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KKR Celebrates 40 Years

KKR celebrates its forty year anniversary with the launch of a new employee volunteer program called “KKR 40 for 40.”

Henry Kravis and George Roberts, Co-Chairmen and Co-Chief Executive Officers of KKR, stated: “When we started this firm 40 years ago with three people and $120,000, our vision was to create a firm with a culture that rewarded collaboration and teamwork. Today that $120,000 is over $120 billion. We are more than 1,200 people strong and, with the support of our employees, we have been successful in creating that culture. We are proud of our evolution from a boutique U.S.-focused private equity firm to a global investment firm. Today we have multiple types of capital, allowing us to invest behind any idea, anywhere in the world. We have investors who trust us to find those ideas, and we are investing in themes that are solving some of the world’s most pressing challenges. And, most importantly, our work is supporting the goals of our many investors and their beneficiaries.”

KKR 40 for 40, or #KKR40for40, is a new employee benefit where KKR employees receive 40 hours of paid time to volunteer and give back to the organizations in their communities. Time is flexible and designed to allow employees to engage in meaningful ways for them and the nonprofits they care about.

“Because so much has been given to us over the years, we have decided that the best way to commemorate our entry into our fifth decade is to give back. Over the years, KKR employees have devoted thousands of hours of private time to non-profits and community causes. This work is just as important as the other kinds of work we do. During this year of our anniversary celebration, we hope our employees will take the time to give back to others in the same spirit of partnership, teamwork and excellence that has built this firm,” Kravis and Roberts said.

In honor of the firm’s anniversary, KKR also launched a letter, a video, and other related materials. In the letter, the firm notes that as of December 31, 2015, “we and our employees and other personnel have approximately $12.3 billion invested in or committed to our own funds and portfolio companies, and every single employee also owns our public equity. In short, we invest like owners… because we are owners.” Both Kravis and Roberts remain optimistic about the future.

You can read the letter and watch the video in the following link.

Politics May ‘Trump’ Fundamentals This Year

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As we approach the end of the first-quarter earnings season, the state of health of the corporate sector is that much clearer: An earnings recession is in full swing. Earnings for the S&P 500 have seen their third consecutive quarter of declines, and will likely be down by approximately 6% year-over-year. While things look better if you adjust for the severe decline in the energy sector, it’s still nothing to write home about.

In previous CIO Perspectives, we have talked about how this lackluster earnings season could give way to better results in the second half of the year, now that oil and dollar headwinds have eased off. At the same time, I have urged caution against chasing the recent market rally because we still feel a more significant earnings breakout is necessary for the market to move above its current trading range.

There is now clarity on another front, too: We finally know who will contest this year’s U.S. presidential race.

Unfortunately, that may be the only thing that is clear in a campaign which has set new standards for unpredictability. Donald Trump’s candidacy was met with derision a year ago. Until his rivals threw in the towel last week, many were sure that we were headed for a contested Republican convention. Why should the unpredictability stop now? Trump could lose by a landslide or win by a landslide—your guess is as good as mine.

This Campaign Could Distract From Fundamentals
The distraction of a Clinton-Trump matchup could subdue sentiment over the next few months, but it may also direct market attention away from the more important questions about what sort of fiscal policies we should expect from this political transition.

At the moment, our concern is that we will not get what would be helpful in supporting a fundamental earnings recovery—regardless of who wins the election.

An Unpopular President Will Lack a Real Mandate
Hillary Clinton’s average “strongly unfavorable” rating in recent polls has been around 37%, while Trump’s has been a staggering 53%. No one else in recent history has managed to alienate more than 32% of the electorate at this stage of a presidential campaign.

This matters because we believe that when the president lacks a real mandate it reduces the likelihood of meaningful policy progress on a number of vital issues for the corporate sector: corporate tax reform, infrastructure spending, and more rational regulatory and trade policy.

On corporate taxation alone, the U.S. remains weighed down by a needlessly complex code, higher rates of taxation than those of similar economies, and a problem with tax repatriation that constrains potential investment in our economy. On trade, even the starting position isn’t pretty. Trump is the first anti-trade Republican nominee in decades, and Clinton has tacked a long way to the left to hold off Bernie Sanders for the Democratic candidacy.

Fiscal gridlock and trade uncertainty could leave the Federal Reserve still doing all the heavy lifting to keep our economic recovery on track.

Populist Policies Threaten Long-Term Damage
Moreover, these are not just U.S. issues. The economic nationalism and populism evident in presidential campaign rhetoric are increasingly heard around the referendum on the U.K.’s membership in the European Union, for example, and in trade, currency, industrial and immigration policy debates worldwide.

Even as fundamentals improve, it could be these concerns that determine market sentiment for the rest of 2016.

Neuberger Berman’s CIO insight column by Joseph V. Amato

Barbara Freedman Wand Selected as Recipient of the Boston Estate Planning Council Excellence Award

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Barbara Freedman Wand, partner at Day Pitney has been selected as the recipient of the 2016 Boston Estate Planning Council Excellence Award. The Boston Estate Planning Council (BEPC) is a multi-disciplinary community of over 700 estate and wealth planning professionals. The award recognizes Freedman Wand’s significant contributions to the estate planning profession, and is the highest honor that BEPC can bestow upon a member of the estate planning community. The award will be presented at the BEPC Annual Gala on May 26, 2016 at the Fairmont Copley Plaza in Boston.

“I am honored to receive this award from my peers and proud to have been recognized for my professional accomplishments and service to the community,” said Freedman Wand.

Freedman Wand advises clients on sophisticated estate planning and the development and implementation of philanthropic goals. She also counsels private foundations and public charities on governance, compliance and planned giving programs. She is certified as an Accredited Estate Planner (AEP) by the National Association of Estate Planners & Councils, and she is a Fellow of the American College of Trust and Estate Counsel. Freedman Wand is a sought-after speaker, mentor, well-regarded author and she has served in numerous professional leadership positions. Freedman Wand also has substantial involvement in community betterment and philanthropic organizations. She is Chair of the Professional Advisors Committee at The Boston Foundation, which counsels the Foundation as it establishes, develops and maintains strong working relationships with the members of Greater Boston’s advisor community. Recently, she was elected to the seven-member Executive Board of Day Pitney.

Freedman Wand has been very active in the larger legal community, with a particular interest in fostering attorney development. She served as a member of the Massachusetts Women’s Bar Association’s Employment Issues Committee, which issued a significant report, “More Than Part-Time: The Effects of Reduced Hours Arrangements on the Retention, Recruitment and Success of Women Attorneys in Law Firms.” This report garnered national and international attention and has been used as a guide for improving attorney advancement.

Freedman Wand has also been selected as a Top Woman of Law by the Massachusetts Lawyers Weekly for her accomplishments in the legal field as a pioneer, trailblazer and role model.

MUFG Investor Services Completes Acquisition of Capital Analytics

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MUFG Investor Services, the global asset servicing group of Mitsubishi UFJ Financial Group, has gained all regulatory approvals for its acquisition of Capital Analytics, the private equity administration business of Neuberger Berman Group, and the acquisition has closed.

The deal is part of MUFG Investor Services’ strategy to become a global industry-leading fund administrator and brings its private equity and real estate assets under administration (AUA) to $145 billion, and total AUA to $384 billion.

Junichi Okamoto, Group Head of Integrated Trust Assets Business Group, Deputy President, Mitsubishi UFJ Trust and Banking Corporation said: “The acquisition of Capital Analytics is another indication of our ambition and commitment to the fund administration industry and enhances our comprehensive offering in the alternative investment space. We look forward to leveraging the capabilities of Capital Analytics and providing a full market offering for both new and existing clients.”

John Sergides, Managing Director, Global Head, Business Development and Marketing, MUFG Investor Services, added: “The asset servicing and specifically fund administration landscape is changing significantly under the pressure of increased demands from regulators, investment managers and investors. This acquisition enhances our comprehensive private equity and real estate offering, for both general and limited partners, ensuring MUFG Investor Services is the ideal partner to support clients throughout the investment lifecycle. We will be making further announcements regarding our enhanced client proposition over the coming months.”

Anthony Tutrone, Global Head of Alternatives at Neuberger Berman, commented: “Our partnership with MUFG will continue to allow our clients to benefit from Capital Analytics’ best-in-class services that they and Neuberger Berman have come to rely upon.”

MUFG Investor Services has acquired all of Capital Analytics’ business and will provide a seamless transition for its employees and clients. Neuberger Berman funds will continue to receive administrative services from Capital Analytics; however, no funds or investment professionals will transfer as part ofthe acquisition.

Schroders Launches Total Return Commodity Fund

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Schroders has announced the launch of Schroder Alternative Solutions Commodity Total Return. The new fund will offer commodities exposure with a flexible approach, allowing the team to take advantage of a wide range of opportunities, as well as limit downside risk.

The fund will invest in energy, agriculture and metals sectors worldwide and will adopt a highly flexible strategy which includes the ability to take short positions and the use of leverage.

The fund will be managed by Schroders’ commodities team, led by Geoff Blanning. Schroders has strengthened its investment resources in commodities in the past two years with the hiring of a Metals Fund Manager, a dedicated Commodity Quantitative Analyst and the inclusion of two highly experienced Global Energy Fund Managers from the broader investment group.

Geoff Blanning, Head of Commodities at Schroders said:

“Schroder Alternative Solutions Commodity Total Return will provide a flexible and low risk option to those investors who wish to re-establish their commodity market exposure following nearly 5 years of relentless price declines, as well as to those investors looking to participate in commodity markets for the first time. The fund will also appeal to those investors seeking liquid alternative investments run by an experienced and specialist investment team.“

John Troiano, Global Head of Institutional, said:

“Commodities as an asset class has had a difficult few years; however, there are encouraging signs that the fundamentals are now turning positive. The new fund is designed for investors who wish to participate in commodity markets to protect against the risk of inflation and invest in a potentially high return strategy, but who also wish to avoid the high downside risk inherent in a fully-invested approach.”

Schroders has a strong reputation as an active commodity manager, with a 10 year track record in actively managing a broad range of commodity funds for clients across the world.”

The fund is not yet registered for distribution in any jurisdictions. Subject to regulatory approval, Schroders plans to make it available to professional investors in Austria, Denmark, Finland, Germany, Greece, Norway, Spain, Sweden and the UK; for public distribution in Luxembourg, the Netherlands, Portugal, Hong Kong, Macau and Singapore; and to qualified investors in Switzerland.

Dynasty Financial Partners Taps Senior Marketing Leader, Gordon Abel

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Dynasty Financial Partners recently announced that it has hired industry marketing veteran Gordon Abel as Senior Vice President, Director of Marketing. Based in New York and reporting directly to Dynasty CEO Shirl Penney, Mr. Abel will build on the firm’s success as one of the leading wealth management platforms for independent advisors. In addition, he will work with Dynasty’s Network firms on developing and growing their brands and marketing strategies.

Gordon Abel has had an extensive career working in financial services marketing at the highest level. Most recently, he worked at Google as Head of Industry, Financial Services overseeing the enterprise relationships for MasterCard and JPMorgan Chase. Prior to this role, he was Executive Director at JPMorgan Chase leading agency and strategic marketing partnerships as well as digital marketing across the firm.

Prior to joining JPMorgan Chase, Gordon spent five years as Director in various executive marketing roles for BlackRock/iShares and spent eleven years in agency management and marketing at Carat, Euro RSCG and SF Interactive as well as others.

According to Mr. Penney, “Dynasty recently passed the five year milestone and we are now ready for the next chapter in telling the Dynasty story. And, as the firms in the Dynasty Network grow, they also want to expand the visibility of their brands in their respective markets. Gordy has the vision, marketing expertise and leadership skills to take the Dynasty brand — and our Network teams’ brands — to a whole new level. We’re very excited to have him join the Dynasty family. We will continue to add high quality intellectual capital to help our clients enhance their experience with end clients and to grow their businesses.”

In this role, Mr. Abel will be responsible for all strategic brand architecture and marketing development for Dynasty Financial Partners. He will focus on leveraging new marketing platforms, technology and data to build awareness and heighten customer value across relevant channels. This will include driving engagement across the growing social media landscape, developing valuable thought leadership content for distribution, expanding efforts in mobile and video as well as optimizing website and search engine best practices. In addition, he will be the point person for all external marketing resource partners.

Mr. Abel said, “I’m honored and enthusiastic about joining fast-growing Dynasty Financial Partners and creating and executing a focused marketing strategy to expand our brand and grow the business. I saw this as a unique opportunity to help tell the story of the future of wealth management and to partner with some of the brightest entrepreneurial minds in finance in our community.”

Investors Paid Lower Fund Expenses in 2015 Than Ever Before

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A study on U.S. open-end mutual funds and exchange-traded funds, recently released by Morningstar, finds that, on average, investors paid lower fund expenses in 2015 than ever before. The asset-weighted average expense ratio across funds (excluding money market funds and funds of funds) was 0.61% in 2015, down from 0.64% in 2014 and 0.73% five years ago. This decline stems from investor demand for cheaper passive funds (index funds and ETFs) and strong flows into institutional share classes, which carry lower fees. Vanguard also contributed to average fee declines, as its low-cost passive funds continue to attract large flows.

But lower average fund expenses do not necessarily mean investors are paying less for their investments overall, reveals the study conducted by Patricia Oey and Christina West. 2015 saw the strongest inflows to institutional share classes through retirement platforms and to ETFs via fee-only advisors. These channels typically levy another layer of fees in addition to the cost of owning funds, so investors need to consider their total cost of investing. Advisor and retirement platform expenses are beyond the scope of this fund fee study, but they are an increasingly important cost component as investors migrate toward investment services and products with these fee structures.

The recently released U.S. Department of Labor’s final Fiduciary Rule states that any industry professional providing investment advice to IRAs and retirement plans (such as 401(k)s) must put the interest of the investor first, primarily by focusing on costs. This rule may result in more scrutiny and better transparency on the total cost of investing, which we hope will lead to lower investment expenses for the average American saving for retirement.

The asset-weighted average expense ratio is a better measure of the average cost borne by investors than a simple average (or equal-weighted average), which can be skewed by a few outliers, such as high-cost funds that have low asset levels. In 2015, the simple average expense ratio for all funds was 1.17%, but funds with an expense ratio above that level held just 8% of fund assets at the end of 2015. (So it isn’t saying much if a fund company touts “below average fees.”) If we look at the largest 1,000 share classes, which account for about 75% of assets in mutual funds and ETFs, the simple average expense ratio remained at 0.64% from 2013 through 2015, as some fees go up and some go down.

This finding suggests that in aggregate, changes in the fees set by asset management firms across the industry are not contributing to the falling asset-weighted average expense ratio.

Indeed, active funds have seen larger asset-weighted average fee declines when compared with passive funds. This might lead to the conclusion that fee declines among active funds are driving overall fee declines, but this has not been the case. Instead, it has been flows out of more-expensive funds (often active funds) and into cheaper funds (primarily passive funds) that have resulted in lower asset-weighted average fund fees.

Thoughts from a “Gringo” on his Brazil Trip

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As a Uruguayan and American that has been working in Brazil or with Brazilians since 1995, I have never seen the country in this way. In 2012, while I was visiting Brazil, I went for a jog early one beautiful morning in Vitória, the capital city of Espirito Santo. Espírito Santo state is Brazil’s largest producer of petroleum and Vitória is an important port for exporting iron and steel from companies like Vale or CST.

As I stopped to hydrate, I realized that the coconut water I bought from a street vendor in this secondary city, was more expensive than a Vita Coco coconut water in New York City or arguably Tokyo! There were clear fundamental reasons BigSur became bearish on the economic growth of the country, on the Brazilian Real and on all Brazilian asset markets. A decade of prosperity fueled by the commodity boom, allowed Brazil to hide problems in its legal and political framework rather than build stronger institutions during its good years.

For the Brazilian families that were clients of ours at that time, we strongly recommended that they diversify outside of Brazil. Fast forward four years later to current day, and the country is arguably in its deepest crisis ever! I have just returned from a trip with a colleague from Intermediate Capital Group, a USD 23 billion in AUM specialized credit manager, with over 26 years of history investing in private debt across the globe. I wanted to share some thoughts about what’s going on in Brazil – while we believe this is a very idiosyncratic Brazilian crisis, we think we can shed some light from our admittedly “gringo” perspective.

A Long Road Ahead to Improve the Economy

Brazil’s economy is facing its worst recession since the 1930s. Its economy is expected to contract by 4-5% this year, after shrinking 3.8% in 2015 (which was its fastest deterioration in 35 years). This could translate into a loss of about 8-9% of GDP in two years, which some economists constitute as a depression.

Many factors led to Brazil’s current situation. There were a series of ill-founded policies, including an excessive increase in consumption through lines of credit, cheap interest rates below the break-even point and an artificially valued exchange rate to control inflation. Brazil also has a lack of trade agreements with the main global economic blocks, and many public entities use “creative” accounting methods. These types of policies enabled the country to achieve a few years of growth above its potential, buoyed by the boom in commodities, and also helped by artificially low inflation, unemployment and fuel prices. In addition to economic decline, many expect an unemployment rate around 12%, a sharp fall in family income and decreases in investment and consumption. Government debt is now rising quickly to a level where reversal becomes extremely difficult and painful to administer. Brazil was downgraded by all rating agencies to junk status, both in terms of local debt and foreign debt.

We believe it’s going to be a long road for the economy to come out of its paralyzed state, and the process will not be quick or easy. Why? This is a highly rigid economy, with a heavy use of indexing. With strong unions, regressive labor laws and a cumbersome judicial system together with poor infrastructure there are many “bottle-necks” in the economy – inadequate roads, a dearth of rail lines, and strapped ports, all hampering the flow of products to market. The cost of moving soy, the number 1 export product in the country, from the grain belt in Brazil’s the interior state of Mato Grosso to the port of Santos in São Paulo state, is close to four times what it costs a farmer in Illinois to get his soy crop to New Orleans

All of this also leads to an incredibly high cost of doing business. The famous “custo Brazil” has many components, including high taxes (36% of GDP, way out of line with the 21% average for upper-middle-income countries), rocking import duties and rigid labor laws that make it hard to use workers efficiently. High interest rates mean firms must spend a packet on financing; high crime adds heavy security costs to their overheads. A terrible education system makes Brazil the world’s second-hardest place for firms to find the skills they need, according to Manpower Group

In the 2016 World Bank’s Cost of Doing Business, Brazil comes 116th in the world (down from 111th in 2015). Some of the high “cost of doing business” factors where Brazil compares unfavorably with OECD countries and even other Latin-American countries include:

Number of procedures and Number of days to start a business;
Number of hours per year of time to pay taxes – Brazil is the ranked the number 1 most time consuming tax system in the world!;
Cost to export; Cost to import; Time to resolve insolvency; and Time to resolve litigation

By analyzing Brazil’s economic prospects for the next few years, we have come to the conclusion that the country will need low real interest rates to recover its ability to grow, and that inflation should remain controlled. We do not see either of those conditions present anytime soon.

A Paralyzed Political Situation with No Clear Solution

While the country is completely paralyzed, it is clear that a political catalyst is needed. However, with or without impeachment we see no deep political change foreseen any time before, and probably during, the 2018 elections. Most likely, we will see one set of crooks is being replaced by another. With or without impeachment of President Dilma Rousseff, Brazil is confronting a host of challenges that would complicate a new government’s ability to revive a sinking economy and ease unrest inflamed by months of bitter political jousting. Any alternative government will be led by politicians that are corrupt and involved in the scandals, especially the centrist PMDB, considered a “party for hire”. Thus, with or without the Senate’s impeachment, we view the political situation as fragile and unstable.

Vice President Michel Temer from the PMDB party, (which shared power with the president’s Workers’ Party before splitting off in March) stepped down as leader of the PMDB this month. This happened after a Supreme Court justice made a preliminary ruling that any impeachment of Ms. Rousseff may extend to Temer, as he’s also being investigated for funding Ms. Rousseff’s 2014 campaign with bribes. The scandal doesn’t end there: on the other side of the coin, the legislator overseeing impeachment, Mr. Eduardo Cunha, is also facing charges and indictment alleging that in 2006, he helped orchestrate a USD 40 million bribe in exchange for two contracts to build floating oil platforms for Petrobras. This illustrates just how difficult it will be for the country to turnaround, as the roots of corruption are deep. Mr. Cunha’s first political patron, ex-President Collor, returned to government 15 years after his impeachment. He was elected to the Senate, put in charge of an ethics committee and will be among those voting on Ms. Rousseff’s impeachment. Does it get more ironic than this?

According to non-profit Transparência Brasil, 60% of Brazil’s federal legislators have been convicted or are under investigation, for crimes ranging from corruption to electoral fraud to assault. The PMDB party could form a new government, but it’s riddled by internal rivalries. The most pressing challenge for Mr. Temer and any new government would be to mollify Ms. Rousseff’s enraged hard-core base. The country will be overrun by social mobilizations, strikes, and workers’ occupations by the homeless and landless. After months of uncertainty and hardship, this frazzled country is inevitably headed for more of the same.

The problem in Brazil is that legislators have immunity. The lead prosecutor in the Petrobras case calls for an overhaul of these rules; saying corruption runs so deep that even the dozens of convictions in the Petrobras investigation won’t be enough to root it out. For a country to get rid of corruption and impunity and change its culture, they will have to alter the institutions. And this is not even on any table at the moment. The other complicating factors that add to instability are that no other political party or leadership has capitalized yet from the population’s distrust and the complicated political system with 35 parties. While it’s not our base scenario, the danger of Brazil following Venezuela’s path is latent.

Cultural Change and Structural Reforms are still Far Away

The crony capitalistic economic model introduced by the Workers Party (PT) generated an explosive growth in debt and huge distortions in the assignment of resources and credit in the economy. Some analysts estimate that around 50% of all corporate loans were subsidized. To reverse the explosive growth of debt, several structural economic reforms will need to be implemented. On the government budget, the main focus must be on reducing compulsory expenditures guaranteed by the constitution, so as to give the government higher flexibility when tax revenues drop. This must include a social security reform, a change in the calculation of the adjustment of the minimum wage and pensions, greater decoupling of budgetary revenue, and greater flexibility in labor laws, to name just a few. But it’s yet very soon to guess what the new economic model will look like.

We do not believe there are any real political alternatives and there is no focus on structural nor institutional change. The economic model and the culture will change once new processes are in place, not just because Judge Moro is going after corrupt politicians and entrepreneurs. We consider this a good first step and a necessary one. However, we do not view it as a sufficient reason for a change in the way Brazil operates. In a Harvard Business Review paper called “Culture Is Not the Culprit” by Jay W. Lorsch and Emily McTague, the authors conclude that culture isn’t something you “fix.” Rather, in their experience, cultural change is what you get after you’ve put new processes or structures in place to tackle tough business and economic challenges (like reworking an outdated strategy or business model). The culture evolves as you do that important work. We are far away from this in the Brazilian model. In the meantime, the corruption scandal is keeping the “Animal Spirits” depressed, as net investment is negative and there is no investment in infrastructure or intensive capital goods industries. There’s yet no catalyst for a change, as there’s no deadline for the persecution of entrepreneurs. However, similar to the dynamic we are seeing in US and Europe, the Brazil M&A space has benefitted from interest of multi-national companies making strategic acquisitions. These are companies looking to buy developed and performing assets with a strong foothold in the country – they can avoid the risks of building businesses or infrastructure assets from scratch this way.

M&A (Mergers & Acquisitions) activity is strong

One theme we’re paying attention to is the serious uptick in M&A activity in Brazil. The fourth quarter of 2015 was the third best quarter for M&A since 1995, with deal volume reaching USD 22.6 billion. This has continued into the first quarter of this year, and bankers are optimistic that the trend will remain for the short term. The near 45% depreciation in the Brazilian real against the dollar since mid-2014 has made Brazilian assets more affordable for foreign investors, attracting buyers from Europe, the US and increasingly Asia. The Brazilian market, with an overall population of 200 million and a large youth demographic (25% of population) is important for many long-term strategic investors, who this point in the cycle, believe they are getting access to a market they need to be in for a cheap price. We’re seeing this especially in infrastructure, consumer goods and consumer discretionary companies.

Farming is Brazil’s one Bright Industry

Brazil’s farmers look set to produce record crops of soy, coffee and sugar cane this year, while cattle ranchers and chicken and hog farmers foresee reaching new heights for exports. Agriculture was the only sector of Brazil’s economy to expand last year, by 1.8%, while overall GDP shrank 3.8%.

The whole world has to eat, and Brazil makes its living from agriculture. Brazilian farming continues to undercut its counterparts in the U.S. and Europe as it is the most efficient producer in the world. This is for two reasons: 1) Brazil became a lot more competitive last year because of the weaker real; and 2) agriculture offers a rare example of a Brazilian sector that is globally competitive. The

country’s largely inefficient manufacturers are still heavily protected by tariffs and import taxes, but the government took the opposite approach with agriculture. Starting in the 1990s, it reduced subsidies and eliminated export taxes while increasing investment in agricultural research. Farmers responded with a rapid expansion of the area under cultivation and a burst of investment that made them among the most productive and efficient producers in the world. Soy products and coffee are the locomotive of Brazil’s agricultural sector. Only the value of soybean and soybean-product exports went from USD 23.9 billion in 2011 to USD 31.3 billion in 2014. Even as sales retreated to USD 27.9 billion last year, soybeans still dethroned iron ore as the country’s most valuable export.

Conclusion

While good economic times do not necessarily make for smooth politics, bad politics generally go hand in hand with an underperforming economy. Certainly, Brazil needs to resolve its political crises before it can tackle its economic woes. The problem is that a successful impeachment vote may simply lead to another equally unstable government — with an administration led by vice-president Michel Temer, also dogged by corruption accusations and questions of legitimacy, it would be near impossible to pass necessary (but unpopular) fiscal reforms.

A question we have is whether Brazil could turn into the next Venezuela, or can it follow Argentina’s path? If Brazil does not “do their homework” and institute structural reform and cultural change, the country can go into a collapse similar to Venezuela. We view this as a low probability scenario, but it cannot be discarded. If Brazil can “clean house” and rid itself of the same old types of politicians, and bring in a leader without ties to corrupt institutions, like Argentina has done with Macri, there may be a chance at a turnaround. It’s still unclear which path Brazil will follow.

It’s also important to note that transitions, even peaceful ones, are messy and take time: Argentina’s economy is likely to shrink this year before the new government produces a turnaround. In Brazil (as ironically in Venezuela), even if there is political change tomorrow, it will take a long time for their economies to regain balance. Markets have been trading Brazil in a binary fashion lately — any development suggesting a rising chance of impeachment leads equities and the currency to rally and vice versa. Caution and patience are warranted. Nibbling for (distressed) opportunities seems the right approach.

Opinion by Ignacio Pakciarz, CEO and co-founder at BigSur Partners.

If The Economic Scenario Were To Be Stagflation?

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If deflation occurs in Europe, there is no evidence to suggest it would persist, as most countries are flooding their economies with additional money backed by public debt. Furthermore, inflation is on the rise, albeit slowly in some countries. I would like to share a perception that first occurred to me in 2010. What if the European economy faced a scenario of stagflation, that is to say a combination of economic stagnation compounded by persistent unemployment and moderate inflation? This is a matter I would like to discuss.

What are the attributes of this footprint stagflation? Besides the aspects of state solvency, they are the same as the symptoms as witnessed during the 1970s: a low rate of economic growth combined with a marginal decrease in productivity, structural and high unemployment (structural dislocations characteristic of economy), underutilization of production capacities, low expectations of earnings (at least in the medium-term), low capital investment to moderate a scarcity of bank credit for private investment, balance of trade deficits and widespread deindustrialization.

The effects of stagnation can essentially be detected by structural unemployment, which is already well established in some areas. Beyond the visible effects the retirement of a significant portion of baby boomers have, (which merely postpones the problem of their replacement income to future governments) unemployment is related to different phenomena: industrialization, inadequate education, exhaustion of the growth model by debt, lack of flexibility in the labor market, entrepreneurship and especially weak ancillary mindsets that have not yet integrated into growth areas. There are also issues surrounding immigration; for example, will it be redesigned to ensure new continued growth in employment?

Inflation meanwhile is not a desirable solution, since it poses a risk of self-power and only nominal increases in state spending. It would appear that as a consequence, this unavoidably leads to the monetary rediscounting of public debt. Of course, inflation depletes returns, especially since the savings are invested in fixed income securities. But as Keynes advanced (1883-1946), “it is worse, in an impoverished world, to provoke unemployment than to disappoint the rentier.

“Some economists even argue an iconoclastic theory that the banking, state and economic crises are the result of a period characterized by excessive disinflation. This period, known as “the great moderation” apparent between 1985 and 2005, would benefit from the expansion of trade areas (through globalization) and a low-cost accessibility to employment pockets, to mask the reality of the repayment of private and public debt. The expansion of demand did not lead to an inflation crisis because western governments absorbed this by their trade deficits.

Why does the perception of inflation raise the specter of secular deflation with many economists (which constitutes a strong collective preference for liquidity and is often confused with disinflation)? Because money created ex-nihilo with coupons which become claims on other coupons, and recalling the words of the economist Jean-Baptiste Say (1767-1832) “the currency is just a veil”, as implemented by the central banks, is a treatise on the future, meaning reimbursement will become uncertain. It is indisputable that the States and also the central banks are currently conducting a monetization of the debt with its corollary of liquidity creation and possible delayed inflation. The recent measures therefore create money without creating a capital.

Finally, we must ask ourselves how European monetary authorities dared to simultaneous impose an extremely low annual inflation target of 2%, whilst authorizing Member States to increase their public debt in such proportions that the most intuitive way to reduce its weight or to reduce its relative value is through inflation as the ECB now intends to stimulate.

Bruno Colmant – Bank Degroof Petercam

Michael Gordon, New CEO for United States at Lombard International

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Lombard International, a global leader in wealth structuring solutions for the high net worth market, appointed Michael Gordon as CEO of its U.S. operations effective May 2, 2016. He will report to John Hillman, Executive Chairman of Lombard International.

Gordon joins Lombard International from his role as Global Head of Insurance Solutions at BNY Mellon. Additionally, he served as Chief Executive Officer of Tiber Capital Management, LLC, a wholly-owned subsidiary of BNY Mellon focused on managing assets for insurance and reinsurance companies. Before BNY Mellon, Mr. Gordon was an executive at New York Life Insurance Company, leading investment and insurance product management, sales and marketing functions.

The announcement is part of a series of strategic developments for Lombard International including the formal launch, in September 2015, of its global life insurance-based wealth management business. This announcement followed the successful integration of Luxembourg-headquartered Lombard International Assurance with U.S.-headquartered Philadelphia Financial.

John Hillman, Executive Chairman of Lombard International, said: “We are thrilled to have someone of Michael’s experience and background to guide Lombard International in meeting our aggressive ambitions for U.S. growth and achieving our goal of building a world class investment platform.”

Lombard International specializes in providing multi-jurisdictional wealth planning solutions through its partner networks across the United States, Europe and Latin America, issuing life insurance policies and annuities from the United States, Luxembourg, Guernsey and Bermuda. Global assets under administration are in excess of USD 75 billion with a global staff number of over 500, including more than 60 technical experts specializing in 20+ jurisdictions.