8 Responses to “May 20, 2022”

1. skeptical says:

   May 22, 2022 at 11:00 am

   Some cheerful thoughts for a lovely Sunday morning.

   Based on the marked discrepancy between perpetuals and the rate resets, one must wonder what does the collective wisdom of the market know?
   Just take a couple of issues- ENB.PR.B, yielding about 6.66% and ENB.PR.A yielding about 6%. A is the oldest ENB issue to my knowledge and has paid a coupon of 5.5% since about 1998. B issue came in much later in the era of ‘promised rising rates.’
   If the rise in rates is indeed permanent and the inflation and consequent higher rates sticky, this is a huge pricing anomaly. If we are indeed entering a world of persistent inflation and rising rates, the prices of these securities should be, reversed, to say the least, if not more.
   After all, if we can be sure of say upwards of 3% GoC5, why wouldn’t you want to own ENB.PR.B that yields 5.2% on par and will reset higher in another 5 years?
   And ENB.PR.A should be a huge duration risk. Yet, the market seems to be acting almost the way the bond market is acting. Inflation chatter is everywhere, but the bond market while skeptically sampling it, hasn’t really made a buy in. Otherwise, all the yields would be much higher.
   Even back in 2008, 5 year GoC was yielding upwards of 4% and 30 year was even higher. That was despite much more subdued inflation.
   So the question is this- why isn’t the bond market responding very forcefully to the threat of higher inflation? Does it really have faith that inflation will be brought down?
   For once, the perpetuals, the corporate bonds and GoC5 are all speaking the same language and that is the inflation will be brought down in the coming months.

   But don’t forget that they were talking the same even six months ago with no recognition of inflation at all and then they all got gobsmacked a few months later.

   If inflation expectations don’t come down, another rout could be in the cards in the coming weeks and months.

2. stusclues says:

   May 23, 2022 at 9:29 am

   “So the question is this- why isn’t the bond market responding very forcefully to the threat of higher inflation?”

   Perhaps the question should be “why does the chattering class presume that CBs will fail at their primary job?”

3. ratchetrick says:

   May 23, 2022 at 8:15 pm

   The CB’s will fail at their primary job because the phenomenon we are experiencing at this moment is not “inflation” as traditionally (and simply) defined as a “demand exceeding supply”. It is, in fact static demand exceeding a temporary supply shortfall caused by “supply chain issues”, the result of assorted one time geopolitical issues. It’s not inflation; it’s inefficiency… simple as that. And it’s temporary. Therefore, central banks, who have only one item in their so called toolbox, the infamous “rate adjustment”, desperately apply it with fanfare , in the same way a losing football team , down by too much too late in the game , desperately applies the “Hail Mary” long bomb pass.

   The central banks have it wrong. That is why they will fail.

4. paradon says:

   May 24, 2022 at 11:59 am

   I think you are drinking the cool-aid. The Government has been telling us that inflation is only temporary for more than a year, the excuses are the only thing that is changing. Wage increases are not temporary and that drives most costs.
   The world of cheap money and uncontrolled printing of money has finally caught up to us.

5. skeptical says:

   May 24, 2022 at 12:33 pm

   The problem here is that most of the Western economies have been hollowed out and can barely breath on rates close to zero. It was a nice little party going on since about 2009 or so. But then, politicians and central banks thought that they were invincible and could violate the laws of nature, free printing etc. And went on a spending binge since 2019.

   As much as inflation is painful, the current structure of our economies will be in shambles at rates even at the ‘neutral’ levels. All the future consumption and demand has been brought forward by lowering rates. Today’s collapse in US housing sales is an important indicator.

   So yes, the Central banks will try to tame inflation by raising rates. But the patient can’t take this much medicine and will succumb way before the required dosage is fully administered.

   The central bankers are killing the patient already on life support by removing the life support, confusing a one off sugar rush with sustained recovery. As the bond market is kind of saying for the last few weeks, the patient is going to go in a coma a lot sooner than people anticipate.

   Energy, food etc. are structural issues that can’t be addressed by Central banks beyond a certain point. If the demand is 120 mbpd and supply is 118 mbpd, perhaps a recession can fix it. But if the demand rises to 130mpbd and supply dwindles or remains stagnant, no recession can bridge the chasm there. Perhaps a truce with Russia or an abandonment of ultra green policies will be the true hobson’s choice someone will have to make in the not so distant future.

6. ratchetrick says:

   May 24, 2022 at 7:40 pm

   The best thing about this blog imo, is that a reasonably small, and usually intelligent sounding group can have ongoing conversation & opine on a subject that we all know, has no definitive outcome! And somehow, this storyline all ties in to the highly limited, and very complex world of pref share investing. It would be interesting to know how many people actually digest these ongoing mini-rants, but chose not to join in lol. Anyway, a vote of thanks to James for providing the venue, along with the daily statistical summaries… and occasional “pictorial statements”. 🙂

7. Yomgui says:

   May 24, 2022 at 10:57 pm

   Hello everyone.
   I’m new here and only started investing in preferred shares about 6 months ago but my portfolio is about 90% invested in them now.
   Even though there is a only small number of people commenting James’ publications, I really appreciate the tone and knowledge of most of you. Always respectful, humble and it is not very common on the Internet.
   Obviously I am unlikely to bring very valuable insight since even though I spend a lot of time trying to understand this market you all are much more knowledgeable than I am but if sometimes I feel like I can contribute, I will do so 🙂

8. jiHymas says:

   May 25, 2022 at 9:22 am

   Hello everyone.

   Welcome to the blog!