wabuffo
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Posts posted by wabuffo
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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
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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
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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.
...the US Treasury has built up a huge cash balance at the Fed -- currently about $1.6 trillion. Also back in August, 2019, Congress suspended the federal debt ceiling for two years -- and has stipulated that when the ceiling comes back into effect on August 1, Treasury should be holding no more than about $120 billion in cash.So to meet the Congressional requirement, Treasury will have to draw down its cash balance at the Fed. Combined with the $120 billion a month that the central bank is already spending to buy securities and keep long-term rates low, this will cause cash reserves that banks hold at the Fed to soar -- likely topping $5 trillion this summer, up from about $3.4 trillion now.
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
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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
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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
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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
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(public, corporate and households).
you can't mix corporate/household debt with federal debt -- its mixing apples and rutabagas. US Federal govt debt (ie, Treasuries) is a reserve maintenance mechanism. It soaks up the reserves created by the deficit spending that has already been deposited it in the US banking system. Otherwise - all rates would go to zero and the private sector would be short zero credit risk collateral for borrrowing.
...and if you're going to talk about corporate debt - its bad form to present it without a comparison to corporate equity. Yep - like I thought - touching all-time lows in corporate debt to equity! Cue ominous macro bear music!
I'm afraid Druckenmiller is a trader. He is very good at it - but because he is good at one field doesn't make him an expert in another.
wabuffo
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This research paper claims in the Weimar Republic Hyperinflation started with a huge runup in stocks and increase in speculation.
Might I recommend more reading about the end of World War I....
This is a good read:
In my view, there are three reasons why hyperinflation might happen:
1) losing monetary sovereignty (ie, central govt must float debt in foreign currency that it cannot issue by fiat)
2) war - or - a government overthrow
3) the collapse of domestic industrial production.
After WWI, Weimar Germany suffered all three. Next - do the United States Federal government....
I don't know anything about Bitcoin, so I can't comment - though I fail to understand why a supposed monetary polaris would be so unstable in value.
wabuffo
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What indicators should one pay attention to instead?
real-time indicator: gold price in USD
longer-term indicator: US Treasury net cash deficit (per US Tsy Daily Statements)/US GDP.
That's because US Treasury cash spending creates new financial assets and the gold price (due to gold's stability in annual production/above ground inventory) is very sensitive to the demand/supply characteristics of the US dollar. (note its not just supply of dollars, its also the demand for dollars - which is high right now due to the recovery forecasts for the US economy).
Just my 2-cents.
wabuffo
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Munger said that he wouldn't buy DJCO at current prices for the stock if he was starting out now looking to buy some. (or something like that).
wabuffo
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if they keep the fed funds rate low but say the 10 year still goes back to the level of a year ago, isn't that a warning sign that things are not well?
Why - isn't that a normal yield curve shape?
wabuffo
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Do you think we'll keep low rates and low inflation
yes.
long rates are going back to where they were before the pandemic. Nature is healing.
If hyperinflation was truly here or on its way, stocks would go down, gold would go up. The opposite is happening. If you are reading anything about inflation coming and the author is quoting M2, velocity of money, Fed 'printing money', etc.. -- ignore them, they've given away that they don't know what they are talking about.
Could we go too far? I guess anything is possible.
wabuffo
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But he did sell some BYD during the summer of 2020 (approx 13% of the position at much, much lower prices). FWIW.
wabuffo
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Burry has been sounding the alarm on Twitter big time.
Wasn't Burry also forecasting big time inflation....in 2009?
wabuffo
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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.
Without giving away too much plot (and spoilers) - a small scientific team (10 people) is left behind on an Antarctic research base as the long winter night is about to begin (the six months of the year without any sun over the South Pole).
When the spring comes and the summer commander and a small crew return to the base, they find the entire team that stayed behind either dead or missing. The summer commander then goes about trying to piece together what happened and find the missing crew.
wabuffo
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Skip his monetary policy/Fed section ("The Point of No Return") - he clearly doesn't understand how any of this works.
wabuffo
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at these level? curious about your thesis.
I've been watching the Company for 5-6 years but never invested in it. But the new capital allocation strategy is a very big game-changer if you run the numbers on it.
I think the decision to fully reinvest all of their free cash flow completely changes the valuation math if one believes they can do it.
And these guys have the track record to do it successfully. We'll see - it might not work as well in practice as on paper.
Bill
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CSU.TO 8)
wabuffo
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If the excess reserves were already excessive before, the Fed still aims to keep the bond buying spree going (so contributing to more excess reserves in banks that may have already too much 'liquidity')
This is actually worse for the banks because it is an asset swap therefore as reserves increase, total assets stay more or less at the same level (unlike Treasury spending which adds both reserves and deposits and increases bank assets (not so fast Wells Fargo! no asset increase for you!)
which means that (for the theory to apply) the TSA account needs to rise (staying the same is not enough) in proportion to bond buying. The Treasury Balance has been coming down since last summer.
The Treasury used to run (at least since the GFC) an account balance of about $400b - give or take. So in a worst case scenario one could foresee an additional $1.2t increase in that reserve chart projection.
What the Fed is doing makes no sense whatsoever.
wabuffo
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The move, which aims to return its cash position at the central bank to more normal levels, will flood the financial system with liquidity and complicate Powell’s effort to keep a tight grip over money market rates.
The US Treasury's Quarterly Refunding Statement is where people are getting this idea from:
https://home.treasury.gov/news/press-releases/jy0011
During the January - March 2021 quarter, Treasury expects to borrow $274 billion in privately-held net marketable debt, assuming an end-of-March cash balance of $800 billion.The Treasury General Account balance sits at ~$1.6t - so ending March at $800b is a big move with big repurcussions......except I don't believe Yellen! Why?
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Let's go to the previous Quarterly Refunding Statement from November.
During the October – December 2020 quarter, Treasury expects to borrow $617 billion in privately-held net marketable debt, assuming an end-of-December cash balance of $800 billion.End of December TGA balance = $1.728 Trillion.
How about the one before that from August?
During the July - September 2020 quarter, Treasury expects to borrow $947 billion in privately-held net marketable debt, assuming an end-of-September cash balance of $800 billion.End of September TGA balance = $1.781 Trillion.
wabuffo
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2016 letter --- 52 pgs
2017 letter --- 85 pgs
2018 letter --- 112 pgs
2019 letter --- 128 pgs
2020 letter ---- ? pgs
What's the over/under line? 150 pgs this year? :o
wabuffo
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I read this book written by two NY Times reporters years back called "Blind Man's Bluff" about the Cold War that involved true stories about submarine espionage. One of the stories involves the USS submarine Scorpion that disappears in 1968 to the bottom of the Atlantic with all hands lost. This sets off a frantic search by the US Navy to find its lost sub. All they knew was its last reported position, the path it was on (it was heading back to base at Newport News, VA after a tour of duty in the North Atlantic) and only vague other bits of information. The area to be searched was a large part of the North Atlantic near the US coast. It was kind of hopeless that the sub would ever be located.
https://en.wikipedia.org/wiki/USS_Scorpion_(SSN-589)
So the Naval Officer in charge of the search operation (a kind of Hunt for Red October Jack Ryan type of guy, I guess) comes up with a novel plan. He doesn't just reach out to experts like other submarine commanders. He assembles a wide range of folks - some with submarine knowledge, mathematicians, salvage ops men - basically a diverse set of knowledgeable people but not all experts in subs. He briefs them with all the information and data that the Navy has related to the USS Scorpion's last voyage. He then asks them to go off on their own, sift through the data and independently offer their best opinion on why the submarine ran into trouble, its speed and its steepness of descent so as to locate where it might have touched bottom. He makes it interesting by offering a reward and prizes to the winner who comes closest to the actual location if/when the sub is located.
The individuals' guesses were assembled on a map and using some fancy math (Bayes Theorem) -- a composite guess of the "crowd" was isolated based on the collective estimate of the group as to where the sub might be located. The location was not a spot any individual member came up with or picked. But a search was started focusing on the spot identified by this collective method and five months later the sub was located within 220 yards from where the group's estimate said it would be.
Ok - why tell this story. Because collective wisdom is what the stock market operates on. It is why it is generally an efficient market. The various participants individually all have guesses about the fair value of a stock. These guesses are made up of lots of random guesses + a tiny bit of signal information in each guess. As these guesses are aggregated, the random parts cancel each other out and what remains is mostly pure signal.
I long ago gave up on using the Kelly Criterion. That is because according to the Kelly Criterion the size of the bet is determined by the formula: Edge/Odds = size of bet. But here's the thing - according to the formula if your Edge = zero, then the size of bet is "Don't Bet!".
If most of us are truly honest with ourselves, do we really have an edge in picking an individual stock vs the market. Do we think our guess as to where the "missing sub" is located is going to be more accurate and correct than the collective wisdom of a diverse group of actors with money on the line? Are we really just punters when we think we are experts?
The good news is that unlike most gambling games (which are negative sum), the stock market is a positive sum game. All we need is to go with the market via diversification in a group of 10-15 high quality businesses and we will do fine. So my recommendation is to put away the Kelly position sizing stuff because if you think you have an edge then you are making big bets that you alone can locate a "missing sub" better than the market can.
wabuffo
p.s. the USS Scorpion story is also featured in James Surowiecki's "Wisdom of Crowds" book.
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I believe that one has to think in terms of the consolidated US Federal government debt mix as the sum of:
(1) currency in circulation + (2) bank reserves + (3) US Treasury bonds owned by the public - (4) US Treasury bonds owned by the Fed.
Some things that are going to happen this year:
1) US Treasury spending will subside as we get stimulus behind us.
2) In addition, US Treasury debt issuance over and above that spending level will decline even more than that as the US Treasury runs down its TGA account at the Fed in time from the current $1.6t down to $800b or below as per the plan released by Yellen's Treasury dept. So spending will exceed borrowing by $800b.
3) the Fed's continued QE is therefore a Federal govt debt management policy that will continue to push the US Federal consolidated govt debt mix more towards the short end, in interest bearing reserves that can't escape the banking system.
I don't see how that allows the long end of the Treasury yield curve to continue to rise over the coming year and beyond. In fact, I think we may see zero long-term yields before we see 3-4%.
wabuffo
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Just one clarification in my original post. RH's account at the clearinghouse is a collateral account -- there as insurance to backstop/cover customer payment failures. Co-mingling customer and broker assets is a no-no. It is not a payment account like my Fed example.
wabuffo
Fed can't keep the rates low
in General Discussion
Posted
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