The Bank of Canada has released a discussion paper by Gordon Wilkinson titled The Behaviour of Consumer Prices Across Provinces:
Measures of core inflation enable a central bank to distinguish price movements that are transitory and generated by non-monetary events from those that are more permanent and related to prior monetary policy decisions. The author uses standard statistical measures to assess the behaviour of consumer prices across provinces and identify price components with more divergent price patterns. The results indicate that energy, shelter and tobacco prices are the most volatile across provinces. Very large price movements restricted to one or a few provinces suggest that the forces or events triggering those movements may be province specific and unrelated to national demand pressures. Such results suggest that constructing a type of core inflation measure called the “trimmed mean” that excludes components with exceptionally large price changes at the provincial level may offer an alternative means of assessing underlying inflationary pressures.
Speaking of inflation, Statscan is changing the shopping basket:
For inflation’s scorekeepers, it’s out with film developing and in with tablet computers and smartphones.
Statistics Canada is revamping its approach to measuring the price of goods to reflect new realities about today’s consumer experience: Spending habits are changing more rapidly, and the lifespan of products is growing ever shorter.
This month, for the first time in four years, the federal agency is updating the basket of goods and services that measures price changes, adding new items like tablet computers, smart phones and dried lentils, and de-emphasizing older ones, such as photography services.
And starting next year, the agency plans to revise the basket every three years or less because consumption patterns are changing more quickly. Statscan has typically updated the basket every four or five years. Similar agencies in other countries, such as Britain or Sweden, update their measures every year or two.
The FRBB has released a Public Policy Discussion Paper by Geoffrey M.B. Tootell titled Do Commodity Price Spikes Cause Long-Term Inflation?:
This public policy brief examines the relationship between trend inflation and commodity price increases and finds that evidence from recent decades supports the notion that commodity price changes do not affect the long-run inflation rate. Evidence from earlier decades suggests that effects on inflation expectations and wages played a key role in whether commodity price movements altered trend inflation. This brief is based on a memo to the president of the Federal Reserve Bank of Boston as background to a meeting of the Federal Open Market Committee.
There’s a new Maple issuer:
The ranks of so-called Maple issues by non-financial borrowers has expanded by one with news Tuesday that Korea Gas Corporation priced and raised a $300-million, five-year offering.
KOGAS set up in 1983, is a public company which has grown to become the world’s largest LNG import company, originally planned to raise $250-million but raised more because of strong institutional demand. The A+ rated notes came with a coupon of 4.58% and a yield of 4.585% – for a spread of 203 basis points or two points tighter than what was presented in the marketing period.
The deal is the first by Kogas in Canada. Indeed the financing is the first Maple by either an Asian or South Korean borrower.
…
The market, both in its heyday and since its return to life a year back, is dominated by financial institutions. But investors soon get their fill of such issues and clamor for borrowings by industrial companies. Kogas has met those wishes and becomes the third non-financial issuer in the past eight months. Earlier, Molson Coors Brewing Co. ($500-million) and Anheuser-Busch InBev Worldwide Inc. ($600-million) raised capital in this market.
…
So fat this year $2.25-billion has been raised via the sale of Maple bonds, For the same period last year $1.8-billion. For all of 2010 $4.5-billion was raised. “I expect that demand will stay strong and issuance for the year will exceed last years,” added [John] Tkach [of Scotia Capital].
This issue is being sold on the exempt market, so you can’t buy it, suckers. The regulators have determined that you’re not smart enough.
OSFI’s Julie Dickson has delivered a 2011 Financial Services Invitational Forum, April 27, 2011. There was nothing very new or interesting in the content, but I was pleased to see that at least some attempt was made to support some of the assertions. One reference was to a letter to the Financail Times from Prof. Anat Admati of Stanford and others:
Banks’ high leverage and the resulting fragility and systemic risk contributed to the near collapse of the financial system. Basel III is far from sufficient to protect the system from recurring crises. If a much larger fraction, at least 15 per cent, of banks’ total, non-risk-weighted, assets were funded by equity, the social benefits would be substantial. And the social costs would be minimal, if any.
…
Debt that converts to equity, so-called “contingent capital”, is complex to design and tricky to implement. Increasing equity requirements is simpler and more effective.
Another reference was to a Bank of England discussion paper by David Miles, Jing Yang and Gilberto Marcheggiano titled Optimal Bank Capital:
This paper reports estimates of the long-run costs and benefits of banks funding more of their assets with loss-absorbing capital, or equity. Measuring those costs requires careful consideration of a wide range of issues about how shifts in funding affect required rates of return and on how costs are influenced by the tax system; it also requires a clear distinction to be drawn between costs to individual institutions (private costs) and overall economic (or social) costs. Without a calculation of the benefits from having banks use more equity no estimate of costs — however accurate — can tell us what the optimal level of bank capital is. We use empirical evidence on UK banks to assess costs; we use data from shocks to incomes from a wide range of countries over a long period to assess risks to banks and how equity funding (or capital) protects against those risks. We find that the amount of equity capital that is likely to be desirable for banks to use is very much larger than banks have used in recent years and also higher than targets agreed under the Basel III framework.
The US housing market is still sick:
U.S. lenders should consider debt-for- equity swaps to help homeowners who face default or owe more than their properties are worth, mortgage pioneer Lewis Ranieri said.
“If his house was $220,000, and now it’s $90,000, give me the keys, I give you a lease for seven years,” Ranieri, chairman of investment company Ranieri Partners LLC, said during a panel discussion at the Milken Institute Global Conference in Beverly Hills, California. “If you behave well, I will give you back the house.”
As many as 11 million troubled mortgages are weighing on the U.S. housing market, said Ranieri, who helped Salomon Brothers become Wall Street’s most profitable firm in the 1980s by packaging home loans into securities. Distressed sales made up 40 percent of transactions in March, the National Association of Realtors said April 20. Home prices fell 3.3 percent in February from a year earlier, according to the S&P/Case-Shiller measure of 20 cities.
I don’t understand how Ranieri’s idea can be described as a debt for equity swap (if you have to give it back, you don’t own it, do you?) but doubtless there’s some explanation.
Of much more interest than all this ephemeral financial stuff is the results of the NASA relativity test:
Gravity Probe B, built by Lockheed Martin Corp. (LMT) and designed by scientists from Stanford University near Palo Alto, California, measured how space and time are warped by gravitational bodies, a phenomenon called the geodetic effect. The probe launched in 2004 also analyzed frame-dragging, the way spinning objects pull space and time around them.
The effects were demonstrated by having Gravity Probe B point at a star, IM Pegasi, while orbiting Earth. If gravity didn’t affect space and time, the gyroscopes aboard the probe would point in the same direction forever during their orbit, as Isaac Newton had theorized. Instead, they showed tiny, measurable changes in the direction of their spin as Earth’s gravity tugged at them, as Einstein had predicted.
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The project was one of the longest-running efforts in the U.S. space agency’s history, beginning in 1963, and cost about $750 million, NASA spokesman Trent Perrotto said today in a telephone interview. The findings were the culmination of 49 years of work by [Stanford physicist Francis] Everitt, who came to Stanford in 1962 to help build the most precise gyroscope ever designed and produced, according to NASA.
Forty-nine years! I think we can allow Dr. Everitt a day off now, right? Then he can work on the Higgs boson.
It was a strong day in the Canadian preferred share market, with PerpetualDiscounts roaring ahead 42bp, FixedResets winnning 15bp and DeemedRetractibles gaining 14bp. The Performance Highlights table, while hardly lengthy, was comprised entirely of gainers. Volume was good.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0353 % | 2,437.0 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0353 % | 3,665.3 |
| Floater | 2.47 % | 2.26 % | 39,268 | 21.62 | 4 | -0.0353 % | 2,631.4 |
| OpRet | 4.86 % | 3.57 % | 61,053 | 1.19 | 9 | -0.0513 % | 2,419.4 |
| SplitShare | 5.20 % | -1.79 % | 74,968 | 0.61 | 6 | 0.0598 % | 2,499.2 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0513 % | 2,212.4 |
| Perpetual-Premium | 5.74 % | 5.62 % | 144,729 | 2.35 | 9 | 0.0000 % | 2,055.4 |
| Perpetual-Discount | 5.56 % | 5.59 % | 121,736 | 14.44 | 15 | 0.4245 % | 2,133.6 |
| FixedReset | 5.16 % | 3.39 % | 210,354 | 2.89 | 57 | 0.1467 % | 2,300.5 |
| Deemed-Retractible | 5.22 % | 5.01 % | 314,348 | 8.09 | 53 | 0.1381 % | 2,103.9 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| PWF.PR.P | FixedReset | 1.06 % | YTW SCENARIO Maturity Type : Call Maturity Date : 2016-03-01 Maturity Price : 25.00 Evaluated at bid price : 25.70 Bid-YTW : 3.79 % |
| BAM.PR.M | Perpetual-Discount | 1.08 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-05-04 Maturity Price : 21.52 Evaluated at bid price : 21.52 Bid-YTW : 5.59 % |
| GWO.PR.I | Deemed-Retractible | 1.09 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.40 Bid-YTW : 6.47 % |
| PWF.PR.L | Perpetual-Discount | 1.35 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-05-04 Maturity Price : 23.04 Evaluated at bid price : 23.25 Bid-YTW : 5.51 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| HSE.PR.A | FixedReset | 81,133 | Nesbitt crossed 50,000 at 25.70. YTW SCENARIO Maturity Type : Call Maturity Date : 2016-04-30 Maturity Price : 25.00 Evaluated at bid price : 25.70 Bid-YTW : 3.98 % |
| PWF.PR.F | Perpetual-Discount | 63,912 | Nesbitt crossed 60,000 at 23.81. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2041-05-04 Maturity Price : 23.55 Evaluated at bid price : 23.82 Bid-YTW : 5.54 % |
| MFC.PR.B | Deemed-Retractible | 59,037 | RBC crossed 39,200 at 21.81. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 21.67 Bid-YTW : 6.50 % |
| TRP.PR.B | FixedReset | 44,790 | Desjardins bought 10,700 from anonymous at 25.20 and crossed 17,700 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2020-07-30 Maturity Price : 25.00 Evaluated at bid price : 25.26 Bid-YTW : 3.80 % |
| RY.PR.A | Deemed-Retractible | 41,765 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 23.87 Bid-YTW : 4.99 % |
| MFC.PR.A | OpRet | 36,410 | RBC crossed 35,000 at 25.75. YTW SCENARIO Maturity Type : Soft Maturity Maturity Date : 2015-12-18 Maturity Price : 25.00 Evaluated at bid price : 25.70 Bid-YTW : 3.57 % |
| There were 41 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| CIU.PR.B | FixedReset | Quote: 27.89 – 28.35 Spot Rate : 0.4600 Average : 0.3299 YTW SCENARIO |
| TRI.PR.B | Floater | Quote: 23.05 – 23.75 Spot Rate : 0.7000 Average : 0.5767 YTW SCENARIO |
| PWF.PR.A | Floater | Quote: 23.49 – 23.83 Spot Rate : 0.3400 Average : 0.2193 YTW SCENARIO |
| PWF.PR.M | FixedReset | Quote: 26.76 – 27.00 Spot Rate : 0.2400 Average : 0.1666 YTW SCENARIO |
| BNS.PR.Z | FixedReset | Quote: 24.50 – 24.70 Spot Rate : 0.2000 Average : 0.1537 YTW SCENARIO |
| CU.PR.B | Perpetual-Premium | Quote: 25.37 – 25.64 Spot Rate : 0.2700 Average : 0.2241 YTW SCENARIO |
Just to speculate around the idea thrown by Lewis Ranieri, maybe the suggested restructuring of mortgages entails something along breaking down the mortgage debt (say 100) into Portion A which reflects the market value of the house (say 70) and Portion B which reflects the loss on the debt (i.e. for simplicity, assuming 100% of the market value of the house was financed by debt, the originally borrowed amount of the mortgage minus current market value of the house, i.e. 30). This part B can be called “Equity”.
So the bank tells the borrower to swap the Debt (the mortgage) for Equity (Portion B). This new contract takes the form of a lease (say a rental agreement) such that the borrower pays a monthly amount to continue living in the house and no obligation to pay anymore than Portion B for 7 years. If he pays the full amount of Portion B, the bank will let him enter into a mortgage for Portion A later on. Ultimately, maybe the bank maybe sells off Part B to a lease funding company who then enters into the lease with the borrower.
Benefits for the borrower? He has to live somewhere and it’s unlikely he buys somewhere else if he defaults, rather he will rent – so he pays a rental to the bank with an option to buy the property in the future. It also helps the borrower offset its negative credit history in the future (this new contract provides him with a mortgage in the future). And it’s likely that to incentivize the borrower to take this new contract the bank has to assume some loss of Portion B.
Benefits for the bank? Avoid recognition of the full amount of the loss when compared to the borrower defaulting (because the bank now has a lease for Portion B), and put more price pressure on the housing book on sale it already owns. Also, probably Portion A goes into some “strong quality” securitized vehicle to obtain cheap financing given that it is the real market value of the house. Finally, that should help banks lobby politicians.
I’m sure the idea is something like that, but I found it rather surprising yesterday when Mr. Google had no information at all for me regarding the details.
Another possibility is an “Islamic Mortgage” hybrid: Commencing with the situation as you describe it, the bank would immediately own 30% of the house, with the borrower owning 70%, financed by a conventional mortgage. If the house were ever to be sold, the bank would get 30% of the gross proceeds by virtue of its equity holding; that 30% could be sold to the borrower – or anybody else – at any time. Whether rent would be charged on the 30% is another question … but perhaps the bank might say that paying for property taxes, insurance and maintenance will be accepted in lieu of cash rent.