Tuesday, April 25, 2017

Greening Cayman and growing the economy

Premier Alden McLaughlin throws a tire on the shredder.

Six trucks carry the tires to the conveyor belt, which lifts them high above an industrial hopper, dropping them into a shredder that reduces each one to two-inch rubber chips in five seconds.

Despite an astonishing capacity to process between seven and eight tons of steel-belted radials – and others – each hour, Island Recycling and its Guernsey Recycling Group partner are likely to need nearly a year to process the half-million tires collected at the George Town landfill during more than a decade.

The shredding started on March 21, marked by Premier Alden McLaughlin donning work gloves and heaving the first tires onto the conveyor and into the maw of the high-powered machine, imported from Missouri.

The shredder’s discharge is dubbed “tire-derived aggregate,” destined for local use as an all-purpose fill for construction, drainage works, road-building, erosion control, landfill cover, “all kinds of possibilities,” says Mark Rowlands, assistant director for solid waste at the Department of Environmental Health.

Already, he said, home builder Davenport Development and planners at Frank Sound’s mixed-use residential-recreation Ironwood community have agreed to take “TDA” for their projects, and names government’s National Roads Authority as a prime candidate for the material.

Rowlands is enthusiastic, not just about the apparently endless – and practical – uses of TDA nor the aesthetics of clearing years-old environmental blight, but also, chiefly, about the economics it represents: “Every material has embedded energy,” he says, calling it “the key to the whole developmental life-cycle.”

TDA simply redirects and repurposes the energy embedded in half-a-million vehicle tires, he says. Instead of burning the scrap and wasting its vast embedded energy in thick coils of toxic, oily smoke, the shredder leaves it intact, recycling it into alternate uses.

McLaughlin spoke to the economic value of the effort: “I am very pleased that we have begun work today on shredding these tires and that the waste can be used for construction projects on-island. This is a major moment as we consolidate our commitment to resolving the landfill issue that has challenged many different administrations in the past.”

Other issues at the landfill

Tires, however, are not, of themselves the most significant problem at the landfill, which receives between 60,000 and 80,000 tons of solid waste every year. In the 12 months between March 2014 and April 2015 alone, the landfill gained 75,000 tons of refuse.

A September 2016 report by London-based engineering and project management consultants Amec Foster Wheeler – and partner KPMG – said if nothing were done, the annual intake of solid waste at the landfill would rise to between 100,000 and 250,000 tons during the next 50 years.

Rowlands, however, is doing something about it under the unwieldy acronym of “ISWMS,” (pronounced “IZ-wims”), the Integrated Solid Waste Management Scheme.

“We are shooting for the end of April to identify the preferred candidate to work out a waste-to-energy compost system and processing of recyclables,” he says.

The Amec-KPMG Sept. 19 Outline Business Case recommended a public-private partnership to execute ISWMS, citing governmental “scarcity of funding, lack of budgetary commitments or lack of expertise.”

Rowlands says government has “two strong bidders” to manage the project, but declines to name them.

Projecting a $10 million capital investment, however, Rowlands says the winner could take another year to launch the plan, estimated to take 25 years and operating costs of $538 million.

“We’ll work out a schedule of implementation once the contract starts,” he says.

Underlining the slow – if steady – pace of remediation, the business case calls for a waste-to-energy facility with a 53,000-ton capacity, operational only in 2019/2020; a facility to recover and bale recyclable materials, with an 11,400-ton capacity, operational in 2019/2020, (DEH already operates a small materials recovery facility at the landfill); a 3,600-ton waste-transfer station from Cayman Brac, also ready in 2019/2020; a 300-ton waste-transfer station from Little Cayman, also operational in 2019/2020; and, according to one government press release, “the potential introduction of curbside dry recyclable collections with a materials recovery facility post-2020.”

The report also envisions public recycling depots with a 1,300-ton capacity. Last June, DEH took over extant stations at seven supermarkets after local reprocessing company Junk – owned by former MLA and Minister of education Roslton Anglin – said it could not afford to continue.

Since launching the effort, DEH reports growing contributions at the stations, recording deposits last year of 192.6 tons of solid waste. For the second half of the year, DEH registered 20.34 tons of plastic, 42.74 tons of mixed paper, 19.78 tons of cans and 109.77 tons of glass and ceramics.

Through mid-February 2017 alone, DEH has collected 9.5 tons of plastic, 13.79 tons of mixed paper, 2.72 tons of cans and 28.3 tons of glass and ceramics.

Waste-to-energy efforts

Estimates are that ISWMS composting, expanded recycling and innovative waste-to-energy facilities could reduce landfill waste from 60,000 tons each year to approximately 10,000 tons, while waste-to-energy operations could generate up to 540 kilowatt hours of energy per ton.

Current recycling efforts, however, are preliminary to the larger ISWMS project, which anticipates island-wide curbside recycling stations. At present, the immediate goal is to minimize additions to the George Town Landfill. DEH has gained a modest boost from private industry.

For example, according to Gene Thompson, director of Health City Cayman Islands, waste-reduction initiatives have diverted 108,000 pounds of HCCI waste from the landfill, 68 percent of the facility’s output. Of that total, 46,635 pounds were recycled, and HCCI treated its own medical waste on-site in East End.

Additionally, through careful building management and diversification of heating, ventilation and air-conditioning systems, HCCI saved nearly 4.3 million kilowatt hours, translating to nearly 300,000 gallons of diesel fuel and 7.1 million pounds of carbon.

Water conservation and re-use for irrigation, cleaning and other non-potable activities has saved 7.2 million gallons and diverted 4.5 million gallons of effluent, he says.

Camana Bay, for its part, collects 200 pounds of aluminum daily at its own recycling stations, and gathers cardboard from its tenants, shipping it off-island through Foster’s Food Fair.

Dart Realty also collects glass and ceramics, feeding nearly 2,000 pounds per day (2 cubic yards) to its crusher – the only one in Cayman. DEH pulverizes all its glass at Camana Bay, which uses it “for a variety of purposes, especially construction. It has been incorporated into pavers, the road surface on new roundabouts and into decorative and functional items such as plant pots,” according to a statement.

At the same time, Camana Bay’s facilities team crushes fluorescent bulbs “in negative air in order to prevent mercury exposure to staff. The resulting crushed glass, phosphor, mercury and aluminum is all recyclable by specialist companies in the United States,” says the statement.

Dart’s Kimpton Seafire Resort and Spa, which opened in November, uses 7,500 LED bulbs and has used the material from the older crushed bulbs to adorn the walking and bicycle paths that wind through the hotel property.

National energy policy

Camana Bay’s enthusiasm for LED lighting also contributes to government’s other ambitious “green” initiative, an effort to create a long-term national energy policy.

A consultation document published in February seeks a path through 2037 “to reduce reliance on high-cost, imported fossil fuels,” which pose “a risk to the competitiveness of the Caymanian economy and the standard of living of residents and therefore an inhibitor to socioeconomic development.”

It follows a draft 2013 NEP and the 2016 creation of an NEP Review Committee. According to its introduction, the February document “sets the stage for the achievement of the territory’s energy goals and takes into account the imperative to reduce greenhouse gas emissions, thereby lowering the carbon footprint of the Cayman Islands.”

The plan “focuses on exploiting renewable energy, promotes energy efficiency and conservation measures and supports energy security by reducing the reliance on imported, fossil-based fuels.”

The 30-page document examines “lowering the carbon footprint of the Cayman Islands,” seeking to generate 70 percent of local electricity through renewable sources by 2037, and to limit 2020 greenhouse gas emissions to 2014 levels, reducing them 10 percent by 2025 and another 20 percent by 2037.

“More than 99 percent of energy demand in the Cayman Islands is met by oil products, largely diesel and gasoline,” the report begins. The Caribbean Utilities Company imports approximately 31 million gallons of sulfurous diesel fuel each year to generate commercial and residential electricity.

Authors divide the study into four sections: two pages reviewing energy use and policymaking; nine pages explaining four energy-efficiency goals; 14 pages providing strategic details for seven energy sectors – including transport, land use and buildings, water, climate change and the environment – and two pages describing implementation and monitoring. Two appendices complete the document.

Strategies include a broad range of public-education programs through schools, legislation and government-funded renewable-energy projects, including technological innovation.

Government will require local utilities to purchase renewable energy from third-party providers; regulators will help develop financing mechanisms to create “green financial incentives” for household-owned generating systems; new tariff structures will encourage energy efficiency; wind energy will be boosted by reviewing airport exclusion zones and restrictions created by East End’s Doppler Radar system; and regular reviews will weigh use of both liquefied and compressed natural gas.

The document calls for increased use of electric and hybrid vehicles, and commits government to reducing its own 1,100-vehicle fleet between 7 percent and 10 percent in the first five years of the policy.

It also commits to better and expanded public transport, using electric and hybrid vehicles, while developing a comprehensive network of bicycle lanes.

Building codes will set standards for ready incorporation and retrofitting of renewable energy systems into buildings, and demanding minimal standards for lighting, insulation, and cooling and ventilation equipment.

Among other ideas are water conservation and recycling; prudent disposal of waste oil; improved pedestrian facilities; traffic management and employee telecommuting; and a review of the 40-acre limit on Planned Area Developments, encouraging construction of commercial centers in each district, decongesting roads and central George Town.

James Whittaker, founder of solar designer and system installer Greentech, and chairman of the nonprofit Cayman Renewable Energy Association, said the 70 percent renewable-generation goal was a minimum target, amenable to more aggressive action.

A CREA implementation committee will consider more ambitious targets, he said, and quicker achievement of the survey’s 2037 peak is next, but would “keep the NEP on track” in the meantime.

Addressing the report and its admonitions about economic growth, Whittaker observed that “Ernst and Young and the Caribbean Development Bank suggest there are tens of millions of dollars to be spent in the next decade,” creating viable renewable-energy systems.

“If Cayman can set itself up as a regional hub,” he says, “we can grow this industry, become a pillar of the economy – and that means the money stays here and the intellectual property stays here,” rather than merely providing local labor and advice to projects elsewhere, then returning home to wait for the next telephone call.

Instead, he says, Cayman could create its own institutions, its own expertise, its own cadre of professionally accomplished people, “and we can build solar farms, grow our own resources and grow our competence.”

Solar, geothermal, LEEDS and the rise of the electric vehicle

Cayman's John Felder delivered the first electric car to Cuba earlier this year. Guyana's ambassador to Cuba Halim Masjeed took delivery of the Nissan Leaf.

The ceremony was less than “historic,” but marked a minor milestone as Cuba’s first electric car was handed over in Havana on March 17 to its Guyana Embassy owners by Cayman Automotive’s John Felder.

Felder’s U.S.-based Premier Automotive Export subsidiary of Cayman Automotive shipped the US-built, four-door Nissan Leaf to Havana in late February, abiding by the terms of the four-year license issued by the U.S. Department of Commerce‘s Bureau of Industry and Security authorizing Felder to ship American-built cars to the island state. Nissan builds eight models, including its electric-powered Leaf, in Tennessee and Mississippi.

The commerce department license was the first for a U.S. car company in more than 50 years, coming in the wake of Washington’s recognition of the Havana government in December 2014, and boosting Felder’s profile both regionally and locally.

He plans to send two more EVs to the Guyana Embassy and hopes to send them directly to the South American nation in the near future. Meanwhile, he has discussed EVs with eight more Cuba-based embassies and has provided a leasing quote to the Mexicans.

Cayman impact

It is in Cayman, however, that he has had his greatest impact through his George Town-based Cayman Automotive, trading largely in U.S., Japanese and Chinese trucks and cars since 2005.

In 2009, he became Cayman’s sole electric-vehicle dealer, selling the first “EV” to Camana Bay and installing almost a dozen-and-a-half charging stations across Grand Cayman, where he has put 52 electric cars on the roads. Another 15 gas-electric hybrids also ply the streets.

Camana Bay’s two-position charging station – outside Bay Market – is partially fueled by solar panels, but form only a tiny part of the development’s 11 Town Centre rooftop arrays.

The latest adorns the four-story, 86,000-square-foot office-and-retail block at One Nexus Way. Scheduled to open in the autumn, it is a twin to the adjacent 18 Forum Lane, which opened in January 2016.

The 100 kilowatt array atop the new building – like that next door – is linked to Caribbean Utilities Company’s Consumer Owned Renewable Energy program by which CORE customers sell to CUC all their solar- or wind-generated electricity, then buy it back at discounted rates as needed.

Nexus Way supplies its own hot water and boasts a 50,000-gallon rainwater cistern. Both it and its Forum Lane neighbor are certified “gold” by the U.S.-based Green Building Council under its “Leadership in Energy and Environmental Design” program, created in 1998 to promote efficient use of resources, particularly energy and water. The council issues LEED ratings on four levels: certified, silver, gold and platinum.

Energy efficiency

According to the camanabay.com website, One Nexus Way “will be one of the most energy-efficient commercial buildings of the region.”

Forum Lane, in fact, was the first mixed-use commercial building in the Caribbean to achieve LEED gold; Nexus Way will attract a similar rating; Camana Bay’s 68,000-square-foot, five-story 94 Solaris Avenue gained a LEED “certified” rating at its May 2012 opening.

In November, Dart Realty opened Cayman’s newest – and LEED silver – luxury hotel the 266-room, 62-residence Kimpton Seafire Resort and Spa.

Geothermal air conditioning cools residences and rooms, while a 143,000 watt, 469-panel CORE-linked rooftop solar array supplies most hotel needs.

Savings between 50 percent and 80 percent of standard lighting costs are achieved with 7,500 LED bulbs, while two 30,000-liter cisterns collect rainwater, augmented by a ground-level reverse-osmosis desalinazation system.

Camana Bay has no monopoly on LEED certification and solar arrays, however. A plethora of private homes, commercial buildings and government offices bear LEED ratings and solar installations.

REMAX Partner Michael Joseph lists 16 LEED homes in Cayman, nine either completed or under construction, and seven more in design.

Another six commercial structures, he says, are LEED certified, including the 150,000-square-foot, $85 million Government Administration Building, which opened in March 2012 with Cayman’s first LEED designation – silver – and Mary Street’s Arch & Godfrey construction-company headquarters, which earned the island’s first commercial “platinum” award last year.

LEED or not, most energy-efficient homes have been built by Endless Energy’s Jim Knapp and Greentech’s James Whittaker, also chairman of the Cayman Islands Renewable Energy Association.

Naul Bodden’s NCB Group, while not formally working to LEED mandates, has pursued comparable standards, building a dozen residential and commercial projects employing solar generation, often augmented by bill-busting geothermal cooling systems that last as long as two decades – and, saliently, keep heavy equipment out of the George Town landfill.

Knapp’s own home was the first in the Cayman Islands to go “off-grid,” generating enough power through its 80 panels and 72 storage batteries to enable him to sever connections with CUC and its national transmission and distribution network.

He has designed installations for homes in South Sound and Parkland Close, and took NCB’s Cayman Technology Centre off grid, the first in the Caribbean and the second in the Western Hemisphere – after a building in Seattle, Washington.

“It has 1,427 solar panels for the four buildings, 33,000 square feet, and 400 kilowatts of zinc-bromide battery storage,” says John van Ryswyk, owner of GeoCayman, NCB’s geothermal contractor. The center, he says, demands “about half” the 1.98 megawatts to 2.2 megawatts generated daily by the solar system, saving CTC’s Security Centre anchor tenant – occupying 16,000 square feet – $15,000 in monthly electric bills between solar generation and geothermal cooling.

NCB recently employed a “sustainability coordinator,” Steven Schiffbauer, who says the two systems have achieved efficiencies that mean “we are now past the point of viability, and are now profitable.”

Van Ryswyk rejects criticism that subterranean geothermal systems can only achieve cooling commensurate with Cayman’s 75-degree ground temperature, pointing to NCB’s Jacques Scott warehouse refrigerators.

“Heat always goes to cool,” he says. “You only need a temperature differential.”

“Geo” systems essentially work by removing warm air and sending it through a series of underground pipes set in an “s” configuration. Their interface with Cayman’s high water table and porous limestone substrate quickly wicks away heat, returning cool air to the building.

NCB’s Crystal Harbour developments include Cypress Pointe’s 19 residences – with Cayman’s first home-geothermal system – and Cypress Pointe North’s 38 residences, each with geothermal and between 62 solar panels and 88 solar panels.

The 26-townhouse Solara, adjacent to Cypress Pointe, and South Sound’s 24-condo Tides also incorporate solar and geo along with PEX piping –flexible polyurethane tubing and conduit replacing traditional, and highly toxic, polyvinyl chloride plumbing – and insulated concrete forms, an interlocking system of walls, floors and roofs creating a sort of sealed box that keeps out heat and preserves cooling.

ICF construction is integral to energy efficiency, says Whittaker, who designed Savannah’s “Sailfish,” the first LEED-certified home in the world, built in 2011 after GBC’s 2010 selection of Cayman, Saudi Arabia, India and China for its international pilot program for residential structures.

“It was a coup that we got ahead. We started right away building Sailfish,” Whittaker says.

He also designed Bella Verde, Dart Realty’s LEED-gold home in Salt Creek. Construction started in 2014 on the 6,920-square-foot, five-bedroom, two-level home, achieving energy savings of nearly 70 percent compared to similar, more-traditional houses.

In 2015, Bella Verde won the Governor’s Award for Sustainability, and subsequently sold just prior to completion

ICF, Whittaker says, is essential to a “good sustainable design,” which he calls “80 percent of the battle.” The right “box” – roofs, walls, windows and doors – yields almost zero energy consumption; is 95 percent free of indoor – and carcinogenic – “volatile organic compounds” such as pastes, glues, plaster, stucco and adhesives; largely eliminates ventilation to the outside – particularly near roads; filters water to U.S. Environmental Protection Agency standards, particularly for chlorine content; and eliminates PVC pipes as far as possible.

No electricity bills

He also retrofitted George Town’s Arch & Godfrey office, which, since its 2016 LEED-platinum certification, has “never paid an electricity bill.”

“In fact,” he says, “negative $15 was his [Managing Director Garth Arch’s] last bill,” meaning CUC has paid the company for its CORE-generated power.

“Garth’s house,” Mr. Whittaker said, “is at zero electricity now,” compared with an annual bill as high as $10,000 for a conventional home.

According to the company’s www.arch-godfrey.com website, the building started as a 100-year-old Caymanian wooden cottage … completely restored [using] all original materials … Features include the highest-efficiency solar system by SunPower, high energy-efficiency ratings, natural lighting, native landscaping and structural integrity to withstand Category 5 hurricanes.”

On April 10, local solar generation will hit a landmark as CUC and its North Carolina-based Entropy Investment Management partner turn on the first of five sections of Bodden Town’s 21,690-panel, 5 megawatt utility-scale “farm,” Cayman’s first.

Proceeding one week at a time, planners will finish commissioning the $6 million farm at the end of the month, pumping clean power into Cayman’s T&D grid, capping six years of sometimes-tortuous effort.

The Electricity Regulatory Authority and CUC initially sought 13 MW of renewable energy in August 2011, only naming two U.S.-based winners 26 months later.

The Chicago company subsequently dropped out, triggering a renewed selection process, while the Pittsburgh company sold its interest to Entropy, which formed local affiliate Entropy Cayman Solar Ltd.

Price negotiations dragged until Oct. 30, 2015, followed by U.S. financing problems that delayed the start of construction from Oct. 2016 until late-February 2017.

Built by local contractors Clan Construction and Mega Systems – with a small role for both Knapp and Whittaker – and managed by Gene Thompson, director of the Thompson Development Group and East End’s Health City Cayman Islands, and Ryan Smith, HCCI construction and facilities manager, the 22-acre Bodden Town array is at last largely complete.

CUC has finished its interconnection facility, enabling grid access to Entropy’s 5 MW of solar power, which it will sell to CUC at 17 cents per kilowatt hour. CUC will add its own base rate – approximately 10 cents per kWh – to Entropy, bringing consumer costs to 27 cents, comparable to diesel-generated rates of 25 cents.

Meanwhile, Thompson and Ryan are building a four-acre HCCI solar array, scheduled to start “by the end of the summer, maybe September,” Ryan says. In a quid pro quo with Entropy, the two are working with the U.S. company’s managing partner David March.

“It’s in the design stage right now, and we’re doing legislation and contracts,” Ryan said, estimating “another two months to complete the load profile and final design.

“We need a building permit and that probably takes two-and-a-half months, so we’re pushing [to finish] by the end of the year.”

The array will produce 0.75 MW, cost $1 million to build and require “seven years to pay back.” It will not be linked to CORE, Thompson says, hinting at a looming dispute with CUC.

“All the power goes straight into the hospital,” he says, indicating, however, the 0.75 MW may not slake the hospital’s thirst for power, requiring the utility to play a role. Air conditioning, for example, is among any hospital’s chief expense and HCCI’s salt-water-based cooling system remains some years distant.

Thompson declined to elaborate, but the complexities were recently compounded when CUC announced CORE had reached its 6 MW cap, leaving unclear the future of the scheme. Its 331 connected customers – and another 186 still deploying generation systems – will generate 5.88 MW, leaving little room for addition.

Last week, CUC said it had “declared” a renewable-energy portfolio of 17 MW, with 6 MW for CORE and another 5 MW for Entropy.

“The remainder of the portfolio and how it is assigned, is under discussion with OffReg,” Cayman’s new Utility Regulation and Competition Office, a spokesman said.

“CUC expects that with the results of its Integrated Resource Plan in the next few months, it will be in a position to deploy strategies and programs to increase the portfolio substantially from 17 MW.”

On Sept. 1, the company announced an 18-week “IRP,” a consultant-led study described by Vice President for Customer Services and Technology Sacha Tibbetts as an effort “to analyze all energy resources that are viable and [to] consider their cost, reliability, environmental impact and other aspects,” yielding “a recommended portfolio of energy resources for the market.”

The 30-year forecast would ensure “all energy options were explored” as CUC decided what the grid could accommodate “in a safe, reliable and efficient manner,” positioning the company “to better understand the needs of the community” ensuring it had “the right energy resource mix for the future,” according to a Sept. 1 statement.

CUC said last week, however, that Virginia-based Pace Global Energy Services had missed the mid-January deadline. A spokeswoman was unable to predict when the study would finish.

“The consultants are still working,” she said. Since September, they had “participated in two public consultations and plan to have a third one before they present their findings to CUC.”

“As soon as I have the dates,” said, “I will let you know.”

The Rolls-Royce of reminders for Cayman’s regulated entities

Dickson and Peedom

On Jan. 17, 2017, Brian Leveson, QC, approved the entry by Rolls-Royce and the Serious Fraud Office into the largest deferred prosecution agreement of its kind. In what is a timely reminder for all regulated entities – including those in the Cayman Islands – Rolls-Royce’s cooperation with the regulator was considered to be an important factor in determining that the DPA was appropriate.

From a local perspective, the judgment is influential, because it highlights the importance of the provisions in the enforcement manual issued by the Cayman Islands Monetary Authority which address the level of cooperation by a licensee and the fact this is a key consideration when CIMA is determining what action it should take.


In 2012, postings on Rolls-Royce’s website about its business dealings in China and Indonesia came to the attention of the Serious Fraud Office. It caused the SFO to seek information from Rolls-Royce about its dealings with seven countries and ultimately led to the biggest single investigation conducted by the SFO.

Once it had been contacted by the SFO, Rolls-Royce immediately commenced its own investigation, which led to an internal report on the findings into these and other issues, which the English court described as “the most serious breaches of the criminal law in the areas of bribery and corruption (some of which implicated senior management, and on the face of it, controlling minds of the company).”

However, the court considered that entry into a deferred prosecution agreement – rather than a criminal prosecution – was appropriate for a number of reasons, including, but not limited to: the change in membership of Rolls-Royce’s board since the investigation had commenced; the impact a prosecution might have on the company and its stakeholders, including its 50,000 employees, shareholders and suppliers; and the saving of significant time and money which would otherwise form part of any prosecution.

Another important factor was that a deferred prosecution agreement “will likely incentivize the exposure and self-reporting of wrong doing by organizations in similar situations.” The point about “self-reporting” then led to an analysis of the “extraordinary cooperation” by Rolls-Royce with the Serious Fraud Office’s own investigation.

The consequence of entry into the deferred prosecution agreement is that criminal proceedings, which might otherwise be instituted, are suspended on condition that Rolls-Royce complies with strict measures imposed under the DPA, including the payment of a very significant financial penalty, the disgorgement of profits arising from the company’s misconduct, and the implementation of a compliance program which would avoid similar breaches occurring in the future.

The benefits of cooperation

In approving the DPA, the court noted that the “full and extensive nature of [Rolls-Royce’s] cooperation has led to the acquisition, and application of digital review methods to over 30 million documents.”

It separately noted the provision by the company of documents relating to its internal investigations, cooperation with independent counsel in the resolution of privilege claims, the provision of recorded interviews and findings on a rolling basis and liaising with the SFO and agreeing on how to approach any media enquiries. While Rolls-Royce’s conduct did not amount to self-reporting, the court was prepared to accede to the SFO’s submission that it should be treated as such, because of the level of cooperation exercised by Rolls-Royce as soon as the SFO’s investigation commenced.

In practical terms, the company’s level of cooperation resulted in the court applying a 50 percent discount to the financial penalty that was to be imposed on Rolls-Royce, which, applying the discount, reduced the penalty to 239,082,645 pounds(about US$300 million). Together with a condition that it disgorge all profits received as a consequence of its criminal conduct, this amounted to a total financial penalty of 497,252,645 pounds.

Rolls-Royce was also ordered to pay the SFO’s costs of approximately 13 million pounds on an indemnity basis. However, the economic benefit of its cooperation with the SFO cannot be overstated.

CIMA’s enforcement manual

The manual refers to the effectiveness of CIMA’s regulatory regime depending “to a significant extent on the maintenance of an open and cooperative relationship between the Authority and those whom it regulates.”

In considering what action to take, CIMA will take into account: “The willingness and ability of the licensee to cooperate with and assist the Authority in terms of its investigations and recommendations. This includes how quickly, effectively and completely the licensee brought the contravention to the Authority; the degree and timeliness of cooperation in meeting the requests of the Authority for information, documents etc.; any remedial actions the licensee has already taken or intends to take in rectifying the situation; and any action that has been taken to ensure that such a contravention does not arise in the future.”

Part 16 of CIMA’s enforcement manual addresses the prosecution of offenses and assessment of fines and penalties. The criteria for assessment includes considerable importance being attached to, among other things, “licensees making timely submission of reports and relevant documents.”

Although we are not aware of any recent decisions by CIMA which highlight the importance of cooperating with it in any regulatory investigation, CIMA’s enforcement manual makes plain the importance such conduct plays in assessing what action it should take.


The judgment and CIMA’s enforcement manual demonstrates that cooperation with the regulator will be a mitigating factor when assessing what financial penalty, if any, should be imposed. The judgment is also a stark reminder of the importance of being full and frank with the regulator once a regulatory breach has been identified, and the benefits of self-reporting once breaches are discovered.

As Sir Brian Leveson said, “A cynic (or irresponsible company) might look at the costs which Rolls-Royce have incurred … and wonder whether it would be more sensible to keep quiet and hope that its conduct does not fall under the eye of the authorities … that is to fail to understand that such an approach carries with it cataclysmic risks, which for Rolls-Royce would almost inevitably spell a far greater disaster.”

Cooperation with the regulator is clearly the more prudent approach once any shortcomings are identified.

Chamber president turns focus to education

Kyle Broadhurst

Education will be a central priority for new Cayman Islands Chamber of Commerce president Kyle Broadhurst.

The attorney succeeded 2016 president Paul Pearson in February.

While Broadhurst will serve a quick year in the role, he hopes to use his term to solidify educational collaboration between the chamber and government.

“The long-term vision would be to go to have a school system that’s producing students that are among the best in the world. What we should be aiming for is the absolute best,” he said.

“We’re dealing with a situation where we are a very small island, small population. We have a very high GDP per person. We should be shooting for the best.”

The Chamber has launched a series of focus groups and information sessions with government, schools and nonprofits aimed at identifying long-term needs. Broadhurst described a vision for the Chamber to become a permanent, vocal advocate for education and vocational training.

“One of the things I would like to see happen during the year I am at the helm is for the Chamber to form a definitive policy for how it’s going to do this in the future,” Broadhurst said.

“This is not a one or two-year thing that needs to be done. This is generational and it needs to be maintained. So it’s a never-ending effort.”

He encouraged youth to think creatively about their career goals. He pointed to the wide spectrum of professional needs in the Cayman Islands, from medicine to tourism.

“Chamber members want to see suitable, trained individuals that are capable of coming in and being part of their workforce or to start new businesses of their own so that our Chamber members can do business with them,” he said.

Public education initiatives

The Chamber will also step up public education efforts this year with a series of animated videos about economic development.

The 10-video series will launch April 5 at Regal Cinemas in Camana Bay.

“They are intended to be able to provide really digestible information, basically some simple economic information about how the economy works, what the role of the private sector is, what the role of government is, how that all interplays with each other,” Broadhurst said.

“Essentially the concept here is to start inserting information into the debate about economic growth, making sure the facts about what it is and what it isn’t are known.”

Candidate forums

Ahead of the May 2017 election, the Chamber will host candidate forums. It has planned 19, one in each constituency. The Cayman Brac forum will be broadcast on Rooster 101.9. All other forums will be broadcast on television.

Broadhurst said a Chamber survey indicated the most important election issues for its members include education, crime, economic growth, waste management and labor.

For more information, visit http://www.caymanchamber.ky/decision2017.html.

Cayman’s rental prices attractive compared to other financial centers

Rental prices in Cayman are on the rise and considered expensive by most, but an international comparison shows they are still moderate compared to other international financial centers.

Research by RENTCafé, a U.S. apartment search website, places Cayman behind 18 of the top 30 international financial centers in terms of apartment rental costs.

The study, which compares average rents for one-bedroom apartments in the world’s top financial hubs, features New York City as the most expensive place to live, with an average rent of $3,680, about twice the cost of a similar apartment in London.

One-bedroom apartments on Grand Cayman average $1,680 per month, according to data collected by RENTCafé.

Casablanca has the most affordable rental market of the surveyed financial centers, with average rent of $820, about half the cost in Cayman and four times less than the cost of an apartment in New York City.

The top three most expensive rental market examined by the report are in the United States, with San Francisco and Boston trailing New York.

In Asia, Hong Kong and Singapore are the most expensive places to rent, in fourth and seventh place, respectively, with average monthly rents of $2,740 and $2,050.

In addition to the Swiss high-end markets of Geneva (5) and Zurich (6), Cayman also trails the Chinese centers of Beijing and Shanghai, which are in 14th and 15th place on the list.

Naturally, the different rental costs are predominantly a function of average salaries and in some cases a reflection of different levels of infrastructure available in the various centers.

The most expensive U.S. cities fall well behind the top three cities in terms of infrastructure – Singapore, Frankfurt and Munich – as well as most major European cities, a March 2017 survey by human resources consulting firm Mercer found.

San Francisco (29) is the highest-ranking U.S. city, followed by Boston (35) and New York (44). Frankfurt and Munich are at the bottom of the list when it comes to rental costs, with average rents significantly lower than in Cayman at $1,350 and $1,050 per month.

Infrastructure and quality of life

Slagin Parakatil, principal at Mercer, said a city’s infrastructure, or rather the lack thereof, can considerably affect the quality of life on a daily basis.

“Cities that rank high in the city infrastructure list provide a combination of top-notch local and international airport facilities, varied and extended coverage through their local transportation networks, and innovative solutions such as smart technology and alternative energy,” Parakatil said.

“Most cities now align variety, reliability, technology, and sustainability when designing infrastructure for the future.”

Mercer incorporated the infrastructure ranking into a quality of living survey that takes accounts of infrastructure, rental cost, health and education services, recreation and the natural environment. In the survey, Austria’s capital, Vienna, ranked first for the eighth consecutive year and other European cities dominate the top 10.

Zurich is in second place, with Munich (4), Dusseldorf (6), Frankfurt (7), Geneva (8), Copenhagen (9), and Basel in 10th place. The only non-European cities in the top 10 are Auckland (3) and Vancouver (5).

London ranks sixth for infrastructure and 40th for quality of living.

Cayman was not included in the Mercer survey, but Nassau in the Bahamas ranked 113th out of 231 cities in terms of quality of living. In 2013, an HSBC expat survey showed Cayman as the fourth most popular country based on economic and quality of life factors.

RENTCafé derived the list of financial centers from Z/Yen’s Global Financial Centers Index and collected the average rents for one-bedroom apartments between 600 square feet and 999 square feet (55-85 square meters) in each of these 30 cities from several housing market data sources. They included Yardi Matrix for the U.S., Point2Homes for Canada and Global Property Guide for most international markets, with the exception of London (GOV.UK), Tokyo and Osaka (Utinokati), Hong Kong (HK Rating and Valuation Department) and Dubai (Bayut).

Brexit and the Cayman Islands – preparing for impact

The current consensus on the possible impact of Brexit on the Cayman Islands and indeed the Caribbean is simply that it all depends on the final Brexit deal negotiated between the U.K. and the EU. But there are a number of reasonable implications and we need to prepare for them.

A so called “hard Brexit” is by all accounts the more likely scenario if we are to believe the most recent reports, suggesting that when the ink dries on the U.K.’s deal to exit deal the EU, there will be immediate consequences for everyone. “Hard” also implies that the negotiations will be tough, and that means not only tough in terms of legal, trade and regulatory considerations, but also in terms of political ramifications.

Everyone expects there to be at least some reasonable transitional periods to allow a smooth transition even in the hard Brexit scenario.

How might this impact the Cayman Islands? The easy way out is to say we simply do not know at this stage, and of course it depends on the results of the negotiations. But to leave it there means the Cayman Islands is unprepared.

Market access

Banks and other financial services institutions in the EU are already considering what Brexit would mean for their existing access to EU market and their clients. In the case of the Cayman Islands, our financial services sector relies primarily on North America, as that is where the majority of our client base resides.

EU President Donald Tusk holds the letter invoking Article 50 of the Lisbon Treaty from the U.K. Prime Minister as he speaks during a news conference at the European Council in Brussels on March 29, 2017. MUST CREDIT: Bloomberg photo by Jasper Juinen.

But we also have clients in many other parts of the world, including in the EU. Anecdotal evidence suggests this may account for somewhere between 15 percent and 20 percent of our clients. This may not appear to be significant, but it’s certainly likely to be a material source of revenue for many institutions operating from the Cayman Islands.

Operationally this may mean that some institutions would need to set up a physical presence in the EU in order to continue to have such access. A cost benefit analysis of that prospect could easily lead to some institutions making the decision to pull out of the EU market entirely. For others it would mean additional investment to set up within the EU. Either way it has financial implications.

Regulatory implications

From a regulatory perspective, it is widely accepted that the discussions will evolve around whether non-EU countries have a regulatory regime that is deemed “equivalent” to that of the EU, as a prerequisite to continue having access to EU clients.

That means that the Cayman Islands government may well be faced with further calls to amend its wider regulatory framework in order to meet any conditions if any aspect of our regulatory regime is not deemed to be equivalent. This implies more cost not only to the government, but also to the various institutions, as most regulatory enhancements lead to some actual costs incurred at the operational level in terms of new systems or staffing resources.

‘Tax haven politics’

A hard Brexit can only be preceded by tough discussions, which will involve politics. The Cayman Islands and other IFCs related to the U.K. have been under constant pressure (and that was putting it lightly) for years from the OECD and major onshore centers to make changes to our regimes. And while some of the requested changes relate to legitimate global standards, many are aimed at stemming the flow of legitimate business that we derive from areas such as the EU.

It should come as no surprise to us if a negotiation between the U.K. and the EU leads to centers such as the Cayman Islands being offered as pawns on the table. The EU may wish for the U.K. to pressure its territories to make further changes to our regime that we might not wish to make at this time or at all. That request may be attached as a quid pro quo for a separate benefit that the U.K. wishes to gain from the EU. We should be prepared to argue our case with objective evidence if these requests start to filter through.

Where does that leave us?

In addition to market access, regulatory pressures and political influence on the nature of our services to clients, the Cayman Islands should also be aware that generally our attachment to the U.K. means there are potentially numerous other general implications such as our basic EU-related travel privileges that may also come into play.

Brexit is still uncertain, but there are some very clear potential impacts, most of which are negative. If nothing else, we should be considering and putting contingencies plans in place both at the government level as well as operationally for individual financial services institutions.

In the case of Cayman Islands-based financial services institutions, this may mean seeking out possible partnerships in the EU, which is a cheaper alternative to setting up a physical presence. FIs can also look at ways to reduce the cost of the Cayman Islands operations in order to redirect investment to setting up additional operations in the EU.

In the case of the government, it means considering existing EU regulations that affect the financial services industry and how Brexit might impact them. The EU Savings Directive and the AIFMD are just two examples of such initiatives.

Paul Byles is owner and director of FTS, which provides regulatory, economic and management consulting services. He has worked in the financial services industry for 25 years and is a former director of a big four consulting firm and a former Head of Policy at the Cayman Islands Monetary Authority. He is also former chairman of the financial services council, the advisory body to the Cayman Islands government.

Why hedge funds underperform

The bull market in stocks recently celebrated its eighth birthday. But the current upswing in share prices is already quite old by historical market standards. Although bull markets usually do not die of old age alone, nobody knows for sure for how much longer this one will survive. But whether its death comes tomorrow or in several years, the performance so far is impressive.

This applies in particular to the U.S. stock market. The S&P 500 Index has risen 254 percent since March 2009. Beside this, we are currently witnessing the second longest run without a 10 percent correction on a monthly basis. “A true secular bull market continues to unfold,” says Mensur Pocinci, head of technical analysis at Credit Suisse.

Active strategies continue to lag

Normally, the interim result is reason enough to celebrate, but not all market participants are in the party mood. Rather, many speak of the most hated bull market of all times. The latter can be explained by the many crises in recent years, which helped to keep the mood of many market participants in check.

But that is not why the average hedge fund investor is probably not as satisfied with the past eight years as investors who just put their money in an S&P 500 Index-ETF. Their sour disposition can simply be explained by the fact that they were left behind like other leaders of the last decade, such as gold, emerging market equities and commodities.

Using Pocinci’s performance data as a benchmark, they have, in fact, every reason to be sour. According to him, the Hedge Fund Research Index (HFRI) achieved on a global basis since March 9, 2009, a total return of just 2.5 percent per year. The yearly average gains of the HFRI Equity Hedge and of the HFRI Macro were even worse, with 2.3 percent and 1.5 percent, respectively. That means they could not compete at all with the increase of 19 percent per annum, which the S&P 500 Index locked in at the same time.

Copycats destroy the performance

This striking result raises the question of how to explain the huge difference in performance. In that context, Pocinci asks himself whether it could be that a large part of the secular bull market in U.S. equities was supported by endowment envy. He is referring to the following observation: When the historic performance of Harvard and Yale funds became public in 2006, it did not take too long for many endowments and other investors to copy the asset allocation of Harvard and Yale.

According to Pocinci, this development did not come as a surprise, if one compares the performance of the S&P 500 to alternative investments from 1999 until 2006. Back then, the HFRI Equity Hedge gained 11 percent per annum, while both the HFRI Global and the HFRI Macro gained 9 percent. However, the S&P 500 Index came up with an average yearly increase of only 3 percent.

Equities and alternatives swapped places

The balance of forces between 1999 to 2006 was therefore exactly the opposite of what happened between 2009 and 2017. Based on that, Pocinci comes to the following conclusion: “After reading the book and accepting the new asset allocation as the solution to all questions, U.S. endowments walked the talk and moved heavily away from U.S. equities into alternatives. One could say it was equities and alternatives that swapped places as equities moved from 48 percent to 35 percent and alternatives from 35 percent to 53 percent.”

According to Pocinci, it was only logical that Harvard and Yale were unable to repeat their outperformance against all endowments and Ivy League universities. But it was also not surprising that the overall strategy lagged substantially the buy-and-hold returns. This finding should remind investors how essential it is to have a proprietary investment process and how important it is to avoid doing what the crowd does. The result also should remind every investor of the importance of the costs connected with an investment vehicle on the final performance. In that respect, it has to be considered that the average hedge fund charges a 1.50 percent management fee and a 17.5 percent performance fee – a big burden in the attempt to beat the overall market.

Investors still doubt the secular bull market in U.S. equities

Against the backdrop of these elementary investment rules, the outcome of a 2016 survey is unbelievable from Pocinci’s point of view, since it showed that endowments, foundations and other institutions plan to dramatically reduce their allocation to U.S. equities over the next three years. Instead, they intend to invest more money in alternative investment products.

That is a planned behavior that somehow gels with the fact that the equity allocation of U.S. pension funds does not stand far from secular lows similar to those in 1974 and 2009. Behavioral patterns like that can typically be observed at the start, not the end, of a secular bull market. Pocinci interprets all this as an indication that the secular bull market in the S&P 500 Index is set to continue. If that forecast should prove to be right, it remains to be seen whether hedge funds will be able to catch up in the performance contest with the leading U.S. stock market indices like the S&P 500.

If it were up to investing legend Warren Buffet, the answer is already clear. The self-made billionaire recently slammed hedge funds again in an annual letter to shareholders published by his investment company Berkshire Hathaway. Based on the harsh criticism mentioned in there, he is obviously more than ready to renew his bet that a basket of hedge funds will also fail to keep pace with the S&P 500 Index fund.

It will be interesting to follow, whether the hedge fund industry can fight back and prove Buffet wrong.

UK criminal offense for facilitating tax fraud affects Cayman service providers

Jennifer Haslett, the Corporate Crime and International Engagement Lead at the U.K.’s HM Revenue and Customs, speaking at a Cayman Finance tax event in March.

Financial services providers in the Cayman Islands may well be within the scope of new corporate criminal offenses for the facilitation of tax crimes both in the U.K. and in other countries.

At an event organized by Cayman Finance in March, officials from HM Revenue and Customs presented details on two new criminal offenses which are going to be introduced by the U.K. Criminal Finances Bill. The bill is currently going through the committee stage in the House of Lords.

Once the bill is enacted, any business with U.K. clients or with an office in the U.K. could face criminal liability for tax crimes committed by its representatives.

Officials at the event said the Swiss data leaks demonstrated to HRMC that in cases when professionals were deliberately helping clients commit tax fraud, U.K. criminal law makes it difficult to prosecute the corporate entities they work for, if they make a deliberate effort to offer illicit services or turn a blind eye to the actions of their employees.

To reach a conviction of such an organization under common law, prosecutors must prove that senior members have been actively involved in the financial crime.

This is a disadvantage to smaller organizations whose management will be more hands-on and involved in wider decision-making than the senior management of large multinational corporations.

The two offenses also aim to close certain loopholes under current law. HMRC officials said they concluded from the data of various taxpayer disclosure facilities that professionals who were involved in deliberately providing illicit services were attempting to hide in the least transparent jurisdictions.

“They were seeking to hide in the gaps between domestic criminal law systems and they were quite effective with that,” said Jennifer Haslett, Corporate Crime and International Engagement Lead at HMRC.

This meant that to be effective, the new types of corporate offense needed to apply globally.

The U.K. Criminal Finances Bill introduces one corporate criminal offense for cases of an individual criminally facilitating a U.K. tax loss and another that applies to an individual criminally facilitating a tax loss outside of the U.K.

The domestic tax offense

The domestic offense can touch on any entity, anywhere in the world, that is providing services to an individual or corporate U.K. taxpayer.

“The key message is your business does not need to be based in the U.K., it does not need to be headquartered in the U.K., it does not even need to have an office in the U.K. to be in the scope of this offense,” Haslett said.

The new corporate tax offenses take effect only if a taxpayer has committed criminal tax evasion and a professional has deliberately and dishonestly facilitated the tax evasion. This is already a criminal offense under existing laws, Haslett emphasized. The only new element is that the organization that the facilitator was providing services for when committing the fraud can now be criminally liable as well.

An important element is that it is not just employees that can attract liability for a company, but also agents and individuals employed by another organization.

This targets service providers who may choose to contract out services that are illicit to business partners. “You cannot subcontract out of liability anymore under this offense,” Haslett noted.

For instance, if a Cayman service provider has a client with a U.K. tax liability and someone provides services on behalf of the Cayman service provider from anywhere in the world and deliberately helps the client to commit tax fraud, the Cayman Islands business will be automatically and strictly liable in the U.K.

Under the proposed law, HRMC does not need to prove intent, only that the corporation failed to stop the representative from committing the criminal act.

The corporation can put forward the defense that it had put in place reasonable procedures to prevent fraud by its staff.

What constitutes reasonable procedures will be different for every organization, and HMRC suggests companies follow a principles-based approach.

Service providers should carry out a risk assessment of how their services could be used to facilitate financial crime, put in place procedures and communicate to staff what is expected from them, together with training, monitoring and regular reviews.

These are not necessarily new things, Haslett said. “I would imagine that a firm operating in the financial services sector in the Cayman Islands, when you do a risk assessment, you will find at least nine-tenths of your risks are already addressed, are things you are already doing.”

Examining the agency relationships is the most likely gap, she said, “but not necessarily a big gap.”

Overseas tax offense

The overseas tax offense is a completely new way of using international criminal law to tackle financial crime. Haslett explained that to create a level playing field it is not enough for HMRC to protect its own revenue. “We have to ensure that businesses operating in the U.K. or individuals visiting the U.K. are held to the same standard as British businesses headquartered in the U.K.”

The overseas offense, therefore, applies if there is a tax loss in an overseas jurisdiction that was criminally facilitated from within the U.K., or if the facilitating services have been provided on behalf of an organization that is carrying out a business activity in the U.K.: for instance, if an employee of a Cayman company working in the Miami office helps facilitate criminal tax evasion for a U.S. client in the United States. If the Cayman company also has a business presence in the U.K., or if the facilitation happened in the U.K. during a business trip, the Cayman organization is within the scope of this offense. “You could face investigation and prosecution in the U.K. because one of your people facilitated tax loss in the United States.”

The offense can apply only if the country suffering the tax loss has U.K.-equivalent criminal offenses both in terms of the tax fraud and the facilitation of the tax fraud. This is the case in most countries with personalized tax systems.

However, Haslett explained, the overseas corporate fraud offense is not designed for countries that faced a tax loss and can take action. It is rather designed as a failsafe if a country is unable or unwilling to take action.

“It is only if there is a failure of justice that we will take action,” she said.

Financial centers targeted in sophisticated phishing scams

J. Peter Bruzzese speaks about cyber security technology at the National Gallery.

Recent email scams directed at Cayman Islands government and law enforcement point to a general rise in sophisticated phishing efforts, warns eShore managing director Polly Pickering.

While many businesses still feel immune to such attacks, Pickering encourages professionals to learn from high-profile cases like the Panama Papers before hackers hit at home.

“Any organization is only as strong as its weakest user,” Pickering said during an eShore event at the National Gallery last month.

Although technology can prevent many cyberattacks, it cannot prevent well-meaning employees from following bad links or downloading infected attachments.

EShore digital marketing specialist Dan Whiteside said 91 percent of phishing attacks start with email, pointing to the need for dual security between staff and technology.

He encouraged companies to strengthen their human line of defense, as well as invest in preventive technology to avoid total reliance on employees.

PhishMe regional sales director Jeffrey Fleischer used prairie dogs as an example of how businesses can improve cybersecurity. Just as the burrowing rodents collectively communicate threats with the rest of the colony, Fleischer said employees should begin flagging scams for their work team.

Rather than deleting an obvious phishing email and moving on, Fleischer encouraged users to flag such messages for their IT team. This way the scams become part of common knowledge and can improve the organization’s overall security.

“We need to condition employees to be vigilant and report suspicious activity,” he said.

He suggested businesses develop a response plan and create an “abuse box” where employees can report suspicious activity.

J. Peter Bruzzese, author of “Conversational Geek,” described the rise in ransomware and “whaling” attacks directed at high-level staff.

As hackers evaluate potential victims, Bruzzese said, they look for gaps in protection to find an easy in.

“Bad guys put you on short list when you don’t have security protection. If I see you are putting some effort in for security, I don’t want to deal with that,” he said.

He described cybersecurity tools as similar to Icarus’s wings, crafted by his father Daedalus to escape Crete. While the wings were functional, they were also subject to user error: flying too high or too low. When businesses ignore best practices online, they also risk the failure of their tools.

Bruzzese encouraged multiple lines of defense, starting with staff training. To protect data stored in digital clouds, he suggested a security tool like Mimecast.

As hackers become more interested in financial gain, places like the Cayman Islands will need to become more vigilant, added Benji Asquith, senior technical specialist for eShore.

“There’s a sense of flying under the radar. That is quickly pivoting and we’re starting to realize that financial centers like the Cayman Islands are becoming more of a target,” Asquith said.

“It’s completely financially motivated nowadays. When you look at 10 to 15 years ago, hacking someone was about bragging rights and you got a lot more high school kids doing it for the glory. But now it’s a professional operation. It’s a business, and the bad guys are following the money.”

Since many businesses do not publicly discuss when they’ve been hacked, he warned that targeted phishing efforts could be more widespread than they appear.

Asquith advised that many hackers will use a side door to access data. They may target a small consulting company to access a large business.

“Think about the data that’s on your systems. No one is necessarily coming after your data, but they’re coming after your clients’ data. If I want to target a law firm, I’m going to look for those peripheral, easiest ways in. Maybe I actually target the two-man accounting firm that’s going to have all of your data anyway,” he said.

He encouraged businesses to avoid complacency.

“A lot of people think they’re OK. But hope is not a strategy,” he said.

A pre-emptive versus a data-driven Federal Reserve

Brendalee Scott-Novak, Butterfield

Immediately following the Federal Open Market Committee’s (FOMC) decision on March 15 to raise the Fed funds rate to 0.75 percent to 1 percent, bond and equity markets rose in spectacular fashion. Currency markets quickly joined in the fanfare, sending the U.S. dollar sharply lower. In what is considered a “Goldilocks” environment for risk assets, the simple message from Chairwoman Janet Yellen is “the economy is doing very well.”

Since the credit crisis, the FOMC has worked tirelessly to convince markets that all policy decisions will be highly data dependent. Delivering a 25 basis point move in December, coupled with another 25 basis point hike 12 weeks later, the Fed is sending a clear message that the U.S. economy is on a solid path to growth.

The March move marks the third increase in rates since adoption of the zero interest rate policy, suggesting rates are still quite truncated near the lower bound of the interest rate spectrum. With Core PCE (Personal and Consumption Expenditure) hovering around 1.7 percent and the diffusion index of major inflation components remaining very much in negative territory, inflation, while inching up a bit, is not at levels to be concerned. Analogous to these factors, there is little evidence of significant wage pressures on the horizon.

This then begs the question, if prospects for the U.S. economy appear to be as well anchored as the Fed advocates, what accounted for the dovish sentiments in the FOMC reports?

The recent tightening actions and optimism from the chairwoman seem to run counter to those sentiments. For the two previous hikes, the FOMC unanimously voted to support the 25 basis point moves. The most recent hike, however, saw one voting member dissenting in favor of maintaining the existing target range. In addition, the forecast for the natural rate of unemployment was trimmed by one-10th of a percentage point, suggesting that slack remains even as employment improves and prime-age working Americans re-enter the labor force. With further revision still on the table, the labor market may have much more room to run before wage pressures (the greatest contributor to inflation) becomes a real concern.

Janet Yellen, chair of the U.S. Federal Reserve, during a House Financial Services Committee hearing in Washington on Feb. 15, 2017. MUST CREDIT: Bloomberg photo by Aaron P. Bernstein.

Perhaps the strongest dovish sentiment in the reports was the change in the committee’s statement surrounding its inflation target. While the Fed lifted its Core PCE forecast by one-10th of a percent to 1.9 percent for 2017, the change in rhetoric from monitoring “expected progress toward its inflation goal” to “inflation developments relative to its symmetric inflation goal” was significant. Unlike the European Central Bank, where the mandate calls for a 2 percent inflation ceiling, the Federal Reserve’s dual mandate of maximum employment and price stability targets a 2 percent medium-term inflation rate.

As Minneapolis Fed President Neel Kashkari recently argued, having a target rate is very different from having an inflation ceiling. With an inflation ceiling, policy response is warranted to keep inflation below that target level. With a symmetric inflation goal, however, many have interpreted this to mean the committee may now allow inflation to drift above the 2 percent target rate with equal concern, for example, if inflation undershoots at 1.7 percent or overshoots at 2.3 percent. Consequently, with inflation firmly anchored at 1.7 percent for the past seven months, possible trimming of the natural rate of employment and little or no wage pressures in the near term, what warranted the recent increase in rates?

Yes, the hawks point to steady progress in the economy and cite the robustness and resilience of financial markets. Economic forecasts have also been optimistic, with Gross Domestic Product revised upward to 2.1 percent for 2018, inflation expectations close to 12-month highs and the median projections for the Fed funds rate climbing to 3 percent for 2019. But the question still remains, do higher projections warrant an increase in rates? Or, should the Fed commit to policy actions based on evidence inherent in the economic data?

Rightly or wrongly, the Fed is operating in uncharted territory following its quantitative easing program and, admittedly, it is difficult to ascertain how markets will react when balance sheet normalization begins. It is also true that the FOMC has more policy tools at its disposal to fight higher inflation versus inflation coming up short, and is therefore more prepared in the former scenario than the latter. Given this well-known bias, however, it may be prudent to just be patient and allow inflation to climb beyond its 2 percent target versus pre-empting the data and risk falling short.

Statistics and Data Sources: Bloomberg LP., BCA Research, Federal Reserve
The views expressed are the opinions of the writer and while believed reliable may differ from the views of Butterfield Bank (Cayman) Ltd. The Bank accepts no liability for errors or actions taken on the basis of this information.

Telecommunication: Flow Caribbean president looks to upgrade infrastructure

Garfield Thompson

As broadband providers seek to step up speed and service, Flow’s Caribbean president, Garfield Sinclair, has his eye on renovating island infrastructure.

He considers the Cayman Islands one of his top Caribbean markets, alongside Jamaica, Barbados and Trinidad. Despite the islands’ small population, their GDP has made them a priority for upgrading high-speed, LTE service.

“I’ve included Cayman in the big markets. We like to think of Cayman as the Monaco of the Caribbean,” he said during a trip to Grand Cayman.

“You contribute well above your weight in GDP per capita and one of the highest GDPs per capita in the world. Obviously, there is a big sect of offshore professionals and a financial services sector that punches well above its weight from a size standpoint.”

Sinclair stepped into his current position in January during a major transition period for the company. Cable & Wireless Communications, traded locally as Flow, was acquired by one of the world’s largest broadband providers, Liberty Global, in May 2016.

Sinclair said the purchase vastly expanded CWC’s procurement power, allowing the company to step up wireless equipment updates and expand cable programming.

“The first set of influences you felt was in the planning process. Liberty spends a great deal of time on establishing three and five-year plans,” Sinclair said.

While telecommunications can change rapidly, Sinclair said, Liberty’s robust planning process should result in better, English-language programming for the Caribbean.

Regarding mobile connectivity, Sinclair said Cayman is a main priority area for improved LTE service.

“Ultimately we want the investment to be supported by the capability on the island to repay that investment as we can’t have an LTE network that’s Caribbean wide yet,” he said.

“Certainly where it’s warranted, that’s where we’re doing it. Cayman obviously warrants an LTE network mobile-wise so that’s what we’re doing here.”

Rather than abandon old copper infrastructure for fiber, Sinclair said Flow is hoping to salvage and upgrade its copper network. Fiber technology has been implemented in Cayman to complement copper lines, but not to replace them, he said.

The company is implementing multiservice access nodes (MSAN) to boost the speed of its copper network and enable better streaming service. Sinclair estimated some areas could reach speeds of 50 megabits to 100 megabits per second.

“There was a thought that copper was dead or dying and you were not going to be able to utilize it very much in the future, but there are very exciting things happening right now with technology. One of them is this MSAN, VDSL2 technology,” Sinclair said.

“Essentially it enables us to give extended life to the copper network and primarily allows for tremendous broadband speeds for the copper network.”

As more people access internet through their cellphones, Sinclair said, broadband connectivity has grown in importance.

“Mobile infrastructure is getting even more robust with the advent of what we have here in Cayman, which is LTE. LTE is very fast, very reliable and in its own first-world jurisdictions, you are seeing fixed broadband capacity being delivered over LTE networks,” he said.

Regarding worldwide staff cuts by Digicel, Sinclair said he is not worried about the implications for Flow.

“When I see activity like that happening at Digicel, to me it just signals the need to constantly fine-tune your operating model for what is an invariably changing landscape, literally day to day and week to week,” he said.

“I don’t take any comfort from or get too worried about operating model changes. Those guys know what they’re doing, so I’ll leave them alone to do what they’re doing. We’re focused on making sure we’re fit for purpose and to the extent we can, future proof our operating model.”

UK Lord Chief Justice: Commercial courts must meet business needs

Lord John Thomas of Cwmgiedd responds to a question from the audience after his talk in the Annual Distinguished Lecture Series at the Cayman Islands courts. On the left is Justice Nick Segal.

In an increasingly competitive market for dispute resolution across jurisdictions, commercial courts still need to work together to uphold the rule of law and support international economic cooperation and prosperity. To do so requires the courts to meet the needs of the business community, said Lord John Thomas of Cwmgiedd, the Lord Chief Justice of England and Wales in a guest lecture at the Grand Court of the Cayman Islands.

In his March 2 talk, which formed part of the courts’ Judicial Education Committee, the most senior judge in England and Wales outlined what commercial courts need to do to stay relevant and to deliver what businesses need from the court system.

“Commercial courts must ensure that they … remain aware of changing business needs and market practices, that they innovate and continue to provide accessible, flexible, economical, efficient justice,” Lord Thomas said. “It is not a case of saying that the needs of business are king. It is more a case of saying that the quality of justice is king; and that is what each commercial court should aim to guarantee businesses.”

For businesses, the two main factors when considering litigation are time and cost, in addition to the certainty of law. While the Lord Chief Justice acknowledged that courts had not “always been designed or operated with the needs of business foremost,” he outlined best practices and innovations in the U.K. and other international jurisdictions that are helping courts to remain “centers of excellence” in an increasingly competitive “market in justice.”

Courts should be vigilant against the long-standing challenges of “cost, complexity and delay,” adopt new approaches to disclosure and discovery and realize the potential of IT, he said.

To remain responsive to business needs, he recommended listening and responding to complaints when they arise, and introducing user liaison committees, “which are indispensable means of communication between the commercial judges, court administration, commercial lawyers and business leaders, both domestic and international.”

The judiciary must have “wide-ranging dialogue to check that the views of all – particularly those who are averse to committees (or do not have the time) – are properly communicated,” he said.

Technology also plays a key role, and the development of an online court/tribunal is progressing in England and Wales, for example. In addition, the London Commercial Court and a few other courts have embraced digitalizing court processes and records. Beginning in April 2017, all claims, applications and documents must be filed online.

It is similarly anticipated that “judges will lead the way” in paper-free trials, as it is already happening in the Crown Court of England and Wales, the Lord Chief Justice said.

In relation to often time-consuming and expensive disclosure procedures, he referenced innovations such as using automated search mechanisms rather than cadres of junior lawyers or paralegals. This new automated approach is being combined with efforts to devise more flexible approaches to disclosure.

In other areas of more business-friendly procedural flexibility, Lord Thomas mentioned the London Commercial Court’s approach of adapting processes to fit the needs of cases. Courts have also introduced more business-oriented, shorter trial procedures that ensure that a single judge is responsible for the management of a case from start to finish.

Other strategies enabling courts to adapt to the needs of business include ensuring the right fit of expertise of judges to the requirements of disputes, and the “development of the law to meet the changes in the way that business is conducted.” This involves preemptively seeking resolution to issues in cases where there is no applicable precedent, even before a legal problem arises.

Overall, said Lord Thomas, “there can be no doubt that what a commercial court needs are judges of the highest caliber who understand the needs of business.” This requires high quality judicial education and seminars through which the business community brings the judiciary up to date.

The provision of modern IT amenities and the availability of legal assistants and of advocates of the highest caliber are other support needs of judges.

“A commercial court, like that in London and here in the Cayman Islands, which can demonstrate its adherence to such standards, is one whose judgments are capable of enforcement across frontiers. It is a court which has real utility to the international business community,” the Lord Chief Justice concluded.

However, he conceded that one area that still needs work is enforcement, where the development of an effective, widely respected enforcement mechanism for commercial disputes is long overdue.

The execution of judgments in other jurisdictions will form part of discussions in a forthcoming forum of international commercial courts in London, he said. The aim of the forum will be to standardize international mechanisms by which judgments for plaintiffs who win cases in Cayman, for instance, can be enforced against defendants’ assets in another jurisdiction.

The disruptive rise of machines in finance

From left, Richard Scott-Hopkins, director, KPMG; Suryanshu Mishra, director, head of Hedge Fund Administration, Deutsche Bank; Tarun Ramadorai, professor of Financial Economics, Imperial College London; Raoul Pal, Cayman-based CEO and founder of the Global Macro Investor and Real Vision; Bettina Warburg, founder and managing partner of Animal Ventures; and Vinay Rao, head of Risk at Stripe Inc. - Photo: David Wolfe Photography

The finance industry is just at the beginning of an unprecedented era of disruption. The accelerating speed of technological change and the potential for automation promises massive changes for banks, investment firms and other parts of the financial industry.

Much of the discussion about artificial intelligence and machine learning has focused on manufacturing. Technological innovation manifests itself most visibly in automated processes that until now were the domain of manual labor.

But it is only the first step. The next wave of intelligent machines is threatening to disrupt the white-collar worker and the more creative thinkers.

In the staff-intensive banking industry, for instance, humans are the main cost center, and the ability of blockchain technology to replace some of the workforce is one of the top initiatives pursued by senior executives in shaping their business.

Impact on hedge funds

Even the world of alpha creators in the alternative investment space may not be immune from the rise of the machines, speakers at the recent Cayman Alternative Investment Summit noted.

Raoul Pal, Cayman-based CEO and founder of the Global Macro Investor and Real Vision, says the best hedge funds have a process, and that means that the best hedge funds can be replaced by a machine.

He points to algorithmic trading and high frequency trading as the first highly successful examples.

“I think most trading will be replaced by machines, but you need to understand that what that means is the hedge fund manager of old just gets replaced by a programmer. So the hedge fund manager will need a different skill set to focus on systems-generated returns.”

While Pal believes computers are very good at processing current information, he thinks they are “terrible at looking into the future,” a time horizon much more suited to human intuition.

“As we see the investment management industry shift with the flow of pension money coming in and becoming more short-term in nature, humans are going to do what humans do well: have a strategic vision for the world,” he said in a panel on how technology affects the alternative investment industry.

Where machines fail

A recent example for the current limitations of machine learning are Brexit and the election of U.S. President Donald Trump, which machines were unable to predict.

“The simple reality is machines are not in touch with human emotions and what people feel and think,” said Suryanshu Mishra, the head of Hedge Fund Administration at Deutsche Bank.

Even with the best polling mechanisms, it would be extremely difficult to gather accurate, reliable information from 7.5 billion people. To then combine data collection, information management and statistical analysis to make assumptions about the disruption of economies and political systems or to identify the best trading activities would require a huge amount of human intelligence and research and development.

Simply basing a trading strategy on predictive analysis with limited and partially unreliable data sources is a flawed approach, Mishra said.

“The investment time horizon might be two to five years, but the information time horizons that you can rely on do not extend for more than two or three days. We don’t know what’s going to play on CNN tomorrow, so forget about a year from now.”

Artificial intelligence

In the debate about the disruptive force of artificial intelligence, the term is often used too loosely, said Bettina Warburg, founder and managing partner of Animal Ventures, a tech consulting firm. The strict definition means that machines would develop a consciousness and start to think for themselves.

“What we have today is much more like intelligence augmentation.”

It is not so much that things are new, Warburg said, “but we are advancing in so many different fields that gives people a sense of unease about the future.”

Smart algorithms, machine learning tools and parallel processing are great advancements that in combination will allow augmenting different kinds of human intelligence, she said, adding that rather than conscious intelligence, the aim is “artificial smartness.”

The future will therefore lie in a human-machine symbiosis that will require humans to adapt.

The talk about artificial intelligence, however, is not just speculation about the future.

Most current applications in financial services are based on supervised learning and require the interaction of humans and machines. For example, spam detection systems are trained by giving them a designated outcome: some emails that are marked as spam and some that are not. The systems then analyze a range of features that in combination become indicators of the correct category.

In the payment industry, the prevention of fraudulent transactions using stolen cards relies on a similar approach.

“We have been using this in the fraud space a lot,” said Vinay Rao, head of Risk at Stripe Inc.

Based on the large number of charge-backs in the industry, there are sufficient examples to train a machine to detect the features most indicative of fraud. “Historically these features have been human coded,” said Rao. Humans know the features of a transaction, but as frauds have evolved, humans are no longer good at combining features and determining correlations.

“That’s when you start using feature discovery methods like clustering. And then again you bring humans to determine do these clusters represent fraudulent behavior and use that in your method,” he explained.


In the alternative investment industry, the majority of back office functions are outsourced, but consultants and technology providers are looking at blockchain and artificial intelligence for automation and to answer the question of how to cut cost and risk out of the business.

Richard Scott-Hopkins, director at KPMG, said all aspects from front to back office have come under scrutiny for potential automation.

On the trading side, he noted, there is already a blockchain solution for derivatives which eliminates the intermediary and saves time by using smart contracts that settle in real time and manage margin collateral.

Even compliance officers need to become technology professionals, he said, and take the rules they have been applying for years and put them into code so that systems can monitor the trading portfolio and allocations.

And at the service provider level, CEOs need to talk to their administrators and custodians about what they are doing about technology.

In this context, asset managers right now are focusing on the challenges around the interoperability from front to back office and the interoperability between this ecosystem and the counterparties, like prime brokers, exchanges and fund administrators, added Mishra. Since systems and tools are often designed with different programming languages, it makes it hard for one system to speak to another and to reconcile data.

“Data becomes a monster unless you figure out how to manage,” he warned. “You may have the best data stored in your database but if you are not able to speak in the same language with the building blocks around you and within you, that is a problem.”


Many new solutions rely on blockchain for automation. Blockchain, the technology that is underlying cryptocurrencies like bitcoin, is essentially a distributed database that maintains a growing list of records or blocks. Although it is much talked about, the real meaning and impact often remains elusive.

Warburg said there are three ways in which blockchain is going to cause dramatic change.

First, we are moving away from an internet of information to an internet of value, she said. “We are actually able now to uniquely create assets out of digital and physical goods and transfer that value without the need for an intermediary.”

The technology itself is used to lower the uncertainty involved in these value transfers.

Second, there are many kinds of blockchain in development, with some focusing on privacy while others are more scalable or have different governance structures. “So we’ll actually see a world of thousands of blockchains that will interact and connect in interesting ways.”

And finally, blockchain will bring about new kinds of assets not limited by making what we already know better, she said, but rather “inventing a new logic to how we do business.”

Blockchain will not only lead to the creation of new products, but also new markets, whether it is around cryptocurrencies or new concepts of ownership and business organization. This could include the idea of a song as a company that doles out profit to the composer, performer, producer and other copyright holders every time it is played. Or new forms of owning an asset, like partial ownership of artwork.

Warburg also predicts a general move toward digital currencies with many kinds of currencies for different purposes. Existing virtual currencies like bitcoin and ethereum are already very different, she noted.

Deutsche Bank’s Mishra agreed, but he cautioned that there is still a long way to go.

Any buildup of a digital currency will need a lot of computing power which translates into hardware requirements and electricity consumption. Security is the other factor.

“Digital currencies will undergo a few security challenges,” he said, in terms of who controls the generation of new currency and ensuring that the mining of new tokens is not corrupted.

Insurance group turns to intelligent technology

Artificial intelligence technology, described as mimicking the human immune system, is planned as the next line of cyber defense for Cayman Islands health insurance provider BritCay.

Technology Security Officer Ben Mobley said Cayman is one of many locations parent company Colonial Group has in mind for Darktrace’s “Enterprise Immune System,” which has already been implemented at the company’s Bermuda office.

The group is also evaluating options for its branches in the British Virgin Islands, the Bahamas and Turks as Caicos.

Darktrace is a cybersecurity company with dual headquarters in Cambridge, England, and San Francisco, California. Its smart technology learns by monitoring network activity and identifies deviations from typical user activity.

Early indicator

Alarms might go off, for example, following a late evening log-in attempt from a user who typically works during standard business hours. The anomaly tips off the system to a possible insider threat, not easily prevented by firewall software.

As a healthy human immune system adapts to disease evolution, EIS technology seeks to create automatic lines of defense against evolving cyberattacks, explained Darktrace Director Emily Orton.

For a company that protects large amounts of personal client data, the technology provides a higher-level safeguard against sophisticated threats.

While firewall and anti-virus technology can prevent outside actors from infiltrating a network, Orton said insider threats, often provoked by unknowing employees, can pose the most difficult challenges.

“Insider threats are one of the biggest areas that the immune system can help you with. It’s one of the hardest types of threats to find,” Orton said.

“We figure a small number is a malicious insider … who has a specific objective. They are difficult because it’s easy for them to get around and they know the system and they specifically try to avoid detection. But a lot of what we see are non-malicious insiders.”

Well-meaning employees can invite attacks by falling for clever phishing scams, following bad links or downloading questionable content on company devices.

As cyberattacks become more advanced, Orton said, more companies and their clients are looking to fortify defense tactics. She has received inquiries from medium-sized enterprises to multinational banks seeking to protect priceless data.

“There is no silver bullet for security. You can’t secure everything but you can deploy very clever systems,” she said.

“(One) fix is taking a different approach and knowing you aren’t going to catch every threat at the door.”

Cayman Islands-based IT adviser Micho Schumann of KPMG added that AI technology is an advanced line of defense, rather than a first step. Companies must also ensure they have covered their basic needs, such as training employees on best practices.

“For a company that’s starting, especially the company sizes that we have in Cayman, you probably want to start with something along the lines of say a gap assessment or a risk analysis,” he said.

“You may have all the anti-viruses and the firewalls and all that good stuff, but if your employee clicks on that link, they might have all been defeated. So that’s why employees are very critical in this whole thing. It’s not all technical. It comes down to human (error).”

He suggested companies take a step back before investing in potentially expensive technologies and first determine their core needs, as well as the data they need to protect.

Schumann also pointed to offline steps that companies should take to ensure their systems are protected. He encourages employees to take care with how they store passwords and to practice caution with who can enter company facilities, where sensitive paper documents may be accessible.

“Nothing is hack proof,” he said. “The perfect golf game doesn’t exist, not does perfect cybersecurity.”

Online standard

In the online world, Orton anticipates AI systems becoming the standard. She describes a possible digital “arms race” in which hackers may one day adopt intelligent methods as well, prompting companies to pursue increasingly advanced technologies.

She encourages businesses to prepare for the rapid evolution of such threats and what she expected will soon be the new norm.

“For us it’s a no brainer. AI is going to be the future of cybersecurity,” she said.

Sustainable prices, scarce waterfront land, global interest

This could be one of those rare moments: The salespeople and the surveyors, the people who value real estate on a business-to-business basis, agree the market is strong and likely to remain so.

Land supply, particularly in premium coastal areas, is healthy and the construction pipeline is strong. The U.S. economy is chugging along, and the political climate surrounding President Donald Trump seems to cut both ways: He will either spark domestic growth, putting more disposable income into American pockets, or spook investors, driving them out of the country and – with a little luck – into Cayman real estate.

“I’m no political expert,” said Sotheby’s International Realty Cayman Islands owner Sheena Conolly, “but, either way, people are encouraged to look at Cayman.

“They may be unhappy with our due diligence requirements, which are stringent,” but, she said, the islands boast a stable environment and an improving economy.

Matt King, senior valuer for Bould Consulting, consultant for sister commercial and residential property expert Avata, and an eight-year member of the Royal Institution of Chartered Surveyors, agrees, but not without caution.

“The Cayman real estate market is overall performing well,” he acknowledges. “Prices have been increasing in some areas through 2016 and into this year in areas around Seven Mile Beach, and South Sound condos in particular have seen large value increases, and there are other pockets of increases, mainly for beach or sea-front properties, plus canal-front land and homes.”

President Trump and new deregulation policies could drive the market either way, he suggests. “Given Trump’s real estate background, it is unlikely the property industry will be one of those that suffers.

“Deregulation measures will likely assist lenders to be more liberal,” even inspiring “non-traditional lenders to enter the market,” King said. “However, should he decide policies at whim and go after the offshore hedge fund market, then he could have a devastating impact on the Cayman Islands economy.”

President Trump has said little about offshore finance, while Treasury Secretary Steve Mnuchin described during Senate confirmation hearings at least one Cayman company he created to shelter his Goldman Sachs clients.

James Andrews, senior managing director at property valuer Integra Realty Resources, offers a measured response, agreeing with Conolly that he is no “geopolitical expert … but there are several potential outcomes.

“For example, he may lower U.S. corporate tax rates, which may encourage corporations to relocate operations and capital back to the U.S., which could be a negative for Cayman’s offshore industry.

“On the flip side, he is anti-regulation, so coupling this with Brexit may mean that there could be less regulatory restraint on the offshore financial industry.”

Neither would necessarily affect the hedge fund industry, the chief driver behind Cayman’s financial services, Andrews said. The key to the local real estate market is the old question of population growth, and that “will be more affected by local politics and the election outcome in terms of what they decide to do with immigration policies.

“In addition, companies need to have financial incentive to stay or move here and to grow; and the cost of doing business in Cayman is quite high.”

Economic growth in Cayman

In a Feb. 15 speech to the Alternative Investment Conference at the Kimpton Seafire, Premier Alden McLaughlin said little about immigration and permanent residence policies, but much about economic growth.

Observing an “age of uncertainty,” McLaughlin said Trump had been elected “on the promise of radical change, and four weeks into his term, his approach to politics and governance would tend to suggest that indeed we are living in … exceptional times.

“The impact of his administration and its yet-to-be-articulated policies with respect to jurisdictions such as Cayman is still very much in question. But there can be little doubt that an unpredictable future is ahead.”

Brexit, he said, was a “glass half full,” and called the Cayman economy “by far the best in the region.”

The islands, he said, had “avoided the ravages of spiraling debt, unsustainable deficits, high unemployment and economic stagnation.”

His government had “grown our economy, reduced unemployment, accumulated fiscal surpluses [and] paid down debt,” improving stagnant 2013 growth of 1.5 percent to a forecast 3 percent in 2016 – accompanied by the lowest level of poverty in the Caribbean and unemployment of less than 4 percent among the entire workforce – and 5.6 percent, down from 10.5 percent, among Caymanians in 2016.

Conolly described the outlook for Cayman real estate as “extremely buoyant,” saying only a few beachfront condos remain available under $1 million, while “the higher end is selling quickly.”

Only one unit remains at Seven Mile Beach’s WaterColours, while South Sound condo development is “extremely busy.” A single-family unit, she said, runs between $3 million and $4 million, and her Sotheby’s Global Network is seeing an uptick in residential enquiries.

South Sound development continues unabated: 56-unit Vela Phase II is 90 percent sold – with another 56 units in Phase III in prospect; Cayman Crossing Phase III is scheduled for completion in late 2017. Naul Bodden will soon complete 24 units at Tides; additional projects by Stephan Baraud and mainland China’s Dating Group will bolster supply; and another 36, $1.3 million homes comprise Fin, which launches an 18-month construction schedule this quarter.

Andrews said “a significant number of pre-sales in projects under construction” had “also lower[ed] the market share for existing units.

“The average price of non-waterfront homes in the SMB area actually rose moderately, but based on a small number of transactions.

“In South Sound, the number of transactions actually declined in all categories except vacant land, with average prices increasing for homes and condos, both waterfront and inland,” he said, although noting his figures were based on Land Registry data, and excluded pre-sales of unfinished projects.

“New projects such as Shore Club, Vela Phase II, South Bay Estates appear to be selling well. We note that there are currently only 12 condos listed for sale in South Sound above CI$500,000, excluding developer pre-sales in projects planned or under construction,” he said.

Paul Pearson, director at Vela’s Davenport Development, repeated his 2016 assessment that South Sound is “on fire,” saying “it’s still on fire. We have seen new developments, the Kimpton [Seafire] and [Howard Hotel Group’s] Margaritaville hotels on Seven Mile Beach, some condo projects and then on South Sound there has been a number of projects started and some completed.

“As we enter 2017,” Pearson said, “Davenport is excited to continue with the next phase of Vela. We also have land on Crewe Road and Old Prospect Road that we are designing plans for.”

He indicated few worries about potentially volatile U.S. politics, suggesting they may work to Cayman’s benefit. Like Conolly at Sotheby’s, Pearson has seen an uptick in interest.

“If anything, we have seen an increase in enquiries from overseas (USA) since the election of the U.S. president,” he said.

“The market was quite soft for a long time, so we are seeing it corrected now.”

He is tight-lipped about new Davenport projects, saying that Crewe Road “is inland and smaller units, about 40 of them.”

He describes them as “starter homes,” priced upwards from $229,000. “We will start towards the end of summer and take about 12 months.”

He declined to name their location, and offered “no comment on Prospect yet.”

IRR’s Andrews said condo sales on Seven Mile Beach slowed in 2016 “due to the virtual sellout of WaterColours,” and a lack of new inventory.

“Because WaterColours was at the highest price point, the average price per square foot has dropped slightly,” he said. “since there were only three sales of those units in 2016.”

The newest alternative, 62 residences at the Kimpton Seafire “competes at the top of the price range,” Andrews said, “and is expected to complete in late spring or early summer and has reportedly sold about 25 percent of its units.”

Non-waterfront inventory down

Sales volume for houses and non-waterfront condos in the Seven Mile Beach area, he said, had slowed; “most likely due to a lack of new inventory and fewer listings than previously.”

Bould Consulting’s King agreed that supply had briefly declined “in the majority of areas,” bringing a kind of market stability, meaning “the outlook should be positive.”

Valuations would follow suit, he said.

“Most people who deal with residential properties focus only on interest rates because they have a direct influence on real estate prices. It’s hard to ignore that record low rates are likely bolstering values to some extent at the current time, and if investors foresee increased variability in future rates, this will likely put a downward pressure on property prices,” King said.

“However, the current low supply levels will certainly ensure stability in the short term and I see Cayman as continuing to be a safe haven in the Caribbean due the huge plans of the Dart Group and the ensuing high-quality development, infrastructure improvements and job creation through hotel development.”

Supply is not likely to remain long in abeyance, however.

Prospects for 2017

In February, Cayman’s largest contractors, McAlpine and Phoenix, proclaimed themselves “guardedly optimistic” about 2017 prospects, mostly in the residential market, particularly around SMB and South Sound, particularly on beachfront property.

“An improving economy means more business activity, which will require more employees, which increases the need for new accommodation for both expanding businesses, new businesses and employees of these businesses,” McAlpine General Manager Ian Pairaudeau told the Journal, while observing that an improving economy was never guaranteed.

“The pipeline looks very strong, long-talked-about projects such as Ironwood appear to be coming to reality and should the government agree to rock removal, the Four Seasons could even be under way before the year is out,” King said. “Add this to the infrastructure works Dart is carrying out, the new building at Cricket Square and the ever-increasing pipeline of South Sound condominiums. We are certainly bullish in this field.”

Tourism projects

Tourism projects appear set to boom, he said, ticking off a handful of imminent investments in the wake of a record 385,451 air arrivals in 2016.

“New tourism developments include the planned Four Seasons Hotel in Seven Mile Beach; the Margaritaville Hotel; a 42-room business hotel in Seven Mile Beach (under renovation); a planned hotel by HHG Group on Pageant Beach in George Town; a proposed 49-room eco-lodge in Barkers Beach, West Bay; a 200-room hotel with 75 residential suites in the Beach Bay area [St. James Point]; and Ironwood, a $365 million 600-acre resort with a 27-hole golf course, 100 rooms, a clubhouse lodge, retail, restaurants and homes for 2,000 in Frank Sound.”

Conolly also points to the eastern end of Grand Cayman, naming “a lot of activity” in Queen’s Highway, Colliers and Cayman Kai, including Sotheby’s Camden House, listing for $5.5 million.

“There are a few other large-scale developments such as [East End’s] Health City,” King said. “The plans include ancillary hotel, residential and commercial uses, and should this be successful, additional development of support services in the Eastern Districts is inevitable, especially with Ironwood seemingly going ahead.”

Inland development bore a more-modest promise; long-term development was likely to be slow, Andrews said.

“The East-West Arterial is badly needed and necessary to spur more development in the eastern districts,” he said.

Questions continue to linger regarding Ironwood and government demands the developer fund a multimillion-dollar arterial extension to Frank Sound. Andrews pointed out, “[They] are publicly saying it is moving ahead despite not having an agreement to move the road.”

Eastern districts

“There is a great deal of buildable land including coastal locations in the eastern part of the island, but development will likely be slower in that area without better road access,” Andrews said.

King said the eastern districts are, in effect, a separate market: “You have only to look to areas to the east where prices are static and marketing periods are well over 12 months to see that Cayman comprises a number of different markets, each performing almost independently.”

While inland may face problems, Andrews observes it may provide affordable middle-class residential options.

“Unless we are talking about … land with canal or water views, inland will continue to struggle,” King said. “Only the sought-after commercial parcels are likely to perform well, and we don’t expect any major value increases east of Hurley’s roundabout in the foreseeable future – unless there are exceptional circumstances such as another invitation to provide a solar or wind farm for [the Caribbean Utilities Company],” a reference to the 21-acre solar array scheduled for Bodden Town’s Pease Bay Pond.

“Inland development has been strong on the west side of the island, as residents want to be close to all the commercial services of George Town and Seven Mile Beach,” Andrews said. “The inland lands in the areas further east will require better access (roads) in order for there to be significant development there.”

“Because of the flat topography and the resulting lack of ocean views from inland properties,” he added, “inland development will likely be mostly limited to domestic housing and related small commercial properties.”

What Andrews calls “non-waterfront residential homes,” typically sold to local residents, performed well in 2016. Sales grew more than 21 percent and average prices nearly 12 percent from 2015.

“Non-waterfront condo sales,” he said, were flat, “but there is a fair amount of new product under construction which may have hampered sales of existing units.

He pointed to strong sales in West Bay and both Spotts and Savannah as “conventional buyers” sought detached homes: “Given the lack of reasonably priced homes in SMB and SS, these three districts showed healthy price increases.”


Frank Sound’s Ironwood could also prove attractive – depending on the appeal of the Arnold Palmer golf course – and drive demand for surrounding lots, creating “an as-yet untapped market,” Andrews said.

Another inland development – boasting government support – is Cayman Enterprise City near Fairbanks Road, extending toward South Sound. Overseas companies, taking advantage of a range of concessionary fees and duties, can take space in 200,000 square feet of offices on the landscaped 70-acre site.

Conolly points to “loads of people” interested in inland developments “in the Grand Harbour area, on the canals, at The Shores – where there must be between 100 homes and 150 homes in the last three years – and at the Yacht Club and Salt Creek.”

The hothouse pace and glamour – and profits – of high-end residential development, especially in coastal areas, has left a quiet and strong commercial real estate market, although King indicates it is underserved.

Commercial market

“The commercial market is performing particularly well,” King said, citing his company’s interest in Caledonian House. “Buildings with a large tenant mix, smaller demises [leases] and flexible terms appear to be benefiting from relatively low vacancy rates at present, and rents within these building are more resilient.”

Compared to the larger Caribbean property market, Cayman has a significant commercial sector. It’s a complex segment, he said; values relate only to the returns produced and a frequent relationship with alternative investments, “hence the need for professionally qualified individuals for this specialized market.”

King decried the idea that the practices of residential real estate are efficiently applicable to commercial sales, calling it a “huge disservice to landlords and tenants alike.”

“Only a handful of valuers are able to conduct these to the necessary standard on island,” he said, calling on banks to improve vetting procedures and create “separate panels” for commercial and residential.

“Otherwise the commercial market will not only suffer from a lack of specialized personnel in sales, but will see a rise in credit risk issues,” he said.

New leases on top-quality stock in new buildings are forcing commercial accommodation to accord with international standards, he said, enabling Cayman to compete “not only with other Caribbean countries, but established markets also, whilst continuing to offer the many benefits of being a country with no direct taxation.”

Rentals, capital values and investment yields, he said, have been declining for years on secondary and tertiary commercial property, “heightened to some extent” by an unwillingness of landlords to refurbish older buildings and underlined by a planning system reluctant to allow creation of mixed-use schemes for existing properties.

Camana Bay

Camana Bay – celebrating its 10th anniversary this year – is beginning to rectify that, however, building a plethora of fresh grade-A space as part of its expansion toward Seven Mile Beach.

Declining returns on older property, King said, is because “simply, that Camana Bay was built – and tenants moved there. But the reality is the lack of grade-A space outside of Camana Bay, parking provision and overall master planning for these areas are just as much to blame.”

“We need an overall master plan for the areas that need regeneration” he said, “which usually includes elements of mixed-use.”

Government appears to have awoken to the issue, however, offering Planned Area Development for “potential regeneration sites,” said King, citing, for example, the long-discussed George Town revitalization, and similar urban renewal schemes for Eastern Avenue and Shedden Road. Already, such contemporary developments as Camana Bay’s Salt Creek, Cayman Enterprise City and East End’s Health City are PAD schemes, often generalized under a “mixed-use” rubric.

Other developers have previously tried – and failed – to integrate residential, office, retail and recreational communities. Now-bankrupt Atlanta-based developer Stan Thomas sought to create a mixed-use scheme in Salt Creek. A similar fate befell Ritz-Carlton developer Mike Ryan’s proposed Dragon Bay project.

“Commercial property lease rates will likely remain steady,” said Andrews, “and although a significant amount of office inventory will enter the market, lease rates are unlikely to decline.”

He speculated that new leases and increased rates could occur in George Town and SMB offices and retail, but acknowledged “concern that new buildings planned in Camana Bay and Cricket Square might flood the market with new inventory.

“The good news is that the developer of Camana Bay doesn’t need to discount the rates to lease the space, and can presumably afford to sit on it for as long as it takes,” Andrews said.

He said lease rates for class-A space office were holding steady at US$50-$60 per square foot and class-B between $38 per square foot and $45 per square foot. Retail rates, he said, are similar, and lower for the class-B and class-C “tertiary locations.”

Industrial rental rates were holding steady at an average of CI$23 for longer leases and better properties, while sale prices for commercial properties “are difficult to compare due to the low number of sales and the varying type of buildings that transact,” he said.

King expects more commercial development to support a growing residential sector. “Retail is the strongest commercial sector in terms of occupancy levels and also one that has been a little neglected in recent years – with the exception of Camana Bay – so we would expect to see further development in this sector.”

He also pointed to “a number of light-industrial projects in the pipeline, many including storage, which is an off-shoot of a growing residential market.”

Population growth

Andrews said population growth is essential to a strong real estate market and hoped Cayman’s May elections might inaugurate long-stalled movement on immigration policies.

“The biggest factor is an uncertain future due to an immigration policy in flux, with respect to permanent residency,” he said.

“As long as developers are able to sell residential units such as condos in South Sound they will keep building, and there is optimism that the permanent residency dilemma will be rectified in the coming year; which would give more confidence to expat residents of the island in terms of buying property.”

While prices are likely to continue unabated, they are, for the moment, justified, although King warned that while “the Seven Mile condo market appears to be flying and value increases appear justified, you have only to look to areas to the east where prices are static.”

And while valuations needed to keep pace with rising prices, it is “critical for valuers not to be carried away with the speculators and realtors who will more often than not remain overzealous about the market,” King said.

Pearson acknowledged escalating prices, but said “the units are selling and the prices are more realistic. They are sustainable.”

He cautioned, however, there “will come a tipping point and developers need to be acutely aware of the area in the market. If standards slip and prices increase at an unsustainable level, that would tip the balance, I believe.”

One element that could drive prices to that “tipping point” could be land supply on Seven Mile Beach or South Sound. “We are seeing that land in the most sought-after areas such as Seven Mile Beach is becoming extremely scarce,” King said. “Land is finite and we envisage sustainable growth for the next couple of years unless a major land owner floods the market or the global market, in particular the U.S., suffers a significant setback.”

Andrews agrees: “Land is becoming more scarce, so land will likely continue to increase unless we see population begin to decline or level off,” he said.

“I would predict we may see some redevelopment of some of the older condominium developments on Seven Mile Beach in light of the lack of additional development land on the beach,” he added.

Conolly said prices were “quite affordable compared to elsewhere in the Caribbean, with condos starting at $250,000 or $300,000.”

More than enough land was available island-wide, providing “loads of opportunities for people to develop good product,” she said. As time passed, Cayman was likely to see “more affordable levels of housing” for a broader range of buyers.

“I’m seeing movement across the board of real estate properties,” Conolly said. While visitors are likely to seek waterfront homes, “there are always more affordable opportunities.

“Inland homes in good areas are selling. They just need to be placed at a more- affordable price point.

“There is a real need for that,” she said. “Hey … we can’t all live in million-dollar homes.”

Inflation: It’s not all in the data

Monique Frederick Butterfield

Inflation, an ongoing rise in the general level of prices, is a metric of paramount importance in economic policy, and even more crucial in the daily lives of every single household. Who do you know who would be in favor of higher prices for essentials like food, shelter and transportation?

The U.S. Federal Reserve, analogous to other central banks, is striving for higher inflation. The medium range target for the U.S. central bank is 2 percent annual inflation, but why not aim for zero inflation, you may wonder.

Apart from a history lesson into the genesis of a 2 percent inflation target, one reason for an inflation target above zero relates to the flexibility of the central bank to stabilize the economy when needed.  A low inflation target, and by extension a low benchmark interest rate, leaves central banks almost helpless in the face of a recession, not leaving much room to decrease interest rates and stimulate the economy. Some may argue this premise has already been disproven as some central banks have been forced to implement negative interest rates and other unconventional policies to stimulate the economy or prevent further economic weakness.

Up to December 2016, previous data indicated a lack of inflation as measured by CPI (Consumer Price Index) figures. Some economists have rightly argued, however, that inflation has been building for a while but has not been evident in the data. The decline in oil prices, for example, has contributed to a low CPI number, masking the gradual rise in inflation.

A more subtle form of inflation has crept into markets during the past few years, appropriate dubbed “shrinkflation.” It is a term associated with food items shrinking in size or quality while maintaining the same retail price. Chocolate treats are the most visible example of this phenomenon, with companies like Mondelez reducing the weight of its Toblerone chocolate bars in the U.K. as a cost saving measure to combat a rise in input costs.

We have witnessed the same development with cereal and chips over the years as the weight of each box or bag has diminished. Although the price of a box of cereal has not increased, the average price per cereal puff or corn flake has undeniably risen.

To make matters worse, wage reflation has been absent from the economy. Consumers are not earning more, yet they are finding it more difficult to make ends meet. Juxtaposing rising inflation with the absence of wage growth will result in negative real earnings. It’s at this juncture where the data (the Consumer Price Index and the Personal Consumption Expenditure) and reality part ways. With central banks proclaiming a lack of inflation and seemingly more concerned about deflation, widespread criticism of the Fed’s strategy and its economic models is growing.

With the release of January’s data, the CPI is finally at a level that should give the Fed the impetus it has been waiting for. According to the report, headline inflation reached a five-year high of 2.5 percent, buoyed by a surge in energy prices. This higher level, however, was not limited to energy prices as housing, rent and medical care costs have intensified in several locations. Despite these numbers, the Fed may allow inflation to run higher a bit longer. While Fed Chair Janet Yellen is seeking to stoke inflation from its current low levels, she is also of the view that the inflation target is an average number, suggesting that a period of inflation beyond 2 percent may be warranted.

There is still yet another factor to take into consideration: the Fed’s balance sheet has ballooned to well over $4 trillion and continues to expand every month. A common way of servicing this debt is to inflate your way out of it. In this case, inflation is effectively seen as a haircut on the repayment on the debt. For that reason, coupled with President Donald Trump’s inflationary fiscal plans, higher U.S. inflation should be expected.

Consequently, it’s highly conceivable that the Fed will not only wait a bit longer before raising rates, but will do so at a snail’s pace. Navigating this upward trajectory slowly and in small increments, could allow inflation to rise above the target, while sending a hawkish tone to markets. Admittedly, such rate hikes could be considered meaningless in the grand scheme of things and seen as just a path to normalization vis-a-vis monetary tightening.

Source: Bloomberg LP
The views expressed are the opinions of the writer and while believed reliable may differ from the views of Butterfield Bank (Cayman) Ltd. The Bank accepts no liability for errors or actions taken on the basis of this information.


Cayman and BVI poised to benefit from Islamic finance growth

Anthony Oakes

Offshore centers are poised to benefit from the enormous growth forecast in Islamic finance over the next few years, says Ogier’s Head of Banking and Finance in Asia.

The combination of increasing appetite for Islamic finance products, new variations on existing products and an increased interest in the role of offshore centers in Islamic finance point to a developing area with huge potential, according to Anthony Oakes, who leads the banking and finance team in Ogier’s BVI and Cayman-focused Hong Kong office.

Islamic finance is based on the prohibition of interest (Riba), excessive uncertainty (Gharar) and gambling (Maysir or Qimar), which makes certain financial products, including interest-bearing instruments and derivatives, and practices like short-selling and leveraging, noncompliant with Islamic law.

As such, Islamic finance relies on real economic transactions such as trade and investment based on profit sharing rather than interest-based and speculative financing practices. It integrates Islamic principles such as social justice and kindness to create products and financial markets that are ethical and sustainable.

Research by the International Shariah Research Academy for Islamic Finance estimated the total value of global Islamic finance at around $900 billion in 2009 – that figure had reached $2.4 trillion by 2015, with forecasts reaching $3.4 trillion in 2018 and $5 trillion by 2020.

“The traditional market in the Middle East remains strong, but we are also seeing growth in Asia, Malaysia and Indonesia. At the same time, the industry is developing new products – we are seeing more Shariah compliant retail and corporate banking and trade finance products coming online,” said Oakes.

“A further interesting development is happening in non-Islamic countries, where access to Islamic capital markets is being sought – a good example is the sukuks issued by the Hong Kong government in 2014 and 2015.”

A sukuk is a form of bond that is structured to be “shariah compliant” by not paying interest. This is generally achieved by giving the investor partial ownership in a tangible asset, for example in a sale and leaseback transaction. Instead of interest and coupon payments, the investor will receive rent payments, which end when the sukuk expires.

In May 2015, Hong Kong sold a $1 billion five-year sukuk at a spread of 35bp over U.S. Treasuries. The government of Hong Kong is currently holding investor meetings in Asia, the Middle East and Europe ahead of another potential U.S. dollar sukuk offering.

Oakes, who recently published a chapter on Islamic finance in the Cayman Islands in The Islamic Finance and Markets Review, said “offshore centers, and particularly Cayman, are well-positioned to take advantage of this growing area because of their flexibility and efficiency, and because their underlying legal systems are based on the trusted, well-established and familiar English legal framework.”

Cayman exempted companies are typically used as the issuer, often described as the trustee, in many Islamic financing transactions, including sukuk, wakalah, an agency or service contract, and ijarah, a lease to purchase or lease to own transaction.

In these arrangements, the Cayman company is often set up as an “orphan” special purpose vehicle because it is formed solely for the financing transaction. The SPV is referred to as an orphan because the beneficial interest in the shares of the SPV, rather than being held by a parent company, are held by a trustee such as a charitable trust or Cayman STAR trust, Oakes noted in the Islamic Finance and Markets Review article.

In this way, the SPV is unlikely to be considered an asset of the borrower in case of an insolvency, and “bankruptcy remote” because it is prohibited from undertaking any activities other than the financing transaction, making the SPV unlikely to be liquidated.

The typical sukuk structure involves the issuance of certificates to investors by a Cayman SPV. The invested funds are used to buy an asset that is then leased back to the borrower. For the duration of the sukuk, the borrower pays rent to the SPV, which distributes the coupon and principal payments on the certificates to the investors.

“If specific events of default occur, the borrower is obliged to repurchase the asset at a certain exercise price so that the SPV may redeem the certificates,” Oakes explained.

Islamic funds are another area in which the Cayman Islands is used for investment purposes.

The majority of Islamic funds tend to be close-ended private equity or property funds, which are structured either as exempted limited partnerships or exempted companies.

Since Islamic funds are established in compliance with shariah principles, they can invest only in industries or properties that comply with Islamic law, but they will use structures similar to a conventional fund.

The Cayman ELP is one of the most commonly used investment vehicles both for Islamic and non-Islamic funds, Oakes noted.

Forbes analyst gives Trump a pass on taxation, not immigration

John Tamny, Forbes political economy editor

Forbes political economy editor John Tamny gave the new U.S. president a mixed report card at the Cayman Economic Outlook conference on Feb. 2. Taking a pro-immigration, anti-tax stance, he ranked President Donald Trump’s ideology from good to “quite simply terrifying.”

He pointed to the diverse, international community in the Cayman Islands as an economic driver for the nation and encouraged the United States to continue embracing immigrants who bring with them “essential knowledge, drive and ambition.”

“There is talk today that somehow immigrants and immigration are the source of economic stagnation. Nothing could be further from the truth,” he said at the Kimpton Seafire Resort and Spa in Grand Cayman.

“If America is to remain the greatest country in the world, it must welcome immigrants. If we somehow close our borders to them, we will no longer be great because we will no longer be what made the country great in the first place.”

Tamny warned against rhetoric that pins job losses on immigrants, and said rather, ambitious immigrants are magnets for job-creating investment.

To be most effective for the nation, he encouraged President Trump to spend more time working on his golf technique than tinkering with the economy.

“If (U.S. presidents) would just play golf for most of their time in office, things would be more prosperous,” he said, transitioning to his anti-regulatory philosophy.

He praised President Trump for his plans to reduce corporate taxes and eliminate the estate tax.

“Taxes are nothing more than a price or penalty placed on work. So in an ideal world, the tax rate would be as low as possible. You do not want to penalize people for getting up and going to work every day,” he said.

He said economic growth would be “blindingly easy” if governments were to implement minimum taxation, resort to bare-bones spending and cut regulations.

“Regulation does not work. Let’s be even more clear: regulation cannot work. If you doubt me, all you need to do is go back to 2008 and observe the global banking sector,” he said.

Tamny said it is the rich alone who are able to fund progress through their investments. He described taxes on them as a penalty placed on their success.

Regarding President Trump’s interest in devaluing the U.S. dollar, he warned of provoking another global crisis.

“Investment is the biggest driver of falling prices and devaluation is the biggest enemy of investment,” he said.

“What (President Trump) doesn’t know about currency could fill books.”

Rather than encouraging American exports, he said the U.S. would risk a negative ripple effect across the globe, starting with its own workers.

“Do you think workers will sit back while their check is eviscerated?” he asked.

He pointed to how U.S. banks have handled President Trump since the 1990s, viewing him as “toxic” and a major credit risk that few are willing to touch.

In general, however, he described credit through U.S. banks as experiencing a free fall, representing 15 percent of credit in the nation. He attributed the decline to the banking bailout as well as to regulation.

For offshore financial centers like the Cayman Islands, he sees an opportunity to move in and capitalize on opportunities that U.S. banks cannot or will not touch.

Bull market resumes its climb alongside a wall of worry

The bulls are back.

Leading world stock markets are impressing observers with new record highs. The Cayman Journal explains why this is happening and what speaks in favor of following the bulls on their way up.

For almost three years the world stock exchanges took a time-out. After being placed on hold for so long, many market participants already feared the end of the bull market, which began in March 2009. But with an impressive comeback, the bulls recently eliminated all of these doubts.

During the fourth quarter of 2016, the leading U.S. stock market indices initially began to set new record highs. Around the turn of the new year, other markets started to follow, and in the meantime, even the broad global equity benchmark MSCI World Index, which contains stocks from 23 developed markets countries, started chasing records again. Also very encouraging: Apple, the stock of the world’s most expensive company, recently ended its own two-year-long breather with new records.

The charts scream ‘buy’

From a chart-related point of view, these are all pro-cyclical buying signals of the highest quality – all the more, as the list with promising chart-images can be supplemented almost arbitrarily with further examples. Every investor who believes only a little in the signal-power of charts cannot leave such a chance unexploited.

However, it is not just the charts that suggest such an action. There have also been major positive developments in the economy as a whole, and compared to the recent past, companies lately are delivering on average more positive earnings surprises.

The recent more favorable environment can also be deduced from the BofAML Fund Manager Survey (FMS) Macro Indicator. Its calculation is based on five parameters: Investor inflation expectations, capex demand, risk appetite, cyclicals (industrials, materials and tech) versus defensive sector (staples, telcoms and utilities) positioning, and equity versus bond positioning. The rule says to sell global equities when Global FMS Macro is deteriorating and cash level has fallen by at least 50bp relative to the past two months, or to buy global equities when Global FMS Macro is improving and cash level is rising relative to the past two months.

Currently the indicator is in “buy” territory as FMS Macro has been trending higher for the past seven months and cash level is higher than it was two months ago. According to BofAML Chief Investment Strategist Michael Hartnett, this is a bullish combo for risk assets because investors have been reluctant to deploy cash even though FMS Macro is positive and clearly on the upswing.

Watch the euphoria level

The aim of this article, however, is not to lead the readers to believe that we are living in a perfect new world. Rather, the resumed record hunt is accompanied by a number of risks. These include protectionist tendencies, increasing political populism, ongoing terrorism, renewed crises risk in the EU, unresolved debt problems or relatively high U.S. stock market valuations. In addition, there are certainly other dangers which can cause uncertainty among investors.

The latter point, however, is actually one of the major strengths of the current bull market. As everyone remembers, since the bull market started in 2009 there has never been a lack of trouble spots. Ultimately, despite the strong price gains that were locked in over the past eight years, this has helped to prevent excessive optimism. This, in turn, is reminiscent of Warren Buffett’s saying that the secret to getting rich on Wall Street is to be greedy when others are fearful and to be fearful when others are greedy.

This may be simplistic, but it contains a kernel of truth. From that point of view, the current mood among members of the American Association of Individual Investors is encouraging. According to the latest survey, only 33.1 percent of respondents are bullish for the next six months. Despite the eight-year bull run on Wall Street, the share of optimists is currently lower than the average rate of 38.5 percent since 1987. On the other hand, the number of bears is 32.4 percent above the historical average of 30.5 percent.

There can be no talk of real euphoria. This assessment is particularly true for Europe, including Germany. Hardly anybody there indulges in optimism. As a reminder, in early 2000, shortly before the TMT bubble burst, it was quite different. At that time there were whole compartments in commuter trains to Frankfurt, in which the only talk was of how much profit the next new initial public offering would bring. Whoever observes something like this ever again should pull the emergency brake and sell all his investment positions immediately. However, as written before, this experience from the past cannot be compared with today’s mood among most investors.

Current situation favors bets on rising indices

Of course, things can always change. In the U.S., President Donald Trump is doing everything he can to revive the “animal spirit.” His primary aim in that respect is to increase the willingness of companies to take more risks again. Should he succeed, this spirit will probably also skip to the stock market. As soon as desirable optimism becomes harmful euphoria it will be important to leave the party in time. Before that, however, it is important to use the next wave of euphoria in one’s own favor, since in the past the last leg of bull markets was typically connected with euphoria, which drove the stock prices up in a significant way.

From the point of view of the bulls, however, it would be best if Stephen Suttmeier is right. The BofAML technical research analyst thinks the recent upward move of the S&P 500 Index could be a sign for a secular bull. At least he sees the S&P 500 breakout from the 2000-2013 trading range as a secular bull market breakout similar to those in 1980 and 1950. These prior secular bulls lasted until 1966 and 2000, respectively. This means, in his view, that the secular bull market triggered in the April 2013 breakout remains at an early stage with at least a decade more to run.

“Should history repeat itself, the secular bull market road map says that the best days are ahead with S&P 500 Index at 3.000 points by 2019 and at 5.000 points by 2024,” Suttmeier says. As a reminder: At the editorial deadline, the S&P 500 Index was trading at 2.351 points.

Looking so far ahead, like Suttmeier does, is probably not everyone’s cup of tea in our fast-paced world. Finally, such long-term forecasts are always subject to potential new external disruption, including, not least, a new EU crisis or the outbreak of a war. To protect the portfolio against such negative events, it is advisable to use stop loss orders.

Irrespective of such protective measures, however, the following applies: Should severe new crises fail to materialize, the current situation on the world stock markets can be considered as very promising. Under such conditions, the chances are good that the prices can move up further on a wall of worry before euphoria could set in later on. Anyone who can follow this way of thinking should put some money to work in ETFs whose underlying indices just generated fresh pro-cyclical buying signals.

Investment summit: ‘Hedge funds are not dead’

Mark Yusko - Photo: David Wolfe Photography

Hedge fund investments have been described as failing many times before, so the suggestion that the industry is dead or in decline is an “alternative fact,” according to Mark Yusko, CEO and chief investment officer of Morgan Creek Capital Management.

Speaking at the Cayman Alternative Investment Summit in February, the investment adviser said it is at least the fourth time in his career, after the mid-’90s, the Dotcom bubble in 2000 and the financial crisis of 2008, that active management and hedge funds have been declared dead.

“It’s because they underperformed again and there is this stupid thing called smart beta,” he said about the financial products that are marketed as an alternative to the traditional “active” and “passive” investment strategies. During the recent stock market upturn, smart beta and other passive, rule-based investment strategies that track general stock market movements gained in popularity because they delivered similar returns at a much lower cost than actively managed investments.

This, however, is not likely to continue when the stock market turns. “Smart beta is an oxymoron. There is no such thing. Alpha is smart,” Yusko said, referring to the returns that active managers generate in excess of the investment gains caused by general market upswings.

Figures from data provider Hedge Fund Research show that hedge funds returned 5.6 percent on average in 2016, well below the 11 percent gain of the S&P 500 during the period.

For Yaskey, U.S. stocks are significantly overvalued, and thus his forecast for the U.S. stock market is negative. “Everyone believes that stocks always have to go up. It is a physical impossibility to generate double-digit returns from U.S. equities over the next decade. It cannot happen. No way.”

While it is true that hedge funds have been underperforming for eight years, and common belief is that investors want to reduce their hedge fund allocations, now is the best time to be invested in hedge funds, he said, because the correlation between asset classes is falling. In other words, different types of investments are no longer rising and falling at the same time, making it more important to select the right investments and strategies rather than to follow general market developments.

“Hedge funds outperform during periods of crisis and during periods of rising interest rates, both of which everyone is afraid of,” he argued, “so you want to be in those strategies during those times.”

Another “alternative fact,” Yusko said, is that pension funds are leaving hedge funds. “Yet the fact is that pension fund assets are rising from 2015 to 2016. If we believe what we hear or read without checking the facts, we actually believe the business is dying. It is not.”

Despite $100 billion in redemptions last year, the biggest outflow since the financial crisis, hedge fund assets under management have grown to $3.2 trillion, he said.

The hedge fund manager’s reasoning is confirmed by the latest JP Morgan survey of institutional investors, such as pension funds and endowments, in the asset class.

Three-quarters of large investors said they were disappointed by the performance of their hedge fund investments last year. But nearly 90 percent of the 234 surveyed investors plan to increase or maintain their current allocations to hedge funds in 2017.

Some large investors are looking to diversify their portfolio by adding new managers and different strategies, the bank said.

A third of investors ascribed the large outflow of capital last year to overcrowding – too many investment managers pursuing a limited number of investment opportunities – and 20 percent said the difficult macroeconomic environment was responsible for the high number of redemptions.

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