PrefBlog

We have a late entry for the ‘Most Loony Government Initiative of 2016’ contest – easy credit for Vancouver house-buyers:

The province of British Columbia will start a program on Jan. 16 that will offer to match the nest egg amassed by buyers for their first house by up to C$37,500 ($28,000) or 5 percent of the purchase value, B.C. Premier Christy Clark said at a news conference. It’s estimated to cost about C$703 million ($526 million) over the next three years and help about 42,000 households enter the market.
…
Under the new first-time buyer program, the 25-year loans will have no interest and no repayment for the first five years. They will only be available to first-time buyers who already qualify for a mortgage under the recent, stricter rules introduced by the federal government, Clark said.

The program may only “incrementally help” home sales in B.C. and may be more positive for mortgage insurers like Genworth MI Canada Inc. than lenders, RBC Capital Markets said in a note to clients after the announcement.

The program doesn’t solve the core problem of high property values next to relatively low incomes, said Andy Yan, Director, City Program, at Simon Fraser University.

“The metro Vancouver area is the most indebted metropolitan area in Canada. What does this C$37,000 enticement do but encourage people to take on more debt?” Yan said by phone.
…
“All the benefit could end up going to sellers,” said Thomas Davidoff, head of the University of British Columbia’s Centre for Urban Economics and Real Estate. If a homebuyer is willing to pay C$500,000 and is presented with an extra C$30,000 of interest-free money, he’ll just end up bidding C$530,000, Davidoff said.

“Subsidies on the demand side are not the way to address affordability in a supply-compromised market,” he said.

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

Information received since the Federal Open Market Committee met in November indicates that the labor market has continued to strengthen and that economic activity has been expanding at a moderate pace since mid-year. Job gains have been solid in recent months and the unemployment rate has declined. Household spending has been rising moderately but business fixed investment has remained soft. Inflation has increased since earlier this year but is still below the Committee’s 2 percent longer-run objective, partly reflecting earlier declines in energy prices and in prices of non-energy imports. Market-based measures of inflation compensation have moved up considerably but still are low; most survey-based measures of longer-term inflation expectations are little changed, on balance, in recent months.
…
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 1/2 to 3/4 percent. The stance of monetary policy remains accommodative, thereby supporting some further strengthening in labor market conditions and a return to 2 percent inflation.
…
The Committee expects that economic conditions will evolve in a manner that will warrant only gradual increases in the federal funds rate; the federal funds rate is likely to remain, for some time, below levels that are expected to prevail in the longer run.

Of interest was the Fed’s long-term projection:

The unemployment rate was 6.7 percent when Yellen took office in February 2014, and it is now at 4.6 percent. The road to a tightening labor market has been a long, spirit-crushing slog for millions of Americans and Yellen has been particularly attentive to broader labor indicators during her tenure. She noted that black unemployment rates were “about back to 2007 levels as well.”

Click for Big

Sometimes I wish I lived in Aukland:

Domino’s demonstrated its ability to deliver food via a drone Thursday in New Zealand and plans to test actual deliveries to customers next month.

“It doesn’t add up to deliver a two kilogram package in a two-ton vehicle,” said Scott Bush, a general manager for Domino’s Pizza Enterprises, which is independent of the U.S. chain and operates in seven countries. “In Auckland, we have such massive traffic congestion it just makes sense to take to the airways.”

A Domino’s customer who requests a drone delivery will receive a notification when their delivery is approaching. After going outside and hitting a button on their smartphone, the drone will lower the food via a tether. Once the package is released, the drone pulls the tether back up and flies back to the Domino’s store.

… or maybe England:

Amazon.com Inc.’s drone delivery program has liftoff—from a rural corner of England.

Amazon last week made its first customer delivery by drone, carrying a package containing popcorn and a Fire TV video-streaming device several miles to a two-story farmhouse near Cambridge, U.K., in 13 minutes. A video the company released Wednesday shows a track the drone used to launch, a platform from which employees monitored takeoff, and a landing pad on the customer’s lawn.

PerpetualDiscounts now yield 5.52%, equivalent to 7.18% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.2%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 300bp, a narrowing from the 310bp reported December 7.

I mentioned coding schools on August 11, 2016. Here’s a cautionary tale:

It was a calamitous job interview two years ago that prompted Jose Contreras to demand his money back from the coding school he attended. His interviewer, the chief technology officer of a startup, watched as Contreras struggled with basics on JavaScript, a coding language he was supposed to be learning during his courses. “Given you can’t answer this question,” Contreras, now 27, recalls the interviewer saying, “You should ask for a refund.” A few months later, jobless and out $14,400 in tuition and fees, Contreras followed his advice.

He’s one of many students who say they felt duped by Coding House, a Silicon Valley school that advertises an average starting salary of $91,000 for its graduates. On Nov. 7, the Bureau for Private Postsecondary Education, the regulator that oversees coding schools in California, assessed Nicholas James, the founder of Coding House, a $50,000 fine and ordered the school to shut down. (The BPPE had previously denied Coding School’s application to operate, in November 2015, June 2016, and again on Nov. 4, 2016.) The regulators have told the school to give refunds to all students who have attended since it opened its doors in 2014. Coding House has filed an appeal. In the meantime it has suspended its programs, students said.
…
Coding House’s spectacular fall is an extreme case, but interviews with more than a dozen coding school graduates reveal that when they do land a job, often their engineering education doesn’t cut it. Many admit they lack the big-picture skills that employers say they want. Training them often requires hours of hand-holding by more experienced staff, employers say. The same holds true for graduates holding computer science degrees, but those employees generally have a better grasp of broader concepts and algorithms, recruiters said.

This is the proper way to be in the landlording business!

Jonathan Gray of Blackstone Group LP went on the biggest homebuying spree in history after the U.S. foreclosure crisis, purchasing repossessed properties from the courthouse steps and through online auctions.

Four years, $10 billion and roughly 50,000 homes later, he will find out if his gambit will pay off. Invitation Homes LP, the Dallas-based company Blackstone formed to maintain and rent those homes, has filed confidentially for an initial public offering that could come as soon as January.

Though Blackstone is unlikely to sell much or even any of its stake in an IPO, the stock market debut will test investors’ interest in the idea that the rental-home business can be institutionalized as apartments, shopping centers and office towers were before.

They’re big enough with holdings concentrated enough to get good tradesmen service – perhaps even hire some full-timers.

When you write cheques worth half your electrician’s revenue … he answers your calls same day!

The Bank of Canada stood pat on rates:

The Bank of Canada today announced that it is maintaining its target for the overnight rate at 1/2 per cent. The Bank Rate is correspondingly 3/4 per cent and the deposit rate is 1/4 per cent.

Economic data suggest that global economic conditions have strengthened, as the Bank anticipated in its October Monetary Policy Report (MPR). However, uncertainty, which has been undermining business confidence and dampening investment in Canada’s major trading partners, remains undiminished. Following the election in the United States, there has been a rapid back-up in global bond yields, partly reflecting market anticipation of fiscal expansion in a US economy that is near full capacity. Canadian yields have risen significantly in this context.

In Canada, the dynamics of growth are largely as the Bank anticipated. Following a very weak first half of 2016, growth in the third quarter rebounded strongly, but more moderate growth is anticipated in the fourth quarter. Consumption growth was robust in the third quarter, supported by the new Canada Child Benefit, while the effects of federal infrastructure spending are not yet evident in the GDP data. Meanwhile, business investment and non-energy goods exports continue to disappoint. There have been ongoing gains in employment, but a significant amount of economic slack remains in Canada, in contrast to the United States. While household imbalances continue to rise, these will be mitigated over time by announced changes to housing finance rules.

Total CPI inflation has picked up in recent months but is slightly below expectations, largely because of lower food prices. Core inflation is close to 2 per cent because the effect of persistent economic slack is still being offset by that of past exchange rate depreciation, although the latter effect is dissipating.

Overall, the Bank’s Governing Council judges that the current stance of monetary policy remains appropriate. Therefore, the target for the overnight rate remains at 1/2 per cent.

It looks like the Banca Monte dei Paschi di Siena bail-out is going to be another brain-dead one, with recoveries based on who you are rather than what you own:

Monte dei Paschi must raise 5 billion euros ($5.4 billion) by the end of this month to avoid being wound down, but private investors are reluctant to provide cash after Renzi lost a referendum on Sunday and announced plans to resign.

The bank is set to raise 1 billion euros from a bond swap with institutional investors and Rome is hoping the 2 billion euros participation from the government could help persuade private investors to fill the 2 billion euros gap.
…
Italy’s treasury would buy the bonds held by around 40,000 retail investors at face value, the sources said.

That way, the government would ensure retail investors do not suffer any losses in the bank’s bailout, making it politically more palatable and staving off the risk of a run on deposits that could trigger a wider banking crisis.

The retail bail-out has been linked to fears of a run, which makes no sense:

Any state intervention to help Monte dei Paschi would entail losses for the bank’s subordinated bondholders in line with European bank crisis rules – something Renzi’s government had desperately sought to avoid to stave off the risk of a run on deposits and a domino effect engulfing other lenders.

It was not immediately clear to what extent retail investors, who hold 2.1 billion euros of Monte dei Paschi junior debt, could be spared in the event of a state rescue.

PerpetualDiscounts now yield 5.50%, equivalent to 7.15% interest at the standard equivalency factor of 1.3x. Long corporates now yield about 4.05%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 310bp, a significant widening from the 300bp reported November 16.