PrefBlog

Today’s Toronto Stock Exchange Screw-Up regards BCE.PR.K:

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Look that that quote on the Toronto Stock Exchange – which, together with its Venture sibling, comprise Canada’s premier equities markets: 8.55-21.35, a small spread of only $12.80. Since the Exchange refuses to sell me closing quotes, instead selling me “Last” quotes, I’m not sure what the actual closing quote might have been – since I don’t feel like spending extra money to get the detail of the last few minutes. So it might have been a post-4pm bid cancellation, it might be another shining example of how TSX’s Market Maker system maximizes market efficiency. I’ll let youse guys figure it out.

Anyway, HIMPref™ threw up when I tried to tell it the reported bid price, so I have substituted $20.50, which is the bid on Pure.

Meanwhile, Capital Power, proud issuer of CPX.PR.A, CPX.PR.C and CPX.PR.E, issued a profit warning:

Capital Power Corporation (Capital Power, or the Company) (TSX:CPX) provided an update today on its third quarter 2014 financial results and its financial guidance for 2014.

In the third quarter of 2014, Capital Power’s owned plants achieved strong plant availability of 97% which was consistent with expectations. However, due to lower plant availability at the acquired Sundance PPA units, other plant derates, and lower Alberta wind generation, overall electricity generation production was below expectations. Accordingly, the Company expects third quarter net income and funds from operations to be below previous expectations. These non-Capital Power operated plant outages occurred primarily in July coinciding with a period of pricing volatility with Alberta spot power prices averaging $122 per megawatt hour (MWh) in the month compared with $45 per MWh in August and $24 per MWh in September. As a result, with commercial production 100% sold forward in July, the Company was required to cover a short market position that negatively impacted its portfolio optimization position in the quarter.

The Company has updated its outlook for funds from operations for the year, which are now expected at the low end of the forecast range of $360 million to $400 million.

In addition, net income for the third quarter of 2014 was negatively impacted by a non-cash write-down of deferred tax assets of $73 million. The write-down related to the accounting impact of U.S. income tax loss carry forwards that can no longer be recognized for accounting purposes based on the Company’s current long term forecast for U.S. taxable income. The forecast showed a decline in taxable income over the latter years of the forecast. For income tax purposes, these U.S net operating losses do not expire until the 2027 to 2033 period. Accordingly, they retain economic value and could result in the Company recording deferred tax assets in the future. The Company continues to pursue U.S. contracted power opportunities and the U.S. business development pipeline is active. Importantly, the write-down is a non-cash item and has no impact on operations or other key performance measures.

Capital Power will be releasing its third quarter 2014 results on October 24, 2014 after the TSX market closes.

I haven’t seen anything yet from the Credit Rating Agencies as to whether or not they consider this serious.

Advantaged Preferred Share Trust (PFR), which made it into one of my articles, was confirmed at STA-2 (middle) by DBRS:

DBRS has today confirmed the stability rating of STA-2 (middle) to the retractable units (the Units) issued by Advantaged Preferred Share Trust (the Trust).

Proceeds from the Trust’s offerings have been used to enter into a forward agreement with Royal Bank of Canada in order to gain exposure to a diversified portfolio of preferred shares (the Portfolio). The forward agreement provides Unitholders with a return equivalent to a direct investment in the Portfolio. The Portfolio is passively managed by RBC Dominion Securities Inc. (the Administrator).

On August 26, 2010, DBRS assigned a stability rating of STA-2 (middle) to the Units issued by the Trust in accordance with the new methodology for rating structured income funds published in May 2010. The rating was mainly based on the strong credit quality of the Trust’s preferred share portfolio and the limited flexibility of the Administrator to invest in riskier assets. The rating was last confirmed on October 18, 2013, at STA-2 (middle).

Since October 2013, the performance of the Portfolio has been fairly stable. The weighted-average yield of the Portfolio is approximately 5.01% as of September 30, 2014. The Trust’s current net income (including a regular additional payment under the forward agreement to offset operating expenses) covers 98.6% of the distribution paid out to Unitholders. As a result, the rating of STA-2 (middle) on the Units has been confirmed. The main constraints to the rating are the interest rate risk of the Portfolio and the potential for capital losses and reductions in income resulting from underlying securities being called for redemption by their respective issuers.

We’re always hearing about Chinese property buyers in Vancouver, but they’re all over the States as well:

This flood of money, arriving from China despite strict currency controls, has helped the city build a $20 million high school performing arts center and the local Mercedes dealership expand. “Thank God for them coming over here,” says Peggy Fong Chen, a broker in Arcadia for many years. “They saved our recession.” The new residents are from China’s rising millionaire class—entrepreneurs who’ve made fortunes building railroads in Tibet, converting bioenergy in Beijing, and developing real estate in Chongqing. One co-owner of a $6.5 million house is a 19-year-old college student, the daughter of the chief executive of a company the state controls.

Arcadia is a concentrated version of what’s happening across the U.S. The Hurun Report, a magazine in Shanghai about China’s wealthy elite, estimates that almost two-thirds of the country’s millionaires have already emigrated or plan to do so. They’re scooping up homes from Seattle to New York, buying luxury goods on Fifth Avenue, and paying full freight to send their kids to U.S. colleges. Chinese nationals hold roughly $660 billion in personal wealth offshore, according to Boston Consulting Group, and the National Association of Realtors says $22 billion of that was spent in the past year acquiring U.S. homes.

It was a strong day for the Canadian preferred share market, with PerpetualDiscounts gaining 6bp, FixedResets winning 32bp and DeemedRetractibles up 11bp. Volatility was high, highlighted by losing Floating Rate issues and winning FixedResets. Volume was well above average (so there, prefQC!).

The SEC is gleefully trumpeting its contribution to market inefficiency:

An SEC investigation found that Athena Capital Research used an algorithm that was code-named Gravy to engage in a practice known as “marking the close” in which stocks are bought or sold near the close of trading to affect the closing price. The massive volumes of Athena’s last-second trades allowed Athena to overwhelm the market’s available liquidity and artificially push the market price – and therefore the closing price – in Athena’s favor. Athena was acutely aware of the price impact of its algorithmic trading, calling it “owning the game” in internal e-mails.
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The SEC’s order finds that Athena’s manipulative scheme focused on trading in order imbalances in securities at the close of the trading day. Imbalances occur when there are more orders to buy shares than to sell shares (or vice versa) at the close for any given stock. Every day at the close of trading, NASDAQ runs a closing auction to fill all on-close orders at the best price, one that is not too distant from the price of the stock just before the close. Athena placed orders to fill imbalances in securities at the close of trading, and then traded or “accumulated” shares on the continuous market on the opposite side of its order.

According to the SEC’s order, Athena’s algorithmic strategies became increasingly focused on ensuring that the firm was the dominant firm – and sometimes the only one – trading desirable stock imbalances at the end of each trading day. The firm implemented additional algorithms known as “Collars” to ensure that Athena’s orders received priority over other orders when trading imbalances. These eventually resulted in Athena’s imbalance-on-close orders being at least partially filled more than 98 percent of the time. Athena’s ability to predict that it would get filled on almost every imbalance order allowed the firm to unleash its manipulative Gravy algorithm to trade tens of thousands of stocks right before the close of trading. As a result, these stocks traded at artificial prices that NASDAQ then used to set the closing prices for on-close orders as part of its closing auction. Athena’s high frequency trading scheme enabled its orders to be executed at more favorable prices.

Athena did not admit or deny the charges, so in the first place this is clearly just another example of regulatory extortion.

But in addition I fail to see anything wrong with the substance of the matter. In order for this to work, we need a situation at the end of the day where the total density of offers (bids) is small relative to the number of imbalanced buy-on-close (sell-on-close) orders; that is to say, if there is only 100 shares buy-on-close imbalance, then it makes no sense to buy 1,000 shares immediately prior to move the price by a dime. On the other hand, it makes all kinds of sense the other way ’round.

So think about it. There’s an issue that might have – for instance – ten blocks of 500 shares each offered at penny increments. And somebody puts in a buy-on-close order for 10,000 shares. There’s a technical term that may be used for a person like this: “moron”.

I cannot think of any legitimate reason for a portfolio manager – even if it’s granny, managing her $20,000 portfolio – to use ‘on close’ orders. The best illegitimate reason I can think of is the manager of an index fund wanting to make absolutely certain that his trade will not affect the tracking error of the portfolio; and what this does is cost his investors money, not because of tracking error, but because the index itself has lost money relative to what otherwise would have been the case. So the PM and his moronic investors (one party or the other has to be moronic!) are getting burned due to the pursuit of a trading strategy that pays no attention whatsoever to the fundamentals of what they are doing.

And, I claim, that is a Good Thing.

This happens all the time with the major indices due to pre-announcement of index changes. Say an issue gets added to the index. The price should go up, right? Supply and demand. But what happens is that it’s pre-announced, so the price goes up during the interim period and the index funds can buy in gradually, while the index itself buys at the higher price. So what we get is reduced, possibly even negative, tracking costs … but the index underperforms what its returns would have been had there been no pre-announcement.

But the index fund sponsor can then take out large advertisements touting their low tracking errors and investors can hide their heads in the sand regarding the performance of their index relative to an honestly calculated meta-inde, which is always a very popular investment strategy.

It’s too bad for Athena, which presumably was offered a choice between paying $1-million to the SEC or paying $2-million to their lawyers and getting randomly chosen for the next 17 completely randomized in-depth compliance examinations. But Assiduous Readers will note the similarities between this case and the various scandal-shock-horror stories about moronic portfolio managers entering stupid orders to be filled at the fixing price in the gold market (discussed February 27, 2014) and in the LIBOR market (discussed December 19, 2012) and in the FX market (discussed September 16, 2014); the regulators needed a villain and chose Athena. After all, stupid, lazy people must be protected. Isn’t that what capital markets are for?

Matt Levine of Bloomberg takes a harsher view:

At 3:50 p.m., Nasdaq tells everyone that, say, there’s a buy imbalance of 224,638 shares of EBay at its current trading price of $23.55. That means that, if trading stopped right there and the closing auction was held at 3:50, there would be more buyers than sellers at $23.55, and the closing price would be $23.60 or $23.65 or $24 or something, and the close would look very volatile.

But trading doesn’t stop right there. There’s still 10 minutes left. And what happens is, people step in to fix the imbalance. They say: OK, if the auction really has 224,638 more buyers than sellers, I will sell those 224,638 shares. (This is called an “Imbalance-Only-On-Close Order.”) And then they go out and buy those 224,638 shares in the continuous market over the next 10 minutes. They buy from people who want to sell now, in order to sell to people who want to buy later.

This is a classic market-making function. The people doing this — and they’re not really people, they’re algorithmic high-frequency trading firms — are intermediating across time. There are sellers now, there are buyers later, and the HFT market-makers buy from the sellers and sell to the buyers, giving everyone a smoother and fairer and more informative price.
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Basically you’ll notice in what I described that the market maker buys at its average price, and then sells at its final price. It has incentives to make those prices as different as possible. One way to make those prices different is to try to buy really efficiently, so you buy at a low average price. Another way to make the prices different is to make the final price really sloppy and inefficient, so you sell at a high final price. That’s what Athena did: It bought about half of the shares it was going to buy smoothly over the last nine minutes and 58 seconds, getting a reasonable average price on half of the shares. That’s “Meat.” Then it would buy the other half sloppily in the last two seconds, pushing up the final price really high and leading to a high sale price. That’s “Gravy.” Gravy is how it made its money.

Speaking of idiotic regulation, there appears to be some consensus that price transparency for bonds is a good thing:

Arguably, the U.S. already has a big lead on Canada in that regard because of the TRACE system that FINRA runs. Dealers have to report corporate bond trades to TRACE. That data is then available to market users through financial information providers.

Why doesn’t Canada have an equivalent, challenged another panelist, markets entrepreneur Doug Steiner?

The answer, [executive director and chief operating officer of the Ontario Securities Commission] Ms. [Maureen] Jensen said, is twofold. There’s the fragmentation of the regulatory landscape in Canada, and the concentration of dealers.

That of course is a reference to the fact that the biggest bond dealers in Canada are a handful of bank-owned firms. They have every incentive not to share such data, because it will cut into profits.

First, it might be really nice if the implications of transparency were investigated, or thought about, or, hell, I’d be happy with a simple “acknowledge” at this point. Price transparency invariably leads to smaller inventories and thinner, more brittle markets. In the corporate bond market as a whole, it has led to an increased proportion of exempt, non-public, issues and to the rise of Credit Default Swaps. But who cares? Teacher didn’t talk about that in kindergarten; teacher talked about being nice to each other.

I will take some solace in the idea that this is beginning to get noticed:

Corporate bond values are swinging the most in more than a year and here’s one reason why: Wall Street’s biggest banks are following the crowd and selling, too.

Take junk bonds, which have lost 2 percent in the past month. Dealers, which traditionally used their own money to take bonds off clients desperate to sell during sinking markets, sold a net $2 billion of the securities during the period, according to data compiled by Trace, the bond-price reporting system of the Financial Industry Regulatory Authority.

Banks have cut debt holdings in the face of higher capital requirements and curbs of proprietary trading under the U.S. Dodd-Frank Act’s Volcker Rule. Their lack of desire to take risks has had the unintended consequence of exacerbating price swings amid the rout now, said Jon Breuer, a credit trader at Peridiem Global Investors LLC in Los Angeles, California.
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Prices will probably keep swinging until it looks like the global economy’s regaining its footing. Or until investors gain faith that central banks can save the day, once again.

Just don’t count on Wall Street dealers to prop up the market. Those days appear to be over.

Soon every day will look like the credit crunch, in which a ridiculously thin market in Asset Backed Securities went ridiculously low … leading to apparent capital problems … leading to a crisis … leading to increased hiring of regulators … oh.

Meanwhile, the economy is looking so dismal there are informed calls for more quantitative easing:

Federal Reserve Bank of St. Louis President James Bullard challenged his fellow central bankers to honor pledges to adjust bond purchases in response to incoming economic reports and to keep inflation stable.

Bullard said the Fed should consider delaying plans to end its bond-buying program at the end of this month to halt a decline in expected inflation. The Fed has tapered purchases to $15 billion a month from $85 billion in December 2012.

“We said the taper was data dependent,” he said in an interview today in Washington. The Fed’s message should be that “we are watching and we’re ready and we are willing to do things to defend our inflation target.”

Bullard’s comments reflect growing concern among Fed policy makers that global economic weakness threatens to push inflation in the U.S. to dangerously low levels. His worries may be reflected in the Fed’s next policy statement, even if his proposal to extend asset purchases isn’t adopted, said Jonathan Wright, a former central bank official.

Assiduous Reader Nestor asked in yesterday’s comments:

James, is is safe to say, all things being equal, that the preferred shares will react positively to the lower treasury and corporate yields?

Yes. No. Maybe. It depends. The correlation between treasury and corporate yields will depend largely on what is driving the changes in yield. If the concern is “interest rates”, then these yields should move together and correlations should increase. If the concern is “credit”, then yields will be unrelated – or even negatively related – and correlations will decrease.

For example, consider this chart originally published in the August, 2009, edition of PrefLetter:

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Some changes, eh? Correlation analysis can be useful, but it is all too often used as a substitute for analysis rather than as an aid, with results that are often grievous and always funny.

Another chart that offers hours of amusement is:

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In the above chart, “PDIE” stands for “Perpetual Discount Interest Equivalent”. You can see that although the correlation with corporate bonds is generally pretty good, that is not always the case – and certainly not on a day-to-day basis. On the other hand, Assiduous Readers will note that by-and-large, the “Seniority Spread” (interest-equivalent yield of PerpetualDiscounts less yield of long corporate bonds) is generally pretty stable – which is not to say “always” pretty stable, nor is it to say “unchanging for decades”.

Another question resulting from yesterday’s post came from Assiduous Reader prefQC, who asked:

I’ve been following (with interest!) your blogs on a regular basis for over a year now. However, I am struck by the fact that you virtually always qualify the overall daily trading volume as “low”, “very awfully low”, “below average” etc. — it is very rarely “high”. So then, just what is your definition of “average” trading volume ?

I answered the question in a strict definitional sense, but I have two representative pictures I’d like to show you:

Average Daily Volume CIU.PR.C
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Average Daily Volume ELF.PR.G
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So you can see that the Average Daily Volume calculated by HIMIPref™ (an exponential moving average that is adjusted to reduce the impact of single day spikes in volume) for CIU.PR.C and ELF.PR.G has declined precipitously over the past six months odd. While I do not compute more general gauges of daily volume (why would I?) it is my anecdotal hypothesis that these two charts are representative of a large swath of the preferred share market, and thus there have been an increasing number of ‘low volume’ days in 2014. Maybe I’ll have to revise my definitions of ‘low volume’!

********************* Update ****************

Sharp-eyed and cynical Assiduous Readers will have noted that I told a fib in the above paragraph, because I do, in fact, compute (and store!) more general gauges of daily volume, in the form of the “Median Daily Trading Value” that I report every single day on the market summary. Here’s the chart for the last year of DeemedRetractibles … chosen because it’s a reasonably large sample with minimal contamination from new issues and movements of individual issues between indices:

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It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts flat, FixedResets gaining 6bp and DeemedRetractibles off 6bp. Volatility was muted. Volume … (drum-roll, please!) … was … wait for it … VERY LOW!

It was a nice day to own bonds:

Treasuries surged, with benchmark 10-year yields falling the most since March 2009, as a decline in retail sales prompted traders to reduce wagers the Federal Reserve will raise interest rates in 2015.

Rates on federal fund futures show traders betting that the Fed will raise interest rates in December 2015, with chances of an increase in September fading to 32 percent from 46 percent yesterday and 67 percent two months ago, according to data compiled by Bloomberg. The benchmark 10-year yield traded below 2 percent for the first time since June 2013 even as the Fed is forecast to end its quantitative easing this month. A market gauge of inflation expectations fell to the lowest in 15 months while crude oil tumbled in a bear market.
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The benchmark 10-year yield fell 14 basis points, or 0.14 percentage points, to 2.06 percent as of 2:17 p.m. New York time and reached the lowest since May 2013. The 2.375 percent note due in August 2024 rose 1 1/4, or $12.50 per $1,000 face value, to 102 26/32. The yield fell as much as 34 basis points and reached 1.86 percent, the lowest level since May 2013.

The 30-year bond rose more than four points and the yield fell as much as 28 basis points to 2.67 percent, touching the lowest level since September 2012, before trading at 2.83 percent.
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The 10-year break-even rate, derived from the difference between yields on Treasuries and inflation-linked debt of similar maturities, shrank to 1.86 percentage points, the least since June 2013.
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Retail sales declined 0.3 percent after a 0.6 percent August gain that was the biggest in four months, Commerce Department figures showed. The median forecast of 81 economists surveyed by Bloomberg called for a 0.1 percent decline.

Four bucks on long Treasuries! Wow! Equities weren’t quite so happy, but it it could have been worse:

An afternoon rebound helped the Standard & Poor’s 500 Index pare its biggest intraday plunge since 2011 amid speculation the selloff was overdone.

The S&P 500 lost 0.8 percent to 1,862.49 at 4 p.m. in New York, trimming an earlier plunge of as much as 3 percent. The index pared its gain for the year to less than 0.8 percent and has tumbled 7.4 percent since a record on Sept. 18. The Dow Jones Industrial Average fell 173.45 points, or 1.1 percent, to 16,141.74 after dropping as much as 460 points. The Russell 2000 Index of smaller companies jumped 1 percent.

It was a poor day for the Canadian preferred share market, however, as it took its cue from equities, with PerpetualDiscounts down 19bp, FixedResets losing 21bp and DeemedRetractibles off 6bp. Volatility was high and dominated by losers – the only winner was PVS.PR.D, which had a bogus bid yesterday and, if we look at actual trades, was actually down significantly on the day. Volume was low.

PerpetualDiscounts now yield 5.18%, equivalent to 6.73% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.05% (maybe a hair more), so the pre-tax interest equivalent spread is now about 270bp, a significant widening from the 250bp reported October 8.

The Fed is very excited about a new extension to regulatory power:

The Board of Governors of the Federal Reserve System and the Federal Deposit Insurance Corporation welcome the announcement today by the International Swaps and Derivatives Association (ISDA) of the agreement of a new resolution stay protocol.
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This initiative is an important step toward mitigating the financial stability risks associated with the early termination of bilateral, OTC derivatives contracts triggered by the failure of a global banking firm with significant cross-border derivatives activities. Initially, 18 large banking organizations have agreed to sign onto the protocol. The protocol provides for temporary stays on certain default and early termination rights within standard ISDA derivatives contracts in the event one of the large banking organizations is subject to an insolvency or resolution proceeding in its home jurisdiction.

The resolution stay amendments of the protocol are intended to facilitate an orderly resolution of a major global banking firm and reduce the potential negative impact of the resolution on financial stability by giving the bankruptcy court or resolution authority the ability to prevent early termination of financial contracts of the firm’s global subsidiaries. The Federal Reserve and the FDIC are encouraged by this effort and look forward to the continuation of this important work.

ISDA adds:

The Protocol essentially enables adhering counterparties to opt into certain overseas resolution regimes via a change to their derivatives contracts. While many existing national resolution frameworks impose stays on early termination rights following the start of resolution proceedings, these stays might only apply to domestic counterparties trading under domestic law agreements, and so might not capture cross-border trades.

Regulators have committed to develop new regulations in their jurisdictions in 2015 that will promote broader adoption of the stay provisions beyond the G-18 banks. Banks have also committed through the Protocol to expand coverage once such regulations are enacted to include a stay that could be used when a US financial holding company becomes subject to proceedings under the US Bankruptcy Code. Those regulations will be made under the rule-making process in each jurisdiction.

The contractual approach is meant to support current statutory regimes and ensure wider, more consistent application. By adhering to the Protocol, the G-18 banks will extend the coverage of stays to more than 90% of their outstanding derivatives notional, and that proportion will increase as other firms sign the Protocol.

The backgrounder (available via a link on the ISDA release) gleefully celebrates the coming extension of regulatory power over investors:

Buy-side firms are not included in the first phase. These institutions are unable to voluntarily adopt the protocol due to fiduciary responsibilities to their clients. By voluntarily giving up advantageous contractual rights, they potentially leave themselves open to lawsuits. The FSB has recognised this issue, and FSB members have committed to encourage broader adoption of the protocol by imposing new regulations in their jurisdictions throughout 2015.

Hyperinflation has been rescheduled:

Federal Reserve Vice Chairman Stanley Fischer said weaker-than-expected global growth could prompt the U.S. central bank to slow the pace of eventual interest-rate increases.

“If foreign growth is weaker than anticipated, the consequences for the U.S. economy could lead the Fed to remove accommodation more slowly than otherwise,” Fischer said in speech today in Washington.

Fischer, 70, said the Fed won’t raise rates until the U.S. expansion “has advanced far enough,” and most emerging markets should be able to weather the increase.

Fischer’s remarks highlight growing concern among U.S. central bank officials about the impact of a global slowdown and a strengthening dollar. He spoke to central bankers and finance ministers gathered in Washington for the annual meetings of the World Bank and International Monetary Fund.

The Fed’s policy making body last month expressed concern that weak demand, particularly in Europe, could add to the dollar’s appreciation, hurting U.S. exporters and damping inflation, according to minutes released Oct. 8.

I’m a big fan of transparency at the top of central banks – even, or perhaps especially, when it gets ugly:

Mario Draghi and Jens Weidmann are clashing anew over how much more stimulus the ailing euro-area economy needs from the European Central Bank.

As Europe’s woes again proved the chief concern at weekend meetings of the International Monetary Fund in Washington, President Draghi repeated he’s ready to expand the ECB’s balance sheet by as much as 1 trillion euros ($1.3 trillion) to beat back the threat of deflation. Bundesbank head Weidmann responded by saying that a target value isn’t set in stone.

The differences at the heart of policy making risk leaving the ECB hamstrung as the region’s economy stalls and inflation fades further from the central bank’s target of just below 2 percent. History suggests Draghi will ultimately prevail over his German colleague.

The public nature of the dispute will force Draghi to disclose more of his thinking than might otherwise be the case – and this is a Good Thing.

But I’m wondering about the ‘set in stone’ metaphor. Is it mixed? You can carve something in stone, which means the same thing as casting it in iron, but can you actually set something in stone to make it permanent? You can set it in concrete, if you like, and you can set a stone in a ring or a driveway, for instance, but I’m not fully convinced that “set in stone” means much. The intending meaning doesn’t match any of the standard dictionary definitions of “set”, nor does this standard dictionary list “set in stone” as an idiom. It’s all very curious.

Anyway, there is considerable controversy regarding Germany’s approach:

In Washington, Mr. Schaeuble not only endured lectures from longtime critics such as Larry Summers, the former U.S. Treasury Secretary who in an unusually frank panel discussion accused Germany of leading Europe down a path of Japanese-style deflation with a misguided focus on budget consolidation.

He also had to listen to advice from traditional allies such as Finland’s Jyrki Katainen, a future vice president of the European Commission, who warned that Germany could not remain strong forever if it failed to invest more in its own infrastructure and education system.
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In its lead editorial on Sunday, conservative newspaper Die Welt argued that a weakening German economy should force a policy rethink and warned that Schaeuble’s push to achieve a “schwarze Null” – a federal budget that is in the black – in 2015 should not turn into a mindless “fetish.”

The Sueddeutsche Zeitung suggested Chancellor Angela Merkel’s Christian Democrats (CDU) risked turning into the “Tea Party of Europe” with their single-minded focus on deficit reduction.

Meanwhile, it appears that hyperinflation has been rescheduled again:

When it comes to spurring inflation in the U.S. economy, the bond market is becoming convinced that the Federal Reserve has almost no chance of achieving its 2 percent target before the end of the decade.

Inflation expectations have plummeted in the past three months, with yields of Treasuries (BUSY) implying consumer prices will rise an average 1.5 percent annually through the third quarter of 2019. In the past decade, those predictions have come within 0.1 percentage point of the actual rate of price increases in the following five years, data compiled by Bloomberg show.
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Based on the gap between yields of government notes and TIPS, traders have scaled back estimates for average inflation through 2019 by a half-percentage point since June to 1.52 percent, Fed data compiled by Bloomberg show.

That decline has significance for policy makers because yields have historically been accurate in predicting the future pace of annual cost-of-living increases.

The market’s five-year forecast has understated actual inflation based on the U.S. consumer price index by a median of just 0.04 percentage point since the data began in 2003.

… and nominals had a good day:

Treasuries climbed, with two-year note yields dropping the most in more than a year, as signs of economic weakness in Germany fueled speculation that slowing global growth will delay Federal Reserve interest-rate increases.

Thirty-year bond yields dropped below 3 percent for the first time since May 2013 as reports showed U.K. inflation dropped to a five-year low in September and German investor confidence eroded. A gauge of inflation expectations measured by the difference between yields on 10-year notes and similar-maturity inflation-index debt traded close to the lowest in more than a year. Volatility reached the highest level since January.
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The two-year note yield dropped five basis points, or 0.05 percentage point, to 0.38 percent at 3:02 p.m. New York time, according to Bloomberg Bond Trader prices. The 0.5 percent securities maturing in September 2016 added 3/32, or 94 cents per $1,000 face amount, to 100 7/32. The yield fell as much as six basis points, the largest decline since September 2013.

The 30-year (USGG30YR) bond fell five basis points to 2.96 percent and touched 2.94 percent, the lowest since May 3, 2013. The benchmark 10-year yield dropped seven basis points to 2.21 percent. It earlier reached 2.19 percent, a level not seen since June 2013.

And equities – particularly energies – got thumped:

U.S. stocks may have perked up today but the commodity-sensitive Toronto market slipped into correction mode.

Equities in Toronto moved into that zone this morning, though pulled back later, only to drop further again in the afternoon, closing down more than 190 points, or 1.3 per cent, at 14,036.68. That marked a drop of some 10 per cent from its peak in early September, thus meeting the definition of a correction.

But is it a plot?

The decline in oil prices may be depriving Russian President Vladimir Putin of his biggest ally.

Oil has been the key to Putin’s grip on power since he took over from Boris Yeltsin in 2000, fueling a booming economy that grew 7 percent on average from 2000 to 2008.
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Brent crude is down more than 20 percent from its June high, cutting billions of dollars in tax revenue from Russia’s most valuable export. The budget will fall into deficit next year if oil is less than $104 a barrel, according to investment bank Sberbank CIB. At $90, close to the current level, Russia will have a shortfall of 1.2 percent of gross domestic product.
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Top Kremlin officials said after the annexation of Crimea that they expected the U.S. to artificially push oil prices down in collaboration with Saudi Arabia in order to damage Russia, according to Khryshtanovskaya. Putin’s spokesman, Dmitry Peskov, didn’t respond to a request for comment on this issue, nor did he respond over four days of calls requesting comment about oil’s importance to Putin.

“Prices are being manipulated,” state-run Rosneft’s spokesman Mikhail Leontyev said Oct. 12 in an interview with Russkaya Sluzhba Novostei radio. “Saudi Arabia has started offering big discounts on oil. This is political manipulation, manipulation by Saudi Arabia, which can end badly for it.”

The reason Saudi Arabia cut its crude prices earlier this month was to boost margins for refinery clients and the move didn’t signal rising competition for market share, a person familiar with the nation’s oil policy said last week.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 9bp, FixedResets down 4bp and DeemedRetractibles off 3bp. Volatility was average, with some of the usual stupidity in recorded figures brought to you courtesy of the twerps at the Toronto Stock Exchange. Volume was extremely low.