wabuffo

For comparison, here United's Mileage Plus spin-out exec summary page during that Covid summer: https://ir.united.com/static-files/1c0f0c79-23ca-4fd2-80c1-cf975348bab9 This is a "business" with stable & growing revenues & income. United put a value on its Mileage Plus program during this transaction of $21B, IIRC. Today, the entire airline is valued at $29B, FWIW. United paid the last of the debt issued by the SPE last summer - so this is a giant cash box now that gives United almost $8B of growing "float" as a liability on its balance sheet. Bill

All of Buffett's favorites combined - float (get cash today for miles that are spent at some point in the future, with some breakage where miles don't get spent at all) and the ability to print one's own currency out of thin air. I don't think it's an accident that Buffett gravitates towards the airline with the Amex partnership. These loyalty programs also delay profit (and tax) recognition) until the points are used (typically a weighted average duration of 2 years). And what is the real "cost of goods" charged against points revenue to an airline for providing a seat? Plus, the airlines are like a sovereign currency issuer - in addition to breakage, they can depreciate the currency required to spend on an airline ticket at will (up to customer pushback, I guess). We got a sneak peak at how profitable the airline loyalty programs were during the depths of Covid in 2020 when both United and Delta pushed their loyalty programs into bankruptcy remote SPEs. This was done in order for the SPEs to issue debt and upstream the cash to the airline to "keep the lights on". There was so much demand for the debt that the $6.5B was upsized to $9B, IIRC. Here's Delta's summary of its program (for the 2019 year) from its 2020 roadshow for the strategic transaction described above: https://www.sec.gov/Archives/edgar/data/27904/000119312520244688/d27099dex991.htm Bill

Continues to rise - back to levels from a year ago. Bank reserves are still stubbornly under the Fed's $3T target. This is the level the Fed believes is a minimum level in order for the Fedwire value transfer/payment clearing system to function properly while also permitting the Fed to control its target interest rate. You can see the rise in Fed o/n repo (i.e, Fed lends reserves in exchange of Tsys/Agency MBS) in late 2025 around Nov, again in Feb and a small spike on tax receipt day (Apr 15). If you look at a graph of reserve balances, this demand for o/n repo matches up pretty well generally with total system reserves falling below $3T. I would also reiterate the growth in two Fed b/s liabilities that the Fed doesn't control - 1) currency in circulation which grows organically year after year, and 2) US Treasury general acct which is swelling to over $1T due to seasonal inflows of tax receipts in April (also reducing reserves temporarily). Less to do with QE and more to do with well-functioning monetary plumbing. Even so, its a 2% increase from the lows of six months ago. Pretty ho-hum. FWIW, Bill

KNOP - the "floating pipeline" company.... Actually bought them at $5 a while ago, bought them again when the GP made a take-under off at $10 and recently when the take-under offer was abandoned and the stock dipped briefly. And today.... slight bump to the quarterly distro and some vague-ish capital allocation review language.... Bill

Did anyone catch Buffett mutter “they can print money” when talking about the fed with beck quick on cnbc? I assume he understands the true plumbing but@wabuffo do you need to give him a call? He is not the only one who doesn't understand the plumbing. Sad. Bill

He's just pointing to the higher rates/spreads from absorbing this refinance. He is just hand-waving because he doesn't understand any of it, apparently. What would we do without "experts"? Bill

Torsten Slok pointed to $10T in gov bond to be refinance, $2T in deficit, sigh.... Treasury securities are pre-funded by the deficit spending which creates the net financial assets for the domestic private sector (and foreign sector via the rest of the world's net export to us) to purchase them. Repeat after me - there is no crowding out. And by the way, if the Treasury didn't issue securities, rates would fall to zero (or even go negative). Its a pity these pointy-headed economists don't even understand any of this... Bill

How did you come across this one? I follow all the BaaS banks pretty closely. Bill

But I will look once more into GDOT, probably for the time after the cash distribution for local German tax reasons. Here's the presentation about the proposed transaction: https://ir.greendot.com/static-files/76c0c810-100e-46ae-8c7a-85107e3a2669 Bill

Maybe @wabuffo looked at them too and have an opinion about them? For me it looks to be a quite unique model they are driving here - low risk loans/assets with low ROA, highly levered and very efficiently run. Don't know them, have not looked at them. What I am buying right now is GDOT (Green Dot). GDOT is a fintech that partners with Walmart, Apple, and Intuit that also owns a bank sub in Utah. GDOT (along with CASH) was one of the pioneers in the development of open-loop prepaid cards in the early aughts. Its a special-situation right now because GDOT is entering into a transaction that was announced last November with a private equity firm + a private AL bank. It will be split in two - the P/E firm is buying the fintech and the AL bank (CommerceOne) is merging with GDOT's bank subsidiary and entering into a long-term MSA to continue to provide BaaS services to the fintech. If it passes regulatory approvals and side-steps a lot of execution risk (both big ifs), for $11.10 per GDOT share you will get: 1) $8.11 in cash, and 2) stock in a new publicly listed bank at <50% of tangible book. But it won't be any ordinary bank - it will be a BaaS bank (like CASH and TBBK). And these banks trade at 2-3x tangible book due to the structurally high ROAs/ROEs from significant non-interest fee incomes & low cost deposits. GDOT has had regulatory issues in its recent past and it had a hiccup which caused it to delay its 10-K from last week into this week so there's some hair on this one. Please do your own due dily here. Bill

TwCitiesCapital... That's a small change - and as I said, the Fed wants to get total reserves to $3t. At the end of Dec, 2025, total reserves were at $2.85T. The Fed has gotten them back to target which gives context to the small change since end of year. Bill

Fed is no longer in runoff. Fed's balance sheet started expanding again in December. Where do you see it expanding? They are now in stasis. It might wiggle here and there depending on things the Fed can't control (US Treasury TGA, currency) - but the Fed is trying to keep its balance sheet flat. Some people point to T-Bill buying, but that's because it must offset the run-off on its MBS portfolio. If it doesn't do that, its balance sheet (and most importantly the total system reserve level) shrinks. The Fed has a "redline" below which it thinks it must not let reserve levels breach. That level is ~$3T. Late in 2025, reserves fell below that level for a number of reasons and the Fed will try to pin that level to its target of $3T +/-. Bill

I think @wabuffo is brilliant. I've learned a lot from reading his previous posts. I appreciate that - but honestly, I am not here to lecture. I really enjoy the free flow of ideas and discussion and just want to participate in that idea flow. Not to sound like an old fart, but it took me a long time to understand how the monetary plumbing of the US works. There are many good authors to seek out who can do a great job of explaining key concepts. Yes - many of them fly the MMT banner! Don't let that be a turn-off. If you ignore their policy prescriptions (I know I do) and just try to follow their explanation of monetary system transactions as one would look at a general ledger of debits and credits, it starts to make much more sense than 99% of the stuff out there from so-called "mainstream" economists. Folks like Warren Mosler, L. Randall Wray, and Scott Fulwiler are where I would start. (if you are interested. If not, no problem). While macro shouldn't be necessary in selecting high quality securities, I have to acknowledge its been a confidence booster for me that I can see through the fog of Fed and Treasury activities in relation to the US economy that keeps me from following the inevitable bearish (and often misplaced) commentary about the outlook for the US economy. Bill

They [federal reservee] are the only source of liquidity during a panic. The US Treasury is the ONLY source of liquidity during a panic. The US Treasury quickly ran up >10% deficit-to-GDP ratios during the GFC crisis and during the pandemic. The Fed is louder but its fairly impotent without the actions of the US Treasury. Contrast this with the 2000-2002 period where the deflation dragged on despite the Fed's rate cuts because the US Treasury stood on the sidelines and continued to run a surplus - until, finally, the economic contraction tipped it back into a deficit position by late 2002, early 2003. Bill

Warsh will get into the chairmanship with plans and promises to shrink the Fed's balance sheet and then bank reserves in the system will deplete until there is a hiccup and he will immediately stop shrinking the balance sheet. gfp is the student who has become the master when it comes to describing the US monetary plumbing! Warsh can't do a thing about shrinking the Fed balance sheet despite his proclaimed goals to do so (to pick one example). The reason as I said is for structural reasons. Currently the Federal Reserve liabilities are $6.6T. Pre - GFC, these liabilities stood at $900B. These liabilities are basically made up of three major components (only one of which the Federal Reserve directly controls): 1) currency in circulation, 2) US Treasury general account, 3) Reserve balances. Currency in circulation grows organically and went from $800B pre-GFC (when it made up almost the entire Fed b/s) to $2.4T today. Nothing the Fed can do here as banks call for vault cash to meet the transactional needs of both the US and global economy for banknotes & coin. US Treasury general account went from $5B to almost $1T today. Again this is not controlled by the Fed. The US Treasury used to hold some of its balances in the US banking sector via its TT&L accounts but no longer does that. In addition, the institution has learned that it must hoard large reserve balances in order to continue operating during the frequent Congressional budget battles over raising the debt ceiling. During these times, the US Treasury has to deficit spend without net security issuance and relies on running down its TGA balance. Finally, reserves went from $5-$6B to almost $3T today. But again here regulatory changes for banks have played a large role. Pre-GFC banks could run large daylight overdraft balances (ie, negative reserve balances) during payment clearing at Fedwire so long as they got back to positive at the end of the day. Those regulations changed post-GFC and US banks must keep positive balances throughout the day and must even forecast keeping a certain amount of excess reserve balances for peak stress days. If one multiplies that single requirement by several thousand banks, the total reserve balances in the system have to be very large. No one knows if $3T is enough today - but in Sept 2019, the Fed found out the hard way that $1.4T wasn't enough (and the US economy is much larger today in terms of Fedwire transactional volumes). Going to a 'corridor system' won't help much in terms of shrinking total system reserves. Personally, I think the Fed balance sheet is kinda stuck right where it is and can't be shrunk much further. It amazes me that Warsh says he's going to shrink it. He either knows better and is just posturing or he really doesn't understand any of this and will have to learn a painful lesson like Powell did in his rookie year. Bill

I think much of what the Fed does is: 1) structurally-driven in terms of its balance sheet, and 2) market following in terms of setting interest rates. So I don't expect much difference in policy from Warsh vs past recent Fed Chairs. But we'll see, I could be wrong. FWIW. Bill

He does provide a decent explanation of why the General RE acquisition was so valuable despite many today who still believe it was a mistake. I don't think he came up with that thesis. I think Daniel Pecaut originated it in 1998. Pecaut has written a book about BRK AGMs, (University of Berkshire Hathaway). FWIW, Bill

deficit spending by the government?

During Covid the bond buying created reserves permanently (or semi‑permanently), while repos The reserves are stuck at the Fed, and beyond a point, are not needed or wanted by the banks -- so much so that the Fed was forced into reverse repo to take them back starting in early 2021. Asset swaps, particularly for reserves, are not liquidity-providing. They don't increase private sector net assets. If your bank swaps your $100 time deposit for a $100 demand deposit - do you have more money? Basically that is what the Fed is doing with the private sector when it does QE. A central bank can't hit two targets with one policy arrow. It tries to control the price of money, but can't control the quantity of money. So it is forced into trying to lower rates - an activity that I'm not even sure that is stimulative (though that's a totally different point) Liquidity was provided during GFC & Covid but not by the Federal Reserve. Because it was provided by another sovereign actor at the same time - folks wrongly ascribe it to central bank actions. As I said, you are pointing to the wrong actor. Bill

...because the Feds liquidity firehose was opened at full capacity in an instant. So the Fed removes an asset that everyone can hold (Treasury security) and replaces it with an asset that only banks can hold (reserve balance) & that is stuck at the Fed. Doesn't seem like a liquidity firehose to me. Quite the opposite. I think you're looking in the wrong place. Bill

Remember the rule: “Always harvest geopolitical risk premiums”

The Fed literally prints bank reserves to buy treasuries when things go haywire which artificially keeps a lid on interest rates. The US Treasury pre-funds its security issuance with its deficit spending. That's why the two numbers basically equal each other (cumulative deficit since day 1 = total private sector holdings of US Treasury securities). If the US Treasury did not issue securities but kept deficit spending, interest rates would fall to zero & eventually go into negative territory. I feel like this is covered ground between us so no need to keep debating this point. Bill

Both matter. The Treasury largely wouldn't be able to do what it does without the Fed and the banks being uneconomic buyers of its bonds. Not true. The Federal government operated with a US Treasury but without the Federal Reserve for many years. Canada went through the Great Depression without a central bank and without any bank failures, either. The only important function the Fed performs is to clear transfers between banks & the US Federal government via Fedwire. That can, and has, been handled by private sector clearing houses established by the banks in the past. Bill

Why do you think not? Because as gfp notes - I think its only marginally effective at bringing down rates. Secondly, to buy more bonds, the Fed will have to add more reserves to the banking sector. As we've seen those reserves if they are not needed or wanted by the banks, come right back to the Fed in the form of reverse repo. So the Fed ends up sucking and blowing at the same time. Bill

trade surpluses, no? yeah - got turned around mid-sentence (trade deficits from US POV, trade surpluses for ROW). I'll fix it, thanks! Bill