Saturday, 26 October 2013

Time to prepare for FATCA

Time is marching on and the deadlines for FATCA are getting closer.

In July 2013 the IRS postponed FATCA implementation for 6 months. Many companies relegated FATCA to the back of the regulatory queue to focus on Dodd Frank, AIFMD, Solvency II and a myriad other regulatory initiatives demanding their attention.

It’s time to focus on FATCA again. The 6 month grace period should be used to prepare for FATCA. fact the delay should serve to underline the scale of the work involved worldwide for both financial institutions and regulators themselves, in order to implement FATCA’s requirements.

In our new Global Perspectives white paper we will look at the 4 essential steps organisations need to complete to prepare for FATCA.

If you’re lucky enough to be unfamiliar with FATCA you can read all about it in our introductory white paper here -
Latest Developments
FATCA is here to stay and its going global. A worldwide web of Inter-Governmental Agreements (IGA’s) continues to be signed whereby countries are agreeing to swap tax details with the US, and also increasingly with each other.
The EU agreed at a summit in May to automatically swap tax details between the 28 countries of the European Union. Incredibly, in October 2013, even Switzerland signed the OECD convention on the exchange of taxation information. FATCA is changing everything.

This is the first in a series of Global Perspectives white papers which will cover what is required to prepare, implement and maintain compliance with FATCA in your organisation.
Our first FATCA white paper examines the 4 essential steps organisations need to complete to prepare for FATCA. You can access it here:-!preparing-for-fatca/c1b4k

Sign up for all our free white papers on our website or by emailing:-

Tuesday, 17 September 2013

5 years on from Lehman's collapse - what's changed?

5 years after Lehmans collapse,  when the world came within a whisker of complete financial and economic meltdown its a good time to ask whats really changed in the world of finance since those dark days in September 2008?

Over the next few of weeks I'll look at the main positive and negative changes since 2008, starting firstly with regulation.

The last 5 years has seen lots of new financial regulation - some of it excellent and insightful, some of it awful and pointless.  The time it has taken for large regulatory initiatives to take place is surprising but we have now seem wide-ranging requirements in relation to taxation (FATCA), consumer protection (Dodd Frank),  banking (Basel & MIFiD) and hedge funds (AIFMD & Form PF).

Whether all this makes much difference long term is a matter for debate. There will likely always be financial crashes as the economic cycle of boom & bust/greed & fear merely reflects the human psyche.

The 30 period following WW2 was largely free of seismic economic shock. This period from the establishment of the Bretton Woods system till the US abandoned the Gold Standard in 1971 was remarkably stable by recent standards. 

Many would put this down to the Glass Steagall Act in the US. This bill passed in the teeth of the Great Depression (which Clinton repealed in 1999 and has since regretted) forbade regular banks from becoming involved in investment banking. Banks lent far too much over the following decade and that house of cards came crashing down in a succession of the corporate, consumer and sovereign bailouts we have lived with ever since.

 John Mc Cain wants to reintroduce a new Glass Steagall bill for the 21st century. This is great idea - despite bank lobbyists probably driving it to extinction.

Since 2008 banks aren't lending so naturally the shadow finance sector has become larger as companies seek new avenues to raise credit. This area needs proper regulation. 

The EU have done a pretty good job regulating Hedge Funds (with AIFMD - and which I spend my days implementing!) but the current Chinese shadow finance system  is a very expensive accident waiting to happen.

 The Chinese authorizes need to urgently bring their shadow finance system under their regulatory remit whereby up to $6 trillion dollars sits in Off Balance Sheet vehicles and loans. We all know how this ended in Europe.

There is also growing pressure to properly regulate offshore finance. 
This is a development worth watching. Personally I am very skeptical whether any headway will be made here, particularly when some critics would suggest that the US and UK are arguably the worlds largest offshore centers (The City & Wall Street/Delaware recycling money from warmer climes).

Some of the latest G20 proposals made the right noises but they also talked about leaving Trusts out of any new offshore financial rules. That's like bringing in Prohibition but excluding Guinness! 

The current system whereby large technology and finance companies structure their corporate tax to reduce their liability to peanuts will probably be changed somewhat. 

However it is important to note that Corporation Tax worldwide is on a long-term down trend and I expect this to continue, especially in the US. Even Sweden's company tax rate is below Americas (the highest in the Developed World).

Finally, one of the unintended consequences of all this new regulation is to make it so expensive to comply that the financial world has seen waves of consolidation with banks, hedge funds and finance companies all merging to becoming bigger, making the banks especially  - and  ironically - truly too big to fail.

10 banks dominate the American financial system and a lesser number in Europe and Asia. There is no credible plan for allowing an institution the size of Citi (quarter of a million employees) or HSBC (7,000 offices) to fail - they would have to be bailed out in all circumstances. Traders know this and have learned that if you're going to fail -  "fail big"!

And that is exactly why finance needs to be tightly regulated worldwide. 

The last 5 years have made some reasonable progress but plenty more still needs to be done in the years ahead.

Friday, 6 September 2013

Deep breaths for the next US debt stand-off

Last week I wrote that the rest of 2013 would be dominated by 3 crises - Syria, Emerging Markets and the return of the Eurozone crisis.

Unfortunately it looks like next month we may have to add a fourth crisis to that list.

This week the US Treasury secretary Jack Lew fired a shot at Congress warning them the US would run out of money to pay its debts, if it did not increase the National Debt limit above its current limit of nearly $17 Trillion.

All of this happening in an economy showing solid recovery and whose recent growth figures keep being revised upwards. 

So while the US may be a private sector success story, but it is a public sector disaster.

The forthcoming US debt and budgetary crisis is part of a multiyear (decade?) paralysis between Democrats and Republicans which has been, and feels, endless.

This legislative paralysis is mirrored across much of the country, where for years politicians have ensures re-election by promising elaborate public pension sector pensions and benefits - which will fall due long after politicians retire!

This reckoning is starting to happen now, as we saw in Detroit, with many other cities and states lined up behind it.

At the front of this queue is Illinois (which contains Chicago, the largest US city after New York and Los Angeles). Illinois spectacularly owes two and half times more in pensions that it has in its pension pot. There is not a snowballs chance in hell this can be paid. Its firemen, nurses and teachers face massive pension cuts in the years ahead. 

The key point here is that the current US debt ceiling discussions do not contain any acknowledgment or provision for these enormous unfunded state and city pension liabilities (never mind solution). The federal government will, in all likelihood, suffer the bill.

As I have written elsewhere, the US is far from alone here. In fact, it in a better state that most of the G20 economies. In Ireland (where I live) the government has unfunded public sector pension liabilities equal to 4 times the country’s GDP! None of this is included in its already dire National Debt figures (of approx. 130% of GDP).

The US debt ceiling crisis will be played out against a background of imminent monetary tightening by the Federal Reserve. This will increase interest rates and while it was always going to happen sooner or later, higher rate expectations are already being reflected in higher US mortgage rates. This will slow down the rebound in the real estate market. 

Though it is highly likely this game of financial chicken will be avoided, the first half of next month could very well be a repeat of August 2011, with its heart stopping moments of brinkmanship, as the world’s richest country teetered on the point of an unprecedented and unnecessary self-inflicted default. 

The long term outlook for the American economy is by far the strongest of major economies, primarily due to its demography structure, entrepreneurial population and access to endless cheap energy and food supplies. 

Needless to say Obama and Congress should put aside politician point scoring on this vital issue and increase the debt ceiling - while also agreeing a credible long term solution to curtail public spending. 

Unfortunately the possibility of this looks remote.

No doubt a last ditch debt ceiling solution will be found in Washington by the end of October. Hopefully it won’t derail the US economy recovery.

The world economy is depending on it.  

Thursday, 29 August 2013

3 crises that will dominate the rest of 2013

As the northern hemisphere summer draws to a close, 3 new emerging global crises threaten to dominate the rest of the year. 

Firstly, in the Middle East Bashar Assad's likely use of chemical weapons on his own citizens is likely to draw a military response from the West. Despite talk of a surgical strike and limited intervention, time and again over hundreds of years the Middle East has shown itself to be a quagmire, capable of embroiling even its most reluctant invader.

The Syrian morass pitches the United States against Russia and its mortal enemy, Iran. This local war could easily become a proxy for indirect military conflict between larger global powers, as happened so often during The Cold War.  Western countries have a firm habit of becoming deeply embroiled in local Middle Eastern conflicts.  

The markets are aware of this and the price of oil (and other commodities) has started to respond accordingly. 

Secondly, while the markets may be clear about the impact of a Syrian strike they are pretty much clueless as to where the ongoing rout in emerging markets will end up. Currencies of many important developing markets are in free fall, as the market responds to the forthcoming "tapering" of money printing in the United States and with it the return of higher US interest rates. 

As the Dollar becomes more attractive to investors, the flood of money exiting major emerging markets is threatening to become a deluge and may cause massive currency depreciation in emerging market economies - which now make up half the world economy  (including India, Turkey, Thailand, Indonesia, South Africa and Brazil).  

The real fear here is that the Federal Reserve is embarking on its new course of monetary action without really understanding the impact it will have on the global economy - including in the USA.  If major economies such as India and Brazil suffer a substantial economic meltdown they will be forced to defend their currencies by dumping US dollars and buying up Rupees, Reals and Rand. 

They will do this by selling the huge amount of US debt they own, forcing up the price of US Treasury Bills and threatening to snuff out America's solid economic recovery. The USA no longer lives in an global economic vacuum.

For the BRIC countries themselves the days of easy credit caused by rock bottom Western interest rates are over and we all know what that did to prepherial European economies once the tap was turned off of their decade long debt binge. 

This brings us neatly to the third likely source of crisis for the remainder of this year - the Eurozone - where last week the Germany Finance minister admitted what many have long already known - that Greece will need a 3rd bailout soon. Nothing will happen until Angela Merkel is safely re-elected shortly but following this, depending on the extent of global turbulence from emerging markets, we can expect to see Greece request another haircut of its debt, to bring it down to a level they have some hope of repaying (perhaps 120% of GDP).

The crucial difference is that money written off will be - for the first time - cash provided by Germany a couple of years ago to bail the country out. This will be the first time the German taxpayer has taken a direct hit for keeping the Eurzone together. Many Germans will have realised that the money they "lent" to Greece over the last 3 years would never be re-paid. These loans being written off will be confirmation that their money is gone and will be hard for many Germans to take.

Even though I write this from a beautiful Mallorcan beach where the Mediterranean resorts are full and the tourist towns heaving, large parts of the Eurozone's peripheral economy are unreformed and only tentatively emerging from 2 years of recession.

If the 3rd Greek bailout is not careful managed it could lead to a wider crisis across the Eurozone (particularly in Cyprus or Italy), which will likely take place against military action in Syria and a tense period in the global economic environment.

It is going to be an interesting final few months to the year.

Friday, 23 August 2013

Another American Century?

“So far everyone who has bet against America has lost"
Bill Clinton, 2012

As so often before, speculation of America's demise has been greatly exaggerated. The US economic recovery is strengthening as the decade rolls on and this time America is expanding with a number of unique engines for economic growth. These will solidify its economic recovery and may even mean we are in for another American, not Asian century.

Personally, I have never been one for the chorus of BRIC hysteria we've endured for the last decade. 

The wheels in India have come firmly off the carriage and unsurprisingly last weeks imposition of draconian capital controls have sparked, rather than stopped a creeping sense of economic crisis and currency collapse. Russia will shortly be in rapid decline as coming access to cheap "fracked" energy brings its recent economic clout to a swift demise. Economic growth has stalled in Brazil and this has been reflected in nationwide protests against its rent-seeking state and high cost of living.

China may be stabilising but its banking system is still a Pandora's Box of bad debt. What it contains no-one outside the upper echelons of the Chinese Communist Party knows. The recent inter-bank wobble was a PR disaster for its central bank and a sign of an immature institution struggling to control its gargantuan domestic banking sector.

What we do know is (just like before the economic crash) any recovery in China will be driven by demand for its exports from the United States.

This US demand for cheap Chinese manufacturing will also drive the Eurozone's only powerhouse economy, as China bulk orders the machinery and parts required from specialist Germany companies so it can ramp up its manufacturing machine in the Pearl River Delta. Chinese satellite economies in Australia and Africa will be keeping their fingers crossed this Chinese growth scenario materialises and their commodity booms are reignited.

Once again - as many, many times over the last century - the USA will be the motor that powers the world economy.

It has been like this since the end of the First World War. There is no evidence that this is changing any time soon. Just the opposite in fact.

The US is the only major economy that has cleaned up the toxic legacy of 2008 - unlike in Europe where zombie banks still shuffle on and meaningful reforms are non-existent. In America bad debts have been written down, banks have been recapitalised, property markets have re-balanced and companies themselves are now far leaner.

The "Shale Gale" of cheap, nearly limitless energy will substantially re-shape the US economy in a way we are still struggling to understand. It will also fundamentally alter the geo-political structure of the world as the US moves permanently away from its addiction to Middle Eastern energy.

Gas in America is currently one quarter the price in Japan. Many US companies are now moving advanced manufacturing factories back on-shore from Asia as the cost of energy collapses and years of 20% annual wage growth in China effectively prices these workers out of the market.

Most importantly the long term shortage in many key commodities which we will be experiencing by mid-century (and hardly ever acknowledge) as the population of the Earth approaches 9 billion (particularly in water and food stuffs) will by-pass America by. China can't even feed 20% of its people so is buying up whatever farmland it can in Africa. 

America, on the other hand has no such problem. It is completely food self sufficient and always will be once it controls the worlds largest bread basket in the Mid-West and the Mississippi delta.

Demography is destiny and America's population is young, mobile, entrepreneurial, highly educated and demographically stable. Most of Central and Eastern Europe's population structure is collapsing. Russia's is even worse and China is aging rapidly.

America may have its share of internal problems - a paralysed political system, glaring inequality, too much government debt and unpayable pension promises - but lets be frank here - most countries would love to have its problems.

Paradoxically one of America's greatest strengths is its regular period of self doubt and neurotic reflection (after the Soviet Unions' first space flight, after the Vietnam War and again after 9/11).

Ironically from here in Western Europe it is clear that these bouts of "decline paranoia" actually usher in a period of ferocious capitalist house-keeping - in a way not possible in Europe's socialist market economies.

This internal re-balancing may be ruthless and uncompromising but it has repeatedly set the stage for the next burst of American economic growth. That is what is happening right now and I see no reason for it to change this century.

Please note - this is a synopsis of a longer white paper which will be issued in Q4 2013. Contact me for a copy when it is available.

Friday, 16 August 2013

End of the August curse?

The last couple of years have seen the normally drop dead quiet month of August throw up a number of unexpected economic crises.

Last year the Euro crisis flared up suddenly in Greece and Spain and Europe's  politicians were grumpily recalled from the continents beaches to perform firefighting duties. 

The previous year the US Congress pushed the country to the absolute brink of default, needlessly and for political point scoring.

Thankfully so far this August it has been a lot quieter.

Commodity prices are recovering from their recent historic lows - a reflection of the gradual upturn in global economic growth being led by the United States.

Japan is coming out of its lost 2 decades and the Eurozone is finally leaving recession. There is a chance that China may avoid a hard lending - if the authorities can dealing with the bursting of a property bubble and a banking sector festooned with hidden bad debts.

The real and continued growth story is in the United States. A constant and on-going flow of economic indicators this year has pointed to a real recovery in the worlds largest economy. This is great news.

It also points to a gradual end of QE in the US, with the printing presses being mothballed and interest rates starting to rise. The US dollar is entering a rare period of economic strength. 

Elsewhere commodity economies like Australia, Canada and New Zealand will be praying the Chinese economy ticks up again and growth follows a likely growing US demand for imports. Australia and Canada in particular have large intact property bubbles, the deflation of which will be anything but painless. 

Back in January we published our annual Global Perspectives white paper predicting the 5 key trends in the global economy in 2013 (Available here).

Looking back - having past the midpoint of this year - we did a pretty good job.

The US economic recovery has continued as we expected, China has underpinned it's slowdown with a huge infrastructural expansion, the Germany election next month has completely dominated the year in Europe and prevented any attempt at substantial economic reform, commodities prices are starting to rebound as we expected in the later half of the year and exchange rates have remained volatile - with the Japanese Yen and Australian Dollar in particular gyrating wildly against the dollar.

You can read our economic predictions for 2013 (Available here) and decide for yourself how accurate our predictions were for the year.

Friday, 9 August 2013

"America’s top 25 hedge fund managers make more than all the CEOs of the S&P 500 combined”​​​​

"America’s top 25 hedge fund managers make more than all the CEOs of the S&P 500 combined”​​​

The Economist, October 2012

Hedge Funds have had an incredible run over the last 2 decades. The annual salaries and bonuses of the most successful managers have been amongst the highest paid to anyone, anywhere, ever.
Astronomical wealth has kept everything from top end international property to luxury goods to private yachts afloat for many years.

This is starting to change.

Multiple headwinds of lacklustre performance, increasing competition and invasive regulation are starting to bite.

This new Global Perspectives white paper examines these trends and asks the question - have hedge funds reached the end of their "Gilded Age"?

Click here to read the full white paper

Wednesday, 31 July 2013

After Detroit - the future global pension crisis & what it means for asset management.

"Prichard is the future, we’re all on the same conveyor belt. Prichard is just a little further down the road."
Michael Aguirre, The New York Times, 22nd December 2010

In 2009 the small Alabama city of Pritchard, outside Mobile became the first city in America to stop paying pensions to its retired workers.

For years the city had been warned that if it did not put more money aside its pension fund would run dry. It was even ordered to do so by the State court.
The City Mayor ignored the court order, deciding it would be better to keep hospitals open, street lights on and paying teachers’ salaries. The additional money to fund the city pension liabilities simply didn’t exist.

Many of the affected retirees have now filed for bankruptcy or gone back to work

This is the future across the developed world.

Private sector workers in rich countries already know the days of defined benefit pensions on retirement are long gone.

Employees in the private sectors have realised that they are in charge of looking after their own retirement. Their existing employers will contribute something but are in no way responsible for providing a comfortable income on retirement nor will they backstop the performance of their private pension fund.

The big change over the next couple of decades will be in the public sector.

This will be the inability of rich world governments to fund their public sector employee pensions.

Governments across the rich world have already accrued gigantic unfunded pension liabilities, the majority of which are of the defined benefit kind (i.e. guaranteeing a pension based on final salary). In most cases these future liabilities are not even included in national debt figures.

The slow realisation by both governments and their state employees that the money to fund their retirements does not exist, will be one of the defining themes of the next 30 years.

This Global Perspectives white paper looks at the future of global pensions after the Detroit crisis & examines what it means for asset management:-

The future global pension crisis & what it means for asset management

Friday, 26 July 2013