wabuffo

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

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

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

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

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

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

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

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

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

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

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

In addition to all the worries about too much stimulus spending stoking inflation, I think there are some interesting things happening in Fed and US Treasury policy over the next four and a half months that one should really keep an eye on. Warning – this is a technical discussion that goes a bit deep in the weeds of the US monetary system. The 99% of you who don’t care about this stuff should STOP READING NOW. Ok – here are the basic moving parts: 1) The Federal Reserve is net-buying roughly $100b in US Treasury securities per month and will keep doing that to continue its “accommodative policy”. 2) The US Treasury’s debt ceiling was suspended on August 1, 2019 as part of a budget agreement by Congress. That debt ceiling toggles back into effect on August 1, 2021. As part of that budget agreement, the balance in the US Treasury’s General Account at the Fed is supposed to snap back to the level it was on the day in 2019 when the ceiling was lifted. This rule was to prevent the US Treasury from “running up its balance”. That TGA to-be balance is $117.6b. Current balance is ~$1.3t https://fsapps.fiscal.treasury.gov/dts/files/19080100.pdf 3) As part of its response to the pandemic, the Federal Reserve on April 1, 2020 temporarily excluded US Treasury securities and bank’s deposits at the Fed (reserves) from its calculation of the SLR (Supplementary Leverage Ratio). The SLR is a measure of bank capital adequacy. Given that reserves currently make up $3.6t and US Treasury holdings make up another $1t vs total bank assets of $21t, excluding these assets from SLR calculations is a pretty big deal for the banks. The SLR exemption for reserves and Treasury securities is set to expire at the end of this month. If it did, bank balance sheets could get squeezed due to the change in their regulatory capital ratios. Most likely, the big banks would sell all of their US Treasury holdings ($1t) to compensate for the over $1t increase in reserves (which they can't get rid of). Its possibly (and even likely in the case of the SLR exemption) that many of these “rules” and policies could change. But if they don’t, it sets up for some interesting interactions that could affect liquidity and risk in the US monetary system. I will assume 1) and 2) are likely not going to change and 3) will get extended. Total US Treasury debt outstanding in the private sector’s hands is $21.816t as at March 10, 2021 (per the US Treasury Daily Statement): https://fsapps.fiscal.treasury.gov/dts/files/21031000.pdf Since the Federal Reserve can’t buy its Treasury securities directly from the US Treasury (except in certain emergency circumstances in the past), it must buy them from the private sector thereby reducing the amount available (and suppressing supply and yields, in theory). On March 10, 2021, the Federal Reserve owned $4.891t in Treasury securities per its H.4.1 report: https://www.federalreserve.gov/releases/h41/current/ Thus, the amount of Treasury securities circulating in the private sector’s hands is $16.925t. This becomes important because the US Treasury appears to be starting the process of running down its account balance at the Fed. Here is the daily numbers for March so far. Normally, the US Treasury would run with a very small balance. This balance used to be $5b before the GFC and then grew to over $100b - $400b after the GFC. But it stands at $1.5t near the beginning of March. The US Treasury would fund its $125b in deficit spending from this table with more-or-less $125b of net public debt issuance and keep its TGA balance level at some much lower amount. But that’s not happening now. Because it is trying to lower its TGA balance, not only did it carry out $125b in deficit spending but it ALSO REDEEMED a net $106b in Treasury debt. Keep in mind, that while this was happening the Federal Reserve was also out in the market buying probably $25b in Treasury debt. Thus, US Treasury debt in private sector hands shrank by $131b. Ok - so we don't know what will happen, but what we do know is that the US Treasury must further reduce its account balance at the Fed by $1.15t between now and the end of July. ($1.268t - 0.118t). How much deficit spending will the US Treasury undertake over that time frame. There is a new stimulus bill passed and some of that spending is happening right now (stimulus checks) - but there's a lot of spending in this bill that will happen over time (past the Aug 1st, 2021 date). In addition, we are coming up to March, April and June which are big tax receipt months for the US Treasury. April in particular is usually a big surplus month (and I think tax receipts will be surprisingly large this year - think all those people with 2020 capital gains taxes to pay that were not withheld or paid as estimated taxes). So let's say $600b of deficit spending over this period - and therefore $550b of net further US Treasury debt reduction (redemptions > issuance). Now add the Fed purchases of $100b per month = $450b and we have a potential reduction of $1t in US Treasury debt outstanding based on these assumptions. That is a ($1t/$16.9t) = 6% reduction a 4.5 month period = 15% annualized run rate. I think that could be a big deal in such a short time - especially with the economy growing fast (~6% GDP growth rate) over this same time frame. A growing economy needs more US Treasury securities, not less. Could this cause a bit of a traffic accident in US monetary policy? It's hard to see yields going higher in this kind of reduction. Of course, many things could change. The Fed could stop its buying and co-ordinate with the US Treasury as it is undertaking its TGA reduction. I would actually recommend this strategy. Or the Fed could decide to not renew SLR - which cause the big banks to dump their US Treasuries into the market. (though I actually don't know if this helps since the banks' holdings are part of the total holdings of the US private sector). Other things to think about. What happens to the banks if their reserves grow to over $5t because of the TGA's reduction? To be fair, most of this reserve growth will be accompanied by deposit growth from the US Treasury deficit spending (except for you Wells Fargo! No asset growth for you!). I'm not making any predictions - but if I did, I'd say Treasury yields go lower and the short-end even goes negative, maybe. Gold continues to go lower til April and then starts back up. Stocks roar higher through May or early June. After that comes the great whipsaw. Yields turn suddenly higher, the air fills with talk of tax increases and the back half of the year is a bit of a rough go for stocks. Of course, this forecast is worth what you are paying for it -- because of course I could be wrong. And regardless, macro shouldn't matter for stock pickers like us anyway 8) wabuffo

As far as QE and reserves are concerned, I don’t think any of this matters really. What matters however is spending and that spending is going up financed by federal deficits. At some point we will see the limits of what can be done without penalties, but it does not seem we are there yet. I agree - just because it turns out we have much more fiscal capacity than we previously thought, doesn't mean we might not push the monetary engine past its red-line. The thing that worries me is that all the MMTers say "don't worry - the deficits will be reigned in if we see inflation". First, I think inflation builds very slowly but breaks out very suddenly such that by the time the Fed and the US Treasury react, it will be too late. Second, the MMT response to inflation seems to be "if inflation, then raise taxes on the rich". That's why you are starting to see discussions about very high tax rates and even wealth taxes. This is almost the opposite of "supply-side economics" of the 1980s where marginal tax rate cuts grow the economy but spread the wealth unevenly. MMTers want to tax at high rates and even tax wealth in order to send stimulus checks directly to everyone below a certain income in order to stimulate the economy. They are very excited about what they saw in 2020. Taxing at high marginal rates and taxing wealth is the way to turn inflation into hyperinflation, IMHO. They don't call it the misery index for nothing. wabuffo

I'd argue the reserve status is already threatened. You already have large countries like China trading in yuan/rubles with Russia to buy oil/gas. At some point it is inevitable that China‘s Yuan becomes a reserve currency. I think this is almost an impossibility - not quite, but almost. That's because of three important factors that must be in place to replace not just the US dollar but also the US rules-based global trading system that the USD supports. Its not just about setting up a tiny oil market in one corner of the world that doesn't use the USD in its trades. First, for the rest of the world to use and save a portion of its wealth in your new reserve currency, your country must run an extremely large trade deficit with every large country. No country other than the US wants to do that - not China, not Japan, not Russia (too small an economy anyway), not Euro-land. They all want to be net exporters - not net importers. Second, you must have the pre-eminent military to peacefully (or not) enforce the global trading system. China doesn't even have a blue water navy, just a coastal defense force. Only the US (and Japan's SDF) have true deep water navies. The US maintains the world's ocean-ways free from harassment so that every country does not have to worry about its ability to trade around the world and get whatever resources it needs. Who can even replace the US doing this? Who even wants to bear the cost of this? Finally, there's geography. Which country enjoys both the greatest protection and the greatest benefit from where it is situated geographically? Which ones are the most weakened by their geography. I think that answer is pretty obvious. Sure, countries gripe and complain about the US "hegemony" especially when they don't like the US throwing its weight around enforcing its system, but let's face it they have all benefited - Germany, France, Japan, even China have all gained the most -- but also have the most to lose from a decline in the US global rules-based system, if it were to happen. And that's because none of them could replace it. Its not perfect, but I would hate to see what a world without the US dollar as a reserve currency would look like. wabuffo

Wabuffo, your take on today's reserve currency status vs historical pegging to gold is interesting. Quite a bit to chew on. The post is gone? sorry about that - I was worried that I was going down a rabbit hole so I took it down to rework it. I'm reposting it below. how can we be so sure there will be no inflation of significance? We can never be sure. One thing I wanted to point out though is that prior to 1971, the US Federal government was in effect spending and borrowing in a "foreign currency". Of course, foreign currency here means gold since the US dollar was pegged to a fixed gold price. One cause of inflation is when a sovereign borrower can no longer borrow in a foreign currency at the old peg and must default and devalue its sovereign currency at a new, lower, peg value. When the default/devaluation happens, inflation is the result as buyers/sellers and borrowers/creditors readjust and reset terms of trade of their contracts over time. Your reference to the 1930s/1940s and 1970s both reflect this - in 1933, the US, under Roosevelt, reset the gold price to $35/oz from $20.67/oz and in 1971 Nixon ended altogether the US dollar's fix to the gold price. There was follow-on inflation in both periods for over a decade after the devaluation/default. There have also been other periods in the US history where the peg was temporarily suspended and then re-established (eg Civil War). By pegging US currency/obligations to gold, US monetary policy pre-1971, was like that of Hong Kong or Greece or even Illinois since none of these governments control their own currency. Since 1971, we are slowly finding out, through trial and error, that the fiscal capacity of the United States is much larger than anyone ever thought since we are a sovereign issuer of our currency (which also happens to be the reserve currency). So I think comparisons are difficult between today and pre-1971. I would even say they are difficult pre-GFC and post-GFC because of vastly different Fed monetary regimes in place since the GFC. wabuffo

However, banks can still use the portion of increased money supply that is held up in reserves to enable transactions valued at higher prices, right? Reserves haven't been a factor in lending for a century or so. Its bank regulatory capital (and the profitability of the loans) that is the constraint. Mandatory reserve requirements were temporarily suspended as a response to the pandemic - so they literally are no longer a constraint. we don't need to worry about inflation because "reserves circulate in the Federal Reserve accounts but never leave the Federal Reserve"? I wouldn't agree with such a direct correlation between inflation and reserves. What I would say is that we are learning, through trial and error, that the fiscal capacity of the federal government spending as a sovereign currency issuer without causing inflation is much larger than anyone previously thought. wabuffo

With the current ttm earnings yield of the S&P at 2.5%, any spike in rates would have large implications. Now imagine if they also raise the Federal corporate tax rate, too..... 8) wabuffo

we've moved on to Roaring 20s headlines in the Economist, Bloomberg Businessweek and Money Week. Predictions of a lasting global boom driven by post-pandemic animal spirts, re-building better, productivity gains from cloud etc., supportive fiscal and monetary policy, and so on. All of which could result in a multi year bull market. How plausible is this prediction given we struggled to get much above 3% GDP growth pre-pandemic The roaring 20s (like the roaring 1980s) were driven by very large cuts to top US marginal tax rates. I bet none of those big name business/economics magazines mention that. The top US Federal income tax rate fell from 77% at the start of the 20s down to 25% by 1925. Coolidge is a very underrated US President. (Reagan took it from 70% in 1980 down to 28% by 1986). Since no one is talking about tax cuts and, in fact, a number of tax increases are being proposed by the new Administration, I don't think these 20s will be quite so roaring. 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