea that if you bleed a person, like they did with leeches in the Middle Ages, then they will get better. But the patient is bleeding to death.

“Paying back debt that is 180 per cent of GDP is just not viable. Ninety per cent of the bailout money is paid back to the lenders. It’s like borrowing on Visa to pay Mastercard. The debt just keeps increasing. The situation is absurd.” The election result will only cement the growing rift between Europe’s north and south over austerity and growth.

Before the official results were even announced, there were stern warnings from Berlin that a rejection of fiscal austerity would not be tolerated by Europe’s economic powerhouse.

“I hope the new government won’t call into question what is expected and what has already been achieved,” said Jens Weidmann, the president of the Bundesbank.

Greece would only continue to get loans if it stayed the course on austerity and the new government should not make promises it could not fulfil, he said.

Many Greeks remained unconvinced that Syriza would be able to renege on Greece’s debts or reverse austerity programmes.

“Tsipras promises a lot but I don’t think he will be able to deliver. How can he do all the things he has promised? We don’t have the money,” said Kostas Maganias, 65, the owner of a bar in Athens.
Nikos Chrysoloras and Marcus Bensasson of Bloomberg also report, Tsipras Wins and Sets Greece on Collision Course With Euro Partners:
Greek Prime Minister-elect Alexis Tsipras set up a confrontation with his European peers as he prepared to form a coalition dedicated to ending austerity, saying the era of bowing to international demands for budget cuts is over.

Tsipras issued the challenge to Greece’s euro-area partners after his Syriza party won a historic victory in Sunday’s elections by harnessing a public backlash against years of belt-tightening, job losses and hardship. Tsipras, who is two seats shy of an absolute majority in Greece’s 300-seat chamber according to the latest results from the Interior Ministry, said his priority “will be for Greece and its people to regain their lost dignity.”

Even in a fragile coalition, the result hands Tsipras a mandate to confront Greece’s austerity program, imposed in return for pledges of 240 billion euros ($269 billion) in aid since May 2010. The challenge now for him is to make good on election pledges including a writedown of Greek debt, while persuading creditors in Berlin and Brussels to keep aid flowing.

“There will neither be a catastrophic clash nor will continued kowtowing be accepted,” Tsipras, 40, told crowds of cheering supporters in central Athens late Sunday. “We are fully aware that the Greek people haven’t given us carte blanche but a mandate for national revival.”

The euro rose 0.1% to 1.1214 as of 8:49 a.m. in Athens today after dipping to a fresh 11-year low after Syriza’s win.
Coalition Building

With investors bracing for a drop in Greek government bonds on Monday, Greek voters awakened to find their new government taking shape. Tsipras plans to meet Monday morning with Panos Kammenos, the leader of the Independent Greeks party, to tie up an agreement already sketched out to form an anti-bailout coalition. He’ll also meet with Stavros Theodorakis, the leader of To Potami, a Syriza official said.

“Political stability will be difficult to find,” Vincenzo Scarpetta, a political analyst at the London-based Open Europe research group, said by e-mail. Syriza’s potential coalition partners “only agree in parts” with its platform, he said. “The medium-term outlook is far from clear.”

While Syriza’s victory was more decisive than polls had predicted, the results after 99.8 percent of the vote was counted left the party just short of a majority, with 149 seats in the 300-seat Parliament. Outgoing Prime Minister Antonis Samaras’s New Democracy, which took 27.8 percent to Syriza’s 36.3 percent, won 76 seats. The far-right Golden Dawn placed third with 6.3 percent, followed by To Potami with 6.1 percent.
Samaras Achievements

“I’m handing over a country that’s a part of the EU and the euro,” Samaras said in televised remarks, as he conceded defeat. “For the good of this land, I hope that the next government will respect these achievements.”

Syriza’s victory sends a signal to parties such as Spain’s Podemos that are challenging economic and political conventions across Europe from a country whose output has shrunk by about a quarter and where one in two young people is jobless.

Investors must now wait for Tsipras to spell out how he plans to negotiate Greece’s future financing needs. An extension of the current euro area-backed bailout program expires at the end of February, with Greece projected to run out of money by July at the latest.
Euro-Area Talks

European policy makers including German Finance Minister Wolfgang Schaeuble warned Greece before the vote against diverting from its agreed bailout program. Euro-country finance chiefs are due to discuss Greece when they meet in Brussels on Monday. Germany’s Finance Ministry said in a statement that Schaeuble’s position was unchanged after the election result and “the agreements reached with Greece remain valid.”

Tsipras, while saying that his incoming government is ready to negotiate and cooperate with the EU over debt, declared the era of the troika of the European Commission, the ECB and the International Monetary Fund to be at an end.

“Syriza’s convincing victory in Greece’s election ushers in a new and even more divisive phase in Europe’s fractious politics,” Nicholas Spiro, the managing director of Spiro Sovereign Strategy, said in an e-mailed note. “A dangerous Rubicon has been crossed.”

The election also ends more than four decades of rule by New Democracy and Pasok, the two parties that have alternated in power since the reintroduction of democracy in 1974 following a seven-year period of military dictatorship. Pasok, which won Greece’s 2009 election before requesting an international rescue the following year, took just 4.7 percent.

“The Greek people punished New Democracy for governing in the petty manner of the old regime’s political parties,” Aristides Hatzis, an associate professor of law and economics at the University of Athens, said by phone. “Most Greeks voting Syriza don’t expect a spectacular change but a marginal one. A marginal one would be significant for them.”
Indeed, a marginal change will be significant for Greeks, but I'm highly skeptical of the wild claims Syriza made during the election campaign. Following my trip to the epicenter of the euro crisis back in September, I continue to think Greece is on the wrong course.

Importantly, even if creditors forgave the entire debt of Greece (they've already forgiven a good chunk), the country will never grow and flourish as long as politicians from all parties keep expanding the Greek public sector beast.

Even after years of austerity, there are more direct and indirect jobs related to the Greek public sector than at any time in the past. It's actually a running gag inside of Greece where the private sector has born the major brunt of all these austerity measures. Despite sky high unemployment, hardly any job was cut in the Greek public sector (in fact, New Democracy hired more workers right before the election campaign).

This was Troika's biggest mistake when negotiating with Greece, and now Germany and the IMF are going to deal with growing anti-austerity movements throughout Europe. Greece is nothing, wait till Italy and Spain sock it to the Germans who have myopically focused on austerity and garnered the disproportionate benefits of the euro union.

From that vantage point, Syriza's victory does offer hope against mindless austerity, but the tenor of Syriza’s coalition partner, Independent Greeks led by Panos Kammenos, suggests compromise may be hard to achieve:
Kammenos said as recently as last week that Greek debt should be audited and its “odious” part written down, whether creditors like it or not. Europe, he said, is being governed by “German neo- Nazis.”

“What we will come to Frankfurt and Berlin and Brussels with is a plan to minimise the cost of that Greek debacle to the average German,” Yanis Varoufakis, an economist and Syriza lawmaker who is tipped as a potential Greek finance minister, said in an interview on BBC Radio 4. “We must be very careful not to toy with fast or loose talk of Grexit,” he said, referring to the prospect of Greece’s exit from the euro area. “Grexit is not on the cards.”
Clearly, there will have to be some form of debt restructuring taking place. Distressed debt investor, Wlbur Ross, appeared on CNBC earlier this morning stating he expects interest rate relief is coming, shaving 4 billion euros a year off debt financing costs. He also said they will renegotiate maturities on this debt (see below).

On his blog, Yanis Varoufakis, hailed Syriza victory as a win for democracy, but as I explained in my comment on the myth of Greek democracy, there is no democracy in Greece. "To really understand Greece, you have to understand that Greek politicians are blatant liars and corrupt to the bone. It's not just Tsipras. Successive governments from the Left and Right kept increasing the public sector to cement their political base and now that the country is bankrupt, they still can't cut the public sector beast because they fear political repercussions."

Moreover, Greece is a pathetic oligarchy run by a handful of ultra wealthy families which basically control everything in the country. This is why I laugh when I see Syriza, "a collection of  Maoists, socialists and communists," being funded by ultra capitalists outside of Greece looking to gain more economic control of Greek assets (The only ultra wealthy Greek businessman I truly respect is Vardis Vardinogiannis who lives in Greece, pays all his taxes in Greece, and flies Greek flags on his ships. Of course, he's Cretan so I'm heavily biased).

Now, what does a coalition government led by Syriza mean for global markets? In his Bloomberg comment, Mohamed El-Erian shared these insights:
The Coalition of the Radical Left, known as Syriza, placed first in the Greek elections today, with at least 36 percent of the vote, according to exit polls. The result could even give Syriza an absolute majority and, if it wishes, allow it to govern without a coalition partner. With these outcomes going beyond what markets expected and priced in, here is a Q&A before trading resumes Monday.

QUESTION: What happened and why will it matter for markets?:

ANSWER: The early parliamentary elections have given Syriza a significant and historic victory that surpasses the market consensus.

This is the first time Syriza is in a position to form and lead a government. Its popularity reflects intensifying economic and social frustrations among Greek citizens, including the perception that their long sacrifice hasn't yielded any meaningful gains, let alone any hint of an end to what they see as years of austerity and deprivation.

An alternative economic approach was the core of Syriza's electoral campaign. Its program, which rejects austerity and seeks debt reduction, was pursued with vigor by the party's leader, Alexis Tspiras, who frequently took swipes at Germany, including personal attacks on Chancellor Angela Merkel. He argued that the most influential power in the euro zone was too austerity-obsessed in its approach to Greece.

This has led to concerns that Greece could exit the euro zone. A so-called Grexit would entail the return of a national currency to replace the euro, losing access to European Central Bank financing windows and, most probably, less financial support from the European Union and the International Monetary Fund. It would also raise doubts about some other countries in the region, leading to a repricing of individual and collective risk factors.

An exit from the euro would require the Greek government to counter the immediate threat of significant disruptions, come up with a new medium-term economic vision, strengthen its domestic institutions and pursue a different relationship with European partners that would preserve the country’s access to free trade and certain financing arrangements.

Grexit concerns have been amplified by indications that, particularly compared with 2010-2012, Germany appears less concerned about the negative spillovers for the euro zone -- and for good reason, given the (albeit still incomplete) efforts to strengthen the region’s institutional structures. For example, regional financing mechanisms have been strengthened, banks have been subjected to more rigorous stress testing and a significant portion of national debt has been refinanced with longer maturities and lower interest rates.

Q: How are markets likely to react when trading resumes Monday?

A: If the larger-than-expected Syriza win is confirmed, and especially if it results in an absolute majority, expect a sell-off in European risk assets, including equities. High-quality bonds would be supported by flight-to-quality flows, resulting in lower yields (particularly on German bonds). And look for prices to fall and risk spreads to widen on bonds issued by European peripheral nations such as Italy, Portugal and Spain.

On the currency front, the euro will probably come under pressure, too, exacerbating the recent weakening to levels not seen in 11 years.

Greek markets are likely to be subjected to the greatest pressures, including a notable widening in risk spreads on sovereign and bank bonds. The question is whether this also translates into a significant pick-up in withdrawals by residents of bank deposits as well as capital flight. If it does, Greek politicians would need to quickly take major steps to counter the threat of cascading market dislocations.

Q: Is a Grexit inevitable?

A: No. To reduce the risk, Tsipras would need to embark quickly on a "Lula pivot." That is, he will need to assure markets that the relaxation of austerity would be accompanied by a big push on structural reforms, that the alleviation of the debt burden would be pursued in an orderly and negotiated manner, and that he is willing to engage in constructive discussions with Germany and other European partners.

Q: Are there broader implications?

A: Yes. The outcome of the Greek elections is indicative of a broader political phenomenon in Europe that involves the growth of non-traditional parties. Fueled by concerns about disappointing growth, unemployment and social issues, it is powered by large-scale dissatisfaction with the established political order. And it isn't limited to the peripheral economies.
Let me state once again, I don't think Syriza's victory will bring another euro crisis. There will a lot of huffing and puffing in Athens but when Tsipras and Varoufakis visit Berlin, they'll quickly realize that Greece has very limited options in terms of what it can and can't negotiate. Varoufakis will argue for his Modest Proposal but I doubt it will gain any support.

But Germany will have to negotiate or risk Grexit, which means risking the end of the eurozone and a hit to its banks, something it can ill-afford. Tsipras and Varoufakis know this, which they will use as political leverage to achieve some concessions on debt forgiveness. Either way, there will be very tough negotiations and there will be political repercussions throughout all of  Europe as some will support these negotiations while others will adamantly oppose them.

The bottom line: Alexis Tsipras won, Greeks voted for him because they're tired of austerity but they aren't holding their breath for an economic miracle. Instead, they're hoping the country will reverse course and start growing its way out of this economic morass.

I remain very skeptical. I don't think Greece will ever grow properly until it deals with its public sector beast, which won't happen under a Syriza-led coalition government which will use debt negotiations to further expand the public sector, much to the detriment of the private sector.

Having said this, I don't think economic catastrophe is coming, just more of the same nonsense that Greece has experienced over the last six years. At the end of the day, Tsipras' thirst for power will govern his decisions and he will bow down to creditors and accept some form of structural reform in return for much needed loans. It's pretty much what most cynical Greeks expect.

The bigger fear for me remains the advent of global deflation. That's a huge problem which policymakers keep ignoring or worse still, keep feeding with mindless austerity measures that exacerbate deflation throughout the developed world. When it comes to austerity, implementation has been completely bungled up in Greece and elsewhere.

Below, CNBC's Michelle Caruso-Cabrera reports on Greece's anti-austerity party's general election win and the possible bailout battle ahead.

And Wilbur Ross, WL Ross & Company chairman & CEO, shares his thoughts on the outcome of the Greek elections and the future of Greece and the European Union.

Finally, take the time to listen to a BBC interview with Syriza's Yanis Varoufakis, tipped to be the next finance minister. "We will take to the eurozone a plan for minimising this Greek debacle, we are going to put three or four things on the table: genuine reforms and creating a rational plan for debt restructure.. we want to bind our repayments to our growth," he said. I wish them luck, they'll need it.

Friday, January 23, 2015

Prepare For Global Deflation?

Koh Gui Qing of Reuters reports, China January factory growth stalls, deflation pressures build, bad debt rises:
China's manufacturing growth stalled for the second straight month in January and companies had to cut prices at a faster clip to win new business, adding to worries about growing deflationary pressures in the economy, a private survey showed.

The HSBC/Markit Flash Manufacturing Purchasing Managers' Index (PMI) hovered at 49.8 in January, little changed from December's 49.6 and just below the 50-point mark that separates contraction from growth on a monthly basis.

A Reuters poll had forecast a second month of contraction with a reading of 49.6.

Reflecting the tumble in oil prices, which have more than halved in the last six months, a sub-index for input prices sank to 39.9, a level not seen since the global financial crisis.

But companies also had to cut output prices for the sixth straight month to sell their products, and more deeply than in December, eroding their profit margins.

"Today's data suggest that the manufacturing slowdown is still ongoing amidst weak domestic demand," Qu Hongbin, a HSBC economist in Hong Kong said on Friday.

"More monetary and fiscal easing measures will be needed to support growth in the coming months."

Falling prices are a concern for China, which wants to avoid Japan's fate of sinking into a 20-year deflationary funk that has depressed consumption and economic growth.

The survey showed final demand for China's factory goods rose this month, but only modestly as the sub-indices for new orders and new export orders stood close to the 50-point threshold.

Factories laid off staff for the 15th consecutive month in January in the face of tepid demand, the PMI showed.


There are already some signs of stubborn deflationary pressure in China.

Producer prices have fallen for almost three straight years. That helped to drag China's annual consumer inflation to a near five-year low of 1.5 percent in December.

To contain deflationary risks, economists at state think-tanks who are privy to China's policy discussions said authorities are ready to cut interest rates further and pressure banks to step up lending. The central bank unexpectedly cut rates in November for the first time in more than two years.

Some Chinese consumers are already postponing purchases in anticipation that prices will fall further in the future, a classic warning sign of deflation that would deal another blow to the Chinese economy, where growth hit a 24-year-low of 7.4 percent last year.

Although 2014 economic growth data was not as bad as some had feared, it suggested that a steady series of policy easing had not sustained activity as much as policymakers had hoped.

In a sign of the times, separate data on Friday showed the bad debt ratio at Chinese banks climbed to a five-year high of 1.64 percent at the end of 2014 as companies struggled to repay their loans in the dour business climate.

Indeed, Sany Heavy Equipment International Holdings Co Ltd said on Friday its 2014 net profit could more than halve after falling coal prices dented demand for coal machinery.

That followed a more dire forecast from Zoomlion Heavy Industry Science and Technology Co Ltd, another heavy equipment maker, which said on Monday that its 2014 net profit may have plunged 80 percent. The profit warning was its fifth in 21 months.

"Right now, I'm more worried about investment," said Chang Chun Hua, an economist at Nomura in Hong Kong. "The financing cost of investment is getting higher with deflation. Real interest rates are going up."

Economists polled by Reuters expect the economy to slow further this year to around 7 percent, even with additional stimulus measures. A cooling property market, high financing costs and heavy corporate and local government debt loads will likely continue to drag on activity.

Chinese Premier Li Keqiang acknowledged on Wednesday that the world's second-largest economy will face downward pressures in 2015 but said it was not heading for a hard landing.
Chinese deflation is another source of great concern for global policymakers. If it continues, it means we're going to experience another wave of disinflation in the West and more deflationary pressure.

And China's deflation dragon is spreading throughout Asia, wreaking havoc on other economies. Gaurav Raghuvanshi of the Wall Street Journal reports, Singapore posts second straight month of deflation:
Singapore's consumer prices fell nearly in line with analyst estimates in December and the island nation reported a second consecutive month of deflation as housing and transport costs continued to ease.

The consumer price index fell 0.2% year-over-year in December, compared with the median estimate for a 0.1% decline in a Dow Jones Newswires poll of six economists, and a 0.3% fall in November.

The cost of transportation, which has an index weighting of 16%, fell 4.1% in December from a year earlier due to lower private road transport costs, the data showed. Private road transport costs fell by a more moderate 5.7% from a year earlier, compared with the 7.0% decrease in November.

Housing costs, which make up 25% of the index, fell 1.4% because of lower rents.

Food prices, which have a 22% weighting in the index, however, rose 2.9% from a year earlier, mainly due to more expensive cooked meals, the data showed.

For the whole year, the consumer price index rose 1.0% in 2014 from 2.4% in the previous year.

The Monetary Authority of Singapore's core inflation, which excludes the costs of accommodation and private road transport, was 1.5% higher from a year earlier in December, similar to the preceding month, because of stable services and food inflation. For the whole of 2014, MAS core inflation edged up to 1.9% from 1.7% in 2013.
And Gareth Hutchens of The Age reports, Is Australia's economy at risk of deflation?:
A few years ago conservatives in the United States were hyperventilating about the then-chairman of the US Federal Reserve, Ben Bernanke, because they believed his radical monetary policies were going to lead to an uncontrollable outbreak in inflation that would decimate the economy.

Remember these accusations?

Newt Gingrich, while running for the Republican presidential nomination in 2012, warned voters that Bernanke was "the most inflationary, dangerous" Fed chairman "in history".

Texas Governor Rick Perry, who also ran for the nomination, claimed Bernanke was "almost" treasonous.

"If this guy prints more money between now and the election, I dunno what y'all would do to him in Iowa, but we would treat him pretty ugly down in Texas," he thundered.

They were cynical statements then and they look ridiculous now – the US economy is actually showing signs of healthy life these days, while it still faces very little inflationary pressure. It's obviously too early to claim victory, but it looks like Bernanke's policies may have worked.

Looking around the world, other major developed economies aren't worrying about inflation at all, despite the amount of money printing that has gone on in recent years.

The thing they are more concerned about is deflation.

Shane Oliver, the chief economist of AMP Capital, felt deflation was enough of a concern that he sent a note to his clients this week explaining what it was and why Australia faced some deflationary risks.

I'll do my best to summarise what he says.

Firstly, he says the absence of inflationary pressures around the world is a good thing, because it means the global "sweet spot" of OK economic growth, low interest rates, and low bond yields can continue.

But a steep fall in bond yields over the last year, to record or near record lows, is warning us that the world may face a period of "sustained deflation".

What is deflation? It refers to persistent and generalised price falls, and it is not necessarily a bad thing. Whether deflation is good or not depends on the circumstances in which it occurs.

As Oliver explains, in the period 1870-1895 in the United States, deflation occurred against the background of strong economic growth, reflecting rapid productivity growth and technological innovation.

This was "good" deflation.

Australians have enjoyed this type of deflation for years in the prices of electronic goods. That's why so many of us can afford to have large flat-screen TVs and other things.

Deflation becomes "bad" when it is associated with falling wages, rising unemployment, falling asset prices and rising real debt burdens.

In the 1930s, and more recently in Japan, deflation reflected an economic collapse and rising unemployment, which was made worse by a combination of high debt levels and falling asset prices.

"[And] in the current environment sustained deflation could cause problems," Oliver says, speaking about the global economy.

"Falling wages and prices would make it harder to service debts. Lower nominal growth will mean less growth in public sector tax revenues, making still high public debt levels harder to pay off. And when prices fall people put off decisions to spend and invest, which could threaten economic growth."

He believes the decline in inflation globally has raised concerns that we may see sustained deflation around the world.

Annual inflation rates are low everywhere.

They are just 0.8 per cent in the United States, -0.2 per cent in Europe, 0.5 per cent in the UK, 0.4 per cent in Japan, and 1.5 per cent in China.

In Australia, annual inflation is still officially sitting at 2.3 per cent, which is much better than other economies, but it looks likely to fall below that next week when new figures come out.

And if that happens, things could get interesting.

The Reserve Bank is meeting in a couple of weeks to decide on interest rates, knowing full well that economists from major banks have been calling on it to cut rates further.

Its job is to try to keep inflation within a 2-3 per cent range, so if annual inflation falls below the 2-3 per cent target it will strengthen the case for the bank to cut rates again.

Rates are already at a historic low 2.5 per cent. If inflation falls below 2 per cent next week, all eyes will be on RBA governor Glenn Stevens.

But is there a risk that Australia faces bad deflation? Oliver thinks it's unlikely.

He says deflationary forces will be felt in Australia as global prices fall, for commodities such as oil and energy, but those forces won't be serious.

He believes a sustained 1930s or Japanese-style deflation is likely to be avoided globally, too.

That's because the US Fed is likely to delay its first interest rate hike if core inflation continues to fall. Japan will likely continue with its aggressive quantitative easing program for some time yet. And China and India look likely to ease monetary conditions further.

Oliver also believes a further interest rate cut is likely in Australia.

That loosely co-ordinated global monetary easing should help to ensure that global growth continues, and in turn prevent a slide into sustained deflation, Oliver argues.

So even though global inflation will remain low, it is unlikely to collapse into sustained deflation.

But a key thing to watch will be the success of the European Central Bank and the Bank of Japan in boosting their countries' growth rates with looser monetary policy.

"The most likely outcome is that inflation will remain low over the year ahead, with improving growth helping it bottom [out], but still significant spare capacity preventing much of a rise [in inflation]," he argues.

"[And] as the generally easy global and Australian monetary environment continues, it will help underpin further gains in growth assets like shares, albeit with more volatility."

Australian interest rates will obviously remain low for the rest of the year.
In my opinion, the Reserve Bank of Australia will follow the Bank of Canada, which just shocked markets with a rate cut, and proceed with its own interest rate cut (keep shorting the Aussie and loonie!).

In fact, Australia is even more cooked than Canada because of its closer trading relationship with China. And just like Canada, it's in the midst of a huge real estate bubble that will eventually burst, a point recently underscored by Australian economist Steve Keen:
Steve Keen, head of economics, politics and history at London’s Kingston University, envisages the RBA making a couple of cuts this year - "and possibly more than that".

"The unemployment in Australia now is the worst it’s been in 10/15 years, and the only thing keeping it up is the housing bubble because that is pumping borrowed money into the economy, people are spending that money, and of course also foreign buyers pumping money and buying real estate," he told Lelde Smits from the Finance News Network .

"Those are really the only two massive inflow sources into the economy.

"If the housing bubble pops then that inflow also stops and we therefore have a downturn driven by having finally a housing bubble bursting.

"So those dangers are there, you can see plenty of reasons for the cash flow spigot to be turned off, I can’t see many ways of turning it on anymore."

He would be surprised to see it below the 2%, but wouldn’t be amazed.

He suggests what he sees as the bubble could keep going, "but what it means is we are more and more fragile on the bubble continuing indefinitely".

Asked for the catalyst for the property bubble to pop, Keen sees two things.

"Partly the economy itself slowing down so much that the negative returns in rental become excessive.

"Those people are having carrying costs and of course passing those carrying costs on to the Australian public through negative gearing, but they none the less have those carrying costs to handle.

"And also, if there is anything going wrong in China.

"Things going wrong in China can go in both directions, we have a serious downturn in China, then it’s quite possible Chinese capital could respond by going offshore and do more buying overseas.

"So a slowdown in China, because it is a speculative slowdown, doesn’t have to mean a slowdown in demand for Australian real estate."
I strongly doubt a slowdown in China will mean a boon for real estate in Australia, Canada and other hot spots, like London.

As far as the argument that Shane Oliver made in the previous article, that loosely co-ordinated global monetary easing should help to ensure that global growth continues and prevent a slide into sustained deflation, I think this is wishful thinking.

As I stated in my last comment, the ECB's new QE measures are a day late and a euro short.  And if the Fed makes the silly mistake of raising rates this year, Larry Summers is right, it will risk a deflationary spiral and a depression-trap that would engulf the world for decades.

Unfortunately, no matter what the Fed does, deflation is coming to America. Bond markets around the world have been telling us this for a long time. DoubleLine's Jeffrey Gundlach, the new bond king, explained why this time it's different. The inexorable slide in rates is telling us that the world will face a prolonged period of debt deflation.

Most institutional and retail investors are not prepared for what lies ahead. Some investors are preparing for a deflationary boom, but they're not ready for the eventual deflationary bust that will happen when global investors start questioning the Fed and other central banks. This will be our Minsky moment and will engender a major crisis in capitalism as we know it.

But for now, don't worry, there is still plenty of liquidity to drive risk assets much higher in the next couple of years. This is why in my Outlook 2015, I'm still bullish on bonds and stocks, but I also warned you to choose your stocks and sectors very carefully.

Given deflationary pressures around the word, I'm not surprised to see utilities (XLU), healthcare (XLV) and telecoms (XLT) continuing to do well but I'm far more bullish on technology (XLK) and especially biotech (XBI) because I think defensive stocks are getting stretched and their valuations will make asset allocators take money off the table. Then again, in a deflationary environment, you might see bubbles in high dividend defensive sectors but my bet remains on tech and biotech.

As far as pensions are concerned, I openly question whether their risk departments are preparing for global deflation and what devastation this could mean across public and private markets. I think it's nice to take the long, long view when it comes to managing pension assets, but I would agree with OMERS and others that are worried about deflation.

Finally, I ask many of you who regularly read me to show your financial support and donate or subscribe to this blog via PayPal at the top right-hand side, right under my bio. I thank the institutions and individuals that have donated and subscribed but I would appreciate a lot more of you to step up to the plate and pay up for the great insights I regularly provide you on pensions and investments. If you take the time to read my comments, please take the time to send me money.

Below, Kyle Bass, Hayman Capital Management, shares his thoughts on the ECB's bond-buying plan and its impact on the euro. Bass thinks euro parity is coming and I agree and warned my readers not to bet against the mighty greenback for now (until the Fed takes a step back).

Interestingly, Bass was featured in Chapter 1 of Steven Drobny's new book, The New House of Money, which has yet to be released. However, you can read Charter 1 by clicking here, and read Bass's take on why he's short Japan and why U.S. pensions are in big trouble (I agree with the latter, not the former). 

Thursday, January 22, 2015

ECB: A Day Late and a Euro Short?

Paul Carrel and John O'Donnell of Reuters report, ECB launches last-ditch program to revive euro economy:
The European Central Bank took the ultimate policy leap on Thursday, launching a government bond-buying programme which will pump hundreds of billions of new money into a sagging euro zone economy.

The ECB said it would buy government bonds from this March until the end of September 2016 despite opposition from Germany's Bundesbank and concerns in Berlin that it could allow spendthrift countries to slacken economic reforms.

Together with existing schemes to buy private debt and funnel hundreds of billions of euros in cheap loans to banks, the new quantitative easing programme will pump 60 billion euros a month into the economy, ECB President Mario Draghi said.

By September next year, more than 1 trillion euros will have been created.

"The combined monthly purchases of public and private sector securities will amount to 60 billion euros," Draghi told a news conference. "They are intended to be carried out until end-September 2016 and will in any case be conducted until we see a sustained adjustment in the path of inflation."

Bonds will be bought on the secondary market in proportion to the ECB's capital key, meaning the largest economies from Germany down will see more of their debt purchased by the ECB than smaller peers.

The prospect of dramatic ECB action had already prompted the Swiss central bank to abandon its cap on the franc while Denmark, whose currency is pegged to the euro, was forced to cut interest rates in anticipation of the flood of money.

The Danish central bank intervened to weaken the crown ahead of the announcement.

Former ECB policymaker Athanasios Orphanides said action was long overdue. "The ECB should have already embarked on QE," he said. "Now that the situation has deteriorated, the ECB will have to do much more."

The euro fell, European shares jumped and bond yields in Italy, Spain and Portugal fell with the single currency dropping a full cent against the dollar to $1.1511.

Draghi has had to balance the need for action to lift the euro zone economy out of its torpor against German concerns about risk-sharing and potentially being left to foot the bill.

Tensions broke out as the meeting got underway with French Finance Minister Michel Sapin firing a broadside at Berlin.

"The Germans have taught us to respect the independence of the European Central Bank," he told France Info radio. "They must remember that themselves."

A German lawyer who has been prominent in attempts to halt euro zone bailouts said he was already preparing a legal complaint against an ECB bond-buying programme.


Draghi said 20 percent of the asset purchases would be subject to risk-sharing, suggesting the bulk of any potential losses will fall on national central banks.

Critics say that calls the euro zone concept of risk sharing into question and countries with already high debts could find themselves with further liabilities.

Euro zone inflation turned negative last month, far below the ECB's target of close to but below 2 percent, raising fears of a Japan-style deflationary spiral.

But there are doubts, and not only in Germany, over whether printing fresh money will work.

Most euro zone government bond yields are already at ultra-low levels while the euro has already dropped sharply against the dollar. Lower borrowing costs and a weaker currency could both help to boost growth but there is a question about how much downside there is for either.

"It is a mistake to suppose that QE is a panacea in Europe or that it will be sufficient," former U.S. Treasury Secretary Larry Summers said at the World Economic Forum in Davos on Thursday.

"There is every reason to expect that QE will be less impactful in a context like the present one in Europe than it was in the context of the United States."

A plunge in the price of oil has thrown central bankers into a spin worldwide. Canada cut the cost of borrowing out of the blue on Wednesday while two British rate setters at the Bank of England dropped calls for tighter monetary policy as inflation has evaporated.

The ECB has already cut interest rates to record lows. Earlier, it left its main refinancing rate, which determines the cost of euro zone credit, at 0.05 percent.

Greece and Cyprus, which remain under EU/IMF bailout programmes, will be eligible but subject to stricter conditions.

"Some additional eligibility criteria will be applied in the case of countries under an EU/IMF adjustment programme," Draghi said.

The move comes just three days before an election in Greece where anti-bailout opposition party Syriza is on track to gain roughly a third of the vote.
David Jolly and Jack Ewing of the New York Times also report, E.C.B. Stimulus Calls for 60 Billion Euros in Monthly Bond-Buying:
The European Central Bank said on Thursday that it would begin buying hundreds of billions of euros worth of government bonds in an ambitious — though some say belated — attempt to prevent the eurozone from becoming trapped in long-term economic stagnation.

The bank’s president, Mario Draghi, said the central bank would begin buying bonds worth 60 billion euros, or about $69.7 billion, a month. That is more spending than the €50 billion a month that many analysts had been expecting.

The long-awaited program, known as quantitative easing, comes after inflation in the 19 countries of the eurozone fell below zero and raised the specter of deflation, a sustained decline in prices that can lead to higher unemployment and that is notoriously difficult to reverse.

As a further stimulus step, the European Central Bank also said it was cutting the interest rate it charges on loans to commercial banks, as long as the banks commit to lending that money to companies or individuals. The new rate would be 0.05 percent, down from 0.15 percent.

“We believe the measures taken today will be effective,” Mr. Draghi said at a news conference.

Financial markets greeted the news favorably. The benchmark Euro Stoxx 50 index was up 1 percent. Bond yields in some eurozone countries hit new lows, including countries that might benefit most from the central bank’s program. The yields on 10-year government bonds in Italy dropped to 1.58 percent and in Spain to 1.42 percent.

The euro weakened further against the dollar, falling about 0.6 percent to $1.1543, a move that could help European exporters.

Top officials of the central bank had signaled clearly that a quantitative easing program was in the offing. But there remained, before the central bank meeting on Thursday, many questions about how large the program would be and whether it would be powerful enough to reverse a two-year decline in inflation.

Programs of quantitative easing by the Federal Reserve in the United States and by the Bank of England in Britain have helped the economies of those two countries recover from the global financial crisis more successfully than the eurozone has been able to.

If successful, quantitative easing would push down market interest rates in the eurozone and make it easier for businesses and consumers to borrow money, helping to stimulate the economy and restore inflation. Quantitative easing could also have a psychological impact, helping to raise expectations that inflation will begin to rise and thus encourage people to spend now rather than wait.

Mr. Draghi said Thursday that the bond buying would continue through September 2016 or “until we see a sustained adjustment in the path of inflation which is consistent with our aim of achieving inflation rates below, but close to, 2 percent over the medium term.”

The decision to begin buying government bonds on the open market came after a debate that lasted months. Mr. Draghi sought to overcome resistance from German members of the governing council and the broader German public, which regards quantitative easing as a form of wealth transfer to countries like Italy.

Mr. Draghi acknowledged on Thursday that there had been intense discussion by the bank’s governing council about how to share the risk if a country later defaults on its debt. Mr. Draghi said that concerns about risks being transferred from some countries to others was legitimate. The compromise preserves some risk sharing, he said.

The European Central Bank will coordinate the buying, Mr. Draghi said, but will delegate some of it to the central banks of national central banks. In a further compromise, some of the risk from bond buying will be taken by the European Central Bank and some by national central banks.

Anticipating critics who might say that the European Central Bank is not in full control of the eurozone’s monetary policy if it shares the risk of its program, Mr. Draghi said, “The singleness of monetary policy remains in place.”

He said that the central bank would begin buying government bonds based on each country’s share of the central bank’s capital, which is commensurate with their population and gross domestic products.

He said that the central bank would not buy more than 33 percent of any country’s outstanding bonds, nor more than 25 percent of any bond issue. The central bank will buy the bonds on the open market, he said, to allow the market to set the price. Those conditions appear intended to address legal challenges to bond buying by the central bank.

Asked about Greece — a special case because of the political uncertainties there and because the country continues to labor under an international bailout program overseen in part by the European Central Bank — Mr. Draghi said that the bank could buy Greek bonds. But in practice, he noted, such purchases might be limited.

Greece, he said, would have to continue adhering to the terms of its bailout program, which is also being administered by the International Monetary Fund and the European Commission. That adherence is currently uncertain, as Greece awaits national elections this weekend that could result in a new government seeking to revise the terms of the bailout.

In addition, the European Central Bank already owns a large proportion of Greek bonds and would not hold more than 33 percent of the total. But in July, Mr. Draghi said, redemptions of Greek bonds could allow the central bank to buy more.

In another crucial provision, the European Central Bank would have equal status to other bond holders — rather than holding itself above other investors and expecting to be paid back first in the event of problems. That will be important to private investors, because if the central bank held itself out as a privileged bondholder, effectively passing more risk on to other bond holders, other buyers might undermine the stimulus program by demanding higher interest rates.

Although the Federal Reserve and the Bank of England used quantitative easing to rejuvenate their economies, such a program would be more complicated in the eurozone. There is no widely traded, Pan-European government bond similar to United States Treasury securities, which were the main vehicle for the Fed’s program.

Another question is whether quantitative easing can help fix the eurozone economy, especially since it has taken so long for the central bank to begin a large-scale bond-buying program. Many economists and businesspeople are skeptical.

“I do not believe it will have a major effect whatever will be announced,” said Karl-Ludwig Kley, chairman of Merck, a German pharmaceutical and chemicals company that is separate from Merck & Company in the United States.

“I do not believe bond buying or whatever is the remedy,” Mr. Kley said in an interview at the annual meeting of the World Economic Forum in Davos, Switzerland. “I do not see, because of these programs, consumers buying more. I do not see companies investing more.”
If you ask me, the ECB's new QE measures while much needed, are a day late and a euro short. I've long argued the ECB is way behind the deflation curve and the way they're going about it won't make a dent in the euro deflation crisis.

Why? Because once deflation becomes entrenched, it's almost impossible to break the cycle. Moreover, apart from the dysfunctional politics and lack of a Pan-European government bond similar to United State, the transmission mechanism isn't the same in Europe where the wealth effect from rising stocks is a fraction of what it is in America (fewer people own stocks).

I'm not the only one who is skeptical. In Davos, the Telegraph's Ambrose Evans-Pritchard reports, Larry Summers warns of epochal deflationary crisis if Fed tightens too soon:
The United States risks a deflationary spiral and a depression-trap that would engulf the world if the Federal Reserve tightens monetary policy too soon, a top panel of experts has warned.

"Deflation and secular stagnation are the threats of our time. The risks are enormously asymmetric," said Larry Summers, the former US Treasury Secretary.

"There is no confident basis for tightening. The Fed should not be fighting against inflation until it sees the whites of its eyes. That is a long way off," he said, speaking at the World Economic Forum in Davos.

Mr Summers said the world economy is entering treacherous waters as the US expansion enters its seventh year, reaching the typical life-expectancy of recoveries. "Nobody over the last fifty years, not the IMF, not the US Treasury, has predicted any of the recessions a year in advance, never."

When the recessions did strike, the US needed rate cuts of three or four percentage points on average to combat the downturn. This time the Fed has no such ammunition left. "Are we anywhere near the point when we have 3pc or 4pc running room to cut rates? This is why I am worried," he told a Bloomberg forum.

Any error at this critical juncture could set off a "spiral to deflation" that would be extremely hard to reverse. The US still faces an intractable unemployment crisis after a full six years of zero rates and quantitative easing, with very high jobless rates even among males aged 25-54 - the cohort usually keenest to work - and despite America's lean and efficient labour markets.

Mr Summers warned that this may be a harbinger of deeper trouble as technological leaps leave more and more people shut out of the work-force, and should be a cautionary warning to those in Europe who imagine that structural reforms alone will solve their unemployment crisis.

"If the US is in a bad place, we are short of any engine at the moment, so I hope you are wrong," said Christine Lagarde, the head of the International Monetary Fund.

Mrs Lagarde said the IMF expects the Fed to raise rates in the middle of the year, sooner than markets expect. "This is good news in and of itself, but the consequences are a different story: there will be spillovers. One thing for sure is that we are in uncharted territory," she said.

Worries about the underlying weakness of the US economy were echoed by Bridgewater's Ray Dalio, who said the "central bank supercycle" of ever-lower interest rates and ever-more debt creation has reached its limits. Interest rate spreads are already so compressed that the transmission mechanism of monetary policy has broken down. "We are in a deflationary set of circumstances. This is going to call into question the value of holding money. People may start putting it in their mattress."

Mr Dalio said the global economy is in a similar situation to the early Reagan-era from 1980-1985 when the dollar was surging, setting off a "short squeeze" for those lenders across the world who borrowed in dollars during the boom.

There is one big difference today, and that is what makes it so ominous. "Back then we could lower interest rates. If we hadn't done so, it would have been disastrous. We can't lower interest rates now," he said.

“We’re in a new era in which central banks have largely lost their power to ease. I worry about the downside because the downside will come,” he said.

Mr Dalio said Europe is already in such a desperate predicament that it may have to go beyond plain-vanilla QE and start printing money to fund government spending - what is known as "helicopter money" in financial argot. "Monetisation is a path to consider," he said.

“If the moderates of Europe do not get together and change things in a meaningful way, I believe there is a risk that the political extremists will be the biggest threat to the euro," he said.

Mr Summers said QE in Europe will not do any harm - and might help a little - but comes too late to lift the region off the reefs on its own. “I am all for European QE, but the risks of doing too little far exceed the risks of doing too much. It is a mistake to suppose it is a panacea or that it will be sufficient."

He said QE in America packed the biggest punch at the start, when 10-year rates where around 3pc and there was still scope to drive them lower. Germany's 10-year Bunds are already down to historic lows of almost 0.4pc. The Fed's stimulus worked through US capital markets but most of the lending in Europe is conducted through banks, which are still "clogged".

Mr Summers said the root cause of Europe's woes is a "strategy of austerity", with grudging and belated monetary stimulus, in the misguided hope that this would somehow bring about invigorating reform. The result is instead economic malaise and a surge in political extremism.

He accused Germany's leaders of succumbing to Keynes's "fallacy of composition", seemingly unable to grasp that fiscal tightening and cuts may allow one country to steal a march on others in a currency union, but if everybody cuts spending together, it turns into a vicious spiral that holds back everybody in the end.

The eurozone states, taken together, have plenty of room for fiscal stimulus, and indeed should take advantage of negative rates to rebuild their infrastructure and invest in new technologies.

The headline reduction in budget deficits is yet another EMU fallacy, he said, accusing Europe's leaders of pursuing "fetishized" debt targets that ultimately undermine future growth and raise the future debt burden. "They are repressed budget deficits," he said.

What is holding them back is the "irresponsible decision" to launch a currency union without a fiscal union to back it up, leading to a refusal to share liabilities and a chronically dysfunctional system.

"It is a failure to recognize that the one-off model of export-led growth that worked for Germany, will work for everybody. It is a failure of generalisation. That is the central error running much of European economic thought. As long as continues to drive policy, prospects for success are very limited," he said.
I think Lawrence Summers and Ray Dalio spell it out perfectly. Go back to read my comment, Don't Fight the Fed?, where I noted the following:
The key here is whether the market perceives the Fed do be behind the deflation curve, not the inflation curve. As I've repeatedly warned, the real concern is about the Euro deflation crisis and whether it will spread to the United States. For now, global stock markets are not worried, bouncing back vigorously from the latest selloff, but this could change and the future of the eurozone remains very fragile.

In my recent comment on whether it's time to plunge into stocks,  I openly questioned Dallas Fed president Richard Fisher for dismissing the contagion effects from eurozone's deflation crisis and how it's influencing U.S. inflation expectations. 

Importantly, the biggest policy mistake the hawks on the FOMC are making is ignoring global weakness, especially eurozone's weakness, thinking the U.S. domestic economy can withstand any price shock out of Europe. If eurozone and U.S. inflation expectations keep dropping, the Fed will have no choice but to engage in more QE. And if it doesn't, and deflation settles in and markets perceive the Fed as being behind the deflation curve, then there is a real risk of a crisis in confidence which Michael Gayed is warning about. Perhaps this is the real reason why big U.S. banks are loading up on bonds (not just regulatory reasons).
In my more recent comment on why OMERS is worried about deflation, I went a step further and stated:
I want you all to keep Makin's brilliant comment in mind because as I stated in my last comment on the Swiss currency tsunami, I'm betting the Fed won't raise rates this year and might even be forced to engage in more aggressive QE if a financial crisis emerges (that's when the real fun begins!).
One thing is for sure, even if it won't make a big difference in the real economy, more QE from the ECB will help propel risks assets all over much higher, especially in the United States. Go back to read my Outlook 2015,and try to understand why even though deflation is coming, there is plenty of liquidity to drive risk assets much higher.

But Ray Dalio is absolutely right, there will come a time when more QE simply won't work and might even reinforce deflationary pressures. That's when we'll see huge downside risks materialize.

On that note, please go back to read my last comment on why the Bank of Canada shocked markets and cut rates. I added some comments from Brian Romanchuk who thinks this was a policy error, but if you ask me, Bank of Canada Governor Steve Poloz has a deep understanding of the risks of deflation spreading throughout the world and the bank was right to cut rates.

Also, markets will now be focusing on Greece and whether we'll avert another euro crisis. There will be more anxiety but I remain confident we will not see a major crisis from Greece, even if Syriza wins and manages to form a minority government.

Below, IMF Managing Director Christine Lagarde, former U.S. Treasury Secretary Lawrence Summers, Goldman Sachs Group Inc. President Gary D. Cohn, Banco Santander SA Chairman Ana Botin and Bridgewater's Ray Dalio, speak on a Bloomberg Television debate on quantitative easing. Francine Lacqua moderates the session at the World Economic Forum's annual meeting in Davos, Switzerland.