PrefBlog

Powell got hawkish at Jackson’s Hole:

Jerome H. Powell, the chair of the Federal Reserve, delivered a sobering message on Friday, saying the Fed must continue to raise interest rates — and keep them elevated for a while — to bring the fastest inflation in decades back under control.

The central bank’s campaign is likely to come at a cost to workers and overall growth, he acknowledged; but he argued that not acting would allow price increases to become a more permanent feature of the economy and prove even more painful down the road.

Stock prices plunged in the wake of Mr. Powell’s comments, as investors digested his stern commitment to raising rates and choking back inflation even if doing so damages growth and causes unemployment to rise. The S&P 500 fell 3.4 percent, its worst daily showing since mid-June, and investors in bonds began to bet that the central bank will raise rates by more than they had been expecting.

Mr. Powell’s full-throated commitment to defeating inflation began to put to rest an idea that had been percolating among investors: that the central bank might lift rates slightly more this year but then begin to lower them again next year. Instead, the Fed chair echoed many of his colleagues in arguing that rates will need to go higher, and will need to stay in economy-restricting territory for a while, until inflation is consistently coming down.

So the streets were filled with hard-nosed, tough-as-nails, whip-smart financial specialists wondering in bewilderment why inflation couldn’t be licked by the Fed waving its magic wand. Perhaps some of them were contemplating standing on a building ledge to admire the view:

The sell-off capped a week of choppy trading that left major indexes down 4% or more for the week.

All told, the S&P 500 fell 141.46 points to 4,057.66. The benchmark index is now down almost 15% for the year.

The Dow lost 1,008.38 points to close at 32,283.40. The last time the blue-chip average had a 1,000-point drop was in May.

The Nasdaq slid 497.56 points to 12,141.71, its biggest drop since June.

The Russell 2000 index of smaller companies fell 64.81 points, or 3.3%, to finish at 1,899.83.
…
The Toronto Stock Exchange’s S&P/TSX composite index ended down 299.05 points, or 1.5%, at 19,873.29, its biggest decline since July 14 and its lowest closing level since Aug. 9.

For the week, the index was down 1.2%, its second straight weekly decline.

Here’s another straw in the wind for those following the effects of monetary tightening:

The veterinary sector has seen some of the most intense buying by large corporations in the past few years, with industry figures reporting purchase prices sometimes reaching nearly 30 times EBITDA (earnings before interest, taxes, depreciation and amortization) at its peak. That is far beyond the four- or five-times multiple a practice may have fetched in years past.
…
Consolidators in health fields typically take on large debts to purchase the practices, and industry leaders in other markets have said the increasing cost of borrowing is putting pressure on that business model.

“With interest rates expected to increase, we may start to see multiples soften,” Michelle Kellaway, chief operating officer of Australia’s Greencross, told industry publication VIN News in June.

Brent Matthew, an Ontario veterinarian who consults others on how to run their practices, said he is aware of some practice owners who say their offers from VetStrategy have been put on hold but he has not heard from the company directly.

Dr. Matthew helps to value practices and says he has seen the market soften after witnessing intense bidding wars earlier in the pandemic.

Assiduous Readers will remember that I have often ranted about Marginal Effective Tax Rates on the poor, most recently on August 31, 2020. There are now indications that the problem will get some political attention:

Mr. Poilievre cites as an example a single mother with three children, earning $55,000 a year. If she were to earn an additional dollar, he says, clawbacks and taxes would eat up 80 cents – creating a marginal effective tax rate (METR) of 80 per cent.

Interestingly, the Conservative candidate makes the case for tax and benefit reform not on the typical right-wing terrain of economic efficiency but rather through an appeal to equity. Olivier Rancourt, economist with the Montreal Economic Institute, said that framing is more effective political marketing and more likely to directly appeal to the middle class. “It’s a message that conservatives are trying to embrace more and more,” he said.
…
Mr. Poilievre’s solution is broad-based tax reform: cuts to income and payroll taxes, what he describes as a cap on government spending, simplification of the tax code and a joint federal-provincial effort to reduce clawback rates in order to lower METRs. (And, of course, he says he will scrap the current federal fuel charge.)

That joint effort is an acknowledgment that much of the problem is at a provincial level, and is particularly acute for Canadians who face clawbacks of social assistance payments once they start to earn income. The Finance Department analysis found that one-third of social assistance recipients had a marginal effective tax rate of 70 per cent or more – far beyond what even the highest earning Canadians pay.

I can’t say I’m a big fan of Poilievre or the hillbilly base to which he is in thrall, but it’s nice to see the issue get some political attention. On a brighter note, I was pleased to learn of a Department of Finance examination of the subject, which was even linked in the Globe article on-line (God, I love the Internet!):

Among non-SA [Social Assistance] recipient workers, the average EMTR [Effective Marginal Tax Rate] was 33% in 2017. The largest proportion (63.4%) faced EMTRs that were in the 30-49.9% range. About 29.3% faced EMTRs that were below 30% and 7.3% faced EMTRs of 50% or more.
The distribution of EMTRs is different among workers who also rely on SA income. Workers with SA income in their family are more likely to face a 50% EMTR or more. Among them, the proportion facing such a high EMTR varies between 22.7% and 44.9% – depending on the assumption used for estimating SA claw back ratesFootnote3 – compared with 7.3% among non-SA recipients.

I’ve said it before, I’ll say it again: universality is the way to go. A Universal Basic Income. Give every Canadian $X per year, include this $X in their income and adjust the tax rates accordingly to pay for it (reductions in entitlement programmes will also help). Start off small; X=1000. Increase gradually until marginal tax rates for recipients of government assistance do not discourage these people from taking part-time jobs, or picking up an extra shift, or moving to take a better job. Bang. Done.

TXPR closed at 617.19, up 0.50% on the day. Volume today was 1.24-million, slightly below the median of the past 21 trading days.

CPD closed at 12.27, down 0.24% on the day. Volume was 61,300, above the median of the past 21 trading days.

ZPR closed at 10.34, up 0.19% on the day. Volume of 112,170 was slightly above the median of the past 21 trading days.

Five-year Canada yields were up to 3.25% today.

Today’s action, particularly the pop after 4pm, was probably due to tomorrow’s redemption of BMO.PR.D and reinvestment of the proceeds by index and other funds.

PerpetualDiscounts now yield 6.16%, equivalent to 8.01% interest at the standard equivalency factor of 1.3x. Long corporates now yield 4.88%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) has widened slightly (and perhaps spuriously) to 315bp from the 310bp reported August 17.