PrefBlog

PerpetualDiscounts now yield 5.36%, equivalent to 6.97% 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 290bp, a slight (and perhaps spurious) narrowing from the 295bp reported January 4.

The Canadian Securities Administrators have released their latest plan to increase banks’ hegemony over the financial system, titled CSA CONSULTATION PAPER 81-408 – CONSULTATION ON THE OPTION OF DISCONTINUING EMBEDDED COMMISSIONS.

It is filled with hilarious assertions and disingenuous speculation, such as:

Based on a review of current actively managed fee-based (series F) fund offerings and their five year alphas, the data suggests that:

• 87% of investment fund managers offering actively managed funds today have some funds with negative alphas which could be at risk of redemption if embedded commissions were discontinued and these managers were not able to adjust their fees or improve performance;
• For active investment fund managers that manage funds with negative alphas, the proportion of assets at risk or redemption could be on average 53% of firm assets;
• In aggregate, an estimated 44% of actively managed fund assets may experience redemption and reallocation pressure to competitor investment fund managers over time if embedded commissions were discontinued and these managers were not able to adjust their fees or improve performance; and
• For active investment fund managers with little or no access to related party distribution97, on average 59% of assets at these firms may experience redemption pressure over time assuming once again these managers were not able to adjust their fees or improve performance.

As we have emphasized throughout this section, much depends on how investment fund managers react to the discontinuation of embedded commissions. And as noted earlier, we expect investment fund managers to alter the way that they compete over time by reducing prices and refocusing their distribution efforts toward improvements in risk adjusted performance to retain market share.

“Refocusing their distribution efforts towards improvements in risk adjusted performance to retain market share” … ha! The banks will refocus their distribution efforts towards in-branch sales. Fees will continue to be absurdly high – they might even get higher – and Granny’s going to put her nest-egg into GICs and house funds, just like the nice man at the bank tells her to do.

And we know the nice man at the bank is not just an expert on investments but is also recommending only those vehicles that he, personally, feels will deliver the best returns as part of the best asset mix for the all-important investor, right? We know this, because he’s on salary and doesn’t have to soil his hands with that evil embedded commission “work for a living” crap. PLUS, he works for a bank, so all of Granny’s worries are over.

Another good laugh was afforded by the paragraph:

As for the issue of low financial literacy potentially hindering investors’ ability to assess the value of advisory services or to negotiate fair fees for such services, the CSA anticipate continuing to work on investor literacy initiatives to increase investors’ awareness of investing costs and empower them to confidently engage in the negotiation of fees with their representative. We also expect that our recent POS and CRM2 reforms (further discussed in Part 6) will improve investors’ awareness and understanding of fund and dealer compensation costs in the lead up to any potential rule proposal discontinuing embedded commissions. This improved awareness and understanding in turn should give investors an initial point of reference from which to gauge the appropriateness of advisory fees under direct pay arrangements.

“CSA anticipate continuing to work on investor literacy initiatives to increase investors’ awareness of investing costs and empower them to confidently engage in the negotiation of fees with their representative” … what, you mean both people who searched for and found and read and understood the official financial literacy educational pages put out and paid for by our Wise Masters? You mean, not just the self-proclaimed investor advocates who feverishly looked to see if their particular hobby-horse was addressed, but both of the people who actually read that earnestly presented gobbledy-gook in order to educate themselves? Wow. Quite the accomplishment!

But, really, you want to understand the point of all this verbiage? It’s well illustrated by this chart:

Click for Big

Bank branch distribution has made huge gains over the past ten years and has now pulled equal with the independents. The point of eliminating trailer fees to eliminate the independent channel and move all the business to the banks … nice big banks with enormous compliance departments with lots of jobs for otherwise unemployable ex-regulators. Very expensive plain vanilla funds for everybody and lots of well paying compliance jobs … it’s the regulatory nirvana and it comes closer every day.

Speaking of government idiocy, this is just in from BC:

British Columbia raised the threshold on property tax grants to homes worth as much as C$1.6 million ($1.2 million) to help offset the cost of property taxes in Canada’s most expensive real estate market.

The move, which boosts the threshold from C$1.2 million, is the latest by the provincial government to address public anger over housing affordability ahead of a general election on May 9. On Jan. 16, it also will begin offering loans to plump the down payments of first-time home buyers.

The grant will reduce the annual property tax on a principal residence by up to C$570 a year in urban areas, according to the B.C. Ministry of Finance, which calculates that 83 percent of homes in the Metro Vancouver region will fall below the new threshold. The province expects to spend C$821 million on homeowner grants in 2017-2018, up from C$809 million in the previous year.
…
[BC Finance Minister Michael] De Jong said the grants were intended to help homeowners who, for example, had bought a property for C$50,000 decades ago but were now living on a fixed income and finding it difficult to pay the tax due on a house worth more than C$1 million.

“The loss of that grant which offsets their taxes would be very problematic,” he said. “That’s the target. Those are the circumstances we’re trying to address.”

It’s just craziness … increasing the complexity of the tax system and further eroding the separation of taxation powers between different levels of government.

Jobs, jobs … , well, money, anyway!:

The 156,000 increase in December payrolls followed a 204,000 rise in November that was bigger than previously estimated, a Labor Department report showed Friday in Washington. The median forecast in a Bloomberg survey of economists called for a 175,000 advance. The jobless rate ticked up to 4.7 percent as the labor force grew, and wages rose 2.9 percent from December 2015.