9 Responses to “July 18, 2016”

1. Nestor says:

   July 19, 2016 at 4:19 am

   James. I’m curious and forgive me if this is a stupid question… but why would a bank or insurance company issue preferred shares instead of debt at this point? if CIBC can borrow money at less than 0%, why issue preferred shares at much higher rates?? is there something i’m missing?

2. BarleyandHops says:

   July 19, 2016 at 2:31 pm

   What Nestor said….

3. malcolmm says:

   July 19, 2016 at 4:06 pm

   I’m wondering the same thing.

   I would also like to know who is buying these negative yield bonds? Is it other banks and governments? I can’t imagine why an individual investor or a money manager would buy such a product.

4. BarleyandHops says:

   July 19, 2016 at 5:17 pm

   Central bankers are in the midst of changing deposit rules that have an impact on how you store money/assets.

   In these uncharted waters, pound-a-mole will become the norm.

   eg:

   Nagy said that both interbank rates and government debt yields could fall as the new regime takes effect. One bond trader said yields fell by about 7 to 9 basis points on papers maturing in 2018 after the announcement

   http://www.reuters.com/article/hungary-centralbank-idUSL8N19Y4G7

   “would buy such a product” – a choice might be hold cash in a bank account and face negative rates of interest, warehouse cash in an off site facility, or hold paper that has a less negative rate but is not subject to new deposit rules that may force you to pitchin (so to speak) to save a financial institution should it go belly up.

   just saying that rules change behavior and lead to unanticipated outcomes

   rulz iirc : A US person can no longer hold physical gold in a safety deposit box

5. jiHymas says:

   July 20, 2016 at 12:18 am

   if CIBC can borrow money at less than 0%, why issue preferred shares at much higher rates??

   This question comes up fairly frequently!

   It is a question of Tier 1 Capital. This is mostly common equity but preferred shares may be included if they meet certain requirements – they must be perpetual, there must be no ‘step-up’ provision that would effectively put a maturity date on them (i.e., pays 5% now, pays 10% in five years … that’s not a pure perpetual, that’s more like a five year bond, so not allowed), dividends must be non-cumulative, issuers must be able to stop paying dividends without triggering default and, for banks, there must a NVCC clause.

   Tier 1 Capital is an important thing. It’s no longer as central as it was – investors during the crunch and regulators after the crunch started concentrating more on common equity – but it’s still very important. If you issue $10 worth of loans (risk-weighted), you have to have $1 of Tier 1 Capital. There is also the Leverage Ratio, so for $20 of loans (not risk-weighted) you still have to have that $1 of Tier 1 Capital.

   So, basically, you can get Tier 1 Capital from either common equity or preferred shares. The banks endeavor to get 12%+ return on common equity, so from their perspective it ‘costs’ them 12%+ to issue. Preferred shares only cost about 5% (in current conditions). So preferred shares are cheaper to issue, but there’s a limit on them.

   There is also a limit, by the way, on the amount of covered bonds they can issue. OSFI is concerned that in bad times, it might be a Bad Thing to have too big a proportion of the assets of the bank tied up to collateralize their covered bonds, so they set a limit.

6. jiHymas says:

   July 20, 2016 at 12:35 am

   just saying that rules change behavior and lead to unanticipated outcomes

   Indeed. Thank you for the good summary of the justification for buying negative-yield bonds.

   rulz iirc : A US person can no longer hold physical gold in a safety deposit box

   I do not believe that this is correct. Here’s one recent reference to safe deposit boxes:

   The global economy has been weakening and could worsen ahead, but there are still a lot of market opportunities for investors, said Marc Faber, editor of the Gloom, Boom & Doom Report.

   “We’re all on the Titanic, but the Titanic still has maybe a few days to travel before it collapses so we might as well enjoy the journey,” Faber, also known as Dr. Doom, told CNBC’s “Squawk Box.”

   Anticipating a downtrend, Faber said he’s holding physical gold in safe-deposit boxes and buried in his garden, as well as holding gold mining shares.

   … and there’s another recent reference on Motley Fool:

   Many investors insist on actually taking delivery of their gold, choosing to keep it either at home or in their safety deposit box. That way, if things start to go really bad, it’s easy to access.

   Still, there are disadvantages to this. Even if someone takes steps to secure it, physical gold is still at risk of getting stolen. And renting a safety deposit box can get expensive if you have a lot of gold.

   You may be remembering some apocalyptic advice:

   Many silver and gold buyers forget one of the main reasons to buy physical silver and gold bullion today is due to the world’s current fragile financial system.

   Some even make the mistake of buying physical bullion and then storing it in a Safe Deposit Box at their local bank.

   Why is that a mistake?

   Safe “deposits” held within regulated bank boxes are not very safe, nor private, nor FDIC insured deposits.

   Here are some major drawbacks of putting bullion into Safe Deposit Boxes:

   – Most likely not insured by the bank.

   – In the USA, the FDIC does not ensure your “Safe Deposits”.

   – The IRS can freeze and even seize your box.

   – A Safe Deposit Box is not cost effective for bulk silver storage.

   – Difficult to diversify internationally via Safe Deposit Boxes.

   – Safe Deposit Boxes are subject to bank holidays (for example during 9/11 banks were closed in the USA. Brink’s Salt Lake City remained open for business).

   – In the USA, bank Safety Deposit Boxes are beholden to bank regulations.

   For the record, I am not a fan of gold. It doesn’t pay any income – in fact, it costs money to store it. Some may retort that this state of affairs isn’t all that unusual nowadays, but I am more comfortable investing in a company that is actually going to use the capital to try to make some money.

   It may surprise some, however, that I have a great deal of sympathy for the apocalyptionist (?) view. I’ve always puzzled over the inherent contradiction between holding gold because one is afraid of chaos and then choosing to hold it in an ETF. I mean, if chaos happens, your ETF shares are just going to be another worthless piece of paper – nowadays, not even that given electronic depositories.

   If I was going to own gold as a hedge against the apocalypse, I’d hide it somewhere, with some sewn into the lining of my clothes.

7. stusclues says:

   July 20, 2016 at 8:12 am

   “… buried in his garden”

   Any idea where Marc lives?

8. BarleyandHops says:

   July 20, 2016 at 5:33 pm

   “I am not a fan of gold”

   For the most part, nor am I. However, physical is portable in small doses for the average person. And, has universal value.

9. jiHymas says:

   July 20, 2016 at 9:58 pm

   Any idea where Marc lives?

   I think it’s in a small town called Aesop’s Fables.