maplevalue

Financial repression at it's finest. Cash is trash!

This Week in Virology 762 - SARS-CoV-2 origins with Robert Garry I don't necessarily agree with the conclusions of the people in the podcast (particular with respect to CCP obfuscation), but still an interesting discussion with some Professors from Tulane and Columbia. They are fairly dismissive of the lab leak hypothesis.

In the face of uncertainty one should base their decisions probabilistically. The probability a novel coronavirus was the result of a lab escape, given it emerged a couple hundred metres from a lab which was conducting research to create novel coronaviruses, and given China has a history of lab escapes for the original SARS, is non-trivial and hence the lab-escape theory should always have been taken seriously.

started position in Morguard North American Residential REIT (MRG.UN)

Many big name investors sit on investment committees for non-profits they are passionate about. A good way to be connected with a non-profit, contribute your skillset, and also gives you confidence when you give money it is being managed responsibly.

Not an exact comparison, but there is this gem from May 17 2007

https://www.newsweek.com/mcdonalds-restaurant-offers-job-applicants-50-turn-interview-1585692

Thank you for this comment and it led me to look more into the mechanics of how BoC QE is operating. One question I had, which you may know the answer to. So the BoC currently remits its earnings to the Federal Treasury. I am just thinking about a situation where if interest rates rose, the value of the bonds fell and interest expense on reserves increases, the BoC could run at a loss one year. Does the govt need to write a cheque to the BoC in this scenario? Or could the BoC just run a negative equity position (it's all funny money anyways).

With respect to government spending I think the comparison to the World Wars is weak at best (in terms of the necessity of the spending). One of the things that will be interesting is the future political will across the country to impose higher taxes to pay for the COVID response. Income taxes were introduced around WWI and made permanent after WWII. For me I can see how Canadians would have come to accept income taxes as an acceptable price to pay to put an end to Nazism. But with COVID related government spending there has been such incredible waste and misallocation of resources (e.g. self-employed people getting CRB who claimed negligible net income in 2019, Chinese state-owned companies accessing the wage subsidy, Leon's Furniture getting the wage subsidy and then paying out special dividends, WE Charity fiasco) that I believe a large part of the electorate will be unwilling to accept higher taxes. All of this probably points to a continued period of endless QE/zero interest rates forever.

Also to put into context what is happening, in 2020-2021 GoC issued 267bn short-term bonds (2yr/3yr/5yr) 107bn long-term (10yr/30yr), 2021-2022 they will issue 160bn short-term 121bn long-term (and keep TBills about the same). Relative to keeping proportions the same it means they are issuing an 'extra' 38bn long-term debt. Now one can compare this 38bn to the total size of the debt outstanding (par value) right now: TBills: 218bn Under 1yr (excluding TBills): 104bn 1yr-5yr: 442bn 5yr-10yr: 120bn 10yr+: 166bn So while they are extending the term of the debt, it really pales in comparison to what is currently outstanding, particularly the 764bn maturing in under 5yrs. Better hope rates are low forever! Source on GoC's Bonds outstanding.

Two comments on this. First on the debt maturity profile. 10yr/30yr yields are already back towards pre-COVID levels so while it is nice to see the extended issuance, the attractiveness is not what it once was. Also, the long end of the curve is less influenced by central bank policy so issuing more can 'move the market'. I believe last year Canada was thinking of having more long-end issuance but did not because of possible market impact. Canada is a small open economy and investors do not view CAD debt in the same way as UST's so this shift to long term issuance could push rates higher (who really wants to buy 30yr debt at 2% in the midst of a massive economic rebound?), and is hence not the 'free lunch' it is being marketed as. Second, I view the green bond as a waste of everyone's time. It's not clear to me that that this will trade at a lower yield (i.e. savings for government) than standard issue Government of Canada bonds, and there are also likely to be a bunch of costs related to setting up the program.

TVO Interview with Federal MP Adam Vaughn - What Should the Government Do About Housing? Absolutely terrific interview to understand the mindset of politicians in Ottawa about house prices, and the lack of political will to do anything about it. Basically says we cannot have a 10% correction in house prices, even after a 20%-30% runup, because we need to "protect the investments Canadians have made in their homes".

A clause in Rogers’ 128-page takeover offer has hedge funds eyeing big gains from Shaw’s preferred shares - Globe and Mail

No thoughts on that particular fund, but worth looking at some of the Mawer funds. Risk-adjusted returns fairly strong (Global Small Cap fund risk/return analysis from Morningstar below). Can invest as a Canadian, and can invest direct with them for lower MERs (fund I mentioned is 1.76% MER). Does not resemble the index very much.

Some similar comments from Prem Watsa in Fairfax Financials most recent annual report https://s1.q4cdn.com/579586326/files/doc_financials/2020/q4/WEBSITE-Fairfax-Financial's-2020-Annual-Report.pdf

FFH, have been growing more comfortable with the name and prefer it over the indices in what is today a very uncertain investing environment.

Message on TD Online Broker Today "We are currently experiencing issues with order entry. You will not be able to edit or cancel orders submitted. You may also experience delays receiving fill reports in your Order Status. Please use caution when placing your orders; they may have been filled. We are investigating the issue and working to restore service as soon as possible." !

I agree with this wholeheartedly. It is amazing how frequently one reads about new labour saving technology (take a look at this video on autonomous fruit picking which looks like it is out of The Jetsons ). I think we have almost become numb to how fast technology is advancing.

One obvious one is banks/insurers. The KBW Bank Index only recently exceeded its pre-GFC high (chart below https://finance.yahoo.com/quote/%5Ebkx/)

Why do people accept it? Because of the money illusion (https://en.wikipedia.org/wiki/Money_illusion) where most people think in nominal, rather than real terms. Inflation of 2% is small enough that most people barely notice it, and do not adjust their behavior much (i.e. still treat cash as a fine asset to hold). Why do governments accept it? Because the government can use it as a hidden tax on individuals. It's no surprise that when government deficits are large the same governments manipulate interest rates so that the real interest rate is negative (right now in the US the short term real rate is deeply negative, 10yr real interest rate is -0.60%). From a fairness standpoint it is very unfair to individuals who are not financially sophisticated, since these individuals would tend to have large amounts of cash or GICs. The rich largely avoid the negative effects of inflation as they tend to own things like equities which fare relatively better during inflations.

Agree with you here. One interesting thing to think about is that in response to a rapidly changing economic situation in 2020, the Fed conducted monetary policy in an 'emergency' fashion (i.e. inter-meeting cuts, cuts larger than 25bps). Given the nature of the COVID shock, and the potential for inflation dynamics to rapidly change in 2021/2022, it is not too crazy to think about the possibility they need to react in an emergency fashion to raise rates. Probably a low-probability event, but given it is not priced in at all it's interesting to think about.

Yes, and closely connected to the big risk that exists in the market. 10yr risk free rate of ~1% vs. a pre-GFC 10yr risk free rate at 4%+ has wildly different implications for where the broad indices trade. Ultimately it will be driven by the inflation outlook, and with the financial markets increasingly divorced from the real economy the assumption of a continued Fed put is a dangerous one. With this risk out there makes sense to stay defensive a be less sensitive to what the performance of the index is.

Right. I don't get it. We didn't have 6% inflation before covid, so what has changed? What has clearly changed is the attitude of governments, and the general population, towards running large budget deficits. To take the example of Canada, the Federal Government ran a $400bn deficit in 2020 (16% of GDP vs. 4% in 2009), and has not produced a budget in two years. This government now has a ~50% of winning a majority this spring (if an election is called), and there is very little appetite for austerity. One of the 'classic' causes of inflation is the government printing money since desired spending > taxes. The political dynamics around deficit spending ('build back better') are likely to be very different post-lockdown vs. post GFC so the low inflation experience of the 2010's is unlikely to be repeated. Deficit source: https://tradingeconomics.com/canada/government-budget

In 2017 1 of every 50 dollars of Canadian GDP came from real estate transaction fees! Source: https://www.cbc.ca/news/business/real-estate-fees-home-sales-1.4226630

If inflation is at 6% for a sustained amount of time central banks will have to decide between 1. Keep low rates while letting inflation run at 5-10% for a few years to decrease the real value of debts while the general populace grumbles (much like Canadians have grumbled about higher real estate) but asset owners do well. 2. Raising rates in a meaningful fashion, leading to the collapse of the entire financial system and bankruptcy of the governments that appoint central bank chiefs. My money would be on 1 being the more likely outcome.