CalPERS' investment committee approved a new asset allocation plan on Monday that is fairly similar to the current allocation, with the equity allocation rising to 50% from 46%.

The new allocation, which goes into effect July 1, 2018, supports CalPERS' 7% annualized assumed rate of return. The investment committee was considering four options, including one that lowered the rate of return to 6.5% by slashing equity exposure and another that increased it to 7.25% by increasing the exposure to almost 60% of the portfolio.

A lower rate of return means more contributions from cities, towns and school districts to CalPERS. Those governmental units are already facing large contribution increases — and have complained loudly at CalPERS meetings — because a decision by the $345.1 billion pension fund's board in December 2016 to lower the rate of return over three years to 7% from 7.5% by July, 1, 2019.

Under the plan adopted Monday, the California Public Employees' Retirement System will have a 28% weighting to fixed income, up from 20%. However, the current 9% allocation to inflation assets, which is largely made up fixed-income instruments such as inflation-linked bonds, is being merged with the fixed-income asset class.

Real assets, which includes real estate, will keep its 13% allocation, while private equity remains at 8%. CalPERS' liquid portfolio, made up of cash and other short-term instruments, will fall to 1% from 4%.

There was one dissenting vote on the 13-member committee, J.J. Jelincic, who argued that CalPERS could take its equity level to almost 60% because it was a long-term investor that could weather ups and downs in the portfolio. By being more aggressive in its portfolio, CalPERS could earn a higher rate of return over the longer term, he said.

Under the more aggressive option favored by Mr. Jelincic, CalPERS staff estimates it could earn annualized rate of 7.25% over the next 60 years.

Other board members said increasing exposure expose was too dangerous given the Sacramento-based plan's 68% funding ratio, endangering the plan's viability in the event of an equity downturn.

Chief Investment Officer Theodore Eliopoulos said the plan adopted was a good balance.

While he said CalPERS would be taking away increased returns if equity bull markets continue, at the same it would be protecting assets in case of a downturn, though even at 50%, CalPERS still has heavy equity exposure.

Critics have pointed out that the new allocation is unrealistic because the pension fund's own estimate shows the portfolio that was adopted would have a 6.1% rate of return annualized over the next 10 years. If investment returns fall under 7% that would increase the system's $138 billion unfunded liability in the near term.

CalPERS officials justified the allocation because they say long term over the next 60 years, they estimate the system can make the annualized 7% rate of return.

Pension fund giant CalPERS said on Monday that it would increase its allocation of fixed income to 28 percent from 20 percent in order to reduce risks in its $346 billion portfolio.

Overall, the California Public Employees’ Retirement System Board opted to keep its asset allocation similar to its current investment portfolio. This decision will guide investment decisions over the next four years.

The fund’s expected rate of return will remain at 7 percent with an expected volatility of 11.4 percent, it said. The expected rate of investment return, or discount rate, was lowered in December 2016 to 7 percent over the next three years. That compares to the fund’s net rate of returns of 8.4 percent since 1988.

Most of CalPERS’ asset allocation will be similar to the portfolio’s current makeup: half the fund will remain invested in global equity, 13 percent in real assets, and 8 percent in private equity. Less money will be devoted to inflation-protection assets and kept in cash.

Henry Jones, chair of CalPERS Investment Committee, said in a statement on Monday that “this portfolio represents our best option for success while protecting our investments from unnecessary risk.”

Board member J.J. Jelincic, the one dissenting vote among the board, said he would have preferred a portfolio with a larger allocation of global equities, arguing that CalPERS had missed market gains after it sold off some equities a year ago.

“We need to be long-term investors,” said Jelincic at Monday’s meeting. “I just do not think that it makes sense to take the lower risk and accept a lower return.”

I have also repeatedly stated on my blog to load up on US long bonds (TLT) on any backup in yields because when the bubble economy bursts and the next deflation tsunami and financial crisis hit us, it will bring about the worst bear market ever.

Of course, central banks know all this which is why the Fed has signaled it's preparing for QE infinity, something which I fundamentally believe is a foregone conclusion, which can explain pockets of speculative activity in the stock market.

Anyway, back to CalPERS. It's right to reduce overall equity risk but increasing fixed income for a large pension when rates are at historic lows necessarily means it will have to decrease the assumed rate of return going forward (the discount rate) and increase the contribution rate, which will cause major panic among California's public-sector employees and cash-strapped cities.

In fact, CalPERS wants broke cities to deliver bad news to out-of-luck pensioners, namely, some workers will lose a share of their pensions because of their employers’ failure to keep up with bills (get ready for the Mother of all US pension bailouts).

Most of Canada's large public pensions have been  reducing their allocation to fixed income and increasing their allocation to private markets, especially infrastructure, over the last few years.

But CalPERS doesn't have a dedicated infrastructure group and deals are pricey these days. I actually emailed CalPERS's CIO, Ted Eliopoulos, to put him in touch with David Rogers and Stephen Dowd at CBRE Caledon Capital so they discuss a game plan in infrastructure, a must-have asset class which CalPERS and many other US pensions are under-allocated to.

Why do Canada's large pensions love infrastructure? Because it's a long-term asset class, even longer than real estate, which offers stable returns in between stocks and bonds.

It's also highly scalable and Canada's large pensions can put a lot of money to work fairly quickly and they do so by going direct in this asset class, which means no fees to funds like they pay in private equity.

The only large Canadian pension which has no infrastructure exposure yet is HOOPP which ironically has the largest fixed income allocation and is super funded (120+% and it will increase its benefits to its members).

Why doesn't HOOPP invest in infrastructure? It hasn't found the right deal yet because deals are expensive in this asset class and thus far, it hasn't needed to. Interestingly, however, HOOPP is shifting some of its credit risk as it recently committed a big chunk to a new CLO risk retention vehicle.

I'm not sure CalPERS is ready to increase its infrastructure investments or do anything exotic in its credit portfolio so I would argue it's sensible to tactically shift more assets in bonds in anticipation of a major pullback or bear market which will clobber risk assets.

Alternatively, it can increase its allocation to Private Equity but that portfolio needs some work and Mark Wiseman and BlackRock's special attention.

Let me also state the following, while I applauded CalPERS nuking its hedge fund portfolio three years ago, I think now is the time to allocate a sizable amount to a select few large hedge funds across directional and non-directional strategies.

Of course, in order to do this properly, CalPERS needs to hire experts who know what they're doing and pay them properly, no easy feat (there's a reason why CPPIB and Ontario Teachers' are Canada's largest hedge fund investors).

But at a minimum, if I was Ted Eliopoulos, I would definitely sit down with Bridgewater, Balyasny, Citadel, Farallon, Two Sigma, Angelo Gordon, and many more top funds who focus on alpha.

CalPERS should be looking at all possibilities but it's easy for me to say they should do this and that, the reality is they can't because they don't have the governance to do everything Canada's large pensions are doing.

So, with all due respect to JJ Jelincic, I disagree with him that now is the time to increase risk in public or private markets. Maybe the right move is to hunker down, increase fixed income allocation, accept lower returns and lower volatility for the foreseeable future, and limit your downside risk.

Lastly, I highly recommend Ted Eliopoulos and CalPERS‘s board speak to my friend, Nicolas Papageorgiou, Vice President and Head of Research, Systematic Investment Strategies at Fiera Capital here in Montreal. There may be smarter ways to reduce overall risk and volatility while maintaining decent returns.

The Liberal government today initiated an intricate overhaul of the system to compensate wounded ex-soldiers, but it remains to be seen whether it will be enough to placate a volatile community of Canadian veterans.

The plan, rolled out by Veterans Affairs Minister Seamus O'Regan, is meant to address smouldering grievances among veterans that has led to protests and at one point spawned a class-action lawsuit.

As CBC News reported last week, the changes involve a two-part rejigging of the current system. Officials outlined how that would work on Wednesday and announced there will be an injection of fresh cash beginning on April 1, 2019. O'Regan said it will take time to introduce the required legislation.

Speaking on background before the announcement, officials estimated the changes would mean an extra $3.6 billion being poured into veterans benefits.

"We are delivering a package of benefits and supports, and financial security for those who need it," O'Regan said.

"I hope they believe we fought hard for them."

At issue is a tax-free lump sum payment, brought in a dozen years ago, to replace a system of pensions for pain and suffering injuries.

Prime Minister Justin Trudeau's Liberals promised in the last election to give veterans an "option" of taking the lump sum or a lifetime pension.

What the federal government is introducing Wednesday is a patchwork allowing veterans to take either the lump sum or a lifetime pension, which would deliver a maximum tax-free payment of $1,150 per month.

In addition, the Liberals will introduce another tax-free pain and suffering award on top of the existing one. It too will come in either lump sum or pension form that would give wounded veterans up to $1,500 per month, depending on their level of disability.

'Not everyone will receive the maximum award'

The second component involves a bundling of six existing income-replacement benefits — already available under the often-maligned New Veterans Charter — into one payment.

The new income replacement benefit will be taxable and it is meant for those "who are experiencing barriers to re-establishment due to a health problem resulting" from their service.

Significantly, it will be available to veterans, survivors for life, and orphans, should they need it.

The part of the plan that will draw the most scrutiny and perhaps political fire is the pain and suffering awards.

O'Regan was clear that "not everyone will receive the maximum award."

Under the current lump sum system, the maximum payout is $360,000, but documents obtained by CBC News under access to information show the average award is $43,000.

Translated to a pension, that means few wounded soldiers would ever see the entire $1,150 per month. Under the old pension act, the most severely wounded soldiers would have received up to $2,700 per month.

The Liberal government has long said its changes "would not seek parity" with the previous system, but officials emphasize that when the two tax-free benefits are combined, that would only mean a difference of $50 per month.

Officials said only about 12 per cent of veterans will be eligible for the maximum amount.

O'Regan said he can't guarantee that the average veteran will receive the same or more compared to the old pension act.

"No, I cannot guarantee that. Each will be individually assessed," he said. But "any veteran receiving funding under the New Veterans' Charter will not be receiving less under this. In almost every circumstance they will be receiving more."

Before Wednesday's announcement, some ex-soldiers were clear on what their litmus test for success is: more money in their pockets.

"The bar the government has to meet is parity with the pension act in terms of the net dollars in a veteran's pocket every month," said retired major Mark Campbell, who lost both legs in a blast in a booby-trapped ditch in Afghanistan.

"It can only be a real pension if the benefits are tax free and if there is no clawback of their military pension as part of the disability payment."

Veterans Affairs officials used a bevy of charts and hypothetical scenarios Wednesday to demonstrate that combining all elements of the plan — both tax-free and taxable benefits — most soldiers would be better off financially.

Sean Bruyea, a veterans advocate, said it is unclear how the changes will affect average veterans given the complexity of the changes.

"This is going to create a nightmare of anxiety among veterans who are going to wonder whether their lives are going to be made any better — or worse," he said.

O'Regan took pains to emphasize that the government will use the coming months, before the changes come into effect, to work with individuals to reassure them.

Canada's most severely disabled recent veterans will gain financial stability for life under a proposed federal plan. However, many injured vets will see only modest gains, if any, and those hoping for parity with the amounts offered under the old Pension Act will likely be disappointed.

The "pensions for life" that were unveiled by the Liberal government on Wednesday include a tax-free monthly pension payment, and a top-up, for pain and suffering.

The government is also amalgamating six pre-existing benefits for veterans whose service-related health problems make it difficult for them to find work into one taxable income-replacement benefit.

The combination of the pain and suffering benefits and the income replacement means the veteran who is 100-per-cent disabled – someone described as having multiple amputations plus post-traumatic stress disorder – will receive more than he or she would have under the old Pension Act.

And they will get much more than what was offered under the New Veterans Charter, which replaced the Pension Act in 2006.

But Veterans Affairs officials say 80 per cent of veterans accessing benefits are assessed as being 30-per-cent disabled or less.

Veterans Affairs Minister Seamus O'Regan said no one will lose money under the new plan.

But those whose service-related injuries are not considered severe will make less than they would have under the Pension Act. A lawsuit launched by six disabled Afghanistan veterans in 2012 demands parity with the veterans who retired when the act was in effect.

Aaron Bedard, one of the vets who is part of that suit, said of the new plan: "This announcement lacks so much detail that it has created chaos amongst veterans on social media."

Mr. O'Regan conceded his government "will not make everybody happy with this" but it is a good and fair option for veterans. "We wanted to make the most of this program," he said, "and we pushed this as far as we could."

Under the New Veterans Charter, disabled veterans could receive a lump-sum payment of up to $360,000 – an amount that is rarely awarded– depending upon the severity of their injury, plus a myriad of other benefits that target specific issues.

Under the new plan, those who retire with a service-related injury will qualify for a life-time tax-free pension for pain and suffering of as much as $1,150 per month. In addition, if they are having difficulty re-establishing their lives because of a severe and permanent injury, they may receive an additional $500, $1,000, or $1,500 a month, depending on the extent of their impairment.

Both of those benefits can be taken as a lump-sum award to a maximum of $360,000. But, if a veteran is severely disabled at a young age and lives into their 80s, the accumulated monthly payments will far outstrip the lump sum.

"We very much want people to take up the monthly option," Mr. O'Regan said. "We wanted to make it lucrative enough that they would want to."

Those veterans who have already received a lump-sum award still qualify for the life-time pension, but the money they have been given will be deducted when the government calculates their monthly payment.

In addition to the pension, four existing benefits – the Earnings Loss Benefit, the Extended Earnings Loss Benefit, the Supplementary Retirement Benefit and the Retirement Income Security Benefit – will be replaced with an Income Replacement Benefit that pays 90 per cent of the prerelease salary of a veteran who is so disabled they cannot work.

And two other benefits – the career Impact Allowance and the career Impact Allowance Supplement – will be replaced by an annual increase of one per cent of the Income Replacement Benefit for those veterans whose career progression has been cut short.

The government will allow vets to make as much as $20,000 before the Income Replacement Benefit is clawed back dollar for dollar.

All of the changes would take effect on April 1, 2019 because they must be approved in legislation and it will take time to put them in place.

"I don't think it is fair to make veterans wait any more time than they have to, to be honest with you," said Mr. O'Regan when asked about the delay. "All I can do is look them in the eye and say we are doing our level best."

A veteran who is 100-per-cent disabled at the age of 25, with a prerelease salary of $60,168 would stand to make $3.758-million over the course of an average lifetime under the new life-time pension and the Income Replacement Benefit.

But veterans who are moderately disabled will receive only a prorated portion of the maximum lifetime pension of $1,150 per month. Under the Pension Act, their pension would have been calculated as a percentage of as much as $2773.47 per month.

"So the vast majority of veterans lose in this case"compared with what the Pension Act offered, said veterans advocate Sean Bruyea. And despite the government's efforts to streamline the benefit, Mr. Bruyea said the complicated new system "is going to create a nightmare of anxiety for veterans, for family members."

The Trudeau government’s long-awaited plan to provide lifelong disability pensions to veterans has been met with confusion and frustration from many of those that it is expected to help.

Veterans Affairs Minister Seamus O’Regan unveiled the new pension plan on Wednesday, more than two years after the Liberals promised it during the last federal election — and only days before Christmas.

The plan promises more money to injured veterans than the current suite of benefits, especially the most severely disabled who can’t work and continue to suffer from service-related injuries.

Yet it offers only modest increases to those on the other end of the spectrum, and continues to provide many with less than the previous lifelong disability pensions, which were abolished in 2006.

“We were focused in this program on those who are catastrophically injured,” O’Regan explained during a news conference at National Defence Headquarters.

“Those who have received a disability or an illness during their service. Those who have a hard time going back to work. Those who have a hard time, as they say, re-establishing themselves.”

The plan is expected to cost $3.6 billion over six years, and will take effect in April 2019.

Veterans and support groups were scrambling after the announcement to figure out exactly how the changes would affect them and their clients, citing a lack of detail as a major complaint.

“It’s confusing,” said Jim Lowther, president of VETS Canada, which support homeless veterans in different cities across the country. “We’ve been going over this all morning, but it’s very vague.”

Veterans receive financial benefits and compensation based on the extent of their injuries or disabilities and whether those factors have an impact on their post-military career and earnings.

The existing system, created in 2006, provides a lump-sum worth up to $360,000 for the most severely disabled, in addition to rehabilitation, career training and income support.

While veterans who want the money right away will still be able to choose the lump-sum payment, the Liberals are also giving them the choice of a monthly payment instead worth up to $1,150.

Those with severe or permanent disabilities will also be eligible for an additional new benefit worth between $500 and $1,500 per month. Both benefits are tax free.

Officials said the more than 61,000 veterans who have already received a lump-sum award will be assessed to determine how much they would have received per month. They will also be eligible for the new benefit, which officials said will be retroactive and could result in substantial one-time payments.

The government will also lump together six different benefits for veterans who can’t find work or whose post-military careers pay less than when they were serving in uniform.

Yet it wasn’t immediately clear who will be eligible for different elements of the new pension plan, or even which of the income-replacement programs will remain in existence after they are merged.

O’Regan guaranteed no disabled veteran will end up with less money, and the department plans to launch an advertising campaign to educate former service members about the plan.

“All of those covered under the (existing) New Veterans Charter will be automatically assessed against the new pension-for-life program,” O’Regan said.

“And no individual will be subject to a net-decrease in overall benefit.”

But that didn’t stop many on social media from questioning whether they would see any real benefits, or prevent concerns about existing supports being clawed back.

“They’ve created chaos with a vague presentation,” said Aaron Bedard, one of six disabled Afghan veterans who launched a legal challenge against the federal government in an unsuccessful bid to force a return to the previous pension system.

“It’s like watching Game of Thrones: You get a couple of answers, but you end up with a dozen new questions.”

The Liberals’ new plan was also panned for continuing to offer less financial support for the majority of veterans than the lifelong pension system that existed prior to 2006 — the same criticism that bedevilled the previous Conservative government after it introduced the New Veterans Charter.

“So we still have this ludicrous situation where you can have two guys with the same injuries from the same war but at different times and getting different compensation,” said Mark Campbell, who lost both legs in Afghanistan.

“That’s fundamentally wrong, and it has not been addressed.”

The Conservatives and NDP were also critical that the new pensions won’t come into effect until April 2019, which O’Regan said was necessary to pass required legislation and ensure Veterans Affairs staff are ready for the change.

Oh, by gosh, by golly, it's time for the Santa rally.

According to "Stock Trader's Almanac," the Santa rally officially begins Friday, the start of the final five trading days of 2017, and ends at the close Jan. 3, the end of the second trading day of the new year.

Some strategists are saying humbug to the seasonal rally because the S&P 500 has already gained 20 percent this year, with 5 percent in just the last five weeks. But Jeffrey Hirsch, editor-in-chief of the almanac, says they've got it all wrong. It's an indicator, not a seasonal trade.

He says the phrase used to explain the year-end phenomena has proven to be true: "If Santa Claus should fail to call, bears will come to Broad and Wall." Hirsch notes that since 1950, the S&P 500 has averaged a consistent 1.3 percent gain in that seven-day period.

"It's an indicator of market health, and if we get the Santa rally, that's good, and if not … The last six times that Santa didn't show up, three were followed by flat years: 1994, 2005 and 2015. Two were nasty bear markets in 2000 and 2008, and a mild bear … in January 2016," said Hirsch.

In 2016, the S&P 500 lost 2 percent during the Santa rally period and continued falling, losing 10.5 percent for the year to date before bottoming on Feb. 11. It then turned around and ended 2016 up 9 percent.

"For the Santa rally itself, a lot of it has to do with the end of tax loss selling and the fact that a lot of us are not around to really trade the market during this period," he said. "It's a period of time where a lot of participants are away, and the smart money comes in and picks up values. It's a time of year for positive vibrations and bullish buying, and if it doesn't happen you get the first sign that things are not so rosy."

Hirsch said while he finds it an important indicator, it's more important when combined with other indicators, such as how stocks trade in the first couple of days in January and the January effect — which is using the first month of the year as a barometer for the rest. "So goes January, so goes the year," is the old adage.

Some find talk of the indicator as just another old Wall Street tradition, kind of like when the traders sing "Wait Till the Sun Shines, Nellie" on the New York Stock Exchange floor on Christmas Eve.

One of those traders, Wall Street veteran Art Cashin, tells me he believes in the Santa rally "a little bit." This past year's Santa rally ended with a 0.3 percent gain, and the month of January was up 1.8 percent.

He said stocks were lifted Thursday, in part by traders picking winners from the sweeping GOP tax bill, approved by Congress on Wednesday. That type of buying could fuel the Santa rally, he said.

Sectors that would benefit from tax reform were trading higher, such as financials, energy, telecom, industrials and materials. Technology companies were trading lower. Many already have a low tax rate and could face new taxes on their overseas operations.

"You could see by the volume, it's not a runaway rally," he said. "Let's remember this year has not been a good year for seasonal patterns. The January effect may be complicated by the tax bill. People weren't doing their tax selling because they weren't sure how things were breaking down."

It's proved to be a major market theme this year: Stocks are hitting all-time high after all-time high in what appears to be an unstoppable juggernaut of an equity rally. Many say that's cause for concern, as the broader market has seen so few pullbacks this year amid virtually no volatility.

According to one analysis, however, the market's historically overbought condition is no reason to press the sell button.

The S&P 500 is the most overbought in 22 years, as measured by its 14-week relative strength index, said Ryan Detrick, senior market strategist with LPL Financial. The classic overbought/oversold indicator is historically elevated, above 80.

But Detrick found that when the S&P 500 has become this overbought (in 13 times since 1950), the market has risen the following year all but once, seeing an average annual move higher of 11 percent.

"In other words, really strong returns going forward, even after we are so overbought, which is one of those rare times that maybe this could be a continuation of the bull market. Things still look pretty good, even though we are still historically overbought here," Detrick said Wednesday in an interview with CNBC's "Trading Nation."

This is just another stunning statistic to pile into a record year for records. This year has also produced the longest daily streak ever without a 3 percent pullback, and the most all-time high records for the Dow Jones industrial average.

Though Detrick is bullish at these levels, he said one risk he sees going forward is potential market turbulence as Jerome Powell's tenure as Fed chair begins early next year. "Overvaluations" are also a concern, Detrick said, but corporate earnings continue to be quite strong.

Alpine Marco’s 2018 Outlook, titled “Unanticipated Boom and Coming Clashes”, is currently being completed and will be released on January 5th . The report’s release will be followed by a live Webcast where I will answer your questions. Here is a preview of the report:

Entering 2018, the investment community has comfortably converged to the view that economic growth in the U.S. will be around 2.5%, growth in the Eurozone will decelerate to about 2% and China’s economic growth will soften to 6.3%, ergo the consensus calls for a replay of 2017 in 2018. As for markets, most investors are cautious on stocks, bearish on bonds and uncertain about commodities and emerging markets.

Maybe the consensus is right, but we disagree. We are looking for a low-inflation economic boom, driven by private capex, re-leveraging and an possible “race to the bottom” in tax cuts around the world. We are looking for much stronger growth in G7 in 2018, while China’s economy could also deliver a positive surprise.

As for financial markets, our research suggests that the bull market in U.S. stocks has not yet matured. Despite the recent price gains, the total return index for the S&P 500 has not even returned to its long-term trend (see chart above). Should a low inflation boom indeed develop, a “melt-up” in global equity prices could be the big surprise in 2018. We are not particularly bearish on US treasury bonds, but the dollar story will become complicated in the New Year.

Finally, various risks will also escalate next year, suggesting that financial market volatility will be sharply higher. Investors should think about hedging strategy, especially now with VIX index at extremely low levels.

Will 2018 be a more "normal" year? 2017 was a year of surprises, but for 2018, not surprisingly, things are expected to be more, well, normal.

Which is why you should be suspicious.

It's true — by almost all measures, 2017 was one of the most extraordinary years in the history of the stock market. Investors saw:

1. Extraordinary returns far above the norm. The S&P 500 is up nearly 20 percent this year, far above the roughly 8 percent average yearly gains since 1945.
2. Extraordinary new highs. We hit 62 daily all-time highs this year, far above the average of 29 that have occurred in years when at least one new high was reached, according to CFRA.
3. Extraordinarily low volatility. The S&P moved 1 percent or more on only eight trading days this year; the average since 1945 was 50 days.
4. Extraordinary sector dispersion. The top-performing sector — technology, up 38 percent —outperformed the worst-performing sectors (energy and telecom, down about 5 percent) by more than 43 percentage points.

What does all this mean? The stock market is a numbers game with a long track record. When you get numbers that are way out of the ordinary, it's logical to believe in mean reversion, that it is highly unlikely that returns or volatility will come anywhere near 2017.

That is exactly veteran market watcher Sam Stovall's advice to his clients. Stovall is chief equity strategist at CFRA, and in a note to clients advised that investors "would be better off anticipating an increase in volatility, a reduction in new highs, as well as a below-average price gain for the '500' in the year ahead."

Getting these extraordinary numbers tends to pull forward stock market performance. In years with above-average new highs and below-average volatility (exactly what we had in 2017), the S&P rose the following year only 55 percent of the time, with an average gain of only 3.1 percent, Stovall noted.

In years where the "dispersion" between the best- and worst-performing sectors was high (also what we saw in 2017), the S&P 500 was also up only 57 percent of the time in the following year, with an average gain of only 1.9 percent.

Stovall's conclusion: "As a result, one could say that in 2018 investors should expect more for less — more volatility for less return."

Get it? "Less surprise" is a big theme for 2018. Jim Paulsen, chief investment strategist for Leuthold Group, has noted that a good part of the stock markets' gain has been related to the string of strong economic numbers that we have seen recently: He notes that the U.S. economic surprise index rose to a 6-year high last week.

"Even if the recovery remains healthy in 2018, it can't continue to surprise," Paulsen says.

But why can't it continue to surprise? Peter Tchir, macro strategist for Academy Securities, is not so impressed with the "reversion to the mean" story.

Tchir notes that the global economic expansion continues, that earnings remain at record highs, and the tax cuts are pushing those numbers up: "It doesn't feel like the tax cut is being fully priced in, and there's no reason corporate America can't keep issuing debt and buying back stock. I'm not sure we can't have more of the same."

And absent some outside shock, why can't volatility remain low, he asks. "With ETFs, people have less need to chase daily trading, and I think that's a good part of the reason why we have seen reduced volatility."

Bottom line: Reversion to the mean does eventually happen, but we are in very unusual times.

Tom Coomer has retired twice: once when he was 65, and then several years ago. Each time he realized that with just a Social Security check, “You can hardly make it these days.”

So here he is at 79, working full-time at Walmart. During each eight-hour shift, he stands at the store entrance greeting customers, telling a joke and fetching a “buggy.” Or he is stationed at the exit, checking receipts and the shoppers that trip the theft alarm.

“As long as I sit down for about 10 minutes every hour or two, I’m fine,” he said during a break. Diagnosed with spinal stenosis in his back, he recently forwarded a doctor’s note to managers. “They got me a stool.”

The way major U.S. companies provide for retiring workers has been shifting for about three decades, with more dropping traditional pensions every year. The first full generation of workers to retire since this turn offers a sobering preview of a labor force more and more dependent on their own savings for retirement.

Years ago, Coomer and his co-workers at the Tulsa plant of McDonnell Douglas, the famed airplane maker, were enrolled in the company pension, but in 1994, with an eye toward cutting retirement costs, the company closed the plant. Now, The Washington Post found in a review of those 998 workers, that even though most of them found new jobs, they could never replace their lost pension benefits and many are facing financial struggles in their old age: 1 in 7 has in their retirement years filed for bankruptcy, faced liens for delinquent bills, or both, according to public records.

Those affected are buried by debts incurred for credit cards, used cars, health care and sometimes, the college educations of their children.

Some have lost their homes.

And for many of them, even as they reach beyond 70, real retirement is elusive. Although they worked for decades at McDonnell Douglas, many of the septuagenarians are still working, some full-time.

Lavern Combs, 73, works the midnight shift loading trucks for a company that delivers for Amazon. Ruby Oakley, 74, is a crossing guard. Charles Glover, 70, is a cashier at Dollar General. Willie Sells, 74, is a barber. Leon Ray, 76, buys and sells junk.

“I planned to retire years ago,” Sells says from behind his barber’s chair, where he works five days a week. He once had a job in quality control at the aircraft maker and was employed there 29 years. “I thought McDonnell Douglas was a blue-chip company — that’s what I used to tell people. ‘They’re a hip company and they’re not going to close.’ But then they left town — and here I am still working. Thank God I had a couple of clippers.”

Likewise, Oakley, a crossing guard at an elementary school, said she took the job to supplement her Social Security.

“It pays some chump change — $7 an hour,” Oakley said. She has told local officials they should pay better. “I use it for gas money. I like the people. But we have to get out there in the traffic, and the people at the city think they’re doing the senior citizens a favor by letting them work like this.”

Glover works the cash register and stocks goods at a Dollar General store outside Tulsa to make ends meet. After working 27 years at McDonnell Douglas, Glover found work at a Whirlpool factory, and then at another place that makes robots for inspecting welding, and also picked up some jobs doing ­computer-aided ­design.

“I hope I can quit working in a few years, but the way it looks right now, I can’t see being able to,” Glover said recently between customers. “I had to refinance my home after McDonnell Douglas closed. I still owe about 12 years of mortgage payments.”

For some, financial shortfalls have grown acute enough that they have precipitated liens for delinquent bills or led people to file for bankruptcy. None were inclined to talk about their debts.

“It’s a struggle, just say that,” said one woman, 72, who filed for bankruptcy in 2013. “You just try to get by.”

A perk that became too costly

The notion of pensions — and the idea that companies should set aside money for retirees — didn’t last long. They really caught on in the mid-20th century, but today, except among government employers, the traditional pension seems destined to be an artifact of U.S. labor history.

The first ones offered by a private company were those handed out by American Express, back when it was a stagecoach delivery service. That was in 1875. The idea didn’t exactly spread like wildfire, but under union pressure in the middle of the last century, many companies adopted a plan. By the 1980s, the trend had profoundly reshaped retirement for Americans, with a large majority of full-time workers at medium and large companies getting traditional pension coverage, according to Bureau of Labor Statistics data.

Then corporate America changed: Union membership waned. Executive boards, under pressure from financial raiders, focused more intently on maximizing stock prices. And Americans lived longer, making a pension much more expensive to provide.

In 1950, a 65-year-old man could be expected to reach age 78, on average. Today, that ­65-year-old is expected to live beyond 84. The extended life expectancy means pension plans must pay out substantially longer than they once did.

Exactly what led corporate America away from pensions is a matter of debate among scholars, but there is little question that they seem destined for extinction, at least in the private sector.

Even as late as the early 1990s, about 60 percent of full-time workers at medium and large companies had pension coverage, according to the government figures. But today, only about 24 percent of workers at midsize and large companies have pension coverage, according to the data, and that number is expected to continue to fall as older workers exit the workforce.

In place of pensions, companies and investment advisers urge employees to open retirement accounts. The basic idea is workers will manage their own retirement funds, sometimes with a little help from their employers, sometimes not. Once they reach retirement age, those accounts are supposed to supplement whatever Social Security might pay. (Today, Social Security provides only enough for a bare-bones budget, about $14,000 a year on average.)

The trouble with expecting workers to save on their own is that almost half of U.S. families have no such retirement account, according the Federal Reserve’s 2016 Survey of Consumer ­Finances.

Of those who do have retirement accounts, moreover, their savings are far too scant to support a typical retirement. The median account, among workers at the median income level, is about $25,000.

“The U.S. retirement system, and the workers and retirees it was designed to help, face major challenges,” according to an October report by the Government Accountability Office. “Traditional pensions have become much less common, and individuals are increasingly responsible for planning and managing their own retirement savings accounts.”

The GAO further warned that “many households are ill-equipped for this task and have little or no retirement savings.”

The GAO recommended that Congress consider creating an independent commission to study the U.S. retirement system.

“If no action is taken, a retirement crisis could be looming,” it said.

‘We were stunned’

Employees at McDonnell Douglas in the early ’90s enjoyed one of the more generous types of pensions, those known as “30 and out.” Employees with 30 years on the job could retire with a full pension once they reached age 55.

But, as the employees would later learn, the generosity of those pensions made them, in lean times, an appealing target for cost-cutters.

Those lean times for McDonnell Douglas began in earnest in the early ’90s. Some plants closed. But for the remaining employees, including those at the Tulsa plant, executives said, there was hope: If Congress allowed the multibillion-dollar sale of 72 F-15s to Saudi Arabia, the new business would rescue the company. In fact, the company said in its 1991 annual report, it would save 7,000 jobs.

To help win approval for the sale, Tulsa employees wrote letters to politicians. They held a rally with local politicians and the governor of Oklahoma. Eventually, in September 1992, President George H.W. Bush approved the sale. It seemed the Tulsa plant had weathered the storm.

The headline in the Oklahoman, one of the state’s largest newspapers, proclaimed: “F-15 Sale to Saudi Arabia Saves Jobs of Tulsa Workers.”

But it hadn’t. Within months, executives at the company again turned to cost-cutting. They considered closing a plant in Florida, another in Mesa, Ariz., or the Tulsa facility. Tulsa, it was noted, had the oldest hourly employees — the average employee was 51 and had worked there for about 20 years. Many were close to getting a full pension, and that meant closing it would yield bigger savings in retirement costs.

“One day in December ’93 they came on the loudspeaker and said, ‘Attention, employees,’ Coomer recalled. “We were going to close. We were stunned. Just ran around like a bunch of chickens.”

A few years later, McDonnell Douglas, which continued to struggle, merged with Boeing. But the employees had taken their case to court, and in 2001, a federal judge agreed McDonnell Douglas had illegally considered the pensions in its decision to close the plant. The employees’ case, presented by attorneys Joe Farris and Mike Mulder, showed the company had tracked pension savings in its plant closure decisions.

The judge found McDonnell Douglas, moreover, had offered misleading testimony in its defense of the plant closing. The judge, Sven Erik Holmes, blasted the company for a “corporate culture of mendacity.”

Employees eventually won settlements — about $30,000 was typical. It helped carry people over to find new jobs. But the amount was limited to cover the benefits of three years of employment — and it was far less than the loss in pension and retiree health benefits. Because their pension benefits accrued most quickly near retirement age, the pensions they receive are only a small fraction of what they would have had they worked until full eligibility.

“People went to work at these places thinking they’ll work there their whole lives,” Farris said, noting that the pensions held great appeal to the staff. “Their trust and loyalty, though, was not reciprocated.”

Dreaming of work

The economic effects were, of course, immediate.

The workers, most of them over 50, had to find jobs.

Some enrolled in classes for new skills, but then struggled to find jobs in their new fields. They wondered, amid rejections, whether younger workers were favored.

Several found jobs at other industrial plants. One started a chicken farm for Tyson. Another took a job on a ranch breaking horses.

The Post acquired a list of the 998 employees, reviewed public records for them and interviewed more than 25.

Of those interviewed, all found work of one kind or another. Yet all but a handful said their new wages were only about half of what they had been making. Typically, their pay dropped in half, from about $20 per hour to $10 per hour.

The pay cut was tough, and it made saving for retirement close to impossible. In fact, it has made retirement itself near impossible for some — they must work to pay the bills.

A few said, though, they work because they detest idleness, and persist in jobs that would seem to require remarkable endurance.

Combs, for example, works the graveyard shift, beginning each workday at 1:30 a.m. His days off are Thursday and Sunday. He worked 25 years at McDonnell Douglas, and more than 20 loading trucks.

He shrugs off the difficulty.

“I don’t want to sit around and play checkers and get fat,” Combs says. “I used to pick cotton in 90-degree heat. This is easy.”

Coomer, too, even if he would have preferred to retire, seems to genuinely enjoy his work. At Walmart, his natural cheerfulness is put to good use.

“Hi, Tom, how are you?” a customer on a motorized scooter, one of many who greet him by name, asks on her way out.

“Doing good . . . beautiful day,” he says, smiling warmly.

Later he explains his geniality.

“I like to talk to people. I like to visit with them. I can talk to anyone. I’ve always been like that, since I was a kid.”

When he sees someone looking glum, he tells them a joke.

Why does Santa Claus have three gardens?

So he can hoe, hoe, hoe.

“People really like that one,” he says.

Coomer grew up on a farm in Broken Arrow, got married when he was 17 — his wife was 15 — and says he’s always liked work.

“I really loved working at McDonnell Douglas,” he says. One time, he says, he worked 36 days straight: 11 hours on the weekdays and eight hours on Saturdays and Sundays. He joked the factory was his home address. All along, for his 29 years there, he had his eye on the pension. And then, for the most part, it was gone.

After the plant closed, Coomer worked as a security guard. Then he worked for a friend who had a pest-control company. When that slowed down, he picked up seasonal work at the city, doing some mowing and chipping.

Then came Walmart.

Soon, he said, he expects to cut back from full-time to about three days a week.

Along with his Walmart check, he gets $300 a month from the McDonnell Douglas pension. Had he been able to continue working at McDonnell Douglas, he calculates that he would have gotten about five times that amount.

“After they shut the plant down, I would dream that I was back at McDonnell Douglas and going to get my pension,” Coomer recalled. “In the dream, I would try to clock in but I couldn’t find my time card. And then I’d wake up.”

In the dream, he would have retired years ago.

Your latest post reminded me of the book “The Real Retirement” by Fred Vettese and Bill Morneau.

The key takeaway for me from that book is that the Boomers have it easy compared to younger generations. The Boomers have ridden, directly or indirectly through the potential for inheritance from their parents, multiple, stunning bull markets, in bonds, stocks and real estate that started in the early 80s. That Boomers have failed to accumulate adequate financial assets in the face of those bull markets represents a failure of both personal responsibility and public policy. It’s pretty much mathematically impossible for younger generations to enjoy anywhere near that sort of asset appreciation. To your point, all the fintech in the world cannot change that fact. Millennials are, therefore, almost necessarily in a much worse situation. But if the Millenials are more financially responsible than were their profligate parents, and if public policy on the issue improves just a bit, it is conceivable that they could indeed end up better off financially than their parents. That said, the soaring debt levels of Canadians do not gesture at improved financial responsibility.

The Dow Jones Industrial Average posted its second-biggest yearly gain of the past decade in 2017, rising a surprising 25%.

The market notched the most closing highs for the index in a single calendar year. Volatility swooned to historic lows and many global stock markets finished the year at or near records or multiyear highs.

It’s a sharp change from what many money managers and analysts anticipated at the start of 2017. At the time, many expected what they called a “sideways market,” where the overall levels of major indexes would remain little changed at year-end. Instead, the S&P 500 posted its best yearly gain since 2013.

Some of them acknowledge they were surprised by a confluence of market-supporting trends. They didn’t expect corporate earnings and revenues to grow at such a fast clip. They didn’t anticipate the economies of all 45 countries tracked by the Organization for Economic Cooperation and Development to be on pace to expand, an uncommon synchronicity. They certainly didn’t predict the Dow would rise for nine consecutive months, its longest streak of monthly gains since 1959, even in the face of geopolitical turmoil in Washington and around the world (click on image).

“There was no knocking the market off its perch,” said JJ Kinahan, chief market strategist at TD Ameritrade. “A couple times it wobbled, but we never saw a wild rush of sales in the market. Every dip was marked with big buyers.”

Heading into 2017, many analysts and investors expected moderate gains for the S&P 500. Goldman Sachs Group Inc. forecast in a January 2017 report that the index would rise to 2400 in the first quarter before fading to 2300 by year-end. Credit Suisse also estimated in early January that the index would close out 2017 at 2300. The S&P 500 closed at 2673.61 Friday.

Underpinning the index’s 19% climb in 2017 has been corporate-earnings growth, which is on pace to post its largest increase since 2011, as measured by earnings per share. At the end of the first quarter, analysts polled by FactSet were expecting companies in the S&P 500 to post 9.1% earnings growth in that period. Instead, companies grew their earnings by 14%, FactSet data show. That expansion has continued, albeit at a slower pace: In the second quarter, earnings for companies in the S&P 500 rose 10% from the year prior, and in the third quarter that growth was 6.4%.

“We’re seeing a peak rate of growth,” said Bob Doll, senior portfolio manager and chief equity strategist at Nuveen Asset Management. However, that doesn’t mean investors should rush to sell stocks, he said—even if growth slows in the next year or two, there is still upside potential, he said.

Mr. Doll, who said his own predictions for the S&P 500’s 2017 rise fell short, also attributed the outsize gains to the synchronous economic expansion around the globe. The U.S. recovered from the financial crisis more quickly than other countries, but that changed in 2017 as others caught up. The result is global stock indexes near records or multiyear highs, from Japan’s Nikkei Stock Average to the U.K.’s FTSE 100. The MSCI All Country World Index is also near a record.

The steep gains of 2017 have some analysts worried that the rally could wane in 2018, particularly if volatility, which hit historic lows this year, ticks up as many predict. Stocks are trading at above-average multiples of their past 12 months of earnings and government bonds have been sending cautionary signals about the U.S. economy’s prospects, something that could end up jolting indexes in 2018.

The yield on the benchmark 10-year Treasury note, often seen as a gauge of investors’ sentiment about the economy, closed at 2.409% on Friday, down slightly from 2.446% at the end of 2016 in defiance of analysts’ predictions that it would soar in 2017 with a surge in growth and inflation. Its premium relative to the two-year note yield has been cut by more than half over the past year (click on image).

Though analysts have debated its significance, a shrinking gap between short and long-term Treasury yields, known on Wall Street as a flattening yield curve, has often been a warning sign for investors. Five of the past six times the two-year yield surpassed the 10-year yield, known as an inverted yield curve, the economy subsequently entered a recession, according to data from the St. Louis Fed.

With few other signs of recession, however, many investors say there are reasons to doubt the yield curve’s signals, which some argue have been distorted by easy-money policies from central banks in Europe and Japan pushing yield-seeking investors into U.S. government bonds, driving down the yields on longer-term debt.

Still, many investors and analysts expect the curve to continue its flattening in 2018, given signs that the Federal Reserve will keep raising interest rates even if inflation remains stuck below its 2% annual target. That could push up the two-year yield, which is more sensitive to expectations for central-bank policy.

That, plus a potential deceleration in economic growth, could set up 2018 to be a tougher year. A bright spot some analysts point to is corporate tax cuts, which could boost earnings growth and stock prices. Yet, some analysts say they are worried the potential benefits from the tax bill are already priced into company shares, limiting upside in 2018.

“We’ve gotten used to things being very good,” said Brad McMillan, chief investment officer for Commonwealth Financial Network, who added that he doesn’t expect either big declines or big gains in 2018. “We don’t need the tailwinds to turn into headwinds, we just need a couple to go away to find ourselves in a very different market environment.”

Stocks could pop nearly 20 percent in 2018 according to a contrarian indicator from Bank of America Merrill Lynch which predicted last year's surprising surge.

The investment bank's so-called Sell Side Indicator measures the average equity allocation recommended by its fellow Wall Street bank peers. The indicator shows Wall Street is still not very bullish on the market at all and until they recommend clients own even higher levels of stocks, the market will continue to gain.

"Historically, when our indicator has been this low or lower, total returns over the subsequent 12 months have been positive 93 percent of the time, with median 12-month returns of 19 percent," according to a BofA Merrill Lynch Global Research report (click on image).

In September 2016, the metric predicted a huge positive return over the next 12 months, a forecast that eventually came true and stood in contrast to the sentiment on Wall Street at the time. Now in early 2018, the model still remains upbeat.

2018 "could be the year of euphoria. Sentiment is now a more important driver of the S&P 500 than fundamentals, and sentiment suggests there is still room for stocks to move higher in the near term," wrote BofA Merrill Lynch strategists in the 2018 outlook press release in December.

To be sure, this indicator is only one input in Bank of America's bigger forecast model. Officially the bank predicts just a 5 percent rise in the S&P 500 to 2800 this year.

The strategist's target is just below the median 2,850 forecast of 13 other equity strategists surveyed by CNBC. That median projection is modest in comparison to the roughly 20 percent climb for the S&P 500 in 2017.

"We think euphoria is what's going to end this bull market and we're not there yet,"Savita Subramanian, the bank's chief U.S. equity and quant strategist, told CNBC in December. "We're not at the point where the investment community is saturated in equities and there's nothing to do with stocks but sell."

In a year when equities across the world have rallied in synchrony, Ryan Detrick of LPL Financial has identified what could be the most important chart for the market next year, as it could signal that the global rally is far from done.

With the S&P 500 up 20 percent this year, on pace for its best year since 2013, emerging markets up 35 percent and Europe's STOXX 600 index up 8 percent, many market watchers have applauded 2017 as the year of global growth.

A big driver of the global markets rally has been earnings. Detrick, who is a senior market strategist, says that based on one chart, the global earnings outlook is still positive for next year.

"We've seen a resurgence of global earnings in 2017 with the S&P 500, emerging markets and developed markets all positive ... [that's the first time it's happened] since 2010,"he said Thursday on CNBC's "Trading Nation."

"Fortunately we're looking at all three of them being positive again next year," added Detrick.

And even though Detrick says there could be more volatility in 2018, he also sees signs of strong fundamentals in the U.S. and abroad that he believes validates the momentum of economic growth around the world.

More specifically, he points to tax reform and the rally in industrial metals such as copper, up 31 percent this year and seen as an indicator of industrial demand, as two factors that could uphold earnings growth in 2018.

"We definitely think a lot of it could be priced in so far what we've seen this year, and we could have some more rocky volatility next year," said Detrick. "But all in all, we just upped our forecast for earnings from about $143 a share to just under $150."

"As we look out 12 to 18 months, there are still a lot of positives," he added. "We've got tax reform, which should continue to drive markets higher."

Within U.S. markets, Detrick says small-caps and financials are the best buys for investors, thanks to tax reform. He also encourages investors to look at emerging markets thanks to their moderate valuations, and he predicts they will continue to grow in 2018.

We are off to what will be a very exciting year for markets and the economy.

Over the past two years I've written this daily piece, discussing the big slow-moving themes that drive markets, the catalysts for change, and the probable outcomes. When we step back from all of the day to day noise that has distracted many throughout the time period, the big themes have been clear, and the case for higher stocks has been very clear. That continues to be the case as we head into the new year.

As I've said, I think we're in the early stages of an economic boom. And I suspect this year, we will feel it--Main Street will feel it, for the first time in a long time.

And I suspect we'll see a return of “animal spirits.” This is what has been destroyed over the past decade, driven primarily by the fear of indebtedness (which is typical of a debt crisis) and mistrust of the system. All along the way, throughout the recovery period, and throughout a quadrupling of the stock market off of the bottom, people have continually been waiting for another shoe to drop. The breaking of this emotional mindset has been tough. But with the likelihood of material wage growth coming this year (through a hotter economy and tax cuts), we may finally get it. And that gives way to a return of animal spirits, which haven't been calibrated in all of the economic and stock market forecasts.

With this in mind, we should expect hotter demand and some hotter inflation this year (to finally indicate that the global economy has a pulse, that demand is hot enough to create some price pressures). With that formula, it's not surprising that commodities have been on the move, into the year-end and continuing today (as the new year opens). Oil is above $60. The CRB (broad commodities index) is up 8% over the past two weeks -- and a big technical breakout is nearing (click on image).

This is where the big opportunities lie in stocks for the new year. Remember, despite a very hot performance by the stock market last year, the energy sector finished DOWN on the year (-6%). Commodity stocks remain deeply discounted, even before we add the influence of higher commodities prices and hotter global demand. With that, it's not surprising that the best billionaire investors have been spending time building positions in those areas.

It's important to read this full report to really understand what went right and wrong in 2017. The worst themes in 2017 were in asset allocation as they were too negative on the stock market and too bullish on the US dollar.

They were surprised by the strength in foreign data and this impacted their asset allocation calls (click on image):

But they got the macro factors (ie. size and style) right and positioned their clients early on in large-cap growth, and it's this sector positioning which their clients value the most. Their asset allocation recommendations are equally excellent but not always easy, especially in a year like 2017 when Eurozone's PMIs did very well on the back of the ECB's massive stimulus, something François openly admits he and his team underestimated.

Along with large-cap growth to capture Risk Off markets, another one of their best themes last year was to overweight stable earnings like healthcare (XLV).

Again, if you're a client, take the time to read their 2017 year-end review of their investment recommendations very carefully, it's excellent.

When looking at 2018, François and his team state the following on the intro to their outlook:

The big story of 2017 when it comes to equities was the dominance of growth. We are not only referring to the Growth Index here, albeit it performed quite well, but rather to the broader “growth” theme at large. In essence, all things associated with growth were clear winners last year. This is often seen in a world where economic prospects are beginning to, or about to, top out. If one excludes the December tax-infused pop in most PMIs, what you saw in 2017 was a broad topping process of leading indicators at very high levels. As such, the Technology sector, with 83% of its market-cap in Growth, led the market. Moreover, stock-selection factors such as long-term growth and high price-to-book generated a lot of excess performance.

The key question as we begin 2018 is whether this growth dominance can continue, and if not, what will replace it? Interestingly, the evolution of market themes in recent years and how they relate to the business cycle was actually quite textbook. The diagram above illustrates the main themes we have all experienced with a rough outline with the typical cycle. In the coming pages, and in tomorrow’s conference call, we will make the case for “stability” as the BIG story of 2018 equity leadership.

In his outlook and subsequent conference call, François and his team spent a lot of time going over the yield curve and explaining why the Fed funds rate is relevant again.

[Note: All clients should take the time to carefully go over his outlook piece and watch the conference call going over numerous key themes]

In our conversation, he told me he is going back to his more traditional indicator, the Fed funds rate inversed, advanced by 18 months as now that the Fed moved off the zero bounds, this indicator is useful once again.

[Note: In 2009, he moved away from this indicator to look at inflation. In particular, the ISM prices paid, inverted, advanced 18 months, to capture changes in monetary policy because ZIRP and QE impacted the traditional Fed funds indicator.]

There are actually four macro indicators that François uses:

1. Fed funds rate
2. Money supply
3. Taylor rule
4. Yield curve

All four indicators are pointing to an economic slowdown ahead but in the outlook and conference call, François, spent a lot of time explaining the importance of the yield curve and how he thinks it will move over the next year.

According to him, "the yield curve remains the single greatest macro indicator in the US" which is a consumer-led economy where credit is critically important.

With the Fed raising rates and core inflation pressures rising in the US, he thinks there is a real risk of an inverted yield curve because the global PMI is topping and weakening, and this will drive long bond yields lower.

He also stated the yield curve is not a leading indicator, it's a gauge of market policy which leads other components of the Leading Economic Indicators (LEI). "As such, it belongs in the policy bucket which leads other indicators."

What this basically means is in 2018, we can expect a slowing of leading US economic indicators, even if you factor in fiscal policy, and this has implications on portfolio positioning

1. He expects a recoupling will occur in all three major economies to the path of lower pospects.
2. A shift of growth to stability which means focus on healthcare (XLV), consumer staples (XLP) and utilities (XLU). Profitability will be a dominant theme in 2018.

Below, you can click on the image to see a summary of their five highest-conviction investment themes for 2018:

And the chart below explains exactly which sectors they are recommending during this shift to a year of stability:

He stressed that he doesn't see any major shock in the near term and thinks growth in Europe and Japan will continue to be decent in the first half but the US yield curve will increasingly become the dominant theme of the year.

This means a slowing of leading indicators, economic data coming in below expectations, stocks will start moving down before this occurs despite the proposed tax cuts and repatriation of foreign profits.

Interestingly, he remains bullish on US long bonds (TLT) and thinks "we have yet to see secular lows on long bond yields."

This is my belief too but I told him I had a discussion with a trader I know who told me "tax cuts + infrastructure spending will lead to higher long bond rates and so will repatriation of foreign profits because it will lead to more stock buybacks and investment spending."

He responded:

I expect core inflation to accelerate ... bonds tend to be more sensitive to headline inflation which is expect to come down courtesy of lower commodity prices.

Most importantly the model Roberto uses disagregates bonds into three components and inflation is only one part. The growth component is already discounting the peak of the cycle so that will only work against you, same for the term premium if PMIs in Europe start to come in. If oil starts to come down then all three parts are pressuring yields lower. It is quite possible we get lower bond yields AND a core inflation scare all the same.

[in regards to what that trader told you] In my experience traders are great at trading but understand nothing of macro. All you are saying here is that this guy is consensus and regurgitating what's in the Wall Street Journal. I have heard that story 1000 times already. Since we all know it is happening why are yields not higher? They are a discounting mechanisms so if that story were true they would already be up.

There is a big belief out there that somehow the tax plan is not fully priced in to financial markets which is insane to me. I think it's typical of what you see at the top of a cycle when people are only thinking about what can go right in the world and trying to find reasons for why the good times will last. It's the opposite of early 2016 when they could only think negative with China about to have a financial crisis etc.

Time will tell.

On China, he says the big investment boom is over and that it's an export-led economy. "China's PMIs follow exports, so we need to watch any slowdown in its trade, especially if the US dollar starts appreciating“ (putting pressure on the renminbi and forcing another massive devaluation there which will export more disinflation/ deflation throughout the world and clobber risk assets).

Interestingly, on Wednesday morning, Bloomberg reported that China may halt purchases of US Treasuries, sending long bond yields higher and disrupting markets. It's obvious to me that people don't understand that China necessarily runs a current account surplus (capital account deficit) to finance the US current account deficit (capital account surplus). In other words, it's much ado about nothing!

I leave you with some important charts as we begin the new year with some of my comments (click on weekly charts to enlarge; as of Tuesday's close):

Long US long bonds: I call this the sleep well at night trade. I know, Bill Gross and Jeffrey Gundlach are warning of a potential bear market in bonds (the latter stating the key levels for investors to watch are 2.63% on the 10-year Treasury yield and 3% on the 30-year), but given the weakening in the global PMI and ever-present deflationary pressures abroad, I continue to recommend buying US long bonds (TLT) on any backup in yields/ decline in prices.

In fact, if you ask me, now is a good time to load up on US long bonds:

Given my bullish views on the US dollar (UUP), I particularly like this trade for Canadian and foreign investors.

Buy more stocks? As far as stocks, as shown below, the S&P 500 (SPY) is on a tear, led by financials (XLF), industrials (XLI) and technology (XLK):

But given my fears of global deflation, lower long bond yields, a potential inverted yield curve, I expect stocks to sell off and hit financials and industrials particularly hard. Risk Off markets will still support technology but the shift there will be toward stability (like software).

Also, with the global PMI topping out and signalling a slowdown ahead, I remain weary of cyclical sectors leveraged to global growth like metals and mining (XME), energy (XLE), emerging markets (EEM) and Chinese shares (FXI):

Importantly, if the global PMI is topping out and pointing to a global slowdown ahead, you want to be underweight or even short these sectors, especially the ones that ran up a lot since bottoming early in 2016 (I would include industrials too as they are leveraged to the global economy).

Return to stability: Since this comment is called return to stability, below are more stable sectors like healthcare (XLV), utilities (XLU), consumer staples (XLP), REITs (IYR) and telecom (VOX):

All these sectors offer stability, a key theme of this outlook, as they offer stable earnings and solid dividends. However, it's important to note utilities, REITs, telecoms and other dividend sectors sell off when rates rise, which is normal and a buying opportunity.

However, buying safer stocks still carries beta risk, less so than a high-flyer like biotech but stocks are stocks, so if you want to lower the volatility of your portfolio, you need to increase your allocation to US long bonds.

Speaking of biotech (XBI), it's been on a tear too, and I made a great call recommending this sector to my readers right before the US presidential election:

But biotech is super high beta and this means when it swings, it swings hard both ways. I still like this sector and think there is something structural going on but you need to stomach a lot of volatility if you buy and hold these biotech stocks (great for swing trades, but they're very risky especially when buying individual companies).

Canary in the coal mine: Lastly, the canary in the coal mine, high-yield or junk bonds (HYG), which typically move down before stocks:

So far, I don't see any imminent threat but with credit spreads at record lows and stocks at record highs, you really need to keep an eye on junk bonds.

I have shared more than enough with my readers. I want to publicly thank François Trahan and urge all my institutional readers to subscribe to the research at Cornerstone Macro and really take the time to read his team's 2018 outlook and listen to the accompanying conference call, it's well worth your time.

Again, please remember some of the charts above are copyright material of Cornerstone Macro and I have explicit permission to use them for this blog post. Anyone forwarding these charts or using them in a presentation without explicit permission from Cornerstone Macro will be prosecuted to the full extent of the law (take this warning seriously).

I hope you enjoyed reading this comment and kindly remind all my readers to please support this blog and the work that goes into it via PayPal on the top right-hand side, under my picture.

It took me a few days to put this comment together, I will not publish anything else this week, will let you digest all the information here.

Below, market optimism reaches 'potential danger' sign not seen since 1986 and Warren Buffett and Charlie Munger think things are getting bubbly out there. However, momentum tends to feed on itself, something Buffett alluded to.

In fact, Bill Miller, a legendary investor who once beat the S&P for 15 consecutive years before running into trouble, told CNBC the market can melt up 30 percent here. No doubt, there is still a lot of liquidity driving shares higher but momentum can shift abruptly so be careful chasing stocks, especially momentum stocks here.

Third, James Paulsen, The Leuthold Group chief investment strategist, and Tom Manning, F.L. Putnam Investment Management president and CEO, provide their outlook on the markets.

Paulsen thinks rising inflation will pose a risk on yields and markets but given long bond yields move with the global PMI, I wouldn't worry about a bond bear market even if US core inflation temporarily picks up (due to the lower US dollar). The global PMI is weakening and this will put pressure on US long bond yields over te next year.

Fourth, Tom McClellan, McClellan Market Report editor, gives his outlook on tech stocks and what he sees for the overall market.

Lastly, David Spika, GuideStone Capital Management, and Steve Massocca, Wedbush Equity Management, discuss how the bull run will play out in 2018 stating central bank policy going forward will prove to be a headwind for the market.

If I were the Fed, I'd be very worried of how to proceed going forward. Stay tuned, 2018 should be another interesting year! Don't panic, just prepare for a bumpier ride ahead and focus on stability.

Lendlease and Canada Pension Plan Investment Board (CPPIB) have partnered to invest an initial £1.5bn (€1.7bn) in the UK build-to-rent (BTR) sector.

The partnership will begin with an investment of £450m in the next phase of new homes at Lendlease’s £2.3bn Elephant Park development in Elephant & Castle, London.

CPPIB will invest around £350m for 80% stake and Lendlease will invest the balance.

This partnership is in addition to the £800m that Lendlease has already committed to housing and infrastructure in the development and will accelerate the delivery of private rental and affordable homes.

Construction has already commenced, and the first homes in this phase are expected to be completed in 2020.

Following this initial investment, the partnership will also pursue opportunities within Lendlease’s wider residential urban regeneration activities in London and across the UK under a 50:50 joint venture.

It aims to help address the UK’s housing shortage, over time, providing thousands of homes in London and across the UK via the development, and long-term ownership, of BTR product.

Lendlease will develop, construct and manage the BTR homes on behalf of the partnership.

Dan Labbad, the CEO of Lendlease’s international operations, said: “In recent decades, structural shifts in the housing market have meant that demand has outstripped supply in the private rented sector, leading to a shortfall of homes in London and across the UK.

“Today’s announcement is a logical next step for us as a business and delivers on our strategy to grow our urban regeneration pipeline and accelerate the delivery of much-needed homes, by working with institutional capital partners to launch this new asset class for Lendlease’s investment platform.”

Andrea Orlandi, the managing director and head of real estate investments Europe at CPPIB, said: “This investment is a great opportunity for CPPIB to further diversify our European real estate portfolio, while at the same time addressing a need in the UK.

“Through this partnership, we are able to access a sector we believe is poised for long-term growth, and we are pleased to be able to do so with Lendlease, one of our existing top global partners.”

CPPIB is already a long-term global partner of Lendlease.

Lendlease is working in partnership with Southwark Council to deliver a GBP£2 billion regeneration programme on 28 acres of land in the centre of Elephant & Castle. Situated in London's Zone 1, our vision is to create Central London's new green heart.

Inspired by the strength of its past, we will re-establish Elephant & Castle as the most exciting new neighbourhood in London not only through what we're building, but also how we're doing it. Our approach to urban regeneration in Elephant & Castle is already setting new standards in sustainability, that will not only will make the Elephant a great place to live, but will play a vital role in tackling issues such as air pollution and carbon emissions, creating a positive impact beyond just the Elephant.

The regeneration comprises three sites:

• Elephant Park Masterplan Almost 2,500 new homes on the site of the former Heygate Estate. Received outline planning permission in 2013 and will be completed in phases between now and 2025. The first two phases South Gardens and West Grove are in construction. 25% affordable housing.
• Trafalgar Place 235 new homes, including 25% affordable housing and a local café. Completed May 2015.
• One The Elephant 284 homes in a 37 storey tower and four storey pavilion building, adjacent to the councils new Leisure Centre. Completes June 2016.

Lendlease views the Elephant & Castle regeneration as a unique opportunity to work with a local authority to create positive change. We will harness the scale of the project to tackle head-on some of the most challenging issues that affect global cities like London.

The Elephant Effect is what will happen when we apply all our imagination, empathy and dedication, and get this right. To do this, we take a long term view to consider how our project will be used to enable sustainable outcomes, such as enhancing biodiversity in parks and buildings, improving public transport and cycle networks, and maximising the resource efficiency of homes. The approach to development and construction will also contribute to sustainable results, such as: utilising cross laminated timber building frames, providing interim site uses to during the construction phase, and working with our supply chain to trial new technologies.

The Elephant & Castle regeneration is one of 18 projects from across the world chosen to be part of the Climate Positive Development Programme. We have set a roadmap that will deliver a climate positive development by 2025, and through the programme, global projects will learn from our outcomes and best practice.

Elephant & Castle is also one of ten low carbon zones identified by the Mayor of London tasked with local production of cleaner better value energy to fuel local households and businesses. As such, we are developing plans for a combined heat and energy centre to power our sites and the surrounding area.

British Pound ETF closes at its highest level since Brexit in June 2016. $FXBpic.twitter.com/2dAhuXic47

— Charlie Bilello (@charliebilello) January 17, 2018

Cortland Partners, Canada Pension Plan Investment Board (CPPIB) and GIC announced today that they have formed a joint venture with a targeted equity amount of US$550 million to acquire and renovate 8,000 to 10,000 Class B multifamily units in the U.S. CPPIB and GIC will each own a 45% interest in the joint venture and Cortland Partners will own the remaining 10% interest.

Class B properties are generally well-maintained older assets with opportunities for improvements to the buildings for the benefit of tenants, ongoing maintenance and long-term appreciation. The joint venture has initially acquired three value-add, Class B garden-style communities located in high-growth markets of major U.S. metropolitan areas:

• Lakecrest at Gateway Park, a 440-unit rental complex located in Denver, Colorado;
• Aurum Falls River, a 284-unit rental complex in Raleigh, North Carolina; and
• Waterstone Apartments, a 308-unit rental complex in Austin, Texas.

“Partnering with these first-class organizations solidifies our business model and proves that a Class B multifamily investment strategy reflects smart money,” says Mike Altman, Chief Investment Officer, Cortland Partners. “We look forward to expanding our relationship with CPPIB and GIC through this joint venture.”

The joint venture will pursue additional opportunities to acquire multifamily properties that are candidates for value-add strategies, primarily in major markets throughout the Southern and Southeastern U.S.

“The U.S. multifamily real estate sector continues to offer compelling risk-adjusted returns for the CPP Fund, driven by favourable population growth and employment trends,” said Hilary Spann, Managing Director, Head of Americas, Real Estate Investments, CPPIB. “By focusing on Class B asset opportunities, this joint venture enables us to add diversification to our U.S. multifamily portfolio, which is concentrated in prime urban locations. We are pleased to form this new joint venture with Cortland Partners, a vertically integrated operator and one of the largest multifamily owner-operators in the U.S., and GIC, a longstanding partner we know well.”

Lee Kok Sun, Chief Investment Officer, GIC Real Estate, said “This venture will pursue a value-add strategy to capture the strong demand and resilient return profile of the U.S. multifamily sector. We look forward to growing this venture with Cortland, an experienced multifamily firm with a sizeable presence in the Sun Belt target markets, and CPPIB, a partner who shares our long-term investment philosophy.”

About Cortland Partners

Cortland Partners is a global, multifamily real estate investment firm that leverages proprietary design and build supply chains with in-house construction, property, and facilities management services to unlock value in high-growth U.S. markets. Headquartered in Atlanta, GA, Cortland owns and manages over 45,000 apartment communities across the U.S. with regional offices in Charlotte, Dallas, Denver, Houston, and Orlando. Cortland also houses a global materials sourcing office in Shanghai, China and an international development office in London, U.K. Cortland Partners is a National Multifamily Housing Council (NMHC) Top 50 Owner and Manager and is ranked among Atlanta’s “Top 25 Largest Workplaces” (2017). For more information, visit www.cortlandpartners.com.

About CPPIB

Canada Pension Plan Investment Board (CPPIB) is a professional investment management organization that invests the funds not needed by the Canada Pension Plan (CPP) to pay current benefits on behalf of 20 million contributors and beneficiaries. In order to build a diversified portfolio of CPP assets, CPPIB invests in public equities, private equities, real estate, infrastructure and fixed income instruments. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, São Paulo and Sydney, CPPIB is governed and managed independently of the Canada Pension Plan and at arm's length from governments. At September 30, 2017, the CPP Fund totalled C$328.2 billion. For more information about CPPIB, please visit www.cppib.com or follow us on LinkedIn, Facebook or Twitter.

About GIC

GIC is a leading global investment firm with well over US$100 billion in assets under management. Established in 1981 to secure the financial future of Singapore, the firm manages Singapore’s foreign reserves. A disciplined long-term value investor, GIC is uniquely positioned for investments across a wide range of asset classes, including real estate, private equity, equities and fixed income. GIC has investments in over 40 countries and has been investing in emerging markets for more than two decades. Headquartered in Singapore, GIC employs over 1,400 people across 10 offices in key financial cities worldwide. For more information about GIC, please visit www.gic.com.sg.

Enfoca, a leading private equity fund manager based in Lima, Peru, today announced the completion of a General Partner-led secondary transaction in which a new investment fund managed by Enfoca purchased exposure to the portfolio companies of three Enfoca-managed funds by providing a liquidity option to the existing Limited Partners (LPs). The new fund also obtained commitments for new capital to develop the portfolio.

Canada Pension Plan Investment Board (CPPIB), which made a capital commitment of US$380 million, and Goldman Sachs Asset Management LP’s Vintage Funds (GSAM) led the transaction. The three largest Peruvian pension funds, Integra, Prima and Profuturo, which have invested with Enfoca since 2007, are also committing new capital to the fund after taking advantage of this opportunity to obtain partial liquidity for their existing investments with Enfoca. In aggregate, the transaction represents a total capital commitment of over US$950 million and sets a new benchmark for General Partner-led liquidity alternatives in the LatAm private equity market.

Through a competitive bidding process, the transaction provided Enfoca’s existing LPs with a liquidity option with attractive returns on their original investments. The transaction gives the new LPs the opportunity to invest in a unique high-growth portfolio of Peruvian mid-market companies and also provides Enfoca with access to capital for new investments and continued growth of the portfolio, as well as an extended duration to realize the portfolio’s potential. Enfoca will serve as the General Partner of the new fund and will manage the portfolio post-closing.

“We are pleased to deliver liquidity for our existing LPs with attractive returns in a landmark transaction for the LatAm private equity market, while introducing CPPIB, a sophisticated global institutional investor, and GSAM, a successful global private equity investor, to our fund. The significant unrealized value in the portfolio provides our new investors with unique access to sectors in the Peruvian market and the Andean region that have experienced rapid growth,” said Jesús Zamora, Co-Founder and Chief Executive Officer of Enfoca.

“This sizable transaction supported by our new investors represents an important milestone for Enfoca and provides our portfolio with greater flexibility and access to capital,” said Jorge Basadre, Co-Founder of Enfoca. “We thank those LPs who are exiting our fund for their support over the years and look forward to working closely with our new and continuing investors as we grow our businesses in the future.”

“CPPIB is delighted to partner with Enfoca and GSAM in this direct secondary transaction, which allows us to benefit from their deep market expertise and track record in Peru,” said Michael Woolhouse, Managing Director, Head of Secondaries & Co-Investments, CPPIB. “Through this transaction, CPPIB will gain further access to this growing market and increase its overall investment in Latin America, one of our strategic focus regions.”

Steve Lessar, co-head of Goldman Sachs Asset Management’s Vintage Funds, said, “We are pleased to be partnering with Enfoca and CPPIB to invest in a portfolio of market-leading, consumer-oriented companies with meaningful growth prospects driven by a strong Peruvian economy. We have been impressed with Enfoca’s investment strategy and look forward to investing additional capital to support the growth of these portfolio companies.”

Park Hill Group LLC served as financial advisor and Davis Polk & Wardwell LLP and Payet, Rey, Cauvi, Pérez Abogados served as legal advisors to Enfoca.

About Enfoca

Enfoca, founded in 2000, is a private equity fund manager based in Lima, Peru. Enfoca manages funds with more than US$1 billion in assets, investing in Peru and other Andean region markets. Enfoca targets companies that operate in sectors that Enfoca believes are positioned to benefit from growth in the economy and consumer spending, such as healthcare, media, education, housing and consumer goods. For more information about Enfoca, please visit: http://www.enfoca.com.pe/

About CPPIB

Canada Pension Plan Investment Board (CPPIB) is a professional investment management organization that invests the funds not needed by the Canada Pension Plan (CPP) to pay current benefits on behalf of 20 million contributors and beneficiaries. In order to build a diversified portfolio of CPP assets, CPPIB invests in public equities, private equities, real estate, infrastructure and fixed income instruments. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, São Paulo and Sydney, CPPIB is governed and managed independently of the Canada Pension Plan and at arm's length from governments. At September 30, 2017, the CPP Fund totaled C$328.2 billion. For more information about CPPIB, please visit www.cppib.com or follow us on LinkedIn,Facebook or Twitter.

About Goldman Sachs Asset Management LP’s Vintage Funds

The Vintage Funds invest in the secondary market for private equity, providing liquidity, capital and partnering solutions to private market investors and managers globally. With over $26 billion in committed capital, the Vintage Funds have been innovators in the secondary market for over 20 years. The Vintage Funds are managed by the Alternative Investments & Manager Selection (“AIMS”) Group within Goldman Sachs Asset Management. The AIMS Group provides investors with investment and advisory solutions across hedge fund, private equity, real estate, public equity, fixed income and environmental, social, governance and impact-focused investment strategies. For more information, visit: www.gsam.com

The unprecedented rise in consumer debt means the Bank of Canada’s rate-hiking cycle is already the most severe in 20 years and further increases will have far graver consequences than conventional analysis shows, Macquarie Capital Markets Canada Ltd. said.

Assuming just one further rate rise, the impact would be 65 percent to 80 percent as severe as the 1987 to 1990 cycle, according to Macquarie, which took into account five-year bond yields, household debt and home buying. Canada’s housing market slumped in the early 1990s after that rate-hike cycle and a recession.

“The Canadian economy has experienced an unprecedented period of hyper-leveraging,” analysts including David Doyle wrote in the note released Thursday. According to Macquarie, this is underlined by the fact that:

• About 30 percent of nominal GDP growth has come from residential investment and auto sales over the past three years. This is about 50 percent greater than what has been experienced in similar prior periods.
• The wealth effect from rising home prices has driven nearly 40 percent of nominal growth in gross domestic product over the past three years, about two to four times the amount experienced previously when the BoC was hiking rates.
• Even as this has occurred, fixed business investment and exports have struggled, limiting the ability for a virtuous domestic growth cycle to unfold. This again is in sharp contrast to similar periods in the past when these were accelerating.

New mortgage stress-test rules will also have a larger impact than estimated, Macquarie said. The new rules in isolation are expected to reduce buyers’ maximum purchasing power by as much as 17 percent. That jumps to about 23 percent after incorporating the rise in mortgage rates since mid-2017, according to the note.

Governor Stephen Poloz has indicated high household debt could make the slowing impact of rate hikes harsher, and that the impact of 2017’s increases will not be fully clear for 18 months, Doyle said.

“When taken together, these observations mean the Bank of Canada is proceeding with hikes despite uncertainty surrounding the severity of tightening performed so far,” Macquarie writes. “This elevates the risk of policy error.”

Macquarie expects only one more rate hike in either April or July.

The Bank of Canada today increased its target for the overnight rate to 1 1/4 per cent. The Bank Rate is correspondingly 1 1/2 per cent and the deposit rate is 1 per cent. Recent data have been strong, inflation is close to target, and the economy is operating roughly at capacity. However, uncertainty surrounding the future of the North American Free Trade Agreement (NAFTA) is clouding the economic outlook.

The global economy continues to strengthen, with growth expected to average 3 1/2 per cent over the projection horizon. Growth in advanced economies is projected to be stronger than in the Bank’s October Monetary Policy Report (MPR). In particular, there are signs of increasing momentum in the US economy, which will be boosted further by recent tax changes. Global commodity prices are higher, although the benefits to Canada are being diluted by wider spreads between benchmark world and Canadian oil prices.

In Canada, real GDP growth is expected to slow to 2.2 per cent in 2018 and 1.6 per cent in 2019, following an estimated 3.0 per cent in 2017. Growth is expected to remain above potential through the first quarter of 2018 and then slow to a rate close to potential for the rest of the projection horizon.

Consumption and residential investment have been stronger than anticipated, reflecting strong employment growth. Business investment has been increasing at a solid pace, and investment intentions remain positive. Exports have been weaker than expected although, apart from cross-border shifts in automotive production, there have been positive signs in most other categories.

Looking forward, consumption and residential investment are expected to contribute less to growth, given higher interest rates and new mortgage guidelines, while business investment and exports are expected to contribute more. The Bank’s outlook takes into account a small benefit to Canada’s economy from stronger US demand arising from recent tax changes. However, as uncertainty about the future of NAFTA is weighing increasingly on the outlook, the Bank has incorporated into its projection additional negative judgement on business investment and trade.

The Bank continues to monitor the extent to which strong demand is boosting potential, creating room for more non-inflationary expansion. In this respect, capital investment, firm creation, labour force participation, and hours worked are all showing promising signs. Recent data show that labour market slack is being absorbed more quickly than anticipated. Wages have picked up but are rising by less than would be typical in the absence of labour market slack.

In this context, inflation is close to 2 per cent and core measures of inflation have edged up, consistent with diminishing slack in the economy. The Bank expects CPI inflation to fluctuate in the months ahead as various temporary factors (including gasoline and electricity prices) unwind. Looking through these temporary factors, inflation is expected to remain close to 2 per cent over the projection horizon.

While the economic outlook is expected to warrant higher interest rates over time, some continued monetary policy accommodation will likely be needed to keep the economy operating close to potential and inflation on target. Governing Council will remain cautious in considering future policy adjustments, guided by incoming data in assessing the economy’s sensitivity to interest rates, the evolution of economic capacity, and the dynamics of both wage growth and inflation.

The sixth round of NAFTA negotiations between Canada, the U.S. and Mexico get underway next week in Montreal. President Donald Trump has repeatedly threatened to withdraw.

Poloz said it’s very difficult to quantify NAFTA’s impact because it varies not only by sector, but also from firm to firm. “So we’ve chosen not to get buried in all of that,” he said. The immediate impact — already being felt — is a chill on business investment in Canada, as it’s either deferred or simply made in the U.S. instead. “That’s the sort of effect that could be bigger, in a binary sense, if an announcement is made that NAFTA is no longer to be. But again, even then, it would take time.”

The U.S. could also layer on additional trade actions that would worsen the blow, he said, citing ongoing actions in the aerospace and lumber sectors. “The analyses that you’re looking at do not consider the channel that I’m trying to emphasize the most,” he said, adding the shock of a NAFTA collapse is difficult to analyze. He contrasted it to the 2014 collapse in oil prices, whose effects were easier to predict.

“You will need the benefit of time and data to understand this as it all unfolds, and so markets should not think of it as a binary event, and I’m hopeful that they’ll appreciate the conversation we just had,” Poloz said.

The Bank of Canada decision hit the newswires at exactly 10 am ET but there was a big jump in USD/CAD beforehand.

It wasn't just a liquidity issue either, there was two way trade higher for at least 20 seconds before the announcement.

Now maybe that was some kind of engineered squeeze, because even if the hike leaked, you wouldn't be pounding the 'buy' button in USD/CAD. However, given all the news in the statement, buying was definitely the right short-term trade.

The Bank of Canada and StatsCan have had issues with data security in the past. I think it's time for another investigation.

Brian Romanchuk, publisher of the Bond Economics blog, wrote a comment over the weekend, The Highly Predictable Treasury Bond Bear Market (added emphasis is mine):

The benchmark U.S. 10-year Treasury has entered a predictable mild bond bear market, and the financial press has rolled out their "What happens when the Treasury Market Dies?" think pieces. (As an immediate disclaimer, I do not do forecasts, and thus I did not "predict" this bear market. At most, I probably noted that previous pricing was consistent with a decent probability of recession happening over the next few years.) As is usual, we are seeing a lot of technical analysis. The technical analysis battle is between two forces: the drawing straight lines is destiny belief, versus the belief in the power of round numbers.

The "straight lines are destiny belief" is fairly well known; it is easy to draw a descending straight line on a long-term bond yield chart (like the one above). The latest move probably broke above a lot of the lines that you could draw. The next logical step is the following: if bond yields are no longer going down, they have to go up.

This is going to collide with the "big round numbers" theory. The theory is that a lot of asset allocators/bond managers have said: "I will cover my short/underweight when the yield hits a round number (3% in this case)." I no longer pay attention to market chatter, but anecdotes about liability managers having hedging programmes kick in at those round number levels was a constant across all developed markets.

As a recovering secular bond bull, I have a natural affinity for the "round numbers" theory. Anyone selling stories about a bond market apocalypse has to explain why institutional investors that are massively short duration versus their liabilities are going to let yields shoot higher. (By contrast, most institutional investors did not even know how to calculate the duration of their liabilities before the early 1990s.) That said, a 3% nominal yield is pathetically low in an environment where nominal GDP averaged 4% a year even during the worst of "secular stagnation." So if I were to rely on the "round number" theory, I would put a lot more faith in 4%, as that is an even rounder number.

Once again, the fundamentals will win, with the fundamentals being forward Fed pricing.

Bond "Bubbles" -- Augh

The phrase "bond bubble" is back. That usage is an insult to any self-respecting bubble. In financial theory, people have tried to use a technical description -- a hyper-exponential price trajectory, based on the expectation that the asset can be sold to someone else also discounting a hyper-exponential price trajectory. Other commentators use a qualitative measure: is there mass participation by retail investors, and does the asset gain lots of popular coverage?

Unless a lot of people think that interest rates can get really negative, an asset that guarantees sub-3% nominal annual returns over 10 years (less than 30% cumulative) is never going to display hyper-exponential pricing. And face it, bonds are a hated asset class. The reason why editors run scary stories by bond bears is that they know that most of their readers hate bonds. Frankly, I am ex-secular bond bull and run a website whose domain name value is derived entirely upon an interest in bonds, and I can hardly get excited by them. (My idea of an exciting bullish headline is "Bonds: You Might Not Lose a Lot of Money in Real Terms!")

Bonds were arguably mispriced -- on the basis that you can now buy them cheaper. However, any losses on long-term bonds are still paper losses. If there is a recession within the next few years, 10-year bonds purchased earlier might still outperform cash if held to maturity.

Irrational, Or What?

The chart above shows the origin of the mispricing: the front end of the curve disrespected the Fed's intentions to hike rates over a relatively short time span. The fact that the Fed was taking baby steps in tightening probably helped the complacency. (In some years, it was one hike per year, whereas the historical pace was one hike per meeting, with eight meetings a year.) The 2-year is finally starting to work in a bit of a cushion.

That said, even if the front end continues to get hammered, bond bulls could come up for reasons for the curve to flatten (meaning that bond yields will rise less than one-to-one than the policy rate). It is not enough to expect forward rates to match the median Fed forecast (plus a term premium), an expectation has to incorporate the skew around the median forecast. Based on the post-1992 historical experience, the probability distribution is skewed towards a much lower policy rate in a recession, whereas accelerating inflation that justifies rapid rate hikes (as seen in the 1970s) has not happened. Even oil price spikes were not enough to trigger a second round of inflationary pressures.

In other words, it appears entirely rational for the bond market to rise slowly in response to Fed rate hikes, as the hard-to-judge probability of recession counters the rise in the baseline forecast for the path of the policy rate. When the Fed was hiking at a pace at 200 points a year, the tightening was front-loaded, and the skew due to recession probability is relatively less important. In that environment, it is not surprising that bear markets were also front-loaded, with most losses incurred almost immediately (or even before the first hike).

Finally, a rise in Treasury yields is not bearish for risk assets. The Fed is only going to raise rates in response to continued nominal growth, which implies that happy days for corporate profitability will continue. Inflation cutting into profit margins drastically would mean that labour is suddenly getting a bigger slice of the income pie, which seems somewhat optimistic. Faster nominal growth swamps the effect of a higher discount rate.

For those of you who don't know him, Brian Romanchuk is one of the smartest guys in the fixed income world. We worked together twice, once at BCA Research where he was helping to publish fixed income products and at the Caisse where he was a senior quant analyst at the Fixed Income group.

Brian has a PhD in electrical engineering but his interests have evolved over the years into monetary economics, in particular modern monetary theory. He has published a few short books on Amazon that are well worth the price and I highly recommend his blog, Bond Economics, which delves into topics that are academic and market oriented.

Brian is also a genuinely nice guy with a quirky sense of humor. I remember plenty of conversations we had on bond bears and how many hedge funds got destroyed shorting JGBs over the last 20+ years.

The problem with bonds is people get way too excited without thinking things through. Readers of my blog know I'm not in the bond bubble camp because I worry about long-term structural deflation. Here is a sample of past comments where I discussed my thoughts:

• Exposing Bond Bubble Clowns?
• Trumping the Bond Market?
• Is the Maestro Wrong on Bonds?
• The Bubble Economy Set to Burst?
• The Mystery of Inflation Deflation?
• Deflation Headed Straight for the US?

1. The global jobs crisis: High structural unemployment, especially youth unemployment, and less and less good paying jobs with benefits.
2. Demographic time bomb: A rapidly aging population means a lot more older people with little savings spending less.
3. The global pension crisis: As more and more people retire in poverty, they will spend less to stimulate economic activity. Moreover, the shift out of defined-benefit plans to defined-contribution plans is exacerbating pension poverty and is deflationary. Read more about this in my comments on the $400 trillion pension time bomb and the pension storm cometh. Any way you slice it, the global pension crisis is deflationary and bond friendly.
4. Excessive private and public debt: Rising government and consumer debt levels are constraining public finances and consumer spending.
5. Rising inequality: Hedge fund gurus cannot appreciate this because they live in an alternate universe, but widespread and rising inequality is deflationary as it constrains aggregate demand. The pension crisis will exacerbate inequality and keep a lid on inflationary pressures for a very long time.
6. Globalization: Capital is free to move around the world in search of better opportunties but labor isn't. Offshoring manufacturing and service sector jobs to countries with lower wages increases corporate profits but exacerbates inequality.
7. Technological shifts: Think about Amazon, Uber, Priceline, AI, robotics, and other technological shifts that lower prices and destroy more jobs than they create.

An important market measure of inflation expectations has risen to its highest level since 2014, as investor’s show strong demand to purchase protection against the threat of rising interest rates and declining bond prices.

The 10-year break-even rate, a market measure of inflation expectations derived from Treasury Inflation Protected Securities (Tips), has risen to 2.09 per cent, it’s highest level since September 2014 when oil prices were collapsing. The impact of oil prices on break-evens is strong, with analysts attributing at least part of the recent rise in inflation expectations to rising oil prices.

At a $13bn auction of Tips on Thursday, primary dealers — responsible for bidding on a pro rata share of the auction to ensure the sale of the debt — walked away with a smaller than average share of the securities, as other investors came in aggressively to buy.

“Bottom line, protection from inflation was in high demand in today’s auction,” said Peter Boockvar, chief investment officer at Bleakley Advisory Group.

The 10-year Treasury yield has risen 20 basis points so far this year to 2.6 per cent on Thursday, closing in on its 2017 high of 2.63 per cent.

“Whether its wage fears or the rise in commodity prices, the inflation view is shifting and I repeat my belief that higher cyclical inflation in 2018 is a large under-appreciated risk,” added Mr Boockvar.

Dutch pension behemoth APG, which manages about A$680 billion, has been applying a factor-based approach to investing for two decades.

But if you suspect they would be a little cynical about the sudden rise in popularity of this approach, your suspicion would be unfounded.

Gerben De Zwart, Head of Quantitative Equity and a member of APG’s Developed Market Equities management team, is excited about the future of this approach.

“Factor investing is on the eve of a very big change and that is due to the digital revolution,” De Zwart says in an interview with [i3] Insights.

“If you look at the past 35 years, then you’d see that scientists have focused on maybe 10 different data sets. They have been looking at these sets and have done smart things with them.

“But if you look at where we are today, then you actually see that we are talking to parties that offer more than 500 different data sets, all of which are new. So we’re getting access to completely new data sets over a very short time frame.

“The question for factor investors is: How do you deal with that? Doing nothing is not an option and APG’s vision is that we are firmly committed to innovation. We do this not only for quantitative strategies, but also for fundamental investments and for the pension fund in general.

“If you have 500 different data sets, where do you start? Well, we do this in two different ways: we have external managers who already invest for more than 60 per cent on the basis of alternative data sets and innovative techniques.

“At the same time, on the internal side we focus on the existing styles that we are going to measure in a smarter way with alternative data sets.”

De Zwart uses the term ‘now casting’, where through the use of these alternative data sets the present is predicted.

For example, this method is used by central banks to predict the state of the economy in real time. Many economic indicators, including gross domestic product, are published with a significant lag. But now casting aims to monitor these variables as they occur.

You can apply this method to investing as well, De Zwart says.

“For example, many people do value investing, but now you may be able to determine the value with alternative data sets more real-time. So you can search in these alternative data sets for information that has the highest added value to your investment philosophy,” he says.

“The danger, of course, is that you have so much data that it will take you 10 years to investigate all of that and you don’t implement any innovation in your investment process.

“At APG, we have the philosophy that we need to add innovations in our investment strategy every year. The question is: Where can we best use our resources, so that is money and people, to create the highest possible marginal benefit?

“What I think is that other investors will have the same problem, but might approach it differently and I think that is going to create a lot of divergence in the returns of factor investors in the coming years because people are going to make different choices.

“In fact, I think from now on quantitative investing will only become more fun.”

Factors, Signals or Styles?

One of the ongoing discussions in the investment industry centres on the question of how many persistent factors there really are that can be exploited.

Some academic literature indicates there are over 300 factors, while others say there are no more than half a dozen.

De Zwart takes a pragmatic approach that sits somewhere in between.

“We make a clear distinction between styles and factors. There are studies that talk about more than 500 factors, but we think that there are actually only a limited number of styles and the point is how do you fill in such a style?

“That happens more and more sophisticatedly. You have value, quality, size, low volatility and then something that we call ‘sentiment’, so there is more in there than just momentum.

“We believe in active factor investing and what that means is that we take responsibility for the returns of the investments and not just for offering exposures to certain styles.

“That is why we work with active external managers and also do a lot of research on factors.

“These factors often have an underlying explanation and we can use very advanced methodologies that measure that theme in a smarter way. But in principle, the essence of such a factor is still sentiment or value.”

“We actually invest in more than 200 of those underlying factors, but then it is mainly about measuring things smarter.”

Another controversial point in factor investing is whether or not you can actually time factors dynamically in order to generate higher returns or whether a broadly diversified multi-factor approach is best.

De Zwart doesn’t dismiss factor timing outright.

“Internally, we look for better factors, but our external managers also look to add value by timing factors. But the timing of factors is extremely difficult and that creates many challenges, so if you look at the total portfolio, we actually have a fairly stable allocation,” he says.

Combining Quant and Fundamental Strategies

APG’s choice of factor investing is not so much a philosophical one as it is a practical one. The pension fund’s factor investments amount to about 80 billion euros, or A$124 billion, and it would be difficult to invest such a large portfolio completely with active, fundamentally focused managers.

A factor approach allows APG to produce above index returns, while at the same time ensuring liquidity.

But it also has a fundamentally driven program.

“A large part of the portfolio is also equipped with fundamental strategies that are highly concentrated. We have a portfolio with 5 to 10 per cent interests, where we also have active ownership, and where we know the company well, we know the board of directors well, but you also see that these portfolios are not liquid,” De Zwart says.

“So half is quantitatively invested and the other half is invested fundamentally and what we see is that the return flows diversify very well. In the year that factor investing is doing well, fundamental is lagging behind and vice versa, which means that the total return on shares is very stable.”

Sustainable Factor Investing

APG takes pride in its approach to governance and sustainability and it requires its external managers to meet the same requirements.

“The responsible investment policy we are implementing for our clients is very progressive, so for example there are ambitions to reduce CO2 emissions by 25 per cent by 2020. We also impose this target on external managers.,” De Zwart says.

Much of the research into responsible investing is quantitative as well, he says.

“Once you know the CO2 footprint of a company, and you have all the data that goes with that measurement, then you can steer it towards the target,” he says.

“We share this methodology with our managers. In this way, we are talking about exactly the same data and methodology and they can measure it consistently.”

It is one of the areas where APG is able to work in partnership with its external managers.

“We work with managers where possible and where they feel comfortable and often it is not so in the area of alpha or factors, but there are many other areas that work well together, such as trading cost models, risks, insights into the market,” De Zwart says.

“Conversely, we also offer the managers something because the responsible investment policy we implement for our clients is very progressive, so the external managers can first work with us to implement the policy and then perhaps also understand better how many European investors view responsible investing.”

This mix of internal and external asset management is what enables APG to pick the right strategy for the right situation, he says.

“In terms of costs, an internal portfolio is very attractive, so our philosophy is that whatever we can do with our people, our intellectual capacities and systems we do internally,” he says.

“That is why externally we look for managers who are complementary to our internal portfolio and who are willing to work together. For some managers that feels very threatening, but at the same time we have relationships with managers that span more than 20 years.”

“We make a clear distinction between styles and factors. There are studies that talk about more than 500 factors, but we think that there are actually only a limited number of styles and the point is how do you fill in such a style?

“That happens more and more sophisticatedly. You have value, quality, size, low volatility and then something that we call ‘sentiment’, so there is more in there than just momentum.

The Ontario Teachers’ Pension Plan participated in a round of financing for Stem, Inc., an artificial intelligence-powered energy storage company headquartered in California.

Activate Capital Ltd. led the $80-million investment alongside Ontario Teachers’ and Singapore-based investment company Temasek Holdings. The amount put forward by Ontario Teachers’ wasn’t disclosed.

“We are thrilled to have the opportunity to support the continued growth of an innovative company with a proven product like Stem,” said Andrew Claerhout, Ontario Teachers’ senior managing director for infrastructure and natural resources, in a press release.

“Ontario Teachers’ foresees that more investment is needed in the transition to a low carbon electricity system and expects that batteries will play a key role in the transition and in making the electric grid more sustainable. Ontario Teachers’ will support Stem’s growth by leveraging our strategic partnerships globally.”

Stem has more than 1,100 sites either operational or under construction with an average system size of 500 kilowatts. Using data, analytics and energy storage techniques, the company aims to make energy consumption more cost-effective and environmentally sustainable, according to Stem’s website.

“Ontario Teachers’ and Temasek have combined portfolios in excess of US$300 billion across the global commercial, industrial and real estate landscape,” said John Carrington, chief executive officer of Stem. “In addition, these firms bring deep relationships, a long history of investment in innovative platforms and credibility with global financial institutions. These elements will be critical in advancing our next stage of growth as we continue to lead innovation in the distributed energy industry.”

According to a release from Ontario Teachers’, Stem has had a strong year in Ontario and is looking to move forward with its global adjustment offering, specifically designed for the region, for use in improving the control of energy costs in manufacturing plants and industrial operations.

Stem, Inc., the global leader in artificial intelligence (AI)-powered energy storage, today announced the first close of its Series D financing with an $80 million investment from a group of leading technology investors. In 2017, the company had over 1,100 sites operational or in construction with an average system size of 500 kWh, having commissioned a new energy storage system on average every two days.

The Series D was led by Activate Capital, a growth equity firm exclusively focused on companies providing innovative products and solutions across the sustainable energy and industrial technology markets.

"Activate invests in fast growing companies with exceptional management teams that are transforming industries. Stem is clearly the leader in the energy storage market, offering a powerful AI and technology platform that creates significant value to those inside their network," said Activate Capital managing director, Anup Jacob.

Activate Capital was joined by Ontario Teachers' Pension Plan ("Ontario Teachers'"), Canada's largest single-profession pension plan, and Temasek, an investment company headquartered in Singapore. "Ontario Teachers' and Temasek have combined portfolios in excess of $300B across the global commercial, industrial and real estate landscape. In addition, these firms bring deep relationships, a long history of investment in innovative platforms, and credibility with global financial institutions. These elements will be critical in advancing our next stage of growth as we continue to lead innovation in the distributed energy industry," said John Carrington, CEO of Stem, Inc.

Stem has had a strong year in Ontario, Canada, and looks to continue its momentum with its Global Adjustment offering–specifically designed for Ontario–which is ideal for large manufacturing plants and other industrial operations that seek improved control over energy costs.

Ontario Teachers' Pension Plan Senior Managing Director Andrew Claerhout commented, "We are thrilled to have the opportunity to support the continued growth of an innovative company with a proven product like Stem. Ontario Teachers' foresees that more investment is needed in the transition to a low carbon electricity system and expects that batteries will play a key role in the transition and in making the electric grid more sustainable. Ontario Teachers' will support Stem's growth by leveraging our strategic partnerships globally."

The equity raise caps a record 2017 for Stem's growth in system count, new market expansion, and partnerships, with more announcements to come in 2018. Stem now has hundreds of systems under management across five states and three countries (US, Japan, and Canada). These systems form networks for capacity and grid services with eight utilities across North America and Tokyo Electric Power in Japan. Of the company's over 1,100 sites, 330 locations are standalone PowerMonitor controls and software for utility use. These sites provide utility customers with additional grid edge visibility and control in areas with high rooftop solar penetration.

In 2017, Stem also announced innovative bundled customer service offerings with CPower, Constellation, and Sunpower for intelligent storage, traditional demand response, and solar+storage. Also in 2017, Stem's platform, AthenaTM, the first artificial intelligence for customer-sited energy storage, was called on over 600 times to dispatch in day-ahead and real-time (five-minute) responses to the California wholesale market, helping alleviate heat wave-induced grid stress through its innovative Virtual Power Plant software technology.

"We are excited to announce that international investors like Activate Capital, Ontario Teachers', and Temasek are joining us in transforming the way energy is distributed and consumed," said John Carrington, CEO of Stem, Inc. "Our investors recognize Stem's innovative value in energy superintelligenceTM and real-time energy optimization that benefits the customer, the utility, and the grid."

About Stem, Inc.

Stem creates innovative technology services that transform the way energy is distributed and consumed. AthenaTM by Stem is the first AI for energy storage and virtual power plants. It optimizes the timing of energy use and facilitates consumers' participation in energy markets, yielding economic and societal benefits while decarbonizing the grid. The company's mission is to build and operate the smartest and largest digitally-connected energy storage network for our customers. Headquartered in Millbrae, California, Stem is directly funded by a consortium of leading investors including Activate Capital, Angeleno Group, Constellation Technology Ventures, Iberdrola (Inversiones Financieras Perseo), GE Ventures, Mithril Capital Management, Mitsui & Co. LTD., Ontario Teachers' Pension Plan, RWE Supply & Trading, Temasek, and Total Energy Ventures. Visit www.stem.com for more information.

About Activate Capital

Activate Capital was founded to be the leading growth equity partner to companies providing innovative solutions across the energy, transportation and industrial technology markets. The firm partners with management teams in high growth companies and provides them with the necessary capital, resources and support to achieve their highest potential to build meaningful scale and impact. Together the Activate Principals have successfully invested over $1 billion in its target sectors, resulting in 11 IPOs and 19 exits through acquisition.

About Ontario Teachers' Pension Plan

The Ontario Teachers' Pension Plan is Canada's largest single-profession pension plan, with C$180.5 billion in net assets at June 30, 2017. It holds a diverse global portfolio of assets, approximately 80% of which is managed in-house, and has earned an annualized gross rate of return of 10.1% since the Plan's founding in 1990. Ontario Teachers' is an independent organization headquartered in Toronto. Its Asia-Pacific region office is located in Hong Kong and its Europe, Middle East & Africa region office is in London. The defined-benefit plan, which is fully funded, invests and administers the pensions of the province of Ontario's 318,000 active and retired teachers.

About Temasek

Incorporated in 1974, Temasek is an investment company headquartered in Singapore. Supported by 11 offices internationally, Temasek owns a US$197 billion portfolio as at 31 March 2017, mainly in Singapore and the rest of Asia. Our portfolio covers a broad spectrum of industries: financial services; telecommunications, media & technology; transportation & industrials; consumer & real estate; life sciences & agriculture; as well as energy & resources. Our investment activities are guided by four investment themes and the long term trends they represent: Transforming Economies; Growing Middle Income Populations; Deepening Comparative Advantages; and Emerging Champions. For more information on Temasek, please visit www.temasek.com.sg.

Ontario Teachers' Pension Plan Senior Managing Director Andrew Claerhout commented, "We are thrilled to have the opportunity to support the continued growth of an innovative company with a proven product like Stem. Ontario Teachers' foresees that more investment is needed in the transition to a low carbon electricity system and expects that batteries will play a key role in the transition and in making the electric grid more sustainable. Ontario Teachers' will support Stem's growth by leveraging our strategic partnerships globally."

Canadian pension funds Caisse de depot et placement du Québec and PSP Investments said on Friday they have bought minority stakes in Fives, an industrial engineering group based in France.

Reuters had reported earlier this month that buyout group Ardian had received binding bids for its stake in Fives and that the Canadian pension fund and private equity firm TowerBrook had both handed in offers for the minority stake.

The bids valued the French engineering group at about 1.5 billion euros ($1.78 billion), according to the Reuters report.

Ardian will remain a part of the company’s new shareholding structure as a minority co-investor, according to the statement.

The buyout group had bought its 45 percent stake in the company, which is majority-owned by its management, from investor Charterhouse in 2012.

Fives, which has annual sales of 1.8 billion euros, designs and supplies machines and ready-to-work factories for the metals, automotive, aerospace, logistics and energy industries.

Financial details of the investments were not disclosed.

La Caisse de dépôt et placement du Québec ("CPDQ") and the Public Sector Pension Investment Board (PSP Investments), two of Canada's largest pension investment managers, today announced a joint investment in Fives, a global industrial engineering group headquartered in France, which designs and supplies engineered machines, process equipment and production lines for the world's largest industrial players. CDPQ and PSP Investments will each acquire a significant minority stake in Fives, which will remain controlled by its management, to support the next development phase. Ardian, a world-leading investment house, will continue to be part of the new shareholding structure, as a minority co-investor.

Founded in 1812, Fives has participated in the modernization of various global industries, including steel, aluminium, cement, energy, and more recently, the automotive and aerospace industries, as well as logistics. The group's rich history is grounded in constant innovation, development of proprietary technologies, international expansion and a pioneering spirit. This enables Fives to have a comprehensive global vision of the various industries in which it operates, as well as strong expertise in the design of critical equipment and solutions for industrial processes.

Today, Fives is at the forefront of innovation, taking a leading role in the "Industry of the Future" with a unique focus and expertise in digitalisation, automation and robotics to optimize industrial processes. With a network spanning four continents, the group possesses a balanced global footprint. For the year ending December 2017, the group is expected to generate over EUR1.8 billion (CAD$2.7 billion) in sales, across North America (30%), Europe (30%), Asia (22%) and the Middle-East and Africa (18%).

This transaction offers CDPQ and PSP Investments the opportunity to become important partners, contributing to the continued development of Fives' solutions, designed to improve the overall performance of industrial plants, including the optimisation of the energy and resource efficiency and environmental footprint. The partnership with CDPQ and PSP Investments will provide Fives with the necessary resources to finance its mid- and long-term expansion plans through major growth avenues, particularly in markets like Intralogistics, as well as leverage its recently developed breakthrough technologies.

Frédéric Sanchez, Chief Executive Officer of Fives Group, said: "In the past years, with the full support of Ardian, we have invested heavily in R&D and business development, both in terms of portfolio products and geographical reach - reinforcing our leadership in our core markets and expanding our offer in adjacent booming segments such as FAW (Fully Automated Warehouse), as well as establishing AddUp, a promising platform with Michelin in metal 3D printing (additive manufacturing). Today, we are very enthusiastic to enter a new phase of our development with CDPQ and PSP Investments. Their long-term approach to investment, their deep valuable industrial insights and their strategic vision aligned with that of the management team make them ideal partners for the group, allowing Fives to take advantage, at a global scale, of the full potential of our diversified operations."

"For over 200 years, Fives' technology has changed the way the industrial world operates", said Stephane Etroy, Executive Vice-President and Head of Private Equity at CDPQ. "We are impressed by the company's ability to continuously adapt, innovate and expand worldwide within the context of rapidly changing technological landscapes. Alongside Frederic Sanchez, his management team, and our partner PSP Investments, we look forward to contributing to the industrial advancement and improved resource efficiency through Fives."

"We are excited to team up with Fives' talented management team, led by Frédéric Sanchez, a true visionary in this sector, alongside our partners at CDPQ and Ardian," said Simon Marc, Managing Director and Head of Private Equity at PSP Investments. "The transaction is a great example of partnership with successful entrepreneurs and like-minded, long-term investors. Fives has been at the forefront of innovation since its inception and we are looking forward to supporting its growth in the next industrial revolution."

"Fives is an excellent company with a rich, unparalleled heritage," added Dominique Gaillard, CEO of Ardian France and head of Ardian Direct Funds. "As a business, it continues to go from strength to strength and its focus on industry-leading innovation, combined with its pioneering spirit, positions it well for the years to come. We have achieved great things with Fives since we first invested. CDPQ and PSP Investments are ideal partners and, alongside Ardian, will contribute significantly to its continued development."

The completion of the transaction remains subject to approval by relevant regulatory authorities.

ABOUT FIVES

As an industrial engineering Group, Fives designs and supplies machines, process equipment and production lines for the world's largest industrials including the logistics, aluminum, steel, automotive, aerospace, cement and energy sectors. Located in over 30 countries and with nearly 8,600 employees, Fives is known for its technological expertise and competence in executing international projects. Fives' multi-sector expertise gives it a global vision of the industry which provides a continuous source of innovation. The effectiveness of its R&D programs enables Fives to design forward-thinking industrial solutions that anticipate clients' needs in terms of profitability, performance, safety and compliance with environmental standards. This strategy is backed by a human resources policy that is focused on the individual, encourages initiative-taking, technical excellence and team spirit. For more information, visit steel.fivesgroup.com or follow us on Twitter @fivesgroup or consult our LinkedIn pages.

ABOUT CAISSE DE DÉPÔT ET PLACEMENT DU QUÉBEC

Caisse de dépôt et placement du Québec (CDPQ) is a long-term institutional investor that manages funds primarily for public and parapublic pension and insurance plans. As at June 30, 2017, it held C$286.5 billion in net assets. As one of Canada's leading institutional fund managers, CDPQ invests globally in major financial markets, private equity, infrastructure, real estate and private debt. For more information, visit cdpq.com, follow us on Twitter @LaCDPQ or consult our Facebook or LinkedIn pages.

ABOUT PSP INVESTMENTS

The Public Sector Pension Investment Board ("PSP Investments") is one of Canada's largest pension investment managers with C$139.2 billion of net assets under management as at September 30, 2017. It manages a diversified global portfolio composed of investments in public financial markets, private equity, real estate, infrastructure, natural resources and private debt. Established in 1999, PSP Investments manages net contributions to the pension funds of Canada's federal Public Service, the Canadian Armed Forces, the Royal Canadian Mounted Police and the Reserve Force. Headquartered in Ottawa, Canada, PSP Investments has its principal business office in Montréal and offices in New York and London, its European hub. For more information, visit www.investpsp.com, Twitter @InvestPSP or LinkedIn.

ABOUT ARDIAN

Ardian is a world-leading private investment house with assets of US$66bn managed or advised in Europe, North America and Asia. The company is majority-owned by its employees. It keeps entrepreneurship at its heart and focuses on delivering excellent investment performance to its global investor base. Through its commitment to shared outcomes for all stakeholders, Ardian's activities fuel individual, corporate and economic growth around the world. Holding close its core values of excellence, loyalty and entrepreneurship, Ardian maintains a truly global network, with more than 490 employees working from twelve offices across Europe (Frankfurt, Jersey, London, Luxembourg, Madrid, Milan, Paris and Zurich), North America (New York, San Francisco) and Asia (Beijing, Singapore). It manages funds on behalf of 610 clients through five pillars of investment expertise: Funds of Funds, Direct Funds, Infrastructure, Real Estate and Private Debt. Follow Ardian on Twitter @Ardian or www.ardian.com

Today, Fives is at the forefront of innovation, taking a leading role in the "Industry of the Future" with a unique focus and expertise in digitalisation, automation and robotics to optimize industrial processes. With a network spanning four continents, the group possesses a balanced global footprint. For the year ending December 2017, the group is expected to generate over EUR1.8 billion (CAD$2.7 billion) in sales, across North America (30%), Europe (30%), Asia (22%) and the Middle-East and Africa (18%).

Regarding Treasury Secretary Mnuchin’s comments about the administration’s weak dollar policy, I want to make sure that you understand what having currency weakness means—most importantly, it is a hidden tax on people who are holding dollar-denominated assets and a benefit to those who have dollar-denominated liabilities.

More precisely, a weak currency:

1. Reduces the currency holder’s buying power in the rest of the world (e.g. dollar weakness reduces Americans’ buying power relative to foreigners’ buying power)
2. Devalues the debt denominated in the weakening currency, which hurts the foreign holder of that debt
3. Supports prices of assets denominated in that currency (because of the currency weakness), giving the illusion of increasing wealth
4. Raises a country’s inflation rate
5. Stimulates domestic activity

None of this is what the U.S. economy needs now.

While it’s described as a desirable and intended thing, it might not be a choice. The size of dollar holdings of reserves (in dollar-denominated debt) and the dollar’s role as the dominant world currency are anachronisms and large relative to what one would want to hold to be balanced, so rebalancings should be expected over time, especially when U.S. dollar bonds look unattractive and trade tensions with dollar creditors intensify.

The euro surged Thursday afternoon to a new three-year high as doubts grew over the future of the European Central Bank's (ECB) stimulus program.

The currency hit the $1.25 level against the U.S. dollar around 2:00 p.m. London time and was on track for its biggest weekly rise since May of last year. Traders noted that, despite comments from ECB President Mario Draghi on Thursday afternoon, they remain convinced that easy monetary policy in the region is coming to an end.

"Draghi failed to surprise the market," Jane Foley, head of foreign exchange strategy at Rabobank, told CNBC over the phone. "The economic data is too strong," she said, adding that investors are therefore convinced that the central bank will have to tighten its policy, despite giving the opposite message on Thursday.

After a routine rate decision for the euro zone's central bank, Draghi spoke at a press conference Thursday, telling reporters that the recent volatility in the exchange rate is a "source of uncertainty." He added that it would therefore require monitoring.

However, he used the same wording back in September — a repetition that markets perceived as a lack of concern over the strength of the euro and thus an indication that the ECB will end up tightening its policy. Draghi nonetheless reiterated that the bank will keep its stimulus for as long as needed and stated that there are "very few chances" that it will change interest rates this year.

The euro has been on an upward trend against other currencies, including the U.S. dollar, for the past few weeks as the region's economy keeps improving and political risks dissipate. However, a stronger euro could hurt European exports and affect inflation in the euro zone — which the central bank has tried to support in the last few years — potentially prompting a change in its policy.

No change in policy

Earlier on Thursday, the ECB left its benchmark interest rate unchanged. Its interest rate on the main refinancing operations, the interest rates on the marginal lending facility and the deposit facility were kept at zero, 0.25 and -0.40 percent, respectively.

Earlier in the month, the ECB's December meeting minutes said the central bank should revisit its communication stance in "early" 2018, prompting market participants to forecast policymakers were preparing to reduce their massive monetary stimulus program. The minutes, which were published on January 11, immediately pushed the euro more than 0.7 percent higher against the dollar, extending the single currency's rally throughout the opening days of the calendar year.

Broad economic recovery

By the end of trade on Wednesday, the euro had gained more than 2 percent since the start of 2018, as a broadening recovery bolstered expectations the ECB may be forced to unwind its policy stimulus sooner than forecast. The euro zone is seeing its best economic growth in a decade, leading economists and policymakers to upwardly revise their economic forecasts for several major European countries. Late last year, the ECB increased its growth forecast for 2018 to 2.3 percent, up from 1.8 percent previously.

Nonetheless, the ECB has long-struggled to bring up core inflation to its aim of about 2 percent and the central bank is not projected to meet its target level until 2020 at the earliest.

Late last year, the bank said headline inflation would be at 1.5 percent in 2017 and 1.2 percent in 2018.

In October, the ECB announced a reduction in the level of its monthly purchases from 60 billion euros ($71 billion) to 30 billion euros. At that time, the bank also said that its quantitative easing program would stay in place until September 2018. It kept the door open to further extensions in the program, depending on the economic conditions of the euro area.

• When a currency appreciates, it decreases import prices and suppresses inflation expectations. When Draghi said  the recent volatility in the exchange rate is a "source of uncertainty" and would require monitoring, he meant it because if the euro keeps rising, hitting inflation expectations and exports, it could cause major problems down the road because the spectre of deflation still looms large in Europe (never mind the recent headlines, I'm talking structural deflation here). 
• The eurozone is growing but the appreciation of the euro will pose problems for exports, stocks and is acting to tighten financial conditions there. Some may argue as long as the euro appreciates, it allows the ECB to hold off on raising rates/ cutting its stimulus, for now. Once the ECB moves, traders will take profits and start shorting the euro.
• Conversely, in the US, the decline in the US dollar is a boon for exports, raises inflation expectations by raising import prices, and loosens financial conditions, putting pressure on the Fed to keep raising rates or risk being behind the inflation curve (even if it's temporary inflation due to a weaker dollar). 

"The largest melt-up occurred in 1929 when the Dow rallied 29.9% in 94 days. The current rally - which I believe is in a melt-up - has lasted 95 days and is up 21%."

Joining the likes of Bill Gross and Jeffrey Gundlach, and echoing his ominous DV01-crash warning to the NY Fed from October 2016, Bridgewater's billionaire founder and CEO Ray Dalio told Bloomberg TV that the bond market has "slipped into a bear phase" and warned that a rise in yields could spark the biggest crisis for fixed-income investors in almost 40 years.

“A 1 percent rise in bond yields will produce the largest bear market in bonds that we have seen since 1980 to 1981," Bridgewater Associates founder Dalio said in a Bloomberg TV interview in Davos on Wednesday. We’re in a bear market, he said.

Readers may recall that when addressing the NY Fed in October 2016, Dalio made virtually the same prediction when he commented on the bond market's DV01:

... it would only take a 100 basis point rise in Treasury bond yields to trigger the worst price decline in bonds since the 1981 bond market crash. And since those interest rates are embedded in the pricing of all investment assets, that would send them all much lower.

Dalio is referring to the record DV01 in the bond market, which according to the latest OFR report released in December, has risen to $1.2 trillion: that's the P&L loss from a 100bps rise in rates.

The watchdog found that "valuations are also elevated" in bond markets. Of particular interest is the OFR's discussion on duration. Picking up where we left off in June 2016, and calculates that "at current duration levels, a 1 percentage point increase in interest rates would lead to a decline of almost $1.2 trillion in the securities underlying the index."

"That just tells us that the nominal size of the bonds outstanding has been growing faster than inflation. Well duh, nominal GDP grows faster than inflation, and the debt/GDP ratio went up as inflation fell.

You could just as easily plot the dollar losses for a 1% move in the S&P 500, and “adjust for inflation”. It would be even worse!"

Whenever there is an uptick in bond yields, scare stories about a coming secular bond bear market are not far behind. The problem with most of these stories is that they are not particularly compelling, and different people have been invoking variations of them for decades. Instead, if you want to come up with a much scarier bond bear market scenario, we need to drop some analytical assumptions, and think through the implications.

The Lame Scare Stories

Each commentator comes up with a different spin on why the Treasury market is about to collapse, and what the implications are. I cannot hope to cover them all. However, there are a few basic stories that quite often appear. Unfortunately, if we want to translate them to a (highly dated) pop cultural reference, they are about as scary as Dr. Tongue's Evil House of Pancakes.

Since I am only summarily dismissing these arguments, I will not waste the reader's time by trying to relate them to particular analyses.

The first (and most common) scare story is about rising inflation. (Admittedly, I always throw in a disclaimer about this scenario when discussing long-term prospects.) The problem is that we almost have three decades of stable inflation (since the early 1990s) in the developed countries. This period also included two oil price spikes, which did not translate into higher inflation. (In fact, they preceded recessions that led to lower inflation.) Meanwhile, commentators have been calling for an inflationary accident throughout that entire period. It is clear that we need some form of structural change to help sustain higher inflation.

The second scare story revolves around foreign central banks suddenly dumping Treasurys. These stories fall apart when we realise that even foreign central banks do not want to vapourise their capital. Furthermore, one needs to explain how the flows that lead to this liquidation will be sustained. Selling Treasurys implies a falling U.S. dollar -- making other countries exporters less competitive. Why exactly do these central banks want to sabotage their existing trade policy? Although it is possible to think of scenarios justifying such an outcome, there are a lot of moving parts in the stories that can break down.

The last set of stories are in the "who will buy the bonds?" category. Since monetary flows are circular, these stories never work.

The Scary Bond Bear Market Story

All we need to come up with a good bond bear market scare story is to examine common analytical assumptions. If we amend these assumptions, we have a story that is possibly as scary as the cinematic classic, The Bloodsucking Monkeys of West Mifflin, Pensylvania.

In the financial markets, it would be safe to say that it would be easy to find commentators that will endorse both of the following scenarios:

1. If the central bank hikes interest rates, it will tend to depress growth, and hence inflation. (The exact transmission mechanism varies based on economic views.)
2. If government debt gets "too large," bond yields rise, and then there is a fiscal meltdown scenario (leading to hyperinflation if the commentator in question likes invoking hyperinflation).

The interesting part of these two views is that they are contradictory: the first implies that rising bond yields suppresses inflation, whereas the second implies that they raise inflation. This is not a bug, it is a feature. Financial market commentators need to jump back and forth between bulls and bears rapidly, and need to have strong opinions regardless of what side of the market they are on. Embracing contradictory concepts means that they have a story to justify whatever their current view is.

In order to generate a more plausible secular bond bear market story, we need to dig into these contradictory views. One of the advantages of Modern Monetary Theory (MMT) is that the theory has dug into these assumptions, as opposed to conventional economics, where the first view (interest rates reduce inflation) is assumed to be true, and there is no questioning of that assumption.

All we need to do is to question the efficacy of rising interest rates to slow economic growth. (It should be noted that Warren Mosler has pushed the following logic the hardest; it may not represent the consensus of all MMT economists. What I am writing here is a paraphrase of Warren Mosler's statements over the years.)

If the policy rate rises, bond yields will also rise. This will imply a greater interest outlay by the government (on a lagged basis), as a considerable part of government debt is relatively short maturity. Furthermore, it raises the interest costs for the business sector, which is a net borrower. Conversely, the household sector is a net saver, and a lot of household borrowing is in the form of mortgages, which are largely fixed in the United States. (Other countries do not have 30-year fixed mortgages, so the interest cost adjusts more rapidly.)

If the household sector has a relatively stable propensity to consume out of interest income, the net result of rising interest rates is to increase household consumption. Rising consumption raises capacity utilisation, and that will likely be more important than the effect of interest rates on investment decisions. The bottom line is that rising interest rates may end up stimulating the economy, for reasons that are similar to the second story above.

However, the key is that this effect is relatively weak. The business cycle is not greatly affected by interest rates (absent the key possibility where a real estate bubble is crushed by higher interest rates).

If policy rates are not particularly potent tool, their precise level is an arbitrary decision of the central bank. This is completely unlike mainstream theory, where the economy spirals to hyper-inflation or hyper-deflation if interest rates are not automatically adjusted to achieve price stability.

In other words, the natural real rate of interest is a chimera. If the central bank thinks the real natural rate of interest is 2%, observed real rates should average 2% across the cycle. If it thinks the natural rate is 3%, the average will be higher -- with no observable difference in outcomes.

If we accept these premises, generating a self-reinforcing bond bear market is straightforward. A change in personnel at the central bank can result in a change to the central bank's reaction function; it could effectively target a higher natural rate of interest. Rising interest rates raise interest income, raising nominal demand. The resulting higher inflation will cause the more-hawkish central bank to keep hiking interest rates.

The only thing that stops this "doom loop" is the tendency of financial markets to blow themselves up. So long as the central bank does not get too aggressive, there is little reason for rate hikes to derail growth. Demand is rising, and although there are pockets of nuttiness in risk markets, private borrowing has been tepid so far this cycle.

In summary, all we need for a secular bond bear market is for Fed policymakers to stop panicking at the first whiff of a slowdown, and to resume rate hikes more rapidly after a recession. Once the pattern of cutting more in a downturn than during the expansion is broken, interest rates will be able to once again take an upward trend.

Is This Plausible?

Although this scare story is more plausible than others, there are still weak links.

Firstly, private sector balance sheets are heavily encumbered with debt. Unless wage growth is quite strong, debt service concerns will limit how far rates can rise. That said, a secular bond bear market would take place over at least a decade (by definition), and so there will be time to adjust.

Secondly, the tendency for the Bank of Japan to keep rates near zero acts an attractor for developed country interest rates. Hiking rates back to 5% again (for example) would create a huge carry differential, and risk pushing the yen to deeply undervalued status.

Concluding Remarks

I am certainly not calling for a secular bond bear market. That said, a change in the Fed's reaction function as a result of changing personnel poses an obvious risk to be monitored.

10-year Treasury yields have surged past 2.7% to the highest since early 2014. Some traders are saying the next stop is 3%. What does this do to U.S. investment-grade bonds, which currently pay an average yield of 3.36%?

— Lisa Abramowicz (@lisaabramowicz1) January 29, 2018

US #bond#yields breaking higher- techs pointing to 3-3.05% next level. UBS “computer” research says equities should start to get worried around 30-40bps higher (so around 3%) pic.twitter.com/2c2glYHdEf

— Joumanna Bercetche (@CNBCJou) January 29, 2018

• Risks in share buybacks
• Defining the short volatility trade
• Explicit vs implicit short vol positions
• Risk parity, VAR control, Risk Premia and CTAs
• Considerations on the unwind of the short VIX trade
• History of correlations on stocks and bonds
• The scenario where we can have another 1987 market drop again
• Consideration on the growing trend to passive investing
• Potential catalysis for market triggers

The Canada Pension Plan Investment Board (CPPIB) will invest $800 million in two new property developments in China by developer Longfor Properties, it announced on Monday.

The projects include a 740,000 square metre residential and commercial development in Western Chinese city Chengdu. The city has a population of 16 million.

The other is a 340,000 square metre development in South Minhang, which is a suburb of financial capital Shanghai.

The developments will both include a shopping mall.

"Both cities are well positioned to capitalize on the future economic growth and harness the returns of growing consumption in China," said Jimmy Phua, head of real estate investments Asia, CPPIB.

He added the move was part of the pension board's strategy to grow real estate investments in China, particularly in the fast-growing retail sector.

"The investments will help CPPIB diversify its real estate interests in China, providing attractive risk-adjusted returns over the long term," he said.

Market regulation

The announcement comes as policymakers in the world's second largest economy embark on curtailing real estate speculation as home prices continue to surge.

More than 100 cities have imposed measures to crack down on speculative buying with Chinese President Xi Jinping emphasizing that "houses are built to be lived in, not for speculation."

Housing data released last week showed that the measures were starting to take affect with new home prices rising just 5.3 per cent in December from year ago, compared to 12.4 per cent in 2016.

On Monday, the Shanghai government also announced that it would continue to strengthen regulation of the city's property market.

Investments in China

Meanwhile, the deal between CPPIB and Longfor is the third of its kind after a 2014 $234 million deal for a similar project in eastern city Suzhou, followed by a $193 million investment in 2016 for a mall in southwestern city Chongqing.

Zhao Yi, chief financial officer, Longfor Properties said the new projects are ideally located high-quality assets that are expected to offer strong returns.

"Our expertise in real estate development as well as in mall operations and management will help us deliver value to our shareholders and partners," he said.

The services sector in China was one of the big drivers of better-than-expected economic growth last year, according to gross domestic product (GDP) data released last week.

The services industry grew 8.3 per cent in the fourth quarter from a year ago and accounted for almost half of the GDP by value.

Real estate, meanwhile, contributed 6.3 per cent to the economy in the same time frame.

Canada Pension Plan Investment Board (CPPIB) and Longfor Properties Co. Ltd (Longfor) announced today they are extending their cooperation to include two new mixed-use real estate development projects in Chengdu and Shanghai in China, for a total CPPIB commitment of approximately RMB 4,200 million (C$800 million).

“We are pleased to extend our existing relationship with Longfor Properties, one of the top real estate developers in China, through these development projects in Chengdu and Shanghai. Both cities are well positioned to capitalize on the future economic growth and harness the returns of growing consumption in China,” said Jimmy Phua, Managing Director, Head of Real Estate Investments Asia, CPPIB. “These projects deliver on CPPIB’s strategy to grow our investments in the Chinese real estate sector, specifically in the fast-growing retail sector. The investments will help CPPIB diversify its real estate interests in China, providing attractive risk-adjusted returns over the long term.”

The mixed-use development project in Chengdu, the capital of Sichuan province with a population of 16 million, is comprised of approximately 740,000 square metres for residential and commercial use. The project is attractively and ideally situated in the East part of Chengdu and contains excellent commercial transportation links, offering great accessibility to the city centre. The site will include a Paradise Walk shopping mall of approximately 140,000 square metres. The large residential component is expected to service the increasing residential demands of Chengdu.

The Shanghai site is approximately 340,000 square metres and is situated in South Minhang, one of the city’s fast-growing suburban areas. The project will comprise retail and commercial components and is ideally located in terms of transport links and its proximity to two universities, as well as the Zizhu technology hub. It, too, will include a Paradise Walk shopping mall.

“We look forward to further extending our cooperation with CPPIB. These investments are another set of landmarks in our work together, following the Suzhou Times Paradise Walk and Chongqing West Paradise Walk projects,” said Zhao Yi, Executive Director and Chief Financial Officer of Longfor Properties. “The mixed-use sites in Chengdu and Shanghai are both ideally located, high-quality assets that are expected to offer strong future returns. Our expertise in real estate development as well as in mall operations and management will help us deliver value to our shareholders and partners.”

Longfor is a well-established residential and retail mall developer and operator in China, and has built a strong brand, experienced retail team and a wide network of local and international tenants in the Paradise Walk malls.

CPPIB and Longfor first collaborated in 2014 with a mixed-use real estate project in Suzhou, which included the development of a Paradise Walk mall.

About Canada Pension Plan Investment Board

Canada Pension Plan Investment Board (CPPIB) is a professional investment management organization that invests the funds not needed by the Canada Pension Plan (CPP) to pay current benefits on behalf of 20 million contributors and beneficiaries. In order to build a diversified portfolio of CPP assets, CPPIB invests in public equities, private equities, real estate, infrastructure and fixed income instruments. Headquartered in Toronto, with offices in Hong Kong, London, Luxembourg, Mumbai, New York City, São Paulo and Sydney, CPPIB is governed and managed independently of the Canada Pension Plan and at arm's length from governments. At September 30, 2017, the CPP Fund totalled C$328.2 billion.For more information about CPPIB, please visit www.cppib.com or follow us on LinkedIn or Twitter.

About Longfor Properties Co. Ltd.

Longfor Properties is a premier developer engaged in property development, investment and management in China. With its business spanning 35 cities throughout China, Longfor Properties serves a wide spectrum of customers, including the upper class, middle class and mass markets. The Group’s product offerings range from high-rise apartment buildings, low-rise garden apartments, townhouses, detached villas, as well as shopping malls and other commercial properties.

Being one of the first developers of shopping malls in China, Longfor has been operating commercial properties for over 15 years. To date, it has opened 26 shopping malls with a total area of over 2.6 million sq.m, and working with over 3,800 merchant brands. For more information, please visit www.longfor.com.

Being one of the first developers of shopping malls in China, Longfor has been operating commercial properties for over 15 years. To date, it has opened 26 shopping malls with a total area of over 2.6 million sq.m, and working with over 3,800 merchant brands.

Fiscal 2017 marked another year of steady growth for the Real Estate Equity portfolio, which at the end of the year totalled $40.1 billion, an increase of 9.2% from fiscal 2016. The Equity programs represent 89.3% of the overall real estate portfolio and 54.5% of the Real Assets portfolio. A slowdown in new investment activity and valuation gains coupled with an active dispositions program resulted in moderate growth in the portfolio in fiscal 2017 compared to previous years. Specifically, the value increase in the portfolio was the result of several factors: (i) $4.6 billion in new investment activity, (ii) valuation increases mainly due to improved market conditions and foreign exchange of $1.6 billion, offset by $2.8 billion in return of capital from asset sales.

At year-end, the Real Estate Equity portfolio consisted of 121 investments with 60 operating partners, managed by a team of 75 professionals across six offices globally. The Real Estate Equity portfolio remains well diversified across major markets globally, with 86% in developed markets such as North America, Western Europe and Australia and 14% in the emerging markets including China, India and Brazil.

Illinois lawmakers on Tuesday expressed interest and skepticism in an idea that the U.S. state should sell $107 billion of bonds to address its huge unfunded pension liability.

At a hearing before the Illinois House Personnel and Pensions Committee, Runhuan Feng, an associate professor of mathematics at the University of Illinois, laid out a plan for selling taxable 27-year, fixed-rate bonds to get the state’s five retirement systems to a 90-percent-funded level.

The bond plan, which was offered by a group representing workers and retirees in the Illinois State Universities Retirement System, would result in a $103 billion reduction in the state’s pension costs by 2045, according to Feng.

Committee Chairman Robert Martwick filed a bill for the bond sale, emphasizing that it was in early in the process and promising to bring in bond market and other experts to testify.

In order to become law, the bill would need to pass both Democrat-controlled chambers and be signed into law by the state governor, currently a Republican.

Illinois pension systems’ funded ratio was just under 40 percent in fiscal 2017, while the unfunded liability totaled $129 billion, according to a legislative commission. The state’s annual pension payment is projected to grow from $8.5 billion in fiscal 2019 to $19.6 billion in 2045 under the current funding system.

Some lawmakers questioned what the plan would do to Illinois’ credit ratings, which are already the lowest among the U.S. states, and if the huge borrowing would make future bond sales for capital projects impossible.

“Are we going to be tapped out completely?” asked Democratic State Representative Scott Drury.

Some lawmakers expressed interest if the bond sale came with additional ways to lower costs that would not violate public pension protections in the Illinois Constitution.

The state has already been a prolific issuer of taxable pension bonds, selling $3.7 billion in 2011, $3.5 billion in 2010, and $10 billion in 2003. The 2003 deal included $7.7 billion of bonds that will not mature until 2033 and $1.4 billion maturing in 2023.

The U.S. and Canadian Government Finance Officers Association has advised its state and local government members not to issue pension bonds, citing several risks that could arise from investing bond proceeds and increasing debt burdens.

It’s being called a “moon shot” proposal to solve the state’s worst-in-the-nation pension crisis.

One state advocacy group is asking lawmakers to borrow massive amounts of money, on top of the debt the state already has. Why do they think it’s the best way to go?

The idea is to go to the bond market, borrow a whopping $107 billion and put it all into the state’s pension funds to get them healthy in one fell swoop. Right now they are short $130 billion of where they need to be, which is helping drive the state’s junk bond rating. The proposal is being pushed by the State University Annuitant’s Association and developed by University of Illinois professor Runhuan Feng, who presented the plan to skeptical lawmakers at a hearing Tuesday in Springfield.

Feng says the state can borrow that money at an interest rate of 5 percent. If historical trends hold up, it can invest that money in the pension funds and get a return of 7 percent, generating a 2-percent profit and saving taxpayers $100 billion over the next 27 years. Feng acknowledges that a lot of chips would have to fall the right way for this plan to work.

“I do realize there’s risk, that’s why we ran a relatively conservative scenario to argue that there is an interest rate arbitrage you can take advantage of,” he said. “And studies show that historically there has been a 2-percent rate based on the tax authorities.”

The testimony was met with a lot of skepticism from lawmakers who wonder what might happen in the case of an economic downturn, and if annual 7-percent returns fail to materialize. Also, would lenders even pony up $100 billion, especially with the state right now not being the most popular of investments? The Civic Federation’s Laurence Msall says no state has even attempted half this amount of borrowing, but because the crisis is so severe, the plan deserves a look.

“No other state in the United States has ever attempted to borrow over $100 billion, no states borrow half that amount, not even California or New York,” Msall said. “And when they borrow that amount, they don’t use it for pensions, they use it to make investments that are going to last longer than the length of the bonds. So, this is an extraordinary idea, it’s one that is only beginning to be vetted, and the burden’s on the promoters to tell us how this could actually be done.”

Gov. Bruce Rauner’s office seemed ho-hum on the idea, through a spokesperson saying: “Pension reform has to save taxpayers money. We ought to start with a constitutional proposal to reform current pensions, like something similar to the so-called ‘consideration model’ first proposed by Senate President Cullerton.”

Other ideas thrown around at Tuesday’s hearing included borrowing this money to pay buyouts to retirees in lieu of receiving yearly pensions. Remember, the Illinois Supreme Court ruled three years ago the state can’t cut or trim benefits.

A big, bold plan to save the state’s debt-strapped public pension funds is being floated this week in Springfield. But don’t get your hopes up.

It’s not the cure to Illinois’ festering financial crisis.

An influential state employee advocacy group, the State Universities Annuitants Association, is urging Illinois to issue $107 billion in bonds to pay off shortfalls in the state’s five leading pension funds.

Yep, that’s a whopping $107 billion — backed by taxpayers who will be on the hook, especially if this deal goes bad. And the odds of that occurring look pretty good.

“It’s a big gamble,” says Howard Cure, director of municipal bond credit research for Evercore Wealth Management in New York.

While full details of this plan are expected to be unveiled Tuesday before a state panel, bond and public finance experts are already highly skeptical. They’re concerned it will add to Illinois’ pension burdens — now estimated at $130 billion in unfunded liabilities and growing — and further hinder the state’s sorry overall financial health.

Let’s start with the bond market.

At $107 billion in 27-year fixed-rate bonds, it would be the largest amount of debt the state ever sought from investors. Bond experts wonder if Illinois — with its record of political dysfunction, inability to pay its bills in a timely way and $25 billion in general obligation debt — will attract enough hungry investors.

One way to lure wary backers is to spice up the bonds and sell them at above-market interest rates. Such a premium would likely attract risk-taking investors, probably from overseas funds, or deep-pocketed individuals hoping to make a killing.

But higher rates are tougher to pay off and investors’ bond payments must be paid on time, says Evercore’s Cure. Missing a debt payment means riling angry bondholders, who could quickly sue the state or take other legal actions to recoup their investments, he adds.

Laurence Msall, president of the Civic Federation — a nonpartisan government research group — says his organization has “serious concerns and reservations” about the proposed bond effort too.

On top of the gargantuan amount, the bond is limited to pensions and not linked to any comprehensive financial plan for improving state finances, Msall asserts. The bond’s size could also impede the state’s ability to seek borrowing or bond financing for infrastructure or other basic needs, he says.

Despite these somber concerns, no one should be beating up on the State Universities Annuitants Association, which represents more than 200,000 current and retired employees, for leading this charge.

The group believes many initial concerns will be addressed when it reveals the details of its plan to the General Assembly committee exploring public pension matters. It will argue that its refinancing proposal will lop $103 billion off state pension costs through 2045 while increasing the pensions’ funding levels to 90 percent.

Rep. Robert Martwick, the Chicago Democrat who heads the House pension committee, has no position on the bond plan but wants it to become part of a larger pension reform debate. In the coming weeks, the $107 billion initiative will be fully discussed by finance experts, labor and taxpayer advocates, he stresses.

Of course, when it comes to Illinois’ public pension crisis, there’s no shortage of issues to chew over.

Government leaders have been doing that for way too many years with few results, mainly because of state underfunding of pensions, feisty union opposition and a provision in the state constitution that prohibits any structural changes to the funds or benefits.

Those who want to totally dump public pension plans haven’t had any better luck getting around that provision.

It’s a nasty trick bag because, in the meantime, the amount of public pension liabilities keeps stacking up and strapped taxpayers are increasingly responsible for paying more.

It’s a mess.

But this big, bold but flawed bond plan isn’t the solution to the public pension crisis.

We can’t be that desperate.

A group of disabled veterans is taking its legal fight for better pensions to the Supreme Court of Canada.

The six veterans involved in what is called the Equitas case say the federal government has a sacred obligation to care for the country's wounded soldiers, and that the duty was breached in a 2006 overhaul to the compensation regime for those injured in the line of duty.

Mark Campbell, a retired major, and former combat engineer Aaron Bedard, both part of the Equitas suit, held a news conference on Parliament Hill today to announce plans to take their pension fight to the Supreme Court.

Campbell said it's a "national disgrace" that the government is spending tax dollars in a legal fight against injured veterans, and "untolerable" that changes to the pension regime have left two standards of compensation for soldiers, depending on when they were injured.

"This is grossly unfair and it has to change," he said.

The overhaul replaced lifelong disability pensions with a lump-sum payment, career training and targeted income support, which the veterans claim was worth less than the previous pension system.

The case, which they hoped to turn into a class-action lawsuit, has been winding its way through the courts since 2012. It was launched when the Conservative government was in power but continued under the Liberals.

Lawyer Don Sorochan, who is representing the Equitas group, hopes the Supreme Court will hear an appeal to that decision, and definitively rule on whether the government has a "social covenant" or sacred obligation, and whether it is enforceable.

"The position taken by the government was astonishing. For them to stand up and say we don't have any special obligation to veterans was completely contrary to everything they had been saying in Parliament, on the election campaign," he told CBC News.

During the 2015 federal election campaign, the Liberals promised to give veterans the option to have a lifelong pension.

Major changes announced

After much frustration and protests, the government announced major changes to the compensation system in December 2017 that would pour about $3.6 billion into veterans' benefits.

But Campbell called that proposal a "sham."

"The new pension for life is nothing more than a shell game," he said.

Questioned about the legal challenge in the House of Commons today, Veterans Affairs Minister Seamus O'Regan said the government has spent $10 billion to expand: pain and suffering compensation, income replacement and education, career transition and mental health benefits.

He also said the government has followed through on its pledge to institute a life-long pension.

"Veterans asked for a pension for life option. We delivered," he said.

According to a copy of the court filing to the high court, the case raises "fundamental questions about the unique and special relationship between Canada and members of the Armed Forces," and whether an "inadequate compensation scheme" breaches Canada's solemn obligation to those who served the country.
'Profound implications'

The filing says the B.C. Court of Appeal's decision could have profound implications for future military service in Canada and the very operation of Veterans Affairs Canada.

"Those who enlist in military service do so at great personal risk and sacrifice, but do so based on the premise which underlies the social covenant: Should they fall or be injured, the nation and people of Canada will ensure they will be looked after," the filing reads. "The implication of the Court of Appeal's decision is that this solemn obligation does not exist."

Sorochan said the social covenant has been recognized since the First World War, when promises were made to those who served their country. It was, and remains, necessary to build and retain a voluntary citizens' army.

Sorochan said the B.C.appeal court ruling effectively said even if a promise was made, any government could undo it "on a whim."

"I don't think that's much comfort if you're going to put your life on the line when you could take away the promise."

Phil McColeman, the Conservative veterans' affairs critic, called on the Liberals to fulfill their campaign promise.

"It's shameful that as a result of Liberal broken promises, veterans have been forced to take their case to the Supreme Court in order to be heard," he said in a statement to CBC News. "The Conservative Party of Canada believes in providing the best possible services and benefits for veterans and their families, in recognition of their service to Canada."

In the House, O'Regan said when the Conservatives were in office, members of the armed forces returned home from duty to find services cut, veterans offices closed and their voices ignored.

In a news release, Marc Burchell, president of the Equitas Society, said the B.C. Court of Appeal ruling says there is nothing embedded in the law to protect injured veterans.

"This case is about making sure the government of Canada supports our fighting men and women as they must," he said. "The government must either reinstate the old Pension Act, or must make sure compensation for injuries under the New Veterans Charter is as good as – or better – than what they received before."

Veterans Affairs Minister Seamus O'Regan said no disabled vet will end up with less money but clearly, the new plan doesn't address the discrepancies that bedeviled the previous Conservative government.

Importantly, one of the vets in the last article is right, you can't have two soldiers with the same injuries from the same war but at different times receiving different compensation. That is fundamentally wrong.

One word of caution to disabled vets, I agree with the government, you are much better off over the long run accepting the monthly payment than accepting a lump sum payment upfront. Don't make the mistake of asking for a lump sum payment, you will regret it.

I know PSP Investments manages the pensions of the Public Service, the Canadian Armed Forces, the Royal Canadian Mounted Police and the Reserve Force. And they're doing a great job, so it's better to stick with the monthly payment for life, trust me on that.

Lastly, I read these stories about how we treat disabled veterans, and I must admit, I'm not impressed with how the Conservatives and Liberals have treated this file. It's just plain wrong and the message it sends out is disheartening, to say the least.

Importantly, I don't find Canada treats all people with disabilities, especially disabled vets, with the dignity and support they deserve.

I'll leave it at that because I have some other more nasty comments on how our country treats people with disabilities but it's Christmas and I'd rather stay polite and composed.