PrefBlog

The downside of the elimination of bankruptcy law as it relates to banks is becoming apparent:

But after studying the proposals, National Bank Financial analyst Peter Routledge found that, under the new rules, commmon shareholders should be much more concerned, because they are quickly treated as collateral damage under the new regime. Should a new crisis emerge, common shareholders could be quickly wiped out, and that could rewrite the survival playbook.

Employing standard banking assumptions about leverage ratios and balance sheet sizes, Mr. Routledge discovered that just a 6 per cent drop in asset values, possibly from writing down a loan book and securities portfolio, would deplete a bank’s common equity capital. Because the bank’s existing common shareholders would then be wiped out, the preferred shareholders and bondholders would have their securities converted into common shares – making them the bank’s new owners.

Under the old rules, governments tried their best to protect common shareholders by setting up bailout schemes such as the Troubled Asset Relief Program, which purchased preferred shares and took toxic debt off of bank balance sheets, but did not upend the common equity investor base.

Mr. Routledge worries too few people appreciate just how easy it is to wipe out the existing shareholders under the proposed rules. When people start to realize this, possibly during the next crisis, he fears it will have disastrous implications for troubled banks.

Speaking of banks and debt:

Debt reduction through austerity reduces spending and thus slows growth; slower growth reduces incoming revenues and thus limits the ability to reduce debt.

This is a factor in the stubborn lack of global capital investment that has been limiting economic expansion – and Canada is no exception.

Standard & Poor’s on Monday pointed a finger at consumer debt as it lowered its 2014 growth forecast for the Canadian economy to 2.3 per cent from 2.5 per cent.

“Consumers might still be postponing purchases, worried about the heavy debt burdens they built up in the past decade, and this could be short-circuiting the growth we normally see in recoveries,” said S&P global fixed income analyst Robert Palombi. Without that consumer pick-up, he said, businesses lack a key catalyst to invest in expansion, which in turn has stifled employment growth.

New OSFI honcho Jeremy Rudin gave a speech to the Economic Club of Canada but didn’t say anything of interest.

The ruble’s in trouble:

Prospects Russia is considering capital controls amid the worst performance in emerging markets for the nation’s bonds and currency sent the ruble tumbling past the level at which the central bank said it would step in.

The ruble temporarily slid beyond 44.40 against the Bank of Russia’s basket of dollars and euros after two officials said policy makers are considering temporary restrictions if net outflows rise significantly. It pared declines after the central bank said it isn’t considering limits on cross-border capital movements. The yield on 10-year bonds rose six basis points to 9.42 percent, bringing this quarter’s increase to 102 basis points. The Micex Index pared its first gain in four days.

Reimposing restrictions on the flow of money that were abandoned eight years ago threatens to worsen a selloff in Russian assets that has gained momentum as the U.S. and European Union expanded sanctions over the conflict in Ukraine. The ruble slid 14 percent versus the dollar this quarter, breaking record lows in the past three days.

“Capital outflows should sharply increase now,” Stanislav Kopylov, who helps manage 45 billion rubles ($1.14 billion) at UralSib Asset Management in Moscow, said by phone from Moscow. “When you’re threatened like that, you need to urgently pull out the cash.”

And so much for Putin’s grandiose dreams of having a reserve currency:

After proclaiming in 2007 that the ruble was poised to become a haven for global investors, the Russian leader has watched it fade, a victim of his nation’s stagnating economy since the land grab in Ukraine. Now so much money is leaving Russia that its central bank is considering temporary capital controls, according to two officials with direct knowledge of the discussions.

The ruble’s share of global trading dropped to 0.4 percent from 0.6 percent since 2012, falling five places to rank 18th most-traded in the world, while the yuan tripled to 1.5 percent, according to the Society for Worldwide Interbank Financial Telecommunication, or SWIFT. Even as protests in Hong Kong this week challenged China’s leadership, direct trading began between the yuan and the euro, capping a year in which trade with European Union nations grew 12 percent.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts gaining 2bp, FixedResets up 8bp and DeemedRetractibles off 1bp. Volatility was low. Volume was low.

Now to figure out why PrefInfo isn’t working.

I swear, I’m thinking about changing the name of this thing to RealEstateBlog! Whenever I post about real estate prices I get more responses than with respect to anything else. So, Garth Turner, look out!

Assiduous Reader prefhound sends me a clipping with the following assertions:

I conclude that a house is pretty much similar to a financial investment. Even today’s apparently “elevated” house prices seem reasonably similar to today’s “modest” long term future equity investment potential on an after-tax basis.

For example, at today’s house prices, buying a house for X dollars could generate a long run return of about 3% (tax free). I see this as coming from the sum of 4 components:
1. Cost of Property Tax – about 1% of X per year
2. Cost of Maintenance and Ongoing Renovations – about 3% per year. Some years are much lower and some much higher.
3. Long run Price Appreciation of property – about 3% per year if kept livable and up to standard. 3% = 2% inflation plus the long run salary growth due to 1% productivity gains.
4. Rent Savings of approximately 4% of the house value per year.

Add up these items (4% in costs; 7% in gains and savings) and the result is about 3% long run return.

Further, with a little help from a few educated estimates:

With my previous estimates of rents and competitive investment returns after tax (all smoothed to the same return every year – which is an approximation), I then compared the house owning scenario to a renting scenario where the total cash flows were the same, but any excess/shortfall went into/came from investments.

Remarkably, the renting scenario came out with a current investment asset worth about 96% of the current house value. The renting scenario was roughly financially equivalent to owning.

In the renting scenario we were saving a lot of money for the first 15 years, but then drawing down from savings to pay rent in recent years when maintenance was lower.

… and, provocatively:

Another aspect of this discussion is that houses seem like strip bond investments in an asset mix. This is especially true if there is no mortgage making home equity more volatile.

Perhaps asset mix discussions should consider a paid off house as a bond and a fully mortgaged house as equity, so that the fraction equity = current mortgage / value ratio. This may be sensible while working and continuously saving, but when retirement cash flows require drawing on investments, income generating financial fixed income becomes increasingly important.

So, like Assiduous Reader adrian2, prefhound is holding to the ‘house price proportional to inflation plus productivity’ argument.

While pondering this, and wondering why I didn’t become a real-estate analyst, I came across a paper by Peter Harrison titled MEDIAN WAGES AND PRODUCTIVITY GROWTH IN CANADA AND THE UNITED STATES:

In 2008, Sharpe, Arsenault and Harrison attempted to explain why the median earnings of full-time, full-year workers in Canada rose only $53 dollars, from $41,348 (2005 dollars) in 1980 to $41,401 in 2005, while over the same period, total economy labour productivity gains were 37.4 per cent. They identified four key factors: measurement issues, rising earnings inequality, falling terms of trade of labour (the relationship between the prices workers receive for output and the cost of living), and falling labour share. That study in some sense raised more questions than it answered about the relationship between real wages and labour productivity. This research note expands on Sharpe, Arsenault, and Harrison (2008) in order to shed additional light on the relationship.

The guts of the matter is a very interesting table:

This table is applicable to 1980-2005 which is to say from the tail-end of the inflationary period to the middle of the Great Moderation.

Ha! So where’s your productivity gains now, fellas? Admittedly, this analysis refers to the entire labour pool and I suspect that only the upper 60% of the labour pool really counts, but still, that’s a real eye opener. Like I always say, the means of production should controlled by the proletariat, held in trust by me.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts up 12bp, FixedResets off 6bp and DeemedRetractibles gaining 2bp. Volatility was minimal. Volume was absurdly low.

On September 24, I mentioned bank account promotions in which depositors effectively received a lottery ticket for making a deposit – this is similar to premium bonds in the UK, but not government-backed. My attention has now been drawn to a more savory alternative:

VISIT an outlet of Chilango, a Mexican food chain in London, and you will be invited to “become part of the story”, not just by eating a burrito but by buying a “burrito bond”. These are four-year loans to the firm of at least £500 ($835), paying annual interest of 8%, along with a variable number of free burritos, depending on how much an individual lends. Helped by Crowdcube, a crowdfunding website, Chilango has already raised £1.8m in this way—80% more than its initial goal—from 585 bond-buyers.

In Britain “mini-bonds” are more loans than bonds, in that they are not tradable (elsewhere they are a less regulated version of conventional bonds). They let individuals lend money directly to small, unlisted businesses. They tend to pay well, albeit with lots of risks and quirks.

We’ll never get that here in Canada. Small, unlisted businesses don’t employ ex-regulators and are therefore beyond the Pale.

There may have been a a little progress made in the battle against bank hegemony:

The Canadian Securities Administrators (the CSA) recently announced that the operation of the CSA National Systems (SEDAR, SEDI and NRD) has been transferred as of January 13, 2014 from CDS INC. to CGI Information Systems and Management Consultants Inc. (CGI).

As a result, CDS INC. (through its affiliate CDS Innovations Inc.) is no longer the exclusive provider of SEDAR data feeds. The CSA will now become the direct provider of these data services to subscribers and data resellers. The services consist of the provision of Canadian public company data filed on SEDAR as well as investment fund data filings. The data is delivered in near real-time (i.e., shortly after the time when made publically available in SEDAR), and includes the original PDF formatted filing, a text conversion of the filed document, and a control file indicating changes in the status of filed information.

Customization of information content received (for example, filtering to receive only certain documents) will continue to be available.

Going forward, these SEDAR data services will be offered directly by the Alberta Securities Commission (ASC), in its capacity as the representative securities regulatory authority authorized to grant licenses and enter into agreements with third parties relating to the use of SEDAR data. SEDAR data services can also be obtained from value-added resellers who have been authorized by the ASC to provide the services.

In addition, data feeds of SEDI data or an organization’s NRD data are no longer delivered by CDS INC. or its affiliate CDS Innovations Inc. These services are now offered directly by the ASC, again in its capacity within the CSA as the representative securities regulatory authority authorized to grant licenses and enter into agreements with third parties relating to the use of SEDI data or NRD data.

SEDI data services consist of providing publicly available information on filings, holdings and transactions by insiders of Canadian public companies who are required to report such trades in SEDI. The SEDI system contains information on almost 50,000 insiders and 6,400 issuers, and averages 20,000 insider reports per month.

A registered firm may subscribe to NRD data services to receive a regular feed of its organization’s registered individuals and registration categories.

Should you have interest in or questions about the services noted above, or wish to become a value added reseller, please contact the CSA IT Systems Office at data-distribution-services@csa-acvm.ca

Regrettably, however, this public information is still not public:

Except as otherwise set out in these Terms of Use or unless you have a written agreement in effect with the ASC which states otherwise, you may only provide a hypertext link to this Web Site on another web site, provided that (a) the link is a text-only link clearly marked “SEDAR Home Page”; (b) the user must be linked directly to the URL http://www.sedar.com and not to any other pages within this Web Site; …

Huh. I’ll be writing the ASC and asking for permission to link to the secret public documents. Any bets on my success?

Assiduous Reader MP sends me a link – unlike youse other bums, who never send me NUTHIN’ – to the page for Andrew McCreath’s BNN show, which includes links to two interviews with Nicolas Normandeau, PM of HPR. The first is a competently performed exposition of preferred share basics, the second has a moment of interest when Mr. Normandeau explains his liking for bank-issued DeemedRetractibles. He also doesn’t like FixedResets with low Issue Reset Spreads and claims to have positioned the fund for a modest upwards parallel shift in market yields. Mr. Normandeau works for Fiera, which is controlled by National Bank, as discussed on March 4, 2013.

It was a mixed day for the Canadian preferred share market, with PerpetualDiscounts off 3bp, FixedResets up 7bp and DeemedRetractibles gaining 2bp. Volatility was nonexistent. Volume was very extremely awfully low.

Michael Lewis – whose book, Flash Boys, is a favourite target for mockery on PrefBlog – had some sharp observations:

Technology entrepreneurship will never have the power to displace big Wall Street banks in the central nervous system of America’s youth, in part because tech entrepreneurship requires the practitioner to have an original idea, or at least to know something about computers, but also because entrepreneurship doesn’t offer the sort of people who wind up at elite universities what a lot of them obviously crave: status certainty.

“I’m going to Goldman,” is still about as close as it gets in the real world to “I’m going to Harvard,” at least for the fiercely ambitious young person who is ambitious to do nothing in particular.

I don’t agree with many of his other assertions in the piece, but I liked that bit!

Eddy Elfenbein of the blog Crossing Wall Street reminds us that a house is just an asset:

Some trader right now is investing in, say, copper. I wish them well. But remember that copper has no independent value. By itself, it’s just an element. Not to get too philosophical, but copper’s entire value is based on what it can do for us. What are the goods and services it can enhance? For that to happen, copper needs to pass though the hands of a business.

This is why long-term studies of what’s been the best investment usually have stocks at the top, followed by bonds and real estate followed by commodities. When you’re investing in a company, you’re really investing in human ingenuity—the way that people can come together and figure out how to make something useful from those assets.

Real estate, for example, is a nice investment. I hope everyone owns their own home. But in the long run, real estate will never, ever, ever, ever outpace stocks. Never. This isn’t just my opinion, it’s reality. It won’t happen because it can’t happen.

A house is simply an asset. No matter how hard it tries, it will never be anything more than an asset. A house does its job by just sitting there. But a stock is different. A stock is part ownership in a corporation. A corporation is people using assets to create wealth. This ain’t just a matter of definitions.

A house’s return cannot exceed inflation over the long term – who would be able to buy it? However, things over the short term can be different, and the short-term can quite possibly exceed one’s lifespan. At present, Canadian house prices are rocketing upwards and have done so for a very long time; part of the recent rise has been interest rates; longer term it has been both a revaluation (in real terms, not just nominal) of the value of having a place to live in the city, whether the city is Toronto, Vancouver or Calgary; and part of it, I think, is due to income inequality. House prices are based not on the average wage of all Canadians, but on the average wage of those Canadians who can afford to buy houses.

My personal view is that a house is just a place to live. But I do know quite a few people who consider them to be investments and buy extra ones for rental purposes. Part of this is risk-aversion; while house prices can and do decline, they rarely decline by as much as equities did during the Credit Crunch. Part of this is wilful blindness; you don’t get a monthly statement from your real-estate broker giving you a solid idea of what you could get for your house if you sold it that day. Part of this is a question of control: renting out houses or speculating on them is something that you can do yourself, without any of the agency problems involved in giving your broker some money to invest on your behalf in companies run by other people, which will be valued by a third set of people. And part of it is … what if I’m wrong?

US public pensions are going to cost a lot:

The 25 largest U.S. public pensions face about $2 trillion in unfunded liabilities, showing that investment returns can’t keep up with ballooning obligations, according to Moody’s Investors Service.

The 25 biggest systems by assets averaged a 7.45 percent return from 2004 to 2013, close to the expected 7.65 percent rate, Moody’s said in a report released today. Yet the New York-based credit rater’s calculation of liabilities tripled in the eight years through 2012, according to the report.

“Despite the robust investment returns since 2004, annual growth in unfunded pension liabilities has outstripped these returns,” Moody’s said. “This growth is due to inadequate pension contributions, stemming from a variety of actuarial and funding practices, as well as the sheer growth of pension liabilities as benefit accruals accelerate with the passage of time, salary increases and additional years of service.”

Here’s a milestone: Government Motors is investment grade:

General Motors Co. (GM), five years after emerging from a government-backed bankruptcy, was returned to investment grade by Standard & Poor’s Ratings Services.

S&P upgraded the biggest U.S. automaker to BBB- from BB+ today, citing progress in Europe, healthy cash flow and limited reputational and market share damage as a result of the company’s record recalls. The ratings outlook is stable.

It was a poor day for the Canadian preferred share market, with PerpetualDiscounts losing 32bp, FixedResets off 8bp and DeemedRetractibles down 10bp. Volatility was low. Volume was low.