Canada Pension Plan Investment Board (CPPIB) plans to invest about 1 billion reais ($396 million) in commercial property in Brazil, a few months after the Toronto-based pension fund opened an office in São Paulo.

In a statement released late on Monday, CPPIB said the investments include the purchase of warehouses, land and stakes in development projects in the logistics and retailing industries, adding to the fund's portfolio of more than 100 properties in Latin America's largest economy.

The move brings CPPIB's real estate commitments in Brazil to over $1.8 billion. Since 2009, CPPIB has bought real estate in Brazil to profit from rising demand for corporate and distribution facilities.

The Canadian giant, one of the world's biggest pension funds with more than $212 billion in assets under management, opened an office in Brazil in February to gain on-the-ground presence and business connections before tapping complex, sizeable investment opportunities. CPPIB's São Paulo office focuses primarily on investments in Brazil, Chile, Colombia, Mexico and Peru.

"Brazil remains a key market for CPPIB over the long term and we will continue to seek attractive investment opportunities through our existing partnerships with top-tier local partners while we continue to build our local presence in Sao Paulo," Peter Ballon, head of CPPIB's real estate investment in the Americas, said in the statement.

CPPIB will pay 507 million reais for 30 percent in a joint venture with Singapore's Global Logistic Properties Ltd. , the world's No. 2 owner of industrial properties, to run 32 logistics properties in São Paulo and Rio de Janeiro, the statement added.

Another 231 million reais were committed to GLP Brazil Development Partners I, a real estate investment vehicle in which Global Logistic Properties has a 40 percent stake and CPPIB a 39.6 percent stake.

CPPIB also pledged to spend 159 million reais to buy a 25 percent stake in a São Paulo logistics project alongside Cyrela Commercial Properties SA.

The fund also paid 100 million reais for a 33.3 percent stake in the Santana Parque Shopping mall, which is jointly run by partner Aliansce Shopping Centers SA, the statement added. CPPIB has a 27.6 percent in Aliansce, a shopping mall operator.

In a separate statement, the pension fund announced that Rodolfo Spielmann was named general director and leader of CPPIB's operations in Latin America. Spielmann, a former Deutsche Bank AG banker and a Bain & Co executive in Brazil for the past 14 years, started at the fund on Oct. 20.

CPPIB has committed $5.6 billion to investments in Latin America.

The Canada Pension Plan Investment Board (CPPIB) has announced a combined $445 million of investments in logistics and retail assets in Brazil in a string of moves that bring its real estate commitments in the South American giant to more than $2 billion.

“Since making our first real estate investment in Brazil in 2009, CPPIB has become one of the largest investors in the sector with ownership interests in logistics, retail, office and residential assets or developments,” Peter Ballon, managing director and head of real estate investments — Americas, said in a release Monday.

“Over the past 10 months we deepened relationships with our key partners to commit additional equity in high-quality real estate assets that are important additions to our diversified Brazilian portfolio.”

The latest investments include $226 million in a joint venture with Global Logistic Properties to invest in a portfolio of 32 logistics properties that GLP previously acquired from BR Properties S.A. CPPIB will have a 30 per cent ownership stake in the joint venture. Logistics properties include warehouses, distribution facilities and the like.

Meanwhile, the CPPIB has committed an additional $103 million to GLP Brazil Development Partners I, an existing joint venture that is owned 40 per cent by GLP, 39.6 per cent by CPPIB and 20.4 per cent by the Government of Singapore Investment Corp. The additional capital will be used to acquire a strategically positioned land parcel in Rio de Janeiro comprising 3.8 million square feet of buildable area.

It has also committed $71 million to acquire a 25 per cent interest in a new logistics development project alongside longtime partner Cyrela Commercial Properties. Called Cajamar III, the development will comprise more than 2.7 million square feet of leasable area located on the outskirts of Sao Paulo.

And the CPPIB is acquiring a 33.3 per cent interest in Santana Parque Shopping for $45 million. Aliansce Shopping Centers, an existing partner, also owns a 33.3 per cent interest in the 280,000 square foot regional shopping centre in Sao Paulo.

“Brazil remains a key market for CPPIB over the long term and we will continue to seek attractive investment opportunities through our existing partnerships with top-tier local partners while we continue to build our local presence in Sao Paulo,” Ballon said.

Canada Pension Plan Investment Board is a professional investment management organization that invests the funds not needed by the Canada Pension Plan to pay current benefits on behalf of 18 million Canadian contributors and beneficiaries.

William A. Ackman, the silver-haired, silver-tongued hedge fund mogul, gestured out the window of a 42nd-floor conference room at Pershing Square Capital Management in Midtown Manhattan. The view was spectacular, but Mr. Ackman’s arm extended not downward, toward the vibrant fall foliage of Central Park, but skyward toward the top of a glittering glass building just around the corner on 57th Street.

He was pointing toward One57, a new 90-story, lavish hotel and condominium building described by one critic as “a luxury object for people who see the city as their private snow globe.” Specifically, Mr. Ackman was referring to the penthouse apartment. Named the Winter Garden, for a curved glass atrium that opens to the sky, it is a 13,500-square-foot duplex with an eagle’s-eye view of the park.

And it will belong to Mr. Ackman. When the sale closes, the reported $90 million price would be the highest ever paid for a Manhattan apartment. It is, he explained, “the Mona Lisa of apartments.” Never will there be another like it.

But Mr. Ackman, 48, doesn’t intend to live there. He lives at the Beresford, off Central Park, with his wife and daughters. The Winter Garden is just another investment opportunity for him and a few others. “I thought it would be fun,” he said, “so myself and a couple of very good friends bought into this idea that someday, someone will really want it and they’ll let me know.” Maybe he will hold some parties there in the meantime.

Whether it’s a top-of-the-world apartment, an attack on a company or even his annual vacations with friends (the next trip is Navy SEAL training), Bill Ackman does everything big.

And this may be his biggest year yet. Overseeing more than $17 billion, his hedge fund is up 32 percent in a year when many other hedge funds are just breaking even. He recently completed a public offering of stock in Europe of part of Pershing Square, and while the shares are trading below the offering price, he still raised $2.7 billion that he can use to make more big bets. He’s also a driving force behind one of the biggest — and certainly the most controversial — potential mergers of the year: Valeant’s $53 billion hostile takeover bid for Allergan, the maker of Botox.

His critics agree that he’s big. They say he stands out for his big mouth and oversize ego, an accomplishment in the hedge fund world. (Even back in high school, his tennis teammates presented him with a T-shirt that read: “A closed mouth gathers no foot.”) Others warn that his fund has a risk of blowing up. His portfolio is made up of bets on less than a dozen companies. (The Allergan stake alone made up 37 percent of his fund earlier this fall, according to filings.) That means when things go bad, they can go really bad. That’s what happened when his $2 billion bet on Target through a separate fund lost 90 percent of its value at one point.

He has wagered $1 billion that Herbalife, the nutritional supplement company, will fail. So far, that bet hasn’t panned out, and even one of his closest advisers has called his theatrics on the subject — including a teary, three-hour rant this summer in front of nearly 500 people — a mistake.

But on that crisp fall morning at Pershing Square, Mr. Ackman was uncharacteristically taciturn. Reserved, even. Or maybe he was just a bit annoyed.

When asked if he has had to make bigger, riskier bets as his fund has grown, he answered, a bit petulantly: “We certainly have to make bigger investments, that’s definitely true. But not riskier investments.” Asked about failures, like the Target bet, he sighed deeply. “Target was a bad investment,” he said, “but out of 30 investments, I don’t know of another investor with as high a batting average.”

He certainly has an enviable long-term record: His funds, excluding the Target and four other separate funds, have returned 21 percent net of fees over 10 years, annualized. He has achieved it by going on the offensive. Mr. Ackman’s role as an activist hedge fund investor is to persuade other shareholders that he knows how to run companies better than current management does. This involves research, argument and, perhaps most important, a sensitivity to how every pronouncement and gesture will be perceived.

“I was angry at Carl Icahn for many years, as you know,” Mr. Ackman said of the longtime activist investor, when asked if he holds grudges. He swiped at his eye and added, lest the movement be misinterpreted: “My eye is tearing. It’s not emotion. I have a clogged tear duct.”

His attention to detail and persuasive powers will be especially important come December, when Allergan shareholders hold a special meeting. Mr. Ackman will urge them to replace a majority of the company’s board and to pave the way for approving the takeover by Valeant.

It’s a high-stakes move. And Mr. Ackman is all in for a big win. He is intensely competitive about everything, from memorizing two-letter words for Scrabble games to, as it turns out, owning apartments.

“It’s one of a kind,” he said of his trophy penthouse. “By the way,” he added, nodding down the street where other luxury towers are expected to be built, “these other buildings are not going to be as good.”

Commanding the Room

All successful people have stories to tell about what allowed them to achieve fabulousness. There is usually a moral. In the story that Mr. Ackman likes to tell, the moral is this: Never doubt Bill Ackman.

During his freshman year at Harvard, Mr. Ackman happened to read the application essay of the guy in the room next door. It was about why he hated Smurfs. Mr. Ackman thought it was really good, and an idea formed. He would write a book on how to write a college essay, drawing on examples and interviews with Ivy League admissions officers. On the advice of a family friend, he broadened his book to include information on college admissions and sent it off to publishers. The rejection letters piled up. He dropped the idea.

Later, two guys from Yale wrote a similar book called “Essays That Worked,” which would be featured in a New York Times article.

“I suffered extreme psychological torture,” Mr. Ackman recalled. The advice that the family friend gave, he added, had been bad. “I said, the next time I have a really good idea, I’m not going to listen just because someone is older than me.” Mr. Ackman continued, “It’s not going to stop me from going forward.”

Fresh out of Harvard Business School in 1992, Mr. Ackman went to work for his father, Lawrence Ackman, at his commercial real estate brokerage firm, Ackman-Ziff. But the young man was impatient. After just one week, and shrugging off advice that he first work for a veteran hedge fund manager, Mr. Ackman convinced his Harvard buddy David P. Berkowitz to start a hedge fund.

Cobbling together $3 million, the two started Gotham Partners. In a tiny office, they pored over corporate filings, hunting for undervalued companies. In 1998, Gotham started a hostile proxy fight against a small Ohio real estate holding company, First Union Real Estate Equity and Mortgage Investments. It took months of tussling before Gotham prevailed.

At Gotham, Mr. Ackman developed the methods he would use again and again. He went after big targets and took his battles into the public arena. Those techniques proved especially useful when he had sold short a company’s stock, betting on a collapse on the stock price.

His first foray into activist short-selling was in the spring of 2002, when he released a 48-page, scrupulously researched paper criticizing the management and reserve levels of the Federal Agricultural Mortgage Corporation. By that fall, Farmer Mac’s stock had tumbled, producing a quick win for Gotham, which had sold the agency’s stock short.

Mr. Ackman’s next short target, in late 2002, was the bond insurer MBIA, which he argued had backed billions of dollars of risky financing. It was a bet that would take years, hours of presentations to credit agencies and regulators, and a Wall Street financial crisis in 2007 before eventually paying off when MBIA’s stock started to collapse. Mr. Ackman’s bet was a huge success, netting just over $1 billion. But Gotham’s days were numbered.

Over the course of several years, Mr. Ackman struggled to right the troubled First Union, including an attempt to merge it with a failing golf operator that Gotham also owned. Investors started to voice concern. When a judge’s decision about the merger in late 2002 went against Gotham, the partners decided to wind down. The once highflying fund was done.

More than a decade later, Mr. Ackman accepts partial responsibility for Gotham’s demise. The problem, he said, was not its investments, which he argues ultimately paid off, but rather the strategy of investing in real estate, which was hard to sell quickly when investors wanted their money back. “I made a couple of strategic mistakes that, had I had more perspective, I wouldn’t have made,” he said.

About a year after Gotham closed, Mr. Ackman reappeared with a new fund, Pershing Square, and a $50 million seed investment from the Leucadia National Corporation. There would be a new focus: activist investing.

At Gotham, he learned that he needed research and a story. At Pershing, he perfected the skill of telling that story to an audience of shareholders, corporate directors and the news media.

“He’s trying to create a theatrical setting where it’s not about the words, it’s about the dynamic, the action,” said J. Tomilson Hill, chief executive of Blackstone Alternative Asset Management, an investor in Pershing Square.

He charged quickly out of the gate, persuading Wendy’s to divest itself of the Canadian chain Tim Hortons. Then he got McDonald’s to sell some of its restaurants and buy back shares. It became clear that when Pershing Square announced a stake in a company, something big was going to happen, and the stock moved.

“Bill commands a room. He’s a tall guy, a good-looking guy. He draws all eyes to him when he speaks,” said Damien Park, the founder of Hedge Fund Solutions, which consults on activist campaigns but has not worked with Mr. Ackman. “Also, his ideas aren’t usually incremental in nature — asking a company to distribute cash or clean up a balance sheet. They’re usually quantum changes in a company.”

That was true of his 2007 mark on Target. In just two weeks, he raised $2 billion for a special fund to invest in just one stock. He wanted Target to sell its credit card business and restructure its real estate holdings. Target sold off part of its credit card business, but management disagreed with his real estate plan. Over the course of two years, Mr. Ackman waged a $10 million campaign to replace board members with himself and four others.

When shareholders voted against him in the spring of 2009, the defeat stung more than his reputation. By then, losses amounted to as much as 90 percent, and many investors in the special Pershing Square fund, including the fellow activist investor Daniel S. Loeb through his Third Point hedge fund, had asked for their money back.

Mr. Ackman suffered another black eye a few years later with J. C. Penney. He won a seat on its board in 2011 and handpicked Ron Johnson, the head of Apple’s retail stores, to turn around the troubled retailer. But the efforts were botched; the company went from being profitable to losing $1.4 billion in 2013. Mr. Ackman resigned from the board in the summer of 2013, selling his stake at an estimated loss of $473 million.

“Every time I see him,” said Mr. Hill at Blackstone, “I say: ‘Bill, do me a favor. Stay away from retail.’ ”

Still, Mr. Ackman notched two of his biggest hits — General Growth Properties and Canadian Pacific — over the same period, helping to offset the reputational and financial losses from Target and J. C. Penney. Pershing estimates that Mr. Ackman’s original $65 million investment in General Growth, which operated commercial properties and has been restructured into three businesses, is now worth $3.3 billion. In Canadian Pacific, Mr. Ackman has so far tripled the value of his original investment after replacing the board and forcing through a turnaround.

His defenders argue that anyone with a fund as large as Pershing is going to have the occasional blunder. “In this business, if you don’t make mistakes, you’re either a liar or you don’t take many swings at the ball,” said Leon Cooperman, the founder of the hedge fund Omega Advisors.

Always a Competition

Last year, Mr. Ackman and some friends took a scuba-diving trip off the coast of Myanmar. The sun was warm, the ocean calm, but even in this idyllic setting, Mr. Ackman felt compelled to devise a competition he could win. After surfacing from each dive, he checked his air gauge against everyone else’s, to see who had used the least amount of oxygen while diving. Using less oxygen suggested less stress, thus proving who was least rattled under water. Mr. Ackman really, really likes to win.
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“When we lost at tennis, always, on some fundamental level, he regarded it as an aberration,” recalled Michael Grossman, his tennis partner in high school.

Mr. Ackman had an upper-middle-class upbringing in the New York suburbs, and he recalls plenty of rough-and-tumble arguments at home with his parents and sister. “Let me win?” Mr. Ackman recalled. “That doesn’t exist in my house. No one lets anyone win. Fight to the death.”

And if, at times, that means putting his fund and reputation at risk, so be it.

“I think he is just prepared to live with the scrutiny and the calumny heaped upon his head,” said William A. Sahlman, one of his professors at Harvard Business School.

This year, Mr. Ackman made a rare move. It began with a meeting in early February between him and J. Michael Pearson, the chief executive of Valeant. Five days later, Mr. Pearson expressed his interest in buying Allergan, the maker of Botox, and sought Mr. Ackman’s help, according to Valeant’s regulatory filings. Mr. Ackman agreed and began buying shares in Allergan through a unique partnership with Valeant later that month, eventually building a $4 billion stake in the company. By April, Mr. Ackman and Valeant had gone public with a bid for the company worth $47 billion. It went hostile.

“A hedge fund getting together with another company to buy out a competitor?” said Alan Palmiter, a business law professor at the Wake Forest University School of Law. “That’s definitely unusual. I can’t recall ever seeing a hedge fund being part of an industry takeover.”

Allergan had stronger words for Valeant and Mr. Ackman. It rejected the deal and warned shareholders that Valeant would squeeze the company for profit and skimp on research. In a federal lawsuit, Allergan contended that the Valeant-Ackman partnership was an “improper and illicit insider-trading scheme hatched in secret by a billionaire hedge fund investor.” The S.E.C. is now investigating. Pershing Square denies the accusations.

The short-seller James S. Chanos, who predicted the fall of Enron, has called Valeant’s accounting aggressive and joined the fight — against Mr. Ackman.

While Mr. Ackman drew support from big Allergan shareholders — including T. Rowe Price and Pentwater Capital Management, and proxy advisers like Glass Lewis — for a special shareholder meeting in December to vote on a new board, the clash has intensified. In early October, Mr. Ackman provided a sometimes testy deposition for the Allergan lawsuit. (After confirming that he had given depositions “a number” of times before, Mr. Ackman added, “I love depositions.”)

Neither side shows signs of backing down ahead of the shareholder vote. In court filings, Valeant and Pershing have accused Allergan of providing false information about Valeant to shareholders. Allergan said last week that it saw no evidence to support those claims. Valeant and Pershing, meanwhile, have raised their offer twice and have signaled they might raise it again in the next few weeks, to $60 billion.

‘A Sad Performance’

For three hours on a sunny day this past July, Bill Ackman ranted. He raved. He brought up comparisons to Enron. To the Mafia. To the Nazis. He cried.

He did this in front of an audience of nearly 500 people in a Midtown Manhattan auditorium. He had billed this as the “most important” presentation of his career, promising that it would be the “death blow” against Herbalife, the nutritional supplement club that he has bet against.

It seemed to have the opposite effect. Throughout the jaw-dropping exhibition, Herbalife’s stock rose higher, ultimately closing the day up 25 percent.

The presentation was so over the top that other hedge fund investors, friends and even members of Pershing Square’s own advisory board quickly labeled it a mistake. “It was one of the few times that I felt sorry for Ackman, a guy who makes more in a day than I make in a year,” said Erik M. Gordon, a professor at the Ross School of Business at the University of Michigan. “It was a sad performance, and it was, minute by minute, calling into question his judgment and credibility.” Mr. Ackman’s theatrical sense had gone wrong; later, he told Bloomberg News that the presentation “was a P.R. failure.”

Others feared the bet itself, which at one point totaled 10 percent of Pershing’s assets. At least one investor had already redeemed his money.

“I’m sure we had some redemptions from people who were nervous about Herbalife,” Mr. Ackman said in the Pershing conference room.

The head of a firm that invests in hedge funds, speaking on condition of anonymity because he might someday invest with Mr. Ackman, said: “There are two schools of thought on Herbalife. Bill thinks this is an outright fraud that will be convicted. To take that big a bet for your fund and your investors, I think it’s foolish.”

Even before the “death blow” presentation, Mr. Ackman had restructured his bet against Herbalife. After discussions with investors and his advisory board, he reduced Pershing’s exposure by 60 percent. But he has spent $50 million just on research and legal fees for his campaign against the company.

“Some of us might be surprised by how much he ventured — how much he got into it — but I don’t think there is anybody on the board who thinks that this is now a mistake,” said Martin Peretz, one of Mr. Ackman’s professors at Harvard, who was an early investor in Gotham and serves on Pershing’s advisory board. (Members of the advisory board each received 1 percent of the firm.) That Herbalife’s share price has fallen 34 percent this year helps, he added. Still, Mr. Ackman’s position will start making money only if Herbalife stock falls roughly another 9 percent.

The Federal Trade Commission and the S.E.C. have opened inquiries into Herbalife and its practices — in no small part because Mr. Ackman lobbied regulators and lawmakers to encourage investigations. The S.E.C. is also looking at Pershing Square and some of the investors who took the other side of the bet.

Some hedge fund executives wonder whether Mr. Ackman has lost his perspective on Herbalife, allowing it to become a personal vendetta.

“I think Bill has gotten very angry about what Herbalife is doing, and the presentation made it very clear that it’s personal to him,” said Whitney Tilson, a hedge fund manager and a longtime friend of Mr. Ackman. “He wants to be vindicated for his personal reputation as well.”

Mr. Ackman argues that he maintains plenty of rational distance. When asked if he could absorb any new information that might change his thesis against Herbalife, he first nodded curtly. Certainly, yes.

But, unable to stop himself, he fell into a familiar refrain. “There’s nothing actually that could prove that Herbalife is not a pyramid scheme,” he said. “There’s nothing.”

Maybe Mr. Ackman is capable of changing his mind. Or maybe not. As for Herbalife, he finished heatedly, “That’s a bad example.”

Bridgewater Associates LP, the $160 billion hedge-fund firm founded by Ray Dalio, sued two former employees who started competitor Convoy Investments LLC, claiming they exaggerated their previous roles with Bridgewater to win clients.

Convoy founders Howard Wang and Wenquan Wu, who Bridgewater said served in “low-ranking roles” in client services and information technology, have tried to pass themselves off as “former key figures,” according to the firm’s complaint accusing the two of violating laws against false advertising.

“Rather than promote their new venture honestly, defendants elected to trade off of Bridgewater’s hard-earned reputation,” the Westport, Connecticut-based firm said in the Oct. 21 complaint in Manhattan federal court.

Wang had publicized that he personally “managed” multibillion-dollar portfolios and helped oversee the $70 billion All Weather fund, while Wu billed himself as helping oversee various “critical components” of the company’s operations systems, Bridgewater said.

After being confronted about misleading claims, Wang and Wu took down only some of their statements from Convoy’s website, and then “mysteriously” hid the bulk of the site behind a password, Bridgewater said. The Convoy founders also submitted exaggerated claims in an application for a trademark for the new firm, according to the complaint.

Ambitions Hidden

While they had agreed to disclose their post-employment plans, Wang and Wu didn’t tell the firm that they were planning to start a competitor, Bridgewater said. The men “kept their competitive ambitions hidden,” telling Bridgewater they were “traveling, ballroom dancing” or passively advising friends and family about their investments, according to the complaint.

A representative of New York-based Convoy who wouldn’t provide a name said in an e-mail that the lawsuit claims are “baseless.”

“We believe this is a case of a giant hedge fund using its weight to scare ex-employees from becoming competition, particularly because we believe our low fee and pro bono approach is disruptive to the established industry model,” the representative said.

Bridgewater is seeking damages and a court order stopping the men from allegedly engaging in false advertising.

The case is Bridgewater Associates LP v. Convoy Fund LP, 14-cv-8413, U.S. District Court, Southern District of New York (Manhattan).

“Be very, very careful what you put into that head, because you will never, ever get it out.”

— Cardinal Thomas Wolsey on King Henry VIII

So it is with inflation. A generation of economists and central bankers who lived through the 1970s learned that there is a large risk from runaway inflation and that steps must be taken to stop it before it gets out of control.

In reality, the threat these days comes from inflation that is too low, or even from deflation. Many of the world’s economic problems would be reduced if we could get more inflation than we have now.

Unfortunately, some central banks concluded after the first bit of revival from the Great Recession that it was time to tighten credit, lest super low interest rates bring a burst of inflation pressure. They saw a need to confront the possibility of soaring prices before it was too late.

The Swedish central bank, which began to raise interest rates in 2010, in part because of worries about a housing price bubble, completed its reversal of policy on Tuesday, cutting its target interest rate to zero after raising it as high as 2 percent in 2011. But Lars E. O. Svensson, a noted economist who resigned from the Swedish central bank board last year, warned that more steps might be needed, including negative interest rates.

The Swedish blunder was not as great as the one committed by the European Central Bank when it raised rates in 2008 — a worse time to do that is hard to imagine — and then again in 2011. Mario Draghi, who became E.C.B. president in late 2011, has done yeoman work to offset the damage of that policy, but consumer price indexes in several eurozone countries are indicating deflation has arrived.

On Wednesday, the Federal Reserve’s Federal Open Market Committee sort of ended its program of buying long-term Treasury bonds and mortgage-backed securities, known as Q.E. for quantitative easing. But it will not unwind those purchases, at least for the time being. As the securities it owns mature, the Fed will roll over the proceeds into new securities.

Now, with quantitative easing ending, what has the Fed accomplished?

It has helped the economy, although not nearly to the extent that might have been hoped. Inflation, far from accelerating as some conservative economists forecast, has been running consistently below the Fed’s 2 percent target. The Fed’s preferred measure, the index of personal consumption expenditures, is up 1.5 percent over the last 12 months, both overall and excluding volatile food and energy prices. It has been more than two years since either measure was up as much as 2 percent. Imagine the criticism hurled at the Fed if inflation had been running above its target for that long.

What we have not heard from the Fed is any clarification of what it will do if inflation does not pick up, let alone if it falls close to or below zero.

“The real question,” said Jon Faust, an economist at Johns Hopkins University, “is how the F.O.M.C. will express its commitment to getting inflation back to 2 percent.” Until he left the Fed this summer, he was a special adviser to the last two Fed leaders, Ben Bernanke and Janet Yellen.

Mr. Faust was speaking before the Fed’s statement on Wednesday. The answer was that the Fed did not have many words about the question, let alone the “words with teeth” that Mr. Faust believes are likely to become appropriate.

The only dissent at Wednesday’s meeting came from Narayana Kocherlakota, the president of the Federal Reserve Bank of Minneapolis, who in a speech this month said, “In my view, inflation below 2 percent is just as much of a problem as inflation above 2 percent.” He wanted a commitment to push inflation up to 2 percent.

“The likelihood of inflation running persistently below 2 percent has diminished somewhat since early this year” was all the Fed statement had to say about the issue.

There is nothing magic about 2 percent, and some economists think that a 3 or 4 percent target might make more sense. But you don’t have to favor a higher target to realize the current inflation rate is not helping the economy.

At the moment, the threat of deflation is clearly greater in Europe than it is in the United States, and presumably some of the factors forcing prices down, including falling agricultural commodity and energy prices and a strengthening dollar, will diminish as time goes on. But if those weakening commodity prices signal a coming decline in economic activity around the world, the picture could worsen.

What is needed is for Fed officials, and other economists, to make clear some of the damage that low inflation can inflict on an economy. They make adjustments harder for countries that need to become more competitive. Cutting nominal wages is difficult and can be devastating for workers facing fixed costs, like mortgage expenses. But if there is inflation, real wages can decline as nominal wages remain level.

It has become common for some economists to denounce the effect of low interest rates on fixed-income investors, but that is not the complete story. Certainly those with money to invest now face an unappealing set of choices. But those who bought long-term securities years ago — when inflation was expected to be considerably higher than it now is — are receiving more value than they expected.

The much discussed ratio of national debt to gross domestic product also suffers. Consider the 18 nations in the eurozone. Collectively, their national debts rose by 7.8 percent in 2012 and 2013, forcing up the debt-to-G.D.P. ratio by 5.2 percentage points. From 2004 to 2006, their debts rose nearly as rapidly, by 7.4 percent. But the debt-to-G.D.P. ratio actually fell by a percentage point. At the time, European economies were growing and inflation was also pushing up the nominal gross domestic product figures. Now there is little if any growth or inflation, and the result is to worsen the debt picture.

The markets inferred from the Fed’s statement that credit tightening through higher interest rates would more likely arrive sooner than expected, and the dollar rose. If the economic growth and job figures continue to look good, and if inflation manages to rise at least a little, that forecast could be a good one.

But what will happen if inflation — and inflation expectations — do decline? So far, as can be seen in the Survey of Professional Forecasters conducted quarterly by the Federal Reserve Bank of Philadelphia, the 10-year inflation forecast has remained stable at 2 percent. If it began to fall, that would catch the attention of Fed officials.

But the bond market is not so confident. The market inflation forecast can be estimated by calculating the inflation rate at which a purchase of a normal Treasury security would be no better or worse than the purchase of an inflation-protected Treasury security of the same maturity. At the end of last year, the 10-year inflation forecast was 2.2 percent; now it is 1.9 percent. The one-year forecast then was 1.5 percent; now it is a forecast of deflation, negative 0.75 percent.

What could the Fed do if it turns out deflation is a real threat? In theory, it could resume quantitative easing. It could also jawbone Congress to provide more fiscal stimulus. If the Republicans win control of the Senate in next week’s elections, the first alternative might bring angry denunciations from both sides of Capitol Hill. The second might simply be ignored.

As long as deflation is a possibility, the Fed would be well advised to explain, again and again, why inflation that is too low is also bad for the economy. The lesson that high inflation is a threat is well known to politicians and voters. There is a need, as Cardinal Wolsey might have said, to get something else into their heads.

Correction: November 1, 2014

The High & Low Finance column on Friday, about the risks of deflation, misstated the market forecast for the 10-year inflation rate. It is 1.9 percent, not 1.7 percent.

Interestingly, the Fed ended its quantitative easing program a couple of days ago and if you read the FOMC statement, it was somewhat hawkish, which makes me wonder if the Fed is on track for making a huge policy blunder.

Importantly, I think the Bank of Japan is right to be worried and the Fed is too complacent about contagion risks emanating from the euro deflation crisis, taking away the punch bowl too soon. The doves on the Fed, like James Bullard, understand the dangers of deflation spreading to the U.S. and why it's important to leave the door open for more QE down the road, but he's not a voting member. Charles Plosser and Richard Fisher, two of the hawkish presidents on the FOMC, voted to end QE but they will be replacedearly next year and this could change the tenor of debate within the U.S. central bank's policy-setting committee.

I wrote my thoughts on Fed policy last Friday, emphasizing this:

...the biggest policy mistake the hawks on the FOMC are making is ignoring global weakness, especially eurozone's weakness, thinking the U.S. domestic economy can withstand any price shock out of Europe. If eurozone and U.S. inflation expectations keep dropping, the Fed will have no choice but to engage in more QE. And if it doesn't, and deflation settles in and markets perceive the Fed as being behind the deflation curve, then there is a real risk of a crisis in confidence which Michael Gayed is warning about. Perhaps this is the real reason why big U.S. banks are loading up on bonds (not just regulatory reasons).

Filling up the car with diesel the other week, I was pleased to discover something which – at least for someone of my generation – still feels very unusual; the price had gone down – again. And it’s not just fuel. It’s food, it’s clothing, it’s laptops, it’s air fares and much else. Indeed, were it not for the ever mounting costs associated with housing, including rents and utility bills, the CPI inflation rate for the UK last month would have been just 0.8 per cent. The picture for shop prices looks even more dramatic; according to the British Retail Consortium, non food price deflation on the high street accelerated to 3.2 per cent in September.

For those of us who spent our formative years in the inflationary 1970s and 1980s, this is an unfamiliar, even alien world. Back then, the big economic challenge was double-digit inflation, which Britain in particular seemed perennially prone to. Interest rates were repeatedly raised and lowered to cope, entrenching a pattern of economic boom and bust that was devastating for industry. It was not until the Great Moderation of the Nineties and early Noughties that the UK was able to kick the habit.

Today the threat is very different and, many would argue, very much more serious – that of stubbornly persistent economic stagnation and price deflation. That we are still worrying about this a full six years after the start of the financial crisis is itself something of an eye opener. Trillions of dollars worth of central bank money printing was meant to have seen off the spectre of deflation once and for all. Regrettably, it has not.

In Sweden this week, the Riksbank imposed a negative interest rate in a belated attempt to address what is now a virtually two-year stretch of falling prices. At least six of the eurozone economies are in price deflation. To that list can also be added Europe’s second largest economy, France, if the impact of increases in sales taxes is excluded.

Even for economies which are growing again, such as the UK and the US, the picture is not good. Analysis by the investment bank Jefferies shows that the proportion of the US inflation basket where price increases are below 1 per cent is at an all-time high. Similarly, the proportion where the inflation rate is above 3 per cent is at an all-time low. Some 31 per cent of the prices that make up “core” US inflation – that is stripping out shelter, food and energy – are now in outright deflation.

If these phenomena were predicted, it might not seem quite so worrying. Presumably, timely action would already have been taken. Yet the fact is that the US Federal Reserve, the Bank of England and the European Central Bank all find themselves continually wrong-footed in their forecasts of the downward pressure on prices. Despite record low interest rates and the wholesale application of squillions in quantitative easing, all three central banks are struggling to make inflation meet mandated targets. If even growing economies can’t restore equilibrium, what hope the eurozone, where years, if not decades, of low inflation or even outright deflation are fast becoming a virtual certainty?

Economists used to talk about the risks of “Japanification” for Europe. The way things are going, this assessment ought perhaps to be reversed; is there any hope of Europe actually avoiding it? It’s hard to imagine that good old inflationary Britain would ever succumb to this trap, yet in terms of wages, we already have. Not since the 1870s have real wages seen such prolonged and deep erosion. And if the eurozone does fall into outright price deflation, it will undoubtedly drag us down with it. Britain cannot forever remain Europe’s debt-fuelled consumer of last resort.

What’s all the fuss about, some ask? Falling prices – that’s surely a good thing? For those with secure forms of fixed income, it most certainly is; it makes them better off. It is also undoubtedly true that there are “good” forms of deflation, created generally speaking by bountiful, and growing, supply. We can include falling commodity, food and energy prices in this category. When these basics fall in price, it puts money in people’s pockets for spending on other things.

It was this type of “good” deflation that characterised much of the Industrial Revolution, and to a lesser extent the 1920s, when there were productivity-enhancing breakthroughs in the application of technology that massively expanded supply. Prices dropped, but consumption, living standards and output boomed.

Admittedly, there are elements of this type of deflation in present pricing pressures. Since the 1960s, the price of a unit of computing power as measured by Floating Point Operations Per Second (Flops), has fallen from an astonishing $8.3 trillion in today’s money to little more than 10 cents. These gains have driven major gains in productivity and substantially changed the nature of work, growth and output.

Yet unfortunately they are probably a comparatively minor part of today's deflationary story. Current deflationary pressures seem substantially to be made up of the “bad” variety, particularly in the eurozone – the kind that stem from financial crises, deep recessions, and big debt overhangs, where demand is depressed below the level of supply. The reason why bad deflation is not a disease you ever want to succumb to, and why central bankers spend so much time obsessing over it, is that once entrenched, it’s very hard to get rid of. Inflation can easily be tamed simply by bearing down on demand with higher interest rates. Lifting demand is far more problematic, however, and once rates reach the zero bound, seemingly well nigh impossible.

If prices are falling, consumers postpone spending decisions in anticipation of getting a better deal tomorrow, and instead save more. This depresses demand, causing companies invest less, employ less, and pay less. Soon a vicious cycle of declining demand establishes itself, made worse by any sizeable debt overhang, the burden of which grows as real wages shrink, making people even more averse to spending.

Sometimes both “good” and “bad” deflation are present, as in today’s falling supermarket prices. The “good” comes from the price war unleashed by the discounters, Aldi and Lidl among them. The “bad” comes from the fact that falling real wages has depressed demand. Consumers have to make less go further.

Yet even accepting that today’s deflationary pressures are substantially demand led, or “bad”, in nature, it is not clear that ever more extreme forms of monetary activism are the answer. There is a good reason why central bankers are desperate to wean their economies off the adrenalin fix of quantitative easing, and why the Federal Reserve for one is so relieved to have brought its programme of asset purchases to a conclusion this week: if it ever did work, it’s self evidently not doing so any longer.

By creating new asset bubbles, sowing the seeds for future financial instability, and widening the wealth divide, it’s also been generating some very undesirable side effects. Monetary activism may have helped save the UK and the US from greater calamity after the financial crisis, but it only steals growth from the future and from others. One effect of loose money is currency devaluation, which might give a temporary boost but merely shifts the deflationary problem onto other states. This in turn produces a race to the bottom as each country attempts to outdo the other. Globally, it’s a zero sum game.

Fiscal stimulus and credit expansion have also been tried, and so far succeeded only in sending national debt levels skyrocketing, for no lasting effect in terms of growth.

In my view, all these approaches are based on a fundamental misunderstanding of what the crisis is all about. The downturn was never just some cyclical aberration that could be easily overcome via traditional monetary and fiscal demand management. Rather, it was a manifestation of deep structural problems – excessive debt in some areas; excessive saving in areas – both within and between national economies.

Until these structural imbalances and supply-side deficiencies – such as the UK’s pitifully inadequate levels of housebuilding – are addressed at national and international level, low inflation and becalmed living standards may be about the best we can look forward to.

The federal agency that invests civil servants' pensions set up a complex scheme of European shell companies and exploited loopholes that helped it avoid paying foreign taxes — a move that could undermine Canada's standing internationally as its allies try to mount a crackdown on corporate tax avoidance.

The arrangement involved two dozen entities, half of them based in the financial secrecy haven of Luxembourg, and all of them set up in order to invest money in real estate in Berlin by a Crown corporation called the Public Sector Pension Investment Board.

The blueprint for the tax-avoidance plan was obtained by the Washington-based International Consortium of Investigative Journalists and shared with CBC News as part of a larger leak of records exposing hundreds of corporate offshore schemes set up to capitalize on advantageous tax and secrecy rules in Luxembourg.

Some of those leaked documents were first reported on in 2012 by Edouard Perrin for France 2 public television and by the BBC, but most of them have never before been analyzed by reporters.

While the Canadian government corporation's transactions were not illegal, a senior German tax official who reviewed them said the pension investment board had used "a very aggressive way to avoid taxes."

"The only goal is to avoid taxes," Juergen Kentenich, director of the regional tax office in Trier, Germany, said of the tangle of Luxembourg companies.

The loopholes that were exploited were legal, he says. "But is this fair? Should a reputable and decent businessman do something like that? That's another question."

Hundreds of millions in European real estate

The pension board invests the pension funds of federal civil servants, RCMP officers and members of the Canadian Forces, and has its directors appointed by the federal government with some input from public servants.

According to its website, it had $94 billion in assets under management as of March 31.

Between 2008 and 2013, hundreds of millions of that was held in real estate in Germany, though the leaked records also lead to assets in France, Spain, Norway, the Netherlands, Britain and Belgium.

The documents — which consist of a tax plan devised for the pension board by global accounting firm PricewaterhouseCoopers — show that the pension fund acquired 69 mixed residential and commercial buildings, totalling nearly 4,500 suites and units, in Berlin in 2008.

CBC News has learned the buildings were acquired for close to $390 million. But as a result of the way the transaction was structured, the pension investment board would have avoided paying $20 million in German taxes.

The purchase exploited a loophole in Germany's land transfer tax, which is normally levied on any entity that acquires 95 per cent or more of the shares of a real-estate holding company.

Instead, the pension board bought a direct 94.4 per cent interest in a number of Luxembourg-based property holding companies, and then obtained an indirect interest by taking a large majority position in entities that held the remaining 5.6 per cent.

The board thus obtained a 96.4 per cent overall stake in the Berlin buildings, but the German loophole meant the indirect holdings weren't counted toward the real-estate transfer tax — so it didn't pay any.

PricewaterhouseCoopers's own experts refer to this kind of set-up as a tax "avoidance scheme," though the firm said in a statement that it rejects "any suggestion that there is anything improper" about its work.

Germany closed the loophole last year.

'No issue was raised'

Pension board vice-president Mark Boutet acknowledged in an email to CBC News on Tuesday that the board's Berlin investments used the arrangement, but said it was "communicated to the German tax authorities and no issue was raised in that regard."

"Before German legislators changed the law, this approach was used by other investors and was consistent with German case law," Boutet wrote. "We respectfully disagree with your characterization of our actions as 'aggressive tax avoidance.'"

The board also avoided paying almost any tax in Luxembourg, because it used a complex system of cascading loans between the different companies it owns. (As a pension plan, it is tax-exempt in Canada.)

And Boutet acknowledged that by acquiring and then selling some of the Berlin real estate using non-German corporations, the pension board saved some money on German capital gains taxes. But he said it was minimal.

"The capital gain tax on the sale of a German company holding German real estate is less than one per cent," he wrote in an email. "No significant tax advantage resulted from [using] Luxembourg companies."

'Hypocrisy'

CBC reporters tracked those companies to an address in Luxembourg, where two staff rent desks in a shared office and oversee $700 million in civil servants' pension assets.

The revelations come as the Canadian government asserts it is fighting the very kinds of complicated, abusive tax practices that see multinational corporations route their profits through letterbox companies in tax-friendly jurisdictions. Just on Monday, Revenue Minister Kerry-Lynne Findlay told the House of Commons: "One of our government's key areas of concern is the issue of international tax evasion and aggressive tax avoidance."

Finance Minister Joe Oliver and his predecessor, Jim Flaherty, made similar declarations in recent years, as they touted measures to let the Canada Revenue Agency go after more tax from money held and moved offshore.

Canada has also pledged to crack down on international tax wizardry as part of wider efforts on this front by the Paris-based Organization for Economic Co-operation and Development and by the G20. Canada is a member of both groups.

"I think this is hypocritical," German opposition MP Gerhard Schick said of the Canadian pension board's tax planning. "Our governments should work for better rules, but they should also, in the companies they control, make sure that they are not part of the problem and avoid taxes as aggressively as private investors do."

Dalhousie University tax law professor Geoffrey Loomer agreed, saying the pension board's explanation that it follows all applicable tax laws is "the completely standard response given by the likes of Apple, Google, General Electric, Amazon, every multinational pharma corporation, every multinational financial institution."

"I have a problem with the hypocrisy of a government entity engaging in tax avoidance," Loomer said, "while the CRA, OECD and G20 are routinely criticizing 'aggressive tax planning.'"

If you have more information on this or any other story, email us at investigations@cbc.ca.

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Secret tax plan censored

The Public Sector Pension Investment Board's Luxembourg holdings came to light in a large document leak. Separately, CBC applied under access to information legislation to get the same documents directly from the pension board. The files that were released came heavily redacted. See a comparison of the redacted version with the original (also click here to view document):

In 2011, the Auditor General of Canada did perform a Special Examination of PSP Investments, but that report had more holes in it than Swiss cheese. It was basically a fluff report done with PSP's auditor, Deloitte, and it didn't delve deeply into operational and investment risks. It also didn't examine PSP's serious losses in FY 2009 or look into their extremely risky investments like selling CDS and buying ABCP, something Diane Urqhart analyzed in detail on my blog back in July 2008.

I had discussions with Clyde MacLellan, now the assistant Auditor General, and he admitted that the Special Examination of PSP in 2011 was not a comprehensive performance, investment and operational audit. The sad reality is the Office of the Auditor General lacks the resources to do a comprehensive special examination. They hire mostly CAs who don't have a clue of what's going on at pension funds and they need money to hire outside specialists like Edward Siedle's Benchmark Financial Services.

Siedle specializes in forensic and operational audits. He would have seen well past PSP's tricky balancing act, and highlighted a bunch of shady dealings. For example, how did André Collin, PSP's former head of Real Estate, join Lone Star right after directing billions to that fund while at the Caisse and PSP? Collin was recently promoted to President at Lone Star, responsible for global operations (unbelievable). He's a good real estate investor but he basically bought himself a cushy job at Lone Star. Amazingly, PSP's governance rules did not forbid their senior managers from working at funds they invest with after they leave that organization (nothing was mentioned in the Special Examination).

KKR & Co. warned Iowa’s public pension fund against complying with a public-records request for information about fees it paid the buyout firm, saying that doing so risked it being barred from future private-equity investments.

In an Oct. 28 letter to the Iowa Public Employees’ Retirement System, KKR General Counsel David Sorkin said the data was confidential and exempt from disclosure under Iowa’s open-records law. Releasing it could cause “competitive harm” to KKR, the letter said, and could prompt private-equity fund managers to bar entree to future deals and “jeopardize [the pension fund’s] access to attractive investment opportunities.”

Iowa soon after released a document with numerous redactions requested by KKR, in a “Transparency Report” that details certain fees and expenses from a 2006 KKR fund in which Iowa invested $70 million. The pension fund received requests for documents from The Wall Street Journal and others.

A KKR spokeswoman said confidential treatment enhances the firm’s ability to share extensive amounts of information with its investors.

Buyout firms, facing scrutiny from regulators on fees and expenses, are trying to keep details of those matters and many others from becoming public through freedom-of-information-law requests being made by journalists, unions, private citizens and others. They have been advising public pension funds to keep secret details about fees, interactions with regulators and other investment data.

There has been a flurry of open-records requests after the Securities and Exchange Commission this year raised concerns about fee and expense practices at buyout firms. The requests often seek details on fees and SEC regulatory examinations.

Financial firms and other corporations often closely guard what they deem to be secret strategies with competitive implications. In this case, private-equity firms are sometimes threatening to punish investors who don’t heed warnings about keeping documents they deem confidential out of public view.

Public pension funds collectively are the largest investors in private equity, with more than $500 billion committed world-wide, accounting for roughly 28% of the total cash outside investors give these investment firms, according to data provider Preqin.

Government employees, retired teachers, firefighters, police officers and taxpayers all have money at stake in these pension plans, and have an interest in how the plans are run and the fees they incur.

The pension funds, under pressure to seek sizable returns amid funding shortfalls, often want to avoid antagonizing buyout fund managers. Meanwhile, private-equity firms aren’t shy about suggesting that access to their funds, which can garner big returns, is a privilege that can be taken away.

Once public pension funds start releasing detailed information in response to public-records requests, “that’s the moment we’re done,” said Linda Calnan, interim chief investment officer of the Houston Firefighters’ Relief and Retirement Fund. “These are sensitive documents that managers don’t want out there.”

In the Iowa case, the pension fund’s general counsel, Gregg Schochenmaier, said KKR’s confidentiality request was “an appropriate assertion of their rights” under Iowa public-records law.

There are varying federal and state open-records laws designed to allow citizens access to documents, emails, meeting minutes and other records related to how government agencies and employees conduct work.

Buyout firms contend it is crucial to keep much information secret for competitive reasons. Disclosing certain data “could undermine a fund’s ability to invest and generate high returns for its limited partners,” said Steve Judge, chief executive of the Private Equity Growth Capital Council, an industry advocacy group.

Private-equity firms enjoy special protection under some state open-records laws, exempting much of their information from disclosure. Some of the exceptions were enacted a decade ago, after a 2003 incident in which venture-firm Sequoia Capital booted the University of Michigan from its fund after the school provided performance data to a newspaper. A Sequoia spokesman declined to comment.

Other skirmishes have arisen this year in various states. A North Carolina public-employees union this year battled the state treasurer over open-records requests, which sought information about alternative-investment fees as part of a union investigation into alleged pay-to-play activities. Citing a broad “trade secrets” exemption for records designated confidential by state contractors, the treasurer produced some records that were heavily or completely redacted.

“It’s all cloak-and-dagger and very hidden with the fees,” said Anne Marie Bellamy, a 60-year-old retired community-college administrator and union activist in Holden Beach, N.C., who receives state pension benefits. “We have a right to know where our money is. I’m planning on that money.”

A spokesman for North Carolina’s treasurer said it provided many unredacted documents to the union, but was obligated under state law to protect certain information. The treasurer’s office avoids making them public amid concerns that investment firms and other companies would stop doing business with the state, he said.

In June, citing concern about the SEC private-equity scrutiny, the Washington State Investment Board sent a questionnaire to 38 of its private-equity managers, asking about fees and expenses and the results of any SEC examinations.

In response to an open-records request from the Journal, the Washington pension fund asked its private-equity managers whether they were opposed to releasing the records under state law. The fund said it received overwhelming expressions of concern about confidentiality from the firms and needed time to review which records would be redacted.

In Florida, a special exception to the state’s expansive Sunshine Law, enacted in 2006, allows alternative-investment firms to designate documents as proprietary and exempt from disclosure.

The Florida pension fund this year also emailed private-equity managers asking about fees and SEC exam findings. In response to a Sunshine Law request from the Journal, the fund provided some heavily redacted responses. A three-page response from KKR was almost entirely redacted.

A spokesman for the Florida fund said the 2006 law shielding some records from disclosure achieves “an appropriate balance.”

This risk, that private equity funds might exclude public pension funds that the general partners deemed to be insufficiently zealous in defending their information lockdown, has long been the excuse served up public pension funds for going along with these secrecy demands. As we demonstrated in May, the notion that the information that the funds are keeping hidden rises to the level of being a trade secret or causing competitive harm is ludicrous. We based that conclusion on a review of a dozen limited partnership agreements, the documents that the industry is most desperate to keep under lock and key. 

Oregon's public information law should be the gold standard for other states including public employee pension funds. Only documents concerning matters under deliberation, i.e. deciding whether a fund, for example, will or won't become a limited partner with a private equity firm, are excluded from disclosure - and those are excluded only until the decision is made. This hasn't prevented the Oregon Investment Council and other public pension fund fiduciaries from claiming that asking for information beyond dog-and-pony show presentations by KKR etc. twice a year may put limited partners at risk of sharing in general partners' liabilities. Claiming that limited partners' fiduciary responsibility requires accepting the 'mushroom treatment' from KKR et al. is a travesty.

In October, New York Times reader Saqib Bhatti penned a letter questioning the ethics behind keeping private equity limited partnership agreements confidential.

“It is absurd that … huge pension funds like the California Public Employees’ Retirement System refuse to demand transparency from private equity firms for fear that the firms will stop doing business with them,” Bhatti wrote in the Oct. 20 letter to the editor. “Wall Street boycotting CalPERS would be like popcorn vendors boycotting movie theaters.”

The spirit of Bhatti’s letter is right on track, though the details need to be fleshed out. High-level private equity fund terms should be open for public consumption – there is no reason these terms need to be hidden from the beneficiaries of the pension systems that invest in the funds.

Here is a list of terms that should be open for viewing at all public systems in the United States, and these should be made public at the very least within several weeks of commitments being approved:

• name of firm and fund

• commitment amount

• fund target

• any and all fees, including carry, management, monitoring, board and transaction fees

• percentage of any fees that will be shared with the LP

• key fund executives

• general investment strategy

• fund track record

• placement agent (if any)

• political donations to local officials, and

• pros and cons outlined by investment staff

Also helpful would be a summary and rationale behind investment staff’s decision to invest in the particular fund.

To be sure, several public systems already include this information, so it is perplexing why every public system doesn’t disclose even this very rudimentary level of information.

One public LP that doesn’t provide enough timely information about its PE investments is the Colorado Public Employees’ Retirement Association. The system has a list of all the commitments it has made going back to 1982, but it only updates the current year’s activity months into the next year. This is due to state law, according to Katie Kaufmanis, public information officer with the system.

The data provided by Colorado includes internal rates of return since inception, so performance can be tracked. However, anyone looking for Colorado’s private equity activity this year, for example, is out of luck until sometime next year. And forget about information on the fees the system pays to individual funds.

The Maine Public Employees Retirement System had formerly been open on details of its commitments. For example, we learned from Maine documents that H.I.G. Bayside is in the market targeting $1 billion for its H.I.G. Bayside Loan Opportunity Fund IV. More importantly, the documents revealed some concern on the part of Maine’s investment staff about what they saw as a high level of turnover in Bayside’s managing director ranks. After we published a story about the staff’s concern, we learned yet another Bayside managing director, David Robbins, had also left the firm. Pensioners and tax payers should have access to this kind of information to understand the risks investment staff is considering while managing their money.

The routine defense of confidentiality is that revealing this kind of information would hurt firms, and, by extension, LPs and their beneficiaries, by putting GPs’ “trade secrets” out there. Steve Judge, president and chief executive officer of the Private Equity Growth Capital Council, wrote in a column for peHUB this week that making LPAs public is:

“akin to demanding that Coca-Cola publish its famous (and secret) soda recipe. Like Coke’s secret recipe, LPAs contain proprietary and commercially sensitive trade secret information that, if disclosed, could undermine a private equity fund’s ability to invest and generate high returns for its limited partners. Overnight, competitors would have access to sensitive information, like the fund’s investment strategy, investment limitations, and key personnel that competitors could use to outbid the fund on a deal or otherwise disadvantage it in competitive negotiations.”

To be clear, I don’t believe full LPAs should be made public. Detailed information about portfolio company financials should be confidential to protect from competitors.

But this is not the case for these high-level terms. Most terms in the industry are very similar and some public systems already release much of this information, making it available to the public already. Firms have had to learn and adapt to a world where this information can be widely available, depending on a fund’s LP base.

The idea that a big public system risks losing access to top-level managers by revealing this information is laughable. While top-performing GPs can pick and choose who comes into their fund, getting into those vehicles is likely not a function of how much information you make public about your private equity program. For example, the Los Angeles County Employees Retirement System, which routinely shares information about its PE investments, was not prevented from committing to Hellman & Friedman’s latest fund, which was one of the most in-demand funds this year.

Firms can threaten and cajole all they want, but in the end, if they need money to hit their targets, they’re going to take commitments even from disclosure-friendly LPs. And if a firm decides to exclude a retirement system from its fund because of that system’s level of disclosure, the system is better off moving to the next manager. There will be another great manager just around the corner less concerned with making public information about the fund.

It is time for consistency across the U.S. public pension system universe when it comes to private equity transparency. High-level terms should be made public in a timely fashion for everyone to understand the costs, benefits and risks of a system’s private equity program.

Go back to read my comment on the dark side of private equity where I discussed some of these issues. I'm not against private equity but think it's high time that these guys realize who their big clients are -- public pension funds! That means they should provide full transparency on fees, clawbacks and other terms. They can do so with a sufficient lag as to not hurt their "trade secrets" but there has to be laws passed that require them to do so.

And what about the Institutional Limited Partners Association (ILPA)? This organization is made up of the leading private equity investors and it has stayed mum on all these transparency issues. If they got together and demanded more transparency, I guarantee you all the big PE funds would bend over backwards to provide them with the information they require.

Private equity is indeed supposed to be private. The onus is on the institutional investors, like Iowa, to govern their investments well. If they think keeping arrangements private is in the best interest of their members, then that is their call.

There are plenty of arguments around keeping economic arrangements private, views on how much and what way managers get paid from people who are not accountable for results is a bad actually do have to position and compete for transactions, including getting into many funds with sufficient time for adequate diligence, at least at certain points of a cycle.

It is a big and competitive world out there, and if public funds want to abandon an area in favour of endowments and high net worth family offices who do not feel the need to disclose private information, then that is the call of a specific organization. But make no mistake, PE general partners, especially successful ones, do look at the quality and effectiveness of their investor base, and favour those that are practical and productive in important ways.

Energy policy is the single biggest issue facing Canada, according to Michael Sabia, head of one of Canada’s largest pension funds.

The Caisse de dépôt et placement du Québec is a major investor in the energy sector and energy infrastructure.

But Caisse CEO Sabia foresees significant change in the energy sector because of the energy revolution in the U.S. caused by massive tapping of shale oil and gas.

That shale oil revolution is partly responsible for the recent glut of oil worldwide, which has driven oil prices to the $80 a barrel level.

Mexico has also restructured its oil sector, making it more open to foreign investment.

“All of these things can very much change how the Canadian energy industry itself works. So that is an issue that we’re very focused on, because we are a large energy investor on a global basis,” Sabia said in an interview with CBC’s The Exchange with Amanda Lang.

Sabia said the Caisse is a big investor in both traditional sources of energy and renewable energy. But right now, pipelines are of particular interest, he said.

Realignment required

“We think that particularly in North America, there is such an important realignment of energy infrastructure that’s required, given what’s happened in the United States and what may happen in Mexico, that there should be some very interesting pipeline or infrastructure opportunities in the energy business,” he said.

Canada faces some difficult issues on the energy file, including who will buy our oil and gas as the U.S. becomes more energy self-sufficient and world oil prices fall.

“I think the issue facing Canada is, how do we market it, how do we move that energy into markets where it can be consumed?” Sabia said.

“Some of that will always be in the United States. But in the past we’ve relied very heavily on the United States. Will that be sufficient going forward, given what’s happened in that country? Open question. Therefore, moving energy east-west is important.”

The Caisse had just under $215 billion under management as of June 2014, including public pension and insurance assets.

Sabia said the Caisse sees future investment potential in Australia, but also mentions Mexico as an area of interest.

“We think that country may be on the brink of really some breakout levels of economic growth which could present us with some very interesting opportunities,” he said.

He’s acutely aware of the signs of a world global slowdown which means taking great care in selecting investment opportunities, and looking to the long term. He also seeks out regional partners who can open doors.

“What that [slow growth] means for us is not that there are no opportunities — there are opportunities — but it requires a particular approach to how we go about investing,” Sabia said.

“It requires us to place...a great deal of emphasis on the quality of our research, on deep, deep asset-specific research. I think the key word in these kinds of markets and in this kind of global situation is to be highly selective. This is not a time to be buying indices, or buying broadly asset classes, this is about asset by asset selection.”

“If (WTI prices) go to $70 (US) a barrel, that’s a problem for Alberta, and the risks (of that happening) are pretty high,” de Bever said. “If this province is going to advance it has to deal with some of this. If we can bring the cost of refining down so we’re no longer the high-cost producer, we might give ourselves some options of not just shipping it to the Gulf but maybe refining more up here and shipping the high value-added stuff.”

In particular, AIMCo is trying to identify technologies that would use less energy to convert raw bitumen into synthetic crude.

Canada's second-largest pension fund, Caisse de depot et placement du Québec, is set to make a big foray into Mexico following an initial $100 million investment in real estate, according to two sources familiar with the matter.

The sources, who requested not to be named as the deal is not yet public, said the Quebec fund is poised to soon unveil a large infrastructure-related investment in the Latin American country.

One source said Caisse and a Mexican institutional investor plan to create a joint fund to invest up to several billion dollars in domestic infrastructure projects. A deal is likely to be finalized soon, the source said.

A Caisse spokesman declined to comment on the matter.

The planned infrastructure fund comes on the heels of a Mexico City investment last week by the Caisse's real estate arm Ivanhoé Cambridge.

The deals underscore the growing global ambitions of the Caisse, which had C$294.5 billion ($260.7 billion) in assets under management as of Dec. 31, 2013, and manages pension and insurance funds in the Canadian province of Québec.

It also comes as large projects promised by Mexico President Enrique Pena Nieto, who has spent his first two years in office passing numerous economic reforms, move closer to getting under way.

These projects include high-speed passenger rail from Mexico City to Queretaro, a new $9 billion airport in the capital and a $10 billion national broadband network. An impending spin-off of thousands of telecom towers owned by Carlos Slim's America Movil (AMXL.MX: Quote) could also present an investment opportunity.

Caisse Chief Executive Michael Sabia is very familiar with the telecom sector, having run BCE (BCE.TO: Quote), Canada's largest telecom company for six years before moving on to head the pension fund manager in 2009, after the global financial crisis.

The fund lost C$39.8 billion in 2008, due in part to risky real estate bets, and saw its net asset base drop to about C$120 billion. It has since been on a surer footing, with net assets recovering to nearly C$215 billion as of June 30.

In June, Sabia said the Caisse, which has long focused on investments in companies and projects within Québec, would increasingly be looking for opportunities abroad.

The fund planned to expand its investing teams and work with new partners, he said, adding it would open an office in Mexico and Singapore, as part of a plan to boost investments in Latin America and Asia.

"It is our responsibility to go out and seek returns where they are," said Sabia. "This will be one of the cornerstones of everything we do over the next five years."

The overseas bets would mirror those of its larger rival, the Canada Pension Plan Investment Board (CPPIB), which has been actively investing funds in infrastructure, real estate and logistics assets overseas in the last few years.

Caisse, CPPIB and rival pension funds and sovereign wealth funds, are all scouting for long-life revenue generating assets. The firms have been making significant bets in physical assets like farmland and forests, along with investments in ports, real estate, hydro-electric power projects and other such assets.

Ivanhoé Cambridge, Caisse's real estate arm, announced last week that it plans to make its first direct investment in Mexico, with an initial investment of more than $100 million in a project in Mexico City. Ivanhoé Cambridge, which has some $40 billion in assets, will spend up to $500 million on its Mexican venture.

It will invest primarily in the cities of Mexico City, Monterrey and Guadalajara and has partnered with Black Creek Group, a real estate private equity firm with extensive experience sponsoring real estate companies in the country.

Ivanhoé Cambridge’s first investment of more than US$100 million will be used for a residential development project located in the Mexico City borough of Cuajimalpa, adjacent to the Santa Fe business district.

The project consists of two residential condominium buildings comprising 479 residential units.

“With this investment, Ivanhoé Cambridge is setting a major foothold in Mexico, which will provide excellent access to opportunities, including long-term investments in a portfolio of high-quality assets,” says Rita-Rose Gagné, executive vice-president, growth markets, with Ivanhoé Cambridge.

“The investment is part of Ivanhoé Cambridge’s strategy of developing a long-term, active presence in growth markets,” she adds. “The economic growth and demographic trends in Mexico are producing a large and sustained local demand for commercial and residential real estate.”

When Prime Minister Stephen Harper attends Remembrance Day ceremonies Tuesday, he will have cut short his attendance at an international summit in China to pay tribute. Yet for an increasingly vocal set of this nation’s veterans, he is guilty of paying too little attention to those who served.

His government has lionized Canadian military symbols, and sent equipment to troops in Afghanistan. Many Conservative MPs care; many see veterans as part of their natural constituency. So why did Mr. Harper’s government become a target for veterans? How did its image instead become Veterans Affairs Minister Julian Fantino lecturing a medal-wearing vet not to point his finger, or dodging a veteran’s wife?

The answer depends on whom you ask – and that’s perhaps how things went wrong.

Many veterans say they don’t have big complaints. But a minority, notably among those with serious injuries – often newer veterans clashing with the Veterans Affairs bureaucracy – feel mistreated. And there’s a new crop of vocal advocates, too, who often think the big traditional groups like the Royal Canadian Legion, are not speaking out for seriously injured vets. The new breed are far more blunt.

Mike Blais, of Canadian Veterans Advocacy, regularly blasts the government on TV. Injured Afghan vets formed Equitas to sue the government for “arbitrary, substandard, and inadequate” benefits. Mr. Fantino meets many of them, but Don Leonardo, who founded Veterans Canada, doesn’t see much point any more. “It’s nice to talk. But show me some action,” Mr. Leonardo said.

Mr. Fantino’s office didn’t act on requests to interview the minister or a government spokesman on the issue. But inside the government, officials suggest the complaints are exaggerated, and promoted by a small group of activists. Budgets have gone up, they note, and in fact, during Mr. Harper’s tenure, spending on Veterans Affairs has increased at about the same rate as overall government spending. But there’s little doubt it has become a tricky issue.

This year’s Remembrance Day has become a particularly top-of-mind memorial after the Ottawa shootings and the death of Corporal Nathan Cirillo as he guarded the National War Memorial. This government wants it that way, and wants to be associated with the country’s military community.

Now, Mr. Harper’s government has appointed a Mr. Fix-It in the form of the country’s former Chief of Defence Staff, retired General Walter Natynczyk. He has stature in Ottawa, credibility with the military community and was part of Afghanistan-war-era efforts to expand support programs for military families.

That could be critical, because the experience of injured Afghanistan vets has certainly fuelled current criticism.

As troops in 2008 or 2009, many felt support from the public. But those who are injured go from being “members” of the Forces to “clients” of Veterans Affairs. Forces’ members go through a medical board when they’re released because of an injury, then a new one when they apply to Veterans Affairs, Mr. Leonardo said.

The case workers at Veterans Affairs Canada care, he said. “It’s not the front line. They’re the most caring people in the world. The problem is the policies, the bureaucracy at the top, the funding.”

Much of the anger grew from the New Veterans Charter, put forward by Paul Martin’s Liberals and tweaked by Mr. Harper’s Conservatives. It was supposed to be a new deal, but sparked complaints, particularly about lump-sum settlements injured vets received instead of pensions.

Part of the problem for the government is that different veterans advocates propose different prescriptions for change to a complex system. But many say they’re frustrated that oft-repeated consensus recommendations – such as increasing the earning-loss benefits, and paying reservists the same level of injury benefits as regular-force soldiers – have languished.

The Commons veterans affairs committee repeated those again this year, but the government’s response doesn’t say what it will do about them or when. The government did promise to phase in several changes, such as ensuring Forces’ members have a Veterans Affairs case manager before they are released, but couched many of their promises to act in thick bafflegab.

Pat Stogran, the retired colonel who served as the first Veterans Ombudsman from 2007 to 2010, said the problem, in his view, stems from the fact that senior bureaucrats run Veterans Affairs like an insurance company, “just trying to write these people off as an industrial accident,” rather than an agency to help vets, he said.

And the politicians don’t have a lot of drive to delve through the bureaucracy. Veterans Affairs ministers don’t have much power, he said. They usually don’t argue with their bureaucrats’ assessment, they are concerned mainly with party politics. “They’re really non-players in this. They’re fighting the opposition,” he said.

It also seems possible that the fact that complaints come from a minority of veterans with problem cases, the government accepts the idea that, for the most part, things are okay.

Mr. Stogran said it’s not all vets who feel unfairly treated. Most leave to go on with their lives. The hard cases, and complaints, come among the disadvantaged after being put in harm’s way. “No, it’s not the majority. It’s the ones who are injured, or have a close affinity to them.”

Canada's proud military service remains largely based on patriotism, not pensions.

Cowichan's veterans are among those fighting for long-term remuneration and care, especially for the wounded.

Their frustration is reflected in a chain email circulating among folks such as retired Canadian Navy veteran Winston Teague, of the Malahat Legion.

That email basically demands pensions, medical care and other benefits for Canadian, British, Australian and American vets, of all ages and theatres, who risked their lives in battle.

The trick is finding fair levels of pension compensation and care through Veterans Affairs Canada.

Reaching that balance is a vitally important mission to Teague, and Cowichan's NDP MP Jean Crowder.

Vets of the Second World War, Korea, Cyprus, Egypt, Afghanistan, and other Canadian campaigns, basically get medical care, plus federal Old Age Security and Canada Pension Plan cheques at age 65.

Vets such as Teague, 73, also receive a military pension based on years served.

But long-term Veterans Affairs Canada pensions are slim to nothing, unless vets served 10 years or more, he explained.

"I don't get anything from VA because my (military) pension (income) is too high — but I'm insulted about (VA provisions) for guys who fought in World War Two, Korea, and Afghanistan.

"I did 33 years in the Navy, so I get 66% of my military pension.

"The maximum you can get in a military pension is 70% of what you earned in the service during your last (or best) six years."

But many Canadians under fire served far less time than Teague. And there's the rub.

Teague is appalled how WW2 vets got medical coverage and a handshake; Korea vets got small VA pensions; Cyprus and Egypt vets got pensions based on half of their best six years pay, upon retirement, under a 25-year military program.

Current Middle East vets may get that same half-pension, but those wounded or released may not have served long enough to get anything from VA.

Instead, they receive lump sums based on pay contributions made overseas. The system outrages Teague.

"Without 10 years of service, it's the responsibility of the military to develop a plan for these Afghanistan and Iraq vets. Give them a pension based on at least half the income from the years they served," he suggested.

Crowder explained it's not that easy. The compensation package must be decided in conjunction with vets and their organizations, she suggested.

"You have different (military) classes, and pay structures so it's not a straightforward matter — but there needs to be some way of ensuring their service is respected," she told the News Leader Pictorial from Ottawa.

Pensions aside, Teague wants our war vets — many with PTSD and lost limbs — debriefed and retrained, through counselling, for civilian life, if possible.

He figured there are "at least a couple of hundred thousand Canadian vets in total."

"From discussions with veterans about the new and old military, there's a huge disagreement about (pensions, care, counselling) with (prime minster) Harper and his (Conservative) party — particularly his VA minister (Julian Fantino)," Teague fumed.

"He's an embarrassment to the country, and to our military."

Crowder said the feds must create a fair compensation plan.

"That hasn't happened. Every government sets priorities as to where their spending goes, and this isn't a (Tory) priority. "Veterans are entitled to other benefits, and our experience is they have to fight tooth and nail, and endless delays, to get hearing aids, wheelchairs and other benefits — every roadblock imaginable is put up."

Hopping through bureaucratic hoops isn't often possible as VA offices close, explained Teague.

"If someone already has medical issues, they're not well positioned to take on the government, and some vets don't go to the Legion," noted Crowder.

"If you ask people to serve their country, you need to be prepared to look after them when they come home."

Teague agreed.

"Pay attention to your veterans, listen to your Legions, and to veterans' advocacy groups," he urged Harper's feds.

"People we have left from World War Two reduces every week. An additional $500 a month would just be a new light in their lives.

"Ottawa has put us in total disregard; we're down around the dog level."

Heading into Veterans Day, New York Gov. Andrew Cuomo has vetoed legislation that would have authorized state and municipal pension credits for peacetime military service.

The legislation authored by Sen. William Larkin, a Hudson Valley Republican and combat veteran of World War II, would amend current law that provides up to three years' credit toward public employee pensions for military service during hostilities. Veterans would have to pay 3 percent of their compensation during those military years to the retirement system.

In his veto message Friday, Cuomo said it's an unfunded mandate on local governments that would incur $57 million in near-term obligations while ignoring recently enacted pension reforms. The measure would apply to every past member of the armed forces who is a member of any public employees' retirement system.

"If enacted, this bill would run roughshod over systemic reforms carefully negotiated with the Legislature to avoid saddling local property taxpayers with additional, unmanageable burdens," Cuomo wrote. He noted that the state associations of counties and mayors and the New York City mayor's office all voiced opposition.

A memo from Mayor Bill de Blasio said it would cost the city about $18 million a year and that a police officer with 17 years of service could qualify for 20-year retirement.

The Assembly passed the bill 133-1 on the last day of the legislative session in June.

Assembly sponsors said the U.S. now depends on a volunteer military, and to encourage citizens to join, the state needs to recognize all veterans by giving them pension access.

"Our veterans deserve this legislation," Larkin said in a statement when the legislation was sent to Cuomo two weeks ago. "It fixes a loophole that has excluded countless servicemen and women who served honorably. This has been especially difficult for women veterans who have not had the opportunity to serve in combat positions and have been excluded from many of the previous service credit bills."

Larkin said Monday he was extremely disappointed and would meet with staff to determine the best way to go forward. He questioned the administration's $57 million estimate, saying the cost would be far less.

Meanwhile, Cuomo signed legislation to increase the property tax exemption for veterans from $5,000 to $7,500 of assessed value and to establish a homeless veterans assistance fund authorizing gifts through a state income tax check-off. Another signed bill provides retirement credits to New York City workers called to active military duty between Sept. 11, 2001, and Jan. 1, 2006. A similar measure already applies to state workers.

When the judge in Detroit’s historic bankruptcy case approved the city’s exit plan on Friday, he said the deal Detroit cut with its retirees bordered on “miraculous.”

Under the so-called grand bargain, foundations, the state of Michigan, the Detroit Institute of Arts and even the city’s water and sewer system have pledged hundreds of millions of dollars to bolster the municipal pension system and give the art collection new, bankruptcy-proof ownership. In return, retired workers accepted reductions to their monthly checks and other cutbacks. If all goes as planned, the grand bargain will keep the retirees’ reduced pension checks coming for the rest of their lives.

But the pension system that the settlement leaves behind has some of the same problems that plunged the city into crisis in the first place — fundamental problems that could also trip up other local governments in the coming years. Like many other public systems, it relies on a funding formula that lags the true cost of the pensions, and is predicated on a forecast investment return that the judge, Steven W. Rhodes, himself sharply questioned during the trial on Detroit’s bankruptcy plan.

Moreover, if Detroit finds itself confronting another fiscal crisis in the near future, it can no longer tap the museum’s art collection, which many saw as its top asset.

These risks might not matter if Detroit’s pension obligations were just a marginal part of the city’s finances. But they are not. Even after the benefit cuts, the city’s 32,000 current and future retirees are entitled to pensions worth more than $500 million a year — more than twice the city’s annual municipal income-tax receipts in recent years. Contributions to the system will not be nearly enough to cover these payouts, so success depends on strong, consistent investment returns, averaging at least 6.75 percent a year for the next 10 years. Any shortfall will have to ultimately be covered by the taxpayers.

In his opinion on Friday, Judge Rhodes said his “greatest concern” for the city “arises from the risks that the city retains relating to pension funding.”

Documents filed with his court show that Detroit plans to continue its past practice of making undersize pension contributions in the near term while promising to ramp them up in the future. This approach is by no means unusual; many other cities and states do it, on the advice of their actuaries. Detroit’s pension fund for general city workers, now said to be 74 percent funded, is scheduled to go into a controlled decline to just 65 percent by 2043; the police and firefighters’ fund will slide to 78 percent from 87 percent. After that, the city’s contributions are scheduled to come roaring back, bringing the plan up to 100 percent funding by 2053.

This will work, of course, as long as the city has recovered sufficiently by then. The state’s contribution to the grand bargain lasts until 2023, with the foundations and the art museum continuing to kick in until 2033. Eventually the payouts will begin to shrink some as current retirees fall off the rolls. Active workers have already shifted to a hybrid pension plan, and they will start to bear most of the new plan’s investment risk. But the city faces decades of payments for retirees under the old plan.

“The city has the potential to be saddled with an underfunded pension plan,” warned Martha E.M. Kopacz, the independent fiscal expert Judge Rhodes hired to help him determine whether Detroit’s exit strategy was feasible.

Ms. Kopacz, a senior managing director with Phoenix Management Services, did find it feasible, but expressed many reservations, especially about pensions.

“The city must be continually mindful that a root cause of the financial troubles it now experiences is the failure to properly address future pension obligations,” she said in her report. Judge Rhodes said on Friday that he agreed.

Pension concerns in Detroit coincide with a high-level debate among actuaries about their standards for funding public pensions and whether the public is adequately protected from more bankruptcies and Detroit-style disasters. The widespread practice of lowballing pension contributions today so that people will pay more down the road comes from the actuarial standards of practice.

Last month, the president of the Society of Actuaries, Errol Cramer, sent a letter to the Actuarial Standards Board expressing concern over “a misperception” on the part of the public. People have the idea, he said, that actuarial funding schedules were designed to produce enough money to pay for the pensions, “which they are not.”

All those eye-glazing board meetings, the bewildering calculations, the talk of “required contributions” and research on whether cities are paying them or not — those things have apparently confused the public into thinking that as long as an actuary follows the standards, and a city or state follows the actuary’s advice, a solvent public pension system will be the result.

Not so. To make his point, Mr. Cramer cited two popular actuarial methods, used in Detroit until now and still in many other places: “rolling amortization,” which pushes costs endlessly into the future, and pension contributions calculated as a percentage of an assumed rising payroll, which “backloads” the funding.

Those methods “do not pay down principal,” Mr. Cramer wrote.

That means they can work the same way interest-only mortgages with low teaser rates did in the subprime crisis: They can allow the growth of invisible debt, which, if not understood and managed carefully, can snowball and harm unsuspecting people.

Detroit is the prime example, and both of those actuarial methods figure in lawsuits filed in September against Gabriel Roeder Smith & Company, the actuarial firm that has advised Detroit’s pension trustees for nearly 75 years. Gabriel Roeder has said the lawsuits are based on a fundamental misunderstanding of actuaries’ roles. A spokeswoman for Detroit’s general retirement system, Tina Bassett, said that rolling amortization has been halted for the next nine years and that broad reforms have been made “to help ensure the decisions we make will provide success in the future.”

The actuarial standards of practice also permit the use of investment forecasts to discount future benefit payments into today’s dollars. Virtually all states and local bodies of government use investment assumptions this way; it makes their pension obligations look more modest and affordable than the true economic cost. The Securities and Exchange Commission bars private companies from reporting their pension liabilities that way, but it has little power over cities and states.

“We are concerned that we see many public-sector plans using practices that have not been used by private-sector plans, or that have been abandoned by private-sector plans around the world,” Mr. Cramer said. He said the Actuarial Standards Board should issue an entirely new standard for public pensions, but if it did not, then it should at least require actuaries to disclose that their standards “are not designed to provide specific regulatory oversight to the practice of plan funding.”

Mr. Cramer’s letter followed recommendations issued in February by a panel of experts and presented to the Actuarial Standards Board. The board is now gathering opinions on whether to revise its standards for public pensions; all comment letters are due by this weekend. Reactions so far have ranged widely, with some arguing that the changes would be costly and unnecessary and might confuse the public even more.

One favorable comment letter came from James Palermo, a trustee of the village of La Grange, Ill., who said better actuarial standards would help shake “a ‘trust the expert’ mind-set” that can backfire.

La Grange was one of a number of Illinois communities that had to raise taxes this year after discovering that their actuary was using an old mortality table that underestimated their police officers’ life spans, making skimpy pension contributions seem adequate.

In Detroit, the lawyer now suing the actuaries, Gerard Mantese, said he thought a faulty mortality table was also part of the problem.

Judge Rhodes said on Friday that the state would have to serve a tougher pension watchdog role. Michigan is putting $195 million into the grand-bargain pot, and in exchange Detroit’s retirees are releasing the state from any liability under its constitutional clause barring public pension cuts. Judge Rhodes said he found that settlement reasonable, but he made his misgivings clear.

“History will judge the correctness of this finding,” he said. Michigan must “assure that the municipalities in this state adequately fund their pension obligation. If the state fails, history will judge that this court’s approval of that settlement was a massive mistake.”

My solution is to bolster defined-benefit plans for all Americans, not just public sector workers, and have the money managed by well-governed public pension funds at a state level.

I emphasize well-governed because a big part of America's looming pension disaster is the mediocre governance which has contributed to poor performance at state pension funds. I edited my last comment on the Pyramis survey of global investors to include this comment:

The other subject I broached with  Pam is how the governance at the large Canadian public pension funds explains why they make most of their decisions internally. Public pension fund managers in Canada are better compensated than their global counterparts and they are supervised by independent investment boards that operate at arms-length from the government.

Of course, good governance isn't enough. States need to introduce sensible reforms which reflect the fact that people are living longer and they need to introduce some form of risk-sharing in these state pension plans.

It’s not exactly a Charlie Gasparino versus Ron Insana Twitter fight, but the two biggest rating agencies are taking pretty different views on the impact of Detroit’s bankruptcy exit plan that a judge just confirmed today. S&P put out a statement saying the plan wouldn’t have any impact on S&P’s ratings of general obligation muni bonds, even though bondholders recovered a lot less money than expected compared to other creditors, particularly public pension recipients. By contrast, Moody’s Investors service just put out a statement saying the ruling “is generally credit negative for municipal investors because it reinforces favorable treatment of pension claims over other unsecured creditors. It also solidifies impairment of general obligation (GO) bonds.”

Moody’s says the plan is bad for GO bond investors in general, and Michigan GO bondholders in particular:

These creditors accepted impairments to their debt. In the absence of clear court opinions on the strength of each pledge, investors will therefore be more likely to negotiate with distressed cities in the future.

And more from Moody’s:

In confirming the plan, the court is sanctioning varying recovery rates amongst Detroit’s unsecured creditors. Reported recoveries for unsecured creditors range from an estimate of 14% for Certificates of Participation (COP) creditors to up to 82% for pension claims in real benefit terms. This disparate treatment of creditors was also a feature of the Stockton bankruptcy. These discrepancies leave investors with more questions than answers, but the emerging picture is one in which pensions have better recovery probabilities than debt in a Chapter 9 case, and municipalities exiting from bankruptcy likely retain responsibility for paying down large unfunded pension liabilities. We also note the confirmation does not affect existing settlements with Detroit creditors. Our ratings already reflect the recovery creditors will receive from those settlements.

Mark Melin of ValueWalk reports, South Carolina Wants Smaller Hedge Fund Managers:

There has been an ongoing academic debate in the hedge fund industry as to what size fund generates the best performance, large or small hedge funds.  Now South Carolina’s pension system is weighing in on the issue.

The $30 billion pension system is interested in allocating to smaller hedge fund manager to enhance diversification and capture increased returns, state treasurer Curtis Loftis was quoted as saying in a Bloomberg Briefs report by Nathaniel Baker.

Interested hedge fund managers invited at public meetings

Showing a degree of southern hospitality, Loftis invited interested hedge fund managers to come on down and “show up” at public meetings, including the South Carolina Investment Commission meetings. “If I were an emerging manager and I wanted to understand how public pension plans work, I would attend the meetings, shake hands and pass out cards.”

The way the “system works” at many pension plans is that hedge fund consultants who specialize in understanding the often complex strategies screen various funds and then make recommendations to the pension system. Funds typically do not receive access to pension fund management until they have been approved through such a screening process.  Sometimes the more sophisticated consultants diversify a hedge fund portfolio based on market environment exposure and use risk management criteria to make selection decisions.

Loftis loves alternative investments

At the start of the year, the South Carolina pension had nearly $1 billion allocated to 14 investments in “strategic partnership funds” of $1 billion or more but had since “unwound about half,” Loftis was quoted as saying in a speech at the Alternative Asset Summit in Las Vegas last month.  “I love alternative investments. I love Wall Street. I don’t mind paying fees,” Loftis was quoted in the report saying in 2013. “But I want returns.”

A key driver for South Carolina is diversification. In 2008 most hedge fund strategies faltered, with a few exceptions in managed futures across the board and some macro strategies.  Loftis was quoted as saying he was “very interested in emerging managers” as a method to achieve diversification and boos returns, he was quoted as saying in the Oct. 28 speech. The pension has already taken steps to address the issue, making “several… investments of $50 million or less the last few of months,” including a commitment of $25 million to $50 million last month to an unidentified small manager, the report noted.  The South Carolina pension system paid hedge funds fees of 1.59 percent last year, according to the report.

The last thing you want to tell Curtis Loftis is that he can’t do something.

That’s one mistake the former South Carolina Treasurer made when Loftis was considering a bid against him. “He reminded me that a Republican has never beat an incumbent in a primary election,” Loftis, 54, recalls. The native of Columbia went on in 2010 to become the first South Carolina Republican to oust a sitting Republican, launching a combative primary campaign, then easily winning the general election that fall.

And that was just the beginning of the upsets.

Since he took office more than two years ago, the former businessman has made it his mission to overhaul the state investment commission that oversees the state’s pension fund. The conflict has included Loftis prompting an investigation into South Carolina Retirement System Investment Commission (RSIC) Chairman Reynolds Williams for allegedly steering commission business to his firm, Loftis and Williams using the media to trade insults and a nearly unanimous commission vote to officially censure Loftis (the treasurer, who sits on the commission, was the lone vote against).

Most recently, a lawsuit filed by the commission against Loftis for holding up an investment contract was thrown out by the state supreme court because Loftis had authorized the contract the day before the court hearing, saving the commision from going into default. It won both sides a public scolding: “We don't appreciate trying to referee kids in a sandbox,” Associate Justice Donald Beatty reportedly said at the April hearing.

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After two years of conflict, both sides say they are eager to move on. But at the base of their disagreement is a fundamentally different view on how the $26 billion retirement fund should be performing. Loftis has seized upon what he calls an imbalance between the fees the commission pays (which have ranged between $304 million and $344 million over the last three years) and its rate of return when compared with other sizeable public pension plans. In 2012, for example, the investment fund earned a net $105 million after paying out $304 million in fees. The rate of return that fiscal year ending June 30, 2012, was 0.4 percent after deducting the cost of management fees, according to the fund’s Annual Iinvestment Report (AIR).

When compared with other public pension plans valued at greater than $5 billion, that performance puts South Carolina’s ranking in the 63rd percentile, or in the lowest 40 percent, according to data collected by the investment advisory firm Wilshire Associates and provided to Governing by the treasurer’s office. The Wilshire data includes major plans like CALPERS, CALSTERS, Washington State, Oregon, and Texas Teachers.

Even a good year of returns is all relative for Loftis -- in 2011 the fund earned roughly $4 billion, or a return of 18.3 percent on investment and paid fees of $343.6 million, according to that year's AIR. But compared to other plans, RSIC finished in the 87th percentile that year, or in the lowest 20 percent. (The top returns in 2011 were above 26 percent while the lowest were below 10 percent, according to Wilshire.)

“If we were number one in returns and in fees I’d love it,” Loftis says. “But you have to pay fees commensurate with what you’re getting. What we’re paying for is a Rolls Royce. And we’re driving off in a [Ford] Pinto.”

But that’s not how the commission sees it.

“What I’d encourage everyone to stop and think about … we’re not thinking about putting ourselves in a horse race with other public pension peers,” says Hershel Harper, the commission’s Chief Investment Officer. “We look at what it is in relation to our expected return of 7.5 percent [over the long term], and what are the risks we are comfortable taking.”

Although Loftis has lamented that the fund’s investment in hedge funds or other “alternative investments” generate the higher fees, Harper noted that the underperforming investments in 2012 were generally in the traditional asset classes, not the alternative ones. Still, in January of this year (2013), the investment commission did something it hadn’t done before: it attached an addendum to its 2012 AIR that provided a second summary letter to the original November 2012 report. The addendum gave the investment fund’s totals for the 2012 calendar year -- a far rosier picture (an 11.5 percent rate of return, in fact) than the fiscal year stats.

A spokesman for the commission said the January letter was attached to give lawmakers and the public a more up-to-date summary of the fund and that the decision to do so was made after it became clear that the final six months of 2012 were financially far better than the first half of the year. The spokesman, Danny Varat, added that he imagined such updates for timeliness would also occur in the coming years.

On fees, Harper warns that it is misleading to compare RSIC’s fees with other public pension plans because there are no uniform guidelines for reporting fees. For example, he said, the commission includes auditor expenses in its fees and other plans don't. “We feel we cast possibly the broadest net in capturing every fee out there,” he said.

Some public pension plans elsewhere are taking a stab at lowering management fees. This spring, the $10.5 billion Orange County Employees’ Retirement System (OCERS) approved a plan that would bundle pension fund assets together in an effort to be able to negotiate lower management fees (a kind of pension fund collective bargaining). The plan was projected to spend $52 million this year in fees, according to media reports.

Loftis’ recent announcement he will seek a second term in 2014 has quelled for now any musings that his pot stirring is part of a larger effort to run for governor. “When I lay my head down at night, I don’t think about that rickety old mansion on Charles Street,” he says. “I can’t stop what I’ve started [here].”

But if there is an understanding to be reached between the South Carolina treasurer and the commission he serves on, neither side has found it. At the last commission meeting in April, the commission's vice chairman threatened to resign on May 31 if the relationship with Loftis was not resolved, adding “there is little or no common ground between” the two sides.

The investment commission’s Chief Operating Officer, Darry Oliver, says he doesn’t think the commission “gets enough credit” for the improvements it has made in recent years such as establishing an internal audit and compliance function. The commission also plans on more transparency in reporting, including more frequent updates on the investment fund’s statistics. The feud with Loftis, Oliver says, is detracting from that. “My view is that the negative publicity isn’t good for anyone -- it’s not good for the commission, it’s not good for the treasurer, it’s not good for the stakeholders.”

But Loftis, who says he initially planned on handing over his commission seat to a staff member but felt compelled to stay on, dismisses that notion. “This is high finance,” he says. “When they say things like, ‘People won’t want to do business with us,’ that’s pure silliness.”

With European inflation declining to 0.3%, and U.S. inflation slowing, a specter now haunts the Western world. Deflation, the Economist recently proclaimed, is a “pernicious threat” and “the world’s biggest economic problem.” Christine Lagarde , managing director of the International Monetary Fund, called deflation an “ogre” that could “prove disastrous for the recovery.”

True, a sudden, large and sharp collapse in prices, such as occurred in the early 1920s and 1930s, would be a problem: Debtors might fail, some prices and wages might not adjust quickly enough. But these deflations resulted directly from financial panics, when central banks couldn’t or didn’t accommodate a sudden demand for money.

The worry today is a slow slide toward falling prices, maybe 1% to 2% annually, with perpetually near-zero short-term interest rates. This scenario would unfold alongside positive, if sluggish, growth, ample money and low credit spreads, with financial panic long passed. And slight deflation has advantages. Milton Friedman long ago recognized slight deflation as the “optimal” monetary policy, since people and businesses can hold lots of cash without worrying about it losing value. So why do people think deflation, by itself, is a big problem?

1) Sticky wages. A common story is that employers are loath to cut wages, so deflation can make labor artificially expensive. With product prices falling and wages too high, employers will cut back or close down.

Sticky wages would be a problem for a sharp 20% deflation. But not for steady 2% deflation. A typical worker’s earnings rise around 2% a year as he or she gains experience, and another 1%—hopefully more—from aggregate productivity growth. So there could be 3% deflation before a typical worker would have to take a wage cut. And the typical worker also changes jobs, and wages, every 4½ years. Moreover, “typical” is the middle of a highly volatile distribution of wage changes among a churning job market. Ultimately very few additional workers would have to take nominal wage cuts to accommodate 2% deflation.

Curiously, if sticky wages are the central problem, why do we not hear any loud cries to unstick wages: lower minimum wages, less unionization, less judicial meddling in wages such as comparable worth and disparate-impact discrimination suits, fewer occupational licenses and so forth?

2) Monetary policy headroom. The Federal Reserve wants a 2% inflation rate. That’s because with “normal” 4% interest rates, the Fed will have some room to lower interest rates when it wants to stimulate the economy. This is like the argument that you should wear shoes two sizes too small, because it feels so good to take them off at night.

The weight you put on this argument depends on how much good rather than mischief you think the Fed has achieved by raising and lowering interest rates, and to what extent other measures like quantitative easing can substitute when rates are stuck at zero. In any case, establishing some headroom for stimulation in the next recession is not a big problem today.

3) Debt payments. The story here is that deflation will push debtors, and indebted governments especially, to default, causing financial crises. When prices fall unexpectedly, profits and tax revenues fall. Costs also fall, but required debt payments do not fall.

Again, a sudden, unexpected 20% deflation is one thing, but a slow slide to 2% deflation is quite another. A 100% debt-to-GDP ratio is, after a year of unexpected 2% deflation, a 102% debt-to-GDP ratio. You’d have to go decades like this before deflation causes a debt crisis.

Strangely, in the next breath deflation worriers tell governments to deliberately borrow lots of money and spend it on stimulus. This was the centerpiece of the IMF’s October World Economic Outlook antideflation advice. The IMF at least seemed to realize this apparent inconsistency, claiming that spending would be so immensely stimulative that it would pay for itself.

4) Deflation spiral. Keynesians have been warning of a “deflation spiral” since Japanese interest rates hit zero two decades ago. Here’s the story: Deflation with zero interest is the same thing as a high interest rate with moderate inflation: holding either money or zero-interest rate bonds, you can buy more next year. This incentive stymies “demand,” as people postpone consumption. Falling demand causes output to fall, more deflation, and the economy spirals downward.

It never happened. Nowhere, ever, has an economy such as ours or Europe’s, with fiat money, an interest-rate target, massive excess bank reserves and outstanding government debt, experienced the dreaded deflation spiral. Not even Japan, though it has had near-zero inflation for two decades, experienced the predicted spiral.

There are good reasons to believe it can’t happen. Most of all, government solvency fears that don’t matter for 2% deflation kick in and stop a deflation spiral. If prices fall 20%, or 30%, bond-holders will see that governments cannot pay back debts. They try to get rid of their bonds before the coming default. They buy things or other currencies, nipping the deflation spiral in the bud.

There is an unsettling feature of the current inflation situation, however. Clearly, our central banks want higher inflation, and the current slow decline was unintended. So, just as clearly, central banks have a lot less understanding of and control over inflation and deflation than most people think.

According to the conventional worldview, the economy is inherently unstable. Central banks control inflation the way you balance an upside-down broom, with interest rates on the bottom and inflation on top. Central banks have to actively move interest rates around to keep inflation and deflation from breaking out. And if they want more inflation, they must temporarily move interest rates the wrong way, let the inflation increase, and then move quickly to stabilize it.

Hence the zero-bound worry. When interest rates hit zero and the Fed can’t move the broom handle any more, the top of the broom must topple into deflation. Except we hit the zero bound, and almost nothing happened. Maybe the economy isn’t so inherently unstable and in need of constant guidance after all.

Bottom line? Relax. Every few months we hear a new “biggest economic problem” from which our “policy makers” must save us. Wait for the next one.

Société Générale strategist Albert Edwards is predicting a yen crash will force devaluations across Asia, which will have significant repercussions for the West.

In the perma-bear's view the market has not 'grasped the significance of this phase of currency wars'.

'It reminds me of the 2006/07 period when falling US house prices and then widening corporate bond spreads were totally ignored by upbeat equity investors until it was too late,' he reflected.

In his view, the yen is set to follow the US dollar DXY trade-weighted index 'by crashing through multi-decade resistance - around ¥120'. Once the dollar-yen exchange rate reaches this level, he expects a very quick ¥25 move to ¥145.

'I expect the key ¥120/$ support level to be broken soon and the lows of June 2007 (¥124) and February 2002 (¥135) to be rapidly taken out,' he noted.

This, he expects, will force devaluations across the whole Asian region and will send a tidal wave of deflation westwards.

'I simply think Japan will lose control of the situation given the quantity of quantitative (QE) being spewed into the markets and unless the US, the eurozone, or indeed Korea, is prepared to come remotely close to Japan’'s rate of QE, jawboning currency stability will do very little,' Edwards explained.

'But I do believe the yen devaluation will drag down other competing currencies in the Asian region,' he added - not least China.

He points to 32 successive months of deflation in China at the producer price level and poses the question: do investors think China can cope with a devaluation of the yen from here?

He answered: 'They simply can’t tolerate this and they won’t. They will devalue.'

He points out that strategists are rarely willing to make bold currency forecasts and therefore do not tend to predict too far from the current spot rate.

'It is mainly the fear of being wrong that prevents them from making bold forecasts, despite consistent evidence that markets are far more volatile than their mundane forecasts ever suggest,' he added.

While Japan is cheap and getting cheaper, he anticipates further dollar strength ahead too.

Edwards is not a strong believer in quantitative easing (QE) in terms of Bernanke's former approach of pushing up asset prices to inflate the real economy.

Yet he believes the only way that QE works is via the exchange rate and commends the Bank of Japan for genuinely doing whatever it takes. This contrasts starkly with the European Central Bank, he comments.

'The problem for the eurozone is that Draghi is getting increasingly long on promises and pretty disappointing on delivery. Japan is just on a different page, league, or indeed planet, altogether,' he added.

He anticipates the yen could fall to the July 08 low of ¥170 versus the euro.

Inflation data published on Monday provide the latest evidence of China’s descent towards deflation. The consumer price index (CPI) rose 1.6% in October from a year earlier, the lowest since the start of 2010. Month-on-month CPI inflation was flat, falling back from September’s 0.5% increase. Core inflation, stripping out volatile food and energy prices, ticked down to 1.4% year-on-year in October, below the 1.7% average over the previous nine months. Meanwhile, the producer price index (PPI) ran deeper into negative territory. Prices of goods as they left factory gates fell 2.2% in October from a year earlier, steeper than the 1.8% decline in September. PPI has been in deflation for 32 straight months.

With producer prices in China declining for nearly three years, the European Union as China’s biggest trading partner has been importing deflation. But with Chinese deflation accelerating, Europe seems doomed to suffer a deflationary crash as consumers delay purchases, companies cancel investments, and workers suffer rising layoffs.

Inflation data published on Monday for the month of October reveals China’s rapid descent towards actual deflation as the consumer price index (CPI) rose just 1.6% from a year ago. The annual reading was the lowest rate since 2010 and flat from the prior month. Subtracting out the volatile food and energy components, Chinese “core inflation” plunged in October to a negative at -1.4% versus a year ago.

After growing from virtually zero two decades ago, the European Union is China’s biggest trading partner. The EU exports about $350 million of goods and services a day but imports $750 million per day from China. The result is a net trade deficit of about $350 million per day. Any change in China export prices are quickly felt in the EU.

Producer Price Index (PPI) for goods leaving Chinese factory gates fell from a negative -1.8% in September to a negative -2.2% in October. The accelerating decline in prices caps a string of 32 straight months of deflating prices.

Falling PPI would normally be a sign that a nation’s interest rates are too high and monetary policy too tight, but the price decline is due to commodity prices that have been plummeting since May of 2012 and are now below the crisis levels at the depth of the 2008 financial crash. As a resource poor nation, monetary stimulation and lower interest rates would little impact reducing falling goods prices. 

China’s strong export surplus with the EU and others has meant that the domestic labor market has remained tight. While average worker wages in China increased by 9.3% in the first nine months of 2014, EU wages were only up by +1%. Labor demand also explains why average youth unemployment in the EU was 18.1% and only 7.4% in China, according to the International Labour report for 2012.

The European Union officially estimated the current inflation rate is +.04% annually, despite the EU targeting a positive +2% rate. Many analysts including Boskin Commission Report,  Hausman’s Journal of Economic Perspectives survey, Robert Gordon, and Mark Wynne believe that EU inflation is positively overstated by  a +0.7% to +2.2%. Such an adjustment would mean the EU is already in serious deflation.

The International Monetary Fund's latest world economic outlook (WEO) raised the probability of deflation in the Eurozone over the next six months from 20% earlier this year to 30%. But with the huge flow of deflated Chinese goods in transit to the EU, the probability of the EU officially being in deflation would seem to be much higher.   

Then-U.S. Federal Reserve Chairman Ben Bernanke opined in 2002 that “sustained deflation can be highly destructive to a modern economy and should be strongly resisted.” Current Chairwoman Janet Yellen shared his concerns in a 2009 speech: “It is conceivable that this very low inflation could turn into outright deflation. Worse still, if deflation were to intensify, we could find ourselves in a devastating spiral in which prices fall at an ever-faster pace and economic activity sinks more and more.”

What economists fear about deflation is not that prices get cheaper, but rather that the expectation of cheaper prices will cause consumers to delay purchases and stimulate employers to cut back production and lay-off workers.

What European social welfare states fear most about deflation is that their tax systems are designed to use inflation combined with progressive income tax rates as a tool to accelerate wealth redistribution from the people to the state. Deflation would reverse that process as tax collections will wither faster than the economy slows.

With the European Union already near zero growth, despite what most economist believe is a substantial overstatement of inflation, Chinese deflationary exports in transit seem sure to push the European Union into deflation.

Deflation is becoming lodged in all the economic strongholds of East Asia. It is happening faster and going deeper than almost anybody expected just months ago, and is likely to find its way to Europe through currency warfare in short order.

Factory gate prices are falling in China, Korea, Thailand, the Philippines, Taiwan and Singapore. Some 82pc of the items in the producer price basket are deflating in China. The figures is 90pc in Thailand, and 97pc in Singapore. These include machinery, telecommunications, and electrical equipment, as well as commodities.

Chetan Ahya from Morgan Stanley says deflationary forces are “getting entrenched” across much of Asia. This risks a “rapid worsening of the debt dynamic” for a string of countries that allowed their debt ratios to reach record highs during the era of Fed largesse. Debt levels for the region as a whole (ex-Japan) have jumped from 147pc to 207pc of GDP in six years.

These countries face a Sisyphean Task. They are trying to deleverage, but the slowdown in nominal GDP caused by falling inflation is always one step ahead of them. “Debt to GDP has risen despite these efforts,” he said. If this sounds familiar, it should be. It is exactly what is happening in Italy, France, the Netherlands, and much of the eurozone.

Data from Nomura show that the composite PPI index for the whole of emerging Asia – including India – turned negative in September. This was before the Bank of Japan sent a further deflationary impulse through the region by driving down the yen, and before the latest downward lurch in Brent crude prices.

The Japanese know what it is like to be on the receiving end. A recent study by Naohisa Hirakata and Yuto Iwasaki from the Bank of Japan suggests that China’s weak-yuan policy - a polite way of saying currency manipulation to gain export share – was the chief cause of Japan’s deflation crisis over its two Lost Decades.

The tables are now turned. China itself is now one shock away from a deflation trap. Chinese PPI has been negative for 32 months as the economy grapples with overcapacity in everything from steel, cement, glass, chemicals, and shipbuilding, to solar panels. It dropped to minus 2.2pc in October.

The sheer scale of over-investment is epic. The country funnelled $5 trillion into new plant and fixed capital last year - as much as Europe and the US combined - even after the Communist Party vowed to clear away excess capacity in its Third Plenum reforms. Old habits die hard.

Consumer prices are starting to track factory prices with a long delay. Headline inflation dropped to 1.6pc in October. This is so far below the 3.5pc target of the People’s Bank of China that it looks increasingly like a policy mistake. Core inflation is down to 1.4pc.

China has flirted with deflation before: during its banking crisis in the late 1990s, and again during the West’s dotcom recession from 2001-2002. Both episodes proved manageable.

This time the level of debt greater by orders of magnitude, with a large chunk in trusts, wealth product, and other parts of the shadow banking nexus, and a further $1.2 trillion in “carry trade” loans from Hong Kong. Standard Chartered thinks total debt has reached 250pc of GDP. This is roughly $26 trillion, the same size as the US and Japanese commercial banking systems put together, and therefore a headache for us all.

Larry Brainard from Trusted Sources says China is sliding towards a European debt-compound trap. “It’s arithmetic. Deflation will kill you if you’re leveraged. It is just a question of how quickly. We don’t know how big the problem is because China is playing a game of three-card Monte and moving the debt to different buckets,” he said.

“The bottom line is that PPI deflation increases the cost of leverage across the board. The risk is that it sets off a self-reinforcing cycle of debt defaults and rising non-performing loans that runs out of the control of the authorities. China will have to cut rates,” he said.

Asia is not yet in a full-blown currency war, but no country can stand idly by as neighbours dump toxic deflationary waste on their front lawn. Korea has threatened to force down the won, pari passu with the yen. The central bank of Taiwan has been intervening.

These skirmishes are happening in a region of festering grievances and territorial disputes, with no Nato-style security structure - or for that matter EU-style soft governance - to damp down fires. The spokes of the diplomatic wheel connect by a perverse geography to Washington, a city retreating from Pax Americana.

The Asia-Pacific Economic Cooperation summit this week feigned concord, but was in reality more like the Great Power dances of the late 1930s. China’s Xi Jinping shook nationalist hands with Japan’s Shinzo Abe, even as both sides rearm, and their warships threaten each other daily in Senkaku waters. In such a world - mercantilist by temperament in any case - attempts to export deflation to neighbours take on a sharper edge.

China has so far held its nerve under premier Li Keqiang, a man determined to wean his country off credit and an obsolete development model before it lurches into the middle income trap. It has not resorted to another blitz of stimulus - beyond short-term liquidity shots - even though house prices have been falling for five months and growth has fizzled. Fathom’s momentum tracker suggests that underlying GDP growth has dropped to 5pc.

The benchmark one-year lending rate is still 6pc. The reserve requirement ratio for banks is still 20pc. Money is getting tighter and tighter.

Nor has China intervened to hold down the yuan. Purchases of foreign bonds have dropped to zero, down from $35bn a month at the start of the year. The yuan has appreciated 22pc against the yen since June, and 50pc since mid-2012. It is up 12pc against the euro since the early summer.

China is in effect strapped to the rocketing dollar through its quasi-peg, increasingly a torture machine. George Magnus from UBS says this cannot continue. “What is happening in the property market is the tip of the iceberg for the whole economy. China will have to resort to monetary reflation over the winter, and I think this will include a lower yuan. We are heading into a currency war,” he said.

This looks all too like a replay the East Asia storm of 1998, when a tumbling yen triggered a Chinese banking bust and pushed Beijing to the brink of devaluation. Washington defused the crisis by stabilizing the yen, and by promising China membership of the World Trade Organisation.

It will be harder to repeat that trick in these deflationary times. The clear danger is that China will feel compelled to defend itself, throwing its huge weight into a beggar-thy-neighbour battle across East Asia.

Should that happen, the mother of all deflationary shocks will roll over Europe before the EU authorities have even got out of bed.

Alibaba, the Chinese e-commerce website, was the hot initial public offering of the year on Wall Street. And not surprisingly, shares of Alibaba wound up in the portfolios of many well-known money managers in the third quarter.

Third Point, Viking Global Investors, Paulson & Company and Soros Fund Management were some of the hedge funds that disclosed sizable ownership stakes in Alibaba when they submitted filings to the Securities and Exchange Commission on Friday.

The regulatory filings, known as 13-Fs, are quarterly updates from large money managers about their holdings in stocks traded in the United States.

Viking Global Investors, the fund led by O. Andreas Halvorsen, reported having about 11 million shares of Alibaba, while Daniel S. Loeb’s Third Point reported a stake of 7.2 million shares. Soros Fund Management, which manages the wealth of George Soros, had 4.4 million Alibaba shares. John A. Paulson’s fund said it had 1.9 million shares.

Also reporting a large stake in the Chinese company was Tiger Management, led by Julian Robertson, one of the best-known hedge fund managers. It said it had about 1.2 million shares. Moore Capital, the fund led by Louis Bacon, reported having about 1.5 million shares.

Leon Cooperman’s Omega Advisors and Barry Rosenstein’s Jana Partners disclosed holding smaller stakes in Alibaba. BlueMountain Capital Management disclosed it owned 303,031 shares, while Appaloosa Management said it had 725,000 shares. Even the family office of Stanley Druckenmiller, the billionaire investor, said it had 10,000 shares of the e-commerce company.

Alibaba raised about $22 billion in one of the largest I.P.O.’s ever, and shares soared 38 percent in the first day of trading.

Investor interest in Alibaba had built up well before its stock market debut in September. But a number of prominent hedge fund managers — Mr. Loeb of Third Point, David Tepper of Appaloosa Management and Mr. Bacon among them — pressed for one-on-one meetings with the company in the run-up to the I.P.O.

The 13-F filings offer the first glimpse of which hedge fund managers and mutual funds were able to pick up Alibaba shares. More broadly, they offer a window into the thinking of money managers as they move in and out of stocks. But 13-F filings also do not provide a full picture. They disclose only what money managers, including hedge funds, were invested in as of 45 days ago— something investors should keep in mind when reviewing any 13-F quarterly report. Moreover, October was a particularly volatile month, meaning stock positions could have changed substantially. The filings also do not require investors to disclose short positions, or bets that a stock will fall in price. And sometimes the S.E.C. will permit investors to keep stock positions confidential for a while.

But the filings can reveal some interesting developments.

For instance, Chase Coleman’s Tiger Global Management sharply increased its stake in Soufon Holdings, a Chinese real estate Internet company in the third quarter. The firm reported owning 14 million shares as of Sept. 30, up from 863,648 shares at the end of the second quarter.

Jana, the activist hedge fund run by Mr. Rosenstein, disclosed in its filing that it also owned 842,268 shares of McDonald’s, a move that contributed to a 1 percent gain in McDonald’s share price in early trading on Friday. Moore also reported having 450,000 shares in McDonald’s.

Elsewhere in the world of fast food, another hedge fund, Fir Tree Partners, reported having 1.5 million shares in Burger King Worldwide. In late August, Burger King agreed to buy Tim Hortons, the Canadian chain of coffee-and-doughnut shops.

But while some hedge funds clustered around a few stocks, disagreement was common. The Fortress Investment Group, for example, disclosed owning five million shares in Ally Financial, the onetime financing arm of General Motors. Paulson, meanwhile, sold two million Ally shares, disposing of its entire position.

Mr. Loeb of Third Point sold his position in Hertz, a previously disclosed move. The rental car company said on Friday that it would revise its recent financial statements after discovering errors.

Some new positions reflected headlines. Appaloosa Management disclosed owning 1.4 million shares in Lorillard, the tobacco company that agreed in July to be bought by its larger rival Reynolds American. Soros said it had five million shares in Yahoo, which owns a stake in Alibaba and received a cash windfall in the I.P.O.

Jana, whose activist strategy often involves pressing companies to make changes, took positions in some of the corporate battles of the day. The hedge fund showed a roughly 0.4 percent stake in Valeant Pharmaceuticals, the Canadian pharmaceutical company that has teamed up with the hedge fund manager William A. Ackman in a hostile bid for Allergan, the maker of Botox.

Speaking of Mr. Ackman, his Pershing Square Capital Management finds itself on the opposite side of the debate of Herbalife with Tiger Consumer Management. Tiger Consumer, the hedge fund led by Patrick McCormack, disclosed that it acquired a 1.78 million share stake in Herbalife in the third quarter.

Herbalife has been under assault from Mr. Ackman for nearly two years. Mr. Ackman, who said he spent $1 billion to open a bearish bet on the company’s stock, contends Herbalife is an illegal pyramid scheme and has been openly predicting the company will collapse.

This is not the first time that Tiger Consumer has had position in shares of Herbalife, according to earlier 13-F filings.

The billionaire hedge fund magnate John Paulson disclosed that he bet heavily on corporate inversions, in which United States companies buy foreign rivals in an effort to relocate abroad to reduce their taxes.

His firm, Paulson & Company, disclosed buying 13 million shares in AbbVie, which at the time had agreed to buy the Irish drug maker Shire. The hedge fund also added 5.3 million shares to its holdings in Shire. That deal fell apart last month after the Obama administration clamped down on some of the economic benefits of inversions.

Berkshire Hathaway, the conglomerate run by Warren E. Buffett, added to its telecommunications and media holdings, more than doubling its stake in the cable provider Charter Communications, to five million shares, and buying eight million shares of Liberty Media.

“That investment story which everybody is touting as one of the best investments we’ve ever made, it didn’t happen overnight. That investment started in many respects almost seven year ago,” Mr. Wiseman said.

“It started with a view towards that market, a view that we need to build capabilities in the region, that we need to deepen our understanding of the region, and that we had a long-term view around the Chinese consumer, the importance of the Chinese consumer.”

Sure, these [energy and commodity] stocks can bounce up from these oversold levels but I would use any relief rally here to shed positions or short them, not initiate or add to your positions. I can say the same thing about plenty of other energy and commodity stocks. Be very careful buying the dips here because there will be further weakness in these sectors, you will end up regretting it.

And it's not just energy and commodities. This market is becoming more and more selective. I tell all my friends and family to be careful with a lot of stocks, especially high dividend stocks. I think some will outperform in a deflationary environment (because rates will remain low for many years) but others are going to get slaughtered. 

Pension fund managers around the world are preparing to invest in riskier assets such as hedge funds and private equity funds as they seek higher returns and their ability to select the best managers improves.

Research by State Street, the US financial group, has found that 77 per cent of pension funds expect their appetite for alternative investments to increase over the next three years.

Oliver Berger, State Street’s head of strategic market initiatives for Europe, the Middle East and Africa, said: “Pension funds are under huge pressure at the moment. With increased market volatility, they are faced with challenging and complex liabilities. To achieve the returns they need, they have to take on more risk.

“However, they are better equipped than ever before to do this. With improvements in data mining and management and reporting, fund managers and asset owners have a better understanding of the risk reward profile of investments,” he said.

The growing appetite for investments in alternative assets such as hedge funds contrasts with a recent decision by Calpers, the largest pension fund in the US, to withdraw its $4bn investments in hedge funds because they had become too complex and costly.
The State Street research, which involved interviewing the executives in charge of 134 different pensions schemes around the world, shows that a large majority were prepared to take more risk as low yields and interest rates have made it harder to meet long-term obligations with safer assets such as government bonds.

Of the asset owners surveyed, 20 per cent also said they expected their risk appetite to increase significantly over the next three years.
The most popular asset class among the so-called alternative asset classes was private equity, followed by real estate, infrastructure and then hedge funds.

Of the survey participants, 60 per cent said they intended to increase their exposure to private equity. This fell to 45 per cent for real estate and 39 per cent for infrastructure.
For hedge funds, 20 per cent plan to increase their allocation, while 3 per cent said they would reduce it.

Regional findings showed that private equity is of the greatest interest to respondents in the Americas, with 68 per cent planning to increase their allocation, compared with 60 per cent in Europe, the Middle East and Africa and only 45 per cent in the Asia-Pacific region.

Asian respondents showed high levels of interest in expanding their investment in hedge funds, with 57 per cent planning to increase their allocation.

The California State Teachers’ Retirement System said it restructured how its investment office is organized and is emphasizing stronger internal controls to pave the way for a shift toward more internal management.

Calstrs, the nation’s second-largest public pension fund, said in a release that it plans to increase the amount of assets its investment team manages internally to 60% of its portfolio, from the current 45%.

The closely watched $186.4 billion pension fund has previously said in investment policy documents that by managing assets internally, it can have more control over corporate governance issues and the flexibility to tailor strategies to its needs.

Calstrs will focus initially on publicly traded assets as it looks to raise the amount of assets its staff will oversee, Spokesman Ricardo Duran said.

In a signal that fixed income could be emphasized for more in-house management, Glenn Hosokawa was named director of fixed income, while Paul Shantic was named director of inflation-sensitive assets. They were previously acting co-directors of fixed income.

Fixed income made up 15.8% of Calstrs’s portfolio, as of Sept. 30, short of an allocation target of 17%. Inflation-sensitive assets made up 0.7% of pension fund assets; the target allocation for the asset class is 1%.

A new organizational structure “allows us to bring more assets in-house,” said Calstrs’ Chief Investment Officer Christopher Ailman in the release.

In addition, Debra Smith was named chief operating investment officer, a new role at the pension fund. She was previously director of investment operations.

Ms. Smith leads a new unit that will tackle issues such as compliance, ethics and internal controls. She will report to the investment committee twice a year, giving her a direct line to board members.

The position builds more separation between investment management and operations at the pension fund, allowing the chief operating investment officer more “structural autonomy,” said Mr. Duran.

CalSTRS has named its first-ever chief operating investment officer as part of a restructuring of the office that oversees the pension fund’s $186 billion portfolio.

The California State Teachers’ Retirement System said Debra Smith, who had been director of investment operations, is the pension fund’s chief operating investment officer.

CalSTRS also named two asset class directors. Glenn Hosokawa was named director of the $22 billion fixed-income portfolio, and Paul Shantic was named director of CalSTRS’ $1.4 billion inflation-sensitive portfolio. Both had been with CalSTRS in other investment-related roles.

Pension fund officials said the restructuring gives CalSTRS greater control over its portfolio.

“These three appointments, coupled with our 2010 creation of a deputy chief investment officer, completes a new organizational structure that allows us to bring more assets in house,” said Chief Investment Officer Christopher Ailman in a prepared statement. “This structure matches what you find in most large investment money managers. This also fits our plans to internally manage more of our assets – currently at 45 percent in house – to a projected 60 percent internally managed.”

Besides saving on investment fees and cost, CalSTRS desires to have more control over corporate governance issues. By owning the shares or underlying securities directly, CalSTRS can push forward with activist-based strategies. 

Koh Gui Qing and Jason Subler of Reuters report, China surprises with interest rate cut to spur growth:

China cut interest rates unexpectedly on Friday, stepping up efforts to support the world's second-biggest economy as it heads towards its slowest expansion in nearly a quarter of a century.

The cut, the first in over two years, came as factory growth has stalled and the property market, long a pillar of growth, has remained weak, dragging on broader activity and curbing demand for everything from furniture to cement and steel.

"It's comes right after China's disappointing PMI figures showing that manufacturing activity is getting dangerously close to contraction," said Alexandre Baradez, chief market analyst at IG in Paris, referring to a private factory survey this week which added to worries about slowing global growth.

"China's central bank is now following the path of the Fed, the ECB and the BoJ. Central banks are really driving markets," he said.

Just a few weeks ago, Chinese President Xi Jinping had assured global business leaders that the risks faced by China's economy were "not so scary" and the government was confident it could head off the dangers.

In a speech to chief executives at the Asia Pacific Economic Cooperation (APEC) CEO Summit, Xi said even if China's economy were to grow 7 percent, that would still rank it at the forefront of the world's economies.

The People's Bank of China said it was cutting one-year benchmark lending rates by 40 basis points to 5.6 percent. It lowered one-year benchmark deposit rates by less - just 25 basis points. The changes take effect from Saturday.

"The problem of difficult financing, costly financing remains glaring in the real economy," the PBOC said.

LIMITING THE IMPACT

The central bank also took a step to free up deposit rates, allowing banks to pay depositors 1.2 times the benchmark level, up from 1.1 times previously.

"They are cutting rates and liberalising rates at the same time so that the stimulus won't be so damaging," said Li Huiyong, an economist at Shenyin and Wanguo Securities.

Recent data showed bank lending tumbled in October and money supply growth cooled, raising fears of a sharper economic slowdown and prompting calls for more stimulus measures, including cutting interest rates.

But many analysts had expected the central bank to hold off on cutting interest rates for now, as authorities have opted instead for measures like more fiscal spending, as they also try to balance the need to reform the economy.

Chinese leaders have also repeatedly stressed they would tolerate somewhat slower growth as long as the jobs market remained resilient.

More recently, the central bank injected cash into the system in the form of short-term loans to banks in an attempt to keep down borrowing costs and encourage more lending even as bad loans increase.

But a growing number of economists said those moves were not translating into either lower financing costs or more credit for cash-starved Chinese companies.

Analysts expressed doubts over whether the impact of the rate cut would find its way into the real economy, either, as the cooling economy makes lenders more risk-averse. Some predicted multiple cuts would be needed well into next year.

Hurt by the cooling property sector, erratic export demand and slackening domestic investment growth, China's economy is seen posting its weakest annual growth in 24 years this year at 7.4 percent.

China's rate move comes after the Bank of Japan sprang a surprise on Oct. 31 by dramatically increasing the pace of its money creation, while European Central Bank President Mario Draghi shifted gear on Friday and threw the door wide open to quantitative easing in the euro zone.

"There is definitely more concern around about the state of the global economy than there was a few months ago, you see that not just when you talk about Europe," British finance minister George Osborne told an audience of business leaders in London on Friday.

Reuters also reports world shares surged on Friday as China surprised markets with its first interest rate cut in more than two years and the European Central Bank's Mario Draghi threw the door wide open to full scale money printing:

European shares and other growth sensitive commodities all leapt as China's move to cut rates to 5.6 percent gave markets a welcome lift after a week where data has shown its giant economy heading for its worst year in almost quarter of a century.

It came as ECB head Draghi spoke in Frankfurt of his determination to use more aggressive measures such as large scale asset purchases -longhand for money printing- to ensure the euro zone did not slump into a new crisis.

"We will continue to meet our responsibility - we will do what we must to raise inflation and inflation expectations as fast as possible," Draghi said in a heavyweight speech.

"If on its current trajectory our policy is not effective enough to achieve this ... we would step up the pressure and broaden even more the channels through which we intervene."

Both the euro zone and China have been lagging the momentum of the United States, stimulus-driven Japan and faster-growing Britain over the last month, but a ramping up of the ECB's rhetoric and Beijing's actions will stoke hopes of a turnaround.

Germany's DAX, France's CAC and pan-regional Euro STOXX 50 were all up between 0.8 and 1 percent by 1230 GMT, leaving them on course for weekly gains of 4.5 percent, 2 percent and 2.4 percent respectively.

"The two together, (China cut, Draghi speech) suggest to me there is still a lot of hard policy work to be done next year," said Neil Williams, chief economist at fund manager Hermes in London.

Beijing's move also carried a hint of an escalating currency tussle in Asia.

A sharp fall in the yen this year as Tokyo has introduced wave after wave of stimulus, has been putting the squeeze on China's exporters due to a loss of cost advantage.

Japanese Finance Minister Taro Aso said on Friday that the yen's fall over the past week had been "too rapid". It was one of the strongest warnings against a weak yen since the aggressive stimulus efforts began two years ago and saw the currency leap off a 7-year low to 117.98.

OIL SURGE

Currency markets everywhere were shaken into life by China's move and the signals coming out of Frankfurt.

The euro fell sharply, slicing its way back down through $1.25 to $1.2430, while 10-year Italian government bond yields, which have been one of the biggest beneficiaries since Draghi took charge of the ECB in 2011, hit a new all-time low.

Hopes that China's growth will now quicken provided a shot in the arm for the Australian dollar, often used as a more liquid proxy for Chinese investments, and likewise lifted other key commodity currencies.

The rate cut also added to a positive mood among oil traders, many of whom expect the Organization of the Petroleum Exporting Countries to trim production, at what looks to be a landmark meeting in Vienna on Nov. 27.

Oil jumped 2 percent, or $1.75 to $81.07 a barrel as it surged towards its first weekly rise since mid-September in its biggest daily rise in a month.

ALL RISE

Global investor sentiment was also underpinned by record finishes by the Dow Jones industrial average and S&P 500 on Thursday after a spate of upbeat U.S. data that offset the recent signs of spreading weakness in China and Europe.

Wall Street was expected to add a further 0.6 percent when trading resumes with the day's upbeat sentiment expected to more than make up for a lack major data.

In emerging markets, Russia's rouble, which is closely tied to the fortunes of oil, was heading for its first weekly rise since early September as the pressure it has been under eased.

Copper and gold also got a lift, with the red metal up 1 percent and spot gold climbing to $1,197 an ounce as traders cheered the prospect of more global stimulus.

"Commodity prices have risen across the board," said Carsten Fritsch, senior oil and commodities analyst at Commerzbank. There is hope that this step (lower Chinese interest rates) will lift commodities demand."

So what's going on here? China's surprise interest rate cut comes a few weeks after the BoJ's Halloween surprise. Global stock an commodity markets are rejoicing after this latest central bank "surprise" but I'd be very careful here because after the initial knee-jerk reaction, reality will settle in.

And the reality is that apart from the United States, the world economy is very weak, with many big economies teetering on recession. Nowhere is this more alarming than in Europe where shrinking incomes are wreaking havoc on periphery and core economies:

Seven years after the financial crisis first struck in 2007, Europe continues to teeter on the brink of a recession. Many economies in the region are yet to regain the levels of per capita income they saw in 2007. For some, incomes are much lower than what they were seven years ago. The accompanying chart shows those European economies that continue to see a fall in per capita incomes, computed in their national currencies at constant prices, compared with 2007. The data have been taken from the International Monetary Fund’s World Economic Outlook database, updated in October.

Greece has been the worst affected, but it is not only southern Europe that has been hit. Incomes in Finland, Denmark, Luxembourg and Norway are still considerably below where they were in 2007. While there’s much talk of a recovery in the UK, per capita incomes there are still below their 2007 level (click on image below).

The weakness in Europe will have several consequences. The obvious one is exports to the region will suffer. The frailty of the euro zone will ensure that monetary policy at the European Central Bank will remain easy for a long time and the ultra-low interest rates there will be a source of liquidity for global markets. Further, with incomes not rising, fresh investments in Europe are likely to be delayed. As a result, funds are likely to move out of Europe to greener pastures, to markets such as India.

The long stagnation in Europe is already having social repercussions, with mainstream parties losing ground to populists of the right and the left. But the stark question that confronts Europe today is: in an era of globalization and footloose capital, is it possible for its welfare states to survive? Or, is the welfare state a hoary relic of a bygone Keynesian age?

Some truths mixed in with rants which could apply to any and all facets of the investment industry. If you don't like Blackstone, don't put money with them. PE even in its golden age did less well across the board then generally perceived, but has played its role reasonably well in dealing with the unpleasant reality of mature companies in mature economies. The bigger picture involves risks around deflation, China, quiet changes to the ISDA contracts that govern counterparties, etc. these things matter more.

I continue to favor small caps (IWM), technology (QQQ) and biotech shares (IBB), including smaller biotechs (XBI) that have sold off lately. These are extremely volatile and risky but there is a great secular story here that will play out for many years to come. 

Keep an eye on companies like Acadia Pharmaceuticals (ACAD), Avanir Pharmaceuticals (AVNR), Idera Pharmaceuticals (IDRA), Biocryst Pharmaceuticals (BCRX), Progenics Pharmaceuticals (PGNX), Seattle Genetics (SGEN), Threshold Pharmaceuticals (THLD), TG Therapeutics (TGTX),  XOMA Corp (XOMA). I would take advantage of the latest selloff to add to some of these biotechs. I also like Twitter (TWTR) and see a bright future for this social media stock.

Are there other stocks I like at these levels? Yes but I'm waiting to see what top funds bought and sold in Q3 before delving into more stock specific ideas. All I can say is tread carefully here and know when to buy the dips and more importantly, when to sell the rips.

Caisse de Depot et Placement du Quebec, Canada’s second-largest pension fund manager, is losing its enthusiasm for bonds with yields close to record lows.

“Fixed income isn’t what it used to be,” Chief Executive Officer Michael Sabia, said yesterday in an interview at Bloomberg headquarters in New York. The manager of about C$215 billion ($190 billion) in assets anticipates reducing its holdings in bonds to around 30 percent over the next two years from about 35 percent, he said.

Bonds worldwide have returned 6.3 percent this year, the most since 2002, according to the $46 trillion of debt securities included in the Bank of America Merrill Lynch Global Broad Market Index. The rally, prompted by central banks in the U.S., Europe and Japan keeping borrowing costs close to record lows to spur growth, pushed average yields globally to a record-low 1.51 percent last month.

Sabia said he may reallocate sovereign debt that included C$15.7 billion of federal government bonds, C$14 billion of Quebec government debt, C$712 million of U.S. government debt and C$2 billion of other types of sovereign bonds at the end of last year. As Quebec’s largest institutional investor, Montreal-based Caisse has traditionally been the main buyer of bonds issued by the provincial government -- a situation that’s unlikely to change.

Lower Exposure

Canada Pension Plan Investment Board is the country’s biggest public pension manager, with net assets of C$234.4 billion as of Sept. 30.

“There are a lot of sovereigns in our portfolio,” Sabia said. “The balance between sovereigns and some other forms of debt, private debt, corporate debt, some real estate debt -- we may want to increase some of that and lower the sovereign exposure. That’s a way of leaving the fixed income in place, but doing a little better from a returns perspective.”

Sabia didn’t specify which sovereign bonds the Caisse would look to sell. At the end of last year, the Caisse held about C$19.7 billion of corporate bonds, including C$13.2 billion of Canadian company debt.

Lowering exposure to government bonds is part of a Caisse strategy to reduce the volatility associated with public markets. Sabia said last year the Caisse was planning to add as much as C$12 billion in “less liquid” assets such as infrastructure and real estate over two years.

Capital markets and central banks have developed an increased sensitivity toward each other since the global financial crisis of 2008, he said. That “co-dependency” may persist in 2015 and 2016, until the relationship between central banks and the capital markets normalizes, according to the 61-year-old CEO.

‘Market Turbulence’

Federal Reserve Chair Janet Yellen has said “she was going to look through the market turbulence -- if the market had a tantrum, she was going to look through the tantrum,” Sabia said. “I think they are trying to find this goldilocks solution where they can move interest rates slowly and keep everybody kind of OK. I’m not sure that’s doable, because I don’t think the markets have taken on board how fragile the situation is. That’s why I think 2015 and 2016 are going to be rock ’n’ roll.”

More than half of economists surveyed by Bloomberg from Nov. 12-14 said improvements in the labor market would prompt the Fed to raise rates in mid-2015. The Bank of Canada is forecast to keep rates at 1 percent until the last three months of 2015. The U.S. central bank ended unprecedented economic stimulus known as quantitative easing in October with the world’s largest economy gathering momentum.

Liability Matching

Economic recovery in the U.S. “is not strong by postwar standards, but it’s not bad,” Sabia said. “The U.S economy is actually doing pretty well. If you were just looking at that, you would say that the Fed is going to have to worry about how close the economy is getting to full employment, and what kind of ramp-up on interest rates is going to be required to moderate that, so that they don’t get too far behind the curve in terms of managing inflationary pressures.”

The Caisse held C$69.2 billion of bonds, real estate debt and other short-term securities in 2013 -- a collection of assets that generated an investment loss of C$41 million. Bond markets worldwide fell 0.3 percent last year, Bank of America data show. Overall, the Caisse had investment income of C$22.8 billion last year.

“If you were just making a pure returns-based decision, you would take that 35 percent down pretty sharply,” Sabia said, referring to the Caisse’s bond holdings. “Fixed income has other attributes. In terms of matching liabilities with the people whose assets we manage, that’s a reason not to take it down as sharply.”

For Related News and Information: Fed Debate Shifts to Tightening Pace After First Rate Increase Blackstone Said to Sell NYC Tower to Ivanhoe for $2.25 Billion Quebec’s Caisse Targets Regular Debt Sales to Help Cut Costs Crumbling U.S. Fix Seen in Trillions of Dollars of Global Money.

The premise of the article seems misleading. The issue is that they believe that other asset classes, especially illiquid stuff, can do better. Given the low interest rates on government bonds, that is not a high hurdle rate. In other words, if we avoid a risk asset apocalypse, those assets will outperform government bonds. I find it hard to argue against that.

Bonds are vulnerable versus cash in a rate hike cycle, but the potential losses are a fraction of the uncertainty in the valuation of things like real estate. But editors love stories that are bearish on government bonds. Even though we have been in a bond bull market for 30 years, I would be hard placed to remember an article with the headline "Expert says government bonds to outperform cash next year".

A mild deflation should not be that bad for risk assets; bonds would give positive returns. It would just mean that the current environment continues longer.

The real risk is a recession; it should not be as traumatic as 2008, but it would probably result in a reversal for risk assets.