wabuffo

Any opinion on what might cause the dollar to lose its reserve currency status? Stahleyp -- you know what gives the dollar its reserve currency status? The world's most powerful military run by a civilian-led government that isn't afraid to use it. My view is that the day the US military is eclipsed by some other great power is the day the dollar begins to lose its reserve currency status. I'm joking (kind of)... But the reality is that the US military keeps the shipping lanes around the world open from harassment and preserves the world's ability to trade freely so as to obtain the resources their own countries don't possess. All countries around the world benefit from that arrangement and don't have to spend on their own military to defend themselves and their ability to trade. Also, the US is still the world's largest economy and is willing to endure the huge trade deficits required for the rest of the world to acquire US dollars and US dollar assets by net exporting to us. The rest of the world prefers to run trade surpluses - so how could they become reserve currencies? Everybody grumbles about the American hegemony but they all benefit from it -- including China (especially China). wabuffo

Looks like gold is having a bit of a run. Any concern there as a harbinger of inflation? Yes - definitely a concern. I think there's going to potentially be a blip here in late April - early May because the IRS pushed back the tax deadline. My working assumption is that tax collections will be a bonanza (especially the last-minute non-withheld taxes) this year. That may cause a temporary US Treasury surplus and a little bit of price suppression on gold. But once we clear early May - gold could take off. Of course, my predictions on gold are no better than a coin flip. As a technical walk on the wonky side - I've been a bit surprised at how slowly and unaggressively the US Treasury has been in getting its general account balance (TGA) down. In addition, the Fed is doing stuff to install pressure relief valves to keep bank reserves from growing. For example: 1) The NY Fed is doing quite a bit of reverse-repo activity now (prior to mid-March there was zero activity). Reverse repo means banks show up with reserves and borrow a US Treasury security overnight. https://apps.newyorkfed.org/markets/autorates/tomo-results-display?SHOWMORE=TRUE&startDate=01/01/2000&enddate=01/01/2000 Its consistently running at $30b per day rolling over daily. It hit a peak of $134b on March 31st - which seems to imply banks doing a bit of "window dressing" for quarter-end regulatory filings. So with one hand the Fed takes Treasuries from the banks and gives them reserves but with the other hand it takes back reserves and gives banks Treasuries - talk about sucking and blowing at the same time. 2) I'm also wondering about the growth of "deposits" at the Fed's "other" deposits column. This line item has grown from around $75b at the start of 2021 to $410b in the latest week - much of it in the last few weeks. These are deposit accounts like that of the US Treasury and the commercial banking sector - but seem to not belong to either of these institutions. The footnotes to the Fed's H.4.1 report say: Seems to me like the Fed is trying to hide extra reserves everywhere but behind the seat cushions as the banks scream "no mas" to the Fed. wabuffo

I think U.S. Bank CEO's are starting to chafe under the effects of the Federal Government's stimulus programs (both those of the Federal Reserve and the US Treasury). PNC Bank CEO speaks some truth in the latest conference call: https://seekingalpha.com/article/4419491-pnc-financial-services-group-inc-pnc-ceo-bill-demchak-on-q1-2021-results-earnings-call

Hey CB - finally had a bit of time to read the article you posted... suggests (to 'solve' the SLR technical features related to our new monetary era) to the Treasury to issue extra debt (overfund) to 'others' and use the cash in order to buy the treasury debt held by the Fed as a result of cumulative QEs. We may disagree about motivations, but I think this is basically what the US Treasury did in 2020. It issued ~$1.8T more in US Treasury securities than it needed vs its net spending. This grew its Treasury general account to as high as a $1.8T balance. I still believe this was done to take the pressure off the banks in terms of reserve balance growth (basically banks would've had $1.8T more in reserves if the US Treasury had not done this). Now whether or not the US Treasury turns around and uses its large TGA balance to "buy" the Fed's holdings of US Treasury assets really doesn't matter (and the author of the article admits as much when he says that in his proposal the US Treasury can just sit on the large balance). It just goes to show how ineffective and counter-productive the Fed's QE policy is. More importantly, anyone who claims that the Fed is "monetizing" the US Treasury's deficit spending is betraying a lack of clarity over what is really happening here. The same effect can be achieved by letting the US Treasury deficit spend without issuing a commensurate amount of US Treasury securities to "finance" that spending while the Fed goes to the sidelines (which is what is happening in 2021, sort of....). wabuffo

Basically his argument is QE is deflationary I don't really agree with this. As you said, this person's argument seems to miss the actions of the US Treasury. I think most people do when they talk monetary policy. Here's what is/would be deflationary. If the US Government (and therefore the US Treasury) ran a multi-year surplus at the Federal level - like we did in 1998-2001. With a surplus, tax receipts (and other Federal govt fees, levies and judgements paid) exceed spending. This removes bank deposits from the banking system and creates a dollar asset "shortage" which led to the deflationary recession of 2000-2002. Recessions lead to a dramatic reduction in tax receipts, which flips the US Treasury back into a deficit -- and the economy is tipped back upright again. What I would say is that QE suppresses interest rates which as I've said before hurts savers more than it helps debtors. Savers seeing a loss of interest income, save even harder - which, in turn, hurts consumption and economic activity. That's not deflation though - that's just lowering GDP growth. Basically some days I wish the Fed would just fire all of its PhD economists and retain only a small staff to help the Fed Chairman, who I would, in turn, lock out of his/her office from 9 to 5 (when markets are open). LOL. wabuffo

Quick Fed update. Total US Commercial Banking Industry Reserves (i.e., illiquid deposits stuck at the Federal Reserve) are about to top $4 trillion. (per yesterday's H.4.1 report) https://www.federalreserve.gov/releases/h41/current/ Bank's are getting a triple scoop of (unwanted) reserve growth at the moment: 1) continued US Treasury deficit spending due to stimulus creates new bank deposit liabilities + federal reserve assets. 2) continued Fed open market purchases of Treasury assets is swapping those purchased assets for a reserve asset. 3) a new factor is the US Treasury's need to run its account balance at the Fed down to a target of ~$117b before August 1st, 2021 when the Congressional Debt limit toggles back on (unless Congress extends it). At the moment, that balance sits at a bit less than $1t, and the US Treasury is starting to run it down. This means that for every dollar that the TGA balance goes down, bank reserves go up a dollar. This is because the US Treasury is spending but then not issuing a corresponding US Treasury security to soak up the reserves its spending is creating. (BTW - this is a real-time MMT lesson that demonstrates how US Treasury issuance isn't really borrowing, it is a reserve hygiene maintenance operation). Here is a chart that I created from the weekly Fed H.4.1 balance sheet report since the start of 2020. The orange line is the actual weekly total reserve balances by the US commercial banking sector on deposit at the Fed. The blue line is what it would've been if, in theory, the US Treasury stayed at its Aug 1st to-be target of $117b. You can see that the US Treasury really ran up its TGA balance during the pandemic, kept it high, but now is starting to run it down and the two lines are starting to converge. It does look like banks are heading to $5t of total reserves vs $21t of total assets. How far will this go? No idea - but its nuts. The good news is the banking sector is super-low risk. The bad news is return on assets and return on equity is gonna suck. wabuffo

They are basically a billionaires collectible. But the billionaire gets to deduct almost the entire purchase price (since there's few tangible assets in a sports franchise) over 15 years in the form of annual tax deduction against his/her personal income from other sources. I bet Steve Ballmer pays close to zero income taxes on his Microsoft dividends thanks to his Clippers purchase. That's why billionaires line up to buy the best/most valuable franchises. I do agree with you though that they are generally poor investments as public companies and really should be privately held by rich individuals. wabuffo

Sold rest of NVEC today - thanks for the great idea Wabuffo!

Keep in mind FWIW that Munger's foreign investments haven't done as well as his WFC, BAC, USB US bank investments (or that 10% corporate bond that he bought and sold). - Posco (PKX) - sold most of it at break-even to a loss. Did a writedown during his ownership for acctg purposes. - 005389.KS (Hyundai Pfd 3) - sold all of it at a loss. Did a writedown during his ownership for acctg purposes. - 1211.HK - his initial purchases back in 2011 didn't do great and he wrote down most of it to FMV. Its performance has largely been due to its big pop in 2020 - otherwise its been "meh" for most of his holding period. He sold probably 15% of it last year IIRC (too early - before the pop). Probably sold another 25% this Q to fund the BABA purchase. Not saying it won't work out. Just pointing out the mixed-track record of buying/selling Asian stocks. wabuffo

Start a new thread on HQI and I'd be happy to opine. I am impressed with the business model where they hold the total AR for systemwide franchise sales and then remit payroll to the individual franchise branches. They just made two decent-sized acquisitions and their core business slowed down due to COVID's impact on temporary labor. I think their earnings will ramp up as more outdoor venues open up where they get some of their temp labor demand and they convert their acquired businesses over to the franchise model. I originally bought it as a special situation during HireQuest's reverse takeover of CCNI because they were doing a large $6 tender to get their ownership over 50% control. But the closer I looked at the pro-forma numbers, the more I thought the HQI mgmt was lowballing the numbers to get people to tender and the more I liked the mgmt and the business. wabuffo

Long-term buy-and-holds for me are CASH, HQI. Smaller-caps with unique business models in very competitive industries but run by exceptional mgmt teams. They've already run up a lot since last summer, though, so may not go anywhere in terms of price near-term. Share price of these two can be volatile so expect severe draw-downs every once in awhile (especially CASH). Also keep in mind HQI did a reverse merger of the old CCNI (Command Center) in order to go public and changed the ticker to HQI, so ignore the stock chart before mid-2019-ish. wabuffo

I like to sell at the money puts for stocks I like. In this case, the premium was too juicy to resist, and puts me into the stock at my buy price if I am put the shares I think one has to be very careful with this strategy. A closer look indicates that selling naked puts is almost always a bad strategy. 1) if one is selling puts at a strike price above one's estimate of IV, then one is not getting adequately compensated in terms of premium for the risk being taken. IOW - one is selling insurance way too cheaply. 2) if the strike price of the naked put is at or below your estimate of IV, then you are better off buying the underlying stock. Why bother with the naked puts in this case? There could be times where selling puts makes sense - but usually because someone like Buffett is accumulating the underlying stock. He has done this in the past when he believes he is buying a stock trading below IV and wants to lock in the price for continued accumulation beyond the immediate term of his buying (eg, KO in 1993-94 and BNSF in 2009-10). wabuffo

DISCK @$33.80

CASH (Meta Financial) just got the nod (for the third time in three chances) to be the official "stimmie" prepaid card issuer on behalf of the US Federal government. https://www.metafinancialgroup.com/news-releases/news-release-details/metabankr-serves-agent-distributing-prepaid-debit-cards-part-0 CASH runs with a balance sheet size typically at around $6b in assets, so for CASH to get a transfer of deposits/reserves via the US Treasury's general acct at the Fed of $11b so close to quarter-end will be instructive to show how our monetary system works. This $11b is on top of the $7.1b CASH got in January in the second round of stimmie which probably has not been fully run down as yet. Heck - I think there's still some deposits left over from last year's first round of stimmie in Q2, 2020. While these reserves and deposits will run down as prepaid card recipients get their cards and spend their balances (these balances will transfer to other banks who represents merchants/service providers who sell the stuff that these prepaid card recipients spend their card balances on) - what we should see on CASH's balance sheet at 3/31 is a massive (and I mean massive) "cash balance" of probably two-thirds the total of CASH's entire asset base. Of course, deposits will be equally huge as well. When the quarterly report comes out, we'll revisit this.... I think it will be quite a good case on how the Fed, US Treasury and bank money flows work. wabuffo

How is BNSF valued by regulators? https://prod.stb.gov/reports-data/economic-data/annual-report-financial-data/ I've never looked deeply - but all the Class 1 railroads have to file financial reports with the US Surface Transportation Board. There might be some information here about how BNSF is regulated. I think you need to cop a squint at the Schedule 250s. wabuffo

If I apply the Kansas City Southern EV/EBITDA C-P deal multiple on BNSF, I get an implied equity value of $142.8B for the railroad. Perhaps that's too high without factoring in giving up a control premium but still an interesting datapoint. I had the impression, Buffett ranked BNSF in third place (behind insurance, Apple stake, but ahead of Energy biz). Total BRK market cap is $580B. wabuffo

In principle, JPM and peers could turn down deposits? Now that would be interesting - we have enough money, we don’t want yours, take it somewhere else Is that possible? The deposits (and reserves) never leave the banking system. JPM sends the deposits to Wells who can't keep them who sends them to BAC...who sends them to? JPM? Whoever gets them has to have a reserve account at the Fed. Is that an intentional byproduct of fed policy? Almost acts like negative interest rates right - incentivizes spending/investing money? For every buyer there is a seller. If I spend my stimmie cash, someone else receives the stimmie cash (and the deposit). The deposits (and reserves) once again just move around, they don't get removed or destroyed. I think the only way the deposits (and reserves) leave the system is if they are converted to US currency or are removed by the US Treasury via bond issuance. wabuffo

I don't know much about plumbing, but this guy seems to think the opposite: He's confused and, in turn, he's confusing his twitter followers.... Basically--if I understand correctly-- what he's saying is pre-SLR change, banks needed tier 1 requirements of 3% of assets but SLR change decreased that to 1%. By ditching the SLR change, it will raise that back up to 3% and banks will be net buyers of US Treasuries... I don't understand anything this guy's saying and I don't think he does either (you really should ignore those dudes on Real Vision). One can get lost in all of the mumbo-jumbo but its actually very simple conceptually. Its all about leverage ratios, right? Bank Assets/Bank Tangible Capital. What everyone (including the bank regulators) learned in the GFC is plain old high-leverage kills banks. The supplementary leverage ratio (SLR) just adds some off-balance sheet assets like derivatives and other adjustments and makes the numerator larger vs Tier 1 capital for systemically important banks. It also adds in an additional buffer layer for safety and soundness (in effect forcing lower leverage for the Global - Systemically Important Banks (G-SIBs)) The key point is that in 2020, the actions of the Fed and the US Treasury dramatically expanded and converted the balance sheets of the big banks: 1) massive US Treasury deficit spending created new bank deposit liabilities with matching reserve assets. 2) Fed buying of US Treasuries swapped bank assets for additional reserves (which are frozen assets - kind of like restricted cash or cash that banks can't get rid of). The Fed immediately worried that, all else being equal, big bank balance sheet leverage ratios were going to fall (ie, leverage was going to increase) because the assets were going to grow faster than tangible capital. That turned out to be true. The worry was the big banks were going to adjust by cutting assets - mostly lending. Not what the Fed wanted to see. So the Fed cut the banks some slack. It said - let's not count reserves (no credit risk, no price risk) or US Treasuries (no credit risk, some price risk depending on duration) in your leverage ratios. Let's look at a time series of some of the big banks (JP Morgan Chase and Bank of America - i'll ignore Wells Fargo because they have an asset cap which is a whole 'nother problem specific to them). All amounts are $000s. Here's JPM: What do we see? Jamie Dimon likes to keep his leverage ratio at about 9% (or assets/equity = 11x). But we can see that assets exploded in 2020 (+26% Q4 '20 vs Q4. '19 while Tier 1 capital only grew +13%). Without the waiver from the Fed, JPM's leverage would've increased to 12.7x and JPM would've probably taken action. That's where the Fed's waiver kicks in. I've broken out the quarterly balances for reserves and US Treasury security holdings for 2020 on the right. When those balances are removed from the leverage ratio calculation, the "adjusted" leverage ratio comes back into line with JPM's historical performance. BAC looks similar: Ok - so here's the deal. The Fed just removed the waiver (though they hint that they will take another look at SLR - possibly permanently exempting reserves? I guess we have a week and a half before the waiver expires so the Fed might issue new SLR guidelines before the deadline at the end of March). The first impact if nothing else happens is what will the big banks do if their official leverage ratios indicate more risk to the regulators? They are not in breach of SLR (they knew it was a temporary suspension so none of them did anything dumb) but the leverage is higher than they probably want so will they make adjustments? They can't get rid of reserves in aggregate. But they can shed US Treasury securities or worse (for the Fed) -- cut lending to lower-credit borrowers...eek! Even with just the status quo at the end of 2020 and given the Fed's motivations, I was surprised the Fed reimposed the old rules (maybe JPow bent the knee to the Warren/Waters political faction? So much for Fed "independence" from political interference? LOL.). But the situation is not status quo in 2021. The Fed (and we) know this. It's going to get even worse for leverage ratios in 2021 for the big banks for three reasons: 1) The Fed will continue to expand its balance sheet with asset purchases - which stuffs even more reserves on bank balance sheets (though it doesn't grow assets - its a swap). 2) The US Treasury is still running "guns-hot" on spending. That will create new bank deposits and reserves and will stretch leverage ratios beyond where they ended in 2020. We could see another +20% growth in big bank assets in 2021 (sad trombone music for Wells Fargo and their asset cap would be an appropriate soundtrack right about here 8) ) 3) The US Treasury also has a one-time problem of getting its extremely large Fed general account balance way the heck down by late July when the Congressional Debt Ceiling toggles back on. This will push reserves into the banking system (and deposits) which the Treasury will not relieve with as much Treasury debt issuance as a reserve maintenance activity. Yet more reserve growth in 2021 - just what the banks don't want and can't use. So its a double-barreled problem for the big banks. How they choose to solve being "offsides" on their leverage ratios will create macroeconomic cross-currents in 2021. They could shed assets. Or (as the Fed would likely prefer). banks could raise more capital either by maybe issuing preferreds (which still count as tangible equity, I think?) or worse for investors, they could cut dividends and share repurchases in order to rebuild equity capital. I don' think Jamie Dimon thinks he needs more capital and he has been known to signal his displeasure at the Fed and bank regulators by allowing the market and economic blow-back of Fed regulatory decisions to boomerang right back to the Fed (see also, Sept 2019 bank reserves/repo mess). In fact, Dimon in JPM's Q4, 2020 earnings presentation fired a shot across the Fed's bow with this slide: Should be an interesting spring and summer for monetary geeks and freaks like us! wabuffo EDIT: You know what? Let's cop a squint at WFC's numbers: Oh man - you can just feel the pain at Wells because of the asset cap! Now imagine another doubling of reserve assets in 2021! At Q1, 2018, WFC had 70% of the assets that BAC did. Another year of 20% asset growth at BAC vs 0% at WFC, and WFC will have shrunk to 40% of BAC's asset size!

what if rates fall even as inflation hits 6%? What's the playbook say then? wabuffo

really like the second cartoon (given my avatar 8) ) wabuffo

I'm a monetary plumbing nerd and thus Thursdays are always an interesting day for me because the Fed publishes its weekly balance sheet as at Weds of this week (H.4.1) at 4:30. That in addition to the Daily US Treasury Statement gives me some data that I like to look at. Well today's Daily Treasury Statement is a humdinger! As indicated upthread, the US Treasury is trying to run down its account balance at the Fed by spending and then not issuing Treasury bonds to sop up its spending (and the bank reserves it creates with that spending.) Cop a squint at today's report: https://fsapps.fiscal.treasury.gov/dts/files/21031700.pdf The TGA dropped by $271b.....in a single day. There was hardly any Treasury debt issuance or redemption. The US Treasury collected $17b in various cash receipts but SPENT $289.3b! That's a one-day deficit of $271.8b. In 2007, the US Treasury ran a deficit of $210b FOR THE WHOLE YEAR. Here we did 30% better than 2007's annual deficit in a single day. That must be a one-day record. The main reason? Look at the spending column under "IRS - Economic Impact Payments (EFT)" = $242b. That's yer basic stimmy payments. It will be interesting to see the Fed's report to see the impact on bank reserve growth since the US TGA balance in the Daily Treasury report will foot with the Fed's b/s on the same date. I expect bank reserves will be up to $3.9t on their way to over $5t by this summer. The big banks deposit growth today must've been huuuge. And Wells Fargo's Scharf is probably panicking right about now because he has to figure out how WFC will get back under the asset cap. [EDIT: Yep - bank reserves yesterday reached $3.87t. They were $3.38t four weeks agao and $3.1t to start the year.] Also as an aside - it appears the Fed will not give the banks continued SLR relief at the end of this month which surprises me. So that will also squeeze bank balance sheets due to the increasing reserves and their counting against capital/leverage ratios. This means that banks will be sellers of US Treasuries on their collective balance sheets (they hold collectively ~$1t), I believe. Interesting times that's for sure for a macro money nerd like me. wabuffo

So it would seem that Warren cut back his purchase volume significantly in response to higher prices. Not surprising but good data point on what price level he cools at. I'm going to withdraw my point that buybacks have slowed - assuming, that BRK is under a blackout until the 10-K is released. In 2020, the AR/10-K was released on Feb. 24, 2020. But in 2021, it was released on March 1st, 2021. I'm going to use the difference in share counts between the 10-K and the proxy. In 2020, from 2/24/20 to 3/4/20, BRK repurchased 5,552,089 B-share equivalents over 8 trading days or 694,011 B-share equivalents per day. In 2021, from 3/1/21 to 3/3/21, BRK repurchased 2,532,754 B-share equivalents over just 3 trading days or 844,251 B-share equivalents per day. Its hard to know what Buffett is really doing here but assuming Buffett is adhering to a blackout period until the 10-K/AR comes out, then its possible he is still buying at the same pace as before. wabuffo

So it would seem that Warren cut back his purchase volume significantly in response to higher prices. Not surprising but good data point on what price level he cools at. Yes - his buying cooled over a period where the B's were trading in the low $240s. BRK's is getting hit today by a one-two punch: - market is triangulating this new buyback info and processing Buffett's buy-price limit. - increased talk about the new administration's tax plans which include raising the Federal corporate tax rate from 21% to 28% (this impacts BRK both on operating earnings as well as an increase in its capital gains deferred tax liabilities). wabuffo

BRK Proxy Statement provides updated share count of A and B-shares as at March 3rd. https://www.sec.gov/Archives/edgar/data/0001067983/000119312521080418/d938053ddef14a.htm In 15 days since the 10-K on Feb. 16th, Buffett has repurchased a further 839 A-shares and 1,274,254 B-shares. FWIW, wabuffo

This is not a nice line of posting, viewed from a fellow CoBF member perspective. You are right. I forgot that ALL CAPS means shouting. I was worried that I'm posting too much about this macro stuff and it was meant more like "oh boy, there goes that boring guy again - skip ahead to the next post." Thanks for the feedback - I'll just let'er rip from now on with no ALL CAP warnings :D wabuffo