Category: Market Action

Interesting article in the WSJ regarding the changing life insurance business:

Prudential Financial Inc. is about to become the largest life insurance company in America by assets. But U.S. life insurance sales aren’t the biggest source of its profits.

Today, many Americans say they fear outliving their savings more than the premature death of a major breadwinner. And industry sales of individual life-insurance policies are down sharply since the mid-1980s. As a result, Prudential has transformed itself into an investing giant focused heavily on retirement-related products and services.
…
Up next, PGIM is making its first foray into ETFs, according to people familiar with the matter. The firm aims to start with two types of ETFs: actively managed fixed-income products, and so-called smart beta equity ETFs, which track the performance of non-market-capitalization-weighted indexes, these people said.
…
The industry shift away from life insurance is in part the result of the proliferation of mutual funds in the 1980s, which opened the door to stock-market investing by middle-income households through tax-advantaged savings plans. Before then “whole life insurance,” combining a death benefit with a tax-advantaged savings account, was a common way to save.

Basic term-life policies picked up some of the slack as savings plans proliferated. But many agents quit the business because commissions were relatively small, further depressing sales.

Click for Big

And there are housing woes even outside Canada:

In places such as New York and San Francisco, which offer the greatest array of high-paying jobs, rents and home prices have shot up beyond the reach of many young workers. The squeeze has even affected the Bay Area’s amply compensated technology workers, whose salaries often aren’t enough to offset the rapidly rising rents and housing costs.

Technology workers who own a home in Seattle, by contrast, can expect to have about $2,000 more of disposable income left over each month after paying housing costs and taxes than those who live in San Francisco, according to a new analysis by Zillow and LinkedIn Corp. released Thursday.

Seattle tech workers who own their homes keep an average of 59% of their incomes after housing and tax costs, while Bay Area tech workers pocket just 37%, according to the study. In Austin, workers hold on to 54% of their incomes if they rent and 62% if they own.

But Ontario is mulling the destruction of the condominium business, given the success of rent control in destroying the apartment market:

Ontario is developing “substantive rent control reform,” the housing minister said Thursday, as the provincial NDP push for tenants in newer units to have the same protections as all other renters.

Currently, annual rent increase caps only apply to residential buildings or units constructed before November 1991. This year the rent for those tenants could be increased by up to 1.5 per cent without the landlord applying to the Landlord and Tenant Board.
…
Ontario Housing Minister Chris Ballard said it’s “unacceptable” that many Ontarians are seeing dramatically increasing housing costs.

“My staff are already developing a plan to address unfair rises in rental costs by delivering substantive rent control reform in Ontario as part of an ongoing review of the Residential Tenancies Act,” Ballard said in a statement.

“In the days ahead, we’ll share more details about a transformative plan that will allow Ontarians, no matter their budget or community, to realize their dream of having an affordable place to call home.”

Today’s big news was the FOMC release:

In view of realized and expected labor market conditions and inflation, the Committee decided to raise the target range for the federal funds rate to 3/4 to 1 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a sustained return to 2 percent inflation.

In determining the timing and size of future adjustments to the target range for the federal funds rate, the Committee will assess realized and expected economic conditions relative to its objectives of maximum employment and 2 percent inflation.

However, Yellen was dovish after the meeting:

Speaking to reporters after the Fed’s quarter percentage-point move on Wednesday, Yellen said the central bank was willing to tolerate inflation temporarily overshooting its 2 percent goal and that it intended to keep its policy accommodative for “some time.”

“The simple message is the economy’s doing well. We have confidence in the robustness of the economy and its resilience to shocks,” she said.

As a result, the Fed is sticking with its policy of gradually raising interest rates, Yellen said. In their first forecasts in three months, Fed policy makers penciled in two more quarter-point rate increases this year and three in 2018, unchanged from their projections in December.

Today’s decision “does not represent a reassessment of the economic outlook or of the appropriate course for monetary policy,” the Fed chief said.
…
Asked about the potential for a fiscal boost, Yellen made clear the Fed is still waiting for more concrete policy plans to emerge from the Trump administration before adapting monetary policy in reaction.

“There is great uncertainty about the timing, the size and the character of policy changes that may be put in place,” Yellen said. “I don’t think that’s a decision or set of decisions that we need to make until we know more about what policy changes will go into effect.”

It’s clear that markets were expecting exciting hawkishness:

The yield on 10-year Treasury notes held at 2.49 percent after tumbling 11 basis points on Wednesday.

PerpetualDiscounts now yield 5.21%, equivalent to 6.77% interest at the standard conversion factor of 1.3x. Long corporates now yield about 4.15%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 260bp, significantly narrower than the 270bp reported March 8.

PerpetualDiscounts now yield 5.23%, equivalent to 6.80% interest at the standard equivalency factor of 1.3x. Long corporates now yield just a bit under 4.1%, so the pre-tax interest-equivalent spread is now about 270bp, unchanged from the March 1 report.

Interesting piece in the WSJ about policy rates and inflation:

On Friday, five top economists presented a paper at a monetary-policy conference saying the main gauges policy makers typically use to understand inflation—such as “slack” in the labor market—don’t actually explain it.

What’s more, the last several years of extraordinary monetary policy have shaken a theory that had held sway for decades in financial markets: American economist Milton Friedman’s view that inflation is ultimately a function of how much money a central bank prints.
…
In fact, economists who study central-bank operations broadly believe that the amount of money created is a consequence of rising prices, not the cause. That is, if the price of apples goes from $1 to $2, the central bank will eventually need to issue more money to prevent money from getting scarce and interest rates from skyrocketing.
…
The reality check for economic theory goes further: Surveys show that lower interest rates aren’t a key factor in the decisions of households and businesses to take on credit and spend more.

I don’t know about that last quoted paragraph. In Canada there certainly seems to be a correlation between interest rates and the amount of mortgage debt consumers are willing to assume and I presume that in the absence of special factors this will be universally true.

In the US, of course, those special factors have been tighter credit in general and a bad experience with real-estate during the Credit Crunch. And I suggest it’s reasonable to advance the argument that retail investment in housing will not usually spark general inflation since houses are neither a productive nor a consumptive asset – they just sit there (at least over the time horizon of the purchaser).

The paper at issue, titled Deflating Inflation Expectations: The Implications of Inflation’s Simple Dynamics, is by Stephen G. Cecchetti, Michael E. Feroli, Peter Hooper, Anil K Kashyap and Kermit L. Schoenholtz; the abstract is provocative:

This report examines the behavior of inflation in the United States since 1984 (updating Cecchetti et al. (2007)). Over this period, the change in inflation is negatively serially correlated, and the change in inflation is best predicted by a statistical model that includes only information from the two most recent quarters. We find that the level of inflation fluctuates around a slowly changing trend that we call the local mean of inflation. Few variables add extra explanatory power for inflation once the local mean is taken into account. This local mean is itself well characterized by a random walk. Labor market slack has a statistically significant, but quantitatively small, effect on the local mean and inflation expectations have no effect. Some financial conditions that are influenced by monetary policy have larger effects on the local mean. Concretely, this means that one‐off moves in labor market slack or inflation expectations that are not mirrored in broader indicators of inflation pressures are unlikely to be predictive of changes in trend inflation.

John Crow and Paul Volcker must be beside themselves with rage – but we’ll just have to wait until the monetarists make their counterattack for the next installment in this saga.

The WSJ has another interesting story today, discussing the shortage of truck drivers. How do you fix a problem? Throw money at it!

Drivers typically receive training from big trucking companies or schools affiliated with them. Those who become independent contractors sign lease-to-own deals to purchase their vehicles, often with those same companies. But the terms are onerous, and drivers owe so much that they may end up working 70 or 80 hours a week just to pay back what they owe and cover expenses such as fuel and insurance. Drivers are suing some companies that use this model, saying they should be classified as employees rather than contractors.

Even those working as employees have a hard time making ends meet, partly because they are only paid for the miles they drive, not time waiting to load and unload their rigs or sitting in traffic. [sociologist and fellow at the University of Pennsylvania’s Robert A. Fox Leadership Program] Mr. [Steve] Viscelli recounts a 16-hour day spent crawling through traffic in the New York area, only to get stuck at a New Jersey rail yard for the night. That day he drove 215 miles and earned $56.
…
The industry could fix its labor shortage, Mr. Viscelli says, by raising pay enough to compensate for the hardships of the job or improving the terms for independent contractors. In 2015, heavy and tractor-trailer truck drivers earned a median wage of $40,260, according to the Bureau of Labor Statistics. Mr. Viscelli says that number masks the reality that most drivers work far more than 40 hours a week to get to that income.

Wages have been rising over the past few years and some firms offer signing bonuses, according to ATA chief economist Bob Costello. Such measures helped bring down industrywide turnover from nearly 100% in 2012 to just over 90% in 2014. More recently, driver turnover has declined to around 80% due to less freight being shipped.