wabuffo

Unsurprisingly, the Survey of Consumer Finances shows that the median household is well behind the mean in terms of financial assets and net worth. What point are we arguing? I think this argument is confusing household balance sheets vs household income statements. You and thepupil are talking wealth, I'm talking annual income. I'm not disagreeing that some households may have negative net worth. Where I am disagreeing is that even negative net worth households have a mismatch of floating vs fixed rates on their income statement -- floating on their meagre interest-earning assets and fixed on their vast interest-paying consumer and mortgage debts. Thus, even a household with negative net worth will see a drop in annual income when rates drop. And that's what drives consumption. wabuffo

Which Fed survey are you referring to? KJP - this one: https://www.federalreserve.gov/releases/z1/20201210/z1.pdf cop a squint at p. 144. I'm attaching it here [click for full-size viewing] can you elaborate here? thepupil - sure! I've highlighted in yellow the relevant balance sheet items for US households in aggregate from the Z-1 table I ripped out of the Fed's report above. Most Americans biggest source of wealth is their home equity. In addition, they have $12 trillion in short-term rate sensitive instruments like time deposit/savings accounts and money-market funds. But their liabilities are largely unaffected by rate changes. Most mortgages are fixed-rate so they won't change if rates change. Consumer credit is largely credit cards and car loans which some, if not most, is fixed rate as well. Let's swag that approx $4 trillion of the total household debts are variable rate. Thus, households have about $8 trillion of NET exposure to short-term rates, so a 1% increase in rates adds about $80 billion to annual income. But if rates drop 1%, then savers save more to recover that lost $80 billion of income. Are there individual households that are underwater? Sure. But its the aggregate numbers that move national consumption and that, in turn, moves GDP, IMHO. wabuffo

So if the interest rates are low and the fed is providing a ton of liquidity shouldn't the "growth" stocks continue the same way they've been on over the past decade? stahleyp -- I guess I didn't really answer this specific question directly. I don't invest in a macro way - but if I did, the two macro variables I would try to forecast are: corporate tax rates (and to a lesser degree personal capital gains tax rates) and long-term Treasury yields. This makes sense right? A dollar of pre-tax income has an annuity value of (1-tax rate)/risk-free rate. Since mid-2017, early 2018 we got a lower corporate tax rate and generally low long-term Tsy yields. That's been good for stocks. For now that should continue to the fall of 2021. After that? I think we could see a double-whammy of a higher corporate tax rate (21% going to, say, 28-29% and possibly higher personal investment taxes) and long-term yields rising on the 10- and 30-year long bonds. That will flip what was a strong tailwind for stocks into a medium-strength headwind in 2022 and beyond. Not a disaster but not the recipe for 15-20% returns in the stock market. Of course, who really knows. I think its best to ignore this stuff and just deal with the micro of analyzing the specifics of the individual stocks in front of you. wabuffo

why is deflation treated like kryptonite? JRM - I think you have to distinguish between price declines due to productivity growth/innovation (which are good for the economy as living standards rise) and price declines strictly due to the value of the dollar increasing (ie - dollar becomes "scarcer"). In the latter case, consumer/business debts become more onerous (increase in real terms) and can lead to a debt/deflation spiral and liquidation of the economy. In the recent past you said you were buying value stocks (I'm assuming you meant something like like low p/b, low p/e or whatever - but my assumptions could be wrong!). So if the interest rates are low and the fed is providing a ton of liquidity shouldn't the "growth" stocks continue the same way they've been on over the past decade? stahleyp - I don't let macro infect my stock selection. I just like riffing on the stuff. I don't do as well when the equity indices are flying. I like to think I do better in down markets, but unfortunately down markets are becoming rare. And when they happen, they last a week now before the monetary authorities bring out their bazookas. Isn't the individual US consumer/voter also often massively short the dollar via a highly levered 30-year fixed-rate mortgage and, perhaps, other debt such as school loans? And how easy is it to reduce nominal wages alongside deflation? KJP - quite the opposite. The Fed household wealth survey proves that most households are hurt by low interest rates rather than benefiting from them. I've been saying for awhile now that the Fed's interest rate suppression punishes savers more than it helps debtors. Because of this, savers save more and consume less which is the opposite goal of what the Fed is trying to do. And its easy to reduce nominal wages alongside deflation in aggregate - just create massive layoffs and unemployment. wabuffo

Today we are printing money and the treasury is sending checks out within the $1.9T stimulus package which is 9.1% of GDP. We have some slack in the economy to absorb some stimulus , but not 9.1% our economy. So, I think we will see inflation, but it likely will be a short term spike. Spek - I basically agree with your thesis. People always focus on the spending but a reduction in the deficit is really a three-legged stool. First, spending will almost certainly go down after this year (though I am afraid that politicians have discovered a new toy -- sending stimulus checks to constituents). Second, the economy will also grow pretty rapidly this year -- maybe 5-6% for the full year. And finally, tax revenues always collapse in a downturn (especially a severe one like 2020 where 20% of the population lost their employment income). So one could see the actual spending fall 40%, tax revenues boom (think of all those capital gains taxes that have to be paid plus growing employment income) and a couple years of rapid GDP growth and we could be back to a 3-4% deficit to GDP ratio by 2022 or 2023. But a lot can happen between now and then so its never a sure thing. wabuffo

If gold moves due to inflation why did it spike from 2008-2011 and then from 2018-2020? In other words, why trust that the gold market knows what inflation will do if its been wrong in the past? I'm looking at GLD since it's the easier to measure from my view. Hey ps! Good questions! First i like to think of the USD like any other commodity. Like lumber or wheat, the USD has its own supply and demand curves. What gold does is it gives you a real-time price signal on the USD's supply and demand (like any other commodity). Gold does this because gold is very stable - its one of the most stable commodities because of its annual mining to above ground inventory ratio. Ok - so we'll come to demand in a moment. First supply. Supply of USD assets comes, not from the Fed, but from the US Treasury. As I've rambled on in a number of posts - US Treasury deficit spending creates new financial assets in the private sector banking system. Treasury debt issuance and Fed operations are asset swaps and don't create new financial assets, they just change the composition of the private sector's US governments asset mix between currency/reserves/Treasury debt. So the first answer to your question deals with US Treasury deficit spending. Here's an annual chart of US cash deficit (as measured by the US Treasury monthly statements) vs annual US GDP. In my mind, any time the deficit goes over 4% of GDP - its probably creating too much USD's. I've highlighted the years where it was above 4%. Right off the bat - the data matches your observations (almost). 2008-2012 and then 2018-2019 were years of "overproduction" of USDs and gold being sensitive to supply - noticed it. 2020 of course has also been a year of oversupply (especially during the April-August period). Since then, its moderated a bit but I haven't updated my numbers fore the last few months. I should do that soon. Back to USD demand. I think the big difference now vs the 1970s, is that there is a lot more wealth than there was back then. So demand for dollars today is less about groceries and gasoline. It is more about wealth and assets. The dollars today chase real estate, stocks, etc... So that's where the overproduction of USD goes and gold once again is sensitive to it. What is happening right now? Its hard to say - but if I had to guess.... Demand for USD and USD assets is revving up. Supply of USDs is moderating. If you look at tax receipts, they are picking up and I think March, April and June will be big months with surprisingly large Fed tax receipts. We'll see how this stimulus package shakes out in terms of spending. The result is that gold is falling which signals a fast recovery in 2021 for the US economy. A fast growing economy signals very high demand for USDs. That suppresses gold if the supply of dollars does not keep up. What about Treasury yields? I think that's noise right now. There are a lot of monetary plumbing things happening over the next 4-5 months that could create a lot of noise in Treasury yields. We'll see. Because of some of things that may or may not happen (SLR regs getting extended, Congressional debt limit kicking back in on Aug 1st, etc) - its really hard to make a prediction. But if I had to guess, SLR will get extended but the US Treasury will have to suppress its net bond issuance so as to hit its account balance requirement before Aug. 1st. That would put pressure on Treasury yields and cause them to go lower - especially if the Fed is still buying $100b of Tsys per month. I'm not sure if I answered your question. But the bottom line is its less about product price inflation these days and more about asset price inflation because that's where all the money goes. wabuffo

Interesting. I sold out at $6.9 or so. BBG reporting that the COH and EC reached a deal today. BK exit can now move forward pretty quickly. wabuffo

More GTXMQ.... wabuffo

I personally don't know a lot about Booth. I listened to an interview with her a while ago though. From what I remember she seemed like a gold bug stahleyp - that was my impression too that she was a gold bug/Austrian type. who understands the plumbing the best. Surprisingly, very few do. Monetary policy is talked about by so many people, yet I find so few truly understand the mechanics of it. Someone I learned a lot from is George Selgin. He's a Fed watcher and economist who has written many books on the subject of the Fed. He's also pretty active on twitter so you can give him a follow there. https://www.amazon.com/s?k=george+selgin&i=stripbooks&crid=322T05JTCR395&sprefix=George+Selgin%2Caps%2C173&ref=nb_sb_ss_c_2_13_ts-doa-p "Floored" is a good one. wabuffo

So would something like UBI not cause inflation? I have no opinion on it. I'm generally a libertarian and think the less govt the better - but I don't know that another spending program makes a difference. Why would tax increases cause inflation? Would it just take reduce market valuations and have minimal effects on the real economy? Taxes create a wedge against the real economy. Also higher tax rates encourage evasion (both legal and illegal). The only thing that gives the sovereign currency its value is one needs it to extinguish one's Federal tax obligations. That's why we accept the govt's money. If you weaken tax collection, you start to weaken the currency, IMHO. Low taxes, sound money - its that simple. Empires crumble not because they overspend, but because they overtax and collection falls apart followed by the empire. Good book on the subject that I recommend: https://www.amazon.com/Good-Evil-Impact-Course-Civilization/dp/1568332351/ref=sr_1_1?crid=2REHOBTDPUVDW&dchild=1&keywords=for+good+and+evil&qid=1614655409&sprefix=For+good+and+ev%2Caps%2C186&sr=8-1 Do you have any thoughts on Danelle Dimartino Booth? I haven't really followed her stuff. Should I? What do you think of her economic commentary? wabuffo

Spek - I think there are two factors in my macro thinking (which is worth what you are paying for it -- nothing). 1) The US recovery will be very strong throughout 2021 - remember we are feeling the effects of stimulus plus the low personal and corporate tax regime of the Trump administration (for now until the Biden folks dismantle it) 2) the US monetary authorities have messed up and now have a Treasury account that must hit its 2019 account balance by August 1st of this year when debt ceiling suspension is removed per Congress's 2019 bill (debt ceiling was suspended for two years on Aug 1st, 2019). I'm not sure if that is the July 31st, 2019 amount ($176b) or the August 1st, 2019 amount ($118b) - but the current balance is $1.4t. With the Fed still on auto-pilot buying Treasuries - it will create two problems for the US economy: a) bank reserves will surge to over $5b (vs $21b of total US banking sector assets). Yes the Fed will relax some regulatory measures (ie not counting reserves as part of regulatory leverage/capital ratios) - but it still moves the US banking system closer to Japanese style zombie banks. b) the combination of Fed buying and Treasury spending its TGA without much Treasury bond issuance might actually shrink the supply of o/s Treasury debt. That's actually a bad thing - especially for a rapidly growing US economy that we will see over the next six months. While none of this should affect our stock-picking, I think it will be an interesting monetary experiment to watch in real-time. Cool stuff. wabuffo

On another note, what would be the biggest risk of inflation in your view? 1) defaulting on sovereign debt issued in another currency (oh wait, the US govt has none) 2) massive tax increases (eg, 70% marginal tax rates, wealth taxes, etc) 3) failed political system The reality is that this last stimulus package is probably unnecessary since the economy appears to be in full recovery mode. But its not permanent spending - just a lot of one-timers sprinkled here and there. That'll juice things a bit - but the deficit will roll over back to a more normal % to GDP ratio (especially as the denominator recovers). Hopefully, that'll be it. I think Japan-ification style monetary repression due to the Fed and US Treasury messing things up is the bigger risk here and I've talked about it upthread. I think its even possible we see slight negative yields in the short end of the Treasury curve by May-June. wabuffo

In short - they both (Burry, Alden) don't know what they are talking about. Alden, in particular is constantly misinterpreting the data and in 2019 thought Fed liquidity was inflating the stock market (now she says the Fed's reserves go nowhere, LOL) Gold and Treasury bond yields are heading down. I've explained why in other posts as well as this thread. The dollar will strengthen. There is no inflation - people always assume that a strengthening economy will cause inflation - and it never does. wabuffo

I view the buybacks to be more a testament on the directionality of the economy, and less so on BRK itself being cheap. If I had to guess, I think Buffett (and Munger) realize that the odds of bagging that $100B "elephant" in their remaining lifetimes has probably dropped to zero. That opinion may have been informed by the reaction of the Fed and US Treasury to the financial panic caused last March by the pandemic shutdowns. That crisis lasted about 5 minutes before any company who needed emergency capital suddenly could borrow cheaply and in almost unlimited supply. Buffett's opportunity to deploy large sums during panics has been taken away. I think its no coincidence that the buybacks started coming in size in Q3, Q4 of last year and according to Buffett will continue in 2021. wabuffo

Looks like 4Q buyback was more aggressive them people thought! Not only that but Buffett kept buying in 2021. Through Feb 16, 2021, it looks like he repurchased another $4-$4.5b in BRK stock (depending on prices paid). Very impressive. wabuffo

thank wabuffo, we are on the same page that the Fed is more than just a Recorder. I had added more functions beyond Recording with the analogy This short paper might help - its a good overview of modern central bank operations. It was written before the Fed significantly expanded its balance sheet but the principles still hold. I think you will find it informative even if you just scan the ten principles only. https://core.ac.uk/download/pdf/207650683.pdf wabuffo

...the Federal Reserve is like a Recorder's office where money is locked up and all that can happen is money can move around but you can't take money out of the Federal Reserve. part of this statement is ok, but a lot of it is incorrect. The Federal Reserve is a bank -- the US Treasury's bank. The US Treasury 'owns' the equity of the Federal Reserve. It exists to manage payments between banks and other banks and also between banks and the US Treasury. The Fed has a simple mission -- make sure every payment in the United States financial system clears without failure. To do this the banks and the US Treasury have "checking accounts" at the Fed. Yes - these are electronic deposits and its an electronic ledger. The amount that banks must keep in these accounts is determined by Fed policy (ie, the Fed used to allow 'daylight' overdrafts so banks used to keep very little at the Fed; now they are not allowed so banks must keep more on deposit) -- just like a private sector bank account. Lately (well for over a decade now) -- the Fed has also given itself another mission: buy Treasury assets and credit the banks' "checking accounts" when it purchases them. Finally, you and I don't get accounts at the Fed. Only banks do. But if the US Treasury needs to send us a stimulus direct deposit - it manages the payment by asking the Fed to move electronic deposits to our bank which means our banks' reserve account. This creates the deposit for us (and a reserve balance for our bank). - so reserves circulate in the Federal Reserve accounts but never leave the Federal Reserve. - the Fed through its policies and its purchases controls the total amount of reserves in the system (in aggregate banks do not control this). The Fed does this because it believes it is lowering long-term interest rates. - US Treasury spending, taxing and issuance of debt also moves reserves between the banks and the US Treasury's general account. There may be a few other things I may have forgotten - but that's the gist of it. The Fed is more than a "recorder" -- it is a bank. A special bank set up by the US Federal Government but a bank nonetheless. wabuffo

They will invent all kinds of complex arguments around money being locked up in the Federal Reserve, even though all Federal Reserve is doing is recording the transactions. This is similar to saying all real estate is locked up inside the County Recorder's office and no real estate can leave the county recorder's office. All you can do is move real estate around within the County Recorder's office, but that doesn't prevent it from being recorded at higher and higher valuations. wabuffo

It is not too big of a stretch of the imagination to think asteroid mining, while somewhat fanciful at this very moment, has the potential to impact precious metals' values in a big way over the next 50 years. wabuffo

Isn't that partially (mostly?) explained by completely removing the gold standard? It's entirely explained by Nixon severing the USD peg to gold in 1971. That also severed the pegging of world currencies to the USD (and gold). Stuff went sideways after that. For example, Middle East wanted to continue to be paid in real terms for their oil at old gold price - so OPEC started raising oil prices. Price controls were instituted in the US - which always lead to shortages (since market isn't allowed to clear) which led to the famous gas lines at the service stations which had any gasoline to sell, etc... It was a fun decade where no govt knew what to do. The 1970s were a very messy transition from one monetary regime to another (which took until Reagan/Greenspan to figure out). 1970s are nothing like today. wabuffo

Well said :-). Just look at what happened in 1970s despite the Fed obviously not desiring it. History repeats. Nope - not the same at all. Why is gold falling if the currency is being debased? wabuffo

Bill Dudley is the only Fed (or former Fed) talking head worth listening to, IMHO. He talks about some important plumbing issues that are coming this spring/summer for the US monetary system. https://www.bloomberg.com/opinion/articles/2021-02-25/negative-interest-rates-could-be-trouble-unless-fed-acts? Dudley goes on to talk about the potential crack-up this may cause at the banks due to regulatory ratios (which will be much worse at the asset-capped WFC, by the way). But he doesn't talk at all about the implications for Treasury bonds and the long end of the yield curve. Why is this also important? These moves to get the TGA balance down to $120b also have ramifications for Treasury debt availability. What's the fastest way for the US Treasury to draw down its balance? That would be to not roll-over its Treasury debt over the next few months as it redeems those securities that come due. This will shrink US Treasury debt outstanding by $1.5t. But the Fed will continue to buy US Treasuries at ~$100b per month. So that's a further removal of ~$500b of US Treasury debt. Combined, the Fed and the US Treasury will shrink Treasury debt o/s by ~$2t over the next five months. Current US Treasury debt held by the public is $21.76t. From that one must also subtract the portion held by the Federal Reserve which stands at $4.82t - making the amount held by the private sector $16.94t currently. So what will happen to rates (even at the long-end) if the supply of Treasuries held by the private sector shrinks by 12% ($2t/$16.94t) over a five month period? Do we think rates will continue to go up? Now as I look at the US Treasury Daily Statements, I don't see any sudden changes happening. The Treasury appears to be largely rolling over its debt. But some people may say - well there's a $1.9t stimulus program about to be approved - that could be another way the US Treasury could shrink its balance without shrinking the supply of US Treasuries. But that's a lot of cash that will hit the US private sector that will be hunting for yield. If the supply of US Treasuries stays the same (ie the US Treasury doesn't issue more debt due to its go-to TGA target), I think rates should also fall as almost $2t of cash sloshes around the system unabsorbed by US Treasury issuance. Something to keep an eye on. Of course, Congress could come in and revise all the goals (including the date of putting the debt limit back on). wabuffo

A thumbs up for "The Head" -- a series on HBOMax. Its short - just six episodes. I'm through four episodes and its very good if you like suspense/mysteries. When one is two-thirds through a show that is thoroughly engaging, one wonders if the show will "stick the landing" at the end. Well, this show really does! But you have to watch the show right to the end of the last episode until the closing credits. ;) As an aside, the hunger for shows to feed the streaming services is really showcasing the quality of international tv shows. The cast for this one is very international. But I love the way that characters interact in their own language (with subtitles of course). When the summer crew arrives, I believe they are mostly Danes. Of course they speak English to some of the characters who speak only English, but when two Danes interact with each other, they switch to Danish. I don't know why, but I really approve of this approach. This is just realistic and reflects what I would imagine would actually happen. If this was an American show, everyone would speak English all the time. Anyway - this TV reviewer gives this one a big thumbs up! wabuffo

if you want to worry about something macro negatively affecting stock prices, I'd worry about what kind of investment taxes are coming down the pike in both the US and Canada in late 2021, early 2022.... wabuffo

gold to the moon have been (temporarily?) I doubt it - gold trades in one day the entire value of Bitcoin (last I checked - perhaps it two days now at the current price of bitcoin) wabuffo