ERICOPOLY

The base rate is unusual. Once it goes back to the usual level, the banks make more money on the non-interest-bearing deposits. What is a "usual rate" and what is an "unusual rate"? 2% would be more usual/policy-neutral. today's rate is unusual/policy-accommodative

non-interest-bearing deposits. Their value will be seen when the base rate goes back up.

Thanks. In 1900, when the rate was 3%, you actually got to keep the entire 3% (no income tax). And it was backed by gold, so you were actually making a real return on the money you lent risk-free. Today when the rate is 3%, and I'm in the 40% tax bracket, I get to keep 1.8%. The very same people paying the interest on the bond are taking 40% back in taxes. That 1.8% is not backed by gold. It could very well be a negative real return. Today's interest rates are not comparable to those in 1900. One gives you a real return, one probably won't. Yet the interest rates are the same.

The base rate is unusual. Once it goes back to the usual level, the banks make more money on the non-interest-bearing deposits.

Are you being facetious? It was the terminal point in the plot of long term interest rates that Fairfax was presenting a few years ago, and this saves me time looking for other data.

Should we not require higher rates to compensate us for not being able to exchange our dollars for gold? Risk adjusted, can we honestly compare the interest rate today to that of 1870? How much of that interest paid can we keep? Before 1913 there was no income tax.

I believe A. Gary Shilling was at the Fairfax dinner/meeting this year, predicting a market decline. He has been right sometimes, but take a look at this one from 10 years ago: 4/14/03 I foresee real returns of 5% to 6% a year on stocks. But while “real” usually means “inflation-adjusted,” in this case, it means “deflation-adjusted.” Nominal returns will be 4%, including reinvested dividends, and deflation will add 1% or 2% a year… http://www.cxoadvisory.com/3767/individual-gurus/gary-shilling/ Or this one, also from 10 years ago -- he forecast corporate profits rising only 1% a year: 6/23/03 On balance, in the years ahead, count on low corporate earnings growth. If you assume that I’m right with my mild deflation forecast, Treasury yields will decline enough to justify current p/es. Then stock prices will go up about 1% annually–only as fast as profits rise over the next decade.

I remember they used to purchase out-of-the-money calls to reduce potential losses on their short position. Have they ever mentioned why they stopped that practice?

What if credit losses hit 3% in a prolonged recession? You are giving examples that don't take into the cost of bad times. Sure, you can make twice as much profit as the risk free rate, but get hosed when things go bad. Instead, what if risk free rate were 3% and you lend at 4%. That's only 33% more than the risk-free rate during good times, but you are still profitable during bad times when losses are running at 3%. Even if those times never come, you need to pass these severe-adverse scenarios the Fed dreams up where you have spiking unemployment and spiking interest rates. I don't see how you are rewarded to lend much out at these low rates where you aren't being compensated for the potentially high default rates and potential spike in interest rates. I should think those scenarios would make you want to sit on your deposits and be very, very, careful loaning them only to people who don't need the loan in the first place.

You can't afford to have too much of the portfolio go sour if the economy weakens. So you keep it very high credit quality because there is no fat NIM to cushion the blow when it comes. During the onset of the 2008 crisis, I believe the profitability of good loans initially widened as rates were cut (lowering cost of deposits). That was a big cushion to help fight off the mounting loan losses. Next time, there won't be any such effect. So by having a presently tight NIM with no chance of deposit costs dropping in the next crisis, don't banks have to be more prudent? It seems to me like that's the case.

jay, I'm thinking about a scenario where (think of Bank of America) you have hundreds of billions on deposit that pay no interest. These deposits are non-interest bearing deposits, so when there is a parallel shift in the yield curve they will be more profitable. Right now the net interest margin is razor thin, so you have to be very, very, very, very careful about who you make loans to. More careful than normal because you need to reduce the amount of loans that go bad in order to preserve the thin profits from the loans that don't go bad. Even after doing that, you are still at record-low profitability from your deposits. Suppose the base rate goes up to 2%. The rise in profitability will incentivize putting more of it to work. Given that each loan has the potential to make much fatter profits, you can afford to lend to less creditworthy individuals. Why? Because you don't have enough highest-credit people to lend to -- so otherwise those deposits sit there underutilized. It takes a relatively healthy NIM before you can profitably lend to people lower down the credit quality spectrum. Thus I can understand why loan to deposit ratios are slight right now. makes sense. They have to be low, because NIM aren't high enough to support lending to lower quality borrowers.

Observation: A bank with non-interest-bearing deposit base can take on more risk with Fed base rate of 2%. There is more profit to be made if things go right with a given loan, thus it can help defray the costs of the loans that go bad. Therefore, the bank can afford to make loans to less-creditworthy borrowers. Just an observation. Wondering how much the slow economy is being hurt by low rates. It's being helped in some ways, but surely hurt as well.

One other thing. Australia only respects "employer sponsored" plans. So if you were planning to quit your job, roll the money to an IRA, and then move to Australia... be careful. They treat an "employee sponsored" plan the same as an Australian Superannuation Fund (their version 401k), but they consider IRA accounts to be a "Foreign Investment Fund". Other countries may do the same. So if you plan on remaining in the US, you don't need to care about that. But if you think you might leave the US later on, put some thought into it first. Also, it appears you can't roll a Roth IRA back to a 401k, but you can do it with a Regular IRA. See, I've trapped myself. I can't get my RothIRA assets back into a 401k -- so I can't go to Australia.

How about this to ease your concern: 1) Quit Job 2) Open Fidelity "self-employed 401k" -- perhaps you become a self-employed handy man for a few months between jobs 3) Roll your employee 401k assets (and perhaps other IRA accounts as well) to the new self-employed 401k. 4) start new job at new employer There, now you have it all in a 401k, not in an IRA Ah... there's a catch for solo-401k plans: If your savings are in a 401(k) account, they are protected from all forms of creditor judgments, including bankruptcy, says Kyle Brown, a retirement counsel with Watson Wyatt Worldwide in Arlington, Va. Solo 401(k)s, however, don't necessarily have the same protections as other 401(k) plans; in some states, solo 401(k)s are protected from creditors, but in others they aren't. http://online.wsj.com/news/articles/SB124181801239401917 Some states give good protection to IRAs (others don't): Other states, such as Texas, Arizona and Washington, protect virtually everything inside an IRA from creditors. In Arizona, for example, only contributions made within the last 120 days can be subject to creditors' claims in a bankruptcy. http://www.latimes.com/la-ira-story3,0,6977190.story#axzz2j51AkHYR

1) Roll your current 401k to Fidelity (or wherever you want your IRA). 2) Then at your new company, invest the 401k in bond income funds. 3) Use you IRA at Fidelity to buy a few deep-in-the-money call options. Just enough leverage to offset what you've got building in the new employer 401k plan. This way, you make income in one account, and it offsets the cost of the leverage in the IRA. Hopefully your stock picking will be good and the IRA will grow much faster than the 401k builds up. Eric, if someone is young, wouldn't they still be better off (long term) just investing directly into the market? It's not like you can use the 401k income generated from the bonds to do much else besides reinvest (unless your plan allows in-service distributions). Sure, but I have my doubts that he'll ever spend more than roughly 5-10 years at a given company before moving on to the next one. Let's say I'm right -- then whenever he moves employers he rolls the 401k to the IRA.

1) Roll your current 401k to Fidelity (or wherever you want your IRA). 2) Then at your new company, invest the 401k in bond income funds. 3) Use you IRA at Fidelity to buy a few deep-in-the-money call options. Just enough leverage to offset what you've got building in the new employer 401k plan. This way, you make income in one account, and it offsets the cost of the leverage in the IRA. Hopefully your stock picking will be good and the IRA will grow much faster than the 401k builds up.

The yield is 7%, but you make a capital gain of 3% if the price of almonds (along with the cost of producing them) rise by 3%. So that would be a 10% return (7% real plus 3% nominal).

I thought it was awesome when, in 2008, he went long MBIA and dismissed Bill Ackman who was short MBIA. Whitman said the following: “MBIA is being victimized by an apparently well organized bear raid headed by William Ackman of Pershing Square Capital Management,” Mr. Whitman wrote. “Ackman believes the bond insurer model does not work because the insureds are able to buy an AAA rating so cheaply,” Mr. Whitman wrote. “The facts are that bond insurance is one of the more profitable P&C businesses.” Bill Ackman is a “slick salesman who does not know much about insurance and certainly doesn’t know much about restructuring secure debt” Boy did he ever eat crow! There's a story about it here: http://www.valuewalk.com/2013/08/marty-whitman-classics-and-mbia-battle-vs-ackman/

Eric, I just ran across this company's website. EOS Energy. They don't mention residential on that page, but their smallest "commercial and industrial" units sound perfect for what you are looking for. They say Here's a presentation where they talk about grid storage, electric vehicle applications, as well as residential applications like what you are looking for. http://www.eosenergystorage.com/wp-content/uploads/2013/04/Eos-Public-Presentation-2013-02-11.pdf The only problem is that it looks like none of these systems are shipping just yet. 2014 for the grid-scale systems and 2015 for the smaller systems. That's pretty cool, finally a cost estimate. Thanks. So they figure it will cost 12.5 cents per kWh to own their system. So if I buy the electricity at night for 9 cents, store it in the battery for an added 12.5 cents, and release it at noon for 47 cents, then I'm saving 25.5 cents. That's a 46% reduction in price of electricity with their system.

A few questions: How much income are they making from their bond portfolio at the moment By what spread are they beating the market short position at the moment How much underwriting profit are they generating Do value oriented investors hold it and will they still hold it in a market collapse when bargains emerge everywhere?

I think you could simulate this effect of imputed capital gains taxes by raising an individual's income tax rate every time he switches employers (if his new pay is greater than the initial pay at the prior employer).

My chief worry that is the source of all this grumbling about taxes is being able to invest conservatively while keeping up with inflation. Let's say I have a bond earning 4% and I get taxed at 46% rate (in California). Hmm... I only have 2.16% after tax. That's roughly a return of 0% after inflation. So that's the first reason why I believe fixed income should be taxed at a lower rate than earned income. Because of this 0% real return, I must invest in shares of businesses that steadily grow their earnings. Compare that to your earned income as an employee. You have a salary that rises every now and then to adjust for inflation. The rise in the present value of your future earnings is a form of imputed capital gain. Just like if I own shares of BAC, if they raise earnings steadily over time the shares will rise. There is a capital gain there associated with the rise in earnings. Same for the wage earner -- the present value of his future earnings stream rises as he is given wage increases. Thus, the capital gains tax could be abolished to put wage earners on a level playing field with investors. People are calling capital gains "income", but they are not recognizing that when their own wages go up the same type of "income" is occurring (if you took the present value of all future earnings and expressed it as a capital value). Do you want to be assessed a special "income" tax on the imputed value of your future earnings stream whenever you switch from one employer to the next? Because that's pretty much exactly what happens when I switch from BAC into WFC. So pretty much everyone (except for investors) is enjoying tax-free capital gains, in a sense. Granted, I know Buffett throws off this argument a bit because he has opted for capital gains in lieu of taxable dividends, but there is some component of capital gains that is strictly due to the steady rise in earnings over time. Investors are in the unique position of owing a tax when they switch from one income source to the next, even when the "gain" is merely the present value of the increase in earnings. But employees never get hit with that when they change jobs -- however they too have a increase in present value of future earnings. Okay, this was a little tongue in cheek but I think there is a point to be made about the capital gains tax. It's not really a "gain" -- when you pay the tax you are losing a share of a future earnings stream -- and often it's just an inflationary rise in future earnings and thus not really a gain at all.

Don't temp me to switch my money into Berkshire shares that don't pay a dividend. I would have no income at all. Then I could qualify for a subsidy. I think it would perhaps (I haven't checked) then only cost me the $50-$70 that you quoted. I thought it might be more like $100 a month, but perhaps your $50-$70 figure is accurate. I don't know. But hell yes I need a subsidy! I mean "no income" is "no income", right? You are poor if you have no income, right? http://www.pbs.org/newshour/rundown/2013/09/will-you-qualify-for-an-obamacare-subsidy.html The law bases eligibility on household income. What does that include? It is income, not assets. The value of a house, stocks or bank accounts is not taken into consideration. Household income starts with adjusted gross income -- a number people can find on their tax returns.

It wasn't as bad as the tool estimated. Today I enrolled my family of four for $671.86 per month. This is for the Bronze 60 HSA PPO through Anthem.

I wonder. The big US financials have tax rates exceeding 30% on their US lending businesses. Imagine what it would mean for them if US corporate tax rate were 12%, as in Ireland.