wabuffo

This is all interesting, but why should the average investor care about this? I don’t see any relevancy for myself and probably the vast majority of investors. I didn't mean to bore everyone with explanations of how the system actually works. I'll stop posting about it. wabuffo

Since the end of March, very little net reserves have been added to the financial plumbing, on a net basis, even if the TGA has been steadily decreasing (minus 261.2B since March 31st to May 19th). There's definitely some weird stuff going on in the monetary system - but I think a lot of it is explainable in terms of how the plumbing works. First - since the end of March, there has been quite a bit of deficit spending with correspondingly little net Treasury security issuance to soak it up. This is as you correctly noted because the US Treasury has a mandate to run its account balance to ~$100b by the end of July (due to the snap-back of the debt ceiling legislation by the US Congress which was temporarily suspended on Aug. 1st, 2019). More about the lack of new Treasury debt in a second.... As we know, Treasury deficit spending creates both a new deposit in the banking system (bank liability) and a new reserve on deposit at the Fed (bank asset). So the banks have received ~$300b of new reserves of which they are stuffing half of it in reverse-repo transactions with the Fed. (Note the difference is because the Fed is also still buying Treasuries in the open market which also creates new reserves). Why are they doing this? They are doing this, because the US Treasury in its desire to run down its account balance, isn't issuing enough new Treasury securities to soak up the excess reserves from the deficit spending like they normally do (meanwhile, the Fed continues to buy Treasury securities in the open market -- which swaps a reserve to the bank for a Treasury security from the bank). In the old days (pre-GFC), when the US Treasury would keep its account balance extremely small (~$5b), net debt issuance roughly matched deficit spending (in excess of tax receipts). But not now. Because the US Treasury needs to get its balance down, you can see that only ~12% of its spending (and reserve creation) was removed by net debt issuance. This is what is flooding the system with too much cash and not enough interest-earning Treasury securities. So there is a rise in reverse repo and a general compression of Treasury yields along the curve. This will get worse before it gets better until the US Treasury is done with getting its account balance to target (unless Congress extends the debt ceiling moratorium). You notice that Treasury yields were rising early in the year but reached their peak on or about March 17th when the US Treasury simultaneously started Stimmie Checks III and started to run down its TGA. I think this sets up an interesting dynamic for a whipsaw in the markets - sometime in July. Yields will very slowly compress through early summer but when the TGA account hits its target and debt issuance surges to match deficit spending, yields could surprise the markets from their current complacency with an explosion upwards through the back half of 2021. If there is also a move to raise corporate tax rates that the market perceives as real (I'm not sure the votes are there for that in Congress) - it could get ugly for equities (that's because $1 of pre-tax earnings will be worth a bit less after-tax plus the discount factor will go up). That's not a prediction - just a scenario to think about among many scenarios for the macro environment. wabuffo

Live shot of current new ideas landscape for me right now. wabuffo

does anyone know if overall Berkshire Hathaway had a good return on Wells Fargo since it got involved a decade ago... I don't know the answer to this - but Buffett first made WFC a major holding in 1990-91 when the double whammy of a national recession and a severe downturn in the SoCal defense industry post-Cold War raised fears about potentially large WFC's loan book losses. Wells was mainly a California bank back then. Keep in mind that this is also before Norwest bought/merged with WFC in the late 90s and took the Wells Fargo name for the combined bank. Norwest's leaders were Kovacevich/Stumpf and they pushed out the old WFC management and brought in their aggressive/arrogant style to the WFC. I think it was like a 10-20 bagger for Buffett til the Norwest merger. After that it wasn't a great CAGR right up to the GFC but before the crash (though both Buffett and Munger were buying more right up to 2007, IIRC). And of course, while it did fine from a low-cost base after the GFC, it has an asset-cap now due to its bad behavior. These are turning points one sometimes has to pay attention to as the brand can endure for awhile while new management ruins the franchise. Boeing/McDonnell Douglas is another good example of this. Even though Boeing "took over" McDonnell Douglas in the late 90s, it was the McDonnell Douglas execs who really took over and some say replaced the engineering culture of Boeing with more of a financial/engineering culture of McDonnell-Douglas. It can take a decade but the rot starts to emerge. wabuffo

Thanks for this great idea Wabuffo - and explanation on DISCK vs A/B - sold at the open. Interesting. I had sold half my position in DISCK when it hit $65, then bought it back in a tax-deferred account at $30-$31 after the Archegos blow-up thinking it was a trading sardine. But I'm going to hold now. Malone and his managers have a great track record maximizing very large, underperforming assets they acquire from smaller base businesses (CHTR + TWC cable). There's a lot of pro-forma cash flow here to play with in the combined HBO/Turner/Discovery/HGTV media assets. I was less enthused about Discovery by itself but am more enthused about the combination. Plus - Discovery is collapsing its multiple-class share structure into a single class after the merger, so owning the K-class, I think one gets an additional scoop of return via the arb to the single class. wabuffo

Where was the last time that they did the secondary offer? In 2017. History repeats because in late 2015, early 2016 - everything oil-related collapsed in price (KNOP included - down to single-digits, IIRC). Mgmt waited for the stock to recover in price and did a couple of secondaries in 2017 (at ~$22) for a few dropdowns. wabuffo

Given it's still paying 10%+ dividend, why not just keep it to continue to collect the divs... Its not a 10% yield - this is a melting ice cube. Part of its dividend is return of capital. If it doesn't do any more dropdowns, then it would be in run-off and slowly liquidating. Per their IR website, only two-thirds of the distribution is a return of profits, the other third is a return of capital. So you have to adjust the yield. It's really paying you a $1.37 dividend on, say, a $20 share price -- or a 6.8% yield (still attractive). The rest of the quarterly distribution is giving you back your capital. That's why KNOP has to continue to make capital calls on you to finance more dropdowns. To its credit, mgmt has been very good about only doing those secondaries when cost of capital is low enough. Unlike others in the shipping industry who routinely soak their shareholders at the worst times. wabuffo

Getting close to unloading KNOP. Somewhere between $20-$22, KNOP will do a secondary as part of funding the dropdowns that are sitting with its sponsor right now. KNOP has managed this beautifully. wabuffo

I'm sure I'm going against the consensus here but I'd rather own Chinese RMB than USD, today and for the next decade(s) to come. The last person I remember making such a definitive statement was Giselle Bundchen ("pay me in Euros! I don't even get out of bed for USD!") I think it was in Nov. 2007.... https://www.dailymail.co.uk/tvshowbiz/article-491838/Supermodel-Gisele-Bundchen-I-wont-bed-US-dollars.html Sad trombone song for Giselle...... Good news is I hear her husband gets paid well...and in USD! wabuffo

I personally think we should crater the economy every once in a while because it's healthy ... The United States used to be on a gold standard, had no central bank and no income tax. I mean what could be better than that Ayn Randian ideal ("really low taxes, sound money")? And yet, we would have a depression every 15-25 years. Is that healthier? Now we debase the currency bit-by-bit and come in with fiscal guns blazing at the first sign of economic trouble. MMTers say that's better. I honestly don't know if it is. Perhaps its too early to know for sure how this new "model" will do. Not to get political, but we like to think that as a democracy we want freedom. As I get older, I sometimes think that's not what we actually want. We don't want freedom, we want comfort - and we are willing to trade some freedom for it. That's because true freedom - in the purest libertarian ideal of no government involvement - is just too wild, wild west for most people. So we settle. wabuffo

why not just run virtually unlimited deficits We already do - pretty much year-in, year-out. We tried to run a surplus in 1998-2001 and cratered the economy from 2000-2002. For the public sector (Fed govt) to run a surplus, the private sector has to run a deficit (i.e, borrow to maintain consumption). To this day, I am convinced that the surpluses of '09-01 were one of the primary factors that led to the borrowing binge that was the mortgage crisis of the early aughts. wabuffo

More CASH, at 3X what I paid a year ago. 10% position now. Diamond hands, never sell...... LOL wabuffo

I don't know if its transitory or not.... but to play devil's advocate. You have three things that are causing an absolutely booming economy 1) very good fiscal policy (to put it mildly - two stimulus checks in one quarter) 2) for now, terrific tax policy (low personal and corporate tax rates) 3) recovery from shutdowns That's a policy cocktail for 6% GDP growth, if not more in 2021. Meanwhile supply chains are trying to ramp back up while demand outstrips their initial start-up curves. I'm not surprised that price is being used to clear demand for the time being. In addition, demand for US dollars and US dollar assets are through the roof. We've got to stop thinking in terms of Phillips Curve nonsense - ie that strong economic growth is inflationary. Now perhaps inflation is coming - but IMHO, it won't happen unless fiscal policy makes a big mistake like implementing the full suite of Biden tax increases being proposed. That will definitely be inflationary. Of course, I really don't know and could be wrong. wabuffo

Dr. Gold doesn't seem worried..... FWIW wabuffo

https://apps.newyorkfed.org/markets/autorates/tomo-results-display?SHOWMORE=TRUE&startDate=01/01/2000&enddate=01/01/2000 31 participants enter into $142b of reverse-repos with the Fed. That's a new recent record since the Fed bumped up the limits. So in reverse repo, the banks give the Fed bank reserves and receive from the Fed a one-day borrow of US Treasury securities. Since banks are sitting on $3.7t of bank reserves - this represents almost 4% of total US commercial banks reserve balances. BTW - this reverse repo number is growing just about every day. Sucking and blowing, the Fed is..... wabuffo

I'll start a new topic to discuss - if you like. I think their technological edge will last for quite a while. wabuffo

IDN - Intellicheck. Very speculative micro-cap. Could be a mistake.

10yr/30yr yields are already back towards pre-COVID levels so while it is nice to see the extended issuance Unfortunately the Bank of Canada bought a large portion of them - thus converting long-term fixed government debt to extremely short-term variable government debt. For example - the Govt of Canada has issued $14.9b 2.75% bonds due in 2048 and the Bank of Canada bought 40% (~$6b). In so doing, the BoC swapped central bank reserves to acquire these. At some point, the BoC (and therefore the Federal govt) will be paying more than 2.75% on that $6b - perhaps for a long time and at much higher rates. Some of you may say - "well by buying 40% of that issue, the BoC helped the Federal Govt get that low rate on the other 60%. That is false. Federal govt's spend first, creating financial assets in the private sector banking system. The debt issuance (as I've explained before) is just a bank reserve maintenance function and not actual borrowing. Central bank policy makes no sense to me. 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