PrefBlog

The Economist has a good piece on income inequality:

Mr Piketty argues that over the long run the rate of return on wealth exceeds economic growth. Over time, this relationship increases inequality as the share of national income going to those who own capital (the rich) rises, while the portion going to labour (everyone else) falls. He also argues that the return on capital in recent history has been remarkably stable, even as economic growth has fallen, and that this trend will continue in the future.

Mr Rognlie has three main criticisms of all this. Several commentators have pointed out that the rate of return from capital should decline in the long run, rather than remaining high as Mr Piketty maintains, owing to the law of diminishing returns. Mr Rognlie expands on this, arguing that Mr Piketty has an inflated idea of the current return. Modern forms of capital, such as software, depreciate faster in value than equipment did in the past: a giant metal press might have a working life of decades whereas a new piece of database-management software will be obsolete in a few years at most. This means that returns from wealth may not necessarily be growing in net terms, since a rising share of the gains that flow to the owners of capital must be reinvested.

Second, Mr Rognlie finds that higher returns to wealth have not been distributed equally across all investments. The return on assets other than housing has been remarkably stable since 1970. In fact, surging house prices are almost entirely responsible for growing returns on capital.

Third, the idea that workers’ share of wealth can continue to decline rests on the assumption that it is easy to substitute capital (ie, robots) for workers. But if lots of the capital in question is tied up in houses, then this switch would be far harder than Mr Piketty suggests.

I don’t find these arguments particularly convincing. With respect to the first point, once capital invested in software depreciates fast enough, it becomes a labour cost in capital clothing: if you need a permanent staff of programmers on hand to keep your business running (whether they are in-house or external), then that’s a labour cost.

The second and third points are interesting, but I suggest that people are spending more on housing because the return on capital is relatively low and relatively volatile – should returns on actual capital increase, then people will stop buying second houses for rental purposes and put their money into the stock market.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 11bp, FixedResets down 31bp and DeemedRetractibles off 19bp. The Performance Highlights table is relatively length and almost all losers, with Enbridge issues again being prominent on the bad side. Volume was on the high side of average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

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TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.26 to be $1.12 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $1.13 cheap at its bid price of 24.90.

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Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 23.93 to be $0.56 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.75 to be $0.69 cheap.

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The fit on this series is actually quite reasonable – it’s the scale that makes it look so weird.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 20.60 to be $0.78 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 23.88 and appears to be $0.78 rich.

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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 16.07, looks $1.72 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.71 and is $1.13 rich.

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Investment-grade pairs predict an average over the next five years of about 0.20%. TRP.PR.A / TRP.PR.F has almost normalized, but remains an outlier at +0.05%. The DC.PR.B / DC.PR.D pair is still off the charts and now predicts an average bill rate over the next 4 3/4 years of -2.87%.

Tomorrow we’ll get two more data points for junk: AIM.PR.A / AIM.PR.B and FFH.PR.E / FFH.PR.F.

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Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

And finally, it seems to me that housing prices is related to wealth, whereas income inequality has increased and is measurable.

The new issue of LBS / LBS.PR.A was priced today at 19.60, compared to its March 26 NAVPU of 18.74. Nice work if you can get it! I have updated the post announcing the offering.

Brookfield Renewable Power Preferred Equity Inc., proud issuer of BRF.PR.A, BRF.PR.C, BRF.PR.E and BRF.PR.F, was confirmed at Pfd-3(high) by DBRS:

DBRS Limited (DBRS) has confirmed the Issuer Rating and the rating on the Senior Unsecured Debentures and Notes of Brookfield Renewable Energy Partners L.P. (BREP or the Company) at BBB (high), and the Class A Preference Shares at Pfd-3 (high), all with Stable trends. The rating actions reflect DBRS’s expectation that BREP will continue to prudently finance its growth initiatives to maintain its deconsolidated key credit metrics in line with the current rating. BREP’s ratings reflect its geographic and resource diversification, and highly contracted portfolio with investment-grade counterparties, while also factoring in the inherent renewable resource risk.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 5bp, FixedResets down 23bp and DeemedRetractibles gaining 6bp. The Performance Highlights table was of normal (for the past four months) size and comprised entirely of FixedResets. Volume was average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.41 to be $1.16 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $1.17 cheap at its bid price of 24.93.

Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.N, resetting at +230 on 2020-3-19, bid at 24.64 to be $0.53 rich, while MFC.PR.H, resetting at +313bp on 2017-3-19, is bid at 25.87 to be $0.64 cheap.

Click for Big

The fit on this series is actually quite reasonable – it’s the scale that makes it look so weird.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 20.95 to be $0.62 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 23.74 and appears to be $0.49 rich.

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This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 16.30, looks $1.59 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.71 and is $1.08 rich.

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Investment-grade pairs predict an average over the next five years of about 0.20% after a big increase today.TRP.PR.A / TRP.PR.F remains an outlier at -0.16%. The DC.PR.B / DC.PR.D pair is still off the charts and now predicts an average bill rate over the next 4 3/4 years of -2.06%.

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Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?

GMP Capital Inc., proud issuer of GMP.PR.B, was confirmed at Pfd-3(low) [Trend Negative] by DBRS:

DBRS Limited (DBRS) has today confirmed the Pfd-3 (low) rating on the Cumulative Preferred Shares of GMP Capital Inc. (GMP or the Company). The trend remains Negative. The rating reflects the strength of the Company’s business franchise as a provider of investment banking and capital markets products and services to its targeted market of mid-sized, primarily Canadian, companies. However, DBRS remains very cautious about the continuing adverse market environment. While GMP’s results in the early part of 2014 demonstrated the Company’s ability to weather weak market conditions, the continuation of the Negative trend reflects the challenges posed by the dramatic decline in oil and gas prices as indicated by GMP’s losses in Q4 2014. To the extent that GMP can adjust to this changed environment, the trend could return to Stable, but sustained weakness in results that indicated a significant deterioration in GMP’s franchise strength or earnings power would likely increase the negative pressure on the rating.

Canaccord Genuity Group Inc., proud issuer of CF.PR.A and CF.PR.C, was confirmed at Pfd-3(low) by DBRS:

DBRS Limited (DBRS) has today confirmed its rating of the Cumulative Preferred Shares of Canaccord Genuity Group Inc. (Canaccord Genuity or the Company) at Pfd-3 (low) with a Stable trend. The Company has successfully integrated recent acquisitions, improved geographic diversity, enhanced its wealth management business segment and demonstrated resilience through the extended weak market environment. Nevertheless, the Company continues to face significant challenges.

Weakness in the energy sector, which has had an impact on many of Canaccord Genuity’s traditional Capital Markets clients, resulted in a loss in the last quarter of 2014 that also reflected impairment of goodwill/intangibles. As a result, the Company implemented expense control initiatives and other actions. The Company announced a planned 4% reduction in its overall workforce, primarily affecting the U.K./Europe and U.S. operations. In addition, there were a number of changes to the executive structure, including the appointment of a CEO for the combined North American capital markets and changes to the investment banking executive team.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 8bp, FixedResets off 10bp and DeemedRetractibles up 15bp. The Performance Highlights table is dominated by losing FixedResets, with a notable presence of Enbridge issues. Volume was above average.

For as long as the FixedReset market is so violently unsettled, I’ll keep publishing updates of the more interesting and meaningful series of FixedResets’ Implied Volatilities. This doesn’t include Enbridge because although Enbridge has a large number of issues outstanding, all of which are quite liquid, the range of Issue Reset Spreads is too small for decent conclusions. The low is 212bp (ENB.PR.H; second-lowest is ENB.PR.D at 237bp) and the high is a mere 268 for ENB.PF.G.

Remember that all rich /cheap assessments are:
» based on Implied Volatility Theory only
» are relative only to other FixedResets from the same issuer
» assume constant GOC-5 yield
» assume constant Implied Volatility
» assume constant spread

Here’s TRP:

Click for Big

TRP.PR.E, which resets 2019-10-30 at +235, is bid at 24.83 to be $1.40 rich, while TRP.PR.G, resetting 2020-11-30 at +296, is $1.27 cheap at its bid price of 24.91.

Click for Big

Another excellent fit, but the numbers are perplexing. Implied Volatility for MFC continues to be a conundrum, although it declined substantially today. It is still too high if we consider that NVCC rules will never apply to these issues; it is still too low if we consider them to be NVCC non-compliant issues (and therefore with Deemed Maturities in the call schedule).

Most expensive is MFC.PR.L, resetting at +216 on 2019-6-19, bid at 24.15 to be $0.49 rich, while MFC.PR.G, resetting at +290bp on 2016-12-19, is bid at 25.47 to be $0.72 cheap.

Click for Big

The fit on this series is actually quite reasonable – it’s the scale that makes it look so weird.

The cheapest issue relative to its peers is BAM.PR.R, resetting at +230bp on 2016-6-30, bid at 21.21 to be $0.64 cheap. BAM.PF.E, resetting at +255bp 2020-3-31 is bid at 24.25 and appears to be $0.83 rich.

Click for Big

This is just weird because the middle is expensive and the ends are cheap but anyway … FTS.PR.H, with a spread of +145bp, and bid at 16.31, looks $1.62 cheap and resets 2015-6-1. FTS.PR.K, with a spread of +205bp and resetting 2019-3-1, is bid at 23.71 and is $1.13 rich.

Click for Big

Investment-grade pairs predict an average over the next five years of about 0.10% – except for one outlier, TRP.PR.A / TRP.PR.F, which has a break-even of -0.24%. The DC.PR.B / DC.PR.D pair is still off the charts and now predicts an average bill rate over the next 4 3/4 years of -2.31%.

Click for Big

Shall we just say that this exhibits a high level of confidence in the continued rapacity of Canadian banks?