PrefBlog

I always take heart from evidence that governments don’t really control economies:

When Argentina decided last week to ease limits on dollar purchases, it became the latest emerging-market nation to acknowledge that capital controls usually fail in masking an economy’s flaws.

Argentina allowed the peso to plunge 15 percent after the central bank began scaling back interventions in the foreign-exchange market on Jan. 22, spurring price increases of as much as 30 percent on consumer goods as international reserves fell to a seven-year low. The black-market price in Argentina rose last week to a record 12.75 pesos per dollar, compared with the official rate of about 8, according to Buenos Aires newspaper Ambito.
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Restrictions on capital flows, ranging from Argentina’s tax on vacations abroad to Malaysia’s stabilizing the ringgit after the 1997 Asian crisis, have had mixed results in boosting investor confidence in a country’s economy. Capital outflow restrictions can be effective “if they are sufficiently comprehensive to slow a sudden ‘rush to the exit,’” according to a report by four International Monetary Fund researchers released this month.
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In Venezuela, a decade of currency controls is fueling the world’s fastest inflation among the 114 economies tracked by Bloomberg and shortages of basic goods.

The official rate of 6.3 bolivars per dollar compares with the 75-bolivar rate on the black market. Official dollars therefore are the most profitable assets in the country, allowing people who have access to them enjoy a lifestyle far beyond the reach of an average Venezuelan.

The referenced paper by Christian Saborowski, Sarah Sanya, Hans Weisfeld and Juan Yepez has the abstract:

This paper examines the effectiveness of capital outflow restrictions in a sample of 37 emerging market economies during the period 1995-2010, using a panel vector autoregression approach with interaction terms. Specifically, it examines whether a tightening of outflow restrictions helps reduce net capital outflows. We find that such tightening is effective if it is supported by strong macroeconomic fundamentals or good institutions, or if existing restrictions are already fairly comprehensive. When none of these three conditions is fulfilled, a tightening of restrictions fails to reduce net outflows as it provokes a sizeable decline in gross inflows, mainly driven by foreign investors.

Turkey’s done a lot of catching up!

Turkey’s central bank more than doubled its main interest rate at an emergency meeting, reversing years of policy after the lira slid to a record low.

The bank in Ankara raised the benchmark repo rate to 10 percent from 4.5 percent, according to a statement posted on its website at midnight. It also raised the overnight lending rate to 12 percent from 7.75 percent, and the overnight borrowing rate to 8 percent from 3.5 percent.
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While most investors advocate higher rates to bolster the lira, Prime Minister Recep Tayyip Erdogan has repeatedly railed against an “interest-rate lobby,” blaming it for a series of blows to his government, including last year’s wave of protests and the graft probe implicating his ministers.

Ignoring reality only makes it hit harder. But politicians never learn.

Sheila Bair has achieved the regulatory end-game:

Sheila Bair, the Federal Deposit Insurance Corp.’s chairman from 2006 to 2011, has been hired for a new gig as a board member at the Spanish lender Banco Santander SA. This seems to have gotten some people upset, even riled.
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The general rule in banking is that it’s OK to become a regulator, put in a few years playing nice with the industry, then take a cushy board seat. Bair didn’t follow that path exactly. Now and then she made some remarks criticizing the way huge banks were run. But she never said anything so piercing or harsh that it distracted them from blowing up the financial system while she was FDIC chairman. She didn’t interfere with anybody’s bailout checks. She kept the FDIC’s bank-financed insurance fund woefully undercapitalized for years. It’s hard to see why “many in the banking world” are upset with her.

It was an unevenly good day for the Canadian preferred share market, with PerpetualDiscounts up 28bp, FixedResets flat and DeemedRetractibles gaining 9bp. Volatility was minimal. Volume was above average.

This is interesting … the demand for physical gold is (currently) uncorrelated with demand for gold certificates:

Austria’s Muenze Oesterreich AG mint hired extra employees and added a third eight-hour shift to the day in a bid to keep up with demand. Purchases of bullion coins at Australia’s Perth Mint rose 20 percent this year through Jan. 20 from a year earlier. Sales by the U.S. Mint are set for the best month since April, when the metal plunged into a bear market.

Global mints are manufacturing as fast as they can after a 28 percent drop in gold prices last year, the biggest slump since 1981, attracted buyers of physical metal. The demand gains helped bullion rally for five straight weeks, the longest streak since September 2012. That won’t be enough to stem the metal’s slump according to Morgan Stanley, while Goldman Sachs Group Inc. predicts bullion will “grind lower” over 2014.

“The long-term physical buyers see these price drops as opportunities to accumulate more assets,” said Michael Haynes, the chief executive officer of American Precious Metals Exchange, an online bullion dealer. “We have witnessed some top selling days in the past few weeks.”

Gold ETFs have always struck me as being something of an internal contradiction. If the world dissolves in hyperinflation followed by chaos, do you really want to own an electronic record that gives you ownership of part of a company that holds title to some gold three thousand miles away? Although mind you, if I did want to stockpile something as chaos insurance, I’d prefer something of more practical value … books, spices, a smithy, ammunition.

We have another entry for the ‘Unintended Consequences’ competition:

Ten years ago, Congress passed a law intended to penalize chief executive officers whose companies shift their legal addresses to tax havens.

It hasn’t worked out as planned. Companies have found ways around the law that create new rewards for executives. When Actavis Inc. (ACT) changed its incorporation to Ireland in October, the New Jersey-based drugmaker helped CEO Paul Bisaro avoid the law’s bite by handing him more than $40 million of stock as much as three years ahead of its schedule, then promising him an additional $5 million to remain with the company.

The payouts to executives highlight the ineffectiveness of the 2004 law, which contained a series of provisions aimed at reducing the tax benefits of reincorporating overseas. In the past two years, a fresh wave of companies has fled the U.S. system to avoid hundreds of millions of dollars in taxes.

The 2004 law has “clearly been a failure” in halting the tax exodus, said Edward Kleinbard, a professor at University of Southern California’s Gould School of Law. “And it now has the perverse result of putting money into executives’ pockets sooner.”

The law imposes a special tax of 15 percent on restricted stock and options held by the most senior executives when a company reincorporates outside the U.S. Since the measure took effect, at least seven large companies have disclosed in securities filings that they risked triggering the tax. All took steps to shield their executives from having to pay.

The consequences of the regulators’ assault on public markets is also becoming more clear:

Facebook Inc. (FB)’s 2012 stock market debut helped spark a boom in U.S. initial public offerings, sucking the life out of a Wall Street fad that the social network had helped popularize: private share exchanges.
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[NASDAQ honcho Robert] Greifeld’s proposed Nasdaq Private Market would help companies large and small let employees trade while avoiding the disclosure requirements and compliance standards that publicly traded firms face. A barrier was reduced in 2012 with the Jumpstart Our Business Startups Act, which quadrupled to 2,000 the number of shareholders a company could have before it needed to disclose financials.
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To succeed, Nasdaq Private Market must persuade more companies to forgo the rewards of being public, such as the lure of greater riches and the brand recognition that comes with a ticker symbol. And only accredited investors — such as large institutions and wealthy individuals — will be eligible to buy stakes, limiting the pool of potential shareholders.

And, in the latest inflation chatter:

One of Janet Yellen’s first challenges as Federal Reserve chairman is generating enough inflation to meet the central bank’s target of 2 percent.

Policy makers have failed to attain their goal for almost two years and now are paring the pace of their bond buying. Inflation rose at a 0.9 percent rate for the 12 months ending in November, according to the central bank’s preferred measure. The last time prices were climbing at or above 2 percent was in April 2012.
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Eric Rosengren, president of the Federal Reserve Bank of Boston, said in a Jan. 7 speech that too-low inflation can be “a cause for real concern” because it increases the possibility a “negative shock” to the economy may lead to deflation. That could cause households to delay purchases in anticipation of even lower prices and companies to postpone investment and hiring as demand for their products dries up. Too-low inflation also means higher inflation-adjusted interest rates, making it harder to achieve a sufficient pace of growth.

“Furthermore, persistently low inflation can theoretically undermine the credibility of the central bank,” said Rosengren, who dissented against the December decision to cut monthly bond buying by $10 billion. If the Fed announces a goal “but is unable to achieve that target in a reasonable time frame, some may call into question its ability to do so in the medium- or long-term as well.”

It was a quiet day for the Canadian preferred share market, with PerpetualDiscounts gaining 4bp, FixedResets flat and DeemedRetractibles up 8bp. Volatility was more than might be expected given these figures, but with no clear pattern. Volume was low; but such as there was was dominated by the RY FixedResets with the February Exchange Date.

Beware! Galloping inflation!

Consumer prices rose 1.2 per cent in December on an annual basis, a faster pace than November’s 0.9 per cent, Statistics Canada said Friday.

The rise in the pace of inflation was primarily driven by higher prices for gasoline, which surged 4.7 per cent. When you strip out the impact of that, consumer prices rose 1.1 per cent annually, though also faster than November’s 1 per cent, the federal agency said.

So-called core prices, which exclude volatile items and help guide the Bank of Canada, increased by 1.3 per cent, again at a greater pace than the 1.1 per cent in November.
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“Over all, the inflation picture remains very mild in Canada as evidenced by the three-month annualized core rate of just 0.7 per cent,” said senior economist Krishen Rangasamy of National Bank Financial.

“For 2013 as a whole, the annual inflation rate was 0.9 per cent, the lowest since the 2009 recession, and the second lowest since 1994,” he added.

BAM sold some twelve-year notes:

Brookfield Asset Management Inc. (NYSE: BAM) (TSX: BAM.A) (Euronext: BAMA) announced today that it has agreed to issue C$500 million aggregate principal amount of medium term notes (“notes”) with a January 2026 maturity and a yield of 4.825%.

The notes have been assigned a credit rating of Baa2 (stable) by Moody’s, A- (stable) by Standard & Poor’s, BBB (stable) by Fitch and A (low) (negative) by DBRS.

The company intends to use the net proceeds of the issue for general corporate purposes.

The notes are being offered through a syndicate of agents led by CIBC World Markets Inc., Credit Suisse Securities (Canada), Inc., HSBC Securities (Canada) Inc. and RBC Dominion Securities Inc.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 30bp, FixedResets off 16bp and DeemedRetractibles gaining 8bp. The Performance Highlights table is comprised of losing FixedResets and winning PerpetualDiscounts. Volume was average.

Taper? Schmaper!:

Treasuries rose the most in almost two weeks, pushing the 10-year note yield further below the level when the Federal Reserve voted last month to taper its bond purchases, as economic reports showed an uneven economic expansion.

The benchmark yield reached a seven-week low as an emerging-market currencies selloff amid slowing economic growth and rising social tension stoked demand for safety. Continuing jobless claims rose last week more than forecast, a manufacturing gauge unexpectedly fell this month, pushing yield further below where it stood after the central bank announced Dec. 18 it would reduce its bond purchases to $75 billion per month from $85 billion amid signs of improved economic growth.

Much handwringing over the loony:

The Canadian dollar weakened to the lowest in 4 1/2 years against its U.S. counterpart after Poloz left the main interest rate unchanged yesterday and said the strength of the currency is hurting exporters. Hedge funds and other large speculators have already amassed near-record bets this year for the local dollar to decline as Canada’s trade deficit came in nine times wider than forecast and a report showed the country shed jobs in December.

The drop pushed the currency below the median forecast of C$1.10 per U.S. dollar for the end of the year in a Bloomberg survey of 63 contributors, suggesting strategists will be revising estimates lower. While some investors speculated that the central bank would signal a bias toward easing policy, Poloz said his next rate move depends on how economic data change the balance of risks to the world’s 11th-largest economy.
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Canada’s dollar, often called the loonie for the aquatic bird on the C$1 coin, fell as much as 0.8 percent today to C$1.1174, the lowest level since July 2009, and was at C$1.1117 as of 8:48 a.m. in Toronto. That added to its 1.1 percent slide yesterday. Fair value is around C$1.15, according to [Deutsche Bank global head of Group of 10 foreign exchange Alan] Ruskin.

The loonie is the worst performer during the past one and six months against a basket of nine developed-nation currencies tracked by Bloomberg Correlation-Weighted Indexes, with declines of 4.9 percent and 8.3 percent. Even so, the Canadian currency is still about 11 percent overvalued compared with its U.S. peer, according the Organisation for Economic Cooperation and Development’s purchasing-power data.

It was a good day for the Canadian preferred share market, with PerpetualDiscounts winning 28bp, FixedResets gaining 14bp and DeemedRetractibles up 26bp. An average-sized Performance Highlights table has a preponderance of winning PerpetualDiscounts. Volume was high.