Cigarbutt

^When the Treasury creates a bond or a bill, the balancing cash 'created' ends up, somehow and through the private accounts, as a liability of the Federal Reserve, as circulating currency or a reserves deposited at the Fed. The Fed acts as the fiscal agent of the Treasury and when the created cash is deposited in the TGA (as a Fed liability), it is simply a temporary listing until the cash is directed to private accounts, after which the cash becomes a typical Fed liability (one-for-one). The role of the TGA is clearly technical, like a central checking account and the Treasury could use this account as a tool to manage reserves. This reserves-management idea is controversial and has been periodically discussed since the 30s. It's interesting that the person in charge of the Treasury now used to be in charge of the Fed. The potential problems related to building excess reserves within the financial system (excessive liquid capitalization of banks (especially with an asset cap, liquidity issues in the repo market) can be dealt with using various technical tools. Excessive capitalization of banking institutions is not a bad or a good thing in itself (it may become a feature however) but it may be symptomatic of an underlying problem (leverage problem related to uneasiness in investing in US large banks at this point even if valuations appear reasonable). The defining feature of the last 20 years for US commercial banks has been the high rate in deposit growth (CAGR 7.6% since 2000 and 7.0% since 2009), well ahead of loan growth. Because of deposit growth rising rapidly secondary to money creation and outpacing loan growth, banks have been forced to increase their allocation to securities. As a result of this excessive liquidity, banks, like a typical investor, have been driving various yields to very low levels in the markets in which they're involved (including the Treasury market!). Interestingly, when the Treasury will drive down its TGA account, with the excess-reserves system in place, it will flood the private market with cash and increase the demand for its own debt securities! In all Q4 announcements and conference calls, big banks described (not literally) this dynamic and indicated that they were patient and prudent with their securities portfolio...(environment of record low real yield and record low spreads) In conclusion, the system put in place (if and until it breaks down) by the Fed makes sure that rates can't increase and, in fact, self-perpetuates low rates (for better or for worse). US commercial banks, all numbers in % 2000 2007 2009 2019 2020 loans/deposits 98.6 96.6 83.6 75.5 64.2 Tr.+agency sec./total assets 12.9 10.4 12.3 16.9 18.2 loans/total assets 60.5 59.7 55.0 56.5 50.5 The trend has been first to lower interest rates, then to get to the zero bound and then to initiate unconventional tools, what's next? The big potential hole in this thesis is that deep secular trends start to reverse and private loan growth becomes, once again, the locomotive of productive growth resulting in significant and self-sustaining growth, significant and sustained federal tax receipts and a progressively lower debt to GDP ratio with all living happily ever after. That may be a reason why Mr. Buffett did not discuss the pandemic in his 2020 letter. The virus was an extrinsic supply side shock that was neutralized (sterilized in Fed language) and that did not, really, changed the underlying fundamentals playing out over the longer term. i've been looking at some money flows (created or not) and there is a bimodal distribution. Most have used the free cash to pay bills and installment debt and some (some on an absolute basis but just as important as the other group on a relative money-weighted basis) have used the funds they did not need to 'invest' and to drive down the yield on government debt. In a way, the Fed people are true geniuses.

@Investor20 It's probably not worthwhile discussing the specifics of ivermectin here. Diversity of opinion is important and institutions like the FDA and CDC need to be improved but if you aim to present alternative options, you have to show also how your process is better than the alternatives. Ivermectin is worth studying more but this is an area where the trust-but-verify approach applies within the present institutional framework, until proven otherwise. With the coronavirus, many have been desperate for solutions and a big risk is to skip some critical steps. For example, poison control agencies have seen a higher incidence of poisoning (unintentional): drinking bleach, pool cleaning products and more recently ivermectin. https://www.sciencealert.com/people-are-accidentally-poisoning-themselves-using-horse-de-worming-drug-for-covid-19 ----- @wachtwoord Diversity of individual opinions is important but, before arguing constructively, we have to agree about the definition of basic facts. The covid-flu confusion and the egregious death allocation to covid have been tools used by conspiracy-related groups and have not resisted the test of due diligence.

When looking at the following, what comes to mind? -People are stupid? -We should be scared? Maybe part of the above answers are right but i would submit that people somehow are trying to get through this, sometimes through trial and error and sometimes the result is not elegant. A nice thing about such a place is that people can share independent thoughts (sometimes with deep convictions). It doesn't mean though that someone who thinks differently is an enemy. ----- Have you seen the latest results for the influenza season (in the US as an example of a global phenomenon)? The point of this is not that we have learnt how to deal effectively with the flu but that there may something to learn if 'we' communicate and collaborate more effectively and in a more constructive way.

This is a complicated question, with a lot of moving parts. In the 2017 report, BRK reported 35.6B of positive development and 6.0B of negative development so it depends on specific changes made but a basic rule of three will give you an approximate answer. For to the locked-in aspect, the basic answer is no as tax is one of the two factors that are certain in life, although submitted to variable levels of certainty. You can think of the tax liability as a an insurance reserve and, with tax rates being raised, you expect to pay more taxes in the enacted year but, even if a non-cash event, you also have to increase the reserves for the amount that will have to be paid over time as a result of the 'adverse' development. Irrelevant addition: i think that's why Mr. Buffett described before that tax float was of lesser (quasi-permanent equity) quality. It seems he prefers to deal with the kindness of uncertainty than the kindness of strangers.

The answer would require reading his mind so this is only speculation. It doesn't appear that he prepares for bu**les to burst but seems to work under a framework that allows him to relatively benefit when they do. On the quote above, he was asked a similar question in 2005 and he had answered that housing was likely expensive in 1-some geographic areas and in 2-some sectors, high-end etc For historical reference (2005): For interest, you can update this graph to now.. Interestingly, now (with accelerating trend in 2020), looking at housing price index to 1-income index, 2-rent index and 3-inflation index, there appears to be another similar period of disconnect (which may be justified?) and for which future trends cannot be predicted precisely. It should be noted that Mr. Munger became a long-term fan of Wells Fargo after the 1990 opportunity and personally bought more at pretty much the exact bottom in 2009. But he's not into bu**le prediction. ----- Anecdotal addition i think "partials" should be "parcels". i use more and more voice recognition software and it's a net positive from a productivity point of view. Maybe, the word "partials" was recognized by an individual (human) but it's possible that it's machine-learning related. When i produce official documents and when doing the final proof-read, a new phenomenon occurs related to this potential recognition problem. Recently (it was a different language but almost the same in English), i almost missed the following: instead of "instead of having six" there was "instead of having sex". Artificial intelligence comes with its own set of challenges and that's before even trying to guess what the person means to say.

The extension into energy and infrastructure is likely to counter the diminishing return aspect that comes with size. The coming transition involves a time period where supra-regional grids will be put in place. The part included in the annual report is not only for (long-term) investors, it’s also a message to regulators and elected officials. For example, what PacifiCorp is trying to do in the West (‘gateway’ towards the California market), involves dealing with many regional regulators (dozens) and many more local and diversified interest groups. There is value in size (+ve long-term NPV) but it’s hard, at this point, to be precise. Also, the local constituents have to deal with conflicting objectives: paying for the infrastructure built in other states means assets and jobs ‘elsewhere’, the origin of the energy (coal vs gas vs others) may not harmonize with states’ objectives and local and regional authorities are bound to lose autonomy. So, in a way, the very large investments are a bet that people will be able, together, to figure out the value of the projects. Contrary to other issues (healthcare, how to deal with a pandemic), this appears to be doable now (and for a while) in a relatively (although potentially messy) cost-effective way. Who will remember Roaring Kitty in 20 years?

Who knows, maybe it has to do with an unusual long-term mindset that may be necessary for the future? When all is said and done, 2020 was a pretty unremarkable year. 8) This is something which is remarkable. He may have felt like writing a Mr.-Paul-Singer-type of annual letter but instead suggests that it is about successors.

I really like the utility's, in theory, however the industry has challenges. Home based solar on demand side and carbon regulations on supply side. Meanwhile concern that regulations are stuck in the past. Any industry experts here? Is it still a good industry? Disclosure: not an industry 'expert' and not holding directly utilities now but i'm a vested fan of private-public partnerships, when done right. From the report: "BHE’s decision to proceed, it should be noted, was based upon its trust in America’s political, economic and judicial systems." The partnership between electric utilities and the rest in the US has a very long and interesting history. About a hundred years ago, the model was defined and the negotiated contract for investor-owned utilities included a 'reasonable' return and other significant attributes such as eminent domain. The model has evolved and there is new transition coming. Let's see. A very interesting part happened in the 80s and later when it was realized that utilities had invested too much in nuclear plants largely because they had responded to contract clauses with the public (and their representatives) changing expectations along the way (resulting in a supply-demand mismatch). This was a time when the "regulatory compact" was questioned and the doctrine was refined. The definition of "stranded costs" came up and utilities eventually were able to refinance debt and to recover costs over time with 'fees' built into customer bills. This played out in a very interesting fashion in the 80s with the Washington Public Power Supply System who built large nuclear power plants in the 70s. The interesting part was that some of the distress was related to the above mentioned regulator-related changed expectations and some of the distress was due to poor management (WPPSS was a muni corporation and integrated within the sometimes disorderly regulatory environment). The process (price discovery) was somewhat messy but things got worked out (eventually) according to Mr. Buffett's quote above. Interestingly, then (1982-3), Mr. Buffett bought the bonds in the middle of the capital structure (those that could rely on the regulatory compact) and bonds went back to par. The bonds lower in the capital structure (those tied to power plants #4 and #5 and tied to poor management) did not really recover. So, what about now and the future? Utilities valuations now are elevated (opinion) but there is a possibility that capitalism can become again premised on the idea that capital is a scarce commodity. At this point, the threats are related to the utility death spiral with distributed energy and to flat demand and to the fact that the present model is outdated. New models are being looked at and may include both a fixed (to maintain access to the grid, think what happened recently in Texas) and a variable component according to volume. It's likely that there will be ways to provide a reasonable return to utility investors even with limited growth opportunities for established markets. The bottom line is that investors want a reasonable return and customers want a reasonably reliable source of energy. There is a huge grid-related opportunity coming and i bet that private players will play a key role in the US. BHE may be in a good spot.

Interesting. When arguing with my teacher (wabuffo) last summer, i suggested the following:

The float related to deferred taxes has been growing steadily. In BHE presentations, this is referred to tax appetite from the parent. Because of the preferred treatment on 'real' investments and because of various 'credits' (as per last fall presentation): "Tax appetite of Berkshire Hathaway has allowed us to receive significant cash tax benefits from our parent, including $1.0 billion in the nine months ended September 30, 2020, and $942 million in 2019". Of course, there is nothing wrong with that but maybe it's a reason to mention, in passing, that BRK reports a GAAP valuation for these "infrastructure" assets exceeding the amount owned by any other U.S. company, with a depreciated cost of these domestic “fixed assets” at $154 billion. Bridging to end-yr 2020, insurance float has grown (CAGR) at 7.1% and tax float has grown at 12.5%, being about 35% of total float now.

The book was published in 1992 and reading contemporary documents from the period, the consensus view was that the downturn was to be temporary and it took a long time to fully appreciate the extent (and duration) before recovery. The chapter on land (ch.3) is quite interesting. Mr. Wood suggested the following (this was almost heresy at that point): "It is the reason Japanese property prices are not again likely to reach the peak levels seen in the late 80s until the beginning of the next century at the earliest." ! A reasonable strategy (to ride the storm) then: buy long term JGBs and fall into a coma for 15-20 years. :) ----- For reference, randomep: No need to worry because interest rates are low. 8)

This movie has special meaning to me (not because of healthcare). i hope you like it. Just in case it's not said, it's a sequel to a movie called The Decline of the American Empire. (not joking) 8)

^Where would interest rates be without the quasi-constant and quasi-permanent central banks’ involvement/support? Does this matter? -CBs are useful (essential) when using technical tools for the financial plumbing related to settlements. -CBs are useful (essential) as lenders of last resort (along Bagehot’s rules) but have become automatic lenders of first resort, mostly using technical (and unconventional) tools to achieve their new roles. -They have been able to sustain a world with permanent excess reserves by paying (technically) interest on excess reserves. This new world (with newer regulatory and capital rules for banks) means banks and the financial system need a very high level of residual excess reserves in the system (this was tested in the fall of 2019). -Apart from the psychological aspect and the dubious wealth effect, open market operations do not work (transmission), when applied over a long period. -Money creation in relation to real economic activity is an essential feature but has to be endogenous (private market participants). Because of the above, markets now expect constant and permanent support and the whole financial system rests on a low interest rate forever scenario. In 2021, it is presently assumed that central banks will significantly decrease their bond-buying activity (not in absolute term) in relative terms to the promised funds on the fiscal side. This will depend on what will really happen to the Treasury Account at the Fed but bond-buying is likely to be more (perhaps much more) than anticipated. Expectations about excess reserves in the system should be adjusted. i think they will keep making technical adjustments because it's easier in a way. However, even if the benefit is questionable, the long-term involvement has caused massive distortions: asset prices, expected returns, leverage and inequality. Going into the easing mode has been easy. Leaving looks like it will be increasingly harder. When faced with a tantrum, the easy way is to tolerate or pretend but, absent a credible exit strategy, one perhaps should consider proximate causes (at least as a learning exercise and for humility). This massive and quasi-permanent expansion of CBs’ balance sheet through open-market operations will eventually be remembered as one of the greatest historical blunders (opinion). And what will they do now if a real downturn happens? And will they recognize that they were more part of the problem than of the solution? 2020 was phenomenal from monetary and fiscal standpoints. Bank loan growth and net worth did not actually decline over the period (both increased markedly). Today’s release of aggregate income, consumption and savings data continues to show unusual developments. When scratching below the surface however, one sees that the bottom 60% have actually dis-saved during this period and 85% of the savings done by the top 40% was done by the top 20%. For inflation purposes, how is that supposed to point to productive growth, a sustainable steep curve, rising real yields AND inflation (until true helicopter money is delivered)? Of course the risk is that the reflation trade is for real this time but there have been many false dawns since the GFC. Another risk is that the MMT crowd is right and simply consolidating the FED with the Treasury would simplify the the-emperor-is-naked perception (perhaps wrong perception?) but i can’t come around (not able to provide the superhuman effort) to this idea given present understanding of the initial motivations that led to the 1913 Federal Reserve Act and continue to believe that there is no free lunch (in the aggregate and compensating for inter-temporal transfers).

There is a chapter on Dr. Schacht. Your explanation is reasonable but the way Germany came out the other end remains bewildering. Anyways, they had this to say about him: "Dr Schacht sat in a single room which had once been used as a charwoman's cupboard, looking on to a backyard in the Ministry of Finance. From this post he transformed the German financial system from chaos to stability in less than a week. His secretary, Friiulein Steffeck, was later asked to describe his work as commissioner: What did he do? He sat on his chair and smoked in his little dark room which still smelled of old floor cloths. Did he read letters? No, he read no letters. Did he write letters? No, he wrote no letters. He telephoned a great deal — he telephoned in every direction and to every German or foreign place that had anything to do with money and foreign exchange as well as with the Reichsbank and the Finance Minister. And he smoked. We did not eat much during that time. We usually went home late, often by the last suburban train, travelling third class. Apart from that he did nothing." [my bold] In an investment world with the there-is-no-alternative reflating mentality, it's interesting to consider the perspective of alternatives for the USD: -% of foreign exchange reserves: ~60% -% of forex transactions: ~90% -% of global debt issued: ~40-45% -% international trade currency: 50-55% -50% of the currency circulating outside the USA -the Federal Reserve has effectively become the central bank of the world (swap lines etc) i'm not sure about all this but from experience being in Cuba (as CDNs, we are allowed to), the alternative is NOT the CDN 'dollar'.

An interesting aspect is that the inflation you are facing depends on where you are in the food chain. Inflation is the net result of a wide array of conflicting forces. Covid simply accentuated previous trends and you will notice that labor intensive items and services items have shown higher inflation patterns. Child care (from basic to specialized nannies) inflation has typically outpaced inflation by 1-2% per year and this has compounded over time. My youngest one (14) will start babysitting this year and the hourly rate has followed a similar trajectory than the Tooth Fairy curve over the last few years, similar to child care overall. For housing inflation 2020-version which is mentioned in this thread, this has been a record year. It appears that the bottom 60% have used cash payments to reduce their credit card lines and the top 20% have saved and invested in various assets, including houses. ----- So, the inflation/deflation debate is one of equilibrium with very strong and often opposing forces. A remarkable aspect that manifested over the last 12 years has been the very high amount of debt issued by the government (with the Fed cooperation) which has not, at least so far, despite almost consensus expectations, resulted in higher inflation. Obviously this may change but Japan is stuck in the same predicament and has not 'succeeded', up to this point (i think their window of opportunity has closed).

I lived when he said this. It was interesting how he also said people seem to be born with a certain personal level of happiness. These statements are somewhat opposing. Not necessarily. What if the genetic traits to be happy include a natural and spontaneous inclination to set low expectations? This is a controversial and ‘soft’ topic but twin studies reveal interesting findings (to help define what is genetic, first and second order, and what is not). It appears genetic traits explain a lot about the level of one’s happiness but also the environment and one’s conscious efforts do contribute significantly. Consciously aiming for low or appropriate expectations may help? A difficult part, let’s say one starts with a 2/10 score on genetic traits, may be to settle for a maximum 4/10 level of happiness. :)

Yes, that's a real risk but manageable, at this point, IMO, for the reasons below. You may like the book that wabuffo referred to: When Money Dies (if you haven't already). Even if the macro stuff is felt to be irrelevant, the book describes several interesting social phenomena that occurred then, for example when people started to look for an alternative (any) for the fiat currency (stocks for a while, cigars, apples and even rutabagas?). The author also describes well the non-linear changes that can occur when trust is lost (ties in well with the velocity concept if you believe in this) with people buying their food in the morning before the food gets more expensive during the day. Something that the book helps with is to differentiate from the 70s or today and the essential ingredients necessary for runaway inflation. There has to be an alternative. The Weimar hyperinflation story is a currency exchange story. For the USD, what is the alternative: the euro, the yen, the renminbi, bitcoin?, asteroid mining? In the 70s, when the tie to gold was definitely severed, there was a time-limited crisis of confidence until it was realized that the USD had become the indispensable global reserve currency. Money just got flooded in the US (and global; some it went to China and overseas, see the direction of the trade balance with people using some of the free money to buy imports) plumbing monetary system. https://finance.yahoo.com/news/online-banks-lower-their-savings-rate-212426441.html My bet, at this point, is that this is more like a flash flood than a secular undercurrent. It could get slippery when wet but i remember the best time to go up a mountain in Hawaï was right after a flash flood.

Reading your post helps to underline the following question: Are interest rates still market rates? The Fed and Treasury have to deal with this technically or fundamentally. Which way will they go? i think the easy way is to accept that excess reserves are a permanent fixture and allow banks to permanently exclude U.S. Treasury securities and deposits at Fed banks from the calculation of their supplementary leverage ratios. This is what happens to people having diabetes, type 2. Excess reserves is the cause and not the symptom of the disease, which is preventable. Once pills or insulin are given, people get used to excess reserves and tend to make technical adjustments (not fundamental ones). So will long term rates rise? Unlikely. So can long term rates rise? Not at this point. The average interest rate on total marketable interest-bearing US public debt is now at 1.54%. Simply going back to rates in 2007 or 2008 would double and more the % of GDP spending and total outlays. ----- Of course, this remains quite unpredictable and the perceived outlook is related to one's perspective about low interest rates and the following result: Some suggest the evolution is positive. From a technical standpoint, i agree. From a fundamental point of view...

^It's actually a very important and interesting concept for property-casualty (re)insurers. Let's say you want to acquire a P+C insurer, apart from growth, the goodwill you want to pay over book value will be a function of the discount (mirror image of the money you expect to make from float) of the reported reserves, assuming reserves are adequately stated.

Your approach is likely the right one and since the last time we briefly exchanged on general corporate debt levels, events showed that you were right and there was further room for growth: Mr. Druckenmiller (not exactly a microinvestor) recently said that he was puzzled by what happened to corporate debt in 2020. It's even better than a permanently elevated plateau. Anyways, from a bird's eye (noob) view, the total debt (public, corporate and households) to GDP in the US is about 400% so an incremental 100 basis points rise in yields would result in an about incremental 4% of GDP debt servicing.

Rising rates is a tailwind for Fairfax (all things considered). They hold a disproportionate amount of their very large bond portfolio in short duration bonds or cash. As rates rise they will take a mark to market loss on existing holdings which will lower BV. However, if they are able to redeploy some of the cash/short term securities into higher yielding bonds then this will increase interest income. Presumably they would also be able to discount estimated future insurance claims at a higher rate which should help increase book value. The reserves are established and reported undiscounted. There was a time when they established and reported reserves for certain workers' comp lines of business (Zenith sub mostly) on a discounted basis but this was a small part of claims overall and, starting in 2012, they no longer described this discounted reserves sub-component.

^Morgan and cherzeca, thank you for the discussion about various government-sponsored enterprises and the sunset option. Entitlement spending is bound to remain a hot topic. ----- The opening poster suggested pockets of labor tightness, a very unusual topic given the very large pool of ‘non-participants’ in comparison to the much smaller ‘unemployed’ group. As the US is about to enter an era of net negative labor force growth (Japan is the leading the way), this may be an area worthy of some soul searching. When Keynes came up with his expectations of a leisure society, he assumed the Beggars in Spain story line would apply ie the ‘productives’ would more than compensate for the ‘non-productives’. He did not envision an entitled and unproductive rentier elite with a bunch of ‘disableds’, financed with debt. The monetary tools, for the employment mandate, are mostly geared to the headline unemployment number and, like the consensus view, the Fed expects inflation on that front in the short to mid-term (Waiting for Godot style). The monetary minds have looked at the declining labor participation and have concluded that it was, essentially, a secular trend (i agree), not a cyclical one, so out of their control or purview. So the Feds won’t interfere with secular trends here, at least not directly. Central bankers are very bright people but often come to interesting conclusions when out of public office. For example, in 2016, Mr. Alan “The Maestro” Greenspan suggested the following: • Entitlements now probably require a three to four percent growth rate in the United States. • Rate cuts, negative interest rates, buying corporate debt is no part of the solution. • Gross domestic savings as a percent of GDP has been declining over the years largely because entitlements have dug into them. • You just can’t print money and buy the infrastructure. Productivity will only increase if there is savings behind the investment. • We should be more concerned about inflation than we appear to be. • The issue is how long can we maintain long-term interest rates by continuously pushing money into the system, at rates which I would say, human psychology doesn’t “continence”. The fiscal tools used to deal with the growing disability problem has been to fund the payments with growing debt (Mr. Greenspan is more politically correct by saying that increasing entitlement spending has been funded by decreasing national savings) and, with present trends firmly entrenched (and incredibly bipartisan), it’s hard to see how this will change. But it will, somehow, when restructuring becomes possible. Japan is an interesting example in relation to this ‘labor shortage’ question. Since 1990, Japan has been a champion of reform delay and lately has been able to delay the eventual day of reckoning by adapting their labor profile. Older Japanese citizens, including the much older ones, have shown impressive resilience with a growing ability (as documented by rising teeth count and walking speed per individual, age-controlled) to participate in the labor force. Japan also has come up with an unusual degree of innovation to make care of the poorly functional elderlies more productive (helping slightly with the overall declining productivity trends (since the 80s, Japan total productivity has been a story of ‘productive’ sectors more than compensating the ‘non-productive’ ones, at least until recently and in spades)). i’m not sure what this means about the stock market today but interesting and real business opportunities (one related to continence or the absence thereof) are shaping up in my local area in this respect. ----- For those getting excited by rising rates, yesterday the US Treasury did something for the very first time. It sold ($60 billion of them) two-year notes at a yield of 0.119%. Because Treasury notes and bonds by regulation have a minimum coupon rate of 0.125%, the yield below that level means the notes were sold at a premium (!) above 100 cents on the dollar -- 100.011965, to be precise, a record. A weird world, we live. Somebody putting a million into the stuff would get about 3$ per day and they say inflation is coming. My bet is ‘we’ can’t have interest rates rise meaningfully and/or for any length of time. Famous last words.

Do we have demographic information on this group? A theory that is worth investigating in my opinion is an aging population that was working longer into their lifetime, who "finally decided to retire" in response to an extreme stimulus (COVID). A small addition as the topic has been an opportunity for me and it may have some relevance to this thread. As you likely know, while the labor participation rate (LPR) has come down significantly for the entire 'group', for the age 55+ group, LPR has gone up significantly, at least up to the 2020 pandemic. With Covid (i think it was the potential exposure to the virus more than exposure to the stimulus), the 55+ age group's LPR has gone down a little (very small decrease compared to the huge rise over many years and, from anecdotal stuff mostly, this group is likely to go back to previous trends once it feels 'safe' out there). The big question that remains (and which is relevant for the deflation/inflation question) is why such an enduring and significant decrease in LPR. Most of the decrease over the last few years has happened in the younger cohorts and the decrease has been inversely correlated to education (or skill) level. ----- In relation to the question that disappeared, when dealing with the LPR question, just like the inflation question, those in the know divide the potential causes into push and pull categories. The tightness of the safety net and high taxes on working wages will tend to pull people away from work. Also, over time, the residual pool of jobs has become relatively less attractive for the residual population left for those jobs, pushing them away from the work force. There are some mild differences between the US and Canada but the developing pattern of decreasing participation has been overall quite similar. The disincentives to work have historically been higher in Canada but the stimulus response by the US in 2020 and beyond left everybody else in the dust. ----- This topic has some importance for me. In the late 90s, i studied the LPR and expected significant declines over time and developed some private business ideas, with the main one around disability evaluation (asset-lite, high returns on intangibles etc). It seemed somewhat irrelevant for a while but what seems irrelevant is sometimes devoid of competition. Anyways, the way it worked is that people who left the work force were typically young and after long-term unemployment insurance often ended up on 'disability'. This does not seem to be a much talked about topic but the issue is very significant. What has become discovered is that people who become long-term unemployed (even more so if 'disabled) are unlikely to go back to work when/if economic conditions improve (hysteresis at work). ----- The bottom line here (apart from business ideas) is that a low (especially a declining trend) LPR will tend to be highly deflationary. Dependence to benefits, over time, may lead to overheating of the printing press. https://fred.stlouisfed.org/series/CIVPART

For several years now, in involved private businesses, there is an unusual trend in low or average skill workers: large turnover and unusual negotiating leverage for salary and conditions. It’s unusual (and puzzling) because the micro situation should reflect the macro situation (which has been evolving for a while) showing the very large pool who have somehow decided not to get involved in the working force. It’s hard to see how this wage pressure will be sustainable. A topic not often discussed is how come there is such a high number of people who have quit the labor force and maybe the underlying reasons help to understand the secular trends in interest rates and inflation. The shifting environment means higher costs related to wages but this seems more like short-term noise. The following is submitted for historical perspective: Headline: Ouch! The yield curve is steep (the 30-yr at a threatening 2.16%..) and inflation is here, there and everywhere. Headline: Since the advent of the unprecedented use of unconventional tools and various stimulants, inflation has remained dormant and now we wonder if two nuclear bombs work 'better' than one. Headline: The allusion to previous ‘dramatic’ events is interesting.

i agree with petec if interest rates rise slowly. Look below: As rates rise, reinvested coupons and reinvestments at maturity will (with some lag) make the bond yields to gradually rise. Inflation-indexed bonds could also be bought. They can also hold the longer duration bonds to maturity and the unrealized bond losses remain so. Looking at the whole industry, there is some kind of consensus that inflation is coming: There may be a problem though if winter is coming but that's another story and one which has come to maturity for Fairfax. They have changed their stance since 2016 and have expressed that they are expecting inflation along general economic growth and seem to espouse the reflation narrative. In the 2019 report, Mr. Watsa mentioned: "Our fixed income portfolio, which effectively comprises 70% of our investment portfolio, has a very short duration of approximately 1.5 years and on average is rated AA-. Very high quality and very short term to maturity – so rising interest rates would not impact our portfolio!" They also have derivative exposure to protect against rising rates for the residual longer term FI portfolio. In 2020, they switched some short term government paper for mid term corporates but duration remains low. If (IMO that's a big if) inflation comes, they are ready to benefit. Wild inflation would hurt but the hurt would be widespread. ----- A related aspect that needs to be considered for an insurer if inflation is for real is that the contracts for coverage are made with a specific inflation target. Especially for longer tail lines, if inflation is higher than anticipated, the eventual cost of claims is paid with more dollars. That was an issue in the 70s and early 80s and since insurers tend to react with a lag and since regulators may not accept significant rate increases, underwriting may suffer for a while. ----- FWIW, i've kept a diary of what would have happened if they had kept their long term fixed income exposure after 2016.