wabuffo

Hypothetically? I went long GLD Leap Calls @$150 in mid-April. I'd wait until the Treasury general acct at the Fed gets down to $100b-$200b (or end of July) - whichever comes first and look to short something like TLT (so maybe TLT puts - medium duration of some sort). Others have suggested shorting high-yield ETFs (not my expertise) since they would see a double-whammy of both rising Treasury rates and rising HY credit spreads. If I'm feeling adventuresome - I'd short the junkiest of tech ETFs since their share prices should fall with rising discount rates (since any cash earnings, if there are any, would be way out in the future) when the TLT puts go on. Maybe even short the Russell via puts. But none of this is anything I might actually do since I'm a big chicken when it comes to both options and shorting. I am comfortable with GLD and GLD calls since I think I understand that one well enough. DO NOT DO ANYTHING THAT I AM DESCRIBING HERE - YOU WOULD BE A DEGENERATE GAMBLER IF YOU DID and BEN GRAHAM WOULD REVOKE ANY VALUE INVESTOR CREDENTIALS YOU MIGHT HAVE ... (I PROBABLY MAY NOT DO ANYTHING I'M DESCRIBING HERE - x GLD) wabuffo

Hmmm - I wonder whatever could be causing this..... https://www.wsj.com/articles/banks-to-companies-no-more-deposits-please-11623238200

Could it have been because it might have been harder to provide in increased quantities something that was "bottlenecked" or "limited in supply" to people with increased money supply, which had been happening already with increased wages? The world had negotiated terms of trade between debtors/creditors and purchasers/suppliers based on a certain peg of gold to the USD with all other world currencies pegging to the dollar. The peg snapped and turmoil followed. Over the following decade, the whole world had to renegotiate its terms of trade between debtors vs creditors and purchasers vs suppliers. This "renegotiation" re-set prices in the typical business income statement based on how long the contracts were - first commodities, then purchased items with lead times, then labor contracts, then long-term debt, etc.. Of course, government made things worse by wading into the mess it had made with monetary policy trying to "fix" things. If you were in the Middle East - you were used to 1 oz of gold buying 12 barrels of petroleum without fail for the last thirty years. Now your old price quoted in dollars was requiring you to supply you 24 barrels of petroleum for that same 1 oz of gold. So the Middle East re-set the price for petroleum back to 1oz = 12 barrels. But that doubled the price of oil in USD. Of course, governments reacted to rising prices with price controls. Price controls always lead to shortages because the market can't clear and thus you could only buy gas on alternate days in the 1970s depending on the license plate number on your car (odd/even days). It had nothing to do with supply or demand. It had to do with pegging, sudden devaluation and the follow-on price controls. My point is that currency debasement goes on all the time. But with a peg its a bit like pressure building from colliding tectonic plates that stops the currency debasement temporarily. Then a devaluation happens and its like an earthquake as the pressure is released suddenly and explosively. That's what the 1970s were after the 1971 devaluation. Today there is no peg and so we debase little by little everyday and no one feels the shifting ground underneath them anymore. But we look at the Pacific Ocean one day, and there's Vancouver Island sitting on the horizon as one looks out from the Port of Los Angeles (stretching my tectonic plate metaphor too far). This gets me to my favorite home-made chart. This is a long-run run chart of the gold price in USD. It just continues to amaze me that folks don't appreciate Alan Greenspan more when you put his tenure in the middle of that chart. wabuffo

Similar to how before the 1973-1974 oil "bottlenecks", money supply had already started going up in terms of wage increases in the hands of people The inflation of the 1970s was entirely due to the "surprise" devaluation of the US dollar on August 15, 1971. wabuffo

We're hitting a critical point where the Fed keeps buying in the open market while, simultaneously, the US Treasury is emptying its TGA account. The rate of new deposits/reserve creation is outpacing the issuance of new Treasury securities to soak up these reserves. The US Treasury is not really doing its job 1 - which is to issue treasury securities as a reserve withdrawal function because it must go to the sidelines for the next couple of months. Money-market fund flows are increasing and having to crowd into O/N RPP at ever increasing amounts but not getting any yield. They also can't break the buck. So their next move will be gating. That will force corporate treasurers to have to pay to either deposit funds into MMFs or buy T-bills outright. Meanwhile the Fed has exhausted its supply of short-term T-bills (15-90 days) being lent into the O/N RRP market, it looks like to me. I'm not sure how it works but lending longer-duration Tsy securities introduces a small amount of mark-to-market risk if there is a sudden move in rates. The Fed is doing over $480b in reverse repo (i.e., lending short-term T-bills) but only has $379b of 90-day or less Treasury securities to lend. O/N RRP should continue to increase due to the factors mentioned above - so the Fed may have to come into the open-market and put more of its buying at the short-end further exacerbating the shortage. By the end of June, early July, the US will start to see negative T-bill rates. That is something the Fed has said it does not want to see happen but I don't think they will be able to stop it. This will be temporary through the summer because after the TGA hits target, the US Treasury will resume its normal Treasury security issuance. That will be a relief valve that should pump the yield curve back up. It will be interesting to see what kind of reaction negative short-term rates get from the Fed and the equity markets. wabuffo

LM - I can't really answer your tax question - especially when it's a speculation on what tax policy may or may not be. But I did want to pivot to an earlier upthread critique of my "method". That criticism was that you can't time the move to trashy $hitcos because one doesn't know the timing of the "all-clear" signal. In my commentary, I kept referring over-and-over to a deflationary scenario but never really explained exactly what I meant. So I'm going to add this dimension to this commentary now. Over the last twenty years or so - there have been three major "deflationary" events. The definition of these involves a shortage of the govt's money (ie, Treasuries). There have been three: 1999-2002, 2008-2009, 2020 (March). Each of these may have had different causes - but they were all defined by the market rushing to the US dollar and US dollar assets like Treasuries and that demand exceeding supply. In my opinion the single-best real-time indicator of a deflationary liquidity squeeze is the real-time price of gold. When there's a crisis, I watch the price of gold closely. If even gold is falling relative to the US dollar and US dollar assets - a deflationary squeeze is on. Now that is different from a speculative run-up in gold that then breaks (like 2012 - or even late 2020, early 2021) when there is clearly no underlying liquidity issues from the US Treasury's fiscal response and thus gold is just falling from a speculative run-up. So you need both conditions: a) an underlying lack of USDs due to inadequate fiscal liquidity, and b) gold reacting to that. Ok - so here's the three charts for each of these events. I've circled in red the deflationary squeeze and in green the relief from the deflationary squeeze (when the price of gold goes back to its pre-squeeze price. The other thing that's interesting is the increasing speed of the US fiscal response. In 1999-2002, the US Federal govt ran a surplus and the economy ground down for three years until the drop of tax revenues flipped the US Federal govt's surplus back into a more "normal" deficit. In 2008, the govt reacted faster but still much slower than the blinding speed of the March 2020 response. Anyhoo - the green circle represents the "all-clear" signal to run into microcap $hitcos. 1999-2002: 2008-2009: 2020 (March): There you go - fundamental analysis you'll see nowhere else. I feel like I have finally fully answered ukvalue investment's original question from the depths of last year's pandemic market meltdown. You are now armed with knowledge and ready for the next banking panic/deflationary crisis, LOL. wabuffo

I would like to discuss how the most money was made from the depths of the last crisis. The lesson from 2003 (after the 2000-02 deflationary bust) and 2009 (after the 2008 GFC) is -- buy the trashiest micro-caps you can and buy a bunch. Their share prices go up the highest. I'm going to use the Wilshire Equal-Weight 4500 (ie, excludes the top 500 stocks in market cap and thus is the equivalent of throwing darts at all the small-cap names). Here's some data. 2003: S&P 500 Tot. Return: +28.7% 4500 Equal-Weight: +97.5% 2009: S&P 500 Tot. Return: +26.5% 4500 Equal-Weight: +88.0% --------------------------------------------------------- We can now update this thru the end of May 2021 (from the end of March 2020 - around the time this question was posed): 2020: S&P 500 Tot. Return: + 65.8% 4500 Equal-Weight: +150.01% The S&P had a great comeback - but once again, the trashiest micro-caps outperformed by two-and-a-quarter times the S&P 500 total return index.

saw this in the F-T today: https://www.ft.com/content/9b32906b-210e-4402-9e3c-0e70f96728f0?segmentid=acee4131-99c2-09d3-a635-873e61754ec6 wabuffo

So are you saying you still think there will be a rough patch from here until year end? I think that there will be a big headfake on Treasury yields (first lower, then snapback higher). Whether that affects equities, I'm not sure... it all depends on whether the economy is growing quickly well into year end, I guess. If growth slows and Mr. Market becomes more convinced that big tax increases are coming, then yeah - I think a rough patch might be coming. If taxes are pushed off due to a stalemate in Congress and the economy continues to rip, maybe not. I am often wrong though... wabuffo

Over a third of the April CPI print was due to used car price inflation. That feels.....uhhh....transitory. The rest is due to y-o-y comparisons to the bombed-out energy sector (which had a negative price per bbl, last year IIRC -- LOL). Of course - more CPI freak-out may be coming as used car prices continued to ramp in May. (hmm - maybe time to add a bit of NICK to the portfolio?) wabuffo

Are you sure $120b by July is correct? I see you cited a Bloomberg article early in this thread that quotes that number, but others are saying the target may be higher and the deadline later, e.g. $500b, $750b. There is no doubt that the US Treasury is operating under a temporary suspension of the Debt Limit. Its noted at the bottom of every Daily report. The legislation was passed by Congress and includes a provision that mandates that the US Treasury's account balance at the Fed must remain at the same level as it was just prior to the suspension. This is to prevent exactly the US Treasury "running up its balance" while the suspension of the Debt Ceiling is in effect. Here's the balance as of the August 1, 2019 Treasury Daily Statement: I'm not sure if its the August 1st balance ($117b) or the July 31st balance ($176b) that holds here - but its still a big drop from the current level. Where you are probably hearing about other balances is from the US Treasury's quarterly refunding forecast documents. Here's the latest one: https://home.treasury.gov/news/press-releases/jy0158 But these quarterly forecasts have been very unreliable in the past and its clear they don't mean much. And, in any case, there's a footnote/qualifier attached to the estimate. That's unlikely to happen. It requires agreement from both the House and the Senate to do this. Could it happen? Perhaps. That's why I qualify my forecast. But I think its a low probability between now and the end of July. Still - not an expert on this stuff so I could be wrong. wabuffo

Rising yield might also push indicies higher Indeed - this is the weakest part of my forecast. That's why I threw in the tax changes as well. It is the one-two combo of a rising discount rate PLUS change in the federal corporate tax rate that will pinch stocks. wabuffo

Yields are lower (as predicted). Gold hit a recent low at the end of March and has rallied (pretty much as predicted). Stocks are also higher (as predicted). Rather than quit while I'm ahead - the signal that I will be watching is the US Treasury general account level and waiting for it to fall to $150b or so. You can follow that level daily at the US Treasury's daily statement website (current TGA level as of May 27th = $746b). https://fsapps.fiscal.treasury.gov/dts/issues The one-two growth in reserves from both the Fed doing QE every week and the US Treasury spending without a commensurate level of debt issuance is flooding reserves into the banking system. This is a one-timer, though til the US Treasury gets to its must-achieve level of $120b or so by end of July. The banking system is like a big bathtub that has its drain plug in and the water level is rising too high. That's why there is a recent spike in reverse-repo. Reverse-repo is the overflow drain at the top of the tub that prevents the water level from flowing over the top of the tub and onto the bathroom floor. When the TGA hits target, I think issuance will pick up which will help long-term rates start to climb again. That should happen sometime in early-mid July. The last part of this three-act play is to watch to see if the rising yields in August-September start to slow down the advance of the broad equity indicies. Of course, I'm not a macro guy and most of the time macro is quite random and hard to forecast. But every once in awhile, things like this TGA rebalancing is going to have some predictable effects. Of course, I could be wrong about all this. wabuffo

After years of the Fed trying to create it, its been done. Fed didn't create inflation (if there is any).... Fed really can't, actually. One has to look at the US Treasury for that. wabuffo

What happens starting Aug and why? Demand for 10 years treasury shouldn't go down starting August. The US economy is too large and complex for single-variable projections. But I would expect that after August, the supply of US Treasury securities will begin to match deficit spending and Treasury securities held by the private sector will begin to go back up. All things being equal, long-term yields should resume their rise that we saw earlier in 2021. That's not a bad thing - the economy is heating up and Treasury securities are in demand as collateral for lending. wabuffo

Seems like a game of musical chairs with not enough chairs. Fed buying treasuries (in exchange for reserves) then repo'ing reserves in exchange for treasuries. I guess it all makes sense, but does it accomplish anything? I doubt it. I think you are right Spek. The Fed used to run a corridor system to control short-term rates pre-GFC to control rates - buying/selling Fed funds (reserves) to keep rates in a tight range. This was at a time when there were no excess reserves. The conceit of the Fed after it did QE was that it now could control both the price and quantity of the money supply - not just price. But here we are - back where the Fed started. It really can't control the supply of money - only the price. It has to do reverse repo to keep its target rates from falling below the zero floor. Its a fugly corridor system once again. wabuffo

Could somebody explain to a 5 year old what is going on right now with the reverse repo purchases? A reverse repo is a swap of assets between the Fed and the US banking sector. The banks give the Fed a reserve asset (ie - Fed funds (ie, reserves) from their deposit accounts at the Federal Reserve) in exchange for a Treasury security from the Fed. These are typically overnight (or over-the-weekend) durations - but since mid-March, they are constantly rolling over and growing so in effect its kinda perpetual for now. The reason for this is because US Treasury spending and Fed open-market buying of Treasury securities due to the Federal government's pandemic response has flooded the banks with excess reserves. Before the pandemic started, the US banking system had $1.7t in total reserves (9% of total banking sector assets). Today, total reserves are a shade under $4t (or almost 18% of total banking sector assets) and continuing to grow. Ok - so why now? Why are the banks doing more and more reverse-repo after not doing much if at all before mid-March? Here it gets a bit more technical and it involves something you haven't heard about lately - the Congressional limit on US Treasury securities outstanding - aka - the "debt ceiling". The US debt ceiling was suspended on Aug 1st, 2019 for two years as part of the last set of budget negotiations. The US Treasury thus had no upper limit for how much it could issue in net, new Treasury securities. This came in handy during the pandemic as it ramped up its issuance and ran its Treasury general account (TGA) balance at the Fed to a high of $1.83 trillion during the summer of 2020 by issuing way more securities than it needed to fund pandemic spending. But the debt ceiling toggles back on this Aug 1st. because the two year limit is ending. In addition, the rules say that the US Treasury must have an account balance at the Fed = to what it was before the debt ceiling was suspended (basically to prevent the sort of thing that actually happened - i.e. running up the TGA balance). The US Treasury's balance back then was $117.6b. Its current balance is $832.9b. So in theory, it must deficit spend $715b between now and then WITHOUT any net issues of US Treasury securities. (IOW, new issues cannot exceed maturity redemptions). In reality, if it spends the same amount over this period (May 21 - July 31st) as last year = $638.9b - that won't be enough and it will have to net redeem a further $76.5b of US Treasury securities (ie maturities less new issuance). But tax receipts are running higher this year than last year - so it may have to net redeem more than $76.5b because this year's deficit could be slightly smaller than last year for the same period. But the Fed is still out there buying Treasury securities from the open market and removing them from the private sector (in exchange for bank reserves). I reckon at its current pace the Fed will buy $177.9 b of Treasuries during this May 21 - July 31st period. So to summarize - the US Treasury will deficit spend around $639b (probably less). In the old days when the US Treasury used to run with a small TGA at the Fed - its net issuance equaled the deficit spending. But not this summer. Not only will the US Treasury not remove that $639b of new bank reserves by adding new Treasury securities -- between it and the Fed, they will WITHDRAW another combined $254b of US Treasuries from the private sector. Unless the debt ceiling moratorium gets extended, that's a lot of cash and reserves sloshing in the system looking for yield. And they are now starting to crowd at the Fed's reverse repo window. If the Fed didn't do this, short-term rates could not be supported and we'd start to see negative rates at the short end. Here's some data to illustrate what I'm talking about. I've divided the pandemic and recovery into several periods. When the pandemic hit the economy in March - June 2020, the US Treasury unleashed very heavy spending (Stimmie I). It also more than covered its spending with huge Treasury security issuance in order to run up its Fed TGA. But the Fed was also out there massively buying Treasuries. The net result was that about 78% of the spending was covered by net supply of Treasuries (between the Fed and the US Treasury's buying and issuing). But since the economy was ice cold, demand for US Treasury's after an initial panic was lower too. But look at the period coming up now (May 21 - end of July 21). A fast-recovering US economy needs US Treasuries, not just for more yield than cash, but as collateral for increased financing/lending. But supply is actually going to shrink vs new reserve creation via deficit spending. Its no wonder everyone is piling up at the reverse-repo window since mid-March. That demand is only going to continue to go higher every week. I think the pressure on yields will also be felt at the long end of the yield curve. Its no wonder that the yields rising were stopped in their tracks in mid-March (right at the time of that massive one-day deficit due to Stimmie III checks/deposits plus the US Treasury starting to ramp down its TGA). Happy to answer any questions if I can. wabuffo

Assuming the 'fed printing' premise is overblown, to what degree do you see asset inflation (housing, stocks, etc) being driven by government policy? Is that overstated in your opinion? My biggest insight from all this is that QE <> money printing. QE at best creates an "unnatural" interest rate curve but it does not put money in anyone's pocket. I think you guys get it now - so I don't have much to add. You are armed with more knowledge about how the US monetary system works than probably 99% of the various financial/economic commentators on TV and the web. Its really simple - you have to take a consolidated view of the Fed/US Treasury and then examine how they interact with the private sector. There are basically three transactions: 1) US Treasury deficit spends - this is asset creation for the private sector. (the only source of liquidity). 2) US Treasury issues a debt security - this is an asset swap with the private sector. 3) Fed buys a Treasury debt security - this is an asset swap with the private sector. Finally, all of these transactions happen through the Fed's processing of transactions through reserve accounts (deposit accounts at the Fed). And by the way - job 1 of the Fed is to manage the US payments system through its management of the reserve accounts. Back to Spek's original question of what this has to do with anything investing related. Probably not much. But it has helped me focus on the stuff that counts and perhaps just as importantly - ignore the 99% of the zerohedge and even mainstream economist comments that are just pure hand-waving. But thankfully - understanding any of this stuff won't prevent one from doing fundamental analysis on specific stocks. 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