PrefBlog

American GDP grew at an annualized rate of 3.9% in the third quarter, but economists were not impressed. On a positive note, ADP Employment data was stronger than expected, which implies that next Friday’s jobs number shouldn’t be disastrous, at any event.

In other words: we’re confused! So what else is new?

The Fed cut to 4.50% today, as expected. When the market is unanimous, the Fed usually listens. Accrued Interest looks to the future and sees the potential for future cuts measured in terms of bank rescue rather than broader inflation/economic concerns.

The more things change … in 1993, the US had the steepest yield curve since the Civil War, as the Fed was busy bailing out the banks’ profitability (this was in the aftermath to the S&L crisis, remember). Then, in 1994, the music suddenly stopped and Orange County, among others, couldn’t find a chair. It will be most interesting to see how this cycle unfolds!

Well, thank heavens that month’s over! There have been a huge variation of the returns in the HIMIPref™ indices over the past month and the fund was unfortunate enough to have identified a broad pricing discrepency just as the panic got started. Returns this month are not a complete disaster, I hasten to add, but will have underperformed the index.

Mind you, the yield on the fund’s holdings is now well above the index and credit quality is great … so the faster that things normalize, the happier I’ll be! Results should be published on Saturday November 3, or Sunday at the latest.

There were thirty other index-included $25.00-equivalent issues trading over 10,000 shares today.

US Consumer confidence was reported to be way down today, while housing prices declined at an accellerating rate. Geez, this is sounding a lot like my September 25 post! Perhaps I should just keep a template full of gloomy news and copy-paste!

There was some very interesting news regarding the overall credit crunch today: it seems that Federal Home Loan Banks in the states are making massive loans to the marketplace, financing them by issuing their own paper:

Countrywide Financial Corp., Washington Mutual Inc., Hudson City Bancorp Inc. and hundreds of other lenders borrowed a record $163 billion from the 12 Federal Home Loan Banks in August and September as interest rates on asset-backed commercial paper rose as high as 5.6 percent. The government-sponsored companies were able to make loans at about 4.9 percent, saving the private banks about $1 billion in annual interest.

FHLBanks are kind of interesting. They are regulated not by the Fed, but by the Federal Housing Finance Board,

an independent agency within the executive branch of the federal government.
…
The Finance Board consists of a five-director board—one of whom is the Secretary of Housing & Urban Development (HUD) or the Secretary’s designee. The other four directors are appointed by the President and subject to Senate confirmation. 

In other words, it’s all political. They trumpet their 4.41% Capital to Asset ratio, but there is no indication that I can find – even in the Annual Report for FHLB Atlanta – of how this may be expressed in standard Basel Agreement terms, like “Tier 1 Capital Ratio”. I don’t know. I don’t know very much about this aspect of the US Financial system … and I’m willing to listen carefully to those who do … but this seems to me to be another grossly under-capitalized source of moral hazard, in addition to the GSEs.

A summary article in Voxeu led me to a CEPR Policy Insight which in turn was based on a lecture given 2007-10-1. Recycling of all kinds is very fashionable nowadays! At any rate, Axel Leijonhufvud has joined the debate regarding whether the Fed (and central banks in general) should target inflation alone, or should also pay attention to (potential / perceived) asset bubbles. He argues that the absence of US inflation in the early part of this decade was due not so much to the availability of cheap Chinese labour as it was to the willingness of the Chinese (and others) to accumulate dollar reserves.

So the trouble with inflation targeting in present circumstances is that a constant inflation rate gives you absolutely no information about whether your monetary policy is right.
…
It is a simple observation that the experience of Japan shows that inflation targeting will not by itself protect you against financial instability. The present criticism goes a step further. Inflation targeting might mislead you into pursuing a policy that is actively damaging to financial stability.

He criticizes SIVs, but I find his arguments a little facile. He does not distinguish between liquidity risk and credit risk (he’s not alone there!) and claims that they circumvent the Basel rules. The well-informed readers of this blog will know that while they used to circumvent Basel in the States, liquidity guarantees are now charged against capital. There is, of course, continuing controversy over whether the liquidity guarantees are expensive enough; I suspect that they’re not; and I have good reason to believe that the issue is currently under intense scrutiny by regulators world-wide. But he doesn’t actually say this.

He also claims that the “SIVs were, like hedge funds, highly-leveraged” … I don’t know exactly what he means by this; he may be considering only the very bottom tranche as equity and ignoring the tranching effects of mezzanine notes; it’s not clear. He speaks very highly of NN Taleb and the Black Swan phenomenon, feeling that the concept is not adequately reflected in risk management at large financial institutions. His final conclusion is that the fact that no big exogenous shock caused the current crunch shows that the world financial system is not well understood … which is comforting indeed to those of us employed by it!

In Canada, the most economically illiterate government since Trudeau elected to cut the GST to 5% and reduce the national debt by a mere $22-billion over the next five years while reducing other taxes as well. Perhaps the boomers will all die off without having ever paid for their government services! Interest on public debt is forecast to remain in excess of $30-billion annually; it’s currently 14% of federal revenue.

I have not yet seen any indication on whether there are any implications for interest-equivalency of dividends in the tax changes. Probably not, since it hasn’t been trumpetted.

It was a good day for preferreds today – good volume and the PerpetualDiscount index was actually up 0.1759% on the day, its third up day this month. Before breaking out the champagne, note that today’s gain is less than yesterday’s loss, so the index is still down on the week.

The spread between BAM.PR.M and BAM.PR.N widened some more, on good volume.

There were thirty-two other index-included $25.00-equivalent issues trading over 10,000 shares today.