Category: Market Action

One thing struck me when reading an account of how some Syrian refugees are doing, now that the first year of special supports has come to an end:

A few among the 28 government-assisted families who have settled in Leaside Towers have found work in the neighbourhood – some frying up halal chicken at the Popeyes, or stocking shelves at Iqbal Halal Market. But some see a disincentive to taking a minimum-wage job: In Ontario, if you are on Ontario Works and get a job, half your earnings over $200 are deducted from your welfare cheque. As they see it, they’d be bringing home so little money that they’re better off using that time to focus on improving English, or running their households, which can consume much of their day.

half your earnings over $200 are deducted? Well of course they’re better off using that time to focus on improving their English or running their households. That’s a complete no-brainer and returns us to a question I have often discussed on PrefBlog, the effective tax rate for low earners.

I advocate a guaranteed minimum income – administered through the tax system, as a refundable tax credit – with more rational marginal tax rates … if you make $20,000 per year, you should pay a tax rate of – say – 10% on your next $1,000, regardless of where the $20,000 comes from. Only in this way can we really say we are making an effort to help people get out of the poverty trap. When we tax that $1,000 at 50%+, we’re clearly just chanting slogans and affirming our moral superiority.

Where’s the incentive to volunteer for an extra shift? Where’s the incentive to take a risk and move in order to get a slightly better job? Nowhere, that’s where. It’s craziness.

So it was with interest that I read today of an Ontario pilot project with respect to basic income:

About 4,000 recipients will be randomly chosen from the three regions. One group will start receiving the so-called basic income as soon as this summer, and the remainder will be part of the control group, which will not receive any payments, according to a provincial spokesman. A single person could receive up to $16,989 per year. A couple could get up to $24,027 annually.
…
However, if an individual is receiving income from a job, the government will deduct half of his or her earned income.

Utterly moronic. I have no words to express my disgust at the cruelty of those who would even consider slapping the poor with a 50%+ tax rate – or perhaps it is their cynical machinations to ensure the failure of the pilot programme that disgusts me. I’m not sure how explicit taxes will work, but I suspect that in practice the “+” in “50%+” will be a significant number – particularly when more subtle taxes, like disqualification from ‘geared to income’ pricing, are considered.

There were two charts I found particularly interesting in a Globe “Explainer” regarding Ontario’s proposed housing legislation.

The first provides a historical count of rental units by type:

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That’s as good an explanation as any of the benefits that rent control brings.

The second is a historical accounting of individuals owning multiple properties in the region:

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That’s as good an explanation as any of the effect of poor stock market returns on the housing market; an effect which is exacerbated by low interest rates.

Meanwhile, it was a pretty nasty day for preferred shares. There was no major change in bond yields today, so I suppose we’ll just have to put this one down as a delayed reaction. TXPR was rebalancing today; it is obvious that this might lead to high volume, but an influence on direction is less clear.

The TXPR Total Return Index is now slightly negative for the month. The smoothness of today’s decline makes me suspect the day’s action was due to selling from one big player … but that is merely speculation!

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So, what the Liberal government of Ontario has done for electricity, they are now doing for housing:

Ontario’s Fair Housing Plan introduces a comprehensive package of measures to help more people find affordable homes, increase supply, protect buyers and renters and bring stability to the real estate market.

The roots of the housing price boom are:

• low interest rates
• an explosion of CMHC guarantees, and
• unsatisfactory stock market returns

I don’t see anything in the plan that addresses any of that.

So the Toronto real estate market is on fire and, as usual, there are those who consider this a bad thing. So far we’re blaming foreigners and speculators … we only need to bring short sellers into the mix to complete the trifecta! But I found the following chart in an otherwise unexceptional puff-piece to be fascinating:

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PerpetualDiscounts now yield 5.08%, equivalent to 6.60% interest at the standard equivalency factor of 1.3x. Long corporates now yield a little under 3.75% so the pre-tax interest equivalent spread is now about 285bp, a significant widening from the 275bp reported April 12.

I missed this drone news from December:

7-Eleven, one of the world’s largest chains of convenience stores, has completed 77 delivers via drone to customers in Reno, Nevada.

The deliveries were made in collaboration with Flirtey, a commercial drone startup that began working with the retail chain over the summer. In November, Flirty made regular deliveries from a 7-Eleven store in Reno to a dozen select customers who used a custom app to place orders, the company said in a release Tuesday.

And Amazon recently delivered sunscreen!

Amazon completed its first public demonstration of a Prime Air drone delivery in the U.S. earlier this week, ferrying sunscreen to attendees at an Amazon-hosted conference in Palm Springs, Calif.

The drone delivery was filmed by an attendee of the invite-only MARS 2017 conference (MARS stands for machine learning, automation, robotics and space exploration). It marks the first time one of the online retailer’s autonomous aircraft was flown for the public in the U.S. outside of Amazon’s private property.

Global bonds were strong today and Canada bonds were no exception:

Canadian bonds rose, sending yields down to levels seen last year, as fresh concerns about the global recovery raised questions about the sustainability of Canada’s growth.

Debt rallied worldwide on Tuesday amid fading confidence in the ability of the U.S. administration to push through growth-supporting policies and mounting geopolitical concerns over North Korean missile tests and the outcome of a looming French election. In Canada, traders looked past a flurry of positive economic data and comments last week from Bank of Canada Governor Stephen Poloz, who took an interest rate cut off the table.

The yield on Canada’s two-year federal government note fell below 0.7 percent for the first time since November, while the rate on the country’s 10-year bond slipped eight basis points, the steepest decline since June, to a five-month low of 1.44 percent.

In an exclusive PrefBlog interview with Fantastic Four Investment Management, portfolio manager The Thing stated:

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PerpetualDiscounts now yield 5.06%, equivalent to 6.58% interest at the standard equivalency factor of 1.3x. Long corporates now yield just a bit more than 3.8% so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 275bp, a slight (and perhaps spurious) widening from the 270bp reported March 29.

Interesting story about the effects of mortgage rule changes in the UK – there are some who have borrowed on a floating rate mortgage. This carries a higher rate than a two-year mortgage – for reasons which I do not understand, since the Gilt curve is normal – and they want to switch, but are not allowed to do so because they no longer qualify for a fixed rate mortgage. They’re called mortgage prisoners:

The customer, who asked not to be named, had been stranded on Bank of Scotland’s standard variable rate (SVR) for over four years. He paid thousands of pounds a year in extra payments because the bank refused his requests to move to a cheaper, fixed-rate deal, and fell into arrears at some points.

While fixed mortgage rates have fallen in line with the Bank of England base rate, lenders’ SVRs have remained flat or increased (see chart, below).

Thousands of people who took out mortgages before the financial crisis found they were barred from switching to new fixed-rate mortgages when existing deals ended.

Lenders said rules introduced following the crisis, known as the Mortgage Market Review, meant existing customers now failed stricter “affordability” tests. This led to the bizarre situation where customers, known as mortgage prisoners, were told they couldn’t afford to switch to cheaper rates.

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I don’t understand why the inversion exists, given the current gilt curve:

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But I have to say one thing … only an unholy alliance of bankers and regulators can produce the phrase ‘you can’t afford to halve your mortgage payments!’