Category: Market Action

Assiduous Readers will remember that I have a long-standing concern about means-tested benefits and their cumulative effective marginal tax rate, which can be so high as to destroy any incentive for the recipient to earn any extra money at all. Bloomberg points out that there are also asset tests:

Susanne Brasset has $5 in her bank account. She’s scared to save more.

Brasset, a 39-year-old freelance photographer in Denver, has cerebral palsy, which limits her ability to work. To pay her bills, she relies on Social Security, which she gets because of her disability.

But the program monitors her bank accounts to make sure she’s not putting away too much money. With more than a few thousand in the bank, she’d be disqualified for the program, as well as for Medicaid and other crucial benefits. Unable to plan for the future, Brasset said her finances put her in a “constant state of anxiety and fear.”

“There’s more money I could be making,” she said. “But I’m discouraged by all the rules I need to adhere to.”

Brasset is caught in a bind familiar to many people with disabilities. Their well-being relies on government benefit programs, but these programs impose strict limits on how much recipients can earn and save. Rules intended to bar freeloaders end up keeping disabled people in a permanent state of poverty, unable to put money away for emergencies, retirement, and other life goals.

One of the basic precepts of foreign exchange markets is the concept of hedging. If you buy a ten-year forward contract on another currency, the rate will be determined by the spot rate as modified by the difference in the ten-year yields of government bonds in the two currencies. That’s the theory, anyway; in practice, the difference between the theoretical rate and the actual rate is the basis:

That quirk means the longstanding notion of the U.S. as a respite from negative yields in Japan and Europe is little more than an illusion. And with everyone from Jeffrey Gundlach to Bill Gross warning of a bubble in bonds, it could ultimately upend the record foreign demand for Treasuries, which has underpinned their seemingly unstoppable gains in recent years.

“People like a simple narrative,” said Jeffrey Rosenberg, the chief investment strategist for fixed income at BlackRock Inc., which oversees $4.6 trillion globally. “But there isn’t a free lunch. You can’t simply talk about yield differentials without talking about currency differentials.”
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In a strange twist, the fact that yields on 10-year Treasuries are still way higher than those in Japan or Germany is part of the reason foreigners are having such a hard time actually profiting from the difference. Negative interest rates outside the U.S. have caused a surge in demand for dollars and dollar assets, pushing up the cost to get into and out of the greenback at the same exchange rate to levels rarely seen in the past.

Ten-year yields in the U.S. are currently 0.23 percentage point below a basket of bonds from Australia, France, Germany, Italy, Japan, Spain and Switzerland on a hedged basis, versus 1.4 percentage points above on an unhedged basis, according to data compiled by BlackRock. At the start of the year, hedged Treasuries yielded over a half-percentage point more.

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Georgi Kantchev, Christopher Whittall and Miho Inada write a good piece in the WSJ titled Are Negative Rates Backfiring? Here’s Some Early Evidence:

Recent economic data show consumers are saving more in Germany and Japan, and in Denmark, Switzerland and Sweden, three non-eurozone countries with negative rates, savings are at their highest since 1995, the year the Organization for Economic Cooperation and Development started collecting data on those countries. Companies in Europe, the Middle East, Africa and Japan also are holding on to more cash.

Economists point to a variety of other possible factors confounding central-bank policy: Low inflation has left consumers with more money to sock away; aging populations are naturally more inclined to save; central banks themselves may have failed to properly explain their actions.

But there is a growing suspicion that part of problem may be negative rates themselves. Some economists and bankers contend that negative rates communicate fear over the growth outlook and the central bank’s ability to manage it.

“People only borrow and spend more when they are confident about the future,” says Andrew Sheets, chief cross-asset strategist at Morgan Stanley. “But by going negative, into uncharted territory, the policy actually undermines confidence.”

When BC imposed its 15% tax on foreign real estate buyers, I think they did it with the deliberate intention of creating uncertainty – otherwise, they would have allowed deals struck in good faith prior to the deadline to close under the old rules. Now the chickens are looking for a place to roost:

At least 427 deals are likely to collapse due to the new measure, according to Dan Morrison, president of the Real Estate Board of Greater Vancouver, citing responses from 27 brokers to an e-mail inquiry. The group didn’t calculate the value of those sales, though they would be worth about C$404-million ($307-million) based on the average purchase by a foreign buyer of C$946,945.

That may just be the tip of the iceberg.

“It’s a domino effect,” said Elton Ash, Western Canada regional executive vice president for Re/Max Holdings Inc. Not only will foreign buyers be hit but also Canadians who had contracts to sell and had already put offers on their next house, he said. Morrison said the effects could take years to play out given some deals involve the sales of condos still being built.
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The new tax violates several treaties and agreements that Canada holds with at least 28 other countries, including the U.S. under the North American Free Trade Agreement, according to Barry Appleton, managing partner of law firm Appleton & Associates, who specializes in international law and has launched claims in Canada under NAFTA.

Jobs, jobs, jobs!

Payrolls climbed by 255,000 last month, exceeding all forecasts in a Bloomberg survey of 89 economists, following a 292,000 gain in June that was a bit larger than previously estimated, a Labor Department report showed Friday. The jobless rate held at 4.9 percent as many of the people streaming into the labor force found jobs.
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The labor force participation rate, which indicates the share of working-age people who are employed or looking for work, increased to 62.8 percent from 62.7 percent.

Wage growth offered more promising signs of acceleration, with average hourly earnings rising a more-than-forecast 0.3 percent from a month earlier, the most since April, to $25.69. The year-over-year increase was 2.6 percent in July, the same as in June.

The average work week for all workers also increased by 6 minutes to 34.5 hours in July from 34.4.

Meanwhile, in the frozen North:

Canada’s economy lost 31,000 jobs in July, due to a big drop in public administration positions as well as declines in Ontario and among younger workers.

Full-time work plunged by 71,000 spots and part time employment rose by 40,000.

The jobless rate rose to 6.9 per cent from 6.8 per cent in June, Statistics Canada said in its monthly labour report released on Friday.

Meanwhile, there are those who are frightened that foreigners might want to buy what we’re selling:

Realtors say it’s still too early to tell how much the B.C. government’s recent 15-per-cent tax on Vancouver-area residential properties purchased by people who aren’t permanent residents will fuel demand for Toronto housing. There are concerns the tax will lead foreign buyers to purchase homes in the GTA market instead.
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The province’s tax adds another layer of angst to the Toronto market, already in the midst of double-digit price gains, fierce bidding wars and what the local real estate board called the “troubling trend” of a shrinking supply of resale homes on the market.

Unease has been growing over skyrocketing real estate prices in both markets. The Bank of Canada recently issued warnings about unsustainable growth, while the federal government has struck a working group to issue recommendations on how to make Vancouver and Toronto’s housing more affordable.

On July 26 I passed on some support for the thesis that it wasn’t trade that was destroying jobs, it was tech. And now George Anders of Forbes argues that tech isn’t all that bad:

2.Tech’s positive impact on employment is much more striking if we also look at a wide range of white-collar professions where software advances improve individual workers’ productivity to the point that demand for their services soars.

3.A case in point: market research. Turn the clock back to 2010, when cheap, efficient services such as Qualtrics and SurveyMonkey weren’t yet ubiquitous. The U.S. got by with just 262,000 market research analysts and marketing specialists then. Splash in new technology that puts online polling and digital marketing within reach of everyone, and — voila! Employment in this category leaps 93%, to more than 506,000.

4.Another example of software’s ability to generate jobs: event planners. If you need to stuff envelopes and make dozens of phone calls, full-scale event planning is a luxury that only rich people (and Jennifer Lopez’s clients) can afford. Digitize everything, and opportunities increase faster than you can say: “Come to our Thursday night meetup.” Employment in this category has climbed 54%, to 87,400, with the creation of 31,000 net new jobs.

Meanwhile, it appears that vegan food startup Hampton Creek Inc. has been naughty:

In late 2014, fledgling entrepreneur Josh Tetrick persuaded investors to plow $90 million into his vegan food startup Hampton Creek Inc. Tetrick had impressed leading Silicon Valley venture capital firms by getting his eggless Just Mayo product into Walmart, Kroger, Safeway, and other top U.S. supermarkets within about three years of starting his company.

What Tetrick and his team neglected to mention is that the startup undertook a large-scale operation to buy back its own mayo, which made the product appear more popular than it really was. At least eight months before the funding round closed, Hampton Creek executives quietly launched a campaign to purchase mass quantities of Just Mayo from stores, according to five former workers and more than 250 receipts, expense reports, cash advances and e-mails reviewed by Bloomberg. In addition to buying up hundreds of jars of the product across the U.S., contractors were told to call store managers pretending they were customers and ask about Just Mayo.
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“We need you in Safeway buying Just Mayo and our new flavored mayos,” Caroline Love, Hampton Creek’s then director of corporate partnership, wrote in an April 2014 e-mail to contract workers known as Creekers. “And we’re going to pay you for this exciting new project! Below is the list of stores that have been assigned to you.” Love’s memo also referenced a key competitor: “The most important next step with Safeway is huge sales out of the gate. This will ensure we stay on the shelf to put an end to Hellmann’s factory-farmed egg mayo, and spread the word to customers that Just Mayo is their new preferred brand. :)”

So the key takeaways, as they’re called in these degenerate days, are:

• Never trust a vegetarian
• Especially, never trust anybody who sells “mayo” without eggs in it.

Because that’s what they tried to do:

Hampton Creek Foods Inc., the healthy-food startup backed by investors including Bill Gates, can’t refer to its vegan-friendly sandwich spread as mayonnaise because it doesn’t have eggs in it, U.S. regulators said.

The company’s Just Mayo and Just Mayo Sriracha also contain ingredients that “are not permitted by the standard of identity for mayonnaise, such as modified food starch,” the Food and Drug Administration said in a warning letter to Hampton Creek, whose investors also include Silicon Valley luminaries Peter Thiel and Vinod Khosla. The letter was dated Aug. 12 and was posted online Tuesday.

“The use of the term ‘mayo’ in the product names and the image of an egg may be misleading to consumers because it may lead them to believe that the products are the standardized food, mayonnaise,” the FDA said.

It looks like Carney has new instructions:

In what one bank dubbed a “sledgehammer stimulus,” the BoE cut interest rates 25 basis points to 0.25 per cent and said it would buy 60 billion pounds ($79-billion) of government bonds with newly created money over the next six months.

It also launched two schemes, one to buy 10 billion pounds of high-grade corporate debt and another – potentially worth up to 100 billion pounds – to ensure banks keep lending even after the rate cut.
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Finance minister Philip Hammond welcomed the rate cut and said he and Carney had “the tools we need to support the economy as we begin this new chapter and address the challenges ahead.”

Bloomberg published some vignettes of those affected by the Vancouver property bubble:

One of those benefiting is a luxury car dealership run by Caleb Kwok, 37, general sales manager at Vancouver’s MCL Motor Cars. It’s selling Bentleys, Jaguars, Aston Martins and Range Rovers so fast that it has had to extend its hours and boosted staff by nearly a third.

“For not being a real big-time city, there sure are a lot of luxury cars in Vancouver,” Kwok says as he walks around the downtown showroom where a special edition, C$250,000 Range Rover SVAutobiography with two-tone paint, reclining rear seats, and tray tables for drinks is about to be driven off by a customer.
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She listed it in April for C$1.288 million, appealing to local Chinese buyers with the lucky number eight. Within 24 hours, four bids came in. They sold within just a few days to a young family for C$1.5 million, no conditions.

“It was surreal,” the retired Air Canada flight attendant said from a boat near her new home in Qualicum Beach, a town of 10,000 people on Vancouver Island a 1-1/2 hour-ferry ride from the city. “It happened so fast. You can’t believe how many people have done the same—moved to Qualicum and the islands. People are flooding in from the mainland with cash in their pocket.”

She bought her new house for less than half of what she got for her old one, part of the flow of “halfers” from Vancouver, as brokers call them. The new property is double the size at 4,000 square feet and has five bedrooms, a view of the water, and half an acre of garden.

And the Canadian economy is getting more dependent upon a distorted housing market:

Canada is in the midst of one of its weakest expansions ever, and only the housing boom keeps it from getting worse.

That’s one of the key takeaways from Friday’s GDP report. Two years since oil prices started plunging, Canada’s economy is almost completely reliant for growth on bank lending and the hot Vancouver and Toronto housing markets.

Real estate and financial services now account for 20 percent of the economy, levels not seen in the data since the early 1960s. That could be a problem, with household debt at a record and policy makers scrambling to slow price gains that are making homes unaffordable for all but the wealthiest buyers.

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Well … I won’t say it makes a crash inevitable, but I’ll say that’s a red flag!

West coast readers will be pleased to learn that I have solved the problem of Vancouver housing affordability:

Calgary’s housing market is bracing for more pain as persistently weak oil prices, mounting layoffs and slowing population growth continue to keep buyers on the sidelines.

Home resales in the city fell 12.6 per cent in July from the same time last year, the Calgary Real Estate Board reported. It was the 20th consecutive month of annualized sales declines as purchases of detached homes dropped to their lowest level since 1996.

“We’ve certainly got a softer market than we did a year ago,” said Diane Scott, a broker with Royal LePage.

Benchmark resale prices dropped 4.2 per cent from last July and were down more than 5 per cent from their peak in October, 2014. Detached home prices fell 3.4 per cent from last year to $502,300.

Among condos, a surge of new listings has left the market with more than six months’ worth of supply, pushing the benchmark price down 6.6 per cent from a year earlier to $277,000. Condo sales were down 21 per cent from a year earlier and were 53 per cent below peak levels in 2014.

You’re welcome. It has been hypothesized that real-estate is a source of strength for the dollar:

Toss in the rest of the country, which certainly attracts some foreign buying despite having generally much less exciting conditions than the Vancouver and Toronto markets, and “maybe total flows into Canadian real estate is $2-billion [a month], and maybe even slightly higher,” [Nomura Securities foreign-exchange strategist] Mr. [Charles] St-Arnaud said via e-mail.

To put it in perspective, net inflows of foreign investment in Canadian securities (stocks, bonds and the like), which certainly have a significant effect on the currency, have averaged about $15-billion a month this year. Inflows from the export of energy products – always a big deal for currency traders, who grossly oversimplify the Canadian dollar as a petro-currency and thus reflexively link its value closely with the price of oil – have been about $5-billion a month. The foreign inflows in the housing market might not be big enough to be driving the currency’s gains this year (up 12 per cent against the U.S. dollar since mid-January), but in a year when Canada’s overall exports have generally struggled (down 3.4 per cent year over year), they are big enough to be providing meaningful support.

Japan is considering issuing 50-year bonds:

Japan’s finance ministry is considering issuing 50-year bonds but says it will first concentrate on deepening and broadening the nascent market for existing 30-year bonds, according to a senior ministry official.

Chikahisa Sumi, director of the market division at the Ministry of Finance, told the Financial Times that the MoF might issue a 50-year bond. His department is in charge of Japan’s large debt issuance.

The UK and France have issued 50-year bonds this year, becoming the first European governments to do so for many years. Super-long bonds are viewed as a useful instrument in ageing societies where they can help pension funds match liabilities and assets over a longer period.

Such desperate measures are necessary if they wish to have any bonds at all with positive yields!

Japanese government bond prices rose to lifetime highs on Wednesday [July 6] as negative yields spread to 20-year bonds, with the Brexit vote exacerbating a flight-to-safety bid that has crunched incomes of banks, pension funds and other Japanese investors.

The 20-year yield fell to as low as minus 0.005 percent , having declined more than 0.9 percentage point since the Bank of Japan made a historic shift to negative rates in late January, in addition to its massive bond buying programme.

With 40-year government bonds, the longest tenure on offer, also yielding just above zero percent, Japan is in line to becoming the only country after Switzerland to have all government bonds yield at negative levels.

On Tuesday [July 5], the 50-year Swiss government bond yield fell below zero percent.

The big news of the day was the July FOMC release:

Consistent with its statutory mandate, the Committee seeks to foster maximum employment and price stability. The Committee currently expects that, with gradual adjustments in the stance of monetary policy, economic activity will expand at a moderate pace and labor market indicators will strengthen. Inflation is expected to remain low in the near term, in part because of earlier declines in energy prices, but to rise to 2 percent over the medium term as the transitory effects of past declines in energy and import prices dissipate and the labor market strengthens further. Near-term risks to the economic outlook have diminished. The Committee continues to closely monitor inflation indicators and global economic and financial developments.

Against this backdrop, the Committee decided to maintain the target range for the federal funds rate at 1/4 to 1/2 percent. The stance of monetary policy remains accommodative, thereby supporting further improvement in labor market conditions and a return to 2 percent inflation.
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Voting against the action was Esther L. George, who preferred at this meeting to raise the target range for the federal funds rate to 1/2 to 3/4 percent.

Bloomberg comments:

All but two of 94 analysts surveyed by Bloomberg News expected the Fed to leave interest rates unchanged at the meeting. Federal funds futures ahead of Wednesday’s statement suggested that traders see close to a 50-50 chance of a rate hike at or before the FOMC’s final meeting this year, in December.

Yellen will speak at the Kansas City Fed’s Jackson Hole, Wyoming, symposium on Aug. 26. That will provide her with an opportunity to discuss the committee’s sense of the economy’s progress.

“The market is going to pay a lot of attention to that speech,” [partner at Cornerstone Macro LLC Roberto] Perli said.

The bond market seems to have read it as dovish:

Treasuries rose, the dollar fell versus the euro and U.S. stocks ended mixed as the Federal Reserve reiterated its intention to tighten gradually even as the economy shows signs of improvement. Gold rallied.

The yield on 30-year Treasury notes fell six basis points, while two-year yields slipped three basis points. The greenback erased gains against a basket of 10 of its major peers after officials repeated that “economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate.” The S&P 500 Index slipped as crude’s plunge weighed on energy producers. Apple Inc.’s best rally since April 2014 led the Nasdaq 100 Index higher. Gold futures jumped.

I’m certainly not going to attempt to estimate the timing for a vigorous series of Fed moves – or even whether the next hike will be the first of a long series or just a one-off – but I will bet a nickel that when the Fed does start hiking in earnest, it’s going to make the first half of 1994 look like a hiccup.

Is past performance an indicator of future performance for those who take risky bets? Today we learned of one guy who couldn’t resist trying to snowball his windfall:

In 2015, [Ronnie] Music [Jr.] won $3,000,000 in a Georgia scratch-off lottery game. As part of the case, investigating agents seized over $1 million worth of methamphetamine, a large cache of firearms, thousands of rounds of ammunition, multiple vehicles, and over $600,000 in cash.

United States Attorney Ed Tarver stated, “Defendant Music decided to test his luck by sinking millions of dollars of lottery winnings into the purchase and sale of crystal meth. As a result of his unsound investment strategy, Music now faces decades in a federal prison.”

PerpetualDiscounts now yield 5.12%, equivalent to 6.66% at the standard equivalency factor of 1.3x. Long corporates now yield about 3.75%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 290bp, a significant narrowing from the 305bp reported July 13.

Low returns are finally catching up to American pension plans:

Twenty-year annualized returns for public pensions in the U.S. are poised to decline to 7.47% once fiscal 2016 results are released in coming weeks, according to an estimate from Wilshire Trust Universe Comparison Service, which tracks pension investment returns.

That would be the lowest-ever annual mark recorded by Wilshire, which began tracking the statistic 16 years ago. In 2001, near the height of the dot-com boom, pensions’ 20-year median return was 12.3%, according to Wilshire.
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Weak annual gains for the California Public Employees’ Retirement System and California State Teachers’ Retirement System dropped their 20-year returns below 7.5% investment targets, to 7.03% and 7.1%, respectively. The two funds, known as Calpers and Calstrs, are the largest public pensions in the U.S. by assets and oversee a combined $484 billion for 2.6 million public workers and retirees.
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Ms. Frost’s comments came days before Calpers said that its fiscal 2016 return was 0.6%, the slimmest gain since the 2008-2009 crisis. Calpers has a funding gap of roughly $112 billion, according to the most recent available data. As recently as last year, Calpers Chief Investment Officer Ted Eliopoulos said in an annual letter that the plan was “reassured by our 20-year investment return of 7.76%,” which exceeded the internal target of 7.5%.

Now, “it is a struggle to have a positive return,” Mr. Eliopoulos said in a media call last week.

Good old CalPERS, always good for a laugh.

Meanwhile, a vitriolic attack on Trump by Mary Anastasia O’Grady titled Wharton Grad Trump Fails Economics has some useful information and links:

In the Foreign Affairs magazine essay recently titled “The Truth About Trade,” economist at Dartmouth Douglas Irwin observed that while the technology has “enabled wide productivity and efficiency improvements,” has “also make a lot of blue-collar jobs obsolete. “Mr. Irwin cites a study by the Center for Business and Economic Research at Ball State University, which “found that productivity growth accounted for more than 85 percent of the jobs lost in manufacturing between 2000 and 2010, a period when employment in the sector fell by 5.6 million. “this 85% compares, according to the study, with 13% of job loss associated with trading during the same period. In other words, to bring most jobs back, Mr. Trump should prohibit mechanization. Would Mr. Pence broke the news to farmers Indiana?

In a paper published last summer in the Journal of Economic Perspectives, an economist at MIT David Autor unload automation reason has hit the middle class hard. He observed that to write code for a task, the programmer should be able to “say explicitly ‘rule’ or procedures” required to do so. But the task is understood by man “secretly” is not easy to automate. Mr. Autor call these obstacles “Polanyi Paradox” after the Hungarian-born chemist and economist who observed that “we know more than we know.”

This is the “higher education” and “low-education” work that requires “interpersonal interaction, flexibility, adaptability and problem-solving” -the most difficult to automate records Mr. Autor. Traditional job-secondary education has become the easiest to replace with technology.

The Polanyi Paradox, by the way, was formulated by Michael Polanyi, who was the father of UofT’s John Polanyi. After a lengthy internet search (I hope you’re grateful!), I have found the CBER Ball State study, by Michael J. Hicks and Srikant Devaraj, titled The Myth and the Reality of Manufacturing in America:

Manufacturing has continued to grow, and the sector itself remains a large, important, and growing sector of the U.S. economy. Employment in manufacturing has stagnated for some time, primarily due to growth in productivity of manufacturing production processes.

Three factors have contributed to changes in manufacturing employment in recent years: Productivity, trade, and domestic demand. Overwhelmingly, the largest impact is productivity. Almost 88 percent of job losses in manufacturing in recent years can be attributable to productivity growth, and the long-term changes to manufacturing employment are mostly linked to the productivity of American factories. Growing demand for manufacturing goods in the U.S. has offset some of those job losses, but the effect is modest, accounting for a 1.2 percent increase in jobs beyond what we would expect if consumer demand for domestically manufactured goods was flat.

Exports lead to higher levels of domestic production and employment, while imports reduce domestic production and employment. The difference between these, or net exports, has been negative since 1980, and has contributed to roughly 13.4 percent of job losses in the U.S. in the last decade. Our estimate is almost exactly that reported by the more respected research centers in the nation.

Manufacturing production remains robust. Productivity growth is the largest contributor to job displacement over the past several decades. This leads to a domestic policy consideration.

The paper by David Autor is titled Why Are There Still So Many Jobs? The History and Future of Workplace Automation:

Major newspaper stories offer fresh examples daily of technologies that substitute for human labor in an expanding—although still circumscribed—set of tasks. The offsetting effects of complementarities and rising demand in other areas are, however, far harder to identify as they occur. My own prediction is that employment polarization will not continue indefinitely (as argued in Autor 2013). While some of the tasks in many current middle-skill jobs are susceptible to automation, many middle-skill jobs will continue to demand a mixture of tasks from across the skill spectrum. For example, medical support occupations—radiology technicians, phlebotomists, nurse technicians, and others—are a significant and rapidly growing category of relatively well-remunerated, middle-skill employment. Most of these occupations require mastery of “middle-skill” mathematics, life sciences, and analytical reasoning. They typically require at least two years of postsecondary vocational training, and in some cases a four-year college degree or more. This broad description also fits numerous skilled trade and repair occupations, including plumbers, builders, electricians, heating/ventilating/air-conditioning installers, and automotive technicians. It also fits a number of modern clerical occupations that provide coordination and decision-making functions, rather than simply typing and filing, like a number of jobs in marketing. There are also cases where technology is enabling workers with less esoteric technical mastery to perform additional tasks: for example, the nurse practitioner occupation that increasingly performs diagnosing and prescribing tasks in lieu of physicians.

On another note, there is perennial weeping about affordable housing in the big cities, with “affordable” being a euphemism for “subsidized slum”. Bloomberg’s Patrick Clark has written a piece titled Why It’s So Hard to Build Affordable Housing: It’s Not Affordable:

“If we want to prioritize closing the gap for low-income households, we’re going to need more funding from public subsidy,” said Erika Poethig, director of urban policy initiatives at the Urban Institute, which published an online simulator Tuesday for the purpose of illustrating the challenges to building new affordable housing. Our Denver developer above is fictional, but he’s an illustration of what that simulator churns out: No matter how you slice it, creating the affordable housing needed today probably requires government help.

Playing with the simulator, you quickly learn that there are only a few levers that truly affect a developer’s ability to finance a project. Taking a smaller fee or negotiating a more favorable loan can help at the margins; so can making the project so appealing to residents that no one ever moves out. To really reduce costs or raise revenue, though, there are just these options: Spend less on land, materials, and labor, or bring in more money by raising rents or finding new public financing. But land, materials, and labor can only be cut so much (construction costs are effectively fixed by labor and commodities markets), and raising rents removes the “affordable” from affordable housing.

That leaves subsidies, the biggest of which is the low-income housing tax credit, which Congress funded to the tune of $7 billion last year. Even so, that program is more useful to developers building for higher wage-earners, said Linda McMahon, chief executive of The Real Estate Council, a trade group for Dallas-area real estate companies. “Below 50 percent of area median income, you’re talking about people who can only afford $500 or so in rent, and you really need another layer of subsidy to pay your [commercial] mortgage,” she said.

DBRS has announced publication of a paper titled DBRS: Basel Capital Requirements – What’s Changing?:

The Basel Committee on Banking Supervision (BCBS) has been active in recent months, finalising the minimum capital requirements for market risk (published in January 2016), while also publishing proposed revisions to the standardised approach (December 2015) and the internal model approach for credit (March 2016) and the standardised approach for operational risk (March 2016). These actions are part of the Committee’s efforts to reform global regulatory standards, and reduce the variability of risk-weighted assets (RWAs) across banks and jurisdictions. While DBRS expects that these efforts will improve comparability across the global banking peer group, further transparency would also be valuable in better understanding the risk profile of banks. In particular, DBRS would view positively the standardized disclosure of RWA calculations and components. DBRS also notes that the full implementation of these new requirements is likely to result in a significant amount of operational work for banks, and is expected to lead to a sizeable increase in RWAs.

With full implementation expected to be required from 2019 (the market risk requirements are to be fully implemented from January 2019 and DBRS expects the time period for implementation to be similar for both credit and operational risk requirements once finalised) this will likely add to the already heavy expense burden associated with regulatory compliance, and result in further pressure for those banks that are currently challenged by limited internal capital generation.