CFA Conference coverage

5:20 GMT: That’s it for my coverage from Edinburgh. I’d like to thank the CFA Institute and its staff for hosting a top notch event, and I look forward to my next visit to Edinburgh. I’ll be at IMCA’s conference in Las Vegas next week, so be sure to check back on Advisor.ca for more coverage of some of the brightest minds in the investment industry.

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Next Generation Asset Management, featuring Alan Brown (Schroder Investment Management), Richard Lannamann (Spencer Stuart), John Stannard (Russell Investments) and Sandy Nairn (Edinburgh Partners).

AB: I can’t think of another career where its possible to come in in the morning, do nothing all day and still have done the best job you could’ve done for your clients.

JS: Investment managers who have lived through investment cycles are better equiped to manage your assets.

AB: We saw a collective error that creaated the financial crisis. It wasn’t willful. One of the fundamental mistakes was buying into Greenspans claim that you caan’t spot a bubble so you shouldn’t even try.

SN: We get the same events recurring, suggesting we don’t learn from history. This time around, the public revulsion is epic. Policymakers will do something to safeguard the financial system, but we’ll see crises in the future.

AB: This is an individual problem, not a macro problem. The real issue is that the government system will give peoplle what the state thinks is the bare minimum they need. We’ll all work longer.

JS: Most people don’t know how much they need to save for retirement, and the industry needs to help educate the public. The people in this room can design new products to help people to retire and annuitize their income stream.

AB: It’s going non-benchmmark. Star managers are seen as a maverick genius, trumping the process-driven team players.

Q: Whats the future of the retail space?

SN: What most of us like least is dealing with people. Its a pain. We run a flat structure rather than layering CIO and chief investment strategists. There’s only one job title at my firm.

AB: The CIO needs to be more involved in research. They can’t be an extension of the HR department.

JS: Consultatnt needs to be more involved in the pension’s decision making. Some are evolving into asset managers themselves. Trustees don’t meet frequently enough to make timely decisions, so multi-asset makes more sense all the time.

AB: Clients need to recognize the snakeoil salesman, so the more people around the table (advisor, consultant and manager) helps keep everyone honest.

JS: Incentive fees encourage gaming the system. Retaining assets should be enough of an incentive.

AB: Asset managers are not price setters, they are price takers (in terms of own compensation). If the manager is losing money, cutting fees won’t help.

JS: Pulling together into a multi-asset framework is key.

AB: World is dividing into passive strategies and high-alpha active. The moment you start looking like the index, you’re overweighting the pricey stocks. You should probably adopt one or the other strategy.

SN: There shouldn’t be a difference between what you do with your own money and client’s money: you don’t want constraints (geog., or asset class). Just ensure you understand the client’s time horizon.

SN: Perceptions of hierarchy are a problem. Shouldn’t view “analyst” as the bottom rung of the ladder. I’ve got 4 ex-CIOs working as analysts because its what they love doing. Analysts generate value and shouldn’t be looked down upon.

AB: You should make it your goal to be dispensible, otherwise you’ll get stuck in one spot. You want people who are better than you around you, so that they are indispensible, and you can rise in the structure, because they caan thrive without you.

AB: I don’t like formulaic compensation; you either pay too much or too little. Its a management cop-out. Eat-what-you-kill lacks judgement.

SN: The breadth of experience…ability to connect elements, see what others don’t, that makes a strong investment manager. Annual compensation is the wrong timescale, they need to be rewarded for the long-term.

JS: You need more than a designation, you need passion, experience with the dynamics of a working market, strong best practice principles, and understanding of organizational dynamics.

AB: There’s a clear shortage of people who caan manage multi-asset portfolios, so new investment professionals should avoid focusing too narrowly. This caan lead to being a CIO, which I’ve quite enjoyed.

SN: You have to play to your strengths. Don’t try to fit into a round hole if you’re a square peg.

JS: Lines are blurring between the advisor and the manager of a pension fund.

AB: You need to document why you are planning to diverge from the benchmark.

JS: Institutional investors might not go Absolute return en masse, but they are more inclned toward it now.

AB: Five years ago everything was benchmark relative. Now 14% isn’t. Five years from now it will be 25%.

AB: We’re taking down the siloes. Trying to deliver real world outcomes rather than chasing a caap-weighted benchmark. As investment responsibilty is transdered to individuals, its no surprise that absolute returns come into focus.

JS: There’s been a reduction in institutional assets seeking fixed income. There’s more data and you have to know how to use it. You need a global view, and you can’t focus on a single asset class. Small firms are moving into institutional space. Be clear what it is that you do…what gives your organization its unique advantage.

SN: We tend to get evolutionary change. We’ll see what we invest in changing over time. Global equity funds will need to start adding other assets when global equities start to run short.

AB: Globalization of the industry will not be reversed. Investment management firms are component suppliers chosen to manage a specialized piece of the portfolio. I think there will be a growing demand for multi-asset experience.

Currency Wars: Choose your weapon, with Axel Merk, president and CIO of Merk Investments.

A: I like gold, but we can never go back to a gold standard, even though there are no safe currencies. Doesn’t mean gold is a bad investment though.

Q: Return to gold standard?

Instead of reducing entitlements, policymakers would rather devalue the dollar and pay out the promises.

A: Don’t expect an end, just a pause. There’s plenty of liquidity, so QE3 isn’t needed, but the USD could continue lower.

Q: QE3?

A: Its less likely scenario; policymakers have the same concerns as the West, and want to open the economy, but they are subject to local concerns. They are strengthening the renmimbi, but its unfolding very slowly.

Q: What about a Chinese revaluation?

The absence of a central Treasury has an upside: they eurozone can’t just print money to get out of its predicament. The strong countries will continue to support the weak.

Spain has a real economy, has a lower debt toe GDP ratio. Democracy is not very old in Spain, so the government will be reluctant to bring in too much austerity.

A: If Greece left the eurozone, what Greek products would you stop buying? Pretty much only have tourism as an industry. Its not in their interest to default. They have to be ready to make a painful structural adjustment if they are going to default. If they can hold out for another couple of years, it will be much easier to avoid pain.

Q: Should we even care about Greece in relation to the euro?

The larger the currency, the less volatile it is. Prop desks and hedge funds have reined in risk, reducing their carry-trade positions on Japan.

If Asia developed its domestic fixed income market, this would help create an alternative. Until then, expect weaker dollar, but no end to reserve status.

A: The USD has done many things right: deepest fixed income market in the world. But if the U.S. abuses the status, then something has got to give. Special drawing rights will not work because of the conflicting interests. There are no real alternatives to the USD, mostly because of liquidity constraints.

Q: future of dollar as reserve currency?

3:49: There are a variety of instruments available: Currency mutual funds; international bond funds; ETFs; deriviatives; international equity funds.

3:46: Currency has a very low correlation with other asset classes. Very slightly positive to all but bonds, with a slight negative corelation there.

3:44: If you’re invested in global fixed income, you should think of directional currency markets as a hedge against interest and credit risk.

3:41: Currency markets are unique because there are players who are not seeking a profit: central banks, tourists…Conference attendees…These allow profit-seeking players to find opportunities.

3:37: Despite the $4 trillion daily turnover in currency markets, it is relatively low volatility market. Most currencies only move a few basis points per day.

3:35: The yen has proven that you don’t need strong growth to boose the value of the currency. The yen may actually weaken if a stimulus package is successful.

3:34: There’s no such thing as a safe asset anymore. Why invest in corporate risk, which is reliant on economic recovery, when you can invest in currency risk, which will also respond to recovery.

3:32: China is also outsourcing risk by increasingly borrowing from foreigners.

3:31: Asia is letting currencies rise in an effort to combat inflation. China has outsourced its low-value manufacturing to Vietnam.

3:30: European consumers stopped shopping 10 years ago, so higher rates won’t stifle spending. In the U.S., the Fed claims it can raise rates within 15 minutes, but this ignores the impact that would have on the still highly-leveraged consumer.

3:27: The U.S. is fighting market forces and is targetting a weaker dollar. In the Eurozone, there is a sense of urgency becacuse the governments haven’t come to the rescue of the consumers, who are more shock resistant. This is supporting the euro. In Asia, currency policy is driven by inlfation, creating a stronger renmimbi.

3:25: The Fed is alone in easing monetary policy, in an attempt to create work. But Bernanke will probably tighten up too late.

3:23: Consumers want to deleverage but the authorities want the debt-fuelled party to continue. The pendulum keeps swinging in and out of the USD, but lately the swings into it have been weaker.

3: 22: Consumers are underwater on their mortgages, but real wages aren’t moving. The only thing policymakers caan do is try to reflate home prices to avoid defaults.

3:19: The social implications: middle class is squeezed, populism rises, social unrest.

3:18: Growth has been spurred by low inflation, low taxes in an attempt to grow at any cost. The result is overprodction: No pricing power, but high input costs. Corporate America did what it could and exported jobs to Asia.

3:16: Despite Bernanke saying he want to generate inflation, the market hasn’t taken him seriously yet.

3:15: Inflation is fueled by inflation expectations…policy makers need to keep expectatoins firmly anchored. That’s why the Fed is concerned about rising deflation expectations.

3:13: Egypt caan kick out the president if they want, but unless they replace him with a great farmer, they won’t see any change in their situation.

3:12: Bernanke is causing global commodity inflation in an attempt to provoke Beijing to revalue its currency. Otherwise China is just importing America’s inflation. The U.S. can afford to raise inflation, as so little total income is spent on food and energy, compared to the emerging markets.

3:10: Policymakers have various weapons at hand: monetary policy; fiscal policy; capital controls; and currency manipulation. Regardless of which weapon is employed, the goal is to protect each country’s perceieved self interest.

3:08: There’s been a lot of talk in the morning sessions about the survival of the euro and the future of the USD. The big picture isn’t so currency specific, its a global currency war.

Risk-Based Investing In Practice, by Guy Stern, Standard Life Investments.

2:46: Does this work in boom times? Yes, but you need to make sure your clients understand that the portfolio won’t keep pace with a raging bull. In boom times, your return will not look a lot like equities. In a market crash, your return will not look a lot like equities.

2:43: Use your cash allocation to pay for the derivatives. You don’t have to borrow money to lever your portfolio.

2:38: The most variable of variables are volatility of corelation, and its near futile to try to predict them.

2:34: “We get paid for controling the risks that we can,” and taking the risks that pay off.

2:33: It’s easy and fairly efficient to take big chunks of risk away, so long as you don’t kid yourself that you’ve immunized the portfolio.

A: Previous to Lehman event, there were lots of counterparties. There are now only 4 AAA-rated counterparties. So yes, there are limits to the amount of risk you can hedge away, but its worth heding away the marginal risks.

Q regarding finding counterparties for all this risk

2:28: The amount of risk taken in deciding “BP or Shell” is pretty minor compared to the risk involved in asset allocation.

2:23: The sum of your risks needs to be high enough to reach the target you need to reach.

2:22: Once a risk becoming un-rewarding, you need to either sell it off, or hedge it out.

2:21: You need to look at underlying elements of a portfolio. A bond portfolio made up of 50% 2-year govt debt and 50% 20-year bonds is not a true 50-50 split, as the 30-year bonds are 15x riskier.

2:17: Lumpy returns are the other problem. 2 investors, each putting 1000 per month into the S&P 500 for 13 years. One starts in 1971, the other in 1994. Both period offer about 9.5% annualized return, but the 1971 start portfolio earns $150,000 more than the later 13-year plan (400k vs 250k)

2:15: Just as you accumulate a large amount, you immediately start to de-risk the portfolio. What’s left at the end gets annuitized.

2:14: The problems with life-cycle investing is the path-dependency of returns, and whether returns are generated in the accumulation phase or the de-accumulation phase.

2:12: Its not a matter of raising returns, but a matter of smoothing thee trend line on returns. This is a major goal for a pension plan.

2:11: Next step, reducing the risk in the equity portfolio while maintaining returns. Here he’s chopped overall portfolio risk from 9% to 6%. The original portfolio before any of this, was 14%.

2:10: Funding levels of pension funds got pummelled when interest rates fell, as liabilities increased and equities “fell out of bed”.

2:08: The reduction of the other risks allows for more risk in the equity portfolio.

2:06: The biggest risk in the portfolio are interest rates and inflation. You can reduce the interest rate risk with swaps. They’ve managed to reduce some of their risks by one third.

2:05: Step one: identify the risks. Using his own company’s pension plan as an example, he points out that there is too much focus on equity risk. You need to hedge away the unrewarding risks, like inlfation risk, etc. This gives you a larger risk budget to invest in risk-assets.

2:00: This session is all about getting rid of all the non-rewarding risk so it can be reallocated into more profitable assets.

1:30 p.m. GMT: Hello Canada, we’re about 30 minutes away from the afternoon sessions starting here in Edinburgh. As with Monday, the conference started today in Usher Hall, which can boast appearances by Led Zeppelin and Winston Churchill, but alas, lacks WiFi. But I’ll be sure to write up my notes, and some of those sessions will turn up in Advisor.ca’s June Special Report.

Monday, May 9

“Farewill Punchbowl: From Inflation Targetting to Credit Targeting,” by Russell Napier, consultant, Orlock Advisors.

5:27: Expect material revaluations within 6 months.

5:26: Politicians don’t like the price of something (CitiBank, Treasuries) they change it. They aren’t players, they’re the referee.

5:25: U.S. inflation will not get to 4% before emerging markets get to 15%. You can hold U.S. equities until inlfation gets to 4%, but then you’ll want out. Consequences are so dire, that you should be overweighting emerging market exchange rates.

5:22: When China loses control of its variables it will go bankrupt. Capital controls, ability to dictate long term and short term rates, control of the banks… Its the biggest misallocation of capital on the planet.

5:21: We’ve criticized Japanese policy makers for the past two decades, but what they were trying to compete against a rising China. When China loses its competitive edge, Japan will be the benficiary. Japan will go bust one day, but it will be on Page 2 of the FT.

5:18: Emerging markets consumers will be the future driver of thte global economy, as a rersult of this massive transfer of wealth.

5:15: Where will U.S. Treasuries stop rising? Maybe 4%, but just as likely 7%. Keep your powder dry.

5: 15: Don’t expect the Fed to tighten. It will be the emerging markets. We will see the Great Reset in currency and debt markets. You don’t want to be long U.S. bonds or equities during the Great Reset. Go long on emerging market currencies.

5:13: The two most dangerous words for investors are “financial suppression” when the public and banking sector are forced to put their money into government debt. Think War Bonds. We could bring in new asset modeling for pension funds. Done. Maybe a financial transaction tax on everything but government debt. There are no bonds to the deviousness of a government of the brink of bankruptcy.

5:09: The baby boomers have gone from the Grateful Dead generation to the Ungrateful Undead, demanding their government benefits. That’s what driving the U.S. debt to GDP ratio toward WWII levels.

5:06: The demand for Treasuries is reaching a structural break. Foreign central bankers will stop buying.

5:05: Bernanke has forced all the countries linked to the USD to print money. He’s using inflation in emerging markets to rebalance currencies, since the EM won’t adjust their FX rates.

5:04: As long as undervaluation works, they’ll keep doing it. But they’ll get inflation out of it. Once their cost base rises enough, they’ll no longer be competitive. They have two choices: let inflation rip through the system, or adjust their currency. It appears that they are doing the latter.

5:02 Foreign holdings of U.S. Treasuries have soared to nearly $4.5 trillion. This is unsustainable, not because its a bad investment, but because foreign central banks need to control their currencies.

5:00 Unwinding this siuation will be very painful, but has already started. Next G20 meeting will see the G13 meet, then invite in the G7

4:59: We’ve grossly misprices Treasuries, and therefore virtually every asset. Emerging markets learned from China, and have locked their currencies in at an artificially low level.

4:58: Historically, stocks tank when inflation reaches 4%. Officially we’re no where near that, but that’s relying on the government’s inflation data, which is probably false.

4:56: We have an institutional bias to keep assets in silos that we are accustomed to, even if they are not the best allocation of capital. Who would earn a fee for putting their clients in gold and Swiss francs?

4:54: All the assets you liquidate to buy, say Brazilian equities, gets invested into U.S. Treasuries, due to Brazil’s balance of payments.

4:52: Contrary to popular opinion, inflation undermines U.S. equity valuations. The curent “Bretton Woods on speed” system is inherently inflationary. Unlike original BW, there are no capital controls.

4:50: Tightening monetary policy too early could spark deflation.

4:48: Cyclically Adjusted PE is a good longer-term indicator, which is currently predicting a downturn in U.S. equities. A multiple of about 23 seems to be the top, which is where it is right now. Historic lows (like 1921, or 1982) are around 6.

4:45: In Hong Kong, they are targeting credit by increasing the level of downpayment needed to buy property.

4:42: The emerging markets are following Nixon and Carter lead on how to fight inflation. Anything in the book to avoid raising nominal interest rates.

4: 41: New tools are being prepared via the Bank of International Settlements, which would allow countries to decalre themselves “in a bubble”, which would allow them to break capital adequacy rules.

4:40: We want to control credit, but we haven’t got the guts to do it properly.

4:40: Have the authorities the guts to raise rates when needed? You might think so, but no one in the 1970s really did. Not the UK, not the U.S.–both brought in capital controls, price controls, etc.

4:38: The enlightened self-interest of “Mr. Market” cannot determine the amount of credit/debt in the system. Someone needs to regulate the credit market, and keep crdit growth lower than GDP growth. Sounds easy, sounds logical, but really quite difficult.

4:37: Asia must move first, because its exchange rate focus has resulted in massive swings in interest rates. The Asian business cycle will change and become stronger, perhaps even uncorelated with the U.S.

4:35: We are now returning to the monetary policy of the past. Credit and money are the focus.

4:33: If there is no party, make sure there is plenty of punch. Greenspan’s policy was followed by those who are now bankrupt, ignoring money and credit.

4:30: Napier spoke at the 2009 conference in Orlando…he says Mickey Mouse still believes in efficient market hypothesis.

“Hoping for the Best, Preparing for the Worst…in Japan” by Dylan Grice, Global Strategist, Societe General.

3:57: Japan’s treasury holdings are about 7-8 months of tax revenues. Their bank loans are also valuable, but no one is sure how to monetize their assets. There needs to be a transfer of wealth from private sector to the public sector to pay off the debt. Most politically palatable way to do this is through inflation, as politicians tend to blame “profiteers” for inflation.

3:54: True, AngloSaxon economies are more prone to capital experimentation, and therefore more prone to hyperinflation. But the U.S. has more time than Japan. Its threat is the healthcare system with massive underfunded liabilities.

3: 52: Japan’s multinationals are in the best position to take on some tax arbitrage and minimize their exposure to a government bankruptcy.

3:51: The simplest way to short the JGB is to short the futures.

3:50: Where to invest in hyperinflation? Look to Latin American, Turkish and Israeli experience: Materials do well, companies that are exporting, or holding reserves of foreign currency.

3:46: Economists say that the problem with Japan is that everyone expects further deflation…but who wants to believe in economist predicitons? Better idea for Japan would be to announce QE program of 15% of GDP…that would generate some inflation.

3:44: For example, no one could have predicted 3 years ago that Greece would suddenly announce that its debt was not really 3% of GDP, but 13%.

3:43: When should we expect Japanese hyperinflation? people are too hung up on looking for triggers; sometimes you don’t see them until after they’ve been pulled. Not the best way to manage a portfolio to wait until you caan see the trigger.

3:40: Book plug! But its for charity: The Gathering Storm, which includes thoughts from a number of writers, including Stephen Lewis and David Rosenberg.

3:39: For Rome, the military had been an asset for the public purse, generating vast wealth through conquest. Once the empire stopped expanding, though, the army became a liability. This is similar to what we’ve witnessed with the babyboom, which was a massive asset for the Western world, but is now starting to drag on economic growth.

3:37: This is the third time today that I’ve heard a reference to Rome’s Third Century debasement. Interestingly enough, I wrote a short paper on that in second year university.

3:36: Buying call options on the Nikkei for 40,000 would only cost about 5% of notional value. Given the explosive upside potential, you could get away with hedging only 10% of notional value. For 4-5 basis points, wouldn’t you want to hedge your portfolio against Japanese hyperinflation?

3:34: In most hyperinflationary scenarios, you get revolution. Not so in Israel in the 1980s. If Japan followed the Israeli experience, you’d get the Nikkei at 63 million points. He admits that’s a bit above consensus.

3:29: Being a creditor nation will not save Japan, as the U.S. was in the same position when its economy crased in 1929.

3:27: Some might see this as the time for the central bank to finally create some inflation, but this is more likely the start of an inflationary spiral.

3:26: Domestic investors will not want to roll over their JGBs, they want their money back and this wave will begin in 2014.

3:25: Japan’s interest is about 30% of its revenues, and the chart is quite sharp. This is at 1.5% interest, so the country cannot afford to pay a higher yield.

3:24: Bond yields are almost unprecedentedly low, and people seem to be anchoring on that as “normal”. Over the past 200 years, U.S. bonds have averaged 5.8%…that’s the same level that Ireland is complaining about as “crippling”.

3:22: Fiscal pressure (bust governments) is what drives inflation. When central banks are politicized, you find these 2 elements in every case of hyperinflation. Eventually, they’ll monetize the deficit.

3:18: Tax revenues have fallen below non-discretionary expenditures, since 2008. Meanwhile its demographic implosion is worse than any other country. The dependency ratio (the elderly) is rising dramatically, with an increasingly small percentage of young people supporting them.

3:17: Most developed market governments are already bust, but Japan is the most advanced in terms of which will default first.

3:16: The international investment community seems to have given up on Japan, so a contrarian investor will think maybe now is the time to buy.

3:15: Japanese equities are vastly under-owned: long in nominal assets, short in equity ownership.

3:14: Only recently have Japanese stocks really started to look cheap. Until 2006 (or so) they were only cheap compared to Japan’s bubble years. Now they really are cheap.

3:13: Of course, it all depends on what you’re looking for in terms of return. If you’re looking for 10% your notion of fair value will be very different from someone looking for 5%.

3:12: Intrinsic Value to Price ratio provides more alpha than price to earnings use. When its “1” then its at fair value.

3:09: This is an exercise in bullet-proofing in case of the worst case scenario.

3:07: Grice says he’s not certain that Japan will see hyperinflation, but there are cheap ways to hedge against the possibility.

3 p.m. GMT: We’re back, with “Hoping for the Best, Preparing for the Worst…in Japan” by Dylan Grice, Global Strategist, Societe General.

“Inflation–are investors wrong or early?” by Russ Koesterich, Chief Investment Strategist, iShares.

2:45: Eventually we’ll see a bond market sell-off, just not this year. At some time over the next 18 months, you’ll see it happen.

2:43: Asian central banks are still buying U.S. debt, so even when the Fed stops buying Treasuries, there will still be buyers. There are also intermediaries who have regulatory requirements to own Treasuries. The U.S. could alter the rules of the game and require financials to hold more Treasuries.

2:40: Bank lending to the Treasury has held back long-term yields. Fed has created a 3.5-4% spread between short and long-term debt. In early 2012, the Fed will likely raise short-term rates, making bank lending to the Treasury less profitable and they will start lending to consumers and businesses again.

2:37: Healthcare and staples have lagged over the past 2 years because of risk aversion.

2:32: Currency debasement is the most politically palatable way to deal with fiscal problems.

2:31: As long as the bond market keeps lending at 3.5%, U.S. fiscal policy will not change.

2:30: Solvency problem is worse than people realize. Problem with using debt to GDP is that it assumes government debt can use entire GDP to service debt. The ability to generate taxes varies from country to country. U.S. struggles to raise its percentage of GDP in taxes…only 18% of GDP. Northern Europe can pull off up to 40%. U.S. has highest debt to revenue 360%, double that of Spain, and more than Greece.

2:26: In rising inflation: overweight energy producers, inflation linked bonds, commodities, gold and other precious metals. Underweight treasuries, financials and consumer discretionary–retailers see higher input costs, while consumer wages lag inflation. He’d be surprised if inflation accelerates in the next 18 months.

2:24: In low inflation environment, you want U.S. large cap, healthcare and consumer staples. These companies have pricing power. Underweight energy and inflation linked bonds.

2:23: Investors bid up the price of gold when the U.S. government ramps up spending, in expectation that the debt will be monetized (currency debasement). Don’t run out and bury gold in thte back yard, though.

2:21: Commodities are not in a bubble, despite what people think. Investors are behaving rationally. Its hard to determine when the price has exceeded fair value. The price should roughly track the amount of money in the system. Gold, for example, has roughly tracked changes in the money supply over the past 40 years.

2:19: How does this all affect your portfolio?

2:19: If the labour market starts to recover, though, you can expect wage demands to rise.

2:18: Did the Fed over do QE2? For the short-term, no: unemployment is still a problem, so no one is asking for a raise. In fact, over the past year, they’ve taken a cut in real terms.

2:16: Expectations of deflation often causes inflation, as consumers defer spending. The forecast of inflation, back in August, called for 1.5%, and has crept up to 2.5%, based on TIPS pricing.

2:14: Given the size of U.S. economy, changes in policy affect global markets. If you’re concerned about what’s going on in Washington, it’s not that it shouldn’t trouble you; it just shouldn’t trouble you this year.

2:13: It will be difficult for the Fed to create inflation over the next few years, because it hasn’t been adding to the money supply for some time, and it takes time for it to feed through into inflation even when it does start to re-inject…it can take up to 10 quarters.

2:11: Fed’s balance sheet isn’t just bigger, its holding assets its never held before, and no one knows how to drain the excess liquidity from the balance sheet. Mechanism for central banks to put money into the economy has been broken for a few years now.

2:10: There has been no growth in wages in the developed world over the last 3 years.

2:08 India’s has not been aggressive enough with its interest rates and real bond yields are negative.

2:06: Developed world’s policy is driving commodity inflation, which is having a huge impact on the price of food in the emerging markets.

2:05: Emerging markets are facing manageable inflation, but it’s not of their own making…they’re catching an inflationary draught from the unconventional monetary policy in Washington, London and the EU.

2:04: Investors no longer trust inflation rates will remain stable, hence the inflation aversion.

2:02: Investors were watching QE1 and 2. Meanwhile inflation has become more volatile, similar to the mid-1980s.

2pm: most measures of inflation–stripping out energy– 2010 was the lowest on record in OECD countries. Yet everyone was focused on inflation hedging.

It’s just about 2pm here in Edinburgh, and we’re about to get underway again. The morning sessions were held in beautiful Usher Hall, which sadly has no WiFi. Fear not, I’ve taken ample notes and will share later on.

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The Sunday evening session–The Bankers Who Broke the World–is apparently off the record. Sorry readers, I’ll be able to tell you what’s going on around here on Monday.

Interesting sidenote, this hall is where the Royal Bank of Scotland held its AGM…the where told shareholders that they pretty much had gone bust and were taking the massive government bailout–which essentially nationalized the bank.

Sunday, 12:37 GMT: I arrived in Edinburgh to some classic Scottish weather…the good folks at the CFA Institute had the foresight to include a brolly in the conference bag. Hopefully my luggage will arrive soon…those of us who just flew in from Toronto might look a little dishevelled until mid-morning, Monday.