PrefBlog

Maneuvering continues on the US debt limit:

The White House endorsed a short debt-limit increase with no policy conditions attached, signaling potential support for House Republicans’ plan for a month-long reprieve from a default.

The idea, proposed today by House Speaker John Boehner, wouldn’t end the 10-day old partial shutdown of the federal government. The plan would push the lapse of U.S. borrowing authority to Nov. 22 from Oct. 17.

It was a rather strangely mixed day on the Canadian preferred share market, with PerpetualDiscounts and DeemedRetractibles both flat, while FixedResets were down 23bp. BAM issues were notable losers on the Performance Highlights table. Volume was quite high.

It’s official – Yellen is the nominee for Fed governor:

President Barack Obama will nominate Janet Yellen as chairman of the Federal Reserve, which would put the world’s most powerful central bank in the hands of a key architect of its unprecedented stimulus program and the first female leader in its 100-year history.

Obama will announce the nomination at 3 p.m. today in Washington, a White House official said in an e-mailed statement. Yellen, 67, would succeed Ben S. Bernanke, whose term expires on Jan. 31.

Bernanke says:

President Obama has made an outstanding choice in nominating my colleague and friend Janet Yellen to chair the Federal Reserve Board. Janet is exceptionally well qualified for the position, with stellar academic credentials and a strong record as a leader and a policymaker.

Yellen says:

Thank you, Mr. President, I am honored and humbled by the faith you have placed in me. If confirmed by the Senate, I pledge to do my utmost to keep that trust and meet the great responsibilities that Congress has entrusted to the Federal Reserve–to promote maximum employment, stable prices, and a strong and stable financial system.

I’d also like to thank my spouse, George, and my son, Robert. I couldn’t imagine taking on this new challenge without their love and support.

The past six years have been tumultuous for the economy and challenging for many Americans. While I think we all agree, Mr. President, that more needs to be done to strengthen this recovery, particularly for those hardest hit by the Great Recession, we have made progress. The economy is stronger and the financial system sounder. As you said, Mr. President, considerable credit for that goes to Chairman Bernanke for his wise, courageous, and skillful leadership. It has been my privilege to serve with him and learn from him.

While we have made progress, we have farther to go. The mandate of the Federal Reserve is to serve all the American people, and too many Americans still can’t find a job and worry how they will pay their bills and provide for their families. The Federal Reserve can help, if it does its job effectively. We can help ensure that everyone has the opportunity to work hard and build a better life. We can ensure that inflation remains in check and doesn’t undermine the benefits of a growing economy. We can and must safeguard the financial system.

The Fed has powerful tools to influence the economy and the financial system, but I believe its greatest strength rests in its capacity to approach important decisions with expertise and objectivity, to vigorously debate diverse views, and then to unite behind its response. The Fed’s effectiveness depends on the commitment, ingenuity, and integrity of the Fed staff and my fellow policymakers. They serve America with great dedication.

Mr. President, thank you for giving me this opportunity to continue serving the Federal Reserve and carrying out its important work on behalf of the American people.

Iceland has foreign exchange problems:

Iceland’s private sector is running out of cash to repay its foreign currency debt, according to the nation’s central bank.

Non-krona debt owed by entities besides the Treasury and the central bank due through 2018 totals about 700 billion kronur ($5.8 billion), the bank said yesterday. The projected current account surpluses over the next five years aren’t estimated to reach even half of that and will equal a shortfall of about 20 percent of gross domestic product.
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Prime Minister Sigmundur David Gunnlaugsson has said Iceland’s foreign exchange shortfall is “a matter of huge concern” as he tries to scale back currency controls in place since 2008. The government’s biggest challenge is to allow capital to flow freely without triggering a krona sell-off that would cause Iceland’s foreign debt to spike and undermine the nation’s economic recovery.

I find it hard to get excited about the US debt shennanigans and tapering … the real problem is in the real economy:

The U.S. Federal Reserve has tripled the size of its balance sheet by “printing” an ocean of money. But despite the hand-wringing of the gold bugs, recent data proves that deflation, not inflation, remains the biggest threat to the U.S. economy.

The loan-to-deposit ratio for U.S. banks explains why Fed stimulus is not translating into inflationary pressure – the added funds remain trapped in the banking system and are not reaching the real economy.
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The intention behind the Fed’s stimulus program was that by expanding bank balance sheets, customer lending would rise, and this would create consumer and corporate demand for products and services. The loan-to-deposit ratio illustrates that the process is stalled at step two – big bank balance sheets are bloated but aggregate demand in the U.S. economy has barely improved. The output gap remains.

I suggest that investors in long-term fixed income should be cheering the dysfunction and sending large donations to the Republican Party. While long-term fixed income is priced on expected inflation, it realizes based on realized inflation. Recessions are good! Depressions are wonderful! And here’s what the OECD honcho has to say:

“We still see the probability of failing to raise the debt ceiling as low, but as the government shutdown drags on, the level of concern is ratcheting up,” said [secretary-general of the Organization for Economic Co-Operation and Development] Mr [Angel] Gurria.

“If the debt ceiling is not raised – or, better still, abolished – our calculations suggest that the OECD region as a whole will be pushed back into recession next year, and emerging economies will experience a sharp slowdown.”

The OECD projects U.S. government consumption would contract immediately by the equivalent of at least four percentage points of gross domestic product, shaving that amount from economic growth next year.

A default, of course, would be even worse, he warned, and would hit other countries hard.

Meanwhile, DBRS has put the US under Review-Negative:

This action reflects the growing risk of a selective default by the federal government on its debt securities as a result of the lack of an agreement to raise the statutory limit on federal debt (the debt ceiling). According to the U.S. Treasury, its ability to borrow will be exhausted no later than October 17, 2013, leaving a cash balance of approximately $30 billion. If the debt ceiling is not raised or eliminated by October 17, it is unclear how the Treasury would operate. While a low probability, missing payments on selected government securities cannot be ruled out. In the view of DBRS, the longer it takes for an agreement to be reached on the debt ceiling, the greater the risk of missed payments.

The review for downgrade reflects the increasing uncertainty over the debt ceiling outcome, combined with the potential lingering repercussions on both domestic and international investor sentiment, and therefore the U.S. economy and financial markets. DBRS notes that the magnitude of these repercussions could increase each day this impasse continues.

If by October 17 there is still no agreement to raise the debt ceiling and the United States subsequently misses a debt payment, DBRS would assign a Selective Default rating to the affected securities, as long as we expect the Treasury to meet its other obligations in a timely manner. If there is a full-fledged default involving a wide array of securities, the magnitude of the downgrade would be greater.

It is an article of faith that Congress’ dysfunction is due to gerrymandering and the consequent importance of primaries. There’s at least some evidence that polarization of Congress reflects polarization of the electorate – extending beyond ideology to geography:

The real reason for our increasingly divided political system is much simpler: The right wing of the Republican Party has embraced a fundamentalist version of free-market capitalism and succeeded in winning elections. (The Democrats have moved to the left, but less so.)

The Republican shift is the result of several factors. The realignment of Southern white voters into the Republican Party, the branch of conservative activism created by Barry Goldwater’s 1964 presidential campaign and the party’s increasingly firm stance on issues such as income inequality and immigration, can all be important to Republicans’ rightward shift.

The “blame it on the gerrymanders” argument mistakenly assumes that because redistricting created more comfortable seats for each party, polarization became inevitable. Our research, however, casts serious doubt on that idea.
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Many districts are safe for one party or the other because of how Americans have sorted themselves geographically — choosing to live closer to people who are politically or culturally like-minded. In Florida, for example, Palm Beach County will be reliably Democratic and the Panhandle will consistently vote for Republicans. These geographic shifts mean that state legislatures, which approve congressional district lines, can tweak but not fundamentally alter the ideological makeup of Congress.

The research cited is a paper titled Does Gerrymandering Cause Polarization?

Arthur Heinmaa of Toron observes:

This chart continues to really worry me. There is no stopping the Canadian trend.

Click for Big

I will laugh through my tears if popping our bubble is as painful (and my guess would be more painful) than it was in America. That would put paid to the ‘Canadian financial stability due to wise regulation’ argument, which I consider ridiculous.

Louis Vachon, CEO of National Bank, the man who led the bank while it was stuffing its Money Market Fund to the nuts with ABCP issued by related companies, is now touting his Capital Markets unit:

The knock on National Bank has long been that it is too Quebec-focused, and that its capital markets earnings, which comprise 38 per cent of its net income, are inherently volatile. For these reasons, the bank trades at a lower price-earnings multiple than its Big Six peers.

Mr. Vachon is now on a crusade of sorts to “demystify” the financial markets arm. While he is realistic about his efforts – “we cannot turn lead to gold” – he argues a major point: “All we’re saying is [the unit] does not deserve the extensive discount” it receives relative to the retail operation.

Prior to 2004, he elaborates, there was never a discount for wholesale banking. And although it is understandable why the financial crisis altered that, much has changed since those tumultuous years. Any argument in favour of a discount is “passé,” he said. “If you look forward now, we’re back to more normal times and client-driven activities,” like corporate lending.

It was another negative day for the Canadian preferred share market, with PerpetualDiscounts down 24bp, FixedResets flat and DeemedRetractibles off 14bp. A lengthy Performance Highlights table is dominated by losers. Volume was low.

PerpetualDiscounts now yield 5.57%, equivalent to 7.24% interest at the standard equivalency factor of 1.3x. Long corporates continue to yield about 4.8% (OK, a smidgen more), so the pre-tax interest-equivalent spread is now about 245bp, with everything basically unchanged from the October 2 report.

Geez, maybe I should open a managed future fund:

Brokers have an incentive to keep clients in managed-futures funds because they receive commissions annually of up to 4 percent of assets invested, prospectuses show. Investors pay as much as 9 percent in total fees each year, including charges by general partners and fund managers.

Amazing – somebody actually took a quantitative look at the spread between downtown and suburban house prices:

No question, you’ll find house prices are cheaper outside big cities. Toronto Real Estate Board numbers suggest a spread of almost $250,000 between city homes and those in the neighbouring suburbs. But as shown in a spreadsheet created by Mr. Hughes, suburban living loses its cost advantage if you have two adults commuting by car each day. Add the effect of stress and time spent in gridlock, and suburbia looks even more costly.

It was another negative day for the Canadian preferred share market, with PerpetualDiscounts losing 28bp, FixedResets down 9bp and DeemedRetractibles off 6bp. There was a surprisingly lengthy list of losers in the Performance Highlights table. Volume was above average.

Lawrence Schembri, Deputy Governor of the Bank of Canada is assiduously sucking up to the politicians:

From my perspective, the FSB is a unique international organization that has certain qualities that many associate with Canadians, qualities I believe will help ensure its success in making the global financial system more resilient. A resilient global financial system is not an end in itself, but a necessary foundation for strong, sustainable and balanced global economic growth, leading to higher employment and improved living standards.

The FSB was born of necessity in the aftermath of the financial crisis. Its raison d’être stems from one overarching fact: the global financial system is highly integrated.2 Financial institutions and markets are interconnected and interdependent within and across various sectors, including banking, insurance, and pension and investment funds, and, increasingly, across national jurisdictions.

Thus, to achieve a comprehensive and coherent approach to the financial regulation and oversight necessary to attain the global public good of financial stability, coordination is essential across countries, across all of the elements of the reforms, and across many different regulators and supervisors. Failure to coordinate would lead to the fragmentation of the financial system, which would impede the global recovery. This need for effective coordination is why the G-20 established the FSB in 2009.

Can’t blame him, really – it worked for Lapdog Carney!

There’s some apocalyptic commentary on the potential for a US default:

Anyone who remembers the collapse of Lehman Brothers Holdings Inc. little more than five years ago knows what a global financial disaster is. A U.S. government default, just weeks away if Congress fails to raise the debt ceiling as it now threatens to do, will be an economic calamity like none the world has ever seen.
Failure by the world’s largest borrower to pay its debt — unprecedented in modern history — will devastate stock markets from Brazil to Zurich, halt a $5 trillion lending mechanism for investors who rely on Treasuries, blow up borrowing costs for billions of people and companies, ravage the dollar and throw the U.S. and world economies into a recession that probably would become a depression. Among the dozens of money managers, economists, bankers, traders and former government officials interviewed for this story, few view a U.S. default as anything but a financial apocalypse.
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While none of the people interviewed for this story expect the world’s largest economy to default this time either, most say the chances of it happening now are higher than in the past.
“It would be insane to default, but it’s no longer a zero-percent probability,” said Simon Johnson, a former chief economist of the International Monetary Fund who teaches economics at the Massachusetts Institute of Technology and is a columnist for Bloomberg View.

I consider it all a little hysterical – but hey! In the financial markets, the hysterics are sometimes right!

I’ve lost a lot of business over the years by admitting there are things I don’t understand – financial guys are supposed to know just precisely how the price of eggs in Spain relates to Brazilian interest rates. But I’m in good company:

Ben S. Bernanke, the world’s most-powerful central banker, says he doesn’t understand gold prices. If his peers had paid attention, they might have stopped expanding reserves that lost $545 billion in value since bullion peaked in 2011.

Bernanke, who holds economics degrees from Harvard College and the Massachusetts Institute of Technology and led the Federal Reserve through the biggest financial disaster since the Great Depression, told the Senate Banking Committee in July that “nobody really understands gold prices and I don’t pretend to really understand them either.”

I generally have a lot of respect for the OTPP. Not this time:

The Ontario Teachers’ Pension Plan is urging the province’s securities regulator to require all public companies have at least three women on their boards, or else risk being delisted from the Toronto Stock Exchange.

Teachers outlines the proposal in a letter submitted to the Ontario Securities Commission in response to its call for comments on a possible new “comply or explain” disclosure rule to boost the number of women on boards. The OSC proposal would require companies to report annually on their efforts to improve board diversity or else explain why they have opted not to make the disclosure.

This is just political nonsense. If Teachers’ really believed that more diverse boards produced better results than less diverse boards and if they were truly interested in outperforming on behalf of their beneficiaries – they would promote a laissez faire in which there were all sorts of boards and they invested in those with more diverse boards on the grounds that these companies would kick the asses of those that were less diverse. You know, in the marketplace. I am very disappointed that Teachers’ is pursuing a political agenda.

Now that Ontario has bought up all the expensive solar panels Mexico is getting the cheap ones:

Mexico, poised to allow foreign oil extraction for the first time in 75 years, is finding its abundant natural resources also appeal to investors in a much cleaner energy: sunshine.

First Solar Inc. (FSLR) of the U.S. has bought its first projects in Mexico, while more than a dozen other developers including Germany’s Saferay GmbH and Spain’s Grupotec Tecnologia Solar SL own licenses there. Local investor Gauss Energia opened Latin America’s largest photovoltaic plant in the country last month.
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Gauss and Portugal’s Martifer SGPS SA opened a 30-megawatt plant in La Paz, Baja California, on Sept. 12 with funding from International Finance Corp. and Nacional Financiera SNC bank. While Mexico doesn’t subsidize large solar, the $100 million project offered an economic alternative to fossil-fueled power in the area, where solar radiation exceeds the national average.

No subsidies and lots of investments! Gee, Mexico must have one of those ‘competitive advantage’ thingamajigs over Ontario when it comes to sunshine! Whoever woulda thunk it?

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts down 12bp, FixedResets off 6bp and DeemedRetractibles losing 19bp. The Performance Highlights table was surprisingly short – below average even by long-term standards. Volume was average.

No jobs number today!

The absence of jobs data leaves economists and their investor clients without the month’s most important numbers on which to place bets, ranging from friendly office pools to million-dollar wagers on the health of the world’s largest economy. The Bureau of Labor Statistics, which typically issues the report on the first Friday of each month at 8:30 a.m. in Washington, yesterday said a government shutdown now in its fourth day means the latest data aren’t ready.

Shades of Enron! Investment analysis isn’t the only field where fraud flourishes in a lazy culture:

A Bangladeshi factory that produces garments for The Gap and Old Navy kept two sets of books to conceal how it is coercing employees to perform 17-hour shifts every day of the week, a new report says, underlining the inability of clothing retailers to improve working conditions among their suppliers.
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“It is easy, because auditors and buyers never come around late at night to check these things,” the factory manager said in an interview. “Sometimes, it is the only way to meet the orders on time.”

The report said it was easy to fool retailers visiting the factory, which is located outside the capital, Dhaka, and employs 3,750 people.

Earlier this summer, the report said, “white foreigners” – buyers from Gap and Old Navy – visited the factory late in the morning of June 22.

A loudspeaker alerted the workers ahead of the visit. They were instructed to respond to questions by claiming that conditions were good and that they needed to do “just two hours of overtime a day.”

There was an interesting wrinkle in the GM bankruptcy:

In 2005, GM lost $10 billion. Researching Nova Scotia notes that year, Truong, the Fortress analyst, called the treasurer of GM Canada and learned that GM Nova Scotia Finance had made intercompany loans to its parent, Truong testified.

Such knowledge would prove useful. Under the 1900 Nova Scotia Companies Act, a company’s owner is obligated to pay the debts of all subsidiaries. Such unlimited liability companies, or ULCs, confer tax advantages on their parents.

Truong believed that GM Nova Scotia Finance’s ULC status would allow creditors to reach up to its parents to collect repayment in the event of a bankruptcy, he wrote in a Dec. 10, 2008, e-mail presented at the trial.

I find it rather odd that an oil-linked currency is a reserve currency, but perhaps that’s the whole point:

Canada now boasts the world’s fifth-largest reserve currency.

According to an International Monetary Fund report this week, central banks boosted their holdings of Canadian money to $108.9-billion in the second quarter of this year, up from $94.9-billion in the first three months of the year and $90.1-billion in the final quarter of 2012.

It was a negative day for the Canadian preferred share market, with PerpetualDiscounts down 10bp, FixedResets off 8bp and DeemedRetractibles flat. Losing FixedResets were notable in the Performance Highlights table. Volume was average.