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.
| HIMIPref™ Preferred Indices These values reflect the December 2008 revision of the HIMIPref™ Indices Values are provisional and are finalized monthly |
|||||||
| Index | Mean Current Yield (at bid) |
Median YTW |
Median Average Trading Value |
Median Mod Dur (YTW) |
Issues | Day’s Perf. | Index Value |
| Ratchet | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.2339 % | 2,683.4 |
| FixedFloater | 4.20 % | 3.46 % | 24,517 | 18.43 | 1 | 0.0885 % | 4,131.0 |
| Floater | 2.88 % | 3.01 % | 59,274 | 19.70 | 4 | 0.2339 % | 2,774.8 |
| OpRet | 4.05 % | 1.98 % | 96,865 | 0.08 | 1 | -0.0790 % | 2,728.2 |
| SplitShare | 4.30 % | 3.86 % | 104,242 | 3.89 | 5 | -0.1412 % | 3,150.4 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.0790 % | 2,494.6 |
| Perpetual-Premium | 5.49 % | 2.33 % | 74,457 | 0.09 | 20 | -0.0989 % | 2,438.8 |
| Perpetual-Discount | 5.28 % | 5.20 % | 105,920 | 15.13 | 16 | -0.3184 % | 2,587.0 |
| FixedReset | 4.25 % | 3.81 % | 187,683 | 8.43 | 75 | -0.0796 % | 2,553.6 |
| Deemed-Retractible | 5.01 % | 2.22 % | 105,314 | 0.41 | 42 | -0.0989 % | 2,560.8 |
| FloatingReset | 2.58 % | -2.37 % | 70,136 | 0.08 | 6 | -0.1498 % | 2,536.5 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| TRP.PR.C | FixedReset | -1.45 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-09-25 Maturity Price : 21.39 Evaluated at bid price : 21.70 Bid-YTW : 3.83 % |
| BAM.PF.D | Perpetual-Discount | -1.33 % | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-09-25 Maturity Price : 21.27 Evaluated at bid price : 21.56 Bid-YTW : 5.70 % |
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| FTS.PR.M | FixedReset | 267,530 | Recent new issue. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-12-01 Maturity Price : 25.00 Evaluated at bid price : 25.15 Bid-YTW : 4.01 % |
| ENB.PF.G | FixedReset | 87,196 | Recent new issue. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-09-25 Maturity Price : 23.10 Evaluated at bid price : 24.97 Bid-YTW : 4.28 % |
| POW.PR.C | Perpetual-Premium | 70,500 | Scotia crossed 25,000 at 25.23; TD crossed 19,900 at the same price; Nesbitt crossed 25,000 at the same price again. YTW SCENARIO Maturity Type : Call Maturity Date : 2014-10-25 Maturity Price : 25.00 Evaluated at bid price : 25.20 Bid-YTW : -7.62 % |
| MFC.PR.C | Deemed-Retractible | 49,454 | TD crossed 40,000 at 22.73. YTW SCENARIO Maturity Type : Hard Maturity Maturity Date : 2025-01-31 Maturity Price : 25.00 Evaluated at bid price : 22.70 Bid-YTW : 5.73 % |
| HSE.PR.A | FixedReset | 35,756 | Nesbitt crossed 25,000 at 22.92. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-09-25 Maturity Price : 22.50 Evaluated at bid price : 22.90 Bid-YTW : 3.80 % |
| POW.PR.B | Perpetual-Premium | 34,843 | Nesbitt crossed 30,000 at 24.85. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-09-25 Maturity Price : 24.57 Evaluated at bid price : 24.83 Bid-YTW : 5.39 % |
| There were 23 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| HSB.PR.D | Deemed-Retractible | Quote: 25.34 – 25.91 Spot Rate : 0.5700 Average : 0.4118 YTW SCENARIO |
| SLF.PR.G | FixedReset | Quote: 21.82 – 22.13 Spot Rate : 0.3100 Average : 0.1968 YTW SCENARIO |
| BAM.PF.E | FixedReset | Quote: 24.61 – 24.95 Spot Rate : 0.3400 Average : 0.2508 YTW SCENARIO |
| IAG.PR.A | Deemed-Retractible | Quote: 22.92 – 23.25 Spot Rate : 0.3300 Average : 0.2410 YTW SCENARIO |
| W.PR.H | Perpetual-Premium | Quote: 25.02 – 25.30 Spot Rate : 0.2800 Average : 0.2050 YTW SCENARIO |
| MFC.PR.G | FixedReset | Quote: 25.81 – 26.01 Spot Rate : 0.2000 Average : 0.1337 YTW SCENARIO |
“A house’s return cannot exceed inflation over the long term – who would be able to buy it?”
This is a common fallacy. A house’s return, over the long term, will go in tandem with the buying power of the population. Setting aside interest rates, it will directly track median salaries, which increase (usually) a bit above inflation.
Yes, I stand corrected. It makes sense for houses to be priced at a constant proportion of the buyer’s income rather than at a constant proportion of a basket of goods and services.
I’ll quibble, however, that the price should not track median salary since the bottom X% of income earners won’t be buying.