Recent musings on an Ontario tax hike should focus attention on Japan’s woes:
Japanese Prime Minister Shinzo Abe is discovering that haste makes waste.
Trying to double his nation’s sales tax to 10 percent over an 18-month period has resulted in the fourth recession since 2008 and the need to postpone the increase’s second part planned for next October. With an election now pending, the levy may be on hold at 8 percent until 2017.
The lesson is that the increases proved too much, too soon, and baby steps may have been more prudent, with the initial 3 percentage-point boost equivalent to 60 percent of the original level. In contrast, the U.K.’s 2011 increase of 2.5 percentage points amounted to a much smaller 14 percent boost and didn’t generate a recession.
Coming up next …Greenspan’s Conundrum Redux!
When then-Federal Reserve Chairman Greenspan raised the benchmark overnight rate from 2004 to 2006, long-term borrowing costs failed to increase, thwarting his attempts to tighten credit and curb excesses that contributed to the worst financial crisis in 80 years.
“We wanted to control the federal funds rate, but ran into trouble because long-term rates did not, as they always had previously, respond to the rise in short-term rates,” Greenspan said in an interview last week. He called this a “conundrum” during congressional testimony in 2005.
The bond market is signaling that past may be prologue as Yellen’s Fed prepares to raise rates next year. The yield on the 10-year U.S. Treasury note has fallen 0.71 percentage point in 2014 even as the Fed wound down its bond-buying program and mapped out a strategy to raise the benchmark federal funds rate from near zero, where it has been since 2008.
…
The Fed does have one tool that Greenspan didn’t: a $4.49 trillion portfolio accumulated in three rounds of asset purchases. Selling some of those assets might provide a way to lift long-term rates if necessary, said Michael Gapen, senior U.S. economist at Barclays Plc in New York.
The sanctions on Russia are having some effect, even if some of the effects were unforeseen:
A recession is imminent, inflation is getting out of hand and the ruble and oil are in freefall, Economy Minister Alexei Ulyukayev told Putin, according to people who attended the meeting at the presidential mansion near Moscow in mid-October. Clearly, Ulyukayev concluded, sanctions need to be lifted.
At that, Putin recoiled. Do you, Alexei Valentinovich, he asked, using a patronymic, know how to do that? No, Vladimir Vladimirovich, Ulyukayev was said to reply, we were hoping you did. Putin said he didn’t know either and demanded options for surviving a decade of even more onerous sanctions, leaving the group deflated, the people said.
Days later, they presented Putin with two variants. To their surprise, he chose an initiative dubbed “economic liberalization,” aimed at easing the financial burden of corruption on all enterprises in the country, the people said. It was something they had championed for several years without gaining traction.
The policy, which Putin plans to announce during his annual address to parliament next month, calls for a crackdown on inspections and other forms of bureaucratic bullying that cost businesses tens of billions of dollars a year in bribes and kickbacks, the people said. It entails an order from the president to end predatory behavior, with prosecution being the incentive for compliance, they said.
There will be another round of bank bashing:
The biggest Wall Street banks have used their ownership of metal warehouses, oil tankers and other commodities businesses to gain unfair trading advantages and dominate markets, according to a U.S. Senate investigation.
In a 400-page report focused on Goldman Sachs Group Inc., Morgan Stanley (MS) and JPMorgan Chase & Co., a Senate panel said the firms have eroded what was once a strict line separating banking from commodities to the detriment of consumers and the financial system. The activity gives banks access to non-public information that could move markets and increases the likelihood that industrial accidents will spur taxpayer bailouts, the Permanent Subcommittee on Investigations found.
“We simply cannot allow a large powerful Wall Street bank the power to influence the price of a commodity essential to our economy,” Senator Carl Levin, who chairs the panel, told reporters in Washington today. He added that his staff “found substantial evidence that these activities expose major banks to catastrophic risks that are poorly understood.”
The controversy over banks’ involvement with commodities has spurred the Federal Reserve to review regulations and prompted some Wall Street firms to try to shed assets. Levin’s new findings include details on clients who entered into controversial aluminum transactions with Goldman Sachs and reveal that an employee questioned whether market-moving information could be passed on to traders.
…
In August [2013], a district judge dismissed a suit against the firm and others brought by aluminum consumers, saying that an increase in a price component of aluminum was “an unintended consequence of rational profit maximizing behavior rather than the product of conspiratorial design.”
It was a good day for the Canadian preferred share market, with PerpetualDiscounts gaining 3bp, FixedResets winning 14bp and DeemedRetractibles up 13bp. Volatility was nil. Volume was very low.
PerpetualDiscounts now yield 5.03%, equivalent to 6.54% interest at the standard equivalency factor of 1.3x. Long corporates yield about 4.2%, so the pre-tax interest-equivalent spread (in this context, the “Seniority Spread”) is now about 235bp, unchanged from the November 5 report.
| 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 | -0.3390 % | 2,532.1 |
| FixedFloater | 0.00 % | 0.00 % | 0 | 0.00 | 0 | -0.3390 % | 4,008.9 |
| Floater | 2.98 % | 3.08 % | 59,597 | 19.48 | 4 | -0.3390 % | 2,691.8 |
| OpRet | 4.02 % | 0.26 % | 95,527 | 0.08 | 1 | 0.0000 % | 2,748.7 |
| SplitShare | 4.27 % | 4.03 % | 50,348 | 3.78 | 5 | 0.1240 % | 3,190.7 |
| Interest-Bearing | 0.00 % | 0.00 % | 0 | 0.00 | 0 | 0.0000 % | 2,513.4 |
| Perpetual-Premium | 5.43 % | -9.72 % | 62,059 | 0.09 | 19 | 0.0903 % | 2,488.2 |
| Perpetual-Discount | 5.12 % | 5.03 % | 99,991 | 15.38 | 16 | 0.0343 % | 2,673.3 |
| FixedReset | 4.17 % | 3.57 % | 178,994 | 4.55 | 74 | 0.1360 % | 2,592.2 |
| Deemed-Retractible | 4.95 % | -0.54 % | 97,471 | 0.11 | 40 | 0.1323 % | 2,609.7 |
| FloatingReset | 2.56 % | -6.10 % | 58,697 | 0.08 | 6 | 0.1109 % | 2,556.3 |
| Performance Highlights | |||
| Issue | Index | Change | Notes |
| No individual gains or losses exceeding 1%! | |||
| Volume Highlights | |||
| Issue | Index | Shares Traded |
Notes |
| BMO.PR.S | FixedReset | 139,500 | Scotia crossed 85,000 at 25.51. RBC crossed blocks of 25,000 and 20,500 at the same price. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-05-25 Maturity Price : 25.00 Evaluated at bid price : 25.50 Bid-YTW : 3.52 % |
| FTS.PR.M | FixedReset | 115,815 | Scotia crossed 100,000 at 25.35. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-12-01 Maturity Price : 25.00 Evaluated at bid price : 25.44 Bid-YTW : 3.70 % |
| TD.PF.A | FixedReset | 79,190 | Scotia crossed 25,000 at 25.54. Jacob Securities (who?) crossed 50,000 at 25.56. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-10-31 Maturity Price : 25.00 Evaluated at bid price : 25.53 Bid-YTW : 3.49 % |
| TRP.PR.B | FixedReset | 51,467 | RBC crossed blocks of 12,100 and 25,000, both at 19.00. YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-11-19 Maturity Price : 19.00 Evaluated at bid price : 19.00 Bid-YTW : 3.79 % |
| TD.PF.B | FixedReset | 38,924 | Nesbitt crossed 25,000 at 25.45. YTW SCENARIO Maturity Type : Call Maturity Date : 2019-07-31 Maturity Price : 25.00 Evaluated at bid price : 25.38 Bid-YTW : 3.51 % |
| NA.PR.W | FixedReset | 23,620 | YTW SCENARIO Maturity Type : Limit Maturity Maturity Date : 2044-11-19 Maturity Price : 23.24 Evaluated at bid price : 25.31 Bid-YTW : 3.65 % |
| There were 19 other index-included issues trading in excess of 10,000 shares. | |||
| Wide Spread Highlights | ||
| Issue | Index | Quote Data and Yield Notes |
| NEW.PR.D | SplitShare | Quote: 32.65 – 33.65 Spot Rate : 1.0000 Average : 0.8547 YTW SCENARIO |
| BAM.PR.M | Perpetual-Discount | Quote: 22.01 – 22.33 Spot Rate : 0.3200 Average : 0.2334 YTW SCENARIO |
| GWO.PR.N | FixedReset | Quote: 21.50 – 21.79 Spot Rate : 0.2900 Average : 0.2069 YTW SCENARIO |
| MFC.PR.G | FixedReset | Quote: 26.10 – 26.44 Spot Rate : 0.3400 Average : 0.2611 YTW SCENARIO |
| TD.PR.R | Deemed-Retractible | Quote: 26.35 – 26.64 Spot Rate : 0.2900 Average : 0.2173 YTW SCENARIO |
| ENB.PR.B | FixedReset | Quote: 24.75 – 25.00 Spot Rate : 0.2500 Average : 0.1813 YTW SCENARIO |