A nice piece in the Globe today about Canada’s rentier economy:
We have to think about what most people rely on nowadays to support themselves and secure their futures. And the answer is assets – housing assets in particular. It’s no longer our salaries or incomes, nor even our pensions. Rather, Canada has become an asset-based economy in which it’s now a viable choice to buy a house far above your income threshold and sit tight – renting out rooms to pay the mortgage you can’t afford on your own income alone – waiting for its value to appreciate.
But there are perils to relying on this sort of economy for our future. An asset-based economy is underpinned by continuous asset price inflation alongside the suppression of income inflation, meaning a rising debt-to-income ratio is built in.
Another example of the asset based nature of our economy is the banks.
The banks now basically control the entire Canadian financial system – rather than simply being an important part of it – with their oligopoly protected from foreign competition by legislation and, to a slightly lesser extent, from new domestic competition by regulation.
A huge chunk of the Toronto Stock Exchange index is comprised of banks. with over 35% of the S&P/TSX 60 index being financial players; compared to less than 15% of the S&P 500.
And, I suggest, any attempt to introduce any real competition to the Canadian financial system – loosening Bank Act restrictions of foreign ownership and restricting bank encroachment on asset management and insurance – would be met by howls of outrage from the rent-seekers who invest in them.
And it appears that Mohamed A. El-Erian is as concerned as I am (see September 20) about the Fed response to the repo blip (from his Facebook page):
The longer this continues, and it will for now, the more it will be seen by investors as (pick your term):
- stealth QE,
- QE lite,
- backdoor QE,
- etc….
The big question is whether, for markets conditioned and empowered to believe they can force the hands of the Federal Reserve, this will be seen as a prelude to the formal resumption of a QE program.
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| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
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| 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 | 1.5575 % | 1,932.1 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 1.5575 % | 3,545.4 |
| Floater | 6.24 % | 6.39 % | 51,847 | 13.35 | 4 | 1.5575 % | 2,043.2 |
| OpRet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.1297 % | 3,377.2 |
| SplitShare | 4.67 % | 4.61 % | 55,914 | 4.01 | 7 | -0.1297 % | 4,033.1 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.1297 % | 3,146.8 |
| Perpetual-Premium | 5.61 % | -18.22 % | 67,565 | 0.09 | 6 | 0.1772 % | 2,990.1 |
| Perpetual-Discount | 5.41 % | 5.56 % | 65,088 | 14.50 | 28 | 0.0950 % | 3,171.0 |
| FixedReset Disc | 5.56 % | 5.51 % | 175,427 | 14.39 | 73 | 0.0672 % | 2,062.6 |
| Deemed-Retractible | 5.22 % | 5.80 % | 75,332 | 7.90 | 27 | 0.0047 % | 3,152.9 |
| FloatingReset | 4.56 % | 6.73 % | 60,503 | 7.95 | 3 | -0.4924 % | 2,336.9 |
| FixedReset Prem | 5.24 % | 3.92 % | 127,961 | 1.58 | 14 | 0.0028 % | 2,586.5 |
| FixedReset Bank Non | 1.98 % | 4.28 % | 84,939 | 2.28 | 3 | 0.0974 % | 2,661.7 |
| FixedReset Ins Non | 5.51 % | 8.07 % | 105,684 | 7.91 | 21 | -0.2886 % | 2,095.7 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| SLF.PR.J | FloatingReset | -1.84 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 12.77 Bid-YTW : 11.13 % |
| IAF.PR.G | FixedReset Ins Non | -1.58 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 18.70 Bid-YTW : 7.69 % |
| SLF.PR.G | FixedReset Ins Non | -1.47 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 12.76 Bid-YTW : 10.73 % |
| MFC.PR.H | FixedReset Ins Non | -1.40 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.41 Bid-YTW : 7.03 % |
| IAF.PR.I | FixedReset Ins Non | -1.36 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 18.90 Bid-YTW : 7.96 % |
| PWF.PR.P | FixedReset Disc | -1.28 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-09-23 Maturity Price : 12.36 Evaluated at bid price : 12.36 Bid-YTW : 6.03 % |
| BAM.PR.X | FixedReset Disc | -1.09 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-09-23 Maturity Price : 12.70 Evaluated at bid price : 12.70 Bid-YTW : 6.16 % |
| MFC.PR.C | Deemed-Retractible | -1.00 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 20.75 Bid-YTW : 6.87 % |
| CU.PR.D | Perpetual-Discount | 1.00 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-09-23 Maturity Price : 22.93 Evaluated at bid price : 23.22 Bid-YTW : 5.31 % |
| BAM.PR.B | Floater | 1.02 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-09-23 Maturity Price : 10.86 Evaluated at bid price : 10.86 Bid-YTW : 6.39 % |
| GWO.PR.R | Deemed-Retractible | 1.11 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.80 Bid-YTW : 5.98 % |
| CM.PR.R | FixedReset Disc | 1.18 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-09-23 Maturity Price : 21.40 Evaluated at bid price : 21.40 Bid-YTW : 5.58 % |
| SLF.PR.I | FixedReset Ins Non | 1.33 % | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2030-01-31 Maturity Price : 25.00 Evaluated at bid price : 18.25 Bid-YTW : 7.93 % |
| HSE.PR.C | FixedReset Disc | 1.47 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-09-23 Maturity Price : 16.61 Evaluated at bid price : 16.61 Bid-YTW : 6.85 % |
| TD.PF.A | FixedReset Disc | 1.60 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-09-23 Maturity Price : 17.15 Evaluated at bid price : 17.15 Bid-YTW : 5.38 % |
| BAM.PF.J | FixedReset Disc | 1.78 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-09-23 Maturity Price : 23.20 Evaluated at bid price : 24.62 Bid-YTW : 4.76 % |
| BAM.PR.K | Floater | 2.47 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-09-23 Maturity Price : 10.80 Evaluated at bid price : 10.80 Bid-YTW : 6.43 % |
| PWF.PR.A | Floater | 2.59 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-09-23 Maturity Price : 11.90 Evaluated at bid price : 11.90 Bid-YTW : 5.89 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| RY.PR.M | FixedReset Disc | 95,395 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-09-23 Maturity Price : 18.15 Evaluated at bid price : 18.15 Bid-YTW : 5.55 % |
| PVS.PR.E | SplitShare | 69,750 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-10-31 Maturity Price : 25.00 Evaluated at bid price : 25.46 Bid-YTW : 4.97 % |
| CU.PR.I | FixedReset Prem | 66,500 | YTW SCENARIO Maturity Type : Call Maturity Date : 2020-12-01 Maturity Price : 25.00 Evaluated at bid price : 25.71 Bid-YTW : 2.31 % |
| TD.PF.E | FixedReset Disc | 45,650 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-09-23 Maturity Price : 19.45 Evaluated at bid price : 19.45 Bid-YTW : 5.52 % |
| BNS.PR.Y | FixedReset Bank Non | 39,200 | YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2022-01-31 Maturity Price : 25.00 Evaluated at bid price : 24.44 Bid-YTW : 3.43 % |
| HSE.PR.G | FixedReset Disc | 35,800 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2049-09-23 Maturity Price : 17.50 Evaluated at bid price : 17.50 Bid-YTW : 7.05 % |
| There were 23 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| CM.PR.Q | FixedReset Disc | Quote: 17.93 – 18.49 Spot Rate : 0.5600 Average : 0.3832 YTW SCENARIO |
| CM.PR.P | FixedReset Disc | Quote: 16.14 – 16.61 Spot Rate : 0.4700 Average : 0.3103 YTW SCENARIO |
| BNS.PR.Y | FixedReset Bank Non | Quote: 24.44 – 24.86 Spot Rate : 0.4200 Average : 0.3041 YTW SCENARIO |
| BMO.PR.C | FixedReset Disc | Quote: 22.00 – 22.30 Spot Rate : 0.3000 Average : 0.1983 YTW SCENARIO |
| MFC.PR.H | FixedReset Ins Non | Quote: 20.41 – 20.74 Spot Rate : 0.3300 Average : 0.2305 YTW SCENARIO |
| TRP.PR.F | FloatingReset | Quote: 13.25 – 13.51 Spot Rate : 0.2600 Average : 0.1724 YTW SCENARIO |
we are experiencing the end result of many forces , free trade (not fair trade) took many high paid manufacturing jobs out of the economy . salaries never kept up with inflation . as int rates went down housing prices went up because people invested in them to get a return as landlords (instead of the 1% gic from the bank). if int rates ever go up house prices will come down ,lots of people will go bankrupt . the gov takes everything but the blame . ., as far as the fed and qe goes , i think the fed will have to go to a permanent qe plan to keep the world economy liquid .
Our entire economy is based on rent seeking. Banking, insurance, utilities and telecom comprise about 80% of TSX. And these are all oligopolistic or monopolistic businesses. Add CP and CN Railways, along with pipelines and you end up with pretty much the entire collection of Canadian blue chips as rent seekers.
And they are very good at this. All these guys have been around for decades, if not more than a century.
And since startups have to fight so much regulation and industry barries, along with regulatory capture mechanisms, there’s no real innovation. This is Canada.
But I tell you what’s happening in the US is following the Canadian pattern.
Tech oligopolies are now a reality and the big guys are now actively squishing the little guys. Watch how Slack, Netflix and Spotify fare in the coming months and years. Google, Amazon, Microsoft, Apple and Facebook run their respective domains and completely own their verticals. Newcomers can’t do much- either they cave in and sell or fight a losing battle. Just today Kik shut down its messgener app. Why? Can’t compete with Facebook or WhatsApp.
US airlines have also consolidated massively and there are only three or four major US airlines left.
Ask Warren Buffett what kinds of businesses he wants to own and he’d say the Canadian kind i.e. Monopolies and Oligopolies. No wonder, Mr. Buffett who used to despise airlines, bought airlines a few years ago. Reason? They are becoming oligopolies with massive pricing power.
Ask Peter Thiel who wrote Zero to One, and his advice is the same. Aim for a monopolistic position.
Why do Visa and Mastercard support such market caps? Oligopolies.
So Canadian businesses really act as case studies on how to run a rent seeking economy. The US economy is slowly moving in that direction.
Is this ideal? No.
Who likes this? Not entrepreneurs, but investors, what more can you ask for?
Oligopolies with almost implicit bail out built into the structure.
Can we imagine RBC blowing up? Or even CIBC? It’d be too much for Canada to contain. Can’t happen. Manulilfe? We saw how they rewrote the laws retroactively to save them.
Worldwide, we are witnessing the same stuff- crony, state sponsored capitalism with massive support by central banks.
Just to illustrate the blue chip rent seekers of Canada. Enbridge has contracts with oil producers that are signed for as long as 100 years. Imagine that. No wonder these guys have little difficulty in selling a 50 or 75 year bond.
And yet that is what we are all doing here, buying pref shares in monopolies that pay us rent!
I think the huge portion of the TSX 60 being comprised of financial companies is caused by the almost complete absence of successful non-financial companies in Canada.
Canada has had some successful non-financial companies in the past but they either blow up or they are bought out. As an investor I would like to diversify my investments to a great degree but I have trouble finding many non-financial companies I am willing to invest in for the long term.